Economist Online

Now it looks like no matter what Europeans are trying to do, and how many summits politicians rush to put together, things just keep getting worse.

If PIGS (Portugal, Italy, Greece and Spain) were to ‘fly ‘, and debt contagion were to spread, and Europe’s Lehman moment finally to arrive, you probably want to at least have a slightest hint of where the next domino is likely to fall. That’s the purpose of this short post.

The following four charts are from researchers at BIS, including my former Brandeis teacher Steve Cecchetti.  I suggest that everybody take a minimum of five minutes going through these tables. For nerds like me, I stick them on the wall in my office.

All debt:

Government debt:

Household debt:

Corporate debt:

From WSJ, what it signals when the German bond yields are rising:

Yields on German 10-year government bonds have risen 0.25 percentage point in the past week to 2.15% even as the euro-zone crisis has deepened. Until now, whenever the crisis has intensified, German yields have fallen and the yield premium for southern European bonds has risen. This shift is a sign the end-game is approaching.

…

The difference is that buyers of U.S. and U.K. debt can be certain which country’s debt they are getting—and what currency it is denominated in. The euro-zone crisis is becoming binary. One possibility is greater integration, such as common bond issuance, which implies greater costs for Germany and fiscal dilution. The other is break-up, which implies costs for every country but which may favor short-dated German paper given the possibility of currency appreciation.

According to Paul Kasriel at Northerntrust, most likely the EU entered recession this quarter.

“The Greek tragedy morphed into an Italian comedy. Now, it has become a French farce”. Bank credit is set to slow down or contract.

Of course, the European Central Bank (ECB) could step in to create some of the credit that EU MFIs otherwise would be creating under normal circumstances. But the ECB fears that quantitative easing would somehow sully its Bundesbankian reputation. How ironic that the ECB, a central bank ostensibly sympathetic to an Austrian approach to monetary policy, would not try to maintain a normal amount of credit creation when MFIs were unable to do so. Europeans, get ready to join your Japanese brethren for a lost decade. It did not have to happen for the Japanese and it does not have to happen for the Europeans. But given the intransigence of Japanese and European central bankers (with the exception of British central bankers), it will.

“You are all in denial. By any objective measure the euro is a failure. And who exactly is responsible, who is in charge out of all you lot? The answer is none of you because none of you have been elected; none of you have any democratic legitimacy for the roles you currently hold within this crisis.”

 

Economic historian Naill Ferguson on the six “killer apps” (or institutions) in the West that generated the Great Divergence since 1700s, up until the recent rise of China.  And he argues that gap between the West and the East is coming to an end, with China fast catching up with the West, leading to a re-convergence of the world economy.

In the interview, Naill Ferguson had many claims in his sharp observation of the history. However, despite being deeply intriguing, most of his claims remain to be just hypotheses.  As a China watcher, I am not so certain at this moment that China’s surpassing of the US on per capita income level is inevitable, although I am positive that China’s total GDP will pass the US in no time.

For readers who are interested in the topic of the Great Divergence and Re-convergence, I would recommend two additional readings: The first is a classic by Ken Pomeranz, “The Great Divergence: China, Europe, and the Making of the Modern World Economy“; and the second is by Ian Morris, “Why the West Rules -For Now.”