KostasGeorgioy European Crisis News

Beyond Bailouts: What Is Cronyism?

2012-07-10T07:58:00.001+03:00

http://mercatus.org/publication/beyond-bailouts-what-cronyism#.T_s10QWqNaM.twitter

MMT, The Euro and The Greatest Prediction of the Last 20 Years

2012-07-09T08:12:00.002+03:00

Lest you think NEP is tooting its own hyperbolic horn a bit too much, I borrowed the title of this post from a 2011 piece written by someone who is currently hostile to MMT even though he acknowledges its predictive accuracy.

(I’ll send 5 Buckaroos to the first person who can identify the author! Sorry, UMKC students are not eligible—they have to work an hour for each Buckaroo to pay their taxes.)

The author of that original piece went on to provide some proof for the case he was trying to make.

Being right matters. This isn’t emphasized quite enough in the finance world and in economics in general. Too often, bad theory has led to bad predictions which has helped contribute to bad policy. While MMT remains a heterodox economic school that has been largely shunned by mainstream economists, the modern proponents have an awfully good track record in predicting highly complex economic events… In the last few years, the Euro crisis has proven a remarkably complex and persistent event. And no school of thought so succinctly predicted the precise cause and effect, as the MMT school did. These predictions were not vague or general in any manner. In reading the research from MMTers at the time of the Euro’s inception, their predictions are almost eerily prescient. They broke down an entire monetary system and described exactly why its construction would lead to financial crisis if the union did not evolve.

You see, he tooted the NEP horn for us. As evidence he selected some juicy quotes:

In his must read book “Understanding Modern Money” Randall Wray described (in 1998) the same dynamic that led to the crisis in the EMU: ‘Under the EMU, monetary policy is supposed to be divorced from fiscal policy, with a great degree of monetary policy independence in order to focus on the primary objective of price stability. Fiscal policy, in turn will be tightly constrained by criteria which dictate maximum deficit to GDP and debt to deficit ratios. Most importantly, as Goodhart recognizes, this will be the world’s first modern experiment on a wide scale that would attempt to break the link between a government and its currency. …As currently designed, the EMU will have a central bank (the ECB) but it will not have any fiscal branch. This would be much like a US which operated with a Fed, but with only individual state treasuries. It will be as if each EMU member country were to attempt to operate fiscal policy in a foreign currency; deficit spending will require borrowing in that foreign currency according to the dictates of private markets.’

In 2002, Stephanie Kelton (then Stephanie Bell) was even more specific in describing the funding crisis that would inevitably ensue in the region: ‘Countries that wish to compete for benchmark status, or to improve the terms on which they borrow, will have an incentive to reduce fiscal deficits or strive for budget surpluses. In countries where this becomes the overriding policy objective, we should not be surprised to find relatively little attention paid to the stabilization of output and employment. In contrast, countries that attempt to eschew the principles of “sound” finance may find that they are unable to run large, counter-cyclical deficits, as lenders refuse to provide sufficient credit on desirable terms. Until something is done to enable member states to avert these financial constraints (e.g. political union and the establishment of a federal (EU) budget or the establishment of a new lending institution, designed to aid member states in pursuing a broad set of policy objectives), the prospects for stabilization in the Eurozone appear grim.’” (emphasis in the original blog)

In 2001 Warren Mosler described the liquidity crisis that the Euro would lead to: ‘Water freezes at 0 degrees C. But very still water can be cooled well below that and stay liquid until a catalyst, such as a sudden breeze, causes it to instantly solidify. Likewise, the conditions for a national liquidity crisis that will shut down the euro-12’s monetary system are firmly in place. All that is required is an economic slowdown that threatens either tax revenues or the capital of the banking system… A prosperous financial future belongs to those who respect the dynamics and are prepared for the day of reckoning. History and logic dictate that the credit sensitive euro-12 national governments and banking system will be tested. The market’s arrows will inflict an initially narrow liquidity crisis, which will immediately infect and rapidly arrest the entire euro payments system. Only the inevitable, currently prohibited, direct intervention of the ECB will be capable of performing the resurrection, and from the ashes of that fallen flaming star an immortal sovereign currency will no doubt emerge.’

Wow. Pretty much hit that nail on the head. For completeness let me add a few more comments. MMT got its start as “Soft Currency Economics”, the title of Warren Mosler’s 1995 monograph, and what could be called the first Modern Money conference was held at Bretton Woods in 1996, sponsored and organized by Warren with assistance from Pavlina Tcherneva (who was Mat Forstater’s undergrad at the time).

Shortly thereafter we created the Center for Full Employment and Price Stability headquartered at the Levy Economics Institute and funded by Warren. I had already started writingUnderstanding Modern Money (in 1995 as I recall) but was finishing it up at Levy in 1997 and circulating it among Warren, Mat Forstater, Stephanie Kelton (then Bell), Pavlina Tcherneva, and Wynne Godley (among others) for discussion (Scott Fullwiler soon also got a copy of the draft). To be sure, my book mostly concerned a sovereign currency-issuing government but at the time we were of course aware of the soon-to-be-launched Euro experiment. The first paper devoted to the problems with the Euro that we read was by Charles Goodhart (who was at that first meeting at Bretton Woods); we read a draft in 1996 (“The Two Concepts of Money and the Future of Europe”) and a version was published in 1997 (“One Government, One Money” appeared in The Prospect in March 1997).

At Levy we discussed these problems and Wynne wrote an excellent editorial, in 1997 after we had all settled at Levy: “Curried Emu: the meal that fails to nourish”. (Interesting tidbit: the author whose title I stole for this essay quotes Wynne’s article but inaccurately dates it as 1992. A footnote then says the date was “corrected” to 1992. But the actual date was 1997 so presumably the author “corrected” the correct date to an incorrect prior date. To be sure, Wynne did write an amazingly prescient piece in 1992, titled “Maastricht and All That“. However, the 1992 criticism of the Euro project is not as specific as the argument Wynne made in the quote from the 1997 article. That is not surprising since the details were not well-understood about a project that would not launch until the end of the decade. Why the author has got the dates all mixed up is unknown.)

Here’s another great quote, from Mat Forstater, written in 1998 and published a year later:

Under the EMU, if investors are at all hesitant about any one member’s debt, they can buy another member’s debt without incurring currency risk, since there is no exchange rate variability among the currencies of member countries. Because member nations are now dependent on investors for funding their expenditure, failure to attract investors results in an inability to spend. Furthermore, should a member’s revenues fail to keep pace with expenditures due to an economic slowdown, investors will likely demand a budget that is balanced, most likely through spending cuts. In other words, market forces can demand pro-cyclical fiscal policy during a recession, compounding recessionary influences…. Even if there were no imposed limits on countries’ deficits and national debts, the structure of the EMU makes it nearly impossible for a country to enact a counter-cyclical fiscal policy even if there were the political will. This is because, by giving up their national monetary sovereignty, countries are no longer able to conduct coordinated fiscal and monetary policy, essential for a comprehensive and effective remedy to periodic demand crises. Why would countries voluntarily sacrifice the ability to conduct a coordinated macroeconomic policy, especially at a time when official unemployment rates are in double digits and there are clear deflationary pressures?

This is from a symposium Mat organized in 1998 (published in 1999 in the Eastern Economic Journal) that included a paper by Jan Kregel and a co-authored paper by Goodhart. Warren then organized a London conference in 1998 and Bard College published a collection of papers to coincide with the “launch” of the Euro. Here are a couple of quotes from that 1999 book (The Launching of the Euro, Proceedings of “A Conference on the European Economic and Monetary Union,” Annandale-on-Hudson, N.Y.: The Bard Center, 1999). First, from Warren:

…market forces can demand procyclical fiscal policy during a recession. Without a higher fiscal authority such as the European Central Bank standing by with counter-cyclical capability and not subject to investor preferences, a severe downward spiral can result, with member nation insolvency at least a technical possibility. At that point, and probably much sooner, I’m certain that the ECB would step out of its Maastricht constraints and take action…. The question today is, if France wants to bail out Credit Lyonnais, or if Italy decides to run a higher budget up, it can’t just do it by decree. You actually have to go out and have investors buy your debts and fund them.

Here’s Jan Kregel from the same book:

Germany appears to have adopted a policy of controlling the growth of nominal wages at a rate that is below its domestic productivity growth. German unit labor costs have been falling …. If Germany does in fact manage, as it seems to have been doing for about two years, to continue to decrease its unit labor costs at 5 percent — that is, at rates that are substantially below those in the other European countries, with no longer a possibility, as has been the case in the past, for the deutschemark to revalue relative to the other currencies — this means that if I am a manufacturer or a government in a non-German European country, I am going to experience declining profit margins until I also manage to compress my unit labor costs. Therefore, if there is a risk associated with the EMU’s introduction of a single currency under conditions in which Germany is practicing a policy based on a belief that in absolute terms their wage costs are too high relative to Asia and the United States — not internally, relative to Europe — there will be very strong deflationary pressures on wages in the other European countries, which will produce a risk that is, I would say, now roughly balanced between zero inflation and outright deflation.

Well, that is precisely what Germany did for the next half dozen years—helping to fuel current account deficits on the periphery. And, finally, here’s how Warren concluded the book:

We happen to think that there should be a contingency plan for the ECB should a crisis happen. . . should a crisis occur, we’ll have this little book on the shelf with which to come up with some ideas. Meanwhile, I’m not going to buy any German, French, Italian or Spanish bonds with your money…

It is now no secret that the EMU had no contingency plan, so for the past 5 years has been making up responses as it goes along—always too little, too late, and too ill-informed to resolve the problems created by delinking nations from their currencies.

Finally, Stephanie and Ed Nell teamed up to publish a series of scholarly papers all focused around a 1998 paper by Goodhart that continued his Chartalist critique of the Euro project in his paper titled “The Two Concepts of Money: Implications for the Analysis of Optimal Currency Areas”. You can still obtain a copy of the Bell/Nell edited volume here. And if that is not yet enough evidence, take a look at Stephanie’s paper from 2002 that correctly foresaw problems with credit default risk.

In order to judge how correct MMT was in its predictions, of course, we have to understand what went wrong in the Eurozone. Our argument was that separating fiscal policy from currency sovereignty would raise questions of solvency that would constrain ability of fiscal policy to expand when necessary. That was the basis of all these arguments: Godley, Goodhart, Bell/Kelton, Forstater, and Wray. But there was an additional angle: how would the crisis begin? Would it be a recession that no individual government could resolve by fiscal stimulus? Would it be chronic current account deficits of some member states (to the benefit of Mercantilists like Germany or the Netherlands)? Or would it be a financial crisis? Well, how about a Trifecta: all three at once?

I think all readers of NEP understand the problems raised by recession—so there is no need to go into that one in detail. As individual nations faced a downturn, their budgets would move sharply to deficits that would rise further above Maastricht criteria; markets would react with higher interest rates that would in turn raise deficits further in a vicious cycle. OK, that happened. And then, of course, we also found out that (Surprise! Surprise!) governments had already been manipulating accounting so their deficits had always been higher than supposed.

NEP readers are also familiar with the current account story—easily understood through the lens of Godley’s sectoral balance approach. The best work in this area has been done by Eric Tymoigne, Daniel Negreiros Conceição, Scott Fullwiler, and especially Rob Parenteau (who has enriched a model introduced by Paul Krugman). I won’t expand on that right now—but a current account deficit must be offset by a combination of a domestic private sector deficit and/or a government deficit. Since these are not sovereign currency issuing governments, private and government deficits can both lead to problems. (To be clear, it is much more than a current account problem, as Rob shows. Any EMU nation can be blown up by its banks even while running a current account surplus. This is the “financialization” or “Money Manager Capitalism” story—probably more than 90% of cross-border finance has nothing to do with the current account, and it was that part of finance that blew up countries like Ireland and Spain. I’ll explain that elsewhere in a response to an entirely confused and specious anti-MMT diatribe by Sergio Cessarato.)

Finally there was the financial crisis angle. So far as I know, Warren Mosler was the first to fully understand this. He was harping on it for as long as I can remember—long before the 2001 article quoted above.

(I have recently become aware of a 1998 paper by P.M. Garber (1998. “Notes on the Role of TARGET in a Stage III Crisis.” Working Paper 6619, Cambridge, Mass.: National Bureau of Economic Research. June.) that explicated the problems created by the clearing mechanism. I covered that over in my GLF blog two weeks ago. A troll responded that MMT had never before paid any attention to the EMU, and (wrongly) cited the “1992” article by Godley as evidence that we simply stole the idea from him.)

But Warren had long argued that a very likely path to crisis would come from a bank failure. With no equivalent to Washington to come to the rescue, each individual nation would have to bail out its own banks. That would add to government debt, cause interest rates to spike, and lead to a run out of banks that could not be stopped. Except by the center—the ECB—which was not supposed to do anything of the sort.

Hello!?! That’s where we are, folks.

Judge for yourselves. Greatest prediction of the past 20 years? Probably not. But certainly our understanding of how “modern money” works helped us to see the underlying problems. Our main claim is now commonplace—almost no commentator now fails to refer to the problems created by separating fiscal policy from the currency. When we wrote this back in 1997-99 at the launch of the misguided experiment, we were ridiculed as fringe nay-sayers. We’re still ridiculed as fringe, of course, even though our main argument is now as mainstream as it can get.

Here are just a few of the mainstream predictions about the Euro also from that little 1999 book,The Launching of the Euro. We knew they were wrong at the time; they are hilarious in retrospect. One wonders where these people are now? Do rotten predictions by mainstreamers ever get punished, or are all their pronouncements—no matter how silly—always one way bets to success?

Let me come to grips with the problem of a debt crisis. A debt crisis may happen, but the EMU does not make it more likely to occur than before. I am even inclined to think that the EMU makes a debt crisis less likely.(Cesar Molinas, First Vice President and Head of European Fixed Income and Research, Merrill Lynch)

What if there is an unusually strong downturn? In that case, the stability pact allows deficits above 3 percent. So there is an escape clause in the stability pact….In such a case, I think spreads would probably widen…However, I think the main market impact probably is an under performance of EMU-bloc governments as a whole, rather than a dramatic intra-EMU spread widening. (Gunther Thurman, Managing Director, Salomon Smith Barney)

Certainly, among most of the major countries in Euroland, there is a very great similarity of economic structures, and the economic cycles are in most cases remarkably coexistent. This suggests that one size fits all. It won’t create a serious problem as has sometimes been suggested. (Norman Williams, European Economist, Barclays Capital)

It is not that the whole fiscal picture in Europe is going to collapse. We can “short” something and “long” something and have lots of up-and-down movements. What’s going to go wrong is indeed that nothing is going to go wrong from our point of view. (Jan Loeys, Managing Director, JPMorgan)

Nothing wrong, indeed!

http://neweconomicperspectives.org/2012/07/mmt-the-euro-and-the-greatest-prediction-of-the-last-20-years.html

To Save the Euro, the Eurozone Governments Must Stand By Greece

2012-06-29T07:46:00.001+03:00

George Soros probably understands the nature of the immediate problem facing the Eurozone (namely, the accelerating bank run which, amongst other things, potentially exposes Germany to trillions of contingent euro liabilities). But even Soros reflects the prevailing – and mistaken – view that Greece might need to become the sacrificial lamb required to save the euro. He said as much in a recent interview in Der Spiegel. Questioned about his proposal to rescue the European Monetary Union via a Debt Reduction Fund, Soros was asked whether this measure could also save Greece.

Soros: Unlikely. Rescuing Greece would require an enormous kind of magnanimity and generosity. The situation there has simply become too poisoned. I think that by standing firm and not compromising on Greece, Angela Merkel would be in a better position to persuade the German public to be more generous toward other nations and distinguish between the good guys and bad guys in Europe –(our emphasis))

Policy makers, market practitioners, indeed anyone like Soros, who keeps saying, “Well, we might have to sacrifice Greece ‘pour decourager les autres’” fail to recognize that this type attitude actually exacerbates the fatal flaw in the euro’s architecture and makes its ultimate demise more likely, not less. The same issues that confront the euro zone today would intensify in the event of a Greek exit. As Yanis Varoufakis has noted “the lack of a constitutional (or Treaty-enabled) process for exiting the Eurozone has a solid logic behind it. The whole point of creating the common currency was to impress the markets that it is a permanent union that will guarantee huge losses to anyone bold enough to bet against its solidity.”

As Varoufakis argues, a single exit suffices to punch a hole through this perceived solidity. It goes back to the fundamental flaw cited by Peter Garber at the time of the euro’s inception. As long as there was no perceived probability of euro exit by any euro nation, the established transfer system coupling private markets with European system of Central Bank support (Target 2, ELA, ECB repos) would function like any other monetary system in a single nation state. However, Garber recognized that if there arose the prospect of a euro exit and, therefore, a devaluation risk for holders of deposits in the banks domiciled in the country slated for exit (e.g. Greece or Spain), the European monetary system would be exposed to a bank run. Under the EU treaty capital mobility was guaranteed. Under the common currency deposit transfers from domestically domiciled banks in countries at risk of euro exit (e.g. Greece, Spain) to banks domiciled in other euro nation states (e.g. Germany, Netherlands) was costless. Faced with any non-negligible perceived risk of a euro exit and thereby a devaluation loss, rational market participants should move all their deposit funds from the banks domiciled in the country at risk of euro exit to banks domiciled in nations at the Eurozone’s unassailable core.

In the United States we have 50 states and one central bank. Likewise in other Federal systems such as Canada and Australia. In all cases, there are fund transfers across states. And these are permanent institutional arrangements. It is highly likely that West Virginia or Mississippi will remain long term recipients of Federal transfer payments, even if they remain “uncompetitive” vis a vis, say, Texas or California.

But there cannot be any prospect of a secession of a state that will bring with it its own devalued currency. Hence, there is no incentive for deposit flights from banks in one state or region to another. Therefore, private markets, with a little help from the Fed, will close the financial circuit to the extent there are such fund transfers. The European Monetary System was supposed to work that way. And as long as no one worried about any country leaving the euro, it did. But once the risk of euro exit on Europe’s periphery raised its ugly head, the euro system became completely different. Peter Garber argued that, given such a perceived prospect, the euro system was a perfect mechanism for a deposit run. And once doubts arose in 2009 about a possible euro exit by Greece and Ireland, a deposit run began – and in earnest.

Openly discussing the possibility of a “Grexit” then, simply exacerbates the current problem. It is akin to cutting an artery to demonstrate that one is serious about “discipline” and self-sacrifice”, whilst failing to realise that cutting that artery could well cause the entire patient to bleed to death. And whether it’s Greece which withdraws (or is booted out), or Italy, or Spain, very few people have, as Simon Johnson recently noted:

gotten their heads around dissolution risk. Here’s what it means: If you have a contract that requires you to be paid in euros and the euro no longer exists, what you will receive is unclear.” Why would that dissolution risk be mitigated if Greece were to exit the Eurozone?

Today, the euro is slowly but surely bleeding a death via the bank deposit runs that are now afflicting much of the periphery and gradually extending further into the core. Commenting on Frank Veneroso’s analysis of the bank run, my colleague Randy Wray argued:

Euroland is now in the midst of a massive run on periphery bank deposits. If you think about it, anyone who still has a Euro deposit in any bank other than a German bank is either a philanthropist or a fool. Moving deposits to German banks is a sure bet: if Germany leaves the EMU depositors will get appreciating Marks, and if Germany remains in the EMU depositors have the safest Euro deposits available.

Why take a risk that Italy or Spain or Greece will leave the EMU, default on Euro-denominated deposits, and redenominate them into a depreciating currency?

Paradoxically, the only way to alleviate this perception is for the European authorities to stand by its weakest member, in order to enhance the perception of the euro’s permanence as a monetary union. That means the line in the sand must be drawn in Greece, not Spain or Italy, as politically unpalatable as that might be to the German public.

Yes, Germany could leave, but as Berlin’s own Finance Ministry noted recently, it would be incredibly costly: An internal report from the finance ministry in Berlin was leaked by Der Spiegel indicating that a breakup of the euro would lead to a 10% contraction in the German economy in the first year with the number of unemployed nearly doubling.

It is also worth noting that although much of the flight deposit funds are going into German banks, under the ECB rules Germany’s loss exposure is limited to its 28% participation in the ECB. Were Germany to exit the euro, it would abrogate the Treaty. Its banking system, including the Bundesbank, might be exposed to almost all of such losses rather than the mere 28% under the current euro system. Which led to a very interesting comment by an Italian reader of Wray’s blog:

My life savings still reside in several Italian banks, partly due to a sliver of optimism but mainly because I fear that if / when the sh*t really hits the fan, and a large share of Greeks, Italians and Spaniards have already transferred their savings to German banks, that Germany will pass a law expropriating funds received from the periphery in order to help pay for the unfathomable costs of the end of the Euro.

Now wouldn’t that be even more foolish that keeping everything in Italy?

A scary thought and perhaps unfathomable. But so much of what has already happened in the Eurozone crisis would have seemed unthinkable just a few months before. And the Italian commentator here poses a legitimate question. The answer to him is, “Yes, leaving money in an Italian bank is one possible response to a threatened expropriation by Germany of funds leaving the periphery in order to pay their counterparty claims as creditor. But the other possibility is to take your money out of the Eurozone altogether.”

Capital flight out of the Eurozone would put the crisis in a different order of magnitude than has hitherto been the case, and would clearly expose once and for all that we have a euro design problem, not a disease of public sector profligacy. Why? Because it would almost certainly expose Germany to risks as well as the other member nations.

Were the crisis to manifest itself as a general loss of confidence in the euro (as opposed to a problem of a major bank run in the Eurozone periphery), we should ultimately expect to see widespread portfolio preference shifts out of the euro, causing a much bigger decline than has hitherto been the case. In many respects, a weaker euro is just what the doctor would order for the EMU nations, as it would provide a growth outlet via the export channel were the currency to fall enough on a trade-weighted basis. But it might be viewed undesirably by the ECB, given its desire to retain a modicum of anti-inflationary credibility (however misconceived that might be) and, more to the point, could well heighten the sense of panic which has hitherto been lurking just underneath the surface of Europe’s banking system.

This has been a most extraordinary silent bank run. We haven’t seen queues of people in front of loads of banks, desperately struggling to withdraw their money, but the Target 2, ELA and ECB repo activity all point to accelerating deposit flight. The biggest beneficiaries have hitherto been the German banks, but a generalized loss of confidence in the euro could well mean that the next wave of panic leads to outflows from the Eurozone altogether, which would likely be reflected via a sharply falling euro exchange rate. Given that the ECB is doing all in its power to keep the run from being a subject of public discussion (to do otherwise would likely exacerbate it), it is also likely doing what it can to maintain a strong or, at least, stable euro exchange rate, to prevent the bank run from erupting wide into the open.

Why isn’t the euro falling? In the aftermath of last July’s U.S. debt ceiling wars, central banks were diversifying out of dollars into euros despite Europe’s woes. However, recently a number of Asian central banks, such as the People’s Bank of China, have acknowledged being heavy sellers of euros. And the Commitment of Traders data continues to suggest that market speculators are net short the euro as well.

If specs in futures markets are massively short, as the COMEX data now seems to be indicating, and central banks are not buying euros, what could possibly be supporting the euro several big figures above where it was in mid-2010 when conditions in Europe were not nearly as bad? Perhaps the ECB itself? Or the ECB in combination with the Federal Reserve via the latter’s dollar swap facilities?

If this week’s summit does not provide a comprehensive solution to Europe’s bank run (as now seems unlikely), the ECB will likely move more aggressively in terms of supporting the continent’s tottering banking system (it is already lowering collateral requirements for both Spain and Italy, and has probably done likewise for Greek banks for the past several months via the ELA). Operationally, it can do this until the cows come home, but as more market participants (and, indeed, other central bankers) come to recognize the precarious position of the Eurozone commercial banking system, and the corresponding risks associated with holding one’s money in any euro-domiciled bank (including Germany) the euro could fall substantially. At a minimum, the ECB must stop the rot by persuading the markets that there will be no sacrificial lambs. To show the euro’s essential permanence, it must hold the line with Greece, not treat Athens like a forced amputation designed to save what’s left of a seriously ill patient.

http://neweconomicperspectives.org/2012/06/to-save-the-euro-the-eurozone-governments-must-stand-by-greece.html

What Should Brazilian Economists and Policy Makers have Learned from the Crisis?

2012-06-29T07:44:00.002+03:00

A global economic winter is coming. The Euro experiment is nearing its total collapse—an entirely avoidable disaster long foretold by MMTheorists. In the US, people’s blind aversion to public deficits and the public debt, fuelled by the alarmist cries of a Republican Party currently controlled by lunatics and economic illiterates, makes it impossible for the government to make use of the stimulating fiscal instruments that are needed to get that country out of its current recession. Even China, the one country that had been seemingly unaffected by the global depression until now, shows signs of slowing down. Brazil better be prepared.

Since 1936, with the publication of Keynes’s The General Theory, economists have known (or should have known) that the key to promoting macroeconomic stability and securing full employment in a capitalist economy is to keep total purchases of domestically produced goods and services from being too low, which would cause a unemployment, or too high, which would cause demand-pull inflation. With falling global demand and because the Brazilian government has been blindly trying to keep its own deficit under control, the Brazilian economy had been able to avoid a recession until recently only because autonomous spending had been kept up by the recent changes in monetary policy.

I cannot stress enough that I am not advocating here against reducing interest rates. I applaud the efforts by the Brazilian government to reduce interest rates, especially its use of publicly owned commercial banks to lower the historically abusive rates that were charged by lending institutions in Brazil. Ceteris paribus, low interest rates are (almost always) better than high interest rates, at least from a macroeconomic point of view. However, the monetary stimulus cannot be the only tool protecting the Brazilian economy against the economic storm coming from the North. In fact, with its combination of an easy-money policy and fiscal conservatism, the Brazilian government may be helping to create a private-debt-bomb set to explode right in the middle of a global recession, when Brazil’s economy can least afford it.

As a growth (or recession-avoiding) strategy, it is possible for monetary policy alone to have stimulating effects in the short-run. By lowering borrowing costs, the Brazilian government was indeed able to stimulate private borrowing. In this case, it was not conventional monetary policy that did the trick (reducing the return on public debt can do little to stimulate private spending), but the use of publicly owned lending institutions to force down the rates for consumers, home-buyers and small and medium-sized businesses. Families responded to the reduction in borrowing costs by increasing their (debt-financed) autonomous consumption (and some real-estate investment). Firms also increased their purchases, not necessarily because the cost of borrowing had fallen, but because the debt-fueled rise in consumption spending created more opportunities to sell commodities for profitable prices. Because more money was being spent, more output was being sold, and because more output was being sold, more jobs were being created.

And now for the bad news: Because of a cruel accounting arithmetic, in the absence of an appropriate fiscal complement or a fortuitous improvement in the current account balance, the private-debt-fueled expansion must unavoidably bring with it an increasingly fragile and eventually unsustainable financial structure (a-la Hyman Minsky).

By going into debt, families and firms can, for as long as credit is being given to them, spend above their incomes. However, the situation can quickly become unsustainable. Because borrowers must repay their debts to banks with interest, and because banks do not ever return as income to families and firms nearly as much as what they earn from them as interest and tariffs, the capacity of all indebted families and firms to meet their financial commitments depends on an ever expanding level of private debt. Allow me to explain why.

In order to meet their financial commitments over the course of any given period (i.e. in order for them to make principal and interest payments, or—at the very least—in order for them to make interest payments and avoid falling behind on their loans), indebted units must earn more money than their non-interest expenditures during that same period. Simply put, indebted units must enjoy positive money balances while they remain indebted. Since one person’s monetary gain is another’s monetary loss, the demand for net money gains of indebted units cannot be satisfied unless other actors in the economy suffer net money losses. Over any given period, these net infusions of money can come from the dissaving by consumers (as rising debt or reduction of financial wealth), the autonomous investment by firms and families (debt-financed or paid for by reducing their accumulated financial wealth), the deficit spending of the government and/or the current account surplus (which reflects the net losses of money by foreign units). Without an increase in the government deficit and/or an increase in the current account surplus, the only way for the demand for money balances of indebted families and firms to be met is for other firms and families to suffer money losses at an increasing rate.

In the US, since real-estate investment was the primary driver of aggregate spending until the 2008 financial disaster, families and firms were able to postpone the exhaustion of their borrowing capacity for a while. As long as the real-estate properties being purchased by borrowers were appreciating at a fast enough rate, indebted units were able to refinance their debts by presenting unrealized capital gains as collateral. Under these conditions, it was possible for the demand for monetary balances of the indebted units to be satisfied not only by the money losses of new borrowers, but also by the additional borrowing by already indebted units.

In Brazil, since most of the expansion in private debt has been associated with autonomous consumption, the borrowing capacity of the private sector has become exhausted much more quickly. On one hand, most of the realizable value of consumable goods is lost at the moment when it is purchased by the consumer, making it impossible for unrealized capital gains to be used as collateral for additional debt by already indebted consumers. On the other hand, the distributional nature of capitalist economies causes the net money losses of indebted wage-earning consumers to be mostly captured by firms, banks and their wealthy owners, while wage-incomes tend to remain stagnant. Thus, although it is claimed that the reduction of interest rates in Brazil has mostly benefited the poorer families, since it has allowed them to purchase previously unaffordable things, in reality it has benefited profit earners the most. For those Brazilian families who have relied on borrowed means to consume, any gain from anticipating the acquisition of expensive durable goods was likely more than offset by the (still extremely high) interest costs.

In the US in 2008, the economic contraction that followed the private-debt-fueled expansion happened because the demand for money balances of indebted units could no longer be satisfied. Once real-estate prices stopped rising at such a fast rate, the rate of new borrowing fell because indebted units could no longer refinance their debts, banks could no longer trust borrowers, and the speculative demand for real-estate properties disappeared. Consequently, money losses were no longer enough for the demand for money gains of indebted units to be met. The result was a recessive spiral almost as bad as the Great Depression of the 1930s.

The mechanism that turns the private-debt-driven expansion into a recession is well known by MMTheorists. With the exhaustion of the private sector’s capacity to borrow, the creation of new debts can no longer provide the positive money balances needed by indebted units. Struggling to meet their financial obligations, these indebted units cut back on spending, but this only adds to their problems (and to everyone else’s). It is the old paradox of thrift in action! Although it is possible for a single individual to increase her saving by cutting back on spending because her income is independent from her own expenditures, it is impossible for society as a whole to increase its saving by cutting back on total spending because a reduction in aggregate spending means a reduction in aggregate income. As we saw just above, the net monetary gains of indebted units who have exhausted their ability to borrow can only come from the total dissaving by other consumers, total autonomous investment, the government’s deficit or the current account surplus. By reducing their own spending, indebted units end up increasing their own financial difficulties by causing overall incomes to fall, thus reducing the incentive for firms to invest (why would entrepreneurs invest more in a shrinking economy?) and for banks to lend (why would banks lend more in a shrinking economy?).

In Brazil, after a brief borrowing frenzy, the capacity of consumers to borrow has quickly become exhausted. This means that we can no longer expect autonomous consumption to keep Brazil out of a recession. The economy has already become stagnant. What is worse, Brazilians must now find ways to provide money gains to the large number of indebted units looking to deleverage. To do so, the government must promptly abandon its conservative stance on fiscal policy. In the absence of growing net exports, only an increase in the government deficit can provide the money gains needed by indebted units to meet their debt commitments and keep incomes from falling. This is just what MMTheorists and advocates of functional finance have been saying all along: government spending should be used to offset fluctuations in private spending so that aggregate spending is kept at the level that produces full employment without demand-pull inflation. In Brazil it is now time for government deficits to rise. *In the US, greater deficits have been needed since 2008.

However, the adoption of functional fiscal policies in Brazil will require that a few myths be dispelled:

(1) The first myth tells us that national governments can use up their borrowing capacity just as families and firms. People actually point to the fiscal crisis in the Eurozone to make their case. However, as long as the money-issuing authority (the Brazilian Central Bank or the Fed) is committed/willing to purchase any amount of federal debt in excess of what private agents are willing to hold, the national government will never face financial constraints on its capacity to spend. This is the case for Brazil and for the US, but it is not the case for the countries in the Eurozone. This is why families, firms, banks and Eurozone governments can go bankrupt, but it is not possible for the Brazilian and American governments to fail to meet any of their debt commitments, as long as they are denominated in their national currencies, unless these governments choose to not service their debts due to the ignorance, stupidity or dishonesty of government officials.

(2) The second myth is linked to the first. Since monetary authorities can always adjust the stocks of reserves and Treasury-debt in the economy, the interest rate paid on national debts is a monetary policy decision and can be set at any level, independently of the size of the national debt. Thus, it is absolutely unnecessary for the government to achieve primary fiscal surpluses in order for interest rates to be reduced. In fact, contrary to popular belief, the causality runs in the opposite way. By increasing the return on Treasury debts, the government causes future deficits to be greater by committing to greater interest payments to the holders of public debt.

(3) The third myth relates to the strange aversion of conservative commentators to government deficits, as if they were somehow more inflationary than rising net-exports, autonomous consumption and/or private investment. There is no logical basis for this fear, unless we are still thinking in terms of a failed monetarist framework according to which increments in aggregate demand can come only from increments in the supply of money. The real world is nothing like the monetarist world. In reality, government deficits increase aggregate demand not because they increase the money supply (which they do, not because governments rely on their “printing presses” to deficit spend, but because the recipients of government payments get credited money-values in their checking accounts), but because they represent purchases of domestic commodities by the government and because they add income to actors with positive propensities to consume. There is no reason to expect that this would be any more inflationary than a rise in investment spending, debt-fueled autonomous consumption or an increase in net exports. In all those cases, more money would be put to circulate in the economy causing the value of total purchases of domestic production to increase, which is all that matters when it comes to rational concerns about demand-pull inflation. In fact, the risk of inflation from a fiscal stimulus may be even lower than from increases in private spending, since public spending could be directed to the elimination of production bottlenecks and other constraints on material production.

By now, economists should know better than to rely on private borrowing alone to keep economies from underperforming. After all, no good can come from a growth dynamic that can only be sustained if private debts continue to grow. Furthermore, while it can accelerate the economic growth during an expansion, a monetary push is unlikely to work for an economy that is already in a recession since it is very hard to tease people into borrowing more money with lower interest rates when their incomes are stagnant or falling. In any case, there is nothing that monetary policy can do for the Brazilian economy at this time. Now that the Brazilian private sector has used up all of its capacity to borrow, avoiding a recession will necessarily require generous government deficits. Thus, it is time for the Brazilian government to challenge all economic delusions that say that public austerity can ever be a way out of recessions and start spending with no concern for its own debt. But wait! Perhaps it has just decided to do exactly that…

http://neweconomicperspectives.org/2012/06/what-should-brazilian-economists-and-policy-makers-have-learned-from-the-crisis.html

Forget the PIIGS, Europe As a Whole Is Insolvent

2012-06-27T08:59:00.004+03:00

Forget the PIIGS, Europe As a Whole Is Insolvent

June 25, 2012 By gpc1981

Europe is heading into a full-scale disaster.

You see, the debt problems in Europe are not simply related to Greece. They are SYSTEMIC. The below chart shows the official Debt to GDP ratios for the major players in Europe.

As you can see, even the more “solvent” countries like Germany and France are sporting Debt to GDP ratios of 75% and 84% respectively.

These numbers, while bad, don’t account for unfunded liabilities. And Europe is nothing if not steeped in unfunded liabilities.

Let’s consider Germany. According to Axel Weber, former head of Germany’s Central Bank, Germany is in fact sitting on a REAL Debt to GDP ratio of over 200%. This is Germany… with unfunded liabilities equal to over TWO times its current GDP.

To put the insanity of this into perspective, Weber’s claim is akin to Ben Bernanke going on national TV and saying that the US actually owes more than $30 trillion and that the debt ceiling is in fact a joke.

What’s truly frightening about this is that Weber is most likely being conservativehere. Jagadeesh Gokhale of the Cato Institute published a paper for EuroStat in 2009 claiming Germany’s unfunded liabilities are in fact closer to 418%.

And of course, Germany has yet to recapitalize its banks.

Indeed, by the German Institute for Economic Research’s OWN admission, German banks need 147 billion Euros’ worth of new capital.

To put this number into perspective TOTAL EQUITY at the top three banks in Germany is less than 100 billion Euros.

And this is GERMANY we’re talking about: the supposed rock-solid balance sheet of Europe. How bad do you think the other, less fiscally conservative EU members are?

Think BAD. As in systemic collapse bad.

Indeed, let’s consider TOTAL debt sitting on Financial Institutions’ balance sheets in Europe. The below chart shows this number for financial institutions in several major EU members relative to their country’s 2010 GDP.

Country	Financial Institutions’ Gross Debt as a % of GDP
Portugal	65%
Italy	99%
Ireland	664%
Greece	21%
Spain	113%
UK	735%
France	148%
Germany	95%
EU as a whole	148%

Source: IMF

As you can see, financial institutions in Germany, France, Italy, Spain, the UK, and Ireland are all ticking time bombs.

Indeed, taken as a whole, European financial institutions have more debt than Europe’s ENTIRE GDP. Let’s compare the situation there to that in the US banking system.

Taken as a whole, the US banking system is leveraged at 13 to 1. Leverage levels at the TBTFs are much much higher… but when you add them in with the 8,100+ other banks in the US, total US bank leverage is 13 to 1.

The European banking system as a whole is leveraged at nearly twice this at over 26 to 1. That’s the ENTIRE European Banking system leveraged at near Lehman levels (Lehman was 30 to 1 when it collapsed).

To put this into perspective, with a leverage level of 26 to 1, you only need a 4% drop in asset prices to wipe out ALL capital. What are the odds that European bank assets fall 4% in value in the near future as the PIIGS continue to collapse?

These leverage levels alone position Europe for a full-scale banking collapse on par with Lehman Brothers. Again, I’m talking about Europe’s ENTIRE banking system collapsing.

This is not a question of “if,” it is a question of “when.” And it will very likely happen before the end of 2012.

The reason that this is guaranteed to happen before the end of 2012 is that a HUGE percentage of European bank debt needs to be rolled over by the end of 2012.

I trust at this point you are beginning to see why any expansion of the EFSF or additional European bailouts is ultimately pointless: Europe’s ENTIRE BANKING SYSTEM as a whole is insolvent. Even a 4-10% drop in asset prices would wipe out ALL equity at many European banks.

On that note I believe we have at most a month or two and possibly even as little as a few weeks to prepare for the next round of the EU Crisis.

With that in mind, I’ve begun positioning subscribers of my Private Wealth Advisory for this very possibility. We’ve already locked in over 30 winning trades this year by finding “out of the way” investments few investors know about and timing our positions to benefit from the various developments in Europe. When you combine this with our 2011 track record, we’ve had 66 straight winners and not one closed loser since July 2011.

Indeed, we just locked in two gains of 8% and 10% in less than two weeks’ time.

So if you’re looking for the means of profiting from what’s coming, I highly suggest you consider a subscription to Private Wealth Advisory. I’ve been helping investors navigate risk and profit from the markets for years. I can do the same for you. Indeed, my research has been featured in RollingStone Magazine, The New York Post, CNN Money, the Glenn Beck Show, and more. And my clients include analysts and strategists at many of the largest financial firms in the world.

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Best Regards,

Graham Summers
Chief Market Strategist
Phoenix Capital Research

http://gainspainscapital.com/wp-content/uploads/2012/06/

Financial Markets Reaction to the Euro Zone Bailouts

2012-06-27T08:57:00.004+03:00

Financial Markets Reaction to the Euro Zone Bailouts

Reuters made these great graphs which give an overview of the market reaction to the Euro Zone bailouts. The following indicators are shown: euro/dollar, Euro Zone banks, Euro Zone government banks and Euro Zone equities.

Reuters

http://www.economicsinpictures.com/2012/06/financial-markets-reaction-to-euro-zone.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+EconomicsInPictures+%28Economics+in+Pictures%29

Why Latvia’s Austerity Model Can’t Be Exported

2012-06-23T15:26:00.002+03:00

Austerity’s advocates depict Latvia as a plucky country that can show Europe the way out of its financial dilemma – by “internal devaluation”, or slashing wages. Yet few of the enthusiastic commentators have spent enough time in Latvia to understand what happened. Its government has chosen austerity, its people have not. Finding no acceptable alternative, much of the labour force has elected to emigrate. This is a major factor holding down its unemployment rate to “just” 15 per cent today.

Latvia is not a model for austerity in Greece, or anywhere else. Both the impression that neoliberal policy has been a success and the claim that Latvians have voted to support this failed model are incorrect.

Latvia’s one year of solid economic growth since its economy plunged by 25 per cent in 2008-10 is billed as a success. Then, unemployment soared above 20 per cent as the shutdown of foreign capital inflows (mainly Swedish mortgage loans to inflate its real estate bubble) left Latvia with a deep current account deficit. It had to choose between devaluation or maintaining the euro peg.

It chose the latter in order to proceed toward euro accession. To meet the eurozone criteria, it cut public sector wages by 30 per cent, driving down overall wage levels and consumption to match its low labour productivity. The doctrine was that this shock therapy and poverty would soon restore prosperity.

What actually enabled Latvia to survive the crisis was EU and IMF bailouts – whose repayments will soon fall due. Relatively low public sector debt (9 per cent of gross domestic product at the start of the crisis) also provided some protection from bond traders. Latvia’s problem was mostly private sector debt, especially mortgage debt, which is secured not only by property but by the personal liability of entire families of joint signatories. The bank insurance agency insisted on this measure as it saw unaffordable housing prices being inflated by reckless bank lending. (Its job was to protect the banks, not the economy.)

The resulting austerity programme is anything but popular. Latvia’s parliament often polls approval ratings in the single digits. Yet the government has survived two elections. How is one to read this?

Chiefly by ethnic politics. The largest party opposing the austerity programme (Harmony Center) largely represents ethnic Russians and had no chance of winning given its focus on rights for Russian speakers. The smaller parties run by post-Soviet oligarchs also are seen as being in league with Russia and are widely resented for fiscal imprudence during the boom years, when oligarch-controlled parties were part of the governing coalition. So the only political force left was the “austerians.” While most voters dislike their economic policy, a majority is convinced that they are best able to resist Russia’s embrace. All other issues are a distant second for Latvian voters.

That said, Latvians have protested against austerity. On January 13, 2009, in the dead of winter, some 10,000 came out to protest in Riga. Teachers, nurses and farmers held demonstrations of their own. The police were called out to suppress protests over closure of a hospital.

After these protests subsided, Latvians resigned themselves and began to emigrate, voting with their feet. Demographers estimate that 200,000 have left in the past decade – nearly 10 per cent of the population – at an accelerating rate that reflects the austerity being inflicted.

Why have so many left Latvia if it is such an economic success, with such popular support for austerity as the advocates claim? Birth rates fell during the crisis – as is the case almost everywhere austerity programmes are imposed. Only now is Latvia seeing the social effects of austerity that become evident with time: it has one of Europe’s highest suicide rates, preventable deaths and disabilities due to healthcare cuts, road deaths due to drunk driving, high crime due to prolonged unemployment and police budget cuts, less accessible, lower quality education and a skyrocketing brain drain alongside blue collar emigration.

The moral for Europeans is that a Latvian economic and political model can work only temporarily, and only in a country with a population small enough for other nations to absorb the outflow of émigrés seeking employment abroad. Such a country should be willing to see its population decline, especially its prime working age cohort. In Greece, this could only worsen an already serious demographic challenge.

Politically, it helps to be a post-Soviet economy with a fully flexible, poorly-unionised labour force. Above all, the population needs to put an almost blind faith in “free market” central planners Ethnic divisions can distract voters from complaints against austerity. Only under these political conditions can austerity be considered a “success”.

The writers, a distinguished professor at the University of Missouri-Kansas City and associate professor at the University of Wisconsin-Milwaukee respectively, have both advised members of Latvia’s government on alternatives to austerity. They are also contributors to the forthcoming book by Routledge Press: The Contradictions of Austerity: The Socio-Economic Costs of the Neoliberal Baltic Model.

http://neweconomicperspectives.org/2012/06/why-latvias-austerity-model-cant-be-exported.html

The Greek financial crisis and a developmental path to recovery: Lessons and options

2012-06-23T09:47:00.001+03:00

Karagiannis Kon de as 60

Electronic Indicators of Economic Activity

2012-06-23T09:34:00.001+03:00

bu-0612-1

Improving the Assessment of Disaster Risks to Strengthen Financial Resilience

2012-06-23T09:31:00.001+03:00

Improving the Assessment of Disaster Risks to Strengthen Financial Resilience

15 σταγόνες βροχής σ' έναν ωκεανό από μπλουζ ιστορίες

2012-06-22T07:15:00.002+03:00

Βασισμένο στο album του Παύλου Καραπιπέρη με τίτλο: " Fifteen Raindrops In An Ocean of Blues
Tales"

Δημήτρης Επικούρης

Δρόμων, 2012
74 σελ.
ISBN 978-960-694-127-6, [Κυκλοφορεί]
Τιμή € 8,52

Νεοελληνική πεζογραφία - Νουβέλα [DDC: 889.3]

Κοίτα φίλε,

Μην αποπειραθείς να διαβάσεις αυτό το μικρό βιβλίο, άμα δεν ακούσεις το CD του Παύλου του

Καραπιπέρη. Να το ακούσεις πολλές φορές και να αφήσεις τα αλήτικά του μπλουζ να μπούνε

μέσα σου σαν το μυρωδάτο λικέρ που γλιστράει ζεστά και γλυκά μέσα στο λαρύγγι το καταχείμωνο,

δίπλα από ένα κούτσουρο που καίει και με μυαλό ορεξάτο για ταξίδια μακρινά στα βάθη των

ανθρώπινων αισθήσεων και παραισθήσεων που δεν έχουνε τέλος και αρχή.

Θα πρέπει να σου πω πως χωρίς αυτή τη μουσική εγώ δεν θα έγραφα τίποτα. Είναι το στυλ του

Παύλου τέτοιο που μου ταξινόμησε τις σκέψεις μου και μου έβγαλε έξω πράγματα που είχα μέσα

μου να κουρνιάζουν από προηγούμενα ταξίδια μου στη γη των ιδιαίτερων ανθρώπων όπως εσύ.

Είσαι άτομο ιδιαίτερο. Δεν είσαι τυχαίος για να ακούς αυτή τη μουσική, επιτρέποντας στα μπλουζ

να μιλάνε στα σωθικά σου. Είσαι και εσύ νεραϊδοχαϊδεμένος, όπως όλοι εμείς που ξεστρατίζουμε

επικίνδυνα από τη ζελατίνη της πλαστικής διασκέδασης των πρωϊνάδικων, των τηλεμαϊντανών,

των διασκεδαστών της δεκάρας, των "γιαλαντζί καλλιτεχνών", των "περίπου" αντρών, των "ροζ"

επαναστατών και της φτήνειας που μας ταΐζουν. Χαλάρωσε, λοιπόν, και άσε τον Παύλο να

ξεναγήσει και εσένα σε κόσμους μυστικούς μέσα από το δικό του ηρωικό, πλούσιο και αμόλυντο

ψυχισμό. Άσε τον να γίνει ο ξεναγός σου σ' αυτό το ταξίδι, θα ήθελα μονάχα, όταν τελειώσεις

το άκουσμα αυτού του CD και το διάβασμα αυτού του μικρού πονήματος, να έχουνε μεγαλώσει

τα φτερά της λευτεριάς της δικής σου, της καταδίκης σου φαντασίας. Εύχομαι ολόψυχα να

εξακολουθήσεις να σεργιανάς εκεί που μιλάνε μονάχα οι ψυχές ανθρώπων ατόφιων και ιερών.

Εύχομαι να συνεχίσεις να ονειρεύεσαι όπως όλοι εμείς που αποφασίσαμε πως μιας και βρεθήκαμε

στη ζωή, είναι καλύτερα να πολεμάμε μάταια απ' το να ζούμε μάταια.

Καλό σου ταξίδι.
Δημήτρης Επικούρης

http://www.biblionet.gr/book/180577/%CE%95%CF%80%CE%B9%CE%BA%CE%BF%CF%8D%CF%81%CE%B7%CF%82,_%CE%94%CE%B7%CE%BC%CE%AE%CF%84%CF%81%CE%B7%CF%82/15_%CF%83%CF%84%CE%B1%CE%B3%CF%8C%CE%BD%CE%B5%CF%82_%CE%B2%CF%81%CE%BF%CF%87%CE%AE%CF%82_%CF%83%27_%CE%AD%CE%BD%CE%B1%CE%BD_%CF%89%CE%BA%CE%B5%CE%B1%CE%BD%CF%8C_%CE%B1%CF%80%CF%8C_%CE%BC%CF%80%CE%BB%CE%BF%CF%85%CE%B6_%CE%B9%CF%83%CF%84%CE%BF%CF%81%CE%AF%CE%B5%CF%82

Greece and the Rest of the Eurozone Remain on the Road to Hell

2012-06-19T13:23:00.001+03:00

So for the short term, it appears we won’t have a “Grexit”, which has led many commentators to suggest (laughably) that a crisis has been averted. Typical of this sentiment is a headline in Bloomberg today “Greece avoids chaos; Big Hurdles Loom”. To paraphrase Pete Townsend, meet the new chaos, same as the old chaos. It is worth pondering how acceptance of the Troika’s program (even if cosmetic adjustments are made) will help hospitals get access to essential medical supplies (see here), whilst the government persists in enforcing a program which is killing its private sector by cutting spending and not paying legitimate bills, and an unemployment rate creeps towards 25 per cent and 50 per cent for youth.

Prior to the June 17th vote, Greek voters were intimidated with a massive number of threats of what would happen if they didn’t vote “the right way” (i.e. anybody but the “radical leftists” in Syriza). Even then the conservatives on just led the vote count from their main anti-austerity rival. Amazingly, New Democracy leader Antonis Samaris suggested in his victory speech last night that the results reflected a vote for “growth.” There is more than a touch of Orwell at work when one can redefine the kinds of programs which the Greeks will be forced to swallow as conducive to “growth” and “prosperity”.

So the Greek government will continue to plug away at austerity and the Troika will continue to pretend that such policies will ultimately lead to a Greek economic recovery. There will be some fake advertising about Europe making it easier on the Greeks, but it will be something without substance. Then things will get worse to the point where Samaras might have to take a helicopter to flee the crowds.

From the Opposition Syriza’s perspective this is not the worst outcome, since the 3rd place Pasok (Greece’s ostensible “socialist” party) is likely to join New Democracy (despite some posturing last night which suggested that they wouldn’t join a coalition in the absence of Syriza’s participation, thereby ensuring that all parties are tarred with these awful austerity policies). Then both Pasok and New Democracy will have to watch as Syrizai leads the opposition and probably wipes them out in another election within a year. Maybe even, within the year.

In the meantime nothing fundamental will change in Greece. It can’t, given that the circuits of credit in Greece are so badly damaged that even efficient, profitable firms have been cut out of the capital markets but also out of the international markets (their suppliers will no longer accept the Greek bank guarantees without which Greek firms cannot import raw materials, as Yanis Varoufakis has pointed out – see here). I asked Yanis why those profitable Greek businesses don’t simply shift their deposits to, say, a German bank, in order to get “reputable” letters of credit, and his response was that a German bank would simply not issue a guarantee on these businesses if they are registered in Greece.

The upshot will be that even profitable businesses will be forced to sell out to outside interests, after which the letters of credit will be forthcoming. If this isn’t an example of “hit man economics”, it’s hard to know what is.

As all of us on this blog have argued repeatedly, in the eurozone we have a solvency problem and a crisis of deficient aggregate demand. Unfortunately, within the European Monetary Union these twin crisis ultimately fall entirely in the realm of the issuer of the currency- the ECB, and not the users of the currency- the euro member nations. So without the ECB, directly or indirectly, underwriting the currency union, solvency is always an issue, whether that be Greece, Portugal, Spain, Italy or, indeed, Germany. Likewise deficient spending power has been exacerbated via the austerity imposed as a condition of the ECB’s help. It is akin to putting a patient on a drip feed, allowing him to recover, then breaking his legs again so that he remains bed-ridden.

And that includes the banking system, which, to serve public purpose, requires credible deposit insurance, again meaning support from the issuer of the currency. As our friend Warren Mosler has noted.

“The last few weeks have demonstrated that the ECB does ‘write the check’ for bank liquidity even though it’s not legally required to do that, (and even though some think it’s not acting within legal limits)

but it won’t just come out and say it.

And, apart perhaps from the Greek PSI (100 billion euro bond tax), which they still call ‘voluntary’,

no government has missed a payment, also with indirect ECB support either through bond buying

or via the banking system, but, again, it won’t just come out and say it’s an ongoing policy.”

So while the ECB has continued to underwrite the Greek (and now Spanish) banking systems, via all sorts of programs – LTRO, ELA, etc., the bank (and the member nations of the EMU) refuse to make explicit commitment of the kind that it will continue to backstop the system and thereby ensure its solvency – i.e. the long awaited “bazooka”. The ECB argues that this is a “fiscal role” which cannot be undertaken by the central bank, conveniently omitting the fact that there is no relevant fiscal authority in the Eurozone, which could take up this role. The ECB is the issuer of the currency and only they have the capacity to create unlimited quantities of euros. Paradoxically, by making this commitment explicit, they would find less need to use the “bazooka”, once the markets became convinced that they were serious. Instead, the ECB effectively plays poker with the markets by exposing its hand from the start, in effect encouraging speculators to persistently call their bluff.

Of course, nobody in Brussels actually acknowledges that the problem rests on the Eurozone’s fundamental architectural flaw (which is to say that there is no corresponding supranational fiscal authority), and they continue to castigate “profligate” governments, which run large budget deficits almost inevitably as a consequence of the collapse in private sector economic activity.

That has been the story of Greece, the rest of the European periphery and now the disease is spreading into the core (Dutch April retail sales were down 11% year-over-year, so this is no longer a “north vs south” problem in the euro zone). A good economy with rising public deficits and ECB support to keep it all going isn’t even a consideration at this point. They have painted themselves into an ideological corner, as Europe’s banking system continues to suffer from the throes of a massive bank run. The Greek election results won’t change that fact.

Contrary to arguments that she doesn’t ”get it”, one has the sense from reading her recent remarks that German Chancellor Angela. Merkel actually does understand the nature of the problem. More to the point, it is likely that she is also aware (via her economic advisors) of the extent of the Eurozone’s deposit run, which is now massive (probably in the trillions of euros). But to draw attention to the real problem risks highlighting Germany’s legal conundrum which we discussed in this piece:

It seems clear that the German Constitutional Court ruling on the Greek bailout in 2010 was quite explicit in terms of its meaning: According to this court ruling Target 2 and various other forms of the ECBs lender of last resort programs are unconstitutional, because they involve an open ended indeterminate exposure of the German people to losses involved in the bailout of the periphery. Yes, these are contingent liabilities, but the irony is that the more that Mrs. Merkel says “Nein” to any genuine proposal which could avert a solvency crisis, the more likely that these counterparty risks become real, rather than contingent. And the German parliament has no say in the disbursements.

And that’s just Target 2. The deposit insurance program, which is now supposedly being discussed at the G-20 summit in Mexico represents a new initiative. That might be more readily challenged before the constitutional court as it is more readily understandable than the arcane and highly technical workings of, say, Target 2.. Chancellor Merkel may realize this. She may realize that a challenge to a deposit insurance initiative might bring to light the issue of the constitutionality of Target 2 and thereby threaten an even more intense run on the banks of the periphery of Europe.

So consider the following: there may well be a constitutional court challenge were the ECB to respond to the challenges posed by Greece and other members of the periphery via a deposit insurance scheme which they backstopped. Unfortunately, the day that a court challenge happens and becomes public the bank run should accelerate greatly. regardless of the ultimate result. If I’m a depositor in a Greek, Spanish or Italian bank and I think there is even the slightest possibility that an ECB-directed deposit insurance scheme could be nullified by a German court ruling, then I’ll raise to take my money elsewhere as quickly as I can. No wonder the issue of capital controls is now being quietly discussed.

This is the real reason why Mrs Merkel says that there are limits to what Germany can do on its own and why she has continued to take such a hard line with Athens over the course of the Greek election campaign.. Of course, she rejects the alternatives because they are politically unpalatable, in part because she hasn’t been honest with her own electorate in spelling out what the real implications of Germany’s position is if the Eurozone blows up. She’s in a corner. This also explains why the Germans are so keen to involve entities like the IMF, because it helps get around this legal conundrum.

Back to Greece. it looks like the economic ‘torture chamber’ of mass unemployment can, operationally, persist indefinitely, even as, politically, it’s showing signs of coming apart. There has been increasing evidence in the last few weeks or so that suggest that the public deficits across the EU are propping up demand just enough to stop the currency union from blowing up.

But the actions of the Troika are neither politically desirable, nor sustainable over the longer term as the recent election results, not just in Greece, but all across Europe continue to demonstrate. Note that the Socialists claimed a huge majority in France’s Parliamentary elections held this past weekend, which suggests that the French too are getting fed up with the austerity led policies championed by Berlin.

Fiscal austerity of the kind imposed on Greece is in its death throes. And thank goodness for that. Because if this form of Kevorkian economics continues, the crisis will surely spread to America’s shores, just at a time when the American ideological soulmates of Europe’s austerian brigade are seeking to shred what’s left of our own social safety net via a manufactured fiscal crisis. As the great Greek tragedian Euripides wrote, “”Whom the gods would destroy, they first make mad”

http://neweconomicperspectives.org/2012/06/greece-and-the-rest-of-the-eurozone-remain-on-the-road-to-hell.html

Είστε ελάχιστος, κύριε Σαμαρά!

2012-06-13T13:14:00.001+03:00

Είστε ελάχιστος, κύριε Σαμαρά!

01:26 panagiotopoulos, videos 1 comment

ΠΑΝΟΣ ΠΑΝΑΓΙΩΤΟΠΟΥΛΟΣ_

Με τίποτα δεν παίζουμε στις εποχές που ζούμε. Ούτε με τις συντάξεις των ηλικιωμένων που τους οδηγούν στην εξαθλίωση, ούτε με την ανεπάρκεια φαρμάκων για τους ασθενείς, που τους οδηγούν από τη χειρότερη ποιότητα ζωής έως και το θάνατο, ούτε με τα όνειρα των 25χρονων που μαθαίνουν ότι θα δουλεύουν για 400 ευρώ, ούτε με τις στρατιές των πτυχιούχων, που πρώτα μορφώσαμε ξοδεύοντας δεκάδες χιλιάδες ευρώ ανά κεφάλι (το μεγαλύτερο μέρος η οικογένεια, ένα σημαντικό μέρος η Πολιτεία) και στέλνουμε πλέον στο εξωτερικό για να επιβιώσουν.

Με τίποτα δεν παίζουμε. Ούτε καν με όσα όργανα συνθέτουν το αναπαραγωγικό μας σύστημα και έχουμε το δικαίωμα να χρησιμοποιούμε κατά το δοκούν. Καταλάβατε το υπονοούμενο κύριε Σαμαρά;

Δεν ξέρω ποιος απίστευτος κρετίνος σας πρότεινε να χρησιμοποιήσετε παιδικά βλέμματα γεμάτα φόβο, προκειμένου να μαζέψετε ψήφους. Δεν θέλω καν να γνωρίζω αν είχατε βάλει ένα extreme θρίλερ μπροστά στα βλέμματα αυτών των παιδιών, προκειμένου να πετύχετε την κατάλληλη έκφραση. Την έκφραση του φόβου, της απόγνωσης, της κακομοιριάς.

Ξέρω μόνο ότι το σλόγκαν «με το μέλλον των παιδιών μας δεν παίζουμε», μπορείτε να το αντικαταστήσετε –μπας και προσποιηθείτε έναν τύπο με ανθρώπινα χαρακτηριστικά- το σλόγκαν «με τα παιδιά μας δεν παίζουμε».

Ξέρω επίσης ότι ένας τύπος που χρησιμοποιεί τέτοιες μεθόδους για να ενσπείρει το φόβο σε ολόκληρη την ελληνική κοινωνία, δεν είναι απλά λίγος, αλλά είναι ελάχιστος. Ελάχιστος ως άνθρωπος, αντίστοιχα και περισσότερο ελάχιστος για να εκλεγεί πρωθυπουργός και να κυβερνήσει αυτό το ρημαγμένο τόπο. Καληνύχτα…

ΥΓ. Δεν ξέρω ποια ώρα θα ανεβεί το άρθρο στο blog. Εγώ ξέρω τι ώρα το έγραψα. Λίγο μετά τα μεσάνυχτα της Τετάρτης, λίγα λεπτά αφότου είδα το προεκλογικό τρέιλερ της ΝΔ με τα πιτσιρίκια. Το «καληνύχτα» έχει σχέση με την ώρα της συγγραφής του άρθρου. Ή μήπως όχι;

Eurozone (once again): A Bleeding Matter

2012-06-07T11:06:00.002+03:00

On May 17th, as I was writing about the financial unbalance between Germany and the rest of Eurozone:

This is the real challenge of the eurozone: how it will work not solely based on Germany's power (it can't last forever) but in the direction of helping the weaker economies to be restructured and competitive again and therefore, rebalancing in productivity terms.

The following Bloomberg BRIEF graphs are even more evident of the problem: the growing gap between Europe's main power and the others, mainly the southern countries.

(via The Big Picture)

In order to exit the current recession, the eurozone HAS to reverse the situation as shown by the graphs above. Otherwise, it will keep on being a bleeding matter with an uncertain future.

TAGS » EUROPE GERMANY EUROCRISIS EUROZONE FINANCE GREEK CRISIS

http://panos-world.posterous.com/134144186

GREECE: A NO HOPE-LAND

2012-06-07T09:14:00.002+03:00

Being on the verge of bankruptcy, one would expect that Greece’s politicians would propose some serious reforms aiming at controlling and alleviating the country’s huge financial burden. Furthermore, one would also expect from the greek voters to exhibit some sort of determination to press for changes that are indispensible if this country is to be rescued from an unprecedented state of turmoil that is threatening to take place sooner than most people would expect.

Unfortunately, this is not the case. While the majority of the political parties directly or indirectly continue to employ the sterile, preterit and dangerous rhetoric of the past two or three decades by giving unrealistic promises, the people are once again ready to follow them.

Some necessary reforms

The greek economy has always been state controlled even when right-wing governments ruled the country. All private business could not survive unless they had business dealings with the state. The notion of pure entrepreneurship without state interventions never existed in the country of Greece, a country whose economy is basically a byzantine copy. Greece has never managed to escape from the “eastern roman” ways of conducting business as reforms are viewed as something “evil” and have never been welcomed by the great majority of the people.
“In Greece, the real power is the power of resistance, the power of inertia”, said a former politician who received the hostility of the people for daring to suggest some innovations. Greece’s main power centers (political parties, professional guilds, public sector unions, business leaders, and the media moguls) have never stopped fighting against every attempt to reform the country because they want to preserve their privileges. They show an extreme determination to block any structural changes that would help the economy be more functional. With corruption being woven into the fabric of the greek state, any reforms seem like “mission impossible”.

The majority of public servants were not appointed through a meritocratic system that evaluated their true credentials and working experience but through a system based on political connections. Millions of votes were given to the politicians who placed people in their civil posts.

Besides being unwilling to work hard and serve the citizens, most public servants “invented” numerous ways of making an extra buck. They directly or indirectly received smaller or larger bribes (depending on the case) to process a civilian’s request. The practice of “feathering their own beds” has not decreased a bit even now where the whole country is collapsing. In the past, most civil servants were handsomely paid by the state by receiving financial “allowances” that were “tailor made” by the politicians who appointed them just to keep their voters happy. Since most of the money that the country borrows is headed towards the payment of the public servants, it is rather obvious that the only means of rescuing Greece from a complete state of disaster is simply to fire at least half of the public servants.

How can this be done? Will matters get even worse if half of the public servants are fired since they will add up to 1,5 million of people who are already unemployed? Undoubtedly, this won’t be an easy task. However, the state could either give them a compensation for a small period of time that would total 1/3 of their salary accompanied by financial incentives to start their own business or even better, encourage them to move to the countryside and be involved in the agricultural sector. One might say that this easier said than done but I don’t think that this sort of mentality will lead the country anywhere. The country doesn’t need any more “thinkers”. It is in need of “doers”, people who would undertake the political risk of improving the economy by getting rid of the state-run practices that have led Greece to this chaos.

The state surely needs to be substantially decreased by entering the phase of a healthy privatization process. Many counterproductive and heavily bureaucratic agencies should be sold to the private sector. In addition, numerous public agencies that were formed to house counterproductive public servants and have no actual role to play in terms of serving the public should be immediately abolished. Otherwise, no matter how many loans Greece gets, the end result will be always the same.

Greece is in need of a better, fairer and more effective tax collecting system. It is true that the greek people have always been negative to paying taxes. However, the “art” of tax evasion is deeply rooted in the history of Byzantium and the Ottoman Empire that succeeded it. The church became the tax collector, a role that granted it with tremendous privileges. So, paying taxes has never been viewed as the necessary process that will benefit the citizenry as a whole but as a means of making richer the state’s corrupted mandarins.
The country’s tax collecting mechanism also needs some heavy reforms. Greece has 286 tax offices a huge per capita figure by OECD standards, created in the past two decades to serve the voting clientele. During the 80’s the 90’s and right after 2007 many civil servants were transferred to tax collection departments from other parts of the civil service without having the necessary skills or training. Why? Because being in charge of collecting taxes allows every public servant to benefit himself by receiving kickbacks. As long as no reforms take place, the ones who undertake the burden of paying taxes are the pensioners, the low salary earners and the small-medium size businesses many of which are forced to abandon Greece to avoid the heavy tax burden. Big businesses which have strong political connections end up paying very little simply because they finance the political campaigns of the corrupted political parties.

Greece’s “heavy industry”
The notion of planning ahead has always been the missing factor regarding the greek state. Many political historians have concluded that matters would have been substantially better if Ioannis Kapodistrias had not been assassinated by the clans that continue to rule the land even these days. Serious attempts to reform the way the state functions have never been popular to the people of this country. Greece’s heavy industry is undoubtedly tourism. However, the services offered to the foreign visitors were not only overpriced but also of inferior quality in most cases. Another underestimated factor is the country’s small enterprises which could help give economy a substantial boost. The greek shoe and jewellery makers as well as some many other craftsmen and small business owners were never given the proper attention so as to develop their exporting potentials. Moreover, Greece has a great number of scientists who were educated abroad and could significantly contribute to the increase of industrial innovations and applications and thus give the economy a further competitive advantage.

Unfortunately, Greece’s private sector is collapsing due to heavy taxation and bureaucracy. The private sector is sacrificed just to rescue the state mandarins. The only surviving private businesses are the ones which had unethically and illegally interlaced with the corrupted public sector.

Dealing with illegal immigrants
When somebody is forced to immigrate, it unquestionably means that he is doing so to seek better employment opportunities and/or to avoid political/religious persecution. The issue of immigration is a very complex and delicate social phenomenon that needs to be tackled with extreme care.

It is true that Greece has transformed itself over the past 30 years. It used to be an immigrant exporting country and now it’s an immigrant importing one. Although no exact estimates are available regarding the number of illegal aliens that live in the country, it’s quite obvious that the number of people who have sought refuge here are more than the country can support especially during its financial crisis. Having in mind the high unemployment rate of Greece, the increase of criminality is somewhat expected since most of the illegal immigrants can barely survive and thus, will employ every possible means (including committing crimes) just to feed themselves. Greece’s geographical borders are hard to guard and control. In addition, Europe’s attitude towards Greece’s immigration problem is treated as an unimportant issue since Europe considers Greece as its “toilet” in terms of controlling the constant flow of immigrants. Most of the immigrants who have come to Greece, never wished to reside in this country permanently. How could this be remedied?

Instead of forcing those individuals to leave the country, the country of Greece could provide them with all the necessary travelling documents that would enable the immigrants to go to other european countries. That would be perhaps one of the biggest nightmares of Berlin, but it could teach Europe a useful lesson for not implementing a solid based and realistic immigration policy.

The geopolitical environment and the unfriendly neighbors
Greece is a balkan country both geographically and culturally. The balkans once were a part of the Ottoman Empire before their struggles to free themselves and become independent states. That may partially justify the degree of ethnocentricity that exists among those states even today.

Terms like the “Great Albania”, “Great Bulgaria”, “Great Serbia”, “the “Great Macedonia” (one of the most successful historical jokes that started in Tito’s times by Tito himself) are an inseparable part of the Balkan mentality which has also been infested by theocracy. Instead of getting rid of their corrupted politicians and find a formula of cooperating among themselves so as to improve their economies, the balkan states exhaust themselves in their attempt to be linked to Alexander the Great. Neither Alexander nor his ancient macedonians exist today. Nobody in the Balkans can claim that he is genetically linked to them after so many intermixtures of tribes that took place there. It would be a great joke if somebody truly claimed that he is a direct and pure descendant of Alexander.

On the other hand, the territorial disputes with Turkey, have forced Greece to be involved in a never ending armaments race that has cost both countries a serious misallocation of resources. In general, the only one who benefits out of this race is the armament industry which is neither greek nor turkish. It is really sad to see countries that share borders to exhibit such a high degree of hostility towards each other.

The lack of european leadership
The European Union along with the concept of having a common currency (Euro) was never based on solid foundations. The countries that comprise Europe have tremendous differences regarding their mentality, their economy, their demographics, their culture and their border threats. The Maastricht Treaty never took into account the above mentioned differences and that led to the turmoil that exists today. A german has very few things in common with an Italian not to mention with a greek, a spaniard with an austrian, a belgian with an englishman and so on. When the plan for a united Europe was concocted, all those factors were not taken into account.

The fate of Euro undoubtedly depends heavily on these great cultural differences but Berlin pretends to ignore them because that serves its economic dominance better. Nowadays, Germany is the key player in the european matters. All other states are either German satellites or “small potatoes”. Germany seems to have benefited from the crisis of the european South and that is the main reason why it insists on the implementation of the heavy austerity reforms that it has proposed. However, in the long run, Germany may be forced to pay a heavy price in its attempt to “germanize” Europe. In the meantime, Greece will continue to be Berlin’s guinea pig in terms of testing the effectiveness of german-made austerity measures that the country is forced to implement.

As a conclusion
It would be unfair to say that Europe and its demands for austerity measures have solely triggered Greece’s miserable financial condition. The uniqueness as well as the roots of Greece’s financial burden can be found in the socio-cultural roots of the modern Greek state and the way it was formed as well as the mentality of the people who are fond of electing corrupted politicians for a post in the public sector. (Read:The socio-cultural roots of the greek economic crisis). Furthermore, Europe as an entity and euro as a common currency seem to have an expiration date that doesn’t seem to be far away. What Greece experiences now is extremely serious and may cause even more serious socio-political repercussions that will have a tremendous international impact. What will happen in the years if not months that will follow will eventually darken not only the history of Europe but also the history of humanity as a whole.

Dimitris Epikouris

http://www.freeinquiry.gr/pro.php?id=2456

Brussels... We Have A Problem

2012-06-05T21:42:00.002+03:00

The following chart from Ray Dalio's Bridgewater probably explains why the words "funding gap" (or "math") will never be uttered by any Eurocrat as that would mean the jig is up. It is also quite self-explanatory: it simply presents visually all that ZH and others have been saying for years.

And to think Europe already spent €2 trillion in bailout cash achieving... nothing

http://www.zerohedge.com/news/brussels-we-have-problem

Frick, Lassmann, Mikosch, Neuwirth, and Suellow: How do economists assess the european economic crisis? A survey

2012-06-05T21:32:00.002+03:00

Andres Frick, Senior Researcher at KOF Swiss Economic Institute of ETH Zurich, Andrea Lassmann, PhD student and researcher at KOF Swiss Economic Institute, Heiner Mikosch, Postdoc Researcher at KOF Swiss Economic Institute, Stefan Neuwirth, PhD Student and Researcher at KOF Swiss Economic Institute, and Theo Suellow, Intern at KOF Swiss Economic Institute. Cross posted from VoxEU.

How do European economists assess the economic crisis in Europe? This column presents results of a survey of members of the Association of European Conjuncture Institutes on various issues related to the European economic crisis, such as the likelihood of Greece leaving the Eurozone, the likelihood of Europe falling back into recession, and the role of the European Central Bank.

Europe is tumbling as one crisis leads to another. Economists, policymakers, and the wider public are debating a series of questions related to the crisis.

Should the ECB play a more active role in solving the crisis?
How fast should fiscal consolidation be (Corsetti 2012)?
Will the Eurozone survive in its present form?
How can the macroeconomic imbalances prevailing in the Eurozone be reduced?
Finally, when will Europe recover from the recession?

We asked these and other questions to the members of the Association of EuropeanConjuncture Institutes (AIECE). The AIECE comprises 36 independent economic research institutes from 21 European countries. Here are some of the results as of 1 April.¹

Greek exit

Elections in Greece on 6 May 2012 challenge the agreed reform programmes and have revived fears of a Greek exit from the Eurozone. For the first time, the ECB itself raised the possibility of an exit. Those recent events might have elevated the risk of an exit of Greece, but even beforehand the risk was present.

We asked the AIECE institutes in March to give their assessment on the probability of Greece leaving the Eurozone. A kernel density calculated from the answers illustrates that the institutes, on average, consider the probability of an exit to be rather low (see Figure 1), mostly due to the high costs involved for both Greece and the Eurozone. That said, the heterogeneity of estimates is high, ranging from 0% to 80%. An institute commented that an improvement in the economic conditions of Portugal, Spain, and Italy would increase the probability of a Greek exit. The reason for this is that such a scenario would moderate Eurozone contagion risks reducing the incentive for other countries to support Greece.

Figure 1. Probability of Greece leaving the Eurozone, kernel density

Note: Epanechikov kernel, bandwidth = 7.2580

Source: AIECE institutes

Further, the AIECE institutes were asked to give probability estimates of a haircut for the sovereign debt of Portugal. The kernel density in Figure 2 reveals that the institutes, on average, see a considerable risk of a haircut. Again, the dispersion of the estimates is high, with probabilities ranging from 0% to 90%.

Figure 2. Probability of a haircut for Portuguese sovereign debt, kernel density

Note: Epanechikov kernel, bandwidth = 7.2580

Source: AIECE institutes

Preferred solution to Eurozone crisis

Facing these risks, we asked the AIECE institutes to provide their view on the preferred scenario to the solution of the European sovereign debt crisis. The majority of the AIECE institutes prefer a stronger involvement of the EU and the Eurozone institutions (Figure 3), including nine institutes in favour of a fiscal union. The fiscal compact, meanwhile, is preferred by only five institutes. In line with the current political discussion in Greece, France, and the UK, four institutes emphasise the need for more flexible austerity programmes. In addition, the institutes were asked to assess the ECB’s commitment to engage in solving the on-going crisis. Two institutes consider the current ECB involvement too strong, while 11 think it is just right and 10 regard it as insufficient.

Figure 3. Solutions to the European sovereign debt crisis

Source: AIECE institutes

Likely fiscal consolidation

In addition, we asked the AIECE institutes to estimate the size of fiscal consolidation measures, which the European governments implemented or will implement in 2012 and 2013. This is a delicate question, as such measures are often difficult to quantify and the institutes had to judge to what extent the planned measures will eventually be implemented. The answers show big differences within Europe. Italy seems most ambitious in consolidating its budget, although other countries are under even higher pressure from the bond markets. Finland, Germany, and Norway on the other hand have only small or even no consolidation packages. Interestingly, the Greek consolidation programme is far from being as ambitious as the Italian or Irish one; it corresponds to just about the average of the Eurozone. The institutes in the Eurozone estimate that fiscal consolidation amounts on average to 4.4% of GDP cumulated over 2012 and 2013, with a slight bias towards higher consolidation in 2013. Outside the Eurozone, the consolidation measures are with 2.7% of GDP distinctly smaller.

Effectiveness of debt brakes

Further, the institutes were asked whether they expect debt brakes (as agreed upon by the EU Summit in January 2012) to be more effective in reducing budget deficits than previous regulations (Maastricht Treaty, Dublin Stability Pact) for both in the EU as a whole and in their own country. Table 1 reports the basic results. In detail, 44% of the institutes stated that debt brakes would be more effective both in their own country and in the EU. In contrast, 19% believed that they would work neither in their own country nor in the EU aggregate. Meanwhile, 31% answered that a debt brake would work in the EU, but not in their own country; and one institute (6%) said that it would work in its home country, but not in the EU.

Table 1. Effectiveness of debt brakes

	Effectiveness in European Union	Effectiveness in own country
Effective	13	8
Not effective	4	6
Total answers	17	14

Source: AIECE institutes

Forecasted growth profile

Finally, we asked the AIECE institutes to forecast the growth profile for the EU and the Eurozone. As can be seen from Figure 4, the AIECE Institutes, on average, project that the EU turns from negative to positive growth in the second quarter of 2012, while the Eurozone follows one quarter later. The institutes, on average, expect the EU to grow more strongly than the Eurozone in every single quarter of 2012 and 2013. This expected growth differential may be explained by the relatively stringent consolidation measures in the Eurozone countries, while the measures in the rest of the EU are on average smaller.

Figure 4. Forecast of quarter-over-quarter GDP growth in the EU and the Eurozone

Source: AIECE institutes. Figure 5 shows the average over the AIECE institutes’ forecast for the EU or the Eurozone, respecitively. The number of answers differs between the two forecasts.

Concluding remarks

In a policy climate marked with as much uncertainty as Europe is now experiencing, expert surveys are one way of gauging what economists think should and will happen going forward.

References

Corsetti, Giancarlo (2012), “Has austerity gone too far?”, VoxEU.org, 2 April.

1The deadline for the forecasts and statements by the AIECE Institutes was 1 April 2012. The full results are presented in the Spring 2012 AIECE General Report, which can be downloaded from the AIECE (here) or the KOF Swiss Economic Institute (here).

http://www.nakedcapitalism.com/2012/06/frick-lassmann-mikosch-neuwirth-and-suellow-how-do-economists-assess-the-european-economic-crisis-a-survey.html

Honest Mom, I only bought the new Playboy to read the article on UMKC Economics

2012-06-05T09:00:00.004+03:00

The UMKC economics department is featured in an article in the current Playboy that discusses the failure of theoclassical economics and economists to admit their theoretical and policy errors. The devotion of theoclassical economists to those errors has proven so dogmatic that their disastrous policies have created the ever more criminogenic environments that drive our recurrent, intensifying financial crises.

The title of the article is: These Rogues Of The Dismal Science Have Been Vindicated By The Economic Crash. How Much Longer Can Mainstream Economists Ignore The Heterodox? You now have a valid excuse to purchase Playboy, care of the UMKC economics department.

Tim Schultz, the author of his article sets out his purpose in attending the 2011 annual meeting of economists in Denver.

“Black is not alone. He is a leading voice among a small group of economists who believe modern economic science simply doesn’t understand the real world. Members of this loosely organized group call themselves, a bit dramatically, the heterodox. Many of them had predicted the financial crisis before it occurred and are now calling for real reforms in order to avoid an even bigger one. Like Black, they are ignored or belittled by most in their profession. Yet reality has issued a wake-up call. The financial crisis and ongoing recession have largely validated many of the heterodox positions on fraud, deregulation and debt. Could the mainstream still refuse to publish, cite or listen to them? I went to Denver last year to find out if the rogues of the dismal science were finally going to have their day.”

Schultz asked one of America’s leading quants, John Cochrane, to critique heterodox economics.

“I mean, every· now and then there’s an excluded subgroup that turns out to be right,” said John Cochrane of the University of Chicago. Cochrane speaks proudly for mainstream, also known as neoclassical, economics. Talking with me over the phone before the conference, he made clear that his condemnation was general: “I haven’t read their specific work. I’m busy, and I try to read what is considered interesting and valid.” His position on heterodox economists was unambiguous: They’re kooks. “They are about two percent of academe and about zero percent of finance.” He was dismissive of their prediction of the credit-bubble collapse. ‘Beware those who predict nine of the last two crashes, okay? They’re just not rigorous and don’t use modern mathematical tools. This business is a wide-open meritocracy. You have to distinguish between closed minds and a lack of quality. The perception is that this is 1969 stuff. Give me new data and new ideas.’”

To review the bidding, Cochrane hasn’t read any of our work. Like all of us “he’s busy.” He reads “what is considered interesting and valid.” The key word in that phrase is “considered.” It means by him and like-minded colleagues. In plainer English, Cochrane doesn’t read anything we write because the people he hangs with don’t read anything we write. They know without reading anything we write that our work is not “interesting and valid.”

A prominent economist at an even more prominent university recently denounced ad hominemcriticisms made by Paul Krugman because he alleged that Krugman criticized without taking the time to read the works of the economists he was criticizing. The economist wrote that “many colleagues” at one of the most prestigious universities in the world helped him draft his denunciation of Krugman, but that he needed to keep their names secret “for obvious reasons” so that they would not also be criticized.

“I like it when people disagree with me, and take time to read my work and criticize it. At worst I learn how to position it better. At best, I discover I was wrong and learn something. I send a polite thank you note.

Krugman wants people to swallow his arguments whole from his authority, without demanding logic, or evidence. Those who disagree with him, alas, are pretty smart and have pretty good arguments if you bother to read them. So, he tries to discredit them with personal attacks.

This is the political sphere, not the intellectual one. Don’t argue with them, swift-boat them. Find some embarrassing quote from an old interview. Well, good luck, Paul. Let’s just not pretend this has anything to do with economics, or actual truth about how the world works or could be made a better place.

It gets worse Krugman hints at dark conspiracies, claiming “dissenters are marginalized.”

Any astute reader knows that personal attacks and innuendo mean the author has run out of ideas.

That’s the biggest and saddest news of this piece: Paul Krugman has no interesting ideas whatsoever about what caused our current financial and economic problems, what policies might have prevented it, or what might help us in the future, and he has no contact with people who do (emphasis in original).”

That extended quotation comes from Cochrane’s response to Paul Krugman’s column September 6, 2009 article entitled “How Did Economists Get It So Wrong?”

Cochrane exemplifies our family’s rule that one cannot compete with unintentional self-parody. I am proposing to my colleagues that we create a new economic medal for hypocrisy: The Cochrane. Cochrane is so logically inconsistent (violating what he terms in his article “the first siren of beauty”) that in his statements to the author of the Playboy article he proves the point he had so recently mocked Krugman for advancing: economic “dissenters are marginalized” by Cochrane and his colleagues. Dissenters are dismissed without ever being read – automatically “considered” beyond the pale. Again, here is what Cochrane told Schultz:

“He was dismissive of their prediction of the credit-bubble collapse. ‘Beware those who predict nine of the last two crashes, okay? They’re just not rigorous and don’t use modern mathematical tools. This business is a wide-open meritocracy. You have to distinguish between closed minds and a lack of quality. The perception is that this is 1969 stuff. Give me new data and new ideas.’”

This is what passes for “rigorous” “crystal-clear” “logic” in Cochrane’s world. He denounced Krugman for failing to understand that Cochrane’s views are driven by ineluctable logic, for Cochrane claims that economics as practiced by Cochrane is a “discipline that requires crystal-clear logical connections.” Does Cochrane know how many crashes we predicted? No, because he has never read any of our work. He, a leading neo-classical quant, made up his numbers to support his conclusion – an all too revealing demonstration of how purportedly “modern mathematical tools” are abused. Cochrane is to logic as “truthiness” is to truth.

UMKC economists, white-collar criminologists, financial regulators, public administration scholars, and law enforcement officials have given the world “new data and new ideas” for decades, but since Cochrane refuses to read the “new data and new issues” he gets to display his “crystal-clear logic” by claiming in an exasperated tone that he has not read any “new data and new ideas” from us. Heterodox views will always fail Cochrane’s test – because he will not read their “new data and new ideas” he will not receive “new data and new ideas” from those with heterodox views.

Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.

Follow him on Twitter: @WilliamKBlack

http://neweconomicperspectives.org/2012/06/honest-mom-i-only-bought-the-new-playboy-to-read-the-article-on-umkc-economics.html#more-2445

Μια κριτικη στην Εκθεση της Εθνικής απο ενα ταλαιπωρο ψηφοφορο!

2012-06-01T09:57:00.001+03:00

Ενα μικρό σχόλιο πριν το διαβασετε. Δεν ήμουν ποτέ καλός στην έκθεση στο σχολείο. Ευχαριστώ πολύ
ΜΙΑ ΚΡΙΤΚΗ ΣΤΗΝ ΕΚΘΕΣΗ ΤΗΣ ΕΘΝΙΚΗΣ ΑΠΟ ΕΝΑ ΜΙΚΡΟ ΚΑΙ ΤΑΛΑΙΠΩΡΟ ΨΗΦΟΦΟΡΟ

THE BASICS OF MACRO ACCOUNTING

2012-05-09T15:54:00.003+03:00

In this blog we are going to begin to build the necessary foundation to understand modern money. Please bear with us. It may not be obvious, yet, why this is important. But you cannot possibly understand the debate about the government’s budget (and critique the deficit hysteria that has gripped our nation across the political spectrum from right to left) without understanding basic macro accounting. So, be patient and pay attention. No higher math or knowledge of intricate accounting rules will be required. This is simple, basic, stuff. It is a branch of logic. But it is extremely simple logic.

A note on terminology: a simple table at the bottom of this post will define some terms that will be used throughout this Primer. You might want to refer to it first, then come back and read the blog.

One’s financial asset is another’s financial liability. It is a fundamental principle of accounting that for every financial asset there is an equal and offsetting financial liability. The checking deposit is a household’s financial asset, offset by the bank’s liability (or IOU). A government or corporate bond is a household asset, but represents a liability of the issuer (either the government or the corporation). The household has some liabilities, too, including student loans, a home mortgage, or a car loan. These are held as assets by the creditor, which could be a bank or any of a number of types of financial institutions including pension funds, hedge funds, or insurance companies. A household’s net financial wealth is equal to the sum of all its financial assets (equal to its financial wealth) less the sum of its financial liabilities (all of the money-denominated IOUs it issued). If that is positive, it has positive net financial wealth.

Inside wealth vs outside wealth. It is often useful to distinguish among types of sectors in the economy. The most basic distinction is between the public sector (including all levels of government) and the private sector (including households and firms). If we were to take all of the privately-issued financial assets and liabilities, it is a matter of logic that the sum of financial assets must equal the sum of financial liabilities. In other words, net financial wealth would have to be zero if we consider only private sector IOUs. This is sometimes called “inside wealth” because it is “inside” the private sector. In order for the private sector to accumulate net financial wealth, it must be in the form of “outside wealth”, that is, financial claims on another sector. Given our basic division between the public sector and the private sector, the outside financial wealth takes the form of government IOUs. The private sector holds government currency (including coins and paper currency) as well as the full range of government bonds (short term bills, longer maturity bonds) as net financial assets, a portion of its positive net wealth.

A note on nonfinancial wealth (real assets). One’s financial asset is necessarily offset by another’s financial liability. In the aggregate, net financial wealth must equal zero. However, real assets represent one’s wealth that is not offset by another’s liability, hence, at the aggregate level net wealth equals the value of real (nonfinancial) assets. To be clear, you might have purchased an automobile by going into debt. Your financial liability (your car loan) is offset by the financial asset held by the auto loan company. Since those net to zero, what remains is the value of the real asset—the car. In most of the discussion that follows we will be concerned with financial assets and liabilities, but will keep in the back of our minds that the value of real assets provides net wealth at both the individual level and at the aggregate level. Once we subtract all financial liabilities from total assets (real and financial) we are left with nonfinancial (real) assets, or aggregate net worth.

Net private financial wealth equals public debt. Flows (of income or spending) accumulate to stocks. The private sector accumulation of net financial assets over the course of a year is made possible only because its spending is less than its income over that same period. In other words, it has been saving, enabling it to accumulate a stock of wealth in the form of financial assets. In our simple example with only a public sector and a private sector, these financial assets are government liabilities—government currency and government bonds. These government IOUs, in turn, can be accumulated only when the government spends more than it receives in the form of tax revenue. This is a government deficit, which is the flow of government spending less the flow of government tax revenue measured in the money of account over a given period (usually, a year). This deficit accumulates to a stock of government debt—equal to the private sector’s accumulation of financial wealth over the same period. A complete explanation of the process of government spending and taxing will be provided in the weeks and months to come. What is necessary to understand at this point is that the net financial assets held by the private sector are exactly equal to the net financial liabilities issued by the government in our two-sector example. If the government always runs a balanced budget, with its spending always equal to its tax revenue, the private sector’s net financial wealth will be zero. If the government runs continuous budget surpluses (spending is less than tax receipts), the private sector’s net financial wealth must be negative. In other words, the private sector will be indebted to the public sector.

We can formulate a resulting “dilemma”: in our two sector model it is impossible for both the public sector and the private sector to run surpluses. And if the public sector were to run surpluses, by identity the private sector would have to run deficits. If the public sector were to run sufficient surpluses to retire all its outstanding debt, by identity the private sector would run equivalent deficits, running down its net financial wealth until it reached zero.

Rest of world debts are domestic financial assets. Another useful division is to form three sectors: a domestic private sector, a domestic public sector, and a “rest of the world” sector that consists of foreign governments, firms, and households. In this case, it is possible for the domestic private sector to accumulate net claims on the rest of the world, even if the domestic public sector runs a balanced budget, with its spending over the period exactly equal to its tax revenue. The domestic sector’s accumulation of net financial assets is equal to the rest of the world’s issue of net financial liabilities. Finally, and more realistically, the domestic private sector can accumulate net financial wealth consisting of both domestic government liabilities as well as rest of world liabilities. It is possible for the domestic private sector to accumulate government debt (adding to its net financial wealth) while also issuing debt to the rest of the world (reducing its net financial wealth). In the next section we turn to a detailed discussion of sectoral balances.

Basics of sectoral accounting, relations to stock and flow concepts. Let us continue with our division of the economy into three sectors: a domestic private sector (households and firms), a domestic government sector (including local, state or province, and national governments), and a foreign sector (the rest of the world, including households, firms, and governments). Each of these sectors can be treated as if it had an income flow and a spending flow over the accounting period, which we will take to be a year. There is no reason for any individual sector to balance its income and spending flows each year. If it spends less than its income, this is called a budget surplus for the year; if it spends more than its income, this is called a budget deficit for the year; a balanced budget indicates that income equalled spending over the year.

From the discussion above, it will be clear that a budget surplus is the same thing as a saving flow and leads to net accumulation of financial assets. By the same token, a budget deficit reduces net financial wealth. The sector that runs a deficit must either use its financial assets that had been accumulated in previous years (when surpluses were run), or must issue new IOUs to offset its deficits. In common parlance, we say that it “pays for” its deficit spending by exchanging its assets for spendable bank deposits (called “dis-saving”), or it issues debt (“borrows”) to obtain spendable bank deposits. Once it runs out of accumulated assets, it has no choice but to increase its indebtedness every year that it runs a deficit budget. On the other hand, a sector that runs a budget surplus will be accumulating net financial assets. This surplus will take the form of financial claims on at least one of the other sectors.

Another note on real assets. A question arises: what if one uses savings (a budget surplus) to purchase real assets rather than to accumulate net financial assets? In that case, the financial assets are simply passed along to someone else. For example, if you spend less than your income, you can accumulate deposits in your checking account. If you decide you do not want to hold your savings in the form of a checking deposit, you can write a check to purchase—say—a painting, an antique car, a stamp collection, real estate, a machine, or even a business firm. You convert a financial asset into a real asset. However, the seller has made the opposite transaction and now holds the financial asset. The point is that if the private sector taken as a whole runs a budget surplus, someone will be accumulating net financial assets (claims on another sector), although activities within the private sector can shift those net financial assets from one “pocket” to another.

Conclusion: One sector’s deficit equals another’s surplus. All of this brings us to the important accounting principle that if we sum the deficits run by one or more sectors, this must equal the surpluses run by the other sector(s). Following the pioneering work by Wynne Godley, we can state this principle in the form of a simple identity:

Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0

For example, let us assume that the foreign sector runs a balanced budget (in the identity above, the foreign balance equals zero). Let us further assume that the domestic private sector’s income is $100 billion while its spending is equal to $90 billion, for a budget surplus of $10 billion over the year. Then, by identity, the domestic government sector’s budget deficit for the year is equal to $10 billion. From the discussion above, we know that the domestic private sector will accumulate $10 billion of net financial wealth during the year, consisting of $10 billion of domestic government sector liabilities.

As another example, assume that the foreign sector spends less than its income, with a budget surplus of $20 billion. At the same time, the domestic government sector also spends less than its income, running a budget surplus of $10 billion. From our accounting identity, we know that over the same period the domestic private sector must have run a budget deficit equal to $30 billion ($20 billion plus $10 billion). At the same time, its net financial wealth will have fallen by $30 billion as it sold assets and issued debt. Meanwhile, the domestic government sector will have increased its net financial wealth by $10 billion (reducing its outstanding debt or increasing its claims on the other sectors), and the foreign sector will have increased its net financial position by $20 billion (also reducing its outstanding debt or increasing its claims on the other sectors).

It is apparent that if one sector is going to run a budget surplus, at least one other sector must run a budget deficit. In terms of stock variables, in order for one sector to accumulate net financial wealth, at least one other sector must increase its indebtedness by the same amount. It is impossible for all sectors to accumulate net financial wealth by running budget surpluses. We can formulate another “dilemma”: if one of three sectors is to run a surplus, at least one of the others must run a deficit.

No matter how hard we might try, we cannot all run surpluses. It is a lot like those children at Lake Wobegone who are supposedly above average. For every kid above average there must be one below average. And, for every deficit there must be a surplus.

Notes on Terms. Throughout this primer we will adopt the following definitions and conventions:

The word “money” will refer to a general, representative unit of account. We will not use the word to apply to any specific “thing”—ie a coin or central bank note.

Money “things” will be identified specifically: a coin, a bank note, a demand deposit. Some of these can be touched (paper notes), others are electronic entries on balance sheets (demand deposits, bank reserves). So, “money things” is simply short-hand for “money denominated IOUs”.

A specific national money of account will be designated with a capital letter: US Dollar, Japanese Yen, Chinese Yuan, UK Pound, EMU Euro.

The word currency is used to indicate coins, notes, and reserves issued by government (both by the treasury and the central bank). When designating a specific treasury or its bonds, the word will be capitalized: US Treasury; US Treasuries.

Net financial assets are equal to total financial assets less total financial liabilities. This is not the same as net wealth (or net worth) because it ignores real assets.

An IOU (I owe you) is a financial debt, liability, or obligation to pay, denominated in a money of account. It is a financial asset of the holder. There can be physical evidence of the IOU (for example, written on paper, stamped on coin) or it can be recorded electronically (for example, on a bank balance sheet).

http://neweconomicperspectives.org/2011/06/mmp-blog-2-the-basics-of-macro-accounting.html

Pyres, Haircuts, and CACs: Lessons from Greco-Multilateralism for Creditors

2012-05-09T15:16:00.001+03:00

SSRN-id2046184

New York Times Reporters need to Read Krugman’s Columns

2012-05-09T15:13:00.001+03:00

To know the Washington Consensus as a regular citizen is to hate the Consensus. The Washington Consensus, as the name implies, was an “inside the beltway” series of neo-liberal policies embraced by the IMF, the World Bank, and the U.S. government. It called for a minimal State and an all-powerful private sector. The private sector and de facto private central banks would discipline the State by insisting on balanced budgets – perpetual austerity. Democracy was unreliable, indeed dangerous, so the central banks had to be “independent” of the democratic process (and wholly dependent on the largest banks). Only the private sector had the proper incentives that could be relied upon to create vibrant growth and a self-correcting economy. The Consensus was developed in the context of the policies that should be imposed on Latin America and Latin Americans were the guinea pigs of Consensus. (This metaphor was particularly troubling for Latin Americans who knew that their ancestors raised guinea pigs as a reliable source of meat.)

The Consensus led to weak growth, high unemployment, and repeated privatization scandals. It enraged ordinary citizens in much of Latin America, which is why there has been a landslide of national leaders elected because of their promises to oppose the Consensus and their open disdain for Washington’s neo-colonial diktats. There is nothing unusual about the Latin American reaction to the Consensus. What is startling is that at the same time that Latin America was rising up to reject the Consensus the dominant neo-liberal politicians and economists in Europe were passionately worshiping its failed dogma with the zeal of the convert. They created the Berlin Consensus, and it rested on austerity today, austerity tomorrow, austerity always.

Overall, European nations showed significant budgetary restraints in the decade leading up to the Great Recession. Most of the periphery did so – Greece is a special case. The Cato Institute, for example, praised Iceland and Ireland as models of restraint. Spain also received praise. The claim that the periphery was “profligate” through large budgetary deficits in the run up to the crisis reverses the facts.

Austerity during a serious recession is economically insane. It is a pro-cyclical policy that makes the recession more severe. A more severe recession is a mass destroyer of wealth and quality of life. It is pure waste. It is the primary cause of dramatic increases in public deficits and debt. Unemployment reduces tax payments and increases demands for public spending. One cannot decide to end a budgetary deficit during a recession by adopting austerity. Austerity (some combination of cutting government spending and increasing taxes) reduces private and public sector demand. This means that imposing austerity is likely to deepen the recession and can make the national deficit and debt larger. It is analogous to the medical insanity of bleeding patients to cure them of disease – and then bleeding them more because the prior bleeding make them sicker. Europeans of the periphery are having austerity imposed on them by German demands – and they are subjected to repeated insults from German and Dutch leaders for failing to balance their budgets because the austerity imposed by Germany deepened their recession and slashed their tax revenues. Germany’s demands for austerity have thrown the euro zone back into recession – but it has forced the periphery into Great Depression levels of unemployment. German-imposed austerity, the Berlin Consensus, is even more draconian than the Washington Consensus in Latin America. Germany and the ECB are open that they are not simply demanding austerity and massive privatization – they are also demanding dramatic reductions in working class wages throughout the EU. The German’s and the ECB are not demanding any sacrifices from European elites. They explicitly target the working class and government workers’ wages and oppose any increased taxation of the wealthy. The Berlin Consensus is a road map to ever greater inequality.

The reaction among Europe’s citizens has been overwhelmingly negative. Every nation that has agreed to austerity has suffered economically and every ruling party that agreed to austerity in return for EU aid has fallen. Austerity is the leading cause of disintegrating EU unity. The nice thing about democracy is that the people are often less wedded to failed economic dogma than are the academic devotees of the cult of austerity.

The New York Times has a very good economist, a Nobel laureate, working for it as a regular columnist. His name is Paul Krugman and among his areas of primary study is how to recover from a severe recession. Regular readers of the paper will know that recovery is the most common subject Krugman’s columns discuss. Sunday’s elections in France, Greece, Germany, and the UK have spawned a spate of articles in the New York Times that have focused on finance and recovery from the Great Recession in Europe. The reporters’ collective take on the elections demonstrates that they are in the grip of dogmas that are so powerful that they have come to believe in anti-facts and to rely on “economic” theories that are rarely believed by economists and have been continuously falsified by reality.

It is now apparent that the paper’s journalists that cover the EU do not read or do not understand Krugman. Here is how they began a story on the French election and the import of Hollande’s victory.

“Mr. Hollande’s campaign promised a kinder, gentler, more inclusive France, but his victory over President Nicolas Sarkozy will also be seen as a challenge to the German-dominated policy of economic austerity in the euro zone, which is suffering from recession and record unemployment.”

Notice the logical disconnect? There is “austerity” and there is “suffering from recession and record unemployment.” The two are presented as if they are not connected. Austerity during a weak recovery from a Great Recession will cause intense “suffering from recession and record unemployment.” That is a fact as we have taught it in economics for over a half-century. It has strong theoretical and empirical support. Indeed, Mr. Draghi, the head of the European Central Bank (ECB) has conceded that austerity deepens recessions and unemployment. He claims that eventually this turns around and austerity aids recovery. When and how austerity turns around and eventually aids a recovery has neither theoretical nor empirical support (hence Krugman’s derisive allusion to the stealth “confidence fairy”). Note also that the interrelationship of the German-imposed austerity and the resultant return to recession in France is precisely why Hollande won the election and is therefore critical to the article.

The article’s economic analysis descends from that failed start. The next sentence reads: “French voters may not like the belt-tightening, but both Mr. Hollande and Mr. Sarkozy had promised to balance the budget in the next five years.” This sentence contains two false implications. First, it implies that a nation suffering from recession can simply decide to “balance the budget.” As I explained, and as the EU’s tragic experience under German austerity confirms, trying to balance the budget not only makes recessions and unemployment worse, but can make the deficit grow. Severe recessions are the great cause of rapidly expanding budget deficits. Second, no patient likes being bled by quacks (whether their doctorate is in medicine or economics). The implication of the article is that austerity in a Great Recession or a depression (which is what the periphery is suffering) is some kind of unpleasant medicine or form of virtuous self-discipline (“belt tightening” is an absurd metaphor for German-imposed austerity). The journalists portray the French as refusing to continue to drink the vital but bad tasting medicine that the wise Germans stoically took a decade ago. No, the French object to further bleeding by German and French quacks whose answer to everything is austerity (Sparmaßnahmen).

The journalists continue the theme of the selfless German economic doctors attempting to convince the frivolous French to take the ill tasting cure for their economic ills.

“The presidential election in France and the parliamentary vote in Greece on Sunday have been closely watched in European capitals, particularly in Berlin, where Chancellor Angela Merkel has led the drive to cure the debt and banking crisis in the euro zone with deep budget cuts and caps on spending.”

The Berlin consensus has not and cannot “cure” the debt and banking crisis – it has made it vastly worse. We are all able to observe the German snake oil “cure” forcing the euro zone back into a gratuitous recession.

The journalists soon slip into TINA (there is no alternative) and implicitly embrace the bond vigilantes (aka, the banks whose frauds and abuses drove the financial crisis that caused the Great Recession) as the appropriate arbiters of public policy.

“While crowds in Paris cheered Mr. Hollande’s victory, investors were more cautious in their reactions.

They are concerned that Mr. Hollande might choose to spend more money to jump-start the economy rather than move ahead with labor and business reforms that economists say France sorely needs to improve its competitiveness to prevent it from getting caught in the euro zone crisis.

‘Markets will not attack France right away,’ said Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington. ‘But there is a risk that if Mr. Hollande does not act early on, France will become the next sick man of Europe.’”

Where to start? First, the bond vigilantes have been attacking Italy and Spain’s sovereign bonds for weeks even though both nations are slavish in their devotion to the Berlin consensus. Italy and Spain make good targets because they have adopted austerity and forced their economies back into recession, which meant that the promises to reduce the budget deficit to meet Berlin’s destructive targets were impossible to meet. The journalists’ implication is that imposing austerity during a recession improves an economy. We have run many real world tests of this dogma and it does the opposite.

Second, the journalists imply that TINA rules – there is no alternative to austerity because the bond vigilantes will crush any alternative. It that were true, then it would be all the more reason for the citizens of Europe to rise up and restore their national sovereignty that they have ceded to Berlin and the largest banks who caused the financial crises that drove the Great Recession. The largest banks are the principal bond vigilantes. If the only alternative available to Europe under the euro and the Berlin Consensus is to force the euro zone into recession, the periphery into depression, and slash working class wages then the euro and the Berlin Consensus have to go because they are destroying the Europeans, their economies, and the EU project. The Berlin Consensus invokes the same “logic” that became infamous in one American unit’s response to the Tet offensive – “it became necessary to destroy the village in order to save it.” Berlin is happily destroying the periphery in order to save it – and is distressed that not enough inferior Europeans praise Berlin for imposing discipline on the ungrateful periphery.

Third, consider the multiple fictions posing as indisputable facts in this sentence taken from the passage quoted above: “[Investors] are concerned that Mr. Hollande might choose to spend more money to jump-start the economy rather than move ahead with labor and business reforms that economists say France sorely needs to improve its competitiveness to prevent it from getting caught in the euro zone crisis.” I will start with the metaphor. When your car battery dies your car will not start. Your car may have other flaws that make it less than ideal, but if you need to get to work tomorrow do you (1) jump start the car or (2) spend the day ordering racing tires and then wait two weeks for them to arrive and be installed before jump starting the car? Jump starting cars works. We have sound empirical and experiential bases for knowing that it works. Running an international competition among nations based on a race to the bottom on working class wages does not work for the world or the working class. It is a wonderful way to make the one percent even wealthier.

Who are the “economists” who say that France “sorely needs” as its priority to cut working class wages? If international “competiveness” on working class wages determines which nations are “caught in the euro zone crisis” then this is another form of dogma that relies on TINA. Again, assume for the purpose of discussion that the economic world we live in has become a negative sum war against the working class. This is what we call the “Road to Bangladesh” strategy. The only way to win a race to the bottom is to refuse to play the game – and create a new system in which we race to the top. It is bizarre that the Berlin Consensus fundamental policy – slashing working class wages – is a straight steal from Marx’s critique of capitalism. The Berlin Consensus’ labor policy is premised on the inherent downward pressure on working class wages imposed by the global “reserve army of the unemployed.” The Berlin Consensus’ further problem is that the enhanced global competitiveness that other EU nations are supposed to obtain by sharp cuts in working class wages are supposed to turn EU nations into massive net exporters like Germany. This is a classic example of the fallacy of composition. We cannot all be net exporters. Indeed, Germany’s large net trade surplus makes it far harder for other EU nations to become net exporters. The Berlin Consensus cannot “succeed” even under its own terms for the EU, much less the global economy.

Fourth, who is the only “expert” cited to support the proposition that France has no alternative, it must balance its budget during a recession in order to avoid becoming “the next sick man of Europe”? That would be a representative of the Peterson Institute’s international program. The original Peterson Institute was established for the purpose of lobbying for balanced budgets. The Peterson Institute researcher continues the medical metaphor under which austerity is the essential but bad tasting medicine that the wise Germans took and cured their economy and are prescribing for the frivolous French. The Peterson Institute loves the Berlin Consensus. The Peterson Institute is one of the groups claiming that U.S. is minutes away from hyper-inflation and that only slashing Social Security, Medicaid, and Medicare can save the nation. Meanwhile, we continue to borrow at historic low interest rates. Their predictions about hyper-inflation and high U.S. interest rates have consistently proven false. Krugman’s (and UMKC’s) predictions about interest rates and hyper-inflation have proven correct.

I don’t mind the journalists quoting Jacob Funk Kirkegaard of the Peterson Institute. I object to his statements being treated as indisputable fact. Reading recent columns he has posted on the Peterson web site demonstrates (1) that he reads Krugman, (2) he admits former ECB President Trichet’s claims that austerity produced more rapid and successful economic recovery are false, (3) he admits that austerity produces deeper recessions and has forced the periphery into depression, (4) he discloses that his priority for the EU is to break its unions, particularly in Spain, so that working class pay can be reduced substantially and employment expanded, and (5) he argues that the reason he supports austerity for Europe is that it is a political act required to convince Germany to support a revised, more stable euro. He has an interesting background as an ex-intelligence officer for the Danish army.

The dogmatic austerity devotees who consistently get it wrong are treated as undisputed authority while the New York Time’s own expert who has consistently gotten it right, and has a Nobel Prize in economics, is ignored. (Krugman was formerly more of a deficit hawk. He now takes into account how different sovereign monetary systems, e.g., the U.S. and Japan, are from currencies like the euro and is more of a dove. UMKC economics consists of deficit “owls.”)

A related New York Times story about investor reactions to Hollande’s victory buys into austerity and the assault on working class wages even more wholeheartedly.

It cites no contrary views by economists. It does not even mention austerity throwing the euro zone back into recession and periphery into depression. It embraces TINA and the Road to Bangladesh strategy. It sees no irony in this, warning that unless France makes deep cuts to working class wages: “‘France runs the risk of becoming more of a periphery country than remaining in core,” Mr. Kirkegaard of the Peterson Institute said.” So the only way for France to avoid becoming like the periphery is to force cuts in working class wages to levels where France can outcompete China – and Germany and Bangladesh. And what does Kirkegaard think the Spanish will be forced to do under this strategy? They’ll have to make deeper cuts than the French. And what will the French do in response to the Spanish working class wage cuts? And what will Vietnam and Bangladesh do if the EU nations cut their working class wages to levels that allow them to “win” the race to the bottom? Won’t they be forced to react by further cuts in their working class wages? Who is going to buy Germany’s VWs under this strategy? To sum it up: in order to avoid becoming a part of Europe’s periphery France’s working class must become part of the third world.

I will close by using the medical metaphor. Bleeding patients, or nations, to cure them is quackery that harms the patient and the nation. Economists pushing the Berlin Consensus violate the first principle of the Hippocratic Oath – do no harm. Paul Krugman needs to run a teach-in at the New York Times for its international business reporters. They are helping the economic quacks who prescribe the snake oil of austerity and have as their real objectives (1) gutting Social Security, (2) destroying unions, (3) slashing working class wages, and (4) making the one percent ever richer and more politically dominant.

http://neweconomicperspectives.org/2012/05/new-york-times-reporters-need-to-read-krugmans-columns.html

Who Bailed Out Whom in Greece?

2012-05-05T00:12:00.003+03:00

We often say that “Greece got a bailout.” But is that really accurate? If you think you understand the Greek bailout, I would suggest you take a close look at the numbers below. What I have tried to do is look at Greece’s finances for 2010 and 2011 to answer three questions: how much money did Greece need in 2010 and 2011? For what purpose? And who provided that money? The answers are really interesting.

The analysis is based almost exclusively on published reports by the International Monetary Fund. Since the numbers do not quite add up (in the IMF’s own documents!), I have made some minor adjustments and I have also, in one case, made an estimate (the split between interest paid to foreign investors versus Greek investors). Where possible, I have consulted third-party sources such as the Bank of International Settlements. I believe the margin of error in the calculations is pretty small.

First, let’s examine Greece’s financing needs. Broadly speaking, a government has four cash needs: (1) to finance expenditures (wages, pensions, services, etc); (2) to pay interest to holders of debt; (3) to repay investors whose debt is maturing; and (4) to finance one-off needs, which for Greece, the IMF defined as including “bank assistance and stock-flow adjustments.”

Overall, Greece needed about €114 bn in 2010 and 2011. Of that, however, only €53 bn stayed in Greece to finance government spending, provide assistance to banks, pay interest to Greek creditors or repay maturing bonds held by Greeks. More than half of Greece’s cash needs, or €61 bn, went to either pay interest to foreign creditors or repay maturing debt held by foreigners.

Now let’s look at where this money came from. Around €41 bn came from private investors, of which 80% were Greek. The rest of the money, €73 bn, came from the bailout provided by the official sector. Germany, France and Italy supplied €36.6 bn, the rest of the Eurozone members provided €16.5 bn, and the IMF provided €19.9 bn.

Looking at the numbers this way, the EU and the IMF gave Greece €73 bn, of which €61 bn went to pay foreign investors who held Greek debt (via interest payments or via receiving cash when their bonds matured). If you mentally split the world between Greece and the rest, then Greece needed €53 bn “for itself” to pay the bills, pay interest to its own investors and honor the debt held by its own people.

The Greek government was able to raise €41 bn of that €53 bn from private investors in the market (in fairness, this was partly aided by the European Central Bank making cheap credit available to Greek banks). But in a very narrow way, the cash provided by foreign governments and the IMF to support Greeks per se was roughly €12 bn – the rest went to foreigners. Even if you assume that all market financing was made possible by ECB-funding, more than half the assistance was still geared to foreign investors.

I have no intention to draw any grand conclusions from this analysis. But it is important to precise when we talk about matters that have acquired an extraordinary political and emotional significance. And instead of merely saying “Greece gets a bailout” we can be more accurate about who is providing how much money and for what purpose. This crisis requires nothing less of us.

http://www.greekdefaultwatch.com/2012/04/who-bailed-out-whom-in-greece.html

IMF Opens Its Doors to Wider Dialogue (ερε δουλεμα που πεφτει)

2012-05-03T18:17:00.003+03:00

The crisis in the euro zone, natural resources management, regulation of international capital flows, inclusive growth, and poverty reduction were front and center as the IMF heard from a cross-section of society.

A record number of representatives at the2012 IMF-World Bank Spring Meetings from civil society organizations (CSOs), government officials, parliamentarians, academics, and labor representatives had the chance to exchange views with IMF staff on topics related to the global economy.

The meetings brought together more than 6,500 people from the around the world who attended some 280 official events.

Twenty-eight CSO representatives and academics from 22 countries received fellowships to attend the meetings, thus broadening the diversity of the participants in various events, particularly the CSO Policy Forum.

The Civil Society Fellowship Program has helped strengthen and deepen IMF’s interaction with civil society organizations from around the world, but especially with developing and emerging countries. The program has now been extended to academics and youth leaders.

“The fellowships are important to the Fund,” said IMF Deputy Managing Director Nemat Shafik, addressing a CSO reception on April 19. “The IMF is firmly committed to our ongoing engagement with the civil society community.”

Regulating capital flows

How emerging market countries regulate and benefit from capital flows was the subject of a panel discussion organized by the Bretton Woods Project. Vivek Arora, Assistant Director in the IMF Strategy, Policy, and Review Department participated as a discussant in the session. Peter Chowla, coordinator of the Bretton Woods Project and Kevin Gallagher, Associated Professor at Boston University appreciated the evolution in the IMF’s approach to capital flow issues in recent years.

Arora outlined the IMF’s work program so far on policies related to capital flows and welcomed the event as part of the ongoing global dialogue on the issue. He noted that a country’s appropriate degree of openness to capital flows depends on its specific circumstances, particularly its institutional and financial development, and full liberalization may not be an appropriate goal for all countries at all times.

Nonetheless, countries with extensive capital flow restrictions are likely to benefit from further liberalization.

In managing capital flows, it is important for countries to strengthen their capacity to absorb inflows and implement appropriate macroeconomic and financial sector policies. Capital flow management measures can be useful for managing inflow and outflow pressures, but they are a complement and not a substitute for more fundamental adjustment.

Renewed focus on poverty reduction and growth

At a session organized by Save the Children Norway, Development Finance International presented findings of a recent study on IMF-supported programs in low-income countries. The study suggests that there has been limited progress in enhancing the focus on poverty reduction and growth since the IMF’s lending instruments were reformed in 2009.

Hugh Bredenkamp, Deputy Director in the IMF Strategy, Policy, and Review Department, challenged the report’s analysis of health and education spending, which the evidence shows has actually risen faster in countries with IMF-backed programs than in other low-income countries.

He agreed, however, with the report’s recommendations on improving the monitoring and reporting of high-priority spending, while cautioning that the IMF should not try to micromanage member countries’ expenditure frameworks.

The IMF’s role in fighting poverty was recognized by Norwegian Finance Minister Sigbjørn Johnsen while Nuria Molina, Director of Policy and Research for Save the Children UK, remarked that the “time has passed where the Fund was saying it has nothing to do with poverty reduction.”

Inclusive growth

At a roundtable on jobs and inclusive growth, Prakash Loungani, Advisor in the IMF Research Department, provided an overview of the work of an IMF working group on the topic. The group’s initial report is expected to be released in May.

The working group is considering things like including enhanced coverage of labor market issues in IMF economic surveillance; a reassessment of the impact of policies, including labor market policies, on employment and growth; and a focus on fostering growth.

“We now know that good policies lead to inclusive growth,” Loungani said. “If growth is not inclusive, it doesn't lead to a sound macroeconomic environment.”

During the roundtable, CSOs and academics expressed approval of the IMF’s focus on these issues, but urged the working group to continue consulting with civil society from various regions on its proposals. Attendees suggested that the working group look at the role of education, productivity, and small and medium enterprises in lowering unemployment and boosting growth.

Elizabeth Stuart of Oxfam also recommended that the IMF look at policies that turn growth into inclusive growth, in particular those relating to social spending. “There is consensus in the literature that agriculture spending, subsidies, social protection, and access to services need to be in place to create growth that reduces poverty and inequality,” she said.

Eurozone debt crisis

At an event co-organized by the Center for Economic Policy Research (CEPR), Mahmood Pradhan, IMF European Department Deputy Director addressed criticism of IMF’s role in the international response to sovereign debt crisis in Greece and other Euro zone countries.

While the reforms undertaken with assistance from the European Union, European Central Bank, and IMF are not easy, the alternative, he said, would be worse. He noted that even if Greece were to exit, as CEPR’s Mark Weisbrot suggested as a potential policy alternative, the country would still have to borrow money to finance its primary deficit. Given the massive cross-border financial exposures in the euro zone, a Greek exit would almost certainly have an impact on the rest of Europe.

Managing natural resources

A discussion on the work of the IMF on natural resource management, a critical issue for many low-income countries, looked at ways to turn substantial resource assets into greater economic growth and higher living standards.

IMF Fiscal Affairs Department Deputy Division Chief Philip Daniel said the taxation of natural resources must be tailored to the unique nature of the extraction activity, with particular attention devoted to recognizing that the revenues are generated by the transformation of finite assets into financial ones.

A well-designed tax system must consider a country’s circumstances and incorporate key principles to guide public policy on extractive industries tax design. It should also include an appropriate mix between royalty-type and rent-based taxes.

A recent seminar on natural resources management organized by the IMF and the Democratic Republic of Congo in Kinshasa concluded that to seize the opportunities that natural resources wealth offers requires strong economic policies and institutions to keep governance concerns at bay.

The IMF recently concluded a consultation process with the private sector, civil society, academics, and others to gather ideas about the best use of natural resources for boosting living standards in developing countries.

Parliamentarians look beyond crisis

A diverse group of 21 Members of Parliament from 18 different countries participated in a one-day workshop, as part of a program organized with the Parliamentary Network on the World Bank and IMF.

Participants focused on the challenges for developing countries to deal effectively with the current crisis. IMF Director of External Relations Gerry Rice explained how the global financial crisis has placed the IMF at the center of the international crisis resolution effort together with the G-20. “The high degree of international collaboration has pulled the international community back from the abyss. For the IMF, the crisis has been an opportunity to change and show that it has learned from past mistakes.”

Interaction with Executive Boards

CSOs and academics also had the opportunity to have a candid exchange of views with members of the IMF and World Bank Executive Boards. Topics raised during the roundtable discussion included the European crisis; the need for jobs; social accountability; and climate change.

Executive Directors representing Africa, Greece, Germany, Nepal, Mexico, Japan, and the Nordic countries participated in the discussion.

http://www.imf.org/external/pubs/ft/survey/so/2012/new050212a.htm

ENDURING THE PAIN IN SPAIN

2012-05-03T18:15:00.002+03:00

There is no doubt that the crisis in Spain is getting worse, threatening to drag down the rest of Europe, and ultimately the US, with it. Over the weekend, Standard and Poor’s downgraded the debt of 11 Spanish banks, after downgrading the country’s sovereign debt weeks earlier. Further downgrades are a given so expect them in your regular Monday morning headlines. Expect more deposit flight from banks and spiking of sovereign bond interest rates.

The country is now officially in recession, as are seven other countries, including Great Britain. Spain’s unemployment rate is now at 24%, the peak seen in the US during the great depression, and is 50% for those under 25. It all adds up to more deposit flight from banks and spiking of Spanish sovereign bond interest rates.

It was easy to dismiss the long, tortuous descent into the Greek bond default as irrelevant and just a favorite topic of a few journalists, as it only accounted for 1.3% of European’s $16.7 trillion GDP. That makes Greece as about as important to the continent’s total fiscal health as the bankrupt cities of Vallejo, CA, Harrisburg, PA, Central Falls, RI, and Birmingham, GA, combined, are to the US.

Spain is another kettle of fish, with the fourth largest economy accounting for 6% GDP. Spain is an even larger portion of the European financial system, with bank assets at $3.7 trillion.

Don’t expect an improvement in the Spanish economy any time soon. It just passed one of the most austere budgets in European history, attempting to roll back decades of over spending and under taxing in one shot. While austerity is great for balancing the budget for the short term, it also triggers recessions which create longer term structural problems, as it has already done in Great Britain and Greece.

The only possible growth strategy for Europe is for the private sector to ramp up spending while the governments are cutting back. In Europe, that means getting rich countries like Germany to spend more to create end demand for poor countries. However, in reality, companies run the opposite direction, hunkering down during times of economic uncertainty.

There is also an additional internal conflict afflicting Europe in that the debt heavy counties of south need inflation to devalue their debt, but deflation to restore their international competitiveness and growth. It all means that the Spanish downturn will be longer and weaker than previously thought.

In December there was a big splash when the €500 billion LTRO was announced to take distressed sovereign debt off the hands of the banks at extremely generous prices. That has since fizzled. Now hedge funds are betting that the other shoe will fall. A second LTRO is a given, but how long will it take them to realize this and how far will bond prices plummet until we get there?

Don’t count on any US bailouts to ease Spanish pain, especially during an election year. Treasury Secretary, Tim Geithner, personally told me last week that Europe was a rich continent and had adequate resources to solve its own problems. Translation: no cash for the beleaguered continent.

It all makes my short position in the Euro through the (FXE) look pretty interesting. Some of the weaknesses mentioned above are already well known and priced into the currency markets, but not all of them. And the Europeans have a seemingly endless talent for discovering new structural problems as time goes on. Those unintended consequences can be a bitch.

With eight governments having fallen since the crisis began, and a ninth in France certain to go this weekend, who will be next is anyone’s guess. We have all become Spanish bond traders, whether we want to or not. Watch those screens.

http://www.swingtradingdaily.com/2012/04/30/enduring-the-pain-in-spain/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+swingtradingdaily%2FhfnE+%28Swing+Trading+%C2%BB+Stocks%29