The future of the euro and Germany's role.

A discussion with David Creelman about  the international financial crisis and the future outlook for  the Euro based on a lecture by George Soros at Humbolt University, Germany, June 23rd 2010

Donald Currie June 24th wrote:

An outstanding address by Soros, long but worth reading. He is saying essentially the same thing as Krugman and Siglitz, namely you can't penny pinch your way out of this financial mess if the euro is to survive. The alternatives for Germany and the rest of Europe will be much worse.

The same argument is taking place in Britain and the US. With the Republicans likely to gain control of Congress this fall with their grab bag looney and light weight supporters in the Tea Party, evangelicals, and naive libertarians (and any good Republicans in hiding for fear of losing their seats to this anarchic mob), it won't be a pretty picture. Dumping social security and leaving the bankers and polluters untouched is hardly a solution during a time when real unemployment is 16% and double that amongst the young.

David Creelman June 24th replied: Here are a few thoughts:
1. The overall financial system
It's good to let people take on some debt; it makes the economy function. However if you let someone take on millions of dollars of debt you create a huge crisis, not only for them when they go bankrupt, but also for all the other people who provided goods and services and were never repaid.

The financial system is totally out of control and needs to be run in an incredibly conservative manner to avoid these blow ups.


2. We may be too far gone to avoid anything but a real f**-up
Much the same point: If someone owes $100k to friends and family then they may never be able to pay it off, but with some debt forgiveness and hard work on part of the debtor then you can reach a solution. But if they owe a million then the losses are too large, lots of innocent people will be going bankrupt; there is simply no reasonable solution, it's a catastrophe. It's like a bad marriage where so many hurtful things have been said that it is beyond redemption, without even hope of a friendly divorce, it's a catastrophe with no solution.

Our big problem may be that every economic solution presented will lead to catastrophe and it becomes impossible even to make a rationale choice between the huge catastrophe and the huger one.


3. Innocent people are going to pay big time
In the end there are trillions of dollars on the books directly or indirectly representing debt that will never be paid back. If you think you have $1000 in the bank you are wrong.  A good hunk of that is actually bad debt.

The questions are: How do write this debt off? and of course Who takes the loss?

There are only two ways to write debt off -- bankruptcy (or some equivalent) or inflation.
Inflation while a huge catastrophe may be the gentler of the two methods; the risk being hyper-inflation.

Who loses is the central battle arena. The Chinese will lose trillions, the Germans billions, the American workers gazilllions.
Many Greeks will lose everything.

I think a huge problem is that this is something that cannot even be talked about or negotiated in the open. As in an ugly divorce it's a fight to the death that destroys the assets rather than finds a way to share them.


4. Is this possible?
I know this is not possible in practice but let's talk theory. If Obama put in a special tax of 50% on the wealth of the top 1% of Americans then he could probably write off all the bad debt in the US.  The rich would still be insanely rich but instead of having millions of individuals and businesses on paper owing money they can never repay, all debts would be in the range where they are being serviced. 

This all revolves around my sense that the key is getting bad debt off the books.