The Truth and Beauty of Madrid and Lombardia (Down and Out)

Summary: The fate of Europe depends on many factors, not least on the support of the people in Europe’s periphery for the European Union. Today we have an excerpt from Truth & Beauty that gives an accurate picture of conditions in this pivotal region, with a comparison to Russia’s time of troubles.

“Labor reform means slavery”. AP photo by Emilio Morenatti


This is a follow-up to Social unrest coming to Europe? If not, why not?, 21 March 20013.


  1. A missing element in our world
  2. Down and Out In Madrid &  Lombardia
  3. About Truth & Beauty
  4. About the author
  5. For More Information about Russia


(1)  A missing element in our world

As the long economic crisis continues — with stability maintained in the developed nations only through unsustainable levels of fiscal and monetary stimulus — one barrier to change becomes ever more obvious: the lack of alternative ideas for organizing the political and economic machinery of society.  That is, finding new modes of social organization that are attractive to some combination of the our elites and the mass public.

Without new alternatives we might remain locked in a crisis with no exit. Our only hope lies with the eventual success of conventional economic policies — and the political apparatus that implements them. Or the ability of our societies to recover (ie, heal themselves), eventually.

To illustrate the abyss into which this has plunged the worst affected nations, today we have an excerpt from “A Hard Rain (’s a Gonna Fall)“, the April 5 issue of Truth & Beauty, by Eric Kraus and Alexander Teddy. They shine the clear light of common sense on the world, cutting through the fog of misinformation emitted by the western news media. This is reprinted with their generous permission.

(2)  Excerpt from T&BL “Down and Out – In Madrid and Lombardia”

T&B has been on the road in Southern Europe. We find nothing remotely encouraging to say – this year, not even the weather was significantly better than Moscow – and the employment situation far, far worse. If the situation were not so grim, there would be something funny about the governments of a continent in deep recession (or depression, in its South/ Western corner) lecturing Russia – with its slow–but positive growth and 5% unemployment – about the virtues of a liberal economic policy.

Perhaps surprisingly, nowhere in Europe is the popular mood one of rebellion or of any longing for a violent overthrow of the existing order – there is no Marxist revolution anywhere on the horizon; rather, one senses a quiet despair, escapism and cynical pessimism. Unemployment is endemic and systematic, in Spain and Portugal the unemployed do not even hope to find a job. People find ways to cope – the welfare state, the informal economy and family structures provide some support – but in terms of building a career, family and future, the prospects are grim.

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Spain’s’ only three options for recovery

Summary:  The Euro-crisis began in March 2010, and yet its causes and basic elements remain widely misunderstood — including, based on their public statements, by many of Europe’s leaders.  Here Prof Pettis gives a clear explanation of what’s happening, and of Spain’s only three ways out of this crisis.

Excerpt from “Three cheers for the new data?”

By Michael Pettis (Prof of Finance, Peking University)
November 12, 2012
Republished with his general permission.

Spain’s three options

Finally, and to turn away from China, we seem to be experiencing a renewed period of increased optimism over European prospects, but we should refrain from joining in. The optimism will soon fade. In the great debate over the economies of countries like Spain, we sometimes forget the simple arithmetic of economic rebalancing. This arithmetic, like it or not, severely limits the options open to these countries.

For many years, thanks partly to bad policies in Spain but mainly to aggressive attempts by Germany to achieve growth by forcing a trade surplus onto its European neighbors, Spain, and many other countries in Europe, ran enormous trade deficits. It is easy and popular to blame the greed of the Spanish and the stupidity of the government for the mess in which Spain has found itself, but the policies Germany put into place in the late 1990s guaranteed that Germany, a country that had run massive trade deficits in the 1990s, would run equally massive trade surpluses in the subsequent decade.

Because once they joined the euro the rest of Europe had no control over the value of their currencies and the level of their interest rates, it was inevitable that European countries that had joined the euro with higher-than-average levels of inflation would be forced to respond to German trade surpluses either by forcing up unemployment or by forcing up consumption, and so running the large trade deficits that corresponded to Germany’s trade surplus. No other choice was possible.

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The bailout of Spain’s banks shows the heart of our problem

Summary:  The US and Europe have not recovered from the 2008-09 crash in part because we applied first aid, but squandered the time those measures bought for us (at great cost).  An essential aspect of post-crash reforms is fixing our financial systems.  The bailout of Spain’s banks — expensive for Spain’s people, easy money for the banks — illustrates the problem.  Here we give details and alternatives.  At the end are links for more information

The modern bankers’ flag

Banks are central institutions in western economies.  Almost every severe economic crash has a large bank failure in the early phases.  That’s almost inevitable given their exposure to the broad economy, leverage, and reliance on borrowed funds.  But their political power makes them resistant to reform, and full recovery from a downturn usually requires their reform.  The most important aspect of this is sharing the loses.  Banks will use their political strength to shift losses onto other.  That’s neither fair, economically sound (as it encourages moral hazard), or necessary.

It’s another example of Capitalism Lost: America goes broke because we forgot how to be capitalists.

The US has experienced massive bank failures every decade since 1980, and we’ve yet to learn how to cope with them.  This is learned helplessness, a consequence of money usefully applied to shape not only public policy but als0 public outcomes.  We saw this demonstrated in the rise and corruption of the Tea Party movement.  Born in opposition to bank bailouts, becoming shock troops for election of bank-friendly Republicans (for details see Occupy Wall Street, another futile peasants’ protest).

For a summary of the problem and alternative see “The Heart of the Matter“, John P. Hussman, 11 June 2012 — Excerpt:

In effect, we’re going into another recession because we never effectively addressed the problems that produced the first one, leaving us unusually vulnerable to aftershocks. Our economic malaise is the result of a whole chain of bad decisions that have distorted the financial markets in ways that make recurring crisis inevitable.

… Every major bank is funded partially by depositors, but those deposits typically represent only about 60% of the funding. The rest is debt to the bank’s own bondholders, and equity of its stockholders. When a country like Spain goes in to save a failing bank like Bankia — and does so by buying stock in the bank — the government is putting its citizens in a “first loss” position that protects the bondholders at public expense. This has been called “nationalization” because Spain now owns most of the stock, but the rescue has no element of restructuring at all. All of the bank’s liabilities – even to its own bondholders – are protected at public expense. So in order to defend bank bondholders, Spain is increasing the public debt burden of its own citizens. This approach is madness, because Spain’s citizens will ultimately suffer the consequences by eventual budget austerity or risk of government debt default.

The way to restructure a bank is to take it into receivership, write down the bad assets, wipe out the stockholders and much of the subordinated debt, and then recapitalize the remaining entity by selling it back into the private market. Depositors don’t lose a dime. While the U.S. appropriately restructured General Motors – wiping out stock, renegotiating contracts, and subjecting bondholders to haircuts – the banking system was largely untouched.

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The periphery of Europe – a flashpoint to the global economy

Introduction:  This is the fourth in a series of dashed off speculative opinions.  Normal procedure on the FM website for these topics would be 3 thousand word posts, supported by dozens of links.  I dont’ have the time to finish them, and too many of these outlines have accumulated in my drafts file.  Perhaps these will spark useful debate and research among this site’s readers. 

In this third year of recession of the worst recession since the 1930s, reserves are depleted around the world.  Cash reserves of households, businesses, and governments.  This increases our susceptibility to a shock.  A poor bio-metaphor to this is the poor health of the world’s peoples in 1918.   The global economy remains unstable, as it was in 1929.  Many links in the world’s economic machinery have broken.  Although the global economy might be in recovery, the stress remains great.  Another link might snap at any moment, increasing the stress on the remaining links — some of which might in turn also snap.  Since the data is conflicting (as usual during times of large change), we don’t know how close they (or us) are to the edge.  Central Bankers know this, which is why they keep the petal to the metal while talking about exit strategies.

 One of the most dangerous flashpoints is Europe’s periphery (the USA is another).  Iceland, Ireland, Portugal, Spain, Italy, Greece, Eastern Europe up to the Baltics.   The european economy is highly integrated, and collapse in even a peripheral nation might ripple though the region with unpleasant consequences.  So rescue efforts are under weigh by the EU and IMF.  But the people of one of more of the crippled nations will certainly reject the prescribed austerity measures.  Greece is first in line, and general strikes are already being planned.  Red emphasis added.

George Magnus, a senior economist at UBS, comments on these developments in “The Return of Political Economy”, 3 February 2010 — A terrifying analysis expressed in mild words.  Excerpt:

In the Euro Area, the politics are complex. Politically, the chances of some of the sovereign invalids being able to implement required fiscal restraints are small. In others, the changes of doing so over a protracted period without social unrest are questionable. However, politically, nothing short of the integrity of the Euro and the Euro Area are at stake. For this very reason, the issue will probably not come to had in the immediate future, or for some time, because all Euro Area countries have strong vested interests in foreign a path back to stability as quickly as possible, and all the more so since contagion has spread to Portugal and Spain. But what will this need?

Austerity packages never work in a vacuum. One of more of 4 crucial ingredients have to comprise the setting.  These are…

  • currency debasement,
  • a sharp fall in interest rates,
  • monetization of debt, and
  • a bail-out financing package.

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