Understanding the Euro crisis

The key to understanding the crisis in Europe (and around the world) is to go back to the classroom.

When economics professors start their lectures they often draw on the blackboard (or used to) an x-shaped graph with an x and y-axis.  One of the lines represents the real or physical aspect of the economy and the other represents the financial.

This is an important distinction which is mostly forgotten when we leave the classroom.

If we want to understand what is happening in Europe we must look at both sides of the graph.

On the financial side I think the way in which we create money is a Ponzi scheme which collapses from time to time.  We are probably dealing with a financial collapse which is made worse by what is happening in the physical world.

Since the depression of the 1930s the people of this world have used up a lot of resources.  There may be lots of resources left but we have used the most accessible.  What is left will require a lot more energy and work to extract.   This has to have a major impact on the economy.

To deal with the financial crisis we can regroup and continue until the next crisis or we could try to figure out a new way of creating money.

To deal with the resource crisis we may have to reevaluate our commitment to economic growth.

Considering the psychological and political difficulties in changing the way we create money or dropping a commitment to economic growth one starts to think we may be better not to try to understand the crisis.  But that too might pose some problems.

 

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The wisdom of a declining European fertility rate

The current issue of The Economist reports with some alarm that the European fertility rate is declining with the economic crisis.  It may be that young people have more wisdom than those who want the population to continue increasing.

Back in October of 2010 the World Wildlife Fund issued its Living Planet Report.

This report claims our ecological footprint exceeds the earths biocapacity by 50 percent and that by 2030 we will need two earths to support sustainable life on the planet.

Even if this report is exaggerated over population has to be a serious concern.  The more we increase the population the more resources will be consumed and the sooner there will be a major ecological and economic collapse.

The challenge is to rearrange our economic activity so that everyone can have comfortable life without the need for continued economic growth.

Population is a difficult and sensitive issue.  An interesting discussion of population limits is found in Raymond Firth’s book We the Tikopia.  Some excerpts from the chapter on population are on this  weblog.

 

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Banking union and rearranging the deck chairs

One of the ways being proposed to deal with the European part of the economic crisis is  centralized banking supervision.  More on that in this article in this week’s Economist.

The question here is would a banking union solve the problem.

Back when Russia was trying central planning and having problems, some people figured the solution was decentralized central planning.  Banking union  sounds like the reverse thinking. It also sounds like rearranging the deck chairs.

If the basic problems is the people or institutions or governments to whom the banks have loaned money are unable to repay those debts then centralization will not work because it will do nothing to reduce or repay the debt.

I think the financial side of the current economic crisis is rooted in the way we create money.  For more on this please see the essay on this  weblog titled “LETS go to market: Dealing with the economic crisis.”

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Running at banks

Today’s issue of The Economist has an article fears of bank runs in Europe.

Runs on banks are such serious things that you cannot expect any banker to tell the truth when his bank is threatened.    A large enough run would also impact a country’s money supply and that has to be a concern for all of us.

If a bank is unable to refund its deposits it is probably because its loans have gone bad.  It could also be because the banker has made some bad bets such as  on interest rate movements.

There is so much debt around that most of it, especially that of governments, will never be repaid.  The best that can be done is to keep rolling it over.  There is a high probability that eventually a lot of people are going to lose their savings either from bankruptcy or inflation.

Deposit insurance schemes can protect against small problems – the banker who makes a bad bet on interest rates – but I’m not sure they can protect against the general widespread debt problem we now face.

According to the article one suggestion for Europe is greater financial integration.  This could delay the crisis but would probably bring everyone down at the same time.

 

The Euro zone’s impossible dilemma

Some economist are worried that attempts to deal with the euro zone crisis are going to force Europe into a recession.  Here’s a link to one such forecast.

It’s a valid fear but one that applies to the whole planet rather than just Europe.  The probable cause of a world-wide recession is that we are using resources at a rate which is not sustainable.

If this is true then policy makers face an impossible dilemma.

Policies which lead to recession will hurt a lot of people and especially the poor.  In this case the line between rich and poor will likely be quite high.

The conventional wisdom is that to deal with a recession governments should spend to stimulate the economy even if they have to go massively into debt.

Stimulating the economy when there is resource depletion is going to deplete resources even faster and will bring forward a major crash.

A further complication is that the Euro zone financial crisis will likely lead to a sharp reduction in the money supply.  Without money the exchange of goods and services will be curtailed.

Resource depletion combined with a loss of money supply has the potential to be disastrous.  But it should leave a few resources for the survivors.

“Anti-American” bank safety issues.

There were a couple of bank safety issues in reports on today’s Huffington Post.

One suggests fears of the impact of the European debt crisis on American banks are overblown with only two banks exposed.  I am a skeptic.  Anytime a bank loses money the loss is likely to reduce the money supply which makes the exchange of goods and services more difficult.  It is hard to see that a major bank crisis in Europe would not be felt in North America.

The other item quotes the chief executive of JP Morgan Chase as saying new international capital requirements for banks are anti-American.

Once again I am skeptical.   In this case anti-American probably means anti-the short-term interests of the large banks. (His bank was one of the two named as being exposed to the European debt crisis.)

In normal circumstances the lower the reserves kept by banks the more they can loan out and the greater their profits.  Reserves are required to protect the bank against heavy defaults on money loaned and the prevent a run on the bank.

Considering the current state of the world economy we should be asking if reserves are high enough.

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