How much pain can the countries under stress endure? Nobody knows. What would happen if a country left the eurozone? Nobody knows. Might even Germany consider exit? Nobody knows. What is the long-run strategy for exit from the crises? Nobody knows. Given such uncertainty, panic is, alas, rational. A fiat currency backed by heterogeneous sovereigns is irremediably fragile.
Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events. Perhaps the panic will vanish. But investors who are buying bonds at current rates are indicating a deep aversion to the downside risks. Policy makers must eliminate this panic, not stoke it.Read it at The Financial Times
By Martin Wolf
Wolf does a wonderful job highlighting the shifting financial balance of the private sector. After relentlessly rising for a couple decades, private sector debt around the globe must now contract to realign with incomes. The size of private credit outstanding far surpasses the level of public debt and is a potentially overwhelming deflationary force. For several years already the severity of this crisis has been underappreciated and the political responses were meager. Why will this pattern suddenly change? Nobody knows. This crisis is probably far from over.
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