This is the bullish scenario!

The Telegraph has a couple great pieces today.  Here’s Roger Bootle:

The big danger for the rest of the eurozone is not that Greece makes a complete horlicks of monetary independence but rather that it makes a comparative success of it. For this to happen, life in the proximity of Syntagma Square does not have to become a cakewalk; it just needs to be better than the current situation of economic collapse without prospect of relief.

Suppose that within a year or so of exit, it looks as though the Greek economy is starting to recover. How then would the governments of Portugal, Spain, Ireland and Italy persuade their electorates that there is no alternative to austerity stretching out until the crack of doom? The game would be up.

What’s more, the markets would know it. Bank deposits would flee from these countries and end up with German banks which, through the Bundesbank, would recycle them to beleaguered banks in the periphery. In the process, Germany and the other northern countries could end up taking on the risk of the whole banking system of peripheral Europe.

I reckon that well before that stage, either the ECB or the Germans would say “enough”. At that point, staring a banking collapse in the face, the peripheral countries would have no choice but to fund their banks by issuing their own money – i.e. leaving the eurozone.

“Why are you so gloomy about the eurozone; can’t you be more bullish?” people often ask me. They don’t understand. What I have sketched out is the bullish scenario! The bearish scenario is that the current system staggers on, with the peripheral countries locked into depression and deflation for decades to come. I am sufficiently bullish to believe that, somehow, this is not going to happen.

Wall Street investors must have read the latest from Ambrose Evans-Pritchard, who is a sort of poet of demand shocks:

“China is in deflation,” says Charles Dumas from Lombard Street Research. Yes, consumer price inflation is 3.4pc – though falling – but consumption is a third of GDP. Fixed investment is 46pc, and here prices have dropped 3.5pc in six months. Export prices have dropped 6.6pc.

The authorities have belatedly responded, cutting the reserve ratio by 50 points to 20pc over the weekend. It is thin gruel. Are we to conclude that the People’s Bank is bent on breaking excess capacity in a cathartic Schumpeterian purge, or that leadership battles have paralysed the Party? Hard to tell.

All the BRICs need watching. India’s industrial output fell 3.5pc in March. The country seems caught in a 1970s stagflation vice. Brazil has softened too, with car sales down 15pc and industrial production contracting in March. The bad loans of the banks have reached 10.3pc, higher than post-Lehman.

The bubble has probably popped already, but hoteliers in Rio are hanging on. The European Parliament has pulled out of the UN’s Rio forum on sustainable development in June because the rooms are exorbitant. “We are short the vastly over-vaunted and over-owned BRICs,” says hedge fund contrarian Hugh Hendry.

My fear has always been that the credit cycle in the Rising World would blow itself out before the Old World has safely recovered, or reached “escape velocity” to use the term in vogue.

Europe will slide further into 1930s self-destruction until it equips itself with a lender of last resort and takes all risk of EMU sovereign default off the table, though that may come too late. The US has functioning institutions at least but growth is barely above stall speed. Ben Bernanke’s “massive fiscal cliff” looms this autumn. The Economic Cycle Research Institute (ECRI) has not yet withdrawn its US recession call.

The BRICS helped save us in 2008-2009. If we now face a global crisis on all fronts – and such an outcome can still be avoided – it will test the mettle of world leaders. Interest rates in the G10 are mostly zero already, and budgets are frighteningly stretched.

Sensing what is coming, Citigroup’s chief economist Willem Buiter says global central banks have not yet exhausted their arsenal. They can “and should” crank up quantitative easing (QE), buy everything under the sun, and do “helicopter money drops”.

I would go even further. Sovereign central banks have the means to defeat any depression thrown at them by launching mass purchases of assets outside the banking system, working through the classic Hawtrey-Cassel quantity of money mechanism until nominal GDP is restored to its trend line.

The problem is not scientific. A world slump is preventable if leaders act with enough panache. The hindrance is that the Euro Tower still haunted by Hayekians, and most G10 citizens – and Telegraph readers from my painful experience – view such notions as Weimar debauchery, or plain Devil worship. Economists cannot command a democratic consent for monetary stimulus any more easily today than in 1932.

One can only pray that helicopter drops do not become necessary in the chilly winter of 2012-2013.

It’s surreal how much this is like 1931.  The only difference is that they couldn’t print gold and we can print dollars, yen, and euros.  That makes this error even more unforgivable.

HT:  Lars Christensen and Anthony J. Evans.



20 Responses to “This is the bullish scenario!”

  1. Gravatar of Morgan Warstler Morgan Warstler
    14. May 2012 at 06:27

    Bullish is Greece living on tax receipts. Period. The End.

    You can’t claim to be pro-growth AND not have a plan in mind for this. Not for Greece, not for the US.

    Ask Bill Clinton.

    Once you get over that hump, the question is simple.

    Since Greeks have to live with a lower standard of living, would they rather do it in the Euro, or not.

  2. Gravatar of Morgan Warstler Morgan Warstler
    14. May 2012 at 06:31

    The only cuts that are believed are the ones that happen in the HERE and NOW.

    This is the gorgeous beauty of NGDPLT, and Scott will not deny it.

    ASK HIM, if you don’t believe me.

    Under NGDPLT, we can make the cuts that matter, things that rhyme with, “ending welfare as we know it.”

    And what happens? GREATNESS.

    1. NGDPLT assures there will be no slow down, nothing the left can point to and say SEE??? Austerity is bad!

    2. The business community sees you are serious about cutting back on entitlements, and focusing on private sector growth.

    I speak for Scott, if you don’t believe what I’m saying is true, ASK HIM, make him answer!

  3. Gravatar of Negation of Ideology Negation of Ideology
    14. May 2012 at 06:32

    “The big danger for the rest of the eurozone is not that Greece makes a complete horlicks of monetary independence but rather that it makes a comparative success of it.”

    The very first sentence encapsulates the situation perfectly. Under the current arrangement, Greece is better off leaving. The rest of Europe can whine that it’s not fair, but that’s not the point. A voluntary Union has to be in the interest of all members, and this one is not. Either they make it so, or it breaks up.

    They need a Hamiltonian moment, but they have no George Washington.

  4. Gravatar of dwb dwb
    14. May 2012 at 06:43

    only in a BRIC country is 3.5% inflation and 9% growth (and the CB is targeting a 14% money supply increase) called “deflation.”

    I guess its all relative.

    BTW, the whole shipyard issue has been well known for many years. I am actually surprised a lot of those ships got built and not cancelled because shipping rates plummeted after the 2008 recession.

  5. Gravatar of Becky Hargrove Becky Hargrove
    14. May 2012 at 07:25

    ‘Efficient’ production loses its meaning if it is defined in the same terms for everyone. Just because it is obvious that certain activities bring in greater wealth and populations agree to make that happen, does not mean other populations should agree to such premise…what kind of division of labor is that? Straitjackets were all the worse because services were hitched to different definitions of productivity, wildly different ideals all over the map with one common denominator of Euro. Let’s hope Greece can find a way to make it work.

  6. Gravatar of Not an Economist Not an Economist
    14. May 2012 at 07:37


    In your opinion, what is the single most pertinent reason why economists by and large do not see the parallels between 1931 and now? Have we really returned to depression era economics? How did this happen to your profession?

    Reading your conclusion is very concerning — it almost “sounds” like resignation on your part, a tone I’ve detected in Paul Krugman’s writing as well.

    Keep fighting the good fight.

  7. Gravatar of Steve Steve
    14. May 2012 at 07:44

    Rogoff “This Time is Different” needs a 2nd Edition

    The reason the economy is slow at recovering from financial crises is that the policymakers who caused the crisis are still in charge during the recovery.

  8. Gravatar of Major_Freedom Major_Freedom
    14. May 2012 at 07:50

    It’s surreal how much this is like 1931.

    I know! Just like in 1931, the government of today is also preventing the market from correcting bad investments, by printing and spending money, and keeping interest rates low.

  9. Gravatar of Master of None Master of None
    14. May 2012 at 08:23

    “It’s surreal how much this is like 1931.”

    Scott, are you concerned about the potential for war or war-like outcomes as a result of this mess?

    How would this play out if Russia were the player holding all of the financial obligations (i.e. instead of Germany)?

  10. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    14. May 2012 at 09:05

    What’s more, the markets would know it. Bank deposits would flee from these countries and end up with German banks […]

    What’s more, the markets already know it. This has been happening for months.

    I live in Portugal and the amount of bank advertisement for savings accounts has certainly increased a lot in the last few months. All the while, some German banks are reportedly charging fees for 0% interest deposits.

  11. Gravatar of Jaap de Vries Jaap de Vries
    14. May 2012 at 09:05

    Good pieces. I remember Krugman arguing that an immediate exit a year or two ago might be favourable, especially for the Greek people. Yet politics had economics in the chokehold, creating weak compromises. I guess this is what we deserve. Although I do expect the central bank to step in when all seems lost. Like they did last time.

  12. Gravatar of Benjamin Cole Benjamin Cole
    14. May 2012 at 09:19

    Print more money.

  13. Gravatar of ChargerCarl ChargerCarl
    14. May 2012 at 09:52

    That second piece was depressing.

  14. Gravatar of J.V. Dubois J.V. Dubois
    14. May 2012 at 09:57

    Scott: I has some interesting discussions during last days lately and it seems that many people do compare Greece with Argentina in 2001. However there have been quite good articles from former Argentinian finance minister that Greece should not be that eager to leave Eurozone, as permanent increase inflation and overall instability caused change into drachmas may totally wreck any possible gains from adopting their own currency and making their exports more attractive. Especially if EU retaliates by protectionism, capital controls and such. These are the articles:

    I know that very much depends on what (and if) there will be any response from ECB and Eurozone that may show to Eurozone periphery some viable exit strategy. I know that this all is akin to foreseeing the future from entrails, but maybe you have something to say, at least in terms of conditional forecast to both scenarios (Greece leaving Eurozone and Greece staying there)

    I am also interested in your assesment of the second article, as this VAT-based consolidation seems to be the best I have seen so far, and it is something that Greeks have a lot of control over.

  15. Gravatar of Major_Freedom Major_Freedom
    14. May 2012 at 09:58


    only in a BRIC country is 3.5% inflation and 9% growth (and the CB is targeting a 14% money supply increase) called “deflation.”

    Only in inflationary economies is 2% price inflation called “stabilizing prices.”

  16. Gravatar of ssumner ssumner
    14. May 2012 at 10:14

    Morgan, You said;

    “1. NGDPLT assures there will be no slow down, nothing the left can point to and say SEE??? Austerity is bad!”


    Negation, Good point.

    dwb, I have an open mind on the Chinese situation. There was a severe slowdown in 2009 and they still had 8% growth.

    Becky, Yes, the euro was a big mistake.

    Not an economist, I’d say the focus on inflation, instead of what really matters—NGDP growth. If (consumer) prices were actually falling I think many more economists would recognize the problem.
    Instead we have falling house prices, which aren’t part of the CPI.

    And no, I haven’t given up yet.

    Steve, That’s right.

    Master of None, No, times have changed in that respect.

    Luis. Thanks for that info–I’m not surprised.

    Jaap, Yes, I also see some last minute rescues, but I’m not sure it will be enough to keep Greece in the euro. That might depend on the June elections–if they have them.

    Ben, Yes, it’s that simple.

    Chargercarl, I agree.

    JV, I read the Argentine case differently. They waited way too long to devalue. Argentina has done much better since the devaluation than before, despite horrible supply-side policies.

  17. Gravatar of Cthorm Cthorm
    14. May 2012 at 11:44


    I really wish you would make a post on the case of Argentina. I read it (still) differently. Argentina in the 90s was moving to broader acceptance of free market reform. Then IMF advice (overemphasizing low inflation…in a developing country) pushed them into “deflation” (by which I mean an AD/NGDP shortfall). The country’s trust in free market reform was thrown out with the IMF bathwater, and so supply side policies have gotten progressively worse. The devaluation helped in so much as it partially reversed the IMF-backed “deflation”.

  18. Gravatar of Saturos Saturos
    15. May 2012 at 04:20

    Here’s what Greece should really do:

  19. Gravatar of J.V. Dubois J.V. Dubois
    15. May 2012 at 07:17

    Just if somebody wonders, as it is I found some very responses to the whole Argentinian comparison story here (Via Krugman, read at the end):

  20. Gravatar of ssumner ssumner
    15. May 2012 at 17:32

    Cthorm, But that is exactly my view!!

    Saturos, That’s priceless.

    JV, Yes, he had some good posts on that.

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