22 June 2011

Blessed Are the Cheese Makers

-->Investment - 'its a bit runny, sir'.

'cheese' = an item that requires the lips to be stretched in the appearance of a smile; 'Feta' – in slices to serve on a plate, Italian word fetta (slice) 
--> Mediaeval Times

As long as interest payments on government bonds remain greater than the rate of investment THEN bond slavery - modern feudalism?  What determines Euro market power?
  • Ability of a bank or financial agency to control the price (interest rate) by controlling the amount of debt that a country chooses to buy or sell.
  • Maximise profits at the limit the country's ability to pay. Replace currency manipulation with debt manipulation. 
  • Ensure the ability to earn does not exceed the ability to service debts by pursing a tight monetary policy to regulate 'inflationary forces'
And a Green Future
A positive spin to the austerity measures is ......

P.S:  'Nobody Expects the Spanish Revolution' on protest banners  - here's the old Monty Python clip:

--> Lost Transcript:

IMF/ECB Package 1.0
The TroikaNobody expects the Troika! Our chief weapon is surprise...surprise and fear...fear and surprise.... our two weapons are fear and surprise...and ruthless efficiency.... Our three weapons are fear, surprise, and ruthless efficiency...and an almost fanatical devotion to the Euro.... Our four...no... amongst our weapons.... amongst our weaponry...are such elements as fear, surprise.... I'll come in again.

IMF/ECB Package 2.0
The Troika: Nobody expects the Troika! Amongst our weaponry are such diverse elements as fear, surprise, ruthless efficiency, and an almost fanatical devotion to the Euro, and nice uniforms - oh damn! …. I can't say it, you'll have to say it.
Prime Minster: What?
The Troika: You'll have to say the bit about 'Our chief weapons are ...'
Prime Minster: I couldn't do that...
The Troika bundles the Prime Minister outside.

IMF/ECB Package 2.1
Prime Minster: Er.... Nobody...um....
The Troika: Expects.
Prime Minster: Expects... Nobody expects the...um...the institutions...um...
The Troika: Troika.
Prime Minster: I know...I know! Nobody expects the Troika. In fact, those who do expect...
The Troika: Our chief weapons are...
Prime Minster: Our chief weapons are...um...er...
The Troika: Surprise.
Prime Minster: Surprise and...
The Troika: Stop. Stop there! Stop there. Whew! Our chief weapon is surprise, blah, blah, blah, blah.
******* Censored ********
The Troika: I..... I know. I know you can't. I didn't want to say anything. I just wanted to try and ignore your crass mistake.
Prime Minster #2: I...
The Troika: It makes it all seem so stupid.
Prime Minster #2: Shall I, um...?
The Troika: Oh, go on, just pretend for God's sake.

20 June 2011

Blowin' in the Wind

'A week is a long time in politics'. Like all regime changing events, realisation and policy, when it finally comes, is always too little, too late. The headlines today look different from a week ago (BBC's Gavin Hewitt's article Greece Crisis: Revolution in the offering?).

Plan 9 from Outer Space (Grave Robbers from Outer Space) is not working. Greek Sovereign Debt is not sustainable.  Uncertainty and confusion continues to reign among decision makers throughout Europe.

(Current holder of the Golden Turkey Award is Governor Walker for the Wisconsin Budget Repair Bill. Wisconsin is a glaring an example of a dogmatically US state, struggling with a budget deficit, applying harsh austerity measures.)

On the 15th June, the people that were supposed to be saved took to the streets and the traders that were supposed to buy Greek debt took up more insurances against default and moved as far as away possible from any stock remotely connected to Greek debt. A new package, a re-run of the previous one with more austerity, buys more time... at a price.

A failure of Greece to pay its creditors will make the Greek banking system insolvent overnight, triggering major losses for Europe's biggest banks holding Greek bonds and Greek banking stocks. (A report (here) from the Swiss Bank UBS shows the most exposed European Banks a Greek default.)  So the plan is to buy time. Manageable, perhaps, but now repeat the same process for Portugal, Spain, Italy and Ireland. The ECB, the European bank system, and the Euro zone could survive Greece, perhaps Portugal, possibility Ireland but certainty not Spain or Italy. Moody's on 17th June issued warnings on the sovereign rating of Italy — the Euro zone's third-largest economy.

Default is coming. The German Chancellor Angela Merkel, almost came close to imposing some form of default but conceded to the French President Nicolas Sarkozy 'soft option' of voluntary (!) haircuts and left Luxembourg Prime Minister Jean-Claude Juncker accusing Germany of "playing with fire". Default might be avoided this time, but what about next time?
The myopia and lack of coordination of Europe's elites reduces the European Community to a contradiction in terms. There is no mechanism, or collective action, to deal with a permanent trading imbalance produced by a dogmatic, poorly designed monetary union. The crisis is not the fault of one tiny country.

One can understand German frustrations, The fall in German real wages (blue line below) fuelled export-led growth, creating a trading surplus and deficits in the Euro zombie periphery. Not surprisingly, German tax payers don't want to pay Euro bailout taxes. Trade deficits are bad, but so are trade surpluses – think of it as wasted effort, that is not channelled back into the Euro Zone economies.
Euro Zone has a systems error. Replace it.
1.  Move from “One Market, One Money.” to “One Money, One Debt, One community”
2.  Forget 1930's austerity measures, jump over the Second World War and go straight to the Marshall Plan (European Recovery Program).

Meanwhile, the debt / GDP ratio is rising. When the average rate of interest of the debt is greater than the economy's growth rate a country it becomes entrapped a ‘vicious cycle’ of debt dynamics commonly experience by third world countries. “Greece and the EMU” (W. Buiter et al. ). Greece was thus given the world’s lowest credit rating, CCC, by Standard and Poor's.

To get out of this spiral, structural economic reforms to be tied to an investment program (not an austerity punishment program) that increases Greece's ability to pay debts and/or a period of artificially low interest rates to shrink its debts and to encourage investment.

The longer the self-denial of Euro's leaders is, the bigger the bill the taxpayer will receive. For deficit Euro zone countries this is via austerity measures; for surplus Euro zone countries this is via increasing funds to support debts and rising interest payments to creditors.

The debate is still entirely focused on with who pays for the cost – remember Twister?

The state reasoning in the world in one word: Newt

IMF/ECB package 2. 0

There is very little time for it to work: to make more structural reforms to improve competitiveness, tighten the screw on tax avoidance and sell off state assets.  Desirable it could be, but unconnected to the evolving situation in Greece.

The idea of selling off state assets when markets are very low is an act of desperation. (How can governments blame markets, then next day feed them with freshly cut meat?).

Defaulting on sovereign debt, unlike corporate debt defaults, does not involve the seizure of domestic assets to pay back funds which usually leaving the lender in an awkward position. Why not give  back the Frenchand German warships and planes Greece was pressurised into buying in March 2010. (German submarines at approx. $6bn, French combat helicopters at $3bn and French Mirage aircraft at about $2 bn).  Greece spends more of its GDP on the military than any other European Union country. Is Turkey more likely to take Greek assets than the creditors?

Curiously, the structural reforms don't include reducing military and law enforcement expenditures.  A key area for the future?

Greeks are willing to make sacrifices. Many of the proposed structural reforms could be understood and accepted, but not to a system that is widely perceived as alien, unfair and corrupt. Even worse, when IMF/ECB's foremost task is to save the banks. The people who could revitalise the economy are camped outside plotting the government's downfall. And even unemployed tax collectors are camping side-by-side with them. (http://www.bbc.co.uk/news/world-europe-13801650)

Austerity measures are locking out a generation of young energetic internet savvy users that are increasingly determined to overthrow an establishment it despises. This is a generation that already felt locked out before the Euro crisis began in 2009. December 2008, saw a massive youth uprising throughout Greece in reaction to the police killing of 15-year old Alexandros Grigoropoulos. They are older and they haven't forgotten. Greek society was already smouldering before the first austerity measures added fuel to it.  

An Alien State and widespread ingrain tax avoidance

Greeks are becoming increasingly fed up and unwilling to swallow a distasteful medicine that is increasingly be viewed as being highly poisonous. The failure to deal with a corrupt political and unjust legal system leads to a failure to eliminate widespread tax avoidance and implement structural economic reforms. In practise the tax system is regressive,  A complex, overwhelming slow legal process, loopholes for vested interest groups and the ability to hire a good lawyer and accountant allows the wealthy to exploit and twist the system to their liking. With off-shore banks, and the ability to move assets quietly aboard, they basically don't pay that much tax.  The poorer you are, the more hungry the bureaucracy is for papers.
"We have reason to believe you are defrauding the “Hellenic Republic of Greece” - Tax inspector
"Oh... how?" - No. 13,456 "Tell me, Mr 13,456 why are you living?" " …? ." “The evidence attached to your income tax declaration is insufficient to justify you being alive. I am afraid we will have to start proceedings to recover amount we objectively consider to make up the shortfall due ..”
“But...” “.. And you will be fined for making a false declaration ….”
“We will also need documented proof that you do not exist elsewhere in the world” “ …. do I need to prove that a teapot is orbiting the sun?!”
“No, we believe you”
Actually, the tax officials can be very human when you treat them as such. They can help you to bury the papers. A practice that the state is intensifying its efforts to stop. This Spanish video (with English subtitles), I found at KTG,  captures the conflict with the state.

Why not apply the same type of medicine to politicians?  The wealth of politicians when they entered public life must be checked and compared with their wealth today, and they must be asked to account for the difference.

Instead of taking from the pensioners, why not fund it from the political elite. Reduce the number of members in parliament as they have no power over the   economy or social policy.  Parliament is bloated with professions that look after their own interests, multiply the numbers of ridiculous laws and cogs up the legal system. Members of this dining club need to work up to 8 years to get a nice pension - I wonder who thought of that law... oh they did.  Why should it be different from any other Greek citizen? Reduce their salaries, extras and impose harsh imprison sentences, with 'no get out of jail cards', for the corruption of ministers, members of parliament and public officials. Abolish the statutory limitations, which in a slow legal complex process, protects them.

The 'Big Fat Greek ' political party must end, but I doubt if it will end voluntarily. Economic reforms need first to deal with a corrupt political and unjust legal system: see The Injustice of the Justice System and Vikings in Greece: Kleptocratic Interest Groups in a Closed, Rent-Seeking Economy

It is impossible to apply any austerity measures fairly without dealing this. It is a constant conflict that encourages non- cooperation, widespread tax avoidance and intensifies the anger towards austerity measures. A lack of faith in the legal and political system and resentment of less privilege classes to paying taxes that feed the pockets of wealthy political dynasties and vested interest groups. When the screws of tax avoidance are turned, who exactly going to get screwed? The chants on the streets are 'thieves!' and the slogans range from “We didn't get independence in 1821'', 'Its not our debt' to even 'No taxation without representation'. There is a willingness to sacrifice but not an unjust and unfair future.

Only an alien state would put the word “Greek” in front of the name of every single state organisation. We don't say the Post Office, we say “Greek” Post Office. When you call for the 'police', you call for the “Greek Police” not the 'Police' – just in case the wrong ones turn up.

Political parties has candidate lists which, in the Greek proportional representation system, can be controlled. Disagreeing with those at the top of list, and those financing expensive media campaigns, moves you down the list. This blocks new blood and new ideas to such an extent that the political system is effectively run by a few political family dynasties. Shares move up and down in the Greek stock exchange according to which party they are tied to. Changing the legal and political system is necessary for the structural economic reforms to have any impact on the economy - they can't be separated.  This is what the protests are about. If the government can't do it, then ....


A Footnote: A Quick Tour of Recent Greek history.

Greek state is burdened by the decaying remains of past regimes, past dictatorships and foreign administrators. There was no post war dream for Greece. Greece has no Victory Day to celebrate the end of the Second World War. War continued into the Greek civil war, becoming the first conflict of the Cold War. Napalm bombing was first used here, not so far away from where I live, before the Korea and Vietnam Wars. The were no Nazi War Trials, and the coercion of citizens into signing declarations of submissions and loyaliy to the new post-war western-backed nationalist state, has haunted all administrations since.

Many of those fighting against German occupation in the 1940s found themselves and their families in prison camps or the 'prison islands' (Gyaros and Makronisos) that continued into the 1950s. Former Nazi collaborators were luckier and rewarded in the Cold War period. Commentators have described a dependency of people on the state for jobs. It is not that simple. For decades many citizens had to submit to the state or be deprived of access to many professions. When that failed, the Greek Junta 1967-74 appeared to reinforce the messaged. Greek National Service passed on the message to each generation. Students cheated, manipulated, escaped aboard, prolonged their years of study, used family and vested interest contacts to avoid the ordeal. Family contacts and who you know were vital.

With the absence of a post-war investment program, plus millions of dollars in bribes pumped in to support corrupt governments that were on the right side of the cold war, the catch up the countries of the European community did not begin until the 1980s. This was fuelled by deficit spending, printing money and inflation.

There are many Balkan stories with a similar themes. Balkans is a place where opposing accounts of history that can be both true, for a different view try: Salonica, City of Ghosts: Christians, Muslims and Jews (as I live there)  Twice a Stranger: The Mass Expulsions that Forged Modern Greece and Turkey (I became an ethnic minority of one a long time ago )  

9 June 2011

The Blindness and Deafness to Modest Proposals

The Blindness
The Euro was suppose to provide a stable currency and remove currency risk.  Martin Wolf in the 'Financial Times' asks where would you prefer to keeping your savings: in a bank in Germany or one in Greece?  The Euro was suppose help economies converge to each other. To argue that Euro economies can stop diverging from each other by using austerity measures that push indebted economies so far back that it will take years to recover is simply madness.

Why are Euro-technocrats so insistent? Here's one explanation. The world is flat. Here's another. When their policies are walked through, or rather when their policies take them for a walk, something non-linear happens … 

How can this blindness be explained? The European Central Bank uses a BVAR forecasting model, based on something called a Dynamic Stochastic General Equilibrium (DSGE) model, to see (!) what is happening in the Eurozone. It does not analyze individual European countries separately – well, are they separate? 

In July, 2010 Robert Solow attacked DSGE models at the United States Congress hearings investigating why macroeconomists failed to foresee the 2008 Financial crisis
'I do not think that the currently popular DSGE models pass the smell test. They take it for granted that the whole economy can be thought about as if it were a single, consistent person or dynasty carrying out a rationally designed, long-term plan, occasionally disturbed by unexpected shocks, but adapting to them in a rational, consistent way... The advocates no doubt believe what they say, but they seem to have stopped sniffing or to have lost their sense of smell altogether.'  Robert Solow, July, 2010.
(Personally, I used such models over 20 years ago to examine the rubbish bins of famous (forecasting) models to try and find out more about their love lives than they were willing to admit.  I was surprised to find them so fashionable.  Rubbish bins are useless without some misbehaving model to throw rubbish into them, but it seems that's what we have got. Its a pity their advocates have lost their sense of smell)
The model assume efficient financial markets, and when things go wrong, blames both the labour market and the state.

There is some truth in this. According to the OECD, the Greek worker in 2008 on average worked 2120 hours per year – second only to Korea in the OECD countries - and 690 hours more than a German worker. Many of these hours are wasted, supporting armies of bureaucrats, lawyers, accountants and, if the constant processing makes you sick, doctors. Foreign tourists don't see this, as stereotypes are used to sell the tourist industry. Tourists pay to see the 'Zorba the Greek' smashing plates, and dancing on a tavern table. They don't pay to see exhausted Greeks frantically scrambling around the concrete jungles to get to work. 
The crisis is more than just about work ethnics. The Euro model is generating a fatal system error; this point is reached when a country is reduced to choosing between living on Junk Bonds or living on Junk Food for the next 10 years.
“Why is everyone clapping”, asked Alice, “all the arrows missed the target!' “Yes, but its a fine distribution of misses” replied the Queen
“Yes, but shouldn't the arrows being getting closer?”
“Off with their heads!” roared the Queen “.. see... '
There are many things wrong with the Greek economy. It won't meet its targets. Its ugly and bureaucratic, but don't kill it.

The Deafness:

The Euro has created an imbalance with some countries producing persistent surpluses and others incurring deficits. This is at the heart of the European Debt problem and it ties down any attempts to make the Greek economy competitive. 'A Modest Proposal' by Yanis Varoufakis and Stuart Holland provides a way of solving this, without substantially amending existing treaties, by converting debts into Euro-bonds and re-cycling trading surpluses into investment programs to help correct trade imbalances. The plan rightly addresses the twin aspects of the indebtedness, government bond crisis and consumer indebtedness, that the Euro is creating and is threatening to both country and consumer sovereignty. The crucial part is a Marshall Plan for Europe, the re-cycling of trading surpluses to create a massive investments program through an active European Investment Bank.

If not this, then something like 'A Modest Proposal' version 2.0 or 3.0 could work. However, the disturbing feature to such plans is the deafness of ECB/IMF officials. According to the New York Times the proposal was 'seriously' considered by Georgios Papandreou and turned down because Germany and the ECB would never accept it. The leader of small but heavily indebted eurozone country appears helpless. 

School kids are told that democracy is about listening to the people and when they grow up are told it is about listening to the markets. It is interesting when stock market analysts agree with Facebook protests in Greece. 
“Greece can't pay? No problem, let's give them another loan that they can't afford. To me, this is very similar to the MCI Worldcom scandal. What the global monetary powers that be simply do not appear to understand is that you can't hold people accountable that clearly aren't accountable.” Glen Bradford, Seeking Alpha
At the moment, Nobody is better than Georgios Papandreou. In the polls of the last 6 months, to the question “Who is the best Prime Minister?” 47% of the Greeks had answered 'Nobody'. Perhaps Nobody is more threatening. If an economy that represents 2% of the overall Eurozone Economy can bring about an European-wide crisis, then why is it incapable of representing its own interests? If it can't then Nobody will and Facebook demonstrations will grow. 

A Modest Proposal is also the title of Jonathan Swift's satirical essay in 1729 suggesting that impoverished Irish might ease their economic troubles by selling their children as food for rich gentlemen and ladies. We are not going down that road, are we?

Jean-Claude Trichet, President of European Central a couple days ago made an speech that was picked up by the BBC.
A vein running through this speech is the belief that governments can't be trusted with spending while officials can. In this vision citizens and voters don't appear to have a seat at the table.
"Would it go too far if we envisaged," he said, "...giving euro area authorities a much deeper and authoritative say in the formation of the country's economic policies if these go harmfully astray?" http://www.bbc.co.uk/news/business-13641063
which means, with a permanent trade imbalance, that some countries are always likely to go 'harmfully astray' Was there any democratic consent to this? 

There was also deafness when the French and Dutch in 2005 voted against a European Constitution. When Ireland voted no, it was made to vote a second time to get it 'right'. Every time a crisis occurs, officials appear acting as doctors trying to save a sick patient. The patient comes back for more and more treatment until it is eventually institutionalized. Greece is institutionalized and social policies become secondary to an economic policy directed unelected officials. Americans frequently complain about the tyranny of Washington, but they can take comfort in the fact that there was a George Washington.