Kyle Bass: Greece a failed state, Euro will collapse, Japan debt crisis next

[Beet]

Japan really needs to print more money, have more babies, and rediscover entrepreneurship and innovation. Its problems may lead to what Bass says, but they are fundamentally different from Greece.

As for Greece, it will survive.

It is remarkable that there is more wealth today than ever in history, and our fundamental problem is that there isn't enough work for people to do. Just think of it! Yet we act as if the problem is that we don't have enough stuff, rather than that the system that we ourselves designed, created, and support is sending us signals that we dislike. Mostly it is the bottom billion in the world that knows of want.

[Beet]

The Euro will (probably) not collapse. It seems likely that Greece is going the leave the Eurozone though. (And it will be for the best of both Greece and the rest of the Euro states.)

If Greece leaves it will trigger contagion. Look what happened when Lehman Brothers collapsed.

[Beet]

The Euro will (probably) not collapse. It seems likely that Greece is going the leave the Eurozone though. (And it will be for the best of both Greece and the rest of the Euro states.)

If Greece leaves it will trigger contagion. Look what happened when Lehman Brothers collapsed.

Spain and Portugal might fall out as well, but I don't think we'll see a complete collapse of the Euro.

If Spain falls out, Italy will too. If Italy falls out, so will France. If France falls out, the entire point of the project is finished.

[Beet]

The Euro will (probably) not collapse. It seems likely that Greece is going the leave the Eurozone though. (And it will be for the best of both Greece and the rest of the Euro states.)

If Greece leaves it will trigger contagion. Look what happened when Lehman Brothers collapsed.

Apples and oranges.

Not at all. Exactly the same.

[Beet]

The Euro will (probably) not collapse. It seems likely that Greece is going the leave the Eurozone though. (And it will be for the best of both Greece and the rest of the Euro states.)

If Greece leaves it will trigger contagion. Look what happened when Lehman Brothers collapsed.

Spain and Portugal might fall out as well, but I don't think we'll see a complete collapse of the Euro.

If Spain falls out, Italy will too. If Italy falls out, so will France. If France falls out, the entire point of the project is finished.

Nah.  Once it gets to the point that countries Germany actually cares about might be forced to leave the Euro, Germany will agree to step in and backstop the Euro more.  Germany has no reason to care about Greece or Portugal.  It definitely cares about France and Italy, but I'm not certain about Spain.

Except that markets will see the logic that Germany also agreed to backstop Greece, then went back on its word when the price became too high, and the Greeks didn't implement enough austerity. It would be the same eventually with Italy or France. Italy won't tolerate being Greecified either. It's really a domino effect here. The logic is the same for all countries. You either agree to open-ended transfers and expansionary policies which are democratically sustainable, or you don't.

[Beet]

You either agree to open-ended transfers and expansionary policies which are democratically sustainable, or you don't.

They aren't democratically sustainable. In Germany.

So you assert, but there's no evidence for that yet (unlike in the periphery). Merkel's approved every bailout to date, and her rating remains pretty high. And the SPD also supports the same policy and is doing fine.

The thing with monetary transfers is that people don't really feel it when the government prints money and hands it out. People only feel the effect of monetary expansion if it's inflationary. Yet in the case of Germany, any inflation would be accompanied by rising wages, since the German labor market is and will remain tight so long as there is no crisis, and the Euro remains in place.

If on the other hand, the EZ collapsed, Germany would be forced to depreciate the DM by printing money (or face a reversal of its employment gains, which Germans would feel), and the effect on inflation would be the same.

[Beet]

The issue will not be "rendered moot", because even if the banking system did collapse, Greece would still need an expasionary fiscal and monetary policy. As would the rest of Europe. What I have been bleating on and on about here, repetitively and to no end for the past two years does not change one iota.

The issue will be rendered moot when policymakers adopt expansionary policies. So long as they continue to adopt contractionary policies, the situation will get worse (note here that I am including labor market reforms under expansionary category. Unlike simple austerity, which contracts aggregate demand, labor market reforms that break downward wage rigidities can increase employment and thus increase aggregate demand over time).

[Beet]

There are certainly policies that policymakers could enact that would turn things around. If they're not "plausible" it would only be because the will to make the right decisions is lacking. All of Europe needs exPansionsry policies now. In some areas (such as wages) Germany needs them most of all. Of course the narrow policies needed vary from country to country. But that just proves the need for cooperation, because no country is an island and none can succeed without the help of others. I do not argue that the movements of the right and left arm be identical, but I do want them to both move together with the aim of picking up the object (in this case trade imbalances) to avert the greatest economic disaster in Europe in our lifetimes

[Beet]

The more money in German hands the better. Increased demand in Germany will be essential to rebalancing.

The strategic costs of a breakup of the EZ also must be considereds as it is the greatest of all costs. In a stroke, Europe's chance to punch its weight in the world and challenge the dollar as the world's premiere currency are shattered. The dream of a European superpower speaking with one authoritative voice in a world of rising powers like China and India would be dealt a mortal blow. In a way it would almost be in the American long run interest for Europe to fail, but it would be a defeat for any human attempt to transcend petty nationalism and thus a sort of defeat for all humanity.

[Beet]

To make the dream of one voice come true it would have helped to have one elected government. Starting with one currency was putting the cart before the horse and it produced what it was designed to produce: a pipe dream. If you want to continue dreaming, nothing prevents you from calling all the splinter currencies "euro" (as in Greek euro, German euro, French euro, etc.) You know: close the window shades, sing "tuc-tuc-tuc, tuc-tuc-tuc" and dream of a long and eventful rail travel.  

Except the currency hasn't splintered. It's still salvageable. 70% of Greeks want to remain on the Euro. The Chancellor of Germany wants the Greeks to remain on the Euro. The head of the ECB wants Greece to remain on the Euro. The heads of ND, Syriza, PASOK, and DIMAR want Greece to remain on the Euro. All the significant parties all agree. The only one dreaming is you. The real dream? The real dream is the notion that high inflation is somehow a threat in this situation. High inflation is not, and never will be a problem so long as the Euro holds together. I am willing to bet anything on that.

[Beet]

Well yes, we are getting closer to it because on both sides (Germany and Greece) have not been doing what is needed. I still hold out hope that faced with the reality of disaster that a breakup would be, it would push politicians to do the right thing. This generation of politicians has a redenzvous with destiny. But compared to what their mothers and fathers and mentors faced, it is nothing. Nothing. Their mothers and fathers faced Soviet tanks along a 1,000-mile front. It appears that this sharpened their senses, put the fear of god in them, and gave them a proper appreciation of social stability, keeping down debt levels, regulating finance, having a strong middle class, controlling unemployment, of coordination, and community, between nations. The current generation finds it more difficult. Well, it does not need to be as hard as it is being made out to be. This is no natural disaster or war. It is a matter of relations between communities of humans and as such, it can almost by definition bet worked out in an orderly fashion, provided that those involved have the will to do so. That is my view.

Greece can also get out from under obligations by default. It defaulted earlier this year and the banks ate their losses; this did not cause huge problems because it was controlled. So Greece does not need inflation. Currently, most of their obligations are to the official sector, IIRC. As long as the interest rate is low, it will not be a problem. Official sector obligations don't face liquidity problems; they're under the control of officials. Greece's repayments can be extended indefinitely, or even OSI can be brought in. But if Greece leaves the euro, of course there is no way Greece will be able to repay anyway.

[Beet]

Ok, by previous generation I meant the generation previous to that of Maastricht. Admittedly the Maastricht generation screwed up - of course. No one is disputing that their actions brought us to where we are today, which is the crisis.

I do not agree that a single European currency *requires* the ultra-unity in politics that you are talking about, the full monty of federal government. Admittedly, nor does it require as little as was sold to Europeans, or as little even as German politicians would admit today. The truth is somewhere in the middle. It requires a common central bank and a common currency policy, and it requires long-term transfers between some countries to others, but it does not require one country to come in and take over the budget of another, nor does it require full political union. In fact, in a non-crisis situation, there would be no problem with the voluntary exit of one member. The present situation is unique only because contagion means Greek exit would be interpreted as a signal for Italian exit. Fix the PIIGS problem and you have addressed the issue. This can be accomplished with a significant move towards political and monetary union, but not nearly so extreme "annexed into Bavaria" which you claim.

Finally about default. There will be no shortage of cash euros as long as the Bank of Greece remains in the Eurosystem and Target2. A bank run would be pointless because any reserves lost from withdrawal of euros would be replaced by Target2 euros from the Bank of Greece. They would be full euros, not Greek government IOUs. There need be no reset of the exchange rate.

Serious wage deflation at the moment is just what Greece needs. Germany herself precisely did comparative wage deflation in 2002-2010 to lower unemployment. Greece needs the same. The failure of Greek politicians is that they have not broken downward wage rigidity, failed to reform the collective bargaining system, and this has resulted in huge unemployment. With wage deflation, Greek unemployment would be addressed within the market system. The same is true for Spain and Italy. But at the same time Germany needs wage inflation. If German nominal wages increased by 5% per year and Greek wages fall a modest 2% per year, then within four years a 30% competitiveness gap and be eliminated. The process already started in 2011.

[Beet]

1. Greece will not stay in Target 2 post-default. If it does, within the next 5 to 10 years euro will be the currency of Greece, and Greece alone.

A wild, unproven assertion, most likely backed up by the reasoning below:

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As it happens, each central bank within the Eurosystem is empowered to create Euros. But the amount of Euros created is determined by joint agreement within the Eurosystem. Also, the central banks are politically independent by law. So no, it does not mean every European country can print as much cash as it likes. The role of a central bank is to provide liquidity to the banking system, precisely to prevent bank runs, and this is exactly the role the Bank of Greece fulfills as a member of Target2. No more.

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There you go again, with the inflation specter. At the end of the day your position comes down to "oh no high inflation!" As I said earlier, I would bet anything that high inflation will not become a problem so long as the Euro stays intact. The fact of the matter is, if what I want happens governments will not print cash endlessly, because they are not "rational" automatons. They are led by people with a capacity for a human thing known as thought, therefore they will not be rational And they will not be voted out of office for not printing endlessly.

The present rate of political change can reverse if Greece's unemployment rate drops, which is the point of wage deflation. Unlike 2008-2012, under wage deflation the total sum earned by Greek workers would not have to fall continuously. Rather the sum earned would be more spread out as new entrants into the work force lowered the average wage. But the point is they would be coming out of unemployment. Wage rigidity is a form of price control and it is always inefficient. The same reasoning applies in Spain and Italy.

I agree that Greek politicians have failed thus far. Perhaps px75 can elaborate more on this. The point is if their forebears fought the Cold War, surely these guys can reform collective bargaining.

Finally, I am talking about monetary transfers, not fiscal transfers. This is nothing new. The Common Agricultural Policy is an example of a big transfer. More to the point the very existence of a common currency is a big transfer. This is not subterfuge, or at least it should not have been. The value of the Euro in the pocket of every EZ member is influenced by the activities of people in other EZ countries. It is obvious. And it is the democratic institutions of Europe which have created it all to begin with.

Now, what democracies make they can unmake. But thus far there is no hard evidence for it. The only real revolt against the system thus far is a revolt against austerity (by SYRIZA coming in second). There was no electoral revolt against the Euro in Greece itself. There is no electoral revolt against the Euro in Germany either. Nor in France. Pro-Euro parties have won overwhelming majorities in all elections in all countries.

[Beet]

I am claiming that the kind of incentive you are talking about will not lead to a spiral of ever more printing. Your reasoning is essentially that since a national government can print a euro, and the decline in the value of the euro from that print is spread across all national governments, then printing is always a net gain and they will print to infinity. That makes sense from the perspective of a 'rational' actor but not a thoughtful actor.

To take an example, the same set of incentives applies to the United States. Other countries (mostly Asian exporters) try to hold down the value of their currencies to the US, so the more the US prints, the more dollars they buy; or the more they depreciate their own currencies and make their goods cheaper for Americans. $7 trillion or thereabouts is held as reserves. So the US government has the incentive to print endlessly. And indeed it has printed a lot, but not endlessly, not enough to send the US CPI above its historical average. Certainly not enough for hyperinflation or to destroy the currency. Why is the Federal Reserve not being rational then? Because it is not suicidal, that is why.

In the Euro, the way it works is simple. Enough money is printed to keep countries of experiencing massive crisis and being forced to leave the zone. But not enough is printed to keep politicians happy. There is a medium in between. I am not proposing giving national governments carte blanche. But printing enough to stave off a banking collapse in Greece [or for that matter, default in Spain] is hardly giving its government carte blanche.

If the agreement between Greece and the Troika collapses, the government may indeed face the situation you face. The Greek banking system could be funded through Target2, but the Greek government itself of course would not be. It may indeed issue IOUs, which may indeed be worth less than real Euros. It would be forced austerity, and I agree that it would not be popular. But that is why Syriza's promises are lies, unfortunately. It is tragic. But it would leave Greece independent, and the choice bare.

In such a situation I think Greeks would be faced with the truth finally and the decision whether to leave the Euro or not. At that point I think Greece should hold a referendum like the Papandreou referendum on the Euro. So long as they know what they are choosing, and the politicians are not lying to them about the consequences. If Greek voters chose the Drachma in that case, I would not oppose it of course. But not until then, should Greece leave.

[Beet]

The defenses would not be blown up because Greece has put forth a strong effort to cut its budget. Had it not put forth such incredible effort, it would not be worth saving perhaps, but it has. The only major area of fail is wage rigidity, but the government spending drop of 8.7 percent of GDP in two years is very impressive.

[Beet]

I don't propose that they be dispensed with, only adjusted. The limits & retaliation were meant to prevent irresponsible behavior; but Greece's problem now is not that it is being irresponsible. It is that the scale of adjustment being asked of it is not feasible without the limits & retaliation being relaxed somewhat.

[Beet]

The ECB has already accepted what outsiders would consider junk has collateral. It holds Greek bonds (another reason why a Greek exit would be a catastrophe, it would man immediate losses to the ECB). Since the difference between liquidity and solvency is to some extent subjective, especially when the problems are due to a business cycle depression, central banks can continue to accept trouble collateral at face value for a long time. As long as they don't mark to market, there is no problem.

As recently as April, money was actually flowing into Greek banks. Don't assume that the situation can't stabilize if a political agreement is reached, or the right parties win in elections.

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What's insane, from my perspective, is to have another Lehman Bros. which would be as bad as the last Lehman Bros., centered in Europe. The cost of such an event is in the trillions. This is not even to mention the strategic stuff that I discussed earlier. The cost of that is potentially priceless. The cost to Germany alone in lost sales, growth, etc. not to mention from defaults in southern European countries, are in the trillions. Greece is not the only European economy that needs inflating. The countries in Europe that are at or below zero growth at the moment have a collective population dwarfing that of Germany; indeed outnumbering the total of countries in Europe that do not need inflating. So if you were to put the countries of Europe on a blind scale, the side that needs inflating is heavier.

[Beet]

Nope, I am asking the ECB to make a commitment to help manage the situation and protect countries that make an effort at reform as serious as can possibly be expected in terms of costs to the domestic society.

Edit: From radical bomb-thrower David Cameron:

"Either Europe has a committed, stable, successful eurozone with an effective firewall, well capitalised and regulated banks, a system of fiscal burden sharing, and supportive monetary policy across the eurozone, or we are in uncharted territory which carries huge risks for everybody".

[Beet]

Nice twisting of Cameron's words. He is clearly saying that policymakers have a choice - one or the other. And a chaotic exit of Greece and "a few others" would definitely been in the category of "uncharted waters."

The idea that an orderly withdrawal could be negotiated is absurd. If Greece has no government, it is because the government committed suicide trying to meet Germany's impossible demands. The one committed to screwing the European financial system is yourself, and the others adopting the austerian position. Now only screwing Europe's financial system, but its political, economic and social fabric, and the lives of millions of people. It's sadistic.

[Beet]

Austerity has not been relaxed - only recently has talk about it occurred, but nothing has happened yet. The opposite of austerity is inflating the economy. If, in general, you oppose austerity, then you are by definition supporting some sort of 'inflation' or reflation. None of the policies we've discussed here avoid a choice between the two outcomes. The choices are the same no matter what currency you are in. The Euro is no more vulnerable to the dangers of inflation than any currency - indeed, it is less vulnerable because of the sheer size of the Euro economy and the presence of countries like Germany in it. Reflation would not destroy the Euro - but failure to reflate will destroy the Euro.

An orderly exit of the Euro at this time by any country under pressure is not realistic. I don't think that a Greek 'negotiated' exit would have been possible at the beginning of the crisis, either. Once the crisis began, the possibility of a successful negotiated exit ended. But regardless, at the present time, none of the peripheral countries would be able to negotiate a managed exit. The practical effect of such an exit would be a 'Lehman event.'

[Beet]

1. euro is A LOT more vulnerable than other currencies - because of the unique political arrangement. If you abolished the power of the US Congress to impose taxes and reduced the federal presidency to a minor bureaucratic job, incomparable in imporance with the truly powerful governorships, I'd be very scared about the federal (paper) dollar. I'd want gold. So that's exactly what they've engineered - "gold". Of course, it's not the best arrangement imaginable - but that's what's out there. Relax it - and it will be paper, that isn't going to stay around long.

Okay - the euro is more vulnerable than other currencies - to breakup risk. Without a strong government backing up, it faces the precise risk which is the reason why it is now dropping in value. But inflation risk? No. Not with the money supply centrally managed by the ECB and the Eurosystem. The risk to the Euro would be magnified by Greece's exit, because it would indicate breakup risk. Why do you think the value of the Euro has been plummeting since May 6? Because investors are scared of inflation? Not so. They are afraid of breakup. Do what I recommend, and the value of the Euro will rise, because Europe will become more like the United States today. Do what you recommend, and it will fall for the opposite reason.

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Greece's presence or absence has nothing to do with the ECB's ability to provide liquidity. And yes it has been providing quite a bit - in fact if it had simply stated a willingness to do so from the beginning, it would ironically have ended up having to provide a lot less. The more it undermines its own actions with paranoid inflation-concern, the more it will end up having to provide for the same result.

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Well then, that just shows that the Euro is popular after all, isn't it? Because you admit that in a time of tranquility, when people do not have the gun of crisis pointed at their head, voters will support the Euro.

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That might only work if Greece was contained and the response was strong enough to convince people that Greece was a single case. But you've already said a "few" more countries could leave the Euro. That's four countries. By the time you reach that number, the contagion will have long become a stampede and nothing will be able to stop the total unraveling of the continent's economy and the Euro itself, in the most awesome cataclysm since 1931, if not greater.

[Beet]

No, that is not what I propose at all. Under my proposal the ECB's objective would be to balance the risks of controlling inflation and avoiding breakup, which is the natural result of recognizing both as serious risks. But if member states took decisions that would imply behavior of the ECB that would result in high inflation, those member states would not receive support and might be kicked out.

[Beet]

No, that is not what I propose at all. Under my proposal the ECB's objective would be to balance the risks of controlling inflation and avoiding breakup, which is the natural result of recognizing both as serious risks. But if member states took decisions that would imply behavior of the ECB that would result in high inflation, those member states would not receive support and might be kicked out.

So, you will have countries continuously threatening break-up: as a matter of deliberate policy, not by accident.

LOL man. No one has threatened breakup in this crisis. Not a single one, despite, as you say, most commentators even saying that it is likely. Governments have continued to deny it.

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If it were bending all the way possible to avoid break-up, the interest rates of all the Euro countries would be the same - as low as Germany, essentially; and there wouldn't be any attempt to enforce austerity on anybody.

[Beet]

No one has threatened breakup in this crisis.

Of course, they aren't: given the existing institutions, this would be mad. But you are proposing a RADICAL change in these institutions, aren't you?

Anyway, nobody is going to be threatening break-up w/ words (that would be counterproductive). They are simply going to borrow to the hilt and have the ECB deal w/ it. That's all.

No one is 'borrowing to the hilt' either. If anyone is, it's the United States.

My position is obviously a change from the status quo, but it's not nearly as far as full political union. Perhaps the David Cameron / Paul Krugman position. So no, it's not 'radical'.

[Beet]

Obviously nobody is deliberately screwing around now: because they now they will be screwed if they ever do. You are proposing that nobody should ever be screwed.

No, I am not proposing that nobody should ever be screwed. I am merely proposing that countries that have put forth a strong effort and credibly do not intend to screw around do not get screwed. Countries that don't put forth real effort should certainly be ejected, but that isn't the case with Greece at all.
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