The transition from step 1 to step 2 in this sequence obviously wouldn happen in a “paradox of fiscal thrift” situation with pre-existing debt.

2) The Estonian fiscal deficit is less than one third of the profit the boss of hedge fund Renaissance Technologies made a wile back. How exactly is there supposed to be no possible exit from the current mess?

Thanks for this, very interesting perspective.

Regarding perspectives there is a very high structural risk for Estonia. Production fell Apr 09/ Apr 08 -33.7% in Estonia, Apr 09/Mar 09 fall was -2.8%. In Latvia production grew Apr 09/Mar 09 was +4.8%.

http://www.dv.ee/Default2.aspx?ArticleID=e3d4c249-74f1-43c8-8f70-490eb087029c&open=sec

The big overall slump in Latvian GDP is caused by extremely undergoing added value in finance and retail trade sectors, which are, however, structurally not so important.

I’m sure you are right that the origins of the problem are different in the two countries, although both had huge borrowing financed consumer and housing booms. Unfortunately, the outcome in both cases is likely to be depressingly similar.

Latvia is producing chemicals and pharmaceuticals which are much more stable during recession. Estonia is assembling mobile phones. Which idiot will purchase a new 500$ mobile phone during recession?

It is a very big “?” where the recovery will come for countries which are addicted to exports – as Germany and Estonia. Who needs a new car and/or a new mobile phone when most do not have enough money for food? At time now the only means of restoring the purchasing power for such goods are governmental stimulus. How many cars and handys can the government afford?