mfioretti: debt* + greece*

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  1. The euro zone is to benefit German industrial output.

    ECB turned off the money supply to Greece to force Greece to its knees. Once there was unconditional surrender, a choice between suicide or execution, ECB turned back on the money supply to Greek banks. The money that was lent, flowed back out to pay off international creditors, a point Germans should note when they keep referring to bailing out Greece.

    The Fourth Reich showed they would happily destroy a country if that country did not give in to its demands. They forced onto Greece, not only a surrender, but an unconditional surrender, part of which is rape and pillage of the country, enclosure of the commons, sell off of Greek assets on the cheap. But at least we all now know what the Fourth Reich is capable of, Its brutality was exposed for all the world to see. At least Podemos in Spain now know exactly what they are dealing with.

    It was meant to set an example to Podemos, do not dare oppose the Fourth Reich this too will be your fate.

    But it has had had the opposite effect, for pro-democracy activists across Europe to double their efforts to defeat the Fourth Reich.

    What we have learnt, we have to work from the grass roots upwards. Syriza has grass roots support that most parties would die for, the NO vote showed that. But it was not enough. We have to restructure society from the bottom up.

    Greece may have lost a battle, but not the war, the fight continues.

    John Cassidy, writing in The New Yorker:

    Syriza’s surrender wasn’t necessarily an ignominious one. As Lenin commented of the failed 1905 revolution in Russia, it was a retreat for a new attack, which ultimately proved successful. “I’m not going to sugarcoat this and pass it off as a success story,” Tsipras said to parliament on Wednesday, prior to the vote, acknowledging that the spending cuts and tax increases contained in the agreement would deal another blow to the Greek economy. However, that wasn’t the full story, Tsipras insisted. “We have left a heritage of dignity and democracy to Europe,” he said. “This fight will bear fruit.”

    The euro zone is to benefit German industrial output.

    The problem Greece has is many idle hands, work that needs doing, and no money to connect the two. What connects the two is money.

    In the Great Depression there was no money, in US banks were closed, because they were bust.

    They created scrips, alternative currencies, across Europe and in the States. They were successful, incredibly successful. The reason they do not exist today is because they were too successful, the Central Banks closed them down.

    In 1931, a German coal mine operator decided to open his closed mine by paying his workers in wara. It was backed by coal. Because it was backed by coal, which everyone could use, local merchants and wholesalers were persuaded to accept it. The mining town flourished, and within the year at least a thousand stores across Germany were accepting wara, and banks began accepting wara-denominated deposits. Feeling threatened, the German government tried to have the wara declared illegal by the courts; when that failed, it simply banned it by emergency decree.

    The following year, the depressed town of Wörgl, Austria, issued its own stamp scrip inspired by the success of the wara. The Wörgl currency was by all accounts a huge success. Roads were paved, bridges built, and back taxes were paid. The unemployment rate plummeted and the economy thrived, attracting the attention of nearby towns. Mayors and officials from all over the world began to visit Wörgl until, as in Germany, the central government abolished the Wörgl currency and the town slipped back into depression.
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  2. They said, in effect: “If you, the IMF, want to be a part of all of this debt restructuring, we want to pay off all the private bond holders so that they don’t lose money. We want to let the speculators gain because that’s our constituency.” But the IMF economists pressured the head of the IMF at that time, Dominique Strauss-Kahn, to write down Greece’s debt.

    The problem is that Strauss-Kahn wanted the IMF to be a player in the European Central Bank and the European Union, the main financial interests. He also wanted to run for the presidency of France, and most of Greece’s debts were owed to French banks. So Strauss-Kahn had to essentially operate in the interest of France, and his own political fortunes rather than what IMF economists recommended. Basically, he agreed to have the Central Bank and IMF lend Greece enough money to pay the bondholders.

    It turned out that the IMF economists were quite right, and Greece couldn’t pay. The result is that the leading economists in the IMF’s European division resigned in anger. They’ve written a series of reports.
    Tags: , , , , , , , by M. Fioretti (2015-07-27)
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  3. “I don’t really feel the weight of the world economy,” he said. “I feel the weight of the Greek people resting on my shoulders. If little Greece, in order to survive, brings down the financial world, it can’t be our fault. It would be as if Delaware brought down the United States economy. That would be the fault of the U.S., not Delaware.”

    Virtually everyone agrees that a default by Greece is the least desirable outcome for both Greece and its creditors — among them Germany and France; the European Central Bank; and the I.M.F. Yet one of Dr. Nash’s critical insights is that there may be many possible outcomes — so-called Nash equilibriums — that produce suboptimal results. A Nash equilibrium exists when each side’s strategy is optimal given what they believe to be the others’ strategy.

    For example, if Germany and other creditors don’t believe Greece’s threat to default, and underestimate the severity of such an outcome, they might see their optimal strategy as remaining firm in their demands for Greek fiscal austerity and structural reforms. If, on the other hand, Germany believes Mr. Varoufakis to be ideologically motivated to reject further austerity, it might well cave to Greek demands for leniency.

    That may be part of Mr. Varoufakis’s strategy - his colorful demeanor and public statements have been so provocative that in April Greece lessened his role in the negotiations, a move that seems only to have enhanced his considerable popularity back home. He continues to be a leading player in the talks and remains a key adviser to the Greek prime minister, Alexis Tsipras.

    In our conversations this week, Mr. Varoufakis came across much more the sober economist than a wild-eyed radical or motorcycle-riding daredevil. He displayed a sophisticated grasp of both game theory principles and the complicated dynamics of the current negotiations between Greece and its creditors.

    Those on the other side of the negotiations are “portraying me as an irrational fool, which is doing my work for me,” Mr. Varoufakis said. “I’ve been stoic. I haven’t let myself get agitated.” Speaking like a true game theorist, he added, “I know who I am and I know they know who I am.”

    Greece is much closer to Nash’s complicated scenarios, said Barry Nalebuff of the Yale School of Management, a game theory expert. “Both sides agree it’s better not to push Greece over the cliff. But how far can you push? Each side knows the other side should be willing to make concessions because it’s in their interest. Neither side does because they believe the other side will. So there’s a standoff. It’s very hard when it’s in both side’s interests and there are multiple solutions or equilibria, which is the situation with Greece.”

    Mr. Varoufakis agreed that in the Greece example, “the game has multiple equilibriums and, therefore, a failure to agree may trigger a chain of outcomes that no one can either predict or control.

    No one I spoke to this week thinks the situation is hopeless. Mr. Nalebuff said that one of Dr. Nash’s most important contributions is the notion of allocentrism, which requires parties to assess the others’ interests in order to understand their bargaining position. (It’s the opposite of egocentrism.) In order to know how far they can push Greece, its creditors need to “understand the interests and objectives of the Greek government. And Greece needs to come up with a solution that works for Germany,” Mr. Nalebuff said. “This could be very constructive,” although it’s no guarantee that an optimal solution will be reached.

    The Greek government submitted a new set of proposals this week, and while details remained under wraps, Mr. Varoufakis told me: “Of course we tried to understand what they want. We’ve been in negotiations for over three months, so we know what they want. We’ve tried to bend over backwards and we’ve accepted conditions that were very difficult for us to swallow.” He said the latest Greek proposal accepts the need for structural reform, including the hot-button issues of pension and tax reform, in return for “a few debt swaps and less austerity.”
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  4. On the other side of the ledger, the benefits of improved confidence failed to make their promised appearance. Since the global turn to austerity in 2010, every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity. In late 2012, the IMF’s chief economist, Olivier Blanchard, went so far as to issue what amounted to a mea culpa: although his organisation never bought into the notion that austerity would actually boost economic growth, the IMF now believes that it massively understated the damage that spending cuts inflict on a weak economy.

    Meanwhile, all of the economic research that allegedly supported the austerity push has been discredited. Widely touted statistical results were, it turned out, based on highly dubious assumptions and procedures – plus a few outright mistakes – and evaporated under closer scrutiny.

    It is rare, in the history of economic thought, for debates to get resolved this decisively. The austerian ideology that dominated elite discourse five years ago has collapsed, to the point where hardly anyone still believes it. Hardly anyone, that is, except the coalition that still rules Britain – and most of the British media.

    I don’t know how many Britons realise the extent to which their economic debate has diverged from the rest of the western world – the extent to which the UK seems stuck on obsessions that have been mainly laughed out of the discourse elsewhere. George Osborne and David Cameron boast that their policies saved Britain from a Greek-style crisis of soaring interest rates, apparently oblivious to the fact that interest rates are at historic lows all across the western world. The press seizes on Ed Miliband’s failure to mention the budget deficit in a speech as a huge gaffe, a supposed revelation of irresponsibility; meanwhile, Hillary Clinton is talking, seriously, not about budget deficits but about the “fun deficit” facing America’s children.
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  5. If Dustmann et al. are correct, and I think that they are, then the ability to transfer these lessons to other countries is zero. No one else has an East Germany waiting around the corner to push down labor costs, and even if everyone did, all that would do is reduce consumption in the aggregate, thereby impoverishing everyone.

    The take home lesson is perhaps then that Germany is only Germany because everyone else is “not Germany.” To try and make everyone a bit more like Germany can only mean the expansion of a poorly paid service sector and the introduction of a minimum wage to compensate. I do not think that’s what structural reform advocates recommend, but it’s where we may end up.
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  6. The last 50 years of Western European history was a central planners dream, a blank slate upon which a new Europe was forged. War powers were shifted from militaristic to economic goals. Germany was rebuilt into the great manufacturing power it is today. France, Italy, Spain all enjoyed multi-decade years of growth. From the wreckage of war, a new era of European power was born.

    The hubris of these planners culminated in the creation of the EU and the Euro. Their shining example of what cooperation between nation-states could achieve.

    Now, almost 22 years have passed since the introduction of the Masstricht treaty's Euro and the entire system is on the verge of collapse. Brussels and the ECB are scrambling to try and undo years of corrupt deals and agreements that stripped Greece of its dignity and fostered the ruling leftist Syriza and the growing right wing Golden Dawn parties. Both have proclaimed they will not further suffer the cannibalistic policies of the Troika any longer. The dream of a unified Europe is on the ropes and there may only be days left to save it.

    The root cause of the cracks driving Greece away are misallocated and corrupt power, money, and influence. The institutions of the EU and ECB were built with high ideals, but the individuals who run them are political animals whose primary duty was to corporations, the wealthy and minimizing the appearance of exploding sovereign debt.

    Greece's technocrats mis-used billions of dollars of EU loans to placate their populace for years and to entrench an elite class of bankers, businessmen and other power hungry individuals into power. By doing this, they left the country in economic shambles, unable to provide its own citizens jobs and opportunities and devoid of any meaningful competition.

    Greece will never be able to pay down their debts by the current agreements. Its citizens will starve first before they ever pay down their debt. Current EU debt stands at €12 trillion dollars, with the Greek portion making up more than €300 billion. Recent comments by Greek FinMin Yanis Varoufakis were uncomfortably true when he said that his country is “insolvent” and “bankrupt.” He is correct is his understanding that the house of cards the Euro was built on can easily come crashing down if any one country decides to pull out.

    Their debt is not owed to their populace, but the to creditors of Europe, the all-powerful Troika, who declared there will be no negotiations. So, Alexis Tsipras has demanded the Troika listen to the will of his people, rather than the planners in Brussels. Neither side can let the other win.
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  7. But while distortions in the savings rate are at the root of the European crisis, many if not most analysts have failed to understand why. Until now, an awful lot of Europeans have understood the crisis primarily in terms of differences in national character, economic virtue, and as a moral struggle between prudence and irresponsibility. This interpretation is intuitively appealing but it is almost wholly incorrect, and because the cost of saving Europe is debt forgiveness, and Europe must decide if this is a cost worth paying (I think it is), to the extent that the European crisis is seen as a struggle between the prudent countries and the irresponsible countries, it is extremely unlikely that Europeans will be willing to pay the cost. As my regular readers know, I generally refer to the two different groups of creditor and debtor countries as “Germany” and “Spain”, the former for obvious reasons and the latter because I was born and grew up there, and it is the country I know best. I will continue to do so in this blog entry.

    A few weeks ago I was discussing with a group of my Peking University students Charles Kindleberger’s idea of a “displacement”, and I proposed, as does Kindleberger, that the 1871-73 French indemnity is an especially useful example of a displacement from which we can learn a great deal about how financial crises can be generated.(4) It then occurred to me that the French reparations and their impact on Europe could also tell us a great deal about the euro crisis and, more specifically, why by distorting the savings rate wage policies in Germany in the first half of the last decade would have led almost inexorably to the balance of payments distortions that may eventually wreck the euro.

    It is a nice accident that the French indemnity accelerated Germany’s adoption of the gold standard, because massive transfer payments from Germany to peripheral Europe were probably necessary for many of these countries to adopt the euro, in some ways their own version of the gold standard. Before jumping into why I think the French indemnity is relevant to the Greek crisis, I want to make three quick points:
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  8. “severe material deprivation rate” of selected European countries over the last few years. Essentially, this is the percentage of the population unable to afford at least four of the following nine items:
    Tags: , , , , , by M. Fioretti (2014-01-28)
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  9. A few hours ago, the Greek government announced that state television and radio channels would be silenced at midnight. No public debate, no debate in Parliament, no warning. Nothing. ERT, the Greek version of the BBC, will simply fold its tent and steal into the night. As probably the only Greek commentator to have been blacklisted by ERT over the past two years, I feel I have the moral authority to cry out against ERT’s passing. To shout from the rooftops that its murder by our troika-led government is a crime against public media that all civilised people, the world over, should rise up against.
    Tags: , , , , , , by M. Fioretti (2013-06-12)
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  10. While attention on the Euro crisis has been focusing primarily on Greece and Cyprus, it is no mystery that Italy, alongside with Spain, constitutes the real challenge for the future of the common currency, in any direction events will be unfolding. In the relative silence of the international press, Italy’s macroeconomic situation has been showing no sign of improvement, and indeed numerous indicators portray a national economy which finds itself in a depression, rather than in a however severe recession. It is no overstatement that the Italian economy is currently collapsing.
    Tags: , , , , , , by M. Fioretti (2013-05-29)
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