I went on "The Patt Morrison Show" on Tuesday to join NPR "Planet Money" correspondent Zoe Chace and travel expert Terry McCabe to discuss the ongoing, seemingly neverending eurozone crisis. As you probably know, there are now serious conversations happening in Europe about Greece exiting the euro. Spain and Italy could be in trouble. Ireland and Portugal already are. Governments have fallen; most recently French President Nicholas Sakozy lost his re-election bid to socialist François Hollande.
Despite all this, it's easy to talk yourself into a false sense of calm. After all, the eurozone crisis feels as if it's been going in for years — because it has been going on for years!
At the Financial Times, Martin Wolf doesn't think we should be calm. He thinks we should acknowledge reality: that post-financial crisis, the world is in a "contained depression." And we're unprepared for the consequences of a eurozone meltdown:
How much pain can the countries under stress endure? Nobody knows. What would happen if a country left the eurozone? Nobody knows. Might even Germany consider exit? Nobody knows. What is the long-run strategy for exit from the crises? Nobody knows. Given such uncertainty, panic is, alas, rational. A fiat currency backed by heterogeneous sovereigns is irremediably fragile.
Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events. Perhaps the panic will vanish. But investors who are buying bonds at current rates are indicating a deep aversion to the downside risks. Policy makers must eliminate this panic, not stoke it.
The bonds he's referring to are, for example, the U.S. ten-year Treasury, which is yielding a record low 1.65 percent as of yesterday (it was at a nearly ridiculous 1.45 percent last week). This means that panicked investors worldwide are basically giving the USA their money for free. When you take the rate of inflation into account — call it roughly 3 percent — this means that investors are getting effectively negative yields.
That's fear, folks. Investors are willing to lose some money in order to avoid losing all of it.
California seems pretty far away from Europe, but if most of the West is in a contained depression, then that depression is much, much worse in the Golden State than it is in, say, Virginia. Our unemployment rate is still at almost 11 percent. Growth in U.S. GDP is pretty weak right now, at less than 2 percent. The state's finances are bad and getting worse with every new admission by the Brown administration that the budget deficit is swelling. Two of our biggest industries — entertainment and technology — are highly dependent on finance.
You don't have startups in Silicon Valley or L.A. without venture capital, much of which originates in big state pension funds like CalPERS. You don't have Hollywood movies without millions in borrowed money or wealthy producers, and public companies like Disney are exposed to whatever goes down in global markets.
The bottom line is that whatever happens in Europe, it's not going to be confined to Europe. Holding the eurozone together will cost a fortune. Allowing it to break apart will bring on a worldwide downturn, turning a contained depression into an uncontained one. There are places in the U.S. that can handle this. But California probably isn't one of them.