Gyroscopic Investing

The Fed is independent of the US government just as much as the European Central Bank (sited in Frankfurt and staffed by Germans?) is independent of the Greek government (thanks to HBreader for my education on that score). I'm just trying to get my head around how default on Greek government bonds is a virtual certainty whilst default on US government bonds is a virtual impossibility. From what I can see all that would be needed to make Greek bonds as safe from default as US bonds- would be for all the other Euro zone countries apart  from Greece to leave the Euro such that only Greece remained in the Euro. In such a situation the value of the Euro would reflect just the Greek economy not that of Germany, Holland etc. With such a devalued Euro, the tax obtained from Greek shipping, tourism etc would easily pay for the interest. Even if Greece continued to be woeful at tax collection, default would still never be likely because that woefulness at tax collection and ballooning deficit would be reflected in the currency  exchange rate rather than  in the bond yields. It is only pegging a currency that creates a sovereign default risk. 2008 hit Iceland much harder than Ireland but it is Irish bonds that are facing default because Ireland is in the Euro and Iceland had a free floating currency that devalued so much that it took all of the strain.

Is my attempt to grasp all of this on the right track?

It's just the politics of the situation that is different.

I view Greece sort of like a U.S. state.  The federal government will help a state when there is a crisis, but as far as the U.S. government assuming the debts of a state and making them good, that's not something that would normally happen here (in fact, the reverse is more often the case, where the U.S. government enacts a law and requires the state governments to enforce it but no funds for enforcement are provided).

Medium Tex, in both the case of a US state and Greece, the economic performance of that state is not much reflected in the exchange rate of the currency that the debts are denominated in. If say Texas represented all of the US economy then Texas would never have a problem servicing its debts because if the Texas economy tanked, then the value of the outstanding amount owed would also diminish accordingly because the exchange rate would tank.

Are you pointing out that the whole idea of an economic union such as the EU without a corresponding political union seems destined to fail?

Or were you getting at something else?

Medium Tex, I was just trying to get my head around the whole euro collapse hullabaloo and also people's doom mongering about treasuries. I had thought that the independence of the European central bank and the fact that it set interest rates predominantly for German needs was the problem. I now figure that whatever the central bank chooses to do, all that matters for avoiding default risk is that the exchange rate floats freely enough. That also drives home the importance of gold in the PP to deal with an exchange rate freely floating down the toilet.

I doubt the EU will fail as an economic union because the US has not failed as an economic union of different states. I think the EU is newborn and is right now where we were fiscally when we were under the Articles of Confederation. They need a stronger central government and they'll be fine. What's going on now in the EU is part of a learning process. Politicians know power when they see it, and they know they are more powerful at the head of a giant union than as members of individual little states. Now a politician from rural Portugal can theoretically become Leader of Europe (I know no such position exists yet, but it will soon).

Indices wrote: I doubt the EU will fail as an economic union because the US has not failed as an economic union of different states. I think the EU is newborn and is right now where we were fiscally when we were under the Articles of Confederation. They need a stronger central government and they'll be fine. What's going on now in the EU is part of a learning process. Politicians know power when they see it, and they know they are more powerful at the head of a giant union than as members of individual little states. Now a politician from rural Portugal can theoretically become Leader of Europe (I know no such position exists yet, but it will soon).

The United States was about 75 years old when several of its members decided to form their own separate economic and political union.  To prevent this from happening it was necessary for over 500,000 Americans to kill each other. 

Think about how the U.S. Civil War would have played out if the U.S. had only been an economic union.  There would have likely been no war and today there would be two countries instead of one.

Given that there is already a history of bloody conflicts among European nations going back hundreds of years, the idea that an economic union with no corresponding consolidation of political power could endure seems farfetched to me.  Alternatively, the idea that European countries would cede sovereignty to a centralized European political authority also seems farfetched.  Would the French let some U.N.-like European entity dictate how it was to be governed?  Would the Germans? 

I think the Swiss were wise to sit out the EU experiment.

I may be wrong about the EU, but from a historical perspective economic unions begin to fall apart soon after some members begin benefiting disproportionately from the arrangement.  With respect to the EU, I think we are already nearing that point.

Indices "Politicians know power when they see it, and they know they are more powerful at the head of a giant union than as members of individual little states."

That is exactly why so many people in Europe loathe the EU. Large nations are not more affluent than small ones. There is no benefit to the citizens from having political union. The only gains are for military might and the egos of politicians. The nastiest wars are often civil wars. Saying that integration reduces the risk of war is very wrong IMHO. Look at Yugloslavia, Ruwanda, the Congo etc etc. The great thing about Europe is its diversity. We can look to the rest of europe and see that we have no excuse for late trains. They can look over here and admire our milky tea and warm beer or whatever.