The human body is a wonderful product of nature, designed for survival in the
most extreme of circumstances. Most human organs can sustain significant damage
without affecting the chances of survival. Lose a lung or a kidney in an
accident, and your other lung or kidney will be sufficient to take you through
the rest of life. Even the organs that aren't available in duality can sustain
much damage - humans need only half their liver for example; half your stomach
can be stapled up, as can many other body parts.
This doesn't necessarily extend to the most vital organs, but figuratively, at
least, if you were to lose half your heart you would survive as a banker; lose
half your brain and you could continue life as a communist. If you happen to
lose both half a heart and
half a brain, you could get along fine in one of the more extreme religious
groups.
None of these wonders of survival, though, accounts for another class of organs
in the human (and other animal) bodies, namely those that lose their primary
functions due to constant evolution; the most well-known of such organs would
be the human appendix. There are few unused organs (or structures, to use the
more correct scientific term) because nature has no time for wasted space or
development.
In general, evolutionary biologists ascribe vestigial organs to "leaps", namely
the infrequent momentous changes that leave virtually no time for the
now-wasted organs to be expelled (or evolved out).
In much the same way that nature discards most organs without any purpose, and
leaves behind vestigial structures as evidence of evolutionary leaps in only
rare cases, true capitalism as evinced by the Schumpeter model of creative
destruction leaves no prisoners. Failing business models are discarded into the
dustbin of history to be replaced by self-sustaining if not self-propelling
forms.
When you interrupt them, though, a number of evolutionary discards remain in
place far longer than they strictly should.
March 2010 will mark the second anniversary of US government intervention on a
large scale in the financial sector, from the shadow bailout of Bear Stearns;
however, even before that, a host of European governments had nationalized or
propped up banks ranging from Northern Rock (see
Rocking the land of Poppins, Asia Times Online, September 22, 2007) to
German banks IKB, Sachsen LB and so on.
As the US and European governments are now discovering, bailouts of Wall Street
do not make an economic recovery more plausible; instead, they make recovery
more expensive. There isn't much point in first spending the money, figuring
out that it was wasted or didn't produce the expected (or more accurately,
"dreamed-up") results, then trying to recoup the money lost.
Taxes on bankers' bonuses are one such instance of manufactured outrage (see
Bonus battles, Asia Times Online, January 2010). President Barack
Obama's special levy on banking profits is another such. Within all this public
posturing, someone must be rather hoping that no one does the actual numbers:
A. Total bankers' bonuses for 2009 - over US$145 billion. B. Expected collection from the United Kingdom's special levy on
bankers' bonuses - 550 million pounds sterling (US$887 million). This is the
government estimate, but more likely it will be about 4 billion pounds. C. Ten-year collection from Obama's new tax on banks - $90 billion.
Banks enjoyed significant liquidity boosts from government actions, which were
then recycled into all manner of fixed-income securities. Central bank
liquidity boosts were so significant over the course of 2009 that the US, the
United Kingdom and some other governments even issued new money to purchase
their own bonds. Indeed, the biggest buyer of US government bonds in 2009
turned out to be the US Federal Reserve; the banks and China were busy running
away to buy other things.
Between the sharp increases in liquidity, bailouts and rising government debt,
the market system may well be approaching its own evolutionary leap that could
in turn result in its own series of vestigial organs. As with nature, it is in
the most inflexible of areas that one would expect to see vestigial organs show
up: sure enough, the first area is Europe.
Greece as the appendix of Europe
On an evolutionary basis, changing the direction of fluids and flows creates
ideal conditions for the sudden de-selection of species; and within species,
the actual use and function of organs. In much the same way, sea changes in
economic and trade flows would most likely create ideal conditions for new
vestigial organs. The significant decline of the euro against the US dollar
this week was the direct result of the difficulties being envisaged for the
refinancing of Greek debt in the next few months.
As Martin Wolf wrote in the Financial Times dated January 19:
The Greek
government has promised to slash its fiscal deficit from an estimated 12.7 per
cent of gross domestic product last year to 3 per cent in 2012. Is it plausible
that this will happen? Not very. But Greece is merely the canary in the fiscal
coal mine. Other eurozone members are also under pressure to slash fiscal
deficits. What might such pressure do to vulnerable members, to the eurozone
and to the world economy?
Having falsified its figures for years, violating the trust of its partners,
Greece is in the doghouse. Yet, even if it bears much of the blame, the task it
is undertaking is huge. In particular, unlike most countries with massive
fiscal deficits - the UK, for example - Greece cannot offset the impact of
fiscal tightening by loosening monetary policy or depreciating its currency.
... Given these tight constraints, a big structural fiscal tightening will
generate a deep recession. That is sure to increase the cyclical deficit.
Assume, cautiously, that for every percentage point of structural tightening
there would be 0.2 points of offsetting fiscal deterioration. Then the
structural tightening needed to reduce the actual deficit to 3 per cent of GDP
[gross domestic product] would be close to 12 percentage points. The Greek
government would find that, for every step it takes forward, it would slip a
bit backwards. So far Greece has not suffered a significant recession. That
seems sure to change. The government will soon be facing miserable public and
private sectors, with no policy levers.
... Meanwhile, the eurozone as a whole, having lost its erstwhile internal
demand engines, must now hope for faster growth of net exports. So do countries
hit by the financial shock, such as the UK and US. So, too, does recession-hit
Japan. So, not least, does China. Either the rest of the world has a spending
binge, or these countries - which make up 70 per cent of the world economy -
are going to be disappointed.
The drama though had hardly
begun. As was reported on Wednesday evening this week (January 27) by the
Financial Times:
The yield spread between 10-year Greek bonds and
benchmark German Bunds widened dramatically on Wednesday, by almost 0.7
percentage points at one point, in what one trader called a "capitulation" to
sellers worried about Greece's ability to refinance its debt.
The mayhem unfolded after Greece denied it had given a mandate to Goldman
Sachs, the US investment bank, to sell government debt to China. Greek 10-year
bond yields closed at 6.70 per cent, 0.48 percentage points up on the day.
The Financial Times reported on Wednesday that Athens was wooing Beijing to buy
up to €25bn (US$34.8 billion) of government bonds in a deal promoted by
Goldman. China had not yet agreed to such a purchase, the FT said.
The government's comments unsettled markets because of their implication that
China, with $2,400 billion in foreign exchange reserves, was not interested in
increasing its exposure to sovereign Greek debt.
Experts, though, said that heavier Chinese purchases of Greek debt would be no
less disturbing. For the eurozone, "a member country implicitly rescued by
China would be an even worse signal than an IMF programme," said Marco
Annunziata, Unicredit chief economist.
Someone must have read
my recent article
What's in a name? (Asia Times Online, January 7, 2010) and decided that
the ideas expressed there - to approach richer savings nations like China with
sweet deals designed to mollify their egos rather than economic or financial
motives. Instead of China though, it was the case of the European Commission,
as the update on January 28 makes clear:
The Greek crisis is a matter
of direct concern to EU countries because of their extensive holdings of Greek
government debt. The UK and Ireland account for about 23 per cent of the total
outstanding Greek debt, followed by France at 11 per cent and Italy at 6 per
cent. Germany, Austria and Switzerland hold about 9 per cent and the three
Benelux countries another 6 per cent.
The outlines of what the EU would do, should Greece or any other eurozone
country be unable to refinance its debt, have been relatively clear for at
least a year, when the global financial crisis triggered the first sharp
increase in the premiums demanded by investors to hold Greek, Irish, Portuguese
and Italian debt.
Bridge loans would be extended to Greece from other eurozone governments,
perhaps with the involvement of bank consortia. But in return, the authorities
in Athens would have to accept strict limits on public expenditure and allow
the Commission to place Greek public finances under close scrutiny.
This may be comforting to any bond investor in Greece today, but the bigger
question does arise about the sustainability of the European Currency Unit
(euro) itself as a result of this "soft" bailout being envisaged for Greece.
Just as governments around the world blinked when confronted with a rout of the
banking sector - described in the first section of this article - the Europeans
are now scrambling to rescue one of their own from the clutches of the big, bad
market.
In doing so, they threaten to reverse the problems of Greece onto their own
balance sheets. Greece may be the vestigial organ of Europe, but Europe itself
risks becoming an unnecessary adjunct to the global economy as a direct
consequence of these moves.
For investors from Asia, the US dollar's perils center on the upcoming bailouts
of various state governments like California by the federal government;
similarly risks for the euro arise from continuing bailouts of member states
like Greece.
Care for an evolutionary leap now that leaves both the US dollar and the euro
as the new, new economy's latest vestigial organs?
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