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Getting ECB'd

by A swedish kind of death Tue May 10th, 2011 at 06:16:05 AM EST

This diary was meant to be called "Getting IMF'd" but apparently right now, within the eurozone, IMF plays the role of slightly less raving mad police officer.

Hence the name. Now to the content.

It has been pointed out that while you learn economics you are best positioned to write clearly about what it means. So I have been thinking about what Getting ECB'd or IMF'd means in economic terms, if we look past the terms of money.

IMF comes in when a country is less rich then it recently was. So what is a rich country?

frontpaged - Nomad


International trade and rent
We need to start from the world perspective. We live in a world with lots of international trade. Now trade is rarely equal, and prices do not converge to a mythical point where demand and supply meets. Trade is often beneficial to both parties, but that benefit is divided in a loopsided manner.

There are a number of ways to get a big slice of the benefits, or to collect rent in econo-speak. One of the most obvious ones is to trade a much wanted commodity, and be the dominating supplier or collaborate with other suppliers in order to keep prices up, lets term this the OPEC-strategy. An other often toted way is to manufacture a product that in quality can not (yet) be copied (German quality). Many countries in Europe are also good at selling the feeling of luxury, which has the advantage of always being more original then any copy (French style). Rent can also be extracted from the system of trade in itself, either by setting the rules to benefit your countries companies (Go, go USA) or by placing the country in a political position that allows trade with partners not willing to trade with each other (Afghanistan, Hong Kong, Finland, Yugoslavia - being a border country is a temporary assignment at best). These are the ones I think of, but surely there are more ways.

So a country that by any means manages to get a big slice of the mutual advantage in any trade deal is a rich one, a country that gets a small share is a poor one.

Who gets ECB'd?
To get to the door of the IMF or the ECB a country must be on the slippery slope down. For some reason its citizens wants more then can be extracted from the system of international trade. Perhaps the leading edge in an industry has been lost (as they tend to be), perhaps the rules of trade has changed. Anyway, the first reaction is to borrow from the country you are importing from, but eventually that route tends to close.

In steps the IMF (or ECB in the euro zone) with an offer: you can borrow money but in return you must effect reforms and you will have to repay the loan. Only problem is that this is like a loan from the mob, the strings attached make it highly unlikely that the principal will ever be repayed.

What does the austerity program mean?
So the country in question has lost that which gave them the ability to extract sufficient rent. Does the ECB then demand a program to find another niche in order to capture more rent? No, no, never.

On the contrary, the austerity strategy is a strategy to lower wages. In order for lower wages to be accepted public services - the parts of the economy that runs mostly for internal consumption and was not a part of the problem - must be slashed. Unemployment must be ramped up, which means that in order to borrow foreign goods les work must be doen within the country. Also control of important natural resources must be handed over, attempts at finding an industrial niche looted, attempts at substituting the imported goods by something done domestically scrapped. And the list goes on.

In short a strategy to compete by low salaries, in effect to try to compete will poor countries. And the only way to compete with poor countries is to become one. If Gordon Ramsey used this on Kitchen Nightmares, every single restaurant he visited would be transformed into a fast-food joint.

Oligarchs
In order to make the program a little less unappealing, local big-men gets a small slice of the huge pie an becomes extremely rich. In the short run this is a self enforcing loop as the local big-men, now turned oligarchs gets an interest in keeping it going.

Then what?
As the ECB/IMF-program makes the country less able to extract rent, it becomes more dependent on loans to get foreign goods, services and natural resources. Short lived bubbles are followed by the next dose of austerity.

Until...?
A number of things can happen that stops the cycle.

  • Impoverished. No more loans, cause there are no more wealth to re-distribute. Welcome to your new lives working for subsistence pay (except those at the top and their servants).

  • Lucked out. A resource has been found on what is still is government land, a government program produced a new industry or a local cheese is suddenly all the rave. Awash in foreign goods, the government tells the IMF/ECB to take a hike. As new loans are not needed, the old ones need not to be payed. Not that this then happens despite the austerity program.

  • Commie strongman. Politician is elected on a program of equality and sticks to it. Politician is denounced as a communist, a strongman and a madman. Country may be subject to sanctions.

  • Deep state takes over. Seeing the country that they worked to protect being chopped up and sold off, actors within the deep state acts and puts a their man on the throne. Government makes deals with some oligarchs and takes out others. Note that the deep state in general sees civil liberties as a problem more then anything else.

  • Civil war. The hardship is blamed on other groups within the country. Country falls apart along rifts in population. New countries start.

None of these are particularly good.

Conclusion for policy-makers:
If you consider a loan from IMF or ECB, just say no. You are better off with almost any conceivable strategy. If you are praised by the IMF or ECB, start doing the opposite.

Display:
My bullet point list did not survive copy-paste.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Thu May 5th, 2011 at 01:40:27 PM EST
Fixed it somewhat.

Now to the content: is it understandable? Reasonable?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu May 5th, 2011 at 01:45:53 PM EST
[ Parent ]
If the bullet points went there, I put them in.

Yeah, it all makes sense.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu May 5th, 2011 at 03:12:15 PM EST
[ Parent ]
The list of border countries may come across as a bit cryptic.

Finland and Yugoslavia could trade relatively freely with both the western and eastern blocs. Yugoslavian trade was stopped by Reagan, then IMF, conflicts, civil war. Finland had no reason to seek help from IMF in the early 90ies as their problem was that IMF reforms were killing their market.

Afghanistan was border territory first between the Russian and the Brittish empires, then between east and west. Trading position destroyed by war.

I believe Hong Kong was one of few places to trade freely with the west and with China.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu May 5th, 2011 at 03:08:28 PM EST
... Taiwanese/Chinese trade.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Fri May 6th, 2011 at 11:24:53 AM EST
[ Parent ]
every single restaurant he visited would be transformed into a fast-food joint

Look, that's what the people want.

Or, that's all the people deserve.

You really don't seem to understand the power of competitiveness.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu May 5th, 2011 at 03:18:11 PM EST
A general point that I did not manage to get in there is that it is not about the oil, the water or any other specific resource or produkt. By destroying smaller economies that manages to capture some rent, this rent can be captured by larger economies and by international companies and local oligarchs. Fortune passes everywhere, and every economy richer then the slums of Haiti has something to plunder.

Every economy taken down also strenghtens the concept of there being no alternative.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu May 5th, 2011 at 04:28:07 PM EST
I think you did get it in there. It was what I understood. It's about looting.
by afew (afew(a in a circle)eurotrib_dot_com) on Thu May 5th, 2011 at 04:36:45 PM EST
[ Parent ]
Good then.

Exactly, and there is always something to loot. So no need searching for a smoking gun in the form of huge mineral assets in Kosovos mountains or hidden rivers under Libya's desert. If it is there it will be looted, but otherwise something else will.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu May 5th, 2011 at 04:42:34 PM EST
[ Parent ]
ARRR, Askod! Piracy rules world wide. The world IS run by a fractious cabal of pirates, to the extent it is run at all. Piracy IS The System of the World!

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 6th, 2011 at 12:22:23 AM EST
[ Parent ]
While piracy rules, in the more successful pirate  states we have a wondrous variety of local presentations, each disguised by priests and bureaucrats so as to spare the tender consciences of the young and most of the middling sort from needing to confront the raw evil with which the system operates on their behalf. But the pirate crews, aka "investors", "TBTF executives", the important positions in the domestic government, such as Secretary of Treasury, Chairman of the Federal Reserve, etc. and military, diplomatic and intelligence officials, all involved with trade, along with those who oversee the domestic looting are chosen for their lack of conscience, variously displayed, as ranging from gusto to discretion. As part of the pirate's crews they are entitled to a greater share of the take and superfluous or ineffective crew members are appropriately "handled".

The analysis becomes so much easier when we dispense with the pretense.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 6th, 2011 at 12:41:52 AM EST
[ Parent ]
A swedish kind of death:
Every economy taken down also strenghtens the concept of there being no alternative.

bingo

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Thu May 5th, 2011 at 05:39:37 PM EST
[ Parent ]
A country can be looted very easily. Only thing you need is credit and mortgages and you can extract much more rent than from resources ever. There are always willing oligarchs; real estate "developers," construction companies, local banks, local politicians to join the looting. When rents and prices bubble, media and economists celebrate huge "wealth creation."
by kjr63 on Fri May 6th, 2011 at 04:17:05 AM EST
[ Parent ]
This reminds me of Hernando De Soto's argument that one way to make poor countries "richer" is to give people legal rights to property so they can take mortgages on it.

See here:

CONSIDER THE TERM "the Third World." Most people probably would conjure up in their minds the image of tens of millions of poverty-stricken people living in Asia, Africa, and South America possessing no means for survival other than their unskilled and primitive labor. Property ownership, in this image, is limited to a select few extremely wealthy individuals and families, who exploit others in societies so they may live lives of comfort and luxury.

Hernando de Soto, Peru's leading free-market economist, says this image is both false and misleading. The ordinary peoples in the "undeveloped countries" of the world, in fact, have a vast amount of wealth. And this wealth enables a flourishing world of trade, commerce, industry, and employment.

Indeed, if one adds up the estimated value of real estate held by "the poor" in these countries, the total value comes to something in the neighborhood of $9.3 billion. The only problem is that most of this wealth is not in the form of legal titles to property; instead, these are "informal" ownerships not recognized or enforced by the political authorities in these parts of the world.

One could argue that Hernando de Soto is advocating policies that make the wealth of the "third world" "lootable". See also this thread on J. B. Clark
wealth is created "from the mere appropriation of limited natural gifts .."and that repelling intruders "is almost the only form of labor which exists in the most primitive social state" (p.10). The atmosphere as a whole, showers or breezes, "minister transiently to whomsoever they will, and, in the long run, with impartiality". Therefore they are not wealth. Those who appropriate them create wealth by so doing. The essential attribute of wealth is "appropriability," to create which "the rights of property must be recognized and enforced Whoever makes, interprets, or enforces law produces wealth".


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 6th, 2011 at 04:44:30 AM EST
[ Parent ]
Well, that's not complete bullshit.

The thing is, without a functioning credit system, your investments are limited by your savings (and your savings by available investments, but if you are willing to accept a low enough return simple hoarding of physical goods constitutes an investment, so in practise the constraint is one-sided). In the monetary economy, investments are no longer limited by savings, because you can borrow against future cash flows (thus essentially allowing investment to crowd out consumption). The flip side is that savings no longer automatically create investment, because you can hoard claims over value instead of hoarding value.

So having a financial system is very probably necessary for serious and sustained industrial development. But having a reasonably strong state (capable of intervening both in the financial system and as investor of last resort when desired savings exceed desired real investment) is a prerequisite for having a financial system that is a net gain rather than a net drain.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 6th, 2011 at 11:57:35 AM EST
[ Parent ]
Which, of course, is the reason for disabling the financial regulatory capabilities of the modern state. A net gain for society is a net loss for the looters.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 7th, 2011 at 09:50:28 AM EST
[ Parent ]
The simple extortion at the heart of the ECB/IMF policies is something that's often lost or obscured when presenting alternative policy proposals.

Thanks.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 6th, 2011 at 02:54:19 AM EST
Ilta-Sanomat (in Finnish): Portugal's gold stash (freely translated).

According to info from Der Spiegel (!), and WSJ, Portugal has 383 tons of gold stashed away, worth 14 billion euros. The Bank of Finland holds 49 tons.

Once again the Finns are asking themselves why they are being asked to pay up to support the "less model citizens" of the Eurozone.

You can't be me, I'm taken

by Sven Triloqvist on Fri May 6th, 2011 at 03:24:53 AM EST
Eurointelligence: (see links above)
Bailout countries could sell their gold reserves to reduce debt woes

Why should countries subject to EU/IMF financial assistance not be force to sell their gold reserves, German politicians ask. Norbert Barthle, Germany's governing coalition budget speaker, and his counterpart Carsten Schneider from the Social Democrats have urged Portugal to consider selling some of its gold reserves to reduce its debt woes and therefore the bailout costs, Wall Street Journal reports.  Portugal has nearly 383 tons of gold, about 9% of its GDP, which is the highest proportion in Europe. Portugal's holding would be worth $18 billion at current market rates. But Portugal has signed central-bank agreements not to destabilize the gold market, and announcing an imminent dump of their reserves would certainly do that. Some market analysts suggest that the gold of debtor states could be used as collateral in repurchase agreements (We think this is a complicated issue, as any form of collateralised borrowing would subordinate ordinary sovereign bond holders )



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 6th, 2011 at 04:16:15 AM EST
[ Parent ]
Yes, why don't they sell that shiny crap? Do they want to impose AusterityTM even if they can get out of it by the simple expedient of dumping some very nearly useless metal?

(Incidentally, this logic presupposes that the Bundesbank is more prepared to support the price of gold than the price of Portuguese sovereign bonds. But in view of recent history this does not seem like an incredible assumption.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 6th, 2011 at 12:00:31 PM EST
[ Parent ]
Good thing they don't have any silver, given the ongoing squeeze on physical silver. They would be hearing a roar from all whom JP Morgan and HSBC could wind up.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 7th, 2011 at 09:55:17 AM EST
[ Parent ]
So goes the myth (I do not know if it is true, probably IS) that that gold was mostly bought during the Salazar time (our 20th century fascist dictator).

This is where narrative and myth start to become very dangerous: if we have to sell that gold, more and more voices will start suggesting that "in that time" things were much better managed (nevermind appalling statistics about infant mortality, poverty, class divide, war in Africa or lack of "less efficient" freedom of speech and democracy). I think we are on a dangerous path in regards to the construction of the myth of "the better government framework". Many people (right and left) already talk about how things were "well managed" at that time.

Beware the power of myths.

  1. Get the Euro
  2. Surrender sovereignty and get humiliated
  3. Forego democracy. Formal democracy at least, because informal one is currently being destroyed as we speak
by cagatacos on Fri May 6th, 2011 at 09:45:40 AM EST
[ Parent ]
See my Barroso to plebes: nice indebted democracy you have there... (June 17th, 2010)
"I had a discussion with Barroso last Friday about what can be done for Greece, Spain, Portugal and the rest and his message was blunt: 'Look, if they do not carry out these austerity packages, these countries could virtually disappear in the way that we know them as democracies. They've got no choice, this is it'."


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 6th, 2011 at 10:04:14 AM EST
[ Parent ]
I actually think both perspectives (in the piece you link) are "correct". These are perilous times.

Anyone here read "The Fourth Turning"? If yes, would like to share an opinion? It seems applicable to this post (A good match for the "Until..." section).

Actually one of the fundamental reasons I started writing with a pseudonym comes from the doubt that democracy and freedom of speech are currently stable.

by cagatacos on Fri May 6th, 2011 at 10:40:47 AM EST
[ Parent ]
writing with a pseudonym

Possibly also a good move professionally.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 7th, 2011 at 10:04:45 AM EST
[ Parent ]
Interestingly it seems that around here the government department that seems to have more problems paying salaries is... defence (which includes part of the de facto police, the one that acts in small cities and rural areas).

It is exactly the group that you DO NOT want to stop paying salaries: those with guns.

Up to now only a delay of one day on salary payments (and today a complaint from the police top official that there are cash flow problems).

by cagatacos on Sat May 7th, 2011 at 11:57:59 AM EST
[ Parent ]
Surprise, surprise!

So goes the myth in Greece, too, that we had no public debt in 1974 (the day our junta fell). Which is of course true, but it had nothing to do with good management. Apart of poverty and inequalities we had nothing of everything else,too, (no roads, no electricity and drinkable water in many rural areas, no health system, no social security and low living standards).
And there is some kind of nostalgia, surprisingly not only by the hard right but also from some left intellectuals,too, for the 1953-74 period of the so-called high growth (but also high inequalities, junta and lame democracy).

Someone should open a diary on junta nostalgia by the periphery Euro elites.

"Eurozone leaders have turned a 50bn Greek solvency problem into a 1,000bn existential crisis for the European Union." David Miliband

by Kostis Papadimitriou on Tue May 10th, 2011 at 08:46:08 AM EST
[ Parent ]
As long as Franco was shut out of the International Community (up to ca. 1955) Spain was all about autarchy.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue May 10th, 2011 at 08:54:07 AM EST
[ Parent ]
Someone should open a diary on junta nostalgia by the periphery Euro elites.
Maybe you could make that your first ET diary...

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue May 10th, 2011 at 08:55:32 AM EST
[ Parent ]
If you replace Greece with Portugal, it is exactly the same (even the year).

If we are forced to put gold (aka, "Salazar's gold") as collateral for extra EU "help", that will entail a massive narrative shift, I believe (from simple nostalgia to maybe active preference for the old times).

yuck.

by cagatacos on Tue May 10th, 2011 at 03:48:34 PM EST
[ Parent ]
National debt was no big issue in Sweden before ca 1980. Was it anywhere? I smell a shift in narrative.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Tue May 10th, 2011 at 04:36:16 PM EST
[ Parent ]
yup
For at least the last 30 years, and definitely since the Reagan/Thatcher revolution got going, a frequent mantra of right wing politics has been that "the state must be run like a private firm". In the Europe in the 1990s the right wing, enabled by third-way social democrats, managed the spectacular feat of structuring the Eurozone around rules that make it all but impossible to run the state in any other way, to the point that Zapatero now freely admits and preaches that the state needs to fund itself in the capital markets (or borrowing from other states) and that in order to access credit it has to be thrifty. So the fourth largest Eurozone member state must run its financial affairs just like a private firm, or a local government, and this is the message coming from a Social-Democratic leader. How the mighty have fallen.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue May 10th, 2011 at 04:38:59 PM EST
[ Parent ]
Eurointelligence Daily Briefing: Not vigilant, with risks finely balanced
Trichet signals no rate rise in June, and says risks are finely balanced; euro falls some 4 cents on the news; Trichet also said he is not committed to the notion of interest rates normalisation in contrast to other central bankers; yesterday also saw a broad-based crash in commodity markets, with oil prices down some 10- cents; EU and IMF officials say Portugal's programme was tough but fair, and that the interest rate will be similar to the one of Greece; German politicians want countries subject to financial help to sell their gold reserves; Brian Lenihan blames ECB for forcing Ireland into a bailout; German bank levy is about to flop; leaks suggest that German tax revenue will grow strongly in the next few years; Fillon calls for iron discipline in the French budget; Dominique Seux says Christine Lagarde should be considered as a potential successor to Dominique Strauss Kahn at the IMF; Argentine's central bank governor Mario Blejer, meanwhile, calls the European financial rescue stragtegy a Ponzi scheme.
(Google link)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 6th, 2011 at 04:11:06 AM EST
Eurointelligence Daily Briefing: The consequences of a not so secret meeting
European finance ministers hold a secret meeting in Luxembourg, and reach consensus to put up another Greek rescue programme; current programme is regarded as having failed, with no chance of a return to capital markets in 2012; Der  Spiegel reported the news of this meeting on Friday night, along with the story that Greece was planning to exit from the eurozone; this part of the story was vigorously denied by everybody; euro continues to fall on these developments; Wolfgang Münchau writes that the failure to organise a secret meeting is symbolic of the eurozone's collective action problem: the present setup is not sustainable; Juan Igancio Crespo writes that a Greek exit from the eurozone would give rise to a  catastrophic financial crisis; Holger Stelzner writes that the EU and the IMF have no way to exert pressure on Greece if they explicitly rule out a debt restructuring; Hugo Müller Vogg says it is better to pay the one-time costs for a Greek exit than to pay the permanent price for Greece remaining in the eurozone; Handelsblatt and FT Deutschland support a new Greek plan; Portugal's PSD proposes radical supply side reforms, including drastic tax cuts for companies; Morgan Kelly proposes an Irish default on the banking system - and the ECB; Nicolas Barre warns that France might slip into a similar position than the peripheral countries; Angela Merkel, meanwhile, is getting increasingly desperate about Mario Draghi - now she wants him at the IMF.
(Google link)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon May 9th, 2011 at 05:36:18 AM EST
MRZine: Political Aspects of Full Employment by Michal Kalecki (original from 1943)
In should be first stated that, although most economists are now agreed that full employment may be achieved by government spending, this was by no means the case even in the recent past.  Among the opposers of this doctrine there were (and still are) prominent so-called 'economic experts' closely connected with banking and industry.  This suggests that there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic.  That is not to say that people who advance them do not believe in their economics, poor though this is.  But obstinate ignorance is usually a manifestation of underlying political motives.

There are, however, even more direct indications that a first-class political issue is at stake here.  In the great depression in the 1930s, big business consistently opposed experiments for increasing employment by government spending in all countries, except Nazi Germany.  This was to be clearly seen in the USA (opposition to the New Deal), in France (the Blum experiment), and in Germany before Hitler.  The attitude is not easy to explain.  Clearly, higher output and employment benefit not only workers but entrepreneurs as well, because the latter's profits rise.  And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation.  The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them?  It is this difficult and fascinating question with which we intend to deal in this article.

The reasons for the opposition of the 'industrial leaders' to full employment achieved by government spending may be subdivided into three categories: (i) dislike of government interference in the problem of employment as such; (ii) dislike of the direction of government spending (public investment and subsidizing consumption); (iii) dislike of the social and political changes resulting from the maintenance of full employment.  We shall examine each of these three categories of objections to the government expansion policy in detail.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri May 13th, 2011 at 08:14:40 AM EST


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