Debt, The EU, And Greece

Mostly fluff, but there's a couple of interesting bits here: Greece v Germany, the bailout game.

Apparently, 70% of Greeks now claim to believe that Germany is trying to start a Fourth Reich.

Postman Dimitris Tzikas, 46, says: "There are no problems between Germany and Greece. But with the crisis, Mrs Merkel has chosen to break us as a country.

Dude, the country is already broken, it's just that you're only figuring it out now that the lending spigot is drying up.

This isn't 100% applicable to the current thread, but I'm not sure where else to put it, and it does include Europe and is entirely about debt, so here we go.

IMAGE(http://azizonomics.files.wordpress.com/2011/12/forex-minus-external-debt.png)

Minarchist wrote:

This isn't 100% applicable to the current thread, but I'm not sure where else to put it, and it does include Europe and is entirely about debt, so here we go.

IMAGE(http://azizonomics.files.wordpress.com/2011/12/forex-minus-external-debt.png)

Some context for this image: it's from this blog post. It's net currency reserves (total reserves minus external debt).

It's interesting how much yellow there is, even in economically active places like South America and the Middle East. (Though many of those countries are hard to see on a map. Geographic area doesn't correspond well to economic activity, so there may be some outliers we can't see well, like that little blip on the east side of the Mediterranean.)

It would be instructive to see a scatterplot of these numbers paired with a 12-month average of the 30-year yield on countries' bonds, I think. Reserves against price of money.

pgroce wrote:

Some context for this image: it's from this blog post. It's net currency reserves (total reserves minus external debt).

Yes, sorry, I meant to post what the numbers were and totally forgot after I fielded a phone call in the middle of typing this.

It's interesting how much yellow there is, even in economically active places like South America and the Middle East. (Though many of those countries are hard to see on a map. Geographic area doesn't correspond well to economic activity, so there may be some outliers we can't see well, like that little blip on the east side of the Mediterranean.)

I thought this was interesting (obviously), but a better plot against the rest of the world may be Forex minus debt as percentage of GDP, instead of absolute dollars. Of course Kenya isn't leveraged for $10T, that would be like 1,000,000% of their GDP.

It would be instructive to see a scatterplot of these numbers paired with a 12-month average of the 30-year yield on countries' bonds, I think. Reserves against price of money.

That would be interesting. You should make that.

Minarchist wrote:
pgroce wrote:

Some context for this image: it's from this blog post. It's net currency reserves (total reserves minus external debt).

Yes, sorry, I meant to post what the numbers were and totally forgot after I fielded a phone call in the middle of typing this.

It's interesting how much yellow there is, even in economically active places like South America and the Middle East. (Though many of those countries are hard to see on a map. Geographic area doesn't correspond well to economic activity, so there may be some outliers we can't see well, like that little blip on the east side of the Mediterranean.)

I thought this was interesting (obviously), but a better plot against the rest of the world may be Forex minus debt as percentage of GDP, instead of absolute dollars. Of course Kenya isn't leveraged for $10T, that would be like 1,000,000% of their GDP.

It would be instructive to see a scatterplot of these numbers paired with a 12-month average of the 30-year yield on countries' bonds, I think. Reserves against price of money.

That would be interesting. You should make that. :)

Respectively: No worries, good point and I would if I could get the data easily.

pgroce wrote:

It's interesting how much yellow there is, even in economically active places like South America and the Middle East.

That's because after the 20th century, no one in their right mind is willing to lend money to a South American or Middle Eastern government. Consider:

Argentina, whose dollar bonds are the highest-yielding among major developing nations, hasn’t issued debt abroad since its record sovereign default in 2001.

If you think the European numbers are bad, you should look at the numbers for places like Venezuela and Argentina, where government borrowing costs are routinely double-digit. That's not to say that they aren't in trouble, especially Venezuela, it just means they can't use that particular fiction to sell it to their citizens. Modern South American countries take care of deficits the old-fashioned way - by creating money - because they have long since lost access to any reasonable market funding.

If anything, South America provides an example of where the U.S. and Europe are headed. The difference is that they were smaller and less important globally, so there was much less tolerance of excess and less damage inflicted by their unsustainable policies. The U.S. and Europe are much more exposed, and continue to increase exposure, which means the damage will be that much greater.

I imagine most of the people still reading this have our favorite economists to read, but Yanis Varoufakis might earn special interest given the gaming angle (he's Valve's economist). His blog posts about Europe feel like they're coming from a war reporter.

The Fable of the Marbles and the Teacher

http://neweconomicperspectives.org/2...

Once upon a time, in a small and remote village across the mountains, in a faraway country, there was a small rural school. It was one of those schools with children of different ages together in a single classroom, a village school like any other, but this is a minor detail. It had a strict teacher. However, everybody in the village loved the teacher, as she was just and fair and she cared very much for her pupils. She was the kind of teacher who gave advice like “you always have to not live beyond your means.”

One day, the school’s teacher proposed a new game to her pupils. It was an easy game to play. The teacher showed the students a big bowl containing marbles. Marbles of many different colors, with some opaque as if made of clay and others made of glass and some of these contained spirals inside. But the shape and sizes of the marbles were not important for the game. The teacher said:

Do you see these marbles? From now on, these marbles will be your money. For each successful task you complete in class, I will give you one marble. If you want to leave school today and return to your family you will need to collect 10 marbles. The objective of this game is to learn how the economy works, and the importance of not living beyond our means.

And the game started. The teacher assigned tasks and exercises and the students began to collect marbles. As you can imagine, there were some students smarter than others and quickly some had collected more marbles than others. In fact, one of them, the second oldest and the smartest student in the school, collected the required 10 marbles very quickly, even before the bell rang. The oldest student was the village’s fool. As you can imagine, this student had barely completed 2 exercises and one paper. The rest of the students had completed some papers as well, but none had the ten required, except for the smartest student, Edward.

When Peter had completed his fifth exercise he went to the teacher’s desk to collect his next marble.

The teacher said “I’m sorry Peter, I do not have any more marbles in the bowl”

“But, teacher! I’ve finished my exercise and you said that when finished I would receive a marble in return. What should I do now? This is not fair!” came Peter’s reply.

“You’re right, but that’s the way the economy works. It’s important to know that we have to not live beyond our means, so you will have to look for the marble elsewhere, because I do not have any more.”

“I can loan you a Marble”, said Edward, the smart student. “I have 5 spare marbles, so I will still have 4 extras”. And Edward, who was also generous as well as smart, loaned Peter one marble.

Sandra came to the teacher’s desk and asked for 3 marbles! And Anne, asked for 5, as did Susan, and Anthony. Quite suddenly all of the students had finished their exercises and started to ask for their marbles.

There were not enough marbles for all! It does not matter how hard they worked or how generous Edward could be, it was impossible for every student to have the 10 marbles required to get out of school.

At the end of the day, parents came to the school’s front door to pick up their children, but only Edward came out. He had provided help to his friends by loaning his 5 spare marbles, but it had not been enough. Only he had obtained the required ten marbles. Now, he was alone and sad. There were no other kids to play with him at the park.

The rest of the parents asked, “Where are the other children?”

“Our teacher will not allow them out, until they collect 10 marbles”, said Edward explaining to the parents how the game works.

One father said: “It seems right to me! Our kids have to understand that they cannot live beyond their means! The ones that have not collected the ten required marbles should have completed the task earlier. If they have not done so, it was probably because they are either lazy or have wasted time”

“So true!” said another one, “It’s going to be a great lesson for our kids”. The rest of the parents agreed, and all went back home, in order for their children to learn the lesson.

The parents returned the next day to pick up their children. Once again no one was waiting for them at the front door of the school.

“Why are there no children today?” some parents asked.

They knocked on the front door and spoke with the teacher. She informed them that no one else had yet obtained the required ten marbles and therefore were not allowed to leave.

But a mother who had been giving serious thought about the situation said, “Wait a moment! There’s something wrong here. There are children that are smaller than others, and therefore are going to finish the exercises later than other. It’s not that they are lazy or are wasting time; it’s just that they have less experience or less knowledge. It’s not fair that just because they need more time, they do not get the marbles. There should be marbles for them as well, why they do not have marbles?”

The teacher replied that there were no more marbles in the bowl.

“But, that’s absurd! Why don’t you cut up pieces of paper and give them in place of marbles when a child has finished a task? They have met the requirement; it is not their fault that you do not have enough marbles in the bowl!” said the angry mother.

“Sorry, but that is not possible. The rules of the game state that this game can only be played with the marbles that were present at the start. They cannot live beyond their means, and they simply are not allowed to go out until they learn the lesson”, said the fair teacher.

“But that does not show them anything!” protested the mother. “Well actually, it only shows that the bigger kids always win and that the slower or weakest always lose because there are stupid rules about marbles!”

Then, the fair teacher smiled and said to the young mother: “Welcome to the European Union”.

On that day, everyone in the village learned a lesson. The lesson was that a fiat money system, does not have value per se and that the ones who produce it, can and should, create as much of it as necessary to allow everyone to be paid for the job.

Edward, the smart student, was happy once again. Finally, the other children were allowed to play with him in the park.

Nice story, but the analogy isn't too clear to me, as the creator of the marble supply is also the one setting the prices and the sole "employer" to the students. How does this connect back to actual fiat currency?

DanyBoy wrote:

Nice story, but the analogy isn't too clear to me, as the creator of the marble supply is also the one setting the prices and the sole "employer" to the students. How does this connect back to actual fiat currency?

This was originally written by a Spaniard.

Here is his answer to your question.

IMPORTANT NOTE TO UNDERSTAND THE FABLE . I used marbles as rhetorical formula, the story would be just as if Europe had decided to write a book with tallies the number of workouts completed and strokes have arbitrarily limited to 100. Can you imagine a child who refuses to paint a more tallies in its accounting exercises done?

http://www.uncafelitoalasonce.com/la...

He is saying the EU is arbitrary limiting currency so the smaller countries cannot even pay what is needed. Hence causing unemployment.

The error there is conflating marbles with wealth. The marbles are not wealth, they never were. But in the real world, wealth is limited. Resources are limited. Energy is limited.

Greece owes Europe energy. And steel. And concrete, and knowledge, and labor. Issuing new tokens just means that everyone using tokens, no matter how well or poorly they've arranged their affairs, gets robbed. There are now more tokens chasing the existing supplies of scarce goods, so they can have fewer of them. If Greece just defaults, then only the stupid people who lent them the money lose, but if money is printed, everyone loses except the people close to the money, ie, the banks that were stupid to begin with.

Entities that take a risk, to get a profit, need to bear the consequences of that risk blowing up. Printing money bails out banks, at the cost of everyone else.

If you take energy and goods from the world economy, you need to repay them. If you don't, there will be consequences. If you owe a lot of energy and goods, the consequences could be very severe. If governments devalue the currency by printing tokens, that has even nastier repercussions than just admitting they can't repay the energy and goods in the first place.

Iceland defaulted, and they're doing pretty well. This is what Greece needs to do. Default, and stop borrowing, and learn to live within their means -- only using the energy and goods they can either create themselves, or trade for.

Malor wrote:

The error there is conflating marbles with wealth.

They're not equated with wealth. They're equated with money. Money being something that is often falsely conflated with wealth.

Will the Europeans let Catalonia secede from Spain? Is this where all this is heading?

Tight money is the problem.

There will be blood on their hands.

No, the government trying to spend more than it actually can, is the problem, fooled into overspending by prior monetary manipulation. More manipulation may help in the short run, but will only make the underlying problems worse.

Malor wrote:

No, the government trying to spend more than it actually can, is the problem, fooled into overspending by prior monetary manipulation. More manipulation may help in the short run, but will only make the underlying problems worse.

Stop it Malor... You are not right in the least. The Spaniards had surpluses during the run up to the financial collapse. This is what they get for that "prudence".

Yep, they did. They were fooled by the global housing bubble caused by too-low interest rates. They thought they were richer than they were, so they took on more obligations than their economy could actually service.

Printing money won't change that. All it will do is cheat everyone in the economy out of what they're owed, no matter whether they were prudent or reckless.

Malor wrote:

Yep, they did. They were fooled by the global housing bubble caused by too-low interest rates. They thought they were richer than they were, so they took on more obligations than their economy could actually service.

Printing money won't change that. All it will do is cheat everyone in the economy out of what they're owed, no matter whether they were prudent or reckless.

Spain is sacrificing their young to be in the club. It is not sustainable. Austerity is reckless. Look what is happening on the streets.

They're being forced to shrink their economy to pay a debt, which is impossible.

ZaneRockfist wrote:

They're being forced to shrink their economy to pay a debt, which is impossible.

This is not necessarily true. They're also receiving an impetus to drop long-term obligations. In the short term it is certainly problematic, but in the long term, those obligations are just as burdensome. They're also very popular, which means without the threat of imminent fiscal collapse or something similarly serious, they would never be reduced. When the economy recovers, which it will, Spain and all countries who underwent some budget slashing will be in a better position. Invariably they'll take on new obligations which will put them back in the hole, but for a while things will be good. The bailouts should keep them liquid enough to endure the contraction and hopefully put them right-side up when things recover.

goman wrote:

Austerity is reckless.

What. How is…in what…I don't even…

They're being forced to shrink their economy to pay a debt, which is impossible.

That's not an inherent impossibility, though it can be in some circumstances. It depends on how much debt you've run up, and how much it's distorted the measures of the economy that were supposedly telling you that you could afford it. Government debt is dangerous. But you can absolutely pay down a debt while shrinking your economy.

And, remember that if your economy will crash if you just go back to steady state, where you're neither running up nor paying down debt, then your economy was already dead, you just didn't know it yet. It was already in an unsustainable state. It wasn't a question of whether it would crash, but when.

If your economy can't actually support a debt, then you need to default on it. Printing money to dilute debt is extremely destructive.

Austerity makes baby Maynard-Keynes cry

Minarchist wrote:
goman wrote:

Austerity is reckless.

What. How is…in what…I don't even…

Hey.. why don't you quote the rest of my post.....I explained my position clearly... and then you can try to mock that. If you can...

Malor wrote:
They're being forced to shrink their economy to pay a debt, which is impossible.

That's not an inherent impossibility, though it can be in some circumstances. It depends on how much debt you've run up, and how much it's distorted the measures of the economy that were supposedly telling you that you could afford it. Government debt is dangerous. But you can absolutely pay down a debt while shrinking your economy.

And, remember that if your economy will crash if you just go back to steady state, where you're neither running up nor paying down debt, then your economy was already dead, you just didn't know it yet. It was already in an unsustainable state. It wasn't a question of whether it would crash, but when.

If your economy can't actually support a debt, then you need to default on it. Printing money to dilute debt is extremely destructive.

The currency is shared in Euroland... They are not printing money.. or even bailing anyone out... they are forcing people to have less money... for what?

Government Debt is less dangerous than private debt that caused the financial crisis... This is what we get... after the bust... either forced austerity or muddle through.

I'll take muddle through thank you very much. Although it is not as good as perpetual stimulus until there is full employment and productivity.

Thank you Occupy! Thank you Franklin Delano Roosevelt! Thank you unemployment benefits! Thank you Alexander Hamilton!

Miashara wrote:
ZaneRockfist wrote:

They're being forced to shrink their economy to pay a debt, which is impossible.

This is not necessarily true. They're also receiving an impetus to drop long-term obligations. In the short term it is certainly problematic, but in the long term, those obligations are just as burdensome. They're also very popular, which means without the threat of imminent fiscal collapse or something similarly serious, they would never be reduced. When the economy recovers, which it will, Spain and all countries who underwent some budget slashing will be in a better position. Invariably they'll take on new obligations which will put them back in the hole, but for a while things will be good. The bailouts should keep them liquid enough to endure the contraction and hopefully put them right-side up when things recover.

What are you saying is popular? Either you are not clear or talking nonsense.

There are no free lunches, goman. Never. Someone always pays.

Malor wrote:

There are no free lunches, goman. Never. Someone always pays.

no crap... can't sacrifice the young and unemployed forever.

Someone always pays, goman. Printing money steals from savers and gives to debtors, which is powerfully destructive. Saving is what makes the steel and energy and labor available to build stuff -- you opting not to use everything you're entitled to, right now, means that someone else can. So you need to reward people who are saving and investing prudently, not the people consuming and destroying.

There is no free lunch. Someone always pays. Your method means that the people who manipulate money get rewarded disproportionately, while the people who make the wealth suffer and starve.

Wall Street does famously in your scenario, which is why the Wall Streeters keep telling you, over and over, that this is the right way forward. It IS the right way forward, for them. But, over the long haul, it will make Main Street far poorer than just taking our lumps now.

Malor wrote:

Your method means that the people who manipulate money get rewarded disproportionately, while the people who make the wealth suffer and starve.

And austerity measures help the people who make the wealth?

No, they just get punished even more because not only is their economy in the toilet, but also their government can't spend any money to help lessen the blow of a sh*tty economy. Under austerity programs the people will literally suffer and starve.

OG_slinger wrote:
Malor wrote:

Your method means that the people who manipulate money get rewarded disproportionately, while the people who make the wealth suffer and starve.

And austerity measures help the people who make the wealth?

No, they just get punished even more because not only is their economy in the toilet, but also their government can't spend any money to help lessen the blow of a sh*tty economy. Under austerity programs the people will literally suffer and starve.

Right! The people who pay are the people who lack income.

Malor is living is perpetual what might happen mode instead of the present of what is happening.