The Greatest Crash – footnote

The story that could run for an awfully long time!

I rather revealed my newness as a US resident by posting my review of David Kauders’ book The Greatest Crash over 2 days last week,  one of them being Thanksgiving Day.  Despite that 1,895 people viewed my review which was entitled The end of an era.

A week has now passed since that review.  I was curious to see what sorts of headlines had been making the news in the last 7 days.  It’s just a random trawl through those items that have captured my attention.

Let’s start with the Financial Times, November 27th,

The eurozone really has only days to avoid collapse

By Wolfgang Münchau

In virtually all the debates about the eurozone I have been engaged in, someone usually makes the point that it is only when things get bad enough, the politicians finally act – eurobond, debt monetisation, quantitative easing, whatever. I am not so sure. The argument ignores the problem of acute collective action.

Last week, the crisis reached a new qualitative stage. With the spectacular flop of the German bond auction and the alarming rise in short-term rates in Spain and Italy, the government bond market across the eurozone has ceased to function.

Wolfgang concludes his article thus,

Italy’s disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most.

Then my print copy of The Economist that arrived on the 26th had this lurid cover page,

Unless Germany and the ECB move quickly, the single currency’s collapse is looming

The leader article contains this paragraph,

Past financial crises show that this downward spiral can be arrested only by bold policies to regain market confidence. But Europe’s policymakers seem unable or unwilling to be bold enough. The much-ballyhooed leveraging of the euro-zone rescue fund agreed on in October is going nowhere. Euro-zone leaders have become adept at talking up grand long-term plans to safeguard their currency—more intrusive fiscal supervision, new treaties to advance political integration. But they offer almost no ideas for containing today’s conflagration.

and a few paragraphs later, this,

This cannot go on for much longer. Without a dramatic change of heart by the ECB and by European leaders, the single currency could break up within weeks. Any number of events, from the failure of a big bank to the collapse of a government to more dud bond auctions, could cause its demise. In the last week of January, Italy must refinance more than €30 billion ($40 billion) of bonds. If the markets balk, and the ECB refuses to blink, the world’s third-biggest sovereign borrower could be pushed into default.

Then on Sunday, 27th, MISH’s Trend Analysis blogsite reveals,

ICAP Plc, the world’s largest inter-dealer broker (one that carries out transactions for financial institutions rather than private individuals), is now Testing Trades In Greek Drachma Against Dollar, Euro

ICAP Plc is preparing its electronic trading platforms for Greece’s potential exit from the euro and a return to the drachma, senior executives at the inter-dealer broker said Sunday.

ICAP is the latest firm to disclose such preparations, joining the growing ranks of banks, governments and other key players in the global financial system whose officials are worried enough about the stability of the common currency to be making contingency plans for a possible break-up.

Then Bloomberg published an article by Peter Boone and Simon Johnson, the latter of Baseline Scenario fame, that opened as follows,

Investors sent Europe’s politicians a painful message last week whenGermany had a seriously disappointing government bond auction. It was unable to sell more than a third of the benchmark 10-year bonds it had sought to auction off on Nov. 23, and interest rates on 30-year German debt rose from 2.61 percent to 2.83 percent. The message? Germany is no longer a safe haven.

and concluded,

Ultimately, an integrated currency area may remain in Europe, albeit with fewer countries and more fiscal centralization. The Germans will force the weaker countries out of the euro area or, more likely, Germany and some others will leave the euro to form their own currency. The euro zone could be expanded again later, but only after much deeper political, economic and fiscal integration.

Tragedy awaits. European politicians are likely to stall until markets force a chaotic end upon them. Let’s hope they are planning quietly to keep disorder from turning into chaos.

Finally, on the 29th the BBC News website carried details of the Autumn Statement made by British Chancellor, George Osborne, to Parliament.

Osborne confirms pay and jobs pain as growth slows

Chancellor George Osborne has said public sector pay rises will be capped at 1% for two years, as he lowered growth forecasts for the UK economy.

The number of public sector jobs set to be lost by 2017 has also been revised up from 400,000 to 710,000.

Borrowing and unemployment are set to be higher than forecast and spending cuts to carry on to 2017, he admitted.

Just look at that figure of public sector job losses – 710,000!

Well that’s more than enough from me but it does surely endorse the opening views that David Kauders expounded in his book, as carried in my review, and reproduced here,

Starting with the first sentence, David sets out the core problem;

This book argues that it is impossible to expand the financial system much further.

expanding this a few paragraphs later,

This is the financial system limit: lack of new borrowing plus excessive weight of debt obligations from past borrowing combine to slow economies down. This is the barrier whichever way policy makers turn. It is like the lid on a boiling kettle. Enough steam can lift it for a while but it always snaps back into place. The financial system limit is a roadblock preventing growth.

A few pages later in this opening chapter ‘The roadblock preventing growth‘ this limit is explained thus,

Policy contradictions also show us that the financial system has reached a roadblock. The glaring conflict between bailout and austerity is at the core. Each bailout or stimulus requires creation of more credit, leading to false financial speculation, and for a short while markets recover their poise. The threat of inflation returns. Later, bad debts rise, the markets tumble again and a new crisis emerges. Austerity, the alternative policy, cuts spending thereby cutting the immediate level of economic activity and bringing economic decline more quickly than the stimulus alternative. Whichever way they turn, the authorities are damned.

You can understand why I called this Post a ‘footnote’ not an endnote.

6 thoughts on “The Greatest Crash – footnote

  1. All caused by the idiotic (NO OTHER WORD will do) over-borrowing of utterly cowardly and incompetent national governments.”Cowardly”? – because they can’t say “No” when it comes to spending, especially to their OWN supporters. Thus civil services are bloated beyond reason, pensions are totally unaffordable, private sectors are shrinking, Europe is sinking into the sand.

    The worst of all was Gordon Brown, who took over a reasonably healty debt situation and after 13 years handed over a country that is essentially bankrupt, even though he told us he had abolished “Boom and Bust”.

    Apart from generally overborrowing, EVERY SINGLE COUNTRY in the eurozone (as far as I know) broke the euro’s OWN RULES about borrowing relative to GDP.

    This has all led to economic meltdown in Europe. The fact that the USA is just as bad if not worse and yet is lecturing US on what to do is either her nor there; everyone has to put his OWN house in order, and there is little sign that the USA is doing that. Their credibility is as bad as Greece’s.

    It really is time there was a law “Reckless Misue of Public Money” that we could use to sling Brown et al into jail. MILLIONS are going to suffer severe economic hardship NOT OF THEIR OWN FAULT, while the architects of this shambles go as yet unpunished, or even as far as can see unrepentent. Their pathetic and toadying acolytes – Balls, Milliband et al – are even AT THIS MOMENT castigating for not borrowing even MORE those who are having to deal with this Augean stables .

    Well, the British voted the Labour rabble in THREE TIMES. Perhaps it IS our fault after all.


    1. Chris, I agree with you about the incredible cheek that Balls and Milliband have to demand that we spend our way out of a debt crisis but, as Kauder says, either way, we seem to be damned…

      For the record, like many others I suspect, I only voted for Tony-I-B-A-Liar twice…


  2. Paul, thanks for this “footnote“. I sympathise with your Thanksgiving faux pas. I have often wondered what it was/is all about and, last week, a post by a fellow-blogger prompted me to check; and to post my comments here.

    With regard to Europe, thanks for the warning: I was aware of the failure of the German bond market auction but had been duped into thinking this was not surprising because such a low interest rate was on offer. However, the fact that people don’t want to buy Italian bonds either implies that no-one wants to buy any European bonds at all. You will know by now that I am not at all impressed with the way the financial services sector can hold entire countries to ransom like this but, accepting the world as it is for a moment, the prognosis is clearly not good. I was therefore a fool to think the crisis had gone away.

    This leads me to my final point regarding the UK and Osborne’s Financial Statement. Its tone was well-trailed in advance, but its content was nevertheless truly alarming. Even at the tender age of 46, I can appreciate that the prospect of 6 years of austerity measures is completely without precedent; worse even than the great depression of the 1920s. People say that “fear” is an important evolutionary survival mechanism but, if so, of what evolutionary benefit is “compartmentalisation”… 2 million public sector workers are on strike today demanding a better pension! What about a better economic system, or even a better planet? How is it that people can be so self-centred and demand justice for themselves, whilst ignoring all the injustices we are inflicting on those least able to adapt; and/or bequeathing to our descendants? We worry about the implications of the current financial crisis when it is becoming evermore clear that – just around the corner now – we face something 10 or 100 times worse, that we probably won’t be able to fix, the consequences of which will be with us for generations if not centuries…

    So, it seems that “denial” is also an evolutionary survival mechanism – but not a very good one.


  3. Hi Paul and Chris!
    Wow, I entirely agree with what Chris (Snuggs) just wrote! For once he is not attacking the principle of a United Europe, but focusing on (some of) the corrupt!

    You are lucky to have nearly 2,000 readers in a few days. Personally I am a bit tired of writing in the wilderness.
    If a thinker thinks among the trees, does anything happen?

    In any case the bottom sin is the privatization of public money. No civilization has ever survived this. Although it has happened before, generally, at least the culprits are in plain sight: tyrants, aristocrats, etc… This time they act through the “invisible hand”, hiding as they do, behind leverage.

    Corzine’s “MF Global” hedge fund failed with a leverage of 44 to 1, and yes, he was messing up with Italian sovereign debt. Corzine has headed Goldman Sachs and New Jersey, thus making him a poster boy for the erroneous role played by finance! Want a poster girl? Before she became a TV executive, the Clinton daughter was also a hedge fund manager. When she got married, the FAA and Secret Service blocked part of the airspace. Was she ever elected? Not by the people. But by the plutocracy, certainly.

    And were the 300 billion stolen by the Libyan dictator returned yet? No. Too busy the bank managers are profiting from it.


    1. Dear Patrice, you wrote, “Personally I am a bit tired of writing in the wilderness.
      If a thinker thinks among the trees, does anything happen?” Well my only response to that is PLEASE do not stop thinking. Your thinking has been an inspiration to me so many times and I bet I am not alone in that. A guest post, or cross post, from you is welcome on this Blog at any time. sincerely, Paul


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