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.

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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?

Efficiency
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.

Competitiveness?
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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22 October 2012

Its Capital, not Labour, Stupid


The Greeks are not drinking medicine; they are drinking hemlock


In any monetary area (be it the US, UK or USA or Eurozone) there will always one area or region which will have a competitive advantage over another. Industry, finance and businesses concentrate in areas that confer to each other economics of scale and advantages over others.  There is always a risk that disparities between regions (economic growth rates & living standards) will lead to separation and breakup. A monetary area peacefully avoids this by either (1) moving funds from its core to its periphery (2) or by its people and resources willingly moving from the less prosperous to more prosperous regions (prices/costs fall in the periphery and rise in the core). When neither happens, the monetary area descends into war, dictatorship, repression, unrest, civil wars, independence movements and revolutions.

Europe is a collection of diverse economies and cultures which, by their very nature, imply structural rigidity; a place where common currency is accepted but a common debt cannot be, without some form of deception; a place where labour mobility gets lost in translation and generates racial tensions; a place where member economies do not share a common growth path; a place, which therefore cannot share a common dream or future. There was and will be no real convergence. There is no legitimate central fiscal authority and no democracy at the centre.  

The mechanism for relocating resources and investment funds across the Eurozone members mis-fired from day one (moral hazard, too big to fail over-lending poor investment decisions). -- Primer on the Banking crisis: (Prof Karl Whelan's Lecture notes - Incentive Problems in Banking)   Euro-leaders responded with ridiculous rescue attempts to save financial institutions that deserved to fail. The effect: zombie institutions stand; countries fall, facing depression and regional (or country) depopulation.  The  'Psuedo Macroeconomics' of debt management and debt collecting policies is destructive and self-defeating.

Fiscal compact agreements will lead to the break up of the Euro-zone and even the breakup of member countries themselves.  Capital does not move to a political unstable declining region. It moves the other way.


The Competitiveness buzzz, Aggregates, Averages and Unit Wage Costs

The crisis began as a financial one. But somehow a switch has been done: from market failings of Global and Europe's financial system  to the market failing in labour markets, repackaged, dished out as medicine in unit labour costs.  Productivity and efficiency are problems, but what are they and where do they lie?

Aggregates and statistic averages can hide, blur and distort many things. Productivity and efficiency is not just about unit labour costs, the number of hours worked or how hard a Greek or German works. Its what these costs represent, or how productive or non-productive these hours of effort are.

OECD figures may be questionable - that the Greeks worked in 2008 on average worked 2120 hours per year (second only to Korea in the OECD but then what do all these extra hours produce?  Armies of bureaucrats, corruption, lawyers, accountants ....  in Greece and in Europe. The system in Greece is inefficient, but it is more than just about the actual persons who clocks in the hours.

Meet Alex, the ‘Lazy Greek Bastard’ behind this crisis


58% of youth unemployment is unjustifiable "'Capital" punishment

Statistics, Lies and Sadistics

Should we speak about incomes in general or wages costs?  In Greece, nominal incomes from property rents and dividends  (excluding corruption, undeclared offshore accounts) rose four times as fast as wage incomes (and 'real incomes' is another story).

The average wage is not  the wage the 'average person' receives. Income distribution (inequality) is not a 'Normal Distribution with a few poor people, a few rich people and the rest in the center. The averages wage is not what the average person earns. When the distribution is not symmetric, the average can be misleading.

What does average incomes, wages, costs, etc mean in real terms to the average person? Inflation in Greece has always been significantly higher than many other Euro Zone countries. Rich and poor experience it differently, if basics rise faster than luxury goods and housing and rents soared.  The very people that lost out on this, were the first suffered austerity. The aggregates printed in newspaper bury many stories.

One of the main causes of inefficiency in Greece is the lack competition caused by local cartels, monopolies (and a weaker buying power for smaller business in wholesale markets). Yet it is unit labour costs that are first. The leading companies retained or even increased their profits while small businesses collapsed around their feet.  Initially consumers suffer higher prices as cartels and monopolies were easily passed on.  When deflation set, wages (if paid) fell at a faster rate than prices. Lower wages didn't lead to a more labour being demanded. Instead, unemployment rose rapidly as domestic demand collapsed.

Greece's entry into the Euro meant that the prices of basics went up, while the prices of luxuries fell. The rich saw the price of their "basket of goods" fall;  the poor (and those not employed by the state) had a very different experience of this 'inflation' rate. The percentage of income spend on rent and food by those who had to work increased and, worst, credit cards were thrown them promising the 'European Dream."  The basket of the typical Greek Mediterranean lifestyle, so desirable in Western European supermarkets, is now too expensive for most Greeks. It is exported and processed food import (at an fixed exchange rate that generates a balance of trade deficit)

What exactly is competitiveness? A economic textbook explanation would look like 
Competitiveness is a measure of a country's advantage or disadvantage in selling its products in international markets. - the price of foreign goods relative to domestic prices.

It is a massive leap of faith to jump to unit labour costs,  the ratio of nominal wage growth to labour productivity.

Confining ourselves to using only unit labour costs would suggest that an economy is more competitive the smaller the share of GDP/National Income that wage earners receive.  So countries like Greece must need to implement policies that pressure wages (and without economic growth, living standards) downward.  Except, in Greece, it is not only about the wage / profit share divide of the cake but rentier incomes that seem to be almost immune and embedded in a corrupt political system.

The concept of international competitiveness encompasses many factors that do not lend themselves readily to quantification eg the capacity for technological innovation, degree of product specialization, the quality of the products involved, or the value of after-sales service are all factors that may influence a country's trade performance favorably.  Unit labor costs, by themselves do not say much.  It is just one factor in the production mix. Efficiency depends on the mix of factors and the scale of the operation - size matters.

Attaining high rates of productivity is often seen as a way of improving competitiveness, but it does not necessarily mean that the possession of such nice statistics will boost sales. (a silly example:  sacking every one apart from the most productive worker in a country would produce very good average productivity figures and an output that no one in the country can afford to buy). Productivity and efficiency, relates also to what people want and the ability and access to buy it.  Mass unemployment and idle resources is wasteful and inefficient

Reducing the income generated by labour by reducing nominal wages may even hamper economic growth.  Kaldor’s paradox showed that the fastest growing economies in the post-war period also experienced faster growth in unit labour costs, and vice versa. Low unit labour costs causing higher economic growth rates is far too simplistic.

Reducing wages share of national income, that is increasing productivity (increasing output per euro spent on a worker) increases profits (and according  to neoclassical theory) kicks off recovery and economic growth.  If investment does not happen (and remember that the whole mess began in the financial markets)  then, like the 1930s , we are in deep trouble. The issues returns back to capital. With everyone playing a 'beggar-thy-neighbour' unit labour cost game, there is no demand and markets to safely invest in.

European policy makers (and as they are un-elected officials often with connections with the Banking community) too easily assume efficient financial markets and, when things go hopelessly wrong, too easily blame the labour market.  'Correcting' the labour markets will not save a flawed EuroZone financial system. It will not created the economic growth to save it.

Euro-leaders and politicians sit happily trapped in a euro-bunker of their own making, protected by the best firewalls money (or rather the Euro) can buy (symptoms of Groupthink).
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18 October 2012

Plan 9 from Outer Space

Euroland Check List 

1) Pass toxic debts on to households (✔)

2) Save Zombie financial institutions  (✔)  

3) Buy time for the capital mobile to escape (✔)

4) Currency overlords to enforce payment on those who can't ship money out (in progress -  Germany shocks EU with fiscal overlord demand)

5) Protest  -   encourage infighting (North/South, Greeks, German, garlic, migrants) (✔) and blame the alien next door (✔) Local media (✔). 

6) Compensate for bad investment decisions (in fact don't mention them) by lowering wages  (✔) and

7) Export led growth to the alien next door  ( Newly discovered planet is just 4.4 light-years  ).

8)  EZ implodes. Neo-nazis try to take over but Eurocrats save the day with the EZ superstate ( Progress (?) Risky, but they want a superstate too ).

8b) EZ unrest (IMF riot variation).  Peace-keeper role -  expelled rowdy non- complying members (nearly there).

9) Members say "we are not Greece" (✔)  & sign up for the Super State. Blame populism and democracy for the crisis and praise Technocrats for restoring order .....

10) and launch to loud cheers,  Le Grand European Investment plan - the ESA's mission to Mars.

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21 March 2012

Special Offer: Fage Total Muppet

The ever-expanding Evangelos Venizelos ran unopposed in the leadership race of ever-shrinking PASOK party on Sunday.  PASOK is for all purposes financially bankrupt with 120 million euros of debt and staff unpaid for months. Voters were required to pay 2 euros (see Veni, vidi, vici). Some chose to spend their 2 euros more wisely (Frustrated Pensioner Hurls Yogurt At FinMin Venizelos - "I came, I saw, I got splattered").

Get the two for one Venizelos+Fage yogurt. Buy now!
Product Update: Greek dairy company FAGED introduces it's new Total(itarian) yogurt. A velvety rich yogurt. Now with even bigger chunks of raspberries and repression.


Importance Notice (24.01.15)
Due to customer complaints this yogurt has now been removedInspectors confirm there were problems with improper cleaning at the plant, but say the yogurt contained only mold. Health officials say there nothing to worry about as they don't eat it. It only affects people with normal immune systems. They were keen to stress that it did not damage the operation of the plant."Though it can make people very sick, it did not damage machinery and therefore there is no reason to stop production. 
The matter is now being referred to the European Court of Justice. One elected official complaint "They are not abiding agreed rules. It sets a bad example.. Its a question of moral hazard. It means that other customers can get away with not eating it. What do I tell my voters?"


Total muppet Book offer (Why I Am Leaving - Goldman Sachs' “muppet" clients). 

Introducing  "Muppet-O-nomics for Dummies" - International Muppet Fund 2012 

The International Muppet Fund 2012 update includes a foreword by Venizelos

25 February 2012

Second Greek Deal: an Exercise in ComPact StuPIGidty

Ministry of Truth:  Strength is Ignorance; Slavery is Freedom; Austerity is Growth

The Second "Greek 130 billion "euro bailout" is not about saving Greece. The numbers and projections were incredible, designed as counters in a "let's make a deal" PSI game.

Re-cap
The Eurzone is an unbalanced monetary union whose economies are in persistent divergence.  The crisis exposes the structural problems of individual economies.  If Greece was the only one facing the threat of insolvency, it would have been bailed out by now. In a monetary union of contradictions, the stress of Eurozone economies moving in different directions, comes apart at the weakest link.  If it Greece wasn't in the eurozone, it would be some other member of the periphery that would be this position.

Greece may have a bloated State sector and a clientelism system ruled by political dynasties, but it is not the cause of the Euro crisis. The world is littered with incompetent, corrupt regimes ruling inefficient economies. In the Eurozone, there is no exchanges rate (or alternative) mechanism to adjust competitiveness and compensate for economies that share very little in common with each other. The "too big to fail" dream is not bringing Europe together, but destroying it. Like other failed monetary unions, this one threatens dictatorships, wars and revolutions.

The Second Greek Bailout Deal

Greece has now been in recession for five years. Greece's GDP fell by 7% last year (17% since 2009) and unemployment now stands at 20%. Youth unemployment (under 25 years) is dangerously close to 50%. Economic growth must be a priority, but it isn't . It only appears in EC communiques.

Reforms without growth are deforming. Austerity, the reaction to 2008 like that in 1929 is creating a monster. Everything, from democracy, freedom, and even humanity itself is being threatened. For what?

A 1930s comedy?
""Well, here's another nice mess you've gotten me into!"

A 1948 nightmare?
with the great powers of global finance in a state of waging permanent war; national cheer leaders (and she who must not be named Tart | KTG) demanding greater competitiveness for their national export effort against each other; populations tuning into national TV 'Hate Weeks' blaming each other; officialdom churning out EuroSoc contradictions; and, new historical agreements each day that erase the previous ones.

Compact StuPIGidty?
The new "Stability and Growth Pact.  At best it is Stupidity Pact 2.0 riddled with holes, rendered useless as each member breaks the fiscal and deficits rules.

But, made effective, it a suicide pact that condemns the periphery economies that sign up for it. It   renders democratic constitutions and civil rights null and void - a 'Find and Replace' button to zap out  the word 'citizens' to replace it with 'creditors' in each nation's constitution.

It means that in a global downturn (imagine a supply-side shock such as a jump in crude oil prices e.g Iranian crisis), a governments will either have to cheat, or cut and deepened its own economy's recession. Trying to cut the budget deficit will lead to lower tax revenues, increased expenditures (more unemployment payments) and yet more missed targets. The country is then placed in a debtors' jail with their finances placed under stringent watch to enforced deeper more bloodier cuts. And once off-track, if you are a small country, there is no way back.

Here's a view from Punk Economics


And a lighter take (from @GTCost on twitter)
The whole Pact can be replaced by the Hitchhikers Guide with no loss of functionality and like the EU, the Deep Thought never computed the actual question it attempted to answer. 
A Carthaginian deal on Greece? ( H/T Fabius MaximusAmbrose Evans-Pritchard 

The Greek deal is a template for the new "Stability and Growth Pact. - a template for an accounting book dictatorship where rules and agreements are made behind closed doors, by unfamiliar officials and  technocrats guaranteeing the rights of creditors above those of citizens. It is served as a austere lesson to discipline all other 'sinners'.  Hardy any of  the "Greek 130 billion "euro bailout" is going to the Greek people. It locks them up in a debtors prison, and then throws away the key.
  1. Exchanging of existing bonds — issued mostly under Greek law — for bonds issued under creditor-friendly UK law will both diminishes their sovereignty and makes the eventual default far more difficult.
  2. Exchanging bonds issued to private investors for loans from quasi-governmental agencies will make the eventual default far more difficult.
  3. The pledging of gold reserves will eliminates a vital resource needed to buy imports during a default and devaluation process.
These will make any future defaulting or exiting of the euro more expensive and more painful.

Here is the second lesson from Punk Economics





The reward for the hardships imposed by the "Second Greek bail-out", is that Greece's sovereign debt will become sustainable at debt/GDP ratio of 120% by the year 2020.

The deal forecasts Greek GDP to fall until some point in 2013 but somehow magically pops up at 2% in 2014 and continues at growth rate that achieves a 120% debt to GDP in the year 2020.  Greece is  a weak economy that has just suffered five years of hard recession with still more austerity cuts to come. How can it return to growth by 2013?  What makes 120% the magical number of debt sustainability? 20/20 EuroVision.

Within hours a IMF leaked Debt Sustainability Report (find here) stated a worse (more likely) case scenario of the debt being 160% of GDP in 2020.  Here is the Greek Debt sustainability analysis  as annotated (by G Jenkins, Swordfish Research Ltd via FT's Alphaville)

“Strictly Confidential” (It has already appeared on Wikileaks so give away as you like)
“Baseline assumptions…the 2011 outturn was worse than expected…the macroeconomic outlook has deteriorated significantly…Medium term potential growth assumptions have been maintained” (Yes, I know it doesn’t make any sense not to alter the growth assumptions when all the inputs have deteriorated but unless we keep the figures the same then even we can’t fudge this one)
“Fiscal path has been adjusted…still bring Greece to a primary general surplus of 4.5% of GDP by 2014, although additional measures will need to be identified to secure this outcome” (I can’t get it to add up)
“… uncertain whether market access can be restored in the immediate post-programme years…” (I mean, would you lend your own money to this lot?)
“For the purpose of constructing the DSA baseline Greece is assumed to maintain good policies post-programme” (Yeah, knew that one would make you chuckle!)
“…if the primary balance gets stuck below 2.5% of GDP” (which it probably will), “then debt would be on an ever-increasing trajectory” (I am working on the Bail-out III paper this weekend...)
“Debt dynamics under an alternative unchanged policies scenario” (Think of it like alternative comedy…it all becomes mainstream in the end, so this is the more likely outcome. It’s not the wrost case scenario — jeez, you definitely don’t want to see that…)
“The Greek authorities may not be able to deliver structural reforms and policy adjustments at the pace envisioned…” (Hey, can you blame them? They have to live there…)
“Greater wage flexibility may in practice be resisted by economic agents” (Turkeys don’t vote for Christmas…)
“Service market liberalisation may continue to be plagued by strong opposition from vested interests” (Expect more riots…)
This was quickly followed by the EC admitting its own prediction from last Nov for 2012 is now "markedly" wrong, with economic activity being much weaker than anticipated. The new EC forecasts (23/02/2012 click here ) exploded the numbers in the Greek bailout deal that had projected the new measure realizing a 120% Debt/GDP ratio for 2020.  Just the headings alone in the report reveal how messed up the Eurozone is. The new forecasts now also show negative GDP growth rates for Belgium, Spain, Italy, Cyprus, the Netherlands, Slovenia and Hungary.

So, after years of suffering, having loss of its independence and being taken over by unelected Trioka officials, the best the Greek economy can hope for is to be in the same unsustainable place as where it is now.

The agreements to cut minimum wages, health care, pensions and "whatever it takes" will reduce domestic demand and deepen the recession.  Cartels and power interest groups, buffered by funds aboard will survive.  Small competitive  businesses won't.  423,000 businesses have shut down while People live of the garbage and sleep on pavements. Ignore the semantics of default, citizens will default everyday on their mortgages, loans and bills. The Troika does not offer a bailout for ordinary citizens or save small businesses from bankruptcy. Greeks are asked (in fact they are being ordered) to do it for their children....



Internal devaluation (replacing the role of exchange rates in adjusting international competitiveness) is proving to be a disaster of epic proportions for the Greek economy. Competitiveness in the Greek economy is not simply measured by a macroeconomic 'real wage level' to be adjusted in neoclassical or simplistic Keynesian versions of the world. Wages cannot be cut off from productivity, productivity cannot be cut off from the structural inefficiencies of the Greek economy, and this in turn cannot be cut off from the political regime in Greece. The much needed restructuring of the Greek economy has to go hand-in-hand with a much needed restructuring of the political and legal system.

Competitiveness in the Greek economy is about cartels, monopolistic market structures and a system of clientelism that kills off development and innovation. Foreign and domestic Cartels, collude, carve up markets, fix prices while regulators look the other way. Innovation retreats to the black and grey economy. Lower incomes groups, struggle to escape a system that tries to make them pay more in an increasingly regressive tax system. The wealthy have off-shore accounts, lawyers and accountants that cut through a complex legal system. Austerity and reforms are applied to the weakest first. A turkey does not vote for Christmas.

To inflict this monstrous deal, the Greek Constitution has to be changed to give creditors first priority to take any revenues that "Greek" government can squeeze from its own population. The money to pay these creditors must be placed in a so-called "escrow account" so that it can't be diverted to other purposes. Any leftover spare cash raise from government revenues will be used to run whatever remains of the country. Unless Greece manages to achieve primary surplus (tax revenues exceeding expenditures excluding interest payments on debt), which is proving to be practically impossible, it will either have to borrow yet more money or break even more obligations to its citizens. More exasperated taxing and expenditure cuts, will slash against those designed for economic reform as the economy spins further into its death spiral.

Think of Greece as a 19th Century UK rotten borough in desperate need for more not less democracy. Think of Europe as not even pretending to be one, enforcing rules that make governments accountable to the creditors, not their citizens.

Here is yet another take on the Greek scam


Debt servitude not investment is the priority in an up-side-down economic development model that reduces the economy to Third World conditions. Eurocrats land in Athens to ensure the serfs don't cheat in making their tributes. The increasing numbers of people exiting the euro to  arrive at soup kitchens, shows how far the third world colonialism has entered into Europe.

Who is the deal really bailing out? The private holders of Greek sovereign might be hit with a loss (in Net Private Value) of up to about 75%. - but these were junk bonds of an insolvent economy a long time ago. The Institute of International Finance representing 50% of private sector bondholders has agreed to this debt swap, but, as  hedge funds and potential vulture funds have resisted participate, the Greek government is trying to enforce participation (Collective Action Clauses, CACs). In effect, it ought to trigger a credit event, so that insurances can be collected on the bonds. The ECB and members Central Banks tries avoid losses by not being in the debt swap. The private sector is rests this and in the end blackmail or coercion will be used. 

This new Greek "bail out " and the Stability and Growth Pact is really an attempt to bailout of the Euro dream.  All means possible are used to prevent its break-up. Democracy and freedom do not count.
.... the sacrifices demanded of ordinary people to preserve the single currency are a huge threat to European union. As externally-imposed austerity bites, not only in Greece but in other countries too, there is a real risk that Europe will fracture along historic lines and people will seek to settle old scores. The single currency is the biggest threat to European peace since the Second World War................ And then there is Spain.....at which point the wheels come off. Spain is much too big to bail out. (Frances Coppola: False Dawn)
In the same light Yanis Varoufakis describes the deal as Crisis Appeasement, using the words (apart from one in red) of Winston Churchill's response to the Munich "Peace in Our time" deal: 
"I do not grudge our loyal, brave people, who were ready to do their duty no matter what the cost, who never flinched under the strain of last week – I do not grudge them the natural, spontaneous outburst of joy and relief when they learned that the hard default [ordeal] would no longer be required of them at the moment; but they should know the truth. They should know that there has been gross neglect and deficiency in our defences; they should know that we have sustained a defeat without a war, the consequences of which will travel far with us along our road; they should know that we have passed an awful milestone in our history, when the whole equilibrium of Europe has been deranged, and that the terrible words have for the time being been pronounced against the Western democracies:" Winston Churchill on the Munich-Agreement Oct 5, 1938. House of Commons
Internal devaluation does not work. Greece is not a neoclassical macroeconomic model. Legal, political, and not just economic restructuring are necessary -  but ones that move towards democracy to motivate ordinary citizens to participate and share in the reforms. This no longer possible without a regime change. Europe is edging towards war, dictatorship or revolution. The choice is yours. 

Thought I had something more to say


14 January 2012

One and 1/3 speed Europe

Two-speed Europe? One part trying to go forward, the other part going backwards sentenced to serve as Europe's Third World. Without a simple mechanism to replace exchange rates and to re-cycle surpluses to cover trading deficits, the Euro-zone core and periphery has pulled apart.

Once an Eurozone member had established a competitive advantage, other members could not easily adjust their competitiveness by lowing exchange rates. This inability to adjust was sustained by an imperfect financial system, with trading surpluses in the core financing the periphery's deficits via French and German banks. One currency, one interest rate provided cheap money to periphery. 'Being too big to fail' meant that Banks were willing to over-lend and undertake riskier debts. This could then be leveraged, chopped up into financial salads, by new exotic financial products. The failure of reckless 'investments' could be socialized, passed on via governments to citizens in the periphery and, if that failed, the German taxpayers was the payer of last resort.
"You've got insolvent banks supporting insolvent sovereigns and insolvent sovereigns supporting insolvent banks" Bridgewater (one of the World's biggest hedge funds)
The Euro was an idea 'too big to fail'. This was shattered in 2009/10.  The imbalance in members' trading accounts and the corresponding capital account imbalances were sustained by the illusion that common currency implied a common debt - German and Greek Sovereign debts could be treated equally.  Euro leaders resisted any form of an euro-bond that would treat members' deficits equally, unless it were to include the effective removal of deficit countries' governments (Fiscal Compact) - a fiscal authority with fiscal rules dictating terms to the periphery.

So all debts are equal, but some debts are more equal. Countries, with no control or access to their money 'printing presses', could become insolvent.  In the periphery, the costs just to service debts soared whilst attempts reduce debts undermined growth and the ability to repay them. The periphery, Greece in particular, is in desperate need of investment.

A lack of co-ordination, Lehman type solutions and 'kicking the can down the road' has brought time for the strongest to untangle and pull their capital out. Worse, Euro leaders has misdiagnosed the crisis, addressed the symptoms and focused on fiscal discipline. Austerity programs have driven economies into a debt/GDP death spiral.  Euro leaders have 'kicked the can (and the periphery economies) down the wrong road'.

Greece is country in the fifth year of a recession. The country is insolvent. EU/IMF has succeeded in making Greece is a special case: a third world economy second only to Sudan in global recession (Economist Intelligence Unit).  The Greek economy will shrink by 7% in 2012.  Austerity has increased the government budget deficit to 21.64bn cancelling out even the desperate emergency taxes. Greece, nevertheless, is instructed to honour its promises.

Greece has slashed everything. Small businesses are collapsing everywhere. In one year unemployment has jumped from 13.3 % to 18.8 %. The Public hospitals are facing acute shortages of everything. Pregnant women are turned away. Diseases are on the rise. Parents find children too expensive to keep and surrender them to the authorities. 1,000s don't have any form of insurance and access to benefits. Rates of homelessness, suicide, crime, HIV, drugs, crime and domestic violence are increasing. This is still not enough.  If this was a war, the country could surrender. I'm not even sure if it is a country anymore.

Yet, almost 3/4 of government expenditures are spent on serving sovereign debt and "bailout cash" is to be spent on European military purchases. (Zerohedge).
"If Greece gets paid in March the next tranche of funding of € 80 billion is expected, there is a real opportunity to conclude new arms contracts." says a mysterious man in a cafe new the Defense Ministry  
A fixed (internal exchange rate) gave some a competitive advantage in the Euro. Some were just 'fixed'
Germany is one of Greece's leading trading partners. Last year, Germany exported goods worth €6.7 billion ($8.5 billion) to Greece -- compared to a volume of imports of only €1.9 billion. But what methods are used to achieve this enormous surplus? (How German Companies Bribed Their Way to Greek Deals -Der Spiegel 5th Nov. 2010)
European leaders tell youth to leave ( http://blogs.wsj.com/brussels/2012/01/13/eu-to-jobless-youth-leave-home/ ).  The youth could tell their leaders to leave, hand over keys and seek work elsewhere. The state may run out of petrol or medical supplies, but it ensures it doesn't run out of tear gas. 

The Wealthy and the capital mobile escape. The poor are blamed for not being poor enough. Those left standing have to pay the creditors.  The EC is pressing governments to change their constitutions to look like debt-collecting agencies, taking whatever, whenever it can. When collecting taxes revenues fall short the country is asset-stripped.

 The Simpsons
To call the administrators of European governments “technocrats” is too polite. There is nothing scientific, in outlawing by constitution all economic policies and beliefs that disagree. Austerity forces the economies deeper into debt, lowering local assets prices that allow local oligarchies to move back in and buy everything cheap. It is a robbery of massive proportions.

All this is still not enough. Angela Merkel and Nicolas Sarkozy insist turning the screw more. The constitution will be changed and future elections will be designed to be decide whose turn it is to turn the screw. Don't pretend this is a democracy. Don't pretend all this is saving Greece. Don't pretend this is creating growth. Don't pretend it is working. And when that all fails, just say Greece is a special case and admire the beauty...
'I think the EU remains the most beautiful construction put in place by humanity' Italian PM Monti  
Meanwhile another work of art,  Picasso’s "Woman’s Head", donated by the artist himself  to honour Greek resistance during the World War II, went missing.
Stolen Picasso’s “Woman’s Head“,  painted in 1934 and donated in 1949 by the artist himself  to honour the Greek resistance against the German occupied forces during the World War II. Estimated to be worth €2-3m.
Godfather: "i'll make you an offer you can't refuse"
And back in the surreal world of finance, in an Athenian barbershop, voluntary PSI haircuts are .......- someone might remember to bring the scissors. Why would this happen voluntarily?

Even the IMF, it seems has had enough of "counterproductive set of austerity measures' imposed by EU:
The senior IMF sources in Washington noted that there were "unprecedened delays" in the proper implementation of fiscal and structural reforms linked to the first 110bn euro bailout programme. Instead, "horizontal austerity measures are constantly being adopted that are leading nowhere, whilst further wage and pension cuts are unjustified because the only way to improve competitiveness is through growth-creating market liberalisation, the opening of closed professions and productive investments". (Athens News 12/01/12)
Even S&P, in explaining their downgrade of Eurozone Sovereign Governments, argue that Euro leaders have got it wrong:
“Financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the eurozone’s core and the so-called “periphery.” As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.”  Credit FAQ: Factors Behind Our Rating Actions On Eurozone Sovereign Governments (FRANKFURT (Standard & Poor's) Jan. 13, 2012)
'Fiscal austerity alone' has been downgraded. 

Neoclassical economics would argue that private investment would fill in the space left vacant by government. It would argue that consumer spending would increase anticipating lower taxes in the future.  Microeconomics reforms ought to create better conditions for growth - but where's the belief and demand.

The post-2008 world is one of uncertainty, 'systematic risk', bankruptcies, insolvencies and survival. The NPVs and life cycles theories are have had their horizons chop off. The multiplier rules, triggered by austerity generating successive rounds of falls in incomes and spending. The result is a domino effect with liquidity & quantity constraints knocking everything off their curves.

Demand does not equal supply. This is what excess supply and the real economy looks like in the EuroZone:
EuroZone under 25 year old unemployment is now at Spain 49.6%, Greece 46.6% Portugal 30.7% Italy 30.1% Ireland 29.3% France 23.8% and Germany 8.1%
Is anyone claiming that this is voluntary unemployment; or is it the fault of millions of European youth for refusing to get on their bikes to cycle to Germany or on the plane to Brazil or Australia ?
Europe without λόγος - all will flow & nothing will stay (misquoting Heraclitus of Ephesus, c.535 BC - 475 BC).
We are in disequilibrium. Standard neoclassical theory and solutions do not work in this space.

Investment and growth is needed. Macroeconomic policy has to create the the right environment to make microeconomics and structural reforms work. It is doubtful that the current European political elite, who have amassed fortunes that created and perpetuated the crisis, are willing to do this. Europe is faced with a political crisis that is blocking any solution to the economic crisis.

Austerity is not a solution that ends the crisis for ordinary people.  It is a solution that only ever considers saving the creditor at the expense democracy, as the majority would reject the payments of debts that they did not create or feel responsible for.

It is a robbery of massive proportions. Democracy needs to be restored to re-balance the system in favour of debtors.  
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