Marshall Auerback: “Extend and Pretend” Continues in the Euro Zone

By Marshall Auerback, a portfolio strategist and hedge fund manager. Cross posted from New Deal 2.0.

Markets are celebrating the triumph of an anti-labor, pro-capital agenda. But is social unrest the consequence?

The Europeans genuinely must genuinely believe that they can get blood out of a stone. Or perhaps resort to a modern day equivalent of turning lead into gold. There’s no other reason to explain the euphoria now prevalent in the markets, in light of the approval by Greece’s lawmakers to pass a key austerity bill, thereby paving the way for the country to get its next bailout loans that will prevent it from defaulting next month.

The €28 billion ($40 billion), five-year package of spending cuts and tax rises was backed by a majority of the 300-member parliament on Wednesday, including Socialist deputy Alexandros Athanassiadis, who had previously vowed to vote against. The European Union and International Monetary Fund had demanded the austerity measures pass before they approve the release of a €12 billion loan installment from last year’s rescue package.

So default is averted for now, which is clearly the main reason behind the global equity rally seen over the past few days. But will the package work? Here’s a look at the details of the Greek Medium Term Fiscal Bill.

The projections for Real GDP Growth are:

2012: 0.8%
2013: 2.1%
2014: 2.1%
2015: 2.7%

The projections for expenditures (bn euros) are:

2012: 79.491
2013: 83.467
2014: 83.363
2015: 85.39

GDP growth rising in the midst of fiscal austerity? How is this possible? Everyone knows the current planned financing of Greece is a band aid. With this new financing, Greece’s sovereign debt to GDP ratio will rise to almost 170%. It will be more bust than ever. Its real GDP may fall by another 4%. Social tolerance for such austerity — already strained — will become less. If that wasn’t evident before, it should have been today, given the sight of various reporters in front of the Greek Parliament wearing tear gas masks as they reported on the “success” of the Greek austerity vote.

Can the package passed today deliver increased revenues? The Greeks apparently think so, if one is to judge by the budget projections.

Actual projections of revenues:

2012: 60.959
2013: 62.454
2014: 63.192
2015: 64.924

Now, to be fair, much of the problem is an antiquated revenue system that supports that state, which results in a budget shortfall consistently about 10% of GDP. Greek economist George Stathakis, for example, has suggested that that the top 20% of the income distribution in Greece pay no taxes at all, which may somewhat of an exaggeration but, if only partially true, suggests that a modicum of tax compliance could perhaps generate an increase in revenues in spite of the austerity measures being introduced.

Perhaps. But it’s hard to see how the EU’s attempt to squeeze more blood out of the Greeks will generate increases of revenue of this magnitude. If one examines the Medium-Term Fiscal Strategy submitted to Parliament on June 8th 2011, it appears that the Greek authorities are basically banking on is a big rise in private consumption and investment by 2013 (both of which are negative contributors to GDP today) to reduce their deficit, even as government consumption continues to decline. So they are essentially assuming a “fiscal consolidation boom”, even though there has been no historical precedent of the kind to justify this kind of a forecast. The Canadian example does not fit because it was accompanied by a huge depreciation of the Canadian dollar, thereby generating a huge turn in Canada’s current account and largely offsetting the impact of the budget cuts. As a member of the euro zone, this option is unavailable to the Greeks.

The short term hope must therefore be ongoing debt restructuring, continued ECB purchases of Greek debt in the secondary market (allowing central banks to buy the debt), guarantees, and lending. The hope is that the financial institutions holding all the periphery government debt can either move it off their balance sheets, or use the American method of “extend and pretend” to avoid recognizing the institutions are fundamentally insolvent.

Short of a fiscal union (which is the ultimate solution to the woes of the euro zone), there are other measures which the Greeks could adopt to make their bonds more attractive to external investors, thereby preventing the markets “shutting the country down” on the grounds that they refuse to extend further credit to a fundamentally insolvent country. Warren Mosler and I have suggested one such alternative: Greece could successfully issue and place new debt at low interest rates. The trick is to insert a provision stating that in the event of default, the bearer on demand can use those defaulted securities to pay Greek government taxes. This makes it immediately obvious to investors that those new securities are ‘money good’ and will ultimately redeem for face value for as long as the Greek government levies and enforces taxes. This would not only allow Greece to fund itself at low interest rates, but it would also serve as an example for the rest of the euro zone, and thereby ease the funding pressures on the entire region.

This suggestion, of course, does not deal with the problem of aggregate demand. But it provides an attractive instrument for the Greek government (and other periphery states) to secure private funding and possibly at lower rates of interest. The bigger issue of aggregate demand, however, is still yet to be addressed, and it is hard to envisage a sustainable recovery in Greece, or, indeed, the entire euro zone, without changes to its institutional structures. Of particular concern is the absence of a fiscal authority which would allow the ECB to stick to monetary policy while giving a European Treasury the purse strings to deal with the crisis.

Opposition to a broader fiscal authority, however, is mounting in the core as the crisis has increased hostility among the members. No one wants to cede power to the center. This opposition also reflects the fact that the third convergence — between elite and public opinion — has also failed to take place. But it also reflects a failure to understand the institutional limitations at the heart of the euro zone. In fact, having lost monetary sovereignty by adopting the euro, core countries such as Germany have more to gain by stabilizing their respective domestic economies by running large deficits during a downturn and boosting consumption, rather than deflating countries like Greece into the ground. That approach is ultimately self-defeating for the prosperous core countries. As Randy Wray has argued:

If the blood-letting and crushing of wages in the periphery actually does work, the factories will be moved out of Germany seeking lower cost workers. In other words, success in the periphery would shift the burden back to Germany’s workers, who would have to accept lower wages to compete. That will be fueled by job losses if Germany cannot find sales outside the EU that will be lost as the periphery nations fall farther into depression. The result will be a nice little rush to the bottom, benefiting Europe’s elite.

Implicit in the drive to create a Germanic style “stability culture” is the belief that public debt is invariably an evil, the consequences of which must be stopped at all costs. But as events of the past decade have clearly demonstrated, excessive private sector debt build-up, notably in Asia and the United States, has played a far more destabilizing role in the global economy than fiscal profligacy, which undercuts one of the main rationales for retaining the Stability Pact in its current form.

If we say that the government can run budget surpluses for 15 years, what we are ignoring is that this means the private sector will have to run deficits for 15 years. The private sector, in this case, would be going into debt that totals trillions of dollars in order to allow the government to retire its debt. Does that make sense? Again, it is hard to see why households would be better off if they owed more debt, just so that the government would owe them less.

The Eurocrats, led by the ECB, are now using this crisis to ram through their vision of Europe, which is fundamentally anti-labor and pro capital. That explains why the markets are celebrating today. But it lays the groundwork for more hostility and conflict in the future.

Wasn’t this precisely what the European Union was designed to prevent?

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  1. Hugh

    “The short term hope must therefore be…” There is no short term hope. Kleptocrats do not fix. They do not resolve. We are just shifting into a new phase of the looting. And as we are seeing, it is not a sell off of the Greek commons per se and sticking Greeks with the bill to pay off their own and French and German kleptocratic elites. It is, as Auerback notes, using the sell off to push for the rollback of labor laws and dismantlement of the safety net.

    Kleptocrats have no brakes, no point when enough is enough, and they ease off. They will keep pushing until there is revolution, collapse, or both. And that’s not just a recipe for Greece. It applies generally. At this point in time, we are in a condition of huis clos, no exit. Reform is futile. Solutions are meaningless. Kleptocrats have no interest in them because they do not promote looting. They are like the scorpion on the back of the frog. It is their nature. The question we all must ask ourselves is if we are going to let them destroy us along with themselves. Because this is not going to stop or get better until we revolt.

    1. Doug Terpstra

      Very clearly distilled, Hugh. The Kübler-Ross model, the five stages of grief —denial, anger, bargaining, depression, acceptance— may apply to our present systemically-terminal condition. The cancer has metastasized, but many are still in denial. For the rest of us, perhaps it’s time to get past the anger and depression, move on to acceptance, that this current system is doomed, and work toward that end. The good news, in this case at least: there is life after death.

      Charles Hugh Smith has a follow-up to the article “Greece is a Kleptocracy” with “The US is a Kleptocracy, Too”. Key points:

      1. Neither party has any interest in limiting the banking/financial cartel.

      2. Our stock markets are dominated by insiders.

      3. The rule of law in the U.S. has been divided into two branches: one in name only for the financial Elites and corporate cartels, and one for the rest of us mere citizens.

      4. Just as in Greece, taxes are optional for the nation’s financial Elites.

    2. Cynthia

      As long as greed and fear rule over us, the jacketboot of austerity will continue its march around the globe. Globalization acting as a vector for austerity is turning democracy into a mirage and voting into a reflection of this mirage. And as globalization acquires more and more characteristics of a black hole, the more warped and delusional it becomes. The only way to prevent ourselves from being warped and deluded to death by globalization is to explode into a supernova, unleashing the power of locality.

  2. mannfm11

    I get some of this, but why would anyone take a lower interest rate in return for debt that is subject to default? The reasoning of putting out money that can be used to pay Greek taxes for bonds that upon default can be used to pay Greek taxes makes no sense. You can spend your money anywhere, while you have to find a market for something that can only be given to a government.

    The big deal is the structure of social insurance is falling apart. One part of social insurance is guaranteeing debt, as in the debts of bankers. The paradox of banking is that bankers are liable for the performance of their assets, lest they fail in making good their liabilities. We have arrived at this position by prolific spending by government and repeated inflations. Deflation is coming, even if it has to come from the total collapse of the value of all paper, especially if governments chose to pretend they can continue to spend what they don’t have.

    What is really going on is the establishment around the world is afraid to tell people they are broke. I mean rich people and people not so rich. I think a dose of government spending would work in the reverse order of how it has been done, to clear the debts first then stimulate. But, what is going on now isn’t much different than giving a extremely loaded heroin junkie another shot of dope. Socialists use the broke window theory, as in world war II, but people weren’t broke themselves, nor were the corporations when world war II ended. Today, the world is floated on debt that can’t be paid and is expanding at a rate that it will eventually be nothing more than a pure Ponzi scheme.

    1. Jose

      “The reasoning of putting out money that can be used to pay Greek taxes for bonds that upon default can be used to pay Greek taxes makes no sense”.

      It makes the following sense:

      I buy 100 euros of one-year Greek debt at, say, 10% interest.

      If this debt becomes a means for payment of Greek taxes, at the end of the year I will have 110 euros available to pay taxes to the Greek State, come what may.

      So default risk on Greek debt has been eliminated – both the principal and the interest are now risk-free.

      Knowing this, investors will be willing to lend to the Greek State at much lower interest rates than before.

      1. Dan Duncan

        This is absurd. Auerback’s proposal only makes sense if investors already have so much income in Greece that the amount they owe in taxes would equal the debt issuance plus interest. Then, if there’s default, they could simply use the investment plus interest as a tax credit to offset money you would have otherwise owed in taxes. It only makes sense if private enterprise is making such a sh*tload of income in Greece that they owe a sh*tload in taxes…and thus, would find Auerback’s tax credit worth the risk.

        Considering that you have an economy on the verge of collapse, in dire need of a debt “lifeline”, it’s a joke of proposal.

        The fact that Auerback puts it out there as if it’s a solution to the crisis is laughable.

        1. Jose

          “This is absurd.”

          Again, no and no – this is one of the best proposals ever presented in order to solve the crisis of the euro.

          It’s in fact equivalent to giving back monetary sovereignty to the euro zone member countries.

          If I’m a resident of Greece – say, one of the 10 million inhabitants of the country – I’ll be pleased to invest in interest-bearing, risk-free government debt in order to pay my taxes.

          And every seller of goods and services in the country – every Greek entrepreneur or firm – will be glad to accept Greek public bonds as a form of payment, since he or she will be able to use said bonds in order to pay inescapable taxes. After all, if one does not pay taxes, one may end up in prison.

          So Greece will again have monetary sovereignty. Public debt bonds will become a form of money. In fact, a parallel, Greek “euro”. And citizens will thereafter be ready to lend to the Greek State at very low interest rates.

          This is a truly great, revolutionary proposal for helping solve the structural crisis of the eurozone.

          And of course, being such a lucid, clever proposal, it stands an almost 0% chance of being considered, accepted or implemented by those who hold effective power in the EU.

          Except if the population and organized political movements can build up real pressure on those powers – demanding that they immediately implement this proposal.

          It should be clear, however, that the present apolitical, aimless protest movements of the Greek and Spanish “streets” will be unable to help achieve a way out of austerity unless they start demanding practical measures such as the present one.

        2. Chester Genghis

          No. As I understand the proposal, as long as the Greek government levies and collects taxes, there will be a market for tax credits. The defaulted security could always be sold as, in effect, as a tax credit.

          In practice, the tax credit provision would provide inherent value so it could remain broadly marketable (i.e. it could be sold to any other investor –not necessarily to someone with tax liability in Greece).

          1. Jose


            Greek public debt would become a form of parallel money, coexisting alongside the official euro.

          2. Dan Duncan

            You and Jose are missing the point. You’re not taking into account that taxes are only a percentage of income.

            So…assuming Auerbach’s plan was in effect and that the standard tax rate in Greece is 25%….

            According to your logic, the investment in Greek bonds would be without risk…since if there was default, the money owed to the investor could essentially be substituted as a tax credit.

            OK, fine.

            BUT a tax credit is only a dollar for dollar win for the aggrieved investor IF said investor makes so much money in Greece, (remember) that he would owe so much in taxes that there would be a dollar for dollar offset.

            If an investor buys 10 million Euros worth of Greek bonds, and there is a subsequent default, the investor is only made whole if investor has 40 million in income that is taxed at 25%, leaving 10 million to owed to the Greek taxing authority….Hence 10 million is owed and 10 million is offset by the default.

            The ratio of income accrued to debt required needs to be 4 to 1.

            Yes, there will be a market for the tax credits. But there just isn’t nearly hat much money being made in Greece.

            There could be carry forwards, etc…but again, this is a risk that there will be enough income in the future.

            The Auerback plan isn’t without merit. There is some benefit here. But calling it a solution is at best a dishonest oversell, and at worst, it’s pathetically delusional.

          3. Dan Duncan

            Sorry for the multiple posts….

            As for the market for tax credits, in the event of a default,there would literally be a deluge of these credits up for sale. The investor is not going to be reimbursed euro for euro on these. There is not enough income being made in Greece. No way.

            It’s typical Keynesian nonsense, promoting another moral hazard: This plan only works if there is no default. But the plan only comes into effect, if there is a default.

            And if there is a default?

            “We didn’t anticipate that. We thought for sure that our gimmick ‘protecting against default’ would be the thing that would ultimately protect against default. Since there is actually a default…well, our plan doesn’t work for that.”

  3. whoever

    it lays the end of the project. no social project can succeed if run by brainwashed, semi-brainless business cocksuckers. the history is full with deadly examples.

  4. RueTheDay

    I wrote about this the week before last.

    There is simply no way this plan will work. It requires both ahistorical economic growth rates (unlikely given the austerity package) and a dramatic fall in interest rates.

    I share your confusion over why the markets have reacted so positively to this. It buys Greece a couple of months, at which time the next deal will probably buy them a year at most. In addition to just being a delay mechanism, it leaves them wide open to be broadsided by an unexpected shock in the interim.

  5. LRT

    We start with a cost. This is the cost of borrowing and spending more than you can afford.

    Greece is going to have to pay this cost. One way is to default, which is not cost free. Another way is austerity, which is not cost free either.

    The situation is not anti labor or pro capital or any of those stupid things. All that is happening is that chickens are coming home to roost. One way or another, Greece is going to pay.

    1. Hugh

      “One way or another, Greece is going to pay.”

      I second Just Tired comment, which Greeks? Most of this money ended up in the hands of Greek kleptocrats who are now trying to dump this mess on to ordinary Greeks. The Socialist government in Greece happily went along with this plan. In doing so, they betrayed the Greek people. Everyone of them doesn’t just deserve to be thrown out of office. They belong in prison, for a very long time.

      I would add that the same dynamic is at work in France and Germany. The French and German kleptocratic elites will dump this mess on to their governments if it all goes south, and that will mean on to ordinary French and Germans.

      If there is a pass through effect to American institutions, then it will happen here as well.

      The kleptocratic strategy at this point is to keep the periphery countries in play as long as possible, but revolution in any of them could effectively stymie this plan. The question then is if it would be enough to blow the system up. We have all been watching Greece. The kleptocrats have been beating up on it because they feel that it is small enough that they can, and get away with it. But each of these episodes puts pressure on bigger countries in a similar situation, most notably Spain. So it isn’t just Greece but Greece’s potential effect on Spain and Spain’s effect on everything else that could blow up Europe, and the world economy as well.

    2. F. Beard

      One way is to default, which is not cost free. LRT

      What cost? Greece should have its own currency and not borrow anyway. So why not clean the slate first?

      1. LRT

        Greece should default. And after it defaults, it will not borrow, because no-one will lend to it, so your prescription will be realized. Why it will have a cost is simple: it will discover that it can embark on no long term large government funded developments. The budget is going to have to balance yearly. Its going to be running a cash box economy. Want to build a railroad? Tough. No way to raise the money. Roads also.

        This is privatization. The private sector will be able to float bonds, if the companies are credible, if the borrowing is in foreign currency.

        It will be a different Greece. It will be back to the fifties. I agree there is little alternative, but do not think it does not have a cost. A reasonably run economy would be in the position where sensible levels of borrowing to fund legitimate long lived government financed projects would be possible. The cost of the mismanagement is that ability will vanish for a generation.

        1. Nathanael


          You want to build a railroad? You only need enough money to import iron ore, and maybe the raw materials for dynamite. (Greece has coal, it has the ingredients for concrete.)

          There’s plenty of labor and there’s enough expertise. You build steel mills (using the unemployed), you run them (using the unemployed), you design them, you send out construction teams, you build them.

          Money is not relevant. Money is an illusion. Is Greece self-sufficient on food? If so, you have something to pay the railroad workers with. (If not, you *do* have a problem.)

  6. RueTheDay

    Under the complex French plan, banks agreed to roll over 70 percent of their Greek bonds falling due from July 2011 to June 2014, while pocketing the remaining 30 percent for themselves. Of the amount to be rolled over, just over two-thirds would be reinvested in new Greek securities with a maturity of 30 years that paid a coupon close to the current official interest rate on the loans to Greece.

    The remaining securities, just under one-third, would be invested in a separate “guarantee fund,” consisting of zero-coupon bonds with triple-A ratings.

    How on earth is this not a “credit event”? Will the ratings agencies accept this as “voluntary”?

    Exchanging maturing shorter term bonds for long term bonds with a coupon of ~5% when the market YTM on 30 year Greek sovereign bonds is currently ~12%? Accepting partial redemptions in third party AAA-rated zero coupons instead of cash?

    What a joke.

  7. F. Beard

    Implicit in the drive to create a Germanic style “stability culture” is the belief that public debt is invariably an evil, the consequences of which must be stopped at all costs. Marshall Auerback

    Public debt is invariably evil. Why should a sovereign government borrow money when it has the right to issue it debt and interest free?

    1. Nathanael

      There are two reasons:
      (1) Ability to easily “call in” and repay debt, so as to reduce the money supply very fast to shut down bubbles, which is not so easy with US Note style issued currency. Applies only to very short term T-bill type things, as longer-term bonds can’t be called in quickly.
      (2) Providing a safe savings mechanism for the conservative (in the nonpolitical sense) citizen — like the Post Office Bank of late Victorian England.

      Of course, the majority of government debt is not operated for either purpose (1) or purpose (2). So I fundamentally agree with you; the Treasury should be issuing US Notes in large numbers instead of screwing around with the Federal Reserve.

  8. Rodger Malcolm Mitchell

    Of course, Mr. Auerback is correct. I believe the euro zone is stuck in one of those hopeless situations, whereby they invented an “Edsel” and now will do everything possible to preserve it, rather than admitting it’s garbage and throwing it out.

    The euro was faulty from the onset. It forced nations to surrender the single most valuable asset any nation can have: Monetary Sovereignty. Six years ago, I predicted exactly what is happening now (UMKC speech).

    Those who refuse to understand the differences between Monetary Sovereignty and monetary non-sovereignty, simply do not understand economics. No amount of tweaking will save this mess.

    Rodger Malcolm Mitchell

  9. Seth

    You ask: “But it lays the groundwork for more hostility and conflict in the future. Wasn’t this precisely what the European Union was designed to prevent?”

    No. The European Union was designed to prevent hostility and conflict between nations. You know, the kind of conflict that gets the capitalists’ factories and other assets blown up. It was never designed to prevent conflict between citizens and jackboots.

    1. whoever

      Well, tell it to the jackboots who pull the ideological strings of the EU politicians.

    2. /L

      Of course and there is also a myth that it was an independent European move to counteract the new empire’s imperialism, aka corporate America expanding globally. It was easier for the new empire to exercise its influence in one entity than a dozen and keep those [that] old global colonial powers at check. Nato, OEEC, OECD, EEC, Euroatom and so on is parts in this web. Already “Will” Clayton wanted to have an economic federation in Europe as a demand for Marshall Money. Fixed exchange rates was also one of Claytons’ demands, the new empires business interests wanted predictability in the European market.

      Dean Acheson claims that the Schuman Declaration came as an surprise to him a few days before it was declared in public when he was visiting France, hard to believe that a few European elites had worked it out in total secrecy without US approval. A few days later when it was announced Acheson was in UK on conference with the British Labour leader Bevin, Bevin didn’t know nothing and was pissed off and accused Acheson and Schuman to have conspired to keep the British out of the loop and that Acheson had been in Paris to give the plan its final approval before the British did know anything. It also cleared the way to fully integrate Germany in Nato.

      The American Committee on United Europe (ACUE), founded in 1948, was an American organization which sought to counter the Communist threat in Europe by promoting European political integration. Its first chairman was ex-wartime OSS head, William Joseph Donovan.
      Declassified American government documents have shown that the ACUE was an important early funder of both the European Movement and the European Youth Campaign. The ACUE itself received funding from the Rockefeller and Ford foundations.
      The U.S. policy was to promote a United States of Europe, and to this end the committee was used to discretely funnel CIA funds – by the mid 50’s ACUE was receiving roughly $1,000,000 USD per year – to European pro-federalists supporting such organizations as the Council of Europe, the European Coal and Steel Community, and the proposed European Defence Community.

      ACUE vice chairman was Allan Dulles, in short CIA money was an important part in creating what is now EU.

      Characteristics of a protectorate is that they in large get to manage their internal business by them self while protecting power take care of foreign relations. The decades in the beginning the European nations did belief they was almost sovereign entity but as we have seen not least the last decade if the empire ask them to jump they immediately ask how high.

      It was a despicable sight to see after 911 how the heads of states rushed to the first available flight means to throw them self at the feet’s of the boy emperor and swear their allegiance. 911 was indeed a major event/disaster in many ways.

      To turn from the nation states of Europe to the peoples Europe we must first be in agreement to repudiate the lackeys Europe.
      French socialist leader André Philip 1965

  10. /L

    It’s Herman Brüning all over again in Europe and we know how well that experiment unfolded after Brüning had stamped out the last breath of the German economy. The sad thing is that there seems not to be any common sense in America this time, Obama sounds like a copy of Brüning.

  11. Jose

    @Dan Duncan:

    In fact, tax rates in eurozone countries are more like 40% of income.

    The Auerback plan would effectively eliminate default risk from Greek public debt. The Greek State will always have taxing powers – so, people who owe taxes in Greece will always be willing to invest in Greek debt without requiring a risk premium.

    As for “Keynesian nonsense”, let us agree to avoid labels in what has been up to now a very useful and productive discussion, ok?

    Throwing labels around is simply not helpful. Terms like “Keynesian”, Hayekian” or “Austrian” are just a sad reminder that economics is still far from being an exact science. Remember, there is no “Einsteinian” or “Planckian” Physics. Just Physics, tout court.

    The Mosler-Auerback proposal could really become a rallying starting point toward a possible solution for the euro crisis. It’s thus preferable to evaluate it on its own merits, while keeping out of the usual ideological traps.

    1. LRT

      It would not eliminate default risk from Greek debt, it would encounter the exact same problem that Greek debt has today. If you are able to evade taxes, why buy bonds that can be used to pay them? What is the point?

      This is not an accounting problem. This is a management problem. The problem is that there is widespread tax evasion coupled with excessive borrowing to finance the expenses that should have been funded from taxation. If you don’t collect taxes, you of course cannot spend the money. Whether you borrow it or not.

  12. carol


    In 1 and the same article you write:

    “… the top 20% of the income distribution in Greece pay no taxes at all, ….”

    and also

    “Short of a fiscal union (which is the ultimate solution to the woes of the euro zone), …”

    Could you please clarify why a fiscal union for 17 countries on the european continent is OK, whereas a fiscal union for 1 country (in this case Greece) is not OK?

    In addition, why do you call tax transfer from tax payers in the northern countries of the european continent to income tax evading, VAT evading, and wealth tax evading people in the southern countries of the european continent ‘the ultimate solution’?

    Can injustice ever be an ‘ultimate solution’?

  13. FGR

    “If we say that the government can run budget surpluses for 15 years, what we are ignoring is that this means the private sector will have to run deficits for 15 years. The private sector, in this case, would be going into debt that totals trillions of dollars in order to allow the government to retire its debt. Does that make sense? Again, it is hard to see why households would be better off if they owed more debt, just so that the government would owe them less.”

    this is nonsense, and faulty reasoning by focusing on some accounting “math” formula.

    if govt retires its debt, then there would just be less financial assets to invest in, and more money would just be sitting as bank deposits and ultimately as reserve in the CB. interests rate would go down, and then MAYBE entice more private borrowing

    with less govt borrowing, that means less monetary manipulation (QE and co), and a more sound currency. and mainly less taxation, which is a burden on households especially (because we already cut the taxes so much on companies and capital…)

    1. F. Beard

      if govt retires its debt, then there would just be less financial assets to invest in, and more money would just be sitting as bank deposits and ultimately as reserve in the CB. FGR

      That would be true if the government used new, debt-free money (Greenbacks) to pay off the debt. Otherwise, money would just be transferred from the bank accounts of taxpayers to the bank accounts of bond holders. Furthermore, any money owed to the Fed would just go back to where it came from, thin-air, if it was repaid.

      interests rate would go down, and then MAYBE entice more private borrowing FGR

      Interest rates are already low but banks are afraid to lend because we are in a depression.

      1. FGR

        sorry F.Beard, i dont see your point.
        ok indeed there is a transfer of money from taxpayers to bondholders (all in the private sector, thats the whole point. so what ? quantity of money doesnt have to decline in that process. money which cant be invested in bonds, will just sit idle in some bank account. from a monetary point of view, one could even argue that money would be used for discretionary spending, and thus actually be a stimulus. quantity of money is unchanged, but velocity would be increasing.

        the ordinary mantra being is that tax cuts are stimulative and tax hikes punitive. but thats too simple an analysis. there is now a lot of empirical evidence that in the balance sheet recession, QE scheme etc… that the velocity of money is collapsing (making all the classic theory wrong), and very logically if (govt) debt is cut heavily, i wouldnt be surprised to see velocity of money increasing !

        1. Nathanael

          The fundamental problem — and the one that very, very few people have been willing to talk about — is that high inequality is a massive drag on the economy.

          This isn’t even controversial. Everyone knows that poor people spend a larger percentage of their income than rich people; that poor people are often income-constrained, and rich people aren’t. Most people, except for supply-side lunatics, know that the majority of the economy is demand-driven.

          This means that if you take the same amount of money, and transfer it from a poor person to a rich person, you have just reduced the total amount of spending in the economy and because the economy is demand-driven you have just reduced economic activity.

          Transfers from taxpayers to bondholders practically always transfer money from the poor to the rich. Therefore they increase inequality, and *make the economic situation worse*.

          Now, if the transfer was financed by punitive (>100%, perhaps) taxes on the rich, and the bondholders were millions of poor individuals (via a Post Office Bank, perhaps), then the transfer would be a net positive for the economy.

          But in the current environment, where the bonds are held by the super-wealthy, and taxes are higher on the poor than on the rich (look it up!), printing Greenbacks (United States Notes) makes a hell of a lot more sense.

  14. Psychoanalystus

    I want to take this opportunity and thank our German and French friends for the new bailout. We really appreciate your generosity.

    But I sense a little acrimony on your behalf, so, my German and French friends, let’s make an agreement. How about if we agree that you will get back to assembling those cute little Volkswagens, Renaults, Airbusses, tanks, cluster bombs, or whatever you keep yourselves busy with these days. And you save lots and lots of Euros to bail out your little banks when the need arises. Of course, you may feel free to go around pretending that you are “first world developed and civilized nations”. It’s OK with us if you even call us lazy and corrupt every now and then, if that makes you feel better about yourselves.

    Meanwhile, while you do all that “developed, civilized, first world work”, I will just get back to my little insignificant life here, spend lots and lots of quality time with my wife, my kid, my extended family, meet up with my friends at our taverna for a glass of ouzo, maybe even another plate of moussaka, and, naturally, get ready for my siesta. Heck, this summer I might even apply for a loan from my friendly German bank so I can extend my swimming pool and buy another Japanese car. All that, if you don’t mind, of course.

    So remember, my German and French friends: make sure that you wake up at 5:30 AM, and keep your noses to the empire grindstone. You know the routine. I am sure your empires have at least 3 more years of life left in them… maybe even 5 if you get your hands on that Libyan oil. So keep building them empires, because you are building for eternity…

    I am sure that 100 years from now, when your Eiffel tower would have rusted away, people will still remember Voltaire, Descartes, and, with a little bit of luck and effort, maybe even Kant and Nietzche. After all, don’t people still remember Plato and Aristotle 2300 years later? Finally, take heart, my German and French friends, because I am sure that 200 years from now the millions upon millions of rich first-world, civilized, and fully developed Chinese, Indian, Brazilian, and Russian tourists visiting Athens will be quoting Goethe, as they marvel at the once German-privatized Acropolis…


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