Its hard to know where to start today. I opened my hard copy version of the Financial Times this morning and every page was “Greek yields off the scale”; “Greece default talk”; “Number of Americans in poverty at highest in 50 years”; “Rome set to identify next asset sales”; Fears of Greek collapse prey on French banking”; “Brics to debate possible eurozone aid”; and so it went. You couldn’t make this stuff up. To avoid sinking into an inconsolable depression, I closed the orange pages and, maybe foolishly, turned my attention to the Wall Street Journal. That came up with gems such as “Limiting the Damage of a Greek Default”; “Exit Strategy Goes Right Out the Door for Euro-Zone States”; “Yields in Italian Bond Auction Highlight Financing Challenge”; “China Not Seen as Knight Riding to Rescue of Italy”; at which point I wondered – given my current geographic location – what happens if I get stuck here? And then, to ease the day’s burden I wondered why the WSJ spells the Eurozone with a hyphen. That seemed to calm things down. Researching the use and mis-use of hyphens splitting words in two. But the thought kept lingering – this is so bizarre that you couldn’t make all this stuff up.
Day 3 in the Land of Austerity (LA LA land). I sometimes enjoy a regular little private activity now which I call for want of a better term – “I told you so” – and which involves going back to articles that were written prior to the crisis about macroeconomic trends and having a laugh about their contents. Today I thought I might share one of these articles with you because it came up in a telephone conversation I had today with a British journalist who was seeking background on a story they were writing. Their contention was that the ECB is in danger of going broke. I suggested (nicely) that they would be better off focusing on the mating habits of frogs in the Lake District of England than writing a story like that. Here is why I said that.
Today I am writing from Austerity Land a.k.a Europe. I know Britain is also austerity land but it has its own currency and will be able to reverse direction more easily as the political sentiment moves against them. I know the US is also trying to emulate the austerity lands but so far the deficit is sufficient to maintain some vague sense of growth there and the politicians haven’t really been able to agree on anything. But in Europe the politicians and central bankers are systematically demolishing their economies – one step at at time – and pushing the system ever more closer to collapse. It is only the extraordinary “outside the rules” intervention of the European Central Bank that is keeping the EMU from collapsing virtually immediately. The Australian ABC News is carrying a story (September 13, 2011) – Shares hit 2-year low as Eurozone crisis deepens. The message of that article is being repeated in various languages over here in Europe across the mainstream media. There is an advanced state of denial over here – a denial that the problem is the Euro itself. How could a currency be a problem? Answer: when it is foreign to every government that uses it. Whatever we conclude about who pays taxes in Greece or who doesn’t; about whether certain public servants have excessively generous pay and conditions or not; about whether workers in one nation are lazier than workers in another; none of these mini-debates focuses on the issue. The problem is that when a nation surrenders its currency-issuing capacity and starts borrowing in a foreign-currency then it is open to solvency risk and cannot respond easily to a negative demand shock of the proportions that we say hit the world in 2007-08. Setting up a monetary system with those intrinsic features ensured that the EMU would enter crisis when the first significant negative demand shock arrived. It was not if but when. Now the same logic that got the EMU into this mess is also prolonging the crisis and denying the region of much-needed growth.
In the last few days, while MMT has been debating with Paul Krugman, several key data releases have come out which confirm that the underlying assumptions that have been driving the imposition of fiscal austerity do not hold. Ireland led the way in early 2009 cheered on by the majority of my profession who tried to sell the world the idea of the “fiscal contraction expansion”. Apparently, there were millions of private sector spenders (firms and consumers) out there poised to resurrect their spending patterns once the government started to reduce its discretionary net spending. Apparently, these spenders were on strike – and saving like mad – because they feared the public deficits would have to be paid back via higher future taxes and so the savings were to ensure they could pay these higher taxes. It is the stuff that would make a sensible child laugh at and think you were kidding them. Now, the disease has spread and the data is telling us what we already knew. The economists lied to everyone. None of them will be losing their jobs but millions of other will. And the worse part is that the political support seems to be coming from those who will be damaged the most. Talk about working class tories! This is a self-inflicted catastrophe.
Today is rather historic because it is the 40th anniversary of the collapse of the Bretton Woods system. On August 15, 1971, the then US President Nixon gave an address to the nation – The Challenge of Peace – where he announced the “temporary” suspension of the dollar’s convertibility into gold – and by closing the “gold window” the fixed exchange rate system was over. The demise of the fixed exchange rate system – and by implication the introduction of the fiat monetary system – provided governments with the scope to pursue domestic policies without tying monetary policy to defending the parity. It gave fiscal policy the capacity to sustain full employment no matter what else occurred. It is a pity that since then governments have been steadily white-anted by conservatives who have aimed to undermine the capacity to ensure there are enough well-paid jobs available at all times. The 2008 crisis that is now reverberating again is a direct result of the conservative political success since that time – not only directly but also indirectly, by pushing the political spectrum so far to the right that the “left” are not “right”. The result of all this is that the “system in deep trouble and it is waiting to blow”.
The big news over night apart from whether Murdoch junior lied and whether the Republicans will compromise with Obama and the Democrats was the successful conclusion of a package to save the Eurozone and stabilise Greece. I actually think the best European news was the drama that was being played out on the heights of Galibier Serre-Chevalier in Southern France yesterday. I thought the theatre and backdrops were stupendous. But while that is getting some coverage the news is being dominated by the “done deal” – the “solution” to the Euro debt crisis. When I read the – Statement by the Heads of State or Government of the euro area and EU institutions – I considered it a statement of a group of failed states who have lost perspective on what governments should be doing.
What I learned studying history at university about Charlemagne I have mostly forgotten other than the broad brush of his historical presence. I know where he is buried because his Frankish home base was Aachen on the extreme west of Germany bordering with the Netherlands. I have spent a lot of time in that area (given my association with the University of Maastricht) and have visited the cathedral that houses his grave. What I can recall is that he was a Christian imperialist who forcibly imposed “Germanic” rule on most of what is now Western Europe. But while he largely restored the old “Holy Roman empire”, this “unity” did not last long after his rule ended. That is, he dramatically failed to embed a lasting unity. I think it is appropriate then that yesterday, the President of the ECB, Jean-Claude Trichet, was awarded the famous The Karlspreis which is in honour of Charlemagne. The Germans think it is about unity or at least that is what they claim it is about. The other analogy with Charlemagne is that just as he sought to impose his religious views on the “heathens”, Trichet is also seeking to impose another religion on the people of Europe – neo-liberalism. It is a religion that has failed to provide succour to those who have had to endure it. It works well for the “priests” as all religion seem to. But it is imposing harshness and calamity on the rest. Anyway, in Aachen yesterday, it was another one of those days when the elites wine and dine well together and hand out prizes to each other.
Today is the first blog I have written that is exclusively done on an iMac running OS X. It is a nice environment but for a long-time linux and windows user it takes a little getting used to. I have been thinking of writing a Modern Monetary Theory (MMT) guide to debt restructuring for non-sovereign nations such as those in the Eurozone who are now essentially insolvent if we exclude ECB assistance. Several readers have asked me to tease out what the implications of a major debt default in say Greece would be for aggregate demand and private wealth. I will write about that more fully another time but one thing that is certain. MMT does not consider it feasible to run a national economy in a way that advances public purpose at all times if the national government has surrendered currency sovereignty in any way. The point is that default has to accompany EMU exit (in the case of the Eurozone nations). In thinking about that I focused my attention on some interesting data from Ireland that I have been looking at for the last week. What is clear is that Ireland has no real future while remaining in the Eurozone. It might stagger along and grow again some day. But it will be so severely damaged from dragging out the recession for its fourth year now and will similarly collapse when the next negative demand shocks hits the zone that it would be better defaulting now and restoring its currency sovereignty. The best option for Ireland is to default and exit.
I am travelling today and over the next few days and so I am stealing moments at airports etc to write the blog in between other commitments. Today we consider the research evidence available which bears on the question of national government debt default. The question is becoming increasingly pressing in the failed Eurozone and there is clear resistance among the elites to the proposition that Greece, Ireland, Portugal – for starters – might ease their domestic economic woes by defaulting. It is clear from the actions and statements of the political and economic leaders that they are more interested in protecting the private interests of capital than they are in advancing the welfare of the citizens in the nations under attack from bond markets. It is also clear that they have lost grip of the an essential aspect of capitalism – private return means private risk. The boundaries between private and public have become so blurred in the EMU as the elites strive to socialise losses. The reality is the evidence that is available doesn’t support the conservative arguments being used to eschew the default option and, instead, impose fiscal austerity on these economies. The evidence suggests that the costs of default while significant are short-lived and evaporate quickly. It is also clear that austerity also imposes significant costs on a nation that span generations. The comparison in the context of adding up these costs over the long-run is a no-brainer – these nations should default and follow a domestic-led growth strategy by expanding their budget deficits. That would require them to leave the EMU which is also essential if they are to regain their capacity to advance the interests of their citizens. Default is the way forward.
This week’s Economist Magazine (May 16, 2011) carried a headline – Sell, Sell, Sell – which referred to renewed calls for an even more expansive privatisation program in Greece than is already under way. The initial program of asset sales was projected to net more than 20 per cent of GDP in funds. But now the EU bosses want more. There appears to a group denial in Europe at present which is being reinforced by the IMF and the OECD and other organisations. They seem to be incapable of articulating the reality that if you savagely cut government spending while private spending is going backwards and the external sector is not picking up the tab then the economy will tank. Under those conditions policies that aim to cut the budget deficit will ultimately fail. But in the meantime the reason we manage economies – to improve the real lives of people – are undermined and living standards plummet and the distribution of income and wealth move firmly in favour of the rich. But if the price is right I’ll buy the Acropolis (and give it back to the people)!