Debt, The EU, And Greece

That will only be in Bank of Cyprus, Ro. I'm not saying this is a factor in the decision but it seems that Bank of Cyprus aided large depositors to get their money out during the bank closure thanks to their units in Britain and Russia. There is a suspicion that the ECB actually called a halt to the negotiations (by threaten to cut off Laika and BoC) not on fiscal or monetary grounds but on pure banking governance or even anger. We are in tinfoil hat territory here but if the ECB and creditor countries feel they have been gamed they might well decide to not be so generous with a few decisions. Like the ones we see in BoC.

Anyway, read the rest of that link. It's an excellent report on the run up to the bailout agreement.

Axon wrote:

Just to correct you about Ireland, it didn't increase its debt during 2002-2007 or ran deficits. In fact it recorded surpluses and built a €17 billion fund

I'm sorry, you're simply wrong - even according to government numbers. Here's the deficit numbers as a percent of GDP:

2002.....0.1
2003.....(1.0)
2004…..0%
2005…..(0.3%)
2006…..1.3%
2007…..(0.9%)
2008…..(7.0%)
2009…..(14.8%)
2010…..(12.0%)
2011…..(10.8%)

You can see the rest of the numbers on Wikipedia. Note in particular how when receipts went up, spending kept pace - even in the flush times, the government usually couldn't wait to spend everything they brought in and then some. While a big chunk of the Irish debt was paid off with during that time, a substantial amount persisted, and then of course when the bubble popped the debt exploded. That is the problem I'm talking about, a ratchet effect - when things are flush, governments can barely control themselves; when times are lean, massive debt accumulation occurs.

On Cyprus, shares are now worthless so nothing much there. Now provide me a figure of the government bonds that Coffey missed, please. Needs to be close to €5.8 billion.

No, it doesn't. The €5.8 billion (now €13 billion) is the amount Cyprus was to pony up to get the bailout. Under a bankruptcy scenario, Cyprus would not need to raise that money. And not all the bank shares are worthless - Laiki's are now, but Bank of Cyprus shares are not. In fact, they both should be; indeed, the shares becoming worthless is precisely how the losses are transmitted to the shareholders.

The rescue loans will further increase Cyprus’ debt burden, which is set to peak at 126 percent of GDP in 2015, according to the documents. That would be one of Europe’s highest debt burdens, putting a serious question mark on the feasibility of returning to the markets to refinance its debt in the following years.

Now, here's the key question: who owns that debt? Who stands to lose if the banks and the Cyprus government go under?

Why, that would be international hedge funds, the ECB (14 billion euros), other European governments (especially Germany), and large European banks. The bailout package is a bold, bald-faced, direct transfer of money from Cypriot businesses and taxpayers to the investment bankers and foreign governments who fund the Cypriot government's debt - as a reassurance that the Cypriot government will actually pay back the ridiculous (to Cyprus) amount of money it owes. Could these creditors absorb the losses of a Cyprus bankruptcy? Without question, the amounts involved are tiny compared to international finance. However, why take losses when you can convince the Cypriot government to rip off their own citizens in order to pay you back?

As for the banking union, I could say that the policy accepted going forward is to maintain lots of smaller banks and have a proper bank resolution process while maintaining the ECBs current policy. I could say that the ECB has already, quite publicly, threatened to remove funding of troubled bnks on two separate occasions (that I know of) in order to force fiscal policy. I could also say that having a banking union in the US is precisely the reason why its avoided the clusterf**k that Eurozone hasn't. I could say all these thing but I suspect they won't really make a difference.

They don't make a difference because we interpret the data differently. You say "avoided the clusterf**k", and I say the only clusterf**k that was avoided was a bunch of rich people losing a lot of money, and it is being done on the backs of those who can least afford it - regular joe taxpayers. Our banking union simply facilitated that process - which, obviously, is not a good thing.

Robear wrote:

Banks opened quietly on Thursday without the feared rushes, but that was before the deal was announced on Friday.

That's because tight capital controls were imposed to prevent it. As was noted earlier, the rich are getting their money out by hook or by crook, which is only going to leave the businesses and residents of Cyprus to hold the bag.

I have to disagree; I think the figures cited are confusing the old Irish budget methods with the new EU ones. Here's another source, which supports Axon, from the Trading Economics website. Your model does not explain a two-year recovery from a -30.9%GDP deficit to -7.7%, which is nearly identical in magnitude to the two year increase, from -7.4%. So you've got to explain the recovery, or your theory won't - can't - apply.

The curve clearly shows Ireland is in a recovery mode, and that the deficits they had were cyclical - related to the overall regional and world economy - rather than structural. This is supported by the page of economic indicators for Ireland on the site.

Aetius wrote:

They don't make a difference because we interpret the data differently. You say "avoided the clusterf**k", and I say the only clusterf**k that was avoided was a bunch of rich people losing a lot of money, and it is being done on the backs of those who can least afford it - regular joe taxpayers. Our banking union simply facilitated that process - which, obviously, is not a good thing.

Unless I'm mistaken, the agreement in late March was that deposits under 100,000 Euros were being protected, meaning that this is *not* being done on the backs of regular joe *depositors*, but rather the rich. All taxpayers will of course be affected. Non-Cypriot depositors have had their accounts locked, and they continue to not be able to get their money out. You'll need to provide some evidence that they are doing so, and also that the middle class is having their bank deposits seized while the rich don't, which seems to be the opposite of what's actually going on.

Actually your technically both right. One is the Dept. of Finance's stats and the other is Eurostat's. They use the exact same figures but count certain things differently. The key difference is the "National Pension Reserve Fund" and you'll find it on the statements linked. This is the €17.5 billion fund we saved up over the period of 2002 to 2007. This is viewed not part of government spending by Eurostat but the DoF record it as a spend. Take your pick. Similarly, you see 2011 shows how Eurostat and DoF differs over how we recorded our bank bailout as well.

Aetuis, I'm not entirely disagreeing with you either on government spending either but you didn't address the substantive point that the Fiscal Compact seeks to deal with those concerns.

Edit: Respond to rest as I go. On child minding duty.

Regardless of how it's counted, the recovery has to be explained. The idea that debt grows in economic hard times and shrinks when things improve is one way to explain it; the idea that there are structural defects in the management of the economy that finally crashed it does not.

Robear wrote:

I have to disagree; I think the figures cited are confusing the old Irish budget methods with the new EU ones. Here's another source, which supports Axon, from the Trading Economics website. Your model does not explain a two-year recovery from a -30.9%GDP deficit to -7.7%, which is nearly identical in magnitude to the two year increase, from -7.4%. So you've got to explain the recovery, or your theory won't - can't - apply.

I'm confused - what recovery? We're talking about the Irish government budget. We know how Ireland is trying to cut its budget deficit: little reductions in future planned spending and big tax increases. These things do not help with economic recovery, but rather suppress it. As long as the Irish government is spending twice what it was in 2003, there's going to be deficits.

The curve clearly shows Ireland is in a recovery mode, and that the deficits they had were cyclical - related to the overall regional and world economy - rather than structural. This is supported by the page of economic indicators for Ireland on the site.

Yes, the deficits are cyclical - but the problem of unconstrained spending and debt being attractive to politicians is not.

The Article wrote:

Historically, from 1995 until 2012, Ireland Government Budget averaged -3.19 Percent of GDP reaching an all time high of 4.80 Percent of GDP in December of 2000 and a record low of -30.90 Percent of GDP in December of 2010.

Note the imbalance, as well as the negative average. This is a structural problem, not a cyclical one. It's much easier to see in the United States, because our government doesn't ever run a surplus even in the best of times.

Aetius wrote:

They don't make a difference because we interpret the data differently. You say "avoided the clusterf**k", and I say the only clusterf**k that was avoided was a bunch of rich people losing a lot of money, and it is being done on the backs of those who can least afford it - regular joe taxpayers. Our banking union simply facilitated that process - which, obviously, is not a good thing.

Unless I'm mistaken, the agreement in late March was that deposits under 100,000 Euros were being protected, meaning that this is *not* being done on the backs of regular joe *depositors*, but rather the rich. All taxpayers will of course be affected.

Correct, which is what I said - except that, as Axon linked above, the rich are getting their money out. The only people left to pay will be a) rich people too stupid or slow to get their money out, and b) Cypriot businesses and residents. How many of those accounts over €100,000 are medium-sized Cypriot businesses and not Russian oligarchs?

Non-Cypriot depositors have had their accounts locked, and they continue to not be able to get their money out. You'll need to provide some evidence that they are doing so, and also that the middle class is having their bank deposits seized while the rich don't, which seems to be the opposite of what's actually going on.

According to the article Axon linked, most of the big depositors were removing their money from branches in London and Russia. The middle class haven't had their accounts seized yet, but if they are all that's left, there won't be much choice. And everyone has had their accounts locked and transfers blocked, not just non-Cypriots, though as the article notes the controls were loosened yesterday to try to mitigate the economic damage.

Aetius wrote:

I'm confused - what recovery? We're talking about the Irish government budget. We know how Ireland is trying to cut its budget deficit: little reductions in future planned spending and big tax increases. These things do not help with economic recovery, but rather suppress it. As long as the Irish government is spending twice what it was in 2003, there's going to be deficits.

The recovery from a larger than usual deficit.

So what you're saying here is that more government spending is good for the economy in a recession. Okay. But note that if they *are* reducing spending and increasing taxes, by definition, the deficits will eventually go away. That's just basic math.

Yes, the deficits are cyclical - but the problem of unconstrained spending and debt being attractive to politicians is not.

You just noted they are taking steps to constrain spending and tax down the debt... You can't have it both ways.

The Article wrote:

Historically, from 1995 until 2012, Ireland Government Budget averaged -3.19 Percent of GDP reaching an all time high of 4.80 Percent of GDP in December of 2000 and a record low of -30.90 Percent of GDP in December of 2010.

Note the imbalance, as well as the negative average. This is a structural problem, not a cyclical one. It's much easier to see in the United States, because our government doesn't ever run a surplus even in the best of times.

And yet if we look at different periods, that average deficit becomes an average surplus. It depends on what you pick, which tells us that our time scale is too small. It's not a good measure.

The US has run surpluses in the past.

As for Cyprus, thanks for clarifying that for me.

Sorry for bringing this back up, Aetuis, but I didn't respond earlier. Busy, you see.

Aetius wrote:

No, it doesn't. The €5.8 billion (now €13 billion) is the amount Cyprus was to pony up to get the bailout. Under a bankruptcy scenario, Cyprus would not need to raise that money. And not all the bank shares are worthless - Laiki's are now, but Bank of Cyprus shares are not. In fact, they both should be; indeed, the shares becoming worthless is precisely how the losses are transmitted to the shareholders.

The rescue loans will further increase Cyprus’ debt burden, which is set to peak at 126 percent of GDP in 2015, according to the documents. That would be one of Europe’s highest debt burdens, putting a serious question mark on the feasibility of returning to the markets to refinance its debt in the following years.

Now, here's the key question: who owns that debt? Who stands to lose if the banks and the Cyprus government go under?

Why, that would be international hedge funds, the ECB (14 billion euros), other European governments (especially Germany), and large European banks. The bailout package is a bold, bald-faced, direct transfer of money from Cypriot businesses and taxpayers to the investment bankers and foreign governments who fund the Cypriot government's debt - as a reassurance that the Cypriot government will actually pay back the ridiculous (to Cyprus) amount of money it owes. Could these creditors absorb the losses of a Cyprus bankruptcy? Without question, the amounts involved are tiny compared to international finance. However, why take losses when you can convince the Cypriot government to rip off their own citizens in order to pay you back?

On the Cypriot bailout itself, your mixing up figures slightly. the €5.8 Billion was what was coming from the banks, the total bailin required was €7.5 Billion and risen to €13 Billion. Nit picking, I know, and not really important but just want us to be in the same page. Its seems the Cypriot Government are taking full responsibility for that raise, well publicly at least. You simply cannot apply for a bailout over a year ago, refuse any conditions on that help, at the final minute attempt to play political brinkmanship and expect you are going to be rewarded for that behaviour. The tax payers in the other Member States have to be considered as well. I expect the Cypriot Government know that themselves.

Anyway, you're advocating bankruptcy and not accepting the bailout? Ok, then you either have to except that the State cannot cover the deposits anywhere near €100,000 (like Iceland) or the State tries to cover it and run up sovereign debts that are unsustainable and will require it to default. You seem to be arguing for the latter as you contend that this is all about protecting German bankers.

That theory, by the way, is going require a lot more evidence than that. Hedge funds holding Cypriot debt isn't news. Once they are downgraded, like they were last year, any reputable institution is forced by their own regulation to pass on those bonds. Using the Hedge fund boogeyman logic, you can argue that any attempt to solve troubled countries situation is in league with hedge funds if you were so inclined. The ECB €14 Billion you cite is ELA funds (emergency liquidity assistance) which are loans, not bonds, to keep cash in the banks. In fact the ECB was threatening to withhold them if the Cypriot Government refused the bailout. Finally, you'll excuse me for offering my sceptism on Germany holding bonds that they don't want to write down. That theory has been offered with no evidence for every bailed out country at this stage and the only one we know of that German banks did hold of any significant amount, Greece, was written down. Besides, if this was all about German banks, isn't Germany just giving the funds directly to their banks the obvious solution and not this elaborate ruse of creating banking unions, bailout funds and fiscal treaties combined with endless Council and Eurogroup meetings?

I'd still like to hear your thoughts on the Fiscal Compact. It seems to address a lot of your concerns if not within margins you'd support.

First, a couple of stories from recent days:

A significant amount of money escaped Cyprus before the deal was first announced, including money from state companies and at least one company closely related to the President.

Despite capital controls, deposits fell sharply in Cyprus, Spain, Portugal, and Slovenia, while rising elsewhere in the EU.

Robear wrote:

So what you're saying here is that more government spending is good for the economy in a recession.

I'm actually saying the opposite - government spending is bad for the economy, recession or not. The reason, of course, is that government spending is politically driven and replaces private spending that would have been economically driven. The government can only get money in two ways - transfers from the real economy (taxes) or future transfers from the real economy, at a price (debt/inflation/etc). Government spending only appears to be a positive because it is included in GDP calculations. (I actually think it should be subtracted, but that's another discussion.)

Okay. But note that if they *are* reducing spending and increasing taxes, by definition, the deficits will eventually go away. That's just basic math.

No, they won't, because the math isn't what most people would expect. What politicians call "cuts" are usually reductions in future planned expenditures, which of course haven't happened yet. Since those planned expenditures are planned in such a way as to be constantly increasing, the "cuts" are simply a reduction in the rate of increase - one that usually disappears in future plans so that politicians can again make "cuts".

Nor is increasing taxes a solution to deficits. As the Greeks and many others have discovered, there are limits to how much revenue a government can gain by increasing taxes; taxes that are too high engender resistance, and will eventually reduce revenue rather than increase it.

The US has run surpluses in the past.

Not really. The numbers that show a brief surplus in the late 1990's are the only instance of the U.S. running any kind of surplus in the last 60 years. That was an accident due to surging Internet-boom tax receipts, rather than actual policy - and ignored existing federal debt as well as unfunded liabilities like Social Security.

Axon wrote:

On the Cypriot bailout itself, your mixing up figures slightly. the €5.8 Billion was what was coming from the banks, the total bailin required was €7.5 Billion and risen to €13 Billion. Nit picking, I know, and not really important but just want us to be in the same page.

Its seems the Cypriot Government are taking full responsibility for that raise, well publicly at least. You simply cannot apply for a bailout over a year ago, refuse any conditions on that help, at the final minute attempt to play political brinkmanship and expect you are going to be rewarded for that behaviour. The tax payers in the other Member States have to be considered as well. I expect the Cypriot Government know that themselves.

Well, you're right, but I'm not seeing how we're not on the same page. The money has to come from somewhere, and the Cypriot government doesn't have it and will refuse to make meaningful spending cuts. The additional increase will come largely from the deposit levy, which is what I was referring to.

Anyway, you're advocating bankruptcy and not accepting the bailout? Ok, then you either have to except that the State cannot cover the deposits anywhere near €100,000 (like Iceland) or the State tries to cover it and run up sovereign debts that are unsustainable and will require it to default. You seem to be arguing for the latter as you contend that this is all about protecting German bankers.

No. As I stated before, the best scenario for the people of Cyprus is where the banks and the government both default and go through bankruptcy. The bailout is about protecting German bankers, among others, and I'm totally uninterested in protecting them.

That theory, by the way, is going require a lot more evidence than that.

Why? One merely needs to look at who is benefiting from the bailout. It isn't the people of Cyprus, who are getting ripped off and will be paying extra taxes for decades to repay the loans.

Using the Hedge fund boogeyman logic, you can argue that any attempt to solve troubled countries situation is in league with hedge funds if you were so inclined.

The bailout is not an "attempt to solve a troubled country's situation". It is making the situation for Cyprus worse, taking money from ordinary citizens to fund more debt. And it is indeed being done to keep the international banking business from taking losses, just like every other bailout in this crisis, by foisting private debt off onto the public. That is their express purpose.

The ECB €14 Billion you cite is ELA funds (emergency liquidity assistance) which are loans, not bonds, to keep cash in the banks. In fact the ECB was threatening to withhold them if the Cypriot Government refused the bailout.

If the banks went under, the ECB would lose that money. There's little difference between a loan and a bond at that point. The ECB was only able to use that as a "threat" because the Cypriot government was scared of bankruptcy - if they didn't have an issue with it, they would have simply defaulted on the loans.

Besides, if this was all about German banks, isn't Germany just giving the funds directly to their banks the obvious solution and not this elaborate ruse of creating banking unions, bailout funds and fiscal treaties combined with endless Council and Eurogroup meetings?

Umm, because this way they can make the Cypriots (and Greeks, and Spaniards, etc) pay for the bailouts instead of their own taxpayers? Remember, the Cypriots are ponying up cash for additional loans, which they will eventually have to pay back at interest.

I'd still like to hear your thoughts on the Fiscal Compact. It seems to address a lot of your concerns if not within margins you'd support.

As I've previously noted, my concerns are not for the details of the agreement, but rather the expected refusal of signatory parties to follow the rules when it is in their interest. This was the problem that the Maastricht Treaty faced, and nothing substantial has changed in the layout of public choice incentives. The treaty still lacks any sort of real teeth, with only a paltry fine of up to 0.1% GDP as the primary enforcement mechanism. No country in serious trouble will even think twice about paying that fine or even defaulting on it. The only real enforcement step - removal from the Eurozone - isn't on the table because the people who made the treaty aren't entirely stupid; they know it will be broken, and they don't want to inadvertently cause a Eurozone breakup. Also, because so many parts of the treaty are based on GDP, it will create further incentives for European countries with budget troubles to game their numbers.

Aetius wrote:

I'm actually saying the opposite - government spending is bad for the economy, recession or not. The reason, of course, is that government spending is politically driven and replaces private spending that would have been economically driven.

How does this work? Can't companies spend money for "political" reasons, and would that treyf their spending? My immediate reaction is that this is a completely made-up distinction. Can you show me in standard economic reasoning - including Austrian - where government spending is bad because it's "politically driven"?

Governments, just like people and corporations and non-profits, use debt, income and all the other trappings of exchange to conduct economic activities. Usually, the fallout from that is argued to be different for governments because of the roles they play in the market. But you're arguing here that *motivation* alone is a reason to consider? I think that your distaste for government overall has led you a few steps too far.

Also, government spending *replacing* private spending is a different claim. Stimulus spending does not detract from the ability of private companies to spend; indeed, it *increases* it. Replacement would be actions like the government taking over the entire automotive sector.

What politicians call "cuts" are usually reductions in future planned expenditures, which of course haven't happened yet. Since those planned expenditures are planned in such a way as to be constantly increasing, the "cuts" are simply a reduction in the rate of increase - one that usually disappears in future plans so that politicians can again make "cuts".

Nor is increasing taxes a solution to deficits. As the Greeks and many others have discovered, there are limits to how much revenue a government can gain by increasing taxes; taxes that are too high engender resistance, and will eventually reduce revenue rather than increase it.

As for spending cuts being only reductions in the rate of growth, that's trivially wrong and I'm surprised to see you make it. For example, the sequestration cuts are real, and apply to today's budgets. You're taking one aspect of cuts - cuts proposed to reduce *growth* of programs over time - and conflating that with actual budget cuts (reductions in current budgets, up to and including the elimination of programs and even departments). The two are different and both occur. As I asserted, if spending is reduced and taxes increased, then the deficits (and debt) will eventually go away.

Put another way, you are asserting that government spending is *never* cut, which is ridiculous.

Finally, no one believes that *unlimited* taxes are a good way to raise money. But the fact remains that if the government is short of funding, raising taxes can increase it to a point, and decreasing spending can also help. That's not really a controversial observation, but you seem to imply that it can't be done except by going to extremes, which is wrong.

You seem to want to drive the conversation away from conventional economic thought and put every mainstream suggestion on the rocks, then claim that that means the ship is doomed, when in fact the steering still works and it remains to be seen how it will be used. At some point, though, either you accept *some* basics of economics, or you've moved into an unproven area of speculation, where there is no common ground for discussions.

Robear wrote:
Aetius wrote:

I'm actually saying the opposite - government spending is bad for the economy, recession or not. The reason, of course, is that government spending is politically driven and replaces private spending that would have been economically driven.

How does this work? Can't companies spend money for "political" reasons, and would that treyf their spending?

Yes, companies can spend money for political reasons; however, the only reason a company would do so would be for rent-seeking - i.e., lobbying and/or bribery in order to gain competitive advantage for themselves. For the company itself this is a rational expenditure, as abusing the government's monopoly on force for competitive advantage is cheaper and more effective than actually competing. For the system as a whole, however, political interference to favor one company over another breeds inefficiencies, blocks failure, and causes malinvestment.

My immediate reaction is that this is a completely made-up distinction. Can you show me in standard economic reasoning - including Austrian - where government spending is bad because it's "politically driven"?

Sure. Rothbard's Power and Market is probably the most comprehensive treatment, concluding that:

The point is that the free-market economy forms a kind of natural order, so that any interventionary disruption creates not only disorder but the necessity for repeal or for cumulative disorder in attempting to combat it.

Here's University of Chicago economist Luigi Zingales talking about some of the problems of crony capitalism, and its detrimental effect on global competition. Wikipedia has a good article explaining rent-seeking, which has a host of links to economics research across the spectrum on the detrimental economic effects of rent-seeking. Econlib has a brief overview of Public choice theory which details how the normal, human self-interest of politicians and bureaucrats affects governmental decision making.

Governments, just like people and corporations and non-profits, use debt, income and all the other trappings of exchange to conduct economic activities. Usually, the fallout from that is argued to be different for governments because of the roles they play in the market. But you're arguing here that *motivation* alone is a reason to consider? I think that your distaste for government overall has led you a few steps too far.

Government does use those tools, but it does not conduct economic activities like other actors. The differentiating factor is that governments employ force in their dealings, and thus their interactions are alway involuntary - if only because the resources they are using to pay for whatever they are doing were forcibly extracted. Economically, this makes them less efficient, because it distorts price signals and abrogates the mutual benefits of normal voluntary trade.

As far as government motivation is concerned, I believe that most politicians are sociopaths interested only in power and wealth; the ones that aren't have positive motivations and truly want to help people. However, whatever intentions or motivations they have are irrelevant; they are by definition incapable (as anyone would be) of comprehending the variables necessary to make accurate large-scale economic decisions, are unable to remove the distorting influence of coercion from their actions, and are largely driven by self interest just like everyone else even when they aren't sociopaths. Every single person in the government could be dedicated to doing things better, and it wouldn't matter very much because they are going about it in the wrong way with the wrong tools, stumbling blindly in the dark.

Also, government spending *replacing* private spending is a different claim. Stimulus spending does not detract from the ability of private companies to spend; indeed, it *increases* it. Replacement would be actions like the government taking over the entire automotive sector.

Of course stimulus spending detracts from the ability of private companies and individuals to spend - where does the government get the money to spend in the first place? Government spending is funded by taxes, debt (deferred taxes), or inflation (hidden taxes), but it all extracts resources from the companies and individuals who make up the society. Governments have no resources in and of themselves, which is why taxes are required, forcible, and pervasive.

As for spending cuts being only reductions in the rate of growth, that's trivially wrong and I'm surprised to see you make it.

You're assuming that I'm defining them, when I'm actually just describing what normally happens - that is why I used the word "usually". You are correct that reductions in the rate of growth are not the only kind of spending cuts; however, they are by far the most common, because they don't actually cut spending. This is, obviously, politically convenient.

For example, the sequestration cuts are real, and apply to today's budgets. You're taking one aspect of cuts - cuts proposed to reduce *growth* of programs over time - and conflating that with actual budget cuts (reductions in current budgets, up to and including the elimination of programs and even departments). The two are different and both occur. As I asserted, if spending is reduced and taxes increased, then the deficits (and debt) will eventually go away.

It such a thing theoretically possible? Sure. But that's not how the public choice incentives play out, which why we've never seen it actually happen in the United States. I can theoretically take a trip to the moon because we have the technology necessary to do so, but it's not likely to happen anytime soon.

Put another way, you are asserting that government spending is *never* cut, which is ridiculous.

It is? When was the last time total federal spending was actually reduced in constant dollars in the United States? That's right, at the end of World War II - nearly 70 years ago. Again, just because something is possible doesn't mean it's likely to happen.

But the fact remains that if the government is short of funding, raising taxes can increase it to a point, and decreasing spending can also help. That's not really a controversial observation, but you seem to imply that it can't be done except by going to extremes, which is wrong.

How am I going to extremes by describing common, everyday government behavior? Governments raise taxes all the time, but somehow the deficits never go away, and the spending cuts never seem to actually happen. Again, just because something is mathematically possible does not mean it is politically possible. One has to stop looking at the way one thinks things should be, and start looking at how things actually are.

You seem to want to drive the conversation away from conventional economic thought and put every mainstream suggestion on the rocks, then claim that that means the ship is doomed, when in fact the steering still works and it remains to be seen how it will be used. At some point, though, either you accept *some* basics of economics, or you've moved into an unproven area of speculation, where there is no common ground for discussions.

I never claimed the ship is doomed - I actually think the opposite. I believe that markets have grown to the point where they are largely out of the control of politicians. However, fighting for that control will hurt a lot of people, so I argue against the various government interventions and tools that "conventional economic thought" offers to policy makers when they need to "do something". It is actually conventional economic thought (read: largely Keynesian theory) that violates the basics of economics, so I can't help but criticize it. I also continue to point out that conventional economic thought is popular because it is politically convenient, not because it is economically useful or accurate.

Greek unemployment getting worse, now at 27.6%

Between the sins of the previous governments and the current austerity measures it doesn't look good for the near future.

Arise Thread!

Greek banks are to remain closed and capital controls will be imposed, Prime Minister Alexis Tsipras says.

Speaking after the European Central Bank (ECB) said it was not increasing emergency funding to Greek banks, Mr Tsipras said Greek deposits were safe.

Greece is due to make a €1.6bn (£1.1bn) payment to the International Monetary Fund (IMF) on Tuesday - the same day that its current bailout expires.

Greece risks default and moving closer to a possible exit from the eurozone.

Prederick wrote:

Greece has basically been soundtracked by Yakety Sax for the past 2-3 years.

Honestly they should probably consider exiting. They're being held hostage by an EU that doesn't want to give them any debt relief, but also doesn't want them to leave the Eurozone. That's an untenable situation. At some point, somewhere on this planet irresponsible lenders have to pay a little for the cost of taking the risk and making bad loans.

This feels like a central flaw of the Euro. You're held to specific standards without a strong central government holding you to those standards and without a willingness on the part of the federal lending institutions to bail you out.

In case y'all are wondering...things are a bit crazy here. You have to realize most Greeks pay with cash, not debit cards. Banks are closed this week. They shut off ATMs. They'll turn them back on tonight with 60 euro withdrawal max per day per account. 1/2 the people are panicked and running around in said panic.

My personal finances are fine even though we just moved houses this weekend. We're good. I've asked my wife not to use ATMs herself out of safety concerns. I'll see how insane things are at supermarket today. Some people are stocking up hugely on dry goods, etc.. I'm very glad school is out for summer so my kids will not be around all this mess. We'll be in our new place enjoying nature and hunkering down.

There's a vote this weekend, which my wife will do (which worries me a bit).

There are objects in front of us. We will deal with them one at a time.
Serenity prayer also in place (irony of that pun not escaping me). We will be fine.

The reforms that EU is asking for - are they so crazy? Because it seems as if Greece gov is basically trying to avoid any pain at all even though the situation they're in makes some kind of pain inevitable.

The referendum really seems like government trying to absolve itself of the responsibility. I personally think that Europe should stop pushing Greece into more austerity. The reforms are badly needed, though, and the Tsipras government doesn't want to do any of them despite the fact that they would help resuscitate the economy.

Poor ordinary Greeks, though, there's years of pain ahead of them.

It's a mess.. my family is a little insulated as both my parents still largely draw their money in US Dollars... my brother though works for UniCredit and I do worry how long that office will remain open in Athens.. He's survived numerous layoffs to the point he basically does 3 people's jobs. But since they did so many of the original Olympic loans I suppose it's in their vested interest to stick around as long as they keep getting some payments on them.

The only sane and likely the least painless path would be for the ECB et al to write off Greece's bad debts. They were bad debts when they were made and this is literally the risk a bank takes when lending. Some times you have to take it on the chin and write off a loan you shouldn't have made in the first place.

Insisting that these debts are good and are repayable is just a path to unneeded economic punishment of the Greek populace. And the banks won't get that money back anyway.

In abscence of this sane way forward the possible referendum outcomes are not great. Vote Yes to Austerity and Syriza will likely need to step down. But this path means Greece sets itself up for at least 10 years and maybe even indefinite collapse of economic growth. Basic Keynesianism shows us that Gov'ts pay off debt as a consequence of growth. With no loans and with austerity in place there will be no growth. This is a terrible choice.

On the other hand a Vote of No to Austerity and Greece are likely left with no choice but to exit the Euro and then actively default on their debt. After which a reformed drachma will be worth nothing and the ability of the state to take out new loans will be close to nil. There will be a painful collapse of growth. But they will be left with the ability to manage their own inflation and with the guidance of the IMF plenty of countries have worked back to solvency from this point. There's a painful 5-10 years ahead but it ought to be moderately self-limiting and there is good precedent that this type of economic management is possible.

These are both terrible choices, and the latter especially so if you care about the Euro. Writing off the bad debt would circumvent both these bad options, I remain amazed this isn't the best option. The risk of currency union is that occasionally the richer portions of the economy have to take it on the chin and take the hit for the poorer performing countries. German and others want to manage this so they get all the benefits and none of the risks of currency union.

If there is effectively a 100℅ haircut who would ever buy a Greek bond again.

Additionally in that scenario I think there would be risk that the bonds of other euro zone nations would be perceived as toxic beyond redemption.

And yet somehow Goldman Sachs is still solvent even though they're responsible for cooking the Greek books as well as complicit in helping to bring down the entire global economy.

Garrcia wrote:

If there is effectively a 100℅ haircut who would ever buy a Greek bond again.

Anyone who was happy or hopeful with the economic state of Greece at some point in the future. Only a small minority of the global market would look at Greek defaulting and think "that's it, I'm never touching Greece again" the vast majority would think, if ten years later dropping the anchor of debt had led to a prosperous and productive Greece "hey, there is money to be made here, and unlike last time when my eyes were too big for my stomach and I ignored the warning signs the country actually looks economically healthy!"

Keep in mind that investment is a two way street, it's not solely the debtor that has responsibility, the creditor also has responsibility to intelligently spend their money on reasonable things. While legal protections for creditors are absolutely important to the flow of capital that fosters growth, there is a limit to how far you should bend over backwards to protect a creditor from their own bad choices. Not only do creditors have a moral responsibility to commit to their own decisions, but that's economically for the best as well. A healthy knowledge among creditors that a bad investment will cause them to lose money is what keeps them making good investments!

That is what interest rates convey, higher interest rates convey "there is greater risk that this loan won't be repaid, so here is a correspondingly higher reward to convince you to press your luck. It is completely reasonable to ask the opposite question than the one you asked "if risky and financially unstable countries are forced to repay their debts at any cost to themselves and their citizens, then why would anyone invest in a stable country with lower interest rates ever again?"

Additionally in that scenario I think there would be risk that the bonds of other euro zone nations would be perceived as toxic beyond redemption.

This is a very big risk, investors are absolutely looking at how Greece turns out and using that as inputs for their decisions with Spain et al. What we have to ask ourselves is "don't worry, throw away your money in corrupt and struggling areas that are just using your loans to pay down their existing debt, trapping themselves in a rat race of bad economic opportunities with no gain for anyone but the lenders" really the message we need to be sending?

Why would the governments that gave the loans write them off with no assurances that Greece is going to change anything? With no change in behavior they are just going to run up debts again with their unsustainable spending and then look for loans down the road (again). The band-aid has to come off sometime. Was this loan payment on June 30th a surprise to them? Did the letter just show up in the mail last week? Greece is not a blameless victim of circumstance here, they have been juggling creditors for like a decade now and haven't been willing to make the changes necessary to get out of the situation, they are just prolonging the suffering or hoping other countries are going to give them a hundred billion dollar donation.

Maybe I am wrong and I don't know enough of the details, but that is how the situation looks from what I've read.

Yonder wrote:

Keep in mind that investment is a two way street, it's not solely the debtor that has responsibility, the creditor also has responsibility to intelligently spend their money on reasonable things. While legal protections for creditors are absolutely important to the flow of capital that fosters growth, there is a limit to how far you should bend over backwards to protect a creditor from their own bad choices. Not only do creditors have a moral responsibility to commit to their own decisions, but that's economically for the best as well. A healthy knowledge among creditors that a bad investment will cause them to lose money is what keeps them making good investments!

But what if like DS mentions the debtor was cooking the books to make things appear better to attract those creditors? Then the creditor has much less culpability.

LeapingGnome wrote:

Why would the governments that gave the loans write them off with no assurances that Greece is going to change anything? With no change in behavior they are just going to run up debts again with their unsustainable spending and then look for loans down the road (again).

Well indeed. I don't think a default/haircut on greek debt should be made without a strict economic plan to fix past behaviour. But that is exactly what the IMF have required of other countries who have be in this position previously.

LeapingGnome wrote:

The band-aid has to come off sometime.

Economy is 25% lower than it was. Growth is in the toilet. 25% unemployment. How many more band aids have to come off?

LeapingGnome wrote:

Greece is not a blameless victim of circumstance here, they have been juggling creditors for like a decade now and haven't been willing to make the changes necessary to get out of the situation

True enough. The previous Greek gov'ts basically lied to the ECB and the Eurozone for 20 years about their economic position.

LeapingGnome wrote:

they are just prolonging the suffering or hoping other countries are going to give them a hundred billion dollar donation.

Well these are loans. No tax money from European citizens was given to Greece. A risk a bank takes in lending is that the debtor may default. Greece wasn't in have the position to service the debt then. They aren't in that position to service the debt now and with zero growth on the horizon they won't be servicing that debt. It's madness to believe that they will be able to pay off that debt especially when the options they have been given all point towards zero economic growth.

If it weren't for the Euro the IMF would require Greece to devalue it's currency. Tell it's creditors to take the haircuts they'll have to make the debt servicable and then have Greece arrange it's expenses to control inflation. None of that is available to Greece while they remain part of the Euro and Germany et al insist the debt can be paid back in full.

LeapingGnome wrote:

Why would the governments that gave the loans write them off with no assurances that Greece is going to change anything? With no change in behavior they are just going to run up debts again with their unsustainable spending and then look for loans down the road (again).

That "running up debts again" is assuming that they can run up debts again, which is assuming that people will still lend to them at rates the Greek government is happy with, which is unlikely. But a debt forgiveness like this works because their existing loans are only helping them (barely) pay off their old loans. With those interest payments removed or profoundly lessened then they have the breathing room and capital available to actually get their house in order. You speak of "change in behavior", but that is the exact problem right now. The desired "change of behavior" is "stop taking out loans that you can't pay back without taking out more loans", but there is a real question of whether it is even fiscally possible change for them to make right now. It seems like the choice is between backing off and seeing if Greece makes the change they've stated that they want to make and become a successful country, or continuing to ride them all the way to the bottom while saying "stop taking more loans, when are you going to pay my loans back, stop taking more loans, when are you going to pay my loans back".

LeapingGnome wrote:
Yonder wrote:

Keep in mind that investment is a two way street, it's not solely the debtor that has responsibility, the creditor also has responsibility to intelligently spend their money on reasonable things. While legal protections for creditors are absolutely important to the flow of capital that fosters growth, there is a limit to how far you should bend over backwards to protect a creditor from their own bad choices. Not only do creditors have a moral responsibility to commit to their own decisions, but that's economically for the best as well. A healthy knowledge among creditors that a bad investment will cause them to lose money is what keeps them making good investments!

But what if like DS mentions the debtor was cooking the books to make things appear better to attract those creditors? Then the creditor has much less culpability.

That's a fair point, but there are two big problems with it. First it assumes that the creditors were legitimately fooled instead of just looking for an excuse to rubber stamp loans to make money off of, and a lot of that happened in the years leading up to the financial collapse. Related to this, even assuming that the creditors were legitimately fooled, these aren't mom and pop banks here, this are multi-billion dollar international lending associations that should be researching these sorts of enormous loan opportunities themselves. I would really like "Let the buyer beware" to start to apply to the big guys again, instead of just us little folk.

Secondly, assuming that these institutions were legitimately fooled, I'm not convinced that Greece should be left holding the bag because of that. After all, while "Greece" may have cooked the books, that's not exactly a sentient entity there. Specific bankers and politicians and bureaucrats cooked the books and committed this malfeasance. I'm not convinced that telling Greeks "ok, well, good luck paying off these criminal loans for the next hundred years" is a necessary penalty in comparison to convicting and jailing the actual individuals involved.

I say I'm not convinced, because I'm not, I also strongly believe in common people taking more responsibility for what their elected representatives do (regardless of whether they voted for them) than most people are comfortable with.

So I'm unsure but leaning towards forcing the debt repayment being "slightly immoral maybe" and fairly confident that regardless of the moral/legal questions of who swindled who, forcing all of the loan payments is the economically sub-optimal choice for economic development in the region.

I think these three pieces are the most salient analysis of what is happening right now.

http://www.theguardian.com/business/...

http://www.nytimes.com/2015/06/29/op...

http://www.theguardian.com/business/...

Someone once described the Eurozone as a burning building with no doors. In other words Greece was basically forced to take on even more debt in order to essentially bail out the banks who made the bad loans in the first place and the banks (Goldman Sachs) that helped them cook the books. In any normal arrangement Greece could default, go through the pain of default and then rebound eventually. They were put on an unsustainable treadmill of debt and austerity by the Troika because the banks wanted their money and no one was willing to take responsibility on the lending side.

I have trouble siding with the banks. They keep doing this over and over and over and over again. They want to make all the gains private and all the risk public. It's absolutely immoral and irresponsible and the banks deserve to lose eventually. It will cause Greece to be seen as a lending risk in the future, but countries eventually overcome that. Companies eventually overcome that. Individuals eventually overcome that. They have a robust tourism industry that would actually keep the economy afloat, I imagine.

LeapingGnome wrote:

But what if like DS mentions the debtor was cooking the books to make things appear better to attract those creditors? Then the creditor has much less culpability.

I think there are absolutely individuals (and an entire company) that should be held accountable. Goldman Sachs, frankly, shouldn't exist at this point. But like Yonder said, I wouldn't put that blame on the people of Greece. As it is, if they exit the Eurozone or receive debt forgiveness they're going to suffer enough as it is.

EDIT: This article that DanB posted is really good. Particularly this.

We should be clear: almost none of the huge amount of money loaned to Greece has actually gone there. It has gone to pay out private-sector creditors – including German and French banks. Greece has gotten but a pittance, but it has paid a high price to preserve these countries’ banking systems.

This is loan shark territory. With Greece taking on all of the pain so that the banks who made bad loans can keep their balance sheets intact. They're literally borrowing money to send that money right back to the banks. With all the debt stills sloshing on in the system, I wish we'd just declare a debt jubilee and get on with it.

Better Idea Than Nothing

Let's just get Greece sorted
All this dithering over Greece is getting boring. European ministers flexing their muscles and posturing over whether they can help the Greek people of not. Why don't we the people just sort it instead?

The European Union is home to 503 million people, if we all just chip in a few Euro then we can get Greece sorted and hopefully get them back on track soon. Easy.

What We Need & What You Get
€1.6bn is what the Greeks need. It might seem like a lot but it's only just over €3 from each European. That's about the same as half a pint in London. Or everyone in the EU just having a Feta and Olive salad for lunch.

So come on, order a Feta and Olive salad, maybe wash it down with an Ouzo or glass of Assyrtiko greek wine and let's sort this sh*t out.