Europe Kicks The Can As Far As They Can [View article]
Notwithstanding tabloid rhetoric, I'm confident that the euro will remain unsustainable due to its flawed construction and the unwillingness of EU officials to adequately refinance its banking system, impose needed haircuts on peripheral debt and ring fence the least viable . At best, we can expect operatic oratory accompanied by ineffectual reforms borne of compromise bridging sharply differing views. At a technical level, I'm not sure whose going to buy this partially insured debt.
With a growth rate of .1% and lagging in fiscal consolidation, Italy's position is very tenuous and with its level of indebtedness default is indeed the most likely outcome.
And when this happens, the entire EU will fall into collapse as the EFSF (the bailout SPV) is not large enough to accommodate either Spain or Italy.
There is growing realization that the EFSF needs to be larger in size if Spain and/or Italy become part of the equation as is most likely. Current interest are punishing, debt is too high and growth is too low.
Understanding there is not popular support to expand the EFSF beyond euro 440 billion, the markets are pricing in risks of widespread default and an seeing deep black holes on core European bank balance sheets.
To make things worse, economic growth throughout the zone is sclerotic which will make default even more likely as tax receipts will fall. After being lied to and spoon fed the truth, the markets have taken it upon them selves to determine what is most probable.
Renminbi Going Down, Eurozone Borrowing Requirements Going Up [View article]
I would like to add an additional thought. Most of the leaders of the EU and ECB tell us things are great and the modest fiscal consolifation underway will cure all fiscal ills. Obviously, there are people who doubt this assertion.
Anyway, if all things are great why would Merkels's proposal that investors share in soveriegn defaults undermine the euro and investor confidence when all things are looking up.
It seems inherently inconsistent and raises the posibility we are trying to put a pretty face on something somewhat ugly.
Renminbi Going Down, Eurozone Borrowing Requirements Going Up [View article]
Interesting snippets John.
After reading the three pieces I was struck by the fact these developments have much in common: incompetent, deceitful and corrupt leadership.
Each time I read the Jobs release I am reminded of manure and this time was no different. How can we keep creating jobs while employment remains at the level it was in 2000?
Propaganda, lies and canards have been used by politicians for decades to placate the masses so that they can remain in power. This time is no different and even though the party in power took an ass kicking in the mid-term elections they are looking forward to 2012 and doing everything in their power to create an illusory recovery supported by lies swallowed by MSM and regurgitated as news.
The Chinese yuan is probably overvalued but it is not the principle reason for our ongoing trade imbalances. When a country persistently runs massive budget deficits it is more than likely spending more than it produces and this incremental demand must be satisfied through additional imports. And it becomes more complicated when we take into account expansion of debt as this introduces further demand and purchasing power without necessarily increasing production.
I don't know who knows what but I have a very low estimate of Geithners capacity to grasp complex issues and pointing our finger and blaming China for our hollowed out and unbalanced economy is simply a political expediency. We have allowed and encouraged unsustainable policies but do not wish to either acknowledge this or change our course. Just blame China; It's always easier to blame others for difficult problems that must be addressed from within.
Similarly, Ireland is having a difficult time reducing its deficits and will more than likely have to draw upon the European Stabilization Fund but is telling the world that it is solvent and that it will be able to make the necessary budget adjustments. Meanwhile, the IMF, ECB and the EU are all releasing panicky and conflicting statements with some pressuring Ireland to take cash as uncertainties in Ireland are roiling much of the euro area. The truth, of course, is Ireland is insolvent but does not want to be systematized for drawing upon the fund and limiting its access to fund unsustainable policies.
The height of this folly was seen most recently in the G20 meeting when Angela Merkel suggested after the Stabilization Fund expires it be replaced with a permanent mechanism (yet to be defined) with provisions for investors to take losses in the event of sovereign default, hoping to shield the German public from bailing out corrupt and bankrupt sovereigns.
Bloomberg recently reported Cowen as saying Merkel’s proposal to involve debt restructuring with losses for private holders of sovereign bonds hasn’t “been helpful". You cannot make this stuff up; the world is a global comedy show.
Monetary Policy in the U.K.: Where QE Actually Works [View article]
You have written an interesting article but UK monetary policy is every bit as convoluted as that of the US's with very similar desires to manage too many macro economic variables. Currently price inflation exceeds the official target yet it's expected there will be further easing in the months ahead; there's more than anchoring expectations. From RTE:
The annual rate of inflation in the UK held steady at 3.1% in September as expected as a drop in transport costs offset a record jump in clothing prices and higher food inflation.
The Office for National Statistics said consumer prices were flat on the month, leaving the annual rate at 3.1%, the same as in August and in line with economists' forecasts.
That is still well above the Bank of England's 2% target, although policymakers expect price pressures to ease over the next year, and therefore the figures are unlikely to change the view that monetary policy will remain extremely loose for some time to come.
Concerns about Britain's economic recovery have raised the possibility the central bank may have to pump more money into the economy to shore up growth.
There were actually three overlapping events underway that added to broader stress in the markets. They were adding, sterilizing and preparing for a rollover. From the Ft:
1) the ECB will be draining the EUR55bn that it has bought in bonds in the SMP. This is interesting since, with the big rollover just one day later and likely a drop in the overall liquidity surplus (to say EUR100-150bn), it might get more difficult/expensive for the ECB to drain that surplus liquidity, which could start pushing Eonia rates higher. SMP equals securities market program (purchases.)
2) there will be the normal weekly MRO: amounts have increased there to stand at EUR152bn, and some of that might be rolled over into the 3m LTRO tomorrow, maybe up to EUR50bn. MRO equals main refinancing operation and LTRO equals long term rolllover
3) and Just two days to go until the July 1 expiry of the European Central Bank’s one-year LTRO. The Long-Term Refinancing Operation added €442bn in liquidity back in June 2009. And now — much to some banks’ chagrin — it’s due to come to an end with no matching-maturity replacement. Instead, the ECB is offering unlimited three-month LTROs to coincide with the end of the 12-month one.The €422bn question then, is how much of the one-year LTRO will roll into the three-month operation.
This indeed is becoming a crisis of confidence with 62% of the people saying the country is on the wrong course with a majority opposed to the strip mining of our medical system in the name of reform. Most fear further reform, increased taxes and sweeping changes in the nation’s economic landscape.
What is conspicuously missing from public discussion of the economy is the miserable and divided political backdrop against which the economy is functioning and reported to be recovering. As long as households and business view the administration as bent on destroying traditional values and lifestyles and fiscal policy as a predatory tool to channel resources to special interests, confidence will remain low and spending constrained; politics and economics are inextricably linked.
What Krugman and others fail to grasp is that most people loath the dystopian ideals embraced by the current administration and a $trillion here or there will not change this mindset and produce a durable economic recovery built upon faith in the future. And beyond this huge disconncet there remain structural issues as noted by an unnamed author at the Von Mises Institute.
The current economic disaster is the result of the combination of negligence, hubris, and wrong economic theory. For decades, an economic and monetary policy has been practiced based on the illusion of, "It doesn't matter." At first it was, "Deficits don't matter." From that, the policy of "it doesn't matter" got extended to money creation, the credit expansion, the stock-market bubble, and the housing boom. Now, we're being told that buying financial junk by the central bank to beef up banks and brokerages also doesn't matter.
The current financial crisis is not of a cyclical nature. The financial turmoil is the symptom of the structural imbalances in the real economy. Over decades, expansive monetary policy has gone hand in hand with implicit and explicit bailout guarantees, and this has distorted the process of capital allocation. Under such perverted conditions, those investors will win most who cast away the restraints of prudence. It is a game that can go on for a long time — up to the point when the irrationality has become systemic.
The simple fact is that the US economy is burdened with a highly lopsided capital structure as the consequence of a wide discrepancy between consumption and production, which, in turn, is the result of monetary policy. Persistent trade imbalances are the symptoms of this discrepancy. This means for the US economy that lower interest rates and government incentives aimed at boosting consumption work as pure poison. Instead of more consumption, more savings, less consumption and fewer imports are needed.
The current financial crisis reflects that many debtors have reached their debt limit and that creditors are lowering that limit. From now on, business and consumers, governments and investors must work under the restraints of lowered debt ceilings.
Government Spending: Who Will Be Paying the Bills? [View article]
The problem is that, there is no opportunity for either side to ever prove itself right, except through enacting their different approaches. However, in one respect, the Obama camp will be proven correct. That is, if there is a major move towards cutting of expenditure, a recession will almost certainly be the outcome. This will then give them an opportunity to say 'I told you so' and blame the problem on the cuts.
What we will never actually see, is what happens next if countries continue to rack up huge deficits, and the dangers that might flow from this enactment of policy. It will allow history to be rewritten to say that, had the spending continued, then the world would economy would have recovered, and all would have been well.
However, it is quite possible for the US, for example, to continue to borrow from the new wealth creating countries and the oil states and appear to continue to be relatively prosperous. However, underneath such apparent prosperity is the reality that there are now the emerging economies that are being coming increasingly competitive, and taking a greater share of global wealth. Countries like China and India commenced with low end, low added value goods, but are rapidly rising up the value chain, and are starting to compete in the higher added value segments. The emerging economies will increasingly be meeting the developed world in the market for higher added value goods and services, and the developing world will win market share.
This leads to the question of whether there will be a miracle of a return to the pre-crisis 'normality'. Can the developed world return to past levels of wealth, at the same time as new and aggressive entrants are entering into more segments of the world market. The Obama solution is built on the belief that, at some point in the future, growth in the economies of the developed world will return, and this will then allow for the existing economic structures to be maintained, and at the same time producing enough growth to repay debts accumulated now. After all, this has been what has taken place following previous recessions.
>>>>>&g...
Contrary to popular opinion, during the depression Federal expenditures had grown from $6.4 billion in 1935 to $9.5 billion in 1940 - over three times the level in 1929. Criticism on the response time of fiscal measures is warranted but based upon the experience of the Depression, Japan’s lost decade and our most recent experience there is sufficient reason to doubt the efficacy of counter cyclical fiscal spending in offsetting deleveraging through increased savings and reduced consumption.
In fact, a number of academic papers suggest quite the opposite. In a landmark paper in the mid-1990s, the economists Alberto Alesina and Roberto Perotti found that economic growth fared much better during large fiscal corrections that were (i) decisive rather than gradual and (ii) relied on reductions in current government spending, rather than cuts in public-sector investment or higher taxes. That finding has since been confirmed by a number of related studies, including Giavazzi and Pagano (1996), Alesina and Ardagna (2009), Reinhart and Rogoff (2010), and the UK Treasury (2009).
Rather than benefit from the possible lessons from this research, we blindly and slavishly follow calls for additional stimulus under the belief aggregate demand is the problem when in fact it is debt. Reinhart and Rogoff clearly demonstrate that when a country's accumulated fiscal debt reaches 90% of its GDP its structural growth potential is reduced.
Ours is at 93% and the idea that additional fiscal spending is required is completely at odds with the facts that additional debt will weaken the economy. Additional borrowing is not an option and until we address our unsustainable debt our growth potential will remain structurally impaired, eliminating any possibility of resumption of historical growth. And, if we raise taxes as was done during the Depression, we will be forever resigned to mediocrity.
Fixing the Euro Crisis: Policy Recommendations [View article]
Your policy prescriptions are, for the most part, very thorough but I question why you avoided the heart of the matter: large government footprints that frequently cover around 50% of state economies and the countless unions that extort, protest, strike and cripple state economies. Until state governments are reduced in size relative to their respective economies and until the powers of unions are reduced, it will be difficult to undertake most, if not all, of the proposed reforms and restructurings. And while it may be required, a restructuring of Greece's debt (a polite default) is tantamount to their leaving the zone which may not be a bad idea given the currency constraint and the need for greater competitiveness through wage reductions. Freed of the euro, Greece could establish competitiveness in tradables through a weak drachma.
Worries of a New Debt Contagion Rattle Wall Street [View article]
Under the IMF/EU proposed plan Greece's debt to GDP will actually worsen between now and 2014. Some feel it will peak in 2015, strongly underscoring the point that the issue of sovereign debt will be with us for some time and during this period it is certain to spread to other countries.
Before I share some material from the FT, let me add that the level of restructuring being proposed for Greece, as measured by the primary deficit, is of epic proportions and few countries have successfully achieved this order of change. This points to how far out of control matters are in Greece and how difficult it will be to rebalance the primary account. From the FT:
The presentation of the main economic arithmetic behind the Greek Economic Policy Programme (EPP), as agreed with the IMF, EC and ECB, reveals the enormity of the task ahead. The programme envisages that the general government deficit will be cut from 13.6% of GDP in 2009 (which could be revised to about 14%) to 8.1% of GDP this year, 7.6% in 2011, 6.5% in 2012, 4.9% in 2013 and 2.6% in 2014. Assuming Greek real GDP expansion is about 2.1% by 2013-14, this implies the debt/GDP ratio would peak at 149% in 2013 (note that the authorities seem to be including an assumption that the public debt/GDP ratio will be revised up 7pp, which would take the 2009 ratio to 122%).
Greek Bailout: More Kick-the-Can Economics [View article]
The 45 billion euro support package, which is short-term in nature, is perhaps sufficient to help Greece with their borrowing needs for the current year should it be drawn upon. what about next year?
In the background, though, are possibilities for a constitutional challenge on any number of fronts within Germany; the Maastrich treaty upon which the eurozone is constructed prohibits bailouts, setting the stage for a legal challenge.
Separately, Greece's economy is contracting while it is adding debt with a 5% coupon; to correct this, further cuts will be ordered which will aggravate already deflationary poicies. This debt spiral will eventually lead to default.
Why don't we just face up to the facts? Because it's easier to kick the can and avoid difficult decisions which carry serious consequences.
Galbraith, Stiglitz, Soros on Resisting the Inevitability of the Greek Debt Crisis [View article]
Edward, I'm not sure you would fit in with that crowd as, like Soros, their thinking is set and they are busy looking for facts and theses which reinforce those views. Those there are all out of the same mold characterized by liberal, progressive thinking and great concern for economic justice and the environment; to my knowledge Martin Felstein was not invited.
They believe themselves to be cerebrally gifted and know what direction society and economics should move; the challenge is develping and IMPOSING policies to move us towards this dystopian destination. It's like central planning without titles hinting of commissar.
Without watching the video, I suspect the collective view of INET is that Greece is a hapless victim; needs financial assistance with low interest rates; budget cuts should not be too draconian as this would be deflationary; and we do not want to occasion civil unrest. The fact that Stiglitz suggests it is Germany which is the free rider here – that Spain and Greece would have seen their exchange rates adjust without the euro such that the build up of external imbalances would never have reached this scale - conveniently overlooks that the fact deadbeat Greece has been able to borrow on the back of the euro' strength.
I would like to better understand the downside to simply imposing conditions upon Greece designed to force their exit from the EU, which is what I believe Germany would like to see. There might be embarrassment; the euro might fall; Brussels would have one less country to oversee and there could possible be staff cuts; and Greece would default on some of its debt. But, as I have said before, I believe Germany would prefer to help its banks rather continually funding an ongoing trainwreck.
This is just too much. When the EU announced its plan to offer Greece assistance the plan comprised, at best, of financial duct tape, stapling over problems and vague cooperation between the EU states and the IMF in assisting Greece. And the head of the EUC, the ruling body, went further by saying they woul never allow Greece to fail, while the Greeks confidently proclaimed they would not need assistance. The EUC can only prevent Greece from failing by giving them a blank check or taking over their fiscal affairs, neither of which will happen which makes the remark absurd. Markets understanding the folly, have pushed up Greek rates and now this hot off the press:
Greece wants to change EU aid deal. Greek officials reportedly want to change the terms of an EU aid deal reached last month in order to bypass IMF involvement. Sources said Greece is concerned the IMF will impose tough conditions in exchange for aid that "might cause social and political unrest." Instead, the Greek government will try to arrange a clearer European mechanism that would sidestep the IMF. Said one Greek official: "There is a strong chance that Greece might be forced to ask for financial support after all, despite official statements to the contrary, and it is essential that the terms and conditions be clear." Separately, Greece is marketing itself as an emerging economy and is targeting U.S. investors in a $5B-10B bond sale to help cover its May borrowing requirement of about €10B ($13.4B). It will be Greece's first issuance in the U.S. in nearly two years.
As I mentioned elslewhere today, with Greece experiencing negative growth and expanding its debt at higher rates, it's in an impossible situation: a death debt spiral.
I believe Germany recognizes this and understands a better outcome would be for Greece to depart from the zone, default on its debt and return to the drachma. They need a devalued currency to deal with high unit labor costs and poor productivity; without this, they will deflate by the day.
Germany would offer assistance to its banks with exposure to greek debt, which would prove a cheaper and better option rather than perpetuating a basket case.
Europe Kicks The Can As Far As They Can [View article]
Italy Likely to Default - CEBR [View article]
And when this happens, the entire EU will fall into collapse as the EFSF (the bailout SPV) is not large enough to accommodate either Spain or Italy.
Europe Crumbles [View article]
Understanding there is not popular support to expand the EFSF beyond euro 440 billion, the markets are pricing in risks of widespread default and an seeing deep black holes on core European bank balance sheets.
To make things worse, economic growth throughout the zone is sclerotic which will make default even more likely as tax receipts will fall. After being lied to and spoon fed the truth, the markets have taken it upon them selves to determine what is most probable.
Renminbi Going Down, Eurozone Borrowing Requirements Going Up [View article]
Anyway, if all things are great why would Merkels's proposal that investors share in soveriegn defaults undermine the euro and investor confidence when all things are looking up.
It seems inherently inconsistent and raises the posibility we are trying to put a pretty face on something somewhat ugly.
Renminbi Going Down, Eurozone Borrowing Requirements Going Up [View article]
After reading the three pieces I was struck by the fact these developments have much in common: incompetent, deceitful and corrupt leadership.
Each time I read the Jobs release I am reminded of manure and this time was no different. How can we keep creating jobs while employment remains at the level it was in 2000?
Propaganda, lies and canards have been used by politicians for decades to placate the masses so that they can remain in power. This time is no different and even though the party in power took an ass kicking in the mid-term elections they are looking forward to 2012 and doing everything in their power to create an illusory recovery supported by lies swallowed by MSM and regurgitated as news.
The Chinese yuan is probably overvalued but it is not the principle reason for our ongoing trade imbalances. When a country persistently runs massive budget deficits it is more than likely spending more than it produces and this incremental demand must be satisfied through additional imports. And it becomes more complicated when we take into account expansion of debt as this introduces further demand and purchasing power without necessarily increasing production.
I don't know who knows what but I have a very low estimate of Geithners capacity to grasp complex issues and pointing our finger and blaming China for our hollowed out and unbalanced economy is simply a political expediency. We have allowed and encouraged unsustainable policies but do not wish to either acknowledge this or change our course. Just blame China; It's always easier to blame others for difficult problems that must be addressed from within.
Similarly, Ireland is having a difficult time reducing its deficits and will more than likely have to draw upon the European Stabilization Fund but is telling the world that it is solvent and that it will be able to make the necessary budget adjustments. Meanwhile, the IMF, ECB and the EU are all releasing panicky and conflicting statements with some pressuring Ireland to take cash as uncertainties in Ireland are roiling much of the euro area. The truth, of course, is Ireland is insolvent but does not want to be systematized for drawing upon the fund and limiting its access to fund unsustainable policies.
The height of this folly was seen most recently in the G20 meeting when Angela Merkel suggested after the Stabilization Fund expires it be replaced with a permanent mechanism (yet to be defined) with provisions for investors to take losses in the event of sovereign default, hoping to shield the German public from bailing out corrupt and bankrupt sovereigns.
Bloomberg recently reported Cowen as saying Merkel’s proposal to involve debt restructuring with losses for private holders of sovereign bonds hasn’t “been helpful". You cannot make this stuff up; the world is a global comedy show.
Monetary Policy in the U.K.: Where QE Actually Works [View article]
The annual rate of inflation in the UK held steady at 3.1% in September as expected as a drop in transport costs offset a record jump in clothing prices and higher food inflation.
The Office for National Statistics said consumer prices were flat on the month, leaving the annual rate at 3.1%, the same as in August and in line with economists' forecasts.
That is still well above the Bank of England's 2% target, although policymakers expect price pressures to ease over the next year, and therefore the figures are unlikely to change the view that monetary policy will remain extremely loose for some time to come.
Concerns about Britain's economic recovery have raised the possibility the central bank may have to pump more money into the economy to shore up growth.
ECB Failed Fixed-Term Deposit Auction [View article]
1) the ECB will be draining the EUR55bn that it has bought in bonds in the SMP. This is interesting since, with the big rollover just one day later and likely a drop in the overall liquidity surplus (to say EUR100-150bn), it might get more difficult/expensive for the ECB to drain that surplus liquidity, which could start pushing Eonia rates higher. SMP equals securities market program (purchases.)
2) there will be the normal weekly MRO: amounts have increased there to stand at EUR152bn, and some of that might be rolled over into the 3m LTRO tomorrow, maybe up to EUR50bn. MRO equals main refinancing operation and LTRO equals long term rolllover
3) and Just two days to go until the July 1 expiry of the European Central Bank’s one-year LTRO. The Long-Term Refinancing Operation added €442bn in liquidity back in June 2009. And now — much to some banks’ chagrin — it’s due to come to an end with no matching-maturity replacement. Instead, the ECB is offering unlimited three-month LTROs to coincide with the end of the 12-month one.The €422bn question then, is how much of the one-year LTRO will roll into the three-month operation.
The Third Depression? [View article]
What is conspicuously missing from public discussion of the economy is the miserable and divided political backdrop against which the economy is functioning and reported to be recovering. As long as households and business view the administration as bent on destroying traditional values and lifestyles and fiscal policy as a predatory tool to channel resources to special interests, confidence will remain low and spending constrained; politics and economics are inextricably linked.
What Krugman and others fail to grasp is that most people loath the dystopian ideals embraced by the current administration and a $trillion here or there will not change this mindset and produce a durable economic recovery built upon faith in the future. And beyond this huge disconncet there remain structural issues as noted by an unnamed author at the Von Mises Institute.
The current economic disaster is the result of the combination of negligence, hubris, and wrong economic theory. For decades, an economic and monetary policy has been practiced based on the illusion of, "It doesn't matter." At first it was, "Deficits don't matter." From that, the policy of "it doesn't matter" got extended to money creation, the credit expansion, the stock-market bubble, and the housing boom. Now, we're being told that buying financial junk by the central bank to beef up banks and brokerages also doesn't matter.
The current financial crisis is not of a cyclical nature. The financial turmoil is the symptom of the structural imbalances in the real economy. Over decades, expansive monetary policy has gone hand in hand with implicit and explicit bailout guarantees, and this has distorted the process of capital allocation. Under such perverted conditions, those investors will win most who cast away the restraints of prudence. It is a game that can go on for a long time — up to the point when the irrationality has become systemic.
The simple fact is that the US economy is burdened with a highly lopsided capital structure as the consequence of a wide discrepancy between consumption and production, which, in turn, is the result of monetary policy. Persistent trade imbalances are the symptoms of this discrepancy. This means for the US economy that lower interest rates and government incentives aimed at boosting consumption work as pure poison. Instead of more consumption, more savings, less consumption and fewer imports are needed.
The current financial crisis reflects that many debtors have reached their debt limit and that creditors are lowering that limit. From now on, business and consumers, governments and investors must work under the restraints of lowered debt ceilings.
Government Spending: Who Will Be Paying the Bills? [View article]
What we will never actually see, is what happens next if countries continue to rack up huge deficits, and the dangers that might flow from this enactment of policy. It will allow history to be rewritten to say that, had the spending continued, then the world would economy would have recovered, and all would have been well.
However, it is quite possible for the US, for example, to continue to borrow from the new wealth creating countries and the oil states and appear to continue to be relatively prosperous. However, underneath such apparent prosperity is the reality that there are now the emerging economies that are being coming increasingly competitive, and taking a greater share of global wealth. Countries like China and India commenced with low end, low added value goods, but are rapidly rising up the value chain, and are starting to compete in the higher added value segments. The emerging economies will increasingly be meeting the developed world in the market for higher added value goods and services, and the developing world will
win market share.
This leads to the question of whether there will be a miracle of a return to the pre-crisis 'normality'. Can the developed world return to past levels of wealth, at the same time as new and aggressive entrants are entering into more segments of the world market. The Obama solution is built on the belief that, at some point in the future, growth in the economies of the developed world will return, and this will then allow for the existing economic structures to be maintained, and at the same time producing enough growth to repay debts accumulated now. After all, this has been what has taken place following previous recessions.
>>>>>&g...
Contrary to popular opinion, during the depression Federal expenditures had grown from $6.4 billion in 1935 to $9.5 billion in 1940 - over three times the level in 1929. Criticism on the response time of fiscal measures is warranted but based upon the experience of the Depression, Japan’s lost decade and our most recent experience there is sufficient reason to doubt the efficacy of counter cyclical fiscal spending in offsetting deleveraging through increased savings and reduced consumption.
In fact, a number of academic papers suggest quite the opposite. In a landmark paper in the mid-1990s, the economists Alberto Alesina and Roberto Perotti found that economic growth fared much better during large fiscal corrections that were (i) decisive rather than gradual and (ii) relied on reductions in current government spending, rather than cuts in public-sector investment or higher taxes. That finding has since been confirmed by a number of related studies, including Giavazzi and Pagano (1996), Alesina and Ardagna (2009), Reinhart and Rogoff (2010), and the UK Treasury (2009).
Rather than benefit from the possible lessons from this research, we blindly and slavishly follow calls for additional stimulus under the belief aggregate demand is the problem when in fact it is debt. Reinhart and Rogoff clearly demonstrate that when a country's accumulated fiscal debt reaches 90% of its GDP its structural growth potential is reduced.
Ours is at 93% and the idea that additional fiscal spending is required is completely at odds with the facts that additional debt will weaken the economy.
Additional borrowing is not an option and until we address our unsustainable debt our growth potential will remain structurally impaired, eliminating any possibility of resumption of historical growth. And, if we raise taxes as was done during the Depression, we will be forever resigned to mediocrity.
Fixing the Euro Crisis: Policy Recommendations [View article]
Worries of a New Debt Contagion Rattle Wall Street [View article]
Before I share some material from the FT, let me add that the level of restructuring being proposed for Greece, as measured by the primary deficit, is of epic proportions and few countries have successfully achieved this order of change. This points to how far out of control matters are in Greece and how difficult it will be to rebalance the primary account. From the FT:
The presentation of the main economic arithmetic behind the Greek Economic Policy Programme (EPP), as agreed with the IMF, EC and ECB, reveals the enormity of the task ahead. The programme envisages that the general government deficit will be cut from 13.6% of GDP in 2009 (which could be revised to about 14%) to 8.1% of GDP this year, 7.6% in 2011, 6.5% in 2012, 4.9% in 2013 and 2.6% in 2014. Assuming Greek real GDP expansion is about 2.1% by 2013-14, this implies the debt/GDP ratio would peak at 149% in 2013 (note that the authorities seem to be including an assumption that the public debt/GDP ratio will be revised up 7pp, which would take the 2009 ratio to 122%).
Greek Bailout: More Kick-the-Can Economics [View article]
In the background, though, are possibilities for a constitutional challenge on any number of fronts within Germany; the Maastrich treaty upon which the eurozone is constructed prohibits bailouts, setting the stage for a legal challenge.
Separately, Greece's economy is contracting while it is adding debt with a 5% coupon; to correct this, further cuts will be ordered which will aggravate already deflationary poicies. This debt spiral will eventually lead to default.
Why don't we just face up to the facts? Because it's easier to kick the can and avoid difficult decisions which carry serious consequences.
Galbraith, Stiglitz, Soros on Resisting the Inevitability of the Greek Debt Crisis [View article]
They believe themselves to be cerebrally gifted and know what direction society and economics should move; the challenge is develping and IMPOSING policies to move us towards this dystopian destination. It's like central planning without titles hinting of commissar.
Without watching the video, I suspect the collective view of INET is that Greece is a hapless victim; needs financial assistance with low interest rates; budget cuts should not be too draconian as this would be deflationary; and we do not want to occasion civil unrest.
The fact that Stiglitz suggests it is Germany which is the free rider here – that Spain and Greece would have seen their exchange rates adjust without the euro such that the build up of external imbalances would never have reached this scale - conveniently overlooks that the fact deadbeat Greece has been able to borrow on the back of the euro' strength.
I would like to better understand the downside to simply imposing conditions upon Greece designed to force their exit from the EU, which is what I believe Germany would like to see. There might be embarrassment; the euro might fall; Brussels would have one less country to oversee and there could possible be staff cuts; and Greece would default on some of its debt. But, as I have said before, I believe Germany would prefer to help its banks rather continually funding an ongoing trainwreck.
Greece Is Not Under Control [View article]
Greece wants to change EU aid deal. Greek officials reportedly want to change the terms of an EU aid deal reached last month in order to bypass IMF involvement. Sources said Greece is concerned the IMF will impose tough conditions in exchange for aid that "might cause social and political unrest." Instead, the Greek government will try to arrange a clearer European mechanism that would sidestep the IMF. Said one Greek official: "There is a strong chance that Greece might be forced to ask for financial support after all, despite official statements to the contrary, and it is essential that the terms and conditions be clear." Separately, Greece is marketing itself as an emerging economy and is targeting U.S. investors in a $5B-10B bond sale to help cover its May borrowing requirement of about €10B ($13.4B). It will be Greece's first issuance in the U.S. in nearly two years.
Greece Is Not Under Control [View article]
I believe Germany recognizes this and understands a better outcome would be for Greece to depart from the zone, default on its debt and return to the drachma. They need a devalued currency to deal with high unit labor costs and poor productivity; without this, they will deflate by the day.
Germany would offer assistance to its banks with exposure to greek debt, which would prove a cheaper and better option rather than perpetuating a basket case.