Saturday, January 31, 2015

Ralph: Weeping and wailing over Greek austerity.


Ralph offers an adult, metaphor free analysis of a situation characterized by "uncompetitiveness" [Ed: this is an inappropriate word here...]  of a member nation of the Euro common currency union here at Ralphonomics, specifically the current situation in Greece.

I’m getting tired of people who weep and wail about austerity in Greece – unless the weepers and wailers have some nice simple solution to the problem, in which case I’m all ears. 
The popular chant “austerity doesn’t work” is fatuous. That chant doesn’t begin to solve the basic problem. 
For the benefit of the uninitiated, the basic problem is as follows, and it’s quite simple. If you just stop weeping and wailing for a minute, it’s easy enough to grasp. If a country in a common currency area becomes uncompetitive, it’s external balance of trade deteriorates and it runs into debt. 
For a country with its own currency, that problem is solved by devaluing its currency. E.g. the UK’s currency fell 25% in value in 2008, and no one I know personally even noticed. 
In contrast, for a country WITHOUT its own currency the only real option is to cut wages and profits in money terms. That’s called “internal devaluation”
Ralph offers as a possible solution to thus situation, a cooperative internal devaluation, but admits that policy would probably be hard to implement politically.

I would point out that our Greek ancestors would solve this problem back when they were running a common Hellenic currency union by immediately converting all foreign claims into domestic claims when the exporters would return from their business in the import nation.

For instance to put this in contemporary terms,  if Daimler would export some autos from Germany to Greece and take payment in Euros from their Greek customers, the net positive Euro balance of this auto business between Daimler of Germany and their auto dealer firms in Greece would be credited by the Bundesbank to the Daimler account in Germany in Euros, the and the cross-border liability would no longer exist between the subject non-govt sector entities.

In this way, the import nation would never accrue the "external debt" that Ralph identifies and is the current negative balance that is causing most of the heartburn in the situation with Greece.

In this era, Greece is in a position as perennial net importer within the Eurozone business environment due to the current location of the highly productive industries in the north.

So we have a few options; probably a few others.

FD:  No "minotaurs" were used or abused in the creation of this post...


37 comments:

Brian Romanchuk said...

Your proposal would convert private sector claims to public sector claims. Instead of private sector induced instability, it would be induced by the public sector.

If the Europeans viewed their system as inherently credible, the governments would have no problems with claims upon each other. But they do not trust each other, and so the governments are unhappy piling up intra-governmental debts.

Dan Kervick said...

Huh? How can a country pay it's debts to a bunch of people who are not Daimler by buying cars form Daimler?

Also, even if it does owe debts to Daimler, you can't pay off a debt to Daimler by buying more stuff from Daimler.

If you owe my shoe store $100, you can't pay that debt by buying another $100 pair of shoes.

Dan Kervick said...

It seems to me that the only way for Greece to get out of the deep socioeconomic hole it is in, given that it is not going to leave the euro, is to tax, dismantle and dispossess its society-crushing oligarchy, and to use the proceeds to put everyone to work and invest deeply in the productive capacity of its people and economy.

Only 39% of the Greek population is employed, among the very lowest figures in the world. No country can make material progress with such a low number of people working.

Critical Tinkerer said...

What Matt is saying is that Greeces debt was incured because private imports are going trough state accounts.

When i buy an imported car, i can not pay to Toyota in Japan directly. It has to go over FED accounting. FED can spend money, on something else, that i gave it to bank, that gave it to FED. FED will have to get a loan from Japan's BoJ, that will pay to Toyota. Money does not cross borders. It is same in EU even tough it is the one currency.

Because it is the single currency but separated accounting, money still does not cross borders. Trade deficits can be paid only with debts from one central bank to another.

Matt is calling for united banking, where buyer of Daimler car would pay it directly to manufacturer and it would not go on state's debt.

Dan Kervick said...

Whether or not money crosses borders is not the issue. The debt of the Greek government to creditors abroad does not depend on whether the Greek government and the creditors use the same bank or a different bank. Similarly, the debts of private Greek citizens and companies to creditors abroad does not depend on whether those private entities and their creditors use the same bank or a different bank.

If tomorrow the Europeans declared a United States of Europe, got rid of all the national banks, and converted all of the assets and liabilities of those national banks to a single European Bank, then many of the Greek debts that are currently "foreign" debts would be converted to "domestic" debts.

But those debts would still exist and Greece would still be an economic basket case.

A said...

I think the proper term for this is "race to the bottom".

A said...

Matt, there was a dreaded metaphor in the post:

"A popular alleged solution for Greece is debt forgiveness or a debt jubilee. Unfortunately that simply kicks the can down the road."

Critical Tinkerer said...

That is a realy funny metaphor:
"A popular alleged solution for Greece is debt forgiveness or a debt jubilee. Unfortunately that simply kicks the can down the road."

The major problem is debt. Debt jubilee is the solution to that problem. How is that kikcking the can down the road?
Every country is continously growing debt, then every country is kicking the can. So why blame Greece when everyone is doing it.

Especially when signing the EU entrance every country is conditioned with import and export quotas on some products.
My country Croatia had to destroy its shipbuilding industry that was 4th largest in Europe before 1990, before the war in Croatia. It is a condition to join EU.
Had to acept Italian, French fish boats into our teritorial waters. Now we are receiving milk production quota. Can not excede it.

They simply requier us to destroy industry and then import, but then complain about deficit.
I believe that Greece was in the same position as Croatia.

Most of the competitivness problem is with interest rates. Southern businesses are operating with 10-18% rate while Northerners are operating with 4-10%. Since all corporations work with debt there is what eats profit margins.

The problem with low wages is what allows low competitivness too. When employees have to pay high wages they are forced to improve technology which improves productivity. But low minimal wages in southern EU is what allows for slow adoption of new technology. I have had my own businesses here and in USA and know incentive differences.

It is the low wages that are the cause of low competitivness. If you look at most prosperous.most competitive countries it is what you find: high wages and high social safety net. This forces adoption of high technology acros the economy.

So, basically everything is opposite of what conventional visdom says.

Ryan Harris said...

Ralph's blindness demonstrates his bias. Of course the corollary to his argument is that the entire currency zone can devalue their currency and then the countries like Germany or Netherlands can allow their labor unions to raise wages to bring themselves more into line with the rest of the majority of the currency union.

It is a better option for the global system as a whole too because China's collapse of their rapid growth and investment phase has left the world with significant excess production capacity. The productive capital laying waste is of very high quality and the only problem is too few customers. Some production will be mismatched to any demand and will need to fail but most could would be used, if the economies in the rest of the world were not depressed by lack of demand.

To use Ralph's obvious Non-"weeping and wailing" solution would only aggravate the macro problem plaguing the world further by increasing investment and the supply side productive capacity on a world with already deficient demand. The private sector can't fix government spending that is collectively too low.
Deficient demand can never be fixed with investment to produce more supply. Demand that doesn't produce more "investment" in new supplies would appear to be what is needed, that sort of demand can only come from government because the private sector isn't taking on sufficient amounts of credit.

Matt Franko said...

Jure its not my idea this is from Plato... all I am doing is reading it... see here please:

http://mikenormaneconomics.blogspot.com/2015/01/plato-on-european-common-currency-zones.html

Dan, if they would treat the (X-M) like this from Plato, then in effect it would become (G-T)= (S-I) so the current SBE is:

(S – I) = (G – T) + (X – M)

If they ran a policy whereby the export nation's CB (Bundesbank) would credit the export firm's (Daimlers) bank account (meanwhile the Greek CB would debit Daimler's account at the Greek CB) then as far as the equation above, (X-M) would go to zero.

The liability for the car would remain in Greece... the Germans would in effect be paid and out of the deal...

So the situation there now, under current arrangements, as for Greece as perennial net importer, (X-M) is always very negative, (imports are a lot higher than exports) which means for a constant (S-I) the (G-T) term has to be higher to offset a more negative (X-M)...

To avoid these non-govt sector international claims building up you can see our ancestors govt/CB would simply credit the exporter in the domestic banking system of the exporter for the net, in Plato's statement here:

"and if when he returns he has any foreign money remaining, let him give the surplus back to the treasury, and receive a corresponding sum in the local currency."

Its important to do this.

This is similar to how the Chinese and Japanese do it, and Swiss (used to) do it...

So the exporters CB would credit the domestic account of the exporter for any surplus the exporter gained in the nation of the importer.....

In effect they would "zero out" the (X-M) in the context of our current SBE... so therefore, for a constant (S-I), you could maintain a LOWER (G-T)

So then if you wanted to target a small positive (G-T) ie govt running a small deficit , that should still result in a positive (S-I) so savings could also exceed needed investment...

the way they are doing it now, they are tying the hands of the non-govt sector firms and member banks by leaving them to deal with these imbalances... and then complaining when (G-T) ends up positive and (to them) too high...

It would be like in Plato's day, if they didnt change them out, then you would have had a bunch of people in the exporters country with a bunch of coins that they couldnt even use there... and not enough left in the importers country for them to function properly either...

so to avoid this (back then when they used metal coins) you have to change out the exporter with domestic coins and return the foreign coins to the govt of the importer..

rsp,

Dan Kervick said...

Matt, I'm sorry, but I have not the slightest idea what you are talking about.

You can't change the trade balance in any significant way by just changing the accounting system by which payments are recorded and credited. You either have to make changes to the quality of the goods being offered, or to their prices.

Also, the trade balance is a flow, but the accumulated Greek debts are a stock.

Critical Tinkerer said...

Matt i fully understood your point, i saw that Brian and Dan did not, so i tried to use an example.

But there is one issue. That process would involve CB printing money, even temporarilly, which is not allowed.
Even if it was allowed, when cleared would depress money supply to importer economy. Since money would flow from importers pockets to exporters pocket.

At present monetary set up, instead of reducing money supply, it goes onto public debts which is returning it back into circulation.

Yes, that would be a perfect solution for fixed exchange rate, CB would not need to do nothing to keep it fixed. But due to lack of money, deflation would be permanent, people would not want to borrow and importer economy would stagnate permanently.
There would be no use of EU then.
No benefits from trade.

What i am trying to say is that at the present (X-M) is neutralized to economy and that it goes onto public debts, which is great. that at the present only (S-I)=(G-T)works. With money outflow, crossing borders, you will have to include (X-M) acumulatevly.

It is good as it is now, but it should be remembered that no country ever reduces its debt without crushing its economy.
Any country that enjoys political power, achieved mostly by military power, can continously increase their debts with no problem, they will never get to be questioned about public debt levels. Just like Japan, Germany, USA, UK.
It is the world politics that are doing this to Greece, just as they did to Yugoslavia to destroy it and just as they are doing to Ukraine now.
Banks raising the rates on public debts is due to political war trough economic means. It is the sign of a state that is corrupt and have no political power. Its residents are corrupt and divided, on each other's throat. It came from centuries of colonialism that stayed in people's hearts and minds.

Malmo's Ghost said...

"It seems to me that the only way for Greece to get out of the deep socioeconomic hole it is in, given that it is not going to leave the euro, is to tax, dismantle and dispossess its society-crushing oligarchy, and to use the proceeds to put everyone to work and invest deeply in the productive capacity of its people and economy."

Greece surely isn't going to abandon the euro, as there is an overwhelming political consensus against that direct act. However, expulsion from the EZ is certainly a possibility, if not probability if Syriza follows through with it's stated program. Now that the ECB has thrown down the gauntlet of Feb28 as DDay for bank funding absent a deal, were soon going to discover who's bluffing and who isn't. My money is on both parties holding their respective lines firmly. If Greece is expelled I don't know if the coalition can hold together there. I don't see any chance of the Moderate Proposal going through either, so it' my way or the highway time.

Matt Franko said...

Dan maybe this way, you say:

" is to tax, dismantle and dispossess its society-crushing oligarchy,"

OK, who is to say that there are adequate balances remaining in the domestic custody of Greek entities to be even able to tax?

iow, to simplify, I realize the contemporary accounting is more complicated than this, but lets start here..... think about Plato's Greek coin situation... if the import nation gave large numbers of coins that were taken back with the exporter to the exporters nation and kept there, how can the govt of the import nation then tax those coins? They are not physically within the taxing jurisdiction so they are out of reach...

We use complex systems today, but it is the same principle... the balances are not even in Greece to be able to tax, they are in Deutchbank under Bundesbank regulation or some other place....

Greek banks dont even have enough capital remaining to bid up the Greek govt bonds to where they would yield less... as they would violate capital requirements if they bid that high, etc... neither does Deutchbank as they are probably taking mark downs on other financed assets as deflation takes its toll on Desuchbank's balance sheet in other business areas.. ... and cant bid more for the Greek debt they dont have the capital to place the Greek bonds on their balance sheets at the higher prices...

So the banks are doing all they can here and still remain in regualtory compliance... they are not "banksters"...they are not making "toxic waste", this is not a "control fraud Ponzi scheme", the "minotaur" is a mythical creature... etc... let's be rational and competent adults here please....

All you have to do is have the govt of the exporter credit the exporter's bank account for the net of the exports, that way the exporter gets paid within the system of the nation that they report in and a foreign claim does not result.

If you allow the build up of foreign claims (ie "money" leaves the jurisdiction if you will..) the domestic tax base deteriorates if you dont increase the topline domestic govt spending number adequately...

rsp,

Critical Tinkerer said...

Matt
That is what i learned from Yanis Varoufakis.
The same problem is with capital accumulation, the glorified succes of capitalizm.
Capital accumulation is acctually accumulating base supply of money needed for demand, by that it is reducing the demand for what it produces and needs to sell. Savings/ demand leakage.

Hence you need printing of new money to replace savings/ capital accumulation. Banks do that in capitalism and state does that in communism. Both do it in socializm.
CBs do that in international trade.

Since only banks do it, prosperity can come only from everincreasing debt. Just as Steve Keen says. His debt acceleration is excellent predictor of growth.

This all comes from: If we imagine single corporation national economy, fixed money and fixed population.
Then:
Cost of production = P*Q.
Price and quantity is determined by cost. Cost is the base of demand. (almost a Fiscal theory of price level). Profit(saving) will reduce demand and cause unemployment in a next cycle. Higher profit => higher unemployment.

So even without rising population you have to have influx of new money(credit) just to keep employment leveled, to replace demand leakage.
This is whole Marx's Capital in one comment.

To avoid such conclusions and consequences of this model neo-keynesians like Krugman do not want to abandon Loanable funds theory.

Kristjan said...

""It seems to me that the only way for Greece to get out of the deep socioeconomic hole it is in, given that it is not going to leave the euro, is to tax, dismantle and dispossess its society-crushing oligarchy, and to use the proceeds to put everyone to work and invest deeply in the productive capacity of its people and economy."

Greece surely isn't going to abandon the euro, as there is an overwhelming political consensus against that direct act. However, expulsion from the EZ is certainly a possibility, if not probability if Syriza follows through with it's stated program. Now that the ECB has thrown down the gauntlet of Feb28 as DDay for bank funding absent a deal, were soon going to discover who's bluffing and who isn't. My money is on both parties holding their respective lines firmly. If Greece is expelled I don't know if the coalition can hold together there. I don't see any chance of the Moderate Proposal going through either, so it' my way or the highway time."








Greece will leave euro, my money is on that. They had a plan like that from the very beginning. Why would they form a coalition with Independents without even having talks with others. The independents are against syriza polittically in almost everything else exept they would leave euro and they are radically against bailout. Syriza will play It out like they were forced out of euro by the tyranny of Brussels. They wanted United Europe like every liberal in Europe does buut they were not given a choice. The ECB has no choice but to pull the plug. Greece will have its own currency in march. Will the Syriza coalition last? I don't know, I hope so, there is not much of the coalition, they only need two to have majprity. Other thing is about Syriza itself, they have different views about euro. I wish them luck, It won't be easy for them. There is going to be drahma in march. Syriza is not backing down.

Matt Franko said...

"Since only banks do it, prosperity can come only from ever increasing debt. Just as Steve Keen says. "

Jure, if this were true then why isn't that happening?

I would assume that banks would always be looking to "make more money" ie increase their profits...

But yet it is not happening.... this is going on 5 or 6 years at least here in the US, if you look at bank debt, it us just getting back to about where it was in '08 or '09 at the high... while the policy rates have been reduced down to 0.25% for the whole while... making loans more affordable...

So there has to be a different explanation or functional description... Keen seems to rely on Minsky a lot so caveat emptor there... not a lot of depth there or understanding exhibited...

rsp,

Dan Kervick said...

Seems to me that "capital accumulation" refers primarily to the accumulation of real capital wealth, and only secondarily to the accumulation of the means of exchange.

There are always ways of redistributing and redeploying wealth in the public interest that don't require government taxing away currency first and then using it to buy that wealth.

If the oligarchs don't have enough cash to take, then just take some of their ownership shares directly. Or use the government's legislative power to change the rights and obligations that govern the terms of the capital owners' control over the disposition of that capital.

Dan Kervick said...

All I'm saying is that if a country is determined to put its unemployed people to work building creating real product and income and building national wealth, there are always ways of doing this. Set up co-ops, for example, and pay people with transferable shares in those coops that can be redeemed with a portion of the cooperative output. There must be some work-arounds that allow the creation of quasi-currencies that aren't covered by the Euro treaties.

Matt Franko said...

Dan,

The Swiss CB has like 200B Euro they have built up thru changing out their exporters net EURs for CHFs over the years...probably a lot of that from Greece over the years...

Probably the Russian CB has EUR reserves that they originally acquired from a Greek importer...

Probably MENA oil producers have a lot of EUR balances that they acquired from Greek importers over the years...

Probably many other non-EZ net exporters to Greece have EUR balances originally acquired from a Greek importer...

Greece can't "invade and get the EURs back"....

so the problem is a systemic design flaw and not necessarily just an internal Greek issue or ideological issue....

Your policy there of confiscation sounds like it may foment a Zimbabwe-like disaster and collapse of output... if you start handing over real assets to people who arent trained/qualified and dont know how to operate them..

rsp,


Dan Kervick said...

Matt, again, what I said is that Greece doesn't have to "get its Euros back" to employ its people.

Confiscating ownership shares and taxing currency are just two different ways of doing the same thing. Don't hand the shares over to people who don't know what to do with them; hand them over to the government and let them use them to organize a full employment policy and industrial policy.

Dan Kervick said...

And who are those "qualified" people anyway? Gazillionaire yachtsmen and island owners who have used that capital to drive the Greek economy into third world status?

Critical Tinkerer said...

Matt
As you know from MMT, banks print money (bring money into economy is better wording) only when we ask for it, when private elements apply for loans.
Even tough policy rate can go to 0%, but banks do not offer loans under 4%.
Due to realisation of that, some economists started talking that inflation target rate of 2% is too low, it should be at least 3% so that policy can have some leway to where it can bite. I say that monetary policy stops working when rate comes bellow 3 since banks do not follow it further.

I was a loan officer for a short time and what determines the availability of the loan is monthly payments, they can not be above 33% of monthly income.

Starting in 1980 where interest rates were 20%, in order to enlarge loan size, banks offered lower rate. That allows for larger loan with same monthly payment. With same income.
EVery time economy slows, policy rate goes down to allow for more loans.
Untill the policy hit the 2% in 2003. That is when banks made up new loans, no amortization, NINJA, no down, subprime, AJR, anything just to allow for larger loans and it worked, for some time.
Then in 2006, Democrats noticed all this and strenghtened regulation so that new imaginative loans had to be cut back. This started the deleveraging process, crashed banks from defaults but Mark to Model saved banks, not TARP. Mark to Model allowed banks not to recognize defaulted loans. More money was destroyed then created/ base supply was shrinking.

Because there is no more options to allow for larger loans while income is still same, or even lower. Rate is at 0 and liar loans are out. No more options to go back to increasing debt while at the same incomes. So after some defaults (deleveraging), new entrants to economy are able to take loans and it very slowly improved.

Can't allow for liar loans anymore, rate can not go down, only option is to rise wages and economy will recover.
How to lift wages up?
In normal times when rates could go down and debt could rise, this would keep employment up and there were unions, and there were politicians raising minimum wage.

These conditions were enabling inflation that comes from wage growth. This inflation with fixed loan rates would allow for easing up the burden of debt (negative real rate) and add the interest tax deduction, burden of loans disapear in 15-20 years, allowing for new debts.

To have same incomes and have everincreasing debt possible there has to be inflation coupled with fixed rates. FEDs policy after 1980 was just right to not allow for real increase in wages. They executed policy with perfect balance that forced it down to 0.
Now at the present, there is no inflation to eat debt burden, no wage rise,no rise to minimal wage.
Only new, young entrants to market can get loans now. Credit scores are destroyed and banks are much more carefull about issuing loans.

Critical Tinkerer said...

Dan
I was talking about profits/savings so called capital accumulation. Even tough capital should mean objects and intelectual property, once you have money you can accuier real capital. It is interchangable.

Greeks do not have to ask for euros back, it never left, but velocity is maybe 2 at the present.
But those euros from trade balances is in govt debt. EU is now asking for it, to pay it back and i do not believe that whole Greece has that much of currency if all debts would clear.
And theay are attempting to clear all debts. Impossible, it would completely shut down the economy.

Instead of clearing debts, they should forgive them in personal bankrupcies which they do not have. Over 1 milion Greeks have defaulted on debts and yet they can not do bankrupcy as you in USA can. Foreclosures and reposesions in firesale is not clearing debts and people in EU enjoy nonrecursive loans. They still owe to banks even tough lost the house and jobs.

Doing just chapter 13 bankrupcies for 1 milion people in Greece could be a start, a good start. There is that many companies that went bust too.
And they can not start new ones since no bank would give loans in down market and barely anyone would ask for it.

Ignacio said...

Jure, if this were true then why isn't that happening?

I disagree, it's happening. In USA the capital markets are not completely dependant on the bank sector (unlike Europe were capital markets are under developed and mostly handled by banks). the non-bank financials can pull a lot of weight as well.

The overall Z1 has never dropped below 2008, it has kept rising, even at a much lower rate. But now there is a lot of re-hypothecation, the FED managed to engineer a mini-housing recovery/bubble and that's what in the end drives credit bubbles.

In Europe is even more transparent because most of the private debt is not as tangled as in USA throught derivatives and private equity and other non-bank financials, and can be seen clearly in banks balance-sheets.

Even under "deflation" we have increasing private (and public ofc, or the system would have collapsed already, as the rate of private debt creation has slowed) debt!

It's very akin to the definition of a Ponzi scheme, whether we like calling it like that or not. The only way it can be kept going is for the public sector to swallow part of that stock of debts AND keep take the role of the creditor (instead of the banks), as has been going in Japan for 30 years. But this is not politically feasible in Europe for obvious reasons, so it cannot happen.

What you suggest would stabilize the problems at the European regional level, but would pass the problem into national Greece which would be driven towards an increasingly closed economy with not international trade, and would require years of internal deflation to clear. May as well put Golden Dawn in the government already and be done with it.

Greece cannot get out of the situation without a de facto default on it's debt, either through debt haircuts, jubilees or neo-drachmas devaluation. There is no easy out of it because they have passed the point of no return, and with a multi-years depression having ravaged a lot of their production capacity. They will have to go through a situation similar to those of Latin countries during the 80's or Asian countries during the 90's. And the lockdown between both parties will force this situation.

This is my opinion right now on the situation.

Ignacio said...

The less painful way of fixing the situation is with a dual-currency system, then Greece would use their EUR balances to clear their outstanding liabilities slowly and import necessary goods, and keep the national currency to keep output and demand as high as possible.

But this is something the ECB and eurocrats won't allow, as it defeats the existence of the euro-scam in the first place (a fixed rate regime for Germany to keep their dominant exporter position in the eurozone).

Kristjan said...

"The less painful way of fixing the situation is with a dual-currency system, then Greece would use their EUR balances to clear their outstanding liabilities slowly and import necessary goods, and keep the national currency to keep output and demand as high as possible.

But this is something the ECB and eurocrats won't allow, as it defeats the existence of the euro-scam in the first place (a fixed rate regime for Germany to keep their dominant exporter position in the eurozone)."


European left is all eurorocrats. All they do is talk anti austerity and attack Merkel. Merkel didn't create the euro, there is no alternative but to go with the internal devaluation if yo want to balance the thing. If Syriza sticks to Its promises to stay with the euro than there is no other alternative than far right to get out of the nightmare.

Jose Guilherme said...

Merkel didn't create the euro

That´s right - the euro was a French idea.

In contrast, for a country WITHOUT its own currency the only real option is to cut wages and profits in money terms

Not true. In a currency union, current account deficits should not be a problem. If the ECB had done QE in 2009 (instead of 2015) there would have been no public debt problem in the periphery countries, yields would have stayed at low levels - and no austerity could have been imposed on Greece.


Critical Tinkerer said...

Jose
You are right that it is the interest rate that got Greece in the mess. But it happened for pure political reasons, not economical as you describe.

It was Merkel who said that "Multiculturalism in EU is over" and "Every nation is responsible for it's debts"
That is when yields widened wiledly for Southern states. Before that it was wide but moderate.

"Multiculturalism is over" means we are not to treat each other in EU as equals. Competition can start to control each other.

"Every nation is responsible for its own debts" is the point when decisions toward integration has turned toward disintegration of EU and yields widened.

Even QE that ECB is proposing is not going to do much since it is limited to helping those that do not need help (yields at 0) while almost no help to those that desperatly need it where yields are enormous, like Greece. Excuse is risk and "equality" of distribution according to economic size and contribution. QE will not go where is needed.

Ignacio said...

QE never goes where it's needed by design. It's a joke of monetarists voodoo economics and the close they can get to their NGDP targeting bullcrap.

Buit, politically, it helps to keep the yields down so in that sense it would have 'kicked the can' in the eurozone a bit longer. The eurozone is inherently unstable as everybody in this blog should know because the lack of fiscal-political union anyway and was to blow up sooner or later.

Jerkel statements are just acknowledging that reality. Maybe politicians can get in their thick heads and revert an undemocratic union (or push towards a democratic one, but the conditions are just not there as there still is too much racism in Europe, plus lack of common language, national identity etc.).

Critical Tinkerer said...

Why was there such high interest rate in Greece even before Merkel's divisive proclamations?

Northern countries have enjoyed capitalist institutons for longer and had banks that saturated potential debt levels. They also used a lot of Saving & Loan banking.
While southern states had much, much tighter monetary policy for years. It is the corruption that affects banking system. Many loans are issued to power players that can avoid repaying it, leaving money in economy and causing inflation, instead of destroying after creating. Power players also enjoyed advantages of low rates while others had to cover for defaults and profits, toiling under high interesst rates. This is negative selection.

Greece had most of the properties without debt, having ability for huge loan increases, CB had to keep very tight monetary policy.
Neo-keynesians talk about capital flow from north to south, but knowing that money does not cross borders i doubt it. It was that debt free economies of south met with sudden ability to go freely into debt. Interest had to be kept high in order to prevent surge in credit creating (new money into economy).
They weren't very succesfull in preventing surge in new credit causing higher inflation.
Political decision to not refinance public debt for Greece by banks, which is normal action for state debts and for corporate debts, caused even higher rates that crashed flexible rate debtors causing numerous defaults in corporate and personal loans, crashing banks as a consequence.
It was also a political decision to save insolvent banks by greek politicians. It is about national pride.

Greeks just as Russians raised interest rates when capital started disapearing thinking that it would prevent capital flight, instead it is causing defaults on domestic loans. Also causing banks to stop issuing new credits that desperate businesses desperatly need.

Everything revolves around; issuing new credits is new money into economy and paying off the credit is destroying that money.

When monetary policy is based on thinking that paying off the loans will just return money to savers when in reality it destroys it, they cause the economic crisis themselves no matter good intentions.

Matt Franko said...

Jure any possibility that the yields widening at that same time would just be a coincidence with something else that was happening systemically at the same time?

iow over here we constantly are warring with these people going all around talking of so called "bond vigilantes" that could allegedly (to them) refuse to purchase the US Treasury bonds or demand higher yields, etc...

So we dont believe in such "bond vigilantes" over here so I was thinking we should not believe they exist in Europe either... the govt bond yields are a function of the policy rate...

When I hear people talking of how "the market" (aka 'bond vigilantes') are "demanding higher yields for Greek govt bonds" I'm thinking "bond vigilantes" and there is something else going on in reality...

like perhaps ultimately there is some sort of capital deficiency in the Greek banking system that prevents banks from carrying the Greek govt bonds at the higher values that would imply much lower yields...

Even the reserves held by external entities, if these reserves are just kept in bank accounts and not used to purchase bonds at higher prices (ie "zero bid" on the Greek govt bonds), that would imply that then the banks themselves could bid up the bonds using the deposits on the liability side to offset them, IF they have the capital...

There are no vigilantes over here in the US for instance because even if the non-bank sector goes "zero bid" on the govt bonds and leaves the balances in deposit accounts, the banks can always compete to bid up the bonds against one another in order to deploy all of their capital to the point of regulatory limits... so rates go down... "vigilante" people not understanding this dynamic and hence getting crushed in the bond market... Bill Gross' "who's going to buy them now?" a most famous example ...

Perhaps if the Greek banks would be given some more capital to leverage, the system would "naturally" start to move to much lower rates in this fashion as Greek banks deployed the capital to just purchase govt bonds... might help...

rsp,

Ralph Musgrave said...

Dan Kervick,

Re “crushing the oligarchy”, the new Greek government have specifically said they plan to do that. Problem is that a previous head of tax collection in Greece left his job because of death threats. See:

http://www.telegraph.co.uk/news/worldnews/europe/greece/11381653/Death-threats-forced-me-to-quit-my-job-says-Greeces-top-tax-man.html

If that’s sort of behavior is typical in Greece, then the country is f*cked whatever it does.

Jure Jordan,

Re kicking the can down the road, my point was that a debt jubilee doesn’t tackle the basic problem which is Greek lack of competitiveness.

Ryan Harris,

Re your opposition to devaluing the Euro and allowing more inflation in Germany, loads of economists have said that’s a solution. I agree with them. That would amount to “internal revaluation” for Germany, which is little different to internal devaluation for periphery countries. There is a SLIGHT difference: the former would cause more Euro wide inflation, but as long as we’re talking about just 2% or so extra inflation in Germany, that’s a minor problem compared to the social costs of widespread unemployment.

Critical Tinkerer said...

Ralph
"debt jubilee doesn’t tackle the basic problem which is Greek lack of competitiveness."

Sure that it doesn't solve basic problem of competitivness, but it prevents from solving it.

What is the basic reason for poor competitivness? I know that conventional wisdom is that the productivity and high wages are the reson. I say it is not.

The major reason for low productivity is low wages. Just compare wages where productivity is high, high wages are coupled with high productivity.
Higher wages by govt mandate or union power force implementation of high technology over time.

Major reason for low competitivness is interest rates for loans to corporations. High rates (comparing to neighbouring countries) force down competitivnes mathematicaly. If yor business can get a loan at 3% and my business in the same branch can only get loan at 10%, who is more competitive all else equal?
And over long periods, high rate on loans prevent implementation of new technologies.

When you take a look at low and high competitive markets, low competitivness is coupled with high interest rates and low wages. High competitivness is coupled with low interest rates and high wages and good safety nets.
I am looking at close naighbouring countries, not at China which is a sort of outlier.

Critical Tinkerer said...

I meant;
Sure that it doesn't solve basic problem of competitivness, but debts prevent solving low competitivness.

Jose Guilherme said...

We should stick to the essentials.

Greece´s problems are a result of a devastating cut in aggregate demand imposed on the country by its EU "partners". GDP has decreased by close to 30%, so it´s no wonder the employment rate collapsed to unheard of levels for a Western European economy.

The "competitiveness" and "supply side" memes are just ideological BS. Krugman´s got a very good recent post on this ("I See Very Serious Dead People") - perhaps he´s becoming more MMT than many self proclaimed "believers"?

There´s no way the EU could have imposed such a program on Greece, absent the lack of support for the country´s public debt in the critical years betwen the GFC and Draghi´s 2012 "whatever it takes" speech. The lack of central bank and NCB support forced the country to ask for "help" - it´s now clear that had Draghi been in charge by 2009 (instead of the pathetic Trichet) the Public debt "crisis" of the periphery wouldn´t have arised.

What about the present? An alternative for Greece would be for it to dare the ECB to expel it from the euro (an illegal move) by having its commercial banks issue new euro deposits for the government; these deposits would then be transferred to the ECB in order to "pay" the Greek bonds on its balance sheet.

The ECB itself forced a similar scheme upon Greece in 2012. The country then paid back 5 billion euros it owed. It could pay all of its foreign debt this way, instead of asking for the politically charged word "restructuring". The time has come to turn around the payments and clearing mechanisms of the eurozone for the benefit of the millions of austerity victims.

A said...

Ryan Harris;

"Deficient demand can never be fixed with investment to produce more supply"

But investment does increase demand in itself, and increases income to workers or suppliers who then spend, resulting in more demand etc.