28 September 2011

Euro Death Race

Euro Death Race 2011 is on release.  The Euro built by the world's finest surgeons. Now screening in Greece, coming to movie theaters in Italy and Spain.  Here is a trailer from the original 1975 version.



The new Greek Austerity measures are explained below:





The reaction in this?  Here's a speech from the Swiss Finance Minster (courtesy of Spiegel, and apologies for the poor translation)  




 More about the speechless shock here


24 September 2011

Time to get rid of the witch doctor

The reward for brutally enforcing a policy crippling the Greek economy is another €8-billion of emergency fund. It will go in through one door of the state and straight back out through another to the banks. It is Orwellian to call it a Greek rescue package. On each occasion the Government receives its 'bailout' money, the average Greek is left with less in his hands. Greeks are not dancing on the streets with overwhelming joy at being saved (see this Austria report). The relieved faces are elsewhere.

Greek default is inevitable and the longer it takes the more expensive it becomes for everyone. Talks focus on how to minimize the damage to the creditors. The Greek economy is secondary. Most of the Greek population do not believe it is working, is in their interests, or offers any hope. Austerity is so damaging that default comes as a relief. It has become a question of survival.

It is impossible for Greece to repay debts by measures that reduce its ability to pay. The economy will shrink 5.5 percent this year and another 2.5 percent next year (latest IMF report). Targets will be missed again. Greece's public debt was supposed to peak at 160% but now the IMF forecasts 189%.  Nearly a quarter of the working population will be out of work by December. The strains on Government revenues and ability to collect taxes are plain to see.

It simply will not work. Protesters on the streets in Greece have every right to say  'We won't pay!'.

Meanwhile urgent discussions and a complicated poker game is being played in Washington.  A G20 statement said the euro zone would take action to "maximize" the impact of the bailout fund by mid-October, recognizing that default and an substantial 'haircut' on Greek debt is essential.

Venizelos, the Greek Fin. Minister, spoke of “absolute fiscal derailment” and “we continue to generate deficits” True, but  austerity is derailing everything.  There will no engine let alone rails for the Greek economy to run. Austerity and the Third world experience, as World Bank's former Chief Economist testifies, does not work. Is there a such thing as  'growth-friendly fiscal consolidation'. The European Community (?) needed to undertake structural reforms not purely confined only to Greece but to the entire Eurozone structure. Balancing national fiscal consolidation without financing European-wide investment programs, reduces countries to colonies.  Why are such programs so politically unlikely? There was and is no Marshall plan.  Perhaps, the threat of a disorderly default will create the willingness for one.

Austerity is about making everyone miserable so that the accounts can look less miserable. In the end there is no paper left to print the account books on. It is a failure to recognise the causes of the Euro crises. This is an excellent read: http://streetlightblog.blogspot.com/2011/09/what-really-caused-eurozone-crisis-part.html 

Internal devaluation is a broken wand

When it comes to restoring trading balances, there is no substitute for actual devaluation. The inability to deal with cartels, local monopolies and market power makes internal devaluation impossible.  This applies not only to Greece but also to Europe.

Monstrosities, such as the Common Agricultural Policy and Investment projects (that require the borrower to match the same amount of money), favour the big against the small.  Food prices are artificially far too high and local cartels control the markets - here's an example of Greek food price fixing and supermarket cartels. One supermarket even imports Greek products back into the country and sells cheaper than French / German controlled supermarkets. In Northern Greece, those who can, go to the borders to get cheaper petrol, food and clothes. Not surprisingly many businesses are closing down.

Wages and incomes fall and many small private businesses close down. Some stay open by not paying their works for months.  Greece, once full small families businesses, is a country full of empty premises and closed shops. The poor have had enough and so have the middle classes - see 'Greece's Middle Class Revolt against Austerity' Austerity in the name of debt service has become a recipe for revolution.

Yesterday Venizelos said 'we would rather be the government who hit the lower and middle classes than be the government that failed to save the country"  So, one wonders, who is he referring when he says 'save the country'?

Greece will default, but it has to default on its terms not on the creditors. The sooner it defaults the quicker it will get out of its debt spiral.  But how do you get rid of the witch doctor?

There seems to be a democratic problem

More enlightening Venizelos quotes: “we are lucky to be under international control” and “when you depend on the markets, you have to accept the creditor’s point of view”

This may depend on how the Greek Parliament votes next week.  But, if we follow Venizelos' logic, what is the point of having a Greek parliament? Why not close it down, get rid of the pretence and save money? Besides, most European were not allowed to directly vote on the Euro. The European idea it seems is not to let Europeans directly vote on the Europe Idea - but they can vote every year on pop songs.

Yet, without a sense of community and mutual trust (and this must imply a better version of democracy) there can be no European common debt structure (ECB backed Euro bonds) or fiscal union.  Without this there is no hope for a common currency.  It becomes intolerable or unacceptable to one or more of its members and breaks down. A European tragedy of the commons.

Speaking of illusions and virtual reality, make what you think of the following:




Greek Default

Default, and the knock on effects on the other PIIGS economies, could mean that some members, such as Greece or even Germany, leaving the Eurozone.  The Greek government has to prepare for events that unfold.

Greece can restore competitiveness and rebuild its economy.  The problem is going from point A to point B and not forgetting that many legal, economics and democratic reforms are still needed.  

If Greece leaves, then the new drachma would fall and immediately restore competitiveness. It would boost the tourist industry and exporters would be able to sells goods and services aboard more cheaply. Imports would become more expensive and the country's trading deficit will shrink.  There are three difficulties with this story: the ability its citizens and businesses to survive the immediate financial crisis; what happens in Greece's export markets and/or the rest of the Euro zone; and access to capital and funds for investment, growth and economic recovery.  The answers are by no means clear ........

The depreciation (that some say could be as much as 50%) of the new drachma could turn any debts that remained in Euros into a crippling burden. It is this prospect that would create a massive run on the Greek Banking System and, is in one sense, the lock on the euro cell.   But to some extent, with the expectation of default, this has already been happening.

The Greek banking system is already in very bad shape. It is not only having to deal with the holdings of Greek debt but the flight of depositors. As the FT's alphaville scribbles on "a note to the troika – every time you say “lack of progress”, another depositor’s faith that a Greek bank is better than the storage space under a pillow dies."  Many deposits have left the country fearing a default and exit. Again from FT's alphaville 'The humble Greek (and Argentine) depositor'

Banks will have to be re-capitalised, provided with liquidity and socialised. If socialised, backed with public funds, the government will have the option to privatised (sell shares/stock of what it puts in later at a price that gives a profit) when the economy recovers. Businesses, those paying mortgages and Greek depositors will need protecting.  Debts will need to be re-negotiated and/or converted into local currency.  Some compensation scheme, for example a stake/shares in the re-capitalised banks, is needed to cover the loss in value of savings.

The Government will printing the new currency and, if there is no external assistance, pumping in liquidity into the banking system. The period is likely to be inflationary and at some point the brakes need to be put back on.  Here lies a difficult question. Would you trust the present Government to do this and not to use its printing presses postpone essential economic, democratic and legal reforms? I suspect a change to government and political system would be required.

The outcome would be chaotic, but planning is needed anyway to cover for the increasing possibility of a Euro-wide system breakdown. A great deal depends on the political struggle with creditors to force them to accept their losses.

It is in this struggle, that the Greek government still has an important weapon to limit the internal financial damage. Greeks governments bonds were issued and written under Greece law (and not yet roll-overed into English law) which gives the Government enormous power. It can call for much bigger losses on the part of creditor holders than what is currently being suggested. The tables can be reversed. Rather than debtor being coerced into doing whatever the creditor wishes, the ability to inflict large losses on the creditors ought to make them more receptive to the demand of the debtors. Hence individuals and companies usually have their assets seized, but countries don't.

The term 'selective default' ought to be re-defined to mean who the Greek electorate choose to 'selectively default'.  Good and bad creditors and debts should be separated and investigated. The international law on odious debts needs to be tested. Not all creditors (those supplying funds for real investment projects as oppose to bogus ones) ought bear the same costs. Here's the famous documentary (if you haven't seen it) explaining the idea:



Two are a couple of points that should be mentioned while speaking of Argentina.

Argentina suffered a debt crisis after fixing its currency to the US dollar in 1992. It lost its competitiveness, built up a large trading imbalance that could not be indefinitely financed  and a collapse in public finances.  It defaulted and eventually recovered. The crisis occurred when the global economy was in healthy circumstances.  Default in 2001/2002 forced bank to place limits on withdrawals. There were big losses for depositors and banks as their assets and liabilities were re-denominated, each at a different exchange rate. It survived. Look at the following graph (via Krugman – it is not up-side-down:


After a period of decline Argentina grew by 9% in 2003 and, with a surge in global demand for agricultural commodities carried on at around that rate until 2008. It survived the 2008 meltdown better. Economic growth occurred even though it did not have access to international capital markets. Perhaps a mixed blessing as the witch doctors will no longer in charge of its economy. Today it has growth rate near to 10% ( Yes it does have corruption and inflation).  Default, however, required an upheaval to the political system and a change in government.

The Greek situation is not quite the same as the Lehman Brothers collapse that triggered the 2007/8 global financial crisis. That was a shock.  A Greek default would not be a surprise and would not have the same effect on markets.  Financial markets have been trying to anticipate this event ever since the Greek crisis begin at the end of 2009. As everyone is expecting default, and those who can have ran for cover, the financial impact has been partly offset.  The crisis that never seems to end, is being perpetuated by throwing money at a lost cause.  At some point there will be none left to throw. 

Assuming the worst case scenario - default and exit leads to a lock out on all capital markets - there is a ray of hope in the following diagram. At the same, it explodes another myth about Greece (via Bloomberg).

   
This shows that Greek households (the red section), unlike the Greek state (white), haven't been 'spending above their means' to the extent that Germans have. The Greek State may have been partying but ordinary Greeks haven't.

If Greece defaults then it will lose its creditability and international ability to borrow. But hasn't it already lost it?  This would force Greece to live within its means, which is what the current austerity measures are suppose to be doing. But, possibly for only a few years. Greece still has resources and householders that are potential under-leveraged savers, which can provide a basis for future growth.   

As for the rest of the Euro Zone?

It might not be a bad idea to read 'Modest Proposal' after all. They might discover that it was also about saving the Euro. Remember that Marshall plan?


17 September 2011

Immoral Hazard


I think it is important to repeat J. M. Keynes' criticism of the Treaty of Versailles (1919) and I will repeat some things I said elsewhere.

"It is an extraordinary fact that the fundamental economic problems of a Europe starving and disintegrating before their eyes, was the one question in which it was impossible to arouse the interest of the Four. Reparation was their main excursion into the economic field, and they settled it as a problem of theology, of polities, of electoral chicane, from every point of view except that of the economic future of the States whose destiny they were handling” Ch VI, The Economic Consequences of the Peace, (1919). J M Keynes.

Europeans are busy arguing over who has the best work ethnics. Some governments take advantage of others in the EC as their citizens are lazy. More formally, they call it a problem of moral hazard. So lets have a look at this.

Moral hazard applies when one side of the market has more information than the other and takes advantage this. Now let me give you two bits of information.

1) Zoi Georganta is a board member of the Greek Statistics Authority (ELSTAT) and professor of Econometrics (University of Macedonia). She claims that Greece’s budget deficit underwent a upward revision in 2009 to 15.4% instead of 12.6% just to force Greece to take the harsh austerity measures. (Read more) It was the announcement of these Greek Statistics that started the Greek debt crisis.

2) Barroso (European Commission President) was invited by Spiros Latsis (a student friend at the LSE) to be a guest on his yacht a month before the Commission approved €10.3 million Greek state aid for Latsis' shipping company. (Read more).  Spiro Latsis manages a family fortune that includes more than 40% in EFG Eurobank Ergasias, the Greek part his Swiss EFG Group and more than 30% in Hellenic Petroleum via his ownership of Paneuropean Oil and Industrial Holdings S.A. Latsis group also controls PrivatAir, Lamda Development, a major real estate group based in Athens etc.

Ok I don't know what lies behind these stories but I just use them to set the scene for the following question.  Who has more information in the risk and bond markets? The buyers or sellers?  I believe that moral argument applies to the buyers of these financial assets.  

Here's an interesting  extract from ' London Banker' blog (23rd June)

If protecting bondholders from bad debt really is the primary objective of the supervisors, then the supervisors have become the problem. Capitalism does not work when capitalists are shielded from the economic risks that they freely undertake for profit when they enter into private contracts for debt finance. If bondholders know that they can get the ECB and the FSA to tilt the field in their direction, they have no incentive to balance yield against risk. They should just go for yield wherever they find it, and trust the ECB and FSA to ensure that they get their money whatever happens to the company, the depositor, the employee or the taxpayer who foots the ultimate bill for their yield.

..... If the officials have decided that the bondholders always win, then the rest of us will always lose. And once the rest of us - the companies, depositors, employees and taxpayers - remember that we have political power, then we will change the system.

This is what we are seeing in Greece on the streets. The Greek people have realised that the government works for the bondholders; the ECB works for the bondholders; the IMF works for the bondholders. They now understand what was not clear before: No one works for the people.

'Too big to fail' means that higher 'risk' debts have been accumulated higher than what should have occurred. It has caused financial bubbles and instability. Deficit countries are paying for this failure in the market through austerity measure. Surplus countries have paid for this by foregoing real wage increases (that produced the surplus) and will pay for financial mismanagement in their taxes.

Attempts to prevent defaults means that the buyers of risk have passed on the losses to the sellers. Deficit countries are then force to impose the losses on their population (those who can't move funds to Swiss bank accounts) through austerity measures. Democratic controls are removed and the representatives of the creditors run the economy. This is in effect a form of dictatorship.

Mediaeval Times

As long as interest payments on government bonds remain greater than the rate of investment (and economic growth) the country is enslaved to meet impossible debt repayments. Debt is paid from future earnings. When undertaking debts there is the presumption that there will be future streams of income to service the debt. The Greek economy is collapsing. So where are the future streams of income that can service the debt?  Whatever happened to that Marshall plan for Greece announced in July?

Greece continues on its road to serfdom. The latest desperate tax, the 'property' tax, obliges those to pay if electricity bill is in their name, is a feudal tax on the space we live. For many poor Greeks, who struggle to pass this bill on to their landlord, the lights will go out.

How much revenue will such taxes raise? Taxes not based on the ability to pay are self defeating.  We have seen austerity measures reduce GDP, savage the tax base, destroy small businesses, reduce overall tax receipts, miss budget targets and calls for more rounds this austerity spiral. Increasing taxes while reducing everybody's ability to pay them will eventually lead to a breakdown in the tax system.

Even the new tax on eating out might fail to increase tax revenues. If Greeks' appetite for eating out falls (%) more than the increase (%) in tax, then tax revenues will fall. Add to this the number of restaurants that will close down, or refuse to pay, and it is easy to see how this particular tax target will be missed.

These taxes only exist to buy time for the Troikai. It cannot get the Greek economy out off its downward spiral of austerity. There is no prospect of real investment or economic growth and the only motive of the measures is to keep the European Banking Sector happy. Greece is insolvent and is being asset stripped.  Its not profitable, unable to make its debt payments and so it is more profitable to liquidate it.

This insane policy, applied repeatedly to Greece for 18 months, is now being applied to all Euro budget deficit countries. Europeans are still failing to under the causes.  Government budget deficits are the symptom not the cause. Spain and Ireland were in a budget surplus, unlike Germany, before the 2007-8 global financial crisis.  They have in common unsustainable trading deficits with their Euro partners and no tools (exchange rates or a monetary policy) to restore competitiveness.  Greece has been trapped by reckless activities and exposure of the European Banking system and a religious worship of the Euro with calls for punishment by its leaders.  

Greece faces mass destruction from a Vietnam 'destroy the village, to save it' economic policy.  Its needs to force the issue by saying it is not going to borrow more money that it simply can't pay back. 

If the Euro auto-pilot can't be switch off, the passengers will at some point say 'lets roll' and take over the cockpit. Alternatively, they may fight each other and bring down the whole Euro project that way.



11 September 2011

Euro Bits and Pieces

Insanity is doing the same thing over and over again and expecting different results. (Albert Einstein). 

Megan Greene's Aug 3rd post  said September will be a perfect storm. September was also the month when UK went off the gold standard in 1931 and the month that the UK was booted out of the European Exchange Rate Mechanism in 1992. (The Economist). Time for Roosevelt's 1932 inaugural address:  'The only thing we have to fear is fear itself'.

Greeks have been given an ultimatum.

"Ladies and gentlemen, the situation is serious in Greece," Schaeuble said in a speech in the Bundestag lower house of parliament. "At the moment the troika mission is suspended. There can be no illusions (?) here. As long as this mission cannot confirm that Greece has fulfilled the conditions, then the next aid tranche cannot be paid. There is no wiggle room here." 

The Dutch prime minister, Mark Rutte, has also warned that fiscal violators who refused to give up sovereignty over their budgets to a new European "discipline" czar should leave the bloc (Reuters). No doubt, at some point, a change to the constitution will be demanded (to enforce balance budgets on all future governments) to ensure voters don't vote for anything different to what is being prescribed.  I don't agree that budgetary indiscipline is the cause of the crisis. I also don't believe in austerity.  Suspending the rights of those who disagree is an act of a dictator.  The terms of surrender are foreign administration, selling off assets, unemployment, falling GDP, rising poverty, more debt and bond servitude.

The damage to today's youth will be felt for decades by everyone. Those who cannot vote now will nevertheless pay the price for a disastrously designed monetary system.  Yet, the Greek government has been trying (a difficult word for them) to put up some resistance.  PASOK, the ruling party, faces extinction by attacking and shrinking the middle class and public sector workers that vote for it.  According to one survey, some 75% of people aged between 18 and 24 said they wanted to leave the country.  "Citizens will judge us in 2013," Papandreou told a party conference.

According to the Kathmerini, without the sixth tranche, the government will be 1.5 bn euros short on October 17th (interesting date in Greece) and won't be able to pay wages and salaries. The government has decided to freeze all disbursements apart from salaries and pensions.  Cleary Gottlieb (Lee Buchheit, the partner represented Iceland and  Argentina) law firm hire was hired by Greece over a month ago.

Greece cannot meet its targets, are at odds with the EU/IMF and talks are on pause.  Next week there is another emergency meeting with the Greek Government. This strategy came to mind:



Key policy makers are still failing to recognise the causes of the crisis. Wolfgang Schauble, the German finance minister, wrote in the Financial Times:
“It is an indisputable fact that excessive state spending has led to unsustainable levels of debt and deficits that now threaten our economic welfare.”
This is a very disputable factSpain and Ireland were running a budget surplus, unlike Germany, before the market meltdown in 2008. They also had lower debt % to GDP than Germany.  In Ireland and Spain it isn't excessive state spending; Ireland ruined it finances by deciding to bail its banking sector; and in Spain a massive property bubble burst.  This was brought about by a global crisis and a faulty Euro. 
I could argue that austerity measures leads to unsustainable levels of debt and deficits, reducing GDP, savaging the tax base, destroying small businesses and reducing tax receipts. Even at the micro level there are difficulties:

(VAT on eating out has been increased in Greece. If demand for eating out falls (%) more than the increase (%) in tax, then tax revenues will fall. Add to this the number of restaurants that will close down or refuse to pay to stay in business, then it is easy to see how this particular tax target will be missed.)

The maths will not work out, like Alice in Wonderland: Let me see: four times five is twelve, and four times six is thirteen, and four times seven is -- oh dear! I shall never get to twenty at that rate!

What the various PIIGS economies do have in common are unsustainable trading deficits with their Euro partners and no tools (exchange rates, monetary policy) to restore competitiveness and correct the imbalance.

The crisis began with banks and the private sector risk markets over-extending themselves. They were bailed out directly by supports or indirectly through austerity measures. Risk was transferred from private to the public sectors and  private toxic assets became public toxic assets.  Countries bail out banks but banks won't bail out countries. The EuroZone was particularly vulnerable with internal trading imbalances.  It has no flexible no mechanism to restore members' competitiveness.  Boot it up and it will fail again.  Europe’s diverging economies is now a fact.

If deficits are sinful, then so are surpluses:  ὁδὸς ἄνω κάτω - the road up and down is one and the same, Heraclitus (c.500 BCE).  Some surplus euro countries have become dependent on its partners for export markets. This graph (from Reuters EcoWin / Fathom) shows Germany exports more to the EuroZone than it does to the rest of the world.  
Germans have a right to ask what happen to these surpluses.  Their real wages were kept low (perhaps if they had more to spend on Greek holidays, things wouldn't be so bad). German wage inflation could be a good thing for Greeks - reducing both the German surplus and the Greek deficit (instead, we have the opposite: austerity)

A chronic trade surplus provided funds for a financial system lacking discipline in the euro periphery.  German exporters and banks also ate at the Greek/Spanish/Irish table.  Those left, pay the bill - the German tax payers, bankrupt Greek/Spanish businesses and the unemployed.  But its worse. The money used for the bill could have been used to make investments that unemployed young of Europe so desperately need.  The price of gold is soaring and the Swiss Franc has appreciated sharply. Look for the missing surpluses in gold and Swiss bank accounts.

As the wealthy rush to Gold and Swiss Bank accounts, others are finding some other interesting exit solutions. How about Flioritos issued by a small town outside Rome or the Exarchia-Lira in Athens?  

A Re-Cap on Economics Principles:
As most of the world is intent on beating itself up with austerity measures,  it  might be a good idea to beat yourself up with basic principles of economics.  I found this (YouTube, - the textbook mentioned here costs a Greek weekly wage) profitable.




The principles of Bah Bah Bah
Paul Krugman asks, since we are in a crisis 'what are marcoeconomists for?' Unfortunately, the profession has become dominated by a narrow range of neoclassical economists; that is, homogeneous versions of Voltaire’s Dr. Pangloss, who always insisted that we live in the best of all possible worlds. Let the markets be.

The chief economist at the IMF said in 2008 "Like all revolutions, this one has come with the destruction of some knowledge, and suffers from extremism and herding. None of this deadly however. The state of macro is good." (Olivier Blanchard 2008)

Yet only Dr. Pangloss is allowed to prescribe. Austerity measures, no matter how bad, is always better than what would otherwise be. Ironically, the secret to Belgium's 0.7% growth while the rest of the world lags is that it has no real government to apply austerity packages. The paradox is that Dr. Pangloss should not be prescribing.

Hitch Hiker's Guide to Macroeconomics
In the dominant DSGE macroeconomic models (see a previous post) markets are always stable and everything is always priced just right. Say 42. Models proclaimed stability (it's the only thing they can ever predict).  Anything that falls outside the economic theory of 'life, the universe, and everything" is a 'fairy tale'. 

Economists tried to do something that even physicists have failed to do - unify the micro and macro cosmos.  The unified theory of everything is constructed around individuals being rational and markets being efficient. Pan-dimensional creators assuming the form of mice guarantee that financial markets always get asset prices right given the available information.  The model maintains its consistency, producing the answer 42 every time. When bubbles burst in their faces, modellers refuse to accept that markets go wrong - the message 'trust the markets' evolves into a religious, un-falsifiable act of faith.

Market failures, “externalities” — costs that some (in my view the banking system) impose on others without paying the price - are ignored as they don't generate the prescribed right answer.  Rationality is conveniently defined as those who agree with view of the world; whilst those who don't are irrational (as it won't be in the agents budget constraint). Lets reverse the situation: monopolies exist, capital markets are imperfect and accept that most individuals are rational - they realise that markets are inefficient. Policy-makers/ economists who cannot perceive this state of the world, persisting believing in efficient markets, are irrational. The result? Political instability.

As as Voltaire puts it: “it is dangerous to be right when the government is wrong”

Another feature buried in macroeconomic models and the debate on austerity versus fiscal expansion is something called Ricardian equivalence. If a government carries out austerity measures to reduce government deficits (by reducing spending or increasing taxes) people will recognise that such a policy means lower taxes or higher spending in the future. They seem to be worse off today, but as they will be richer later, they will increase spending.  Not quite. The problem is the pronoun. Many are poorer today, but a few will be richer tomorrow (and if you are nice they might even employ you).

Back to the Hitch Hiker's Guide, Arthur pulls random letters from a bag, but only gets the sentence "What do you get if you multiply six by nine"?
     "Six by nine. Forty two."
     "That's it. That's all there is."
     "I always thought something was fundamentally wrong with the universe"
Six times nine is, of course, fifty-four. The Euro program should have run correctly, but the unexpected arrival of the Anglo Saxon speculators has caused input errors into the system. This has meant the European electorate subconsciously asks the wrong question. It shouldn't ask about democracy.

Some one else who based some of his stuff on Ricardo is back in vogue on Wall Street. 'Marx is hot' headlines Businessinsider.com and Forbes has "The U.K. Riots And The Coming Global Class War".

The London correspondent of the New York Tribune (in 1850s)
A senior UBS economic adviser at Swiss UBS, urges policy makers to 'Give Karl Marx a Chance to Save the World Economy'. Things are serious. 

Money... its a gas

Minsky: "Anything can be money, the difficulty is in getting others to accept it."

One of the biggest problems was that crucial developments in financial markets, the risks of an unregulated shadow banking industry, were ignored. The technologies behind payments, stores of value and the creation of new financial assets have dramatically changed the macroeconomic landscape.

Many economists were fed the classic quantity theory of money: MV = PY.

If I have a 10 euro note (M) and I buy something, then that person buys something else with the same note, and so on and so forth, it speeds around  (V for velocity) the economy.  What this note buys at the end of a period are things brought times their price (PY).  (Simplistic, but now add banks deposits and the money multiplier)

The view that governments control M (printing notes and bank regulations on banks deposit creation) and V is fixed by culture and technology is now wrong.

Banking and financial technologies have changed all this. Today's wide variety of payment options are nowhere to be found in traditional monetary aggregates. The volatility of velocity (V) and the shifting definitions of what is accepted as means of payment (particularly for corporations and governments) has led most Central banks to give up on monetary aggregates. They have loss control of the link between money and the economy and instead targeted short-term interest rates.
During a period of prosperity "... velocity-increasing and liquidity-decreasing money-market innovations will take place.....In time... a slight reversal in prosperity can tigger a financial crisis" (Minksy (1982) "It can happen again)
National Government have loss control, if they ever had any, of the link or transmission mechanism between money and the economy.

Within this space operates the shadow bank industry  -   an industry involved in money, securitized mortgages/bonds and debt creation with large corporations and institutions use commercial paper to finance their short-term needs for cash. A system of  special purposes vehicles and securitizations that jump off balance sheets, behave as banks deposits but can bypass safeguards, increase leverage and profits in boom but increases losses in the crisis. This made the recreation of the 1929-31 banking crisis possible.

Look again at MV = PY


(Update: According to a Nov 18 2012 report (PDF) by an international body of regulators (Financial Stability Board) worldwide assets in shadow banking, ranging from money-market mutual funds to banks’ off-balance-sheet vehicles to credit derivatives, totaled $67 trillion last year.)

The explosive growth of the shadow banking system calls for a re-think of MV=PT.  The speed of money is not a constant, but a variable that can manipulated profitably in a global environment.  The move to the Euro involves a loss of sovereignty to member states, but there is also another loss of sovereignty occurring in the background. We are in a world where governments can default, but banks are saved don't, and the assets of countries are claimed. Where are the global lenders of last retort?

Nassim Taleb and Mark Spitznagel on the US economy: "The elephant in the room is the amount of money paid to bankers over the last five years. In the United States, the sum stands at an astounding $2.2 trillion".

Minsky moment:
The amount of money pumped into 'saving' the banking industry does not go to investments such as hospital, schools or industrial project.  Excessive leverage is the basis for profits and, when the bubble bursts, massive losses are left to the public (who will then argue with each other).  The banks take risks, get paid when things work out, and when they don't pass it on.  The more this risk can be passed on, the more they buy. Risky assets get over-valued and bubbles burst.  Government bonds can be leveraged, creating more financial products, debts and even more returns.  When massive losses occur, there is a merry-go-round of passing the debt.  Taxpayers pay, debtors countries can be forced to undergo austerity measures .  In the end taxpayers are expected to pay for the failure'.

As I said before  .. 'preventing defaults at all cost is in many ways perverse.  It is perverse as one would usually expect the buyers of risk, not the sellers of risk, to suffer the losses. It rewards poor investment decisions. In such perverse conditions, the market collapses into a frenzy of speculative feeding. It is perverse, by Casino rules. The Casino is saying come and play here. If you lose, don't worry our staff will pay. This is not sustainable.'

The Euro is badly built road on an impossible terrain. Flattening everything may succeed in forcing euro economies converge towards a desolate landscape of abandoned businesses.  The strength of Europe has been its rich diversity; its weakness its inability to accept diversity.