Where did the debt come from? Understanding the austerity disaster

The new capitalism: What's Mayan is yours

Oh, sweet Jesus, this is going to be one hell of a year.

Maybe you’re one of those people who’ve stopped reading the paper because it’s too depressing. Is that why you’re so quiet? Maybe you eschew any headline that holds the word “Crisis,” or “Euro,” or (God forbid!) both together, because those augur something incomprehensible, and no knowledge is good news. Maybe you’re counting your dwindling cents and thinking things can’t get worse. Well, it would be hard for things to get worse, but the reality of our economies at this moment is that they’re drawn toward disaster like a gawker passing a massive car crash — and while he puts on the brakes to look, the cars behind him pile up too, till the wreckage stretches down the freeway for miles. Reading the business pages used to be like listening to the traffic reports, telling you what roads to avoid in the morning. Now it’s like tuning in to the Emergency Broadcast System’s slow, terrible whine, and realizing you should have figured out where the nearest fallout shelter was years ago.

But hiding won’t help. I can promise you the only way through the year ahead is to be radical: I mean, to be unflinching in looking at the tangled roots of this mess, to try against all our instincts to see things as they are.  There is a reasonable chance we will have to rebuild the world in our lifetimes. If that happens, we had better be armed with knowledge about how the one we have went wrong.

So let me share the little bit I know these days. You surely saw Friday that Standard & Poor’s went after Europe with a machete.  The ratings agency downgraded the credit of nine countries in the Eurozone.  Austria and France lost their triple-A status. Malta, Slovakia and Slovenia also came down one notch.   Italy, Spain, Portugal and Cyprus lost two; the last two countries now join Greece as issuers of junk bonds. It’s a comprehensive declaration of disbelief in Europe’s ability to save itself.

Into the abyss

This happened the same day that talks broke down between Greece and the commercial banks it owes money.  You remember that last year, the European Union promised to write off 100 billion euros of Greek debt if bondholders –that is, the banks — would agree to take a 50 percent loss on their Greek lendings. This is Angela Merkel’s idea, a way of forcing the banks that made the dumb loans, not just European taxpayers (read: not just Germans, since they’re the only ones in Europe with any money) to take a hit. The dumb banks are not happy. Their representative said, ““Discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach.” The New York Times explains that this might (might!)

be a not-so-subtle message that if Europe pushed too hard on this point, then the creditors could no longer accept the agreement as a voluntary one. That is crucial, because an involuntary debt revamping would be seen by creditors as a default — a step Greece and Europe are trying hard to avoid.

If Greece defaults, it could set off the activation of credit default swaps — a type of financial insurance. [Basically, the banks have bought insurance against the possibility that debtor countries default.] If the issuers of that insurance have to start paying up, many analysts fear the same sort of falling dominoes of i.o.u.’s that cascaded through the financial industry after the subprime mortgage market collapsed in the United States in 2007 and 2008.

What can you say? To quote Rick Perry: oops?

All this follows a month when Europe seemed to be looking up a little. Italian bond sales were doing reasonably well. (If you asked me a year ago whether I’d ever care about Italian bond sales, I would have said basta! assurdo!)  In November,when Berlusconi resigned, the interest rate on Italy’s bonds climbed to almost 7.5%, a point that means the markets expect default: “even higher yields aren’t enough to attract buyers. That kind of panic is self-fueling, and once it starts it can destroy its target within days.”  Yet Italy clawed its way back, thanks to reassuring infusions of money from the European Central Bank. Friday its three-year bonds were selling  at an average rate of 4.83 %, not great but the lowest, most manageable rate they’d seen in four months. The Standard & Poor’s blow, however, means the markets still don’t trust Italy as far as they can throw it. Try throwing Italy. It’s heavy.

Greek gross domestic product (GDP) collapsing: Atlas died, consumption shrugged

Here’s the problem. The markets insisted on austerity plans so that governments could repay their debts. But now the markets see that the austerity plans are keeping the economies — Greece, Italy, Spain, and many others — from growing, perhaps for more than a decade to come. And without economic growth, there’s little long-term prospect for repaying debt. Hence the markets are losing confidence in the governments anyway, pushing them toward increasingly likely default.

Take the Greek case. The Washington Post notes that after two years of austerity,

increasingly, critics of the quick-cuts theory are pointing to the worsening recession [in the country] as evidence that the medicine is killing the patient, with the nation’s sharp, sustained decline leading some economists to suggest that the country has entered a more serious depression.

“Suggest”? Stathis Kouvelakis lays out the details:

Workers and the retired alike have lost around a third of their incomes. Wage arrears in the private sector have now reached three months on average, while public-sector pensions—around €500 to €700 a month—are in many cases not being paid at all. Public services are in a state of collapse: schools are without textbooks, bringing teaching to a virtual halt, while hospital patients are being told to buy their own medication from pharmacies. The suicide rate, traditionally one of the lowest in Europe, has increased by 40 per cent in just one year, and the health of the population is deteriorating dramatically.

And here’s the kicker, killer, whatever:

The actual unemployment rate is said to be around 25 per cent (the official rate is 18.5 per cent), with the figure twice as high among 15-to-24-year-olds, while GDP [gross domestic product] has declined by at least 12 per cent since the start of the crisis, a proportional drop comparable to the effect of the 1930s Depression.

Greece has suffered, he says, “one of the most drastic drops in living standards that postwar Europe has seen.” It’s akin to what happened in the former Soviet Union in the 1990s — and we know how well that turned out.  Putin, here we come! It’s even more like the effects of structural adjustment on Latin American economies in the ’80s, and on Africa in the ’90s. “The Mediterranean economies are being sentenced to years of rot and hyper-unemployment,” Mike Davis writes. The policies the industrial West inflicted on the developing world for thirty years are coming home to roost.

From the bankers’ perspective, though, the problem is that you can squeeze such a collapsed economy until the pips squeak, and you can’t get repayments out of it. Hence the crisis that last week’s events represent.

Meanwhile, in order to enforce austerity, governments are becoming less democratic — since their people don’t want the plans their leaders are compelled to pursue.  The unelected “expert” governments installed in Greece and Italy augur things to come.  In the London Review of Books, David Runciman channels Carl Schmitt and the theorists of “emergency.” Democracy has a “crucial advantage,” he says, because it can undo itself: it’s

more politically flexible than the alternatives. That is, in a crisis democracies can experiment with autocracy but autocracies can’t experiment with democracy, not even in small doses. They daren’t, for fear of losing control.

But the present experiment in technocratic rule may not be enough to get things done. We may need a full-fledged turn to dictatorship, as spread across Europe in the late ’20s and ’30s:

[The] turn to technocracy looks like a diversion. It served its purpose in allowing the Greeks and Italians to ditch busted governments without holding elections. But if the technocrats are meant to sort out the mess, instead of simply providing a bit of breathing space before elected politicians get another crack at it, then they will need some autocratic powers. They will have to be able to force their nasty medicine down the throats of kicking and screaming populations.  … The hard truth is that democracies do not save themselves by flirting with technocracy. They have to flirt with something nastier.

Democracies have survived worse crises than the present one because their previous experiments with non-democratic methods have always been time-limited. In war, for instance, democratic governments have often had to resort to emergency powers, but when the war is over, those powers get given back. That won’t work this time. The present crisis is not a war, and it’s not going to be easy to tell when it is over.

In short: the endless War on Terror has not so much ended as it’s been forgotten. The War on the Poor is bidding to succeed it.

We are in Stage II of the massive crisis that began in 2007. In Stage I, the world’s banks threatened to collapse under the weight of unpaid debts owed to them.   Governments everywhere bailed them out — which meant assuming their debts. But now, as Michael Lewis writes,

The financial crisis of 2008 was suspended only because investors believed that governments could borrow whatever they needed to rescue their banks. What happened when the governments themselves ceased to be credible?

Where did all this debt come from?

There are as many answers as economists. Strikingly, though two recent books — the late Chris Harman’s Zombie Capitalism and David McNally’s Global Slump: The Economics and Politics of Crisis and Resistance — both turn back to one of Marx’s core but most controversial ideas.

It’s called, in that peculiar Marxian manner of legislating, the Law of the Falling Rate of Profit. The gist is this: Capitalists want to increase the amount of productivity they can extract from labor every hour. They can Taylorize — make work time more efficient; they can cut wages; but after those means are exhausted, the best route is to invest in new labor-saving technologies. The first businessmen to introduce these machines and tools will get a short-term boost: they can produce more cheaply than their competitors, but sell at comparable prices. That means their profits will rise.

However, the ultimate source of value for Marx is labor. If investment grows more rapidly than the labor force, it is also growing faster than new value is being created. (Moreover, as investment grows faster than wages, it grows faster than the money available to workers to buy the goods and keep the economy going.) “When productivity rises, profits fall. The more ‘capital-intensive’ is a business, the less profit is made in proportion to the amount of money invested.” As businesses continue to invest, then, the profits they can make — the value they can extract, above what they’re spending on both technology and labor — will inevitably start to spiral down.

Although versions of this theory date back to Adam Smith and David Ricardo, it wasn’t popular in the 20th century. Mainstream economists hated it because it suggested that the recurrent crises of capitalism couldn’t be fixed: the system itself contained a cancerous paradox, a spore of decline. “At a certain stage,” Marx wrote, capitalism “conflicts with its own further development.” Revolutionary Marxists of all stripes disliked it because they expected the system to fall through their indispensable action, not some internal contradiction: the workers, led of course by the vanguard Party, would rebel against exploitation and install Utopia. These pages of Marx, read literally, suggested that capitalism could consume itself regardless of what the workers did.

However, the Law provides a very good description of the major cycles of capitalism since the 1920s. Each was a period distinguished by new technologies and new investment that created soaring rates of profit — which gradually declined till the system couldn’t sustain itself, and a major crisis set in.

All those commodities! Don't forget the bombs, though.

Consider the period after the Second World War, with the planet recovering from slaughter and a Great Depression. The French, much catchier than Marx, call the thirty years from roughly 1945-1974 les trente glorieuses. It was an age of almost unbroken growth across the whole industrialized world, Europe and North America alike. So-called “Fordist” production methods, chiefly the glory days of the unified factory assembly line, helped sustain it, as did growth in consumer goods like cars and helpful household machinery.  However, massive military spending by the US (and arms industries all over Europe), along with the technologies military research produced, was its mainstay.

It all crashed starting in the early ’70s. It used to be customary to blame this on the oil price shocks of the period, in 1973 (post-Yom Kippur War) and 1979 (post-Iranian revolution).   Suddenly the one critical commodity that powered economies quintupled in cost. Obviously this devastated profits, but it’s clear that profit rales were already falling precipitately since the late 1960s.

Price shock: Crude reality

The strange response of business to the crisis proved its unusual severity. Businessmen across the developed world both cut wages (and jobs) and raised prices.   Slashing prices as wages and employment decline (that is, when you fire people) is usually the logical thing to do.  When there is less money to spend in the economy, prices should go down, along with demand. The strange phenomenon of “stagflation” instead dominated the 1970s: unemployment and economic stagnation came coupled with galloping inflation, prices jumping steadily higher. This wasn’t just the result of oil prices driving production costs upward. Rather, it’s hard not to interpret it as a campaign to break the back of labor, and the rights (and wages) it had won during the trente glorieuses. Capital wanted to destroy labor’s will to resist by squeezing workers from both ends: shrinking the money they had to spend, while raising the pricetag on the things they had to buy.

What brought developed economies out of the crisis of the 70s, however, was first of all a side-effect of the 1973 oil price shock. A huge amount of money went into the hands of oil-rich states. They deposited most of it back in Western banks, which had to do something with it, and found few investment opportunities amid a recession.  However, a great many Third World states, especially in Latin America and Africa, also found their economies wrecked by the oil roller-coaster; they needed money. The banks happily, joyfully lent to them, to put that money to use! Wonderful, until the second oil shock in 1979 wrecked the Third World’s economies again — along with the so-called “Volcker shock” at the same time, when the head of the US central bank raised interest rates sky-high, causing a worldwide downturn, and making loans almost impossible to repay.

“Structural adjustment” was the result. As countries confessed inabillity to cover their debts, international institutions — the World Bank and the International Monetary Fund — stepped in to oversee structured payment plans. Invariably these involved mandated economic “reforms”: privatization (selling off factories and resources, usually to the West), drastic cutbacks in state services (so the savings could go to debt servicing), reorienting whole economies from manufacture to shipping raw materials off to the developed world.

One critic writes:

According to UNICEF, over 500,000 children under the age of five died each year in Africa and Latin America in the late 1980s as a direct result of the debt crisis and its management under the International Monetary Fund’s structural adjustment programs. These programs required the abolition of price supports on essential food-stuffs, steep reductions in spending on health, education, and other social services, and increases in taxes. … Extrapolating from the UNICEF data, as many as 5,000,000 children and vulnerable adults may have lost their lives in this blighted continent as a result of the debt crunch.

Destructive across two continents, structural adjustment sent windfalls of money to rejuvenate the European and North American economies. Jubilee 2000 estimates that by the 1990s, debt servicing alone was moving $300 billion per year from the South to the North. As J. W. Smith says, the debt crisis beginning in the ’80s produced “the greatest peacetime transfer of wealth from the periphery to the imperial center in history.”

Structural adjustment: The medicine that makes the malady worse

Debt-related transfers helped power the economic revival of the 1980s and 1990s in the developed world.  New modes of production also boosted profits– breaking up factories and moving whole segments of the production process to cheap-labor areas — along with new technologies, especially the computer explosion. Still, Chris Harman estimates that the rate of profit in the period never reached much more than half its stellar heights of the trente glorieuses.  There were also sporadic but sharp recessions, far more frequent than anything the postwar boom had seen — not only the 1979-82 downturn, but sequels in 1991 and 2001.   These suggest the profit rate was undergoing an irregular but inexorable decline. The second trente glorieuses was turning out pretty ingloriously.

Here is where the debt comes in.

1975 – 2005: that’s thirty years, an entire generation, of slashing wages across the developed world, while spending more and more money on new technologies.  That’s a recipe for a crisis of demand. Who, under those conditions, has money left to buy things? Of course, if you’ve cut wages at home, you can try to resolve the problem of popular spending power by finding new markets abroad.  With structural adjustment plans still leaving much of the world’s population reeling, though, new markets on many continents were limited to the small elites surfing on the flow and froth of global capital. Mass markets for anything more than cheap exports were getting hard to find. Moreover, even in the age of globalization, when money runs around giddily from point to point like hamsters in a maze, some goods can’t be exported. Housing is a prime (or sub-prime) example. You can take all the jobs in Flint, Michigan, and export them to Guam or Guadelajara; but the houses people lived in will stubbornly remain behind, where nobody has cash to buy them. They can’t be packed up or moved to some Shanghai or Kobe where folks can afford them.

Debt was the answer. Debt re-entered the picture like a third-act deus ex machina. If debt in the developing world had powered Northern economies’ initial revival, debt in the developed countries fueled the frenzy of spending that postponed, then precipitated, the end. If people’s spending power was shrinking, you could always give them fictitious money to spend. And housing, the paradigmatic commodity that couldn’t be moved where the real money was, was the perfect place to encourage them to spend it.

Credit ballooned. Capitalism in the last phase of the period was turbo-powered by a huge wave of fake money.   Mortgages, credit cards, auto loans, and other kinds of credit became incredibly easy to obtain. The housing bubble that resulted in the US —  housing prices driven up by demand, and an enormous number of people indebted to buy houses they couldn’t in the end afford — started to collapse first, in 2006. But the tidal wave of loans, of spending fueled by nonexistent money, had surged around the developed world. Whole countries were swept up in it. John Lanchester cites symptoms of the mania. Spain and France ran up debts that totalled ten times their annual revenues.  Meanwhile, though, “Iceland’s stock market went up ninefold; … in Ireland, a developer paid €412 million in 2006 for a city dump that is now, because of cleanup costs, valued at negative €30 million.”

Most people with a special interest in the events of the credit crunch and the Great Recession that followed it have a private benchmark for the excesses that led up to the crash … phenomena that at the time seemed normal but that in retrospect were a brightly flashing warning light. I came across mine in Iceland, talking to a waitress in a café in the summer of 2009, about eight months after the króna collapsed and the whole country effectively went bankrupt under the debts incurred by its overextended banks. I asked her what had changed about her life since the crash.

“Well,” she said, “if I’m going to spend some time with friends at the weekend we go camping in the countryside.”

“How is that different from what you did before?” I asked.

“We used to take a plane to Milan and go shopping on the via Linate.”

Since that conversation, I’ve privately graded transparently absurd pre-crunch phenomena on a scale from 0 to 10, with 0 being complete financial prudence, and 10 being a Reykjavik waitress thinking it normal to be able to afford weekend shopping trips to Milan.

There’s a tendency these days to treat these people as morally weak for succumbing to temptation. Michael Lewis sees all of Greece as a study in “total moral collapse”:  “a nation of people looking for anyone to blame but themselves.”  But what were they supposed to do?  Fold their hands demurely and stay poor, while everybody else was getting rich? After all, the easy credit was being pushed on them by banks who seemed to know what they were doing.  Of course, we all know now what turned the banks into playground money pushers. They had found ways of repackaging debt into mathematically incomprehensible financial securities, and then selling it to someone else. The sale and resale of debt itself became a fantastically profitable industry, with the securities layered and combined so that nobody could tell how much of what they were buying (or selling) was solid debt, and how much was subprime stuff careening for default. The whole world economy was running on funny money. It ran for a while, and then fell apart.

And that leads us to where we are now. The banks, burdened by bad debt they’d lent or bought, by customers right and left defaulting, tottered on the verge of failure. The governments bailed them out –first the US and the UK, then other countries from Portugal to Greece to Ireland. All that bad debt the banks owned on their balance sheets suddenly became the property of you, the taxpayer, pretty much wherever you are. I’ll let Robin Blackburn summarize the story:

The Great Credit Crunch of 2007 has developed into a contraction of wider scope and great tenacity, centred in the main OECD countries. Governments acted to avert collapse, but in doing so themselves became a target. Bail-out measures adopted during the early phase of the crisis between 2007–09 saw the US, UK, and eurozone authorities increase public indebtedness by 20–40 per cent of GDP … The transfer of debt from private to public hands was carried out in the name of averting systemic failure, but in some ways it aggravated the debt problem since bank failure, however disruptive, is actually less devastating than state failure. Before long, the bond markets were demanding plans to cut these deficits by slashing public spending and shrinking social protection.

And this gets us back to my starting point. The markets wanted austerity; but austerity cannot give them economic growth, and some degree of growth is needed for governments to pay off this mountain of bank-debt-become-public debt — as well as to care for the minimal needs of populations pushed to the margins of endurance.  There is no easy way out, no simple formula for starting the business cycle up again. Capitalism is trapped in this contradiction, feeling blindly for the exit, and coming up against bland, impassive, smooth-featured walls.

What’s coming? What does the New Year hold? I can’t say — like you, I barely want to imagine it. The threat is not only to our livelihoods; it’s to democracy. Already, in Greece and Italy, the markets have shown themselves more powerful than the publics.  Governments responsible to no party, transcending the voters’ will, were set up at the beck of bondholders, who form a Higher Electorate against whom mere citizens are simply beggars.

Moreover, the post-austerity state, stripped of its capacity to provide for public welfare and of many of its other powers, has little to legitimate itself except its willingness to repress and kill. Recently the New Yorker profiled Nicolas Sarkozy, France’s tiny president presiding over an increasingly tiny state, its authority whittled away not only by the European Union (which the article, like most French people, tends to blame) but by the pressure to slim down to Thatcherite or Reaganite dimensions.  The profile tries to explain Sarkozy’s ferocious rhetoric against immigrants, criminals, Muslims, Gypsies.

“People need to understand why the President puts so much stress on the question of security,” one adviser told me. “It’s precisely because it’s something which is entirely in your hands.” When it came to crime in the streets, he said, “there is no Europe here.”

The same logic leads to governments that massacre the poor in Jamaica and Nigeria in the name of vindicating their withered existence, to the tear gas staining the air of New York and Oakland. The welfare state turns into the security state. Many have perished; more will.

Austerity, we’re told, is the answer. But austerity makes the problem worse. Is there any comfort to be found?  Livy wrote, of the last years of the Roman Republic: “They had reached that final point when the difficulties they faced were less terrible than their solutions.”  We seem, to the unjaundiced eye, to be inching there.   “Another world is possible,” they chant in the demonstrations. Possible? It’s urgent.

Goodbye Euro, hello apocalypse

Nouriel Roubini explains why the Eurozone is doomed. The only way to ensure that economies on the poor periphery are healthy enough to want to stay in it is to abandon the austerity-only plans being forced down their throats, and allow them to expand. But the big economies in Europe won’t hear of this. The salvation measures would involve

significant easing of monetary policy by the European Central Bank [ECB]; provision of unlimited lender-of-last-resort support to illiquid but potentially solvent economies; a sharp depreciation of the euro, which would turn current-account deficits into surpluses; and fiscal stimulus in the core if the periphery is forced into austerity.

Unfortunately, Germany and the ECB oppose this option, owing to the prospect of a temporary dose of modestly higher inflation in the core relative to the periphery.

The bitter medicine that Germany and the ECB want to impose on the periphery – the second option – is recessionary deflation: fiscal austerity, structural reforms to boost productivity growth and reduce unit labor costs, and real depreciation via price adjustment, as opposed to nominal exchange-rate adjustment.

In other words: politically and socially unacceptable misery around Europe’s rim. There’s one last option for the Eurozone’s rich countries: “bribing the periphery to remain in a low-growth uncompetitive state.”

This would require accepting massive losses on public and private debt, as well as enormous transfer payments that boost the periphery’s income while its output stagnates. Italy has done something similar for decades, with its northern regions subsidizing the poorer Mezzogiorno. But such permanent fiscal transfers are politically impossible in the eurozone, where Germans are Germans and Greeks are Greeks.

In fact, we now see that the whole Eurozone is in something of the same state as the chronically inept and divided Italian state that was cobbled together 150 years ago. It’s called uneven development; rich regions and poor regions have to coexist in uneasy fear and envy, forced into the same currency and polity. In Italy, the misbegotten result has been decades of political deadlock and massive corruption. For Europe, by contrast, the last ten years looked fairly hopeful, buoyed by a strong Euro and the housing bubble. But now the illusions have been stripped away and the reality is on view. Germany wanted the southern European markets, but it’s not willing to keep their economies strong enough to survive.

Roubini expects the zone to start crumbling:

The recent chaos in Greece and Italy may be the first step in this process. … With Italy too big to fail, too big to save, and now at the point of no return, the endgame for the eurozone has begun. Sequential, coercive restructurings of debt will come first, and then exits from the monetary union that will eventually lead to the eurozone’s disintegration.

Everybody says this will make the 2008 implosion of Lehman Brothers look like a hand grenade compared to the Big Bang.  Whatever’s coming, it’s unlikely to be fun.

“This is the biggest story in the world right now”

Così è, se vi pare!

Forget Obama. The most important politician of our time is Silvio Berlusconi. His career as a leader has been built around two simple principles that are essential, incontrovertible koans of the period:

  • Capitalism is weak and it can’t save itself. It needs to seize control of the state and all its powers, to protect capitalists against their recurrent crises.
  • You don’t need a fascist movement or a coup to do this: how backward-looking, how 1935!  You need to sell appearances to voters, to turn statecraft into a genre of entertainment.

Others, like ex-actor Reagan or Saatchi-&-Saatchi-sculpted Thatcher, may have grasped fragments of the formula ahead of time, but only Berlusconi worked it out with the precision of a logical theorem or a Harvard-MBA business plan, and only Berlusconi put it into practice with his inimitable, retro-ironic garnishes on top, making Italian politics a 3-D, Imax version of The Benny Hill Show.

Unfortunately, it’s over. Berlusconi is stepping down, although with an in-next-week’s-episode waver about exactly when. And, in a minor sideshow to this tragic drama, Italian capitalism is collapsing. The rate for the government’s bonds soared to almost 7.5% today, which means, basically, that the market no longer has the slightest faith in Italy. As Kevin Drum explains, once interest rates climb above 7%

even higher yields aren’t enough to attract buyers, Europe’s main clearinghouse will start to require higher collateral for Italian bonds used in repo trades, and traders will start panic selling, which would send rates spiraling even higher. That kind of panic is self-fueling, and once it starts it can destroy its target within days….

Unless the European Central Bank (ECB) steps in, Italy will be shut out of the bond market very quickly. It will be unable to roll over its debt, and default will follow. This is basically Greece on steroids, since Italy is something like six times bigger than Greece. The eurozone deal announced a couple of weeks ago might have been big enough to handle a Greek collapse—though even that’s not a sure thing—but it’s not even close to being big enough to handle an Italian collapse. … This is the biggest story in the world right now.

Dominic Rushe in the Guardian helpfully offers 10 reasons to be frightened this is the end of the world. I’ll only mention a couple:

The speed at which government bond crises can escalate is startling: in April 2010, 10-year bond yields in Greece hit 7%; within a month they had reached 12%, prompting Greece’s first bailout package. In Ireland, 10-year bond yield hit 7% in November 2010; a month later it had risen above 9%, triggering a bailout. In Portugal, yields hit 7% in November 2010; the bailout came in May. …

“At this point, Italy may be beyond the point of no return,” Barclays Capital said in a gloomy report this week.

The NY Times points out that the spiralling crisis owes a bit to a very Berlusconiesque endeavor in the smoke-and-mirrors department:

Italy is the only country among Europe’s weaker nations that offers investors the opportunity to buy or sell futures contracts tied to Italian bonds. Though the feature was presented initially as a way for investors to hedge their exposures, investors who want to make a negative bet on the euro zone can sell Italian bond futures — which adds to the already significant downward pressure coming from investors who are unloading their bond holdings directly.

I mentioned recently how the market in futures — in purely hypothetical commodities — is driving up food prices to unsustainable levels. Here, the market in hypothetical debt is boosting the price of the real thing. A last game of appearances!

There isn’t enough money in Europe to bail out Italy. Reportedly French and German bankers are murmuring about breaking up the Eurozone, throwing Italy (and Greece, Spain, Portugal) overboard and lashing together a life-raft with the remaining solvent economies. No one knows how this could be done without multiplying the panic tenfold.

In very calm and measured tones (“Unfortunately, the lifeboat-to-passenger ratio is less favorable than it might appear …”), Daniel Gros observes that Italy’s economic woes are mystifying. There’s plenty of capital, technological innovation is chugging along, and structural reforms have already been imposed. What’s the problem? Could it be governance? Could it be that capitalists can seize the state, but only to run it into the ground? In terms of governance, “the three most important indicators for the economy are:  the rule of law; government effectiveness in general; and control of corruption. Italy’s performance on all three indicators has deteriorated dramatically over the last decade.”

Maybe more than appearances matters after all.

the moving finger writes

Meanwhile, Rushe says a bit acidly, “It probably doesn’t help that Berlusconi pretended to fall asleep during key meetings with European leaders.”  How can the show go on when even the showman is bored by it? Alas; the master of the revels has lost interest in the flimflammery. It’s natural for capitalism to collapse like a used condom when the Head Capitalist himself can’t give it his full regard. Even his parting comments to himself suggest a reaching for hootchy melodrama to pepper up the dull technicalities of his exit — an attempt to recapture his own attention. During the vote that spelled the ruin of his government, cameras caught him scribbling on a piece of paper:

“308, – 8 traitors; Government upturn; Vote; Take note; Resignation; Italian President; One solution; Let’s move”

Gnomic as a riddle; crystalline as a haiku! Maybe that’s the epitaph of our era.  As the archaeologists of a future civilization dig through the rubble of this century, the used condoms of our passions, the broken CFL lightbulbs of our great ideas, perhaps they will find in those cryptic words the key to everything, the “Rosebud” to rationalize the great crash and fall, and all their computers will be bent to decipher Berlusconi’s parting sigh.