Merkel at Bretton Woods

by Migeru Sat Nov 5th, 2011 at 04:49:55 AM EST

Consider the following account of the Bretton Woods summit towards the end of WWII:

When Keynes began to explain his idea, in papers published in 1942 and 1943, it detonated in the minds of all who read it. The British economist Lionel Robbins reported that "it would be difficult to exaggerate the electrifying effect on thought throughout the whole relevant apparatus of government ... nothing so imaginative and so ambitious had ever been discussed"(5). Economists all over the world saw that Keynes had cracked it. As the Allies prepared for the Bretton Woods conference, Britain adopted Keynes's solution as its official negotiating position.
But there was one country - at the time the world's biggest creditor - in which his proposal was less welcome. The head of the US delegation at Bretton Woods, Harry Dexter White, responded to Lord Keynes's idea thus: "We have been perfectly adamant on that point. We have taken the position of absolutely no"(6). Instead he proposed an International Stabilisation Fund, which would place the entire burden of maintaining the balance of trade on the deficit nations. It would place no limits on the surplus that successful exporters could accumulate. He also suggested an International Bank for Reconstruction and Development, which would provide capital for economic reconstruction after the war. White, backed by the financial clout of the US Treasury, prevailed. The International Stabilisation Fund became the International Monetary Fund. The International Bank for Reconstruction and Development remains the principal lending arm of the World Bank.
The consequences, especially for the poorest indebted countries, have been catastrophic. Acting on behalf of the rich world, imposing conditions which no free country would tolerate, the IMF has bled them dry. As Joseph Stiglitz has shown, the Fund compounds existing economic crises and creates crises where none existed before. It has destabilised exchange rates, exacerbated balance of payments problems, forced countries into debt and recession, wrecked public services and destroyed the jobs and incomes of tens of millions of people(7).

(Clearing Up This Mess , George Monbiot, November 18, 2008)

(h/t eurogreen)

But the US didn't do just this. After flirting for some time with plans to deindustrialize Germany in order to turn it into an agrarian backwater, the US settled on a massive programme of industrialization of Germany, the Marshall plan. They could just as well have said "we'll keep our surplus and you pull yourself up by your bootstraps", but they didn't. And an important part of the reason why they did it is that the people in charge of American economic planning (including Harry Dexter White) had recent memory of the Great Depression.

The problem that Keynes was attempting to solve is the tendency of trade balances to grow more lopsided with time, leading to macroeconomic instability. The solution is the introduction of penalties on net exporters (being a net importer carries inherent penalties already in the form of interest payments on the debt accrued to finance the trade balances, and occasional devaluation crises). The political difficulty is that, until a crisis hits, there is no incentive to do anything; and, after the crisis hits, the exporter of last resort has everyone else over a barrel, and even feels righteous about it.

So, the story of Bretton Woods has been repeating itself since the end of 2008, when political leaders were shocked out of their complacency about the Global Financial Crisis. Despite lofty declarations of intentions by world leaders at the preparatory G20 summit late in 2008, at the inaugural G20 meeting in London in the Spring of 2009 the European Union, led by Germany, rebuffed American attempts to agree a global fiscal stimulus package on the argument that Europe's more generous "automatic stabilizers" rendered an ad-hoc stimulus unnecessary. Later in 2009, there was another G20 summit where

Leaders of the world's biggest economies papered over their differences at the G20 today with agreement to develop new guidelines to prevent so-called "currency wars".
The deal falls well short of the 4% limit on national trade deficits and surpluses proposed by US President Barack Obama, which was blocked by exporting countries China and Germany.
...
The problem of trade imbalances, which has seen countries like China build up massive reserves on the back of booming export industries while the high-consuming West has become mired in debt, "was never going to be solved overnight", said Mr Cameron.

(The Independent [UK], 12 November 2010)

Now, according to twitter accounts, at this week's G20 summit in Cannes German Chancellor Angela Merkel undermined efforts to address the ongoing Global Financial Crisis, even leaving the summit early: @paulmasonnews

Hearing that Merkel nixed the plan for the IMF to issue SDRs (ie print money) then left. Hence Sarko + Cam facial expressions like doom

The proposal at hand was for the IMF to issue Special Drawing Rights (the IMF's and World Bank's unit of account) in order to fund the European Union's efforts to contain its debt crisis, which reportedly Merkel refused.

Two people familiar with the matter said the SDR issue could total $250 billion. One option under discussion is to use some of that money to beef up the European Financial Stability Facility, the euro zone's bailout fund.
...
The SDRs would be held on central bank balance sheets.
Holding the SDRs would help assure investors that a country such as Italy, for example, had an extra pool of reserves it can tap in an emergency. That should help to push borrowing costs down for the country.

(Special IMF Money Considered, WSJ, 4 November)

As I quipped yesterday in reaction to that, Merkel's position must have been

Of course not.
Issuing SDRs would be inflationary. It would mean that the world as a whole would be living beyond its means, and we have to end that once and for all. The solution is global fiscal consolidation. As in 2009, automatic stabilizers (always respecting the constitutional debt and deficit limits) will suffice. The world as a whole must become a competitive net exporter, like China and Germany.

Let nobody say that Merkel didn't bring her economics lessons well memorised.

Merkel at Bretton Woods | 46 comments (46 topical, 0 editorial, 0 hidden)

Re: Merkel at Bretton Woods (4.00 / 6)

In the immortal words of afew

The moondust pixies will eagerly buy our goods and pay us back with gold industriously dug from the Mines At The Back Of the Moon.
We'll be able to have a bullion crisis, yoopidoo!

To err is of course human. But to mess things up spectacularly, we need an elite — Yanis Varoufakis

by Migeru (migeru at eurotrib dot com) on Sat Nov 5th, 2011 at 05:07:48 AM EST

Re: Merkel at Bretton Woods (4.00 / 3)

If everyone has to become a net exporter like China and Germany the obvious solution is to find some alien planet people who will buy all our export surpluses and pay us with..er..alien moondust. Then the problem becomes what to do with the alien moondust which has no intrinsic value on earth other than to allow some rich dudes to travel first class to said alien planet.

We will then have an alien moondust bubble because there are not enough rich dudes to spend all the moondust on exotic travel and the rest of the moondust schloshes around global markets inflating the cost of energy and commodities to the point where the real economy can't support the price of those inputs and crashes bursting the bubble and rendering the moondust almost worthless.

Moondust owners demand their money back (with interest) and are increasingly frustrated that moondust owers (like Greece) can't be forced to repay what they don't have. Crises, instability, wars, defaults, and inflation are the result with everyone fighting everyone else and no one noticing that the aliens have taken over the planet.

Take a bow, Goldman Sachs...

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Sat Nov 5th, 2011 at 09:19:58 AM EST
[ Parent ]

Re: Merkel at Bretton Woods (4.00 / 2)

But the moondust pixies were paying with gold from the dark side of the moon. Good times! The money supply is expanding.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Nov 5th, 2011 at 10:08:35 AM EST
[ Parent ]

Re: Merkel at Bretton Woods (none / 1)

WSJ blogs: Reading the Fine Print in Cannes

One move with potential consequence: The G-20 got specific about which countries promised not put austerity uber alles at a time of growing concern about slowing global growth. To wit: "Australia, Brazil, Canada, China, Germany, Korea and Indonesia, where public finances remain relatively strong, taking into account national circumstances, agree to let automatic fiscal stabilizers work and, should global economic conditions materially worsen, agree to take discretionary measures to support domestic demand as appropriate, while maintaining their medium-term fiscal objectives."
In contrast, the November 2010 Seoul G-20 declaration emphasized the need in advanced economies for "clear, credible, ambitious and growth-friendly medium-term fiscal consolidation plans."
The mention of `automatic stabilizers' is important: Much of the fiscal stimulus in Europe during the 2008-09 recession came not from explicit spending increases or tax cuts, as was the case in the U.S., but by letting automatic spending increases (for unemployment compensation and so forth) widen deficits. The U.S. and International Monetary Fund have worried that Europe's deficit-fixation could lead some countries to interfere with these automatic stabilizers in today's slowing economy in order to hit previously made budget deficit goals.

To err is of course human. But to mess things up spectacularly, we need an elite — Yanis Varoufakis

by Migeru (migeru at eurotrib dot com) on Sat Nov 5th, 2011 at 05:25:10 AM EST

Re: Merkel at Bretton Woods (4.00 / 2)

In How austerity in Europe works, Ed Harrison notes that cutting social programs, including automatic stabilizers, is the only course available to them under exiting EA rules once they have arrived at the current situation:

In a downturn, currency users are necessarily pro-cyclical. The economy is shrinking, so for currency users in general, revenue is shrinking. And since they have to `get' euros, they cut back their outlays to deal with this or risk insolvency.
Now, this is always the case for national governments because a shrinking economy means shrinking tax revenue. Moreover, in the case of governments with automatic stabilisers to pay for, outlays are also increasing. So a worsening of the government's budget is automatic in a recession. As currency users, the euro zone's national governments must also be worried about insolvency as we now see. They too must act pro-cyclically then.
Procyclicality is one of the structural flaws of the euro zone; there is no federal agent to add any net financial assets counter cyclically during a recession. Thus, the euro zone business cycle will always have to be more volatile as every economic agent must act pro-cyclically. That makes current account imbalances a lightening rod for intra-European recrimination.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Nov 5th, 2011 at 10:19:17 AM EST
[ Parent ]

Re: Merkel at Bretton Woods (4.00 / 5)

Harrison's

In a downturn, currency users are necessarily pro-cyclical ... As currency users, the euro zone's national governments must also be worried about insolvency as we now see. They too must act pro-cyclically then

Is the central thesis of my diary The new private state

The main distinction between a State and a local/regional government used to be that the State had monetary sovereignty. This was especially true in the post-Bretton-Woods floating-exchange-rate fiat-currency regime. Monetary sovereignty means that the state can create money by spending it into its economy or, under financial convention, selling newly issued bonds to its central bank in exchange for newly created fiat money. In this way, the Treasury/Central Bank system enjoyed access to seigniorage income. Local and regional governments lacked this ability and depended on a combination of local taxes and central government funding. Similarly, private firms needed to rely on their operating income exceeding, on average, their expenses.
The Eurozone rules, enshrined in the Maastricht Treaty (now part of the Lisbon Treaty), explicitly bar the ECB from giving credit to public entities or buying their bonds. This, quite simply, means the Eurozone member states now operate as local/regional governments under them used to. Lacking funding from a supranational entity since the European Union does not have its own fiscal resources, all states can rely on is their own tax income and they must run balanced budgets like a private firm or a local government in order to retain access to private credit. In the Eurozone, therefore, the State must be run like a private firm. What used to be a political slogan is now the only way to function consistently with the institutional framework. Even the Social Democrats admit it and propagate it. Now let's look at the consequences.
The most important consequence of running the state like a private firm is that the state should not be in the business of providing free or implicit guarantees of any kind, as these are large "contingent liabilities" threatening to bankrupt the state. The threat of bankruptcy is real, as the state must fund itself by borrowing from private lenders, unable as it is to create money to fund necessary expenses deriving from the exercisising of implicit guarantees. One alternative to bankruptcy is default, but this is considered unthinkable as defaulting on obligations to fellow EU member states is "uneuropean". In addition, countries with a large primary trade deficit may find it impossible even to default.

To err is of course human. But to mess things up spectacularly, we need an elite — Yanis Varoufakis

by Migeru (migeru at eurotrib dot com) on Sun Nov 6th, 2011 at 02:53:21 AM EST
[ Parent ]

Re: Merkel at Bretton Woods (none / 0)

But Harrison, former diplomat that he is, is far, far from clearly describing the movement as towards "a new private state." The problem with this for all but the very wealthy is that the very wealthy are well positioned to benefit from depressions. That is when they consolidate and deepen their power and influence. Business expand their scope and extent of operations in good times and consolidate market penetration and control in bad times.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Nov 6th, 2011 at 05:13:32 PM EST
[ Parent ]

Re: Merkel at Bretton Woods (4.00 / 4)

Stephanie Flanders: The great shakedown in Cannes (BBC economics editor)

US officials are exasperated with the Europeans. All along, the US Treasury Secretary, Tim Geithner, has been saying the eurozone had to clean up its own mess - and reminding them that the continent had ample resources, as a group, to do it.
And, he would add, they have a handy institution for putting an end to liquidity crises, with an unlimited pot of money at its disposal. It's called the European Central Bank.
But, Mrs Merkel would always respond, it's not that simple. You must understand that we are 17 democracies, with our own political challenges to face - and our own histories. In the case of Germany, that includes a scarring memory of what happened the last time a central bank "came to the rescue" of the government.

There is an urgent need to deconstruct the German Creation Myth that hyperinflation in 1923 is what caused the Nazi debacle, ignoring all the political developments in Germany over the following decade.

To err is of course human. But to mess things up spectacularly, we need an elite — Yanis Varoufakis

by Migeru (migeru at eurotrib dot com) on Sat Nov 5th, 2011 at 05:38:49 AM EST

Re: Merkel at Bretton Woods (4.00 / 2)

ET has also spent some time on deconstructing the notion that hyperinflation can happen any time, any where the central bank so much as prints one single euro. But I can't seem to find that discussion right now.

by Metatone (metatone [a|t] gmail (dot) com) on Sat Nov 5th, 2011 at 07:02:33 AM EST
[ Parent ]

Re: Merkel at Bretton Woods (4.00 / 8)

H/T to Alex Harrowell at AFOE:

Occupy the space to the left of the European Council. There's a lot of it | afoe | A Fistful of Euros | European Opinion

This morning's Irish Times reports that German opposition leader, former environment minister, and Social Democrat Sigmar Gabriel was in town. And what did he say? Every damn thing.

Athens austerity measures mad, says German opposition leader - The Irish Times - Wed, Nov 02, 2011

THE AUSTERITY measures being imposed on Greece are "mad", and indicate that Europe learned no lesson from the rise of the Nazi Party, Germany's main opposition leader said yesterday.
Sigmar Gabriel, the chairman of the Social Democratic Party and potential future chancellor, said the measures were "mad" and amounted to an "evil circle".
At a seminar organised by the Institute of International and European Affairs in Dublin yesterday, Mr Gabriel cited the example of Weimar Republic chancellor Heinrich Brüning, who cut successive budgets during the Great Depression.
Germany ended up with six million people unemployed. Brüning's cutbacks contributed to a rise in support for the Nazi Party, which grabbed power in 1933.

by Metatone (metatone [a|t] gmail (dot) com) on Sat Nov 5th, 2011 at 09:46:30 AM EST
[ Parent ]

Re: Merkel at Bretton Woods (4.00 / 6)

Comment on the AFOE post adds a bit of detail:

PeakVT Says:
November 4th, 2011 at 10:37 am
"Brüning's cutbacks contributed to a rise in support for the Nazi Party, which grabbed power in 1933."
Yes, unemployment in the 1930s, not inflation in the 1920s, was the enabler. The NSDAP went from 32 seats in 1924, to 12 seats in 1928, 107 in 1930, and 230 in 1932.
I'm glad somebody in Europe is saying this aloud.

by Metatone (metatone [a|t] gmail (dot) com) on Sat Nov 5th, 2011 at 09:58:06 AM EST
[ Parent ]

Re: Merkel at Bretton Woods (4.00 / 5)

Yes, it was '29-'32 that saw the rise of the NSDAP, not the earlier period. On the contrary, throughout the mid-20s right up to the eve of the Depression the Nazis were marginal, as their legislative election results show:

scan from a French edition of Richard Overy's Historical Atlas of the Third Reich

The steep rise mirrors the steep fall in employment over the same period.

by afew (afew(a in a circle)eurotrib_dot_com) on Sat Nov 5th, 2011 at 01:24:54 PM EST
[ Parent ]

Re: Merkel at Bretton Woods (4.00 / 6)

On Brüning, who did not have the support of a majority in the Reichstag for his austerity policy:

By June (1930), Brüning was running into serious difficulties in his attempts to reduce public spending through emergency decrees. On 16 July, his wide-ranging finance bill - aimed at reforming state finances through a stringent deflationary policy of cuts in public expenditure and higher taxes - was rejected by the Reichstag. Brüning... now resorted to emergency decree to make the bill law... a step of doubtful legality. When an SPD motion, supported by the NSDAP, to withdraw the decree was passed by the Reichstag, Brüning sought and received... the dissolution of parliament. (...) New elections were set for 14 September. For democracy's prospects in Germany, they were a catastrophe. They were to bring the Hitler Movement's electoral breakthrough.
The decision to dissolve the Reichstag was one of breathtaking irresponsibility...
(Ian Kershaw, Hitler 1889-1936, ch 9, Breakthrough)

In that September 1930 election (the 18.3% marker in the above chart), called through the obstinate deflationary authoritarianism of Brüning, the NSDAP went from 12 to 107 seats in the Reichstag, becoming the second party in Germany and now a "serious" force to be reckoned with.

It was an obdurate policy of austerity during a depression that opened the door to the Nazis, not the spike of hyper-inflation seven years previously.

by afew (afew(a in a circle)eurotrib_dot_com) on Sat Nov 5th, 2011 at 01:51:31 PM EST
[ Parent ]

Re: Merkel at Bretton Woods (none / 1)

One should not react to a myth with building a counter myth.

Seven Years is not really a long time. If you look at the election results of the spring 1924 election, there was clear radicalization.

Not only did win the KPD a lot of votes from the SP, but there was a pronounced shift from the center-right, that is DVP and DDP to the right. Not the NSDAP yet, that is right, but the nominally monarchist DNVP. The DNVP was not only ultra-nationalist but also anti-democratic.

And while the center-left, that is the SPD, did recover somewhat, the center and center-right did terminally decline. Not only lost they permanently votes, but there in a terribly fright of losing votes to the farther right (DNVP, then NSDAP). Making them unfit for coalition governments with the SPD.

Conventional wisdom is that the german middle classes and their traditional (liberal) parties were ruined or at least traumatized during the great inflation. So this part of the population were quite willing to listen to radical messages at the start of the great depression. And the already weak party system succumbed.

So the great inflation was one, if not the only one, reason for the rise of the radical right in Germany from 1930-1933.

by IM on Sat Nov 5th, 2011 at 03:59:07 PM EST
[ Parent ]

Re: Merkel at Bretton Woods (none / 1)

The results were:

1924 1928 1930 1932 1933
NSDAP 3% 2.6% 18.3% 37.8% 43.9%
SDP 26% 29.8% 24% 21.9% 18.3%
KPD 8.9% 10.6% 13.1% 14.6% 12.3%

Those years saw major loss of support for the German National People's Party from 20.5% to 6.1% (- 14.4%) and the German People's Party 10.1% to 3.6% (- 6.5%.)

Over the same time frame a slew of minor parties simply collapsed. Can see the details by comparing this with this.

The Left-Center Left had a minor rise from 34.9% in 1924 to 36.5% in 1932 which was dwarfed by the consolidation of the Center and Far Right by the NSDAP.

One big reason was the street violence and economic hardship coupled with the increase in vote for the Communist Party of Germany (KPD) led to an absurd fear of a "Bolshevik Revolution" by Center and Center-Right voters.

Notes:

In 1924 the NSDAP allied with the Deutschvolkische Freiheitspartei in the "National Socialist Freedom Movement."
The 1933 election was carried out under heavy state-sponsored intimidation and violence.

Ever since I learnt about confirmation bias I've started seeing it everywhere

by ATinNM on Sat Nov 5th, 2011 at 04:36:51 PM EST
[ Parent ]

Re: Merkel at Bretton Woods (none / 1)

Ah, see, but you ignore the earlier elections:

1919 1920 1924 I 1924 II

DDP: 18,5% 8,3% 5,7% 6,3%

Zentrum: 19,7% 13,6% 13.4% 13,6%

DVP: 4,4% 13,9% 9,2% 10,1

DNVP: 10,3% 15,0% 19,5% 20,5%

NSDAP: - - 6,6% ca. 3%

What happened was the radicalization of the voters of the center (DDP) and center-right to the radical right DNVP. Zentrum was stable being based on identity politics. In 1928 the DNVP, after a phase of flirting with moderation, got in trouble. The voters did first chose smaller special interest parties like WP and then from 1930 the NSDAP. So the great migration was from DDP to DVP and DNVP, them from DDP and DVP to DNVP, then to splinter parties, then to the NSDAP.

So the radicalization of the center-right voters started during the great inflation and even later the narrative that "the inflation ruined" the middle classes was quite important.

by IM on Sat Nov 5th, 2011 at 05:13:18 PM EST
[ Parent ]

Re: Merkel at Bretton Woods (4.00 / 4)

The narrative may have had some influence, but surely greater was the Versailles Treaty (not just a narrative, genuinely ruinous).

Look at the numbers you show: the movement from the centre-right to the national right was already well under way in 1920.

by afew (afew(a in a circle)eurotrib_dot_com) on Sat Nov 5th, 2011 at 05:25:03 PM EST
[ Parent ]

Re: Merkel at Bretton Woods (4.00 / 5)

Yes, that was the third big influence: The treaty. And the other events inflation and depression were connected with the treaty and its consequences.

Brüning for example did not discuss his politics during the depression in our terms. He did see most of the problems as caused by reparations payments and did concentrate on the moratorium and the conference of Lausanne.

And that wasn't a Brüning thing: especially on the right inflation and depression was mostly seen as a foreign plot.

But if you compare 1920 and May 1924 you will see that the combined radical right is at around 25%, instead of 15%. And that is mostly the period of the great inflation.

by IM on Sat Nov 5th, 2011 at 05:47:52 PM EST
[ Parent ]

Re: Merkel at Bretton Woods (4.00 / 4)

I realize I may be interpreting Brüning in a way he would not have deemed acceptable...

But even the radical right votes combined (DNVP + NSDAP) declined slightly from the May to the December 1924 elections, and considerably more by 1928 (16 - 17%). Yet, in the 1930 election called by Brüning, the two parties were back up to a combined 25% again. The difference being that the (all the same more radical) Nazi party had overtaken the DNVP (18% compared to 7%).

by afew (afew(a in a circle)eurotrib_dot_com) on Sat Nov 5th, 2011 at 06:10:06 PM EST
[ Parent ]

Re: Merkel at Bretton Woods (none / 0)

I chose 1924 is the starting point because it represented a lull - Ground Zero, so to speak - in the Post World War One political, social, and economic trends and the global economic crisis of 1929 hadn't happened.

Ever since I learnt about confirmation bias I've started seeing it everywhere

by ATinNM on Sat Nov 5th, 2011 at 06:16:45 PM EST
[ Parent ]

Re: Merkel at Bretton Woods (none / 0)

IM:

building a counter myth.

I am building nothing there, merely offering historical evidence from recognized sources. The NSDAP actually lost traction in the years following the hyper-inflation spike.

by afew (afew(a in a circle)eurotrib_dot_com) on Sat Nov 5th, 2011 at 04:50:20 PM EST
[ Parent ]

Re: Merkel at Bretton Woods (none / 0)

The NSDAP was not the only problem. Not even the only problem on the right. And you are interpreting the facts. I just point why, especially if you look at other radical right-wing parties, the facts can be interpreted in a different way.

by IM on Sat Nov 5th, 2011 at 05:19:08 PM EST
[ Parent ]

Re: Merkel at Bretton Woods (none / 0)

Also have to consider the Wiemar Republic never commanded support from more than a plurality of the population. The military and most of the Conservative Parties wanted the Kaiser back. The KPD and Left wing of the SPD wanted a socialist revolution, miscellaneously defined and proposed. The freikorp were violence prone and deranged. Other Right Wing elements detested democracy and wanted Authoritarian government, miscellaneously defined and proposed.

The proportional seat allocation of the Wiemar Republic ensured all of these, and more, were in the Reichstag making effective government an impossible task.

Ever since I learnt about confirmation bias I've started seeing it everywhere

by ATinNM on Sat Nov 5th, 2011 at 06:31:35 PM EST
[ Parent ]

Re: Merkel at Bretton Woods (none / 1)

ignoring all the political developments in Germany over the following decade.

Like, just to name one thing, The Great Depression!

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid (arvid.hallen at gmail.com) on Sat Nov 5th, 2011 at 06:50:24 PM EST
[ Parent ]

Re: Merkel at Bretton Woods (4.00 / 4)

There is an urgent need to deconstruct the German Creation Myth that hyperinflation in 1923 is what caused the Nazi debacle, ignoring all the political developments in Germany over the following decade.

See also this

Eventually, some debts were reinstated to partially compensate those who had been creditors. A decree of 1925 reinstated some mortgages at 25% of face value in the new Reichsmark (effectively 25,000,000,000 times their value in old marks) if they had been held 5 years or more. Similarly some government bonds were reinstated at 2-1/2% of face - to be paid after reparations were paid. Mortgage debt was reinstated at much higher percentages than government bonds. Reinstatement of some debts, combined with a resumption of effective taxation in a still-devastated economy, triggered a wave of corporate bankruptcies.

That's what destroyed the German economy in the secodn half of the 1920's.

To be fair to Weidmann's point, though, it was a ban on central bank discounting of Treasury Bills that stabilised the currency after 1923. But that doesn't mean that discounting tresuries caused the hyperinflation. It's a bit like saying that because aspirin relieves headaches, headaches are caused by lack of aspirin in the bloodstream.

To err is of course human. But to mess things up spectacularly, we need an elite — Yanis Varoufakis

by Migeru (migeru at eurotrib dot com) on Fri Nov 11th, 2011 at 04:44:00 AM EST
[ Parent ]

Re: Merkel at Bretton Woods (4.00 / 3)

But of course even the milder form of the argument is horseshit: Defaulting on the war reparations removed the fundamental cause of hyperinflation, and forbidding rediscounts of speculative lending removed the ability of speculators to attack the currency.

Rediscounting of government bonds has nothing to do with it, and pretending that it does is quackery of the rankest sort: The sort where the voodoo witch doctor gives the patient acupuncture along with medicine and gives credit for the improvement to the acupuncture rather than the medicine.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Nov 11th, 2011 at 05:03:56 AM EST
[ Parent ]

Re: Merkel at Bretton Woods (4.00 / 4)

"That's what destroyed the German economy in the secodn half of the 1920's."

No. Not really. The 25% of some private debts had not to be paid at once. Rather there was a term of five years or so. From 1925 interest had to be paid on this privileged debt. That destroyed nothing. 1925-1929 the economy was as good as it got.

As far as I understand the great depression in Germany was caused or at least triggered by the dependence on short-term credits from the USA. (And other foreign investors: UK, the Netherlands etc.)

by IM on Fri Nov 11th, 2011 at 10:10:37 AM EST
[ Parent ]

Re: Merkel at Bretton Woods (none / 0)

After October 1929 US banks began to withdraw credit as they urgently needed to reduce their balance sheets. That certainly did not help the German economy.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Nov 11th, 2011 at 11:38:53 AM EST
[ Parent ]

Re: Merkel at Bretton Woods (4.00 / 5)

Yanis Varoufakis: If greed did not cause it, what did? (7 December 2010)

The euro, it must be remembered, was conceived at the height of the Grand Hoover's reign. Germany thought that it could extend its growth model to the eurozone. Convinced that the Grand Hoover would continue to suck in its surpluses, Germany thought that its surpluses could expand further within Europe if deficit countries like Greece, Spain, Italy etc. were given a strong DM-linked currency. Germany's condition for sharing its currency with the rest was that nothing else would be shared except for the common currency: Debt, taxes, government expenditure would be all nation-state-specific. Each euro of debt would belong to one country only and no surplus recycling mechanism would be set up.
Now, a child would have told you that, the moment you bind economies together into a currency union between some disparate countries without a surplus recycling mechanism, you write the script of a future crisis. The Americans knew that when they established Bretton Woods and quickly added the surplus recycling mechanism, beginning immediately with the Marshall Plan. The eurozone never learnt from that experience which, ironically, had brought the EU into being all that time ago. The current crisis is the direct outcome of such negligence and the sovereign debt crisis is its manifestation; not its cause.
Of course, while the Grand Hoover worked its magic, sucking up the German surpluses and keeping alive the worldwide glut of cheap private money, all seemed well. While the imbalances within Europe were getting larger, cheap private money allowed deficit states to cover the gap by borrowing. But when the Grand Hoover splattered and died, Europe's underlying imbalances came to the fore.

(earlier)

To err is of course human. But to mess things up spectacularly, we need an elite — Yanis Varoufakis

by Migeru (migeru at eurotrib dot com) on Sat Nov 5th, 2011 at 06:00:43 AM EST

Counterpunch being optimistic (none / 1)

Is Goldman Sachs Poised to Takeover Europe? » Counterpunch: Tells the Facts, Names the Names

On Tuesday, G-Sax alum, Mario Draghi, will take the helm at the European Central Bank replacing retiring ECB president Jean-Claude Trichet. The appointment has slipped by the media virtually unnoticed even though the ECB is the most powerful institution in the EU and is likely to play a critical role in solving the debt crisis.

Is Goldman Sachs Poised to Takeover Europe? » Counterpunch: Tells the Facts, Names the Names

Guarantees on bank debt is a direct subsidy to big finance, which is why we think that a former G-Sax exec. will support the policy.
Draghi is no fool, he knows that the German plan that was announced last week is more of the same "extend and pretend". It has no chance of ending the crisis. Regardless of the stock market's (positive) reaction, borrowing costs are still rising, the credit markets are in turmoil, and the clock is ticking. It's now or never. Either the ECB takes the initiative and acts as lender of last resort or the eurozone is toast.

Is Goldman Sachs Poised to Takeover Europe? » Counterpunch: Tells the Facts, Names the Names

The central bank's new approach will put the ECB on a collision course with Germany. This is a clash that can no longer be avoided. Draghi's job is to save the union for the financial elites who benefit from it. Ultimately, their interests will prevail over Germany's. You can bet on it.
Naturally, no one cares about the public's interest. The EU's working people don't count.

So Draghi will morph ECB into lender of last resort to save the banks? Well, hope springs eternal.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Sat Nov 5th, 2011 at 09:18:12 AM EST

Re: Counterpunch being optimistic (4.00 / 4)

I think that, especially in the light of Draghi's recent statements we need to take on board IM's point from a recent discussion.

The head of the ECB is not a Greenspan like cult leader, he doesn't have real freedom of action.

Changing the leader allows cosmetic policy changes - for example the small interest rate cut - but real policy changes would require changing the ECB board. And that hasn't happened, so there will be no major policy change.

by Metatone (metatone [a|t] gmail (dot) com) on Sat Nov 5th, 2011 at 09:49:13 AM EST
[ Parent ]

Re: Counterpunch being optimistic (none / 0)

Do national governments have the authority to sack their current representative and appoint a new one?

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Nov 5th, 2011 at 10:23:22 AM EST
[ Parent ]

Re: Counterpunch being optimistic (4.00 / 2)

ECB: Governing Council

Responsibilities
to adopt the guidelines and take the decisions necessary to ensure the performance of the tasks entrusted to the Eurosystem;
to formulate monetary policy for the euro area. This includes decisions relating to monetary objectives, key interest rates, the supply of reserves in the Eurosystem, and the establishment of guidelines for the implementation of those decisions.

As I understand it, here is where a decision to buy unlimited bonds would need to be taken. So who are the 23 here:

ECB: Governing Council

The Governing Council is the main decision-making body of the ECB. It consists of
the six members of the Executive Board, plus
the governors of the national central banks of the 17 euro area countries.

On what terms the governors of the national banks are appointed is a matter for state law - so it probably differs on how much they have bought the independent central bank stuff. If they can be replaced, they can probably be instructed as well which would make more sense unless the government wants to change its CB-boss anyhow.

ECB: Executive Board

The Executive Board consists of
the President
Vice-President and
four other members
All members are appointed by the European Council, acting by a qualified majority.

Which means that if there is power to recall, it rests with the EC as a body.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Sat Nov 5th, 2011 at 10:41:16 AM EST
[ Parent ]

Re: Counterpunch being optimistic (none / 0)

If, as IM has asserted, decisions by the ECB Governing Council are by simple majority, instruction would do. But then the question arises: What if the ECB Executive Board refuses to act on the decision of the Governing Council?

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Nov 5th, 2011 at 11:21:09 AM EST
[ Parent ]

Re: Counterpunch being optimistic (none / 0)

Well, that could get interesting.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Sat Nov 5th, 2011 at 01:28:26 PM EST
[ Parent ]

Re: Counterpunch being optimistic (4.00 / 2)

What do you mean asserted? It's the law. Or perhaps the charter.

And I am sure that nowadays all central banks have presidents with fixed terms. Now recall possible.

by IM on Sat Nov 5th, 2011 at 04:09:20 PM EST
[ Parent ]

Re: Counterpunch being optimistic (4.00 / 2)

I looked it up: The presidents of the national banks have a minimal term of five years.

It is in PROTOCOL (No 4)
ON THE STATUTE OF THE EUROPEAN SYSTEM OF CENTRAL BANKS AND OF THE EUROPEAN CENTRAL BANK of the Treaty on European Union.

Article 10.2:

>Save as otherwise provided for in this Statute, the Governing Council shall act by a simple majority of the members having a voting right.<

And Article 14.2:

The statutes of the national central banks shall, in particular, provide that the term of office of a Governor of a national central bank shall be no less than five years.

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2010:083:0201:0328:EN:PDF

So a government who wants to change the national representation has to be patient or lucky.

by IM on Sat Nov 5th, 2011 at 04:28:29 PM EST
[ Parent ]

Re: Counterpunch being optimistic (none / 1)

No disrespect IM, I was working from memory and didn't want to overstate what you had said.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Nov 5th, 2011 at 05:38:24 PM EST
[ Parent ]

Re: Counterpunch being optimistic (4.00 / 3)

The appointment has slipped by the media virtually unnoticed

What continent does Counterpunch live in?

To err is of course human. But to mess things up spectacularly, we need an elite — Yanis Varoufakis

by Migeru (migeru at eurotrib dot com) on Sat Nov 5th, 2011 at 04:25:16 PM EST
[ Parent ]

Re: Counterpunch being optimistic (4.00 / 3)

Not ours.

To be honest, I wouldn't use Counterpunch for much information anyway; their big chief is a climate denier.

by IM on Sat Nov 5th, 2011 at 04:29:55 PM EST
[ Parent ]

Re: Counterpunch being optimistic (4.00 / 3)

The ECB is already a lender of last resort for the banks. "Unlimited" liquidity for the banking system does not appear to be at risk. The whole controversy is about market-making of last resort in the sovereign debt market.

To err is of course human. But to mess things up spectacularly, we need an elite — Yanis Varoufakis

by Migeru (migeru at eurotrib dot com) on Sat Nov 5th, 2011 at 04:38:43 PM EST
[ Parent ]

Trivia (4.00 / 2)

While checking for the composition, appointment and recall of ECB board members, I found this:

European Central Bank Headquarters - Wikipedia, the free encyclopedia

The European Central Bank Headquarters^[1] is a building complex under construction in the eastern part of Frankfurt, Germany. It includes a 185-metre-skyscraper which will be the new headquarter for the European Central Bank (ECB).^[2] It is expected to be completed in 2014.

But is the euro expected to survive until 2014?

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Sat Nov 5th, 2011 at 10:48:02 AM EST

Re: Trivia (none / 1)

Perhaps the ECB will be taken private in a leveraged buy-out.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Nov 5th, 2011 at 11:22:24 AM EST
[ Parent ]

Re: Merkel at Bretton Woods (4.00 / 5)

Britain turns on 'disreputable' Germany as relations sour over eurozone crisis | Politics | guardian.co.uk

the Anglo-German relationship is one of the most constructive within the EU. The Franco-German alliance is obviously the most important in the EU - the "spinal column" of the eurozone, in Nicolas Sarkozy's words.
But Germany tends to find Britain a steady and reliable partner within the EU. Berlin, which hopes this will endure, has always believed British euroscepticism is self defeating. It believes that France would love to use Britain's semi-detached status to make the single market less open and more protectionist.
With this history in mind, it is striking how relations between Britain and Germany have soured in recent weeks. In Whitehall senior figures are joking that Greece is turning into a "German protectorate".
The words of one senior Whitehall figure sum up the British view:
People are slowly waking up to Germany's disreputable behaviour in this whole saga. Their growth over the last decade was in large part down to countries like Greece buying German goods after racking up public and private debt because they had German levels of interest rates after joining the euro. And now Germany is dictating in very harsh terms what they should be doing. This shows how lucky we are that we are not in the euro.
This helps explain why the prime minister is pushing the Germans so hard to accept that the European Central Bank should act as the lender of last resort to countries within the eurozone. This would place a huge burden on Germany which is Europe's largest and most successful economy. But British officials have a clear message. Germany should be prepared to pay something back after prospering in the first decade of the euro by exporting shiny new Mercedes cars to countries like Greece.

by afew (afew(a in a circle)eurotrib_dot_com) on Sat Nov 5th, 2011 at 04:45:33 PM EST

Re: Merkel at Bretton Woods (4.00 / 7)

We're doomed. A Whitehall apparatchick makes more sense than the combined French cabinet. The End Times are upon us.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 5th, 2011 at 10:23:59 PM EST
[ Parent ]

Re: Merkel at Bretton Woods (4.00 / 2)

by afew (afew(a in a circle)eurotrib_dot_com) on Sun Nov 6th, 2011 at 02:55:04 AM EST
[ Parent ]

Merkel at Bretton Woods | 46 comments (46 topical, 0 editorial, 0 hidden)

Go to: [ European Tribune Homepage : Top of page : Top of comments ]

Merkel at Bretton Woods

Top Diaries

Fiscal and Organizational Capacity of States and Sovereignty

Pentecost steam

A Nomad's Life (A Farewell)

Newspeak to English pocket dictionary

Standing on the Shoulders of Giants - Europe and the Mongol...

Quantifying Utopia: A UBI Calculator for the USA

Simple Solar Principles

Rail News Blogging #24

Recent Diaries

Fiscal and Organizational Capacity of States and Sovereignty

Pentecost steam

Simple Solar Principles

Quantifying Utopia: A UBI Calculator for the USA

Newspeak to English pocket dictionary

Standing on the Shoulders of Giants - Europe and the Mongol...

Rail News Blogging #24

A Nomad's Life (A Farewell)

The Brussels Consensus: economic disaster in EU candidate...

Origins of German Neo-Austerianism

Ferguson hates on Keynes

Dionysian revels: Nice, May Day 2013:

Anglo Or Not, It's A Disease

The UK and the Euro

Free Energy: Solar and Dynamo LED Keychain Lights

Kruganomics 101

Gold

Corporate Profits and Aggregate Demand

VC Investment: Then and Now

An Ambush of Wishful thinking and Cargo Cult law.