Europe: "You Can't Make Up How Bad It Is"

From Zero Hedge, by Tyler Durden 05/02/201:

At The Milken Institute conference yesterday, Hugh Hendry delivered his usual eloquent and critical insights on the state of Europe. Beginning with the statement that "All of Europe has defaulted", the canny-wee-fella (translation: shrewd and cautious young chap) explained that "The political economy in Europe is such that the politicians chose to default on their spending obligations to their citizens in order to honor the pact with their financial creditors and so as time goes on, the politicians are being rejected." Between France's election of Mr. Hollande and Luxembourg's 'when times get tough you have to lie' Juncker, Hendry says the only inspiration for Europe is fiction as "you just can't make up how bad it is" as he goes on to discuss the precedent for a way forward, the grotesque distortions of fixed exchange rate regimes, why Weimar happened, why the transfer union will never happen, Ayn Rand's reality, and fear politicians are feeling.

The entire discussion is well worth watching for a sense of the underlying reality in Europe.

The underlying reality that what the European monetary union is about is not about preventing a third so-called European civil war, it is essentially about making someone (France, Germany or both) a Great Power, a European Hegemon, and a global player.

Starting at around 12:00, Hugh begins his must-watch discussion...

And begins again at around 30:00, Hendry discusses the British perspective on the impeccable logic of the German mind and why the transfer union will never happen in Europe...and why Wiemar happened...

At around 46:00, Hendry addresses Germany's emerging housing bubble (and why it won't occur) and the two forms of leverage in the world.

From 52:40, Hendry takes on the view of (disagreeing with) a weak USD and the US being supplanted as a global leader

Hendry confesses to not being able to finish reading Ayn Rand's Atlas Shrugged at around 1:02:00 and explains why (apart from its length and lack of pictures)...noting that is too depressingly real in its description of the world we live in today...

We have reached a profound point in economic history where the truth is unpalatable to the political class - and that truth is that the scale and magnitude of the problem is larger than their ability to respond - and it terrifies them.

Concluding at 1:10:10 - "we are single-digit years away from the most profound market clearing moment"

(h/t Stock Bitch)
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Related:

Leeb - We Will See Unbelievable Chaos Going Forward

This Is the First Time In History that All Central Banks Have Printed Money at the Same Time … And They’re Failing Miserably

Chomsky: U.S. and Europe ‘committing suicide in different ways’

Mike Shedlock tackles Paul Krugman and the Greenspan Contrarian Indicator (GCI)

From  CapitalAccount, May 1, 2012:

Welcome to Capital Account. So what is this austerity we keep hearing all about. Well, this isn't word of the day, but let's look at a quick definition:

noun, plural aus·ter·i·ties. 1. austere quality; severity of manner, life, etc.; sternness. 2. Usually, austerities. ascetic practices: austerities of monastery life.

Hmm...sounds pretty awful. I wouldn't want to live in a monastery or live a "stern" lifestyle. But does cutting back on government spending equate to "austerity?" Well, maybe in the short-run for those whose incomes drop as a result, but what about longer term, what does austerity mean? There seems to be this popular notion among mainstream economists that there are periods, like the one we are in today, where the private sector, willy nilly, just stops spending. This is otherwise known as a "crisis in aggregate demand," and the solution, according to people like Paul Krugman, is for the government to step in and spend money. But why is the private sector not spending. Again, mainline economists point to something called "the paradox of thrift," in order to explain away this...well...paradox! They believe that people, responding to negative future expectations about growth, income and security, choose to save an ever greater amount of their ever declining income. By doing what is in their own best interests, as the theory goes, the whole of humanity drives itself and its economy to a grinding halt and back into the stone age. If everyone saves, there is no one left to spend, and if there is no one left to spend, then there is no economic activity. GDP contracts, incomes crash, and savings evaporate. Essentially, it is a self-produced depression.

Sounds pretty straightforward right? Only it isn't. What economists like Paul Krugman, Ben Bernanke and others fail to recognize, is that there is a reason why the private sector is not spending, which has nothing to do with an elaborate, psychological feed-back loop. It is true that negative future expectations do reinforce a negative trend, but at some point, that trend DOES HAVE to reverse. A bottom WILL form, and from that point the economy rebounds. So what then, is preventing the bottom from forming? Enter, that four letter word, D-E-B-T. The reason that the economy cannot recover, and the reason that the private sector is not spending, is because it is in the process of deleveraging from a debt binge that has gone on, arguably, for almost 4 decades in the US, and with a bit more variation in Europe.

The problem is not a lack of demand. This is a symptom. The disease is a stock of nominal debt so large that it has created a negative drag on the economy. Attempting to carry this debt, i.e. not defaulting on it or not forgiving it, is a path towards feudalism...towards serfdom. This is why we have bankruptcy laws for the private sector. The notion that this should not apply to government debt as well is bank propaganda.

As we have mentioned often on this show, excessive debt levels lead to the distortion of prices and the misallocation of capital. This misallocation ultimately pushes economies into recession. A recession isn't pleasant, but it is a natural economic process. You can't have booms without busts, and a recession is just the economy's way of purging itself of all the malinvestment created during the boom. In the economy, as in life, you cannot run a race forever without taking a break. At some point, you need to rest, and if you don't do it on your own according, your body will force it upon you. Debt is a stimulant for the economy, the same way that amphetamines are a stimulant for a runner. It may help you get more growth in the short-term, but you will pay for some of that extra growth with a recession later on. That's life. Nothing moves in one direction forever.

And on that note, this intro seems to be bumping up against those limitations, so let's turn now to our guest Mike "Mish" Shedlock for his take on all of this. He has been writing about the downturn in Spain and Germany, the fight between Paul Krugman and Ben Bernanke, and more!


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