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Macroinformation for the #spanishrevolution

by kcurie Thu May 19th, 2011 at 02:01:02 PM EST

So, you may have read something about young people gathering in Spain. I actually just got from a meeting in front of the Spanish Embassy in Berlin. It was a quite interesting crowd. They were all very smart, very political, and well-organized.. they just do not know exactly where it will go.. but it seems that a reform of the voting system and Europe is something that united all the people there. Luckily, on social issues it was a left-right wing crowd.


And I guess, the most important thing I listened to, besides the body language that my anthropological deformation requires to observe, is that we should provide information, more and more information without telling people what to think. Just give information about how the system works.

And then I thought, that is naive, but nice. In most topics is impossible to give information without politics, but regarding how the economic and electoral world works, that it is indeed somehow possible.

So here goes a rant, a rant about how the economy and Europe works. Just information. Other people did the job regarding the electoral law better than me.

First, Europe has a common currency, this means that there are no independent countries, we can not print the quantity of money we want, only the country that has more influence over the ECB (the bank in charge of printing the money) rules.

At this point, all member states are just like companies (except Germany that control the ECB). When one has its own currency it can decide how much currency it wants to print and in which form. It can decide to create debt or print notes, it can print and invest in any company it wants or it can eliminate any debt it may wish to any company or person it may wish. If you do not print your own money you do not have this ability. This is called the ability to have your own monetary policy. So, Portugal, Italy, Spain do not have their own monetary policy.

Is monetary policy important? Yes, absolutely, a lot, a wrong monetary policy destroys a country, literally. A proper monetary policy solves almost all the problems one can imagine in the short and medium run, and can even make the coutnry better positioned to be  rich in the long run.

How so? Ok, here you need some basic macro. Imagine that every one of us had to spend all the money we had in our pockets within a couple of months. So all our income will be expenditure. And suppose we could only spend this income on things that are produced in the last year. Imagine in this world that everybody has a house (possible crazy world) and there is no other object which requires a lot of effort and time to get. Then, in this world,  everything I buy, gives work to another person. Every expenditure is another person's income.  Here, the money goes around and there can only be an excess of demand for a certain product if there is lack of demand for another. But if this happens the economy can adapt. If suddenly people ask for less cars and more bikes, cars will pile up unsold, prices of cars will fall while bikes will be sold three months in advance, and prices would increase. Workers in the car industry will be fired but they would find job in the bike industry which will be crazy for workers. Obviously, tastes change continuously, so people will adapt jobs and works continuously, but there can no be a lack of demand of all products. If someone is temporally unemployed, give him some money for some time until he finds another useful thing to add to the economy.

See, in this world you do not need to worry about money. Money is just a medium of exchange. The moment you have something worthy to sell you can buy stuff.

The problem of this economy is that you can not innovate and do new things. If you want to do a new thing you do not consume for some time until you do it. So, you  need credit. Besides, in this economy you must be always working, otherwise you are out. So you need to save. A good economy that wants to make us richer by trying to make it easier to make a copy for everybody of anything we want (copies of apples so that anybody can have, and energy, and clothes, and music..) needs to innovate and save.

But saving and credit have a serious serious problem if you are not careful. When there is savings and credit, there can be a lack of demand of new products and workers. Why? Simple, there can be times when there is a huge amount of demand for money to save. Not money as something to make an interchange, but money as something that I can have which guarantees that I can buy stuff in the future. So, there can be an excess of demand for money (or financial products or assets) and not enough for newly produced products, leading to very high unemployment.

But this is not the only problem, sometimes people who gave credit want to get their money back now and sometimes people who are in debt want to pay down the debt without the other side increasing the amount of products they want to buy. They want to pay debt for just in case they get out of work, for example..or for the sake of having more savings. All in all,  the same thing, an excess demand for money not to buy new stuff and give a job to somebody else, but to save or pay down debt.

This nightmare world is called a deflationary spiral, and it is really awful.. it is the one we are living now because a lot of bankers got robbed in a casino called Wall Street and realized their investments were not as sound as they thought and kept and kept money and money to recover their supposed wealth without giving credit or buying new stuff. By keeping money they did not give credit, new companies were not created, unemployment raised, people saw the bad times coming and... saved more and paid more debt.. and.. well three years now and counting.

Sometimes it might happen the opposite, when there is no excess of demand for money but excess of demand for new products. This happens when people want to get rid of the money. When this happens, there is too few products in all markets, leading to inflation since there is too much money chasing too few products, which leads again to people wanting to get rid of the money because they think is losing the ability to buy stuff in the future given the inflation that exists...

OK, so now you see that economy can have serious problems leading to millions of people unemployed and in poverty just because there is an imbalance between money to purchase in the future (financial products or assets as money) and present demand of products.

It is even worse than that. In both situations, deflation (the first one I explained) and inflation (the second), you have awful negative feedbacks. For example, the more deflation you have -> the more people want to save->the more unemployment you have -> the more people want to save and pay debt -> the less demand there is for new products ->the more unemployment ->the more deflation-> the more savings... And the same for inflation, the more inflation there is -> the more useless is the money -> the better is to spend it -> the more demand there is for new products that can not accomodated ->the more inflation,etc.

When this happens, economic crisis do not last half a year or one year, as it is  the case when there is just a huge change in the preferences of the consumers but no change in the preference of money. When financial crisis hit leading to a safety fly to accumulate money, crisis can last years and years, leading to the destrucion of the things that made us rich in the first place: innovation and factories that can start to produce new things and services.

How can you end one of these awful episodes? I guess you know now, with monetary policy and with some redistribution of income to give money to people that will spend it in the case of deflation (or save it in the case of inflation). This last option is called fiscal policy.

Fiscal policy is obvious, if too much money sits idle and saved, let's take some of this money and give it to people who will spend it. If you are a social person, you may think the State is the best option to spend it, if you are more an individual guy, you might think that you should target the low-middle class and give them the money, they are the ones that spend almost all their income. That's it for fiscal policy,  but why monetary policy is necessary? Because fiscal policy is never enough.

If you redistribute you can not change the awful dynamic of not investing, and no credit, and the demand for money when the shock is large enough. You have no other option that to print the money the people want (in case of deflation) or eliminate this money (in case of inflation).

So, what happens with Portugal and Greece. Easy, they had huge amounts of money going around in credit given by germans (and french and some spaniards) If they would have had their currency, they would have printed money making the people abroad lose "effective" money when they became mad with the desire for money now, their currency would have fallen with respect to Germany, Greek people will be poorer in the sense that imports will be more expansive, but this gives them the incentive to produce more stuff, and actually exports would rise avoiding  large unemployment. So the bad feedback would have a good feedback pushing the country out of the spiral.

The same goes for Spain.

But what happens when you do not control the currency. Well, meanwhile Germany has the same need to print  money than you, no big deal.. but what happens when Germany sees that their people do not want to save more. Well, they do not need to print money..actually they might be worried about inflation, so they would reduce the amount of money. The problem with the euro is that this reduction affects everybody.

Now Spain, Portugal are no longer countries, they are like private companies with debt they can not print money to pay. If the creditor to Spain Inc. wants to get the money back badly, it will impose cuts and cuts so that Spain can service the debt. But this is a huge mistake, because cuts will reduce even more the revenue and the income of the people of Spain Inc.. and actually the debt they have will increase in terms of the things they can produce.

All in all a disaster. Only three option are possible. First the Spanish Inc company defaults and debt is eliminated.. hitting the creditor badly (and another round of panic?), or the company ceases to exist and leaves to create its own money (gets out of the euro and is no longer a company) , or you just first destroy the economy and income of the middle classes trying to pay down debt.. and then you realize you can not pay anyhow in a deflation-austerity spiral and you jump anyway or default.

There is a way Spain can get out of it without destroying the euro? Of course, like the US does it. It is called a common emission of debt.. so the entity that prints the euromoney (ECB) lets Spain take as much debt as it wants to pay fown the private debt that the companies inside Spain have, with the understanding that in the future they will have to give it back when Spain grows again.

Would this work for Greece? No, unfortunately no, because Greece is not able to pay in the future the huge debt it has, so the only option is accept it, either by accepting a slightly higher inflation in the eurozone printing the money that Greece needs or by a default...or.. by having a common european tax to pay for unemployment benefits and mobility of workers in the whole euro area. In other words, to have an european economic union.

I hope I have given you a clue...we should leave for another post why austerity measures never allow a country to pay its debt...the same thing goes for discussing what really makes you rich in the long run.. but in the long run we are all dead.

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Thi is a long english version of http://avionesdecercanias.blogspot.com/2011/05/lo-que-me-estoy-perdiendo-nolesvotes.html

May be we can adapt it, add things which I left and forgot, improve the paragraphs, and distribute it around Europe?

Can we?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Thu May 19th, 2011 at 02:07:50 PM EST
Can you e-mail me?

I was looking at it on your blog without realizing you'd posted it here in English...

by afew (afew(a in a circle)eurotrib_dot_com) on Fri May 20th, 2011 at 10:02:39 AM EST
[ Parent ]
Sure..

Done... you have my e-mail.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri May 20th, 2011 at 10:11:45 AM EST
[ Parent ]
Your analysis is most applicable when manufacturing is done in your country. But a major aspect of the current squeeze on the working age, well educated population is that TPTB have put them into wage arbitrage against developing economies, where wages are much lower. This effect may be much stronger in the USA than in Spain. How much of your merchandise available for purchase is made in non "First World" countries? But, in any case, the availability of cheap labor in the BRICs, in conjunction with international corporations and a domestic financial elite that acts in the interests of the international corporations and exercises de facto control over your politicians, means that Spanish citizens have trouble competing with cheap foreign labor. Any time there is financial trouble, the remedy proposed by the elites is "reform" that makes the Spanish worker less competitive.

The most important thing to get across to the protesters is that they should, at all costs, prevent the Spanish Government from bailing out private debt owed by business and individuals to other countries. There is no reason to do so except to please the bankers in Germany, France, the UK, etc. The reason not to is to prevent Spain from being in the same position as Ireland and Greece.

Last, this is all a fraud based international house of cards that allows economic elites to fleece the rest of their countryment. IF refusing to socialize the losses on loans to Spanish business and individuals brings the whole house of cards crashing down, Spain would be doing the citizens of the rest of Europe and the USA a great service, though things will be hard for a while. The longer the frauds run the worse the final collapse will be.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu May 19th, 2011 at 11:07:51 PM EST
You mean that the problem in Spain is larger than the fly to safety and money.. well it is true.. the fact is that the problem is the global search of safe assets.

If Spain had the peseta, you can prevent the effects of this flight with devaluation.. making spanish products cheaper and the low-wage products more difficult to import in a lot of cases.. or at least in enought hem to keep unemployment at reasonable levels.

So, it is more the euro + financial flight to safety.. but I guess this points comes acroos in the text, doesn't it?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri May 20th, 2011 at 08:23:18 AM EST
[ Parent ]
I guess this points comes acroos in the text, doesn't it?

It would depend on the individual. Good practice would be to make the argument clear to all, regardless of their level of knowledge about political economy.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 20th, 2011 at 09:24:20 AM EST
[ Parent ]
Yes..well it is clear that it is not the mean message.. the main messsage: controlling your own currency is importnat.. if you do not do it ayou at the mercy of foreign decisions.. unless Europe is your new home.

It also shows how great crisis always start, the problems with low wages and global competition for some type of work is not there.. this is a problem after the lack of demand is resolved... Although it is true that higher income differences make a large scare more likely.

So two more classes of macro are needed.. why austerity does not work.. and how income isdistributed (together with weatlh) and the implications for demand of workers and inflation (the problem of the zero bound for low inflation).

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri May 20th, 2011 at 10:15:32 AM EST
[ Parent ]
A good way to start might be to provide a toy model of a largely self sufficient economy with its own currency. Then you can show all of the things that won't work if you don't have control of your own money supply and if those who do are not giving you what you need. Then you can show the problems that result when you stop manufacturing most of your own consumer goods. etc. etc.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 20th, 2011 at 09:40:26 PM EST
[ Parent ]
THE GREAT SLUMP OF 1930 by John Maynard Keynes, 1931 provides the basics framework of macro economics, debt-deflation and the roles of consumer and capital investment and spending explained almost totally non mathematically in three pages! It is the clearest simple explanation I have found and any reasonably bright person who is interested should be able to grasp the essence with a bit of effort. Once one has that 5 Km high overview or gestalt click into focus, so much of what they already know falls into place. At least that is what I found for myself.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 20th, 2011 at 09:53:02 PM EST
[ Parent ]
It also shows how great crisis always start, the problems with low wages and global competition for some type of work is not there.. this is a problem after the lack of demand is resolved... Although it is true that higher income differences make a large scare more likely.

What seems to happen is that the financial sector, if unconstrained, will always try to juice the economy with debt. Steve keen has shown that employment is strongly related to the change in debt. See Deleveraging, Deceleration and the Double Dip Debt allows future purchasing power to be brought into the present and this increases growth -- until a society is drowning in debt. When TPTB are driving down consumption by driving down wages so as to keep a larger piece of the pie for themselves, they seem naturally to turn to debt bubbles for relief from the contraction that naturally occurs.

Debt adds to growth in the early stages of a bubble. But when the bubble bursts and the debt has to be repaid debt repayment subtracts from growth as people defer or forgo consumption to pay down debt. The role of debt is like the third rail for "mainstream economics". They try to deny its relevance, because, if its role is understood it undercuts their arguments and exposes their manipulations.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 20th, 2011 at 10:10:47 PM EST
[ Parent ]
The problem is that paying down debt does not increase the spending of the receiver of debt.. the money just evaporates for consumption and is almost automatically saved..

great comments

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Sat May 21st, 2011 at 05:17:36 AM EST
[ Parent ]
the money just evaporates for consumption

Right! A small fraction of debt repayment might show up as spending from financial sector executives' bonuses, but most, even of this money, is deployed back into more financial ponzi schemes. If it went back into investment for social overhead capital or domestic production capital it would help, but, with current financial realities, it is more likely to go the investments in the BRICs, where it generates better returns for the owners of the capital. Your (formerly) 1st world domestic economy only serves as a target for wealth extraction, not a site for wealth creation. This is true in Spain as well as in the USA.

Workers 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 Sat May 21st, 2011 at 09:30:08 AM EST
[ Parent ]
I absolutely agree... It cna also be used to ver the asses, and cover the capital needed for banks not to blow up...

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon May 23rd, 2011 at 07:46:48 AM EST
[ Parent ]
And if the lender has an underwater balance sheet, the money that is repaid will go to pay for spending that is long in the past -- unless there is a default.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 21st, 2011 at 02:52:35 PM EST
[ Parent ]
...debt repayment subtracts from growth as people defer or forgo consumption to pay down debt.

Obviously this is true, but hardly the reason for the recession now or housing market crash. The debt first creates debt deflation to real economy, and only after that, problems start. All happens before deleveraging. I'm quite sure that USA, Ireland or Spain were not deleveraging when problems started. The Serious People talked about "liquidity" (whatever that in the end means(most likely a recession of the real economy)).

by kjr63 on Sun May 22nd, 2011 at 05:15:30 PM EST
[ Parent ]
A financial crisis leads to banks stop lending which is very bad news as all sorts of investments hinges on bank loans. The longer it lasts, the worse the consequences.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Mon May 23rd, 2011 at 05:00:44 AM EST
[ Parent ]
"Would this work for Greece? No, unfortunately no, because Greece is not able to pay in the future the huge debt it has, so the only option is accept it, either by accepting a slightly higher inflation in the eurozone printing the money that Greece needs or by a default...or.. by having a common european tax to pay for unemployment benefits and mobility of workers in the whole euro area. In other words, to have an european economic union."

I totally disagree with this point. Even at levels of debt piled by the 2004-09 government (they double it in absolute terms in just 5 1/2 years), Greece would still be able to serve its debt if she had to pay for them a reasonable interest rate, i.e. around 3-3.5% i.e. as high as it used to pay or as high as "risk-free" Germany pays.

"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 Sun May 22nd, 2011 at 04:26:30 AM EST
Are you sure?

Debt over GDP is higher thant 125 % so basically, at 3-3.5% you need around 4% growth with balanced budget (which needs more contractionary spending.. whcih is a feedback impossibility). Let's say Greece needs a 5% growth to pay down debt at 3%... is it really possible? Or are we asking the impossible?

Isn't it better just to slash debt at around 70-80% GDP with haircut interest rates to 1-2% and ask Greece to grow at normal 3%?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon May 23rd, 2011 at 07:53:52 AM EST
[ Parent ]
I doubt any analyst could figure this out. You have to remember that although Greek debt is now around 144% debt to GDP, the economy has massively contracted (4.5%-5% for at least two years) and so now we're measuring their ability to pay against a crippled economy. The rise in debt to GDP from 115% when this crisis started to 144% is now because of an increase in public expenditures. Greece has actually reduced expenditures.

To what degree might Greece's economy grow in a world in which it's public spending doesn't give the economy a steroid bounce? No one knows. The debt to GDP might as well be 14400% if Greece does not have a way to bounce back strong.

by Upstate NY on Mon May 23rd, 2011 at 10:35:58 AM EST
[ Parent ]
That is true as far as it goes, but also beside the point.

The reason - the only reason - that Greek sovereign debt is unsustainable is that Greek foreign debt is unsustainable, because Greece has a persistent, cycle-averaged foreign deficit in excess of any realistic growth rate for a European economy.

Currency crisis, not debt crisis.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 23rd, 2011 at 09:07:15 PM EST
[ Parent ]
And because the ECB and the Eurozone treat intra-Eurozone debt as foreign debt.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Tue May 24th, 2011 at 01:42:17 AM EST
[ Parent ]


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