November 3, 2011
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Reading Krugman, DeLong, Yglesias, and everyone else on Europe is depressing and difficult, because I never did study much macroeconomics. But I follow the argument, I think, and I’m convinced. Greece is going to default, and it’s very possible that either Italy or Spain will be next, leading to the collapse of the Euro and, at minimum, another Lehman-sized shock.

In principle, we could avoid it. In practice, it looks like we won’t.

How does this play out? What happens? OK: we have a self-fulfilling bank run on Italy or Spain, their bond yields go Greek. What’s the next stage? What do things look like the next day? In particular, what do things look like outside the financial industry?

Is this mostly a matter of vanishing institutions? Painting lots of new signs on buildings, finding new jobs for unemployed bankers? That when you go to an ATM in Italy, you get different colors of currency?

Or does it mean that Spain and Italy are about to hold a big tourism and real estate sale, with everything at half price?

Or does it mean everyone in Spain and Italy has no money in the bank and nobody knows who owns the house?

I understand it’s likely to be bad, but how would this really play out?