Spiralling into the Moussaka

Delusional Economics is an Australian economic practitioner unhappy with the current dumbed-down, vested interest economic reporting the Australian public is force fed on a daily basis. He takes pleasure in re-reporting the news with “bad” parts removed, and a bit of contrarian balance thrown in.

Cross-posted from Macrobusiness, the Australian economics blog

From the morning links

Explosive growth of unemployment recorded in Greece, with a total number of unemployed is at 733,645, according to data from the Greek Statistical Authority (ELSTAT) that were released Wednesday.

The percentage of registered unemployed reached 14.8% in December 2010 an increase of one percentage point compared with November.

The number of the employed workforce in the country fell to 4.23 million from 4.3 million the same period. Record low unemployment, record the ages of 15 -24 which rose 39% from 28.9% compared with December 2009.

Based on the geographical breakdown of the population, residents of the Ionian islands hardest hit as unemployment reached 23.1% due to the dramatic drop in tourist traffic.

It is significant that the region of Attica, the official jobless rate rose to 14%.

The new employment figures are in contrast to the moderate estimates of the government and the IMF experts are talking about “restraint” in unemployment to 14.5% in 2011 and increased slightly to 15% next year.

I am sorry but  “IMF expert” is a oxymoron.  This outcome was completely inevitable. Let us remember exactly what the Greeks  signed up for under the illusion of a rapid prosperous outcome.

Greece will not restructure its debt and will not need more cuts to achieve fiscal targets set in the emergency funding programme it agreed with the European Union and the IMF, its finance minister told a Sunday paper.

The debt-laden country has been offered a 110 billion euro ($134 billion) bailout to avoid defaulting on its debt and in return promised to cut the deficit by 11 percentage points of GDP and bring it below the EU’s cap of 3 percent by 2013.

Markets fear the drastic belt-tightening to secure the deal may plunge the economy into deeper recession and threaten its meeting fiscal targets, prolonging the country’s debt crisis.

“Greece will not need additional measures, especially ‘painful’ measures. I see only one option ahead, delivering on our targets with consistency,” Finance Minister George Papaconstantinou told Sunday’s Eleftherotypia newspaper.

Greece’s economy, which makes up about 2.5 percent of the euro zone, is expected to stay in recession for a second year in 2010 after a 2 percent slump in 2009.

The Bank of Greece projects the economic downturn will deepen, with GDP seen contracting by 4 percent this year, as tax increases and cuts in wages and pensions take a toll.

“The recession will be deepest in 2010 and thereafter there will be a gradual recovery,” the minister told the paper. “I remain optimistic and believe we will recover fast.”

So with 15% of the willing labour force sitting around twiddling its thumbs please explain how the country is supposedly going to recover ? Bring on Moody’s

Moody’s Investors Service cut Greece’s sovereign-debt rating Monday by three notches to B1, infuriating the Greek government and temporarily denting the euro amid renewed worries about the ability of Greece and other debt-loaded euro-zone governments to avoid default.

The ratings agency, which also assigned a negative outlook to Greece’s ratings, highlighted the government’s difficulties with revenue collection and noted a risk that Athens might not meet the criteria for continued support from the International Monetary Fund and the European Union after 2013.

Difficulties with revenue collection? Translation: you can’t tax unemployed people.

That could result in a voluntary restructuring of existing debt, the ratings agency said. Last June, Moody’s cut Greece’s rating from A3 to junk status at BA1.

The decision to deliver a further multinotch cut Monday reflected concerns that the “fiscal consolidation measures and structural reforms that are needed to stabilize the country’s debt metrics remain very ambitious and are subject to significant implementation risks, despite the progress that has been made to date,” Moody’s said.

Seriously I actually laughed out loud when I read that.  What progress ? The Greeks are trying to implement the strict austerity regime as requested by the IMF and the EU. Moody’s are now punishing the Greeks for implementing that exact plan because guess what, the outcome doesn’t fit the deluded perception of what should be happening. It is a tag team of stupidity.

Here is the Greek past and predicted current account deficits chart.

and here is what I said would happen back in May 2010.

… if you think you can cut your GDP by 11% and suddenly your economy will be all roses you are utterly delusional.

If Greece cannot improve its current account balance ( which is nearly impossible given that it threw away control of its exchange rate when it joined the EU), then simple maths states that Greeces’ private entities need to reduce their current net saving position by 11% of GDP over the next three years. Realistically this means , more unemployment and probably debt deflation.

Just to make it clear, it is impossible for Greece to have deleveraging of both the public sector and the domestic private sector at the same time, because it does not run a trade surplus. The only way they could turn their trade balance around is to suddenly start producing a revolutionary new product the world must have, or for the Euro to fall much further so their export goods become cheaper to non-Euro countries. Given we can’t think of any up and coming Greek products ( although we hear they have a lot of uranium ) and given that a fair percentage of their trade is intra-European and their currency is tied to other bigger countries that have stated they will do “anything” to keep the Euro high then this seems impossible.

History is also against them in regards to deleveraging of the private sector. People usually want to spend money ( ie. lower savings , take on debt ) at times when the economy is good and/or their is a speculative bubble that urges them to move their money from cash savings. I think it is pretty fair to say that Greece is not going to suddenly see a tech/housing boom anytime in the near future and it is obviously that its economy is not good.

Also note that as unemployment rises ( one of the inevitable outcomes of this policy position ) then the government will need to provide the private sector with more unemployment and other benefits, this works against the exact thing they are trying to achieve ( less govt spending ).

The only conclusions that we can see is if Greece actually attempts to reach its imposed IMF targets then either private sector have to spend savings and take on debt, as we said above not something people usually do when the economy is in the cr*pper, or nominal private income will deflate.

It is therefore quite possible that they are heading for a “debt deflation” cycle because as the private sector attempt to pay down debt they are indirectly lowering their nominal income which leads to even more indebtedness.

But that is not the worst of it. As I explained in my recent post on Europes continuing mess, Greece was always going to be in trouble as soon as there was an economic downturn in Europe because they are trapped between the domestic policies of Germany and the inflexibility of the monetary system they signed up to when they joined the Euro.  The austerity package is failing, but it is only failing to fix the symptoms.  Without currency deflation the only possible outcome is lower wages for the Greeks, which will inevitably lead to default on loans, the exact thing the Germans and French are attempting to stop happening.

However I have to ask exactly what the EU are hoping to achieve. Let us for a minute pretend that the Austerity package does work without the collapse of the Euro banks and the Greeks accept the fact that they need to move onto a lower pay structure. Once the debt is cleared away Greece will suddenly appear as modern stable well educated economy with a low wage base that is extremely attractive to international companies. Under these conditions they may even become a net exporter into Europe.

Does anyone think that this will be acceptable to the French or the Germans ?

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  1. ScottS

    Thanks, DE. Fantastic write-up. I really think you put your finger on the crux of the issue — it’s a plan to depress wages, and more to the point, living standards, in a “first world” country.

    We’re seeing that movie over here in America.

  2. sgt_doom

    Gosh, I love moussaka, and gyros sandwhiches.

    Many, those Greeks know their cooking. Ital, Greek and Japanese food rules the day.

    Had to touch upon the really important subjects today.

  3. KnotRP

    Monetizing future profits and stripping them (via paychecks, fees, and bonuses) under the canard that future effort can some how be “well done” (a future act scored with a past tense, for the purpose of *taking what has yet to be made, and thus earned* in the present tense) always produces a future where there is nothing *productive* (renumerative) left to do, because the profits were extracted in the past, but the effort still remains to be done. This is why a depression feels so strange: there is plenty of labor available to exert effort, but the profit to drive the effort is missing (having been taken already in the past).

    We’re in for a multi-year economic dead zone….

    1. MyLessThanPrimeBeef

      Multi-year economic dead zone…

      My theory on pain is that the total amount of pain suffered equals pain magnitude times pain duration times pain area.

      For the math inclined, it can be written like this:

      Total Pain = Pain Magnitude x Pain Duration x Pain Area,

      or for those who like abbreviations,

      TP = PM x PD x PA.

      (by the way, I call this the First Equation of Pain).

      What happened here is that by reducing the pain magnitude, we increase pain duration and possibly pain area as well to such an extent that the total pain is larger.

      Normally, a child prefers a smaller magnitude pain, but as chronically illed adults will tell you, the low-magnitude long duration turtle-type (vs. hare-type) pain is much more painful.

      So, it seems, our hope is to have more adults in charge and brace ourselves for a quick, sharp pain.

  4. Maju

    Europe (and specially Greece) is set for a revolution, there is no other solution even if it may take some time to gather momentum (5 years? ten?) because people is still hoping for the Capitalist system to deliver after “the troubles”, as it did in the past for maybe some 70 years now, a whole lifespan!

    A fear is that some may look to fascism as a pseudo-solution, blaming immigrants and such as scapegoat, but in any case the scene is set for a political and social explosion of some sort.

    This won’t be a bourgeois revolution like the one that is shattering the Arab World, it will be a workers’ revolution because Europe had its bourgeois revolutions long ago and it is precisely these bourgeois systems which are failing now in a way that is outrageously exploitative, revealing of the real ugly and ultra-violent nature of the system, circumstance under which the mask of formal democracy will collapse, no doubt.

  5. Jimbo

    Great Post. I’ve picked up so much intl. economics, especially the technical equations, on Naked Capitalism.

  6. In Hell's Kitchen (NYC)

    Greece has an extensive “under the table economy.” It will
    weather this storm like it weathered the Nazis and the

    Let’s not forget: when the ancestors of today’s Greeks were
    building the Parthenon the ancestors of those who today call
    themselves “the West” were climbing up trees to eat acorns.

    OPA !

    1. Maju

      “The Mongols” in Greece? Please! You must mean the Turks, I guess.

      The B-book economy is of no use to workers (whose income is usually very tightly controlled) nor the state (whose taxation is dependent only or mostly on legal and transparent economic flows). Black economy almost only benefits maverick businesspeople, such as drug dealers, weapon and human traffickers, etc. This is no way to build a “Germany” but a “Somalia”.

  7. Procopius

    It seems we’re going to see why Marx made his criticisms of capitlism. Clearly he was right about one thing — capitalism requires an army of unemployed persons to keep wages depressed to the starvation level and they’re working on getting there. Actually, this was easily foreseeable. This is what happened all through the second half of the twentieth century, everywhere the IMF went. This is what happened in South America and Asia EVERY SINGLE TIME the IMF was allowed to impose their policies. Their policies have always been so obviously wrong for the problems they are used on that I’ve never understood how people who are supposed to be very smart could fail to see the harm they do.

  8. Alessandro Barbero

    The actual political system of Greece is not democracy, it is basically a sociocommunistic state regulated dictatorship.
    The people who vote in political elections and reelect the same political parties over and over again composed mainly by 1 million public servants and the 1,2-1,5 million people who work in closed services in private sector highly regulated by the state.
    Now by taking under concern also the families of those highly privileged working classes, the number of voters can easily reach 4-5 million people out of 10 million people of the total population of Greece, excluding the wealthy Greek classes (privileged with monopolistic markets), the older people (due to health issues they cannot vote) and young generations (under aged to vote) .
    So the democracy in Greece is highly regulated by the state and politically the system in Greece comes very close to political systems like in Libya, Egypt, Korea etc.
    In Greece there are only approximately 2-3 million people, Greeks and foreigners, who basically have no rights and they straggle to make a living in private sector and these people must also produce enough wealth in order to compensate the economic losses from the public sector and the highly regulated private sector. Of course this is impossible and for that reason Greece is in dept of 150% of GDP and this not by not taking the actual Greek GDP which can make the dept more than 200%.
    Greece historically can be analyzed as another political example that when governments have the tendency of ruling and not managing the economy of the county in the name of <> and another sociocommunistic ideas, the form of government from democratic becomes dictatorial.

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