The world's most irresponsible global citizen of the moment is not North Korea or Iran, despite the obvious dangers each poses. It is not China, favored target of blame for job losses from Indiana to Istanbul. Rather, it is one of the primary beneficiaries of global integration, a country now contributing aggressively to the risks mounting in the global economy. It is Germany.
One person on earth has the power to dampen the crisis in Europe, which risks spreading beyond its continental confines to yield a global contagion -- Germany's chancellor, Angela Merkel.
Merkel could attack the largest threat now confronting Europe and the rest of the global economy: rising borrowing costs, which have the potential to turn anemic economic growth into a catastrophic credit shock whose consequences would be felt virtually everywhere. She could declare that conditions have become so dire that the European Central Bank must put aside its traditional constraints and aggressively purchase the sovereign debts of Italy, Spain and other nations grappling with rising interest rates. That would bring borrowing costs down immediately, while setting in motion a process that would quell the crisis, or at least shrink it substantially.
But Merkel will not issue such an exhortation, instead allowing the central bank to remain impotent in the face of emergency. She will not do this because central bank intervention could increase inflation, and Germany is ruled by a visceral fear of that prospect. This fear has outlived its historical origin by a half-century: Catering to inflation worries today by hemming in the central bank is something like refusing to restore electricity to a darkened German city for fear that President Roosevelt will bomb it.
The fundamental threat that haunts the world today is essentially deflationary, with prices falling and businesses hunkering down. People in control of money can see that economic growth is slow, meaning that not enough consumers can afford goods and services. The result is retrenchment, layoffs and stagnation -- a cycle made worse by the austerity imposed by Germany and other European leaders as condition for a plainly inadequate financial rescue fund they cobbled together for debt-saturated European nations.
Rising borrowing costs are an outgrowth of the fact that global investors lack faith in Europe's abilities to fix its problems. The available facts are no source of comfort.
Investors know that the European Union is a union in name only, and that the Euro lacks mechanisms to aid countries that face untenable debts. They know that Greece, a relatively small country in economic terms, still can't pay its debts over the long term, not even after the latest European relief package. They know that the austerity Germany demanded for that relief will make the situation in Greece worse.
They know that Italy, a large country, is growing hardly at all, making it impossible to pay back its debts without a lot of help. They know that increasing the size of the bailout fund entails a messy political process likely to yield disappointment, exacerbating the crisis of confidence.
They know that if Italy defaults, or merely comes close, that will produce serious trouble on many shores, as banks reckon with fresh losses and demand for goods and services takes another hit, sending major economies into recession.
They know that French banks are particularly exposed, putting pressure on the government, which would presumably have to bail out teetering French lenders, adding to the chatter that even France could be in for a downgrade to its credit rating.
All of these facts are manifest in a single barometer: the bond market. Investors have been shunning sovereign debt, which forces governments to pay higher rates of interest to finance their debts. That spells higher borrowing costs, which further constrains businesses and makes the dynamic worse.
In recent days, borrowing costs have spiked not only in Italy and Spain, but in Euro-zone nations that have much smaller debts, such as the Netherlands, Austria and France.
The bond market speaks in simple declarative sentences. What it is saying now is that people are afraid to lend money to European governments because they don't see how those governments are going to pay them back. This is not merely a description, but a warning with consequences, reinforcing the predilection against lending.
How powerful are the bond market's edicts? James Carville, the loquacious political strategist, once famously wished to be reincarnated not as a baseball star or the Pope, but as the bond market, because, he explained, "you can intimidate everybody." Anyone wondering if that still applies might ask a man named Silvio Berlusconi, who was until recent days the prime minister of Italy and is now pursuing other opportunities in the private sector.
Berlusconi is not easily intimidated. He had survived ceaseless reports that he enjoyed the company of hired women. He endured legal accusations that he partnered with the Mafia, engaged in money laundering and cheated on his taxes. He had managed to hang on to his job despite a legal probe into claims that he had a sexual relationship with a minor. Not a week went by without someone in the Italian press declaring that some new revelation would finally spell his political doom, but Berlusconi just carried on.
But when Italian borrowing costs last week breached 7 percent, this was too much for the nation's leader. Far from a symbolic indignity, this meant that Italy needed rescue to avoid spiraling debts that risked default. The price of that rescue was structural reform, something Berlusconi could not be trusted to implement, so he was done.
Angela Merkel has the power to soothe the bond market. She could champion an expanded role for the European Central Bank, making it the continent's lender of last resort. That would invite the wrath of a significant slice of her nation, yet it would also make her a legitimate hero among financial policymakers worldwide -- and action on her part could be an enormous help.
There are understandable reasons why Germans are less than excited by the prospect of putting their prodigious national savings on the hook for the profligate spending and noxious debts of less disciplined peoples. One can sympathize with the hard-working German employee of a manufacturing powerhouse who imagines his taxes being used to bail out Greece, where he envisions lazy government bureaucrats tapping pensions to sail off into the Cyclades.
But this has already happened, and it cannot be undone. German and French banks led the way in pouring credit into Greece, Italy and other European destinations, creating the cheap credit that enabled governments and individuals to borrow with little worry. With those banks confronting trouble, their national taxpayers are stuck coming up with guarantees needed to prevent an unruly reckoning.
And if repugnance at bailing out the undeserving continues to dominate policymaking, the result will be fewer people able to buy goods, which means fewer sales for German manufacturing powerhouses whose exports have produced so much wealth.
One way or another, the German taxpayer is going to pay. The only question is what will they get for their contribution: global growth and the avoidance of financial catastrophe, or the smug satisfaction of having not helped an unsympathetic neighbor whose slide into recession brings everyone else along for the ride?
Merkel has in recent days spoken of her abiding commitment to enhancing European political union, which is very nice, and even important in the long term. But it's irrelevant in the here and now, and it can't happen quickly enough to make a difference. It's like talking about installing solar panels on the roof while the gas furnace is burning the house down.
One way or another, Merkel is about to put her mark on history. She gets to decide precisely how. She can carry on as ever and go down as another parochial figure who could not transcend the traditional limits of place and culture, and who helped destroy the Euro and the historical project of European integration. Or she can take a risk, confront the German inflation fetish, and help unleash the crucial credit of the European Central Bank -- and maybe play the leading role in averting global tragedy.
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Treasuries Fluctuate on Signs Inflation Cooling, Euro Turmoil
Stephen King: It's time for a revolution in Germany's inflation targets and ...
We need to live within our means; only unencumbered savings can solve a debt crisis. However, if you were astute, you would have noticed that this is not your run of the mill debt crisis; the crisis is a symptom, the cause Sir, is political. Greeks do not want to live in debt slavery just as much as the Germans do not wish to take prisoners.
Maybe you should say what this really is: a global sovereign debt crisis acting like a wrecking ball, holding one currency after the other hostage, all the while backed by a bunch of bedwetters, the banking cartel that demands riskless profits.
Why does Ireland have to be bailedout if their GDP/capita was higher than Germanys? So much for using GDP as a measure of wealth and Keynesianism as a school of economic thought. And strange that Spain is being bailed out, when their Debt/GDP is lower than Germanys. So what exactly is the problem here Sir? What you propose is intellectually lazy and distorts causality.
I dare say if inflation utterly destroyed your country, as it did Germany in the 1920s, and then led to the rise of Hitler, the Nazis and WWII, you'd be ruled by a visceral fear as well.
Inflation fixes everything?
Condendation to those who are not sinking into debt quicksand?
Come on, Germany, jump into the toilet! The water is fine!
Printing money, as Mr. Goodman suggests, just prolongs the inevitable...
We have convincing evidence that our leaders are refusing to acknowledge the fundamental problems with the system and simply continue to try and maintain the status quo. We have American Congressional leaders refusing to legislate their own greed (http://www.zerohedge.com/news/congress-must-immediately-pass-hr-682-stop-trading-congressional-knowledge-act), regulators purposely ignoring illegal actions (http://www.zerohedge.com/news/european-banks-response-margin-calls-just-break-law-and-make-it) or actually encouraging banks to manipulate their financial data (http://www.zerohedge.com/news/guest-post-regulators-are-encouraging-banks-game-risk-models), market manipulation (http://www.zerohedge.com/contributed/broken-markets-intervention-and-manipulation), unsustainable European debt levels (http://www.zerohedge.com/article/imf-prepared-bail-out-greece-trichet-warns-debt-unsustainability-europe-and-us), growing concern over stronger economy's debt levels (http://www.zerohedge.com/news/has-juncker-gone-insane-eurogroup-head-says-german-debt-levels-cause-concern), and commentary that the entire economic system is nothing more than an elaborate ponzi/pyramid scheme (http://www.zerohedge.com/news/european-ponzi-goes-full-retard-efsf-found-monetize-itself) that relies entirely on growth....
Let Goldman fix their problem, they caused it.
if its coming - buy something real & be in debt up to your eyeballs. Its simple history which repeats over & over
It's pretty obvious what's going on to anyone with two brain cells to rub together. It's only sly to those with fewer than two brain cells—or to the dishonest who are desparately trying to maintain the fiction that they're honest, hard-working, put-upon, debt-ridden victims.
'... but folks are not stupid - they see it coming ...'
... a few folks are not stupid—a few folks see it coming ...
its all very well to see it coming, but unless you have big chunks of capital - there is little you can do - what hedge can you make to protect your $5k savings account - buy a 100 cases of baked beans?
And these defaults will certainly cause contagion and a worldwide financial panic that will affect most nations, including America. And we will deserve it too, for we allowed our economies to be subsumed by these zero-sum gambling houses that don't actually make anything or add any value. We leveraged ourselves and gave away the keys to the kingdom in exchange for a few shiny trinkets.
Only the nations that actually make things will avoid serious pain. Even they will feel it, though, and they have their own challenges that threaten their stability.
In the end, it will be good. The markets will get the correction they need to put them back in their places. The banks that fall will serve as a good example to the ones that survive that the illusion of "moral hazard" has been replaced with a real and very dangerous hazard. It's called free enterprise. Bad businesses go out of business. Even banks.
The polite and freindly approach with hardly any insults is bound to be effective. Germans love that.