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Is it me, or it's the end of the eurozone?

by kcurie Fri Jun 17th, 2011 at 08:00:11 AM EST

I wanted to write something in a diary. I wanted to say that down down deep in my brain I thought something about the European crisis that my conscious brain was not aware.

I need to explain..and I need therapy...I need social support. I need comments telling me that I am wrong.

front-paged by afew


In the last couple of days I have become aware that my symbolic brain had thought about the crisis without me being aware of the fact.

I now realize that I thought that Germany, ECB and France will push all the Mediterranean countries towards austerity measures that would be accepted, in ex-change for moving the greek debt in private hands towards public hands in the next two years. And once all the debt was in public hands, Greece, Portugal and Ireland would default. Not Spain, Spain was too big to fail, the ECB would buy Spanish bonds in case of a bond attack, as long as Spain promises to grow at 0.5 % during 3 more years to guarantee the Spanish debt in European banks.

I though the euro will survive, as always, with banksters getting the money, and workers paying the price.

No more.

Now I see that a Greek defualt will never be a possibility for the ECB (the fact that Greece may revolt at anytime will just bring the outcome forward), now I see that Greece can not threat to default without starting a Minsky run, and a capital flight. So a default and leaving the euro is the same thing for the crazy nuts in the ECB.

And there is no chance that Europe will become a transfer union any time soon. More worrisome, all media treats the greek debt that the ECB has as something dangerous for the ECB!!!for chirst sakes, this means they do not get anything at all (or they do). The ECB can print money!!! well.. it should be able to print money!!! but maybe the European framework does not allow the ECB to print money??!! Is it true? can it be possible? I think it is, written in law or in fundamentalist ideology.

And no fiscal transfer, no ability to print money, no way to pay back debt, and equivalence of default and ECB triggered Greece bank-run leaves only one option. This last option.. with Portugal following.. and Ireland.. and then Spain, deciding what to do, or maybe without any option but leaving the euro.

It is the end of the euro. Roubini is right... and my unconscious brain was wrong...it is time to be scared.

Display:
It's the end of the zone as we know it.

I do not think a smaller eurozone will survive either, the rules are to mad. Another business cycle and new deficit countries will be shed.

So change along the lines of Modest Proposal or dissolving (or dissolving a bit and then change). But it is the end of the zone as we know it.

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

by A swedish kind of death on Fri Jun 17th, 2011 at 05:49:21 AM EST
  1. The euro as "the currency of the Union" that all EU member states are supposed to be converging towards (if they are not already in the euro area or have an opt-out).

  2. The eurozone of 17 countries.

  3. The euro.

Of these three, the first is by now a dead man walking. The second can hardly avoid break-up. The third could well survive as the currency of a smaller group of countries.

The prospect of a DM-proxy currency that no longer has even the pretention to universality within the EU fills me with gloom. And I can't see why any country would (should) want the euro under German rules (maintenance of present value of assets, no fiscal transfers, no evolution towards an adequate political system for economic governance), in a single-currency single market dedicated to German trade expansion at the expense of its "partners". Or why the EU itself should be a pole of attraction to candidate countries.

The German ultrahard-money doctrine creates a centrifugal risk that runs counter to the neolib free trade and competition stance of German government and business. What will remain of the latter if the former is religiously upheld is moot. From a pro-European point of view, who cares? We already have sovereigntism without sovereignty, and inter-zone and inter-country squabbles, within a closed system that is not supposed to evolve (except towards tighter limits yet, see "reform" of the Stability and Growth Pact). Something's got to give.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Jun 17th, 2011 at 05:57:23 AM EST
Or to put it another way - you can't build unity by tying rats into a sack and forcing them to fight for scraps.

But my worry is that the eurozone is not the problem.

The problem could easily become the extent to which Wall St decides that euro-instability is a timely excuse for another meltdown.

Meanwhile we have Russia and China threatening NATO with "concerns" over Arab intervention.

None of this is looking good.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Jun 17th, 2011 at 07:35:25 AM EST
[ Parent ]
I really thought that they would manage to get away with the euro-gold standard. No more... it is over.. probably within 2 years.. unless a dramatic change of perceptions regarding what should be done appears.. or a massive crack in the banking system, leading to another recession when even Germany would need loose monetary policy.

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 Jun 17th, 2011 at 08:11:41 AM EST
[ Parent ]
The other day I was thinking the appointment of a new ECB President was a cause for optimism, since he can change policy with respect to his predecessor without losing face.

However, Draghi takes over from Trichet will start in October/November of this year and I don't think the house of cards will stand that long.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri Jun 17th, 2011 at 08:45:42 AM EST
[ Parent ]
Even within a smaller eurozone, how are you going to account for Italy, Belgium, and even France? How are these three countries in particular to coexist with Germany?
by Upstate NY on Fri Jun 17th, 2011 at 09:49:29 AM EST
[ Parent ]
I think I was suggesting that question by saying that a rigid tight-money union is incompatible with German mercantilism.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Jun 17th, 2011 at 09:57:03 AM EST
[ Parent ]
But if they're going to give up mercantilism they could do it before the Euro-17 blows up.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Jun 17th, 2011 at 10:18:30 AM EST
[ Parent ]
I have it on good authority they're going to give up tight money first.

No, wait...

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Jun 17th, 2011 at 03:01:08 PM EST
[ Parent ]
For a couple of months until the crisis blows over or as a fundamental way of viewing the economics of currency unions?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jun 18th, 2011 at 05:11:38 PM EST
[ Parent ]
More likely over the smouldering ruins of the currency union.

Which can easily be arranged.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jun 18th, 2011 at 05:14:35 PM EST
[ Parent ]
Belgium and France have pretty good productivity, and are more aligned with Germany in its business cycle. This makes a smaller Eurozone, composed of them (and don't forget the Netherlands!) a pretty good proposition. Italy is another issue, but probably stable in a medium run.

ECB has 'low and stable inflation' written into its founding charter. It's actually a law, and before you see them 'printing money', you better start arguing for eurozone governments getting together and changing the charter. Of course, this could only happen after the catastrophe, because Germany would refuse to hear about it otherwise.

by Sargon on Sat Jun 18th, 2011 at 02:51:23 AM EST
[ Parent ]
When this crisis started, Portugal and France had the same debt/GDP ratio (in a few charts it was one data point on top of another). And, by the way, Spain was way better.

A bad year in France, say posting a deficit of 6+% and I think we might revisit your assumption.

You cannot beat the Anglo-Saxon spin machine.

by cagatacos on Sat Jun 18th, 2011 at 03:04:05 AM EST
[ Parent ]
When this crisis started, Portugal and France had the same debt/GDP ratio (in a few charts it was one data point on top of another). And, by the way, Spain was way better.
Thank you for your contribution. Clearly, this was about fiscal irresponsibility, and we need to enforce much stricter rules.

The Growth and Stability Pact didn't pay any attention to private debt. So, in the deficit countries with low debt ratios, private debt exploded. When the bubble popped, the public sector had to pick up the pieces.

Germany and France twice in the decade changed the rules to avoid being sanctioned for excessive debt but in the past couple of years they have attacked countries which have excessive deficits because of the depth of their recessions.

Apparently one of the stumbling blocks of Eurozone reform right now is that France and Germany don-t want sanctions to be automatic so as to retain wiggle room to escape them again. The European Parliament's current proposal is fairly automatic, and so may run into unsurmountable Franco-german opposition in the Council.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sat Jun 18th, 2011 at 03:26:57 AM EST
[ Parent ]
I said nothing of debt/GDP ratio. My argument is more about optimal monetary union area, and the degree to which their shocks are synchronized.
by Sargon on Sat Jun 18th, 2011 at 10:16:52 AM EST
[ Parent ]
That their shocks happen to be synchronised now does not tell you that they will continue to be if the Mediterranean countries reassume their ability to defend themselves from mercantilist attacks.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jun 18th, 2011 at 10:56:23 AM EST
[ Parent ]
In 2010 France imported from Germany for 112 billion USD and exported to Germany for 80 billion USD, making up a large part of France current account deficit of 53 billion USD (fourth largest in the world, third largest in the eurozone). (All figures from CIA)

Belgium has balanced trade and the Netherlands runs a surplus, so Germany and BeNeLux would probably work even with today's rules.

As I see it the only reasons France and Italy are not treated like the Mediterreans they are, are political reasons.

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

by A swedish kind of death on Sat Jun 18th, 2011 at 03:13:51 AM EST
[ Parent ]
France and Italy both used to have CA surplus not that far ago, and French productivity is actually pretty high. Italy didn't show up much productivity growth lately (last decade, say), so it's a problematic member of the potential narrowish Eurozone. Comparing with Spain, Portugal, or Greece, who had deficits as far as the eye could see (maybe not in Spanish case, but it's also the safest of the PIGS), the differences could not be missed.

Plus, of course, they are both large countries, and it's much easier to start a speculative attack against a small country, even if fundamentals are weaker in a larger neighbor.

by Sargon on Sat Jun 18th, 2011 at 10:29:18 AM EST
[ Parent ]
The definition of "price stability" is not in the charter.
Quantitative definition

While the Treaty clearly establishes the primary objective of the ECB, it does not give a precise definition of what is meant by price stability.

The ECB's Governing Council has announced a quantitative definition of price stability:

"Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%."
The Governing Council has also clarified that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term.
So they could meet tomorrow and decide to change that to 5%.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sat Jun 18th, 2011 at 03:21:22 AM EST
[ Parent ]
Yes. They could also define the price stability to be anything less than Germany's or Hungary's post-WWI hyperinflations. But they wouldn't.

Typically, for large economies the inflation target is defined within a band of 1 to 3%. Not one economist in their right mind would think of 5% as 'price stability'. There could be arguments that a temporary target of 4% could be useful right now, to generate higher inflation expectations. Or that we should re-evaluate the danger of deflations and move the target higher just to get a bit further away from that abyss. But I doubt we'd be calling that 'price stability'.

And of course, that's not going to happen as long as Germany is in. From their perspective, inflation is so catastrophic (see certain electoral results in 1930s), that almost no amount of data will outweigh their priors.

by Sargon on Sat Jun 18th, 2011 at 10:40:47 AM EST
[ Parent ]
But inflation is never about price stability. If inflation had anything to do with price stability it wouldn't be used as an excuse to raise interest rates - an action which redistributes wealth and only lowers nominal inflation as a second or third order effect. (Assuming it doesn't raise real inflation by increasing asset prices.)

If you want to control prices, you can institute retail price and profit controls. You can tax commodity speculation. You can take steps to increase supplies and reserves of key items. You can wean your economy off commodities like oil and gas which have wild volatiility around a consistent increasing price trend.

The idea that inflation -> increasing interest rates is yet another example of expedient brain rot and mono-mania.

But it not only redistributes wealth by applying an interest tax which is passed to the ownership class, it also fixes the role of the central bank as the central political driver and master of the entire economy.

Hence in the UK we have a bunch of noobs sitting around a table every month deciding what rates should be. These people aren't elected, and in economic terms they seem to be very very serious, which means they're good party apparatchiks.

Why are they making political decisions without democratic accountability? How did this self-serving and flawed model get baked into the system?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat Jun 18th, 2011 at 10:54:09 AM EST
[ Parent ]
If inflation had anything to do with price stability it wouldn't be used as an excuse to raise interest rates - an action which redistributes wealth and only lowers nominal inflation as a second or third order effect.
I can only remain speechless about the 2nd and 3rd order effects. Long and variable lags I agree. No effect? I beg to differ.
by Sargon on Sat Jun 18th, 2011 at 02:54:25 PM EST
[ Parent ]
Why? Wealth redistribution - or more explicitly power redistribution - is the primary effect of an interest rare hike.

Explicitly, people who work have less to spend. Implicitly, they spend more time worrying about how little they have to spend.

Both limit their wealth and power.

But if you happen to own capital - specifically the kind of capital that can be invested in ways that are linked to interest rates - you suddenly find yourself richer without having to do jack.

I think what confuses people is that you can create the same effect by keeping interest rates too low, to inflate an asset or commodity bubble.

The first happened in the UK in the 1990s, where record interest rates created record house prices. The second happened almost everywhere in the 2000s.

The first seems counterintuitive. But because capital owners were making giant piles of money while workers were being made homeless, they had to do something with it, and speculation and "investment" were an obvious choice.

Meanwhile "inflation" is a convenient fiction. The definition varies according to the results you want.

If your aim is to increase spending and productive activity - which is the usual excuse - it makes no sense at all to kick people who are already paying more for basic essentials by also making them pay more for their housing.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat Jun 18th, 2011 at 04:57:38 PM EST
[ Parent ]
That's interesting. In your thinking, both high and low interest rates lead to the same distributional outcome. I guess this is because of an institutional failure?

But, barring social revolution, someone still has to run monetary policy. And yes, it's run to control inflation to a large degree. Try explaining to Germans that inflation is a 'convenient fiction'. They know better, as they should. (Do you see any correlation between the fact that inter-war Czechoslovakia was about the only country in Central and Eastern Europe capable to maintain democracy throughout the whole period, and that it was also an area that has escaped hyperinflation? Just asking.) There's some research showing that inflation aversion in nations is a function of existence of inflation crises in the past. If you aren't German, you can't understand what its monetary policy elite is thinking, just because you grew up in a different environment.

Finally, I don't disagree with the fact that interest rates have distributional consequences. A 'fictional' inflation, however, has them even worse, as poor and those on fixed incomes tend to have higher CPI than middle or upper part of the distribution. In inflation is low, the discrepancy gets much less.  

by Sargon on Sun Jun 19th, 2011 at 05:02:44 AM EST
[ Parent ]
Try explaining to Germans that inflation is a 'convenient fiction'. They know better, as they should.

Inflation and hyperinflation are two fundamentally different beasts, with only the most cursory of relationships.

(Do you see any correlation between the fact that inter-war Czechoslovakia was about the only country in Central and Eastern Europe capable to maintain democracy throughout the whole period, and that it was also an area that has escaped hyperinflation?

Obviously.

Hyperinflation happens when you have hard currency obligations that you are unable to meet, and attempt to meet them anyway. The fact that Czechoslovakia avoided hyperinflation (while being a small country that could not well tell foreign creditors to walk off a cliff) tells me that its economy was a lot less vulnerable to the loss of access to hard currency money markets.

As an aside, I think you display a somewhat rosy view of Czechoslovak governing practises in the Interbellum, but that is a slightly different subject.

Finally, I don't disagree with the fact that interest rates have distributional consequences. A 'fictional' inflation, however, has them even worse, as poor and those on fixed incomes tend to have higher CPI than middle or upper part of the distribution.

Nothing wrong with that you can't solve by indexing public transfers to median income.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 05:47:54 AM EST
[ Parent ]
In your thinking, (TBG), both high and low interest rates lead to the same distributional outcome. I guess this is because of an institutional failure?

This is a rhetorical conflation, at best. The same distributional outcomes were achieved by two different pro-bankster policies. There is nothing at all incompatible with low inflation and stable asset prices, if that is the desired policy outcome. It wasn't.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 19th, 2011 at 02:14:13 PM EST
[ Parent ]
Typically, for large economies the inflation target is defined within a band of 1 to 3%.

That is a political convention which has no basis in empirical reality. There is no documented cost to the productive economy of 5 % or even 7 % yearly inflation.

To the banks, yes. But the banks exist to serve the productive economy, not the other way around.

Not one economist in their right mind would think of 5% as 'price stability'.

This economist in his right mind would beg to differ.

Money - whether in cash or in bonds - exists to facilitate exchange and investment, by lending businessmen a measure of the state's coercive power. It should not be mistaken for a store of wealth, because it is not - it is a token of political power.

As such, it only needs to retain value through a typical transaction period. Which is on the order of weeks or months, not years. Anybody who uses state money (as opposed to real, tangible capital) to accumulate long-term wealth is usurping a tool of sovereign economic policy, and as such I fail to see any issue with having them pay for the privilege.

There could be arguments that a temporary target of 4% could be useful right now, to generate higher inflation expectations.

If you believe that inflation is driven (almost) exclusively by expectations rather than fundamentals, sure.

But that would be a rather peculiar view of inflation.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jun 18th, 2011 at 10:56:06 AM EST
[ Parent ]
I'm sorry but we are getting close to the boundaries where I simply cannot understand your definitions. That inflation to a large extent is driven by inflation expectations is not controversial. What defines expectations is an active area of academic research (including mine).

On why high inflation is bad - the easiest book to read is Gali latest textbook. Besides, inflation variability is also higher when inflation itself is high, making all kinds of production decisions difficult.

I have no problem with money printing being not inflationary in a recession. The problem in the Eurozone at present is that the 'core' seems to be requiring higher interest rates than the 'periphery', and so for the core money printing would be inflationary. How much - opinions could differ, ECB is probably more panicky than the most. That's going back to the argument about shocks synchronization.

It's rather unambiguous that 10% inflation brings bad economic outcomes, and there's some evidence for the lower values as well. Plus, we have pretty damn persuasive theories that tell us exactly why 6 or 8% would be bad, as well. I don't think the opposite is true.

On what could happen to France if the Mediterranean countries move to 'defend themselves from mercantilist attacks' - that's an empirical question. I wouldn't bet any policy on assumption that France would become PIGS in that hypothetical monetary area.

by Sargon on Sat Jun 18th, 2011 at 11:45:07 AM EST
[ Parent ]
Besides, inflation variability is also higher when inflation itself is high, making all kinds of production decisions difficult.

shrug

The output gap is higher when inflation is low, which reduces the rate of real capital investment.

Difficulty I can live with. Hamstringing, not so much.

Besides, that difficulty relates mostly to the fixprice sector, whose fixed expenditures and liabilities are fixed in nominal terms more often than in real.

Indeed there is a case to be made that low inflation policies introduce unnecessary relative price rigidities in the fixprice sector, because high nominal fixed costs increase downwards nominal price rigidity. Basically, when you have fixed nominal costs, it is easier to adjust relative prices by raising nominal prices at different rates than by raising some nominal prices and lowering others. The former eats into your bank's profits - the latter makes your company go tits-up.

The problem in the Eurozone at present is that the 'core' seems to be requiring higher interest rates than the 'periphery',

No, the problem is that Germany needs higher wages and higher inflation, to rebalance the current accounts.

Rebalancing the current accounts by having higher inflation in the surplus countries is almost always less painful - much less painful - than attempting to do so by having deflation in the deficit countries.

It's rather unambiguous that 10% inflation brings bad economic outcomes,

Yes, that's roughly my threshold for acceptable inflation as well.

But I note that this is mostly speculation, because we haven't actually had 10+ % inflation in most Western industrial economies since the War.

Plus, we have pretty damn persuasive theories that tell us exactly why 6 or 8% would be bad, as well.

I sure haven't seen any.

I wouldn't bet any policy on assumption that France would become PIGS in that hypothetical monetary area.

I wouldn't bet any policy on that hypothetical monetary area inheriting the inane Eurozone inflation-targeting mandate, because I don't think France would roll over and play dead. But if it does, Athens on the Seine is very nearly a mathematical inevitability.

Unless you propose that this new currency union would accept payment in Drachma for their exports, in which case it is a little difficult to see what all the current fuss is about.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jun 18th, 2011 at 12:24:10 PM EST
[ Parent ]
The output gap is higher when inflation is low, which reduces the rate of real capital investment.
I really don't understand some of your arguments, sorry. It's hard to speak about output gap and inflation without first specifying a particular model and the shock which is assumed to be hitting the economy. Do you have in mind a classic supply shock here?

Basically, when you have fixed nominal costs, it is easier to adjust relative prices by raising nominal prices at different rates than by raising some nominal prices and lowering others.
Again, this is very hard to evaluate without looking at a model you have in mind.

Rebalancing the current accounts by having higher inflation in the surplus countries is almost always less painful - much less painful - than attempting to do so by having deflation in the deficit countries.
I agree, but that's not the objective function which calls higher interest rates in Germany. From Bundesbank's POV, they have to make sure inflation pressures don't build up on the back of robust recovery they are having right now.

On whether or not France would agree to inflation targeting in any hypothetical monetary union that runs IT - well, Sarkozy could shout all he wants, another Frenchman Trichet isn't going to give in. And that's going to continue. They might negotiate some weight on an output gap, but it's going to be lower than at the Fed, for sure.

Plus, we have pretty damn persuasive theories that tell us exactly why 6 or 8% would be bad, as well.

I sure haven't seen any.

Well, I guess we read the NK Macro differently.
by Sargon on Sat Jun 18th, 2011 at 02:48:21 PM EST
[ Parent ]
It's hard to speak about output gap and inflation without first specifying a particular model and the shock which is assumed to be hitting the economy.

The output gap is the gap between the contemporary output and the output you could achieve at full capacity. I was not aware that this was model-dependent.

To low order, "full capacity" can be approximated by "full employment."

Do you have in mind a classic supply shock here?

No, I'm not talking about a shock. I'm talking about a persistent general glut, due to (a) inefficiencies in private sector capital allocation and (b) the desire to hold an increasing portfolio of sovereign monetary instruments as the economy grows.

Of course, if you're in a neoclassical modelling environment, a persistent general glut is assumed away axiomatically. But I consider that a problem with neoclassical modelling, not with reality.

I agree, but that's not the objective function which calls higher interest rates in Germany.

There is no objective function which does that. See Mig's sig.

From Bundesbank's POV, they have to make sure inflation pressures don't build

But the BuBa should not be making that decision. The ECB should. And from the ECB's PoV, they have to make sure that - since there is no European fiscal transfers budget or Bancor - inflationary pressures do build up in Germany. Because to do otherwise is to imperil the very existence of the Eurozone.

well, Sarkozy could shout all he wants, another Frenchman Trichet isn't going to give in.

Sarko can fire Trichet. Trichet can't fire Sarko.

Plus, we have pretty damn persuasive theories that tell us exactly why 6 or 8% would be bad, as well.

I sure haven't seen any.

Well, I guess we read the NK Macro differently.

I'm pretty sure we don't.

I just don't find a theory of the political economy that implicitly (and occasionally overtly) assumes long-run money neutrality to be particularly convincing.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jun 18th, 2011 at 05:06:51 PM EST
[ Parent ]
The output gap is the gap between the contemporary output and the output you could achieve at full capacity. I was not aware that this was model-dependent.

Two typical gaps that people would use are the difference with potential output, and with 'natural' output. If you simply use HP filter to get at the gap, then yes, it's not model dependent. Otherwise, it is, especially for natural output.

Of course, if you're in a neoclassical modelling environment, a persistent general glut is assumed away axiomatically. But I consider that a problem with neoclassical modelling, not with reality.

OK, I see  - you are speaking about current environment, where, following your own definition, output gap is large in magnitude and negative. I got confused when you spoke about 'higher' gap.

And no, the persistent glut isn't assumed away, not in NK environment for sure. I'd put the finger for the current problems differently - lack of demand, with one of the reasons a desire to re-balance. But no problem with inefficiencies in private capital allocation - people are thinking seriously now about measuring of FIRE output, and what has made it so high, and why it turned out to be socially inefficient.    

There is no objective function which does that. See Mig's sig.

Every social science is politics or could be used for political purposes. So what? More seriously, yes, there is - the one in Walsh, taught to undergrads, even. But of course, if you don't find these theories convincing enough, they don't exist for you.
And from the ECB's PoV, they have to make sure that - since there is no European fiscal transfers budget or Bancor - inflationary pressures do build up in Germany.

You have an implicit model in your head which is very different from the ECB one. I'm not sure any model on fiscal-monetary policy interaction in a monetary union would lead to your prescriptions.
Sarko can fire Trichet. Trichet can't fire Sarko.

Yes. Sarko could do many strange things, but so what? You typically don't rise to the top only to challenge everything the elite believes. Of course, as a professional I'd love to have him do this - this would make identification in papers studying the effect of central bank independence on average inflation so much easier - but, again as a professional, I shall do anything I could to prevent such event, no matter what I might be thinking about the ECB monetary policy at the moment.
by Sargon on Sun Jun 19th, 2011 at 04:48:28 AM EST
[ Parent ]
Two typical gaps that people would use are the difference with potential output, and with 'natural' output.

Well, obviously you use potential output, since there is no convincing theory of "natural" output, let alone a reality-based way to estimate it.

OK, I see  - you are speaking about current environment, where, following your own definition, output gap is large in magnitude and negative.

Yeah, when I talk about "output gap" I talk numerical values, since output can hardly exceed capacity for any length of time together (if it does, you would appear to have misestimated capacity).

And no, the persistent glut isn't assumed away, not in NK environment for sure.

I have a few textbooks that say differently. Highly regarded too. State of the art, used by at least one Very Serious University's department of Economics, which is staffed by Very Serious People, who all swear by long-run money neutrality (at least when they talk to the students).

I'd put the finger for the current problems differently - lack of demand, with one of the reasons a desire to re-balance.

That is a good description of the last few years.

But we have had substantially less than full capacity utilisation for the last thirty or so years. So clearly there is a longer-term problem which is not caused by the panic of 2007, unless cause is no longer required to precede effect.

There is no objective function which does that. See Mig's sig.

More seriously, yes, there is - the one in Walsh, taught to undergrads, even.

This amounts to saying that because you can write a policy with Greek letters, it becomes objective. I think most social scientists would take issue with that.

Be that as it may, the arguments for requiring a hard-and-fast rule for interest rate policy are, well, less than compelling.

You have an implicit model in your head which is very different from the ECB one.

Yes. That fact was established some months ago, when the ECB insisted that the private debts of private Irish banks should be borne by the Irish taxpayer. A decision which it has pursued with a naked blackmail that exceeds even the most generous reading of its mandate.

I'm not sure any model on fiscal-monetary policy interaction in a monetary union would lead to your prescriptions.

As Keynes pointed out at Bretton Woods, any fixed-rate currency regime requires either an automatic mechanism to limit foreign surpluses, an automatic mechanism to recycle them, or both. These requirements arise from simple national accounting relations, so unless you wish to abolish double-entry bookkeeping, they are not particularly negotiable.

Absent explicit fiscal transfers, the easiest way to accomplish the same thing is with implicit fiscal transfers. By printing money for deficit countries to pay the surplus countries with.

None of this should be terribly controversial. We have already had three fixed-rate currency regimes blow up for precisely this reason (four if you count the various Latin American attempts to peg to the US$). It beggars credulity that the ECB is incapable of grasping such a simple fact. But I suppose we'll simply add the Eurozone to the list of cautionary tales one of these months.

but, again as a professional, I shall do anything I could to prevent such event, no matter what I might be thinking about the ECB monetary policy at the moment.

Why?

Central bank independence does not seem to have done anything good for the economies where it has been practised.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 05:36:40 AM EST
[ Parent ]
I'd put the finger for the current problems differently - lack of demand, with one of the reasons a desire to re-balance. But no problem with inefficiencies in private capital allocation - people are thinking seriously now about measuring of FIRE output, and what has made it so high, and why it turned out to be socially inefficient.

When your policy has succeeded in concentrating wealth into a very few hands then, along with wealth, you have concentrated discretionary spending power. If your policy has eliminated consumer manufacturing by shipping it to China or Vietnam so you will be able to keep a larger portion of the sale price from royalties and/or investments in retail and shipping, you have further diminished your domestic demand. Then the goal becomes extracting as much accumulated wealth from the country in which you operate through financial manipulation in the FIRE sector before the whole thing collapses -- and that is where this policy has brought us.  

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 19th, 2011 at 02:27:29 PM EST
[ Parent ]
people are thinking seriously now about measuring of FIRE output, and what has made it so high, and why it turned out to be socially inefficient.

You mean real estate? Why there was a bubble and why the bubble was socially inefficient?

by kjr63 on Sun Jun 19th, 2011 at 04:24:54 PM EST
[ Parent ]
That inflation to a large extent is driven by inflation expectations is not controversial.
Certainly its not controversial. For faith economics, its a doctrine of faith, and for empirical economics, its only holds up if you build it into the model and so beg the question.

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 Sat Jun 18th, 2011 at 06:17:00 PM EST
[ Parent ]
Well in Planet Finance - the FIRE economy - investors buy assets either for income or because they have have inflationary expectations ie they think the asset will appreciate in value. Or both.

In the real world on the other hand Joe Blow does not have inflationary expectations. He asks for a pay rise not because he thinks prices WILL go up, but because he thinks 'Fuck me, prices HAVE gone up. I need a pay rise'. ie he looks back not forward.

But what is happening now at the zero bound of dollar interest rates is that investors are buying assets whether they carry an income or not. Hence the correlated price moves across commodities which have become completely financialised.

So the irony is that in being sold 'inflation hedging' funds and structured products by investment banks etc etc the inflationary expectations of these investors leads their financial purchases of commodities to cause the very inflation they aim to avoid.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jun 18th, 2011 at 08:22:34 PM EST
[ Parent ]
However, the inflationary expectations that Sargon refers to is not asset price inflation, but price inflation of newly produced finished products. When you assume a model that automatically tends to full employment and also assume the neutrality of money, you remove most of the actual causes of that inflation from consideration, and so must turn to the fiction of inflationary expectations to create a model in which observed product price inflation is plausible.

Certainly for assets sold and resold on secondary capital markets, expectations of asset price inflation are an important part of asset price inflation. Of course, those same mainstream economists who are forced to resort to inflationary expectations are the cause of observed product price inflation were assuring us that the asset price inflation in the housing bubble were reflecting "real" factors, or else the FIRE sector would not have agreed to hold so many assets that would be chickenshit if the housing sector was in an asset bubble with an ever present threat of bursting ~ because that would be riskier than the observed risk premiums were showing.


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 Sat Jun 18th, 2011 at 08:32:25 PM EST
[ Parent ]
Of course, those same mainstream economists who are forced to resort to inflationary expectations are the cause of observed product price inflation were assuring us that the asset price inflation in the housing bubble were reflecting "real" factors, or else the FIRE sector would not have agreed to hold so many assets that would be chickenshit if the housing sector was in an asset bubble with an ever present threat of bursting ~ because that would be riskier than the observed risk premiums were showing.

Your brush is way too broad. It's as if I looked at the current membership of Eurotribune and called all of them Maoisits or Trotskites or whatever - you see, all three groupings are 'on the left'.

What I find painfully stupid at this forum is that many people just cannot take it that WSJ - especially its editorial page - isn't run by economists but by ideologues.

And BTW, I don't see what's the fuss about 'actual causes' of inflation - there's wealth effect in consumption, for example, which affected demand in 2009 in pretty much measurable ways. Sharp and short deflation was one of the outcomes of a dramatically lower demand.

But anyway, I prefer to discuss alternative model of economy in different fora. Through working papers and conferences. What we have here makes very little sense to me.    

by Sargon on Sun Jun 19th, 2011 at 03:58:11 AM EST
[ Parent ]
But anyway, I prefer to discuss alternative model of economy in different fora. Through working papers and conferences. What we have here makes very little sense to me.

Let us know if our ¨painfully stupid¨ predictive record is worse than that of your serious colleagues.

And what we can't take is the use of economic storytelling to promote political aims, while pretending to scientific objectivity and personal disinterest.

If the above doesn't bother you then yes indeed - ET may not be the right forum for you.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Jun 19th, 2011 at 04:14:18 AM EST
[ Parent ]
That's really funny - I usually find myself to the left of my typical classroom, and here I get hammered as an ultimate right-winger. Punishment for refusal to be ideological, I guess?

And you might be surprised to know that as an outsider I don't have political interests to promote (which makes European political circus so interesting). But yes, I'm trying to be a scientist. Thanks for noticing - perhaps I'm doing something right.

And finally, could you please point out where did I say anything about ¨painfully stupid¨ predictive record? Why do you need to use straw man arguments?

by Sargon on Sun Jun 19th, 2011 at 05:37:45 AM EST
[ Parent ]
I don't see anyone indicting you for being a right-winger.

I do see people indicting you for subscribing to economic models that assume long-run money neutrality.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 06:13:34 AM EST
[ Parent ]
What I find painfully stupid at this forum is that many people just cannot take it that WSJ - especially its editorial page - isn't run by economists but by ideologues.

No, I think most people here get that.

What I find painfully stupid is that when I crack open a Marginalist textbook, it says broadly the same things that the ideologues in the WSJ editorial page say.

You seem to assume that we here are unfamiliar with the orthodox liturgy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 06:04:07 AM EST
[ Parent ]
You seem to assume that we here are unfamiliar with the orthodox liturgy.

That's exactly my point. You are so far away that you probably can't see a difference along the line of, say, Cohrane - Lucas - Zingales - Williamson - Swensson - Woodford - Eggertson - Krugman - Galbraight. Yes, all of the above are 'marginalists'. But not all of them get the same respect on WSJ opinion pages.
by Sargon on Sun Jun 19th, 2011 at 06:36:02 AM EST
[ Parent ]
I think Galbraith would take exception to that claim.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 07:25:37 AM EST
[ Parent ]
He's really marginal 'marginalist' for sure. But in his research works, he's citing the same people I'd mention in a class. He doesn't dismiss the whole research paradigm.
by Sargon on Sun Jun 19th, 2011 at 08:13:17 AM EST
[ Parent ]
What I find painfully stupid at this forum is that many people just cannot take it that WSJ - especially its editorial page - isn't run by economists but by ideologues.

I think we would agree that they are ideologues, though some may also be "mainstream" economists. And does not even begin to address what so many of us here find "painfully stupid" about contemporary received opinion regarding economic matters.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 19th, 2011 at 03:52:52 PM EST
[ Parent ]
... of the WSJ have to do with what I said?

Finding the inflationary expectations story persuasive speaks to susceptibility to the status of the status quo, not to the strength of the story as a cause and effect explanation of real world inflationary processes.

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 Sun Jun 19th, 2011 at 08:45:21 PM EST
[ Parent ]
There may be a new deck with fewer jokers soon. (I can hope.):

US Seeks to Curtail OTC Highly Leveraged Retail Trading in Paper Commodities and Currencies

Leverage going from 100:1 down to 10:1 on lots of trades, it seems.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 19th, 2011 at 12:52:06 AM EST
[ Parent ]
Why do we hwve to countenance Germany's inability to understand that hyperinflation happens when you try to inflate away foreign or indexed linked liabilities and never domestic denominated liabilities?

Seriously, maybe Mitterrand and Delors just grossly underestimated the depth oof German economic neurosis.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sat Jun 18th, 2011 at 02:19:09 PM EST
[ Parent ]
I guess because they believe in fiscal dominance theory of hyperinflations.
by Sargon on Sun Jun 19th, 2011 at 05:20:58 AM EST
[ Parent ]
Sure, but why do we have to countenance it?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sun Jun 19th, 2011 at 10:04:48 AM EST
[ Parent ]
Because it might be true, perhaps?
by Sargon on Sun Jun 19th, 2011 at 01:12:37 PM EST
[ Parent ]
Inflation is clearly influenced by fiscal policy.

Hyperinflation, however, has never actually been observed outside of a currency collapse or wholesale destruction of a government's ability to control its jurisdiction.

Inflation and hyperinflation are two completely different beasts, and are only superficially related. An important clue that a central bankster has no idea what he's yammering about is that he talks about Eurozone hyperinflation, something that is patently not possible (barring a really messy breakup).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 01:45:36 PM EST
[ Parent ]
OK, good, not only we read NK Macro differently, we also read historical record differently. Governments never tried to finance their operations through seigniorage, losing control of the currency and requiring ever increasing inflation rates to support their revenue streams in the end.

Fine, but I think I'm stopping here - marginal product of this discussion became zero for me.  

by Sargon on Sun Jun 19th, 2011 at 01:59:33 PM EST
[ Parent ]
Sovereigns always "finance" their operations through seigniorage. Spending creates demand, taxes destroy demand.

Obviously, if you generate demand in excess of what your economy can honour, you get inflation. But that is a different beast from Weimar, Brazil, Argentina and so on.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 02:16:04 PM EST
[ Parent ]
But the point we're arguing here is that whether seigniorage leads to inflation or hyperinflation depends on whether the government is attempting to fund domestic or foreign (or index-linked) liabilities.

Lacking academic Neoclassical Economics credentials, let me quote someone who does have them... An analysis of the consequences of seigniorage is contained in Can Central Banks Go Broke? by Willem Buiter. On page 8, there's

even if the resources needed to recapitalise the central bank are less than the maximum amount that can be appropriated through seigniorage (given by the peak of the seigniorage Laffer curve at A in Figure 1), the extraction of these resources may involve an unacceptably high rate of inflation.
Up to here we're talking about politically unacceptable inflation, but still inflation.
Worse than that, even the maximum amount of real resources the central bank can extract though seigniorage may not be enough to close the central bank insolvency gap. This could happen if the central bank had a large stock of foreign-currency denominated or indexlinked liabilities. In that case, without a capital injection from outside the central bank, the central bank cannot meet its funding needs from its own resources. The result would be hyperinflation and/or central bank insolvency.
Weimar experienced hyperinflation because it had unsustainable debt reparations to pay in foreign currencies (or in gold, which under a gold standard regime amounts to the same thing). Domestic debt can always be paid through seigniorage, albeit at a possibly politically unacceptable rate of inflation falling short of hyperinflation (because it is not runaway - a characteristic of hyperinflation is that once it gets started the rate of inflation snowballs out of control).

Also, as argued a long time ago by BruceMcF:

Also note that the [Weimar] Republic ...

... was not "the [Weimar] Republic" of Faith-Based Monetary Theory either.

The hyperinflation of the [Weimar] Republic followed, as Keynes in part predicted in "The Economic Consequences of the Peace", from the collapse of the economies in Germany's former major export trade zone, combined with an increased structural dependency on imports with the French occupation of the Rhineland industries.

Combine that balance of payments position with a demand that the [Weimar] Republic hand over regular reparations payment, and it is quite like a badly governed African nation that has to pay the debts to the World Bank and other transnational corporations incurred with no expectation by the lending agencies that the result of the projects funded would be sufficient foreign exchange earnings to pay off the loans.

It is, of course, possible to interpret both theory and the historical record differently, but then we're in the realm of economics as just-so stories because if you have more than one economist with academic credentials not accepting each other's models then they will characterise each other's readings of the historical record as just-so stories.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sun Jun 19th, 2011 at 05:01:34 PM EST
[ Parent ]
There is an important difference between hard and soft currency.

Any economic model that does not explicitly account for the difference between hard and soft currency is prima facie suspect.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 05:11:33 PM EST
[ Parent ]
could you explain the difference (again?!) between the two?
can you have both at once or is it a strict binary decision?

2 syllables good, one syllable better ;)

'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 Tue Jun 21st, 2011 at 01:34:59 PM EST
[ Parent ]
Soft currency is your own currency (where "you" are the government of the country in question). Hard currency is everyone else's currency.

You need hard currency to buy stuff other people make, unless they want to give you their stuff for free, as China wants for the US (well, not really for free, since the quid-pro-quo is that China gets the US' capital plant in return).

The neoclassicals treat all currency as being commodities. So when your currency is dropping like a rock, they advise you to destroy some of it, and not print as much of it.

The problem with that advice is that people don't buy your currency because it's shiny. People buy your currency because it lets them buy your stuff. Which means that the reason your currency is losing value is either that you have higher inflation than your trading partners or that you are unable to meet your hard currency obligations.

In the former case, trying to defend the exchange rate is stupid - it will make your companies move to other countries. Eventually you will become unable to defend your exchange rate because you've lost your industries, and then you'll have neither the strong currency nor your industries.

In the latter case, you cannot defend your currency by rationing it. If you have less hard currency than you owe, Mr. Soros and his friends can always squeeze you. Now, there are two possible reasons why you might find yourself in that sort of bind. The first is that you took leave of your senses and borrowed hard currency in order to gamble with it. Like Ireland.

The second possibility is that your economy went tits-up, and that crashed your ability to make stuff to sell to foreigners for hard currency. In that case, you want, seemingly paradoxically, to print more money, because getting your economy running again is the only chance you have of producing enough stuff to cover your hard currency obligations.

Can a currency be both hard and soft? Yes and no. In principle it can't. In practise, the way the BuBa treats the €-Mark is making a pretty convincing case that it can be. In fact, the whole "independent central bank" scam is all about making your soft currency behave like hard currency. Which is stupid, of course. But makes a lot of sense if you are operating in a mental model where all currency behaves as hard currency by assumption.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jun 21st, 2011 at 04:25:11 PM EST
[ Parent ]
thanks Jake... much appreciated.

'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 Tue Jun 21st, 2011 at 06:10:58 PM EST
[ Parent ]
Governments never tried to finance their operations through seigniorage, losing control of the currency and requiring ever increasing inflation rates to support their revenue streams in the end.

What happened is exactly what Keynes predicted in The Economic Consequences of the Peace. The treaty was designed by the French to cripple Germany and it did. The reparations were, essentially, unpayable, requiring, as they did, that Germany export over 1/3 of her annual coal production. As Germany had been, at best, self sufficient in coal this shut down at least a third of her manufacturing, and when Germany became sufficiently in arrears, France sought to act as a "debtor in possession" by occupying the Ruhr. This destroyed the rest of the manufacturing, by design, as France's goal was more to hamstring Germany, than to receive reparations. Having huge foreign obligations and nothing to export to obtain foreign currency was the classic cause of the ensuing hyperinflation.

All of this leads me to wonder if the current policy of Germany towards Greece, Ireland and Portugal is an example on an international level of what Freud referred to as "the repetition-compulsion neurosis", which usually involved a perceived need to do unto others what has been done unto oneself. Of course the French denied that hamstringing Germany was their goal, just as Germany denies that the austerity measures on which they insist are designed to push the countries on which these policies are foisted into a debt deflation death spiral. After all, we all want to think well of ourselves, regardless of the mental contortions required, and the easiest and most effective emotional defense is denial.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 19th, 2011 at 05:54:48 PM EST
[ Parent ]
As far as repetition-compulsion goes, and harming others, hasn't Germany already done enough?

It's a shame that Freud never came up with a reciprocal theory that would analyze how more virtuous actions, say the Marshall Plan, were likewise reciprocated.

by Upstate NY on Mon Jun 20th, 2011 at 09:04:32 AM EST
[ Parent ]
See one of his followers, Melanie Klein's Love, Guilt and Reparation and Envy and Gratitude. My wife bought these back in '75 - '76 and I could not but read them myself. Unfortunately, Freud's hermeneutic approach gets no respect these days.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jun 20th, 2011 at 02:42:50 PM EST
[ Parent ]
As far as repetition-compulsion goes, and harming others, hasn't Germany already done enough?

My sense would be that there is never "enough" of a compulsion until either the physiological basis and/or the process is brought into consciousness and is deliberately controlled by the one experiencing the compulsion. Ideally, both would be brought about in treatment.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jun 20th, 2011 at 02:48:11 PM EST
[ Parent ]
Something's changed. As anyone who stayed in Germany a while and met many Germans of the 80s and 90s can affirm, there was a great deal of self-consciousness, maybe suffocatingly so where hardly a conversation could be had without referencing the political. Jazz, cars, food = politics.
by Upstate NY on Mon Jun 20th, 2011 at 03:51:35 PM EST
[ Parent ]
there was a great deal of self-consciousness, maybe suffocatingly so where hardly a conversation could be had without referencing the political.

I suspect that self-conscious discussions involving political choices was part of what I described above as bringing the pattern of compulsion into consciousness and placing it under rational control. If that process has noticeably decreased, as you suggest, it could indicate a return to conscious repression of awareness of the compulsion, which would allow the compulsion to operate more noticeably.

Part of this may be generational. Even former German leaders have noted that the current leadership has lost sight of common European interests and that the current political situation has little tolerance for actions and expenditures that do not benefit Germany itself. This goes hand in hand with recent economic policy, which has asked sacrifices from the German working class in the name of "competitiveness". So much of the German electorate feels, with some justification, that that they have made sacrifices and now it is time for others to do the same.

Of course there is no discussion of sacrifices by German business elites, who have greatly benefited from German labor's sacrifices, as it is easier to blame the peripherals. Nor is there any appetite to look at the consequences of neo-liberal policies or, especially amongst the media and politicians, for understanding that it was banks in the "virtuous" trade surplus countries that took imprudent risks with loans to the peripherals, that for the surplus countries to have their surpluses there have to be deficit countries or that EU and ECB policies have favored Germany at the expense of the interests and needs of the deficit countries that are now unable to pay the loans that they took on in better times. Nor is there any recognition that the pain that is being inflicted on the peripheral countries far exceeds anything that Germany has itself experienced since WW II and its immediate aftermath.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jun 20th, 2011 at 04:44:49 PM EST
[ Parent ]
The American Novelist Walter Abish (an American of German Jewish descent) described his trips to Germany as a matter of showcasing a repression of German history in plain sight. This was seen from the early postwar German days as new towns were built over some with bad histories, literally over the bones. But a perfect example may be Paul Celan's Todesfuge which describes a concentration camp. Celan disowned the poem when he realized that German children were discussing and reciting the poem in school in the national curriculum. To be fair to Germany, this is an immensely difficult and monumental task, to put the past in context, commemorate it, and at the same time build a future. Given the 20th century, it seems an incredible task for one to undertake. A pyschoanalytical approach may be one of the last things that's applied to the task itself, and it comes almost as a luxury.

And by the time it comes, we're ready for it to happen again.

by Upstate NY on Mon Jun 20th, 2011 at 05:54:58 PM EST
[ Parent ]
A pyschoanalytical approach may be one of the last things that's applied to the task itself, and it comes almost as a luxury.

And by the time it comes, we're ready for it to happen again.

Well, by now, it is largely considered an unscientific curiosity, as the hermeneutics based approach is rejected. Fortunately, brain science is beginning to reestablish significant parts of what was lost and on firmer foundations. The Skinnerian Stimulus-Response based psychology, which was mostly what was left, really could not resolve the differences between a rat and a man, so it was not too useful for analyzing higher level functions.                          

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jun 21st, 2011 at 02:50:50 PM EST
[ Parent ]
The Skinnerian Stimulus-Response based psychology, which was mostly what was left, really could not resolve the differences between a rat and a man, so it was not too useful

Well - er - actually... :)

The Freudian stuff diverged off into psychodynamic theory, attachment theory and various sort-of-hand-wavey theories of personality.

They're not all completely wrong - some of them make useful predictions - but it's not obvious how formally scientific they are.

The problem for all psychology is that objectively, all you can look at is behaviour. Conscious and unconscious motivations are much more difficult to judge.

But the DSMs are mostly behavioural, and work on the basis that if someone does a lot of A,B,C and D, it's not a surprise if they also do E and F.

I've said before that none of this has worked its way into politics or economics in any useful way.

The Marxists turned Freudianism into a weird intellectual fetish object that was almost completely disconnected from real actions, and completely undermined any contribution it could have made to public debate.

I think at some point in the next century - possibly the next quarter century - psychology is going to explode all over politics and economics, and there may be an outbreak of sanity after that.

Although it's not obvious, the DSMs are all about moral behaviour, and the fact that certain illnesses cause individuals to act in a maladjusted (immoral) way.

Obviously you can debate that, but it would be better to have that debate than it is to live with the current situation, where personal and social morals have almost no connection at all to practical political and economic morality - but almost everyone assumes they're very similar.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Jun 21st, 2011 at 03:27:31 PM EST
[ Parent ]
I think at some point in the next century - possibly the next quarter century - psychology is going to explode all over politics and economics, and there may be an outbreak of sanity after that.

Hope springs eternal! Come the day. And I certainly do not deny that there were abuses by some and bizarre forays by others out of that tradition, but is was far better than nothing but Skinner.

I think a combination of brain science and hermeneutics is essential to the future development of the field. We have to accept that there will be a higher level of uncertainty about human psychology than about many physical sciences. But my inner cynic suspects that it has been very convenient to have most psychological disciplines under a cloud. What remains or has become respectable mostly are approaches that generate cash flows and promote social control. We need to do better.

 

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jun 21st, 2011 at 03:54:10 PM EST
[ Parent ]
As someone in literature, I am not at all bugged by the a-paradigmatic things we study. That we lack empirical data points to the phenomena studied. I'm fascinated by brain and cognitive science (I'm actually "The Power of Music" right now by Elena Mannes) and I think it's very worthwhile but its going to have a great deal of difficulty accounting for a field that is difficult to even describe, never mind touch and measure.
by Upstate NY on Tue Jun 21st, 2011 at 08:52:34 PM EST
[ Parent ]
Hermeneutics is the basis for almost all art and literature, so, when it is dismissed, so are all of the "humanities".

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jun 21st, 2011 at 11:13:12 PM EST
[ Parent ]
Well, Freud and the Freudians did not do themselves any great favours by fudging their research data and generally defending themselves against criticism in the manner of a fundamentalist sect...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jun 21st, 2011 at 04:00:52 PM EST
[ Parent ]
ThatBritGuy:
I think at some point in the next century - possibly the next quarter century - psychology is going to explode all over politics and economics, and there may be an outbreak of sanity after that.

I just fear it will land in marketing.

by generic on Tue Jun 21st, 2011 at 05:11:31 PM EST
[ Parent ]
Psychology is already heavily used in marketing and advertising.  Go to any Marketing department, start pontificating about "rational consumers" and watch them explode into laughter.  Psychology will only enter Economics in a big way when Economists decide to stop farting around and study how an economy actually functions.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Wed Jun 22nd, 2011 at 08:35:32 PM EST
[ Parent ]
That is a pity. I think discussions about essentials assumption would help. And I think historical examples and case studies are important to answer questions like what causes hyperinflation. Modern economics of all schools don't take historical experience serious enough.

So it be valuable to discuss German from 1919 to 1923 (or 1914 to 1923) or Brazil in the eighties or Zimbabwe in the last few years.

From all I know about Germany during the great inflation, I think the reparation narrative then popular in Germany and now popular among some posters here is wrong.

You on the other hand seen to think that the hyperinflation of the twenties and the somewhat high inflation rates of the western countries in the seventies are qualitatively the same. That isn't right but perhaps I misunderstood you.

by IM on Mon Jun 20th, 2011 at 03:21:47 AM EST
[ Parent ]
The current US incarnation of "mainstream economics" does not really include economic history or history of economics, as several ET contributors and many economic historians have noted. Cynics, myself included, have suggested that this is to reduce the cognitive dissonance that teaching both history of economic thought and economic history would provoke in economics grad schools.

For a scholarly critique of the factors that molded economics in the US from the late 19th century through the '40s see Henry George and Neo-Classical Economics. It is based on a referenced monograph by Mason Gaffney: Neo-classical Economics as a Stratagem against Henry George

A sample from Gaffney:

Neoclassical economics is the idiom of most economic discourse today. It is the paradigm that bends the twigs of young minds. Then it confines the florescence of older ones, like chicken-wire shaping a topiary. It took form about a hundred years ago, when Henry George and his reform proposals were a clear and present political danger and challenge to the landed and intellectual establishments of the world. Few people realize to what degree the founders of Neo-classical economics changed the discipline for the express purpose of deflecting George and frustrating future students seeking to follow his arguments. The strategem was semantic: to destroy the very words in which he expressed himself. Simon Patten expounded it succinctly. "Nothing pleases a ...single taxer better
than ... to use the well-known economic theories ... [therefore] economic doctrine must be recast" (Patten, 1908: 219; Collier, 1979: 270).'


"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jun 21st, 2011 at 03:27:48 PM EST
[ Parent ]
From their perspective, inflation is so catastrophic (see certain electoral results in 1930s), that almost no amount of data will outweigh their priors.

German leaders need to learn that there are ways, other than inflation, to create a social and political catastrophe. They also need to learn that, just because the Nazis did it, it is not automatically bad. The reparations regime, in combination with the gold standard, was crushing Germany. The Nazis saw the power of fiat currency and command control economic policy in pursuit of national power.

Where is it written that fiat currency and an interventionist fiscal and economic policy inevitably lead to world war and genocide? The purposes to which such directed investment are put are policy decisions which, in an economic union such as the euro-zone, could lead to growth, economic resiliency and expanding wealth for all. Perhaps that is the problem. Is the goal ineffable wealth concentration into the hands of a very few? That hypothesis best fits the requirements of Occam's Razor.

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

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jun 18th, 2011 at 05:25:49 PM EST
[ Parent ]
Well, Germany does have a fiat currency. It's called Euro. And the German government did conduct some expansionary fiscal policy at the height of the crisis (it didn't need to do too much because of good automatic stabilizers), accompanied by the ECB's expansionary monetary policy. What these guys don't believe in is that expansionism is warranted at or close to full employment, and they might be acting on that belief too soon.
by Sargon on Sun Jun 19th, 2011 at 05:18:09 AM EST
[ Parent ]
What they fail to account for is the fact that in a currency union, "full employment" means "zone-wide full employment," not "local full employment."

If you stop creating demand as soon as a single jurisdiction has reached full employment, you basically ensure that there will be a persistent general glut when measured zone-wide. It is as silly as assuming that the British government should curtail spending when there are no unemployed left in London, instead of continuing until there are no unemployed left in any major city.

They are the central bank of a currency union, but they act like they're the central bank of Germany. Well, there is no such thing as a free lunch: If Germany wants to reduce exchange rate volatility, it will have to accept higher inflation volatility (and higher baseline inflation). Because you have to have a buffer variable, and there is no reason Germany's trading partners should accept "other people's unemployment rate" as the buffer variable for Germany.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 05:53:59 AM EST
[ Parent ]
Well, it's a currency union but not the fiscal union. German government doesn't have to create demand for other countries whose citizen don't vote in Germany.

ECB does act on eurozone economic aggregates (when you talk to ECB staffers, they swear by anything they never look at individual countries' data, only at the aggregates) - the problem is that Germany is so damn big, its development does carry. You can't see Greece in aggregate inflation data. That why Germany is a big chunk of 'core' while Greece is 'periphery'.

by Sargon on Sun Jun 19th, 2011 at 06:26:02 AM EST
[ Parent ]
Well, it's a currency union but not the fiscal union.

Which means that pretty soon it won't be.

Again, this should not be a terribly controversial point. We've had three or four currency unions blow up just in the last seventy years over precisely this flaw.

It's a good thing the BuBa's economists aren't running nuclear plants. With that sort of record, most of Europe would be a radioactive exclusion zone by now.

the problem is that Germany is so damn big, its development does carry. You can't see Greece in aggregate inflation data. That why Germany is a big chunk of 'core' while Greece is 'periphery'.

But Greek unemployment does show up in the aggregates. Greece has, what, 5 % of the Eurozone's population? With ten percent unemployment, that's half a percentage point in the aggregate. That's measurable.

Of course, if you believe that the Eurozone needs five percent unemployment, because you want to use unemployment to sweep structural inflation under the rug, then Greek unemployment can go clear to 50 % before the ECB feels compelled to act...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 07:34:28 AM EST
[ Parent ]
The last time Fed was trying to achieve full employment in the teeth of mismeasured output gap (they didn't take rapidly changing demography into account), the Great Inflation was the result. You might not care. Many voters did and still do.

I don't 'need' 5% unemployment, I just think it couldn't be much lower consistently.

You can think whatever you wish about the fiscal union; currently, it's not there. It might be desirable, but definitely not politically feasible. I was trying to tell you what the current crop of policymakers is doing (IMHO), and why they are doing it. What's the use of saying that things could be different in a completely different institutional environment?

by Sargon on Sun Jun 19th, 2011 at 08:21:12 AM EST
[ Parent ]
I don't 'need' 5% unemployment, I just think it couldn't be much lower consistently.

The Fordist political economy would like a word with you.

As for what the ECB is doing, I understand perfectly well what they are doing: They are protecting their bankster friends from their own stupidity, the purchasing power of lazy money from the risk of having to actually work for a living and their staff from having to use any higher brain functions than what you could get out of a reasonably sophisticated calculator.

But those are political decisions, not constitutional requirements.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 08:36:25 AM EST
[ Parent ]
The last time Fed was trying to achieve full employment in the teeth of mismeasured output gap (they didn't take rapidly changing demography into account), the Great Inflation was the result.

Nonsense. The Great Inflation had nothing to do with full employment.

I expect you think two oil price shocks - you know, the ones that made everything a lot more expensive - and the costs of a pointless war in Vietnam had nothing to do with it.

You're basically just quoting Samuelson here with no evidence of any kind of critical thinking.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Jun 21st, 2011 at 03:33:05 PM EST
[ Parent ]
The last Nobel Prize winner in Economics was apparently out of his mind.
by Upstate NY on Sat Jun 18th, 2011 at 06:16:57 PM EST
[ Parent ]
Whom exactly do you have in mind here - Peter Diamond, perhaps?
by Sargon on Sun Jun 19th, 2011 at 05:12:43 AM EST
[ Parent ]
Krugman
by Upstate NY on Sun Jun 19th, 2011 at 12:23:51 PM EST
[ Parent ]
a) his Nobel was in 2008, I believe, so he's definitely not the last winner, and b) it's him as well whom I had in mind among proposing a temporary 4% target, see here.
by Sargon on Sun Jun 19th, 2011 at 01:31:02 PM EST
[ Parent ]
He has written on a sustained 6-7% being feasible even optimal in the past.
by Upstate NY on Mon Jun 20th, 2011 at 09:01:29 AM EST
[ Parent ]
I don't know if he's correct but Varoufakis doesn't think any changes to the charter need to be made for the ECB to issue Eurobonds. He also recommends using the EIB for investment.
by Upstate NY on Sat Jun 18th, 2011 at 09:28:32 AM EST
[ Parent ]
ECB has 'low and stable inflation' written into its founding charter. It's actually a law,

Printing money is not inflationary when you are at less than full employment, unless you severely misspend it. There can be no crowding out until you have reached capacity.

Further, "low and stable" can be taken to mean 2 %. It can be taken to mean 4 %. It can be taken to mean 8 %. None of these values has any inherent advantage over any other as far as the productive economy is concerned, so it is not immediately apparent that 8 % inflation is disqualified by the charter.

The "stable" part is more problematic, because inflation is a very handy shock absorber - it would make excellent sense to fix nominal growth at - say - 7 % per year, and let inflation be what it happens to be.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jun 18th, 2011 at 10:43:14 AM EST
[ Parent ]
The problem is that many people still cling on to the euro zone myth.

The more time we spend tied within this monstrosity the more possibility there is for very dangerous animosity to kick in. If we start dismantling this now, it will be bad, there will be pain, but it will be sustainable.

If we cling on until a massive problem occurs, then we will see a disorderly dismantling of the beast. By disorderly, I mean bullets and war.

What people fail to understand is that being anti-euro is being pro-european: if this experience continues for much longer, we will see a repeat of the 20th century. If this starts to be dismantled now, there will be some animosity, but probably nothing serious.

Sometimes the only realistic solutions are all variations of bad. Clinging to the expectation of a good outcome (and insisting on it) will just bring about the most terrifying outcome.

by cagatacos on Fri Jun 17th, 2011 at 07:18:17 AM EST
wow, this thread is really unsettling...

is germany's bluff being called? is the swelling street a foretaste of what politicians (running through underground tunnels to escape populist wrath) fear and respect as boundaries to their unfettered concupiscence?

it's obvious their ideology has no brake other than the sight of their own countrymrn getting abused by lornordure, so once stood up to in this way, can they understand that they have gone too far?

the politicians are the increasingly thin skin of the beast, as the sockpuppets fold under the public pressure, whom else do the real criminals have to hide behind?

corrupt ersatz governments can rise and fall like houses of cards, but the people know eventually they're being flim-flammed, and are engaging their frustration, organising their rage.

watching a talking head on rai news the other day interviewing 2 youth leaders behind the recent upset votes in italy, one who protested the nuke issue, the other the water privatisation... stunning the lack of comprehension on the anchor's part, the patronising, ignorant questions, and on the other side, the cool, sober attitude of the youngsters, one even quietly merry, the other controlled, but with a maturity of focus that was extremely heartening to behold.

i start to wonder, reading this diary, feeling my naive hopes for the federation of yurp embodying the best of the planet's ideals foundering, whether i need to stop being attached to the european union working.

at the end of the day it may be too big a mouthful to chew at our present state of evolution, and what's emerging for me is that it actually matters less than good regional government.

brussels is light years away... if the european economy is built on sand, then no amount of rosy, noble visions will justify the union.

soooo.... either the young people all over europe decide that they want an united europe badly enough to gum up the works to the point the politicians crumble and make way for new blood, (and i have a strong hunch this is the only thing that could save the union, and my bet is it will happen), or the scabby sharks that are shredding the social fabric win and run the whole shebang into the ground, game over, fail.

the senile oiligarchy that conditions world events hates anything they cannot financialise and control through credit games, yet the hope for innovation with regard to changing the economic topography of europe lies outside their grid, it lies in the youth who don't believe their continent has to be mismanaged in this pitiful way, and are willing to throw themselves onto the cogs of a machine that is out of control.

the internetz help link protest- (ers) but they do not incentivise it/them per se, that sentiment has to be born in the heart of each individual due to his/her singular experience.

the greater the numbers, the gentler the revolution. whereas before i thought the weakness of the protesters was their lack of coherent policies, but now i think differently.

energy is the unifying field that links all human activity. its hijacking by plutocrats afraid of change is ever more revealingly retrogressive. no other policy coherence needed, really, just stop what we're doing and organise a fairer system, that respected human rights, and the environment, and that wouldn't need the nightly news ritual disembowelment of a country's best asset, its youth, getting the shit pummeled out of it by paid government thugs.

change the way we create energy, that will change everything else...

and alas that means taking on the economics establishment and helping to establish a new narrative.

hence ET!

'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 Fri Jun 17th, 2011 at 09:55:39 AM EST
[ Parent ]

watching a talking head on rai news the other day interviewing 2 youth leaders behind the recent upset votes in italy, one who protested the nuke issue, the other the water privatisation... stunning the lack of comprehension on the anchor's part, the patronising, ignorant questions, and on the other side, the cool, sober attitude of the youngsters, one even quietly merry, the other controlled, but with a maturity of focus that was extremely heartening to behold.

I have a similar experience to report over here. The spokespeople for our "geração à rasca" (generation in trouble - more or less) where exactly as you described. One reason for hope.

Also, the local transition town movement seems active, with some critical mass and, again smart, level-headed and informed.

The future is not dying ideologies (social-democracy included), a LTE-mill or something like that. The future will be something new being invented right now by these people.

Real reasons for hope.

by cagatacos on Sat Jun 18th, 2011 at 03:38:47 AM EST
[ Parent ]
You talk symbolic brain, Varoufakis talks Semiotics versus hard facts
During the first part of 2010, culminating in the May `bail out' for Greece, Europe decided: (a) to remain in denial about the poor health of its banking sector, (b) to treat Greece's insolvency as a liquidity crisis and (c) to prescribe austerity measures that deepened and widened the ensuing debt crisis.

Since then developments have made it abundantly clear that this is a course to nowhere. Predictably, the Greek crisis got worse not because the medicine was badly, or insufficiently, applied but because (a) it was toxic and (b) it had awful side-effects on Europe's ailing banking sector.

...

The time to stop dithering has come. First, Europe needs to recapitalise its banks. Secondly, it needs to unify the Maastricht-compliant part of eurozone's debt (through the introduction of a homogenous eurobond). Finally, we need a new pan-European investment spree (via the European Investment Bank). Then and only then will the `Greek' problem be reduced to an order of magnitude in concert with my country's actual size.

This is an english version of an article in Die Zeit published yesterday in German. A month ago, Varoufakis had published Article in Die Zeit, promoting the Modest Proposal
Is there an alternative? Absolutely! Consider the following three-step policy that attacks all manifestations of the crisis head on:

1. Use the funds raised by the European Financial Stability Mechanism (EFSF) to recapitalise the eurozone's (almost insolvent) banks in exchange for shares in these banks. Once the banks are cleansed, they will no longer need to rely on massive liquidity injections from the ECB (and can even be asked to take a selective haircut on bonds from the periphery). The EFSF then sells the shares and recoups its funds, thus costing the German taxpayer nothing (much like the TARP scheme in the USA).

2. A conversion loan is organised by the ECB for the part of the debts of member-states which does not exceed the EU's Maastricht limits (60% of GDP). In brief, the ECB takes on its books forthwith a tranche of the sovereign debt (of all member states that request it) equal in face value up to (the Maastricht-compliant) 60% of GDP and finances this by issuing eurobonds that are its own liability. Naturally, the member-states continue to service their debts (to the ECB now) but at the lower rates (and with the longer maturity) secured by the eurobond issue.

3. Empower the European Investment Bank (EIB) to fund a large scale investment program by which permanently to counter the forces of recession in peripheries that keep dragging the rest of the currency union (including parts of German society) toward stagnation. How can this happen? By allowing for the 50% of project funding (which now the bankrupt member-states must raise!) to come from the ECB's net eurobond issues.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Jun 17th, 2011 at 07:22:24 AM EST
Now, this is all very fine and dandy. But what are the possibilities of these proposals happening?

Are they politically feasible?

I think some, shall we say, "risk assessment" should be done here. If the EU continues muddling through its current path (or something similar), what might happen?

I speculate that the "muddling through" will continue up to a point where things will simply start to break down disorderly.

Me thinks that "disorderly breakdown" should be discussed. And that people should prepare for it (even on a personal basis).

by cagatacos on Fri Jun 17th, 2011 at 07:35:25 AM EST
[ Parent ]
This being said, it seems that Germany might be waking up a bit...
by cagatacos on Fri Jun 17th, 2011 at 07:37:18 AM EST
[ Parent ]
Varoufakis is also right about another thing. he says there is no chance now for this option to succeed.. but just wait a couple of years more... with the same situation... maybe someone would listen then.

It seems that Germany gives the green light to the bail out of the European banks via Greece, now it is time to see if Greece accepts.. but the point is, this exact situation will be repeated next year.. or earlier...

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 Jun 17th, 2011 at 08:10:04 AM EST
[ Parent ]
Why wouldn't Greece accept? A reduction of the 15% of the budget that now goes to service debt would be most welcomed in Greece. Even in a disorderly default scenario, Greece would still be on the hook for at least 60% debt to GDP, if not much more.

One thing protects Greece in all this mess. The vulture funds can't swoop in and buy the defaulted loans because the jurisdiction for all these notes is in Greek courts. This is quite different from how vultures typically deal with defaults in Africa or Asia or even South America.

by Upstate NY on Fri Jun 17th, 2011 at 09:54:54 AM EST
[ Parent ]
I mean the austerity part of the package which will lead to a worsening debt situation in a year.

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 Jun 17th, 2011 at 10:10:05 AM EST
[ Parent ]
One thing protects Greece in all this mess. The vulture funds can't swoop in and buy the defaulted loans because the jurisdiction for all these notes is in Greek courts. This is quite different from how vultures typically deal with defaults in Africa or Asia or even South America.
This is actually a reason to oppose any "Eurobonds" solution which doesn't include an explicit EU-wide surplus-recycling mechanism (e.g., Varoufakis' beefed-up European Investment Bank proposal).

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Jun 17th, 2011 at 10:14:44 AM EST
[ Parent ]
Skimping on the EIB is IMHO one of the two most likely points of failure of Yanis' proposal. Public investment being such an alien concept in today's environment. The other being insufficient recapitalisation of the banks. Who knows how deep they really are in the red?
by generic on Fri Jun 17th, 2011 at 12:16:28 PM EST
[ Parent ]
After 4 years of global crisis, 2 1/2 years from Lehman, and 16 months of Greek crisis with two rounds of EU-level stress tests, you would hope they would know.

The fact that the people in charge are running around with their hair on fire as we speak does not make me too confident that they know. Or maybe they know but are in denial.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sat Jun 18th, 2011 at 02:41:39 AM EST
[ Parent ]
Another faint hope extinguished?

Germany climbs down over Greece bailout demands | World news | The Guardian

Angela Merkel has admitted defeat over Germany's plan to force private banks to contribute funds to a new bailout package designed to rescue the Greek economy.

After a meeting with the French president, Nicolas Sarkozy, in Berlin on Thursday, the German chancellor said they had agreed that any contribution from private creditors to the package would have to be voluntary.

"We want the participation of private creditors on a voluntary basis," said Merkel, stressing that there was no legal way in which banks could be forced to play along.

Sarkozy welcomed Germany's change of position, describing it as "a breakthrough".



It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Fri Jun 17th, 2011 at 08:37:25 AM EST
It means that my unconscious brain had a point.. now the question is what will happen in Greece in the following days.. and the problem is that in one year we will be back to square one. Greece will have to default.. maybe they will accept it then once banksters are safe? Maybe my unconscious brain was right.. I am really puzzled.

I do not know what to think.

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 Jun 17th, 2011 at 08:41:33 AM EST
[ Parent ]
BusinessWeek: Greek Notes Surge as Merkel Seeks Compromise With ECB on Loans
Greek two-year notes surged, driving yields lower for the first time in nine days, after Chancellor Angela Merkel retreated from German demands that bondholders be forced to bear a "substantial" share of a new rescue.
So now Merkel will be content with an insubstantial private share in the new rescue?
Merkel said that a debt rollover modeled on the so-called Vienna Initiative was a "good basis" for enrolling investors voluntarily to help Greece. She declined to give a date for the package to be worked out, saying that the matter must be resolved "as quickly as possible."

"We would like to have a participation of private creditors on a voluntary basis," Merkel told reporters today. This "should be worked out jointly with the ECB and there shouldn't be any dispute with the ECB on this," she said.

Meaningless.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Jun 17th, 2011 at 09:03:03 AM EST
New York Times: Germany Backs Down From Confrontation With E.C.B. Over Greece
Germany backed away Friday from a confrontation with the European Central Bank over a new bailout package for Greece, agreeing under pressure from France not to force private investors to shoulder some of the burden.
Enlarge This Image

...

"This should be worked out jointly with the E.C.B.," she added. "There shouldn't be any dispute with the E.C.B. on this."

"This is a breakthrough," Mr. Sarkozy said, referring to the softening of the German position.

Taking a page from The Onion, this is truly precedented.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Jun 17th, 2011 at 09:06:12 AM EST
[ Parent ]
La banca gana... this means this will be repeated ad infinitum until all debt is public hands? How to speed the transfer from banks to taxpayers?

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 Jun 17th, 2011 at 09:50:21 AM EST
[ Parent ]
Actually, no.

The ECB does not want to continue buying sovereign debt in the secondary market, and it has in fact stopped purchases altogether.

And the ECB insists on fiscal consolidation and structural reform. Just this past week, the Spanish Central Banker was all over the press advocating debt brakes not only for national but also for regional debt.

So today's words from Merkel are moot. Agreeing with the ECB is pointless since the ECB doesn't have a solution to the problem.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri Jun 17th, 2011 at 10:17:51 AM EST
[ Parent ]
Sall Street Journal: UPDATE: Germany's Merkel: Europe and Euro Tightly Bound Together
Sarkozy stressed that private investors would be asked to volunteer for a program designed to avoid a "credit event or payment shortfall," that euro-zone leaders would work to agree on it "as soon as possible," and reiterated that the model successfully implemented to prop up Hungary, Romania, Serbia and other eastern European countries would be a model for it.

...

"There are worries that we want to create a credit event. We don't want that. That's why we say we'll do everything together with the ECB, everything together with the (IMF and EU Commission)," Merkel said.

...

German Finance Ministry spokesman Martin Kotthaus said Friday that nothing impedes "that ideally Monday we find a solution and an agreement to the key elements of the program."



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Jun 17th, 2011 at 09:10:49 AM EST
To what extent is a realisation that the future of the Eurozone is seriously at risk beginning to impact on -e.g. - German public debate, and to what extent is there the beginning of a realisation that it is the ECB which is most in need of "reform".

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Jun 17th, 2011 at 12:42:30 PM EST
I'd find it hard to imagine that many German readers of the Bild are discussing reform of the ECB, or the viability of Eurobonds together with the necessary restructuring of the treaty.

That said, there's been an uptick in facebook posts on the economy from nearly null to some.

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin

by Crazy Horse on Fri Jun 17th, 2011 at 01:40:06 PM EST
[ Parent ]
I suppose I was thinking more of Der Spiegal readers and those likely to have an influence on public perceptions, policy makers, and electoral prospects.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Jun 17th, 2011 at 02:17:50 PM EST
[ Parent ]
From the Article in Die Zeit promoting the Modest Proposal (13 May 2011)
Last Friday, Der Spiegel published a story that "Athens is considering withdrawing from the euro zone" and, moreover, that a meeting was being held in Luxemburg on that afternoon to discuss the matter. After fast and furious denials, red-faced officials soon confessed that a high level meeting was indeed taking place in Luxemburg, albeit with an agenda that did not contain an impending Greek exit from the eurozone. As for the Greek government itself, it did what it does reliably in the face of an inconvenient story: it blamed it on speculators and their journalist friends.

Der Spiegel is, of course, no instrument of speculators and it is rather disingenuous of the Greek government to imply otherwise. Having said that, it is also untrue that the Greek government considered withdrawing from the euro, despite the country's massive problems. So, the pressing question is: Why did Der Spiegel choose to suggest that a euro exit by Greece was on Mr Papandreou's (the Greek PM's) cards, even though its journalists knew full well that it was most definitely not?

The only answer that is consistent with Der Spiegel`s calibre, political connections and intelligence is that the good magazine, in consultation with certain circles within the German government (in particular the Finance Ministry), was trying to send a message primarily to the German Chancellor but also to the Greek Prime Minister. What message? That it is time to begin the debate which Europe has been avoiding for more than a year. A debate about the need to stop living in the collective illusion that the eurozone's present course is sustainable.

Wishful thinking, maybe?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sat Jun 18th, 2011 at 02:51:25 AM EST
[ Parent ]
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Jun 18th, 2011 at 08:44:20 AM EST
[ Parent ]
Before you can do something different you have to recognize what you're doing is wrong.  I see no evidence the ECB or other EU institutions have taken that step.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Fri Jun 17th, 2011 at 04:09:30 PM EST
[ Parent ]
Is there a mechanism where Greece could unilaterally pull out of the Euro without internal economic collapse? If so, perhaps they could default on their Euro-denominated external exposure, revert to their own currency, and then say that since they will have control over their own currency from now on, there is no reason to fear another default. Thus pushing the Euro problem back into the E.U.
by asdf on Sat Jun 18th, 2011 at 01:51:35 AM EST
They would need to impose capital controls. At least on a temporary basis they would have to suspend the application of the Schengen agreement. Their central bank would be shut off from the rest of the Eurosystem. It would be like the Argentinean corralito, on steroids. Greece would have to ration necessities and use a local currency while using the remaining Euro reserves held in Greece to purchase fuel and food in international markets. Comandeering local Euro reserves in this way might prove tricky as Euros would be hoarded by the population away from the State's reach.

While one can possibly argue that this wouldn't be worse for Greece than the current situation, just qualitatively different, if would be worse for the Greek elites and those who currently keep their jobs, and who directly or indirectly are the life support of the indignant gathered at Syntagma. It would also trigger an absolute financial disaster in Europe and the US. In Europe the Eurozone wouldn't last the week. The "peripheral countries" and maybe even France would be devastated by a run as money fled to Germany. Internationally active investment banks (Swiss, English and American) would have to be rescued from their CDS exposures.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sat Jun 18th, 2011 at 02:49:29 AM EST
[ Parent ]
ECB must have a hard money policy; Germany will keep its mercantalist economy; and Greece's leaving the euro would bring a worldwide financial crisis. There's little chance of a European bond.

Is default the only answer and pick up the pieces from there? Or would default be the same as leaving the euro?

Hey, Grandma Moses started late!

by LEP on Sat Jun 18th, 2011 at 03:13:54 AM EST
[ Parent ]
Under default:
Greece would have to ration necessities and use a local currency while using the remaining Euro reserves held in Greece to purchase fuel and food in international markets. Comandeering local Euro reserves in this way might prove tricky as Euros would be hoarded by the population away from the State's reach. They would need to impose capital controls. At least on a temporary basis they would have to suspend the application of the Schengen agreement. Their central bank would be shut off from the rest of the Eurosystem. It would be like the Argentinean corralito, on steroids.

While one can possibly argue that this wouldn't be worse for Greece than the current situation, just qualitatively different, if would be worse for the Greek elites and those who currently keep their jobs, and who directly or indirectly are the life support of the indignant gathered at Syntagma. It would also trigger an absolute financial disaster in Europe and the US. In Europe the Eurozone wouldn't last the week. The "peripheral countries" and maybe even France would be devastated by a run as money fled to Germany. Internationally active investment banks (Swiss, English and American) would have to be rescued from their CDS exposures.

The only change is that the first and second halves of the first paragraph would switch places as to which one logically precedes the other.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sat Jun 18th, 2011 at 03:18:16 AM EST
[ Parent ]
I suppose one solution would be the ECB buying up all the Greek bonds it could get its hands on, then have Greece default on those bonds, then the ECB repairing it's balance sheet by printing new money. Not the best solution, not ideal in any way, but it might just work.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Jun 18th, 2011 at 10:31:46 AM EST
[ Parent ]
That would solve the problem...

... for another five to ten years, until it blows up again.

The problem is that there is no surplus limitation or recycling mechanism. If you do not fix that problem, you do not fix the Eurozone.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jun 18th, 2011 at 11:09:54 AM EST
[ Parent ]
Fiscal transfers would do the trick for Greece too.

For Spain, a simple eurobond up to 80% of GDP would be enough to keep it well anchored. Of course, this is, ina  sense, a recycling mechanism.

First print all the money needed for Greece... then make it formal with fiscal transfers.

Why, oh why they think printing money is inflationary in Europe... maybe they should say it would be inflationary in germany.. but really?

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 Jun 18th, 2011 at 11:24:33 AM EST
[ Parent ]
Printing money to give to Greece would mean they would turn-around and give it to the banks who are themselves part of the problem.  Near as I can tell, from the little I know, Greece should not have been able to borrow as much money as they did in the first place; they had no demonstrated ability to invest the money in productive enterprises to generate the funds to pay the debt off.

Any way one cares to look at it, the global financial system was fundamentally flawed which has led to the current crisis, is maintaining the current crisis, and is digging the world ever deeper into crisis.  Any way one cares to look at it, Neo-Classical Economics - the intellectual basis of the global financial system - was and is fundamentally flawed which has led to the current crisis, is maintaining the current crisis, and is digging the world ever deeper into crisis.

I suggest "Greece" (and Hungary and Lithuania and Iceland and ...) is a symptom, rather than the disease, and it's the disease that needs curing first and only then can the crisis be fixed.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Jun 18th, 2011 at 12:23:45 PM EST
[ Parent ]
Near as I can tell, from the little I know, Greece should not have been able to borrow as much money as they did in the first place; they had no demonstrated ability to invest the money in productive enterprises to generate the funds to pay the debt off.

Where did the money go?

Hey, Grandma Moses started late!

by LEP on Sat Jun 18th, 2011 at 01:18:07 PM EST
[ Parent ]
Roughly $14.85 billion/year went to arms purchases, with the big ticket items bought from Germany and France.

Arms makers lean on Greece

France is pushing to sell six frigates, 15 helicopters and up to 40 top-of-the-range Rafale fighter aircraft.

...

Germany is meanwhile pressing Athens to pay for a diesel-electric submarine from ThyssenKrupp, of which it refused to take delivery in 2006 because the craft listed during sea trials following a disputed refurbishment in Kiel.




She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Sat Jun 18th, 2011 at 01:46:37 PM EST
[ Parent ]
Thus you feel military investment is not 'productive.'That's a strange position to take. ;)

Hey, Grandma Moses started late!
by LEP on Sat Jun 18th, 2011 at 03:12:12 PM EST
[ Parent ]
It's plenty productive as a form of permissible industrial subsidy in a polity infested by neoclassical brain rot. Unfortunately, it is only productive for those countries the armaments are bought for, so it does not improve the customer's ability to pay for such procurement.

Which, of course, was never the point of neoclassical policy prescriptions, which are a pretty transparent game of three-card monte designed to con countries out of their resources and sovereignty and into colonial servitude. It's just a pity the market-fundies believe their own propaganda.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jun 18th, 2011 at 05:10:05 PM EST
[ Parent ]
neoclassical brain rot

Gettin' a mite testy there, Bruce old boy me duck.

LOL

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sun Jun 19th, 2011 at 12:16:04 AM EST
[ Parent ]
Jake, I meant.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Sun Jun 19th, 2011 at 12:19:22 AM EST
[ Parent ]
I could think of less flattering comparisons ;-)

And yes, I am getting a little tired of seeing people do the same thing that has blown up three times over the last three generations - one time sufficiently spectacularly that you need nine figures to count the casualties.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jun 20th, 2011 at 10:05:36 AM EST
[ Parent ]
That's $150 billion over 10 years. Add in a few Bridges to Nowhere, an Olympics, a State of the Art national public surveillance system purchased for a billion from the USA (it's non-functional), and you're at $200 billion. Couple that with a bevy of very low-paying jobs in gov't that take people out of economic productivity, and well, you've messed things up.

How can these things be reversed?

Don't spend $150 billion for armaments, don't host the Olympics, put your politicians in jail when they are involved in boondoggles with foreign corporations, downsize your government employee workforce and then DOUBLE the average pay of lowpaid workers.

by Upstate NY on Sat Jun 18th, 2011 at 06:27:31 PM EST
[ Parent ]
If you are telling me that the root of the problem is the crazy finantial system coming from an stupid non-scientific mythology regarding the long-term neutrality of money and the fact that the economy is not studied as a complex system in accademia but as a marginalist super-strucutre.. do you think I can disagree?? (I still remember reading with incredulity the macro and micro books of Krugman..are they stupid? I think the new versions are going to be a huge improvement)

And still, macro has a very useful tool to get the general structure, you have mean field models like Say, Keynnes or Friedman which offer you a clue about the general dynamics of the systems. More specifically, they tell you about the fixed points of the system. Getting in the mesostructure with mean field models is, by definition ,stupid nonsense and dangerous, but even smart people like Sagro here never heard about that fact (if your read carefully what he writes). Scientifically speaking they are ignoramus: plain narrative-builders of hot-air, people who do not know anything about what a complex system is. They do not know what a bifurcation is, they do not know what is a slave variable, a manifold.. I doubt they have ever solved numerically a chaotic dynamical system ... they are stupid and they think they are smart.

Yes, the problem is that the present financial system is a crazy mess, and it should be dismantled... the second problem is that there is no scientific model of the main equations which relate fluxes and variables at the mesosocopic model of the economy with hard-tested differential equations for the different sectors of production (some people in MMT try to do it at least, with more or less success, but they try at least!!!), and even less for the main flows of money and assets-type money. So, we do not know which financial system would produce a better outcome in the process or increasing the number of goods which can be "copied at zero cost" as the marginalist would say.

But there is a hope: in a lot of corners of the academia,  people like Krugman, Delong, etc.. who knew that mean-field theories were reliable but the detailed model were not (though harmless- and still they think that the best science is econometrics coupled with mean-field models at each scale), now realize that micro-based macro models are dangerous. They realize that when you construct a model that is clearly wrong on its premises, when you do not understand that the whole is more than the sum of its parts, these models can be published at will depending on political interests because it is "a model"  even if it assumes nonsense (DSGE anyone?). I think they will take more seriously the idea that they should teach mean-field models as they are to students, eliminating all the neo-classical  shit microfoundations. Now there are, at long last, pushing for other ways to approach the system. In 20-30 years we may get a proper scientific insight on financial and monetary policy.

Now, we have history and well-tested mean field theories. It is enough to know what this a crisis due to panic fly to monetary assets reducing the demand for present consumption. We know that financial markets panic and destroy money. So, even taking into account of the fact that the way textbooks teach how banks create money is bullocks (we all create money, you only need three people, Mig repetition!!!), we know enough to predict exactly what will happen, given the fix points of the system. Bu we do not know enough about how to tell the fundamentalists and ignoramus of the ECB that they are dumb, crazy and shitfull, and make it stick. We do not have enough media, adn we can not treat them like wackos as we treat the global-warming is a hoax, AIDS is not a virus and the second law of thermodynamics goes against God's will type of people. And on fundamentals, they are the same kind of people.

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 Sun Jun 19th, 2011 at 09:14:28 AM EST
[ Parent ]
For the Absolute Ever-Living Mother-Loving Win.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Sun Jun 19th, 2011 at 11:43:26 AM EST
[ Parent ]
Getting in the mesostructure with mean field models is, by definition, stupid nonsense and dangerous, but even smart people like Sagro here never heard about that fact (if your read carefully what he writes)

I studied phase transitions before becoming an economist, you know. But there are some problems in applying statistical physics methods to economics, which force most of us - formed physicists - into econometrics or finance when we switch to economics. Perhaps the future lies the stat phys way, but we just don't know how to jump there.

Yes, I did simulate chaotic systems, and I do know what a bifurcation is. If you think econophysics is an answer, I doubt it - torturing minority game to death won't move us far. Catastrophe theory was tried and abandoned, as well.

Thanks for a breath of sanity, anyway.

by Sargon on Sun Jun 19th, 2011 at 01:30:55 PM EST
[ Parent ]
Dynamical equations... that's why you are forced into econometrics...there is no framework for a classical dynamical system modeling approach...where behaviors are terms in the equation. Game theory can give you some insight in some asset-based flows and some oligopolistic markets...not much more.

I know, it  is sounds like psychohistory because that's what it is...then , your hypothesis can be perfectly tested: which terms reproduce the observed data?

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 Jun 20th, 2011 at 04:38:28 AM EST
[ Parent ]
Dynamical equation approaches are likely doomed as closed theories because one way of thinking about the effects of economic innovation is to imagine it as changing the dimensionality of the dynamical system.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Jun 20th, 2011 at 04:41:23 AM EST
[ Parent ]
Yes.. that is still the main problem...New markets. It seems long-term is not achievable.. short-term predictions could be in principle done. I think they could explain a lot about short-term poicy.. I mean, Greece, the FED, the ECB, the euros, the finantial shock.. you do not need a model with new markets changing the dimensionality.

and if the new markets do not represent a large chunk.. you may have proper medium-term approaches.

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 Jun 20th, 2011 at 04:52:07 AM EST
[ Parent ]
I contend that a [the?] major factor in the business cycle is the emergence of a new market.

Drawing a physical parallel, my model of the business cycle would be a bifurcation of an infinite-dymensional dynamical system on the period-doubling cascade. Imagine a fluid in a situation describable by a finite number of proper modes and thus a finite-dimensional dynamical system approximation. Other modes are all stable (i.e., a small deviation tends to dissipate). At some points as you increase the throughput (Reynolds number) one of the stable modes becomes marginal, then unstable. Then any noise will be amplified exponentially in the direction of this new unstable mode. But of course the right thing to do there is to consider the dynamical system of one dimension higher, where the growth of the mode is not exponential. It ia approximately exponential initially but then it saturates. Logistic growth might be a better approximation. So you have a transition from an attractor in N dimensions to one in N+1 dimensions that's a business cycle.

So the scale of one business cycle must be the medium-term timescale you talk about.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Mon Jun 20th, 2011 at 05:02:51 AM EST
[ Parent ]
So, in other words, complex mathematics are a key to good economics.
by Upstate NY on Mon Jun 20th, 2011 at 09:22:03 AM EST
[ Parent ]
Economics is harder than ecology which is harder than statistical physics which is harder than mechanics which is harder than geometry.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Jun 20th, 2011 at 09:29:52 AM EST
[ Parent ]
Is Economics harder than Physics, or is it at the Galileo stage of its development, where  all the accepted scientists are in the possession of the Pope?

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Mon Jun 20th, 2011 at 09:39:19 AM EST
[ Parent ]
The two are not mutually exclusive.

The harder a discipline is to study, the later should you expect it to mature as a field of science. If for no other reason then because getting good data is going to be a lot more expensive. One dude and his manservant could get quite good data on planetary motion even before the telescope. One dude and his manservant haven't a snowflake's chance in a blast furnace of getting good macroeconomic data unless they live in a modern industrial society that can afford to spend up to a percent of its GDP on data collection alone (and has the technology to automate much of it, and the institutions needed to standardise and enforce reporting requirements).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jun 20th, 2011 at 09:55:58 AM EST
[ Parent ]
I am reminded of Dune where the Fremen had an understanding of the planets ecology that included Fremen as a large foraging animal. Fortunately that would be a stabilizing feed-back loop as it would reinforce the cultural norms of a large foraging animal.

In economics on the other hand, if you assume that humans are homo economicus, you then must assume that a fair number will read and act upon the theories in order to gain most for themselves. A de-stabilizing feedback loop as acting to take advantage of the system described in general includes acting differently then the system prescribes.

Then again, most of us are not sociopathic homo economicus at all. So there is that problem too.

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

by A swedish kind of death on Mon Jun 20th, 2011 at 02:43:44 PM EST
[ Parent ]
I am reminded of Dune where the Fremen had an understanding of the planets ecology that included Fremen as a large foraging animal. Fortunately that would be a stabilizing feed-back loop as it would reinforce the cultural norms of a large foraging animal.

At one point, Herbert has the planetologist who "goes native" claim that: "The highest function of ecology is understanding consequences."

Oh, and the name of that planetologist? Pardot Kynes. There are many good things that can be said about Herbert's alliterations. "Subtle," however, is not one of them.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jun 20th, 2011 at 03:20:16 PM EST
[ Parent ]
No.

Not misspecifying your models is key to good economics. There is nothing particularly enlightening about complex mathematics in and of itself.

The fact that not misspecifying your models requires complex mathematics is an unfortunate reality. The world would be much easier to understand if it didn't. But the reality is what it is - it doesn't get any worse by owning up to it.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jun 20th, 2011 at 09:36:33 AM EST
[ Parent ]
Also note, the change of dimensionality is a problem that would also plague ecology and sociology. These are evolving systems that can generate their own new entities endogenously though processes not described at the level of abstraction of the dynamical system description.

This is an idea of theoretical biologist Stuart Keuffman, and I came across it in a joint paper of him with Lee Smolin on cosmology (!). Here is the key quote:

(There is an analogous issue in theoretical biology. The problem is that it does not appear that a pre-specifiable set of "functionalities" exists in biology, where pre-specifiable means a compact description of an effective procedure to characterize ahead of time, each member of the set[8,7]. This problem seems to limit the possibilities of a formal framework for biology in which there is a pre-specified space of states which describe the functionalities of elements of a biological system. Similarly, one may question whether it is in principle possible in economic theory to give in advance an a priori list of all the possible kinds of jobs, or goods or services[8].)


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Jun 20th, 2011 at 05:44:13 AM EST
[ Parent ]
See also A Manifesto for Modern Political Economics: Extracts from our new book by Yanis Varoufakis
The cause of this failure is the inherent error; the inevitable logical inconsistency of any system of ideas whose purpose is to describe capitalism in mathematical or engineering terms. This is not, however, an intellectual failure as such. It is a mere reflection of capitalism's essence, which only appears to us as logical inconsistency when we try to transplant into political economics an mindframe confined within some fixed `geometry'. Imagine a theorist that tries to explain complex evolving ecosystems by means of engineering models. What would result but incongruity and a mindset bent on misunderstanding the essence of the explanandum; a flight from that which craves explanation?

Political economists are that kind of theorist: nuts-and-bolts mechanics trying to defeat indeterminacy and to replace it with `closure'; tragi-comic figures struggling to impose a mechanical template upon evolving systems. No matter how skilled as engineers, and irrespectively of how adept we are at machining our tools precisely, our efforts are doomed. If anyone doubts that, it is worthwhile looking at what happened when economists accepted the challenge of incorporating evolutionary mechanisms into their study of capitalism's historical dynamics: The exciting logic of Darwinian evolution (according to which complex patterns arise spontaneously from very simple underlying mechanisms) was emptied of all content and thrown onto the pyre of the inherent error.[i] Like a latter-day Midas, everything that the mainstream economist touches turns into a glittering, barren `thing', bereft of life and explanatory potential.

This is the stuff of unintended consequences of efforts to transplant a `scientific' approach to political economics. The best intentioned political economists begin with a healthy appreciation of the fact that their models are nothing but provisional forays into structured thinking. David Ricardo, Karl Marx, Alfred Marshall and John von Neumann are excellent examples. However, they are inevitably led astray by the very ambition to model economic phenomena by means of `closed' accounts of all the variables within. As we explained in preceding chapters, this ambition ensures that, before long, the models take over and the provisional terms in which they do their work start regarding themselves as direct reflections of a concrete reality.



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Jun 20th, 2011 at 07:11:02 AM EST
[ Parent ]
Kauffman, not Keuffman.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Jun 20th, 2011 at 09:08:45 AM EST
[ Parent ]
there is no framework for a classical dynamical system modeling approach...where behaviors are terms in the equation.

There's Systems Theory which

von Bertalanffy believed a general theory of systems "should be an important regulative device in science," to guard against superficial analogies that "are useless in science and harmful in their practical consequences."

Sargon, somewhere in here, states Economics have abandoned Catastrophe Theory.  What was NOT said was CT was not found to be unapplicable to Economics it was found the mathematical techniques for applying CT to Economics were, and are, unknown; some nitty-gritty, in-the-trenches, actual for-fucking-real research needed to be done.  It was deemed (covertly, nobody came right out and said it) much easier to ignore what CT was telling them and bullshit their way through.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Jun 22nd, 2011 at 09:12:28 PM EST
[ Parent ]
Oh.. I forgot.

I still got from your writing that in your training the idea that modeling mesostructure with mean-field approaches or microdynamics is crazy nuts was not something included. Somehow I got the idea you seem to be OK with this approach thinking that economics is different than solid state physics regarding the difference between micro, meso and macro. Well, the craziness of simulating macro with micro.

I apologize if I was wrong.

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 Jun 20th, 2011 at 04:44:20 AM EST
[ Parent ]
Any way one cares to look at it, Neo-Classical Economics - the intellectual basis of the global financial system - was and is fundamentally flawed which has led to the current crisis, is maintaining the current crisis, and is digging the world ever deeper into crisis.

I suggest "Greece" (and Hungary and Lithuania and Iceland and ...) is a symptom, rather than the disease, and it's the disease that needs curing first and only then can the crisis be fixed.

Death to the vermin (c) Vernon Vinge, A Fire Upon the Deep.

by Sargon on Sun Jun 19th, 2011 at 02:04:37 PM EST
[ Parent ]
I don't understand the reference.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Sun Jun 19th, 2011 at 02:33:58 PM EST
[ Parent ]
You have to read the book, sorry. The major idea - beware of those who want you to exterminate some 'vermin'. Or 'disease'.
by Sargon on Sun Jun 19th, 2011 at 02:54:44 PM EST
[ Parent ]
Claiming that something is an intellectual disease that needs curing appears to me to be a far bit from claiming someone is vermin that needs to be exterminated.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Sun Jun 19th, 2011 at 03:12:33 PM EST
[ Parent ]
</sarcasm>
by Sargon on Sun Jun 19th, 2011 at 03:24:36 PM EST
[ Parent ]
If mass murder was my gig I'd be making a fat 3 figure income designing advanced weapon systems for the US military.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Sun Jun 19th, 2011 at 04:33:41 PM EST
[ Parent ]
Nor do you solve the problem with deficits in the PIGS. But as the current policy is mainly about kicking the can down the road and hoping for divine intervention, we might well see something like this happening.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Jun 18th, 2011 at 11:31:42 AM EST
[ Parent ]
Our food dependency increased massively since entering the EU.

If they feed you, they own you.

by cagatacos on Sat Jun 18th, 2011 at 03:59:46 AM EST
[ Parent ]


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sat Jun 18th, 2011 at 04:03:19 AM EST
[ Parent ]
The same thing happened in Greece. Svelte Greeks became the most overweight in Europe. Greece is the biggest importer of French beef in the world.
by Upstate NY on Sat Jun 18th, 2011 at 09:37:38 AM EST
[ Parent ]
Given the consequences, why didn't they do something smarter in the beginning with their 195 billion euros? Greece's deficit was 250 billion.

When you look at this, you begin to think a guy like Varoufakis is out of his mind. How could he possibly want MORE Europe when there is no leadership, no intelligence, and most of all, little cohesion and trust. This is why he's preaching to his fellow Greeks that default is a mistake at the same time that he's suggesting Greece issue ultimatums to the rest of Europe. But he's insane. Ultimatums can only lead to default for the precise reason that this whole crisis has been botched from the beginning.

I said this early on. For any real change to happen, the people making policy would personally have to feel the pain of losses. Over the last few years, we have a financial class that's become wealthier, not less wealthy. Whatever is happening has so far worked for them. Bini Smaghi, Draghi, Weidmann, Merkel, Junker, Stark, Rehn, etc. are people who are incapable of empathy. They are maybe just a hair more humane than Greek politicians.

by Upstate NY on Sat Jun 18th, 2011 at 09:36:43 AM EST
[ Parent ]
Spiegel.de: Aufmarsch der Euro-Zauderer: Streit über Griechen-Hilfe (16.06.2011)
Ein Ausweg ist derzeit nicht in Sicht. "Wir möchten Zeit kaufen, weil wir nicht wissen, was wir tun sollen", zitierte die Nachrichtenagentur Reuters am Donnerstag einen EU-Diplomaten, der damit die deutsche Argumentation beschrieben habe. Es ist ein Satz, der die verfahrene Situation in ihrer vollen Pracht entlarvt.
March of the Euro Procrastinators: struggle over Greek help
A way out is, for the time being, not in sight. Reuters quoted an EU diplomat on Thursday describing the German argument thus: "we would like to buy time, because we don't know what to do". It is a phrase revealing the muddled situation in its full glory.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sat Jun 18th, 2011 at 08:26:29 AM EST
Reuters: Analysis - Berlin seeks time to resolve own Greek aid dilemma (16 June 2011)
Germany wants Europe to postpone a new bailout deal for Greece to buy time for a compromise on involving private creditors that does not look like a climbdown that would entail political risks for Chancellor Angela Merkel.

Merkel will try to resolve this dilemma in talks on Thursday with the European Central Bank's Mario Draghi and on Friday with French President Nicolas Sarkozy, with the ECB, Paris and European Commission all questioning Berlin's position.

Interestingly, she's not meeting Trichet, she's meeting Draghi. That must be because Draghi is chairman of the Financial Stability Board, not because he's part of the ECB.
"The argument goes: We don't know what to do, let's buy more time," said an EU source, blaming Merkel and Finance Minister Wolfgang Schaeuble, whose proposal that private creditors accept a bond swap to extend Greek debt maturities now looks in doubt.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sat Jun 18th, 2011 at 08:32:09 AM EST
[ Parent ]
Hard, really, to imagine the Buba participating in the European project. Or the Germans.

I don't think this is really that hard to understand...some think Germany is at the heart of Europe. Some think a better ally is and always was Russia. No surprise given certain developments in this latter country that it was hard to see Russia in that light for a couple of bourgeois generations...

But it is still hard to tell who is more European, Germany or Russia.

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

by r------ on Sun Jun 19th, 2011 at 04:36:22 AM EST
Jerome said once that as an adolescent he had to choose between German and Russian as a foreign language to study. He chose Russian to know thy enemy. I think he chose the wrong language if that was his intention.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sun Jun 19th, 2011 at 09:57:58 AM EST
[ Parent ]
He did learn english after all.
by IM on Mon Jun 20th, 2011 at 03:24:44 AM EST
[ Parent ]
And Russian well enough to do fieldwork in Ukraine for his PhD dissertation.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Jun 20th, 2011 at 03:44:34 AM EST
[ Parent ]
But since his passion is wind, german wuold have benn more useful. And since in his interpretation the anglo-saxons are the problem, english is the right language.

You, on the other hand, certainly learned german?

by IM on Mon Jun 20th, 2011 at 03:50:00 AM EST
[ Parent ]
Yes, and English and French and Italian. But my motivation was certainly not to learn the language of the enemy.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Jun 20th, 2011 at 03:51:44 AM EST
[ Parent ]
I tried to learn french out of the purest european motives, but never was not particulary successful.
by IM on Mon Jun 20th, 2011 at 04:00:19 AM EST
[ Parent ]
Guess why I learnt Russian? ;) Not that I recall that much of the language now.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Jun 20th, 2011 at 05:59:41 AM EST
[ Parent ]
[Starvid's Rysskräck™ Technology]

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Jun 20th, 2011 at 06:01:28 AM EST
[ Parent ]
A stab at understanding what has happened so far:

A Eurozone introduced
1 Periphery gets its currency rates looked to the core. Periphery gets stuff and core gets claims, that are placed in periphery debt (private or public)

B Great Finance crisis
1 Banks all over the eurozone suffers from structural insolvency. ECB gets mighty afraid of domino effects.
2 Banks fall in Ireland, ECB forces Irish taxpayers to guarantee the banks.

C Eurozone crisis
1 Speculators see that Greece and Ireland can not defend its government debts as EMU rules dictates cutbacks in recession. Run on debt starts.
2 Speculators see that Spain (and Portugal?) can not defend total debts as ECB will force governments to take over private debt (see B2). Run on debt continues.
3 ECB answers by demanding more cuts and privatisations. And then puts up limited warchests in defense of debts.
4 Speculators see warchests as poorly locked treasure chests.
5 States income falls as economy is strangled. More loans needed.

Repeat C3 through C5 a couple of times, and here we are.

Is this roughly correct?

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

by A swedish kind of death on Sun Jun 19th, 2011 at 08:50:29 AM EST
Except C2 may have been the other way around.

According to an interview with Almunia:

When asked whether Lenihan's decision was a mistake, Almunia said: "Yes, indeed."

Almunia, who is now the European competition commissioner, said the decision was presented to Brussels as a fait accompli.

He said the then government's failure to notify Europe was "very unfortunate" and that the initiative had come as a surprise.

"To my knowledge everything was explained and discussed ex poste ... If I remember well, it was at the end of the September 2008 when the Irish authorities - without notification here [in Brussels] - extended an unlimited guarantee to assets, also to creditors; and all those bondholders than can benefit from this unlimited guarantee, they are protected.

"This was not our decision ... We were dealing the day after with how do you say - a fait accompli," Almunia said.

I don't know who to believe but I suspect the Irish Minister of the Finance at the time and his party's culture (since dead, and canonised by austerity fetishists here) was quite capable of imagining he had hit upon another sure-fire scam.

As to the trustworthiness of Alumia, perhaps others have some insight.

by Pope Epopt on Sun Jun 19th, 2011 at 09:07:15 AM EST
[ Parent ]
Sorry - I meant B2.
by Pope Epopt on Sun Jun 19th, 2011 at 09:07:51 AM EST
[ Parent ]
Right you are, ECB did not get involved until later (as far as we know).

So, corrected version:

A Eurozone introduced
1 Periphery gets its currency rates looked to the core. Periphery gets stuff and core gets claims, that are placed in periphery debt (private or public)

B Great Finance crisis
1 Banks all over the eurozone suffers from structural insolvency. ECB gets mighty afraid of domino effects.
2 Banks fall in Ireland, ECB forces Irish taxpayers to guarantee the banks. Irish politicians take leave of their senses and guarantees the banks.

C Eurozone crisis
1a Speculators see that Greece and Ireland can not defend its government debts as EMU rules dictates cutbacks in recession. Run on debt starts.
1b ECB makes it clear that they will not accept defaults of any kind.
2 Speculators see that Spain (and Portugal?) can not defend total debts as ECB will force governments to take over private debt (see B2). as they are expected to guarantee their banks. If debt is taken over, ECB will stop any defaults (see 1b). Run on debt continues.
3 ECB answers by demanding more cuts and privatisations. And then puts up limited warchests in defense of debts.
4 Speculators see warchests as poorly locked treasure chests.
5 States income falls as economy is strangled. More loans needed.

Repeat C3 through C5 a couple of times, and here we are.



Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Sun Jun 19th, 2011 at 03:08:25 PM EST
[ Parent ]
2 Banks fall in Ireland, ECB forces Irish taxpayers to guarantee the banks. Irish politicians take leave of their senses and guarantees the banks.
They didn't take leave of their senses. It's even worse than that.

Recall: LQD: Put your money into Irish Banks [Updated] by Frank Schnittger (October 2nd, 2008). In the comments:

Helen:

Representatives of Irish banks managed to get themselves on both BBC Radio 4 and Radio 5 talking about [th]is and "jokily" promoting the idea that UK citizens should move their money to Irish banks. I was amazed at how readily the BBC allowed this promotion and..well advertising really...to take place as "News".
to which I replied
They really are taunting the Commission's Competition authorities... Which luckily is not Irish (McCreevy: Internal Market) but Dutch (Neelie Kroes). And she tends to get into conflicts with McCreepy on a regular basis, oddly enough.


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sun Jun 19th, 2011 at 04:46:04 PM EST
[ Parent ]
2 Banks fall in Ireland, ECB forces Irish taxpayers to guarantee the banks.

A popular myth, but still false. Ireland did act in autumn 20008 of it's own accord - the unlimited guarantee - to the consternation of the other european countries.

by IM on Sun Jun 19th, 2011 at 09:11:27 AM EST
[ Parent ]
I think it would be more accurate to say that the ECB wouldn't countenance allowing the banks go bankrupt.

The details of the implementation of that was up to the Irish government, who did it in possibly the most stupid way possible.

by Colman (colman at eurotrib.com) on Sun Jun 19th, 2011 at 09:23:24 AM EST
[ Parent ]
I may be misremembering the timeline, but the way I remember it, the ECB blackmail didn't start until some time after the Irish guarantee. At the time of the guarantee, the ECB was still in denial about there being a crisis at all.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 09:26:16 AM EST
[ Parent ]
I may be mistaking which EU institutions were involved. There's been so much smoke laid around that battleground that it's not obvious what went on.
by Colman (colman at eurotrib.com) on Sun Jun 19th, 2011 at 09:30:12 AM EST
[ Parent ]
Lenihan sold out a whole generation of young Irishmen and women, gave their future jobs and tax monies to his friends in banking and real estate, presented it to Brussels as a fait accompli (not sure they would have refused though), and then conveniently died.

He is not regretted.

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

by r------ on Sun Jun 19th, 2011 at 09:34:26 AM EST
[ Parent ]
The real estate guys are mostly fucked. Well, what passes for being fucked for rich people. But most of them aren't really very rich any more. Really. They're currently scrabbling to hold on to the couple of millions they have in the wife's name and avoid bankruptcy.
by Colman (colman at eurotrib.com) on Sun Jun 19th, 2011 at 09:38:24 AM EST
[ Parent ]
Except that you forgot the pump-and-dump against Greece, and I don't think Fianna Fail needed any ECB help to Epic Fail the Irish banking crisis.

Also;
D New Rules
1 Greek and Portuguese centrist parties are discredited by their support for macroeconomic insanity and submission to foreign powers.
2 State crackdown on Greek and Portuguese left-wing groups that challenge the Conventional Wisdom.
3 Discredited centrist parties and the weakening of left-wing direct action groups enables fascists to stage a coup attempt, possibly with the aid of police forces brutalised by repressing left-wing activists.
4 Police-military confrontations, a la Egypt, if the military has been kept clean of skinhead assholes. A la Libya if it hasn't.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 09:15:14 AM EST
[ Parent ]
Too funny!

You forgot American interference.

Hopefully they will no longer have their economy or the Chinese to finance them anymore by then.

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

by r------ on Sun Jun 19th, 2011 at 09:29:10 AM EST
[ Parent ]
We don't need American interference to make a complete clusterfuck of this situation.

And no, I don't think it's funny. It wouldn't even be funny if it were happening half a world away and half a century ago, let alone having it happen here and now.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 09:50:58 AM EST
[ Parent ]
It is also funny to see the social democratic elements of parties where there has been a socialist tradition...in Spain, Greece, Portugal, show themselves for what they are.

You are charitable when you refer to them as "centrist".

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

by r------ on Sun Jun 19th, 2011 at 09:30:36 AM EST
[ Parent ]

Suddenly and expected

Obituary for a common currency.

Says Eurointelligence (reminding us that Spiegel sells a million copies a week):

The story itself consists of a nine page long news story of the current negotiations and political and historic context plus a seven page story of the new movement of the discontent in all euro crisis countries.
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Jun 20th, 2011 at 06:05:07 AM EST
Wolfgang Münchau on why the euro will survive

In his FT column, Wolfgang Münchau noted that the euro critics who predicted the immediate demise of the eurozone had been proven wrong by last week's events. George Papandreou reshuffled the cabinet, and Angela Merkel capitulated on the private-sector involvement debate, which has been the biggest obstacle to an agreement on a second Greek loan package. The events of last week produced a political economy lesson about the eurozone - events are pushing the eurozone towards further economic and political integration. Greece will eventually default (or be foregiven its debts) - of this there can be no doubt - but Greece will default into the EFSF/ESM/bilateral programmes. Three finance options will then be available, monetisation, fiscal transfer or a eurozone bond. The ECB will reject the former, the member states will reject the second. The eurozone bond will emerge as the only realistic way out. There may still be a major accident on this path, but it will not happen this month, and probably not this year either.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon Jun 20th, 2011 at 06:38:35 AM EST
[ Parent ]
European Tribune: Get your policy analysis five months early.

Though of course I have grown noticeably more pessimistic since then (was that really only five months ago?).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jun 20th, 2011 at 08:52:07 AM EST
[ Parent ]
I'm also surprised at how fast this has piled up. My predictions at the beginning of the year were for the the Eurozone to survive intact for this year at least, because the current arrangement was so much in Germany's mercantalist interests.  Now we might be looking at a core Eurozone in Northern Europe stretching only from the Netherlands to Germany.  It would be interesting to know if contingency plans are being drawn up at the EC or the national government level.  Does anyone have any intelligence from the people who normally print currency?

I find it hard to believe, however, that the EU could make that transformation so quickly, given that they are only now admitting to the systematic nature of the problems. One of the fault lines is the relative speed of national developments in Greece, Portugal and Spain (especially by the Greeks who are trying to re-make democracy for us all), compared with laden-tanker-like responses of the EU.

My bet, for what it's worth, would still be on Eurobond issuance and cobbling the thing together for this year.

by Pope Epopt on Tue Jun 21st, 2011 at 04:27:19 AM EST
[ Parent ]
The people who normally print currency are the banks.

We know roughly what would happen in the event of a Eurozone breakup - we've seen it all before (Iceland, Russia, Argentina, etc.).

We also know roughly what would have to happen to make the Eurozone not break up.

If I were a betting man, I'd give it around 50/50 odds.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jun 21st, 2011 at 04:40:00 AM EST
[ Parent ]
The Richard Koo link from JakeS is well worth spending a bit of time on, by the way.

It explains how the Japanese avoided a full blown recession while their asset prices fell by 87% after their bubble burst.  And you've guessed it - the Japanese government spent and continued to spend while the private sector deleveraged and did not invest.  The national deficit grew rapidly, but they didn't cut themselves into a great depression.  In the process, various neo-classical articles of faith were shown not to hold in a time of asset-bubble hangover deflation.

Precisely the opposite of the ECB/IMF prescription.

by Pope Epopt on Tue Jun 21st, 2011 at 06:00:33 PM EST
[ Parent ]
Eurogroup makes payment of fifth loan tranche contingent on Greek parliament's approval of the austerity package
The events of last week produced a political economy lesson about the eurozone - events are pushing the eurozone towards further economic and political integration. Greece will eventually default (or be foregiven its debts) - of this there can be no doubt - but Greece will default into the EFSF/ESM/bilateral programmes. Three finance options will then be available, monetisation, fiscal transfer or a eurozone bond. The ECB will reject the former, the member states will reject the second. The eurozone bond will emerge as the only realistic way out.

This is by far the most optimistic reading of the crisis I've seen for a good while. "Kicking the can down the road" is no longer seen as delaying the inevitable -- default, doom, disaster and despair -- but of buying time to bring about the reforms required to make a go of monetary union.

  • Monetization
  • Fiscal transfer
  • Eurobond

Take your pick... I'd like all three, please. If the Eurobond is the only politically viable option, let's have some explications!

If the whole damn crisis is all about Germany's surpluses being recycled in unproductive investments in the deficit-ridden periphery, then I suppose a Eurobond mechanism is about formalizing a recycling mechanism, controlling the use of the money, and making it sustainable?

How do you oblige the Germans to buy the bonds?

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Jun 20th, 2011 at 11:22:18 AM EST
From elsewhere in the thread
Spiegel.de: Aufmarsch der Euro-Zauderer: Streit über Griechen-Hilfe (16.06.2011)
Ein Ausweg ist derzeit nicht in Sicht. "Wir möchten Zeit kaufen, weil wir nicht wissen, was wir tun sollen", zitierte die Nachrichtenagentur Reuters am Donnerstag einen EU-Diplomaten, der damit die deutsche Argumentation beschrieben habe. Es ist ein Satz, der die verfahrene Situation in ihrer vollen Pracht entlarvt.
March of the Euro Procrastinators: struggle over Greek help
A way out is, for the time being, not in sight. Reuters quoted an EU diplomat on Thursday describing the German argument thus: "we would like to buy time, because we don't know what to do". It is a phrase revealing the muddled situation in its full glory.
(links in the original)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon Jun 20th, 2011 at 11:26:47 AM EST
[ Parent ]
I suspect they know what they have to do, but have no idea how they're going to sell it to their voters without explaining that the Original Sin was suppressing their wages in the name of competitiveness.
by Colman (colman at eurotrib.com) on Mon Jun 20th, 2011 at 11:32:11 AM EST
[ Parent ]
The only thing that can save our sorry asses is solidarity and economic integration. Slowly, the "elites" are coming to recognize this (the economists and bankers, by construction, can't, and will have to be circumvented).

So now, the people who have been selling us tabloid nationalism are going to have to switch to brotherly love...

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Jun 20th, 2011 at 11:50:54 AM EST
[ Parent ]
Yeah, that would be the problem. Should be fun to watch, for very small values of "fun".
by Colman (colman at eurotrib.com) on Mon Jun 20th, 2011 at 11:51:50 AM EST
[ Parent ]
What I find ridiculous is how industrialists and CEOs are weighing heavily on eurozone integration and how the collapse of the zone would kill their business--almost with no remorse whatsoever for taking huge salaries while they suppressed worker compensation and thereby tamped down demand.

Did these guys sit on some banking boards too I wonder?

by Upstate NY on Tue Jun 21st, 2011 at 08:59:17 PM EST
[ Parent ]
How do you oblige the Germans to buy the bonds?

You don't.

You have the EFSF issue them, and then people can buy them or not. If they don't, they'll get shuffled around the EU bureaucracy for a bit, until they (inevitably) end up on the ECB's balance sheet, because that is the only place they can end up.

tl;dr: Eurobonds is simply an exercise in calming BuBa neuroses over "monetising" the debt.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jun 20th, 2011 at 12:18:45 PM EST
[ Parent ]
I suppose I'm just banging my tin drum here, but I'm seeing nothing about the parasitic losses in the economy from skimming being the real reason for the downward spiral.

The economy is not an infinitely milkable cash cow, and that's definitely an undercurrent axiom in all this discussion.

You guys are intoxicated with theory, and somehow blind to normal understanding of productive systems and their frictional losses.

Align culture with our nature. Ot else!

by ormondotvos (ormond.otvosnospamgmialcon) on Mon Jun 20th, 2011 at 10:48:52 PM EST
From my POV, overtly writing "the parasitic losses in the economy from skimming being the real reason for the downward spiral" would be the same as writing "this morning the sun rose in the east."

It's a given.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Jun 21st, 2011 at 11:51:27 AM EST
[ Parent ]
I have tried to sum up this thread in Spanish.. difficutl but I tried..
I eliminated all technicalities and went to the core of the issue

http://avionesdecercanias.blogspot.com/2011/06/soy-yo-o-es-el-final-de-la-eurozona.html

with nice pictures. I hope it is useful.. somewhere.. sometime.

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 Tue Jun 21st, 2011 at 06:55:17 PM EST
EconoMonitor : Don't Shoot the Messenger » Is Italy, Not Spain, the Real Elephant in the Euro Room?
Looking through the latest round of EU GDP data, one thing is becoming increasingly obvious: when it comes to future monetary policy decisions at the ECB, and to exactly how many more interest rate hikes we are going to see, then the performance of the Italian economy is going to be critical. The growth pattern now is clear enough: Germany and France move forward at a lively pace, while the so called "peripheral" economies (Portugal, Ireland, Greece, and Spain) either remain in or continually flirt with recession. They are constrained by the combined burden of their lack of international competitiveness, their over-indebtedness and the contractionary impact of their austerity programmes.


Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Sun Jun 26th, 2011 at 08:09:04 PM EST


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