Eastern Europe is Broke
You think it’s bad here in the US of A?
Take a look at our friends across the pond – and across France and Germany – where you get to those great “emerging markets” that captured the world’s imagination after the fall of Communism. From about 1995 to the early 2000s, the story of growth in places like Poland, Hungary, Czech Republic and the Baltic nations was nothing short of astonishing. Many of these nations were even able to join the elite European Union and share in the great common market.
Oh, the good old days.
Well, they’re done. Kaput.
And now European leaders are asking the International Monetary Fund (IMF) to bail out the nations of Eastern Europe for a cool sum of $500 billion. This isn’t to bail out Eastern European banks. It’s to bail out Eastern European NATIONS.
In many ways the crisis in Eastern Europe mirrors ours: too much debt and speculative growth in real estate and retail, especially in Latvia and Estonia. Look at the debt ratios of some of these countries. They make the Asian crisis in 1997 look like child’s play.
Added to this was the complex problem of currency exchange, where millions of Poles and Hungarians and Czechs were encouraged to convert their debt into Swiss francs – low interest rates enticed borrowers to eschew the zloty and the forint for the stable Swiss currency. But, like resetting adjustable rate mortgages in the US, the Swiss-based mortgage rates have gone up, as have defaults in Poland. What’s worse, the Swiss franc is actually in danger of collapse as a result of Switzerland’s investments in Eastern Europe.
It’s as if Eastern Europe was a giant sub-prime market, and the resulting carnage is taking out the venerable banks of Western Europe.
So, yeah, we’ve got it bad here. But things are actually quite a bit worse in Europe, where they have to contend with multiple governmental positions (the ECB can only dictate continental policy so much without pushback from individual creditor nations). And the Euro, the pride and joy of the new European economy, will likely face devaluation vis-a-vis the dollar. (Which is a reason why concerns over a devaluing dollar at this point are unfounded – what would the dollar devalue in relation to?)
Anyway, that’s the news from Europe. Over here we’ll see how the rumored preferred stock-to-common stock conversion plan at Citi goes down tomorrow.
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7 Responses to “Eastern Europe is Broke”
We are seeing the decline and fall of the second Roman empire.
When Romes economy was expanding she was strong. When it stopped. When she met with obstruction and had to force her way forward then the begin of decline was inevitable. The cities would hand out food to the poor. As they handed out more and more food, more and more -poor showed up at the cities wanting food and less and less people worked to produce. AS the pace of expansion slowed and new trade was not brought forth to the kingdom then the amount of food handed out became an burden on the Roman empire.
The basic tenet of society is productivity. The USA bases its model on economic expansion to keep people working, productive and happy. So too does every other nation that wishes to even remotely resemble the first or second Roman Empire. And so when the USA was founded it was an absolute certain that it would fail. Not in the short run or even the long run but when the economic expansion was halted and all the lands to conquer were conquered and as Alexander wept for having no more worlds to conquer, so too does the USA have no more lands to expand too.
Economic expansion has peaked and there is only one way down. The last 12 years has been nothing more then smoking mirrors and unless we replace the smoke and mirrors with something tangible then the decline of this nation will be precipitous.
“Which is a reason why concerns over a devaluing dollar at this point are unfounded – what would the dollar devalue in relation to?”
Stuff.
I talked about some scenarios back in the fall.
In sort the dollar may rise (or at least hold steady) against other currencies but eventually start falling against real goods. This is what happened in the second stage of the Depression, after the massive deflation and writeoffs occurred.
I discussed the relationship to production and real value in the second post of that series.
Are there two people commenting under your name? On my post about the financial system you accused me of fear mongering, and now you're talking about the collapse of the American Empire and precipitous decline. I actually think if we clean up our financial system and take our hits, our power will grow.
unless we replace the smoke and mirrors with something tangible then the decline of this nation will be precipitous.
I too actually believe that we have an opportunity to delay the inevitable. But we must replace the smoke and the mirrors with something tangible and something that produces real wages and real services and that is long term. The democrats have always had the platform they are just so damn distracted by other things that they cant keep up with all their stuff they want to do.
Green.
Additonally Mikkel…..you overlook one thing that will keep the dollar inflated. These foreign countries are mostly exporters. They live by exports. To export to foreign nations in times of economic stress will force them to devalue their monetary unit. Additionally I will agree that spending all this money is pointless. We are doing nothing more then throwing money at the problem without a plan and without fixing anything. We are just putting off tomorrow what needs to be fixed today.
My daughter used to call me to borrow a couple hundred dollars to help her pay her bills for this month. I lent it too her a couple months in a row and then it dawned on me. They are 200 bucks short this month paying their bills because their bills are 200 dollars a month more then they make. That means next month they will be 200 bucks short and the month after that unless the underlying dynamics of the problem is addressed.
In other words pay off 200 dollars worth of bills to balance the budget or increase your income by means other then borrowing.
For the USA its just easier to borrow then face the political consequences of balancing the budget.
As to our economy if we wish to go forward, to continue to be productive then we have to look to creative ways to do that. Energy is free. No one has to produce the suns solar rays or the winds power or the power of the tides or the strength of the geothermal wells. Tapping this free energy will provide millions of jobs going forward. Long term jobs that will replace those that are lost as companies that make dinosuars come to grips with reality…………Big 3 for example.
I agree. If we can ride this out and keep from panicking the US and the world will emerge stronger than ever. Now we know what wont work, what we need to do differently, and hopefully have a greater understanding of the effects of globalization.
The weak will sink and the cream will rise to the top
“They live by exports. To export to foreign nations in times of economic stress will force them to devalue their monetary unit.”
This is why creditors do worse in depressions than debtors. It was true for the Great Depression and it'll be true now. Still, the debtor countries had depressions back then, just not as bad as the US. You should read the post I linked to at the end.
Even during the height of the Great Depression, 75% of people kept their jobs, and those that did had an OK time surviving and even started putting themselves in a position to see great increases in standard of living as they eschewed non-essentials and saved money. The real tragedy came from the other 25%.
Which is why I have advocated strengthening our unemployment by both extending its length and increasing the amount. The rest of what they are doing is nothing but feel good, worthless junk thrown around to all the differing factions that have a hand in the pie.