Noted M.I.T. economics professor and former International Monetary Fund (IMF) chief economist Simon Johnson has just made some rather ominous statements over the past 24 hours which are worthy of note to anyone following global and domestic economic developments, specifically with regard to what’s occurring in the euro zone and how it will affect the rest of the world. (More about this in a moment.)
That being said, I’m definitely of the opinion that Johnson somewhat damaged his “brand” when he accepted a fellowship from the Peterson Institute for International Economics, awhile back. (i.e.: aligning himself with others on the austerity bandwagon—then again, some of our most celebrated, status quo-backed, neoliberal Dems and others went down that same route, too, didn’t they? [Clears throat: Ahem.] Laura D’Andrea Tyson, Peter Orszag, Larry Summers and Paul Volcker, among many others, currently serve on Peterson’s Board of Directors.) And, he further exacerbated that misstep when he briefly sang the praises of Jon Huntsman over the past year, as well.
But, the reality is that perhaps his greatest work, the book, “13 Bankers,” and a record of public commentary that he had developed, especially in 2008-2009, as one of the most prescient economists of our “Lesser Depression,” truly stand out as beacons of progressive economic history and thought, IMHO. Johnson’s clarity during that period is brilliantly demonstrated by a read of the following MSM pieces from those couple of years, including: “The Quiet Coup,“ “The Two-Track Economy,” and “More On The Two-Track Economy…” among others. (IMHO, for anyone supporting and/or following the Occupy movement, these three pieces should be required reading.)
Last night, he posted another, rather huge milestone of a piece over at HuffPo, and a variation of the same over at his Baseline Scenario blog. It’s quite timely and extremely worthy of discussion…
“The End Of The Euro: A Survivor’s Guide”Johnson continues on to remind us that the European economy amounts to a third of the world’s GDP. Additionally, we’re told that total sovereign debt on the continent is roughly “$11 trillion, of which at least $4 trillion must be regarded as a near term risk for restructuring.”
By Peter Boone and Simon Johnson
Baseline Scenario blog
May 28, 2012
In every economic crisis there comes a moment of clarity. In Europe soon, millions of people will wake up to realize that the euro-as-we-know-it is gone. Economic chaos awaits them…
… Greece’s economy can only get worse.
Some European politicians are now telling us that an orderly exit for Greece is feasible under current conditions, and Greece will be the only nation that leaves. They are wrong. Greece’s exit is simply another step in a chain of events that leads towards a chaotic dissolution of the euro zone…
… The end of the euro system looks like this. The periphery suffers ever deeper recessions — failing to meet targets set by the troika — and their public debt burdens will become more obviously unaffordable. The euro falls significantly against other currencies, but not in a manner that makes Europe more attractive as a place for investment.
Instead, there will be recognition that the ECB has lost control of monetary policy, is being forced to create credits to finance capital flight and prop up troubled sovereigns — and that those credits may not get repaid in full. The world will no longer think of the euro as a safe currency; rather investors will shun bonds from the whole region, and even Germany may have trouble issuing debt at reasonable interest rates. Finally, German taxpayers will be suffering unacceptable inflation and an apparently uncontrollable looming bill to bail out their euro partners.
The simplest solution will be for Germany itself to leave the euro. Germany’s guilt over past conflicts and a fear of losing the benefits from 60 years of European integration will no doubt postpone the inevitable. But here’s the problem with postponing the inevitable – when the dam finally breaks, the consequences will be that much more devastating since the debts will be larger and the antagonism will be more intense.
A disorderly break-up of the euro area will be far more damaging to global financial markets than the crisis of 2008…
He also points out that this includes a “…market for 185 trillion dollars in outstanding euro-denominated derivative contracts, [which] will be in turmoil and there will be large scale capital flight out of Europe into the United States and Asia. Who can be confident that our global megabanks are truly ready to withstand the likely losses? It is almost certain that large numbers of pensioners and households will find their savings are wiped out directly or inflation erodes what they saved all their lives. The potential for political turmoil and human hardship is staggering…”
(I most recently discussed these inconvenient truths concerning the derivatives casino in multiple posts over the past three or four days. You may access those titles HERE.)
He notes that it’s critical for officials in Europe and at the IMF, along with the rest of the global community, “…to work on how to dismantle the euro area…while extricating itself from this colossal error of a single currency.”
He ends with even more ominous commentary, and I’m not going to fill in the blanks here. You really should checkout his words today. Links to it are up above.
# # #
One more thing. I find it typical of the blogosphere’s sometimes - misdirected narrative, wherein a few folks go to great lengths to lay down the grossly false claim that because one reports upon the commentary of another (one, I might add, far better qualified to comment on all of this than anything I could add to the discussion), “the messenger” therefore is assumed to support all or most of the messages of the individual upon whom they’re reporting.
Let me be clear here: that’s typical of a pitifully shallow effort to discredit facts. (i.e.: so-and-so posted a piece about so-and-so, therefore, this is what the diarist believes.) Let me be even more direct: It IS pure, unadulterated bullsh*t.
And, folks who enter into that grossly oversimplified, inherently failed exercise in distortion and false equivalency are insulting the intelligence of the audience, if not outright lying to its readers; and this is the truth, no matter where it occurs.
Once again, as I have many hundreds of times over the course of almost six years here, I’m providing this community with input from an outside source. It’s meant to inform and foster intelligent discussion. Do I agree with everything that the outside source believes in? Hell, no. That sentiment goes for the thoughts of Paul Krugman, Yves Smith, and a myriad of others, too. (However, I will state—as I have at least a few times up until now--that when it comes to economics and social change, if there is anyone with whom I concur almost 100% of the time, it is Joseph Stiglitz.)
So, have at it…