Wednesday, June 1, 2011

Krugman: Eurozone is at the Panic Stage

Paul Krugman is a terrible theoretical economist, but he is pretty decent when it comes to looking at data. This morning he comments on the obvious train wreck that the Eurozone is becoming:

A very important column from Martin Wolf. One way to summarize his argument is to say that slow-motion bank runs are already in progress in the European periphery, and that these countries’ banking systems are being sustained only by a process in which, say, Ireland’s central bank borrows from the Bundesbank and then lends the funds on to Irish private banks to replace the fleeing deposits. Here are claims among central banks as of the end of last year:

Click for larger view

You can see why we’re now at the panic stage. The Bundesbank is already very upset about its large claims on troubled debtors, which are backed by sovereign debt as collateral. Yet if financing stops in the wake of a debt restructuring, the result will be to collapse the debtor nations’ banking systems..
Put another way, what China has been to the US, by buying heaps of Treasury debt, Germany has been to the Eurozone. None of this is sustainable. For the U.S., the dollar eventually collapses and Treasury interest rates go through the roof. For the Eurozone, it's major restructuring (a/k/a default) or huge Euro money printing.

3 comments:

  1. "Paul Krugman is a terrible theoretical economist, but he is pretty decent when it comes to looking at data. This morning he comments on the obvious train wreck that the Eurozone is becoming:"

    He may be right on this, but in general, I STRONGLY disagree with the above statement. I was a physics/Comp Sci major, not an economist, but I see massive holes in his data analysis all the time. He's constantly trying to make a point by posting a graph of data with no labels on the axes so you can even tell what the graph is about. And, on top of that, he makes massive assertions that the data doesn't support. For example, he'll make some Keynesian assertion of a deteriorating economy by showing a graph of a drop in manufacturing without ever considering an increase in imports. He's a classic cherry-picker of data to make his political point.

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  2. Even a stopped clock is right twice a day.

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  3. So it's not actually Germany that is sustaining the Euro? If you find this analysis disconcerting you might want to talk to someone you trust about what is really going on in he world outside your television.

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