During the crisis of 2007-2008, there was fair bit of discussion of the so-called Minsky Moment, when an economy that has built a house of cards of speculation and over-leveraged “Ponzi units” (creditors that could never make good on their commitments, and are viable only by finding new suckers to give them new debt to pay old lenders) starts to collapse.
But the idea of a Wile E. Coyote moment was less widely discussed. Wile E. Coyote was the famous Warner Brothers character ever in pursuit of Road Runner. One regular bit of shtick was having him run off cliffs and proceed quite a way in thin air, falling only when he looked down and saw the gulf below him.
Despite some occasional sharp falls in equity values in May, and a significant depreciation of the euro, most investors recognize that some serious adjustment is inevitable, starting with a restructuring of Greece’s debt. Yet in a peculiar parallel to the US’s extend and pretend with its financial system, the officialdom seems to hope that if things can be kept on even keel long enough, the system will self-repair, or at least be better able to handle the shock. Yet the contrary evidence continues to mount, with Fitch’s downgrade of Spain to AA+ leaving Moody’s as the sole rating agency that pegs Spain at AAA.
Some of my readers who have high-level political contacts say that the plan in policy circles in the US is for banks to continue to get the soft glove treatment (in particular, super low interest rates) so they can rebuild their balance sheets. Funny how their managements are still being allowed to siphon of a lot of these subsidized profits via outsized bonuses. This may also be true for Eurobanks, whose are even less far through writing down dodgy debt than their US peers.
The problem is that it looks virtually certain that dislocations will hit Europe well before banks are off their covert life support programs. Yet while a restructuring of Greece’s sovereign debt is seen as inevitable by most analysts (well, save maybe Jeffrey Sachs), the denial among the Eurozone leadership appears profound. From an article yesterday by Gillian Tett in the Financial Times:
Last week, some of China’s most powerful sovereign wealth fund officials held discreet discussions with investment banks about the outlook for the eurozone. And one of the hottest topics was the thorny issue of haircuts.
More specifically, as the eurozone writhes in turmoil, what the Chinese (and others) are trying to work out is just how big the losses on government bonds might be if, say, Greece were to restructure. Equally crucial, they (and others) are also trying to work out who might take that haircut.
It is a crucial question for the bond markets. Unfortunately, however, it is also a topic that eurozone leaders are adamantly refusing to discuss – or even recognise.
As Tett points out, holders of sovereign debt in the weaker Eurozone nations are in a not-pretty situation. Bailout-related borrowings are to be senior to existing debt, so if these rescues merely postpone the inevitable and Greece’s (and other) debt is restructured, they are likely to be worse off than if it were to happen now.
It isn’t hard to see, given that the bailouts simply shift risk from the periphery states to the core, that would be better to do triage, and make a first cut at which borrowers simply won’t make it, and restructure those debts. The current program instead is ultimately about protecting Eurobanks from losses, and is destined to fail. John Mauldin, in his newsletters, has been featuring the work of Rob Parenteau, as featured first here on Naked Capitalism (and a source of much reader ire): that deleveraging the public sector and the private sector at the same time is impossible absent a big rise in exports. Pretty much every major economy is on a “reduce government debt” campaign. Many are also on a “deleverage the private sector” program too (which is warranted, given the amount of profligate lending that occurred). The problem, however, is that these states can’t all increase exports, particularly to the degree sought. As Mauldin notes:
Let’s divide a country’s economy into three sections, private, government and exports. If you play with the variables a little bit you find that you get the following equation.
Domestic Private Sector Financial Balance + Governmental Fiscal Balance – the Current Account Balance (or Trade Deficit/Surplus) = 0
… As Rob [Parenteau] noted, “…keep in mind this is an accounting identity, not a theory. If it is wrong, then five centuries of double entry book keeping must also be wrong.”…
The implications are simple. The three items have to add up to zero. That means you cannot have both surpluses in the private and government sectors and run a trade deficit. You have to have a trade surplus…
Going back to the equation, if Greece wants to reduce its fiscal deficit by 11% over the next three years, then either private debt must increase or the trade deficit must drop sharply. That’s the accounting rules.
But here’s the problem. Greece cannot devalue its currency. It is (for now) stuck with the euro. So, how can they make their products more competitive? How do they grow their way out of their problems? How do they become more productive relative to the rest of Europe and the world?
Barring some new productivity boost in olive oil and produce production, there is no easy way. Since the beginning of the euro, Germany has become some 30% more productive than Greece. Very roughly, that means it cost 30% more to produce the same amount of goods. That is why Greece imports $64 billion and exports $21 billion.
What needs to happen for Greece to become more competitive? Labor costs must fall by a lot. And not by just 10 or 15%. But if labor costs drop (deflation) then that means that taxes also drop. The government takes in less and GDP drops. The perverse situation is that the debt to GDP ratio gets worse even as they enact their austerity measures.
Yves here. Rob Parenteau drew out the implications in an earlier post:
….if households and businesses in the peripheral nations stubbornly defend their current net saving positions [continue to reduce debt levels], the attempt at fiscal retrenchment will be thwarted by a deflationary drop in nominal GDP. Demands to redouble the tax hikes and public expenditure cuts to achieve a 3% of GDP fiscal deficit target will then arise. Private debt distress will also escalate as tax hikes and government expenditure cuts the net flow of income to the private sector. Call it the paradox of public thrift.
As it turns out, pursuing fiscal sustainability as it is currently defined will in all likelihood just lead many nations to further private sector debt destabilization. European economic growth will prove extremely difficult to achieve if the current fiscal “sustainability” plans are carried out. Realistically, policy makers are courting a situation in the region that will beget higher private debt defaults in the quest to reduce the risk of public debt defaults through fiscal retrenchment. European banks, which remain some of the most leveraged banks, will experience higher loan losses, and rating downgrades for banks will substitute for (or more likely accompany) rating downgrades for government debt. A fairly myopic version of fiscal sustainability will be bought at the price of a larger financial instability…
It is not out of the question that fiscal rectitude at this juncture could place the private sectors of a number of nations on a debt deflation path – the very outcome policy makers were frantically attempting to prevent but a year ago…
Or to put it more bluntly, if European countries try to return to 3% fiscal deficits by 2012, as many of them are now pledging, unless the euro devalues enough, then either a) the domestic private sector will have to adopt a deficit spending trajectory, or b) nominal private income will deflate, and Irving Fisher’s paradox will apply (as in the very attempt to pay down debt leads to more indebtedness), thwarting the ability of policy makers to achieve fiscal targets. In the case of Spain, with large private debt/income ratios, this is an especially critical issue.
Yves here. As we have said before, the stresses on the Eurozone could be alleviated if an effort was underway to rebalance internally, meaning increase German consumption. But Germany is also on an austerity kick. Thus the result is very likely to be deflation, which as Rob pointed out, will lead to widespread private sector defaults. That is almost certain to blow back to the financial system. With banks like Deutsche Bank, SocGen, and Paribas part of the core global debt market infrastructure, the potential for another act of the global financial crisis is real. The only other way out is a very large fall in the euro, which as we have pointed out before, would not be well received in the US, China, or Japan, since a deflationary shock that large has high odds of putting their recoveries into reverse gear.
This feels like 2007 all over again, with the authorities insistent that Things Will Be Fine, when a realistic assessment suggests the reverse.
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It’s no surprise that Moody’s rates Spain AAA. Don’t they usually like to wait for a default?
“As we have said before, the stresses on the Eurozone could be alleviated if an effort was underway to rebalance internally, meaning increase German consumption.”
The stresses on the Eurozone wouldn’t be alleviated even if Germans consumed more. Complex problems don’t tend to be solved by simplistic solutions.
Occam’s Razor notwithstanding, I actually agree with you!
Excellent article. What most shocks me is that the baillout funds will be treated with seniority of existing euro debt.
This is totally unequitable, and more or less represents a “reverse” ponzi scheme where the last sucker to put their money in is the only one that gets anything back out.
If i owned any Greek, Portugese, or Spanish debt i would immediately sell it and take my haircut now, because playing along with this abomination only encourages the EU to continue ripping off investors at will.
Coldcall…would it be that the monies facing reduction prior_too_the bailout had lesser face value without the life line.
Skippy…lender of last resort has always been senior in my observations….just saying.
Thats a a good point. However if the bailout is sort of conditional in that no-one knows when they might pull the plug and cause Greece to default, then are they really doing anyone any favours, including bond holders?
From what i gather, many bondholders used the EU bailout (which pumped the value of PIGS debt) to get out at a better price. So i guess one could be grateful to the EU for that though im not sure they meant that to happen :-)
I bet they were annoyed when PIMCO used the time to sell their PIGS debt!
All true in my book, sadly most of this debacle could be dealt with, if it were not for the BOND holders that really count_ sharing some pain_.
Skippy…personally I don’t see this as a solvency/liquidity problem, more like a sore loser problem.
The priority given to last money in is simply DIP financing of one form or another.
I don’t see any easy way out of what looks like a very long hard and bumpy road to write down a lot of debt — public and private that will never be paid.
Some of my readers who have high-level political contacts say that the plan in policy circles in the US is for banks to continue to get the soft glove treatment (in particular, super low interest rates) so they can rebuild their balance sheets…..
The problem is that it looks virtually certain that dislocations will hit Europe well before banks are off their covert life support programs….
Yet while a restructuring of Greece’s sovereign debt is seen as inevitable by most analysts (well, save maybe Jeffrey Sachs), the denial among the Eurozone leadership appears profound.
However stupid the globalization cadres may be, it seems the banksters themselves aren’t among those who believe the lies discussed in the previous post. They know that the banks will never be out of the corporate welfare ICU, that the Bailout is permanent for as long as the system can exist. The Bailout is the very basis of “modern” economies going forward, until the zombie collapses once and for all.
Ergo this:
Funny how their managements are still being allowed to siphon of a lot of these subsidized profits via outsized bonuses. This may also be true for Eurobanks, whose are even less far through writing down dodgy debt than their US peers.
They’re simply looting as much as they can on a personal basis while the getting’s good. That’s also why they never “resumed lending” (except where the loans are guaranteed by the FDIC or bought directly at far-above-market prices by the GSEs), the fraudulent pretext under which the Bailout was originally sold.
So it’s the same dynamic in Europe. This new stage of the Bailout, as well as the shock doctrine “austerity” assault, are the exact same con as was perpetrated in 2008: it’s all necessary to “restore the health of the banks”, which boon will then “trickle down” to Main Street.
And the truth is the same as in 2008 – all resources should be deployed the exact opposite way. It’s the banks and finance rentiers in general who should be austeritized, while all real wealth goes to rebuilding Main Street on a non-financialized foundation.
attempter is absolutely right in his/her conclusions.
“As we have said before, the stresses on the Eurozone could be alleviated if an effort was underway to rebalance internally, meaning increase German consumption. But Germany is also on an austerity kick.”
There was a chart the other day showing that Germany’s Public+Private debt is higher than Greece’s. That would imply that the Germans are correct to deleverage, and that it’s the euro area as a whole that needs to be more competitive vis a vis their trading partners.
It’s the banks and finance rentiers in general who should be austeritized…
What a great turn of phrase. I couldn’t agree more.
Somebody should take that and put it on buttons or T-shirts:
“Austeritize the banks, not ordinary Americans!”
or
“Austeritize the banks, not ordinary Europeans!”
I’d just add that in the US, and apparently in Greece too, the military also needs to be “austeritized.”
Seconded!
Starve the Banks, Not the People!
Austerized, maybe.
Indeed. As far as I know, that was never considered by BO although he had advisors suggesting such action. And just this week Timmy was preaching US bailout measures to EU finance ministers.
Or in other words, US econ policy seems to range between TARP’ing on the hi end extremes: shock & awe bailouts.
RE: Mr. Parenteau and his reasoning for larger gov’t debts IOT fuel private savings, I’m still skeptical of its practicality. I quibble with his underlying assumption that there is a relevant distinction for the greater economy between private & public debts. What good is it for the private sector to “save” if the public sector, to which the private sector must pay taxes or suffer the consequences of devaluation/inflation to balance the public books, is in deficit? While accountants may be pleased, as one concerned about underlying value I think the argument is a sham.
As has so often been pointed out, the core problem is an excess of debt, both private & public. Neither the US nor Europe have solved that problem, only exacerbated it in hopes it will self-correct given time, gov’t & central bank largesse, and excessive accounting latitude.
The further TPTB go down the “kick the can, paper over problems” road, the more the foundation of modern finance & gov’t (trust in accounting, currencies, value, contracts, law, etc) becomes eroded, risking a far uglier end than another depression. It is time to pay the Piper, else we’re going to suffer a far worse fate at his hands.
There are no easy, pain-free solutions. The solution is deflation with all the attendant pain; essentially, a Great Depression II. It is a choice between quite bad and awful. I hope we have the stomach to choose quite bad instead of being smacked by awful.
“As has so often been pointed out, the core problem is an excess of debt, both private & public. Neither the US nor Europe have solved that problem, only exacerbated it in hopes it will self-correct given time, gov’t & central bank largesse, and excessive accounting latitude.”
Bingo!
We are currently living through an experiment in economics; we are in a petri dish and because of the limitless number of variables and possible black swans that lie in wait, no one can predict the exact outcome or the exact time the result of the experiment become obviously to all of us.
After the experiment is concluded I think the world will reject fiat currencies, ‘modern’ economic theory, inflation targeting, phony government statistics, mark to fantasy accounting, off balance sheet debts, currencies that are not stores of value, misguided fiscal/monetary policy, misallocation of capital into ventures that are idiotic on their face, CDS that are not transparent, a reserve currency that is controlled by a single country, and a host of other very poor practices that have been dreamed up by Wall St and encouraged by governments…all to the detriment of Main St economies around the world.
Damn right the changes are going to be painful…but what passes for banking and soverign economies now is not sustainable. The focus now is to attempt to prevent the corrections that are necessary to restore sound economies from happening ‘on my watch’, a play for one more day in the sun. The show will go on until it doesn’t.
Well said Bates.
I agree with you but have one question: what kind of currency fits your requirements as a store of value, not fiat etc.?
Gold is a fiat currency. We had as many financial panics under the gold standard as we have under the fiat dollar. Moreover, the golden rule applies; he who has the gold makes the rules. How long would it take the international banks to buy up all the gold and then once again control the world’s currencies?
Commodities can also be manipulated. The hedge funds were responsible for the runup of oil to $150 per barrel. The global financiers have so much money, they can control any commodity, therefore commodity based currencies.
I look forward to your reply.
I second mannoclay’s request for an explanation of which money-type can store value. Value is in good soil; clean, abundant water and air; civility; trust; community; sustainable energy supply, and a sustainable relationship with the ecosystem. What type of money can ‘store’ these things?
What we have is a centuries old system in which money has influenced more and more in terms of what gets done socially, politically, and in pretty much every aspect of civilization one can think of. Money is the problem, whether commodity-backed fiat or government decree fiat. We need a money (or monies) that fosters a healthy set of relationships within human society and between societies and their supporting environment (the planet), and does not seek to ‘store value’ at all. Until we have that, we’re living on borrowed time. To repeat a cliche, you can’t eat money.
mannoclay: I don’t want to answer for bates but it seems clear that he was laying out an agenda as much as describing frustrations with a host of practices that are not fair or transparent and/or are open to abuse.
I think there are several proposed solutions for the makeup of future currencies. Even if bates has a favorite, this may not be the best place to discuss it. (In any case the likely result of such discussion would be that none is clearly superior and that developments in the future will heavily influence any changes in the world financial system.)
Vepasian & Bates,
It’s remarkable how much you too sound just like Calvin Coolidge and Herbert Hoover.
Before the Great Depression:
He (Coolidge) maintained the status quo for the benefit of business. Twice he vetoed farm relief legislation–to the immense satisfaction of the industrial and banking community which consisted his strongest support–on the ground that the McNary-Haugen bills were economically unsound. He vetoed the soldier bonus, too, on the ground of its expense, though in this case his veto was overruled. His proudest boast was that he cut down the cost of running the Government by systematic cheeseparing, reduced the public debt, and brought about four reductions in federal taxes, aiding not only those with small incomes but even more conspicuously those with large. Meanwhile his Secretary of Commerce, Herbert Hoover, ingeniously helped business to help itself; on the various governmental commissions, critics of contemporary commercial practices were replaced, as far as possible, by those who would look upon business with a lenient eye; and the serene flattering pronouncements upon business and assurances that prosperity was securely founded.
http://xroads.virginia.edu/~HYPER/ALLEN/cover.html
After the panic, during the Great Depression:
Since Hoover’s first fever of activity after the Panic, he had been leery of any direct governmental offensive against the Depression. He had preferred to let economic nature take its course. “Economic depression,” he insisted, “cannot be cured by legislative action or executive pronouncement. Economic wounds must be healed by the action of the cells of the economic body–the producers and consumers themselves.” So he stood aside and waited for the healing process to assert itself, as according to the hallowed principles of laissez-faire economics it should.
But he was not idle meanwhile. For already there was a fierce outcry for Federal aid, Federal benefits of one sort or another; and in this outcry he saw a grave threat to the Federal budget, the self-reliance of the American people, and the tradition of local self-rule and local responsibility for charitable relief. He resolved to defeat this threat. Although he set up a national
committee to look after the unemployment relief situation, this committee was not to hand out Federal funds; it was simply to co-ordinate and encourage the state and local attempts to provide for the jobless out of state appropriations and local charitable drives. (Hoover was quite right, said those well-to-do people who
told one another that a “dole” like the one in England would be “soul-destroying.”) He hotly opposed the war veterans’ claim for a Bonus–only to see the “Adjusted Compensation” bill passed over his veto. He vetoed pension bills. To meet the privation and distress caused by the drought he urged a Red Cross campaign and recommended
an appropriation to enable the Department of Agriculture to loan money “for the purpose of seed and feed for animals,” but fought against any handouts by the Federal government to feed human beings.
In all this Hoover was desperately sincere. He saw himself as the watchdog not only of the Treasury, but of America’s “rugged individualism.” “This is not an issue,” he said in a statement to the press, “as to whether people shall go hungry or cold in the United States. It is solely a question of the best method by which hunger and cold shall be prevented. It is a question as to whether
the American people, on one hand, will maintain the spirit of charity and mutual self-help through voluntary giving and the responsibility of local government as distinguished, on the other hand, from appropriations out of the Federal Treasury for such purposes. . . . I have . . . spent much of my life in fighting hardship and starvation both abroad and in the Southern States. I
do not feel that I should be charged with lack of human sympathy for those who suffer, but I recall that in all the organizations with which I have been connected over these many years, the foundation has been to summon the maximum of self-help. . . .
http://gutenberg.net.au/ebooks06/0600221.txt
Of course Hoover’s laissez faire absolutism only applied to the rich and powerful, and not the down and out:
On 28 July, 1932, Attorney General Mitchell ordered the police evacuation of the Bonus Army veterans. When they resisted the police shot at them, killing two. When told of this, President Hoover ordered the army to effect the evacuation of the Bonus Army from Washington.
At 4:45 p.m., commanded by Gen. Douglas MacArthur, the 12th Infantry Regiment, Fort Howard, Maryland, and the 3rd Cavalry Regiment, supported by six battle tanks commanded by Maj. George S. Patton, Fort Myer, Virginia, formed in Pennsylvania Avenue while thousands of civil service employees left work to line the street and watch the U.S. Army attack its own veterans. The Bonus Marchers, believing the display was in their honour, cheered the troops until Maj. Patton ordered the cavalry to charge them—an action which prompted the civil service spectators to yell, “Shame! Shame!”
After the cavalry charge the infantry, with fixed bayonets and adamsite gas, entered the camps, evicting veterans, families, and camp followers. The veterans fled across the Anacostia River to their largest camp and President Hoover ordered the assault stopped. However Gen. MacArthur, feeling this exercise was a Communist attempt at overthrowing the U.S. government, ignored the President and ordered a new attack. Hundreds of veterans were injured and several killed—including William Hushka and Eric Carlson. A veteran’s wife miscarried. The infant, Bernard Myers, died in the hospital after the incident but reports indicated the death was not caused by the evacuation of the BEF.
http://en.wikipedia.org/wiki/Bonus_Army
Many thanks again, masked stranger, for vital historical perspective and an analysis of self-evident truth and revealed wisdom.
Sadly and surprisingly, Obama seems headed down Hoover’s infamous path as well. On every crisis to date he has been in thrall to the same failed ideologues, including so far in the unnatural BP disaster. On the next, imminent credit crisis, his mettle will surely be tried by fire, but I have little confidence now that he can rise to it.
OMG!
This is a fairly good description of Obama’s behavior. Banksters get everything, so does the military industrial complex, but Congress and the WH keeps fucking around every 3 months about extending jobless benefits.
And let’s not talk about the unrelenting assault on civil liberties that this Congress AND Obama’s DOJ are guilty of.
They’re even seeking new laws to silence the lawyers, just as Liz Cheney wanted.
How perverse can that be?
Vespasian asks, “What good is it for the private sector to “save” if the public sector, to which the private sector must pay taxes or suffer the consequences of devaluation/inflation to balance the public books, is in deficit?”
It depends entirely on who it is that pays those taxes, does it not—the haves and ill-gotten have-mores or the little people, whether we continue to tax productive sweat or speculative larceny and outright embezzlement. The wealth gap and gross inequality unseen since the Gilded Age of robber barons has created an unsustainably-leveraged global economy and a rogue kleptocracy trampling the commonwealth. Practically all of Bennie’s zero-interest free money has gone entirely into new asset bubbles and wars, with very little into new energy production, manufacturing, infrastructure investment, education, etc. Your screed sound like a retread of failed libertarian laissez-faire doctrines when what we clearly need is a radically restructured system based on revolutionary priorities.
Ah, yours is an apples vs oranges criticism. Mr Parenteau’s argument is specifically about the Net Private Sector, not the individual pieces therein. Certainly private citizens could all increase savings at the reduction of savings in businesses & corporations, without necessitating increased gov’t deficits. Gov’t deficits under your thinking are used as a way to push wealth to and from targeted areas within society; I’m against this due to my distrust of where the gov’t will pull & push from/ to (i.e., nowadays, from the citizens to the corporations).
Yeah, my “screed” does sound libertarian, but you are incorrect to call it “a retread of failed libertarian laissez-faire doctrines” … because those doctrines didn’t fail, they were never in place to begin with. We had economists, politicians, and businessmen proclaiming their actions and the system to be Capitalist and libertarian…but things weren’t actually so. Welcome to smoke & mirrors propaganda; read up on Orwell and you’ll get the idea.
Vespasian:
Unless you have devised a better system of accounting than the 500 year old legacy of double entry book keeping, you must recognize, not as a matter of theory, but as a matter of logical consistency, one household in the economy cannot save more (that is, spend less than it earns) unless another household deficit spends (that is, spends more than it earns). There are, after all, two sides to every transaction, right?
Now we can say the same thing at the sector aggregated level. The household sector as a whole cannot net save money unless some other sector, or combination of sectors, is deficit spending. That can be business, government, or foreign sectors, but it better be at least one of those three.
If that is still not making sense, come back to me and we can try a different way in. The point is in a stock/flow coherent macroeconomics, things must add up. You all have been taught to reason from the point of view of one household or one business, and to blindly ignore the effects of your actions on the possible range of outcomes for other actors in the economy. This may suit some analytical purposes, but it is utterly pointless to reason this way in macroeconomics. Macro is not aggregated micro, and you have been fed a pack of lies and distortions to believe so. Lose your delusions.
Regarding excess debt as the nub of the problem, I would say more specifically, the problem has been the issuance of debt for activities that do not appear to have an explicit private or even an implicit social return equal to or greater than the cost of debt itself.
From the more intelligent wing of the Austrian School, this can be termed a situation where a nation is “consuming its capital”, when the all in rate of return on the borrowed funds is less than the monetary cost of funds.
Now as for your naive Austrian School solution, which is a liquidationist approach, I myself do favor controlled burns and debt restructuring, the latter of which I am certain we are swiftly headed toward in the eurozone, but great conflagrations tend to kill a lot of innocent bystanders.
Go talk to any small business owner you know. They can offer you dozens of stories about entrepreneurs forced out of business because banks cut them off, through no fault of their own. The banksters just got nervous after Lehman, and squeezed out the small fry – why take the risk. In great credit contractions, alot of otherwise valuable and viable entrepreneurs get crushed by credit rationing. That is hardly the kind of natural selection that leads to pro-growth economic outcomes.
best,
Rob Parenteau, CFA
MacroStrategy Edge, sole proprietor
The Richebacher Letter, editor
The Levy Economics Institute, research associate
Wile E. Coyote also has a AAA rating from Moody’s.
Until he looks down.
“Nice” heading on the Spiegel this morning:
“German Federal Bank suspects French Conspiracy.”
[http://www.spiegel.de/wirtschaft/soziales/0,1518,697489,00.html]
“Deutschlands oberste Banker sind irritiert: 25 Milliarden Euro hat die EZB bisher für griechische Staatsanleihen ausgegeben. Nach SPIEGEL-Informationen vermutet die Bundesbank, dass damit vor allem Paris gedient wird – so könnten französische Institute ihre Schrottpapiere loswerden.”
[My translation:]
“Germany’s top Bankers are irritated: The ECB has already spent 25Billion on Greek bonds. According to SPIEGEL-Information, the German Fedaral Bank suspects that above all Paris has benefited- thanks to the actions of the ECB French institutions have been able to get rid of their rubbish-bonds.”
If the Franco-German relation sours the EU fails. I want to hear more about the Swiss investments in Greece. Why aren’t there any articles about the EU bailing out the Swiss? This is such a rort, it’s incredible.
“Barring some new productivity boost in olive oil and produce production, there is no easy way. Since the beginning of the euro, Germany has become some 30% more productive than Greece.”
I am doing my part. As such, effective immediately, I shall double up my household’s consumption of Greek olive oil. Additionally, in the context of my on-going boycott of BP (a.k.a., British Petroleum, S.O.B.) I have already hired expert mechanics (a coupla of illegal Mexican guys short on cash) to modify the V8 engine of my oversized SUV parked at my Florida residence in order to make it run on Greek virgin olive oil. :)
Vinny
If its diesel, I recommend coconuts…SEE
The Coconut Revolution
http://topdocumentaryfilms.com/the-coconut-revolution/
This is the modern-day story of a native peoples remarkable victory over Western Colonial power. A Pacific island rose up in arms against giant mining corporation Rio Tinto Zinc (RTZ) – and won despite a military occupation and blockade. When RTZ decided to step up production at the Panguna Mine on the island of Bougainville, they got more than they bargained for. The islands people had enough of seeing their environment ruined and being treated as pawns by RTZ. RTZ refused to compensate them, so the people decided it was time to put an end to outside interference in the islands affairs. To do this they forcibly closed down the mine.
The Papua New Guinea Army (PNGDF) were mobilised in an attempt to put down the rebellion. The newly formed Bougainville Revolutionary Army (BRA) began the fight with bows & arrows and sticks & stones. Against a heavily armed adversary they still managed to retain control of most of their island. Realising they were beaten on the ground, the PNGDF imposed a gunboat blockade around Bougainville, in an attempt to strangle the BRA into submission. But the blockade seemed to have little or no effect. With no shipments getting in or out of the island, how did new electricity networks spring up in BRA held territory? How were BRA troops able to drive around the island without any source of petrol or diesel?
What was happening within the blockade was an environmental and spiritual revolution. The ruins of the old Panguna mine were being recycled… to supply the raw materials for the worlds first eco-revolution. A David and Goliath story of the 21st century, The Coconut Revolution will appeal to people of all backgrounds.
Skippy…highly recommend watching this tragic and humerus tale.
It’s actually pretty simple. Just think about oil wells. The natural state is towards blowing out. That’s kind of like inflation in an economy. The European economy over the past ten years has shown some danger signs of overheating, wages and benifits are rising fast in some areas. So drilling mud has to be added to equalize the pressure. That’s austerity. Too much austerity and everything collapses into the well. But those who call for no austerity ever are the moral equivilant to those MBA’s on the Deepwater Horizon who prematurely called to remove all the drilling mud. After all, it had been years since the last blowout.
And where are all the austerty critics on California?
Once the necessary corrections are made then stimulus can be added (some mud removed) to allow the European economy to grow again. And of course many bank defaults will have to occur along the way. But anyone who thinks that all the global imbalances and debt binge is going to be easily resolved is fooling themselves.
Too much austerity and everything collapses into the well. But those who call for no austerity ever are the moral equivilant to those MBA’s on the Deepwater Horizon who prematurely called to remove all the drilling mud.
Perhaps a little Biblical wisdom is in order:
1 There is an appointed time for everything. And there is a time for every event under heaven—
2 A time to give birth and a time to die; A time to plant and a time to uproot what is planted.
3 A time to kill and a time to heal; A time to tear down and a time to build up.
4 A time to weep and a time to laugh; A time to mourn and a time to dance.
5 A time to throw stones and a time to gather stones; A time to embrace and a time to shun embracing.
6 A time to search and a time to give up as lost; A time to keep and a time to throw away.
7 A time to tear apart and a time to sew together; A time to be silent and a time to speak.
8 A time to love and a time to hate; A time for war and a time for peace.
The scope of these verses is to show, 1. That we live in a world of changes, that the several events of time, and conditions of human life, are vastly different from one another, and yet occur promiscuously, and we are continually passing and repassing between them, as in the revolutions of every day and every year. In the wheel of nature…sometimes one spoke is uppermost and by and by the contrary; there is a constant ebbing and flowing, waxing and waning; from one extreme to the other does the fashion of this world change, ever did, and ever will.
http://www.biblebrowser.com/ecclesiastes/3-7.htm
Good stuff today, DS. Nice passage from the Book. I should use that when I am amusing myself by needling scientists about the illusory concept of “equilibrium.”
By the way, KdB, what was meant by the question “Where are all the austerity critics on California?” I live in CA and hear all sorts of debate on both sides of the austerity topic here. Not sure which side you were referring to and why that was relevant? Would love to hear your thoughts on the analogies you draw from Eurozone countries (FYI, I think there are many similarities and many differences).
What I meant was that it would be interesting to hear the opinion of the euro-critics to austerity in California and its deflationary effects.
But they may very well see austerity in Cali differently than in Europe since I do as well. I’m originally from SF and to me California, with its public university system was heaven on earth back in the sixties and even the seventies into the eighties. The JC and UC systems did more to fight the class war than any room full of Marxists could ever dream of accomplishing. And many of the architects of the UC system were Republicans. But then Prop 13 changed everything and the decline started. Long story short I would raise taxes before cutting spending. In Europe on the other hand, since the society is already fair and just, then its fair austerity would hit all classes.
But I have to recognize that what passes for the left nowadays in Cali has unfortunately stopped using public money to build middle class institutions and instead often just gives it to favoured constituencies and in the process just encourage dysfunctional behaviour. From what I hear 25% of California’s teenagers do not even graduate from high school. Illegal immigration has been disastrous for working class men especially. There are serious social problems to say the least. Many of these problems cannot be resolved by economics or even public policy. A new morality, work ethic, social contract has to be created or 25 years from now the place will be a total nightmare.
Maybe the FIRST warning and insight that we got into the fact that this whole OIL BASED ECONOMY could run out (remember that there is nothing more LIQUID than oil, and that human society all hangs together, and it all hangs around… WORDS) was the 1973 oil crisis.
I think that we realized at THAT point that we were heading toward… where we are now.
You know, we are very very intelligent, LOGICAL animals. There is great… method in our madness. Most people think that what is irrational can not be understood, because it is beyond understanding. That is… a false hypothesis. And our language ensures that we know a lot that we don’t know we know.
So… in 1973 (probably before, really…) we already KNEW where we were heading.
Gotta take this fact into account when analyzing the… war on poverty, the war on drugs, etc, the war on just about everything that moves in the U.S. since 1973.
Thanks for the reply. Forgot to check back in. I agree with much of what you say.
That said, even though Prop 13 is (on its face) an incredibly, incredibly stupid way to go about doing property taxation, I actually feel it has caused far fewer problems than it is credited for.
Of course, I agree on raising taxes here (even knowing how disproportionately they fall on me).
California has been the subject of many, many social disturbances in its history (some on a fairly significant level). Actually, things seem to be holding up quite well right now based on my own long time of living here. The prison system is an outrageously expensive failure. I would start there on the austerity tip.
I live in Los Angeles and have OCD regarding LA history. Few know the radical conservative origins of the city, replete with open-shop terror, forced segregation, corrupt police, and wholesale economic rape by the landed class. While these elements have been seen in many other cities, LA really outdid itself in all four. There is simply not a US city that compares in that regard. But even with all that, the place grew wildly and is still holding together much better than everyone who is not here is ranting and raving about! Despite all the backwardness (left and right), and the extreme dislocations caused by mass immigration of the poor from Latin America and Asia, I think things could be a lot worse. FWIW, I live in a modest house, in a mixed-income, mixed-race part of the city. I know how quickly the powder keg can explode, having lived through its combustion a few times, but still, I think all the hysteria about California is a little overboard. And beyond that, California is so large and so diverse that it defies generalization. It’s more than three times the size of Greece’s population (and a much bigger multiple on size of economy and amount of land).
Then again, I could be wrong. We could all be headed for disaster!
Kevin: I live in California, and have since 1982. So I know what you saw, and I agree about the undermining of one of the greatest human capital investment programs we have seen in the US, namely the UC system.
I think what goes missing in many of these discussions is a failure of both sides to acknowledge the Predator State critique, which Jamie Galbraith wrote a few years ago.
Basically, before, or alongside, the restructuring of debt and the economy, there must be a serious revitalization of democracy and accountability within government itself.
There are simply too many rentiers/leeches attached to the body politic, and many of them inhabit the top 10% of the income distribution, not the bottom 10-50%.
Until we are ready to join together to rip the Vampire Squid off of our faces, and reorder spending and taxing priorities, we will be bled dry.
So, on with the ferment of democracy I say. But you cannot just sit there and watch this on your flat screen TV or YouTube. You have drop your mental manacles, the ones they’ve got you enslaved with, and start daring to think for yourself and to act with others to achieve common goals.
And that scares the fetid feces right out of them, because they thought they had you all anaesthetized in every fashion possible.
Fellow sheep, you have nothing to lose but the wool that has been pulled over your eyes for decades now!
So why have they adopted the IMF suggestions… and for that matter, why does the IMF advocate the measures they do?
This post (and prior posts) make the problems abundantly clear.
If this is all because bondholders can’t handle a Greek restructuring without triggering a systemic problem, then not only will the wheel come off the wagon, but they should come off the wagon. We are approaching the end of the line.
. . . end of the line.
It’s not the so much the end of the line as much as the is bill is coming due.
That bill will be paid in the standard of living of ordinary people . . . until they make it clear that they will not accept any more.
“The lamps are going out all over Europe; we shall not see them lit again in our lifetime.” And probably in Europe’s western extension too.
Assuming the absence of an external sector for a moment, the accounting identity just says, that public debt is net private financial wealth, e.g. some papers, that say nothing about the real health, wealth, and very little about the distribution of that in the society. The real wealth is in productive capital. I don’t know much about double book accounting, but to keep the accounting identity true, private investments must not be counted as saving. If I buy equipment and open a workshop, this has the same meaning as consuming.
For this accounting identity it doesn’t even make a difference, if I borrow the money or save it myself. If I borrow it, I produce some liability for the private sector, but the entity, that does the borrowing produces a claim of the same size.
Or in other words, the private sector has tons of gross debt, and tons of net savings. There is no accounting identity whatsoever, that says, you can’t reduce gross debt in the private sector without increasing the net saving. You just have to transfer the money from the people with the claims to the people with the liabilities.
So what does this mean for the public deficits? If the gov’t finances the reduction of its deficits by taking money from those private entities, that have claims, rather than those, that have liabilities, there is no reason to assume, that this will impede the necessary reduction of gross debt in the private sector.
There are reasons for not having too little public deficits, but you can reach all reasonable goals with sustainable budgets.
“The real wealth is in productive capital” No, real wealth is output from the realization of real productive capital in sales. You’re forgetting about the demand side of the equation.
“to keep the accounting identity true, private investments must not be counted as saving. If I buy equipment and open a workshop, this has the same meaning as consuming.” Yep, borrowing or drawing down retained savings to invest in real capital stocks amounts to a form of consumption, “productive consumption”, and it’s level is a key component of the level of aggregate demand and thus the level of employment and output. In turn, real investment in technically improved, productivity-raising capital stocks raises the level of actual and potential output, while lowering its costs, and thus produces “savings” qua increases in the level of real wealth. Such growth in output/income can then pay down debts or at least reduce the ratio of debt/output.
So the two issues here are what the debt loads have been incurred for, as to sustainable productive purposes or not, and the effects of the debt on the distribution of income and thus sustainable aggregate demand. Your apparent intuition that conflict over the distribution of income is a key component of the crisis and that governments could do something through their policies and enforcement to alter that balance is correct. But not within the purview of laissez faire capitalism and the supposed sanctity of property rights.
So the two issues here are what the debt loads have been incurred for, as to sustainable productive purposes or not, and the effects of the debt on the distribution of income and thus sustainable aggregate demand.
john c. halasz,
That’s extremely helpful. Thanks.
It sounds like all debt is not created equal, and to scream “more debt” or “less debt” omits what should be the most important part of the debate.
The whole problem is such remarks as ‘all debt is not created equal’ and the remark it replies to: ‘ Your apparent intuition that conflict over the distribution of income is a key component of the crisis and that governments could do something through their policies and enforcement to alter that balance is correct. But not within the purview of laissez faire capitalism and the supposed sanctity of property rights.’
The suggestion (I think) is that if we engage in seizure of assets and then redistribute them, and perhaps also equalize incomes by tax policies, then the large part of the crisis that is conflict over the distribution of income would be solved.
This is just idiotic. It might be that you would solve whatever problems there are from uneven distribution, but those are not the problems that are causing the current crisis. And in solving them in that way, you would create far greater ones. This has after all been tried many times in the 20C, and the invariable result was large scale programs of mass murder, which left the survivors poorer.
What then is the problem and what should be done about it? The problem is that Greece is a poor country. Its not very productive, it does not make high value products, it cannot therefore have, in aggregate, as high a standard of living as other countries that are more productive and do make products that other people want to buy. It is not too different from a poor city someplace. Every time they take to the streets and start burning down bits of Athens, they say to anyone with any money, stay away from here.
They are going to have to get used to life in the real world. You want to make some money, improve your standard of living, work at it systematically, and you can. You don’t want to, that’s fine too, but then don’t expect to have retirement at 50 and houses full of consumer goods.
If you borrow heavily in the effort to live as if you were most productive, sooner or later, one way or another, there is going to be payback. Burning down bits of Athens will not affect this. Either straighten up, or go back to tilling those olive groves by hand. Or emigrate. That was the traditional solution, and it may become the favored alternative again.
Right-wing, reactionary ideological piffle. As if all violences of the 20th century were caused by the violations of divinely-ordained bourgeois property rights, and if all human prospects should be held hostage to that alleged “fact”. But what’s still more ideological is the tracing of all systemic effects to individual intentions, as if that could at all be an adequate explanatory framework. These longer-run systemic/structural orchestrations are the result of the aggregation of myriad decisions, both private/individual and public/collective, with multi-lateral responsibility amongst both creditors/surplus-holders and debtors/deficit-spenders. And it’s certainly not the Greek working-class that responsible for the tax-evasion and excessive consumption, (since they lack the resources for paying taxes and acquiring consumption credit, to any large degree), but rather the Greek “royalist” upper-crust, who also have been responsible for the laggard economic development of modern Greece. So, er, why should they bear the lion’s share of the pain and adjustment burdens? Furthermore, there are distinctions between forms of debt (or financial asset claims generally), not just between public and private, or household, business and financial, but between senior/secured and subordinate/unsecured. And, of course, unsustainable or unpayable debt contracts are broken all the time, in accordance with changed economic expectations and with re-distributive effects, explicit or implicit: it’s called default, bankruptcy or restructuring.
But then governments are sovereign and are not there to simply carry out the dictates of “markets”, but rather to balance public interests through policies that include discretionary taxation and spending. The Greeks could, e.g., double their VAT and compensate the bulk of the population with a progressive negative income tax, which would thus constitute an efficient, highly collectible progressive consumption tax scheme, while at the same time reducing direct labor/production costs and constituting a de facto import tariff/export subsidy scheme to “internally devalue” and rapidly correct the CA deficits and restructure the economy toward rapid growth in employment and output, and that could be done whether they choose to leave the Euro or not, (though I’ve begun to think that, given the dispositions of the Euro surplus nations, they might well be better off leaving). Yes, there would be a wrenching frictional adjustment to the new scheme, but, at least, it promises growth out of crippling debt ratios rather than deflationary collapse. (If the choice is starkly between stagflation and “austerity”, i.e. severe Fisher debt-deflation spiral dynamics, then the former is clearly preferable as a means of burning off excessive debt-loads, for the vast majority of the population).
So the upshot is that it is the old neo-liberal GE theory, which claimed that market mechanisms alone would operate such that maximum efficiency and optimal social welfare functions would be achieve without any public policy intervention, that has been tested and failed in actual practice, resulting in vast international CA imbalances, growing debt-loads, and growing income inequality qua aggregate demand deficiency, as well as an excrescent, basically non-productive over-financialization of economies. And if any salutary way out is to be found to the crisis, it won’t be by letting current “market” interests prevail, but through public policy interventions that re-structure both debt-loans and real economy investments, with re-distributive effects both between classes and between nations.
So it’s you, michel, who is the idiot, (from ancient Greek, idiotes, a person without public standing), since you lack any sense of the public interest, let alone political justice, in favor of the reactionary self-satisfaction of the private interests of the parasitical bourgeois rentier.
The problem is that Greece is a poor country. Its not very productive….
[….]
You want to make some money, improve your standard of living, work at it systematically, and you can.
While this may contain an element of truth, from what I can glean from press reports Greece is also an extremely corrupt country. Corruption in its bureaucracies may be a much more potent source of injustice and poor productivity than the lack of work ethic on the part of the people. The element of honest illusion in your middle-class creed is transmuted into dishonest pretension when you cling to your credo in defiance of the facts.
The suggestion (I think) is that if we engage in seizure of assets and then redistribute them, and perhaps also equalize incomes by tax policies, then the large part of the crisis that is conflict over the distribution of income would be solved.
This is just idiotic. It might be that you would solve whatever problems there are from uneven distribution, but those are not the problems that are causing the current crisis. And in solving them in that way, you would create far greater ones. This has after all been tried many times in the 20C, and the invariable result was large scale programs of mass murder, which left the survivors poorer.
Ah yes, anyone who doesn’t march in lockstep with your Manichean construct—-laissez faire capitalism vs. Communism—-is immediately branded a “Communist.” By painting your opponent with the face of evil, you suppress debate without ever having to counter the actual arguments of the other side.
Fortunately, Reinhold Niebuhr has already done a superb job of demolishing your argument, so I will just defer to him:
The achievement of America in developing social policies which are wiser than its social creed and closer to the truth than either Marxist or bourgeois ideology is subject to two important reservations. First, the debate in the western world on the institution of property was aborted in America. Nothing in the conflicting ideologies of Marxism and the bourgeois culture reveals the contrast between them so much as their respective attitudes toward property. Property is the instrument of justice in the creed of the bourgeois world; and the source of all evil in the Marxist interpretation. Both creeds miss the truth about property. Since property is a form of power, it cannot be unambiguously a source of social peace and justice. For every form of power, when inordinate or irresponsible, can be a tool of aggression and injustice. However, since property is not the only type of power in society (not even of all economic power), it cannot be the sole source of injustice. Since some forms of property represent the security of the home, and others are instruments for the proper performance of our social function, some forms of property are obviously instruments of social justice and peace.
Clearly the Marxist and the bourgeois property ideologies are equally indiscriminate. The Marxists ideology has proved to be more dangerous because, under the cover of its illusions, a new society has been created in which political and economic power are monstrously combined while the illusion is fostered that economic power has been completely eliminated through the “socialization” of property. A democratic society on the other hand preserves a modicum of justice by various strategies of distributing and balancing both economic and political power. But it is not tenable to place the institution of property into the realm of the sacrosanct. Every human institution must stand under constant review. The question must be asked, what forms of it are viable under what specific conditions? In so far as the absence of a Marxist challenge to our culture has left the institution of property completely unchallenged we may have become the prisoners of a dogmatism which will cost us dearly in some future crisis.
The second weakness in the American political and economic situation is that the lip service which the whole culture pays to the principles of laissez-faire makes for tardiness in dealing with the instability of a free economy, when the perils of inflation or deflation arise. They are finally dealt with pragmatically; but not before the consequences of inaction have become very apparent. Some believe that the lessons taught in the great depression of 1929 have been so well learned that a recurrence of such a catastrophe is impossible; but it is not altogether certain that is true.
–Reinhold Niebuhr, The Irony of American History
that is a clear perspective. It seems self-evident that Greece’s debt did not fund “productive” activities, or its economy would be far stronger than it is.
So who should pay?
It seems reasonable that a compromise between lenders (who knew better, I have no doubt) and borrowers (who knew better, I have no doubt).
And yet we see the lenders fob off their debts onto the larger public balance sheet, and we see the borrowers cloak themselves in anonymity, while Europe’s true savers groan under the weight of the larceny of their financier class, and we see those without debt or wealth or opportunity of any kind riot in the streets in protest of the yoke of impoverishment placed on their neck by the mistakes of the financier class and the borrowers.
We see no justice, anywhere. And we see the looter financiers enlarge their bonus grab bags and counsel governments behind the scenes, while the governments themselves shuffle, duck and cover behind whatever rationalization they think will fly.
We see a moral morass, an ethical enema, a carnival of corruption, operating within the cold and perfect validity of what passes for macroeconomic policy.
Yes, and the stupid investors who put money into Greece, knowing full well that was a country that was on a lower R&D path, running a large trade deficit, had a well organized working class that could demand and win compensation gains in excess of labor productivity gains…they should lose their shirts, their principal should be restructured down, or lost entirely.
All fine and good, but what do you do when that busts many of the financial institutions in the eurozone, and causes a run on the bankings system of Europe, plus a global flight to highly liquid assets that shifts financial asset prices down around the world, setting off self-fulfilling reductions in private spending out of income flows…cuz that my friend is where we are at, and that is the world we actually inhabit.
Take a look around you, and then please deal with this. If your solution is wholesale liquidation, please tell me what deserted island or mountain fortress I should meet you at, because that is the road to Lord of the Flies outcomes, plain and simple.
‘would not be well received in the US, China, or Japan’
And? Since when has self-interest come before anything else? And as long as the Russians are fine with it, the EU doesn’t much care what two Asian currency manipulating competitors and one large market, which has been pretending to pay using the previously magical art of financial engineering, care.
Global economic collapse – this is just a part of it. No one will win.
To me it seems less like 2007 and more and more like the 1920s and 30s. Maybe there will temporarily be more redistribution of wealth upward (via higher taxes, pay cuts, benefit cuts and unemployment) followed by political overthrow and ultimately a much bigger redistribution of wealth the other way. There’s only so much people will take before they realize there are other options, overthrow the govt and turn on the creditors.
People don’t revolt until things look hopeless and they feel that they have no other option. There’s a long way to go before then.
OTOH, the kind of economic/financial problems we face are likely to feed on itself and accelerate.
The rational course would be for political leaders to understand the problems and take strong action now. But that is politically risky so they’d rather sweet talk us and kick the can.
I agree that a peasant revolt is unlikely. I was thinking more along the lines of eventually electing politicians with different ideologies who promise to raise living standards and weren’t afraid to cancel debt, confiscate private property, whatever. It’s happened.
The current political system makes that difficult. The political system is broken in a way that works for the wealthy and well connected. The two-party system, for example, doesn’t seem to be in any danger.
Well-funded politicians will continue to tell us that the future is bright as our standard of living falls. Politicians that focus on problems will continue to be marginalized and sidelined as naysayers, alarmist, un-American, socialist, etc.
I hate sounding so gloomy. I think we both recognize that citizens have a principal-agent problem. Who do our representatives work for?
Just like we talk about mis-guided incentive programs on Wall Street, the same sort of problem exists for politicians. They have a stronger incentive to perform for their contributors than for citizens.
Why it’s the monetary equivalent of Konrad Dippels experiments at Castel Frankenstein – it’s the Eurostein. Who is going to pull the plug or update the playbook?
Thanks to all for another illuminating post and comments, all of which help this economically/financially unschooled reader to understand better what’s going on here.
It appears that the party is coming to an end as far as the bond market is concerned. This will indeed be a Wile E Coyote moment not only for Europe, but for the United States sometime in the not too distant future.
At this point, deflation seems to be baked into the economic cake.
http://whatisthatwhistlingsound.blogspot.com/2010/05/when-bonds-collapse-party-is-over.html
Parenteau says:
Well, that would explain why the banksters are pushing for deficit reduction, then, wouldn’t it? They get the usury, and they get more opportunities for usury.
On another note, why do we still believe that the ratings agencies are doing anything other than gaming the system on behalf of their owners?
I keep having trouble with the logic of this. One should be able to lay out very simply what the alternatives are, and what is being recommended as a policy.
The argument seems to be that a country like Greece has two choices, which are determined by some accounting identities. The main one is that you cannot at the same time have a balance of trade deficit, a public sector surplus and a private sector surplus. “….if Greece wants to reduce its fiscal deficit by 11% over the next three years, then either private debt must increase or the trade deficit must drop sharply. That’s the accounting rules.”
We know that what cannot happen, will not. What will happen is limited to the possible.
Greece is going to reduce its debt, because people will stop lending to it. The Greek private sector is not going to increase its debt, because it is already in over its head. This means that the trade deficit WILL drop sharply, and this means Greece will either leave the Euro, which is a default, or it will drop wages and thus taxes, and then default. Or it will default right now and try to stay in the Euro, and fail, and then leave the Euro.
So all roads lead to a Greek default and exit from the Euro and also to dramatic falls in living standards in Greece. Is this the argument?
There seems to be a subtext that what the rest of the world should do is bail Greece out, and after that Spain, Portugal, the UK, maybe then the US. But that is a later stage. Have I got it right, that if they do not bail out, the above is the argument?
The problem isn’t Greece as Greece, it’s that Greece exposes the entire problem with the Eurozone structure.
Europe has two problems – they don’t have an internal rebalancing mechanism as in the US. It is fairly well-known that high-income states (such as California) have about 80% of their income taxes returned to them in the form of federal spending, lower-income states have greater than 100% of their taxes returned to them – that is one form of internal distribution the US has that is unavailable in Europe.
Europe’s other problem is that they need to stimulate their entire economy, but they can’t do so because they they are shackled to each other and no one institution has any overall European fiscal authority. It is absolute idiocy. It’s like chaining a bunch of kids together in the schoolyard, they will march along fine until there is any kind of disruption – then they fall over each other trying to get away. I just hope Europe doesn’t tear itself apart over this.
Greece is going to muddle along for a while anyway – their labor force works more hours than Germany, they have less private debt (for now) than Germany and their labor costs are taxed at a higher rate than Germany. I imagine a lot of those bubble condos in Greece will be soon be owned by Germans – that should show the Greeks the benefits of fiscal austerity over hard work.
The key thing to understand is why economies EVER exit downturns. By the logic in this post, they never would.
But somehow the magic happens, sometimes after a long time and other times more quickly.
If anyone has written a book about this, firmly grounded in actual history, I’d LOVE to read it! As would we all, I’m sure.
There’s a lot of information available about business cycles online and in text books.
But this discussion goes beyond the business cycle to include the risks caused by large debt loads carried by countries, banks, and consumers.
Can you recommend any books in particular, that focus on what turns the tide from less (business activity, jobs, spending) to more?
Based on the amount of “expert” disagreement I see, and the apparent paucity of historical examples of success using whatever policy is being recommended by any given “expert”, I definitely have the impression that nobody really knows why economies recover – especially from big events like the Great Depression.
Reinhart & Roghoff: This Time is Different
The bond vigilantes have read it and so have all reputable economists and the more switched on pols.
… As Rob [Parenteau] noted, “…keep in mind this is an accounting identity, not a theory. If it is wrong, then five centuries of double entry book keeping must also be wrong.”…
It isn’t wrong, but the way it is being used here is.
This accounting identity — all proper identities are true by definition — as it is being used, only makes sense in the case where the only pertinent trade imbalance is ‘external’, that is where the massive build up of debt and leverage is at the international level.
For instance, if we were to use this, then the total ‘private debt’ would be equal to Private Debt – Private Savings (e.g. unless your mortgage is owned by the government or a foreigner, the creation of that mortgage had a net debt result of ‘0’). Likewise, the same would occur with Government Savings vs Government debt. This means we’d net out all liabilities, and all debt owned to other Government entities (e.g. Social Security Trust fund, Government debt owned by the Fed, etc…).
If we did this in the United States, our ‘debt-to-GDP’ level would be quite a bit lower than 350%. What remained would be the true Private/Public/Foreign imbalance.
The result, is that vast internal trade imbalances are ignored, as though an internal imbalance is any less problematic than a trade imbalance based on the arbitrary separation of ‘humans groups’ into ‘foreign, private, and public’ units.
The reality is, that internal debt can, in fact, be deleveraged without a trade surplus or the ‘government’ running a deficit. Given that this crises is at least as much a story of foreign imbalance as it is domestic imbalance, Rob’s statements are a major mis-characterization of the problem.
So, while Rob’s use of the accounting identity for Greece specifically, may be quite germane, I would question extending it to Spain, Ireland, or any other country where there are huge domestic problems to compliment the error of foreign distribution.
The focus on accounting identity, and thus net cross-national debt, also ignores the complexity underscoring the resolution of this crisis.
Specifically, it ignores that countries currently running a surpluses have powerful motivations to continue to do so. Why? Because running trade surpluses will help them ‘resolve’ their own domestic imbalances by transforming those imbalances into foreign imbalances. Much like private sector debt was being ‘solved’ by transforming it into public sector debt.
S.R.
Either I am missing your point, or you don’t understand the national income identities and the sectoral financial balance equation that is created from those identities.
There certainly can be domestic imbalances: the domestic private sector can run large surpluses or deficits, as can the government sector. Nothing in my work denies that – au contraire.
So maybe try to help me understand the tree you are trying to bark up, because right now it looks more like a stump to pee upon.
thx in advance,
Rob
The story “Greece will default” has been recited oh so many times that it has become worse than a “dog bites man” story. Still, I find that there are things for me to learn, such as that olive trees are the major asset of the Greek economy. No wonder they are going down the drain! How many Kalamata olives does it take to collect 300 bil euros? This could be discussed in a future article.
BTW, on the issue of the accounting identity, in two months we will have advance data on the current account AND the balance of payments in the first half of 2010. Maybe we can revisit the accounting identity at that time and some new data.
The example I like to use to put the sectoral balance equation into perspective is to say in Mauldin’s vein
Let’s divide a country’s economy into three sections, men, women and exports. If you play with the variables a little bit you find that you get the following equation.
Men + Women – the Current Account Balance (or Trade Deficit/Surplus) = 0
I’m going to go so far as to say that women run chronic deficits only because the men run chronic surplusses. So if the men stop spending, the women suffer too unless we can import more money. Possible solutions are to get the men to spend more on their women, get the women to leverage and buy things from the men, or the men and women decide together to spend less and just be happy with each others’ company for satisfaction. I’m for the latter.
By men and women, you mean domestic citizens, if you are going to be logically consistent, which I realize is more than many people can handle in these days of infotainment, massive drug consumption, and underinvestment in public education.
All you are doing with your “men and women” category is adding together the domestic private sector and government financial balances, and then splitting them in two on the grounds of anatomy.
Not terribly useful to the task at hand, eh?
The financial crises will serialise…eventually to the US
The banksters will use each crisis to consolidate wealth, reduce taxes on the rich/increase taxes on everybody else while reaping the fruits of successive bailouts and “consolidating” fiscal accounts (reduction of middle class transfer payments like social security).
This process has been underway for over 30 years and will not change.
see W Buiter’s speech at teh CFR for outline of the global elite’s game plan:
http://www.cfr.org/publication/22072/
A series of increasing violent wars may be undertaken as a distraction as the process becomes increasingly onerous on the hoi polloi and wealth inequality is further stretched.
regime changes, including military coups are possible in every developed nation…
very possibly the revolution will not be televised…
http://www.youtube.com/watch?v=BS3QOtbW4m0
In the backrooms of the Federal Reserve, Ben Bernanke ponders……
Bernanke: I am not sure, if we return to gold, if this situation will get anymore stable.
Shadowry figure: Ben, you got to do it, the current system of debt based banking is over, much like it was over for Gold in 1933. Now it is time to return home.
Bernanke: uh, the choas and famine will be great, how do you intend to keep down the peasents.
Shadowry figure: Corporate governence has promised me they will have private security large enough to handle the no good filth who steal from us. If it takes killing a 100000000 so be it.
Bernanke: Man, this is TOUGH, but the bubble grew to large and we have lost control……..finally……make it so….
Ron Paul: Yes, finally, I have what we have wanted. How is the gold collection going……..friend.
Dimon: It is going well, I will tell you this Ron, this takes me back in history to the beginning when we started this scam. Just no Lincoln’s ok?
Ron Paul: Gods no Jamie, that weirdo freaks runaround in 61 still is a historical blight on America.
Bernanke: I still get to keep the Fed……
Ron Paul: Ok, ok. You get to keep it, with gold back in charge, some central management in keeping the regions in line is due. But I want it back to the original charter and not the centralization of the 30’s, ok?
Bernanke: Deal, great.
Ron Paul: laughs in high voice…..
Ron Paul: I am getting old, time for Rand to take over
Bernanke: Did you really name him after Aynnie?
Ron Paul: Nah, his name is Randall, but yeah, I shortened it down to “Rand” after Aynnie….so………
Dimon: What gets me is how America doesn’t understand how the illumanti works. They have been cultivated so long by us, they REALLY believe in the myth of the “New World Order” and “Totalitarian Socialist States”.
Paul: Yeah, they are dumb. The isolation of ethnic groups into a group based anarchy is key. Essentially does the same thing as Coummunism by destroying the classical state and country. Lets face it, the Commies were given their shot and it just fell back into ethnic tribalism all over again. Now it is our turn and our oppourtunity.
Ron Paul: Well it is time for me to leave fellas….
Jay Rockafeller: Hey, whats up.
Ron Paul: Jay
Bernanke: Jay
Dimon: Jay
Jay Rockafeller: I got the Birchers going on boys, just like my old relative, Nelson did when he,Welch and Koch founded the Birchers all those years ago scamming the Kulaks.
Ron Paul: Great, great, but you forgot Oliver as well…
Jay Rockafeller: Oliver? That college professer, nazi punk…please…
Ron Paul: Calm down Jay……I gotta go, later boys….
Bernanke: (softly) bye bye Ron
Dimon: Later amigo
Jay Rockafeller: adios…
(Ron Paul leaves the Federal Reserve building and runs into Kulak supporter)
Kulak: Ron, is it gonna happen? Right, right?
Ron Paul: It is gonna happen patriot!
Kulak: Oh so great, finally that big horrible government will be brought down to consitutional levels and are taxes finally gone. Oh, what a wonderfull day it will be…..
Ron Paul: Great, great, keep on fighting, it we see any reactionaries against us, I…….
Kulak: I thought we were the reactionaries?
Ron Paul: Uh yes, keep those commie scum at boy
Kulak: Uh, got it……..I gotta go to work
Ron Paul: goodbye.
Ron Paul: to himself (dumb Kulak, after we start the liquidation, you won’t have a job, idiot).
The end
Dear Yves, are you afraid of Germany?
“Yves here. As we have said before, the stresses on the Eurozone could be alleviated if an effort was underway to rebalance internally, meaning increase German consumption. But Germany is also on an austerity kick. Thus the result is very likely to be deflation, which as Rob pointed out, will lead to widespread private sector defaults.”
I agree in general with Mauldin but I disagree with the anglosaxon viwe of the world. In what, you asked? In the general view that you only can cut imbalances of Club Med if Germany imports more using consummation. This is the anglosaxon view and is wrong because is suported by debt and leverage.
I dont want to spend a lot of time with rotten anglosaxon view about economics. I dont care any more. This is a problem for you, anglosaxon ctizens. Ad portuguese I can show our results:
In the first quarter, Portugal exports to others european partenrs rose 13,5% and imports just 1,2%. Inside the Eurozone, Portugals exports rose 12,3% andd imports stalled, 0%.
Portugals exports to outside Europe, in the same period, rose 18% and imports 32,5%. Imports rose a lot because last year imports fell a lot when an important rephinary had a fire and stopped prducing.
Last March, Portugals exports to outside Europe rose 38% y/y.
Last March, Portugal exports to Europe rose 19,9%.
With these numbers I think is possible to cut imbalances without screaming proteccionist policy. We dont need to blame Germany but looking to them what are they doing good and to try do the same or better.
Portugal has some imbalances and must to be cuted. Some say that these cure to our problems could generate deflation. Maybe theyre right however is better deflation that hiperinflation. Hiperinflation will the outcome from the worng model in USA and UK.
Some say that Greeks cant export except olives and olive oil. I am not sure about that. They can try to export if they do the good policies. Not the anglosaxon policies but their own way.
In Portugal were trying to export everything that we can. Cars, gas and diesel, machines, medicines, software and so on. Not only wine and sun.
The problem is simple: anglosaxon world is good to give advice but bad to take their own medicine and cure.
Now is a kind of fashion to blame the €uro and to see his end. Im not sure about that. In Europe everybody is trying to cut their spending and their imbalances. Even Greece is doing very well cuting their fiscal deficit.
In one year we will see Europe in better shape. With less fiscal deficits and with the ai to cut public debt. Of course this cure will cause some pain to our people. We will have political agitation however we will achieve better results than others. We cant forget that others are in worst situation and are trying to escape from their own cure.
We will see who is right and who is wrong.
you forget the biggest fear. What if Germany approach of slowing down the entire cycle actually work.
That it is not about maintaining velocity of economic activity, which is unsustainable. printing money to maintain consumption-production does indeed only create bigger debt.
America cannot accept that. There is no such thing as accepting smaller GDP, slower economic activity, more sustainable macro finance. If people have less, albeit more sustainable, it’s a failure. Even if maintaining hot economy means big crash in the future.
It’s called the american exceptionalism. (aka. short US bond, cause it’s a bubble.)
shit PJM, enough of your nationalist ranting already!
what’s your best 2-bagger?
I used to want a 10-bagger but realized that was greedy so I’ll settle for a 2-bagger, then I’m heading for Lisbon to drink your sorry ass under the table in an absinthe bar. I don’t car if I puke. I want to live in an absinthe bar and have a harem of Portugese women (all under 150 pounds). I’ve had it with Macroeconomics already, OK.
Yours truly,
Don Flamingo de Rue de la d’Azur, Esquire
PJM –
Portugal may indeed find a way to swing its trade balance around fast enough to overcome the fiscal drag.
They cannot use currency to do this, so I presume Portugese businesses are either massively cost cutting or they are innovating and marketing like never before.
I doubt the latter two are the main drivers, as these things take time to implement. I submit cost cutting must be the main way Portugal is swinging its trade balance around so quickly.
In which case, odds are a number of Portugese households, the ones most indebted, are about to get very delinquent on their debt payments, and many will begin to default.
Could cause a problem PJM, right?
Now as to whether the eurozone as a whole could pull of a trade swing as dramatic as Portugal’s, unless you have a very strong global recovery going, you can be sure before too long, the eurozone will either run into protectionist backlashes, or to competitive currency depreciations with other nations and regions.
Other parts of the world are not going to cede market share equal to 9-10% of eurozone GDP without a fight. A solution for one nation involving trade surpluses is clearly not a solution available for all of the eurozone, barring something that allows the rest of the world to achieve a high, well above trend growth path in the very near future, and to sustain it for the next 3-5 years.
I would place very, very low odds on that outcome, PJM.
best,
Rob
Andre says–It’s called the american exceptionalism. (aka. short US bond, cause it’s a bubble.)
Bulletin my friends: All of modern commerce is a bubble. And the pin deflating it is a breakdown of trust. When counterparty integrity is not guaranteed, then business cannot function. In steps government. The only thing a centerist government has ever produced is debt. That is the only way it can function. Even with a gold standard, the government not being a gold producer, must leverage it’s debt against it’s gold reserves. The only thing that any government makes is money (fiat money), but still a medium of exchange.
I had to laugh at some earlier protests about the “reverse Ponzi” nature of the increasing seniority of subsequent tranches of Euro Debt. Have you people been totally in the dark about the equity operations on Wall Street over the past 10 years? Companies endlessly print share certificates untill they are essentially worthless, then they run up the debt till the company itself is worthless, thus leaving everyone; shareholders, prefered shareholders, and bondholders, with near zero assets. Then the corporate management fiddles what is left off to the chosen party for pennies and happily rides into the sunset on thier “Golden Parachutes”. I shake my head that we allow it to happen. What should be called grand theft is at worst labled missmangement and the perps get to keep their spoils???
The same opperations are now being carried out on national and global levels. Probably by the same people! If each subsequent tranche of debt is senior to the previous and paid with ever inflated (more valueless) currency, then the bondholder of the final tranche (supposing an ability to trigger a default), will have bought a very cheap asset (read; nation plus territory, plus resources, plus slaves).
Europe is more like the Keystone Cops than Wily Coyote Yves.
The paddy wagon is lurching, some are clinging on and some have fallen off and are running comedically behind trying to catch up, sometimes two or three are wrestling for the steering wheel and sometimes nobody is driving at all.
I wouldn’t worry about the banks though – they are being fattened up for the kill: http://www.economist.com/business-finance/displaystory.cfm?story_id=16231434
Thanks for the link BBB.
If somebody has already said this, my apologies but one thought which occurs is that perhaps it is wrong to think of the Greek private sector as one amorphous, over indebted group. There arguably could be at least two groups, one over indebted, who are perhaps the poor, and another who are not, call them the rich, who may be running a healthy surplus and not be indebted at all.
I do not know how much of a solution to the problem lies in these two areas, but there have been suggestions that quite a lot of government money goes directly or indirectly into the pockets of politicians in Greece (perhaps these are just malicious rumours) and that a good deal of the assets of the rich end up in bank accounts in places such as Switzerland, and the income is undeclared for tax purposes. If there is truth in these suggestions, I wonder how much of the solution to Greece’s public debt problems might lie in putting an end to these practices?
William; About a month ago there were quite a few stories detailing the reverse of your contention. Apparently there is a huge tax avoidance by the upper eschelons of Greek society. The numbers I read suggested that there is in excess of $30 billion of unpaid taxes which have since departed for freindlier climates. Supposedly the Greek government was trying to recover about $1 billion of this amount?? I guess the other 29 billion is connected or untouchable???
Paul
Thank you
Just got back from wine tasting in Carmel Village.
Things are fine, trust me. The nobility is doing good.
Yves wrote: “Funny how their managements are still being allowed to siphon of a lot of these subsidized profits via outsized bonuses.”
Funny too how it is that it is taught in Econ 101 that “savings is the engine of investment” but these same bankers have hypnotized people with the line “we see rates holding near zero for the foreseeable future” meaning “we hope to use your money without giving you anything in return” for as long as we can get away with it” while
having no scruples about charging credit card holders 20-30% per annum. It is difficult to think of many countries that have managed their affairs well, but in Canada, where not pissing $20 billion a month down the rathole of foreign adventure has enabled them to run budget surpluses the past 8 years, they are offering savers higher, not lower returns, which will stimulate investment.
Maybe if Congress would re-discover the meaning of usury and refuse to speak with lobbyists one day per month, a similar awakening could occur in the U.S. as well