Why Greenspan is Right to Fear the Eurozone and TARGET 2

06.02.2017 • Central Banks

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Selva Freigedo – Port Phillip Insider Extra (Australia) –

The problem I have with democracy is that 51% can legally annihilate the other 49%.

Dr Alan Greenspan, 2017 Agora Economics Roundtable

Never was this statement truer than in 2016. During that year, the 50 1 majority turned the world, as we knew it, upside down. The Colombian referendum, the Italian referendum and the US presidential election delivered shock results, leaving countries deeply divided.

Yet let’s not forget the one referendum that started it all: Brexit.

As Greenspan mentioned during the Agora Economic Roundtable in Baltimore I attended two weeks ago, these upsets can be explained by the collapse of the standard of living in the years after the global financial crisis.

Here is Greenspan:

very obviously in the last eight years we’ve gone into a stagnation, which incidentally has pretty much been for the last 10 years worldwide. And that stagnation has led to an extraordinary collapse in the growth of output per hour, which meant that standards of living were freezing at very low levels. And in all human history, whenever you get a situation where the population feels deprived one way or another… it begins to revolt. The revolt here is Brexit, Scotland, Italy.

Yet the biggest take-away from the meeting was where Greenspan predicted the next crisis to come from: Europe.

Here is what he had to say:

Something is going to happen there. My view is it’s either going to be Greece [or] it conceivably could be Italy…but it is extraordinary what is going on in this system while the total assets of the European Central Bank continue to go straight up. What would happen if there was a default of the euro? In the United States, if there were a default on the dollar…for example, if the Federal Reserve went into default, the US treasury would bail it out but… There is no comparable vehicle to help the [European] system. I’m very worried…Mario Draghi, whom I know and he’s a very good guy, is just talking like we’ll do whatever is required. Well at some point somebody’s going to say, “I don’t want to accept euros.”

So what is it about Europe that worries Greenspan? Read on…

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