Gyroscopic Investing

This is bound to start some debates on politics, but it's an interesting article regarding what caused the Euro crisis.

http://streetlightblog.blogspot.com/201 ... -part.html

What caused the Eurozone crisis is the marriage of a whole group of countries, languages and cultures that are fundamentally incompatible and always will be incompatible.

It has always been a matter of time before some of the poorer managed countries abuse the better managed ones. Imagine one very large family and extended family coming together to pool all their wealth. Who doesn't think the deadbeat cousins and uncles aren't going to eventually take advantage of the situation?

It is a collectivist experiment with the same predictable end results. I hope it ends soon so the countries of the EU can regain their sovereignty over their own affairs.

craigr,

Did you even read the article?  Your narrative could make some intuitive sense, but the article addresses those points and seems to indicate that's probably not the case.

Further, Ireland was probably the most "conservative" European country.  Super low taxes, low regulation, low deficits & total debt.

Now look at them.

Like the author, I tend to think the problems must be systemic, not local to the "irresponsible" countries.

moda0306 wrote:Like the author, I tend to think the problems must be systemic, not local to the "irresponsible" countries.

Read the article. I disagree.

The problems are in-born because many of the member countries have a history of doing things like blowing up their currencies. Each country's politicians are going to want to spend on things to look out for their own constituents at the expense of other members. There is just no way it will work.

This all became apparent to me back in 2001 when I was in Europe right when the Euro was being fully rolled out. I toured many of the countries but one incident really stuck out: Truck stops in Germany and Italy.

When traveling to Germany the truck stops (auto stops, whatever they call them) were very orderly. You stood in line, grabbed a tray, got your food and paid.

In Italy we stopped at the same company name truck stop. Instead of the orderly Germans you had the not so orderly Italians. The counter where you ordered your food was mobbed and the only way you got served was to be louder and more noticeable than the others. It was a very Italian experience.

But at that moment it was clear to me that the EU was an incredibly dumb idea. Not because I think one culture is better than the other, but because fundamentally the Germans are not Italians, the Italians are not French, the French are not Spaniards, the Spaniards are not Dutch, the Dutch are not Austrians, etc.

The idea of all these countries with their cultures, histories, and governments coming together under a single currency and single rule is just not workable. And it will fail. But not because one country likes debt and another doesn't. It will fail because human societies don't organize around people's differences successfully. And this will be the story with the EU.


P.S. When I returned in 2002 to Belgium I spent a week working with the Belgian Dutch in Brussels. I heard constant complaining about the French-speaking half of their country. I think one day Belgium will in fact split as well. I found it telling that even the capital of the EU is itself divided so strongly divided.

Maybe those differences are more of the core of the issue, but when you set up a currency, and then the governments are run like our states are (no direct control over currency), it creates systemic risk, whether you are all just like each other, culturally, or not.

If we can "clean up" this situation abit, what if all of these countries WERE the exact same in culture, but did exactly the same thing.... keep their original governments, but convert to a common currency that they can't control.

I think the same thing would have ended up happening, as macroeconomics & math seem to suggest in the article.

Maybe the differences in their culture lead to them not wanting to abandon their own national governments or to other systemic problems, but in the end I think it can be whittled down to economics (as it is partially a social science) with their cultural differences causing problems through the vehicle of trade balances and noncontrol of currency.

For instance, what made the PIIGS countries turn into the ones suffering the most?  It wouldn't appear that it's not their welfare state spending habits.  It much more appears that it's a balance of trade & macroeconomic issue.  I think it's too easy to say "it was bound to fail because they can't get along" without analyzing whether some inescapable macro-trend had doomed them from the start, regardless of what their cultural harmony was.

moda0306 wrote:It much more appears that it's a balance of trade & macroeconomic issue.  I think it's too easy to say "it was bound to fail because they can't get along" without analyzing whether some inescapable macro-trend had doomed them from the start, regardless of what their cultural harmony was.

The trend is they aren't compatible culturally. All these other issues could be resolved, but won't be because the Italians don't want to be French, the French don't want to be German, etc.

In the US the differing states could be viewed as the same model with trade and macroeconomic issues. But culturally they are largely the same so it has managed to work out so far under a single government/currency model. But this doesn't mean these conditions will continue forever and the US could face similar discord down the road and probably will eventually. Even in the US we had the Civil War which was trade related but also an expression of cultural differences (which goes FAR beyond the slavery issue often put forth).

Craig, I totally agree with you that the (wonderful ) cultural diversity of Europeans probably makes political and fiscal unification undesirable and unfeasible. BUT I think it is vital to be clear that the Euro currency is doomed because it is a monetary union without a fiscal union. If there was fiscal union, then the euro would work however much the people of europe hated it. India like europe has a massive cultural diversity with many languages etc. They have fiscal union with fiscal transfers across the country and so there is no Rupee crisis in the way that there is a Euro crisis.

In the link moda put up, it talks about "capital creation" and "consumption". I take it that house building accounts for much of the "capital creation". I think that is very important. To my mind building houses is totally different from building factories, irrigation schemes or anything that provides a means to earn money from foreigners or to import less. Becoming indebted to foreigners in order to build houses for yourself is always going to end in crisis. The euro is a screw up because Germans lent to the other countries so that the other countries could build houses. With seperate free floating currencies, the Irish punt and Spanish peso? would have devalued and so the German lenders would not have got back much Deutschmarks in return for the stupid property loans.

stone wrote: the Irish punt and Spanish peso? would have devalued and so the German lenders would not have got back much Deutschmarks in return for the stupid property loans.

Stone, it was the Spanish peseta.  Are people in the UK breathing (somewhat) easier because they did not go for monetary union?

With all that's happening in Euro-land, some, if not all, of those currencies might have to come back again:  French franc, Belgian franc, German Mark (Deutschmark), Italian lira, Spanish peseta, Austrian schilling, Netherlands (Dutch) guilder, Greek drachma, Portuguese escudo, Irish pound.  And a bunch of others.  I still have some of the old currencies stuffed in a scrapbook.

smurff wrote:

stone wrote: the Irish punt and Spanish peso? would have devalued and so the German lenders would not have got back much Deutschmarks in return for the stupid property loans.

Stone, it was the Spanish peseta.  Are people in the UK breathing (somewhat) easier because they did not go for monetary union?

With all that's happening in Euro-land, some, if not all, of those currencies might have to come back again:  French franc, Belgian franc, German Mark (Deutschmark), Italian lira, Spanish peseta, Austrian schilling, Netherlands (Dutch) guilder, Greek drachma, Portuguese escudo, Irish pound.  And a bunch of others.  I still have some of the old currencies stuffed in a scrapbook.

I kept my old currencies before the switch. I figured I'd have the chance to use them again once the Euro blew up. No joke.

Stone, you mention India as an example of a monetary AND fiscal union. The USA is another example. How would the absence of a fiscal union work out here?

Smurff, when they were seriously talking about the UK joining the euro, it was at 0.5 euros per GBP. The exchange rate is now 0.87 euros per GBP. I've no idea how things would have panned out if we had joined but I guess it would have been a disaster. As a concept I find the euro hard to fathom. Is the point of it to be an underhand way to force political integration on an unwilling public? Or is it a way to force the real economy to subsidize the financial sector (eg to get German car makers to bail out German banks via bailing out Greece)?

jmourk, are you wondering what would the USA be like without fiscal union? I guess US citizens would not pay any federal taxes. All the taxes would be state taxes. There would also be no US government bonds, only state bonds. The federal institutions would be paid for by each state making a payment. So if Nevada had a property bubble and collapse (as they did), they would still be liable to pay towards the US military etc but would have to do so from a much smaller economy and so taxes would rise. People would migrate away from Nevada because the taxes were sky high and there was no work. That would further shrink the economy. The Nevada state bonds would look certain to default and so would have 80% yields (or whatever they have in Greece). It would be almost impossible for Nevada to get enough tax just to meet the interest payments etc etc.

craigr wrote:

smurff wrote: I still have some of the old currencies stuffed in a scrapbook.

I kept my old currencies before the switch. I figured I'd have the chance to use them again once the Euro blew up. No joke.

I used to live in Spain (plus a couple of other countries).  Whenever the government would change the design of the currency, they would give everyone a deadline, like a couple of years, for exchanging any currency of the old design at a bank.  Anyone who missed the deadline would be left with a handful of paper and metal worth little more than tourist trinkets, at best.  (Use your favorite bathroom visualization for the "at worst.") 

Sort of like a NYC subway token--a historical curiosity, but no good for riding the subway, unless you exchange it for a Metrocard with a nostalgia buff.

In the USA, when the government. releases a dollar bill into circulation, it's completely acceptable as a dollar (or fiver, c-note or whatever) for commercial uses as long as it physically holds up and store cashiers can identify it.  Collectors cull the really old stuff out and put it in numismatic holders, because the collectible value is greater than its face value.  Even if you could, it would be dumb to spend a $2 face value silver certificate (worth $20 to $200+, depending) for a bag of Cheetos--even if the Cheetos are on sale.  

Lots of European countries used to do this.  If you had more than a certain amount past the deadline, some would allow you to ship the stuff to the central bank and appeal for an extension. 

Supposedly all this was done to stop counterfeiters, but it's also a good way to offload some governmental obligations without a formal repudiation--especially in countries with relatively weak currencies.  It's also a good way to keep the bulk of people's money accounted for in banks. And if you're a criminal with a lot of soon-to-be-expired cash hidden around, good luck getting it transformed into the new currency without attracting suspicion.  It's a way of collecting back taxes from the underground sector.

So craigr, you might have to use your saved pesetas and lira to line the inside of a hope chest. 

smurff wrote:So craigr, you might have to use your saved pesetas and lira to line the inside of a hope chest. 

Yeah my comment was somewhat tongue in cheek when you realize that perhaps the total value is less than $50 from all the countries. I kept them more for the novelty aspect. I figured they wouldn't be honored in the future and was done more as a symbolic gesture of the eventual demise of the Euro.

It's such a shame because some of the countries had very pretty currency that the Euro notes just can't touch. The old Dutch Guilders are my favorite.

My fave is from Czechoslovakia (it was called that then).  Great colors, pretty money.

The latest thing I heard was that in Greece they have stopped eating hummus and taramasalata, it is a double dip recession.