We really need to pay attention to what is going on in Europe these days. This could spread like wildfire and have a big impact on the world and U.S. economy, and effect the 2012 elections.
In the last week, it looks like 2 European governments have fallen. The bond vigilanties that Krugman makes fun of, are beating at the doors of Greece and Italy. This is not good news for the entire world.
There's probably 2 ways this can end up, and neither is going to be very good for anyone. We need to pay attention, and be prepared.
First, here's some news reports:
Italy at breaking point, Merkel calls for "new Europe"
Italian 10-year bond yields shot above the 7 percent level that is widely deemed unsustainable, reflecting investors' concerns that they may not get their money back and prompting German Chancellor Angela Merkel to issue a call to arms.
Merkel said Europe's plight was now so "unpleasant" that deep structural reforms were needed quickly, warning the rest of the world would not wait. "That will mean more Europe, not less Europe," she told a conference in Berlin.
Silvio Berlusconi, Italy's embattled premier, will resign shortly afterward, Napolitano's office said in a written statement.
Either a new government will be formed, the statement said, or elections will be called soon after the long-awaited reforms are approved.
The head of the International Monetary Fund, meanwhile, painted a stark picture of the challenges facing the world's economic stability as attention focused on Italy.
"The global economy has entered a dangerous and uncertain phase," Christine Lagarde said in remarks prepared for delivery at the International Finance Forum in Beijing.
"If we do not act, and act together, we could enter a downward spiral of uncertainty, financial instability and a collapse in global demand. Ultimately, we could face a lost decade of low growth and high unemployment," she said.
And from Krugman:
This is the way the euro ends.
Not with a bang but with bunga-bunga.
Seriously, with Italian 10-years now well above 7 percent, we’re now in territory where all the vicious circles get into gear — and European leaders seem like deer caught in the headlights. And as Martin Wolf says today, the unthinkable — a euro breakup — has become all too thinkable:
This is serious stuff folks. The issues we think might be big in next years election, might get tossed out the window if this problem isn't solved quickly.
I believe there are 2 ways the Italy problem might conclude.
Hang on to your butts if this happens. Most people reading this would become the new American poor, and it would be a 1930's type of poverty. Here's how we get there. Italy defaults on it's debt, that debt is held by a lot of European banks, many banks throughout Europe begin defaulting on their debts and start to fail, there's a run on European banks and the banking system starts to collapse, which triggers a gazillion credit default swaps that were issued by, you guessed it, American banks. In the meantime, interest rates in France start rocketing and France becomes the new Italy.
This scenario leads to a world wide depression worse than the 30's, a truly unthinkable event.
2) The ECB steps up and starts printing Euro's to inflate away the debt:
This devalues the Euro a lot, which makes everything made in Europe cheaper and everything made in the rest of the world, including the U.S., more expensive. The U.S. then starts to see it's exports start to drop, unemployment starts rising, GDP starts dropping, the deficit starts skyrocketing, and the Republicans sweep the 2012 elections claiming that we should have implemented austerity a year ago.
The only option for the U.S. will be for Bernanke to crank up the printing presses and devalue the dollar so we can raise our exports.
Ok, this could get very ugly in a hurry and it's going to throw next years elections into complete turmoil. So I suggest we keep an eye on what's happening in Europe, and hope and pray to whatever deity you follow, that they can quickly get this under control before it gets completely out of hand.