Nothing matters right now except Europe.
The technical and real failures in the stock market, better jobs numbers, quibbling about recovery sustainability — all sideshows. Default in Europe is not merely inevitable, but under way.
Sometimes default comes in one "swell foop," and other times progressively or displaced, as now: a bank run in Europe is gathering speed, anticipating ultimate default. Hence the 10-year Treasury note to 3.39 percent, mortgages at 4.875 percent.
Europe coming apart confirms three large and acutely human lessons: the game-theory of bailouts, the morality of lifeboats, and the Newtonian physics of hot stoves.
Imagine that your house is on fire. Further, the tinderbox next door is inhabited by a neatnik-retentive who has hoses stacked at every bib.
YOU: Could I borrow a few?
NEIGHBOR: Use your own.
YOU: I only have one, and it burned up.
NEIGHBOR: You shoulda thought of that.
YOU: But, your house is going to catch fire.
NEIGHBOR: Not with my hoses.
Then the house behind it bursts into flame, and the next. You can’t use your hoses on both sides at once …
YOU: Please share, or the whole block is going to go.
NEIGHBOR: No. I’m not going to help people who aren’t prepared, and started the fire anyway.
One lifeboat, many people in the water. That lifeboat is designed for 20 people — 30 are already in it, with choppy water lapping at the gunwales. Try to rescue one more, and all will die. The group can decide whom to save, but how many is predetermined.
Source: European Central Bank.
You can use a stove unwisely for a long time and not get burned. One compound accident from a pan overloaded with bacon, and grease splashes, burns one hand, the other hand grabs the frying pan, burns, jerks away, knocks the pan over, the contents spill on legs and stovetop, nice big fire … One accident like that and you’ll eat cold food for a long time.
One action creates equal and opposite reaction.
How citizens, officials and bankers of the New World and the Old World can miss morality plays so simple is beyond me. By roughly 1990, fear of overloaded bacon, learned so hard in the 1930s, had faded.
A new compound accident began in July 2007, and U.S. authorities dithered. The fire department didn’t show up until half the block was gone, in September 2008.
The U.S. was blessed with a big fire department: by late 2008 the U.S. federal government had guaranteed basically every IOU and deposit in the land. In no small miracle, confidence in the "sovereign guarantee" held.
Europe’s sovereigns are scattered in millennial-old cultures. One currency chains them together in the water, but the lifeboat can hold only half. Try to get all in the boat, or all stay in the water … no matter what, they’ve all had it. No sovereign in Europe, or group, can save the weak. There’s no choice but to cut the chain.
This adventure is not a Lehman/2008 replay; it is a bigger Asian Contagion, circa 1997-98.
Germany will lead the strong to a new currency, but the bad debts of the weak held by the banks of the strong will be an immense economic drag.
The weak will go back to original currencies, devalue, and thereby repudiate most of $1 trillion dollars in debt held by the strong, and descend into depression, but also open their paths to recovery.
China’s hoard of export winnings includes euros to counterbalance Yankee wallpaper … now euro pasteboard. China and the emerging hotshots will lose their European consumers. Staying outside the system as predators has its own risks.
The one place to come out more or less whole: the U.S. The S&P 500 companies’ foreign earnings will fall in volume and currency value, but planetary cash will flood here, making it easy to sell Treasurys and keeping all interest rates low, maybe lower — maybe extraordinarily lower.
We’ll get a breather for our own budget fix. An over-strong dollar will hurt exports, but our import engine will once again — just as in ’97-’98 — pull the world forward to recovery.
The greatest single danger will be the hot-stove reflex away from credit. The U.S. is already deep in an aversion to lending and borrowing, but the only way out of this, ever since 2007, has been a resumption of prudent lending and borrowing.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at firstname.lastname@example.org.
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