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Greece: The Debtor that Roared

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Greek Prime Minister George Papandreou has managed to put the European crisis game of financial fakery into turmoil. Pretty much no informed commentator expected the latest gimmick-larded rescue package to work; there were simply too many points of failure. And even if this program had miraculously come to fruition, a later train wreck was still inevitable, since Germany was persisting in wanting two contradictory outcomes: running trade surpluses in Europe, and not lending more to its trade parters.

But no one anticipated that a long suffering debtor would revolt, which is what Papandreou’s announcement of a referendum on the punitive bailout amounts to. He’s publicly coded it in securing Greek support for the deal, but this is actually a clever form of brinksmanship. As Marshall Auerback and Rob Parenteau foresaw, Greece is engaging in a Samson-like gesture of pulling down a much bigger structure to end its misery.

The creditors who pressed on relentlessly with austerity programs in the face of deteriorating results and visible opposition by the Greek public were unduly confident that they could grind down a subject state. Indeed, the New York Times reports that a more and more Greeks, including members of their elites, are contemplating what all orthodox Eurocrats and experts had heretofore considered unthinkable: leaving the Euro and restoring the drachma. That does not mean it will happen; indeed, nearly 70% of the public opposes the idea.

The goal of Papandreou’s move presumably is to renegotiate the terms of the deal imposed on Greece. To get the heretofore dictatorial Troika to take him seriously, he’s effectively threatened the nuclear option of blowing up the rescue package, which means default. And the disruption of a default suddenly changes the calculus of a Euro exit. The incremental short-term damage would not be that much worse, and the longer term benefit of regaining sovereignity, controlling its currency, and as a result, being able to depreciate the drachma would likely more than offset the costs. (Remember, the advantage of Greece staying in is to fund its budget deficit. But with the rescue packages so punitive that the Greek economy is shrinking faster than its debt levels are, the advantages of cooperation look to be illusory).

It is still possible that the Greeks will fall into line. Papandreou’s coalition has only a thin majority (5 as of the vote on the July package). Two have defected, and he faces a no-confidence vote on Friday. But the Matina Stevis of the Wall Street Journal tweeted (hat tip Clusterstock) that a referendum has 99.99% odds of taking place before Christmas. (Reports of a shake-up of its armed forces are a wild card. This move is presumably to prevent a military coup. However, so far, there is no further commentary from Greek sources).

But this gambit puts the plan announced last week in shambles. We’d said Chinese meaningful Chinese support was the ONLY way the bailout fund, the new super levered son of EFSF, might actually succeed. The Chinese were reportedly cool when Sarkozy made a sales pitch, and the Chinese went further, with a former member of its central bank, Yu Yongding, patiently explaining in a Financial Times comment why this was an obviously dopey deal from the Chinese vantage. That was before Papandreou’s coup de foudre, which means the Chinese now have even better reasons to keep their wallet closed. Not surprisingly (Kathimerini via Clusterstock), the IMF is considering withholding the next round of funding, which would assure a Greek default.

As Ambrose Evans-Pritchard reminds us, the next domino to fall is probably not Portugal or Ireland, but Italy, which has a refinancing coming in February 2012. The spread between German bunds and Italian government debt hit a life of Eurozone high today, and the absolute Italian borrowing costs at today’s yields would be unsustainable. From the Telegraph:

Unless the European Central Bank step in very soon and on a massive scale to shore up Italy, the game is up. We will have a spectacular smash-up.

If handled badly, the disorderly insolvency of the world’s third largest debtor with €1.9 trillion in public debt and nearer €3.5 trillion in total debt would be a much greater event than the fall of Credit Anstalt in 1931. (Let me add that Italy is not fundamentally insolvent. It is only in these straits because it does not have a lender of last resort, a sovereign central bank, or a sovereign currency. The euro structure itself has turned a solvent state into an insolvent state. It is reverse alchemy.)

The Anstalt debacle triggered the European banking collapse, set off tremors in London and New York, and turned recession into depression. Within four months the global financial order had essentially disintegrated.

Now in fact, this crisis may finally snap the Germans out of their unending hyperinflation fixation by making them realize that the looming disaster of cascading defaults is far more likely than a repeat of a very particular set of circumstances (including the stripping of German productive capacity) nearly 90 years ago. As we and numerous others have said, there is a simple solution here, which is for the ECB to expand its balance sheet (in crude terms, print). But we’ve been told by sources in contact with ECB staffers that Trichet and much of the ECB leadership is unwilling to leverage the bank’s “equity” beyond a certain point that is well below what would be required for a credible rescue (and we would assume its new head Draghi will not be able to change this view). So it is apparently not just the Germans who are opposed to the ECB acting as lender of the last resort, but the ECB itself.

As Martin Wolf wrote in today’s Financial Times:

Blessed are the creditors, for they shall inherit the earth. This is not in the Sermon on the Mount. Yet creditors believe it: if everybody were a creditor, we would have no unpaid debts and financial crises. That, creditors believe, is the way to behave. They are mistaken. Since the world cannot trade with Mars, creditors are joined at the hip to the debtors. The former must accumulate claims on the latter. This puts them in a trap of their own making.

And that trap is about to snap shut.

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138 comments

  1. Economic Maverick

    Great post!

    Could this be the “Paradox of Debtors prison”?

    If creditors put everyone in debtors prison, they have no income streams left…..and can’t pay the creditors!

    Ok, rough metaphor, but thought it was funny

    How about: “Debtors of the world, unite, you have nothing to loose except your access to capital markets that you don’t really need and are probably better off not having!”

    1. sgt_doom

      Negative! It was an ultra-post!

      And this phrase says it all: “..the European crisis game of financial fakery ..

      And connected to the American game of financial fakery, me thinks!

    2. rd

      It appears that the German and French bankers forgot that “democracy” is actually a Greek word meaning “rule of the people.”

      I think the bankers thought “demo” was what they could do to governments.

  2. Marley

    Bwaaaahahaha! I look forward to making my cupcakes! The sheer stupidity of it all. Yes, we can ALL run surpluses!!! Yes, we can all Net Export!! The Paradox of Thrift never had so ardent a group of imbeciles to wave its banner proudly above a crumbling castle of cards. And the cherry on top: sending Sarkozy, like some kind of Crapaud-king to China to beg like a dog. I can imagine a bunch of Beijing based government officials laughing their asses off at these haughty European nincompoops. “They must think we’re f***ing stupid”, I can imagine them saying – in Chinese, of course… with subtitles. Oh man… I’m going to bed with a big firkin’ smile on my face. Merci Beaucoup.

    1. Swedish Lex

      If Greece goes Iceland, I guess that the EU will drop Greece like a rock. If Greece decides it wants to be in charge of its own future entirely as of the day after the referendum, causing an immediate stop in the cash infusions from the euro partners, so be it.

      All claims on and equity in Greek banks etc. will have to be written off entirely. A loss that the euro zone can absorb.

      Such a situation could set a precendent with regard to other euro states. There is nothing to prevent them from going Iceland too, of course, and they will have the new Greek “experience” to learn from.

      If there indeed is a decision to hold a referendum, what is there to prevent a total bank run ahead of that referendum?

      1. WalterW

        > If there indeed is a decision to hold a referendum, what is
        > there to prevent a total bank run ahead of that referendum?

        Even if the decision would ultimately be not to have a referendum,
        that bank run will likely be in full swing already, as we speak. If I
        were Greek and had not yet cashed out my bank account, the mere
        possibility of this referendum would definitely have been my cue
        to do so. I predict Zerohedge will post such as ongoing sometime
        later today…

        1. Praedor

          At this point I don’t see how the Greek government could possibly get away with NOT having a referendum. The people, already pissed off, would not be salved by being told first that they get to have a say in the future of THEIR country (referendum) only to then be told that their “betters” know what is best for them and they should just sit quiet and take it in the ass.

          It boggles me that talking heads in finance and Europe governance are upset that a DEMOCRACY is seeking to actually practice DEMOCRACY. The elite do NOT own the countries, the people do. THEIR say is the end all, be all, NOT what bankers say.

          1. agent zero

            The Greek parliament already voted (should count as some form of democracy) and approved austerity measures on Oct, 20

            http://www.reuters.com/article/2011/10/20/us-greece-idUSTRE79H1FI20111020

            Is calling for a referendum now equivalent to saying that the Greek parliament did not really represent the Greek people?

            And by the way, I have yet to read any explanation on why the Greek Communist party felt compelled to provide “security” (men with baseball bats and helmuts) for the Oct 20 protests.

          2. sgt_doom

            “At this point I don’t see how the Greek government could possibly get away with NOT having a referendum.”

            Thank you —- you articulated it EXACTLY!

      2. vlade

        Indeed, the big Q is what would the rest of EMU do if Greece went Iceland.
        The rational part for them (rEMU) would be to make them total pariah – effectively shut all the trade with them, and prevent them from trading with the rest of the world too. In other words, make them really suffer.

        The worst outcome for rEMU would be Greece picking up in a few months – showing Portugal, Spain and Italy (especially Italy with its primary surplus), that there’s life outside EUR.
        That would, I believe, most likely lead to EU breakup, unless some other internal devaluation mechanism was in place.

        Of course, if EU would want to retaliate for Greece escaping, it would not look very good, and could turn into David vs. Goliath PR fight (with Germans leading the charge, it would look particularly nasty). Thus the optimal solution is to prevent this from happening.

        I predict that this will keep game-theorist happily occupied writing case studies for years to come…

        1. Diego Méndez

          I cannot see how any of Spain, Portugal, Italy, Ireland and Belgium can keep the euro if Greece leaves it. They would follow suit immediately, since they would suffer a sudden stop.

          1. vlade

            They could, but the rEMU would have to make two things exceedingly clear – they will make whoever breaks EU treaty (which says that the membership is irrevocable, and exiting EUR breaks it) suffer beyond any rational cost/benefits analysis (which is the only way how to really enforce things – be irrational), but on the other hand would reward compliance.

            So far, the EU approach has been heavy on the descriptions of deployable sticks, but very light on carrots (or even description of any carrots, unless one counts “you know you want it [EUR]“)..

            In other words, it was bullying – which works until it suddenly doesn’t.

            If Franco-German alliance wants to keep Greece in EUR, they better come up very quickly with some real carrots I’d say – or get a stick that will actually work (and no stick works forever).

          2. Swedish Lex

            I doubt that much bullying and use of a stick would be necessary. If there is an “exit” majority in the referendum, Greece would run out of cash the same instant, if not before. I suppose that the country would seize to function immediately, but I am open to hear what others have to say on this topic.

            If Papanderou thinks that he is certain that there will be a “stay”, he is a fool. One can never predict the outcome of a referendum. The Greeks will have to treasure this opportunity to have their say and will have to live with the consequences of the outcome.

            The sensible Greeks that already have not transferred their euros to banks abroad or hid them in the garden, now have a few weeks to do so.

          3. Praedor

            It would be better if they all, en mass, left the Euro and joined together into their own independent bloc of outsider sovereigns. Pull Iceland into their group too. Leave the conservative scum robber barons of Europe to stew in their own filth with their much diminished Euro.

          4. Yves Smith Post author

            Swedish Lex,

            You seem to forget:

            1. Iceland DID suffer a collapse of its banking system and a shutoff from capital markets. It has six months of real chaos and came out better in the end.

            2. It is pretty well documented that even animals will take only so much unfair treatment from their own species before retaliating, even if retaliating will hurt them even more. There are a lot of chimpanzee studies on this. You are assuming economic rationality, when considerations of fairness are also at work.

        2. Praedor

          I believe that Greece should be talking with the BRIC about trade, etc, should they go their own way (Iceland too). Time to sideline the scum of Europe (the banker elite, not the people) and the USA. Finance needs to be taken down to dust.

          You have to nuke big finance from orbit. It’s the only way to be sure.

        3. rotter

          “effectively shut all the trade with them, and prevent them from trading with the rest of the world too. In other words, make them really suffer.”

          they wont, not-trade with Greece, there would be no political support for such an ongoing program of revenge, and how would they keep Greece from trading with non EU countries, IE the rest of the world? Blockade? that wont happen.

          1. YankeeFrank

            Not just that. Lip service is paid to the double-edged sword but in all the analysis it seems to be forgotten — without Greece (and the other likely EU-evacuees) — Germany’s economy will not be doing so well. Who’s gonna buy all their wonderful weapons and cars?

      3. Sy Krass

        There were reports of a bank run on this site over the weekend. And it’s been going on in slow motion since the summer. Don’t have the link, sorry.

      4. xenadu

        Except when the CDS events trigger and cause another crisis. All it will take is one of those dominoes falling and being unable to pay to transform a gross exposure to a net exposure and then you have collapse.

        The fact that naked CDS is still being written and we pretend that CDS on counterparties magically removes risk is just insanity.

    2. jake chase

      The first thing the banks would do is run to Bernanke for a bailout on their CDS exposure. By the way, these are American banks on the hook for this drek. As for Greece, where do you suppose it will borrow money in the future if it defaults? Don’t think I would want to have a Drachma savings account. In two years a gallon of gas might be 50,000. Why would anyone outside Greece want them? Maybe to buy olives, or tour the islands?

      Look, Greece isn’t going to default; that is a populist fantasy, sort of like electing Ralph Nader president. What will happen is some kind of extend and pretend restructuring. The only question is how big are the bank haircuts and what are the terms of the new bonds issued in exchange? Why is everyone acting like Greece is the good guys in this disaster? Does anyone think it ever intended to pay this money back? Has it ever made any serious attempt to collect taxes, to generate foreign exchange, to make anything and sell it on the world market? Has anybody ever been to Greece and seen people there working at anything other than fleecing tourists?

      1. Praedor

        Uh Jake? “Extend an pretend” is the same as defaulting. You are simply calling for the day of reckoning (default) to be put off a bit, not prevented.

        Extend and pretend is the same thing as default. The time frame (immediate vs a year or 3 down the line) is all that changes, not the result.

      2. YankeeFrank

        And tell us jake, did the German bankers ever seriously think the Greeks were going to even be able to pay them back? You have to rid yourself of the propagandistic notion of the upright and solid banker. It is one of histories biggest lies, and you fall for it hard obviously. A million John Houseman’s spouting “we earn it” in self-righteous upper-crust British accents has done amazing things and turned many people’s understanding of history on its head. Bankers, throughout history, are the least trustworthy bunch of thieves there are. Dress ‘em up in fancy suits, add an air of wealth and rectitude and all the sudden the grift becomes “sound business sense”. Please wake the fuck up already, the German bankers already made their fortunes, the ongoing looting of Greece is merely the act they must perform in order to not appear to be the completely disingenuous thieves they really are (so they can do this go-round again asap).

        1. jake chase

          Don’t take it personally YF; just telling you what is going to happen. Did the German bankers hold a gun to the Greek politicians’ heads? I think that was 1942. Look: the scam is not lending money; the scam is taking bets on whether or not the money will be repaid, knowing that if the bets pay off the public treasury will cover.

      3. mac

        I agree that the “bankers” never expected to be repaid. This is not unlike the folks who made the sub prime loans on over priced houses, they never thought of repayment, they only concentrated on making the deal.
        Wake up the world is not like it was in 1953.

      1. rd

        It means that you are willing to fish and cut bait instead of paying off ruinous debts to foreigners. Greece is also traditionally a fishing country, so it could work but the better climate would attract more tourists.

  3. WalterW

    > The goal of Papandreou’s move presumably is to
    > renegotiate the terms of the deal imposed on Greece.

    Perhaps it is, but if so, then calling a referendum will NOT accomplish that.

    For if the Greeks would vote to unilaterally leave the euro, there would
    be no deal to negotiate whatsoever – Greece would simply default and
    totally call the shots themselves on whatever they might be willing to
    repay beyond that.

    Alternatively, if the Greeks would vote to accept the current deal, what
    leverage would Pap/Greeece have to demand renegotiations? His/its
    own people just fully accepted the deal!

    The only way to use the outcome of a referendum to force the troika
    into renegotiations would be if there were three (or even more) choices
    on the referendum ballot: assuming such outcome would be mixed,
    Pap could then use the threat to fall back to the worst of those options
    (=from EU viewpoint) to force better terms. But then again, having a
    three- or foursome referendum basically defies the point of having
    one in the first place.

    If renegotiation really was Pap’s goal, it would have been much more
    effective for him to +threaten+ to call a referendum. Judging how all
    of the EU is shocked, shocked today – boy, would they at the very least
    have listened to him really carefully.

    1. SidFinster

      Not necessarily – If the Troika offers Greece an obviously sweeter deal before the referendum takes place, G-Pap can declare the “matter of national importance” to be resolved and cancel the referendum as unnecessary.

      Of course, this works best when delivered as a sucker-punch to the Troika, catching them off-balance, undermining existing prviate commitments and public statements. The panic in the markets also plays into Papandreou’s hands. The Troika cannot go on record as saying “democracy is bad.” Papandreou basically led the Troika into a dark alley and then jacked their socks. Pathetic Europols cannot compete.

      Suppose the referendum does go forward and is rejected – G-Pap can still try to rengotiate, or simply tell the Troika that his hands are now tied.

      If the referendum passes (and G-Pap does seem to be making the right noises in public, although he may not campaign as hard as he could) – Papandreou finally has a clear mandate to carry out austerity.

      Any of these outcomes is better for G-Pap and worse for the Troika than the status quo.

      Don’t hate the playa, hate the game.

    2. PQuincy

      And who’s to say that Papandreou didn’t, in fact, raise the threat of a referendum to his intergalactic masters’ Troika messengers, and was ignored?

  4. charles 2

    the idiom “coup de foudre” means “love at first sight”. You probably meant “coup de tonnerre”…

  5. psychohistorian

    So if the trap shutting is the creditors saying no more then why should debtor laws be any more enforced than financial regulations?

    I struggle trying to conceptualize how much of the outstanding debt is the result of financial excess brainwashed into the public just like it making sense to build consumer products to wear out to force repeated consumption.

    I don’t have any debt and own my modest home. That said I think that the coming debtor adjustment that is coming will not favor us prudent types and I am becoming ok with that….as long as the class system is eliminated or the economic incentives changed enough so that competition is balanced against cooperation, sharing, building and maintaining public commons for the greater percentage of us.

    1. Praedor

      Just a note but DO you own your home? Try not paying taxes on it and see how much you own it. It is ALWAYS just a payment away from being stolen from you for the sake of some 1%-er banker.

      1. psychohistorian

        Touche!

        I try not to dwell on it as I contemplate that another part of my retirement, supposedly coming to me starting in a couple of years, is a Koch owned business pension fund.

  6. RT

    I have a deep sympathy for the Greeks (excluding their corrupt elite, to be sure). As a German who didn’t vote for Merkel’s coalition I feel deeply ashamed about her policies as well as terrified to my bones and helplessly filled with impotent fury about the whole mess she’s consequently continuing to deepen instead of solving. That’s absolutely the worst government we ever had, period. And meanwhile there are many more ordinary German citizens who see it this way.

    Given this, I must say that I also do not understand the Frenchs Sarkozy and Trichet who fully adored and embraced the German version of neoliberal austerity economics as well as the Bundesbank’s stubborn and narrow-minded monetary policies.

    Now, the only hope left is that Merkel – who evidentially has no steadfast political principles aside of her staying in power – will finally surrender to reality as she did just this year’s spring with turning her own pro-nuclear-energy policies curtly into the opposite. However, she did that only after the fact, which then was the Fukushima meltdown. So, the ‘Last Man Standing’ may only be Mario Draghi as the ECB’s new chief who can make a difference – but who knows, he may also be at first a member of the European banker elite.

    1. Diego Méndez

      I am glad to hear a German say that. Ordinary German citizens are the only hope for the eurozone.

      As I see it, there is huge fear among the European national elites, especially the German one, of a democratic, eurozone-level economic government. They have tailored the system to suit their interests against the democratic interest of the majority. Only Germans have the power now to change this fact, and it will benefit them hugely in the long term.

      1. LeeAnne

        and ditto for the US. With 50 State AGs working heatedly to demolish US rule of law for protecting individual property rights, confident that they have the Courts, MSM and Congress to back them up.

      2. Jim Haygood

        ‘There is huge fear among the European national elites … of a democratic, eurozone-level economic government. They have tailored the system to suit their interests against the democratic interest of the majority. — Diego Méndez

        BRAVO! That is the same punchline to the solar plexus delivered at the end of Ambrose E-P’s article in the Telegraph:

        And as my old friend Gideon Rachman at the FT writes this morning: the Greek vote is “a hammer blow aimed at the most sensitive spot of the whole European construction – its lack of popular support and legitimacy.”

        We all know how votes against EU treaty amendments (in the few states which actually held referenda) were simply bulldozed over.

        How many Europeans would vote for the ongoing US occupation of Europe via NATO? Scandalously, the US uses its Ramstein air base in Germany (not to mention its Italian and British bases) as a platform for its illegal invasions, occupations and state terror bombings in the Middle East. But Europe’s militarist elite isn’t about to put NATO’s depradations to a public vote anywhere.

        If the euro goes down, its undemocratic character will at least allow one to feel that its demise was richly deserved.

    2. GermanQR

      RT,

      Excellent post, I concur completely, although I am sure you’ll agree that Merkel’s is definitely NOT the worst government that Germany has ever had.

        1. PQuincy

          Indeed, Germany has had worse governments! Yet why is it that the current German elite seems to fear the events of the early 1920s (hyperinflation under very particular circumstances) much much more than the events of 1929-1937 (when deflation and depression brought in the very worst government possible)?

        1. psychohistorian

          I look at Germany like I look at Japan…..socially re-engineered after WWII. Both countries have contributed and continue to contribute significantly to the advancement of society but as neutered soldiers for the imperialistic world rather than as mutual partners in a non-class based and non-imperialistic world.

          They are playing their role but I think the German 99% is becoming as aware as the 99% in other “western socialized” countries.

          What an interesting time we live in.

  7. Mikey M

    The point is its a bullshit referendum to start with as it will be made a referendum on the euro. The Greeks will be asked whether they support the bailout but they will be left in no uncertain terms that a NO means a NO to the euro and they will be expelled immeidatley. The EU has to expell them for fear of this happening anywhere else within their little crazy empire.

    Apparently, or so folks keep saying, the Greeks like the euro and dont want to leave it. Which just shows how crazy people are today because any moron can surely see that the hughely over-valued euro is what has helped make Greece, Italy, Spain, Portugal even less competitive than they were in the 80s and 90s.

    So frankly, they are all idiots and i couldnt care less what happens to greece or the Eu for that matter. The quicker they implode and we get this over with the better.

    1. Diego Méndez

      I am not sure someone may be an idiot just because they don’t want to lose their lifetime savings in an 80% devaluation.

      1. vlade

        Is it better to lose your savings in 80% devaluation, in return to get a hope of 8-9% real growth afterwards, or live of your savings for the next 10 years because you have no job? (and be effectively unemployeable afterwards)

        Of course, the first “hope” is a big if, hugely dependent on being able to build at least slightly better institutions. In last few years number of Greeks I met in London spiked, and most of them have absolutely no interest to return home – if because when looking for a job, it matters who you know (or how much are you willing to pay) rather than what you know.

        Which brings me to a different place – there’s no good solution for Greece that doesn’t involve massive improvement in institutions (such as ability to actually collect taxes).

        W/o institutions Greece will just turn into a failed second-world country, regardless of whether with EUR or w/o EUR. I suspect that one way how the bailout could have worked, is if Germany/France were pushing not for austerity as such, but for better institutions (which, to an extent would result in cuts anyways, but no mindless cuts w/o improving tax collection and like). Again, from talking with my Greek friends, they are sick of the corruption and nepotism, but don’t believe anything can be done within Greece on this, as “all elites are the same – corrupt”.

        But then, EU wasn’t able to enforce its own with Romania when it wanted to EU, so why should it be able to do this with Greece?

        1. SidFinster

          Is it better to lose your savings in 80% devaluation, in return to get a hope of 8-9% real growth afterwards, or live of your savings for the next 10 years because you have no job? (and be effectively unemployeable afterwards)

          The answer probably depends on:
          1. How old you are; and
          2. How much you got saved up.

        2. Mr. Eclectic

          Very good point.

          Greece, along with the rest of the troubled countries of the EZ, didn’t build the modern institutions of the rest of western Europe during the post war years. In certain aspects it still retains certain pre-modern characteristics, eg greater importance of family and immediate community versus faith in larger and more abstract institutions. Participation in the EU was mainly a means towards that end.

          This crisis up until now has been a lost opportunity to force those necessary changes. The Greek people have realized that they are in for a rough decade. The question, and the reason they are increasingly opposing “expansive austerity” (btw, who the frack comes up with these oxymora as valid concepts?!), is that it doesn’t provide a framework for growth and healthy social institutions. Simply put, no new social contract is offered.

          A very subtle but important point is also the average productivity of Greek workers. Looking at OECD and Eurostat data, Greeks work the longest hours in the EZ, with a productivity index above the average. The lack of a robust regulatory framework though, and the farcical enforcement of what little there is due to corruption, means that employers have very little incentive to invest into enhancing the productivity and competition through investing. Profit margins are the highest in the EU (~40% up until 2009) in a market that is controlled by various cartels.

          Greece needs a new social contract, plus that regulatory framework that will force investments towards actual improvements in competitiveness, instead of rent-seeking.

          1. aet

            Indeed, that all does seem something for the Greeks to work out.

            And I do suppose they know themselves better than others do, them being the heirs of Socrates and all, so they’ve got to make their own decisions, like everybody else has to.

            It is imperative that the Greeks themselves understand precisely what the consequences of their making any one of the choices open to them would be, prior to them am making that choice.

            They ought to give an informed consent (or not), if their consent must need be obtained. There’s usually no point in doing these sorts of things half-way.

      2. Tweetie

        They can always take their money out of a Greek bank, deposit it in a German bank and then vote “No” to the Euro.

        After they have gone back to the Drachma, they can use the gains to pay off their debts cheaply.

        1. Diego Méndez

          If Greece get out of the euro, Greeks living in Greece lose the EU citizenship, the equality of rights vs. other EU citizens and the protection of EU courts.

          This means Germany could collect Greeks’ money from German banks as a compensation for failed Greek payments. This could be ruled legal under international laws.

          Thus, sending your money abroad only works if just a few people do it. The uncertainty surrounding anything related to a euro exit is massive, and there are no obvious failsafe protections.

          1. Frank Powers

            You are confounding membership in the EMU with membership in the EU. The latter would in no way change even when Greece dropped out of the EMU, ie. the Euro.

          2. Diego Méndez

            @Frank Powers, current treaties force all eurozone countries to keep the euro. Leaving the euro means leaving the EU, unless core countries have mercy and decide on an exception to current treaties.

      3. Praedor

        The answer would be to pull out all your savings in Euros and change them into something else while the Euro still has any value whatsoever. The answer is NOT to put the Euro corpse on a ventilator and keep it breathing (by machine) and pretend it is still alive.

        Transfer to almost ANYTHING other Euros for your savings: gold, Aussies, the dollar, whatever.

    2. Konrad

      I think the claims that average Greeks support the euro is a banker’s lie promulgated by the corporate media to reassure investors that all is well, squares are round, and 1+1=3. Greeks want relief from their agony, regardless of what currency they use. Many are now growing their own food in fields because they have no money to buy food in stores. WTF do they care about defending the euro? They just want the pain to end.

    3. Lafayette

      {So frankly, they are all idiots and i couldnt care less what happens to greece or the Eu for that matter. The quicker they implode and we get this over with the better.}

      Said with vehemence and no small amount of ignorance.

      You haven’t noticed, perhaps, but ours has become a multi-polar world. There’s not just Uncle Sam forcing “his democracy” down our throats. There is also Europe (which is getting to be a larger economic entity than the US) and, of course, China. Russia rattles its sabers, but remains a second-class world power, despite all the strutting of Putin and Medvedev.

      So, you way wish to dismiss unwisely Europe, but any American does so at their own peril. After all, to whom will you sell otherwise your Boeing aircraft, your P&W jet engines, your Caterpillar earth-movers … and Wall Street’s effing Toxic Waste?

      Obama has made considerable efforts towards pushing the EU towards getting its house in order. Evidently, he knows something you do not. That Europe is an important American partner in world affairs and also a major world market into which America sells its products and (more importantly) services.

      1. psychohistorian

        While I agree with some of what you say I key harking back to the fact (for me) which is is that same global inherited rich that basically control all of “western socialized” countries are executing a Shock Doctrine event on the 99% of those counties…..effect on the rest of the world is collateral damage.

        I would really like to encourage collaboration among “western socialized” countries 99% ers to combine energy and make necessary changes.

        Sharing posting and commentary on sites like this is a start.

  8. Mr. Eclectic

    It is an interesting development, but, unfortunately, as anything from GAP, it’s aim is not that. First of all, it is not clear what the referendum will be about. Will it be about the 10/27 deal, the whole troika package of solutions, exiting the euro, affirmation of government policy, etc, noone knows.

    Secondly, GAP has lost control of pretty much everything. Ministers don’t coordinate, everyone is issuing statements against each other, MPs are leaving the majority (from 160 he’s down to 152 and counting), and no branch, sector and department of the government is functioning properly. The people are angry, strikes everywhere, the middle class has finally given up and started refusing to pay the ever increasing emergency taxes and tariffs, while the upper class still pays nothing. The legacy of his administration is the total dismantlement of the very young and fragile social state in Greece.

    A historical note here: it is very interesting to note that, unlike most European countries, the establishment of a social welfare state and modern institutions started in earnest only in the 80s. I don’t care if markets and societies need more or less – practically until then Greece had none. In western Europe, the post war interchange of conservative and social-democratic governments led to the rise of modern European states and social institutions. In Greece, due to the civil war, there was no left counter part to the dominance of the right. Also, unlike western Europe, the Marshall plan in Greece was partially ineffective, again because of the civil war.

    Furthermore, referenda are a rather sore point in the history of the Greek State. They regarded fundamental aspects of the state and constitution (mostly the restoration or abolition of monarchy), and, out of seven total (first one held in 1920), five of them were fraught with either manipulation or outright fraud (with regards to the previous post, the voters’ registry was used to determine whether someone had voted in the 1946 referendum. The left had abstained, so each abstainer was branded a leftist. Up until 1990, it was required for citizens to provide their voting record in their major dealings with the state).

    It seems that GAP is making his last gamble to maintain some control of his party, and that’s it. If he loses the referendum by a small margin, he believes that he can still retain the leadership. Unfortunately, this is not a Sampson moment. He cannot use this as leverage in a negotiation, as WalterW points out in his comment.

    1. Lafayette

      {In western Europe, the post war interchange of conservative and social-democratic governments led to the rise of modern European states and social institutions.}

      Point well taken.

      Social Democracy is a blend of both capitalism and socialism. That is, crudely put, it is the milking of the capitalist cash-cow to provide public services to the population. Europe has a much lower Gini Coefficient (a measure Income Unfairness) than the US. See here: http://en.wikipedia.org/wiki/File:Gini_since_WWII.svg

      The US may have won WW2, but it did not understand the pressure of Europe to respond to Communism on its doorstep. Of course, Europe let American troops defend its infant democracies against the Russian Bear.

      At the same time, however, it instituted social-democrat practices that assured its people such welfare as (1) a Universal National Health Systems (that deliver state-of-the-art health-care at costs about a third of Americans privatized insurance) and (2) Free nursery, primary and secondary schooling and almost-free Postsecondary Education (either vocational, college or university).

      With the former above, Europe has a relatively healthy people, whose life span is longer by one year than that of Americans. (Though obesity is inching upwards towards US levels.) As regards the latter, it has passed more of its secondary-school student through tertiary education than the US.

      The EU is not the US, however. Though it has the potential of a larger internal market than the US (due to population size) it will always have an inherent unemployment that is greater, by at least 1.5%, than the US. This is due to the lack of employment mobility because of language barriers. Barely two percent of any EU country’s people live and work outside their home nation.

    2. SidFinster

      “It is an interesting development, but, unfortunately, as anything from GAP, it’s aim is not that. First of all, it is not clear what the referendum will be about. Will it be about the 10/27 deal, the whole troika package of solutions, exiting the euro, affirmation of government policy, etc, noone knows.”

      The answer to the question will depend on what question is asked. The Troika cannot be so stupid as not to know this, so the question itself will be another valuable negotiating tool for the Greeks. Notice that G-Pap has not disclosed the question – yet.

      All part of a masterstroke that left me speechless.

      1. Dave of Maryland

        I was wondering about that, about the exact language of the question itself. The cynic in me says it will be so poorly worded as to make both YES or NO meaningless. Thus splitting the vote while at the same time depressing turnout, meaning that all parties could claim victory while the sheer agony continues.

        Note the Greek military shakeup that immediately preceded the referendum announcement. Sort of like clearing the decks for rough times to come. Myself, I’d much sooner blackmail the existing military leadership than replace it with fresh faces, even if I thought they were my best buddies.

    3. Mr. Eclectic

      Actually, Merkel and Sarkozy made it clear for the rest of us: no matter the wording, it will come down to whether Greece stays or exits the EZ.

  9. Cathryn Mataga

    Is this it? Is it just gonna’ blow, the whole banking system in Europe? I think the discussion has to change now to ‘what happens when Greece defaults.’

    I guess there’s always the chance that some kind of massive fraud will turn this into a vote for austerity — maybe there is still hope after all. That’s the optimist in me.

    Ooh, Anstalt, I remember reading somewhere about a financial crisis in Europe in the 30′s. I have to wikipedia this one.

  10. Lafayette

    A SAD TALE

    It is not a “farce”, that which is happening. It is a Very Sad Tale.

    At its origins is the Maastricht Treaty that formulated and gave birth to the Euro. At the time, the Germans – knowing full well the habits of its Mediterranean neighbors – asked that there exist a fine for all countries that consistently passed the debt limit of 3% of GDP.

    That rule was never enforced and there was no regulatory oversight of EU budgets by the EU Commission in Brussels. Those two very grave mistakes of the EU Commission have been repaired – but the damage is obviously done.

    The Greeks were amongst the most profligate of the Euro-zone countries and they fully deserve the mess they are in. Angela Merkel, in negotiations last week, convinced the banks to give Greece a 50% haircut on its debt. The banks had agreed on 21% and, to do so, she was obliged to threaten them with a Greek default of the kind they feared most.

    It is well within the rights of a democratic country to ask its people to give their opinion on the matter of the austerity that has been imposed. (Let’s not forget the demonstrations that have already occurred.)

    Papandreou is up to either of two tricks:
    * Either he announced the referendum to force his own resignation – giving him the opportunity to return to the leadership when times are better, or,
    * He knows the Greeks will be told it is either the agreement reached or an exit from the EuroZone – which, in fact, most Greeks do not want.

    We shall see which is his real motivation either very soon (with his resignation) or in January (with the referendum).

    However it works, Greece, which is not a great export country has at least a decade of relative hard times before it. Perhaps they will learn their lesson of profligacy.

    MY POINT

    Of course, there are lessons to be learned all around. Why should American be obliged the glaring Income Unfairness of their own country, just because Reagan reduced marginal income and capital gains taxes?

    And when are the American people going to understand that they’ve been had and want a reform of our taxation system such that it be more just?

    1. Praedor

      What Greece needs to learn is that their f*cking rich leeches need to pay taxes, not just the “little people”. They need to learn that government needs to be uncorrupted (by being in bed with Greece’s rich no-tax-paying leeches).

      1. Lafayette

        Praedor: They need to learn that government needs to be uncorrupted (by being in bed with Greece’s rich no-tax-paying leeches).

        Then it will amuse the hell out of you (pun intended) to know that the second largest real-estate owner (after the Greek State) is the Greek Orthodox Church.

        Which has been relieved of any requirement whatsoever to pay taxes to the Greek state on its properties.

        Of course, one of the priority projects of the Merkel-Sarkozy tandem is to harmonize tax regimes amongst EU countries. The present EU tax cacophony cannot continue.

  11. Mamzer ben Yoni

    “Long SUFFERING debtor”??

    Please, in the case of Greece, “long RIPPING and CHEATING debtor” might be closer to the mark!

      1. Mr. Eclectic

        Along with France, with a 6% deficit, while Greece’s was about 3.8%, IIRC. In fact, noone said anything about that, because of the so called relaxation of the criteria due to that Francogermanic coup.

      2. Lafayette

        DIFFERENT DEBT MOTIVATIONS

        It was not Germany as much as the Mediterranean countries and one other from the North of Europe, that is, Ireland.

        Ireland was drawn in to the same Realty Bubble as Japan and Sweden had known previously. It indebted itself accordingly.

        Ditto Spain (yet another realty bubble), ditto Portugal (not so much realty as government spending) and finally ditto Italy (the negligence of Bunga-Bunga Berlusconi to adopt the measures necessary to get a handle on Italy’s woeful pension policy for an aging population).

        In each instance, the motivating reason was different. Unfortunately, the result is collectively the same.

        POST SCRIPTUM

        Note that Germany’s debt, which is almost as large as France’s, is far less a concern to the Banks? Why?

        France’s debt is owed to banks. But German Administrations off-loaded the debt onto the German public – by selling bonds. As a result, the Sovereign Debt of Germany is largely owned by the German public (and not the banks).

        As a consequence CRA’s have faith that the German Treasury will not default on a debt owed to its own people. (Who vote …)

  12. Philip Pilkington

    “The goal of Papandreou’s move presumably is to renegotiate the terms of the deal imposed on Greece. To get the heretofore dictatorial Troika to take him seriously, he’s effectively threatened the nuclear option of blowing up the rescue package, which means default.”

    Hypothetical alternative reading: Pappy saw what everyone else saw over the past few weeks; most notably the secret document. He then concluded what many others concluded: that the Germans et all were not simply ignorant, but belligerent; that the crisis has become a game of politicking and jockeying for power with certain European countries using it to establish their power in certain European institutions in which, up until now, they have remained but a member of.

    Upon seeing this — something which Pappy had long suspected, since his erstwhile economic advisor, Yanis Varoufakis, has been saying it around Greece for well over a year now — he decided that he wanted no part of this and jumped for the escape hatch. In this reading the referendum is simply a crashing of the bus.

    “But we’ve been told by sources in contact with ECB staffers that Trichet and much of the ECB leadership is unwilling to leverage the bank’s “equity” beyond a certain point that is well below what would be required for a credible rescue…”

    This is interesting because it raises the question of whether the ECB is still succumbing to the Bundesdisease of hyperinflation phobia or whether they are genuinely worried about the ‘equity’ of a bank that prints its own money (absurd). Certainly it seems that Trichet realises that the bond purchases are not inflationary:

    http://www.businessweek.com/news/2011-10-11/trichet-says-inflation-fears-due-to-bond-purchases-unfounded-.html

    Which means that Yves and sources are probably correct. If so, then this is so crazy it hardly bears thinking about. It means that the whole crisis continues on because of concerns about a balance-sheet of an institution that issues currency! I think this further supports the ‘political jockeying’ hypothesis. Either that, or Trichet is dimmer than even the worst of his detractors claim…

    1. craazyman

      Honestly Phil, I think many of these folks get more credit for creative intelligence than they deserve and therefore more credit for devious machiavellian positioning than is likely the reality.

      For example, yesterday I briefly channeled Mr. Corzine’s noospheric imprint because I was editing something about the financial crisis that mentioned his recently deceased firm — and I encountered a very monodimensional and narrow intellectual energy sort of like that of an intensely focused dog or cat. I would describe it as a very bright but thin wall of illumnation, fuzzy and not a complete sphere, like a broken eggshell.

      I’m not casting any aspersion of Mr. Corzine as a person, I’m simply searching for metaphors. The other image that came to mind was that of one of William Blake’s visionary heads — which may seem a contradiction with my first image — but in reality the vision itself is the link, highly animated and ecstatic, but in Mr. C’s case so narrowly focused and inflexible as to be nearly an instinct, or even an addiction, as opposed to a creative thoughfullness.

      1. Philip Pilkington

        “I think many of these folks get more credit for creative intelligence than they deserve and therefore more credit for devious machiavellian positioning than is likely the reality.”

        I don’t think its a conscious plan. I think people like Merkel see their authority tangibly increased by the debt-crisis and so they let it roll on. Simple as.

        1. Lafayette

          PP: I think people like Merkel see their authority tangibly increased by the debt-crisis and so they let it roll on. Simple as.

          Angela Merkel was recently shifted into a minority government (of her own party the Christian Democrats). She has what is supposedly a “National Government”, which means that the opposition is also part of the government until new elections will be called – which will be done as soon as this crisis is history.

          So, she does not have all the elbow room she might like to have. After all, the Socialists are looking constantly over her shoulder and other parties of the Right are too small to help her in any way in the Bundestag.

          It has been repeated by many here that the Germans are inflicted with Inflation Hyperphobia – and such is likely the case. But it must be understood that this a concern more of the Left in Germany than the Right. The Right typically mouths useless words about inflation, but the Left gets tied into knots over the subject.

          So, the Germans must be beat over the head with the notion that the ECB must be made into a Lender of Last Resort – meaning that it will, indeed, print money to relieve the Greek Debt problem. Which all Central Banks have done when in similar circumstances.

          Unfortunately, the last time such a crisis happened, the Central Banks were minding their own money and not the Euro. In fact, they had looked with Great Hope at the Euro to end their own national problems with money exchange rates.

          And the EU did not sufficiently realize that very great differences in inflation rates across the EU member states made a common euro policy extremely difficult for the ECB to manage. The euro was supposed to “harmonize” European economies, but the politicians insisted upon bringing into the fold new states – which made integration all that more problematic.

          It would take someone like a magician to manage ECB-policy under the present circumstances. Buona fortuna, SuperMario!

          1. Philip Pilkington

            Yeah, I’m the one that ran the inflation phobia article…

            And don’t confuse national power with supranational power. Merkel et all have been turned into some of the most powerful people on the planet in the recent crisis. A blind man could see that they can solidify German/French/whatever influence in the Euroinstitutions by battering the periphery.

            I’m not even saying this is rationally thought out — it usually isn’t. When Merkel and others stand up in Europe and bash the periphery they feel their power increase at that moment immeasurably. Sure, this may have implications for their electability in the medium-run (maybe, causality is open to debate there), but that rush of power is what every politicians lives for.

            Think of the recent Italian debacle. Merkozy had a great time bashing Berlusconi and this was well covered. Were the reasons rational? Not really. Merkel didn’t like the guy. But when she sat at that table all the cards were in her hands. If you’re remotely familiar with the psychology of politics you’ll realise what a rush this is for the people put in this position. It’s what they live for.

            This sort of politics has been played in Europe for decades — nay, centuries — it’s just more of the same.

      2. Praedor

        No worries. I have no compunction about calling a spade a spade so I DO cast aspersions on Corzine’s character.

    2. Mr. Eclectic

      Y.Varoufakis was just a speech writer, and he quit. His main advisers are former IMF, Global Bank and large banks executives.

      GAP is indeed that clueless.

      1. Philip Pilkington

        Doing an interview with YV right now. Gonna probe him on this. My feeling is that even GP saw the writing on the wall after the document leak. I mean, you could only read that in one way…

        “Greece is doomed… oh well…”

        1. Mr. Eclectic

          Just in, Varoufakis’s latest post “Time to resign, Mr Papandreou”:

          http://yanisvaroufakis.eu/2011/11/02/time-to-resign-mr-papandreou/

          In it, he presents his view that the referendum was just a maneuver to get his MPs behind the proposed plan, since they wouldn’t have to vote for it, instead passing the responsibility over to the people. Making in one move a mockery of both representative and direct democracy. In the meantime, he hoped that the EU would make some minor cosmetic changes, so that the plan would be more palatable, and he might even win the referendum.



          Now, in a desperate bid to cling on to power, you (Mr. Papandreou) are attempting to gag your people by imposing on them a false choice between (a) an agreement which is bad for Europe as a whole and (b) staying in Europe.

          Perhaps the most damaging of all aspects of your referendum idea is that it will solidify in the rest of Europe’s collective mind the false impression that the problem is Greece; causing our partners to remain in denial about the roots of our collective problems in the eurozone’s design.”

    3. Sy Krass

      Couldn’t it be that G-Pap simply is caving into reality? “The game is up, this is useless, it’s unenforceable, and it’s going to collapse anyway?” Contrary to popular belief, you can draw blood for a turnip, but eventually it loses consciousness too.
      HAHAHAHAHAHAHA!!!!!!!

  13. Jim Haygood

    ‘Let me add that Italy is not fundamentally insolvent. It is only in these straits because it does not have a lender of last resort, a sovereign central bank, or a sovereign currency.’ — Ambrose E-P

    ‘As we and numerous others have said, there is a simple solution here, which is for the ECB to expand its balance sheet (in crude terms, print).’ — Yves Smith

    Gokhale and Smetters showed in 2003 that the US, mainly due to unfunded social promises, has a large and escalating negative net worth (i.e., it is insolvent, but liquid). The official annual Financial Report of the United States shows the same. This analysis has since been extended to developed Europe with the same result.

    In the rare (indeed, practically oxymoronic) situation of an inflationary government running a disciplined series of budget surpluses, excessive debt can actually be reduced in real terms. To some extent, Brazil achieved this improbable feat in the 1990s. It is most unlikely to be repeated in Europe or anywhere else.

    Like the poor, Halloween-goblin inflationists will always be with us (indeed, one would expect considerable overlap between these two groups of badly-informed unfortunates.) But whether a wheelbarrow of currency buys a loaf of bread, or a handful of gold coins buys a house, the destination of improvident social welfare states is everywhere the same: complete and utter RUIN.

    1. Philip Pilkington

      “Gokhale and Smetters showed in 2003 that the US, mainly due to unfunded social promises, has a large and escalating negative net worth (i.e., it is insolvent, but liquid).”

      How can the US be insolvent if it issues currency? That makes no sense…

      1. Philip Pilkington

        This might be a start — although since it doesn’t deal with currency sovereignty it doesn’t go far enough; not to mention the fact that what they say about hyperinflation etc. is stupid. Still the main point still stands. Even in standard economic argument a government cannot really be ‘insolvent’. Hence, Pritchard is correct:

        http://en.wikipedia.org/wiki/Insolvency#Government_debt

        “Although the terms bankrupt and insolvent are often used in reference to governments or government obligations, a government cannot be insolvent in the normal sense of the word. Generally, a government’s debt is not secured by the assets of the government, but by its ability to levy taxes. By the standard definition, all governments would be in a state of insolvency unless they had assets equal to the debt they owed. If, for any reason, a government cannot meet its interest obligation, it is technically not insolvent but is “in default”. As governments are sovereign entities, persons who hold debt of the government cannot seize the assets of the government to re-pay the debt. However, in most cases, debt in default is refinanced by further borrowing or monetized by issuing more currency (which typically results in inflation and may result in hyperinflation).”

      2. Jim Haygood

        Simple — ‘insolvent’ means that the present value of current and future liabilities exceeds the present value of current and future assets. Gokhale and Smetters estimated US negative net worth at around $50 trillion.

        ‘A government’s debt is not secured by the assets of the government, but by its ability to levy taxes.’

        This I would claim is a subtle but significant misstatement. Taxation certainly secures an ability to service debt at some level. But it doesn’t guarantee that the interest payments won’t eventually exceed what the government realistically can collect in tax, along with its other obligations. Printing the difference just leads to an inflationary blow-up, sooner or later. There is no magic beanstalk, I assure you.

        This is the plight faced by the OECD rich countries. No realistic, bearable amount of taxation can extricate them from it. By not funding social benefits in a prudent manner (that is, currently funding all estimated future obligations) — plus, never imagining the possibility of demographic decline as the world’s population exploded — they have shit the bed big time.

        Go south, young man! (the ‘global South,’ so to speak). ;-)

        1. Philip Pilkington

          I wonder if your argument would hold up in a bankruptcy court. Because it sounds to me like ideologically charged rhetoric. The trick is to conflate two different entities — in this case, a sovereign state and a business or household. Then carry on this metaphor — yes, in rhetoric we would consider this a metaphor — in order to invoke an emotionally charged response in the listener (“Huh!? The US is INSOLVENT!!! OMG!!!”).

          I could do this with lots of things. I could conflate the US judicial system with a person and then claim that the judicial system is a murderer. Analytically this is bunk, but rhetorically it is not so — and I’m sure you’d find many anti-death penalty people doing this. Or I could treat private corporations as individuals (buttressing my argument in this case with their legal status) and then go on to assign DSM categories to them. (“OMG!!! DSM-IV indicates that they are psychopaths”). Etc. etc.

          Meanwhile Aristotle and the other founders of logic roll in their graves.

          My guess is that the ‘analysts’ you cite have an ax to grind. They’re probably Austrians. Maybe extremist anti-government types that aren’t Austrian. But the rhetorical tactics look Austrian. Failing that Marxist — but I doubt they’re Marxist.

          1. skippy

            Philip I need your help…I can’t find the coin slot to this planet[!] and I’m hungry!!! Jim said I can’t eat till I find it, curse you Jim!

            Skippy…I know, I know, defective marsupials…piss off…

          2. Philip Pilkington

            Had it in one. Gokhale is a Cato propagandist:

            http://www.cato.org/people/jagadeesh-gokhale

            His main work centers around robbing social security… sorry, I meant: social security privatisation.

            Ditto for Smetters — although he doesn’t hold a position at the Cato Politburo:

            http://en.wikipedia.org/wiki/Kent_Smetters

            These guys, as I thought, have major anti-government axes to grind. They’re cronies, of course, and the type of ‘analysis’ they do reflects this.

            It’s funny how some lefties get co-opted by these guys. They start buying into the “government is insolvent” argument and next thing you know they’re donning a hat with teabags on it or hanging out with Alex Jones and Rand Paul outside the Fed. Slippery slope, folks. Slippery slope.

          3. JTFaraday

            I don’t know. It still seems to me that while the teapers just don’t like the fed/central bank function because they associate it with big government and central planning, you’re still pretty much just slipping down the other side of the financialization hill by being in favor of big government and central planning while failing to fully take measure of the fact that the central banking function isn’t remotely functioning in the interests you want it to.

            Even if it *theoretically* could, it isn’t *in fact.* Consequently, I can’t take either idealist camp too seriously.

            “The Eurozone has fallen into an intellectual trap in which banks have come to believe their own anti-government propaganda. Associating budget deficits only with wage and price inflation excludes consideration of government spending to bail out banks or provide credit to re-inflate asset prices (as well as creating infrastructure to hold down the cost of living and doing business). Opposing public social spending, German and other European banks threw out the baby with the bathwater by blocking central banks from doing what the Bank of England, the U.S. Federal Reserve and other central banks were created to do: finance public deficits. This obliges governments to borrow from banks, insurance companies and other financial institutions. The resulting debt overhead leads to debt deflation that slows the economy and its tax yield, producing a fiscal crisis that in due course becomes a financial crisis.

            To resolve matters, banks are backtracking and urging the European Central Bank to make loans to government – for the purpose of bailing out banks and bondholders, not to spend on employment in the “real” economy. Voters understandably resent further bank bailouts, under conditions where many debtors are themselves facing foreclosure and have lost much of their net worth. Why should governments bail out the financial sector at the top of the economic pyramid but not reflate production and consumption in the “real” economy. The problem today, after all, is under-employment and debt deflation, not inflation.”

            http://michael-hudson.com/2011/10/trade-theory-financialized/

          4. Philip Pilkington

            @ Faraday

            I’d like to think my positions are a bit more nuanced than being ‘for’ central planning and big government… I’m moreso ‘for’ full employment and higher wages, I should think. Being ‘for’ central planning and big government (or taking the opposite tack) is — to me at least — about as vague as being ‘for’ wellness and human progress. If you’re that vague you’re always going to be co-opted by people with more specific aims… in this case people who want to loot social security…

          5. JTFaraday

            Pilkie, the pseudo-populist Teapers don’t want to “loot social security.” On the other hand, your central bankers, who you trust to run policy, do.

            Um, duh? Your camp and their camp are BOTH running neck and neck in the “useful idiot” column, to put in “leftist” terms.

            You cloak your political naivete in convoluted sentences I don’t think even you understand– and you like to red bait the crowd on a regular basis– but YOU’RE the accidental Stalinist.

        2. LucyLulu

          Are the benefits unrealistic or is our present healthcare system broken? The majority, about two-thirds I believe, of those “unfunded liabilities” are Medicare expenses. Healthcare costs, whether private or public, have been rising at rates that far exceed the rate of inflation, and are twice or more in the US of any other developed country, while demonstrating poor results in comparison. Yet, the US refuses to consider implementing any of these demonstrated more successful plans, instead insisting on keeping our existing bloated and inefficient system in place and attempting to make minor tweaks (Obamacare).

          Furthermore, I find the idea of looking at “unfunded liabilities” over an infinite horizon a ridiculous notion. What corporate financial statement does this, and how many wouldn’t also appear bankrupt when evaluating compared to “present value of current assets”, instead of looking at future anticipated output. Taxation and benefit levels are not static, as was assumed, they are policies that are both legislated and can and do change over time, and in fact, are currently on the table right now.

          Dean Baker and David Rosnick point out that instead of comparing the present value of the future accumulated liability with current output, we should compare it with the present value of future accumulated output, which Gokhale and Smetters estimate at $682 trillion. So the future “unfunded liability” is equal to 6.5% of future output—not trivial but not nearly as scary as “four times the value of the country’s annual output.”

          If I’m not mistaken (please correct me if I’m wrong), SS and Medicare are already 6.5% of GDP.

          1. Fiver

            But we cannot know, nor is there any reason to expect, that we can continue to expand output indefinitely. Billions outside the “developed” (are we really?) world are now making claims on total global output, CURRENT and FUTURE they were unable to make even 20 years ago. And rightly so. But this is not an infinite pie, nor do we, the global 10%, have any right to continue to claim the lion’s share of the wealth when it’s absolutely evident everyone else is as smart and hard-working and deserving as we at least fancied we once were.

        3. Praedor

          Socialism nor social democratic systems are not “required” to go to ruin.

          First, “demographic decline” was seen/predicted by the designers of social security at the beginning. They KNEW there was a population bubble that would contract and they designed the system accordingly (hence Social Security has a FAT surplus now, will go into the red for a while, then level off for virtual perpetuity). All that is needed here and there are minor adjustments to deal with the finer details of the predicted demography (like eliminating the cap).

          Capitalism itself is doomed for failure/collapse again and again as it is a bogus system predicated on the impossible: perpetual growth. It is physically/scientifically impossible to have perpetual growth within a closed system. Capitalism demands perpetual population growth (impossible and ultimately self-destructive), perpetual and growing extraction of physically limited resources, etc. Perpetual growth. Thus it MUST fail as it is predicated on a fantasy.

          Thankfully, capitalism has a knack for proving its inherent flaws at certain times when people, being short-sighted, start to get all wobbly on reality. For instance, when all the talk was about “privatizing” social security, 2008 comes along and demonstrates the inherent bullshit that is the market that the privatizers wanted everyone to be dependent upon for their very lives in retirement (the market casino, and it is nothing BUT a casino, crashed and wiped out many idiots that trusted in the fantasy of capitalism for retirement).

          1. LucyLulu

            Praedor wrote: “First, “demographic decline” was seen/predicted by the designers of social security at the beginning. They KNEW there was a population bubble that would contract and they designed the system accordingly (hence Social Security has a FAT surplus now, will go into the red for a while, then level off for virtual perpetuity). All that is needed here and there are minor adjustments to deal with the finer details of the predicted demography (like eliminating the cap).”

            Yes, and Reagan made substantial hikes to payroll taxes to take these anticipated demographic changes into account to cover upcoming social security shortfalls. What was NOT anticipated were the tax cuts that would be later implemented, that the surplus funds would be “borrowed” to make up for budget deficits, replaced by bonds which conservatives would later wish to default upon, even denying that the bonds existed. How often do we hear that the “lock box is empty”? Interestingly though, these same people still report our total debt to be $15 trillion, rather than reducing it by the $2.4 trillion that is not in the empty lockbox.

          2. psychohistorian

            THANK YOU LUCYLULU!

            Your description of the looting of SS is right on the money (pun intended) and needs to be repeated by Rachel Maddow in detail as the gang of 12 and rest of “our” bought government tells us more lies to cover their perfidy.

        4. sidelarge

          You really need to expand your library beyond Rogoff’s 90% theory and right-wing blowhards like Gokhale and Smetters.

      3. Vespasian

        Philip, by your reasoning that a nation that issues its own currency can never be technically insolvent, how do you regard Zimbabwe’s experience? It’s an example of technical solvency taken to absurdity … yet it’s not the only example. Does technical solvency even matter, or the underlying value? Any links to previous posts of yours on the subject would be appreciated.

          1. Philip Pilkington

            Well, yeah, it’s semantics. But then again complaining that someone calling ‘black’ ‘white’ could be considered semantics too. I’m not one for doublespeak — especially not when there is an implicit ideological or political argument lying in wait underneath…

    2. Dave of Maryland

      Could Europe print its way out of its misery?

      Can the US drop money from helicopters?

      I heard the reason the US is not printing money is that it would go into the hands of consumers who would spend it at WalMart where it would end up creating inflation in China.

      By the same token, if Europe were to print its way out of its mess, would that money not end up in Germany, creating inflation there?

      Or am I confused?

      1. Philip Pilkington

        Inflationary pressures depend upon how the money is distributed. QE, for example, did not stoke CPI inflation because it never entered the real economy.

        If the ECB purchased bonds with newly credited reserves the effects would be identical to QE (because that’s what QE was… buying bonds with new reserves). This process would not be inflationary and Trichet has admitted this (see the link in my comment above).

        1. Fiver

          In what way are huge commodities and food spikes not the “real” economy? How many times over the last several months has Bernanke said “headwinds” were “easing” because those spikes were tailing and the “consumer” was getting relief – as if they didn’t track the ups and downs of QE in near-unison?

    3. F. Beard

      But whether a wheelbarrow of currency buys a loaf of bread, or a handful of gold coins buys a house, the destination of improvident social welfare states is everywhere the same: complete and utter RUIN. Jim Haygood

      You ignore that it is socialism for the rich (fascism) that causes the need for socialism for the poor.

  14. Finance Addict

    Although the referendum was called for strategic reasons, there is a certain beauty to the thought that Greece is pulling a page out of the Occupy Wall Street playbook:

    Show me what democracy looks like!
    *This* is what democracy looks like!

    http://bit.ly/uBk7Pa

  15. JTFaraday

    “Germany was persisting in wanting two contradictory outcomes: running trade surpluses in Europe, and not lending more to its trade parters.”

    “The creditors who pressed on relentlessly with austerity programs in the face of deteriorating results and visible opposition by the Greek public were unduly confident that they could grind down a subject state.”

    “Italy is not fundamentally insolvent… The euro structure itself has turned a solvent state into an insolvent state. It is reverse alchemy.”

    While they have frequently been depicted as being on opposite sides of the fence, and may themselves view things that way, it seems to me that what the public in Germany and the public in Greece are both concerned with is the state of the real economy.

    Meanwhile, the EU technocratic elite has evidenced little concern in common with the public, has created a vast financialized superstructure that is damaging the whole region, and is now trying to play ye olde European nationalism game– not to give the public any democratic control over their own political unit, but to distract them and the entire globe from their own culpability.

    Classic scapegoating. We have the good/bad Germans and the good/bad Greeks, depending on your perspective.

    Whereas it seems to me that the only thing either group of people was really culpable of is not recognizing in advance what role they would play in the inevitable morality play when the technocrat’s financialization scam collapsed in on itself in a big cloud of smoke and mirrors.

    I’m getting really tired of these people. Shrinking them back down to their proper size should be a top priority.

    1. Praedor

      Well said. The governments of ALL failed states (USA, all of Europe) are entirely focused on “finance” and the “finance system” as being the end-all, be-all of existence. The people demand jobs, better living conditions, etc, and all the government criminals hear is, “We want bigger and richer high finance in our lives! We want bankers to be happy!”. Thus they conduct ALL their business of government towards this end.

      The people are being ignored and this is a state that cannot self-sustain for long before guillotines come out.

  16. Rodger Malcolm Mitchell

    The EU tragedy would be hilarious if not for all the people who are, and will continue, suffering. All those experts — all those Nobel winners — all those sage advisers, running in circles creating convoluted plans designed to do the impossible, i.e. make monetarily non-sovereign nations survive long term without inputs of money.

    Can’t be done. There are two, and only two, possible solutions for the euro nations. Either:

    1. Leave the euro and re-adopt their own sovereign currency
    or
    2. The EU give (not lend) euros to member nations as needed.

    There are absolutely, positively no other long-term solutions. Period.

    Those who do not understand Monetary Sovereignty (http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/) do not understand economics.

    Rodger Malcolm Mitchell

  17. Psychoanalystus

    I would like to take a moment out of everybody’s busy schedule to proudly report that I have already done my part in starting a bank run on Europe’s TBTF banksters. As previously reported here, in September I closed my accounts with that French monstrosity commonly known as Societe Generale, in October I closed my account with the Austrian Raiffeisen Bank, and last week I have closed my accounts at that Greek joke of a bank called Alpha Bank. Upon return to the US, in the spring, I plan to move my money from the regional bank I am now dealing with to a small credit union.
    So there, I have done my part. Now, if I may paraphrase JFK, “Ask not what can the government do to help the economy; ask what can YOU do to crash your favorite bankster mafioso”.

    Happy running everybody… bank running, that is…

  18. James

    Greece has a primary surplus. Assuming it doesn’t nuke the world economy a default would help. They can have a short sharp pain with a quick ‘recovery’, or long drawn out austerity and potential revolution.

    The ECB is left with the choice of buying massive amounts of european sovereign debt because of a Greek default, buying massive amounts of soverign debt to stop sovereign defaults or of course, job hunting.

    Finally Europeans need to decide if they want to be one nation with one currency, or many with their own.

  19. Lafayette

    THE WIEMAR REPUBLIC

    {Let me add that Italy is not fundamentally insolvent. It is only in these straits because it does not have a lender of last resort, a sovereign central bank, or a sovereign currency. The euro structure itself has turned a solvent state into an insolvent state. It is reverse alchemy.}

    And let me add that if there is no Lender of Last Resort, the fault is with the Germans.

    In this case, Greek Debt is just a pretense. The Greeks have very little Export Income and are in no position to finance their debt. In fact, they never have been and the fact that they had hid it demonstrates their duplicity. It will behoove therefore the EU to maintain payments.

    The solution is evident: The Germans forget the Wiemar Republic and its hyperinflation of the 1920s (because that aint gonna happin in the EU with productive capability well below 70%).

    And they give Mario Draghi the go-ahead to Print Money. That is, the ECB indulges in the same Quantitative Easing as done the Fed by buying up the BadDebt.

    That cost – and, for sure, there is an inevitable cost – is in the form of renounced growth rate due to the EU’s Debt Overhang. It will take a while to “work off” the BadDebt and that process will entail lower growth rates.

    Which means the EU must Pay the Piper for its negligence at the outset of the Euro, that is, its unwillingness to stop profligate member countries from spending beyond their means to repay (in case of a recession – which, thanks to the US, is upon us).

    LO AND BEHOLD

    And, frankly, boys ‘n girls, what if Obama announced a public referendum (that binds the Fed) for or against an enhanced version of his Jobs Plan, meaning increased Stimulus Spending?

    Would you (plural) get bent out of shape if you were reminded that the US is making EXACTLY THE SAME MISTAKE Congress made in the early 1930s? That is, before Keynes published his book suggesting that the sole way out of a Recession was government spending.

    Which convinced Roosevelt to implement such a strategy with the Alphabet Soup Agencies (that built the Tennessee Valley and the Hoover Dams, amongst other things). All of which nonetheless was not enough to really stop the recession.

    It took WW2 to end the Great Depression – thank you, Adolph Hitler. (What is it about the Germans that they should be so often at the crossroads of our economic history, I wonder …)

    1. Praedor

      I believe they were all cross-roady with the Roman Empire too…had something to do with its ultimate demise (concurrent with internal decrepitude and corruption).

  20. the lives of others

    For shame! I don’t know of any profligate Greeks, expect the 1 percenters who do not pay taxes and already moved their money outside Greece, just like their brethren in the U.S. Why don’t you call them “risk takers” and “job creators” such as those who caused the 2008 fiasco in Wall St.?
    This “profligate Greeks” slander must stop. Start here now.

  21. Keating Willcox

    This is an interesting idea, one of unexpected consequences. Who spoke of the possibility that once Greece had a balanced budget, ignoring its debt load, that there would be an amazing incentive to leave the Euro, forget the debt, and print Drachmas? Greece can still accept Euros commercially, and now, since it has no debt and a balanced budget, and can print its own currency, it becomes a better debtor out of the Eurozone than in. PD has been smart. He defused a coup, he will have a an election which will permit the Greek people to speak, and if they are smart, they will simply stop paying any of their Eurozone debt. Since the Greek Drachma will be a somewhat weak currency, Greek tourism will explode, Greek exports will increase, and Greek employment will soar. They will have new debt in Drachmas at lower rates than Italy or Spain. If they need to support Drachmas, they can use price supports for Greek goods and services.

    Who loses? Euro banks and their investors…but most of the countries will have smaller banks at the ready to cover depositors, and continue banking business. Nothing works as well as killing insolvent banks. Ask the Japanese.

    Some US banks and funds are in trouble, and some investors will lose money. But the big change will be how well Greece does on leaving all that Eurozone debt behind. PIIGS eyes will be watching with interest and enthusiasm.

  22. Siggy

    If Greece wants to have a referendum, they should have one. It is their country that is spinning down the drain.

    I don’t entirely understand the riots and the demonstrations. You government provided benefits, pay the taxes, either direct or indirect thru inflation. But then, you can’t inflate; well then, default, repudiate, after all, you dear lender were stupid to lend to us in the first place.

    Now then, comes the reality that european banks and a few others hold sovereign debt which is now priced at 10% to 20% of face. Maybe the percents are a little higher, nonetheless, the haircut will trigger the insolvency of the banks.

    It’s really funny to watch the talking heads. Pity that the sufferors will be you and I.

  23. Hugh

    I just wanted to point out that the Dow was up a couple of hundred points today. What this should tell us is that markets are not harbingers in this. If they were, they would have gone defensive weeks ago and stayed that way. They didn’t. I think bankers are already angling for a bullish market to justify their end of the year bonuses. Little things like an imminent Greek default be damned. It looks to me like markets far from reflecting uncertainties in Europe are actively resisting them. The result likely will be that the crash will already have happened before they react.

  24. Susan the other

    What is wrong with us? Besides the fact that we are almost too dumb to shit? This is not a crisis. This is a temper tantrum. I’m gettin sick of it. I want the Fed and the ECB (whatever it really is I don’t know and I don’t even care), and any other brave authority, to print up lots of money and stand by it. So much money that we can all finally quit squabbling and we can then all live reasonable lives. And then I want the ultimate sacrilege: I want effective, broad-based price controls. I’m so offended by “traders” speculating on the value of wheat and corn while 20% of the world starves, not to mention oil. It will take 10 years for all the monkeys to decide what to do and in the meantime, life must go on. But, it will….destroy capitalism! What’s left to destroy?

    1. psychohistorian

      If we had public leadership that was representative of the 99% in our “western socialized” countries they would be putting together policies and programs to educate, train, employ and keep their citizens healthy. To fund these things they would say to the existing companies, banks and the global inherited rich, This is what we are doing. Get with the program and share or we will nationalize you and provide the socially necessary services ourselves.

      But we don’t have public leadership, we have toady puppets for the global inherited rich playing this kabuki of hypocrisy about how some debts are sacred and others can manipulated away onto the publics’ back. Rule of law is for the little people.

  25. Jim

    JTFaraday(above) points to a potential future conflict between the MMT perspective and the anarchist leanings of OWS when, in his response to Philip Pilkington, he states “…you’re pretty much skipping down the other side of the financialization hill by being in favor of big government and central planning while failing to fully take measure of the fact that the central bank function isn’t remotely functioning in the interests you want it to.”

    Most MMTers assumes that the state is benevolent (it tends to work in the interests of its citizens) and most anarchists assume that the state is never benevolent (it never works in the interests of its citizens) and must consequently be abolished.

    Both MMT and anarchism may need to rethink their respective visions of the modern state.

    The anarchist tendency within OWS through its explicit endorsement of democratic decision-making processes in local general assemblies is implicitly taking on the present concentration of political power within our modern nation-state. This interest in down-sizing the nation-state to units (at this point, local general assemblies) small enough to allow for a more direct democracy may be laying the foundation for future debate on a genuine refederalization of our state structure.

    The MMT tendency still seems stuck in a narrative which explains the last 200 years solely in terms of the unfolding of an all-encompassing capitalist system( and consequently endorses the positive role of the state in containing this capitalism without taking into consideration the simultaneous step by step concentration of political power within our nation state over this same period of time–which has culminated in our present union of Big State, Big Capital and Big Bank.

    The New Left of the 1960s self-destructed into Marxist-Leninism, the drug culture, and the left-wing of the liberal establishment.

    Can the present anarchist tendency develop a radical new vision of the future which is sensitive to the political and cultural concentration of power as well as the economic concentration?

    1. JTFaraday

      You can’t trust THIS government. Here, or in Europe.

      I’m not an anarchist, (but it may be the anarchist moment).

    2. JTFaraday

      “Can the present anarchist tendency develop a radical new vision of the future which is sensitive to the political and cultural concentration of power as well as the economic concentration?”

      I also think you could just as easily ask that question of the “deficits don’t matter” Dick Cheney contingent.

  26. Markar

    I think Greece has a real opportunity here. Tell the EU to shove it, hard default, return to a drachma valued @50% of the Euro and back it with their gold. Watch foreign investment pour into the country, not to speak of the tourist boom they would immediately realize. Oh, and finally, NATO can’t go in and bomb them for their actions because they are already a member.

    1. aet

      “…return to a drachma valued @50% of the Euro and back it with their gold.”

      Lots of assumptions packed into that sentence.

  27. Fiver

    Thanks for another excellent discussion. My 2 cents:

    1) I wonder if many of the people who are just dumping on Greece, or Germany, or both, or all of Europe as if this was either simple, or easy, or that ANY course of action was obviously superior have any idea how they sound? The boundless arrogance of the Angloshpere never ceases to amaze me – and I am one.

    2) My first reaction was that this was tactical, i.e., that Pap had caved to domestic pressure from Greek interests who could not themselves stomach their own 50% haircuts aligned with the core anti-austerity groups, etc., and intended to use the threat of a vote to angle better terms – until I read about the senior military firings. Which made me consider the possible US(or via its pup, NATO)role given the stakes.

    3) There really IS a crisis in democratic legitimacy that is every bit as important as the financial terms.

    4) Would it not at least appear to be in everyone’s interest, most assuredly including the banksters, to have a democratic vote that SUPPORTS this deal (or any modified deal) in the country that has the line in the sane drawn through it? And really, isn’t it likely that the Greek public will be deliberately frightened to death to vote “no” – just like any other public would be when confronted with a calamity and given the false choice by banksters/elites between stable pain and that of the “unknown” variety?

    5) Would this not buy a good chunk of time to come up with a real plan? Are we certain this is all a surprise?

    I very much hope that Greeks get to vote, and that they vote a resounding “NO”. If we are ever going to take these bastards on, it has to start somewhere. But I rather think the vote, if there ever is one, will be “yes” if it’s even close no matter which way the real count goes.

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