The Rope Limit, Redux

Sorry I haven’t written much recently.  The recent snowstorms have tossed me around, as I care for my family, and those around me.  It is amusing in a backwards way, to see Washington, DC frozen at a time when there is so much volatility in global finance.  Yo, Treasury, make sure the skeleton crew on international finance gets in, regardless.

The incentives are perverse in every way in Europe.  If Germany, France, and the Netherlands don’t bail out Greece, then what will become of Portugal and Spain?  And later, Italy and Ireland?  In aggregate, this is big.

But, if Germany, France, and the Netherlands do bail out Greece, then will Portugal and Spain be next in line?  And later, Italy and Ireland?  In aggregate, this is big.

Perverse, indeed, and I criticize my own thoughts on the Euro that I thought would die from inflation.  No such thing.  The Euro is strong —  So strong that marginal nations were able to borrow at rates lower than they ever dreamed imaginable.  The debts built up like mad, ignoring the day when the inevitable weakening in aggregate demand would come, and debts of marginal, overindebted nations would prove weak.  The EU is validating the idea that currency union requires political union.  We learned that in the US 200 years ago, but the youngsters in the EU have to learn that lesson the hard way.

This is an ugly situation, as ugly as China forcing exports into the rest of the world, or the US Government continuing to borrow with abandon.  What seems to have no limit may find the limit more rapidly than one anticipates.

Just be aware that sovereign volatility has negative impacts on asset prices.