angusthermopylae (43.21)

Schadenfreude?

April 28, 2010 – Comments (3) | RELATED TICKERS: SHA , DNN , FRD

Schadenfreude....what a wonderful term!  And what better way to open a discussion on the expanding problems in the EU than with a word from the country of reluctant heroes, Germany!

The Issue

Like anyone who has been here on CAPS for a while, I've seen plenty of discussion about the threats and pitfalls inherent in the Fed's and Treasury's strategy:  Too much money (from low rates, tons of government debt, and billions in bailouts) could cause a Zimbabwe-like collapse of the US dollar.  From there, it's a short hop, skip, and a jump to runaway inflation, robbing corpses for gold in there teeth, cats and dogs living together, yada-yada-yada.

This particular issue has been rumbling around for a while, and has even had some real-world (First Life, if you will) consequences:  Gold is through the roof, the US and China are having a verbal food-fight over China's currency policy, and there were even discussions about a "basket of currencies" that would replace the Almighty Dollar. *gasp!*

But, despite all the screaming, a few people have been questioning these scenarios--not because they are far fetched (e.g. Zimbabwe), but because nothing happens in a vacuum...

Enter the PIIGS

So, here we have Greece's debt (treasuries, bonds, etc) rated as junk; Portugal downgraded, and it looks like Spain is playing Casey-at-the-bat.  (Hmmm....actually,it's more like Greece struck out, Portugal pulled a hamstring, Spain was walked to first, and Germany is trying to save the day, a la Casey...gotta work on that metaphor...)

Anyways, the point is that the Financial Gotterdammerung (sp?) everyone was so worried about is happening on the other side of the pond.  Who knows how far it will go, and how badly?  Magic 8-Ball says "Ask later...I'm on my break."

But (and here's the punchline, folks) what should the US reaction be?  Should we await with bated breath, seeing how far the axe will fall and how deeply it will cut?  Should we rip off that mild-mannered persona, put on the cape and white hat, and ride to the rescue of our EU friends/partners/allies?

Or, in our secret, blackest heart of hearts, do we raise a little cheer?

Blasphemy!

I am in no way encouraging, condoning, or advocating the position that the EU's problems are a Good Thing(tm)--the world is too interconnected, there are too many living, breathing people who will get hurt, and I'm not really the person who delights in the misfortunes of others.  All too often it's just a matter of blind, dumb luck that allows one person or group to avoid a catastrophe that gladly demolishes another.

However, there are those who do think that way, and from a purely cold, selfish, and self-interested way, they may have a point.  Consider the ramifications if the EU is hurt (not killed) by the current financial crisis:

    --Reserve currency:  The eruo had been floated multiple times as the alternative to the dollar.  While there are numerous financial and political reasons this idea could gained traction, a "look what would have happened" scare will probably make this idea toxic for the foreseeable future.  "Ha!" we say.  "You don't like us?  Try spending your funny-money without us!"

    --Consumer Society:  One of the main objections to the whole Bush/Obama approach to preventing Depression II was that it could lead to many of the goods we take for granted suddenly being out of reach.  A weak dollar couldn't buy all those foreign-made goodies we take for granted, therefore international trade is severely disrupted (those sweat shops have to sell their Nikes somewhere!), and the whole globalization thingy grinds to a halt.  But, if someone else is worse off, then the only market for those shiny toys is right here.  This all boils down to....

    --The strength of the Dollar, and US international power:  It's pretty much agreed that, since 1945, the US was on top for two reasons:  Military strength and creditor status.  While Europe, Japan, and the USSR recovered from massive destruction of their infrastructure, we had the military and the wallet to go about doing things our way, getting the best deal we could.

Oh, sure, little things like backing dictators and then being surprised when they turned on us kept happening (Castro, Shah, Hussein, etc) but most of the world had only two choices--US or them ("them" being the Soviets or China, depending upon geography.)  Over the last 20 years, my humble opinion is that we pretty much pi$$ed that away, but nevertheless, the US has coasted quite well on that old WWII momentum for a good 50+ years.

Then the chickens came home to roost:  Housing, bad banking, bad investments, bad policy (foreign and domestic)--all pretty much put the US in a world of hurt.  As alluded to, the world started looking at alternatives to US leadership economically, politically, and militarily.  (Even some domestic rats left the ship--didn't Halliburton move their headquarters overseas?)

But the running of the PIIGS could be seen as a chance to turn that around.

Bad Idea

This is a bad idea, for one simple reason:   It's trying to recapture what is long gone, on a temporary basis, and simply due to events mostly out of our control.  The reason everything went to hell in a handbasket in the first place was because of inherent, systemic problems in the US economy.  And despite the avoidance of Great Depression II, a lot of those problems have not really been fixed.  (Yeah, I'm one of those...)

But that may not stop some from trying to use the EU's deteriorating situation to their advantage.  Politicians and policy makers might try to be a little more belligerent; US companies could push a little harder and ignore long term consequences; and everyone could walk around congratulating themselves on how much better they are doing compared to those poor bastiches over in the EU.

Don't think it could happen?  Just run back through Goldman Sachs's history again--someone, somewhere, will always try to squeeze that last drop of imitation blood from a turnip.

The next few weeks and months should be interesting.  However the EU situation plays out, our reaction (or marked lack of reaction) will be a good tell for what the long term plan:  Fix it, forget it, or finagle it.