Home > Uncategorized > Links. Schauble lets bankers loot the German public, dynamic multipliers.

Links. Schauble lets bankers loot the German public, dynamic multipliers.

1) On the Slack wire blog Josh Mason states, in a post about how restraining domestic demand led to current account surpluses in Europe (emphasis added): “Personally, I don’t think that the masters of the euro care too much about the outcome of the struggle for competitiveness; it’s the struggle itself — and the constraints it imposes on public and private choices — that matters. But insofar as the test of the success of austerity is the trade balance, I suspect austerity can succeed indefinitely“.

2) About these constraints: Schauble, the German minister of finance, blocks endeavours of the European Investment Fund to issue bonds and raise money to lend to small and medium enterprises in southern Europe, companies still have to pay interest rates which are way higher than northern European and French companies have to pay.

3) While at the same time, according to Norbert Häring, he backs a German committee, with a lot of bankers in it (Deutsche Bank, Allianz (a bank and insurance company),  Ergo (an insurance company) as well as former central banker Marcel Fratzscher), which is preparing and advise to establish a ‘Bundesfernstraßengesellschaft’, a government owned company which will build and repair highways but which will not be funded by the government but by… companies like Deutsche Bank, Allianz and Ergo. And which will have to pay a higher interest rate than the government has to pay. At the same time, Schauble defends a ‘schwartze Null’, a small public surplus for the government, which in Germany is enabled by cutting public investment… Public risks, private gains. By the way – some highways built by public-private partnerships in Germany were pretty expensive…

4) Sebastian Gechert and Ansgar Rannenberg calculate the macro-economic effects of the 24,5% of 2009 GDP government cuts in Greece. No surprises there… But, interestingly, they have made a meta-analysis of 98 estimates of multipliers, which enables them to gauge ‘typical’ multipliers for different kind of government expenditure cuts/tax increases during different phases of the business cycle. Tax increases have a stable multiplier of 1,0 but government transfers have during downswing but not during upswings a multiplier larger than 2 (a cut in transfers of a billion will during a downswing cause a GDP contraction of 2 billion). Government consumption (most education, parts of health care) and investments have very high multipliers, too. Increasing taxes during a crisis is, though not smart, smarter than cutting expenditure.

  1. Robert W. Parenteau
    April 1, 2015 at 10:44 pm

    See p, 7, figure 5. http://www.levyinstitute.org/pubs/pn_15_1.pdf

    The Macrofinancial Balance Equation is: DPSFB + GFB – CUB = 0
    where: DPSFB = domestic non financial private sector financial balance (S-I, or Y-E), GFB = total government sector financial balance, and CUB = current account or external balance

    Only if nations run CUB>GFB, is a “twin surplus” growth strategy sustainable. If GFB>CUB, as in sector 1b, then DPSFBY, I>S), and financial fragility of private sector will increase, raising systemic risk as debt to income ratios of DPS increase, or at least net worth to income ratios fall (barring serial or perpetual asset bubbles).

    So in a balanced fiscal budget case, which could slowly achieve falling government debt to income ratios, the DPSFB = the CUB, and DPS financial fragility is unlikely to increase if CUB>0. Then the financial fragility is “exported” to your major trading partners, who may be accumulating external debt in other than their home currency (and remember currencies of nations with high and rising CUB tend to appreciate, increasing debt servicing costs for your trading partners, so systemic risk increases even faster than you might otherwise expect).

    In other words, Neomercantilism still sucks as a “sustainable” growth strategy, just like it did 2-3 centuries ago. Worse yet, it will eventually come back to bite you, particularly when your trading partners are delinquent on their debt servicing, and they default on external debt…in which case you have to make emergency liquidity loans in a Ponzi scheme fashion to your trading partners…to keep your own banks and other financial institutions from going insolvent with bad loans and bad bond holdings related to your trading partners going bust…oh, wait…but then you get your central bank to do massive quantitative easing…to the point that more and more bonds have negative yields to maturity, the central bank deposit rate has gone subzero (but commercial bank deposit rates still have an effective ZLB), and the yield curve has flattened so much because institutional investors are front running you, the central bank…until both your bank profitability and your life insurance company solvency and your pension fund solvency becomes an even bigger problem…and is this sounding familiar to anyone out there yet?

    To wit, an analysis fully informed by a solid understanding of macro financial balances, and grounded in 7 centuries or so of double entry book keeping principles rather than high theory or fancy econometrics, reveals that the seemingly virtuous “twin surplus” growth strategy is no panacea at all. In fact, it may lead to a mutually assisted suicide pact between your central bank and Finanzkapital… as we are currently witnessing in the eurozone with the ECB’s PSPP operations. But nobody has quite connected the dots on this one yet. And what a surprise it will be when they do. Because the ECB cannot back out of this. It is a game of Musical Chairs, writ large, with systemic risk at stake. No private investor holds negative yield to maturity (NYTM) bonds unless they expect near guaranteed capital gains before the NTYM bonds mature. The minute the ECB even suggests it is prepared to pause, taper, or end the PSPP program, every institutional investor will want to sell every NYTM bond in his or her portfolio. We will witness a yield spike, in a no bid bond market, with contagion effects in other markets as fire sales spread to any and all liquid financial assets. Pricing will go discontinuous, just as in the October 1987 equity market episode. But very few people can see any of this.

    The twin surplus objective, so near and dear to the Troika, appearing so virtuous on the surface, is a lovely recipe for an eventual (or perhaps even imminent, if strengthening eurozone macro data takes the ECB into pause mode on PSPP operations) financial crisis.

    • Nell
      April 2, 2015 at 10:42 am

      Nice post. Thanks

  2. April 2, 2015 at 12:20 am

    “Government consumption (most education, parts of health care) and investments have very high multipliers, too.” & “… is this sounding familiar to anyone out there yet?”

    Fantastic. A better plot than fiction. Do positive returns to degrowth work in here anywhere?

  3. Emmanuel Sarroso Taratoga
    April 7, 2015 at 10:59 am

    There is still missing huge chunks of puzzle pieces in this big scam. Which entourage of persons signed the lending agreements throughout the last decade which set the Greek public in this precarious situation, not to mention the German bank savers? It is one thing to sort out the mess, where the parties now use all sorts of shady rethoric, such as WWII repayment claims. Has Greece paid back its debts from the time of Aristotle? Has The Turks since the Ottomans?
    Im less interested if Lagarde gets paid, and more interested in finding out who in the name of the Greek public sector scammed the whole Eurozone (even though the apparatchechs were willing participants) and continue to scam the taxpayers through all those institutions which is funded with public debt from the nation states of Europe. Europe is supposed to be transparent and a beacon of Enlightenment values, but in this case its the dark ages.

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