Yves here. This is an extract from the new book, Failed, by Mark Weisbrot, the co-director, with Dean Baker, of the Center for Economic and Policy Research. I’ve been reading his book (all of my non-post related reading comes in snippets on the treadmill or airplanes, and the latter only when I have no WiFi) and like it so far. It has an excellent discussion of the role of the IMF, particularly its leverage via informal support from other major institutions, that by itself makes for important reading.
My only quibble is that Weisbrot accepts and promotes the widely accepted, but inaccurate idea that Greece would have been better off to have defied the Troika and tried going on the drachma. He like many other economists, analogizes Greece’s situation to Argentina circa 2002, when as Yanis Varoufakis pointed out strenuously in 2012 (and his comments then were directed at Weisbrot as well as Krugman, and Weisbrot has bizarrely chosen to brush them off) that the two were not comparable by virtue of Greece not having its own currency (as in Argentina was depreciating an existing currency, not facing the staggering complexities and collateral damage to imports and most important, its nearly 20% of GDP tourism sector) and the destabilizing effect a Grexit would have on the Eurozone, which in turn would blow back to Greece. Regular readers know we discussed this topic at exhaustive length, and financial service industry professionals with relevant expertise agree that our estimates of the time and costs involved in making the computer system changes (which must occur across numerous participants) would be likely to exceed our estimates of three years. The considerable cost and damage of a mere two-week of severe restrictions on Greek bank and business access to international payment systems were enough to bring Greece to its knees. The notion that Greece, which was and is in desperate shape, could take the hit of prolonged economic disruption of this level, ignores the high odds that Greece would slide in short order into being a failed state.
We’ve been surprised, as well as frustrated, by the resistance of people who profess to be analytical, to to hear that Greece only has very bad options. While bowing to the Troikas’ misguided plan was akin to having one hand amputated, with the high odds of having the fingers on the other hand cut off over time one by one, the alternative of a Grexit was akin to an immediate amputation of both legs. And a s clearly unpalatable as it was to again agree to wear the austerity hairshirt, Greek citizens were also unwilling to leave the Eurozone.
While a dramatic break has the emotional appeal of shocking and potentially hurting Greece’s counterparties, particularly Germany, the reality is that Greece would suffer far and away the most damage. By contrast, hanging on longer, as unattractive as that seems, keeps alive Greece’s best hope for rescue: that other countries rebel against austerity, as Portugal is to a degree and Marine Le Pen is doing in a far more concerted manner in France. The shifts in the game board that have the potential for the least bad outcomes for Greece lie almost entirely outside Greece’s control and depend on how quickly the inevitable failure of austerity policies leads to broad scale changes.
By Mark Weisbrot, an American economist, columnist and co-director, with Dean Baker, of the Center for Economic and Policy Research in Washington, D.C. Excerpted from his book Failed: What the “Experts” Got Wrong about the Global Economy. Cross posted from Alternet
Of all the examples of neoliberal policy failure since the Great Recession, the eurozone crisis stands out as a work of art. The European authorities who made this mess—the European Commission, the European Central Bank (ECB), and the International Monetary Fund (IMF)—known as “the troika”—provide one of the clearest, large-scale demonstrations in modern times of the damage that can be done when people in high places get their basic macroeconomic policies wrong. That it has happened in a set of high-income economies with previously well-developed democratic institutions makes it even more compelling.
It is necessary to say “previously well-developed” democratic institutions because the eurozone countries surrendered their sovereign rights to control their most important macroeconomic policies: first monetary and exchange rate policy, and then increasingly fiscal policy for the so-called PIIGS countries (Portugal, Italy, Ireland, Greece, and Spain). As we will see, this was a profound loss of democratic governance, and one for which tens of millions of eurozone residents would pay dearly in the years following the world financial crisis and recession of 2008–2009, and for as yet untold years to come.
Most citizens of the euro area did not understand what they were losing when the Maastricht Treaty was signed in 1992, and the euro was introduced in 1999. You couldn’t see it until there was a serious recession—when the government really needed to use expansionary macroeconomic policies to restore growth and employment. Then we discovered that not only was the fate of most Europeans in the hands of people who were almost completely unaccountable to the electorate; it was worse than that. Power was now in the hands of people who had their own political and economic agenda, and who, as we shall demonstrate, saw the crisis as an opportunity to implement changes that could never be won at the ballot box.
To see the world of difference between unaccountable and partially accountable economic authorities, we need only compare the economic performance of the eurozone with that of the United States in the six years following the collapse of Lehman Brothers in October 2008. The United States, which was the epicenter of what would become a world recession, had a downturn that lasted officially 18 months; its recession was declared over in June of 2009. To be sure, it was the worst US recession since the Great Depression, and more than four years after the recession ended, employment levels were almost the same as they were at the depth of the recession. The US recovery was nothing to brag about; only the vastly worse results in the eurozone could make it look good. By February 2014, the eurozone was still close to record unemployment of 12 percent (as compared with 6.7 percent in the US); and GDP had fallen in both 2012 and 2013. And in the harder hit countries like Greece and Spain, unemployment had passed 27 and 26 percent, respectively, while youth unemployment surpassed 58 and 53 percent.1
By 2013 more than 20 governments had fallen in the euro area, but austerity was still the order of the day. This could never happen in the United States, where even if the deficit hawk Republican Mitt Romney had been elected in 2012, he would not have dared plunge the US economy back into recession. His first goal, like that of most politicians, would be re-election, and there would be no external authorities that could force him to commit political suicide.
Then there is the vast difference between monetary policy in the two economies. Although by law the Fed and the ECB are both independent, there are degrees of independence and some would say, dogma; and the Fed turned out to act quite differently than the ECB in the past five years. The US Federal Reserve, which had lowered its policy lending rate to zero at the end of December 2008, kept it at or near zero for the next six years. As a way of providing further stimulus through influencing expectations, the Fed also made it clear that these “exceptionally low” rates would continue for “an extended period.”
By contrast, the ECB actually raised rates twice in mid-2011, to 1.5 percent, despite the weakness of the eurozone economy. But even more important was the Fed’s policy of more than $2.3 trillion of quantitative easing (QE), which the ECB had refused to consider, despite the fact that it was so drastically more necessary in Europe—given the vicious cycle of rising borrowing costs that threatened to spiral out of control in the weaker economies, including the “too-big-to-fail” countries of Italy and Spain. With QE, as we will see, Europe could have recovered as quickly as the United States, and of course much more quickly if the member countries had the ability and the will to engage in expansionary fiscal policy. The ECB, like the Federal Reserve, controls a hard currency and can create money. As such, it had the ability to prevent the sovereign debt of eurozone countries from ever becoming a crisis in the first place. It actually had the ability to keep long-term borrowing costs for eurozone countries, including even Greece, as low as it wanted—as the Fed did in the United States while the US federal budget deficit soared to a post–World War II record of more than 10 percent of GDP.
The Fed’s QE also provided some funding for the government to stimulate the economy through spending and tax cuts, without increasing its net debt burden. This is not magic but just the rules of accounting, combined with the economics of a weak economy. When the Fed creates money through QE, and uses it to buy long-term US Treasurybonds, it refundstheinterestpaymentsonthesebondstothe Treasury. This means that the government is getting the equivalent of an interest-free loan, and its net debt burden does not rise. It can then use this money for anything—building a more energy-efficient infrastructure, for example, or any kind of expansionary fiscal policy. Unfortunately, in the United States, the federal government did not take advantage of this “free money” as much as it could have. And yes, it really is free money—with consumer price inflation at 0.8 percent for 2014 in the United States and negative 0.2 percent in the eurozone, there is no downside to this money creation, since there is no significant risk that inflation will become too high.
I remember speaking about these matters with a group of German members of parliament, from all of the major political parties, in September 2011. One of them objected that it would be impossible to sell the idea of expansionary macroeconomic policies, and especially those involving money creation, to a German public that still had historical memories of the devastating hyperinflation of the 1920s. I couldn’t speak to that—not being an expert on German public opinion—but my response was that if this was indeed the case, it indicated a problem of public education, not an economic problem.
And public education is a big part of this story. It is a story in which most of the public—in Europe, the United States, and much of the world—has been continually misled as to the nature and causes of a festering economic problem. How else to explain how a crisis that originated from over-borrowing by the private sector was sold to the public as a problem caused by governments refusing to live within their means? It was then exacerbated by fiscal tightening, to the point of pushing the regional economy into years of recession and stagnation. The worsening crisis was then used to justify still more neoliberal policies—including cutting public pensions, shrinking the public sector, privatizations, and making it easier for employees to be fired. This sequence of escalating misery caused by government policy—accompanied by regressive structural reforms—can only happen if a broad swath of the public, including many journalists and politicians, is seriously confused as to what has gone wrong and what feasible economic alternatives are available.
But to understand how it happened we must also look at how the decision-makers—in this case the so-called troika—made their decisions, in large part independently of the citizenry’s views of what is right and wrong. For that we must turn to the financial crisis that began in early 2010.
Crisis as Opportunity: The Troika Seizes the Moment to Reshape Europe
The crisis in eurozone financial markets began as a problem with Greek sovereign debt that could have been easily managed. Greece’s economy is less than 2 percent of the GDP of the now 19-member eurozone, and the other euro countries had set aside vastly more than enough resources to resolve Greece’s problems in early 2010 when Greek debt first began to disturb the financial markets. But before it was over, the crisis would push the eurozone into its longest recession and record-high unemployment, and make Europe the biggest drag on the world economy.
By the end of 2011, the so-called BRICS countries—Brazil, Russia, China, India, and South Africa—were being recruited to help Europe by buying some of their bonds or with contributions channeled through the IMF. What is wrong with this picture? India has a per capita income of $3,400,3 less than one-ninth of the eurozone; Brazil has 42 million people living on less than $4 a day.4 Even China, although it has more than $3.6 trillion in reserves, has only about one-fourth of the per capita GDP of the euro area.5 And as noted above, a eurozone recovery has always been feasible without any outside help.
The eurozone crisis is most commonly described in the media as a “debt crisis,” or more specifically as a “sovereign debt crisis.” But this is very misleading. If we look at the numbers and recent history, we see a crisis that has been fundamentally caused and deepened by bad policy. Of the PIIGS countries, only Greece can be said to have built up a potentially unsustainable debt burden before the financial crisis and world recession of 2008–2009 hit Europe. The others actually reduced their debt-to-GDP ratios during the boom years of 2003–2008.6 Spain’s net public debt, for example, fell from
41.3 to 30.6 percent of GDP during these years.7 Italy’s was larger, at 89.3 percent of GDP,8 but with a low budget deficit and low interest rates there was not any reason for such debt to be seen as unsustainable until the mismanagement of the eurozone economy sent Italy’s borrowing costs much higher.
Even Greece, when it was negotiating its first agreement with the IMF in May 2010, had a debt of 130 percent of GDP,9 which could have been manageable with low interest rates, and with the debt burden reduced over time with reasonable growth. Seventeen months later, after shrinking its economy at the behest of the European authorities, its debt had increased to 170 percent of GDP.10 By this time, even when the European authorities reached a tentative agreement on October 26, 2011, for a 50 percent “haircut” for bondholders—that is, a 50 percent reduction in the principal of the Greek public debt held by private bondholders—it was still not enough to put Greece on a sustainable debt path. A problem that could have been resolved with—at most—just a few percent of the funds that the European authorities had set aside for this purpose had morphed into a financial crisis that threatened the health of the whole European economy. This was one result of what economists call pro-cyclical macroeconomic policy—shrinking the economy when it was already weak or in recession.
From the beginning of this crisis, the European authorities had the power, resources, and ability to bring about a robust recovery of growth and employment. It was the will that was lacking. Most commentators and analysts have emphasized the difficulties of coordinating fiscal policy—especially the spending that would be needed to put the eurozone economy back on track. A narrative of hard-working, thrifty Germans and other northern Europeans reluctant to subsidize the lazy and indulgent habits of their southern neighbors became a common theme in the media. Of course most of this has no basis in reality. For example, Greeks, on average, put in considerably more hours on the job than their German counterparts—about 2,037 per year as compared to 1,388 in Germany.11 Greeks also retire later than Germans do. And if we look at the problem in terms of who has benefited most from the good years of the euro, it is not so clear: more than 100 percent of Germany’s growth in the expansion from 2002 to 2008 came from exports, the majority of which went to Europe. Germany’s export-led growth also enabled them to increase productivity and competitiveness in manufacturing. Over the long run, this is much better than the bubble-driven growth that countries like Spain and Ireland experienced in the run-up to the crisis.
This is not to deny that there are serious problems of tax evasion for high-income earners and business owners in Greece and Italy, or that popular sentiments in countries like Germany or Finland can make it more difficult to assist other eurozone countries in crisis. But the eurozone crisis was not brought on by public sector over-borrowing. And even “anti-bailout” sentiment in the richer countries is often oversimplified—much of it is not just national prejudice against southern Europeans, but also includes more legitimate popular resentment against bailing out European banks.
But all of these problems are secondary compared to the fun- damental and deeply misunderstood problem of flawed macro- economic policy. If not for the economic damage inflicted by the European authorities in 2010–2013, the Europeans could have had a number of years to try to correct the structural and politi- cal problems of the eurozone—if that was what the people and their elected representatives wanted to do. It is of course possible that the political will would not be there to make the changes that would be necessary to preserve the common currency over the long run. But for more than four years (and still going), the European authorities successively implemented policies that slowed the eurozone economy and, for most of that time, addi- tional policies that caused serious financial crises. This would make it increasingly difficult, if not impossible, to address prob- lems of policy coordination or other structural problems of the eurozone.
As noted above, Greece’s debt situation was transformed from something that could have been resolved relatively simply, and with few resources, into an intractable and contagious mess. And the acute crisis that the eurozone suffered from July 2011 until August 2012 was based on the worries in financial markets that the European authorities might do to Italy what they did to Greece. When the IMF had to lower its growth projections for the Italian economy, between its April and September forecasts in 2011,12 it was a direct result of the $74 billion austerity package that the European authorities forced on the Italian government.
In May 2010, the Greek government was the first to receive money from the European authorities to finance the rollover of its debt because it was no longer feasible to borrow from financial markets. “Together with our partners in the European Union, we are providing an unprecedented level of support to help Greece in this effort and—over time—to help restore growth, jobs, and higher living standards,” said IMF Managing Director Dominique Strauss-Kahn in announcing the agreement for 110 billion euros to be disbursed over the next three years.13
The key words were “over time.” The IMF and its partners knew that the fiscal tightening would make things worse. “Real GDP growth is expected to contract sharply in 2010–2011,” said the Fund, but it added that “from 2012 onward, improved market confidence, a return to credit markets, and comprehensive structural reforms, are expected to lead to a rebound in growth.”14
The first part of that prediction came true, with GDP fall- ing by 11.7 percent during 2010–2011.15 But the second part was a pipe dream. By December 2011, the Organisation for Economic Co-operation and Development (OECD) was forecasting a further decline of 3 percent for 2012,16 which turned out to be 7 percent.17
It was not surprising, given that the Greek government commit- ted to cutting $28.3 billion, or 12 percent of GDP, from its budget through 2015, and laying off 20 percent of its public sector workforce over the next four years.18 Who is going to invest in a country that has committed to years of recession?
The IMF justified these measures partly on the grounds that the alternative—a debt restructuring—carried too much risk of conta- gion to the rest of Europe, where banks held hundreds of billions of dollars of Greek debt. But because the “bailout” package destabi- lized the Greek economy and thereby increased the risk of a chaotic default, their preferred solution actually worsened the contagion.
Fears that Greek bondholders would end up taking losses, and that Portugal, Ireland, and possibly even Spain would follow the path of Greece began to seep into financial markets. On May 9, 2010, the ECB said that it would intervene in sovereign bond mar- kets, reversing a decision just four days earlier that had sent mar- kets tumbling.19 It was a concession by the ECB, but it was much too small to arrest the financial crisis that the European authori- ties had set in motion. Fears that a Greek default and its aftermath would result in a breakup of the euro began to move the markets.
The next day, the European authorities (including the IMF) reached an agreement on a trillion-dollar fund that was intended to “shock and awe” the financial markets into believing that default by any of the eurozone governments on their bonds was not pos- sible.20 Stock and financial markets initially soared in response, but there was a terrible hangover as reality set in the next morning. At this point the debt of Italy, which was considerably larger than that
of all the other troubled eurozone economies combined, was not yet considered to be at risk.
But even for the others, including Spain, it was already clear to many that without a commitment by the ECB to keep borrowing costs down to sustainable levels, a “bailout” fund would only enable the governments to pile up more debt, on which they would even- tually have to default. The European authorities were still not ready to consider any practical solution. By establishing fiscal tighten- ing as a requirement for access to any European/IMF funding, they had guaranteed that the debt problems would only grow worse.
At this point, even the bond markets, which traditionally rally when governments commit to budget tightening, started to become strangely Keynesian: bond prices would sometimes fall on news that Greece, for example, would implement further austerity. In November 2010, the Irish government became the second eurozone economy to sign an agreement with the IMF and the European authorities, after their 10-year bond yield had passed 8 percent. Portugal would be third, in May 2011. The dreaded agree- ments that had been, in past decades, the punishment meted out to low- and middle-income countries with balance of payments prob- lems, had now become the fate of high-income European nations. It was an artificial and unprecedented kind of “balance of payments” crisis: these were, after all, governments with a hard currency that could be created by “their” central bank. But the central bank wasn’t really theirs, unfortunately, and it wasn’t going to do what the central bank of the United States or even the United Kingdom was willing to do in order to contain the crisis: most importantly, contain the sovereign borrowing costs of the vulnerable countries. The crisis scenario that began in July 2011 went like this. The austerity, in combination with the slowing regional economy, was causing the Italian economy to grow slower or even shrink.
Slower economic growth causes government revenues to fall (and some spending to automatically increase), and so the promised deficit targets are even more difficult to reach. The government is then pressured to take more steps to cut spending (and/or increase taxes). This further reduces economic growth. The process contin- ues in a downward spiral, as happened in Greece. And Italy’s debt, then at $2.6 trillion, was more than five times the size of Greece’s.22 The European authorities had not managed to put together the resources to deal with a possible default of this magnitude; hence the series of crises in financial markets.
See original post for references
I stopped reading when he declared. The recession was over in 2009. That is precisely the year that my job losses began!
That bothered me, too. What does nominal GDP have to do with the actual economy encountered by most Americans? For someone calling out neoliberal orthodoxy, that seemed awfully neoliberalish.
The transition from the neoliberal GDP is occurring… too GDI…
Employment lags the business cycle. At the NBER (National Bureau of Economic Research), real GDP, personal income, industrial production, and retail sales are considered along with employment.
NBER dates this expansion as having started in June 2009, after stocks (one leading indicator) bottomed in March 2009.
Hold on. He didn’t say that the recession ended in 2009. Here’s what he said, with bold highlighting added:
In other words, pedantic academic economists and government officials declared the recession ended in 2009. People really did make such claims, no matter how absurd this seems to other people, myself included.
I think the nominal recession was doused with QE which created a different set of problems that rhyme with recession but might be better described in engineering terms
Agreed. The work you (and others) did on that front was truly fantastic. Introducing a new currency is not in itself a solution to either a bank run or unsustainable inequality. It’s a tool in the toolbox, as the Serious People like to say, nothing more (or less).
One perspective I would echo back to the general thrust from CEPR is that I would suggest quite strongly that failed is an unsatisfactory framework. The word implies a good faith effort to promote the public good that simply does not exist in our current leadership class. The prevailing management philosophy has not failed. Rather, it seeks different end goals than most of the rest of us desire. The power structure in the US is essentially, more or less, fascist. The communists and the capitalists both have been pushed out. Honestly, and somewhat ironically from the US perspective, one of our last hopes is that Berlin and Paris ultimately stand up to the 21st century American style of fascism before things get much worse.
The long, slow, multi-decade concentration of wealth and power has been a remarkable success in American political economy, and to expand the scope to the global economy, one absolutely must address fraud and NATO. Our European friends are not equals; they are vassals to the American empire (USUK, Anglo-Americans, etc.). That is the context of global political economy in which the specific events in Ireland and Greece and so forth have taken (and are taking) place.
I would just add that economists, even the CEPR have the training/indoctrination, as mentioned by perpetualWar – if everything has to be looked at through the frame of GDP growth, your pretty much reduced to your only tool being a hammer and your only problem being a nail.
Yep, and I think that’s what’s exciting about this time period. There is widespread enough disdain for how establishment economics has warped and twisted the original idea of GDP that I think we’re very close to returning it to its support role rather than granting it center stage. One tool of many rather than the whole toolbox.
Which is partly why it hurts so much when thoughtful people affiliated with places like CEPR ultimately fall back on that ole’ friend. They appear as if caught between worlds, not liking the establishment vision but not comfortable advocating a different one.
This assertion I think deserves its own comment. There are two fundamental premises that continue being assumed as true when they are not necessarily so.
1) Economic growth is not necessarily a good thing.
2) Cutting spending and/or increasing taxes is not necessarily a bad thing.
These items cannot be stated as general principles. They depend upon the specifics of how resources are allocated by individual public policy choices.
Taxing the wealthy can be an excellent thing to do in an economic depression caused by excessive inequality. Cutting military spending can be an excellent thing to do in the face of an out of control national security state. Cutting healthcare spending can be an excellent outcome of restraining costs that merely pad the pockets of the already affluent. Cutting growth measured in the formal economy can be an excellent thing to do if it creates growth in the unmeasured informal economy, especially if that results in less pollution and other negative consequences of activity in the formal economy. And so on.
In theory, I agree, but in practice everything in the modern political economy is designed to make sure that those cuts and taxes are NOT remotely evenly distributed, or, god forbid, targeted at the haves instead of the have-nots. If I thought for a second that the taxes would be on those making $250,000 a year or more, and the cuts would be to military contractors and price supports/subsidies to corporations I would say “go for it”, but the chances of that are about zero. So, I would say raising taxes and cutting government spending in a recession, given the world we live in, is a bad idea tout court.
I don’t follow? I am disputing the author’s premise that increased taxation and decreased spending are necessarily bad. I would challenge the position you take of trying to have it both ways.
It is inherently contradictory to say that you distrust our system to raise taxes in a way that benefits the public but yet you trust it to lower taxes in a way that benefits the public. Similarly, it makes no sense to say that you trust our system to spend more money yet you don’t trust it to spend less money.
Weisbrot does mention how DSK & the IMF were far-sighted in 2010, giving Greece a bailout that would pay off its debt gradually. It was said after DSK was spitzered that it was done bec. he was too dovish to lead the IMF and/or bec. Sarkozy didn’t want him runnning for president. That almost indicates that when Weisbrot claims the neoliberals took over to change the EU financially they had a clear-headed understanding of what they did not want, which would have been gradually stabilizing the EU’s financial mess. It makes me wonder if the EU/Troika was involved in controlled demolition of the European economy and they wanted to get it over as fast as possible, while still saving the banks. But because saving the banks required a gradual solution bec. they were all insolvent, none of this blitzkrieg of EU members could work. The banks needed revenue coming in to pay down their malfeasances but the economies supporting them were simply murdered. Maybe. And if so it explains why the EU is so paralyzed still. They aren’t just stupid, they’ve tied themselves up in a huge knot.
Most interesting hypothesis, ma’am, and it explains some apparent anomalies. I shall apply this to other situations/pobservations and see if it seems to work. I suspect it will :)
I don’t think they had a clearheaded understanding of anything. They had powerful backers among the rich and the financiers who demanded that above all else their assets must be made whole, and every kind of manipulation and malfeasance was employed to protect the wealth of the wealthy with no consideration of the systemic implications. Europe has been weakened economically, diplomatically, and militarily in the process. It’s populations have been demoralized and demobilized. The European 1% (really somewhere between 3% and 7%) have held their own and are coming out of this dominating their societies in a way they haven’t since before WWII, so they are content, even if the whole continent has been hallowed out (better to rule in hell than serve in heaven). It’s sad, for with all its flaws the post-war European welfare state was probably the best system for the largest majority of the population of those states ever implemented in history. It is now a memory, to be reviled by scholars and intellectuals on the make and explained away as a passing phase by the mainstream. The new TINA will be a mangy form of American-style winner take all capitalism, and woe to any (as we see today in Paris) who resist it.
Schaeuble was a “take your medicine” kind of guy – so the thinking (yes it served the rich as usual) was to get it over with asap because why else do it? And I agree as it has been proved, they were clueless. And we were only slightly less clueless. Because we at least had sovereign banking.
Clueless and malicious, both. They had their (malicious) agenda that Weisbrot describes so well, but they were clueless to suspect that their agenda would endanger their own system.
Having a clue would only have paid off farther down the road than any of them were willing to wait, whereas cluelessness promised immediate payoffs.
I pity the historians of future times using some accidentally-preserved copy of NC’s comments threads as primary sources – wondering what the Dickens “DSK was spitzered” actually means!
LOL! Forget the historians. What about me? I’m trying to figure out if “spilzered” has a double suffix or not. Is that allowed in english grammar?
I’m guessing that this is alluding to Elliot Spitzer whose career was ruined by a sex scandal right when he was about to cross big Finance.
right. it’s a tried and true political dirty trick. To spitzer somebody. ;-)
As in, why surveillance is Necessary and Important. Spitzering fodder.
Splendid bit of original thinking Susan – a more plausible version of the history than the usual one. Thanks.
Sally Brown Economics
Government is just a black hole employed as a ground on a fulcrum. 95% of adults are consumed by the past, waiting for History as they see it to repeat, to take advantage, so independent-thinking young people drive all the change, which is why the communists, who fear kids accordingly, spoil them, to make them dependent. As I said from the beginning, I’m just telling you why lots of people are going to get themselves killed.
There are still many of us around with fathers and grandfathers who worked for Carnegie, Rockefeller and JPM, and helped Tesla kick their ass. Roosevelt was a JPM contemporary priss who simply bolted up JPM’s monopoly system to the middle class actuarial ponzi. And the process has been globalized under every president since.
One day, we are out in the school yard lighting off rockets, and the next, kids are competing to see who has the most expensive tennis shoes made in China. Now that the majority has triggered demographic collapse globally, with Family Law, the global economy has devolved all the way back to the JPM/Edison partnership. FANG is simply the latest and greatest herd control mechanism.
Stocks are super junk bonds, renamed, and all bonds are war bonds, because war is the only possible outcome of groupthink, left to its own devices. Bringing CPS/CSS in front of a Grand Jury, the latest iteration of the sh-show, is way too little, way too late. If you are going to waste your time teaching critters, teach their DNA.
GDP – public, private or non-profit, makes no difference to labor. You kill the hydra by turning it on itself. The mercenaries in the Middle East are just Pinkerton, Roosevelt with a Tiffany dress.
The birth canal is the exit, and the communists short it every time. You don’t have to do anything, but be about your business. Don’t poke a lion with a big stick expecting a happy outcome; Grace is anything but defenseless.
The communists piss away their resources every time, trying to prove that black is white. “How about tens and twenties? All I want is what I have coming to me. All I want is my fair share.” Crybullies; that’s the best one yet.
Printing real estate inflation, assigning the debt to renters, and employing a tax system to ensure the positive feedback isn’t exactly rocket science. Can’t blame Trump for trying to protect his skin in the game. But it’s just a game, of misdirection.
War is coming.
‘But owning property is what ties people into a free-market system.’
You cannot own real estate. Only rent it. Try not paying property taxes.
Communists? Really? Where? What alternative, extra-dimensional universe do you live in, because the only significant communist nation left in this particular universe (in which neo-liberalism reigns supreme) is Cuba, and if you think Cuba is dominating world political economy, you seriously need to be in a straight-jacket before you injure someone with your degenerate word salad.
Um, I have to agree that that was one weird, incoherent, screed.
Whatever he’s using, he needs either more of it or less of it.
Would you consider North Korea to be Communist?
Not in any way Marx would recognize. Do workers own the means of production in NK? Do workers have any say at all in NK? Hardly. NK is one of the least communist countries on the planet.
That goes for China and Vietnam, as well, both of which are far more capitalistic than communist. I don’t know about Laos, but Laos is one of the least globally significant economies around.
I psrcieve a Grexit, or return to the Drachma not as amputation of both legs, but amputation of the head.
I would be curious to hear Yves’ and others’ take on Warren Mosler’s advice to countries in the EU who want to regain the use of their own currencies.
Mosler, if I understand him correctly, advises such a government to begin paying government workers, pensioners, other providers, at least in part, in the “new” sovereign currency and, at the same time, requiring that tax payments due to the government be paid only in the new currency.
He does not say that the private banks (or possibly even the national central bank) should be required to stop using euros. On the contrary, those banks could continue to use euros and take and clear euro deposits. Since the private banks are member banks of the ECB system, his assertion is that they will not be abandoned by the ECB on account of what the state government does.
Because the state government will create a demand for its “new” currency by reason of requiring that tax payments be made in that currency, it can offer to issue the new currency at par with the Euro to anyone who wants to convert Euro into the new currency.
So, essentially, Mosler is recommending the gradual introduction of the “new” currency over time. It seems to me that this could be done exclusively with paper money initially, until the electronic version of the new currency is set up. While this is not a complete solution, it would open up more policy space for the state following it to the extent of the new currency in circulation.
How many people pay their taxes in cash?
This is the dual currency model. Yes, probably the only practical way to do it, but the transition should be ….interesting.
And, as in Greece, the ECB might choose to punish the government by cutting off the country’s banks – unless it’s a TBTF, like France, Italy, or Spain.
If LePen wins in France, it should be quite interesting to see what she actually does.
The other thought I have been having on this topic has to do with defensive planning for a possible breakup of the eurozone.
The coalition in Portugal, for example, could order the development of the systems necessary to revert to a national currency not as a concrete plan, but as a contingency plan.
The rationalization is that if a large state like Italy or France dropped out of the Eurozone, it would spell the end of the system and, rather than deal with the chaos, Portugal would be able to switch over to its own currency immediately because it had planned for such an event.
Even better, from the point of view of selling such a contingency plan, is to point to the Germans and the ones who might bail out on the euro if they no longer found it useful. That might be a way of putting the eurocrats within the country on the defensive.
And you are correct, Mosler’s plan does seem to me to be a dual currency approach. In fact, Barcelona is planning on introducing its own currency, irrespective of whether Catalonia wins independence, so that could be a small scale model of how to do it.
Mosler’s (and others’) proposals to use parallel currencies and/or replace the euro as a panacea strike me as pretty bizarre, bordering on economic malpractice. It’s inherently deceptive, or at least convoluted to the point of nonsense.
First, paying workers, suppliers, pensioners, and others in a national currency unit that is depreciating against a euro currency unit still in use by the banking system is just another name for looting by connected insiders. When people receiving this new sovereign currency go to pay rent and buy food, the price denominated in said national currency unit will be higher than the euro price. Unless the government fixes the foreign exchange rate, in which case, why bother: you have now re-pegged to the euro.
Second, the argument that taxation value of money will support the value of the new national currency unit is extremely misleading to the point of being intellectually dishonest. That only works if the taxation is of sufficient size to matter (in other words, austerity), yet these proposals are often exhorted as a means of fighting against austerity.
Third, the transition to the euro started as an accounting concept and then went to physical notes and coins after a long number of years working that out. That’s not to say it’s impossible to do it the other way around, but that opens up even more uncertainty when the electronic systems (which constitute the bulk of both payments and accounting systems) are the last to make the jump rather than the first. Quite the contrary, the fact that the euro is an established global currency means that the cash market can continue using euros for the time being as other parts of the economy are prioritized more highly for switching to the new national currency unit.
Ok, so let’s look at each one of these counterarguments.
First is the argument that when you start paying people in the new currency, it will be depreciating against the euro. That is, according to Mosler, a false assumption. The reason is that his plan would not force the conversion of euro deposits to new currency.
Instead, the country issuing the new currency would have it on offer at par or a slight premium over the euro. Because the population need the new currency to pay taxes, they will buy the new currency with their existing euro for that purpose and be able to use euro for savings, etc.
Since the issuing government is the monopoly issuer of the new currency, it has the ability to control the price of that currency in euros.
Secondly, on the tax base, the issuing country already has a tax base and had a tax base prior to adopting the euro which will/did drive the currency. That tax base does not need to be any bigger than it already is at the time of introduction of the new currency.
As to the last point, I don’t see the disagreement. Mosler does not advocate forcing the conversion of euro denominated bank deposits. Therefore, your last statement seems completely compatible with what he proposes.
Finally, this is not offered as a panacea. It is offered as an alternative to a system which is not working. Since it will be operated by humans, by definition it is going to be flawed, just like the current system is flawed.
I would encourage you to think more carefully about those assertions.
That is just plain academic fraud. The purpose of reintroducing a national currency unit in the European context is to change the value relative to the euro. If the value of the euro is acceptable, then that negates the need for a different currency. Mosler cannot have it both ways. He either advocates a revaluation of the currency within a national economy like Greece, or he does not.
The population would only need the new currency unit if it wasn’t being paid in the new currency unit. Again, Mosler can’t have it both ways. Either taxation will equal spending – Evil Austerity – or it won’t. If spending of the new currency unit exceeds taxation of it, then it is dishonest to claim the population will need it.
No, it does not have the ability to control the price of a foreign currency.
You just said that people will need the currency to pay taxes. Now you’re saying the tax base already exists?
That is the disagreement. I’m pointing out that in the development of what we know today as the euro, it started off conceptually and then became physical coins and notes. Mosler proposes something unprecedented: allowing the banking system to continue denominating electronic assets, liabilities, payments, and other records in a foreign currency unit even as the average domestic citizen is herded into a separate national currency unit. Not inherently bad: rather, an observation about increasing uncertainty in the face of not having any experience doing this.
Hence panacea. Mosler and others think there’s something magic about calling a fiat currency by another name. What matters are the humans making the decisions. Greece didn’t bail out its banks and refrain from taxing its oligarchs because the euro made them do it. They did those things because public officials chose to do so.
We confront a failure of management, not a failure of monetary economics.
So, again, let’s look at the arguments:
That is not true. The purpose of reintroducing a national currency unit is to restore the sovereignty of the country doing it in terms of its fiscal space. Whether and to what extent the new currency’s value varies compared to another currency is not the purpose.
There is also a false assumption operating here. Not everyone will be paid in the new currency unless everyone becomes a government employee, which is obviously not going to happen. Those who are not government employees are still free to use euros to make purchases and transact all other business except pay their taxes and other obligations due to the state government. For those obligations, they will need the new currency. The state government, as the monopoly issuer of new currency will sell new currency at par in exchange for euros to those who need them in order to pay those obligations.
Yes. The tax base already exists in the sense that the state government today is collecting taxes from its citizens. The difference is that today it accepts payment of those taxes in the form of euros, whereas under Mosler’s plan the state would refuse to accept euros but will only accept the new currency on a one to one basis with the euro.
I agree in part. But the failure of management is in the failure or refusal to understand how the monetary system works. Hence the 3% deficit limit in the Stability and Growth Pact. Obviously, even if a state government (e.g. a LePen government in France) bail out of the euro and then continues to impose the same austerity measures currently in play in the eurozone, things will not get better.
I’m fascinated by your continued insistence on having it both ways. If you want to introduce a parallel currency so that you can spend more of those currency units than you tax back while allowing the banking system to continue using the euro, that of course will work from the perspective of the sovereign government.
It will work by devaluing the parallel currency relative to the euro. It is simply a transfer of responsibility for addressing the euro-denominated debt from the sovereign to the people receiving payments from the sovereign, like workers, pensioners, and suppliers. Your notion that nominal increases in budget deficits denominated in the new currency unit will make a difference to people suffering in the real economy is flawed. It is a solution in search of a problem rather than a solution to the actual problems of financial fraud, wasteful spending, and lack of taxation of the wealthy.
Or perhaps there’s a simpler way of addressing the underlying dynamic, going back to the original comment:
I wholeheartedly agree there. However, that’s not the problem. No one disputes the ability of a government to emit currency units.
The problem is going the other direction. The government (at least, one on friendly terms with its euro-using neighbors) cannot print euros to give them to people who want to convert the new currency into euros.
Interesting idea. I would like to see this discussed. Do you have a link to Mosler on this? I took a quick look at his website and didn’t see it.
This is probably a good start:
There is lots of discussion about Greece specifically and parallel currencies/TANs/etc. more generally throughout the historical NC pages.
He recently gave a talk to an EU subgroup, along with one other person. The point at which he begins to explain the new currency idea is at about 1:15:00. BTW there are two little windows in the top left of the youtube feed. Click the one on the right to get the english language version.
We may or may not think much of our democratic institutions, but as Weisbrot notes in passing (re the Maastricht Treaty), there isn’t even a gesture towards democracy in the Brussels misery machine. What democracy we have left resides in the nation-state, whether you love it or hate it. Nationalism is unfashionable at the moment, but I lose no opportunity to remind people of the simple fact that the nation-state is where the democracy is.
is eurozone unemployment calculated the same way as american unemployment? specifically, in the US you are not unemployed if you drop out of the labour force, and you drop out of the labour force when you stop getting unemployment benefits, which happens much earlier than in the eurozone. how do the adult labour forces look instead?
also, first sentence of the third paragraph, you are missing a ‘refuse’ in between ‘to’ and ‘to’.
This is an excellent essay. Thanks for posting it. To begin with, it sets the semantics correctly avoiding the term “monetary union” because there is not such union in Europe. The euro is just a common currency and the ECB must be the most dysfunctional institution in the EU because it sets common monetary supply for 19 different “treasuries” with different and even divergent necessities. As a result monetary policy in the eurozone is chaotic.
Weisbrot describes well the case of macroeconomic misunderstanding and misleading the public in Europe. For me, the most important issue rigth now is the inability of the authorities to recognise the dysfunctionality of the eurozone. Moreover, some seem to be happy with monetary chaos. Authorities do not aknowledge that this chaos is the root cause that migth ultimately end with an euro breakup (and with it the rest of EU institutions). We, the european public, are almost as clueless as the authorities. Nobody wants to talk about the failures and destiny of the euro. Prohibido, interdit, proibito, verboten, forbidden! We buildt the beast without the switch off button or an alternative engine to replace the malfunctioning one. Some economists talk about “rebooting” the eurozone (supposedly with a new operative system).
In Spain, for instance we are facing general elections very soon and none of the political parties address this question openly. Even the new political alternatives that present themselves as “fresh air” required to clean up the institutions fail to do so.
I think Weisbrot really nails it.
“”This sequence of escalating misery caused by government policy—accompanied by regressive structural reforms—can only happen if a broad swath of the public, including many journalists and politicians, is seriously confused as to what has gone wrong and what feasible economic alternatives are available.
From the beginning of this crisis, the European authorities had the power, resources, and ability to bring about a robust recovery of growth and employment. It was the will that was lacking.
the “too-big-to-fail” countries of Italy and Spain
the $74 billion austerity package that the European authorities forced on the Italian government.
In November 2010, the Irish government became the second eurozone economy to sign an agreement with the IMF and the European authorities, after their 10-year bond yield had passed 8 percent. Portugal would be third, in May 2011″”
What does the future of this lack of willingness to create employment and climate mitigation mean for Spain, Italy and France.
And probably even more pressing, what does it mean for cities on the front lines of these problems such as Dhaka.
Climate Refugees and a Collapsing City
“”The incidence of flooding in Dhaka is increasing, and the lack of water and sanitation facilities means waterborne diseases such as diarrhea and typhoid are widespread.
The situation in Dhaka illustrates how climate change is neither something that affects only polar bears, nor a problem only for future generations. Many fear that failure to act now will render the Bangladeshi capital a precursor for wholesale climate catastrophe.””
The Euro can never work in its current form.
It is bringing back the tensions the EU was designed to remove.
Germany is throwing its weight about and forcing the ECB to use policies that work for Germany and punishing the Club Med nations.
It’s primary aim is to reduce the power of democracy within nations.
“The putative “father of the Euro”, economist Robert Mundell is reported to have explained to one of his university of Chicago students, Greg Palast: “the Euro is the easy way in which Congresses and Parliaments can be stripped of all power over monetary and fiscal policy. Bothersome democracy is removed from the economic system” Michael Hudson “Killing the Host”
“Let me issue and control a nation’s money and I care not who writes the laws.” Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild.
The Euro’s primary aim is to reduce the power of democracy within nations.
“The putative “father of the Euro”, economist Robert Mundell is reported to have explained to one of his university of Chicago students, Greg Palast: “the Euro is the easy way in which Congresses and Parliaments can be stripped of all power over monetary and fiscal policy. Bothersome democracy is removed from the economic system” Michael Hudson “Killing the Host”
“Let me issue and control a nation’s money and I care not who writes the laws.” Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild.
Dean Baker and Weisbrot have incidentally put their finger on one of the rules of US representation that needs to be changed yesterday – early in the text they note that a politician’s first priority is to get re-elected.
USA needs a constitutional clause preventing any elected officer serving a second term.
That would permit representatives to do their job properly and waste no time begging.