13 April 2017


I have given up using economics to explain the rationality behind what happens in Europe. 'European values', as represented by every treaty since Maastricht 1992, are the rules and order of ordoliberalism.

17th Century Tulip Security Arrangements (The Tulip Folly (1882) by Jean-Léon Gérôme)
It disavows macroeconomic policy by treating countries as if they were individual households (or Swabian housewives). When policy fails it blames the household for not fulfilling its obligations and imposes (against the wishes of that household) reforms or punishments to adjust its immoral ways. The word "reform" is as meaningful as the words "reformatory", "correctional facilities" and "approved schools" used in the 19th and 20th century penal systems for offenders. It does not matter if that the household (eg Greece) cannot be a Swabian housewife. What matters is that other households realize the folly of straying from the 'righteous' economic path. The 'true' economies of Ordoliberalism will, even at a cost to themselves, try to ensure that blaspheming economies (include the UK) are not successful examples.

Wine, women and "exceptional importance"
"In the crisis of the euro, the countries of the North have shown solidarity with the countries affected by the crisis. As a Social Democrat, I give an exceptional importance to solidarity, but the one asking for it also has obligations"

“You can’t spend all the money on drinks and women and then ask for help." Jeroen Dijsselbloem, President of the Eurogroup
Apart from wine and women, where else did the Greek bailout go*?
In a statement to the BBC, Dijsselbloem apologised for what he termed "Dutch directness" that he attributed to a strict Calvinistic culture.

Add a strict Calvinistic culture and call it Calvinomics. 
“Man’s heart is evil”(Mark 7:21-23) so voters are by definition evil
Dijsselbloem’ s Five Points of Calvinomics are easily remembered by the acrostic TULIP

1. Total Depravity (Total Inability) the voter is intensely sinful and his sin has extended to the entire economy.

2. Unconditional Election The EuroGroup can chose those whom he was pleased with glory and others for damnation. The elect are saved by the endeavor of good surpluses granted by the grace and divinity of the euro. This is what the EG means when it admonishes the voter to make  his "calling" and "election" certain. Bearing the fiscal surpluses is an indication that  the euro has sown seeds of grace into the sinner.

3. Limited Atonement (Particular Redemption of debts): Debt forgiveness is not for all people. Nor is it for all true euro believers. Only the righteous can be forgiven. The righteous are  saved unto surpluses and it is thus that only the creditors can be forgiven. Believers cannot go into debt and then ask for atonement.

4. Irresistible Euro All sins respond to the inward call of the euro, when the outward call is given by the ECB in the name of the Holy Balance sheet. What a comfort it is to know that the  gospel of EU will penetrate our hard, sinful hearts and wondrously save us through the gracious     inward call of the euro !

5. Perseverance of the Surpluses (also known as Once Surplus Always Surplus) They are eternally secure in the Euro.

..... and add the following map of the EU (Greece is somewhere near the edge on the right)

The Garden of Earthly Euro Delights - H Bosch (not to be confused with Bosch "Invented for life" household products)

On other  -isms
"Muslims who refuse to accept European values must realize there are better places to reside" – Wolfgang Schaeuble, the German Finance Minister.

What about Europeans who refuse to accept 'European values'? Where do we go?  I want different policies. I don't want ordoliberalism. I am a blasphemer.

*Source static.esmt.org/publications/w

18 February 2015

Baltic Economic Miracle in two graphs

Latvia and the Baltic economies are often cited as examples of what the virtue of pain, austerity, can do.

How was this Baltic economic miracle achieved? Depopulation

And the medicine:
Latvia’s economy fell by more than 20 percent from its peak in 2007. By doing what EU officials want, as fast as possible, it successfully reduced the ability of Latvians to make more Latvians and lost a large slice of its population. In doing so, it managed to become the best performing shrinking economy in the European Union.
The message to Greece is that austerity can work.....if it has a responsible macro-pruning government to stamp on its own population to death until they leave or stop breeding.

...unless, Schaeuble has an efficient or quicker way to reduce the population of Greece.

If you want a vision of the future, imagine a boot stamping on a human face - forever." - George Orwell (1984)

Reference: Used to hardship latvia accepts austerity and its pain 


12 February 2015

Germany is a very inefficient economy

The European Union not so long ago received a Nobel (inventor of dynamite) prize for remaining in one piece.  Before it blows up, let me take the opportunity to lob a stick of dynamic.

The Germany economy is really inefficient..... 

there... you may now click and leave

So let me begin by apologizing to German readers who are unwtting victims. It must be painful spinning around on Schäuble's treadmill. And, as the "BIld" will tell you, we having such a jolly crisis at your expense. But.... 
"The world should rejoice at the positive economic signals the eurozone is sending almost continuously these days".  Wolfgang Schäuble 
So let me call it the Schäuble economy, as many Germans are being treated unfairly by it.  Here's his success story:  
"Take Germany. In the late 1990s it was the undisputed “sick man” of Europe – seen by domestic and international commentators alike as uncompetitive and condemned to decline ...... A first wave of adjustment, starting in 2003, focused on strengthening employment incentives, streamlining the public sector, fixing social security and raising consumption taxes. Down to shop-floor level, companies and unions worked together to make labour more flexible........"  Wolfgang Schäuble 
You may well ask why Germany was the "sick man of Europe" in the late 1990s - but lets leave that other monetary union (the German Mark and German unificiation) aside for now. 

What is the primary goal of the Schäuble economy?  To chase down little pots of gold, found at the end of the rainbow, called trading surpluses.  

If it weren't for the euro or for agreements in the labour market that Schäuble mentions above, then this excess demand for "all things German" would have raised the price of German goods, increased the demand and the wages of the workers that produced these goods, and eliminated the trade surplus. 

Schäuble trade surplus means that wages are lower than what they would be (without the agreements). It also means the wages are also lower that what they would be relative to capital (so we use less machines, robots etc in the production mix). So more labour (which Schäuble economy sucks in from the periphery's pool of idle young) and less capital is being used than what would otherwise have occurred. In other words, there is less physical investment and this production mixed creates a lower or sluggish growth rate. This drags down the growth rate not only of the Schäuble economy, but the entire European continent with it.

In other words the German or the Schäuble economy is highly inefficent one in its misuse of resources and dooms the European economy, by getting investment wrong, to lag behind the rest of the world.  This inefficiency is paid by imposing austerity on taxpayers living in the periphery

So if surpluses are wasteful, Germany is Europe's most inefficient economy.

Here is the statistical data showing the current (trading) account surplus moving in the opposite direction to the levels of capital stock. 
via @LThomas12 CA Surplus and investment are highly negatively related.
"The share of investment in gross domestic product is one of the lowest among industrialised countries. It has been declining rapidly, from an average of 23%in the 1990s to less than 17 per cent today"  Fratzscher 18th Nov 2013

The 1990s was a story of the impact of German unification and the influx of cheap East German labour. The pursuit of trading surpluses within the Eurozone, by agreements to keep real wages down, re-writes the Schäuble's 1990's "Sick man of Europe" story into a massive expansion pack of 28 volumes. Everyone in the Eurozone, and beyond, becomes sick.

The frugal German's housewife's chase for surpluses may be a very cute story, but what is she going to do with those damned surpluses? 

Give them to the Greeks or hide them under her matress? They didn't go into real investment. 

This is unfair on the  taxpayers (and the frugal Athenian housewife who economises by scavenging bins) of other economies who pay for the obsession until they go broke. 

Usually one intervenes, when one's friends is caught up some habitual immoral behaviour. One is almost tempted to show solidarity and ask for the Troika to be sent in.

9 February 2015

Petering out in Never Never land

Even if the EuroZone and the Greek economy survives the present crisis, there is a madness in its arrangements (fiscal compact) that threatens the Eurozone's long term existence. Crises will reappear whenever there is a peroid of strong growth in the Eurozone. Internal trade imbalances, surpluses and deficits will build up again and creditor countries and Euro institutions will again give the entirely wrong response. This, and the damage this cycle does to investment, makes Europe a lost Continent. It is ironic that Syriza, mistakenly called anti-Euro, has something that at least looks like a plan to save the Eurozone from itself. 

Remember that Fiscal Multiplier? 
see http://www.bloomberg.com/news/articles/2013-01-04/imf-officials-we-were-wrong-about-austerity

Here is a simple school exercise in numbers that seems to be beyond some European governments.

A country has a very large budget deficit and wants to reduce it. GDP is $100 and its budget deficit is 10% of GDP and it is told to reduce it to 5%.  So it cuts government spending by $5 and overall spending, GDP, falls by $5. 

Someone's spending is someone's income, and they too are forced to spend less which in turn affects other incomes. After a small cycle of after-effects (the multiplier) overall spending falls by, for example, by 1.5 times the initial cut.  If the tax rate is 25%, then the following changes are

    -$5 the initial spending reduction
    -($5)(1.5) = $7.5 the overall fall in incomes and spending - as people loss jobs and spend less

     Old tax revenues = $25 ;
     new tax revenues = $( 100 – 7.5) x 25% = $23.125
    -$1.875 = Fall in tax revenues 

The deficit falls from $10 to $6.875 (not to $5 as the Troika hoped for).

But what percentage is $6.875 of $95?   Hmmm its 7.4% not 5%. of GDP.  Someone's cheating, lets apply more cuts.  Surprise, surprise... those nasty Greeks are missing their deficit targets again.

The IMF assumed /calculated the Fiscal Multiplier was close to one, but it was found to be a lot higher in times of distress than in normal times. Europe's austerity policies were therefore founded on faulty assumptions. They should be reviewed. This is bascially what Syriza in Greece is asking for. It has to refuse to continue with a "bailout package" that is fundamentally wrong and destroying the real economy. For many Greeks the choice has become very simple: "your home or Grexit".

So why are some Governments so persistent, even if it means throwing away their own taxpayers' money? 

Well you need to believe in euro fairies as every time you don't believe in one, then one .... kind of exits.  Now you do believe in euro fairies, don't you .... ?

Never Never Land 2015

17 January 2015

Cloud cuckoo land

Yesterday I posted a piece here on a cuckoo clock (Swiss Fanc) that chimes for Angela Merkel and Alexis Tsipras (on an election victory) to do "realpolitik".  The explanation I liked on yesterday's global spasms (and the Greek story) comes from Paul Mason's Channel 4 post .  American readers might also want to check "Welcome to the Currency Wars"

"In Switzerland, they had brotherly love, they had five hundred years of democracy and peace – and what did that produce? The cuckoo clock.” ― Orson Welles (from "the Third Man")

.....But now Switzerland is famous for something else. This week its central bank abandoned a currency peg with the Euro with all the suddenness of a film noir plot reversal.
To explain. During the euro crisis, with money flowing into Switzerland driving the value of its currency up, the Swiss National Bank announced a currency cap. It would intervene in the markets, and print money, so that the Swiss franc’s value stayed pegged to the euro.
Given the money of the global rich is stored in Swiss francs, and quite a lot of east European mortgages also, the sudden rise in value after the cap was lifted works like this:

a)   The value of people’s savings held in Swiss francs rises
b)   The value of people’s debts in Swiss francs also rises, especially people in east Europe who took out mortgages with Swiss banks
c)    The big Swiss manufacturing and export sector will get hammered
d)   The central bank itself will lose a lot of money, because some of the money it printed was used to buy assets in euros and dollars, and these are now worth less in Switzerland. And that means Swiss cantons, including Graubunden where the Davos jamboree is held, will lose money – because they lose or gain from central bank profits.......

....The SNB’s move came, simply, because it could not go on financing the cost of pegging its own currency. The central bank’s balance sheet had grown to 80 per cent of GDP.
Next week, it is probable that the European Central Bank will make an equally dramatic move, announcing between €500bn and €1tr worth of quantitative easing, in a move designed to end stagnation in the eurozone.

What we’re seeing, then, is three central banks engaged in an attempt to use monetary policy and bank regulation against a tide of deflation and low growth. You could think of it this way: there is very little growth available in this corner of the world and one way of competing for it is by stimulating your economy with QE, and letting your currency fall against others.
The ECB’s gambit next week is a kind of “join the club” move – because everyone else will do it. Switzerland’s move was really an admission that: we can’t do anymore. And the Greek situation is being driven by voters signaling – via the poll lead of the far left Syriza party – that “we can’t do anymore”..... "The cuckoo clock chimes for the Swiss franc" 
 As for the EU, and its rationalized* foolishness, here's something from Aristophanes (the Birds ): - "the perfect city in the clouds, named Νεφελοκοκκυγία, (Cloud cuckoo land)" comes crashing down. 

I didn't even mention the crows..

PS -  I was tempted to make a more respectable post with some random terms.  These are a few terms that I might have failed* to exclude:

*rationalized -- the world does not makes sense; make the world smaller until it does.

endogeneous - nothing exists outside the box

lower (and zero) bound interest rates -  we can't find the box

exogenous  -  god help us

The Impossibility Trinity 

Black S̶w̶a̶n̶ Wednesdays 

25 November 2013

German Macho-economics - Wolf gang pacts 1 and 2

"The road up and the road down is one are the same."  Heraclitus 535 BC–475 BC 
Not all countries can run trade surpluses at the same time; someone's exports is someone else's imports.
"The world should rejoice at the positive economic signals the eurozone is sending almost continuously these days".  Wolfgang Schäuble 

G̶e̶r̶m̶a̶n̶ Schäuble Macho-economics Wolf-pact version one - German Surpluses
"Take Germany. In the late 1990s it was the undisputed “sick man” of Europe – seen by domestic and international commentators alike as uncompetitive and condemned to decline ...... A first wave of adjustment, starting in 2003, focused on strengthening employment incentives, streamlining the public sector, fixing social security and raising consumption taxes. Down to shop-floor level, companies and unions worked together to make labour more flexible........"  Wolfgang Schäuble 
Germany’s external balance deficits became substantial surpluses after the creation of the Euro. In effect, this was underpaying the German worker's contribution to output and overcharging the German consumer.

Why? Here's a slightly classical version.

When the sales value generated by the demand for a country's exports exceeds the sales value of its demand for imported goods, the excess value appears as surpluses in the country's trading account. The surplus is an excess demand (for exports relative to imports) and, as such, a pressure for prices of exports to rise relative to imports.  There is no internal eurozone system of exchange rates to do this in one movement. Hence the argument for economic reforms to ensure perfectly working competitive markets.  However, if the price mechanism works then this excess demand transmits a demand that leads to higher prices of resources producing German exports ie it ought to be signaling a rise in wages.

However, here lies Schäuble's "down to shop-floor level, companies and unions working together to make labor more flexible" - a strange meaning of flexibility that restricts German wages from being upward flexible.

When the price of labor is suppressed then the demand for other inputs (producing any given level of output) and other production mixes are suppressed,  This undermines real investment, distorting the production mix to screw up the economy's 'production function". Keeping wages down below their "market values" damages the efficiency and growth potential of an advanced industrial economy.

Thus to persistently maintain trading account surpluses is to perpetuate a disequilibrium; one that screws up the price mechanism in a way that doesn't allow the excess demand for German exports to be translated as a demand for investments in technology factories, etc.  To do it persistently, is to  move the economy towards a cheap labor one and away from the traditional German capital intensive one.

And so trading imbalances create investment problems (for a different way of looking at this see a previous post  National Output for Mummies 101)  and this is what the statistics show -  Germany has a huge private investment gap.
"The share of investment in gross domestic product is one of the lowest among industrialised countries. It has been declining rapidly, from an average of 23 per cent in the 1990s to less than 17 per cent today" Investment, not the surplus, is Germany’s big problem Fratzscher 18th Nov 2013
via CA Surplus and investment are highly negatively related.
Given how these distortions can impact investment, it is foolish to merely see trading surpluses as an improvement in competitiveness.  There's a hidden inefficiency problem The artifical reduction of wages relative to the cost of capital undermines investment and will affect the long term competitives of an economy.

International competitiveness is measured by the relative prices of domestic goods to foreign goods. When the word 'prices' is then replaced by the word 'wages', the above investment is keep hidden. Even worse, this is something that we really shouldn't being doing when economies are in disequilibrium as a result of a global finiancial crisis. Correcting for problems that appear as a result of a breakdown in global financial markets by interfering in labor markets to reduce wages to restore  "competitiveness" is an illusion.  Beg-thy-neighbor competitiveness reduces everyone's growth. Short-run gains come at the expense of under investment in capital and lower growth rates.

German trade surpluses and investment problem spills over into the rest of Europe. An imbalance in one market creates imbalances in others. By definition, Germany's trading account surplus means the country is a massive net lender to others. A surplus in one place implies a deficit in another place. These capital outflows were based on financial returns and guarantees that did not reflect economy's actual economic returns, but were based on balance of payments funding needs.  The surplus led to over-lending that fueled property and  bond (trading deficits have to be financed) bubbles that burst as unsustainable debt crises in the periphery. When the bubble burst, the risks were were minimized by lenders exerting political control - by doing whatever it takes - to extract measures on the borrowers.

This is dark side of the trading imbalance. The profits made by maintaining the imbalances are private, but the risks and losses are social, that is passed on to the public ie the tax payers. The public swallows this with the help of a media narrative that plays on national stereo types.  The debate is reduced to whether Hans or Costas is to blame. Obviously Costas is to blame. So his wife, children, friends, pets, neighbors, visitors and anything that happens to move within the national borders should pay.

A second strange idea is the macho idea that surpluses reflect a superior method of production or product: the German brand.  There are better cars in the world than Mercedes; but they don't dominant sales. There are worst cars in the world than Mercedes that can outperform it in reveunes.  It's all a question of price. If Indian (Land Rovers) and China invest better than Germany, then even Mercedes won't be cheap enough.

Another way to see the German trading surplus is as loss to the actual Germans who are produce it, as the result of an underpaid effort in producing excess output. In return for this, they are overpaying for the imports they consume.  Giving up something now for the future is an investment, this extra sacrifice does the opposite. Trading surpluses leaves the German economy either to disappear down a blackhole or sustain the demand for these surpluses to pay for someone's else deficit.  They also represent lost opportunities to provide social and public investments.  Schäuble is very proud "in streamlining the public sector, fixing social security and raising consumption taxes".

Germany is becoming a cheap wage rather than an investment economy. Trade surpluses are not good.  They don't represent how well you are doing, but how well you could have been doing.

Wolf-pact version Two - from German to Euro-wide surpluses (and deficits)

Surpluses in one part of Europe and idles resources in another is a gross mis-allocation of  resources. This cannot - no matter how good the country is at making cars -  be an efficient system.
"Everything flows and nothing stays." Heraclitus of Ephesus  
When the Eurozone stopped working, instead of dealing directly with the surpluses in the creditor countries, austerity was applied on the periphery.  The solution was to do what Germany did.  In these economies repressing wages reduced import demand rather than increased exports. (Besides if everyone is exporting, who is importing?) In effect, external trading balances are restored by creating mass unemployment and destroying the economy's internal markets.
"A second wave of expenditure restraint and reforms followed once the financial crisis was past its peak....Thanks in part to its education system, which is attuned to the needs of business, Germany has a youth unemployment rate below 8 per cent – the lowest in Europe" Wolfgang Schäuble 
Has there been a revolution in the German education system? Or is the Germany economy just sucking talented, skilled labor resources from the periphery economies where youth unemployment hovers around 50%?
"The adjustment was ambitious and sometimes painful but its implementation was flexible and adaptive. The European safety nets have provided a well-calibrated mix of incentives and solidarity to cushion the pain." Wolfgang Schäuble 
There is no solidarity or European safety net to cushion the pain. Safety nets may exist in the in the core, but they have been systematically ripped out in the periphery.  The "well-calibrated mix of incentives and solidarity to cushion the pain" disappears as one moves down from the creditor to the debtor nation.
"In just three years, public deficits in Europe have halved, unit labour costs and competitiveness are rapidly adjusting, bank balance sheets are on the mend and current account deficits are disappearing. In the second quarter the recession in the eurozone came to an end." Wolfgang Schäuble 
Again this is the cheap wage model, where competitiveness is not achieved by investing to improve productivity. "Bank balance sheets are on the mend" but inactive with little lending for investing in businesses. "Current account deficits are disappearing" as this what would happen when consumers become too poor to buy imports.

There is no end to the recession in the periphery and there is no liquidity where it is needed the most in the periphery.

Imperfect monetary unions worked by population movements.  Populations are being made to suffer or migrant.  The periphery economies of the Euro are forced, unwillingly but bonded by debt.  to apply internal devaluation.  The only real intent (excluding the increasingly but interestingly contradictory IMF) is not a major internal political and market reform of oligarchical and cartel market structures, but wage suppression (unit wage costs).

The obsession to create surpluses emphasizes cheap wages rather than sound economic investment.  As a result the core economies have a greater and greater appetite for labor resources.  In paricular
"Germany is ageing and shrinking. France and Britain will overtake it soon, in terms of population. Too few women enter the workforce and they have too few children. Germany is over-reliant on industry and underperforms in services. Over half of every generation leaves school after 10 years, often with only a rudimentary knowledge of English and similar cultural skills. Immigrants are still not welcome. Most of these problems could be fixed with quotas for women in senior management and for immigrants in the civil service and the police; allowing dual citizenship; and encouraging kids to stay at school. But these reforms are unlikely to happen." Guardian: Why Germany's strength is an illusion
This shortage not cleared (by demand and supply) by wages increasing, but by draining and selectivity picking from a large pool of idle labor resources from an increasingly poor periphery.

Again, not good news for German workers, as it will keep German wages low, but this time by labour resources (immigration) flooding in from the periphery to compete for jobs.  Its a toxic mix that will increase nationalism and racial tensions.

Thus Europe moves, disastrously, en mass towards a cheap wage model economy.  Even more disastrous, when one realize that the EU raises taxes from its working population to finance a system (Common Agricultural Policy CAP) that creates artificially high foods prices. A policy of lower wages with 38% of EU budget for the next five  years going to CAP.  Yet, only 5% of the EU population work on farms.  Something has to give.  Even without the political chaos and under investment, a cheap wage model of the economy is not sustainable when also coincides with a system that keeps food prices high.

Suppose somehow it does hold together, and labor flows back and forth between the core and the 'homelands' in the periphery in tune with the demands of  core's economy.  As cultural and national loyalties and prejudices increase, the pressure  (governments are forced to balance their  budgets) will increase on richer EU member to tighten up immigrant residency, voting and social benefits rights.  It then not that great a step for the European labor market to fragment into a kind of apartheid system with different class of rights and conditions in each of the 'euro homelands'.  Unless you are one of the fortunate few that will be reaping profits from such a system, it is good for no one....of any nationality.

12 November 2013

The four finger government

Greek PM Samaras' first comments after this week's vote of confidence were: "the Government has been strengthened". In reality they lost a MP and the majority is now only four:

A workable majority

but its quite big 

Where you can meet Greece's new media (take you for a) spin doctors 
Which translates as

the one-finger government: as  'partner' Venizelos realizes from the latest PASOK percentage in the polls

Which is a lesson, as discussions with the Troika tend to devour political parties one by one

And then there were none

.....which leaves someone a little Dazed and Confused - Hanging on by a Thread:

14 October 2013

Its a miracle!

The miraculous recoveries of Spain and Greece

with a little bounce off the bottom. 

And even better, the economies are being stabilized. 

and "aren't we lucky the most expensive machine in the hospital" still goes ping

but then it was about saving the machinery, not the patient.  

IMF Documents Excerpts May 9, 2010 meeting at which the IMF board approved Greece’s first bailout. (published in the Wall Street Journal and copied below)
Swiss executive director Rene Weber :  We have “considerable doubts about the feasibility of the program…We have doubts on the growth assumptions, which seem to be overly benign. Even a small negative deviation from the baseline growth projections would make the debt level unsustainable over the longer term…Why has debt restructuring and the involvement of the private sector in the rescue package not been considered so far?”
Brazil’s executive director Paulo Nogueira Batista :  “The risks of the program are immense…As it stands, the programs risks substituting private for official financing. In other and starker words, it may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bailout of Greece’s private debt holders, mainly European financial institutions.”
“Our decision to go along with this problematic and risk-laden program should not be taken to mean that we will support it in the future. Going forward, we will consult with our authorities and other chairs to make sure that the fund is not led along the path of endorsing a program that may prove to be ill conceived and ultimately unsustainable.”
Argentina’s executive director Pablo Andrés Pereira : “The alternative of a voluntary debt restructuring should have been on the table…The European authorities would have been well advised to come up with an orderly debt restructuring process. The bottom line is that the approved strategy would only have a marginal impact on Greece’s solvency problems…It is very likely that Greece might end up worse off after implementing this program.”
Iranian executive director, Jafar Mojarrad : “We would be interested in staff clarification regarding the option of debt restructuring. We would have expected such an option to be discussed in the staff report, even if the intention were not to retain it.”
Egyptian director Shakour Shaalan : “We would be grateful for further elaboration on the assumptions…underlying staff’s medium-term growth projections. They appear to us to be rather optimistic…We would be interested to learn from staff whether debt restructuring was among the options considered in the assistance package. Debt restructuring may be looked upon disfavorably, but it should be envisaged.”
India’s executive director Arvind Virmani : “The scale of the fiscal reduction without any monetary policy offset is unprecedented…(It) is a mammoth burden that the economy could hardly bear. Even if, arguably, the program is successfully implemented, it could trigger a deflationary spiral of falling prices, falling employment, and falling fiscal revenues that could eventually undermine the program itself. In this context, it is also necessary to ask if the magnitude of adjustment…is building in risk of program failure and consequent payment standstill…There is concern that default/restructuring is inevitable.”
China executive director He Jianxiong : “The risks to the program are significant…The growth projection appears optimistic.”
 Also from the minutes of the May 9, 2010 board meeting on the Greek bailout:
“The exceptionally high risks of the program were recognized by staff itself, in particular in its assessment of debt sustainability.”
“... according to the Brazilian ED, ‘a bailout of Greece’s private sector bondholders, mainly European financial institutions.’ 
The Argentine ED was very critical at the program, as it seems to replicate the mistakes (i.e., unsustainable fiscal tightening) made in the run up to the Argentina’s crisis of 2001. 
Much to the ‘surprise’ of the other European EDs, the Swiss ED forcefully echoed the above concerns about the lack of debt restructuring in the program, and pointed to the need for resuming the discussions on a Sovereign Debt Restructuring Mechanism.”
The Swiss ED (supported by Australia, Brazil, Iran) noted that staff had ‘silently’ changed in the paper (i.e., without a prior approval by the board) the criterion No.2 of the exceptional access policy, by extending it to cases where there is a ‘high risk of international systemic spillover effects.’”
Christine Lagarde, IMF Managing Director, in June 2013:
“In May 2010, we knew that Greece needed a bailout, but not that it would require debt restructuring…We had no clue that the overall economic situation was going to deteriorate as quickly as it did.”
And where's that "Le Grand European Investment plan"?

And that super big recovery? ... Remember the medicine.

Got the picture?
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30 September 2013

National Output and Disintegration For Mummies

1. Mummified and Buried with debt
2. National Output for Mummies 101
3. Europeaness and the Bubble-gum card
4. Bleak House
Recent economic news seems to justify optimism.  The summer saw well-behaved sovereign interest-rate spreads, a strengthened euro and a recovery in equity markets. Very superficial.  
Part one: - mummified and buried with debt for the afterlife:
The underlying crisis in the euro-zone is still there and very real. Many economies in the Euro-zone face very poor growth prospects. Debt overhang and balanced-book repression still haunts investment - private 'capital' that could go to productive investment remains 'flighty'.

Euro-zone's self-inflicted macroeconomic disequilibrium will persist - a cycle of internal trading imbalances, bubbles, financial repression, deflation and uneasy peace (global upturns and elections). Press one button to restore a member's import-export trading balance and create internal imbalance. Press the other to restore its internal balance and create an external trade imbalance.

Without growth prospects, unfortunate economies are mummified and entombed. A one trillion euro Pyramid (that give liquidity to banks to buy government bonds) to ensure a safe journey to the afterlife (in 2020) is not enough.  Euro tribes may still revolt and seek a new promised land.

Solving the euro-zone trading imbalances (caused by misspecified fixed 'terms of trade') by destroying trade (depression) is (fiscal compact) madness. There is still no flexible mechanism to adjust a members' terms of trade to the constantly changing conditions of global trade. Instead, adjustment is by sluggish corruptible unfair structural reforms and population movements that (works in the USA but) destabilizes euro member's political systems.

The resolution to this very European economic disequilibrium (reoccurring internal trading imbalances and more potential 'debt overhang') is politically unfeasible.  It doesn't take much to stir up a new crisis.  Successful monetary unions follow political unions, not the other way around.

But "We are all Europeans. I'm European. You're European"
"We're all mad here. I'm mad. You're mad."  How do you know I'm mad?" said Alice.  "You must be," said the Cat, "otherwise you wouldn't have come here."  Alice-in-Wonderland
Germany elected a Mummy ('Mutti' Merkel ), trusted by her voters to handle Euro crises. The 'Home' and "Mummy knows best" comes first. But why should Germans care about Greeks more than Germans?  How can European policies not be dominated by national media and prejudices?  How can voters not worry more about their own economy and livelihoods than elsewhere?  How can voters, suffering years of economic repression, not worry about their livelihoods, not resist and not change policies and not create another Euro-zone crisis?  Does Greece having a primary budget surplus make it bolder, more independent and freer ... to do what?

Debt repayments:  "Two Tens for a Five"

Greece still needs a real restructuring of its debt, including deep write-offs. To do this in any real meaningful way, Greece will still face a stand-off with the creditors and will again be threatened by euro exit. Without real debt relief and sustained economic recovery, a choice becomes even more clearer to voters. Either leave your country (and move to other increasingly xenophobic countries) or make it leave (euro exit).

Debt Overhang
Greece's debts is currently higher than it was in 2010. Its economy has collapsed by 25% and its debt to GDP approaches 180%. It is maddening ratio that stubbornly refuses to go down.  On the other hand, policies that reduce a denominator to (pay and) reduce a numerator (Debt / GDP) will do exactly what to the actual size of the ratio?

Unmanageable debt burden compromises economic growth. It is a ghost that haunts any Euro-zone country finding itself on the wrong side of the trading balance. It distorts and crowds out investment, with an economy's funds increasingly managed by feudalistic principles rather than by economic returns.  "Debt overhang" (debt is so large that it threatens ability to repay its past loans) scares off potential investors who will need to deal with the unpredictable actions of a government prioritizing impossible debt-servicing obligations.  The returns from investing in the economy are effectively "taxed away" by the repression imposed by existing creditors who had over-lent.  Bad investments, that are not allowed to fail, drives out good investment. When investors do appear, projects with quick returns rather than for long term projects that make growth sustainable are more likely to be chosen.

Debt per se is not a 'bad'. The addition of debt can finance and enhance the country's capital stock and productive capacity and restore a country's competitiveness. In Greece, the additions of debt to maintain (rather than write off) bad debts perpetuates 'bad' lending and a rotting system. It attracts vulture funds more than real investors. Debts should have been written off back in 2010 to restore the confidence of investors in the real economy - not the confidence of 'failed' lenders to a failed system. It was bad capitalism not to write off bad debt and to disable the reboot button.

The flaws in the Euro system are still there.  There is still no flexible mechanism to replace the role of exchange rates - instantaneous adjustments to a country's competitiveness. Recovery and short to medium term attempts to stimulate the European economy will regenerate new, if not old, trading imbalances.  As for long run solutions, Europe does not seem able to coordinate any 'agreed' and meaningful  policy. An adjustment (in the absence of internal exchange rates) of economies by population movements or depopulation leads to more political uncertainty, economic and regional inequality and nationalism and political extremism.  Poorer regions will lose more of its taxpayers and human capital whilst at the same time be faced with an aging population and rising health and welfare costs.  

Government budgets crisis, even if it is enshrined as the 11th commandment "thou shall not overspend",  will not go away

Part Two: National Output for Mummies 101 (you may want to jump to Part 3)

Or you might read Credit Writedown's  Why can’t people understand national accounting?
"the whole framing of the problem presented in the media is wrong because it gets cause and effect totally backwards. The question the media asks is "how can government cut the government deficit?" The real question is "why are deficits high to begin with and what should we do about it?" And it’s this question that gets people into trouble."
An economy's output cannot simply be measured by adding the monetary value of each producer's output -  the output of one (wheat) is another's input (baker) - but it can be measured by adding the differences between the value of output (bread sales) and inputs (wheat purchases) - "Value Added",

If a producer's balance sheet profits appear as:
Profits  =  Sales  - Purchases From others  -  Depreciation  - Wages  -  Interests
then a producer's "Value Added" is
(Sales - Purchases from others )  =  Depreciation  +  Wages   +  Interest  +  Profits
 'Value Added"  =   (S - PF)    =         DP        +      W      +      IN      +      P
and the "Value Added" for all producers is:
GNP at factor cost  = Σ (S - PF)  = Σ (DP + W + IN + P)

Allowing for depreciation, the monetary value of an economy's output (Net National Product NNP)
NNP = GNP - Σ DP  = Σ (W + IN + P)
is equal to all the possible ways of earning income - National Income (Y).
NNP  =  Y 
Output, including imports, goes to consumption (C), investment (I), government (G) or is exported (X)
IM + NNP  = C + I + G + X
Available resources  =  Resource use
NNP  =  C + I + G + (X - IM)
Incomes (wages, profits/interest and rents) are used to pay taxes (T), saved (S) or spent (C)
 Y = C + S + T
Savings is postponed consumption, stored under a mattress, bank account or as "financial investments" (stocks and bonds) with various degrees of liquidity or risk, that lay claim to income from future production. 

The national income accounting identity (NNP = Y) gives
C + I + G + (X - IM)  = C + S + T
I + G + (X - IM)  = S + T
(X - IM) = (S - I) + (T - G)
Current Account (Trade) balance  = Private sector net savings + Government budget account

This [ (X-IM) = (S-I) + (T-G) ] is the Euro-zone default line

Persistent trading deficits (X - IM) < 0 will always be accompanied by accumulating (private or public) debts ie
 (S - I) + (T - G) < 0. 

The trade imbalances (X - IM) do not easily clear, as there is no simple mechanism to adjust relative prices (domestic to foreign prices). There is no exchange rate, nor domestic currencies, to do this job.  The impact of these surpluses and deficits (and a political 'tragedy of the common' euro debts), has distorted the European investment mechanism
I = S  -  (G - T)   -   (X -  IM)
net investments =  private savings +  govt budget  +  trade account

In Spain this manifested itself  in a construction property bubble.; in Greece, net imports was offset by government deficit; and in Ireland the government debt replaced banking debts.  

It is the current account balance which drives the flow of wealth and employment within the Euro-zone. The tail that wags the government doggy budget deficits.  Even if the EU's Fiscal Compact works (T- G = 0), trading deficit will be accompanied by private sector debts as
(X - IM) = (S - I)
This could be resolved by either exchange rate or by efficient financial markets on the other side of the above equation. Euro-zone has neither:  no internal exchange rates, a financial system (that allows the 'bad' not to fail) and, in turn, an inefficient or corrupt investment mechanism. Using internal devaluation to adjust domestic to foreign prices (international competitiveness) fails when the internal markets are themselves monopolistic. Getting a corrupt system to reform itself doesn't get the intended results.

Net investment (I) in the national accounts may increase but, in a macroeconomic disequilibrium, this can be an illusion. There are three main components of net aggregate investment: 1)  'real' economic investment (additions to the stock of capital - machinery and equipment) with returns from future output),  (2) construction (factories, offices AND residential ) AND (3) inventories (intentional or not eg unsold goods).  

When the system fails, this mix can become very toxic. Real economic investment (1) is overwhelmed by (2) construction and property bubbles that eventual show up as (3) unsold goods and stocks.

Part Three:  'Europeaness' and the original Bubble-gum card 

Bubbles are shared fantasies, pricked by reality. Scrams are getting enough people to believe in the fantasy to pay for it. Euro-zone convergence was myth.  The euro crisis has been a story of more and more dealings in government debt, insider trading, bribes to politicians, and debts backed debts to spend on purchasing more debts.

The trade benefits of convergence turn out to be as mythical as the South American Trade benefits were to South Sea Company (UK early 1700s).  The company's stock rose (S. American trade was under Spanish control) with more and more dealings in government debt fueled by insider trading, bribes to politicians, and loans backed by those same shares to spend on purchasing more shares. The renewal of war with Spain in 1718 did not prevent its collapse in 1720.  
The South Sea Bubble Card - 1720 
The South Sea Company was created as a public-private partnership to reduce the cost of national debt under the disguise of a monopoly of South American trade (which was under Spanish control).  In 1718 war broke out with Spain. The bubble burst in 1720. The only real trade that occurred was in people (slaves)

Effective financial markets ought to mean that the returns to investment (future profits and output) are related to borrowing costs (debts) where the risk of failures sold and brought in derivative markets. A rise in net investment ought to indicate an increase in the productive capacity with profit-taking accruing from wealth creation. The risk of returns failing to meet lending/borrowing costs ought to be dealt with by the secondary markets (buying and selling of risk, insurances and the pooling of risk etc). When profit-taking, risk-taking and borrowing costs become increasingly disconnected from the economy's actual returns and risk, increases in aggregate investment are illusory.

Net investment (and GDP) in the euro zone periphery flowed into bond, construction, real estate and asset bubbles. Trading surpluses were fed into a slot of a bubble-gum vending machine that fed deficit countries forced to operate on 'bad' Terms of Trade. Like Gresham's Law, a debased currency of circulating debts leads bad investment (debts) driving out good investment (debt).  

Once the bubbles burst, trading deficits (X- IM) fall by the private sector (S-I) imploding - investments, output, consumption (and hence imports) and savings and investors run for cover.  The trading deficit economy, is then subject to a viscous circle of underdevelopment, buried by the weight of accumulating debts that become increasing larger in real terms as its future income and GDP falls.  

The Abbott & Costello Multiplier 

The result is a macroeconomic disequilibrium where consumption, savings, investment, government expenditure and tax plans will collapse upon each other. The economy does not grow but shrinks its way out of financial crises.  

Part four: Bleak House
"Suffer any wrong that can be done you rather than come here!"
Jarndyce v Jarndyce  a large inheritance entrapped in a case dragging on for many generations that is finally resolved by the legal costs devouring the entire estate. (Charles Dickens' Bleak House)
Europe is threatened with long-run stagnation. Its investment engine over-flooded with toxicity, the funds of trading surplus economies' channeled into poor investments and pyramid schemes whilst deficit economies are asset-stripped of their human capital.  A flawed monetary union adjusts by population adjustments (emigration, lower quality of life, lower birth rates, lower life expectancy etc).  The periphery's young migrate to the core keeping its wages costs low and its relative competitive advantage. Human capital (education, healthcare, etc) that was paid for in the periphery yields its returns to the core. Left behind is an increasingly unskilled, aging and unhealthy population tied to debt repayments struggling on third world wages to meet European food prices (distorted by a flaw Common Agriculture Policy). 

You cannot have the holy trinity of stable current accounts, sustainable debts and balance government budgets.  They could be sustained by a permanent system of European-wide transfers. Something like the original Marshall Plan, that laid the foundations to the original European Community, would do. But this would imply a degree of "European-ness" that does not exit.

Without debt forgiveness and real investments, a small indebted country should keep a euro-exit card up its sleeve and not be afraid to play it.
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26 October 2012

Bye Bye Democracy Hello Bond-Age

Greekistan: latest proposals leaked on how to deal with the troublesome colony German Finance Minister wants Greece’s Tax and VAT revenues place in an Escrow Account. 

So if Greece makes a primary budget surplus then a dedicated receipt (such as part of VAT income)  transferred monthly to the trust account. And if Greece doesn't make a surplus, then automatic budget spending cuts equally divided through all spending programs. If it Greece refuses bring in officials who will make them as democracy is a form of cheating.  And if all this is unpopular with the natives, throw in some sweeteners.

But not too sweet.  "Growth and job-enhancing measures" (or the further reduction of wages costs livings standards) and "the release of some structural funds dedicated to the 181 projects of high priority,” (feed the local Oligarchs - usual conditions of having funds to match EC funds will probably apply)

The Road to Serfdom or Bond slavery 

The debt / GDP ratio?
 It gets worse all the time.  As long as interest payments on public and private debt remains greater than the rate of investment and the ability to pay, the economy will be entrapped in a dynamic ‘vicious cycle’ of debt.  Debts are "excessive" due to the inability to pay (not size per se). Just throw in another forecast, who cares if they miss the targets?
“Yes, but shouldn't the arrows being getting closer?” asked Alice,
“Off with their heads!” roared the Queen
 "... Look, fewer misses"
So the external balance (Greek exports to imports) was positive. The poor are too poor to buy imports  and the middle classes are being eradicated  “In Greece right now, to be unemployed means death”  - less heads to be counted in the future unemployment statistics.  As for Youth employment, call it Youth-anasia.  An Export recovery? The latest Industrial orders statistics are not so pretty ("Are there signs of a turn in the Greek economy?")

"It is clear that Greece is off track and there is no chance they will cut the debt to 120 percent of GDP in 2020 as envisaged."  (a euro zone official, who insisted on anonymity).

Austerity undermines the ability to pay, driving more and more people into debt and poverty.  "Creating the 'conditions of growth"by doing the opposite.  Asset stripping is not economic development.  Turning bad debts into a (bad taxes) fiscal problem, and passing debt burdens on to taxpayers, means less income and revenues. A shrinking domestic market, rising cost of subsistence (wages) and an increasing ugly political environment for investment, are not exactly ideal conditions for making a local producer  more competitive in global markets.

Share photos on twitter with Twitpic
Euro crisis in a bin  - note the desperate advertising leaflets
photo via @asteris
Anyone really believing in this Austerity nonsense? Even IMF economists show that the damaging multiplier effect of austerity is very severe (The IMF and the End of Austerity)

Instead of growth, citizens are burdened and enslaved by debts, who are then told that they are not poor enough to be competitive, are cheats and are then asset-stripped.  Local oligarchies can then move their capital back in, buy everything on the cheap.  

A transfer of wealth from those not poor enough to those not rich enough. 'Perfect Markets' are only for the few with 'Rentiers' rather than producers

All this for our children's children's welfare? Younger generations suffer the most, can't afford children, and more and more families in Greece are forced to surrender their children to charities.  (One surplus that Greece is producing  - re: Swift's Modest Proposal)

Generation X debt reduction.  The present generation sacrificing supposedly for the next by sacrificing the next (jobless youth/at 58%). Taking away someone's future to secure someone else's today. Inverse / Perverse investment may secure today, but  no one safe tomorrow. 

There are three basic ways to reduce the debt-to-GDP ratio/ fraction
1) reduce the numerator e.g Debt forgiveness / default 
2) increase the denominator e.g. growth or/and inflationary increases in GDP or 
3) remove the statistic - remove the sovereign state. 

When debts cannot be paid or rolled over, foreclosure time arrives and Government is removed. Welcome to "More Europe - less democracy," Don't bother voting on this; you can't. 

Economic growth may come with pain, but the idea that pain (or torture) generates growth is perverse.

Medicine?  "Now the drugs don’t work; They just make you worse" Verve (via )

And the goals of economic policies are ?
Human Happiness? Welfare? Efficiency? Competitiveness?

RT : Efficiency is a highly developed form of laziness <<<--or an unit of output produced with the least effort.   To be 'efficient' at producing something that no one wants is meaningless. So whose wants/welfare are we referring to?

The 1% Pareto Optimal rule
Efficiency defined as where no gains can be made without making a very wealthy person worse off.

Does it now mean increasing the number of poor, reducing numbers of small business enterprises and increasing the relative power of oligarchs and monopolies?  Are we (with the help their media outlets) confusing "enhancing the conditions" for making abnormal / excessive profits with  'competitiveness'?

"Trying to makes ends meet, you're are a slave to money and then you die" Verve  - Euro's Bitter Sweet (drug related) Symphony
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