from David Ruccio
It all started with a simple question about the Greek debt crisis: “who owes how much to whom?”
Well, as it turns out, it may be a simple question, but there’s no simple answer—at least not an answer that’s easy to formulate based on all the simple-minded reporting and background essays available in the media and from various economists.
Most of what I’ve been reading refers to “Greek debt” owed to the rest of the “Europe.” But, with a background in Latin America, I know that for the most part (unless and until the debt is officially restructured) countries don’t borrow from other countries and countries don’t owe debt to other countries.
from current issue of the WEA Newsletter
By Yannis Dafermos, Marika Frangakis and Christos Tsironis, Conference Leaders
Between 20th October and 21st December 2014, the World Economic Association organised an online conference about the crisis and the austerity policies in Greece. The conference covered issues related to the social and economic effects of austerity, the 2012 haircut of the Greek public debt and the prospects of the Greek crisis. The papers of the conference, which are available here, provide valuable insights into these issues, as well as useful pointers with regard to the on-going crisis one year later. Here we recap some of the main points raised during the conference and we look into the current state of affairs. Read more…
Creditors might have burned something like 40 to 60 billion Euro of their wealth by “maintaining ELA (Emergency Liquidity Assistance) to Greek banks at the current level”. Greek banks need ELA to be able to buy Euronotes to put in the ATP machines and to enable Greek to wire money abroad. Greek are not able to do anymore, or only to a very limited extent and turning off the ELA tap has sent the Greek economy into a downspin. Again. GDP might decline with another 5 to 10% (even when we reopen the ELA tap today), the grey and black economy will increase, taxes will dwindle and unemployment might top 30 or even 35%. While, using the creditor logic, Greece did not do worse than other indebted countries (graph). To he contrary. As I see it, Greece has become a failed state already Read more…
Finance as Warfare
by Michael Hudson
Published by WEA eBooks 1 July 2015
To simple people it is indubitable that the nearest cause of the enslavement of one class of men by another is money. They know that it is possible to cause more trouble with a rouble than with a club; it is only political economy that does not want to know it.
— Leo Tolstoy, What Shall We Do Then? (1886)
The financial sector has the same objective as military conquest: to gain control of land and basic infrastructure, and collect tribute. To update von Clausewitz, finance has become war by other means. It is not necessary to conquer a country or even to own its land, natural resources and infrastructure, if its economic surplus can be taken financially. What formerly took blood and arms is now obtained by debt leverage.
The creditor’s objective is to obtain wealth by indebting populations and even governments, and forcing them to pay by relinquishing their property or its income. Direct ownership is not necessary. Fully as powerful as military force, debt pressure saves the cost of having to mount an invasion and suffer casualties. Who needs an expensive occupation against unwilling hosts when you can obtain assets willingly by financial means – as long as debt-strapped nations permit bankers and bondholders to dictate their laws and control their planning and politics?
Such financial conquest is less overtly brutal than warfare waged with guns and missiles, but its demographic effect is as lethal. For debt-strapped Greece and Latvia, creditor-imposed austerity has caused falling marriage rates, family formation and birth rates, shortening life spans, and rising suicide rates and emigration. Read more
The relevance of wealth and income inequality has been acknowledged by unorthodox writers for some time. The recent success of Piketty’s book (2014) shows that the wider public is also interested in this issue. Piketty’s 15-year program of empirical research conducted in conjunction with other scholars analyzed the evolution of income and wealth (which he calls capital) over the past three centuries in leading high-income countries. Among the lessons, he highlighted; Read more…
from Yanis Varoufakis
- Negotiations have stalled because Greece’s creditors (a) refused to reduce our un-payable public debt and (b) insisted that it should be repaid ‘parametrically’ by the weakest members of our society, their children and their grandchildren
- The IMF, the United States’ government, many other governments around the globe, and most independent economists believe — along with us — that the debt must be restructured.
- The Eurogroup had previously (November 2012) conceded that the debt ought to be restructured but is refusing to commit to a debt restructure
- Since the announcement of the referendum, official Europe has sent signals that they are ready to discuss debt restructuring. These signals show that official Europe too would vote NO on its own ‘final’ offer.
- Greece will stay in the euro. Deposits in Greece’s banks are safe. Creditors have chosen the strategy of blackmail based on bank closures. The current impasse is due to this choice by the creditors and not by the Greek government discontinuing the negotiations or any Greek thoughts of Grexit and devaluation. Greece’s place in the Eurozone and in the European Union is non-negotiable.
- The future demands a proud Greece within the Eurozone and at the heart of Europe. This future demands that Greeks say a big NO on Sunday, that we stay in the Euro Area, and that, with the power vested upon us by that NO, we renegotiate Greece’s public debt as well as the distribution of burdens between the haves and the have nots.
from Asad Zaman and the WEA Pedagogy Blog
We live in a world awash with money. Not only can the banks create 20 times more money than the amount they receive as deposits, but an enormous shadow banking system has come into existence which creates massive amounts of credit without any regulatory restrictions. At a time of the global financial crisis, the value of financial instruments was more than 10 times the world GDP. Daily trade in foreign exchange is around $4 trillion, while actual merchandise trade is only $50 billion. This huge excess clearly represents speculation and gambling, rather than currency exchange for the needs of trade.
The ways of the super-rich Lords of Finance are far beyond the ken of ordinary mortals like you and I. Winning and losing bets in millions of dollars daily are just a small part of the thrill of living. One of the important tools they use is buying on margin. This means that you can buy $50 worth of stocks or foreign currency by paying just $1. In effect, the dealer loans you the remaining $49 by using your stocks as collateral. If the stock goes up to $51, you can sell and get out with a quick 100 per cent profit on your investment. If the stock declines to $49, you again sell and get out of the market, losing your marginal payment of $1. Read more…
from Dean Baker
In response to questions from people everywhere, I will share a couple of quick thoughts on the possible departure of Greece from the euro. First, several people have raised the possibility of Greece being thrown out of the euro.
There is no way that Greece can literally be thrown out of the euro in the sense of being prohibited from using the euro. Any country has the option to use any currency it chooses. This was an issue that came up in the referendum over Scottish independence. The independence movement wanted to leave the United Kingdom but to continue to use the British pound as its currency. U.K. Prime Minister David Cameron said that the Scots could not keep the pound if they left the United Kingdom. Read more…
After 2008, GDP growth in almost all Eastern European countries disappointed. Greece is in a class of its own, Poland and Slovakia did well (graph).
Between 2007 and 2014, economies like those of China and India were spurting ahead – but in countries like Lithuania and Romania production was barely at the 2008 level while in countries like Latvia, Croatia and Slovenia (austerity darlings, by the way) it was below the post crisis peak… Not all growth is good – but Read more…
Why all tis attention for Greece and not for Croatia or Slovenia? Because Greece is where the main battle is fought. But on this blog more attention will be paid to other countries. Anyway: a Greek referendum about the euro is a very good idea – but this might be the worst time to hold one. You can do this when you still have a lot of cash somewhere. Or when you’re already in default. But announcing a referendum when you’re on ELA – it’s not a good idea. Surely when the creditors have one overriding goal: they want you out of government. And they play to win. Which means that you have to kill them. Or lose. Inflicting a wound and crippling them (which surely happened) is not enough.
A) Breaking (and I can’t stress enough how important this is): the wound is really deep, as the ECB changed its mind in a fundamental way. Up till now the ECB has been adamant. THE EURO IS IRREVERSIBLE, adopting it is irrevocable. But they changed their mind (and historians of course knew better all the time). Yesterday, an interview with Benoît Cœuré, one of the highest ranking civil servants of the ECB, started with this sentence: La sortie de la Grèce de la zone euro, qui était un objet théorique, ne peut malheureusement plus être exclue. Translation: Grexit can’t be excluded, anymore. Read more…
from Yanis Varoufakis
The Eurogroup Meeting of 27th June 2015 will not go down as a proud moment in Europe’s history. Ministers turned down the Greek government’s request that the Greek people should be granted a single week during which to deliver a Yes or No answer to the institutions’ proposals – proposals crucial for Greece’s future in the Eurozone. The very idea that a government would consult its people on a problematic proposal put to it by the institutions was treated with incomprehension and often with disdain bordering on contempt. I was even asked: “How do you expect common people to understand such complex issues?”. Indeed, democracy did not have a good day in yesterday’s Eurogroup meeting! But nor did European institutions. After our request was rejected, the Eurogroup President broke with the convention of unanimity (issuing a statement without my consent) and even took the dubious decision to convene a follow up meeting without the Greek minister, ostensibly to discuss the “next steps”.
Can democracy and a monetary union coexist? Or must one give way? This is the pivotal question that the Eurogroup has decided to answer by placing democracy in the too-hard basket. So far, one hopes.
Intervention by Yanis Varoufakis, 27th June 2015 Eurogroup Meeting
Colleagues, Read more…
Update: Yannis Varoufakis about the Syriza mandate (and Grexit is not a legal option). Too bad that Jeroen Dijsselbloem doesn’t even try to be his intellectual opponent.
Mario Draghi, president of the European Central Bank and a natural born winner, lost.
It is a bitter loss.The Euro project as it was supposed to be is in tatters. The Euro turns out to be reversible. Since the introduction of the Euro macro economic volatility in the Eurozone increased, growth declined, unemployment reached levels not seen for seventy years and banks have still not been properly regulated. Also, Eurozone wide income transfers (pensions, unemployment benefits, deposit guarantees), which are needed for social reasons as well as to stabilize the Euro and the economy, are a more distant dream than ever. Reckless private money creation of the Irish/Dutch/Baltic type still can happen anywhere at any moment. And grotesque imbalances persist: the Dutch current account surplus is, at the moment of writing, supposed to be 13% of GDP. or 21 billion Euro in the first quarter of 2015.The Euro was designed to decrease national differences and to curtail governments by invoking market discipline. The opposite happened (but democracy was curtailed). Read all about it: Wynne Godley, in 1992 (!):
I am driven to the conclusion that such a view – that economies are self-righting organisms which never under any circumstances need management at all – did indeed determine the way in which the Maastricht Treaty was framed. It is a crude and extreme version of the view which for some time now has constituted Europe’s conventional wisdom (though not that of the US or Japan) that governments are unable, and therefore should not try, to achieve any of the traditional goals of economic policy, such as growth and full employment. All that can legitimately be done, according to this view, is to control the money supply and balance the budget. It took a group largely composed of bankers (the Delors Committee) to reach the conclusion that an independent central bank was the only supra-national institution necessary to run an integrated, supra-national Europe. Read more…
On Voxeu Arvind Subramanian, India’s chief economic advisor, argues that: “for monetary transmission to work, both consumer prices and producer prices are relevant, but for different sets of agents.” while consumer prices show, in India, a much higher increase than producer prices.”. Which means that the central bank should not just look at consumer price inflation but also at producer price inflation. In the June issue of The Journal of Economic Issues I stress a similar point in “Metrics Meta About a Meta Metric: The Consumer Price Level as a Flawed Target for Central Bank Policy”, though going one step further (fifty free downloads here). From the abstract:
Inflation targeting is currently the policy of choice for central banks. This policy invariably targets consumer price inflation, which is only one of many available price level indices (such as prices of new investments and house prices). As there is no stable relationship between these price levels, and as differences in developments between the different price levels might induce destabilizing behavior, there is no reason why “low and stable” consumer price inflation should guarantee monetary and financial stability. Following John Maynard Keynes, a “low and stable” increase of average nominal wages might do a better job. As price levels are designed to estimate the purchasing power of spending power and as income, and spending power are used to not just consume or invest but also to pay down many kinds of (gross) debt, it is advisable to use a joint definition of monetary and financial stability, which combines stable purchasing power of monetary income with a stable ability of households and companies to pay off debts.
Jens Weidmann, boss of the Bundesbank, wants to restrict the power of the Greek central bank to provide Emergency Liquidity Assitance (ELA) to the Greek banks as he is afraid that Greek banks will use these reserves to purchase short-term government debt (at this moment total assistance is about 89 billion). Sigh. Greek banks indeed own some short-term government debt. But the Greek government was, as late as april 2015, in fact still funding the banks too, with as much as 9 billion euro (graph 1). Which comes on top of the tens of billions of income transfers from the Greek government to the Greek banks. And the Greek banks do not need ELA to purchase government debt but to be able to provide the ATP’s with cash (which they have to buy from the central bank) as especially Greek households are exchanging deposit money for cash (between november 2014 and april 2015: about 21 billion, at this moment it might be about 30 billion). This bank run is clearly triggered the lack of credibility of the European Central Bank (look here). Restricting ELA will disable households to take their money out of the banks and will therewith cause a large problem for Greek households in case of Grexit, when deposit money will be redominated (unlike Euronotes). It’s hard to believe that Weidmann does not understand this (though I’m not too impressed with his accounting skills, to put it mildly). Which means that he is trying to engineer a severe, unnecessary and cruel haircut of Greek deposits – the opposite of debt relief. First, you trigger a bank run, than you disable people to take their money out of the bank – while the very bankrun you engineered increased the risk that this bankmoney will loose value….
Links. Reviving cities, declining international trade, the accounting side of Grexit and the trouble with credit rating agencies.
Remco Schrijvers about the accounting side of Grexit (ELA is created by the bank of Greece and not a Greek liability to the Eurosystem…). Draft!
Henri de Groot e.a. on Voxeu about the revival of cities (and Henry George)
Why have cities emerged as hubs of economic activity in this era in which the internet seems to be the ‘cul-de-sac’ of physical distance? .. Several authors point in the same direction, namely spill-overs and the agglomeration of human capital. Gennaioli et al. (2014) show how within countries, human capital clusters in a small number of regions. The premium in regional GDP per capita is 20% and more per year increase of the mean education level in a region. This return is far above any reasonable estimate of the private return to human capital. Desmet and Rossi-Hansberg (2008) focus on the role of general purpose technologies. In the 1920s and 1930s, that was electricity. Since 1990 it is information technology….Knowledge spill-overs imply that cities are a focal point of location-driven externalities. Land rents are the expression of these externalities. A location’s rent is high not because of the characteristics of the location itself, but because of what happens at locations in their direct proximity. This is a clear example of an externality, the value of your property depends on the actions taking by the owners of neighbouring property. These externalities provide a textbook argument for developing public policy at the level of the city and why a Henry George tax on the value of land is most efficient.
The Syriza proposal to The Institutions has been published by Ekhatimerini. Some quick remarks (from the top of my head, I did not check):
A) The Institutions could have seized the opportunity to combat corruption and rent seeking behaviour by oligarchs and banksters (some tax exemptions are supposedly enshrined in the Greek constitution…) but they did not put pressure Syriza to do what Syriza wanted to do and clearly wasted the opportunity.
B) The financial proposals are not sound as they are ‘parameteric’, i.e. as they do not take all kind of macro (and micro!) economic consequences into account.
C) As B) was the most important (and totally right) criticism of Syriza of existing measures this means that the proposals indeed surrenders (but see below). FYI: the macro economic failure of earlier programs is clearly shown by the extremely large difference between the calculated and the (much larger) real consequences of austerity. The micro economic insufficiency is clearly shown by the weird insistence of The Instiutions that average, economy wide labour costs are a measure of competitiveness – which leads to the idea that cutting wages of teachers enhances the competitiveness of manufacturing. The lack of macro (and micro!) economic logic of the proposals is a hallmark of all Eurozone austerity programs: so called ‘reforms’ of the labour market and the lack of reform of financial markets consistently both do not have a sound economic basis.
1) Regarding privatisations and tax evasions and a fiscal council the proposals are pretty much the same as earlier proposals from about three months ago.
2) On the labour market there are no real proposals
3) There are some very explicit remarks about banks in the sense that the government has to respect the private management of the banks blablabla and ‘no fiscal policies actions would be taken that will undermine the solvency of the banks’ (no need to, of course, we can leave that to the bankers themselves. And didn’t the Greek government veryu recently inject about 24 billions of tax payers money into these same banks – but that’s of course not disrespecting ‘private management’). This feels a bit like the Greek government has been forced to write this.
4) There is a remarkable lack of new wealth taxes (a little regarding yachts, but that’s peanuts).
5) Vague but extremely important: “The authorities will further develop and swiftly implement a comprehensive strategy for addressing the issue of non-performing loans”. This is a very important issue which indeed has to be addressed. But Ireland and Cyprus show that The Institutions have a clear idea about such policies: creditors come first and second (in Ireland in fact first, second, third, fourth, fifth, sixth and seventh – there are seven ‘experimental’ stages to squeeze money from creditors before a creditor can default). In combination with point 3 and accepting the idea that point 3 has been forced upon the documents by The Institutions it seems that The Institutions try to impose a very creditor centered system of dealing with non-performing loans on Greece, just like they try to do in Cyprus and Ireland. The Europe of the banks. Somebody seems to have forgotten that ‘bank‘ and ‘bankrupt‘ have the same historical etymology: when a moneylender couldn’t pay he did not get loads of government money but his bench was broken and his licence revoked.
6) The tax increases (VAT) and spending decreases (pensions): complicated. You have to know a lot about the details of the Greek VAT end pension system to be able to make a clear assessment of these proposed measures. With that in mind: as I see it the increase in the pension age is a necessary step which, by the way, is totally consistent with traditional socialist ideas about labour: jobs can and have to be decent and work can be dignified – no reason for early retirement. But such measures are at the moment not urgent from a macro economic point of view, as the unemployment rate is 27%. It might however help people with low pensions as they can work longer. Increasing VAT on the islands (tourist destinations!) is bonkers – tourism is very price sensitive. Increasing other VAT rates is, in a deeply depressed economy, very counterproductive: tax wealth (land?) instead. Increasing (medical) costs for rich pensioners might be fair but considering the fact that most pensioners are poor it’s just another hit to their purchasing power (though generic medicines may become cheaper) it does seem as if the vulnerable are hit. Which is of course the explicit political intention of The Institutions: weaken the core constituency of Syriza!
Aside: The Institutions want countries to install an independent ‘fiscal watchdog’, like the Dutch Centraal Planbureau (CPB) or the USA CBO. Though the Dutch CPB is decreasingly independent, it still takes heed of micro and macro consequences of policy measures. It won’t be long before The Institutions will notice this and start to press for an increasingly legal instead of economic nature of these watchdogs.
The Levy Institute. Back in 2008 the Fed did not have a clue about shadow banking (though shadow banks are called ‘banks’ for a reason…), according to Matthew Berg who scrutinized the 2008 minutes of the meetings of the Fed. Aside – in Europe, at least part of securitized mortgages (which were shifted from the balance sheets of the official ‘MFI’ banks to the balance sheets of shadow banks) were even removed from the estimates of money and credit, as they were not visible on the balance sheets of the official banks anymore, which means that monetary statistics underestimated the growth of money and credit in those days. Clueless in Frankfurt.
The Worldwatch institute. About a two months ago it published its ‘flagship’ The state of the world in 2015 report about the interplay between economic and environmental issues. An excerpt:
“The very pillars of contemporary success—among them, high degrees of specialization, complexity, and manifold interconnections—could very well turn out to be humanity’s Achilles heel. Specialization works well only within certain tightly controlled parameters, but it could be useless under changed circumstances. Complexity and interconnections multiply the strengths and advantages of a viable system, but they also make it susceptible to a rapid cascade of destabilizing impacts. Such a highly productive system is actually low on resilience because it focuses on constantly reducing any slack or redundancy—the exact features that allow for resilience to materialize. Author Thomas Homer-Dixon quotes Buzz Holling, a leading Canadian ecologist, who has warned that the longer a system is locked onto a trajectory of unsustainable growth, “the greater its vulnerability and the bigger and more dramatic its collapse will be.” Seen through this broader lens, it is clear that the challenge for humanity today is no longer anything like what it faced in the 1960s and 1970s, when developing pollution abatement technologies and lessening the degree to which resources were wasted provided a more-or-less adequate answer to the most pressing problems of the day. The world now needs to adopt solutions that change the entire system of production and consumption in a fundamental manner, that move societies from conditions of energy and materials surplus to scarcity, and that develop the foresight needed to recognize still-hidden threats to sustainability. This goes far beyond the realm of technical adaptations, and instead requires large-scale social, economic, and political engineering—in an effort to create the foundations for a more sustainable human civilization.”
from: Bruce Edmond
One of the areas that classical economics has been very weak is in the modelling and understanding of the value of goods and services.
Mostly it is assumed that price is a good proxy for value – this makes things a lot easier. However this formulation is clearly inadequate if given a moment’s thought – if the price was the value nobody would be bothered to sell anything since the value they gained (whether directly or indirectly via the IOU of money) would be the same as what they lost. The reality is this: the value to the buyer is greater than the price, so that they actually bother to buy the item or service, whilst for the seller the opposite is true (so they want to sell). Some of this is due to diminishing returns – the increase in value from none to one apple is greater than from 1000 to 1001 apples (even if the apple has the same price). However diminishing returns are only part of the story of value.
The other move is to represent value as a 1D measurable utility. This is definitely an advance on price, since this can be different for different people etc., however this is either meaningless (there is no mapping from the details of the situation/state/ownership and utility) or unrealistically limited (e.g. a utility function is assumed with certain properties). For example, it is not clear that value can be reduced to a 1D measure – the amount of love we receive, the amount we contribute to society and the money we have may not be commensurable. That is, there may be no meaningful ‘exchange’ rate between these. Yes one may make comparisons when one has to make a decision, but this may be so sharply context-dependent that this comparison is not usefully formalisable or measurable.
Today, the presidents of five European Institutions presented a “Roadmap for the future of the Economic and Monetary Union“. According to Mario Draghi,
“The report describes how we can move from the current system of coordination by rules to joint decision-making within common institutions … We need a quantum leap in European integration. We need to address the fragilities of our economies; to ensure that divergence will become convergence again; and to safeguard the irreversibility of monetary union. Our report provides the roadmap for this.”
* The ideas are not new. Look at this post from over three years ago.
* The ideas will lead to the de facto abolishment of independent nation states in the Euro area. A quote from a three year old speech from José Manuel González-Páramo, member of the board of the European Central Bank (emphasis added):
In other words, the euro area is responding to the crisis by creating a new and more comprehensive model of economic governance. This is aimed at preventing imbalances in all policy areas before they can trigger crises – and managing crises more effectively when they do arise. In many ways, this response is sui generis and departs from the template we associate with political federations. For example, the “two pack” gives the Commission the power to demand the kind of reforms that the U.S. federal government could not demand of a U.S. state. Moreover, the federal government would not be able to sanction a state if, for example, its tax code was leading to a local housing bubble. This is now not excluded in the euro area under the Macroeconomic Imbalances Procedure.