Thursday, June 14, 2012

Doomer underpants gnomes

- by New Deal democrat

You're probably familiar with the series South Park's "underpants gnomes," whose business plan is:

1. collect underpants.
2. ???
3. profit!

While this is meant to satirize ridiculous plans for success, the reverse also applies. The blogosphere and the media are full of recipies for failure that are light when it comes to the transmission mechanism.

The latest version of one such chronic recipe can be found in Dani Rodrik's hypothetical scenario in which Europanic ultimately leads to some version of World War III. His scenario moves from the - perfectly plausible - partial dissolution of the Eurozone to the following:
As the reality of the partial dissolution of the eurozone sinks in, the financial meltdown spreads from Europe to the United States and Asia.
So the recipe is:

1. Eurozone split
2. ???
3. DOOM!

The truth is, nobody really knows what happens at step number 2, so there is no way to know what the outcome of that step would be. A Eurozone split could in very short order give rise to a dozen Icelands. I doubt many obversers at this point would consider Iceland's reaction to financial distress a failure, much less one that is having more negative than positive effects.

While anything is possible, in particular it isn't clear at all that there would be a financial meltdown in the US as a result of a Eurozone split. It might actually lead the world to a much quicker resolution of the financial debt debacle that began in 2007.