Tag Archives: Greece

Blood on his Hands

KrugmanLast week, there was a violent protest at ECB headquarters in Frankfurt. Since the Greek debt crisis, we have seen simmering violence all over Europe. These young people have a right to be angry. Their prospects have indeed been wrecked by failed fiscal policies. Unfortunately, they are protesting in the wrong city. They should be in Rome and Athens, demanding the return of capitalism.

The kids think they are protesting against “austerity,” which simply means that the government is no longer able to support them. They also can’t get jobs, because socialism has destroyed their economy. Their governments – Portugal, Italy, Greece and Spain – are bankrupt. Historically, when your government runs out of money, the social transfers have to stop.

That’s what happened in every other sovereign debt crisis. We had the Asian debt crisis, the Mexican crisis, and sundry other peso crises. In each case, the IMF lent a little money, and then demanded they get their accounts in order. They didn’t call it austerity. The natives called it “imperialism,” but – they needed the money. An IMF loan with strings attached is still better than being flat broke.

Emerging market policymakers were faced with economic advice that suggested many years of austerity and unemployment … [but] when the crisis hit at home, Western economists were much less willing to accept the pain – Rajan

Now, however, there is a new narrative. Other countries are lending to the PIGS, and the ECB is creating fresh money. Thus, Europe’s young people have been told, there is no need for austerity. If the EU and the IMF (and the hated Germans) insist upon getting paid back, and the ECB fails to print enough Euros, then they are the villains – not the corrupt politicians back home.

The kids are protesting against “austerity,” as if there is an alternative. In the real world, there is no alternative. When you’re broke, you’re broke.

The euro area is not a political union of the sort where some countries permanently pay for others – Draghi

So, who told them that austerity was a punishment imposed by the troika? Who gave them the intellectual support for throwing acid on the police? Paul Krugman. Because of Krugman’s dogmatic and increasingly unhinged musings, real people got hurt. The blood is on his hands.

Krugman is still calling for free money, while respectable economists have moved on. Even Christine Lagarde, in her latest address, said the time had come for structural reform. The national bank of Sweden has told Krugman to mind his own business. Ironically, this is the same outfit that awarded him the Nobel Prize in 2008.

You would wish when [Krugman] says this – that Sweden looks like Japan – that he write fewer articles and have more of a look at the data … it doesn’t make him come across as a guy who is very well informed – Jansson

This is the problem with being a pundit. Sometimes you’re too busy writing polemics to mind the actual data. Just last month, we caught the professor in a freshman blunder over chart scaling.

Keynesians like to think they’re “evidence based,” but the evidence is that six years of accommodation have harmed savers, enriched the banks, distorted price discovery, and not solved the Euro crisis. Structural reform would have meant a short, sharp recession, followed by a strong recovery. We can’t prove the counterfactual, but we can state the current situation with certainty.

More than six years after the start of the Great Recession … unemployment remains high and inequality has increased. This is why we need a decisive push for structural reforms – Lagarde

We are now six years into a weak recovery (in America) and a triple dip recession in Europe. The central bankers have no dry powder for the next downturn, interest rates have gone negative, and – did we mention the violence? The only Keynesian prediction coming true right now is the one about easy money and the end of capitalism.

Professor Krugman accused the Riksbank of “sadomonetarism.” He has coined “austerian” as a play on the Austrian school of economics – which school, by the way, is what separates the prosperous North of Europe from the bankrupt South. It must be fun to sit in an ivory tower and make jokes, while his followers throw petrol bombs in Europe.

See also: You Say You Want a Revolution


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Greek Debt Dilemma

We heard that Greece’s new finance minister, Yanis Varoufakis, is an expert on game theory, and we thought it would be fun to analyze the Greek debt crisis from that perspective. Patrick Young says the EU is in a lose-lose predicament, and that certainly sounds like applied game theory.

On one horn of the dilemma (a Greek invention) the EU may accede to Varoufakis’ demands for restructuring. Some of these demands are quite extreme, like growth linked bonds, perpetuities, a bridge loan, and more haircuts. If the EU blinks or, more accurately, if the troika blinks – then the other bailout countries will want the same concessions. Also, as Patrick Young says, it would be unfair to countries like Ireland, which took the medicine.

Germans at all walks of life are sick and tired of seeing their own municipal facilities closed down … bailing out the Greek economy to the tune of €700 per family. That’s a transfer payment the Germans didn’t sign up for.

Morally, this is where Jeremiah stands. Estonia lived through an internal devaluation and emerged stronger for it. Someday, some Greek government will have to make reforms – to cronyism, tax evasion, and unsustainable social spending. Germany seems to be the only fiscally responsible country over there – and they’re pilloried for it. Jeremiah’s moralizing is not the topic, however. We’re talking about game theory.

On the other horn, if the troika plays hardball – halting the ECB collateral waiver, suspending the next tranche of bailout cash – then Greece will be “forced” to exit the Eurozone, and maybe the Union. We put “forced” in quotes because, at this move in the game, Varoufakis would not accept the troika’s terms. Greece would exit, and play the victim. Of course, as Thomas Schelling will tell you, the key is to make sure the troika knows you’re not bluffing.

This is where the IMF comes in. Exiting the euro has always been the right answer for Greece (see this comparison with Argentina). They’re in primary balance, and they could easily implement the three D’s – drachma, default, and devaluation. There would be some pain, but Greece has already endured some seven years of pain. If they had exited right away, they’d be back in the bond market by now. However, like Argentina, they would need help from that lender of last resort, the IMF.

The government quickly collapsed and was replaced by one that devalued the currency and defaulted on the country’s debts … growth resumed a few months later

The IMF is blocking the exit, by cooperating with the EU and ECB. This is because a successful exit, like a successful renegotiation, would also set an undesirable precedent. Spain would be next, the Eurozone would dissolve, and the IMF would have to fund more emergencies than it can handle. It would be the capital equivalent of a refugee crisis. If Greece were to exit, the troika would prefer them to crash and burn, pour encourager les autres.

So, when Varoufakis threatens to borrow from China or Russia, this is not as petulant as it sounds. Whether a practical matter or a bluff, he needs a source of funding other than the IMF – and the IMF has done a lousy job of including emerging economies. Small wonder that China is willing to lend contrary to Western preferences. We wonder, by the way, if the IMF will be so hardnosed when the time comes for France.

So, while there is no guessing how Chancellor Merkel will play the troika’s hand, the likeliest outcome seems to be a continuing fudge while the EU grinds steadily toward mutualization.  They should arrive at that goal just in time for the whole Union to go bankrupt together. Pyrrhus, another Greek.

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You Say You Want a Revolution

Jeremiah has just read a disturbing statistic about youth unemployment.  This Economist leader nicely summarizes the dangers.  If you are young and desperate, sooner or later you will decide to tear down “the system,” which is to blame for your plight.  Jeremiah urges you to be careful assigning blame, and not tear down any more than you have to.  Systems are tricky to rebuild, and you generally end up with a dictatorship.


If you are in the Maghreb, you overthrew a corrupt dictatorship last year, and replaced it with a different corrupt dictatorship.  You still have no future.  Only the men with guns have changed.  If you are in Europe, you may be thinking about tearing down your so-called “capitalist” system.

Under stress, European democracy will devolve into mob rule and then dictatorship.  Plundering the rich will be easy, and for a few years your new dictator will look like a savior.  There will still be no productive jobs – only the work of plunder and repression.  You will still have no future, except the lucky few who have set themselves up as new leaders.  In the immortal words of Thomas Peterffy, “the rich will be poorer, and the poor will also be poorer.”

The rich will be poorer, and the poor will also be poorer.

If you are young and jobless in America or Europe, ask yourself – what changed?  Your parents had the good life.  Have the capitalists stolen absolutely all the money?  From everyone?  Were you betrayed by the socialists?  Who, really, is to blame?  Be wise before you join the barricades.  Don’t accept easy answers, not even from old Jeremiah.

In America, and most of Europe, be aware that capitalism is gone.  Jeremiah has written elsewhere about capitalism.  We will not belabor the point.  Starting a new business is the acid test of capitalism.  If you are in Spain, for instance, you know what this means.  The young man in Tunisia who set the Arab Spring ablaze could not sell fruit in the marketplace without harassment from the police.

In America, we have only crony capitalism, which means that if you make a big donation to the current monarch, you can get a billion dollars for your “green energy” project.  The dollars are green, alright.  Just be sure to pocket them before the auditors show up.  Oh, and – no, you can’t sell fruit in the marketplace.

Private sector employment is collapsing.  The fortunate ones are those who have government jobs, union jobs, or government union jobs.  These people have the same skills as you, but they enjoy job security with generous pay – plus health and retirement.  Non-defense government spending is $3 trillion per year.

Before you accuse Jeremiah of stirring discord among the proletariat, set aside your ingrained belief that “America is a capitalist country.”  We have only cited here the privileges of the party members.  You, unemployed young person, are the proletariat – not them.

Pundits make the mistake of diagnosing America’s ills as the stereotyped ills of capitalism.  Sadly, you are too young to remember the Soviet Union.  Increasingly, the soviet model offers a better description of America.  Vast swathes of our economy are controlled by the central government, with the same dismal results – not to mention the cronyism, the propaganda, and the police state.

Therefore, do not demand more support from the government.  This idea that the government can support you is a propaganda trick.  In fact, you are supporting the government.  Demand less of that.  Demand, first and foremost, your own freedom.

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Resist Nazi Bailouts!

nazi-merkelThe various tactics used by the ECB to bail out failing Euro nations all amount to the same thing – transfers of wealth from German taxpayers to bankrupt nations in the South.

This is not to play on national stereotypes.  Individual Greeks may work as hard as individual Germans.  Their elected leaders, however, have followed unsustainable policies.  Greece did not go bankrupt through random chance – nor Italy, nor Spain.

Corrupt, bloated and inefficient, its public administration has come to a standstill; tax officers no longer able to receive bribes or kickbacks have simply stopped working.

German leaders did their proper job of balancing the national budget, curtailing social spending, fighting inflation, raising the retirement age, raising tax revenue, and stimulating industrial production.  Now, the EU is asking Germany to shoulder the debt burden accumulated by years of feckless policy elsewhere on the continent.  It is simply infeasible, not to mention immoral and illegal.

The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities.

The founding treaty specifically forbids sovereign bailouts.  Much of the energy exerted by EU and ECB deliberations, since the crisis began, has been in circumventing these provisions.  Not only the news media, but official representatives, have branded Germany “selfish” for not pitching in more, and for attaching strict terms about repayment.

Pity Chancellor Merkel.  At home, German voters wonder why they must pay to support foreign spending.  Abroad, she is reviled for not being more liberal with German money.  The correct response would have been “nein, danke,” right from the beginning.

We would stand on the “no bailouts”’ clause and, if these other countries cannot manage an internal devaluation, as Estonia did, then they are welcome to quit the Euro and devalue some other way.  The spite could not possibly have been worse, and Germany would be billions ahead.

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Defying Gravity

Here is yet another NYT article demonstrating that socialists do not understand the law of gravity.  This seems more like a religion than a school of economics.  The author believes that workers, in Greece and elsewhere, “deserve” a certain wage and a certain standard of living.  These will be set by the government, and agreed by – you guessed it – those same workers.

The fact is, wages are falling in the formerly rich world because our workers are not competitive with workers in Asia.  Jeremiah’s thesis, contrary to the author, is that living standards are inevitably linked to economic value in the real, global economy – not nominal wages, and not the local socialist government.  Here is a point-by-point debunking of Mr. Tilford’s arguments:

  • Income has not magically “accrued” to the those at the top – they earned it.  On the bright side, the rich are no more immune to competition than the proletariat.  Better redistribute their wealth while they’ve still got it!
  • A steady decline in investment or “unfair” returns to capital?  Which is it?  Maybe it’s capital flowing to more productive parts of the world.
  • A “structural shortage of demand” and “recovery in consumption” are obvious appeals to Keynes, but how much debt-financed stimulus is required?  How many willing lenders remain?
  • A rise in the share of national incomes accounted for by wages, in real terms, can only come from increased competitiveness.  Monetization and redistribution are palliative measures, not solutions.
  • Executive remuneration is already linked to whatever the owners of firms believe is their best risk-adjusted return.  The idea that governments should meddle in how private firms pay their employees, including their executives, shows a basic ignorance – let’s say “mistrust” – of how capital markets work.
  • Jeremiah has no quarrel with redistribution, per se, except that it in practice it usually turns to graft and bloat.  In Europe’s case, agreed, the VAT is regressive.
  • Taxing investment returns, once again, assumes that all investors are fat cats.  They’re not.  They’re ordinary people trying to save for a rainy day, a new house, or retirement.
  • The author asserts that competitiveness is a zero-sum game.  We should all beg off austerity and print money instead.  Oddly, the world’s creditor nations complain about that being a zero-sum game.

Mr. Tilford’s arguments are socialist dogma, but he is right about public opinion.  Voters will associate structural reforms with declining living standards – correctly, because declining standards are inevitable.  If a Chinese worker can do the same job as a Greek worker, then the two will ultimately share the same living standard.  What’s unfair about that?

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Bonds and Discipline

James Carville once quipped, “I want to come back as the bond market, because then you can intimidate everybody.”  As we watch the riots now engulfing Europe, few outside the financial markets recognize that the trigger was a spike in bond yields.  This is a fiddly concept, and it doesn’t get much air time.  To understand the European crisis, and the potential American crisis, it is worth understanding the bond market.

Everyone agrees that America’s deficit spending is unsustainable. Our national debt is about 100% of GDP, which puts America in the same league as Greece and Spain, plus we have state and local debt.  Greece’s gross debt is roughly $500 billion.  That’s a lot for Greece, but America’s $16 trillion could seriously damage the global financial system.

Democrats propose to solve the problem by raising taxes and cutting defense spending.  Republicans propose to solve it by reducing the size of government and “reforming” entitlements.  Both sides expect help from economic growth, again using stereotypical policies – government spending, and deregulation, respectively.  All the bond market wants is to get paid.

America borrows roughly $1 trillion each year.  Tax receipts cover about 60% of our expenses, and we borrow the rest.  Interest payments on the national debt amount to $360 billion per year.

We need to borrow continuously, to pay for – well, everything, from the armed forces to social security.  We borrow by issuing bonds in the open market.  Investors – like banks, pension funds, and China – support our lifestyle by paying cash for our bonds.

America has historically been a good credit risk, and we can borrow at roughly 3% APR.  Eventually, though, bond buyers will start to worry about getting paid back.  When that happens, our APR will go up.  It’s just like the effect your FICO score has on your car loan.

The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short

America took the first step down this road last year, when our credit rating slipped from AAA to AA+.  The rating agencies, led by S&P, wrote that they had concerns about our ability to enforce fiscal discipline and bring down the national debt.  Again, this is no different from an auto or a home loan.

The bond market is not partisan in its approach.  They don’t care if we jack up tax rates, slash spending, and wheel grandma over the cliff – as long as we make the payments.  This is known as “austerity” in policy circles.  If you have ever had a discussion with a debt collector, you understand this perspective.

The only brake on the bond market’s appetite for austerity is the recognition that too much of it could throw the economy into recession, and reduce our ability to pay.  This is the debate currently going on in Europe – how much austerity can the governments of Spain, Italy, and Greece withstand?  Continuing the analogy, “if you repo my car, then I won’t be able to work and for sure you won’t get paid.”

You can tell old Jeremiah is having a digression here.  The point is, one fine day Uncle Sam will go the bond market and instead of 3% APR we are going to get 7% APR.  That’s what happened in Europe, and it happened suddenly.  Seven percent of $16 trillion means over $1 trillion just in interest payments.  That’s a full year’s deficit spending right there.

If you can’t enforce fiscal discipline, the bond market will do it for you.

Remember last year, when President Obama went on TV and said, “I don’t know if I’ll be able to pay social security,” unless Congress raises the debt ceiling?  At that point, we faced an artificial debt limit, imposed by law, and Congress changed the law.  The real debt limit is imposed by the bond market and, when we hit that, there will be no changing it.

This is what people mean when they say, “if you can’t enforce fiscal discipline, the bond market will do it for you.”  The kids throwing rocks and burning buildings in Europe seem to believe that someone will magically kick in an extra billion or so, to get them over.  Maybe they’re right.  Maybe Germany has that kind of money, but nobody has what it takes to bail out America.

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The Grapes of Wrath

The Economist has a good analysis of America’s jobless recovery.  It is worth reading just for chart #1, which compares this recession with those of 1973 and 1981. At the time, 1981 was compared with the Great Depression.  Homeless workers migrated from Detroit to Houston in search of jobs, only to freeze in their cars.  Pundits recalled Steinbeck.

In 1981, according to the Economist, employment fell by 3%, and climbed back to normal after 28 months.  Today, it has fallen by 6%, and has only now found the floor after 28 months.  It looks like being twice as deep and twice as long.

Lots of laid-off workers will never regain their former earning power.

The Economist says this is part of a long term trend toward lower standards of living in America.  This is the long term trend Jeremiah has been warning against.  In the short term, of course, the government must spend money on relief efforts – and the economic stimulus package is too unwieldy to qualify as a short-term measure.  It is starting to look more like a pork fund for the 2010 elections.

The most important thing the government can do right now is to provide tax credits for people to get out of their underwater mortgages, so they can relocate and find a job – from Detroit, say, to Houston.

The ultimate solution, though, is smaller government – and better education.  We do not want to fall into the trap Greece is in, where everybody depends on the government and the government is bankrupt.  Government can be a backstop when private industry falters, but there is no substitute for a flexible work force.

See also:  I Need a Freaking Job

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