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Expecting the Worst

27 Temmuz 2012 Cuma

The Spanish bailout was agreed to this month, but with so many restrictions and indications that it isn't the start of something bigger that the markets were, to say the least, not happy.

I also think it's especially interesting to see just how much the recent rally in Irish bonds reflected hopes that the country's bank rescue could be "Europeanized"; once those hopes were dashed, it all went away. So when does the full-blown crisis start? Hard to say. At least some indicators say that the market expects the worst, but not right away.

It really does seem as if we're looking at Dornbusch's Law in action. Commenting on Mexico's economic crisis in 1995 for a "Frontline" series, the late economist Rudi Dornbusch told an interviewer: "The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought, and that's sort of exactly the Mexican story. It took forever and then it took a night."

And God, do I wish Rudi were still with us. He would have been in his element, and would have been a really important voice for sanity.

Inflationary Obsession

A recent article in Business Insider, "The World Is Experiencing the Opposite of a Sovereign Debt Crisis," was, I thought at first, just saying the obvious. Then I looked at the comments.

In the article, published online on July 15, the deputy editor Joe Weisenthal makes the well-known point that aside from the experiences of certain euro area countries, yields on sovereign debt have plunged since 2007; investors are rushing to buy sovereign debt, not fleeing it. I was a bit surprised by his description of this insight as being non-mainstream -- I guess it depends on your definition of mainstream. But surely the notion that what we have is largely a process of private-sector deleveraging, with government deficits the consequence of this process, and interest rates low because we have an excess of desired saving, is pretty widespread (and backed by a lot of empirical evidence).

And there's also a lot of discussion, which I'm ambivalent about, concerning the supposed shortage of safe assets. This is coming from bank research departments as well as academics, it's a frequent topic on the Financial Times's Alphaville blog, and so on. So Mr. Weisenthal didn't seem to me to be saying anything radical.

But those comments! It's not just that the commenters disagree; they seem to regard Mr. Weisenthal as some kind of space alien. They consider it just crazy and laughable to suggest that we aren't facing an immense crisis of public deficits with Zimbabwe-style inflation just around the corner.

And I know that it isn't just the Business Insider commenters; pretty obviously, the great majority of people who spend their time watching financial news and reading financial blogs operate in an intellectual universe where the surpassing evil of deficits and the imminence of vast inflation are just what everyone knows; year after year of low interest rates and failure of inflation to take off -- which must have cost people who believe this stuff a lot of money -- makes no dent in that certainty.

It's an interesting phenomenon. I don't think it's just a product of the usual propaganda efforts from the right. There's something about the "Deficits! Inflation!" story that evidently resonates with a lot of people no matter how often and how badly the worldview fails in practice -- and is also completely resistant to attempts to point out that things must add up, that everyone can't simultaneously spend less than their income.

What's going on? I have some ideas, which I'll try to flesh out in the future. And of course there's a self-reinforcing character to this mindset: because it's what consumers of financial media want to hear, purveyors of content respond by telling them this stuff, to such an extent that they're shocked and mystified when someone like Mr. Weisenthal points out that it just ain't so.

Anyway, I think it's important to get a grip on this phenomenon, which is one of the factors distorting our policy debate.


On July 20, finance ministers from the 17 nations that use the euro officially approved the terms of a bailout for Spain's banking sector, which continues to struggle after the collapse of the country's real estate market.

The agreement stipulates that the European Union will provide up to 100 billion euros to Spanish banks as needed, and these bailout loans will flow directly to the banks in order to avoid saddling the government with more debt. To bolster banks' balance sheets, so-called "toxic assets," which total about 200 billion euros, will be transferred to an Asset Management Agency -- which is, according to an analysis by Daniel Woolls of the Associated Press, "essentially a 'bad bank'" -- and then sold later.

While some policy makers hailed the agreement as a step in the right direction for Spain, global markets did not respond positively, and the euro fell to its lowest level in more than two years. Many economists have suggested that this reflects growing concerns that Spain's government will need its own bailout, especially after officials from the heavily indebted province of Valencia announced this month that they would seek financial help from Madrid.

"The great blag and bluff of the euro zone has always managed to kick the can down the road, but it is no longer a viable strategy," Marc Ostwald, a strategist at Monument Securities in London, told a reporter for Bloomberg. "We're getting to a crunch point."

Spain is facing its second recession in three years. And while interest rates in troubled countries like Spain and Italy are hitting new highs, yields have reached negative values in nations like Denmark and Germany. "When investors in Europe are prepared to park their money for two years at a negative yield," wrote the commentator Michael Mackenzie in a Financial Times article published on July 19, "it is a clear signal of fear that the euro zone is in imminent danger of breaking apart."

Romney Still Doubling Down on Failed Policies

There's a tone of incredulity to the writings of Romney apologists. It seems as if they can't believe that the magic words -- Capitalism! Free markets! Job creators! -- aren't silencing his critics. After all, they say, wasn't Mitt Romney just doing what has been standard for the past 30 years?

Actually, we don't know just how standard his behavior was and won't until we see his tax returns, which will probably never happen (there has to be something really explosive in there). In any case, however, the fact that we've had a Gordon Gekko economy for 30 years doesn't make it O.K.

A couple more illustrations of what those 30 years involved. First, a chart on wage stagnation despite rising productivity, on this page. Second, a dramatic rise in household debt, which many of us now believe lies at the heart of our continuing depression. See the second chart on household debt as a percentage of gross domestic product.

You might ask, what should be done about this troubling performance? Well, President Obama is proposing mild meliorative measures: reform that at least assures workers of having health insurance, and modestly stronger financial regulation. Mr. Romney, on the other hand, wants to double down on the policies that brought us to where we are today: more tax cuts for the rich, more financial deregulation.

And his defenders are mystified that anyone should question the wisdom of this point of view.

Decoupled and Divided

Predictably, Mr. Romney is accusing Mr. Obama of "attacking capitalism" and "dividing America" by raising questions about Bain Capital and those hidden tax returns. This is all par for the course; many of us remember how any criticism of President George W. Bush was unpatriotic, and if I recall correctly, during the dot-com bubble The Wall Street Journal argued that any skepticism about stock market valuations showed a lack of faith in free markets.

The special Romney twist is his desire to have it both ways. He's proud of his business record and his success, he says, but at the same time wants us to believe that he had nothing to do with Bain's actions over a three-year period when he was still its C.E.O., and is completely unwilling to let us see the tax returns that would tell us something about exactly how he achieved his current wealth. (There are two competing theories about his tax stonewalling. One is that he had one or more years of zero taxes. The other is that he actually made a lot of money in 2009, because he shorted the market. We may never know which is true.)

Anyway, just a reminder about what's really dividing America: the fact that a rising tide no longer raises all boats. And there has been a dramatic decoupling between overall economic growth and the fortunes of the typical family.

It's not an "attack on capitalism" to suggest that growing income disparities and the corresponding failure of most Americans to benefit from rising productivity are problems. Still, what can be done? Well, you can ask the rich to pay somewhat higher taxes, and you can strengthen the safety net -- which is what Mr. Obama actually advocates. But Mr. Romney wants to do the reverse.

So Mr. Romney wants us to celebrate the success of people like him, even though their success doesn't seem to have benefited ordinary families, and even though he stands for policies that would aggravate the gap between a fortunate few and everyone else.

And then he accuses Mr. Obama of dividing America.