Bill Black: New York Times Reporters Embrace the Berlin Consensus and Ignore Krugman and Economics

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Yves here. Black does yeoman’s work in describing the bias in the New York Times’ Eurocrisis reporting.

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posted from New Economic Perspectives.

The New York Times’ coverage of the euro zone crisis continues to exhibit two related flaws. First, it is overwhelmingly written from the German perspective – the Berlin Consensus that is driving the crisis. Second, it continues to ignore economics. Paul Krugman, the NYT’s Nobel Laureate in economics, has been explaining the economics of the crisis for years in his weekly NYT column. We know that Berlin either doesn’t read or comprehend what Krugman has been trying to explain, but it is remarkable that so many of the NYT reporters covering the euro zone crisis share their failure to read or comprehend.

A recent example of this pattern is the May 8, 2012 article “German Patience with Greece on the Euro Wears Thin.”

The introductory paragraph establishes that the frame for the article is Berlin’s destructive and warped view of the euro zone crisis.

BERLIN — Just weeks ago, the idea that Greece would leave the euro zone was almost unthinkable. Now, with Greece’s newly empowered political parties refusing to abide by the terms of the country’s international loan agreement and Europe’s leaders talking tough, that outcome is looking increasingly likely.

We should begin with the title of the article. Germany has insisted that Greece follow austerity policies (the Berlin Consensus) that were certain to force Greece into depression. The Berlin Consensus has forced Greece into a depression. The German reaction to the economic catastrophe that it has forced on the Greek people is to be enraged that the Greek people in the recent election rebelled against their leaders who had given in to the German demands that the Greeks be forced into a depression. Greek patience with Germany’s destructive policies, its assaults on Greek sovereignty, and its constant, vitriolic insults of the Greek people has more than worn “thin.”

The Greeks are responding to the failed Berlin Consensus in a manner similar to Latin America’s revolt against the Washington Consensus. The Greek reaction, therefore, was not “almost unthinkable” – it was the typical response of a nation whose leaders caved in to a neoliberal assault on their economy and sovereignty. The NYT reporters get their analytics wrong because they studiously ignore the Greek perspective and refuse to even entertain the question of why anyone would expect a nation to accept being forced by a hostile foreign power into a great depression. As I have argued, the “Occupy” movement in the U.S. should stand in awe of Germany’s reoccupation of Greece. The Greeks have a bitter history of Greek quislings aiding Germany’s World War II occupation, so their rage at their recent leaders’ surrender to German demands is understandably intense.

The Greek reaction would be understandable if the NYT reporters bothered to consider the Greek perspective. Unfortunately, the reporters’ adoption of the German perspective leads them to emulate Berlin’s refusal to consider the Greek perspective. Instead, the reporters’ adopt the German framing of the issue. That framing is that the Greeks are inexplicably “refusing to abide by the terms of the country’s international loan agreement.” The idea that the Greek people should continue to take the Berlin elevator that has plunged their nation into a great depression because their disgraced leaders were coerced into agreeing to a deal that is destroying their nation is insane. Democracy is all about throwing out leaders who have disgraced themselves, crushed the nation’s economy, and cravenly taken orders from a hostile foreign power. The Greeks have done just that. Why would anyone expect the Greeks to continue to follow a suicidal economic policy imposed by Germany? Berlin and the NYT reporters share the bizarre belief that if your coerced leaders sign a suicide pact you have a duty to commit suicide because – a deal is a deal.

The reporters fail to ask why the Greeks object to the deal and why the consequences of the deal would be suicidal for Greece. Instead, they simply assume that Greece should continue a deal.

But the frustration with Greece here is undeniable. There is a growing conviction that it is up to Greece to follow through on its commitments, that Europe is done negotiating.

Germans are now predominantly of the opinion that they would be better off if Greece left the euro zone,’ said Carsten Hefeker, a professor of economics and an expert on the euro at the University of Siegen. ‘If the country really is continuing on the path they are taking now, it would be hard to justify keeping them in. How do you deal with a country that says we don’t want to keep any of the commitments we have made?’

Note the lack of any embarrassing questions by the reporters to Hefeker, who they describe as an expert in the euro. His premise is that if the Greeks refuse to continue to follow a suicidal austerity program mandated by Berlin, if instead they take “the path” of rejecting austerity “it would be hard to justify keeping them in [the euro].” We are back at one of the most disturbing aspects of the Berlin Consensus – the dogma that “there is no alternative” (TINA). Austerity during a recession, much less the great depression levels of unemployment Greece is suffering, deepens the depression and tears the nation apart. Berlin insists that its suicidal policies are the only alternative. Krugman (and many others, including UMKC economists) have been explaining for years why that view is economically illiterate.

The Berlin Consensus has forced the euro zone into recession and thrown the periphery into depression level unemployment. If the reporters had listened to economists they would have responded to Hefeker’s query by reformulating his question. His question invites a follow-up by the reporters: “How do you deal with a country that says we don’t want to keep any of the commitments we have made?” If the “commitments” are suicidal, then the way you deal with Greece’s refusal to commit suicide is to praise it and end the German diktats that have devastated Europe. If Chancellor Merkel gave into foreign coercion and signed an agreement that was suicidal for Germany and the German people threw her out of office through a democratic vote and repudiated the agreement, who believes that Hefeker would urge Germans to commit suicide on the grounds that a deal is deal?

The reporters then note the German praise for Spain’s conservative government because of “the government’s efforts to cut deficits in spite of a contracting economy.” Germany praises the quislings who give in to its coercion and cause their national economy to collapse into great depression levels of unemployment. Germany praises suicidal quislings, but it is venomous in its hate for the Greeks because they have thrown the quislings out of office.

Greece, on the other hand, is roundly criticized for lying about the true state of its finances again and again, before and after joining the euro zone, and its failure to take any of the numerous steps demanded by its creditors to modernize its economy and — a particularly sore point — its tax collections. Its status as a special case is underscored time and again.

I agree that Greece is a special case and that it has greater internal problems of its own making than other nations of the periphery. What isn’t special about Greece, however, is the insanity of Berlin’s demands for austerity in the midst of a recession or depression. Austerity has produced a crisis throughout the euro zone and it has caused a great depression in many nations of the periphery. Most euro zone nations have made false statements about the true state of the economy and budget deficit projections. The central reason the projections proved false is that Berlin insists that austerity will produce recovery, but it actually produces economic losses or even catastrophe. Berlin wants euro zone nations to create their budget deficit estimates on the assumption that austerity will spur economic growth. Using Berlin’s preferred means of projecting budgets deficits has caused virtually every euro zone nation to greatly underestimate the actual budget deficit.

When a nation such as Greece is forced into a great depression its tax revenues fall sharply and the need for public expenditures, e.g., for unemployment payments, grows. The result is that nations do not control their budget deficit. If they adopt austerity they may make the budget deficit even larger. If they raise taxes they reduce private sector demand and if they cut government programs they reduce public sector demand – both of which make the recession worse. My colleague Stephanie Kelton has been very strong in trying to get this basic fact across to the public and policy makers – nations do not control their budget deficits. Austerity does not lead to balancing the budget – it leads to recession and depression. If you hate budget deficits, you should realize that it is recessions that primarily drive budget deficits and that adopting austerity during a recession or the recovery from a recession is what leads to deeper recessions and severe depressions.

The reporters miss all of this (as does Berlin). The reporters then move to options, but the genius of TINA is that there are no options.

But the options are few and unpalatable. One possibility, analysts said, would be for the troika to pay Greece just enough to keep government services running, withholding the rest until the political situation clears up. In what some consider the most likely possibility, the creditors would agree to renegotiate the terms of the bailout and the new Greek government would go along.

But there is also the possibility that the troika will finally refuse to hand over any money whatsoever, something the I.M.F. did a decade ago in Argentina, when Buenos Aires failed to meet its bailout terms. If this happens, many experts say, Europe will be ready.

“Unpalatable” to who – and how did the purported unattractiveness of policy options come to be a “fact”? The reporters present these two paragraphs as facts – not Berlin’s dogma that is economically illiterate and has been falsified by the facts. If Germany stopped demanding austerity the euro zone would not be in recession and the periphery would not be continuing to descend into depression. If the euro zone followed policies to expand employment through increased public sector demand the results would be extraordinarily “palatable.” The German Consensus is catastrophically “unpalatable” – which is why it has consistently led to voter rejection of the quislings who have been coerced into giving in to Berlin’s austerity diktats.

It is unacceptable for reporters from the nation’s top paper to present statements like this as facts. The reporters’ statements about the alternatives are not simply contestable; they are contrary to observed reality and economics. It is deeply disturbing that the reporters covering the euro crisis have adopted the Berlin Consensus and become devotees of cult of austerity, but the newspaper has a duty to prevent them from presenting their dogma as fact.

If the NYT reporters read Krugman (or most any sentient macroeconomist) they will learn that austerity is not the only alternative – it is the worst alternative of those under consideration. If Germany and the European Central Bank (ECB) were to increase public spending Germany and the entire euro zone, indeed, the entire world would be better off. Pushing the euro zone into recession and the periphery into great depressions is terrible for every euro zone nation and imperils the global economic recovery.

The NYT reporters do note the alternative that Greece could withdraw from the suicide pact that Berlin insisted they sign and default on its debts. The article implies that the IMF taught Argentina a lesson when it refused to continue to adhere to the suicide pact the IMF had coerced disgraced Argentine leaders to accept. The implication is that the Argentine option is unpalatable because the IMF cut off of funding results in a disaster in Germany. The facts, however, are inconvenient. First, it was Argentina that told the IMF to go jump into their choice of the Atlantic or Pacific Ocean. Second, Argentina’s rejection of the austerity suicide pact worked brilliantly for Argentina and its people – and Argentina’s government has never been cited as an exemplar of good government.

It would be relevant to know why Argentina fell into a depression so severe that the IMF intervened and prescribed its universal snake oil – austerity. Argentina eventually rejected the IMF suicide pact and defaulted on its debt. Argentina was the purported star performer demonstrating the wisdom of the Washington Consensus. Timothy Geithner, in his IMF incarnation (where he was also a policy failure), approved a report entitled “Lessons from the Crisis in Argentina” dated October 8, 1993:

In 2001-02, Argentina experienced one of the worst economic crises in its history.

Output fell by about 20 percent over 3 years, inflation reignited, the government defaulted on its debt, the banking system was largely paralyzed….

The events of the crisis, which imposed major hardships on the people of Argentina, are all the more troubling in light of the country’s strong past performance. Less than five years earlier, Argentina had been widely hailed as a model of successful economic reform….

Argentina was widely considered a model reformer and was engaged in a succession of IMF-supported programs (some of which were precautionary) through much of the 1990s, when many of the vulnerabilities were building up.

Argentina followed the IMF’s Washington Consensus game plan, which plunged it into depression. The IMF told Argentina that a partial bailout and austerity was the answer to depression and the Argentine leaders were desperate enough to agree. I set out below the IMF’s description of what it sought to impose on Argentina. If you know enough to realize its similarity to the troika’s (EU, ECB, and IMF) demands on Greece you may wonder why the troika would repeat the IMF’s failed policies from a decade ago in Argentina. (Hint: recurrent failure is the IMF’s specialty. Failure, therefore, has never led the IMF to change its insistence one size fits all financial suicide pact. Actually, I am being too kind to the IMF. Geithner concluded that the IMF had made mistakes in dealing with Argentina – it had not been draconian enough in insisting on austerity, reduced national debt-to-GDP ratios, and reduced working class wages. As I said in my first column on this subject, citizens that have experienced the tender mercies of the Washington and Berlin Consensus develop a passionate hate of those policies.)

“The program sought to bolster the prospects for economic growth through gradual fiscal consolidation—an increase in the public sector primary surplus to 1½ percent of GDP from about ½ percent of GDP in 2000— with an overall deficit of about 3 percent of GDP—and various structural measures. The consolidation plan was formulated against the backdrop of a new fiscal pact with the provinces and envisaged improvements in tax enforcement. On the structural side, the program aimed at promoting private investment and competition in domestic markets through (inter alia) elimination of tax disincentives, continued implementation of already approved labor market reforms, and deregulation of key sectors….”

The alert reader will not be surprised that austerity did not produce an economic recovery in Argentina.

The attempts at strengthening the public finances failed, however, to break the cycle of rising interest rates, falling growth, and fiscal underperformance. Financial markets initially responded positively to the revised program, but already by mid-February, it became evident that the fiscal deficit was about to exceed the agreed ceiling for the first quarter. Moreover, following the resignation of the finance minister, his successor was forced out of office in less than two weeks as his planned budgetary cuts and reform measures failed to find the necessary political backing.

As always, austerity failed to deliver its promised economic benefits and produced a political backlash among the citizenry that realized that austerity was a suicide pact imposed by a hostile neo-colonial power.

Geithner predicted that Argentina’s default and anti-austerity response would make it extraordinarily difficult for Argentina to recover.

Looking forward, the country faces enormous challenges not only in restoring macroeconomic stability but also in re-establishing the pre-eminence of contracts, property rights and economic security that has been damaged by the government’s defaulting on its debt and reneging on its convertibility commitment. Damage both to the balance sheets and to the credibility of the banking system also needs to be repaired. While the devaluation has addressed immediate concerns about competitiveness, one troubling aspect of the performance of the Argentine economy was that, even during its boom years, 1991-98, unemployment remained persistently high, underscoring the need for reforms of the labor market and for other improvements in economic institutions and structures that foster a more dynamic private sector.

[T]here needs to be a fundamental rethinking of the role of the state—not least, in the relations between the federal government and the provinces, and the size and cost of the civil service—if expenditure is to be commensurate with revenues.

The IMF was writing about an Argentina in a severe recession, but Geithner’s report stressed that the IMF’s primary concern was the need to re-establish: “the pre-eminence of contracts, property rights and economic security….” “Reforms of the labor market” is code for cutting working class wages. The IMF answer to severe unemployment is to add to it by firing public workers. The needs of the Argentine people were not even tertiary to the IMF. The IMF, Washington, D.C., and Berlin are always amazed that the citizens of the nations they assault figure out that their welfare is irrelevant and become enraged at those that inflict the suicide pact.

Actually, the Geithner report did reach one sound conclusion. Unfortunately, Berlin has ignored it.

With regard to crisis resolution, the Argentine crisis illustrates the importance of timely debt restructuring in cases in which the debt dynamics have become irreversible. Once a debt restructuring has become unavoidable, measures to delay it are likely to raise the costs of the crisis and further complicate its resolution.

Berlin has mastered the art of forcing the periphery to twist slowly in the wind while being subjected to constant insults. Everyone suffers from Berlin’s passive aggressive assault on the periphery. Berlin, however, finds it politically and personally desirable to put a boot on the throat of the nations of the periphery and squeeze until quislings emerge to do Berlin’s bidding.

The 1993 Geithner report about Argentina reached another interesting conclusion that the IMF and Berlin failed to follow when dealing with the current crisis.

An important consideration that has to guide the Fund’s decision-making process and that was clearly underscored by the Argentine experience is that, in a situation in which the debt dynamics are clearly unsustainable, the IMF should not provide its financing. To the extent that such financing helps stave off a needed debt restructuring, it only compounds the ultimate cost of such a restructuring.

Greece’s “debt dynamics are clearly unsustainable” but the devotees of the cult of austerity are late to see this fact because they believe that austerity spurs economic growth. If austerity spurs economic growth then debt dynamics are rarely unsustainable. As the nation reduces spending the economy expands, which increases tax revenues, which allows the nation to achieve a budgetary surplus. Similarly, the IMF and Berlin assume that if a nation cuts working class wages during a recession it will increase exports and run a trade surplus that will provide funds it can use to pay down its sovereign debt. The IMF and Berlin do not understand that sharply reducing working class wages during a recession can cause already inadequate private sector demand to fall and deepen the recession. The result of believing in what Krugman aptly labels the “Confidence Fairy” is that it leads you to believe financial fairy tales in which austerity allows nations to recover from even severe debt crises – even when (like Argentina and the euro zone) they lack a true sovereign currency. This causes Berlin and the IMF to continuously fail to realize that debt has become unsustainable in nations that lack a sovereign currency. The Geithner report admits aspects of this problem.

Growth projections were a central element in the failure of many interested parties—including the authorities, the Fund, and market participants—to identify the vulnerabilities that were building up during the boom years of the 1990s. During that period, Argentina’s growth projections were based on what was, in hindsight, an overly favorable reading of the benefits of the structural reforms that had taken place and prospects that further reforms would be implemented. This experience calls for a careful and critical assessment of the links between structural reforms and growth, both in the context of work on individual countries and in cross-country analysis.

Sadly, it is impossible for the IMF or Berlin to undertake “a careful and critical assessment” of a core dogma. That is the nature of dogma. The result is recurrent error.

The IMF was relying on austerity to summon the “confidence fairy” and produce a miraculous Argentine recovery. David Rosnick and Mark Weisbrot of the Center for Economic and Policy Research (CEPR) authored an excellent report on Argentina (Political Forecasting? The IMF’s Flawed Growth Projections for Argentina and Venezuela) in April 2007.

‘The Argentine authorities were committed to fiscal tightening, including ‘a freeze on nominal primary spending at all levels of government, and by deepening the proposed reform of the social security system’ and the Fund staff expressed satisfaction. According to their report in the Second Review the staff insisted, ‘this strategy is appropriate, and deserves the increased financial support of the international community.’

On the basis of the optimistic projections for economic growth, the Fund pushed for deeper reforms including more fiscal tightening, privatization, and deregulation aimed at restoring market confidence. In January of 2001, First Deputy Managing Director Stanley Fischer stated, ‘Market reactions to the program and recent external developments have been positive: spreads on Argentine bonds and domestic interest rates have declined significantly in recent weeks and the stock market has rebounded strongly. These developments bode well for a recovery of confidence and economic activity in the period ahead.’

Even the IMF’s internal review found that the IMF took actions that could succeed only if confidence played a magic role. The confidence fairy, of course, never appeared.

In 2004, the IMF’s Independent Evaluation Office (IEO) would report on the Second Review declaring that the ‘[p]rogram design was highly optimistic’ based in large part on overly optimistic assumptions and inconsistent program projections. The IEO even pointed to a lack of ‘serious analysis of exchange rate sustainability.’ Subsequent decisions by the IMF to provide further loans in May and then September 2001, despite ‘increasing recognition that Argentina had an unsustainable debt profile, an unsustainable exchange rate peg, or both’ were made ‘on the basis of largely noneconomic considerations and in hopes of seeing a turnaround in market confidence and buying time.’

Once Argentina defaulted, the IMF expressed its desire to see the nation “suffer.”

In January, Stanley Fischer’s replacement, Anne Krueger, wrote in El Pais, ‘Defaults are always painful, for debtors and creditors alike. And so they should be. Countries – just like companies and individuals – should honor their debts and suffer when they fail to do so.’

What is clear is that the IMF did not approve of Argentina’s actions. Dawson expressly linked the lack of financial assistance to specific policy actions on the part of the Argentine government.

Before lending resumes, it is expected that Argentina will move to establish an internationally recognized insolvency regime and deal with the economic subversion law, which allows for arbitrary official actions against business. The authorities also must address the provincial governments’ spending and issuance of alternate “currencies.” To date, these and other necessary reforms have not been put in place, and so… no financial assistance has been offered.

‘The Fund is also concerned about the rule of law in Argentina,’ Dawson wrote. However, the very next day, the democratically elected President Hugo Chávez of Venezuela was overthrown in a military coup. On April 12, the day after the coup, Dawson noted that the IMF was already in Caracas to conduct an annual review. ‘And we hope that these discussions could continue with the new administration, and we stand ready to assist the new administration in whatever manner they find suitable.’ Chávez was returned to power a day later, after most Latin American governments refused to recognize the dictatorship, and after massive street protests by Venezuelans.

So what happened to Argentina after it defaulted, the IMF withdrew all aid, and Argentina adopted policies that Geithner claimed made its recovery extraordinarily unlikely? For the reasons I have explained, the IMF consistently overestimated how well the Argentine economy would perform under its Washington Consensus policies. “In Argentina, the IMF overestimated GDP growth for 2000, 2001, and 2002 by 2.3, 8.1, and 13.5 percentage points respectively.”

Once Argentina decided to default on its debt and break with the suicide pact demanded by the IMF, the IMF’s economic projection errors continued – but reversed their direction.

The direction of International Monetary Fund (IMF) forecasting errors was reversed after Argentina rejected the IMF suicide pact.

Argentina’s default on its public debt at the end of 2001, and the subsequent collapse of its currency. Then the IMF began underestimating the strength of Argentina’s economic recovery. As shown in Table 1, the WEO estimates for the four years 2003 through 2006 came in low by 7.8, 5.0, 5.2, and 4.3 percentage points respectively.

Argentina’s recovery, which Geithner had dismissed as next to impossible given its break with the policies mandated by the IMF suicide pact, proved extraordinary.

In December 2002, with the economy eight months into an economic recovery, the IMF staff wrote that “[f]inalizing an economic program that could be supported by the international community is an essential first step to putting Argentina on a path to recovery.” Even later, in April 2003, the IMF’s Director of Research called Argentina’s growth “a hiatus at the moment from its long economic fall.” Argentina has now completed a five year economic expansion with the fastest growth in the Western Hemisphere, with real GDP (adjusted for inflation) growth of 47 percent.

To sum it up, Argentina’s experience demonstrates one of the most palatable alternatives to Berlin’s insistence that the periphery accept a suicide pact of austerity-driven severe depression. The NYT reporters wrote about Argentina in a manner that deliberately gave the opposite impression.

The reporters end their article by channeling Berlin at is most arrogant.

Mr. Dieter said: “The mood in German government circles has become a little less enthusiastic, to put it mildly. Just last Friday, Finance Minister Wolfgang Schäuble said on the record that membership in the European Union is not compulsory, it’s voluntary, and Greek society has a choice.” He added, “I think this is a good reflection of the changing mood of German policy makers.”

“You can’t be a member of the club and disregard the rules,” he said.

Berlin’s way or the autobahn! The nations of the periphery cannot follow “the rules.” Berlin’s insistence that they do so has forced them into depression. No nation in the periphery should be trying to follow Berlin’s suicide pact. Euro zone nations cannot insure that they follow “the rules” and their attempt to do so is what has thrown the euro zone back into recession, has casued revenues to fall and expenses to rise, which has caused almost every euro zone nation to violate “the rules.” Again, a nation does not have the ability to simply make a “choice” as to whether it runs a budget surplus. Attempting to run a surplus can trigger and intensify recessions and cause enormous budget deficits. Germany and France have violated the oxymoronic “Growth and Stability Pact.” The Pact produces shrinking economies and economic crises. As the Pact threw the euro zone back into recession Berlin insisted on making the Pact more suicidal. Greece should withdraw from the euro, but the euro zone must abandon its worship of the failed austerity dogma and its endless wait for the confidence fairy.

Another team of NYT reporters wrote a slightly better article on May 8, 2012 about the financial crisis, but they too began from the TINA premise, as their title reveals: “Few Options if Europe Turns Away From Austerity.”

The authors acknowledge that austerity is counter-productive.

The situation in Europe represents a conundrum for investors who generally recognize that the cuts that have been made in recent months by countries like Italy, Spain and Greece have caused their economies to shrink.

That is a good start to an article and, logically, the admission should call for an urgent rejection of austerity. The reporters, however, do not seem to understand that a counter-productive policy cannot be the preferable policy. Instead, the reporters seem to imply that a counter-productive policy might be desirable.

‘It’s very easy to abandon austerity measures because they are painful things to do,’ said Otis Casey, the head of fixed-income research at Markit. ‘It is much tougher to figure out how to grow economies.’

Those statements are incoherent. It should in fact be “easy to abandon” a counter-productive policy like austerity. The use of the word “painful” causes the incoherence. Lancing a boil is painful, but essential to healing. The problem with austerity for nations that are in recession or seeking to recover from recessions is not that it is “painful”, but that it is counter-productive. That is why it represents the same kind of disastrous treatment as bleeding patients. The first thing to do when one finds oneself in a hole is to stop digging. So the first answer to the problem of recessions is to not make it worse by adopting austerity. It is not “much tougher to figure out” that counter-cyclical fiscal and monetary policies are superior. Economists have understood for over a half-century the desirability of creating automatic stabilizers. The Berlin Consensus has created automatic destabilizers via austerity.

The article then descends into total incoherence by embracing TINA.

Foreign investors, who are still an important source of funding for the French bond market, are closely watching to see whether Mr. Hollande hews more closely to his more strident campaign rhetoric or to an official platform that actually called for cuts to France’s deficit, just more slowly than had been planned.

‘He needs to realize that he has very limited room to maneuver,’ said Jurgen Odenius, the chief economist at the fixed-income division of Prudential. ‘If he goes out of his room to maneuver, the markets will push back.’

The NYT journalists characterize Hollande’s statements criticizing the Berlin Consensus because it prescribes austerity for recessions as “strident campaign rhetoric.” That is a phrase that implies that the policy is extreme, unsound, and advanced solely for base political reasons. But the reporters know better, or at least they did four paragraphs earlier when they conceded that austerity was counter-productive. Hollande’s statements opposing Berlin’s counter-productive insistence on austerity that threw the euro zone back into recession and the periphery into depression were correct. In those statements, Hollande was speaking sound economics and policy. The proponents of austerity are the folks who rely on “strident campaign rhetoric” and ignores the facts that that their predictions that austerity will lead to recovery have repeatedly proven false and that they offer no coherent theory of why austerity would lead to recovery. “Strident” accurately captures the virulent nature of the Berlin Consensus’ rhetoric.

It is true that Hollande’s statements about austerity are incoherent. He has called for balancing the budget – eventually. That position is not sound economics, but it is a vastly less counter-productive policy than Berlin’s. Hollande (and the entire euro zone) “needs to realize” that it is the Stability and Growth Pact, the structure of the euro, and the limited role of the ECB combine to expose euro zone nations to the bond vigilantes. None of those exposures support adopting counter-productive policies that cause economic catastrophe. The exposures to the bond vigilantes tell us where the design flaws are in the euro zone are that the euro zone should be fixing. If Berlin is telling us that the euro, the Stability and Growth Pact, and the ECB are designed so badly that TINA arises and forces the euro zone to adopt the counter-productive policies that have forced the euro zone back into recession and the periphery into depression, then Berlin is telling us that the system must be immediately reformed or ended.

The reporters who wrote this second article also fail to realize that they are making purported statements of fact that are anti-facts. This sentence assumes that that imposing austerity on nations in recession leads to balanced budgets and reduced debt. “Beyond France, Mr. Hollande has advocated for a revision to the European fiscal compact, which would move the countries toward balanced budgets and less debt.” I hope that by now the reader spots the error in that sentence. The reporters present as fact the false claim that the Pact “would move the countries toward balanced budgets and less debt.” The Pact’s mandated austerity, as the reporters said in the seventh paragraph, “caused their economies to shrink.” It is a dangerous illusion to believe that a nation controls its budget deficit. The Pact mandates a pro-cyclical fiscal policy that makes recessions and depressions more likely and more severe. The Pact does not “move the countries toward balanced budgets and less debt.” It does the opposite.

Another example of this most basic of economic errors was presented uncritically by the reporters.

Dennis Snower, president of the Institute for World Economics in Kiel, Germany, argues that Spain and most European countries could still tap financial markets for more money if they adopted constitutional pledges to run budget surpluses in good times.

The pledge would have to be written in stone, he said. Mr. Snower argued that one reason German borrowing costs are near record lows is because the country has already adopted such a constitutional amendment.

With the exception of Greece, it would work for everyone,’ Mr. Snower argued.

No, it would not work for everyone. Indeed, it would not work reliably for anyone. Running material budget surpluses “in good times” is an excellent means of producing “bad times” (recessions). There is nothing virtuous about running budget surpluses. Governments are not like households. My colleague Randy Wray has a number of articles explaining this point. The United States and Japan “borrowing costs are near record lows.” Neither mandates budget surpluses and both have debt-to-GDP ratios far in excess of Germany’s.

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  1. chitown2020

    Issue our own currency…U.S. BANK NOTES …..via State Banks. Our currency can be backed by anything of value. I suggest our own natural resource revenues…natural gas and electric revenues. Some of those revenues could be lent TO THE PEOPLE at a nominal interest rate agreed upon by the American people to buy homes and start up new businesses. The interest money collected could fund Healthcare, State and Local College and infrastructure improvements and would create prosperity. Abolish the FED.

  2. oh really

    That’s rich: Imagining that Krugman has anything meaningful to say to real and serious people in a real and serious country. Krugman’s prize was mostly poltical. What credibility he ever had he sacrficed long ago when he decided to be a Left wing/tranzi mouthpeice. His prize was moslt poltical and his “trade theory” is just another tranzi reationalization for globalism. He is just another member of the tranzi Nomenklatura, and a partculalry loony one. If he tried to actually do business on his “theories” he would go broke, but then stripped of his position in the Nomenklautra he would have do what he was meant to do: teach highschool algebra. Those who use his “theories” to implement that hustle we call “public policy” have greatly harmed this Nation and the Post World era. Moreover, the whole notion of the BRICS and the NWO are about to come crumbling down from the very effects that krugman failed to udnerstand. It is his vision that is “flawed’ and most deveastingly so.

    It nis comic that you claim others do not understand Krugman. Krugman does not udnerstand Krugman. His loopy ideas, shared by his whole parastic “class” are part of the problem. It is hardly the Germans that are being abtuse or callow here; it is Kruman.

    And that business of “the NYT’s Nobel Lareate” is just comic. Hote: they are not on the committe, at least not directly. My how you Liberals need badges, certificates and awards to fill the void of your ideology and cant. The USSR was the same way–endless prizes and awards. Do you really think that everything that comes out of Krugman’s mouth is true merely because he has a (highly polticized) award?

    One wonders how we all muddle through prior to the Nobel Prize. Economics has decsended to the level of the psuedo scinece Psychology, and our current “crisis” clearly underline this. Mumbo Jumbo.

    1. gf

      You are just running scared because you know that the entire rights’ economic policy is failing across the western world. Their failures are so vast it is hard to measure. Then clowns like you come out of the wood work and fail even more miserably to defend it.

      Sad but comical just the same. But expected, since the right no longer can distingush between reality and fantasy.

    2. Gerard Pierce

      I don’t claim to know that much about economics myself, but I do recognize low-grade bullshit when I read it.

      500 or so words of insults – no arguments – no rebuttal of whatever of Krugman’s ideas you dislike.

      I can’t even disagree with you because beyond the insults, you never said anything.

    3. F. Beard

      If he tried to actually do business on his “theories” he would go broke, oh really

      One should not conflate a business with a monetarily sovereign government. Deficits are unhealthy for a business but are usually good for a monetarily sovereign government else gold mining under a gold standard is not usually good either.

    4. Eureka Springs

      I can’t help but agree with much of what you say and wonder why Mr Black is trying so hard to move the overton window a few millimeters.

      Krugman is a neoliberal and weakling, negotiating with no one but himself so much of the time for minuscule maneuvers in a systemic fail situation – which would preserve entirely to much if not all of it. That’s no good reason for others at the NYT to back him up, leave their positions as authoritarian followers, repeat him on occasion, much less bother to read him for anything other than a laugh at the so-called left. I still want to believe Mr Black understands this, but his last two articles here make me wonder.

      It seems to me that this is perhaps more bait for another fight like the recent MMT ers seized upon. Did they get that fight by engaging him like this… or by ignoring him, until he engaged in error?

      A much shorter post, leaving Krugman out of entirely would have moxie. Maintain a greater integrity, Mr Black… A clearer voice. You’ve earned it, don’t give it away.

    5. This is funny

      Just one simple simple question: who is going to pay for more Greek, Spanish, Irish, French or Italian government spending?

      1. dixiebrick

        why the savers of course. By savers I mean those who have been forced to save these losers.

        1. roger

          I have a different definition of savers. I define them as those who profited from the economic policies of the past that have driven the developed world into a huge disaster, and now insist on maintaining economic policies that will prolong that disaster for the vast majority because they want to profit from that, too.
          Another phrase for savers is rentseeking hypocrites. You can spot them by their use of a certain thuggish, mafia type vocabulary, in which victims become “losers”. A good example of this “saver” type is the narrator of Goodfellas. It is the same brand of moral idiocy, I think.

    6. Synopticist

      Hard right wingnuts like “oh really” have nothing.
      If their ideas were right, we’d still be booming like it was 2006.
      Krugman may be wrong sometimes, but the Chicago school is wrong ALL the time.

    7. wunsacon

      I’m impressed by how you packed your prose with so many of the words and expressions right-wingers use to mock the left. Did you enroll in some kind of camp for that?

    8. reality_bites

      The Big Lie called LTRO – Long Term Refinancing Operation (or the striking similarities between the Federal Reserve’s TARP and the European Central Bank LTRO)

      The brain child of the ECB’s new President Mario Draghi, the LTRO allows private european banks to borrow directly from the European Central Bank which is a major departure for the ECB.

      The banks ask for loans that the ECB grants at a nominal 1%.

      To keep Europe’s in business, banks in Italy, Spain, Portugal, Ireland and Greece between them borrowed:

      €489 billion on Dec. 21 2011 & €530 billion on Feb. 29. 2012.

      €1 trillion – so far – because there is every reason to suppose the ECB will decide the only way to avoid a collapse in the banks, they seem determined to keep from their maker, is to pump yet more money into them (LTRO3).

      The banks take the money then use it to do several things.

      1.First and foremost to buy sovereign debt as is the plan.

      According to data from the Spanish Treasury, in just December 2011 and January 2012 alone, Spanish banks and other domestic lenders increased their holdings of Spanish debt by 26% to €220 billion. That’s a whopping additional debt of over €40 billion.

      So exactly how “successful” were those Spanish debt auctions since the auctioned debt was NOT bought by the bond market-at-large i.e. non-resident holders but by domestic holders i.e. Spanish banks?

      Similarly Italian debt has been bought by Italian banks increasing their holdings by 31% to a massive €267 billion in the three months ending in Feb. 2012.

      It starkly clear that neither Spain nor Italy has had any truly successful bond auctions in some time. What they have had is a suicide pact with their own insolvent banks.

      That way the sovereigns claim all was well with them. After all they show suprisingly ‘buoyant demand’ for their debt/bond auctions, while marvelously keeping down the interest they had to offer.

      The result is that private banks are in possession of sovereign debt that would have paid them between 5-6%. So, money they borrowed at 1%, bought bonds that paid them 5%.

      That is a straight bailout from the sovereign’s tax-payer of 4%.

      2. At the same time the largely insolvent private banks desperately needed cash and capital. Cash for day-to-day running & capital to meet minimum capital adequacy rules. Which just means the base of capital against which their massive book of loans sit upon.

      Just think about it:

      The sovereigns could have gone to the ECB themselves and borrowed money for 1%. Instead the sovereigns let the private banks borrow from the ECB at 1% and then the sovereigns borrow from the private banks – when a sovereign sells bonds/debt the buyers of that debt are lending to the sovereign – at 5%~6%.

      Why? – So they could say: ‘We are not having to get bailed out by the ECB. No, we are selling our debt successfully to the market, who love us.’

      It’s a lie but it makes it sound as if the ‘recovery plan’ and the unpopular austerity policies must be working.

      And at the same time allow the sovereigns to bail-out the private banks without having to tell the people they were doing so. Two lies for the price of one.

      If we now take a look of who ended up with what, the picture becomes rather ugly:

      The insolvent private banks pretend to be solvent but in fact what they have is a vault full of IOUs/bonds from their Nations which in turn claim to be selling their debt but have in fact sold it only as far as down the road to their domestic banks that are only alive at all because they are being bailed out!

      And what of the ECB? In the words of former ECB board member Juergen Stark who recently admitted in an interview with the German newspaper Frankfurter Allgemeine that “…the balance sheet of the euro system, isn’t only gigantic in size but also shocking in quality”.

      The ‘shocking’ quality of the assets are the bad loans that Europe’s private banks couldn’t get anyone else in the whole wide world to accept as collateral. Every time the ECB bails the banks out, each time it ‘extends loans’, it has to accept in exchange as collateral whatever the banks have left in their books, meaning the ‘assets’ that the ECB wouldn’t accept last time.

      What is actually truly happening is that an elaborate debt-laundering two-step has been put in place so that banks can be bailed out by nations who can be bailed out by the ECB.

      But it is done in such a duplicitous way that the banks appear to be merely getting a loan, the Nations appear to be selling their debt as per normal and the Tax Payer, who is actually footing the bill for both, is completely in the dark about the whole thing.

      THAT is the ECB and our European rulers in action. Feel shafted and lied to? You should.

      If it all seems head-spinningly circular, that is because it is. It is a cycle of lies and debt re-branding. As long as the momentum of the lie and of public belief is in the ‘forward’ direction then all seems to be well. Everyone is selling their debt, no one is being bailed-out and no-one is aware of who is paying. But if the lie and the momentum of belief goes into reverse then all the players start to look more not less vulnerable and at risk.

      What has happened in the last week with the election in Greece and the unravelling of the lies and hidden bank insolvency in Spain is that the momentum of the grand lie has started to reverse. If that reversal is not halted and the truth not quarantined then there will be another clamour raised by Europe’s insolvent banks for the ECB to announce yet another emergency funding programme.

      The fog of burning acidic financial lies that have been rained down on us for four solid years is finally meeting political reality and opposition. Suffering can be ignored and met with the police baton but it cannot be erased forever. We have yet to see what if anything M. Hollande will do in France and what will happen in Greece and Spain. But the momentum of their lies is, for now at least, running against our oppressors.

  3. readerOfTeaLeaves

    The NYT reporters should stop getting pwn’d.
    From this post, it appears that the Germans are already putting the squeeze on Hollande.
    It was to be expected.
    But that just makes it all the more embarrassing that NYT reporters would be so bloody gullible.

  4. dSquib

    The Austerians most likely know the near to medium term folly of Austerity from an economic point of view, but believe the countries of the Eurozone will eventually “recover” anyway. It’s just that in the meantime they want to shape society to their liking while they have a once-in-a-generation opportunity to do so.

    1. reslez

      Working class austerians mistakenly believe what they’ve been told. No more, no less. They’re repeatedly fed a false metaphor (household and federal budget equivalence). The other myth the working class is expected to believe is that suffering leads to salvation. The reality is working class suffering breeds working class collapse, meanwhile the wealthy benefit.

      Wealthy austerians believe in what profits themselves personally. They spread the false metaphor. Austerity imposed to pay for bank bailouts and debt that never needed to be issued in the first place = bonanza for bonuses. Yippee!

    2. Eric L

      So what are the odds that the ECB understands perfectly well the lesson of Argentina and everything layed out here, but simply see it as their job to get as much money as possible out of Greece before they inevitably default.

  5. Adam

    If you get a burn on your hand, don’t put it in the microwave. That said, definitely don’t put it in the toaster oven!

    Not understanding this PK love. Will revisit.

  6. Hugh

    I think this piece shows the limits of Bill Black. He is rightfully angry over the insane illogic of austerity. But I don’t see what he gains from invoking an Establishmentarian like Krugman. oh really above rants about Krugman as a leftist. This is the same kind of nonsense that brands Obama a socialist even though he is governing to the right of George Bush. Krugman is a neoclassical economist with a few Keynesian flourishes. Politically, he is a Democratic tribalist, that is a staunch defender of one of the two corporatist and kleptocracy enabling parties. He’s hardly the go to guy if you are interested in progressive change.

    There is also in the piece a weakness that comes from a failure to apply the kleptocratic perspective. Kleptocracy explains why the Euro elites, not just German but Greek, Spanish, Irish, Italian, etc. are backing austerity despite its destructiveness to the Euro 99%s. It explains equally well why reporters at a major neoliberal organ like the Times would enthusiastically shill for kleptocracy.

    Finally, I would note again that Europe has six problems and that even if austerity were reversed that alone would not solve the euro crisis because it would not solve the euro zone’s underlying problems:

    1) Lack of a democratic fiscal and debt union
    2) An insolvent, predatory banking sector
    3) A weak, ineffective central bank
    4) Mercantilist trade patterns
    5) Corrupt political elites
    6) A kleptocratic class calling the shots

    1. chris

      Bingo! Bingo! Bingo!

      Krugman’s supposed Keynesian bent can not be squared with his Democratic partisanship. One can not promote Obama’s re-election and be anything but an economic shill for our fraud of a president and his tribe of crony capitalists.

    2. Montanamaven

      I give a sigh of relief when you, Hugh , show up. Why indeed would Black even mention the establishment ‘s Neo liberal voice, mr. Krugman?
      I looked for you on the Jamie Dimon piece. Lots of words to describe just another part of the con that is part of the kleptocracy’s daily business .

    3. DP

      I also agree with Hugh. Bill Black’s area of expertise is in the regulation, including fraud detection and prosecution, of the banking industry. He is not an expert in economics, if there is such a thing as an expert in economics which in my opinion is largely a voodoo pseudo science.

    4. tom allen

      Agreed, Hugh, though it is a neat rhetorical swipe to use NYT columnist Krugman to rebut NYT reporting.

      The Times is becoming a sort of reverse-Wall Street Journal (the WSJ being well-known for having idiocy on its editorial page and facts on its front page.)

    5. Linda Gomez

      Your aren’t rightfully angry?

      ‘Once Argentina defaulted, the IMF expressed its desire to see the nation “suffer.”’ Wow. The similiarities to what we see today in the US must be from a similar desire to see people “suffer”.

      Needless to say behavior like that will result in the rest of the world “ridding themselves of all U.S. military bases and of IMF controls.”

    6. kris

      I cannot believe myself, but for the first time ever I agree at least 90% of what you said. Well formulated.

    7. chitown2020

      Why people don’t get it …… is not a political party, idea or policy. Nor is it economics or mathematics …It is an IDEOLOGY ….A BIG IDEA…A NEW WORLD ORDER…..Disguised as GLOBALIZATION…SECURITIZATION…..IT IS ILLEGAL AND UNCONSTITUTIONAL. IT IS A GLOBAL CREDIT SCAM BY THE 1% TO STEAL EVERYTHING………The self appointed rulers and thieves who have hijacked or stolen everything by lies, fraud and deceit want to also own and control the freedom, independence, minds, bodies and souls of the 99%. This BIG IDEA has been disguised as financial crises, recessions, depressions, disaster relief, wars, money lending, central banks, the FED, the U.S. DOLLAR and has hijacked and robbed nations and their people of their wealth all through history by SECRETS, BRAINWASHING,
      DECEIT and LIES TO DEFRAUD and STEAL the FREEDOM and INDEPENDENCE of the 99%. It is all alot of BIG LIES and can only be brought to fruition by all of us believing their lies. The sneak in their LIES like a thief in the night and disguise them as many things to ROB US… 9/11, the on going bailouts, TBTF, the fake nationalization of companies that WE ALREADY OWN….budget deficits, bailouts, wars, a war on terror, poor economy, healthcare, the Gold Backed Dollar, GOVERNMENT SPONSORED ENTERPRISES, MONEY LENDING, HAMP, HARP, a World Tax, FED MONETARY POLICY, the Patriot Act, the
      NDAA….. all FRAUD in order to ROB US.

  7. genauer

    “Just weeks ago, the idea that Greece would leave the euro zone was almost unthinkable”
    wrong. This was evel spelt out publicely a year ago, maybe somewhat unclear for the uninitiated in “first unorderly default”

    “The Berlin Consensus has forced Greece into a depression”
    Wrong. If live 20 % beyond your means, on credit, cutting back on that will shrink your GDP number by that. But since when is somebody entitled to continue living on credit they will never pay back? Since when must I give more credit to a notorious liar and swindler? This is 100 % Greece own fault.

    Europe is done with the endless string of Greek lying and attempted blackmail, like Venizelos in July 2011 and Papandreou in October, and Samaras telling the EU one thing,
    and his voter the opposite. They got at least a dozen chances to come clean, and now we are finally at the end of the pole. To call those greek liars “German quislings” is the height of falsehood.

    Europe has a very long history of correcting financial excesses and returning to growth based on renewed trust,
    built on fiscal responsibility And the most countries also in the past needed the pain from the bond market to correct. Germany was one of a very few countries, disciplined enough, to decide by herself, on time, making it significantly less painful.

    No serious person wans to hear this hilarious little Krugman ISLM Glasperlenspiel “Shop till you drop”. Did Obama or Geithner ever discuss with Krugman? I dont think so. Who else in the US, Bernanke?

    From Germany:
    “I can’t stand this rubbish anymore,” said Norbert Walter, the former chief economist of Deutsche Bank AG

    What Krugman wrote about, international trade and urbanization / spatial development of economic activity,
    are very interesting topics, but If you ever read the papers and tried to apply this in the real world, you will see very quickly, that his utterings are completely useless. He very carefully shied away from anything close to the real world.

    That investors get very shy when your public debt goes beyond 90 % or your external debt beyond 4x your exports.
    There is nothing new about that, Read Reinhart & Rogoff.

    The Euro was born with the Maastricht treaty, clearly spelling out, that you should target a debt of 60 % GDP.
    What did Greece and Portugal do ?

    1. salvo

      “The Berlin Consensus has forced Greece into a depression”

      of course, it has. Recurring to xenophobic insults doesn’t change the evidence that the insane german approach is pushing not only Greece into depression

    2. K Ackermann

      The Euro may have been born of the Maastricht treaty, but conception happened during the heat of pan-European desires. The Euro was just a device to spur the dream of unification.

      The Euro is not a wedding ring, but rather a set of handcuffs. When the spouse dies, there is no burial – there is only a corpse to drag around and resent.

      There are serious problems with the Euro. Why would any country give up so much sovereignty by joining a fiscal union?

      Your second-to-last paragraph completely ignores reality.

    3. ruben

      What did Germany and France do?
      They violated the Maastricht treaty from 2003 onwards, with deficits higher than 3%.

    4. paulj

      Credit requires repayment in excess of the money created. Since in the Eurozone all money creation is through credit, it is mathematically impossible to repay all of it. Debt must be constantly rolled over as compound interest sucks out a country’s finances.

      Germany is the beneficiary of being an export country. How well will they be doing when their main customers are broke?

    5. reslez

      If live 20 % beyond your means, on credit, cutting back on that will shrink your GDP number by that. But since when is somebody entitled to continue living on credit they will never pay back?

      Ah, so you also buy into the myth that governments should be forced to borrow their own money from the private sector. This myth is very convenient for bankers.

    6. Kukulkan

      genauer wrote:
      From Germany:
      “I can’t stand this rubbish anymore,” said Norbert Walter, the former chief economist of Deutsche Bank AG

      Norbert Walter (along with every other banker it seems) has forgotten the most basic and fundamental rule of lending: Don’t lend more than you can afford to give away.

      I’ve been unemployed for stretches of my life and hung around with others in similar straits and we all knew this almost instinctively. If someone falls short and needs more money than they have to cover a utility bill or the rent or some emergency and you happen to be a little flush at that moment, you lend them some money to help them out. And you don’t count on them paying you back. Oh, the recipient of the loan will generally make a good will effort to pay you back and, if they luck into a gig as a shelf picker in a warehouse or on the harvest trail picking fruit or as a back-up musician in a pub or whatever and earn some extra money, they will pay you back, but if circumstances don’t work out that way, they won’t. And only an idiot would expect them to.

      And only a bigger idiot would count the money they lent as being an asset rather than just gone, the same as if they’d spent it on something else.

      When you lend money out, it’s gone; if you get paid back, it’s a nice windfall.

      Don’t lend more than you can afford to give away.

      I really don’t see why bankers should be privileged class that are immune to that principle.

      (Now, some might say that this is an invalid analogy, but I figure if national finances are just like a household budget, then banking is just like lending practices among poor people and the same principles should apply to both.

      If German and French bankers lent more money than they could afford to give away, then they’re idiots and deserve what happens to them. If they’re in trouble, they could ask others to lend them some money to tide them over, but they’re not improving their chances of that happening by acting like a bunch of self-righteous assholes.)

      1. paulj

        “…if national finances are just like a household budget…”

        They aren’t. Households are currency users, Governments (sovereign) are currency issuers. The issuer can’t run out of money.

        The amount of money printed by sovereign governments (money, not credit) is small compared to the value (measured in dollars in the U.S.) of assets held by at least 1 to 15, 20 or more.

        There are not enough dollars in existence to monetize a small fraction of all that wealth.

        The problem is massive amounts of wealth accumulation that for all practical purposes renders dollars as non-existent. They may as well be on Mars.

        Not enough dollars in the hands of those that would spend it.

        Money not spent is money wasted.

    7. ChrisPacific

      “The Berlin Consensus has forced Greece into a depression”
      Wrong. If live 20 % beyond your means, on credit, cutting back on that will shrink your GDP number by that. But since when is somebody entitled to continue living on credit they will never pay back? Since when must I give more credit to a notorious liar and swindler? This is 100 % Greece own fault.

      So we have a very large external debt, sufficiently large as to be unrealistic to pay back without driving the country into a crippling economic depression, and denominated in a currency that is outside the country’s control. We also have a reluctance by creditors to write down the debt, even though it’s clear that the attempt to repay it will ultimately fail and cripple the country in the process, on the moral grounds that the suffering is necessary as punishment for the country’s previous sins.

      Kind of reminds me of the war reparations payments imposed on Germany by the Treaty of Versailles. Remind me again how that story ended?

      The analogy of a deficit country to a profligate individual spending beyond their means is a tempting one, but there are a number of important differences between the two cases, and what’s appropriate in one case can be inappropriate (or actively harmful) in the other. This has been discussed at length on this blog in the past – I suggest browsing the tags on the right, or doing a search for some background info.

  8. sunny129

    In theory, there is no difference in theory and practice, but in practice there is!

    The Berlin consesus/austerity sounds good and plausible in THEORY, but in REALITY it is

    ‘contrary to observed reality and economics’.

    We live in REALITY of the current World and NOT in theoritical and rhetorical universe of ideologists of either persuasion.

  9. Ray Duray

    I found a typo and a broken link.

    Re: “Timothy Geithner, in his IMF incarnation (where he was also a policy failure), approved a report entitled “Lessons from the Crisis in Argentina” dated October 8, 1993:”

    1) The date should read October 8, 2003

    2) The hyperlink leads to a 404 page. Here’s the salient URLs to the report:

    Table of Contents

    Full report:

  10. Ray Duray

    I’m glad that Bill Black is using Argentina as an example of a nation shackled by an austerity regime imposed from outside the sovereign nation. There’s a fascinating documentary on the topic created by Naomi Klein and Avi Lewis called “The Take”. It’s a hopeful story of the recovery of the Argentine economy after the Argentinian government snubbed its nose at the IMF and the international bankers.

  11. Conscience of a Conservative

    Members of the Euro are in monetary not fiscal union. They are like individual states of the United States. Krugman is wrong, as long they have the monetary union without the fiscal union, they must exercise austerity. France has had large social programs and high taxation relative to GDP for years and the result has only been slow growth. What should be done is tackling of pension issues in Europe and rationed spending.

    I fiscal union were to happen, Germany could subsidize Spain or Italy, but that’s not likely, so absent countries leaving the union(something Greece needs to do) austerity is the only course. That said, countries like Greece, Italy, Spain & Portugal need a lower exchange rate than Germany for export advantage. They’re not exporting high tech equipment but rather exist on tourism, olive oil sales, textiles etc.

    Anyway Krugman is just arguing a policy he wants adopted at home for political reasons(he likes big gov’t)

    1. Ignim Brites

      There is another alternative. That is for the Greeks to leave Greece. That is the best course for those who are young and strong. They can send funds back to support those who are too old or weak to move. In the long run, what is now known as Greece is destined to be a UN wilderness area.

    2. reslez

      There is yet another alternative (to add to Ignim’s comment). The EU could reform its clearly unworkable structure to allow the ECB to backstop the debt of individual nations. This would allow countries to run the budget deficits that are obviously necessary for economic growth and politically workable levels of employment.

      It is obvious to any observer that modern economies need to run budget deficits at the federal level to achieve even middling levels of growth (in the absense of a huge export surplus). Germany and France routinely violated Maastricht for years. And due to their refusal to spend appropriately their economic results were middling at best. Yet we are somehow to believe and budget surpluses are achievable and good, when they have almost never been in evidence. Let’s all believe in Santa Claus while we’re at it.

      Draconian austerity never led to anything but popular revolt and fascist takeover.

        1. F. Beard

          Under a gold standard would you be asking, “Gold mining forever?”

          Yet deficit spending by a monetary sovereign is equivalent to mining and coining new money under a gold standard.

      1. Conscience of a Conservative

        Why is Federal deficit spending with countries borrowing superior to simply depreciating the currency to a level that spurs export and domestic manufacture over importing. Federla spending tends to be inefficient at best.

        1. F. Beard

          Federla spending tends to be inefficient at best. CoC

          Then you should be for just giving new money to the population ala Steve Keen’s “A Modern Jubilee”.

  12. jal

    “The Berlin Consensus has forced Greece into a depression”
    Wrong. If live 20 % beyond your means, on credit, cutting back on that will shrink your GDP number by that. But since when is somebody entitled to continue living on credit they will never pay back? Since when must I give more credit to a notorious liar and swindler? This is 100 % Greece own fault.

    “This is 100 % Greece own fault.”


    It is 100% the fault of the lenders.

    The lenders have an IQ of 100.
    The borrowers have an IQ of 50

    By blaming the borrowers you are presuming that they are smarter than the lender and that they have succeeded in scaming the lenders.

    1. genauer

      The IQ of northern europeans are a few points higher than those of the southerners. This is the same for north and south in the US. Please google this for yourself, and decide whom you believe for a 4 or 12 point difference. I am not defending any particular source.

      To argue that a German retirement fund should assume a southern european government as a kind of inherent imbecile,
      … I am struggling for words for that.
      Do you really mean what you say ?

      Plenty of good people (e.g. Handwerker) in my fatherland live happy and very prosperous lives, without college degrees, but a good reputation for good work, unlike those “social workers”, revolutionaries.

      1. jal

        “To argue that a German retirement fund should assume a southern european government as a kind of inherent imbecile,
        … I am struggling for words for that.
        Do you really mean what you say ?”

        I mean to say, ” those that are educated in financial matters should be held responsible for the decisions that they made.”
        Its too bad that, in general, we, the population, trusted those “honest” financial elite to take care of our pensions funds.

        Those financial elites made bad decisions and, yes, with our money and yes we will suffer while they will reap their elite bonuses and pay checks.

  13. genauer

    @ ruben on “Germany and France violated Maastricht treaty”

    short version:
    yes, the 3 % limits were overstepped by SMALL degrees in 2002 + , but immediate, strong, and decisive actions were taken to remedy it. The 3.0% are not the holy Gospel, where a tiny violation results in eternal hellfire. It was never meant like this.

    long version:
    please take a look at the data and the time lines.

    “BIP” is the German acronym for GDP. West Germany suffered after reunification a huge, sudden, and unpredictable drain of resources, to rebuilt the East, to the tune of 10 % of GDP per year. At first we addressed this with ratching up taxes by 10 % (Solidaritätszuschlag), but that was not sufficient in the long run. Huge Solidarity of the rich and middle!

    Germany went over the 3.0% limit the first time end of 2002.
    Germany had just suffered from a century flood (Elbe Jahrhunderthochwasser), requiring swift and expensive government action, not exactly planned. We elected a new government in October 2002 and were pressured endlessly to join the attack war on Iraq, and refused to do so. The violating GDP / deficit numbers come in 4 – 6 weeks after the end of a period.

    Just 4 weeks later, a left / green Government under Chancellor Schroeder announced the famous
    Demanding Sacrifice, more personal responsibility and not raising pensions, public salaries, reducing time liimts for unemployment, etc.

    Just 4 weeks later !

    Parliamentary process takes some time, implementing the “largest changes since World War II” is not done clandestine over a weekend.
    And this is good democratic practice !

    It brought his own party to a breaking point, losing over 20 % of its members. I saw the communist demonstrating in the streets, many of them, week after week after week.
    Many hard and heated discussion with friends and family, who said: your can not be that hard. Yes we can and we must, because we do not have the money.
    We have signed the Maastricht treaty with our neighbours, and “pacta sunt servanda”. We can not live beyond over means forever.

    Those strategies never work immediately, unemployment goes up in the short run, GDP does not rise immediately.
    Deficits rose to 4.0% in 2003, improved slightly to 3.8 %, the 3.0% target in 2005 was again missed slightly,
    Schroeder called early elections and was voted out office.

    And VAT was raised by 3 % to make absolutely sure of a lawfully small deficit.

    I dont know the time details of France, but I see only 2 years of significantly (erm: by 1%) missing the 3.0% target,
    shortly after 2000.

    All rich, middle, and poor contributed equally as one nation, indivisible. The net income distribution is today exactly were it was 20 years ago ( graph 1) and 50 and 100 years ago (Krelle PhD thesis 1957.

    A 100 % GDP transfer in total (and still counting till 2020) from West Germany to East was financed by TAXES, and not by taking on debt.

    That means that our Scorecard now looks not beautiful, but good enough and certainly sustainable

    1. paulj

      “…A 100 % GDP transfer in total (and still counting till 2020) from West Germany to East was financed by TAXES, and not by taking on debt…”

      Another mathematical impossibility. Taxation can’t create new money, it can only re-distribute it.

      Germany is teh beneficiary of being a net-export country, their economy has been financed by selling their products to the peripheral countries (net imports).

      When those countries can’t afford to buy German products how well do you suppose the German economy will do?

      1. reslez

        In the Eurozone, taxation redistributes money. In other countries (like Canada, Japan and the U.S.) taxation destroys money.

  14. a crude interest

    So let’s say that Greece tells Berlin to jump in the Volga, just for giggles. Can someone explain to me how Greece would go about dumping austerity and embark on governmental free-spending when they’re broke? Their bonds are running at 20%. Who’s going to lend them money? And isn’t Argentina a tough example in respect to the fact that they had their own currency at the time of their crisis (does that have a bearing?)?. Doesn’t being tied to the Euro preclude Greece from launching anti-austerity? And what is/are the desired outcome or milestones to hope for? Increased deficit spending leads to an uptick in economic activity which in turn leads to increased tax revenues, etc and so forth? I’m just curious here….don’t see how this would actually be implemented. And btw, anyone who has to invoke the Nazis and/or WWII in this matter automatically loses points and street credibility.

    1. paulj

      Create and spend their own currency? Money creation is not constrained by borrowing unless a government makes that choice.

      1. a crude interest

        Yeah, leaving the EZ was not necessarily in the tool box, I assumed, as it was the evil Germans implying that course of action.

    2. Coldtype

      Lose credibility how exactly? If the Germans, or more accurately, the Trioka can do with mere treaties and contracts what once would have required an occupying army how then is Black’s point not relevant?

  15. chitown2020

    Fox News discussing how the muni pension plans (the peoples money) has been robbed . The peoples pension plans were turned into a Ponzi Scheme by the corrupt politicians in CONGRESS and these pension plans are now pay as you go plans that will be bankrupt in 10 years. They acknowledged that it is CONGRESS that is behind this robbery of America. CONGRESS is the entity that created the FED and repealed GLASS STEAGAL. CONGRESS are the TRAITORS who have robbed us of everything. OCCUPY CONGRESS.

    1. chitown2020

      Fox News also reporting that CONGRESS is going to allow the Communist Bank of China to open banks in America and allow them ACCESS TO THE PEOPLES MONEY…..! TRAITORS….!!!!!

      1. chitown2020

        CONGRESS is allowing more of our enemies direct and unfettered access to the peoples money. …….CONGRESS IS NOW ALLOWING THE ROBBERY OF THE PEOPLES BANK OF AMERICA AT THE U.S. TREASURY DEPT… the COMMUNIST BANK OF CHINA….! WTF PEOPLE…! TAKE THE MONEY OUT…!

        1. chitown2020

          Whoever says this is not a sneaky, srategic commie takeover of America is either a commie traitor themself or really stupid. This is all being done under the GUISE OF MONEY LENDING when WE THE PEOPLE were LENT NO MONEY…!!!!!! WE THE PEOPLE WERE AND ARE THE LENDERS….! WAKE UP AMERICA…! TAKE THE MONEY OUT….! MAKE THESE CRIMINALS PAY THEIR OWN DEBTS….!!!!

          1. chitown2020

            As long as CONgress allows America to be ruled by the Fed and their banks we are not free and AMERICA WILL NEVER RECOVER….We are here now to PAY THE DEBT OF THE BANKSTERS and the CORRUPT THIEVING, TRAITOR POLITICIANS……THEY ARE RELYING ON FOREIGN COUNTRIES TO FEED THEIR GREED FOR WEALTH,……THE TRAITOR POLITICIANS HAVE TURNED THE AMERICAN PEOPLE INTO DEBT SLAVES TO MASSIVE BANKSTER DEBT FRAUD AND OUR COURTS INTO FRAUDULENT DEBT COLLECTION AGENCIES……! THE JUDGES ARE NOW ENFORCERS OF A COMMIE IDEOLOGY AND LEG BREAKERS FOR THE FOREIGN OWNED AND CONTROLLED BANKSTER MOB…! The traitors in CONgress have allowed themeu foreign enemy complete and unfettered access to the peoples money via TAXATION and the HIJACKING of FORT KNOXX and the U.S. TREASURY DEPT….THE PEOPLES MONEY IS FREE FOR THE TAKING BY THE FED and our foreign enemies….EVEN THE COMMUNIST BANK OF CHINA…..TAXATION is why the traitor politicians and the foreign corps HIDE THEIR ILL GOTTEN GAINS OVERSEAS…AND DONT PAY TAX…! WE THE PEOPLE ARE PAYING FOR OUR OWN ROBBERY..! The traitors from within are using the AMERICAN PEOPLE as their own personal PIGGY. BANK and allowing their foreign BANK cohorts and minions to do the same……..These traitors allowed Wall Street to turn people into corporations by our birth certicates in order to use each and every American to be turned into a Stock. The traitors did the same credit scam with our gold, land and now our homes…..! CORPORATIONS ARE NOT PEOPLE…..! DECLARE YOUR NATIONAL SOVEREIGNTY FROM THE FED AND STOP PARTICIPATING IN THE FRAUD…..! STOP THE BANK FRAUD…..

  16. spigzone

    What’s missing here is the fundamental hard physics based reality underlying what is happening. Growth requires energy. Worldwide petroleum production essentially plateaued in 2005 and is currently tipping into a permanent, if slow, decline.

    The pie is starting to shrink and it’s going to keep shrinking into the indedinite future.

    The Big Contraction has started.

    EVERYTHING happening on the world stage financially and economically is directly tied to this overarching reality.

  17. Hugh

    I wonder what the German word is for kool-aid since genauer seems to be mainlining it. What genauer is leaving out of his fairy tale is that the euro made German exports cheaper relative to what they would have been in marks. This allowed Germany to engage in mercantilist trade with its EU neighbors and build up big trade surpluses. The euro created a cycle where peripheral wealth was transferred to Germany as German profit while German wealth was cycled to the periphery as peripheral debt. This was always unsustainable but was made worse because these debts were denominated in euros placing the periphery in a monetary strait-jacket where they could not inflate them away and redress the trade advantage that Germany enjoyed under the euro.

    genauer like some Prussian junker of old makes much of German discipline but the euro was rigged in favor of Germany from the start and if the Germans were so “disciplined” how is it exactly that they made all these bad loans to these “profligate” peripheral countries for so long? The whole trope of the virtuous lender and profligate borrower has gotten really old. We have taken it apart here so many times I am surprised that there are those still willing to trot it out as if it was anything more than what it is, a fairy tale.

    1. reslez

      Part of Germany’s “success” was freezing wages of its own workers. So yet again the looter elite achieve results for themselves by hollowing out the citizenry. And as we see from commenters like genauer, the average German has no patience to endure yet more austerity, especially if it will benefit those dirty lazy foreigners.

      1. Hugh

        It’s an important point. Europe’s 99%s are being kept divided by their 1%s. Ordinary Germans have been had by their elites just as ordinary Greeks have been had by theirs. I have said this before but until Europeans view this as European problem, and not a Greek, Spanish, or even German one, no solution is possible.

    2. hermanas

      Hugh got it. Is this just Schadenfreude? Give us a growth plan. The Eurozone like Nafta, Cafta, etc. were imposed by the 1%, crash this dummy.

    3. wunsacon

      >> if the Germans were so “disciplined” how is it exactly that they made all these bad loans to these “profligate” peripheral countries for so long?

      So, so true…

  18. This is funny

    Who will be on the hook for even more government spending? This piece is insane.

    1. Hugh

      If you are talking Greece, how about Greeks forcing their wealthy to pay taxes? The tax debt of the wealthy could even be denominated in euros giving the government access to foreign exchange.

      If you are talking, Europe, including Greece, the money could be made available through the ECB. It wouldn’t be inflationary because Europe’s big problem now is deflation, not inflation.

      In the US, the government could take back control of the Fed, spend what it needed and fund it via money creation, instead via debt. Again this would not be inflationary because the US too is experiencing deflation. What inflation we do see in groceries and gas is fueled by the current Fed’s policies, hitting the country’s 99% with the double whammy of inflation inside deflation. Taxes could also be substantially raised on the rich, not because the government needs these revenues to fund itself but to soak up potential inflation arising from them.

      What is insane is the current situation. What is equally insane is sticking with the elites who created it.

      1. This is funny

        Creating ECB money out of thin air is inflationary. In fact I would say money creation is the definition of inflation. Once created, it will eventually make its way through the system and bid up prices. The US is already exporting inflation on a massive scale (think food and energy prices around the world). The population is left holding the bag. A 30-year debt binge won’t be resolved by creating more debt and more spending. There is no painless way out, unfortunately.

        1. F. Beard

          There is no painless way out, unfortunately. This is funny

          Not so, you’ll be happy(?) to hear – see Steve Keen’s “A Modern Jubilee”.

  19. genauer

    @ “a crude interest”

    Sorry that I have to say a few more general words, before adressing you in detail. Please just have a little patience.

    In general, I am coming from a physics / engineering background,
    and became interest in “macro economics” because of:
    “what is my money, the fruit of my personal labor worth in 30 or 40 years down the road”
    I have never cheated anybody, not a single cent of tax tricked, neither here nor abroad, typical german …. idiot ?

    1. one side:
    8 years ago, I had a cleaning lady for 6 / hour, engineering degree in something nobody needs anymore. Bitter.
    Went on to be a maid in Switzerland, age 35.
    Some of my neighbours work for 4 / hour. Many stories of good, talented engineers, who do not even remember when they got the last even nominal pay raise.
    Have you ever looked into the hollow eyes of such people, in your own family? When I tell them, based on economic thinking, there are better days ahead ?

    2. the other side:
    my present cleaning lady got an integral pay raise of 50% and she deserves it. In the bad times I found numerous excuses
    to up payments for the taylor, lawyer, tax advisor. Personal default rates in eastern Germany are still VERY high.
    Thats the way this business works. Wasnt really that different over thousands of years.
    Now the poor / middle of Germany reap the benefit of 15 years of sacrifice. Low Unemployment, rapidly rising wages, safety.

    3. History
    it was our first Iron Chancellor Bismarck (certainly not a socialist)
    who introduced UNIVERSAL health care and retirement benefits, over 100 years ago, in 1885.
    When did other countries do that ? I belong more to the upper 10 %, but I have just the exact same level of service.
    I have not paid a single cent for some “special extra”, and will not. Compare that to Greece.

    4. US economists and bankers
    3 rules for prosperity:
    a) never listen to US economists and bankers
    aa) Argentina, repeated bankruptcy, 1983, 2001, next 2015 ?
    bb) Mexico 1995
    cc) Russia 1998

    b) if you cant avoid them, do the opposite
    especially Soros, Buiter, Geithner, Slim,

    c) in all cases listen to the Bundesbank

    5. at “a crude interest”

    To tell Greece or anybody else specifically what to do, would be not only very arrogant, but also very counterproductive.
    We have fought wars for thousands of years in Europe to not get told.
    and that holds for my tribe as well! Nothing better than to annihiliate the Roman Varus and his 3 “elite” divisions, down to ther very last man.

    All we Germans say, if you want additional credit, you have to make credible, that you pay back. period.

    Btw. Greece, Ireland, Portugl have 3.5-4% interest rates on the IMF / EU loans, not 20%.
    20% are the discounts people are sacrificing on old loans to those folks.

  20. Laughin' Austrian

    We Austrians are watching these hilarious Keynesian discussions with mixed feelings. History shows what works and what doesn’t. Yet, the Neros of failed Keynesian ‘principles’ play on. How many times does that school of thought need to fail before the white flag is waved?

    1. F. Beard

      You can laugh all you want but you live in a glass house. The Austrians, while professing to be for economic liberty, are almost to a man in favor of a government enforced gold standard. That makes them hypocrites.

      I could go on but hypocrite is a sufficient charge.

      1. chitown2020

        They sure have a lot of people brainwashed with ALOT of lies. We are all on the same fraudulent monetary system. It is just disguised as other things. It is all fraud economics because we are supposed to be playing monopoly on their board. That is why they are CRUCIFYING SMALL BUSINESS…. The only way to be free is to issue our own currency via State Banks…U.S. BANK NOTES backed by our own natural resource revenues. ABOLISH THE UNCONSTITUTIONAL AND ILLEGAL FED….BOYCOTT THE LARGE MULTINATIONALS….!

  21. chitown2020

    Keynesian schmanzian….that is just a tool like Globalization and Taxation and Socialism and Securitization and Money Lending and the Patriot Act and the NDAA and 9/11 being used to overthrow us. They are using UNCONSTITUTIONAL and CRIMINAL ACTS to rob, overthrow and destroy our unalienable rights and steal our wealth, our freedom and steal our country. THROW THE TRAITORS OUT…. RESTORE THE U.S. CONSTITUTION…ISSUE OUR OWN CURRENCY ….U.S. BANK NOTES VIA STATE BANKS…..BACKED BY OUR OWN NATURAL RESOURCE REVENUES…NATURAL GAS AND ELECTRIC….DONT BUY FOREIGN GOODS OR PAY FOREIGN DEBTS….NATIONAL SOVEREIGNTY WILL PREVAIL..

  22. Eric

    Greece needs REFORMS and the Greeks themselves are the first to admit this.
    This week there was an interesting TV show on the BBC with Michael Portillo (who thinks Greece should leave the eurozone) visiting Greece and interviewing several Greeks. These are the cliffnotes:
    Greece has spend a lot of borrowed money on infrastructure, consumption of luxury cars and goods etc etc while paying little taxes. all thanks to the low euro interest rates since they left the drachma. This was unsustainable and all the Greeks interviewed admit it.
    Greeks do want to keep the euro. This means they have no choice than to go for painful internal devaluation.
    Greeks have no faith in their politicians, they want to keep the euro and stay in the EU as they think that without the pressure coming from the EU (and yes Berlin) nothing will change.
    In short, a totally different picture than the author of this piece wants us to believe. Please stop abusing the word austerity in the case of Greece, and please stop blaming Germany.

    1. Blower

      Greeks need to help take down Goldman, that’s what they need to do. Then, stateside we can lasso the kleptocrats, correct their aggressive propaganda, and save some lives.

  23. Eric

    ”The Berlin Consensus has forced the euro zone into recession and thrown the periphery into depression level unemployment.”

    this is a lie.
    Let me illustrate with Spain: Spain had unemployment levels of around 20-25% until the late nineties. Than the euro came along, with low interest rates, fueling a housing construction and consumption binge. Not surpisingly unemployment fell, Spain even allowed millions of immigrants into the country (many working in construction).
    Now the bubble has bursted, Spain is back were it started: unemployment levels above 20%.
    The conclusion is that what the author calls depression level unemployment has nothing to do with ”the Berlin consensus” and is nothing new for Spain. Spain is not going through an economic cycle, Spain is back with what it always had: structurally high unemployment. The low unemployment level of the past 10 years was the exception, and completely unsustainable as it was purely based upon a bubble.
    For the other periphery countries there are similar explanations. The euro made them high, they couldn’t believe their luck, they thought they were catching up with the rich euro countries fast, what they didn’t see, or didn’t want to see, was that it was all fake unsustainable growth. and now we need to believe that it’s all the fault of the ”Berlin consensus” and that we can save the periphery by giving them even more money? What are they going to do with it? Build more housing? Import more porsches?

    1. American Idiot

      This is what austerity is all about:

      The Houses of Morgan, Goldman and the other Big Five are justifiably worried right now, because an “event of default” declared on European sovereign debt could jeopardize their $32 trillion derivatives scheme

  24. genauer

    @ hugh

    There is no kool-aid in Germany. We strongly prefer beer.
    Even the “bionade” story is based on a beer process . -)
    And this is a horror story, from an entrepreneurial point of view.

    There is no “mercantilist” interest in Germany. We spend all our “goods” surplus on vacations.
    As recently as 2005 or integral Current Account was NEGATIVE.
    See the second page (blue curve) of

    We are no saints, see consumer debt

    More than half of the reduction of consumer debt was by defaults.

    There was no first and no second “German miracle” like silly ignorant US economists believe.
    and comments

    It is just hard work, discipline, and realism.

    Like so many before us, and so many neighbours did as well, like

    Finland, Sweden, Denmark, low lands, belgium, luxembourg, austria, switzerland,

    and recently adjoining:
    estland, lettland, poland, czech, slovakia

    Just read their scorecards

    None of them ever got such a largesse of EU money, but Greece

    1. Jim

      How did Germans ever agree to the Eurozone? They must have known that the endgame was a United States of Europe, anchored by Germany. Is this what the German voter wanted. In fact, a monetary union between the USA and Mexico makes more sense than having a monetary union between two countries so disparate like Germany and Greece.

  25. mac

    If the point is to support Krugman I find no virtue in it.
    I even wonder that anyone prints his junk.

  26. kris

    Diagnosis is one thing. Cure is another thing.
    The clueless Krugman and the respectable Black are good at diagnosing, but don’t know much about the cure and the reason is – there is no cure. Their starting point is wrong, hence they are both mumbling.

    1. F. Beard

      THERE IS NO CURE. kris

      Actually, there is. Steve Keen’s “A Modern Jubilee” is part of the solution.

      1. kris

        It’s the quickest trade-off but by no means a cure.

        In finance as in life there is one reality: There are no solutions. There are only trade-offs.

        1. R Foreman

          The problem is the banking parasite sucking off the wealth producing economic entities. Eliminating the parasite to help the host recover (via jubilee) certainly is a solution.

          Accumulating interest on debt-based money is the problem, as it concentrates the money into fewer and fewer hands. This must be remedied, either by market forces or through government action. At present the governments are preventing the market from acting to heal the economy, and you have all kind of distorted asset pricing.

    2. Jim

      There is a cure: The dissolution of the Eurozone.

      Would also add, great post. Did not know that Geithner had been so off re: Argentina growth prospects back in 2002. The only question is, did he know he was off, but had no choice in the matter? I say this because Mexico, after the December 1994 devaluation, also boomed for about 5 years. Why would he have believed that Argentine growth would have been mediocre when he had the recent example of Mexico to draw from?

      Preguntas, preguntas….

      1. kris

        I agree with you, but I don’t know why you qualify that as “cure”. It’s becoming just a matter of definitions at this point.

  27. Linus Huber

    What policies brought us to this mess? Austerity or Keynes?

    Well, it certainly was Keynesian policies by having ever greater deficits over the past 20 years and ever increasing manipulation by Central Banks. Of course, we can continue to devalue a currency and robbing people of the possibility to save for the future and as a result making them increasingly more dependent on the government.

    Sound money is not simply nice to have but a requisite for long term prosperity and price stability. The believe that money’s purpose is to be available for manipulation by Central Banks and Governments is a rather questionable proposition and proves to lead to unrestrained behaviour by governments with all its consequences and, over the long haul, robs the individual of freedom and incentive to excel. At its core it is a breach of the principle of the rule of law as it allows the elite to decide who turns out as winner or loser economically.

    This does not mean that the banking sector is to be absolved of their wrong doing. Bankers have to be made personally responsible for their risk taking as otherwise they enjoy the benefits and transfer the risk to someone else (e.g. the public). This undermines the free market’s proper functioning and leads to enormous losses, once the accrued malinvestments have to be written off. Bankers do know best to evaluate risk and we do not need voluminous regulations but simply accountability by the actors.

    1. F. Beard

      Sound money is ethical money:

      Government money should only be legal tender for government debts, not private ones, and private money should only be acceptable for private debts, not government ones.

      That said, a universal bailout from all debt to the counterfeiting cartel, the banking system, with full legal tender fiat is justified. After that fiat can revert to legal tender for government debts only.

      1. Linus Huber

        Well F. Beard

        Bail outs may have many different forms. But any type of bail out must be fair to the whole population and not simple for the benefit of those who acted irresponsibly in the past.

        1. F. Beard

          Universal includes non-debtors too. Must I spell that out every time? Apparently so.

          1. Linus Huber

            You cannot bail out someone who lived within his means and does not have any debt.

    2. wunsacon

      >> Well, it certainly was Keynesian policies by having ever greater deficits over the past 20 years and ever increasing manipulation by Central Banks.

      Start calling it what it is: Reaganism. When you cut taxes and don’t cut spending, you run a deficit. Reagan increased the deficit even with the economy expanding, contradicting Keynes.

      Right-wingers have run with this policy ever since, claiming they were “starving the beast” and “make government so small we could drown it in the bathtub” but demonstrating by their inaction that they were only paying lip service.

      1. wunsacon

        And I’m not the only person who thinks so.

        “The Debt Doesn’t Matter, Reagan Proved That.”
        – Dick Cheney

      2. Linus Huber

        Well, blaming a particular political party is simply a cheap argument and does not address the problem. The difference between those 2 main parties in the US is rather minor and both acted similarly in that during most good times the idea of reducing the debt was always delayed for another day.

        There are those who argue that the debt does not matter. They may have been correct, however I consider it extremely dangerous to apply linear thinking in this regard. If we do depend on low interest rates to avoid blowing up the currency, we have given away a great deal of flexibility in monetary policy. We would be hostage to another probably still unseen problems that might hurt us even more. The idea of “free lunch” is hard to kill.

    3. Calgacus

      No, it is austerity that brought us to this point. (Though as Godley & Wray I think explain in some paper, the USA was sometimes a confusing special case). Austerity leads to big deficits. Targetted deficit spending leads to low unemployment, low inflation, good growth and lower debt / GDP. Functional finance (don’t care about government debt / deficits, care about reality) is sounder (leads to lower debt) than sound finance (obsessing about balancing government budgets). Linus, I like the way you think, (I’m Some Guy down at billyblog) but you simply don’t understand what money IS, and seem to subscribe to the Austrian school, which has the merit of putting the absolutely wrongest answer at the center of their theory. Your thinking would be right IF the Austrian theory of money were right.

      Keynes, MMT is for very sound money. “An Honest Day’s Pay for an Honest Day’s Work” pretty much sums up Keynes / MMT / JG. MMT in the USA would be vastly less inflationary than the current “infinite multiplicity of disguised welfare programs for destructive rich parasites, a punch in the face for people who do real work” system.

      Spending, money creation, debt creation does not devalue money, any more than a general issuing more orders in an army than are carried out on any one day “devalues” the orders. Some of the orders may take a long time to carry out. The army may be getting bigger & bigger, the weaponry more & more sophisticated, more & more bases may need to be built, necessitating more orders. What matters is how sensible these orders are, how well they mesh with reality, not how many of them there are. Well targetted orders (targetted spending) lead to victories, objectives, swiftly built army bases. Bad orders, contradictory orders are what devalue orders. Like spending that leads to no new production.

      Overly vague orders, blank orders that have the general’s signature (corresponding to non-targetted aggregate demand stimulus) : well, smart subordinate officers might be able to interpret them wisely. And when the general has lost his mind and refuses to issue any / enough orders (a depression) – even issuing only such vague orders could hardly fail to do good.

      The point is that money is not like a rock or a hunk of gold – the Austrian theory. It is much, much more like orders in an Army. Applying one’s intuitions about rocks to money leads to crazy results, crazy hallucinations, crazy theories that usually suggest the exact opposite of what works. It is amazing that economies work as well as they do when guided by such utterly wrong theories. So when economies are guided by sound, sane, real, not bastard, Keynesian / Institutional/ MMT economics – the USA in WWII, China for the last few decades, the whole world to varying degrees during the postwar full employment Keynesian era, you get superlatively good economic performance.

      1. Linus Huber

        Hi Calgalus, nice to meet you here.

        I understand your point of view but have real problems to agree. People have a propensity to save for the future and to store some of their work for future consumption. When you take that possibility away from them and take over the system of caring for everybody, you produce bad incentives.

        In some regard I may agree with you in that I completely disagree that owners of capital can dictate the terms of lending and repayment as long as we have a functioning democracy. Once debt becomes unpayable, it sould be written off in my opinion. This also will discipline unsound lending.

        I also like to have bankers be personally accountable for their risk taking enhancing above aspect.

        In the long run, it simply opens a new can of worms if you continuously follow policies that decide on who is going to win and who is going to lose with the help of devaluating the currency. We should adhere to policies that are honest, open and without discretion. There are many aspects to it but we will see over the next few years whether the loose monetary policies presently in action will improve the situation or whether they will simply prove that we delayed the suffering that might be considerable harsher than when we would have followed policies that I consider sound.

        To avoid the write off of malinvestments can in my opinion never lead to a proper reboot of the economic system but simply delays the so famous “creative destruction”.

      2. Linus Huber

        The examples you list for Keynesian success are doubtful.

        The US had years of hardship before the boom started after WW2 and most malinvestments were cleared by that time.

        China experienced enormous growth in credit volume and will at one stage have a major problem as this produced countless malinvestments that will not allow to have a real return on investments resulting in the need for lots of write offs.

        1. Calgacus

          Linus, the point is that your are errors traceable to a wrong theory of money. Even many MMT fans don’t understand the correct theory too well. E.g. one wrote a long essay that started from thinking debt must be “debt for something”. Exactly wrong. MMT’s theory of money is so simple it repels the mind. The Austrian theory is a cognitive error on the level of The Man Who Mistook His Wife for a Hat, but worse. Money, credit is not like a rock, but an immaterial device of the mind, like an order.
          People have a propensity to save for the future and to store some of their work for future consumption. When you take that possibility away from them and take over the system of caring for everybody, you produce bad incentives. Government deficit spending is NOT taking away the possibility of saving for future consumption. It is the saving itself that harms the value of, that devalues the saving; Good government spending is necessary to restore its longterm value. It is truer to say that government spending to match savings leakage is implicitly demanded by the saving itself.

          n the long run, it simply opens a new can of worms if you continuously follow policies that decide on who is going to win and who is going to lose with the help of devaluating the currency. If the government did not do this, there would be no money. We would live in a nonmonetary economy. Which is what Austrian/neoclassical theory sort of describes. There is just no way to NOT do this, and have a monetary economy. There’s always going to be some taxation and some spending. And again, it is not devaluing the currency. Currency is not like some physical liquid which can be diluted.

          Thinking that central banks have much to do with the problem, except that they shirk their regulatory tasks, or that low interest rates are “loose money” also flow from the incorrect outlook on money. The “loose monetary policies presently in action” are nothing of the kind. It is clear that currently they are making money TIGHT, not loose. The Austrian/mainstream/neoclassical outlook gets everything backwards.

          We should adhere to policies that are honest, open and without discretion. Absolutely. But the policies should be based on knowledge & reality. Not economic theories which are the most awesomely, fundamentally wrong theories of ANYTHING in the history of mankind. Believing that people can fly by flapping their arms, thinking that gravity repels objects to fall up – are much better theories than the commodity theory of money.

        2. Calgacus

          The US had years of hardship before the boom started after WW2 and most malinvestments were cleared by that time. This is a recent “Austrian” theory that is such an incredible pack of lies that nobody could say it until recently, when enough people died off. It’s lies on the level of saying Germany won the war in the field. Real Austrian economists living at the time never said such incredible nonsense. They’d have been taken off to insane asylums.

          In reality, the boom started in 1933, with FDR and the New Deal. Biggest stock market bull market of all time, too, soon after. Look at what capitalists do, not what they say. Too slow recovery, too little spending, especially for the common man, but very real recovery, swift decrease of hardship. The WWII boom is what finished off the depression, stabilized the US economy’s finances; the immediate postwar boom and policies were not so great, and progressively changed for the worse over the decades.

          China experienced enormous growth in credit volume and will at one stage have a major problem as this produced countless malinvestments that will not allow to have a real return on investments resulting in the need for lots of write offs. Although much of it is disguised as bad bank loans, this spending is disguised government fiscal spending. The point of government spending is to not have a real FINANCIAL return on investment, but to have a REAL return on investment. To have a bigger real economy. They are very different things, the point, the error, of mainstream economics is to confuse them, the real and the nominal. It’s closer to the truth to say that the business of the government is to malinvest, and this is what makes good private investment possible. China is very successful. Maybe the most successful economy in the history of the world. By some measures, they are already a bigger economy than the USA. If that is a problem and is due to malinvestment, we need more malinvestment!

          1. F. Beard

            It’s closer to the truth to say that the business of the government is to malinvest, and this is what makes good private investment possible. Calgacus

            It appears to me that the purpose of government is to get money into the economy and that this is so important that even wasteful spending helps.

          2. Linus Huber

            Not long ago, i read about a study about human behaviour in situations that were perceived to be unjust (sorry, I do not remember where, so I cannot offer a reference). The result was interesting in the sense that it showed that people prefer to have an unjust situation rectified even if they do have to suffer negative consequences on a personal level. The result was surprising in that it refuted the idea of the homo economicus who is at the base of many economic theories.

            In my opinion, your prescription fester and enhance the presently evident injustices as perceived by a large majority of the population. It defies some basic economic rules and the principle of the rule of law and favours those presently on top as they are not made accountable for past errors.

            In theory you may have found an easy way out but I personally believe that Ponzi would consider himself an amateur in view of many of your proposals.

          3. Fiver

            Your versions of the US from 1933 to 1941 and the “miracle” of China are wildly over the top.

            It is notable, however, that many of the New Deal projects undertaken had strategic implications for WWII, eg, Columbia River/Grand Coulee Dam – which turned Seattle into Boeing:

            “The dam’s primary goal, irrigation, was postponed as the wartime need for electricity increased. The dam’s powerhouse began production around the time World War II began, and its electricity was vital to the war effort. The dam powered aluminum smelters in Longview and Vancouver, Washington, Boeing factories in Seattle and Vancouver, and Portland’s shipyards. In 1943, its electricity was also used for plutonium production in Richland, Washington, at the Hanford Site, which was part of the top-secret Manhattan Project.[73][74] The demand for power at that project was so great that in 1943, two generators originally intended for the Shasta Dam were installed at Grand Coulee in an effort to hurry the generator installation schedule.[7”


            Just a coincidence, no doubt.

            The US resolved its economic woes only as a consequence of WWII, from which it emerged in a position of unmatched historical power across the board.

            It then put in a bid for the biggest mistake any country ever made, in terms of total future unintended consequences both for the US itself and for the world. That error was for the US to define the level of production/economic activity required to wage a total war as the standard and goal because it brought full employment – it never crossing anyone’s mind to question the whole concept of “job”, and that such an incredibly productive modern industrial economy didn’t necessarily require full employment, just ample income.

            But instead it had become “growth” at all costs, which did 2 things:

            1) Completely incapacitated our judgment with respect to the real world sustainability of unlimited growth.

            2) Once “growth” is defined as imperative because, it’s believed, only “growth” could possibly deliver “full employment” the die is cast for what stares us in the face:

            The wealthiest member of the wealthiest civilization that ever existed hasn’t the first fucking clue how to organize itself to avoid the impending collision between the global economy and the biosphere, unless one counts a policy of global hegemony as the “Plan”.

            The scale of the waste in China beggars the imagination. I feel very, very badly for China. It is simply not possible for a billion+ Chinese to sustain a late 20th century American lifestyle any more than it is going to be for the US itself – the immense investments in excess infrastructure is time and resources China could ill afford to waste.

            I’m a democratic socialist/environmentalist, which makes me an idealist and realist.

          4. Calgacus

            FBeard:It appears to me that the purpose of government is to get money into the economy and that this is so important that even wasteful spending helps. Yes, but even more, enterprises run by the government, unlike the private sector, need not make a profit, which is an absurd and impossible measure of whether a government should run these enterprises, make these investments or not. Efficient government enterprises can and often should “waste money”. This is not waste in the real sense, but often an additional benefit. There are plenty of things governments do better than the private sector, and often the pricing which would be best for society as a whole, on any reasonable definition of “best” is not going to cover the moentary costs, so the government is the best & only one to provide the service / good.

            Linus: In my opinion, your prescription fester and enhance the presently evident injustices as perceived by a large majority of the population. It defies some basic economic rules and the principle of the rule of law and favours those presently on top as they are not made accountable for past errors. What festering? what enhancement? What injustice? Giving people jobs – money for productive work – is an injustice? To whom? The problem is that these basic economic rules – aren’t. In fact, many of them are insane raving, based on the insane raving that is the commodity theory of money. Sure, rectify injustices, punish the bad guys. Many detailed MMT prescriptions would eliminate the source of income of the parasites on top.

            MMT & the JG are about justice & the rule of law. All it is saying is – stop forcing people to not work, thus denying them any claim to society’s production, denying them it for no reason at all. For that is insane. It’s not just slavery. It’s slavery to an insane slavemaster.

            A monetary economy has no tendency to full employment, any more than an army has a tendency to efficient operations without any orders at all. What if in the course of Austrianly liquidating malinvestments – the unemployment rate goes to 100%? Nobody can do any paid work, and enormous numbers of people die. Does this make sense?

            It always boils down to money. What do you think money is Linus? Where does it come from?

  28. sissy

    Adam, you made me laugh. Simply hysterical. Let’s put Tim Geithner in the microwave, that will solve most of the problems we are facing, but no of course no after all Timmy is a member of the private club that no one can get into except the for the Federal Reserve, the SEC, the FDA and of course the real rulers of the entire world and we all know who they are don’t we? I’m going to fly down to LA this week to help produce a few of my movies with Derek Frieda who is producing a movie with Al Pachino and John Malkovich. Wish me luck Adam, I’m going to need it. One again Bill Black nails it to the wall with a huge five hundred ton nail.Things here in Washington are booming. Everyone is driving a shinny new car, and businesses are popping up everywhere. Tomorrow I am going to look at a stunning house that is yellow and it’s only $200,000 dollars. It’s so cute I could scream, but I won’t. I have to get back to my writing. You are too funny Adam. How can I contact you? Are you the Adam that is on the Daily Kossacks web site? If you are say hi to the old gang for me will you?

  29. Colin

    NYT bias? The NYT is maybe just one iota above fox news. American mainstream news as a whole has about as much integrity as as $5 whore. No offense to the prostitute.



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