On Wednesday, November 23, something potentially catastrophic happened: Germany, considered the rock-solid safest place in Europe, tried to sell bonds and there were not enough buyers. In other words, the world market was afraid to buy German debt.
I told Ann, "This is either the first sign of Armageddon or something really big is going to happen very soon."
Exactly a week later we got something big: The US Federal Reserve (our central bank) is leading a joint effort with Canada, Japan, Britain, Switzerland and the European Central Bank to push "dollar liquidity."
What does that mean? The US is basically lending billions (trillions?) of dollars to the other central banks. The world operates on the dollar - something I knew but didn't quite realize how true it was until I moved here. Those central banks will lend them to their banks. Those banks will, hopefully, start lending again. The world's monetary system is on life support right now and this is a very good, albeit short-term medicine.
I can't wait to see how this plays out for the public in the US. I see this as nothing short of "America comes to the rescue of the world" but it can be easily played by the right wing as "Obama is bailing out the rest of the world." Never mind that the Federal Reserve is not part of the Obama administration.
I don't write about the economy much because I fear there are so many ways things can get worse that it is simply too depressing. And, really? If the euro collapses all bets are off. Today's action does nothing to keep the patient alive beyond a few months. Unfortunately, in this case the patient is the world economy. Austan Goolsbee (the best economist Obama appointed when elected but then ignored) depressingly sees no positive outcome to the euro crisis.
"Today's action does nothing to keep the patient alive beyond a few months"
ReplyDeleteI totally agree with that statement Steve. All the governments establish plans to save money but the car is driving upon a wall and instead of turning around the politicians do just slow down the speed a little bit.
The biggest expenses of Germany are in the social system but the politicians are not brave enough to cut costs in this sector. The probability, that our next government will be a left coalition is not low and I am pretty sure the costs in the social sector will increase if this will be the case. In my opinion, the savings are just done, if nobody, or let's say not many voters, are seriously hurt … but it will not work like this.
Another issue is that the systematic problems of the euro zone are not really solved. One trigger for the debt crisis was the interest rate. It is definitely too low for the southern countries. I do not like the idea of a uniform monetary policy for Europe as long as we don’t have a uniform fiscal policy (like in the US). But there is no change happening at the moment, because there are too many countries involved which have particular interests.
So far, the crisis is not really affecting our daily life (at least this is true for Germany), but if the day comes, that a rating agency will lower the rating of Germany the situation will change. My fear is that at the end of the day, there will be a hyperinflation that “solves” the debt crisis. And I am not alone with that fear … look for example at the prices of gold or real estates.
Thanks for the comment Lukas. All interesting points... I am interested in the incredible fear of hyperinflation among Germans. Your country remembers the problems of the 1920's much better than my country remembers the problems of the 1930's!
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