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The idea that you can destroy democracy and drive everyone to poverty in order to "pay back debt" I thought was abandoned in the Middle Ages.

As a side note - it wasn't abandoned. Treaty of Versailles.

But you are right, of course. Thinking people abandoned that idea long ago, because it never worked except in a few very limited circumstances.

But in order to restore a primary budget surplus it's the standard treatment: its what happens when you default, just on a much bigger scale.

I'll set aside of course the fact that Germany is not giving money to Greece but loaning money to Greece, at 5%, making a nice profit since it borrows it a 2%.

Except, of course, you, and me, and just about everybody else understands that Greece is neither able nor willing to ever pay that money back.

Which makes that "loan" what?

Note that austerity, isn't an answer to the debt problem (destroyed economies don't pay back debts), it's an elite political strategy against labor and against the achievements social Europe, everywhere in Europe.

I doubt that. First, "Austerity" is a big word without a decent definition. Germany ran "austerity" politics for most of its recent history and yet has one of the most advanced social networks in Europe. Basically, what got us off track, financially, were three things: the unsuccessful Keynesian episode in the 70ies, Kohl's economically botched reunification, and of course the current crisis. Each of which dwarfs the ones before it.

The point of prudent financial policy isn't a balanced budget per se. Others have noted that one method of dealing with debt is growing out of it (which, fwiw, is only sustainable as there actually is long term growth, which leftists tend to oppose for ecological reasons). So, yes, you can increase debt, in a limited fashion, but only as much as far as it is compensated by growth - and preferably somewhat less.

And if THAT is austerity, well, its the only long term sustainable policy at all. All other policies lead to the Greek end game.

Note that I do not reject Keynesian boom-bust spending by that - at least not the way it was originally conceived. The problem with Keynesian reality is that there is no political system that ever managed to implement the "and in boom years we pay back the debt we incurred in a bust period" part.

Not even Germany. Especially not Germany.

by cris0 on Fri Feb 17th, 2012 at 10:50:01 PM EST
[ Parent ]
Treaty of Versailles.

So you are one of those Germans who, a few months ago, I suggested might be favoring the current treatment of Greece on the grounds that this was what was done to Germany via the Treaty of Versailles! The repetition-compulsion neurosis of Freud: do unto others as has been done unto you.  And my suggestion was dismissed here as being unlikely. By the way, the problem with that behavior is not just that it is unjust, but that it doesn't even work - at least to relieve the anxieties which provoke the behavior.

We never learn. The stupidities of our ancestors we compulsively repeat. But this reminds me of descriptions of my behavior at age 3 with my cousins. My girl cousin was a year older and larger. My boy cousin was my age but smaller. She would hit me and I would hit him! Not very noble, but that is how children are.

The response of visiting on Greece the sort of devastation that was visited on Germany after WW I is, at best, neurotic. Greece never attacked Germany, quite the opposite. And Hitler repaid France in spades for Clemenceau's infamous 'pound of flesh' revanchist treaty. But that didn't stick, so now you want to accomplish by economic means what could not be accomplished by military!  Q.E.D.

Having read accounts of Versailles, including Keynes' The Economic Consequences of the Peace, which reads like a summary of inter war events but was written in 1919, I felt that France, if not the other countries attacked by Germany in the late '30s, had brought a good portion of its disaster upon itself, (by no means to excuse Nazi Germany for its actions).

Thank you for confirming my suspicions.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Feb 18th, 2012 at 01:26:41 AM EST
[ Parent ]
Should have said "So perhaps you are...

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Feb 18th, 2012 at 03:29:20 AM EST
[ Parent ]
Except, of course, you, and me, and just about everybody else understands that Greece is neither able nor willing to ever pay that money back.

Which makes that "loan" what?


It makes that loan a transparently obvious effort to disguise the bailout of the German banks who made bad loans as an attempt to help to feckless southerners one last time to comply with their obligations - at the cost of seriously increasing those obligations and seriously degrading the ability to pay, via the 'austerity' conditions. This makes no sense economically, but plays well politically to the popular press while giving still more claims for which German banks can be reimbursed by foreigners.

The maddening thing about this is that Greece, like Ireland and Portugal, have been foolishly noble about trying to honor their obligations, and, instead of recognizing that effort and helping them do so, this is seen as a justifiable opportunity to make more money off these countries via the 'rescue'. In reality this is most likely to end up simply as one more way for the German financial elite to milk the German public while getting them to cheer on the efforts, as Greece is suffering far more.

This is similar to what lower class whites in the US South long accepted as their final consolation for being screwed over, bankers and plantation owners, officials, etc.: "At least you ain't no nigger!" I come from that background, have rejected that thinking and know with whom I stand. Such manipulation is most pathetic when it is most successful.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Feb 18th, 2012 at 01:46:32 AM EST
[ Parent ]
The maddening thing about this is that Greece, like Ireland and Portugal, have been foolishly noble about trying to honor their obligations, and, instead of recognizing that effort and helping them do so, this is seen as a justifiable opportunity to make more money off these countries via the 'rescue'.

See the poor are honest. I.e., strategic default is a tool for the rich. And the level of personal and national "pride" that the Greek people show is actually an atavistic sign on secular poverty.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Sat Feb 18th, 2012 at 02:14:01 AM EST
[ Parent ]
Germany ran "austerity" politics for most of its recent history and yet has one of the most advanced social networks in Europe.

Germany's austerity was a protectionist exercise in which Germany piggybacked on the rest of the Eurozone to pay for the reunification.

Colour me unimpressed.

And of course it won't work for the Eurozone as a whole, because the world outside the Eurozone is not going to let the Eurozone piggyback on their recovery.

Basically, what got us off track, financially,

A creative rewriting of the present. There is no European government finance crisis. There is a European trade imbalance crisis.

were three things: the unsuccessful Keynesian episode in the 70ies,

Historical revisionism. The Keynesian policies in the '70s were perfectly successful at their objective - which was to maintain output and employment.

They were not successful at containing inflation, but (a) inflation doesn't matter, so fuck that. And (b) the '70s inflation was imported and therefore not amenable to fiscal policy solutions.

The point of prudent financial policy isn't a balanced budget per se. Others have noted that one method of dealing with debt is growing out of it (which, fwiw, is only sustainable as there actually is long term growth,

False. The government can simply elect to pay zero per cent interest on its bonds.

And if THAT is austerity, well, its the only long term sustainable policy at all. All other policies lead to the Greek end game.

False. Look at Japan.

The problem with Keynesian reality is that there is no political system that ever managed to implement the "and in boom years we pay back the debt we incurred in a bust period" part.

Because it is totally unnecessary. Governments do not have to pay back their "debt," ever.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Feb 18th, 2012 at 03:48:40 AM EST
[ Parent ]
Germany's austerity was a protectionist exercise in which Germany piggybacked on the rest of the Eurozone to pay for the reunification.

It might surprise you, but history didn't start in 2002 or 1999.

Because it is totally unnecessary. Governments do not have to pay back their "debt," ever.

Yea, because after frequently defaulting they have no problem to attract new lenders.

Just how stupid do you think people are?

by cris0 on Sat Feb 18th, 2012 at 08:06:17 AM EST
[ Parent ]
Yea, because after frequently defaulting they have no problem to attract new lenders.

Just how stupid do you think people are?

Ahem.

Fitch Upgrades Iceland Rating To First Step Of Investment Grade (FEBRUARY 17, 2012)

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Sat Feb 18th, 2012 at 08:13:06 AM EST
[ Parent ]
Different situation.

Iceland never defaulted. They just (prudently) refused to guarantee certain debt of their failed banks (something that Ireland should have studied much more closely before doing the opposite).

They found other creative solutions to maintain a banking sector sufficient to service their (relatively small) domestic economy; solution which may or may not work in bigger states.

If investors did learn something from that is "do not lend money to loosely regulated Icelandic banks" - which do not exist any more anyway.

They also might learn "trust the instincts of Icelandic politicians" - which actually could improve their bonds' reputation.

by cris0 on Sat Feb 18th, 2012 at 09:10:19 AM EST
[ Parent ]
With this statement you have lost whatever credibility you had.

In the United States, Cris? Your contribution is really unwelcome. You should spend more time on US politics.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Sat Feb 18th, 2012 at 09:40:15 AM EST
[ Parent ]
In the United States, Cris?

That's the default setting for new users...

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Sat Feb 18th, 2012 at 09:42:11 AM EST
[ Parent ]
talking about default....

The Hun is always either at your throat or at your feet. Winston Churchill
by r------ on Sat Feb 18th, 2012 at 09:49:57 AM EST
[ Parent ]
ah.

hmm.

Thanks for the pointer. Corrected.

FWIW, this kind of mandatory data collection is not a good idea. That particular selection list would benefit from an "undefined" or "world citizen" line.

by cris0 on Sat Feb 18th, 2012 at 10:09:25 AM EST
[ Parent ]


tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Sat Feb 18th, 2012 at 10:21:42 AM EST
[ Parent ]
ET 1.01 you mean?

Would be good.

by afew (afew(a in a circle)eurotrib_dot_com) on Sat Feb 18th, 2012 at 10:43:18 AM EST
[ Parent ]
ET 1-plus-epsilon.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Sat Feb 18th, 2012 at 10:46:00 AM EST
[ Parent ]
what are you talking about?
by cris0 on Sat Feb 18th, 2012 at 09:56:37 AM EST
[ Parent ]
Iceland defaulted on its depositor guarantee. Which has far higher seniority than mere government bonds.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Feb 18th, 2012 at 09:42:49 AM EST
[ Parent ]
except, as to my knowledge, it didn't.

Uk and the Netherlands' loud yelling to the contrary notwithstanding Iceland made it clear very early that it only considered Icelandic domestic savers guaranteed; and afaik those were compensated to the legal limit.

Aside from that, even if you were right and Iceland had really changed the order of seniority in favor of its bondholders here, that again would boost its reputation with bond investors. The increase of which was the original point Migeru was making.

by cris0 on Sat Feb 18th, 2012 at 11:37:56 AM EST
[ Parent ]
Uk and the Netherlands' loud yelling to the contrary notwithstanding Iceland made it clear very early that it only considered Icelandic domestic savers guaranteed; and afaik those were compensated to the legal limit.

Yeah, except that under the relevant international treaties and domestic law, domestic and foreign depositors are equally covered by depositor insurance. Because depositor insurance is based on the country the bank lives in, not the country the depositor lives in.

That's an insane rule, of course, but no more insane than expecting Greece to pay for Germany's export subsidies.

If an ex post facto law can change a default into a not-default, then I propose that Greece et al introduce such a law stating that all government debt issued prior to such and such date is payable in Monopoly money.

Problem solved!

But if you still don't like the Icelandic example, you can have Argentina, Russia and 1920s Germany as examples of the world not ending just because you go with the Argentina Alternative.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Feb 18th, 2012 at 11:56:30 AM EST
[ Parent ]
So where do you think money comes from? Some wizard shitting gold ingots?
Or would you agree that it is created by the Central Bank?
by generic on Sat Feb 18th, 2012 at 08:15:50 AM EST
[ Parent ]
Well, it's actually created by the commercial banks. In the short run, the Central Bank just accommodates it.

Otherwise the "real economy" would be swimming in money from the ECB's "nonstandard liquidity measures". Instead, the ECB's liquidity is ending up... as excess bank reserves at the ECB.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Sat Feb 18th, 2012 at 08:54:30 AM EST
[ Parent ]
True but all state debt must be bought with CB money so I don't think it is misleading to say that all the money we are talking about here is created by the CB.
by generic on Sat Feb 18th, 2012 at 09:07:01 AM EST
[ Parent ]
It's quite possible that the announcement of 3-year liquidity auctions, the second of which will take place at the end of the current month, is responsible for the drop in bond yields in recent peripheral bond auctions (Spain and Italy, mostly). After all, banks know in advance they'll be able to turn the bonds into cash.

However, none of this liquidity is free or cheap, despite the low interest rate (you have to take into account the valuation haircut for collateral).

See Why Deutsche Bank Avoids The LTRO

Sometimes, there is news that isn't what it seems. Today, we got one of those: Deutsche Bank (DB) saying that it didn't take advantage of the LTRO due to its wish to keep its reputation.

...

So German public debt yields 0.2%, Deutsche Bank would be losing money on it if it decided to buy and deliver such debt at the LTRO. This means that for Deutsche Bank to make money on the LTRO, they would need to buy debt from the troubled countries, which at this point obviously no bank official wants to increase exposure to.

So the LTRO is a way for banks to make money, but one that works mostly only for the periphery, troubled, countries and their banks. And Deutsche Bank isn't avoiding it because of its reputation; it is avoiding it because it doesn't want more exposure to the sovereign troubles, and there is no money in it otherwise.



tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Sat Feb 18th, 2012 at 09:41:00 AM EST
[ Parent ]
The historical experience is that states can access the international money markets again after 18-24 months. See, e.g. Russia, Iceland and Argentina.

Besides, states only need to borrow to fund their current accounts deficit. Which, when you default on all foreign debt, means your trade deficit.

So yeah, a year or two of fuel rationing, and then they're in the clear. So far, Greece has suffered two solid years of far greater arbitrary cruelties in pursuit of an economic theology that has been wrong about everything of any importance for the last two hundred years.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Feb 18th, 2012 at 09:35:26 AM EST
[ Parent ]
It might surprise you, but history didn't start in 2002 or 1999.

Indeed. The recent episode of (West-)German mercantilist wage suppression began in 1991.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Feb 18th, 2012 at 09:44:55 AM EST
[ Parent ]
Speaking of 1991, if German "solidarity" was compatible with the destruction of the East German economy, a fortiori there's no problem with doing the same with the Eurozone doing the same to Greece.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Sat Feb 18th, 2012 at 09:47:12 AM EST
[ Parent ]
The same and worse.
by Upstate NY on Sat Feb 18th, 2012 at 10:28:03 AM EST
[ Parent ]
Which could have been avoided if East German salaries and fortunes had been repressed, by for example swithcing 2 Eastmarks for 1 Deutschmark.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Feb 20th, 2012 at 01:11:36 PM EST
[ Parent ]
True, but if the Bundesrepublik had had even a half-assed industrial policy for the East, the salaries would have recovered in short order.

The fortunes would not, of course. My heart bleeds for them.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Feb 20th, 2012 at 02:25:12 PM EST
[ Parent ]
Sure, I agree. Salaries would have climbed back up at the pace East German industry had modernized, just like in Poland, Czech republic and so on.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Feb 20th, 2012 at 02:29:41 PM EST
[ Parent ]
'Ways and ways' are a matter of priorities. Who takes the hit. The wealthy or the workers? Germany wanted to reunify, but not at the expense of the wealthy and powerful.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Feb 20th, 2012 at 02:53:22 PM EST
[ Parent ]
As it was, the BuBa retaliated against Kohl by being extra hawkish, which was a contributing factor to the 1992 crisis which ejected the Pound and the Lira (and nearly the Franc) from the ERM.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Mon Feb 20th, 2012 at 03:13:56 PM EST
[ Parent ]
JakeS:
And (b) the '70s inflation was imported

could you please explain/enlarge on this? are you referring to OPEC and the results of their change in policies then, lines at gas pumps etc?

'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 Sun Feb 19th, 2012 at 08:38:09 AM EST
[ Parent ]
"As a side note - it wasn't abandoned. Treaty of Versailles."

Yeah, well, the treaty of Frankfurt (1871) imposed to France greater payments in terms of percentage of GDP, and it was paid in two year -despite there having been major fighting in France in 1870 against not a single shot on German soil in WW1.

It was a political decision to pretend that Versailles was an economic impossibility.

Germany loves giving debt morality lessons despite having been the worst debt offender of the 20th century.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Sat Feb 18th, 2012 at 06:31:43 AM EST
[ Parent ]
Naother instnace of historic revisionism.

To quote Wikipedia:

the total sum due was decided by an Inter-Allied Reparations Commission and was set at 269 billion gold marks (the equivalent of around 100,000 tonnes of pure gold). This 100,000 tonnes of gold is equivalent to more than 50% of all the gold ever mined in history (est. 165000 tonnes) which was clearly not within the means of the Germans to pay. Consequently their only way of paying back the debt was in devalued Gold Marks which ultimately led to the hyperinflation;

The treaty of Frankfurt mandated 5 billion francs, to my knowledge the gold equivalent of 4.5 billion gold marks.

So there is a factor of about 50 between them.

by cris0 on Sat Feb 18th, 2012 at 08:34:41 AM EST
[ Parent ]
Well, I read several articles that came to that conclusion back in 2010 but admittedly cannot manage to trace them right now. It might be that part of the reason for the conclusion was that France had to pay within three years whereas Germany was allowed to spread its payments over decades, therefore being able to grow a lot in the interval.
Still:

"the total sum due was decided by an Inter-Allied Reparations Commission and was set at 269 billion gold marks" is more than misleading.

-That was the initial sum but it was promptly brought down to 132 billion marks. Please note that it is estimated that Germany had caused 150 billion marks of damage to the neighbouring countries.
-Yes the currency was called gold mark and one can give a gold weight equivalent, but this would give the impression that it had to be paid in gold which was certainly not the case. It took many forms, including sharing intellectual property (unlike for the treaty of Frankfurt, where it was entirely in currency).

I don't know about the exchange rate in those days, but "So there is a factor of about 50 between them. " is worse than misleading.

First, 132 is less than half of 269.

Then, the German GDP in 1919 was VASTLY superior to the French GDP in 1871 (especially stripped of Alsace and Moselle). I did make my case in terms of percentage of GDP, which in the case of the treaty of Versailles you should spread over several decades (thus the percentage of GDP would fall rather a lot over time).

Which is not to defend the treaty of Versailles. I agree with Keynes in that respect. Now, what Germany insists Greece suffers is probably worse than what Versailles asked of Germany -although Greece did not launch a war in the other European countries.

As for the insistence that Greece follows the European treaties (that were passed with no little political flexing of muscles) come what may, even where they are demonstrably unworkable, well, France abided by all its obligations of the treaty of Frankfurt until 1914. Germany did not.
Yet it's Germany giving the morality evening classes these days.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Sat Feb 18th, 2012 at 01:08:01 PM EST
[ Parent ]
Except, of course, you, and me, and just about everybody else understands that Greece is neither able nor willing to ever pay that money back.

Which makes that "loan" what?

Default does not equal lack of eventual payment. You can bet Greece will pay these loans back. I hope you also realize that the amount loaned to Greece so far is 80 billion, 13 billion of which come from Germany.

In all prior defaults, even when the money wasn't loaned to Greece but instead to a Bavarian prince who used the cash for his own purposes, Greece paid the money back (unlike in Germany's defaults) at often incredibly high interest rates (20%+++).

The troika loans have seniority over all other loans, and now we find out the ECB just swapped its bond purchases in the secondary markets for senior notes.

by Upstate NY on Sat Feb 18th, 2012 at 10:09:02 AM EST
[ Parent ]
Except, of course, you, and me, and just about everybody else understands that Greece is neither able nor willing to ever pay that money back.

It's not able, yes (it's elites are very willing, it's not like they're going to pay for it) but that realization and the actions that should follow it were never allowed to be articulated, and no policy implications were drawn from it. Quite the opposite, the whole episode was used as a time saving device so the ECB (i.e. the EU taxpayer) could be burdened with the private debt of German and French banks, so it could default at taxpayers expense not the bankers.

Germany ran "austerity" politics for most of its recent history

No. Germany had austerity of the type we're talking here under Heinrich Brüning, AFAIK, and the results of that are well known

But in order to restore a primary budget surplus it's the standard treatment

What? destroying democracy? And why is a primary budget surplus more importance than independence and why does it make mass suffering OK? And again destroying the economy worsens debt and destroys much more than the current economy. One has also to look beyond first order effects...

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Sat Feb 18th, 2012 at 10:40:30 AM EST
[ Parent ]
cris0:
long term growth, which leftists tend to oppose for ecological reasons)

Does. Not. Compute.

supporting real growth in quality of life for populations well served by their governments, enacting intelligent, especially ecologically intelligent policies are what being a 'leftist' is all about.

supporting the present giveaways to the already rich, plundering resources for short-term gain, these are the bailiwick of the right.

'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 Sun Feb 19th, 2012 at 08:33:55 AM EST
[ Parent ]

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