By Marshall Auerback, a fund manager and investment strategist who writes for New Deal 2.0.
Arthur Conan Doyle’s literary creation, Sherlock Holmes, once solved a murder by noting the dog that didn’t bark. It doesn’t take Holmes’s ingenuity to see that the plan on offer for Greece is clearly a rescue package which doesn’t rescue. It’s a dog’s breakfast.
Greece indeed is being offered a financial aid package of around 22 billion euro, but no funding will be made available until the country fails to find funding elsewhere, entirely obviating the point of the bailout. Greece, like all borrowers, simply offers securities at ever higher rates until it finds the needed buyers. Failure, in theory, is defined as the rate reaching infinity with no buyers. At that time, the euro members would step in with a loan offer at a non concessional rate which would then presumably be infinity. As George Friedman of Stratfor has noted, “That is akin to offering a homeowner, who is about to default on a mortgage, a refinancing offer that equals or increases his mortgage rates above the rate he already cannot pay.”
This makes no sense at all, of course. In reality, it’s a statement that says Greece is on its own. It means that the EMU nations will stand by without taking action as observers of the standard market default process of Greek funding rates going into double and then triple digits as happens to all failed borrowers of externally managed currencies, including nations with fixed exchange rates.
So much for European solidarity. Even worse, German Chancellor, Angela Merkel has managed to secure the backing of France for her proposal for a joint International Monetary Fund and bilateral aid package from euro-zone countries should Greece need help, which is a shame, given that recent remarks by French Finance Minister Christine Lagarde suggested that Paris better understood the nature of the current crisis.
An interesting question which has hitherto been unanswered by the mainstream media: why did the Greek debt crisis erupt with such sudden ferocity in the past month or so? As many observers have noted, if these countries had their own national currencies, they could allow their currencies to float, which would potentially allow some stimulus via the external sector. More significantly, they are unable to use the expansionary fiscal policies that would help pull their economies out of recession. Of course, both France and Germany also violated these rules and were never punished for their transgressions. Indeed, the selective applications of the rule in EMU have made it more apparent that this is nothing more than a liquidationist gambit on the part of Berlin and now, it appears, Paris.
A liquidationist gambit is the removal, by power, of government from the society. Liquidation occurs when society has ceased to be a center of power, and has become a center of weakness. It therefore becomes far more prone to corporate predation. It does not mean that government becomes either smaller or less intrusive, but that government’s traditional role of mobilizing resources for broader public purpose is impaired. These are some of the instruments which are characteristic of liquidation gambits:
1. Looting
2. Corporatism and cartelization
3. Brow-beating (societal interest above self interest, power as power, cooptation and betrayal) particularly via manufactured bankrupcties
4. Shams and accounting frauds
The unseemly side of the Franco-German power play came to the fore last week: ECB President Jean-Claude Trichet ostensibly took some pressure off Greece by extending emergency lending rules, saying its bonds won’t be cut off from ECB refinancing operations next year in case Moody’s Investors Service lowers its rating to a level comparable with other companies. Of course, this occurred only after the Greeks cried “Uncle”.
Why were these lending rules threatened to be removed in the first place? This has never been adequately explored. Trichet’s statements marked a reversal for the ECB, which said in January that it wouldn’t soften its collateral policy for the sake of a single country. The bank was scheduled to reintroduce pre-crisis rules at the end of 2010.
This basically confirmed my earlier suspicions that this entire crisis was triggered by the ECB at the behest of the Germans. The ECB closed the lending window to Greece, which had been dealing with the inherent operational constraints of the EMU by buying Greek government debt, repo-ing it to ECB, and then taking the reserves from that and buying more government debt. The Germans surely took offense to that, since it is Weimar 2.0 from their paranoid perspective. Ireland has also been using this loophole. Of course, that Germany and France were serial violators of these EMU imposed constraints (when they routinely ran budget deficits in excess of 3% of GDP) never seemed exorcise the President of the ECB to the same degree.
Given the loss of Greece’s independent currency creating function, the repo mechanism was likely the only way to get “vertical money” into Greece, once ECB stopped expanding its balance sheet as the crisis died down. So various European central bankers started mentioning in front of microphones that ECB rule waiver would be up at year end, (the one that lets ECB hold and repo lower quality rated euro zone government debt) and, presto, a fully-fledged crisis emerges in Greece.
How convenient, especially as it finally gave Berlin the leverage to fully impose its version of hair shirt economics on those allegedly lazy southern Mediterranean scroungers. Left conveniently unstated is the idea that the longer the PIIGS are forced to wallow in stagnant growth, the more persistent will be the very budget deficits and the larger the public debt to GDP ratios for which they are now being punished. It’s akin to someone having a high temperature because he/she is suffering from influenza and therefore denying that person medicine on those grounds. Trying to work against the automatic stabilizers with austerity programs will be futile unless you start dismantling some of the automatic capacity, which gives rise to these stabilizers.
Which is exactly what is happening at present. As Bill Mitchell has noted:
European countries have stronger automatic stabilisers than most other nations because they have historically given better protection to their workers and retirees etc. The push for austerity is seeking to undermine these provisions in part and in my view that is one of the hidden agendas in all of this.
We would agree with Mitchell and go further by noting the hypocritical nature of the cuts demanded here. As is the case in the US, fiscal austerity seems only to apply when dealing with “wasteful” social spending, because at the same time France and Germany were imposing harsh austerity conditions on the Greeks in exchange for their “support”, Berlin and Paris are using the leverage created by the debt crisis to force Athens to buy their weaponry and warplanes even as they urge those “profligate” Greeks to cut public spending and curb its budget deficit. France is pushing to sell six frigates, 15 helicopters and up to 40 top-of-the-range Rafale fighter aircraft. Greek and French officials said President Nicolas Sarkozy was personally involved and had broached the matter when Papandreou visited France last month to seek support in the financial crisis, according to The Economic Times.
Talk about gunboat “diplomacy”! The Germans like to argue that nations such as Greece, Portugal, Spain, Ireland and Italy blew the opportunity that interest rates converging down gave them to get labor productivity up with new investment. In Berlin’s eyes, it is all their fault they can’t “achtung baby” and get their lazy work forces in line, with lower unit labor costs, like the Germans themselves managed after 7 years of deflating their own country into the ground following on from reunification (of course, this conveniently in the days before the creation of the Stability and Growth Pact).
Surely there was a better way? Rather than the austerity cold bath to break the back of labor and induce a private income deflation with a decidedly Fisherian debt deflation cast to it, would it not be better for current account countries to reinvest the surpluses in the deficit nations in the form of direct foreign investment, or PIIGS government bonds directed solely at public investment that will improve productivity in periphery and have ripple effects on private investment, or run it through the European Investment Bank?
Or the creation of a supranational authority, but not one which replicates the austerity ethos embodied in the Stability and Growth Pact — rather one which emphasizes the principle that the only fiscally sustainable policy is one that promotes full employment. As we’ve said before, this could be done via a Government Job Guarantee program. We would need a supranational authority which is geared toward a full employment goal. Such a program would potentially be even more attractive in Europe, given that minimum wages and income support packages are far more generous in than in the US, consequently leaving less scope to use the JG program as a means to replace a strong social welfare benefits model with some form of indentured slavery, which is something one could potentially envisage developing in the US.
Acknowledging that crony capitalist politicians do have this proclivity toward supporting corporate predation and wasteful spending and giving goodies to their campaign contributors, a genuine Job Guarantee Program that automatically adjusts to insure the private sector can actually realize its desired net nominal savings position largely frees the system from political parasites while increasing the freedom of the private sector to achieve its goals. And it is consistent with the idea of re-employng the country via, say, green tech initiatives.
If the Franco-German axis proves resistant to this idea, then it might be time for the Greeks, Portuguese, Italians, Spanish, Irish, etc., to send a different message to Chancellor Angela Merkel. To quote those noted political philosophers, Keith Richards and Mick Jagger, “Angie…ain’t it time to say goodbye?”
An exit from the euro zone would clearly create a short term problem because the PIIGS nations that wanted to exit would have to deal with a foreign currency debt burden. It is unclear how the transfers back into the central banking system from the ECB noted above would serve to offset the “euro exposure” upon exit. And there is also likely to be collateral damage within the remaining EMU nations’ banking systems, given the amount of PIIGS debt that they likely hold. But ultimately as part of a painful adjustment process it might require the nation to default which could manifest as a negotiated settlement where the creditors accepted the local currency (or nothing). It would be painful and messy. But a long, drawn-out process of wage cutting is the other way and that will have to be a decade-long adjustment. Far more costly, other words, in the long run. And, as Keynes, noted insightfully, in the long run, we’re all dead.
81 comments
Comments are closed.
I again agree with this kind of posts. I still wonder why German and French banks invested in Greece and now they are not allowed to take an haircut…
I contend that it’s an awaful mechanism of money creation for nothing and Greece should orderly default while staying within Euro.
http://mgiannini.blogspot.com/2010/03/money-creation-for-nothing-or-let.html
Well, nearly all of the Eurozone countries have their well known issues, and I believe the market will discipline the weaker ones which will cause economic contagion to to infect what many consider to be the stronger ones. There is no free lunch here. Reference http://boombustblog.com/Reggie-Middleton/1355-In-the-Pan-European-Sovereign-Debt-Crisis-who-do-you-put-more-faith-in-the-EU-the-IMF-or-Reggie-M.html wherein I show that the IMF and the EU have been consistently over-optimistic regarding the prospects of most of the Eurozone throughout this crisis, yet those very same countries base their austerity plans on forecasts that are even more optimistic than the proven overly optimistic EU/IMF numbers.
This is a guarantee for failure. In Greece’s case, I have stated this explicitly – http://boombustblog.com/Reggie-Middleton/1342-Greek-Crisis-Is-Over-Region-Safe-Prodi-Says-Liar-Liar-Pants-on-Fire-says-Reggie.html, but it can easily spread to the other nations in the form of financial and economic contagion – http://boombustblog.com/Reggie-Middleton/1338-Financial-Contagion-vs.-Economic-Contagion-Does-the-Market-Underestimate-the-Effects-of-the-Latter.html wherein most significantly underestimate the latter.
I have made a clear case of this potential coming from Ireland as it attempts to whip its banks into shape. You see, Ireland is 2nd only to Great Britain in NPAs as portion of GDP, and has significant claims against nearly all of the troubled EU nations and the UK. This may not end well. See http://boombustblog.com/201003301358/Ovebanked-Underfunded-and-Overly-Optimistic-The-New-Face-of-Sovereign-Europe.html
Some true points. It’s imbalances within the EU that have also led to Greece causa sui to have big deficits.
On the other hand the rich Greeks don’t really / really don’t pay their taxes. That’s also an important cause of the current problems.
You can’t really expect northern europeans to pay up when the rich in the south don’t pay taxes.
I couldn’t agree more. Solidarity is a two-way street where Greece needs to contribute a much more effective revenue collection system than they have had to date. About the first phrase I learned in Greek was “Do you want the price with or without a receipt?”.
“The ECB closed the lending window to Greece, which had been dealing with the inherent operational constraints of the EMU by buying Greek government debt, repo-ing it to ECB, and then taking the reserves from that and buying more government debt… Given the loss of Greece’s independent currency creating function, the repo mechanism was likely the only way to get “vertical money” into Greece, once ECB stopped expanding its balance sheet as the crisis died down.”
Can you clarify this transaction with a further example, Marshall?
You mean the National Bank of Greece was buying Greek government debt and doing repo on its own balance sheet (“financing” it) with the ECB?
If vertical creating, you mean it was buying new issue debt directly from the government?
I don’t understand the reserve reference in the Euro-system context. Normally, a singular central bank that is “financing” via repos on its own balance sheet (i.e. system reverses) is draining its own reserve liabilities (as the Fed intends). It creates reserve liabilities by acquiring assets in the first place. How does a central bank in any context require reserves to “buy more government debt”?
JKH,
Link to recent Bank of Greece Balance Sheet here.
I notice total assets on balance sheet and off balance sheet well in excess of 50% Greek GDP. Resp,
Thanks, Matt.
The mystery continues. See below.
Hey JKH – I landed in this comment section by chance! Don’t comment here. Actually I have little mystery in my head now – though that claim is highly risky ! I actually thought that even though the EZ took a wrong decision to have a single currency, their docs are more transparent that the Fed. There is one which says that the currency printing is demand determined. What are the things that are bothering you ? Maybe I am missing something.
Ramanan,
Everything bothers me.
Coherent explanations of ECB monetary operations are non-existent – and I mean a coherence that logically synthesizes the interactive operations of the ECB proper, the NCB’s, and the commercial banks. I’ve perused, googled, and read what’s available until I’m fed up with it.
The Fed is far superior in comparable explanations, through its website and its speeches. I’ve always been satisfied in that case.
JKH,
If this is frustrating for you, then I have no hope for myself….
If you look at Asset line items 5.1 and 5.2 in the Bank of Greece balance sheet I linked to above. I submit that those numbers reported there by the Bof Greece, are included in the totals for MRO and LTRO that the ECB reports weekly in this report here.
So the ECB report is just an amalgamation of the individual NCBs weekly input (i think). This is yes frustrating maybe because we are used to the Feds H.4.1 that has alot of detail and is issued weekly. Since it looks like the NCBs are tasked with conducting monetary policy in their jurisdications, it would be more interesting if the NCBs would publish weekly
balance sheets, but it seems they just are content to send the totals to the ECB to report. that November 09 BofG balance sheet was the most recent I could find.
It could be that when one would say: ‘they repo with the ECB’ it really means: ‘they repo with the Bank of Greece (on behalf of the ECB)’.
Mike N. has repeatedly pitched more in depth shows related to markets, economics and related public policy to the leading cable financial news channels in New York, unfortunately, these proposals have fallen on deaf ears. But for me at least we have this new media like Yves has here, Marshalls great posts, and great commenters like you and Ramanan, and many others out there.
Resp,
Matt,
The item that caught my eye on the Bank of Greece balance sheet was the $ 38 billion in intra-Eurosystem liabilities – specifically, TARGET2 ESCB liabilities. Notice that this is a net number as well – with a zero balance in the corresponding asset account.
This is quite relevant to the point you and Ramanan were discussing at Bill’s. I think it represents ECB and non-Greece NCB claims on the Greek central bank, which have arisen because of gross capital outflows as well as current account deficit outflows. Those outflows transfer reserves from the Bank of Greece to other Eurozone NCBs, who then get credit for these amounts in their own accounts with the Bank of Greece. That’s what these intra-system claims are, I believe. This is the issue of reserve distribution that I raised initially in our discussions.
P.S.
Matt,
An unusual analogy:
Suppose PBOC didn’t buy treasuries and left all of the dollars it purchased from Chinese exporters on deposit at the Fed. That would drain reserves from the US banking system. The Fed would then have to expand its own balance sheet by buying all of the treasuries that China didn’t buy in order to put reserves back into the US banking system. In that scenario, China’s bloated account at the Fed would be analogous (OPERATIONALLY) to the intra-Euro system liability of the Bank of Greece to the other NCBs.
JKH,
To continue your PBOC analogy, US would be running a current account deficit with China ($20B) and the PBOC decided to let this $20B sit at the Fed. Fed has policy rate at 1%. If at the same time, deposits to US Treasury account at the Fed were running sightly less than withdrawals ($10B slight fiscal deficit) and the bank system was not creating any credit (recession). Would the Treasury have to sell $30B of bonds to Dealers then the Fed would quickly buy $20B of them to put reserves in to maintain the target?
Or in other words, in our hypothetical case here, the Treasury would have to issue $30B even though the US fiscal defict was only $10B. An additional $20B of bonds would have to be sold solely to support monetary policy?
Resp,
Matt,
– China (PBOC) runs surplus “investment” balance at the Fed of $ 20 billion, due to its current account surplus with the US; this drains $ 20 billion in active reserve balances previously used by the US domestic banking system (debit reserves; credit PBOC account)
– US Fed responds by purchasing $ 20 billion bonds from the market to re-inject domestic banking system reserves that have been drained by PBOC “hoarding” (debit Fed bond asset; credit Fed reserve liability)
– US Treasury runs (potential) deficit balance at Fed of $ 10 billion due to US government deficit spending; this net spending increases active reserve balances available to the domestic banking system (debit US Treasury account; credit reserves)
– US Treasury responds by issuing $ 10 billion new bonds to the market to drain reserves injected by US government deficit spending (credit US Treasury account; debit reserves)
– The combination of the two events/responses is equivalent to an initial reserve change of a $ 10 billion drain and a consolidated government response of a $ 10 billion purchase of debt from the market, although operationally the responding actions are split between the Fed and Treasury
Good points Matt and JKH.
My previous comment was to throw some optimism :) We have to find the role of banks http://www.ecb.int/pub/pdf/mobu/mb201003en.pdf (Monthly Bulletin) has some stats page 112/S-11 has something interesting- central governments have big accounts at the banks: the deposits of the central governments were worth €277B in Jan 2010. The bulletin seems to have decent stats.
I find the LTRO operations worth €442B a bit silly.
JKH,
Thanks. From what youve told me here, in this hypo. case the Fed could just purchase on the run Treasury bonds previously issued. That would provide the needed reserves to the system.
In the Greece context, I suppose the Greece NCB could just do the same (purchase on the run Greek govt bonds, as long as they were acceptable in the Eurosystem from credit quality perspective) to offset that liabilty you found.
They have no choice. They are probably bound by Treaty to conduct monetary policy iaw ECB directives. Resp,
JKH,
If Marshall is right here, and the behind the scenes catalyst is that Germany took exception to something that they saw on the Bank of Greece balance sheet. (Which is not part of any treaty i might add)
Do you think anyone in Greece understands MMT/reserve accounting well enough to refute the German objection? I know Greece has hired Stiglitz for advice but he seems to be advocating a back up credit line approach.
Resp,
JKH/Matt,
Not sure if this is relevant : http://blogs.ft.com/economistsforum/2010/03/the-eurozone-and-limited-liability-non-bank-government-debt/
“For example around 30 per cent of Greek government debt is held by commercial banks from other European countries and nearly 20 per cent is in the hands of domestic banks.”
Also, banks wouldn’t need reserves to purchase government debt. They can just make deposits for the governments in exchange for government bonds (loans make deposits). So I don’t think that there is any issue. Banks can purchase government debt in two ways.
Also €38b intra-euro system liabilities are no cause for concern since it is an accumulated amount over many years not just one year.
This paper from Buiter says NCB wont bailout under any circumstances- he was a central banker so maybe he is right. Even Bill says something similar.
“We recognise that, despite the Treaty ban on direct financing by the Eurosystem of
member governments (no direct loans from the Eurosystem and no direct purchases of government debt by the Eurosystem in the primary issue market are permitted), the Eurosystem could, if it wished to do so, bail out member governments by outright purchases of their debt in the secondary markets. This would not violate the letter of the Treaties and the Protocols, but it would certainly violate their spirit. Again, there is no evidence to suggest that the ECB would, under any conceivable circumstances, knowingly choose to bail out fiscally challenged Eurozone governments through outright purchases of their debt instruments or through equivalent ways of monetising the debt of the fiscally incontinent.
From the early days of the EMI (Lamfalussy (1997)), through the Presidency of Wim Duisenberg and now during the Presidency of Jean-Claude Trichet, all those who matter for a bail-out decision have clearly and publicly stated that a bail-out of the fiscally improvident by the Eurosystem is not an option. We take them at their word: there will be no bail-outs by the Eurosystem.”
Ramanan,
Buiter: “Again, there is no evidence to suggest that the ECB would, under any conceivable circumstances, knowingly choose to bail out fiscally challenged Eurozone governments through outright purchases of their debt instruments or through equivalent ways of monetising the debt of the fiscally incontinent.”
“Fiscallly Incontinent” LOL! The image someone uninformed could take from that rhetoric! So disrespectful.
I think this thread has shown here that Buiter and his ilk are so ignorant/hardover that they think monetary operations required by Treaty is “monetization”. The Bank of Greece probably has to buy substantial amounts of Greek Govt bonds from dealers for normal monetary operations. Germany (large net exporter) probably has excess reserves due to the same process in reverse, so they dont have to.
Resp,
JKH,
(Always nice to see a fellow MMT traveler commenting, and your insights are always good, JKH). On your query (and I’ve checked this with a few people, but the list is by no means definitive). My understanding was Greek banks were buying Greek govt. debt and repo’ing it with ECB. When Greek bank buys Greek govt. debt, reserves are extinguished. Repo with ECB allows reserves to be replenished. Banks then go back for another tranche of Greek govt. debt. Voila, backdoor monetization, as long as they leave the self-imposed credit rating constraint inoperative, as they know they must do.
Irish banks apparently were/are doing the same.
But if there is a better description, I’ll take it. I would not profess to be an expert on ECB ops, and their balance sheet is ridiculously opaque.
Thanks, Marshall.
The comment from Charles further below was also helpful; I had misunderstood that the reference was to Greek commercial banks (not the NCB) buying government debt.
Certainly agree that the ECB balance sheet and related operations are opaque.
P.S.
Marshall, your recent interviews on BNN have really been quite good. (As have Yves’ interviews.)
Apart from your own content, it may have something to do with the longer attention span and interviewing style of the BNN hosts, which in turn might show some correlation with Canadian good manners and intelligence.
Perhaps Warren M. should give BNN a shot.
Marshall, you wrote:
“An interesting question which has hitherto been unanswered by the mainstream media: why did the Greek debt crisis erupt with such sudden ferocity in the past month or so?”
As was reported by some MSM: a few months ago, the Greeks had a general election, opposition party was voted into office, new government announced that the outgoing government had massaged the deficit numbers enormously. The out-of-the-blue minus 12% instead of previously stated minus 6% erupted the greek debt crisis. No need to invoke a conspiracy this time.
“We would need a supranational authority which is geared toward a full employment goal.
the only fiscally sustainable policy is one that promotes full employment. As we’ve said before, this could be done via a Government Job Guarantee program.”
we already have this. It’s called the Fed, and it doesn’t work. government is not designed to solve problems. it’s a brake, which has been effectively shorted to accelerate crony capitalism. the relative growth of top-down control/agency only leads to tyranny.
there is no top-down solution to the current crisis. the constitution pulled too many amps a long time ago. Congress is not the innocent virgin it pleads to be, nor is the Fed independent, nor is there a regulator onboard with clean hands.
the Titanic hit the iceburg. what can be salvaged, and how much goodwill remains among those capable of doing the salvaging? start with who is not capable of doing the salvaging – the existing nexus, or any of its minions.
but keep trying, while the whole world watches it sink, and the captains keep shouting louder and louder, all’s well.
the problem is one of goodwill, which gets expensive when there is no trust. money on Tuesday for a hamburger today just doesn’t get it.
You need a motor to pull the Titanic, and bubble gum, tie-wire, and duct tape, the tools of the trade in Congress, aint gonna get it.
the nation/state system is a center of weakness.
if you want that thing salvaged, it’s going to be expensive, in all kinds of ways, and the old families know it. they are still weeding each other out, or the job would already be started.
hint: ordering people around is no longer a quality or prerogative of being the boss. you have to be able to out-work the crew, not all the time, but when push comes to shove. otherwise, they will ignore you.
when the time comes, the Titanic will be brought into dry-dock for repair, even if it means pulling it up from the bottom of the ocean.
a lot of people are making really bad bets.
I just find it amusing you’re responding to yourself who responded to yourself who responded to yourself who again responded to yourself.
recursive eh?
here’s another:
No government can survive for long without individual surplus from the economic profit cycle, which requires increasing real revenue and decreasing real costs simultaneously, and the number of individuals that can swim in and out of a black hole riptide, once it develops, is relatively small.
The cartels need a waveform large enough to pick that $500T load, and its out there, but it’s only tangentially passing the ground vortex, providing just enough voltage to slow the sinking of the Titanic. True to form, the bosses in the middle are still trying to prove to themselves that they are in control. While control is a wet dream for some, and irrelevant to others, it’s a nightmare for the rest.
Sometimes, the cartels need to be reminded that the frame of reference for life is not a one-way street, just their corner of it, and theirs is a tiny, tiny corner of the universe. They only delude their followers into thinking that it is the universe, because they never leave the cave.
They might want to get busy and install those cleats.
(watch out for the backlash)
There seems to be a pattern here. First you cut someone’s income streams, make him replace that with borrowing, continue until he’s overloaded with debt and then move in to pick up the spoils.
Works with citizens, companies and, apparantly, governments. That banks do this is no surprise, but now governments are openly doing it as well (via their banks) and canibalize their neighbours.
Brave new world.
Governments have always done this. Countries used to blockaded by navies until they paid certain countries their debts.
Hhm, yeah. The same concept it is. However, nowadays it is much more vile and hidden.
Besides nowadays governments might be doing it, but they are really doing it on behalf of the banks. So governments can now be considered the banks agents.
Of course, you can now say it has always been thus, banks using goverments to further their goals.
That would mean, however, that all the wars we went through, all the death had nothing to do with nationality, or political systems but were solely organised for the banks profit.
I think I could subscribe to that.
Real quickly because I’m on a deadline:
1. No matter how well intentioned, many Europeans will see any calls by Americans to break up the Eurozone as concern trolling at best…
2. What many Americans fail to understand about Europe (at least in the non-Germanic countries including certainly Belgium) is that there is a huge informal economy that provides jobs to many of the so called unemployed. I’ve seen estimates of the size of this “black economy” of around 20% of GDP. This informal economy for example dominates residential renovation. Any time I have work done on my house I am always given two prices, the in-the-system price and the black price.
3. This same group of Europeans (non-Germanic) tend to hold the state in pretty low regard. Any attempt to take the Euro away from them will lead to chaos. Any asset that is not tied down will be shipped or wired to a Euro country. Then once the new currency is imposed it will be immediately rejected by the people and a million ways will be found to continue using Euros, at least when selling something (they will more than happy to buy in the new currency of course). The governments will need to expend huge amounts of effort to enforce any new currency
4. This low regard for the state held by non-Germanics is not necessarily a bad thing. During WW2 the Germans occupied both Belgium and Holland and imposed agricultural restrictions and rationing on both. The Dutch, who tend to respect authority, went with the system and when things broke down in 1944 half a million of them starved to death. Belgians immediately rejected the new system and instead set up a thriving agricultural black market, corrupted local Nazi administrators, and when 1944 rolled around they were in good enough shape to avoid starvation.
5. The Greeks should consider defaulting.
6. Keith and Mick are indeed great political philosophers. My favourite example is from “Salt of the Earth” where they show incredible insight into the two party system:
Raise your glass to the hard working people
Let’s drink to the uncounted heads
Let’s think of the wavering millions
Who need leading but get gamblers instead
Spare a thought for the stay-at-home voter
His empty eyes gaze at strange beauty shows
And a parade of the gray suited grafters
A choice of cancer or polio
You are right about it. I’d add Germanic countries into the mix (Germany’s black economy is around 18% GDP, compared to 25+% in Southern Europe; both figures are high indeed).
But there is a huge misunderstanding in foreign media when reporting Spanish unemployment. Spain has never had 4m unemployed or 20% unemployment.
Both in the early 90s and now, official figures point to 20% unemployment (in some areas, 40%). That’s because in some areas, almost every waiter, shop assistant, construction worker and sales representative are working in the black while collecting unemployment benefits.
E.g. recently in the Canary Islands (25+% unemployment), the Government proposed a plan for unemployed construction workers. They learnt about green energy for 6 months and then had a well-paid guaranteed job. 800 vacancies were proposed to many thousand unemployed people; only 4 workers accepted. The rest of them said they couldn’t work informally if they went to school for 6 months!
Another example. A friend of mine was looking for a sales manager in 10%-unemployment Madrid. 5 good candidates were interviewed, all of them “officially” unemployed. 3 of them were working in the black while collecting benefits.
This should help relativize the sense of emergency surrounding Southern Europe (which some areas are admittedly in a real depression).
So…the hippies were right!
That explains the vicious crack-down on them, I guess.
Thanks for the memory. I lived through that hunger-winter of 1944 as it became known. Fortunately the farmers in my home county, Friesland, did what the Belgian farmers did and we never went hungry. There even was food for the Dutch from the west of The Netherlands, provided they had the courage to cross the Ysselmeer and had the means to pay. A barter system developed, called the Black Market. Bob de la Frise.
My worst nightmare would be to look into my children’s starving eyes and have no food to give them.
By the way, I should have said half a million suffered from malnutrition, I think the actual death toll was closer to 20,000.
I am not sure whether I understand you correctly. Are you criticizing the farmers that bartered their crops? Please note in those days there was no transport at all. The only way to move around, apart from walking on wooden shoes (scarce)and not very comfortable, was the bicycle, not much use without tires. A rubber tire for same would command a side of bacon. The rich citizens of W-Holland had many items that were valued in my part of the world, always considered poor and backward. If ever an economic system created equality, it was this barter-trade. Finally, quite a few of those farmers that did not obey the orders of the nazis, paid with their lives. I can give you a list. BV
no, no, no. Sorry if I was not clear but I was touched by the fact that you survived such an awful experience and I was just placing myself into that same situation and imagining how horrible it would be.
I am not fool enough to start making judgements on people who lived through that kind of hell. Once the crisis started in 2008 I started stockpiling food in my basement but at the same I always wondered what I would do if my starving neighbors came for food.
I hope I never have to answer that question.
To the Salt of the Earth!
Excellent points. I agree with you 100%, and also have to live with that reality every day (which is not a bad thing, by the way).
In Greece, the “black market economy” is probably close to 50%. The same goes for some of the new Eastern European EU members. One can’t blame them, though. This part of Europe has been used and abused not only by Germany, but by Turkey, Russia, and a slew of dictators. We just don’t trust authority around here, and have developed a disdain for anything royalty (which is what the EU leadership looks like to us).
Also, in this part of Europe most people still maintain a close connection with their villages of origin, where family farming is still common, so should a famine strike again, it’s unlikely many will starve. In fact, I get fresh milk, cheese, eggs, fruits, and vegetables from my father-in-law every week, we make our own yogurt, and once a week we drive up in the mountains to a monastery to get fresh water from a spring. Heck, if Billa, Metro, and Real would go out of business tomorrow, I wouldn’t even notice. :)
Vinny
@JKH
Greek Banks buy bonds and refinance at the ECB discount window. They only have to put 4 to 5% haircut for that (that is a leverage of 20 to 25),and the position is marked to market. Lending @6% by borrowing at 1% with only 5% cash down is a great business, as long as the customer is paying and you have the cash to pay for the margin calls. At the extreme, 100% of the Greek Government outstanding could be purchased this way. What we may see is increased haircut from the ECB (up to 10%-20%).
The biggest issue is if there is a bank run in Greece, because it will be linked to a broadening of Greek Sovereign Debt and therefore to margin calls.
Note that, politically, a bank run in Greece will be framed as “Even the Greek don’t want to fund the Greek Governement” and therefore bail-out will be out of question, only the terms of default will be negociable.
Thank you. I needed help with that too. But isn’t it German and French banks that are most heavily exposed and vulnerable?
Thanks. I completely misunderstood if the reference was to Greek commercial banks buying new issue government debt.
“rather one which emphasizes the principle that the only fiscally sustainable policy is one that promotes full employment.”
– “full employment” has proven to be incredibly inflationary in practice, especially during weak economic growth (see any Friedman/Schwartz). Why would any sovereign nation, even within the EMU, consign itself to guaranteed inflation? How would the allocation of resources to enact “full employment” be delineated across the nations? How would such a policy account for differing levels in inflation across borders? Your idea would need, as you mention, the current surplus countries to invest in the current deficit countries. But who would make such a fixed investment choice considering an outright commitment to full employment, and likely inflation? What would be certain these investors would be receive proper returns relative to the risk they would incur in such an investment (esp given prospect of default)? Such investors would need to believe in perpetual prosperity of the eurozone and/or concessions with regards to inflation/default.
“Job Guarantee Program that automatically adjusts to insure the private sector can actually realize its desired net nominal savings position. . .”
– Who determines this? How would this be calculated? What sector would the jobs be in? What type of skill sets would these jobs require? Would it not be more prudent to wait until the more advanced of green technology comes to fruition before making substantial investments? What type of regulatory environment would need to be legislated in order to force consumers to choose the green technology over more cost efficient legacy technology?
“An exit from the euro zone would clearly create a short term problem because the PIIGS nations that wanted to exit would have to deal with a foreign currency debt burden.”
– Why not just exit, print their own individual currencies with an peg to the Euro that ensures a competitive advantage and then pay the debt by accumulating Euro reserves? I mean, if you go down the default path why not do something far more sneaky that enables the Greeks/PIIS to at least appear to be properly servicing their int’l obligations?
“Why were these lending rules threatened to be removed in the first place? This has never been adequately explored. Trichet’s statements marked a reversal for the ECB, which said in January that it wouldn’t soften its collateral policy for the sake of a single country. The bank was scheduled to reintroduce pre-crisis rules at the end of 2010.
This basically confirmed my earlier suspicions that this entire crisis was triggered by the ECB at the behest of the Germans. ”
I think the description of the causal flow is incorrect.
The ECB, in the midst of the financial crisis, accepted worse-rated bonds as collateral. This was announced as an emergency measure and was supposed to be temporary, although the final date was left vague. At the end of the last year, the ECB via Trichet made clear that it would like to see the emergency measures phased out. It was not unique; the Fed showed the same attitude with respect to its emergency measures. This manifests coordination between the two big central banks, not a German conspiracy.
Then in the beginning of this year Greece was downgraded – no German involvement there, the ratings agencies come from the other side of the pond. Since that’s what triggered the present crisis, I think we can lay to rest the idea of a German conspiracy. But, who knows, maybe Oswald didn’t shoot Kennedy, either.
“As is the case in the US, fiscal austerity seems only to apply when dealing with “wasteful” social spending…”
On the contrary, I don’t think the Germans would care a flying fig if the cuts came from Greek military spending, or if the Greeks began to tax its upper bourgeoisie. Recall that German society tends to be more egalitarian than Anglo-Saxon society and, by and large, does not consider social spending “wasteful.” This is an Anglo-Saxon misreading of German society based on how Anglo-Saxon society works. Still, clearly, it’s hard to get Germany sympathy for Greeks, when the Germans retire at 67 and the Greeks at 60.
“If the Franco-German axis proves resistant to this idea, then it might be time for the Greeks, Portuguese, Italians, Spanish, Irish, etc., to send a different message to Chancellor Angela Merkel….”
Ah yes, and now we finish with the Anglo-Saxon wet dream. Something tells me that, when push comes to shove, Portugal, Italy and Spain will prefer Germany to the Anglo-Saxon world, which insists on calling their countries PIGS. Really, do you realize you are demeaning them, do you think it’s so cute, or do you just not care?
The idea that Greece can just leave the Euro Zone is a bit thin. It is not just a matter of the governmental debts that would become unpayable if Greece were to reestablish a devalued Drachma. It is the entire private sector. Everyone has debt in Euro’s. So moving in this direction is a very dangerous step. This would quickly turn around and bite N. Europe in the butt.
Possibly the best idea would be for the ECB to write CDS for Greek Bonds. This would allow Greece to find the investors they need. It would also generate big income for the ECB. Just kidding……
LOL.
Perspective of an outsider. Though one who maintains a second home in Spain and who has done some business there and in Portugal, Italy and Germany. Merkel had given Freddie & Fannie Papanotpolis an implicit guarantee. Seemed like a good idea at the time. Germany was in the best of positions to benefit from EMU. Germany makes things for developing economies. Much more “advanced” than the rest of the EC. Dominated my industry for a long time. And the Club Med bunch has had to invest (borrow) enormously to reduce unit costs to become competitive. And credit has been conspicuously available (presume from German banks). Bruce Krasting is right. It is the entire private sector. There is very little flexibility in those bussinesses. High fixed costs, high tax rates and inflexible labor standards. Which was acceptable in exchange for implicit government guarantees. And now Merkel wants to hedge her position? My own feeling is that there is much less risk to Greek default than to “internal devaluation”.
Im so sorry to disagree with you, Yves. Concerning Portugals economy and problems, I think you should study better our problem.
The majority portuguese academic economists agree that are inside factors that harms our economy and not external factors. External factors are less important than you think.
And thats because are internal factors that we have economic problems in Portugal we, portuguese, are changing our economy and, soon than can you think, we will come back to strong economic growth.
But to change our economy, portuguese needed to concentrate in his problems in stead blaming others. Until that internal reflexion and a way of thinking we couldnt work in our problems.
I can give you an good example. Today world has more and more winers producers. Portugal is a tradiditional producer and some years ago a lot of people worked in that sector. But with new producers (like USA, uruguay, Brasil, South Africa, Australia and so on) and with our lack of modernization we lost a lot of jobs in that sector.
However the sector in stead compaining agaisnt new producers and methodologies we focused in doing better wines with less costs and targeting high qualitiy wines. Portuguese producers wanted better prices for their production so to achieve that they start doing great wines.
Today the winer sector is back on track and has wining his battle agaisnt new cheap wine producers. Last Wine Spectator gave us, portuguese producers, a good attetntion. And deserved. In stead adopting foreigners grapes, like french Chadornnay, for example, portuguese producers changed everything, but knowing that portuguese grapes are better for our soils, climatology and solarity. Portuguese producers hanged the techncologies, the management but focuesd in great wines. To sell a bottle of wine with higher margins.
You can see portuguese sucess in that matter through this link:
http://www.winespectator.com/issue/show/date/2010-04-30
“Portuguese Power – The Douro Valley delivers its best reds of the modern era, led by intriguing native grapes such as Touriga Nacional”
So, I think, in stead talking on external problems, we should talk in internal problems that harms the labeled Clubmed countries.
I think that your viw on that problem is wrong and dont helps the countries if they adopt your view. We must focus in our problems not denying our behaviour that is the problem.
Best regards.
Hey, PJM… send me a coupla bottles :) I’m sure Portugal (or Greece for that matter) will never be competitive on a global scale again, but I’m sure with enough of that quality wine around, we won’t really care. :)
Vinny
Dear Vinny, do you really need a couple of bottle? ;)
I disagree with you on that matter:
“I’m sure Portugal (or Greece for that matter) will never be competitive on a global scale again, but I’m sure with enough of that quality wine around, we won’t really care.”
We will be competitive and we will celebrate with good wine, good food and even wth good sun and weather. Youre invited to that day. To celebrate our hardworking.
Remember, History teached us self that cycles are allways present and what seems today pretty clear, tomorrow youre wrong.
But hey, even if we fail we still have good wine to drink and celebrate. :)
You say these are some of the instruments which are characteristic of liquidation gambits:
1. Looting – TARP, CDS, Bailout, bonus
2. Corporatism and cartelization – that too
3. Brow-beating (societal interest above self interest, power as power, cooptation and betrayal) particularly via manufactured bankrupcties – not yet
4. Shams and accounting frauds – all over the place
Looks like we have liquidation here, in the US of A.
I think all should read that paper. Give us some insigths about portuguese economy and her problems:
http://www.nbp.pl/konferencje/radisson/Mowcy/mateus/Mateus_paper.pdf
Portuguese bad lessons to others countries:
“Bad lessons
Unfortunately, there are also some mistakes in the Portuguese experience that should be avoided. The bad lessons are that high fund transfers may lead to aid
dependence and encourage rent seeking among entrepreneurs, which is detrimental to growth. The emphasis in physical infrastructure, encouraged by EU structural funds,
may also lead to a less efficient resource allocation, and a careful benefit-cost analysis of the big projects should be scrutinized by the central government and Parliament. The
momentum of institutional reform needs to be kept all the time, in view of the major transformations that countries in the transition phase need to undertake: corporate
governance, public policies, funding pensions, technological and management transfers from developed countries, etc. Finally, as nominal convergence progresses, the threat of financial crises should be avoided. This is the role of an efficient supervisory system of
the financial sector, using mainly a prudential approach. This means that euro accession should not be rushed.”
Please, do homework before some statments.
I say again: Clubmed has problems because their own mistakes. Others who deny this crudel truth are missing the real economic problems inside our countries.
Is worst an bad diagnostic than a bad solidariety.
Please, do some homework.
I like/enjoy your posts PJM. IMO, what you have to say demonstrates underlying commitment to doing things the right way. Good for you/Portugal.
One thing… this assumes good government. There’s as many ways to corrupt government than people under the sun. The key there is, IMO, whether scrutinzing is done by government, or “market entities” or (whatever)… if people doing the scrutinizing are corrupted, the system (economy) they’re pulling the levers on gets wobbly.
If they are honest, then success has a better chance. If they are smart, then better chance. And if they are both, and dig deep (work!!!) to keep objective eye on things, tap into best resources (people, trends, needs), then things not only have a foundation but fertile ground and nourishment for growth.
Very, very astute and smart way of seeing things, my Portuguese friend… bravo!!! If this mindset is being woven into your society, w/common understanding among significant portions of your population, good things await Portugal.
Dear Jdmckay, thanks a lot for your support.
However, we must congratulate all portuguese people, even who disagree with diagnistics and the steps tha wered doing. I think Portugals population deserves these congratulations because suffered a lot to work in the good way. Almost all portuguese know that crude reality: hard work, hard work and more hard work. The portuguese population discovered that easy money dont means wealth and we dont have any shortcut to improve our standar of living.
I think the real portuguese hero is the avergare portuguese Joe who struggles to survive and to improve his work towards a better standard of living.
I think portuguese population is the best today in Europe because they work hard to do good things instead allways compainng agaisnt their competitors.
My portuguese population, with a lot of handicaps of course, are doing thhis hard way aproach. Soon or later we will have that great reward: better life for all. Inst easy, they know that. But a people with more than one thousand of years experience has more wisdom than we, literate pretendrs think. ;)
Thanks again.
“Berlin and Paris are using the leverage created by the debt crisis to force Athens to buy their weaponry and warplanes even as they urge those “profligate” Greeks to cut public spending and curb its budget deficit. France is pushing to sell six frigates, 15 helicopters and up to 40 top-of-the-range Rafale fighter aircraft. Greek and French officials said President Nicolas Sarkozy was personally involved and had broached the matter when Papandreou visited France last month to seek support in the financial crisis, according to The Economic Times.”
Gotta love the forces of austerity looting the Greek corpse.
Some said that internal demand isnt working in Portugal. Last decade was “the portuguese lost decade” however even in the start of last businesscyle Portugal had a strong internal demand. What is wrong?
The wrong is the lack of internal competition and not focusing in producing better to susteian internal and external demand.
Some links, pelase read, is in english:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1535278
http://www.gpeari.min-financas.pt/arquivo-interno-de-ficheiros/economia-portuguesa/2006/Portuguese_Economy_July06.pdf
We lost 10 years but we improved a lot. Some economic reforms are giving good results. Not enpuph yet to be a wildcat growth economic but were doing our way. Its hard and dloly than we want but with strong steps in the rigth way.
I strongly believe that we will show a better grothw than all think. We showed more strength in last recession than we could believe before the international crisis. But now, portuguese economy is showing the signs that is towards a good economic perfomance.
Our exports is growing again and industrial production is shwing a good perfomamce again, even we had a strong euro, vis-a-vis with las year.
And were exporting more but better, with more margins and better financial retyurns. We focused in high qualitiy goods and services that are showing the first good results.
Now in Portugal, more good companies are growing and less competitive companies are dying. One day we will have more good companies than bad and will create more jobs, betters jobs and better financial profits.
Please, do some homework before some statements.
from your SSRN link:
Amongst my developed-over-long-time-core-way-of-doing-things-in-order-to-get-good-results (rules) is:
* making distinctions matter. Doing so gives a person/group(company, band, church, government, whatever) clarity about exactly where they are.
* Bypassing detailed scrutiny (laziness) leads to inaccurate assumptions. It also leaves fertile ground for outright fallacies to be suggested/accepted. And, when this happens, they tend to take root. And the grand prize of doing things this way: corruption. >> poverty >> confustion!!! (eg: American “free market” economics).
So I’m very curious when I see sincere attempts to establish meaningful/useful metrics. And in order to focus the intent (words have gotten soooo cheap): I would generally define metrics as: A method aiming to provide 100% accurate (realistic… real) assessment of a given thing, process, set of conditions, etc. etc.
In work I’ve done, over time, metrics have become more or less indispensable… and as much a part of the job as the job itself. In today’s increasingly tech/knowledge based/sophisticated and inter-woven/reliant world, metrics more important than ever as tool to ensure more favorable outcomes.
As aside, and omitting intent of crooks, the deliberate use of metrics by (especially) US money goons to inaccurately depict the same is, in process and w/intent, the predictable path that has led US to the brink. That the term/profession: Accounting, has become large, well paid effort aiming to distort the meaning suggested by that word, well…
(thus concludes my short essay on: metrics. :) )
Anyway… do you know anything about this PESSOA? Is it internally (Portugal) conceived? I poked around GOOGLE and couple other places, couldn’t find it.
Thanks.
Dear Jdmckay,
“Anyway… do you know anything about this PESSOA? Is it internally (Portugal) conceived? I poked around GOOGLE and couple other places, couldn’t find it.”
Infortunelly Iam not expert in this metrics. Isnt my subject area. But studies from Banco de Portugal are very respect in academic world in Portugal. I just remember read something related Blanchard studies some years ago.
However my personal opinion, regarding economic model metrics, we must to give less degree of concern than we tend. Normally can be “worked” to give some conclusions. However, as I said before, Banco de Portugal is one of the best research institutions in Portugal and is very respeced among academics.
I would like to show something to our readers. Is in portuguese but give us a view how we work in Portugal.
http://www.jornaldenegocios.pt/index.php?template=SHOWNEWS&id=412679
In this opinion, in stead blaming others for doing a good work, the opinion maker tries to establish a connection between saving rates and economic perfomance. And his focus is in the best praticces. Germany.
This kind of opinions, in economic newspapers, isnt histerical armageddon seeling. Is very shilly and gives more information than trying to be “smart than others”, but to cut bad portuguese behaviour.
What happened with this kind of good opinions? Portuguese changes their behaviour.
Ill show another link:
http://www.jornaldenegocios.pt/index.php?template=SHOWNEWS&id=396641
In this news, regarding Banco de Portugal Boletim (reports to know what is happening), we know that savings rates increased a lot in 2009. The portuguese, after a strong internal demand in private consummation in the last years (as we can read in the first link) showed a correction, after the credit crunch.
What I want to show is this: in stead excuses to do right thing we must to start doing the right way. And the portuguese people did that to fight an old error. This is the good thing: people do the right thing in stead blaming others and doing the wrong things.
As I said before. The monsters are inside us, noth others. The portuguese are learning to fight their monster and doing the good thing. Goods habits makes goods men. ;)
I always enjoy your comments but disagree with you in thinking Portugal’s problems are so heavily internal. Portugal was really I’ll prepared to join the EC. 25 years ago. The economy was 2 cities and the highway that comnected them had not been completed. There were a handfull of well managed national champion companies. You mentioned some names here a few weeks ago. One of them I know from my industry. A few wines from the Douro were known globaly. The rest of Portugal was a subsistance economy. Many, many Portugese worked in France & Germany. Everybody in Spain knew to stay off the highway the first of Aug. It was a panic.
That’s all changed. What changed it? Joining the EC. It gave smaller companies access to markets they never had. It gave Portugal and everybody in it access to financing it never had. But it came at a cost. Conformity of practices. You can say harmonization if you like. And competition from outside that had never been experienced. But Portugal bought into it and rightly so. There was no way, no way at all, that tiny Portugal could have stood in the way of that sea change in commerce. Portugal had no choice. None. It is nothing but a credit to the Portugese that they made the investments they did. It had to be done. But we shouldn’t forget that the larger more industrialized countries also benefited from that investment and that they had risked less.
I agree with you, Marco Polo. As I said before, we took the decision to enter in EEC not because economic factors. I mean, it was political causes to join EEC (former EU) and to establish an Democracy in Portugal.
And yes, Its true. Open borders give us an open market. The problem is this: we didnt have legs to sustain the competition. Thats why european funds inst good as we thought some years ago. Put pressure where isnt good: like wages in economic sectors that surive with consummation, for example. Or construction sector. Or even public services.
After portuguese revolution, for example, econoomic shools teached almost kenesian crap or even communist crap. Even today, keynesian thinking is majority in economic schools but theyre are in crisis because keynesainismo is the worst thing that hapenned in my cowntry.
Years after years we listened the same things: the State must push for strong internal demand. Savings isnt good. The State must construt bdridges like nowhere.
What hapenned in Portugal? After to be a cowntry with one of best economic perfomances in world (like Spain and Greece) in the XX century, today has a lot of debt, low personal levels of savings and economic productive sectors with low productivity. Keynesianismo is broke in Portugal, even keynesians still dominate economic thinking.
Thats why I disgaree with some arguments. Isnt the lack of internal demand or even external demand that is the portuguese problem. (As Spain and Greece, but this is a discussion for them.) Is the lack of productivity and good services and produtcs to compete in internal markets or external.
It took some years and almost to have a bankrruptcy to portuguese understand where the problem is. Some believed that we could protect our companies and gave them rentseeking positions. We had a government that believed in “national champions” but that failed. (Same problem in Spain, that theyre will discovery soon than they think.) That Prime-Minister took the bad advice from protectionist keynesians and when figured that was a mistake, he resigned and stop to be politican. He was engineer who believed in… Economists. ;) Great mistake.
As I said, we didnt have economic fundations to compete in modern and global markets. Even with strong internal demand, portuguese production failed to delivery that demand. So we started to import much more than we export. Wrong thing. (USA as the same problem but deny this own mistake. They dont understand that excessive low levels of interest rates has the same efects of keynesian policies. Thats why some found an interesting correlation between economic growth and… Real estate boom.)
It was hard to the average Joe to understand that what they believed was wrong. Everybody, since the begining of our Democracy, told to average Joe: Government and the State will push for our level of standard life. We will be rich just spending and pushing internal demand. Wrong.
After long discussions and an extraordinary level of unemployment, in a cowntry where working is a symbol of sucess and status, people undrstands better what we failed. it took time. It was hard for a lot of opinion makers to understand that the problem was inside home. Intelectuals never admits that are wrong. Or admits after a catastrophe.
But know we are changing. Now we understand what mr. Michael Porter teached us, about 20 years ago but just few really listened. Everybody thought that EU would give us a great standard of life without doing the right things.
Portuguese people is a hero. Now they dont give a lot of credit to economist and intelectuals. ;) They start to have better way of thinking: doing better than others and learning with them. But onlye who says the plain truth: goals that we achieve with hard working and time. No more shortcuts and trickies. They dont work.
“… because keynesainismo is the worst thing that hapenned in my cowntry.”
Damn man, mine too. What can we do about that?
” So we started to import much more than we export. Wrong thing. (USA as the same problem but deny this own mistake. ”
There is so much more that I would like to say about that. Basically, many of us thought the imbalance would be temporary.
Dear MarcoPolo, I have a answer for your question. Inst so beautiful but is the best, in my humble opinion.
“Damn man, mine too. What can we do about that? [Excessive keynesian think in economics.]
My answer is: dont listening economists, gurus and others who are theorics and sell their wisdon without pratice. That is my humble opinion.
In spite my backgronund, economics, I believe we can achieve better results if we dont listening economists. Especially who promises shortcuts to be rich. an the easy way.
In Portugal we made that mistake. When we had a strong crisis in the wine sector, two opinions came from mainstream economists. (I know a little about that portuguese sector because I have some parents in that business.) The first opinion was: this sector has a lot of people who cant compete in modern world. The peasants dont have high education (mostly are analphabet or basically only reads and wrights simples tenses) and they need to leave the sector and to give them public subsidies to survive. The second opinion was: give them more education and we must to try changing their jobs even if theyre old for new markets and technological sectors.
I remember my father´s in law tell me: these guys from government are crazy. Who the hell will create wealth to pay that people to stay home? And for that peasants working is vital and they cant survive staying home?
The sector was very split wich thing to do. Later came good wines from abroad. French producers, normally the benchmark in the international wine sector started a new strategy. My father´s in law told me: we agree in the company to bet in high quality wines to compete in international markets. Some market studies show us that we have some opportunity to explore.
To do a great wine to increase his value you need to work hard. A company must to teach new ways to do things to peasants who dont even know read and wright. That people, peasents, are very smart with common sense gained with experience. To do a great wine the company and his leaders must to embrace together some goals that are very hard to achieve. However, in stead listening economists, burocreats and theorics, everyone start having formation and learning new things. My father´s in law start woking with computers with 55 years old. Peasents started to work with eletronic sensors and others instruments to evaluate the quality of the grapes. They started to understand basic english commands. But all were commited to improve their skills and doing better. Everyday, every year, introducing new robots in the lands, in the winemaking process and so on.
They stopped listening who promise the easy way to do things. They made an revolution in the small villages and lands. Peasants, in stead to be home, and suffer psichological problems, depending of others or the State, learned to do things in another way. To survive. And were seeing the results of that colective effort. The company has a great number of wines with high rates from Wine Spectator. Is creating more jobs and more wealth to peasants, who sells their grapes to the company. All are seeing a better hope for their future.
In my humble opinion we must to stop listening economists and gurus. especially who dont have experience in the field and dont know the real world. Inst easy but with luck, we can. Yes, we can.
When companies are bankrupts they sell assets. I think Greece has to sell her assets like land and historic landmarks.
They can sell the province of Macedonia to the republic of Macedonia to the north.
They can recognize Turkish Cyprus as a state.
Sure to kick up the geopolitical stakes anyway. :)
As much as the anglosaxons are trying to wringe their way out of their financial, fiscal and – above all – moral mess by bashing competitor coountries whose prudent economic policy has managed to partially avert anglofinance’s “global” catastrophe – the reckoning is coming, and it’s coming fast.
The pathetic attempts to bankrupt Greece, blackmail the eurozone and breakup the euro – the only real rival to the flailing dollar – through government-sponsored speculation and media manipulation have failed miserably.
If anything, it has shown the rest of the world to which nauseating lows anglosaxons – governments, banks, media, but also, as proven time and again on blogs like this, its peoples – are prepared to go to avert their own day of reckoning. But it’s coming, and fast – America has at least thirty PIIGS waiting to be bailed out or else (http://www.nytimes.com/2010/03/30/business/economy/30states.html?hp).
Now, I don’t like gloating, and I know the US and UK are in for a very rough ride the coming decade, but you guys sure make it hard to empathize.
We don’t want your empathy. Go spend it on someone weak.
Well, you’ll get it regardless of personal preference. In fact you’ll get more, for your pitiful clinging to the chimera of American power.
Bas, there are three countries that are the engines that drive the world; the United States, Germany, and China. Take a run against any of these three countries and see who you have for support.
To put it another way, do you want to be the bug or the windshield?
Forcing Greek citizens to bear the costs of ‘internal devaluation’ in order to prop up a non Greek European arms industry is unjust and unecessary. More so when you consider the owners of the bonds to fund these purchases are non greeks. Its analogous to underwater homeowners in the US being forced by their govt to pay off the winnings to those who bet against them.
In this case Greece is merely the conduit between (largely) French arms manufacturers and the foreigners providing vendor financing to greece.
So of course Greece should default, keep the euro, and leave France and Germany to continue their ongoing war without them.
If I just keep my eyes on the military payment flows, then default by greece transfers the problem to buyers of greek debt. German banks hold a lot of greek debt.
At the end of the day this reduces to a German/French debt restructuring. Does France provide some kind of vendor discount to the ultimate vendor financers (ger)through some creative mechanism or does france leave germany to absorb the entire loss?
Greece, like the original subprime borrowers in the US, isn’t a major factor in solving the larger structural problem. The problem is with the bondholders who funded the bubble. They need to absord the losses.
Once again, globally bondholders are TBTF.
>> So of course Greece should default, keep the euro, and leave France and Germany to continue their ongoing war without them.
Greece can’t keep euro after default. She has to start with new currency and try to rejoin the EMU later.
So, Greece has to choose between keeping euro and defaulting.
If they default, then renegotiate the debt, and the reset debt is within the bounds, they could continue to participate in the Euro,
The destabilizing costs of Greece exiting the Euro will rebound to the remaining Euro participants. I’d wager these cost outweigh the costs of rescheduling Greek debt, with the result Greece could retain the Euro.
>> If they default, then renegotiate the debt, and the reset debt is within the bounds, they could continue to participate in the Euro
If they default they have to start from scratch. It is how bankruptcy works. So, they would have to rejoin EMU in my opinion.
Marshall is right about his policy recommendation. The EU/EMU construct is faulty! Greece should first renegotiate the debt, demand a haircut and restructure it at the same rates. Then convert to drachmas so the Germans and others who do not like Greeks can bail out their own banks!
The National Bank of Greece is a commercial bank and not the central abnk of Greece. As far as the repo mechanism with Greek public debt was not really tried as I have noted at my comment with the post at New Deal 2.0!
As about the Portoguese fellow, he obviously love to talk about Portugal regarding the nature of the blog! Give us a break!
I agree. This is a market solution. Merkel is doing right thing.
Here is also how the U.S. had to handle TBTF problem. Let them fail and help affected banks later to sort out consequences.
I wonder if Greece might try a second currency. Last year, California ran with IOUs. Shouldn’t Greece run with IOUs called Drachmas? If they use them for Greek government expenditures, and allow payment of taxes with them, they might have an opportunity to work their way out of this mess; provided their citizens roll up their sleeves.
The public sector will transact in drachmas. The private sector will transact in euros. The public sector gets greedy, the drachma/euro exchange rate cleans them out.
It’s a very l-o-o-o-o-n-g mess.
Better to strike a back door deal with Eurobureaucrats that Greece defaults mostly on non-European debts, exits from EMU and rejoins it back in, say, 5 years.
If Greece reissues the drachma it does not mean that Greeks have to convert their savings ifrom euros to drechmas. However, private loans can be converted into drachmas if both parties agree. All government loans will be converted in drachmas that have not been renegotiated with a substantial haircut! Any losses to foreign banks can covered by the states of their countries or left to take their losses as in case of default. Returning to the euro, I dont know! Why Greeks return when Germans have on desire for a transnational EU wide fiscal policy that covers EU wide imbalances from surplus countries to deficit countries.
>> If Greece reissues the drachma it does not mean that Greeks have to convert their savings ifrom euros to drechmas.
I very much doubt it since most deposits are already lent out to Greek businesses/consumers by Greek banks. Would those loans be paid back in euros?
I read that some rich Greeks have transferred their money out of country in anticipation of that.
They can be converted in drachmas if the parties agree to such an arrangement. This is not a problem as an agreement will be made with the ECB for a gradual settlement of repo obligations.