German hypocrisy and lunacy

I haven’t much time to write a blog today (travel and other commitments). But I have been examining tax revenue data for the EU in the last day or so as part of another project and thought the following might be of interest. The analysis is still unfinished (by a long way). But to the news – I laughed when I read the story from Der Spiegel (March 12, 2012) – Germany Fails To Meet Its Own Austerity Goals – which listed Germany as a serial offender in the hypocrisy stakes. I also laughed when I read that the German Finance Minister, in between games of Sudoku, told a gathering in Berlin yesterday that (as reported in a Bloomberg video) “deficit spending is the wrong way to bolster economic growth” and that “People who believe you can generate growth without pursuing budget consolidation have “learned nothing from the experience of the crisis.” The combination of staggering hypocrisy and manifest arrogance (thinking that the world is so stupid that they actually believe austerity will deliver growth) seems to have reached new heights.

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A tale of two economies – Greece and Iceland

Last Friday (March 9, 2012), the Greek government effectively defaulted on its public debt after the required minimum of 75 per cent of private creditors agreed to the so-called “haircut” or debt swap. I find it amusing how the Euro leaders have attempted to massage the default as a debt swap or some other euphemism. The facts are obvious – close to 100 per cent of those who are holding Greek government debt will lose at a minimum 53.5 per cent of the value of their assets. This was forced on the private sector by the Troika (EU, ECB, and IMF) who apparently think it is preferable to undermine private sector wealth than introduce changes to their the Eurozone monetary system which might actually make it work! The discussions in Europe will quickly move to when Bailout 3 is required because reducing the level of Greece’s debt does very little to alleviate the problem which is the capacity of the Greek government to service the flow of interest payments while simultaneously destroying its tax base with austerity. The recent performance of Iceland serves as a timely reminder of how currency sovereignty (monopoly issuance and floating currency) can assist an economy make substantial structural adjustments without major attacks on living standards. Moreover, such an economy can restore growth relatively quickly in contradistinction to EMU nations which are locked in (variously) to years of recession-cum-depression. This blog is a brief tale of two economies – Greece and Iceland

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Athens burned, while I played Sudoku

Today, I am back in Greece. Yesterday, there was a confidential in-house “Staff Note” leaked from the Institute of International Finance, which purported to estimate the costs of a disorderly default on Greek government debt. Most of the paper was about ECB and related “contingent liabilities” which summed to around €1 trillion. However, once you understand the nature of those “contingent liabilities” in the context of the capacity of the ECB as the currency-issuer in the EMU and compare them with the real losses being endured by the Greek economy and its people, then you soon realise that the Greek government should reintroduce its own currency immediately. The European elites, however, are too busy playing Sudoku to appreciate that, ultimately, their ideologically-motivated austerity will not only impoverish Greece, but will also cause their whole monetary system to collapse.

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Some appalled economists – just missing the boat

In January 2011, 44 per cent of Spanish working people below the age of 25 were unemployed. A year later Eurostat report (in its March 1, 2012 publication) – Euro Indicators – that the rate has climbed to 49.9. For the overall labour force in Spain, the unemployment rate rose from 21.7 per cent to 23.3 per cent over the same period. That is Great Depression-type magnitudes. At the other end of the unemployment spectrum, currently, is The Netherlands. Their overall unemployment rate has risen from 4.3 per cent in January 2011 to 5 per cent in January 2012. Notwithstanding the massive underemployment in The Netherlands (almost 50 per cent of the working age population work part-time – average is less than 20 per cent for EU) and the large proportion of workers hidden from unemployment by disability support pensions – this is a low unemployment rate. And therein lies the rub. The Dutch Centraal Planning Bureau released its latest – Short-term forecast yesterday (March 1, 2012) which showed that over the next 4 years it will violate the current Stability and Growth Pact (SGP) and face fines under the Excessive Deficit Procedure. And to put a finer point on this – the Dutch government has been one of the more rabid proponents of fiscal austerity and one of the first to heel-click in line to sign Germany’s … sorry the EU’s fiscal compact. All of that should tell you that the current leadership in Europe has no viable solution to its crisis. Some French economists have come up with a solution. This blog considers their work and concludes they are on the right track but haven’t penetrated all the neo-liberal myths that they seek to highlight.

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The lesson for the Europeans is that the US fiscal stimulus worked

Today, I was reading the latest report from the US Congressional Budget Office – CBO’s Estimates of ARRA’s Economic Impact – which shows that the American Recovery and Reinvestment Act of 2009 (ARRA) has been successful in increasing real GDP growth in the US and reducing the rise in the unemployment rate. Some simple calculations reveal that in the absence of the ARRA US economy would still be in recession. That is, taking a European trajectory. There is also evidence that the Obama administration were presented with analysis that showed that a much larger stimulus than was chosen was necessary, yet this information was suppressed in final documents that were the basis of the fiscal intervention. It seems that the neo-liberal ideologues within the Obama camp deliberately undermined the fiscal intervention and so its impact, while positive, was far less than was required. I also read an interview with the ECB president, Mario Draghi today. The ECB is now pushing fiscal austerity as the only way out of the Euro crisis. In juxtaposition to the US experience, the Europeans remain fixed to the view that saving the flawed institutional structure (that is, the EMU) is a higher priority than insuring that people prosper. The lesson for the Europeans is that the US fiscal stimulus continues to work.

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Standby for the third Greek bailout

I suppose I have to write something about the extraordinary deal that emerged out of Brussels yesterday. I tweeted at the time that the “Latest EU Bailout will not end the uncertainty. Greece will not be able to withstand a decade of repressive economic policies”. The ABC National News last night introduced the bailout in terms of “finally resolving the uncertainty” and then proceeded to interview an analyst who outlined why the deal will increase uncertainty. This is the state of confusion among the media commentators who are bullied by the Troika to mouth is the official rhetoric but who must also realise that the projections underpinning the approach are deeply flawed and that the situation in Greece will continue to deteriorate. The reality is that this “deal” only buys some more time. In the meantime, the real situation in Greece will continue to worsen. Standby for the third Greek bailout.

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The politicians in Europe and the UK are deliberately sabotaging their economies

Eurostat published their latest National Account estimates for the Eurozone on Wednesday (February 15, 2012) – Flash estimate for the fourth quarter of 2011 – which allows us to complete the picture for the 2011 calendar year. Overall, the results are appalling. Many nations are now double dipping and even the European powerhouse, Germany contracted last quarter. Over the Channel, the British economy also contracted in the 4th quarter 2011. None of this should come as any surprise. An economy cannot grow when the private sector is deleveraging and is in constant fear of unemployment and the public sector deliberately refuses to step in and provide fiscal support. It is even worse when the government further undermines the capacity of the private sector to spend (by harsh cuts in pensions etc) and cuts its own net spending into the bargain. As one commentator noted yesterday “it makes no sense to drive an economy into recession where it stops people from working and thus paying more taxes” if the goal is to reduce budget deficits. The political leadership in Europe and the UK is deliberately sabotaging their economies. The same mentality is gathering pace in the US. Spare us!

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Our pathological meanness to the unemployed is just bad economics

A lot of attention is being focused on the Eurozone at the moment given the scale of the economic and social crisis that is unfolding there. It is clear that the unemployed and other pension recipients are being made to pay very significant costs for the policy folly imposed upon them by the Euro political leadership. However, the mean-spirited treatment of the disadvantaged is not confined to Europe. In the US, for example, the Congress is soon to debate and vote on a serious reduction in income support for the already beleaguered unemployed. There is a tendency to think about this from the perspective of a commitment to social democracy as being immoral, iniquitous, and a violation of the human rights of the disadvantaged. While I have great sympathy with all of those emphases, there is an easier attack that can be mounted on cutting unemployment benefits in the US or elsewhere. Such a strategy only serves to further undermine the spending capacity of the private sector at a time when the principal problem is a deficiency of aggregate spending. A simple understanding of macroeconomics leads to the conclusion that our pathological meanness to the unemployed is just bad economics.

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The Greek elite – prefers to eat its children

I am travelling for most of today and so haven’t much time to write a blog. I am typing this on the train to Sydney airport. The press has been increasingly highlighting the on-going Greece situation. What is important to note is that the neo-liberals are no longer honey-coating the fiscal austerity in terms of “fiscal contraction expansion”. The Greek finance minister is now saying that the Greeks have a choice between disaster and total disaster. Other are juxtaposing sacrifice with chaos. I have noted that in recent months that a lot of commentators have been asserting that an exit would be a disaster – far worse than the current “disaster” of 4 years recession and more to come. But rarely do you read any coherent analysis of what might happen should Greece exit the Eurozone. My view is that while the dislocation would be intense and costly it would, in the longer-term, be less costly than the current alternative – which is persistent recession for the foreseeable future and a savage erosion of real living standards, especially for the next generation. As on commentator put it over the weekend (full quote provided later) – the current austerity approach with “deep structural inequalities and its rigid adherence to a failed economic ideology, protects neither democracy nor human rights. Stiff-necked and punitive, it prefers to eat its children

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Yesterday austerity, today growth – but leopards don’t change their spots

It has been interesting to watch how various members of my profession are dealing with the on-going crisis over the last 4 years. Clearly, imbued with the notion that the “business cycle” is dead, which the mainstream macro economists had been attempting to establish as a given in the public debate, most economists were in denial at the outset of the crisis. That denial moved into the manic deficit terrorism that has sought to reconstruct the private debt crisis into a sovereign debt crisis – which allowed them to vent on their pet topic – dislike of government fiscal policy when used to increase employment. They have no problems with active fiscal policy when it is aimed at contraction. They just hate the public sector supporting growth even when the private sector is incapable of doing so. But as the empirical reality has increasingly rejected the predictions of the mainstream macroeconomic models – there has been no inflation breakout or rising interest rates or sovereign government insolvency – there has been a shift going on. Some of those that were advocating austerity now seem to be advocating growth. But when you dig a little deeper there is no fundamental catharsis in my profession going on. The only motivation for those now saying Europe needs growth not austerity is that they are trying to distance themselves from the train wreck that the political leaders are creating there. As the title suggests – yesterday austerity, today growth – but leopards don’t change their spots.

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Greek government should tell Troika it is prioritising a fall in unemployment

The UK Guardian reported (February 6, 2012) – Disbelief as Greek politicians delay deal on €130bn rescue package – that the German Ma’am is becoming “exasperated”. Such discomfort. Apparently, the fact that the Greek government has to engage in some discussions with other interests in Greece before signing up to further extremely damaging cuts is upsetting the German leader. She claimed that “Time is of the essence. A lot is at stake for the entire eurozone”. She is probably right. The quicker Greece cuts further the faster its exit from the Eurozone will be. But Merkel’s discomfort is nothing compared to what the Greek population is feeling at present. The Hellenic Statistical Authority or EL.STAT reported that the October 2011 unemployment rate in Greece was 18.2 per cent compared to 13.5 per cent in October 2010 and 17.5 per cent in September 2011. It will continue to rise as long as the government buys the Troika-line and imposes worse austerity. But it seems that the Greek government has become totally obsessed with fiscal ratios – that is, totally neo-liberal-centric – and is losing focus on a human tragedy that they are causing. The Greek government should tell the Troika it is prioritising a fall in its unemployment rate – like it or lump it!

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Saturday quiz – February 4, 2012 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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Monetary movements in the US – and the deficit

This week I seem to have been obsessed with monetary aggregates, which are are strange thing for a Modern Monetary Theory (MMT) writer to be concerned with given that MMT does not place any particular emphasis on such movements. MMT rejects the notion that the broader monetary measures are driven by the monetary base (hence a rejection of the money multiplier concept in mainstream macroeconomics) and MMT also rejects the notion that a rising monetary base will be inflationary. The two rejections are interlinked. But that is not to say that the evolution of the broad aggregates is without informational content. What they paint is a picture of the conditions in the private sector economy – particularly in relation to the demand for loans. In this blog I consider recent developments in the US broad aggregates and compare them to the UK and the Eurozone, which I analysed earlier this week. But first I consider some fiscal developments in the US, which, as it happens, are tied closely to the movements in the broad monetary measures. The bottom-line is that the US is growing because it has not yet gone into fiscal retreat and the broad monetary measures are picking that growth up. The opposite is the case of the European economies (counting the UK in that set) where governments have deliberately undermined economic growth and further damaging private sector spending plans.

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Bank of England money supply data paints a grim picture

Just as the recent monetary data from the Eurozone has revealed the parlous state of demand there, the money supply data released by the Bank of England yesterday revealed a collapsing borrowing by households and firms in Britain scale not previously seen. It is clear that the December data shows that households are deleveraging (paying credit cards down) and business firms are now in full retreat similar to the worst of the recent downturn in 2009. The evidence for that conclusion is to be found in the fact that the Bank of England’s broad money supply measure contracted by 1.4 per cent in December, which the Bank noted was the largest single month contraction on record (shared with December 2010). Just like the latest ECB monetary aggregates are showing what the real situation is like in the Eurozone, the Bank of England’s data is painting a very grim picture of life in Britain as the draconian fiscal austerity drives that economy into the ground. The data also provides a continued rejection of mainstream macroeconomic theory, which is an interesting aspect in its own right.

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Latest ECB data shows how bad things have become in Euroland

I was reading the recently published January 2012 Monthly Bulletin from the ECB yesterday. It provides a massive amount of interesting data about the developments in the Eurozone plus analysis. The descriptive analysis is fine (this went up, this went down) but the conceptual analysis leaves a lot to be desired. This is an institution that still talks about reference values of broad money as a policy target to control inflation. Basically, that idea has no application in our monetary system. But that aside, the release of the latest M3 data tells us how bad things are getting in the Eurozone and do not augur well for the coming year, despite the up-beat forecasts for real GDP that the ECB are still providing. The latest ECB data shows how bad things have become in Euroland.

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Saturday quiz – January 28, 2012 – answers and discussion

Here are the answers with discussion for yesterday’s quiz. The information provided should help you understand the reasoning behind the answers. If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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The US is not an example of a fiscal contraction expansion

Recent data releases suggest that the current economic experience on the two sides of the Atlantic is very different. The latest data shows that the UK economy is now contracting and unemployment is rising as fiscal austerity begins to bite. Conversely, the latest US data shows that growth is on-going and the unemployment rate is finally starting to fall. This may be a temporary return to growth because the political developments that may occur later in this year could see some serious, British-style fiscal austerity being imposed on the US economy. At present though, my assessment of these disparate trends is that fiscal austerity is contractionary if non-government spending is insufficient to offset the decline in public spending. However, some observers are trying to hold out the US experience as vindicating those who believe in the notion of a “fiscal contraction expansion”. But the data tells us clearly that the US is not an example of this mania.

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IMF – the height of hypocrisy but still wrong as usual

When I read the latest news from the IMF early this morning I sent out a tweet saying that it was the height of hypocrisy for the IMF now to be trying to reclaim the high ground in the current economic debate by lecturing nations about the dangers of fiscal austerity. The IMF will always be part of the problem rather than the solution. They are consistently the architects of misinformation and bully national governments on the basis of that misinformation only to come back 3 months later and say “gee whiz”, look how bad things become. Currently the IMF is pleading for more funds. If I was a national government contributing to this bullying, incompetent organisation I would immediately cancel the cheque and, instead, spend the money pursuing domestic growth for the benefit of the citizens is that rely on my decisions. The current position of the IMF represents the height of hypocrisy. Further their forecasts are significantly error prone as usual. Wrong models will generally produce terrible forecasts that have to be continually revised. In the case of the IMF, these errors are also systematically biased by the ideological nature of their approach to macroeconomics.

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The catechism of the IMF

In early January 2012, the IMF published the following working day – Central Bank Credit to the Government: What Can We Learn from International Practices? (thanks Kostas). In terms of the title you can’t learn very much if you start off on the wrong foot. The bottom line is that if the theoretical model that you are using is flawed in the first place then you wont make much sense applying it. The other point is that while this paper presents some very interesting facts about the legal frameworks within which central banks operate and provide a regional breakdown of their results, their policy recommendations do not relate to the evidence at all. This is because they fail to recognise that the patterns in their database (the legal practices) are conditioned by the dominant mainstream economics ideology. So concluding that something is desirable because it exists when its existence is just the reflection of the dominant ideology gets us nowhere. Their conclusions thus just amount to erroneous religious statements that make up the catechism of the IMF and have no substance in reality.

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Budget deficits are part of “new” normal private sector behaviour

Today I am in the nation’s capital, Canberra presenting a class at the European Studies Summer School which is being organised by the Centre for European Studies at the Australian National University. My presentation is entitled – the Euro crisis: fact and fiction. I will have more to say about that in another blog. Today I am considering the issues surrounding the decline in personal consumption spending and increased household saving ratios. The argument is that this behaviour which is now clearly evident in most economies marks an end to the credit-led spending binge that characterised the pre-crisis period of the neo-liberal era. But with that era coming to an end and more typical (“normal”) behaviour emerging, the way we think about the government (as the currency-issuer) will also have to change. There is clearly resistance to that part of the story, in part, because there is a limited understanding to the central role that the government plays in the monetary system. As private sectors become more cautious, we will required continuous budget deficits to become a part of this return to the “new” normal.

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