More news later today on my new/old book project, but for a moment let’s look at what’s happening in Greece, because I’ve become quite convinced that markets have gone completely mad and the world economy is about to suffer for that madness. In fact I am sure of it. That’s because stocks are up today on word of a second debt bailout for Greece — a bailout that has no more hope of standing than the one before it. Greece is bound to default, beginning a likely fall of economic dominoes across Europe. And while that news is not explicitly about technology, it will certainly affect all of us interested in technology, because Greece is screwed along with much of southern Europe.
Here are the facts — not my opinions, facts.
In January, Greece’s tax revenue from its Value Added Tax (VAT) collapsed by 18.7 percent from a year earlier.
The VAT rate for food and drink rose from 13 percent to 23 percent in September to comply with demands of the European Union, European Central Bank, and International Monetary Fund.
The effect of this boosted tax revenue has been overwhelmed by the contraction of Greece’s economy with overall tax receipts (not just the VAT) falling 7 percent compared to a year ago when they were also considered to be terrible, just not quite as terrible as they are now.
Meanwhile, 60,000 small firms and family businesses have gone bankrupt in Greece since the summer, this in a country with only 11 million people. Imagine a quarter of all businesses disappearing from Ohio over just three months, because that’s the equivalent.
The Greek budget deficit is stuck near 8-9 percent of Gross Domestic Product (GDP) because the country’s economic base is shrinking so fast.
Yet shares are rising on markets across Europe supposedly on the idea that Greece will this time fulfill its obligations under the new debt accord — obligations that will continue until 2020 when the country will still be prostrate with public debt at 120 percent of GDP — if everything goes perfectly?
Now my opinion: Greece is screwed. The new debt accord won’t hold, austerity measures won’t be fully implemented, and the Greek government will formally default within six months. And stocks are rising as powerful people and organizations prop up share prices just long enough to unload their own positions, leaving the little guys to drown.
Far better to just let Germany take over the payments and own that Greek jalopy outright.
But that’s just one geek’s opinion. What the heck do I know? Yet I must speak up because I sure don’t see any of this in today’s business press.
Broadly agree with you on this Bob, it seems our European leaders don’t understand simple arithmetic, let alone economics. As a resident (not a citizen) of Greece, it hurts me to see the damage being done to this wonderful country by faceless and heartless bureaucrats and speculators.
There’s lots of good comment by the Greek (and hence ignored) economist Yanis Varoufakis here: http://yanisvaroufakis.eu/
Trouble is that it’s not about arithmetic and economics. For the Germans, the political imperative of expanding the euro project blinded them to the dangers of admitting numerous southern states whose economic metrics fell miles short of their own rules for joining. They encouraged this calamity at every turn and now they face the prospect of having to pay for it out of their own pockets. There are far too many voters alive in Germany whose parents told them of the horrors of the hyper-inflation which caused two world wars and encouraged the rise of Hitler. They can’t bear the thought of its happening again so they’re not willing to swallow the cost of the euro crisis. They’re the only people who can pay for it and they wont. Calamity is inevitable.
I believe it wasn’t the inflation of 1923 that paved the way for Hitler’s rise, but the deflation of the Bruening in 1932 that paved the way to Hitler’s ascendancy to the Chancellery. The inflation of 1923 was a reaction to the reparations payments to the French and their occupation of the Ruhr as a result.
Bruening kept Germany on the Gold Standard, to keep the economic elite happy. So did Hitler by the way – however the Nazi’s got around this problem by providing massive credits to exporters so that they could be able to participate in foreign markets, in deed, Nazi Germany was cited for dumping in the American market at one point.
For more on this topic see Adam Tooze’s “Wages of Destruction” (British Historian, copyright around 2006) on the economic history of the Third Reich and the late Wiemar Republic.
Paul Krugman has been saying for a couple of years that Greece is screwed. There is NO WAY to fix their finances with austerity. I give the EU maybe a year. Greece will default, go back to the drachma and rebuild. The austerity hawks will then set their sights on Spain and destroy that country. It seems that Germany needs to destroy Europe. Maybe we should have a three strikes rule on Germany? The situation is completely insane.
I’m with Bryan. Paul Krugman may sound bonkers at times, but he (channelling Johnny Keynes) has been proven consistently right going back 5 years. We let Mitt Romney implement his slasher program, and, if Krugman’s track record holds, we follow Greece, Spain, England, Ireland, Italy down into the vortex. 25% unemployment here we come!
Krugman’s great, but other people have been covering the european fiasco well too.
This guy pointed out that the Greek default is occurring in stages, and they already wrote off 50% of the Greek debt in october:
http://economistsview.typepad.com/economistsview/2012/01/fed-watch-hows-that-austerity-working.html
So by the time Greece actually formally _defaults_, it’ll be over. What’s killing Greece now isn’t the remaining debt, it’s the austerity measures Europe imposed on it leading to “nobody can spend any money, so nobody can make any money” liquidity crunch and economic paralysis. (The money that’s left is hoarded by rich people and corporations just sitting on it, afraid to spend what they can’t replace.)
The obvious fix would be to print some money so people could start exchanging goods and services with it. Heck, a bit of inflation would _erode_ the existing debt… if they had their own currency. But the European Central Bank is actually the German Central Bank, and Germany’s been running the european union as a captive market for their exports, and it’s strangling the peripheral countries (who among other things had all their money drain out to Germany, spent on goods that were cheaper to import than produce locally because Germany has manufacturing economies of scale tiny Greece can’t match).
http://krugman.blogs.nytimes.com/2011/11/07/wishful-thinking-and-the-road-to-eurogeddon/
Matt Yglesias had a good article recently, on how Europe’s moves to protect rich people and corporations (foreclose on everybody but save the banks at all costs, just like here) have actually insulated America from the worst of Europe’s inevitable implosion, by giving us time to pull our assets out:
https://www.slate.com/blogs/moneybox/2012/02/06/europe_s_elites_haven_t_saved_themselves_but_may_have_saved_america.html
Basically, the Euro was a bad idea from day one. Keep in mind it’s only a couple decades old, this is its first major crisis, and it turns out the way it’s set up? It’s not a load-bearing currency:
https://www.theatlantic.com/business/archive/2011/11/fiscal-union-cannot-save-the-euro/249093/
You can in no way compare the USA to spain, italy, greece etc… We issue our own currency backed by our economic productivity. Euro nations have no control over their currency b/c the ECB regulates it not the individual nation’s treasury. It makes a huge difference in dealing with trade deficits.
Doesn’t the UK make its own currency? They’re still part of the EU.
It’s not apart of the monetary union. There are other aspects to the EU than just the euro currency, labor, free trade, etc…..
The UK has their issues but is not in the same boat as the rest of the PIGS.
The only way you can believe that Krugman has been consistently right is if you willfully ignore everything he has been dead wrong about. For example: the speculative oil bubble. In his masterpiece, The Oil Nonbubble, he wrote, “the rise in oil prices isn’t the result of runaway speculation; it’s the result of fundamental factors, mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China.”
Krugman argued that the only way it could be a speculative bubble is if the speculators were hoarding “private inventories of black gunk.” I guess Krugman, the mast economist, did not notice that speculator (i.e. investors that are not directly involved in the production, transport, or consumption of a commodity) participation grew from one-quarter to two-thirds of the market, a demand increase equal to 848 million barrels over five years. There was never any shortage of product (a fact Krugman acknowledged). The bubble plainly occurred because more speculators were bidding on the same finite number of futures.
Krugman couldn’t see this because he is blinded by his own anti-business, global warming, big-government-can-create-renewable-energy ideology that he couldn’t see the readably available facts. He might occasionally come up with something that has the appearance of truth, but mostly he’s just a political hack.
As opposed to an internet troll hack, who isn’t a tenured economist at Princeton? I’ll keep trusting Krugman, thanks.
Ditto
So you are saying Krugman was right about the oil bubble?
I presented facts and you resorted to argumentum ad hominem. So who’s the troll?
By the way, I know a thing or two about the oil bubble. I wrote about it at the time. And I was right.
https://www.thetruthaboutcars.com/2008/05/the-truth-about-high-gas-prices-or-how-i-learned-to-relax-and-pay-67-to-fill-up-my-suv/
and:
https://www.thetruthaboutcars.com/2008/06/update-why-oil-prices-will-tank/
and my favorite:
https://www.thetruthaboutcars.com/2008/09/oil-prices/
Montgomery is still the troll here.
Perhaps the best way to evaluate Krugman is to use the Rodney Dangerfield test:”if you want to look skinny stand next to someone fatter than you.”
When you do that Krugman looks positively sterling. He and his confederates (pragmatist – which is really what Keynes was ‘when times are good governments should exercise austerity, when times are bad, and they are deflationary/demand deficient, governments should be the spender of last resort’ ) have been right, by huge orders of magnitude than any other school of thought.
I’m sure there are moments when Krugman has been wrong. But my god, the guy’s track record is unassailable. The “chicken little” austerians have been predicting inflation any day now, for five years.
I think the thing to do, is for the EU to retrench, if not back out, out right, on the currency union. Then what happens in Greece shouldn’t matter.
There are other ways out too: the ECB could be, and should be, the lender of last resort.
Argentina defaulted a few years back, and they are fine now.
Argentina: https://www.indexmundi.com/g/g.aspx?c=ar&v=66
Last I heard Iceland, with its own currency, is doing better than Ireland.
So, China and India’s recent (decade or so?) expansive hunger/need/use for/of oil has had no impact on the rise of the cost of Oil? That’s missing the forest for the tree’s. China’s oil pre Y2K was roughly 5%, now? Nearly equal that of the US’s.
As far as the M.A.D. economic arrangement the US is in with China, the US still accounts for 25% of the Global Economy while China is at 8%, after years of double digit growth. (Fareed Zakari) The people who use their brains nearly always make more and have a greater impact on the economy then those who use their physical tools (pro athletes being the obvious exception) Foxconn and other major Chinese manufacturing giants are making Goods designed, by others, who will profit more than the maker.
For an interesting take on the China/American economic relationship read James Fallows series of articles in the Atlantic Monthly. Also, NPR’s Planet Money did a great story called the “Giant Pool of Money”.
The Greek issue is an interesting one, I read as Greece was preparing for the 2004 summer olympics that they were spending roughly a years GDP in preparation for the games. The expectation was that they were willing to into debt to host those Olympic games with the belief that tourism over the next 15+ years would bring a high ROI… The only problem is once the 2004 games were over, the Global economy started it’s nose dive and no one did go to Greece to vacation and take in the venues.
The real question is, what if Greece defaults? Globally, their impact on the Economy is… bluntly, not much. Greece is the Dakota’s, Idaho, New Mexico of the EU… Greece will default, that’s the end game. No other solution makes sense for anyone. Let Greece default, lose their membership in the EU, and become the Motel 6 of Europe. One of the funniest parts of “My Big Fat Greek Wedding” was the extreme Ethnocentrism of the Brides father in being Greek. It was funny because it’s true. Let’s be honest, it’s been a few years (squared) since Greece was a country of importance.
Is the Global economic downturn and subsequent problems an indictment on the EU as a whole? Since it’s inception in the late 1950’s the EU has been very successful in meeting it’s original goal.
There’s still a waiting list of countries willing to join. Maybe the EU should do what the NFL, NHL, MLB, NBA etc… do, when someone wants to buy a team? They pay the league X dollars ON TOP of the cost of the team. Russia (not technically on the waiting list – as their application was turned down in the late 90’s – but you know they’d jump if called), Turkey, Croatia, Bosnia? You still want in the EU? Fine, cost of membership is X billions… That money could be used to bolster the economies of Greece, Spain etc… and lessen the importance of the French and Germans… Just a thought.
I always thought that Europe should have stopped at “Community” status. I thought the “European Union” was a step too far, integration wise, given the depth of diversity differences. I’m all for the European project. In fact, most of my life I’ve been jealous of not being European (I’m a history and geography buff, our history is less than 250 years, and to find another country speaking another language, as a kid, I had to drive 700 miles, which never happened – if I had been born in Belgium, like my ancestors, I could almost walk to three different countries, and have a major linguistic borders running right down the middle of the country – and the history goes back to Caesar’s conquest of Gaul).
If the EU was a step to far, in my mind, the ECU was a step way too far. How many Greeks can move to Germany to get a job?
In my mind, the Europeans need to be thinking about how to take a step backwards before trying to move forward. How to shrink the ECU out of southern Europe and the Baltic states and Ireland – then wait another hundred years.
So you’resaying he was wrong about the oil bubble, but Taibbi was right – it was Goldman Sachs that did it?
In short, yes. But Matt Taibbi had the benefit of hindsight. Krugman wrote about the Oil bubble as it was happening, which is much harder to do. I posted links to a series of articles I wrote over the summer of 2008 in the midst of the crisis, but the posting is caught in Cringely’s spam trap and has been awaiting moderation since 2/10.
Pretty much. All this moral outrage requiring austerity measures is just setting things up for a big fall. Where has austerity worked? Iceland? They chose a different route, changed the gov’t, refused for the regular folk to be on the hook for banker debt and seem to be doing well. Meanwhile, in Ireland, austerity’s still grinding on and nothing much seems to be happening. They won’t have as hard a landing as Greece but still looks like things have to go down there.
Something struck me about what you just said, though off to the side…
A loan is some sort of agreement between (at least) two parties, the lender and the borrower. Whenever we have a “bad loan” the lion’s share of the criticism falls on the borrower. But let’s look at that again, for a moment. Very few ordinary citizens ever become experts on the process- we do what diligence we can, but we just don’t borrow often enough to become experts. On the other hand, lenders are… lenders. That’s their business, they SHOULD be experts. They should also know how to estimate the risk of loans they’re making, and should know how to avoid making bad loans.
During news coverage of the mortgage problems in the US, they covered some specific instances. Listening to some of those cases, it almost seemed that they were *designed to fail*. When the prevailing interest rates for “good” home loans were around 5% there were subprime loans being written for 11% and due to adjust UP in a few years. At least part of the problem was that somehow the responsibility for the loan got lost – someone got paid for writing loans, and had no responsibility if they were bad loans.
Then there’s the investment side. Someone should have known that this was “too good to be true”, which brings it back to austerity measures.
Once again, all blame goes to the borrowers. They’re clearly not blameless, but there are other parties here who deserve a healthy share of the blame. But “austerity measures” seem to place all blame squarely on the borrowers, and make sure that investors get their “too good to be true” returns. Either that, or it’s even worse, in that someone behind the scenes is pushing it all to a crisis point where both borrowers and investors lose and they walk away scott free with the bank.
“That’s their business, they SHOULD be experts. They should also know how to estimate the risk of loans they’re making, and should know how to avoid making bad loans.” They are and they do know. But thanks to government loan guarantees and goverment officials espousing “Affordable Housing” to get themselves elected, the experts followed the government mandates. The fault lies with the general populace who voted for the government.
Perhaps Germany needs to destroy Europe in order to save it.
The figures you provide for reduced tax rates are very interesting. Hadn’t read those before. Fully implemented austerity measures are deliberately contractionary, which would make those collapsed tax receipts worse, not better.
Greece will, indeed, have to leave the Euro and return to the drachma. Floating FX is what Milton Friedman got his Nobel for. Had they had their own currency, they could devalue (yes, a form of default) but it would keep things in balance on the books. But within the confines of the Euro, they can only attempt internal devaluation (massive deflation in their economy) to attempt the same thing that external devaluation would have achieved. Better to have a floating currency. It’s worth at least one Nobel.
To this, Krugman is in agreement. Ireland is, once again, the model. But compared to Iceland, not so much.
Of all the GIPSI countries, only Greece was fully corrupt, the other’s had balanced accounts in surplus. Greece has only about 10 million people and an economy about the size of Greater Miami’s. It shouldn’t be able to pull down the global economy.
I find it offensive that people are painting the requirements of the other euro countries and the IMF as “destroying” Greece. They did that all by themselves. If you need to borrow money every year just to pay salaries etc, which would still be true for Greece even if all their debt would be forgiven, then you’ll find yourself at a point where nobody wants to lend you any money anymore after a while.
Greece is not a poor country. A few years ago their GDP was $27000 per capita, more than twice that of Poland. They just need to stop spending more than they make. We’ve seen time and time again that after painful restructuring growth starts happening and the pain goes away after not too many years.
If anyone disagrees with the above: fine. YOU send the Greeks your money then.
I broadly agree with you. Greece got itself into this hole (Goldman Sachs reputedly helped) through governments spending their way there. On top of which the modern Greek culture is all about avoiding paying the government and collecting ‘contributions’ while they do it, which means Greece’s tax base has been lowered substantially from what it should be.
I do think they’ll default, but Greece on the whole is hardly innocent of the situation it is currently in.
Some people think that we Greeks live like kings, when in reality most of us struggle to survive. The company I work for as a web developer is about to go bankrupt. My own salary has fallen from 800 to 250 euros over the past two months (hey, that’s almost 70% down). Of those 250 euros, 40% is going to taxes. So I only have 150 euros to spend for the living expense. But wait, there’s more: I also have to pay an additional 23% for drink and food, so right now I have to work for a month to earn a mere 115,5 euros. How’s that for a king? Now, guess what: about 90% of the tax revenue goes to loan repayments. Over the last two decades, Greece has repayed its debt more than twice. Maybe it’s time for our German friends to give us back the money they owe us as well:
https://www.greece.org/blogs/wwii/?page_id=220
Check it out.
Agreed
I agree. My job here wasn’t to ask forgiveness of Greek debt but simply to point out the current state of market denial. Not everyone is that stupid, so this must be further manipulation as I described — manipulation that will end up costing us all.
Two points:
A) Who let Greece into the Euro?
B) Spain had a budget surplus before the current mess hit and they’re kinda screwed now too.
Also, a country can run a perpetual deficit as long as it has economic growth and a couple percent inflation. Each year, it can keep debt at the same percentage of GDP pretty easily by adding together the following three:
1) Increase in GDP.
2) Inflation (eroding value of existing debt).
3) Getting to print and spend enough money to keep up with #1 and #2.
So something like a 5% annual budget debt can literally be kept up _forever_. (From a certain point of view taxes exist to keep inflation under control, money is just debt with a good makeup artist anyway. Your “promissory note” is an IOU from the government. That’s what promissory note _means_, written right there on the bill. When you ask “They owe you _what_ exactly?” the answer turns out to be “Not locking you up next tax time”, that’s actually what forces everybody to use _this_ medium of exchange instead of coffee beans or something, which is the _other_ reason for taxes.)
Yeah, Greece is a slimy pit of corruption, but so’s Russia, and to a certain extent China. Applying microeconomics to countries works about as well as applying quantum mechanics to Jupiter. (We’re pretty sure both where it is and how fast it’s going, to more significant digits than we actually need.)
Alas, this is correct. Greece is a poor country that got into the habit of living like a rich country using someone else’s money. The horrible destruction of their economy is a result of suddenly having to live within their own means.
None of which changes the damage they will do to Europe and us when the are forced to leave the euro zone, but they simply can’t grow out of their problems with the kind of constraints Germany is demanding.
I call it “punishing” Greece, or “biting off your nose to spite your face.”
Your numbers are a bit selective I think, or at least don’t present context. I am not doubting that Greece may not yet be out of trouble, and I certainly think the EU has done a hamfisted job of fixing the problem with quick surgery (we all know the danger of letting festering wounds go untreated). But how many of the businesses folding in Greece were even sustainable in a proper economy anyway? Greece has been run terribly, a huge black market, poor tax collection, etc. Now they are forced to get things in order, so businesses that weren’t paying taxes, and thus were profitable, may no longer be so. Throwing out a few numbers like this without proper context is just scaremongering.
Most of the “blindness” can be traced to the fact that many of the ECB (and Greece’s current head of state) are former banksters themselves.
When it’s clear the foxes are guarding the henhouse, you know the game is up.
I’m not so sure that this is Greece-o-geddon. While governments of the English speaking world and Northern Europe tend to deal with issues in one sitting, this isn’t the way that the rest of the EU works.
In their mind, we lurch about, shouting and over-reacting to events. They like to think they take their time, gain consensus and then move step-by-step, with a pause each time for reflection. For the EU, they are evolving the solution, trying deliberately not to go directly to the end result… This partially explains their utter hatred of the money markets who simply won’t work the way they want, and sit still and wait for a few months to make a judgement on each step. The markets keep punishing the lack of transparency and a clear path forward. But that’s entirely the process the politicians in the EU are following. It’s not deliberate, it’s part of their consensus building, cosy coalition-building habits.
Here’s how I think things will go (if the markets can’t push the rest of the EU into doing something drastic).
Greece will stay a part of the EU, there are too many federalists in charge for them to allow Greece to leave. There’s also no way out legally so it would have to take a lot of bravery for the Greeks to try – they’d all go personally bankrupt when their money became worthless.
It will default 100% on its debts – but step-by-step – at the moment they’re asking for a 70% “haircut” from investors, up from 50%. It’ll get higher and higher.
This won’t be declared a default. The troika of creditor groups will try to declare it as something else. Some laws or treaties might have to be rammed through to stop the markets declaring otherwise.
Greece will re-form it’s entire taxation system. But that will be piece by piece, and with subtle takeover by the Germans to act as “advisors”. They’ll probably be sent by the EU so there’ll be a token Frenchman in there as well. This is the only way they can change the national sport of avoiding their responsibilities.
The Greek economy is small enough that the EU can just about afford this. It will become necessary as contagion spreads to Italy, which is just too large to save. In order to avoid Italy collapsing, Greece will have to be saved – but it will just take many more “critical” summits, treaty negotiations and months of speculation in-between.
Not edifying, and certainly not the way an English-speaker would consider doing this. But certainly how the collegiate, consensus-builders from anywhere south of Brussels want to do it.
Unless, of course, the Markets get their way…
“Greece will stay a part of the EU, there are too many federalists in charge for them to allow Greece to leave. There’s also no way out legally so it would have to take a lot of bravery for the Greeks to try”
There’s been a way out of the EU since the Lisbon Treaty. It’s the Eurozone that there’s no way out (other than by leaving the EU).
I expect that when the time comes, either a loophole will be found or there will be a tiny treaty change that doesn’t require much in the way of national parliamentary approvals or referenda.
1. A good deal of the trouble in Greece is actually caused by being in the Euro zone. After Greece joined, a lot of money flowed in from the other EU countries, that wouldn’t have otherwise. Now it’s time for the money to go back. Some of the countries in trouble in the EU actually had spending under control. Especially Spain, I think.
2. If you divide the sum of the Grecian bailouts by the population of Greece, you get the per capita figure. Which is astonishing:
240,000,000,000 Euros / 11,000,000 Citizens = 21,818 Euros/Citizen. Including babies, old people, et cetera. The total debt outstanding is about twice that amount. There is no way this can be paid off.
Amounts are as accurate as I can make them by Googling, bu they are changing as we read.
So where did the bail out money go? Did each Greek citizen just got a fat check in the mail and kept it under the mattress? Everywhere it seems the news identifies the abstract entity that got a bunch of money (Greece), and the party responsible for paying it back (Greek citizens), yet not a word about who ended up with the pot of money. This is about as legit and “factual” as the home prices at the height of housing bubble. Answer that question and perhaps we can begin to fathom why the so-called “bail-out” idea do not work in the fist place.
Iceland and its currency went bellyup and the new government said eff yew to British and Dutch creditors, yet the world, the euro and the universe didn’t end, the Royal Navy and Amsterdam bankers didn’t foreclose on Reykjavik. Iceland is about as screwed financially as any debtor nation can get but they’re defiantly going it alone.
I’m a little more worried about China holding all those U S Treasury notes and now offering to step in to help Europe … if China holds all the notes, it can threaten to cause a run on the dollar and the euro if it doesn’t get it’s own way politically in the future.
A) China doesn’t hold most of our debt. It’s mostly money we owe to ourselves.
B) Should China choose to dump our bonds (selling dollars), the value of the dollar would fall, making our exports far more competitive than they are. Cheap Chinese imports to the U.S. would become expensive Chinese imports to the U.S. They would be cutting off their nose to spite their face.
Currency devaluation is a powerful tool and the Chinese would only be helping us out if they dumped the dollar.
If you owe the bank a $100,000 dollars, the bank owns you. If you owe the bank $10M, you own the bank. So yeah, our debt with China is large but there’s not much they can do about that. They’re basically in for a penny and a pound, as far as the U.S. goes.
Add to this that the economy in Iceland is doing better than the Euro average. When they told the banksters to f-off, they invested in their own future instead.
This all sounds Greek to me 🙂
“Far better to just let Germany take over the payments and own that Greek jalopy outright.”
What does that mean? Who would “let” Germany do what? Buy Greece?
Today the Bank of England decided to pump another £ 50 bn via Quantatitive Easing to the economy. That’s £ 325 bn in total, about $ 448 bn.
Essentially by pumping this money in to the economy it’s disguising the recession / depression that we’re in. And making the money in your pocket worth less.
Added to this is rising fuel costs. Petrol (gas for cars) is over a third more expensive than it was in recent years, electricity and gas (for heating) went up by 18% last year.
So what you’re earning is worth less, but the very basics of heating your home and travelling to work has risen. Is it any wonder why we have less money to spend on technology? (Other thank the iPhone 4S obviously!).
[…] […]
(I’m a Greek citizen, though I’ve lived in the UK for the past 6 years) I think a lot of you are ignoring the political situation in Greece. In the end any course of action will have to be agreed on by a current or future Greek parliament.
1. Like “Giorgos” above, most of my fellow Greeks believe that our budget deficit was caused primarily by borrowing. Yes, we pay a lot in interest but the *primary* (i.e. ignoring debt & interest) deficit has been at around 10-15 billion euros (and rising) a year when total tax receipts were around 50 billion (and dropping). Deficit-to-revenue is a much more useful metric than debt- or deficit-to-GDP in my opinion, and easily understood by the electorate. “We spend 20% more than we bring in” is a simple phrase that none of our politicians or intellectuals have used over the past couple of years, instead blaming “speculators”, “the markets” and other abstract, usually foreign enemies like all populists are wont to do.
2. Where did we find this extra 15 billion? We borrowed it. Who lent it to us all these years? Mostly banks on the open market. Why were they willing to lend us money when the fundamentals were so bad? No, it’s not the euro. One word: Basel. As long as Greece remained A+ or better rated it meant these banks did not need to keep any capital in reserve to cover our debts to them, regardless of their own risk analysis, because *that’s what the regulators said*. Like it or not, it was government regulation that distorted the sovereign debt market just like it did the US property market. I’m not a libertarian, I support government regulation of the financial industry, that doesn’t mean there’s no such thing as bone-headed, counter-productive regulation. Excellent analysis of this here (by a libertarian): http://lolgreece.blogspot.com/2011/12/lolgreece-christmas-carol.html
3. People mention “austerity”, both in this thread and in the media, as if it’s one thing that you turn up or down. There’s different kinds of austerity. You can increase direct taxation, indirect taxation, cut salaries, cut social security, cut public investment, devalue (if you control monetary policy) and each of these has different effects. The Greek government has not fired a single civil servant. It has not opened closed professions; you can’t get a new taxi license from the state in Greece; you have to buy, rent or inherit it from someone who already has one; same with pharmacists, truck drivers, notaries and a bunch of other professions which are – correctly – licensed but – tragically – the state will not issue any new licenses for, meaning they form little cartels all over the place. We still spend FIVE BILLION EUROS A YEAR (half our primary deficit!) buying arms: fighter planes, warships, tanks, submarines, rocket launchers, and for what? Because everyone in Greece is convinced Turkey might invade tomorrow. Instead of cutting government expenses we’ve cut pensions, stopped building infrastructure and taxed the crap out of income, profits, property and consumption. THIS IS NOT because our political class does not understand basic economics, it’s because politically it’s the least distasteful thing to do. Fire civil servants, allow new businesses to compete with the taxi drivers and pharmacists and you’ll have them, their relatives and their friends vote for the other guy in the next election. Stop buying arms and the far right will start shouting about how you’re leaving us defenseless.
Politics in Greece, like much of the world, is dominated by fear of the other. Turkey wants to invade, evil speculators want to rob us, Germany wants to govern us, Macedonia wants to steal our history and heritage, the list goes on. As an American you must understand this and see the parallels to the “Commies”, “Jihadis”, “the 1%” and other supposed enemies that have been blown entirely out of proportion for decades by a political class that uses fear to push through policy. The idea that Greece’s woes are the result of a false prosperity that was enjoyed not only by the few but also by the many is something no politician can ever sell. There’s not much we can do about that.
Excellent analysis, Stephanos. In the long run, if the people and politicians do not adapt, the market will do it for them.
Bob, you need to get out more. I can send you any number of blogs that discuss Greek’s situation in depth. Your problem is your reading Murdoch’s defunct newspaper. As mentioned above Krugman has the most detailed summary and you just need to go read his blog.
Here’s a quick summary as others have also mentiond:
1. Greece doesn’t matter. It’s economy is small, the EU can take the hit.
2. Greece doesn’t matter — except for Greeks and those who lent money. The Greek people are suffering.
3. This is all negotiation and Germany trying to reform Greek government (instead of the Greek voters doing it). The EU will bail out Greece.
4. The REAL problem is Italy. Anyone think Berlusconi’s finances were legit? Italy is huge. Greece is a handy distraction from Italy, Spain and Ireland while the EU tries to get them off death row.
5. The investors who have purchased Greek debt are telling us what the ‘haircut’ prices will be.
6. Everything depends on when China’s bubble bursts.
“Greece doesn’t matter — except for Greeks and those who lent money.”
Those who lent money include a number of foreign banks, whose solvency is consequently in question.
I do read Krugman. Heck, I KNOW Krugman, through his next-door neighbor in Princeton, my good friend Adam Smith. Our online audiences are roughly comparable in size but don’t overlap very much. Hence my decision to write about this here and now.
Count me as both a Krugman and Cringely reader (Robert P. Krugely?) . Seems as though there’s more overlap than you think.
“Your problem is your reading Murdoch’s defunct newspaper.”
Apparently, you missed your remedial grammar class.
“Your problem is you’re reading Murdoch’s defunct newspaper.”
He’s not the only one who missed his remedial grammar class. NOT ONE CONTRIBUTOR to Bob’s excellent forum (that I’ve seen – apologies to any exceptions) knows the difference between it’s = “it is” and its = possessive pronoun, same as his, hers, theirs. Heck, some of you have started swapping the two – “its only a matter of time before Greece stops paying it’s debts”.
But aside from that – great discussion, with blessedly few contributions from the wild-eyed far left and right.
Let me defend for the grammatically challenged. Generally, blogs are concept oriented. I’m more interested in getting my concept right, and could care less about the grammar and the spelling. Still, I usually take a stab at doing a decent job at this. Its and It’s are one I try to catch. But the fact is, I’m taking time off of something important to embellish my fancies here, so I write as fast as I can, and some time click out of the site before I’ve double checked everything. In my case, when I write, it’s all ideas flowing out my finger tips, that’s what I’m concentrating on… and when I do that, the spelling goes out the window… my fingers will literally will spell any word any which way they want to until I’ve gone back and checked: there, their, they’re; too, two, to; or one of my more fatigued mistakes – one, won, juan. The worst part is, since I’ve written it, I won’t catch a lot of my own mistakes. Its just a blog, and I’ve got better things to do than fine polish it. I’m gracing people with concepts here, and if they don’t get the concept because of phonetic or grammatical mistakes, well, I’m just sorry.
“1. Greece doesn’t matter. It’s economy is small, the EU can take the hit.”
That would be correct, if this was just an economic problem. But if this was just an economic problem then Greece would have been kicked out years ago (assuming it was ever let in in the first place).
The reason why Greece matters at all is because the Euro is more about the politics of European Integration than it is about economics. Greece leaving the Euro puts the entire European project in danger.
But it shouldn’t. Sweden, Denmark, and the United Kingdom all have their own currencies still. It really only threatens the ECU. There’s no way of getting around it, the ECU was a bone headed idea. The EC (European Communty) was a great idea and the EU (European Union) a great idea on the boarder of being a step too far.
As I understand it, the treaties that created the EEC, the EC, the EU are still standing and are separate from the ECU. So, if the ECU falls, then they fall back on the other institutions and start over again on how to move forward. But it seems obvious the ECU is a bridge too far, and after the current crisis there’s going to be a massive overhaul to make sure it can’t happen again, and that might mean something like a dual currency idea: an international currency side by side with a local currency. In Italy you can use either Lira or Euros, for a transaction, that kind of thing.
Without a lender of last resort, without full migration of labor, the ECU lacks efficacy.
In a sense governments are like businesses, and need to start thinking and acting like businesses.
For a business to make a profit — which is the main objective — income must be greater than expenses. Obviously for a business to just break even income must equal expenses. Running at break even is dangerous. The slightest miscalculation or misfortune and the business is running at a loss. Most businesses can not survive for long when expenses exceed income. Even for well run not-for-profit organizations the objective is to make a slight profit and build a modest cash reserve. Sales, contributions, business, the economy is always changing. Sometimes income is lower. Sometimes it is higher. When one has a cash reserve it is easier to ride out the low income periods.
When a business needs to make more profit there are two ways to do it — cut costs and/or increase prices. When one increases prices one risks the implications of the classic economic price vs demand curve. As price goes up, demand weakens. If you are not careful, by increasing prices you could reduce your income and profit. Cutting costs smartly is often the best course of action. It forces one to evaluate what they do, why, and how. It forces improved efficiency. These are things governments need to learn to do. How many of us have visited a government office, waited forever, while the workers stroll around behind the counter doing nothing? How long would a retail store allow its employees to behave like government workers?
There is something else one needs to understand about cutting costs. Every Dollar (or Euro) of cut cost goes right to the bottom line. For every Dollar (or Euro) of new income, only a fraction of it reaches the bottom line. When you sell more products, only a fraction of the income is profit. The majority of the money is absorbed by overheads, costs of doing business, etc. It is for this reason a business must always be keenly focused on constant cost reduction. Simple selling (or taxing) more puts an organization in the unhealthy pattern of hiring more people, building departmental empires, adding layers of management, etc.
Governments really need to operate with balanced budgets. Only in a time of a true economic crisis should they borrow money. Governments need to focus on the true source of their income — the prosperity of their economy. When the economy is healthy, when business is profitable, then a governments income is strong and secure. The same things that hurt business will ultimately hurt government. Many of the things that help and hurt business came from government. So it is vitally important that government start thinking like a business and acting accordingly.
Governments are absolutely NOT like businesses. The goal of government is to provide for the security and welfare of its citizens, not to make a profit.
Ah, but you missed the point. Governments need to be fiscally sound. Deficit spending only works when there is strong economic (and tax revenue) growth. In a static economy, balanced budgets are a necessity. One of the reasons governments are so inefficient is due to the lack of good business management. In business there are strong economic incentives and constraints that do not exist in most governments. Now that most of the world’s economies are now static, it become imperative for governments to operate more efficiently.
Please explain Facebook and Twitter as legit businesses. Mofia, drug cartels, and pimping are also a good business models. Perhaps countries should be more like the Mofia?
Wrong.
This is the difference between macro and micro economics.
Businesses are open systems. They interact with other ‘open systems’. When bad times his a company, they tighten their belts, and maybe they survive the bad times.
Ultimately, governments can’t do this. The bigger the economy, the more it approaches a closed system. In a closed system gross expenditures ultimately equal gross income equal GNP.
Case in point of how this works is Germany. It is acting like an open system. If all nations do what Germany is doing, tightening its belt and trying to export its way out of its trouble, there will be no one to import what Germany makes. A lot of what Germany makes is consumed in the rest of Europe. If the rest of Europe tightens its belt too much, what do you think will happen to Germany?
By the way, the smallest closed system I can think of now is a game of monopoly. Germany is in the position of owning Park Place and Boardwalk, everyone else has to “tightern their belts”.
One of my initial thoughts on the crisis was how the Germans must think they are screwed any way they go. Having learned after two wars they can’t win that way, they become part of an integrated Europe, with a southern tier that self destructs, for which the Germans are blamed/expected to pick up the tab.
More broadly, we don’t know exactly how the train wreck is going to play out, so we afar watch with a morbid fascination, and some fear of the shock waves that are to come. But, what is this likely to do to national characters of the European states for the coming generation? What happens in Europe over the next several decades will be largely rooted in what people experience in this decade.
This is a worldwide problem. A global depression is heading our way and fast. Why is it that some people can just sense this coming and others are blind with optimism? Both Europe is ‘done’ and North America too. America is in such bad financial shape that it is technically bankrupt. Top that off with a European crash and goodbye to North America too. It wouldn’t hurt to have a couple thousand bucks in cash out of your bank machine now, along with enough food to last you for a week.
Simply put, there isn’t enough money on the planet to cover the positions of the world’s governments. That’s it. That’s it. My guess is by 2015 at the very latest, because it takes time for things to unwravel on a global scale. 2008 was just a tremor before the big quake.
A global depression is an economic deflationary contraction brought on by the forced recording of losses amongst the individual players which once underway is difficult to reverse.
There is one country with one player who does have “enough money on the planet” or better yet this universe, the Federal Reserve System. The Fed has Congressional authority beyond a central bank to include “maximum employment” and under that mandate we’ve seen the Fed scope up Treasury debt like a vacuum cleaner. The Fed can use it’s currency exchanging rights with other central banks to trade Dollars for Euros and buy, let’s say Greek debt. Nobody outside the Fed controls it’s balance sheet and the Fed can write off it’s losses with just a journal entry. Yes it’s inflationary but that’s a tractable future event responsive to monetary policy, another Fed mandate.
The political fallout will be noisy because EVERY monetary asset holder on the planet was given a haircut however it keeps everyone in the game with less contraction than would otherwise be forced by small players leaving the economy.
Well it looks like the Greeks have taken over Washington DC. When does the dollar collapse because we can not stop blowing and extra trillion a year. We are losing ten percent of the value of our country every year we do this. In the long run America will be the cheapest place to buy everything. Then the Chinese will really be upset.
The bailout is not for Greece, it is for the bankers who made loans to Greece. The bailout is just even larger new loans to rollover the old loans. Greece (and Ireland) faces a future where its people will be impoverished debt-slaves repaying bankers for the next 40 years while its national treasures are sold off. Or they could do what Iceland did: default on its government loans. Iceland’s economy is now recovering nicely despite predictions of doom from bankers and economists (with such a lousy record, does anyone really believe mainstream economists anymore?).
You’ve hid the nail on the head about who is really being bailed out in Europe (the banks control the governments there just as much they do in the USA) but it’s not true that Iceland defaulted on its government loans. Those loans were made by private Icelandic banks, most notably for American sub-prime mortgages.
When the banks had to be taken over by the Icelandic government to protect the citizens’ savings that were wasted on those loans, the British and Dutch governments tried to force the Icelandic government to pay back money that it had neither lent nor borrowed (their reason for trying to do this was that the Icelandic banks also wasted a lot of British and Dutch savings for the same purpose).
I agree with you about who is actually getting a bailout but calling it “another bailout of bankers/investors who purchased Greek debt” just doesn’t have the same ring to it.
BTW, all these “economic crises” are born from the fact that our monetary system uses debt as money, and debt that is created by private banks who profit from ever increasing amounts of debt which will never be repaid.
Watch “Money as Debt” on YouTube for an eye-opening explanation: https://www.youtube.com/watch?v=Dc3sKwwAaCU
You don’t seem to understand what money _is_.
Of course money is debt. When I deposit money in the bank I haven’t got it (they loan it out) but I can still _spend_ it (check, ATM card, etc). Sheesh, technically we’re in the third decade since I wrote this:
https://www.fool.com/portfolios/rulemaker/1999/rulemaker990719.htm
https://www.fool.com/portfolios/rulemaker/1999/rulemaker990723.htm
The alternative is commodity money, the price of which fluctuates just as much as anything else (look at the gold bubble recently, https://www.slate.com/blogs/moneybox/2012/02/09/the_gold_bubble.html ) but with no easy way to _control_ it, which is actually horrible for the economy because you get uncontrollable inflation interspersed with bouts of deflation, and _deflation_ means hoarding cash is a viable investment strategy which means you have a liquidity crisis just like Greece is going through now due to not having its own currency. (It’s happening now because Germany is being selfish, but there _is_ somebody in control of it. With commodity money, there’s nothing you can do to fix it when this sort of thing happens, and it happens a lot.)
Notice how ancient Rome had debt-as-money (heck, they had corporations) and lasted centuries, then the middle ages used gold for a thousand years of paralyzed serfdom (charging interest was declared a sin by the Cathlolic Church, which was the headless remains of the Roman bureaucracy, so debt-as-money was actually _impossible_), and then the protestants broke away from the church and reinvented paper money?
Do you prefer the economy _before_ the enlightenment, or _since_ the enlightenment? (Note: heavily catholic spain stuck with gold and renounced paper money through the 1800’s or so. Look up “mercantalism” sometime. There’s a reason we could just walk in and take Florida under Andrew “duhbyuh” Jackson.)
The problem with fiat money is you have to trust whoever’s steering. The problem with commodity money is NOBODY CAN STEER. “Obviously if nobody is steering we can’t crash!” Er… no.
Rob
Stocks are going up because the FED, ECB and Bank of England are all printing lots of money and lending it to banks who are in turn buying lots of sovereign, corporate and other debt.
The stock market probably thinks that it doesn’t matter if Greece defaults at this point because banks, even those who might take a hit can just get more money from the ECB.
A default by Greece is already priced into a the market in many ways, the danger was before Christmas when the ECB hadn’t yet turned on the printing presses and no one was actually sure whether they would or not. Markets hate uncertainty as we all know, but now that uncertainty is gone, the ECB will step in and will and is printing. Hence stocks away!
Perhaps politicians need to read articles like this…
https://www.easysafemoney.com/why-raises-dont-work-explained-its-as-easy-as-pie/
A large part of Europe (UK, France, Germany, Netherlands) regards the Greeks as lazy, socialized, entitled babies who aren’t willing to “roll up their sleeves” and do the hard work.
I mean, aside from seaside vacation and old ruins, what does Greece have to offer? For a country so steeped in history, their innovation and industrial output is utterly shameful.
Greece, first you must change the perception of your country and your people. Just like the many Americans who bought homes beyond their capabilities and now are screaming for a bail out, the Greeks must recognize that they are at fault here.
(Sorry for my bad English, it is not my first language.)
The market is up not because people believe that Greece will ever repay its debts but because a number of risk-loving but systemically important funds had bought Greek debt in the expectation of such a bail-out. (Have we learned no lessons from 2008?) Had there been no bail-out, likely there would have been contagion flying everywhere.
This is an important point: this Greek bail-out occurred not because people wanted to bail out Greece, but because some Too-Big-To-Fail funds used their leverage to screw taxpayers (primarily Europeans, this time, but many of the rest of us indirectly) AGAIN. All these banks, funds, etc., bought into Greek debt knowing it was in default risk and also KNOWING that a bail-out was the only way they would get paid.
The question is, are they going to buy Greek debt again? If they do, taxpayers beware.
You might consider zerohedge.com as an alternate source of news. Read the story about the Greek MoD and his German submarines. Just more evidence that you are correct.
Or try using http://brucekrasting.blogspot.com/ (he’s a headliner at zerohedge) and has been blogging the entire Greece situation for some months now.
Poor Greece. They would be left out to rot if it wasn’t for the real possibility that if they actually default and it is so declared, then all those ‘security blanket’ CDS issues would actually come front and center and then we could watch all the CDS issuers on Greek sovereign debt disintegrate into dust.
And that’s when the real game starts…..
One further thing. Planet Money interviewed a hedge fund chief about the Greek debt “haircut”. Apparently, there are major players who are trying to MAKE a default happen so they can collect on their credit default swaps. Essentially, big hedge funds are shorting Greek debt, and using their influence to ensure the ‘credit event’ happens.
Yup. Afraid I agree with you.
Who thought all those paranoid Euroskeptics in places like the UK and Denmark would be proven right? It retrospect, it makes absolutely no sense for Greece, Cyprus, Germany, France and Slovakia to be using the same currency.
Maybe if all of them were states or provinces within a true federal union, it could be made to work. Mississippi and New York State are probably roughly about as far apart economically as Greece and Germany. So are — say — New Brunswick and Alberta north of the border.
But the EU isn’t a federal state. It’s a loose confederation of sovereign countries with different national interests, different cultures and vastly different economies. An interest rate appropriate for Germany or the Netherlands will almost always be way too high for Greece or Slovakia, and vice versa. It’ll lead to nice, measured, controlled growth in sophisticated economies like the former, and smother the lower-wage, low-cost semi-developing economies of the latter. Imagine what would happen to China or Indonesia if they suddenly adopted the US dollar, US interest rates and US wages. That’s pretty much what happened to Greece, ON TOP of its notorious corruption and high rates of tax evasion.
Didn’t anybody do the math before they made the most revolutionary change in Europe’s economy since the Middle Ages?
By the way, I should add that even in a federal state like Canada, it’s hard to balance the economy to benefit all regions of the country at the same time.
In the 1970’s, the federal government tried to control energy prices to protect the industrial heartland of Ontario and Quebec, at the cost of disrupting the economies of oil and gas producing provinces like Alberta and Saskatchewan.
Now we have exactly the opposite situation. Alberta and Sask are riding high on rising oil and potash prices and red hot development projects. This bounty has driven the Canadian dollar way up, from a low of about 65 cents 13 years ago, to virtual parity with the US dollar now. And now the industries of Quebec and Ontario are suffering because a higher dollar vastly makes their products much more expensive on the export market, and with only 32 million people, we live or die on exporting.
Now multiply this problem 100 fold, and you have Europe.
1) In the big picture, Greece does not matter.
2) If the whole European picture falls apart (contagion) it will affect the markets but for now the European crisis is priced into the US markets.
3) The US markets are way overbought (an unhealthy amount of buyers thinking the market will only go up) till something pops the current bubble – expect this soon. (This is frustrating for me – cant buy because we are near a top and there is a high probability of a major price correction and cant short the market because it is too early to play options till the market confirms its next move.)
4) Almost all news people have no f***ing clue about the stock market. My sources are people who have worked in the market.
Ironically, it was Germany that had all kinds of financial problems not too many years earlier due to war crimes against humanity, which had tremendous financial burdens placed on them.
In many ways that has shaped the now disciplined financial powerhouse Germany has become.
To quote some thing I saw somewhere else:
“Hey Germany, remember the Marshall Plan?”
The important questions about Greece’s excessive borrowing that are often ignored and, in my opinion deliberately ignored, are where this borrowed money came from and how come it was lent to a country that could not possibly pay it back.
Unlike the USA which can print its own money, Greece does not have its own currency and therefore had to borrow Euros from somewhere else. Unlike the American Federal Reserve, the European Central Bank (its Eurozone equivalent) is not allowed to lend money to governments, so the Greek government had to borrow from banks and other financial institutions who had access to Euro funds.
These Euro funds did not belong to the banks that lent it, they belonged to individuals and businesses who put their money in the bank. To simplify things just a little bit, the banks took a lot of money belonging to Germans, who are cautious and prefer to save than to spend, and lent it on to the Greek government and other untrustworthy borrowers.
I suppose that that answers the second question above – the banks didn’t care that the loans would not be repaid back because it was not their own money. More importantly, the European governments and the European Central Bank turned a blind eye to this reckless lending because they represent the interests of the banks more than they represent the European citizens.
Yeah, I’m hesitant to believe the moralistic condemnations of Greece too. Without their own currency to devalue and adjust, the EU locked Greece in with an aggressive manufacturing and exporting powerhouse. Small Greek enterprises could not compete with Germany (who profited from, and no doubt engineered Greek dependence) and Greece became more and more dependent on Germany for imports of everything. Germany ran a surplus by exporting to dependent nations, and made them monetarily dependent too. When the world economy tanked the dependent nations were really hurt, now Germany doesn’t want anything to do with them. I don’t attribute this to German traits, but to the ugly side of capitalism and human nature. – my 2 cents.
Americans should not be too smug about the over-borrowing Europeans when their own borrowing is being boosted artificially.
One thing that does this is their governments ability to just keep on printing money without any real wealth to back it up.
Another is the way that China keeps buying US government bonds because propping up the American economy encourages Americans to continue buying Chinese goods. When China finds other markets in the developing countries, it might just pull the plug on US borrowing.
US equities rally continues until Greece unexpectedly collapses or the US elections are over.
My guess late November to early January, although I’m not a good forecaste, but neither is anyone else…….
Remember, the difference between a prognosticator and a rich investor is the prediction of TIMING, not that its going to be a collapse in the markets. That’s a given.
Bob,
The part about not finding any in today’s business press needs to be further qualified. Maybe it should not finding any in today’s business press in the United States.
Here’s a good article from the Daily Telegraph talking about this very subject.
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100014720/greek-death-spiral-accelerates/
Nouriel Roubini is bullish on the American economy. It’s passe to be a doom and gloomer now. Greece will be fine. The worst is behind them. I’m more concerned with the fact Germany is in a place to redeem itself and it’s place in History and is failing to do so.
About 25 years ago, Chris Rhea wrote a song called “The Road To Hell”. Those lyrics & that song were unbelievably prophetic – it’s all about credit & worthless paper. Here’s the YouTube link – https://www.youtube.com/watch?v=tSJie3BbYNU&feature=fvsr
It has come true. Hide your cash.
Lyrics: https://www.stlyrics.com/songs/c/chrisrea816/theroadtohell233212.html
Reading these comments it’s interesting to see how Germany have become the new-old Bad Guy again. Especially in the minds of Americans, who of course have forgotten where the _global_ economic crisis, which in turn resulted in the current European crisis, actually started. But it feels so much better having someone else to point a finger at, right?
Let them fail already and let’s move on.
“the Greek government will formally default within six months.”
I’d bet on it being sooner – a lot sooner. An imploding Greece might just be the thing needed to scare the French people into re-electing Sarkozy, which would be good for Merkel and the rest of the Frankfurt group.
I think the people of Greece are partly responsible for their problems. This article in the Daily Mail explains a lot. I agree a crash is on the way.
https://www.dailymail.co.uk/news/article-2007949/The-Big-Fat-Greek-Gravy-Train-A-special-investigation-EU-funded-culture-greed-tax-evasion-scandalous-waste.html
FYI – the only reason this post made any sense to me was thanks to Planet Money:
https://www.thisamericanlife.org/radio-archives/episode/455/continental-breakup
Europe is Germany and the sooner the Greeks and everyone else get used to that idea the better. Not Hitler’s Germany, not even the Kaiser’s Germany. A different, gentler Germany, but nevertheless a very hard working one.
I think the problem is a too cozy relationship between lawmakers and hedge funds. We need politicians (those guys responsible for making laws) that are willing to put their country first. Recently, the House passed the Stock Act but it was significantly watered down before it passed. Below is a story told in 4 links. Unfortunately, it’s a true story.
https://www.washingtonpost.com/politics/in-cantor-hedge-funds-and-private-equity-firms-have-voice-at-debt-ceiling-negotiations/2011/07/22/gIQAZYNVYI_story.html
https://www.washingtonmonthly.com/political-animal/2011_06/cantors_conflict_of_interest030602.php
http://thehill.com/blogs/on-the-money/banking-financial-institutions/209175-original-stock-act-sponsors-accuse-cantor-of-mishandling-bill
https://www.rawstory.com/rs/2012/02/08/cantor-slammed-for-neutering-stock-act/
As for Greece, I agree with Krugman.
https://www.nytimes.com/2011/10/28/opinion/krugman-the-path-not-taken.html?_r=1
You need to read Paul Krugman’s blog to understand what’s going on in Europe.
The whole EC is screwed, unless they realise soon that with a single currency, Greece’s debt is Germany’s profit. It’s all because of the single currency and the determination to cut their way to growth.
I particularly like this article which explains things pretty well.
https://www.nytimes.com/2011/10/28/opinion/krugman-the-path-not-taken.html
Krugman is just presenting the usual socialist agenda. So socialists will likely agree with him.
Keynes was anything but a socialist. Most people in the US,at least, have
absolutley no idea what socialism is, but they bandied the term about as if it
was something bad.
The Socialist (Labour) Government of the U.K. gave us Universal Health Care,
Pensions that didn’t evaporate, and subsidized, even free , education , for those
who had ability … sorry.
I agree.
Last I looked, Germany was socialist, and it’s their agenda that’s driving things.
Krugman’s just a pragmatic Keynesian (I know, that’s redundant). Keynes believed that governments should practice austerity when things are good and spend when things are bad (i.e. when there’s no demand).
Things are bad.
I think it’s a matter of degree. Does “spend when things are bad” mean “spend without limit, printing money without limit, until a stick of chewing gum sells for a million euros”?
Here’s your answer:
see graph of figure 1 here: (I’m sure you’ve seen this before)
https://www.cbpp.org/cms/index.cfm?fa=view&id=3490&utm_source=twitter
It makes the case that cost of a well executed short term stimulus is almost free.
The Keynesian position on deficit spending to stimulate demand is that it cosst very little and has a high pay back. The long term cost of deficit spending to implment a stimulus is almost nil.
In 2009, right when the Krugman was calling for a BIG stimulus, the South Koreans actually implemented it. They implemented a massive Keynesian Rx of roughly 25% of their GNP over 4 years (some of this came from currency deflation – the won went from 940 to the dollar to 1240 and more – thus exporting some of their problems). They had 0.2% growth in 2009 and 6% in 2010 with unemployment below 4%. In May 2010 their press reffered to the recession of 2008-9 as if it was ancient history.
Krugman’s and Keyne’s point is: #1 in the long run, we are all dead, #2, the unemployed lose their skills and in the aggregate this makes the entire nation poorer. (Case in point, I haven’t worked in my field in over 5 years, so now I can’t get a job in it any more – at least until demand is way up). Meanwhile I work at call center, with my doctorate degree, while I retool, at the age of 51. Korea’s economy has grown over 10% since September 2008. They’ve sharpened, their collective skills. They spent the money on infrastructure – new subway lines, nearly every station was refurbished, fast rail, etc…
I read Krugman, a lot. He basically says that the government is selling bonds at negative interest rates. We should be borrowing a boat load of money and fixing out 3rd world infrastructure while the borrowing is cheap, That would put people back to work, and by improving our infrastructure, improving our competitiveness to boot.
While we are at it, we should can tax cuts. The multiplier on varioud infrastructure investments can be as high as 2.5, but for tax cuts its 0.5 – that means for ever dollar of tax cut, we get 50 cents of stimulus. As Krugman says, we could be arming for an invasion to fight outer space aliens and it almost wouldn’t matter, but investing in infrastructure would certainly have long term pay back on competitiveness.
Thus, spending money on putting people back to work isn’t a real danger to inflation.
When you consider that what we borrow, will result in people who are taking in government benefits anyway, suddenly paying taxes, and being put to productive use, I think the policy is a “no-brainer.”
Getting the politics right, that’s the big brainer.
The fact that smart people like yourself fear stimulus because it MIGHT cause inflation, while not wanting to increase taxes means that Big Money is getting it’s message through at the expense of ordinary people’s livelihood. I’m not sure why ordinary people will want to die to protect the property rights of Big Money anymore, when Big Money squats on ordinary people without a thought or a care.
Whatever impetus for Marxism (which is too often confused with socialism) may exist, doesn’t come from the track record of Marxism itself, it comes from the track record of Big Money squatting on ordinary people. Technically speaking Krugman is a very wealthy man, who advocates for the interest of ordinary people, the have nots, as if he were advocating for himself, because over the long term, he is advocating for himself. The only thing keeping him and Warren Buffet and other rich people from continuing being rich and comfortable is the spread of discomfort to too many people. Suffering serves no use. So why propagate suffering with austerity when it serves no one’s use?
It’ll start with Greece and spread to the rest of the world. There is a grand scheme for world domination by a few banking cartels. Check http://www.zeitgeistmovie.com to get an idea of what’s going on.
I had a holiday there in 2005, it was like being in a nation where no-one acted as if they were over the age of 12. The attitude there is any one should be able to lie cheat steal without anyone else worrying. On a 2 lane road 4 cars racing side by side while coming to a rise so you could not see the oncoming traffic. I was going the 80 k speed limit all the others were a lot faster.I braked and waited for them to get over, surprise surprise 4 cars came at them from the other side without any tourist to break early. Almost every day I was driving in Athens i saw people hurt in car crashes and everyone around them were shocked and horrified that there was a accident. Yet everyone drove like it was the last day before they took up suicide bombing. It is amazing they managed to avoid defualt so long
Look! What do you want either as Bush43 did; 8 years of growth at the expence of 20 trillion now. The same happened in Greece 10 years of borrowing for govenment pensions and good times and trouble now.
Charles Dickens gave the answer 150 years ago.
Income one pound; expendature 19/6 happiness.
Income one pound; expendature 20/6 penury.
With any luck, holders of Greek bonds will only take a 75 percent haircut.
With no luck, holders of Greek bonds will take a 100 percent haircut — and Greece will be the first country in a while that is a 100 percent cash society (a very difficult proposition) until the drachma and fledgling credit can be rebuilt.
In any case, the Greeks have a hard 10 or 20 years ahead of them.
Of course, the dreams of a unified Europe will go up in flames with the Greeks. This is a good thing.
Good thing?
The collapse of the Roman Empire caused Europe to be politically fragmented for 1500 years. That’s roughly 1500 years of near constant warfare.
That’s a sadistic sociopath’s idea of a good thing.
A good piece for a change. Banks do not lend money to those who do not have any money but who need time! Greece is a country its needs time, a willing bank that looks at this angle will be safe. There will be some ups and downs. It is that bank which wants to make a killing that’s what the real Authority should be after. Greece was cheated by a speculator/investor/banker. First they/it should receive exemplary punishment, whoever that is and whichever nation it belongs to.
What’s happening to Greece happens to a man the world does not care but to a country it would open floodgates to a black hole.
That has been on all the business channels for over 1.5 years. Come on due some reading other than tech sites
I think in the final analysis, the U.S. is still the epicenter of the world economy. We are the worlds customer.
Europe’s problems didn’t start until are problems started. Our demand cratered. As a result, the % of Europe that sold to us cratered.
I think, then that there are reasons to be a tad bit optimistic. Our economy is improving. Some of that is natural. Our demand is held down by housing debt, over time that eases up slowly and demand returns.
Meanwhile durable goods expenditures that are put off, eventually have to be made. The car fleet is the oldest it has ever been since the end of WWII. U.S. demand for vehicles dipped from around 16 million in 2008 to 9 million in 2009. Now the industry is predicting demand for 2012 to be 13 million.
So demand in the U.S. appears to be slowly coming back. As it does, it should create a positive upward cycle. We could be seeing private sector job growth this year over 350,000 a month. More people working means more purchasing power in the hands of the masses, means more demand.
A pick up in demand in the U.S. should take some of the pressure off of Europe. So, a short term, kick the can down the road, deal on Greek debt may be enough to get the global economy away from the edge of the abyss until demand in the U.S. helps lift the European economy from disaster.
Please take a hard look at those demand for automobiles figures. The drop in demand was equivalent to Great Depression numbers: nearly 40%. If not for unemployment, social security, food stamps, stimulus spending, two income families, auto bailouts and other government programs, this economy would easily be as bad as 1930s and in some ways is as bad, maybe worse.
We’ve had 30+ years of supply side bias policies in the U.S. The supply side saturation point was reached in 1997 or there abouts. How do we know? Because when the ration of supply to demand is too great, there’s not enough demand for investors to get suitable returns on their investments. This causes two things: investment bubbles – when reasonable returns show up in one small segment of the economy, say new technology, which brings with it its own demand, investors FLOOD that sector creating a bubble; Deregulation – regulation exist to force investors to engaged in socially constructive endeavors, things like building new companies, products, inventions and service, when investors can’t make money off of orthodox investing, they eyeball unorthodox antisocial investing they’ve been roped off from, things like pay day loans, subprime mortgages, credit fault swaps for subprime loans, and because investors are rich and persistent the government eventually relents, the regulations come down and the mayhem follows. Both these things became evident as the 90s dragged on. The recession of 2001 was deflationary and should have triggered demand side bias policies, but because we had a radical Republican regime in place, they pored the coals on supply side, and in 2008 demand just collapsed.
The real problem is demand, yet we still don’t hear demand side bias policy proposals coming from Democrats (re Obama) or any Republicans. This was the same in the 1930s.
The demand side policies were first implemented by the governments of revisionist powers, Japan in 1932, and Germany in 1933. The established powers attempted to stay on the supply side as much as they could. Roosevelt included, attempted to balance the budget in 1937 and the economy collapsed again. Unemployment figures I’ve seen show 1941’s unemployment as below (if only just a smidgeon) that of 1936 – remarkable when you think of it because most of us believe that pre-war munitions work began in 1938. The revisionist powers eventually forced the established powers to implement Keynesian economics – in Britain and France as early as 1936, but in the U.S. much later.
This time around we have the wisdom of experience, but again we lack the political will to implement demand side bias economics. In both the 1920s, and in pre-2008, wealth had dramatically concentrated. This effects the policies chosen. He who pays the piper calls the tune and last I looked, Wall Street and Big Money interest still hold both parties captive. Demand looks set to improve the rest of this year, but anything goes in 2013 when politicians won’t need votes but will still want money.
solid call. there is a persistent nonsense out there that business creates jobs, and giving them carte blanche creates a shipload of them
believe it was Forbes a week or so ago that rightly said that business exists to maximize shareholder/owner profit. there is no incentive to create even one job if a bag of free money hits the counter.
only buyer demand does that.
There’s a difference between creating jobs and creating productive jobs. Businness, because of the profit incentive, creates productive jobs for products in demand domestically and elsewhere. The government can create jobs by spending taxpayer money on stuff not in demand and by doing so prevents productive investment. It doesn’t always do this but the point is that it can, since it has no financial incentive but instead has the desire to buy votes by giving people so-called “jobs” as a way to pay for their votes. Hence the need for a balanced budget to keep the government spending in check.
Thank you Ronc, for refuting the prolific, 20/20 hindsight, looney socialists with the facts of economic improvement and hidden cost of government regulation.
I strongly suspect that the “government is always wrong” mindset is just as damaging as the “government can fix anything” mindset. Not everything that government does has no demand.
Of course you are correct. People do have different opinions as to what should be provided by government and which level of government. I’m reminded of Dennis Miller’s idea of the role of the Federal government: “Take care of the military and light the Christmas tree”.
“Nothing’s made until it’s sold.” – So bragged salesman that I worked for.
The private sector will not build anything, unless there is demand for it.
I’m not sure about that, lots of cars are made before they are sold, but the overall point is probably true – especially in a market economy. When we say there is no market for buggy whips, that means there’s no demand for buggy whips.
Nothing gets made unless there is demand for it.
Government can and does effect both demand as well as supply. The choice ought to be based pragmatically, upon conditions, not ideology, be it Dennis Miller’s, mine, or anybody elses. And this was the basis for Keynes’ outlook: in good time’s austerity, in bad time public spending – of course he was thinking of deflationary bad times.
When you have too much demand and to little supply, you get inflationary pressure; thus supply side bias policies are plausibly called for. When you have too much supply and to little demand you get deflationary pressure – and so demand side bias policies are called for.
For 30 years government policy has had a supply side bias. The efficacy of a supply side bias is greater in a soviet command economy, but in a free market (demand) economy the efficacy for supply side bias policies is limited at best – more like pushing on a string.
Regardless as to the preceding, it is obvious that demand side bias policies are called for.
There is need for better infrastructure. If you’ve been overseas, you know ours looks and rattles like a third world construct. Investors can’t find good returns. As a result the Government is borrowing at, effectively, negative interest rates. That means investors are paying the government to hold their money.
Because we know that we are going to have to spend money on upgrading our infrastructure sooner or later, why not do it when the government can borrow the money at almost zero costs. The competitiveness and productivity of this nation resides on the quality of its infrastructure.
If you were the majority owner of a motorcycle company, would you hire someone to run on it that didn’t believe in motorcycles? The last few generations of Republicans have been people who didn’t believe in the efficacy of government: as a result we got the worst government imaginable – they took a country from history’s heights and in eight short years put it in the dumpster.
The ideology of no-government is good government is a misnomer and the purveyors have got cards they aren’t showing. The big money behind no-government is good government is Corporate – and Corporations want to shrink government then fill the vacuum that government leaves behind. This is a form of Fascism (“Fascism is a merger of state and Corporate power” – Mussolini). Corporations are controlled by a very small minority, and corporations are by law forced to pursue shareholder profit. They don’t have a conscious and if they do, it would be illegal. Corporations, are, by law, sociopaths. If you can’t see the problem with this arrangement, well then, you are no smarter than Dennis Miller, who has stated many times that he’s not very smart.
It’s best to break away from ideology all together, as Keynes did, as our ancestors did, as the East Asians are doing now.
Look, civics is not an easy subject. It’s not for the simple minded. You can’t reduce something as complex as running a 300 million person country to simple sound bites by a comedian. Only a few of us here have the competancy to design a car, conduct brain surgery, design a new CPU. However, unlike engineering or medicine or even sales, because of democracy, everybody is a practitioner of civics. You can get 80 or 90% right with a sound bite, but the 10% left is where the complexity lies, and that is the difference between success and failure for a country.
wholesale, not retail. cars are sold to dealers using “floor plan finance” money. GE or Whirlpool or Electrolux build refrigerators and ovens when a distributor/retailer (big home centers do both, everybody else buys from a distributor) places orders.
there are still homes, cars (like the Volt probably started), ham radios, and many new and shiny things from new and shiny outfits that are initially built out “on spec” to pioneer a market. the numbers are usually limited to priming the market, review units, etc. it’s not really a product until there are marks in the order book.
point is, the fraction of the economy that is “top driven” is miniscule, and the part that is “market driven” is high 90th percentile. if you just joined us, that means The Market ™ is driven by purchases.
and high-90th percentile of demand is NOT from the top 1% of wealth holders.
if you believe The Market ™ rules, you can’t believe that “job creators” push the economy. that’s arguing both sides, saying whatever you like when you feel like it.
The definition of inflation is not the prices of some items going up due to greater demand. That is simply the law of supply and demand at work. Inflation occurs when all prices go up not because things are in greater demand but because the government is printing more money to pay for it’s objectives (like reelection) rather than raising taxes.
Bob, you should really stick to your knitting.
Or someone less polite might come back telling you that “Far better to just let China take over the payments and own that U.S. jalopy outright.”
No, you’re wrong sir. China is owed about 3.8-trillion dollars. USA citizens are owed about $14-trillion dollars. It would be like the USA Citizens taking back the country which they partially all ready own. Big business has a majority share,
Thanks for the reply. Here’s two thoughts:
– If you own 80% of your house, and the bank owns 20%, unpaid, what happens?
– What’s the numbers on European debt?
I’ve been following this story in the financial press for a few months. There are two outcomes of the Greek economic crisis.
Option 1 — The European Central Bank will finally step in and provide Greece the funding it needs. In doing so the ECB will force severe concession on Greece. It will severely hurt the Greek economy. What happens next is the big question behind Option 1. Does Greece stay with the European economic union and tough it out? Or does Greece leave the European union?
The concessions being demanded on Greece are harsh. There are many and violent protests. If the government accepts the ECB demands, the government could be ousted and replace with leaders who will throw out the agreements.
Option 2 — Greece leaves the European union and defaults on its existing loans. This will cause a big problem in Europe. The Central Bank will have to step in and help the affected banks. Greece isn’t the only weak economy in Europe. If Greece defaults, it will put pressure on the other weak economies. The result will be very severe to the whole economic union.
The USA, UK, and China may also step in to keep the EU and its banks solvent.
While these events should not hurt the economy of the USA, it will. It is important to understand what happened in the USA in 2008. Many of the biggest banks had large holdings in the stock market. When the mortgage crisis hit, there was a run on Wall Street by the banks. That was what killed the stock market, our pensions, etc. Consumer spending came to a halt, and that caused more problems.
If Greece defaults, that will hurt the banks. The banks will dump their stock holdings to raise cash. And we’re off to the dumpsters again.
The only difference today is governments are trying to help, BEFORE the banks get into trouble. If the EU demands are too much for Greece to bear, then trouble is unavoidable.
Dear Bob
See Michael Shedlock’s blog.
http://globaleconomicanalysis.blogspot.com/
He does a very good job of covering this topic.
+1 for Michael Shedlock’s blog. He has been on this for a long time.
I know Mish quite well. We met 2-3 years ago at the Kauffman Economics Bloggers Conference and have stayed in touch. We’ll be together again on April 25th. Mish is a wild man and almost as smart as he thinks he is (I’m sure he says the same of me). Yes, he’s been on top of this story. Does that mean I shouldn’t write about it?
When Greece defaults and Portugal, Italy, and Spain fall with it, the only place investor money is going to go is either into gold or more likely, US Bonds and equities. In the short term a major correction; long run, the US.
16 Feb 12
Heard insider selling at 15-1.
It’s called “Distribution”.
Shares are being offloaded to the retail public.
But what do I do.
Sell off a 10 cent uranium miner that’s come down from $2.
Because it might go to 2 cents 🙂
Should have said purchased at 10 cents.
[…] train wreck in progress, here. Cringley is in on my hero pages; always has been and always will be. But this is totally top shelf […]
[…] What is worrying is that nothing fundamental has changed about our economy. There are no new safeguards for consumers and wealth is still percolating to the top. Still people are starting to talk about recovery. But a recovery based on what? The idea that things will get better without some sort of fundamental change is naive at best. If you want to see what it looks like when you try to force things to get better without actually fixing the problem, I suggest you look towards Greece. […]
Greece’s biggest problem is that it is full of Greeks and that is a problem that is not ameanable to correction. It has been estimated that something like thirty percent of the Greek economy is systematically hidden from the taxman which is a function of the economy being corrupt from top to bottom. The government can try impose all the austerity it wants but it is not going to change the character of the Greek people.
Good point, but I wouldn’t call it a “character” issue. It’s simply the fact that a law must be enforced to be a real law. If they start arresting corrupt officials and enforce penalties for tax evasion, people will quickly adapt to the new system.
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