RWP was born in Manchester, in the north of England, in the late 1950s, so he is very old. He really liked the north of England, which by 1965 was hip and had three TV channels, and where he went to a coed school. His parents, for reasons best known to themselves, then yanked him away, to Belfast and then Dublin, which had one TV channel that started up at 6 pm with the Angelus (Catholic call to prayer). He also had to go to an all boys school, where he realized he really missed girls. This probably let him focus on schoolwork, though, and at age 19, after he had finished college, he set off for America, where he still resides. He has a bachelors degree in biochemistry and a Ph.D. from Harvard in biophysics, and has lived also in Mainz, Germany, Setauket NY, and Richland WA. He currently divides his time between Nebraska, Rosslyn VA, and Florida.

Saturday, May 26, 2012

Are we in the Euro's event horizon?

My first foray into macroeconomics. Don't laugh.

The title refers to an interesting property of supermassive black holes. In theory, because the Schwarzschild radius of a black hole (the event horizon, assuming it isn't rotating) is proportional to the mass, while the gravitational field falls off proportional to the inverse square radius, an astronaut could cross the event horizon without experiencing significant tidal forces. In essence, the astronaut would be cut off from the universe by a singularity, and doomed, without ever realizing he was fatally close to a black hole. It's a wild analogy, of course, but reading the newspapers this morning led me to wondering if the Euro is large enough that its collapse is now unstoppable, before even its collapse has caused any significant damage.

The first item of news is that Germany is now experiencing a property boom, not as a result of its own macroeconomic policies, but because the flow of money from Southern Europe into German banks has substantially inflated German money supply, and is causing a potential bubble in its property market. This is new and unusual. The German property market has historically been kept stagnant by Bundesbank policy; even quite affluent Germans rent their residences rather than buy them.

The second item, was of course the distress of Spanish Bank Bankia which is suffering a bank run (or bank jog, because it's slower). Greek banks have been experiencing the same phenomenon in the last week. Southern Europeans are now sufficiently convinced of the collapse of the Euro that they're moving their money offshore. Interestingly, until now, this wasn't a substantial problem. Something has changed.

Third, the NY Times has a silly story that says the reason Germany is unenthusiastic about a Greek bailout is their own lack of success in economically stimulating the former East zone, which absorbed trillions of marks and later Euros and still lags the West. Greece's problems are similarly structural, not monetary, it says. Of course, it's all true, but it has the odor of a semi-bluff put out by the Bundesbank; true enough to be plausible, but not the real story.

The real story is that Germany has calculated that, were there to be a growth 'stimulus' as the US, France and most of Europe are advocating, the money would not flow to Southern Europe, where it's needed, but into Germany, where it's comparatively safe. Germany could tamp down asset bubbles by increasing interest rates and contracting its own money supply, but that would simply make Germany a more attractive place to park funds. People are already investing at interest rates near zero; imagine if the interest rates were raised! The result would inevitably a German bubble, not a reinvigoration of the periphery.

The problem is long-term, not short term; it's structural, not monetary; and a stimulus would be suicidal. Meanwhile, without a stimulus, Europe will continue in austerity for a long time, and some countries, such as Greece, Spain, Portugal and probably Italy, are doomed.

A smaller currency would already be in a spiral, as speculators seized the reins. George Soros did this to sterling and to the Malaysian ringgit. But the Euro is too big yet for any single speculator or group of speculators to take down. Nonetheless, I'm traveling to Europe in a month, and despite the currently low price of $1.25, I'm holding out for better. If I'm right, it's going to go substantially lower.

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