Tuesday, 8 May 2012

European ‘Titanic’ sails blithely on [updated]

"Despots and democratic majorities are drunk with power. They must reluctantly
admit that they are subject to the laws of nature. But they reject the very notion of
economic law . . . economic history is a long record of government policies that
failed because they were designed with a bold disregard for the laws of economics."
                           - Ludwig Von Mises

The economic future of Europe is now certain. It looks like this:

The sinking of the Titanic, commemorated in recent weeks, has parallels with the sinking of Europe—a process that has only accelerated in recent days with the election of governments promising voters they can eat their cake and have it too.

The Titanic hit an iceberg, took on water, and sank.  Nothing could save it--not pumps, not bailing, not wishing the huge hole in the side would go away. One by one its non-watertight bulkheads filled up with water, the great ship broke in half, and it went to the bottom taking thousands of souls with it.

The parallels should be obvious: European economies hit an iceberg and are now sinking because of the inrushing waters of their governments’ debts—debts accumulated in part because of decades of welfare and years of overspending, and in part because of a futile attempt to prop up all the bad positions exposed in the crash. They wished the reasons for the crash would go away, and hoped a mountain of government debt would fend off reality.

They were mistaken. It is the inrushing tide of government debt that will now sink them.

It has been said that in rejecting the ruling parties this weekend French and Greek and British voters were protesting the “austerity” measures adopted by their governments. But not one of these governments had even bothered to cut their over-spending (which might be defined as spending more than you take in). None had elected to begin what might have been the life-saving process of cutting their coat according to their cloth; none  had chosen to spend less than it took in.  In all these places, and in places with even greater reason to face reality rather than fake it, the most that was ever done was just to reduce the rate at which their overspending  was allowed to accelerate.

This was and is insane. When your boat is sinking by an incoming tsunami of government overspending, it is not “austerity” to begin bailing out your ship with a teaspoon.

Yet this is all those governments had ever agreed to do. And now Europeans have voted for parties promising to to take away even the teaspoons, and to effectively rip an even bigger hole in their hull.

Which means the end will be even closer than before. Because the newly elected democratic majorities’ commitment to overspending will deliver the coup de grâce to any hope of .  This is the moment when—like the Titanic—the back of the Leviathan is broken and the Eurozone splits into two and sinks..

It is still argued that the overspending was necessary. That without government borrowing and spending taking up the slack,  European countries would have faced economic disaster. Yet because the government spending allowed the malinvestments exposed in the crash to continue—allowed all the bad positions to survive—the response has effectively guaranteed that recovery will not happen (recession being loosely defined as the period whereby bad positions are extinguished and the economy exposed as being “out of whack” begins to rebalanced and re-start), and bad government over-spending has effectively crowded out what could have been good private capital spending, i.e., the type of spending that must precede any genuine recovery. The result has been a sinking ship of stagnating economies, zombie companies, and huge and increasing unemployment

This is not despite the governments’ “stimulus,” but because of it.  The governments’ responses ensured recovery could not happen—and it invited the debt tsunami that is now going to sink them.

What they were relying on—and by “they” I mean every overspending Eurozone government, whether elected in or elected out—what they were all relying on (they hoped) is that they could eat their cake and have it too.  And they hoped this  could happen because the Eurozone arrangements virtually guaranteed (they thought) that while they were eating their cake the Germans would carry on baking it for them.

But even a guilt-ridden Germany can only shoulder so much. In what Peter Schiff calls "a startlingly frank assessment of the current problems in Europe", Dr. Andreas Dombret of the Executive Board of the Deutsche Bundesbank (the German central bank) makes the problem plain:

...Exchange rate movements are usually an important channel through which unsustainable current account positions are corrected....In a monetary union, however, this is obviously no longer an option. Spain no longer has a peseta to devalue; Germany no longer has a deutsche mark to revalue. Other things must therefore give instead: prices, wages, employment and output.

The question now is which countries have to shoulder the adjustment burden. Naturally, this is where opinions start to differ. The German position could be described as follows: the deficit countries must adjust. They must address their structural problems, reduce domestic demand, become more competitive and increase their exports.

In banker speak, that means he sees no appetite for Germany to carry on baking the Southern Europeans’ cake for them unless they intend to adjust.

And since European voters are making plain they would rather sink than make any adjustment at all, that makes what happens next all but inevitable.

Glug, glug, glug.


Europe’s election results remind Don Watkins of a scene near the end of Atlas Shrugged.

“…Sure, I could pretend—and I wouldn’t save your economy or your system, nothing will save them now—but I’d perish and what you’d win would be what you’ve always won in the past: a postponement, one more stay of execution, for another year—or month—bought at the price of whatever hope and effort might still be squeezed out of the best of the human remnants left around you, including me. That’s all you’re after and that is the length of your range. A month? You’d settle for a week—on the unchallenged absolute that there will always be another victim to find.”


  1. Good riddance to bad rubbish, frankly. The European democratic Socialism experiment will go down in history as yet another failure of all-powerful statism to deliver human progress. The only question is whether the US will follow Europe down the gurgler and whether NZ's politicians have the balls to start planning for the inevitable fallout.

  2. Actually, the surprising thing is that it seems no one has pointed to the arrogance of the experiment which some politicians and bureaucrats thought that they would play with a 'nation's' currency. It takes me back to the Fletcher Challenge letter stocks. Sometimes mad people just have to be restrained from experiments which affect everyone but start as the private "let's see what happens" approach of the instigators.

  3. the drunken watchman8 May 2012, 19:14:00

    "This is the moment when—like the Titanic—the back of the Leviathan is broken and the Eurozone splits into two and sinks.."

    so when does it happen?

    been waiting long enough :)

  4. the drunken watchman8 May 2012, 19:17:00

    I believed Doug Casey when he said this 30 years ago. Wish I hadn't.

    As a result of taking his advice, I stayed poor while all around me others grew rich by not believing him :(

  5. fuck you Europe, fuck you hard,
    all i want is NZ currency better ;
    and we will do it , fuck you China pay rates

  6. reduce the rate at which their overspending was allowed to accelerate.

    Or do you mean:

    reduce the rate at which their overspending was allowed to accumulate.

    The first is a reduction in the increase in acceleration of spending; the second a reduction in the acceleration of the spending itself. (it’s a bit better but still not cutting spending)

  7. “The governments’ responses ensured recovery could not happen”

    There was nothing to recover in the first place. All that pre GFC money went into PIIGS property & welfare bubbles.

    Leave the EU & default. PIIGS economies return to olive, potato & orange growing.

    Instead sundry blood & soil fascists / commies are being elected across Europe promising equality for all. Titanic’s sister ship will be hitting the iceberg next night.

  8. It's just the same as the mid-80s

    In the mid-80s, US capitalism out-competed and destroyed eastern european communism.

    In the mid-10s, Chinese capitalism out-competed and destroyed western european communism.

    NZ of course is still a communist country.


1. Commenters are welcome and invited.
2. All comments are moderated. Off-topic grandstanding, spam, and gibberish will be ignored. Tu quoque will be moderated.
3. Read the post before you comment. Challenge facts, but don't simply ignore them.
4. Use a name. If it's important enough to say, it's important enough to put a name to.
5. Above all: Act with honour. Say what you mean, and mean what you say.