The eminent Financial Times analyst Martin Wolf is getting a lot of attention for a scary column he just published. Some of the scariness lies in the title, "Panic Has Become All Too Rational," which is even scarier when your realize what a rational guy Wolf is.
FT is behind a paywall, but I'll give you the alpha and omega:
Suppose that in June 2007 you had been told that the UK 10-year bond would be yielding 1.54 per cent, the US Treasury 10-year 1.47 per cent and the German 10-year 1.17 per cent on June 1 2012. Suppose, too, you had been told that official short rates varied from zero in the US and Japan to 1 per cent in the eurozone. What would you think? You would think the world economy was in a depression. You would have been wrong if you had meant something like the 1930s. But you would have been right about the forces at work: the west is in a contained depression; worse, forces for another downswing are building, above all in the eurozone. Meanwhile, policy makers are making huge errors.
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.
In the eurozone, they are failing to do so. If those with good credit refuse to support those under pressure, when the latter cannot save themselves, the system will surely perish. Nobody knows what damage this would do to the world economy. But who wants to find out?
Presumably "those with good credit" is a reference to Germany.
And speaking of Germany: If your memory of the 1930s is hazy, and you need a reminder of what kinds of political forces can be unleashed in very bad economic times, this clip from Greek TV may help. The guy who throws water on the woman in red and assaults the woman in white is from the Golden Dawn party (commonly identified as neo-Nazi), which in this year's election won enough votes to sit in parliament.
Background details here.