New York Times columnist and Nobel Prize winner Paul Krugman occasionally brushes up against an understanding of how the macroeconomy works. Some people actually have said to me that he does get it but chooses for political purposes not to disclose a full understanding of the basic principles of Modern Monetary Theory (MMT). Well in his most recent column – We’re Not Greece – published May 13, 2010, I think you can conclude that when left to his own devices he doesn’t have a clue about what is really happening in the macroeconomy. So today, we are exposing his mainstream (neo-classical) keynesian nakedness – he is now naked and without clothes.
Last Wednesday (May 5, 2010) I wrote that Bailouts will not save the Eurozone in response to the miserable plan put forward to take the Greek government out of the bond markets for a period. Yesterday they announced a major ramping up of the credit line they are offering which is more characteristic of a fiscal rescue than anything else. However, it amounts to the blind leading the blind. The euro funds to finance the credit line are coming from the same countries that are in trouble. There are no new net financial euro assets entering the system as a consequence of this €750bn bailout plan and, ultimately, that is what is required to ease the recession and restore growth. The restoration of growth will also ease their budget issues. But this is Europe we are talking about. Despite the nice cars and bicycles they make, they are not a very decisive lot and their institutional structures are hamstrung by an arrogant sclerosis that pervades their polity and corporate world.
Three people are dead in Athens as the people turn ugly against an even uglier ideological push against their welfare. The EMU is now facing an untenable future. Senior policy makers within the EU are now lecturing the UK about the need for harsh fiscal measures following the election. And the UK goes to the polls today and the polls are suggesting “sweeping gains” for the conservatives who are unfit to govern and will drive their economy even further backwards if elected. All of this is unnecessary. All of it a reflection of a failed ideology trying to re-assert itself. The upshot will be that the Eurozone will wallow in crisis for years to come and the rest of us are taking policy positions that will lead to the next crisis – if not a double-dip recession later this year.
We are back onto Greece again today as the crisis deepens. Overnight Spain is appearing to be under bond market pressure and the Germans are calling for even harsher fiscal rules to be applied to keep member states “solvent”. The point is that none of the remedies being proposed will ultimately work. What is needed in the Eurozone is a major boost to aggregate demand. However, the policy direction is to further undermine spending in the member economies as austerity measures are being imposed throughout. This foolish reverence of the Stability and Growth Pact will worsen things. The problem in the EMU is that the basic design of its monetary system is flawed and the accompanying fiscal rules only accentuate those design flaws. None of the remedies being proposed by Euro leaders will work and the bailouts will not save the Eurozone. It has to fundamentally redesign its system or disband.
A brief blog about the Eurozone today given I am travelling later on in the morning (Thursday, US time). Events in recent days are further exposing the absurd logic inherent in the design of the monetary system arrangements that the EMU member nations signed up for. The sovereign debt crisis that has so far be confined to Greece is now spreading to other member nations (Portugal and Spain). Further, the concerns over sovereign risk are now spreading into the commerical banking system and the logical extension of that are bank runs and a closure of the entire payments system. The reluctance to provide any EMU support for the beleagured Greece and the posturing by Germany is now being overtaken by these events in recent days. The initial “bailout” offer to Greece that took so long for the EMU bosses to make – given it rendered their claims to have constructed a stable sustainable monetary system absurd – now pales into insignificance. Much more support will be required and soon. But even that will not solve the structural flaws in their system. They would be better just abandoning it and maintaining political ties to stop them invading each other. After all, it was the tensions after the Second World War that have, in no small part, driven these flawed attempts at union anyway.
Today my RSS feed was full of all sorts of information and it took me some time to get through it all. The reason? I just purchased an Amazon Kindle DX and it arrived this morning. As a frequent traveller I seem to carry too many books and papers given I read a lot and so the Kindle is my proposed solution – everything is going to being stored on it – novels, travel documents, bus timetables, academic papers, mp3s, you name it. My bags will now be lighter and that continual shuffling of papers to access the right one at the right time is going to be a thing of the past. So I got to know it a bit today! Anyway, one paper I did read today was from the European Central Bank (ECB) entitled – The Impact of Numerical Expenditure Rules on Budgetary Discipline over the Cycle. It is so bad you would gasp for air reading it. It is replete with statements that just appear without scrutiny and are taken for granted but, which in fact, are at the basis of the whole argument about fiscal rules and are hardly acceptable.
Today I read another appalling beat-up from the researchers at Société Générale. The fabrications and poor analysis contained in the Report should instigate class actions from their subscribers for grossly misleading them in their investment decisions. But the real problem is that the financial journalists seem content to function as meagre mouthpieces for this hysteria – to use their columns to spread it widely without the slightest introspection or critical scrutiny. The result is that the public are continually confronted with outrageous propositions – which carry not even a skerrick of truth. They then form fallacious perspectives about public policy that ultimately undermine their own welfare. The lies are all presented as being “iron clad laws” and “inevitabilities” and “fundamental truths”. But as I learned as a youngster – lies are lies.
Today I was reading the The Ohio Funds’ Memorandum of Law in Opposition to Defendant Rating Agencies’ Motion to Dismiss, which is the legal document prepared by the Attorney General for the State of Ohio on behalf of the Ohio Police & Fire Pension fund, Ohio Public Employees Retirement System, State Teachers Retirement System of Ohio, School Employees Retirement System of Ohio, and the Ohio Public Employees Deferred Compensation program. It is interesting in its own right but also raises questions of the tyranny of bond markets and the need to conduct fundamental (not window-dressing) reform of the way our financial institutions and governments operate. These thoughts then took me back to Europe and the proposed bailout of Greece by its Eurozone colleagues. All these topics are interwoven and reflect the sheer stupidity of the way we constrain our monetary systems. Rather than being vehicles that can liberate us from poverty they have been designed to invoke harshness and disadvantage for most and untold wealth for a small minority.
Today I have been looking over documents from the EMU which emerged from last week’s summit in Brussels. Within the plush environs of their meeting halls and probably over very sumptuous dinners the best they could come up with was a half-baked plan to stop the daily headlines which have been indicating impending Greek default. Such a default would damage the Eurozone monetary system and probably show the way for other nations, which are being similarly bullied by the EU bosses into impoverishing their nations. Given some reporting today they may have succeeded … in stopping the headlines … for the moment. But the approach of the EMU leaders will do nothing to address the fundamental structural flaws in the their whole system. With the prospect of an extended period of austerity throughout the zone, they are really just making it more certain that the next major global downturn sinks them for good. That is, if social instability doesn’t do it beforehand.
The events continue to get more strange in the Eurozone by the day. Yesterday, Portugal was downgraded, which will worsen their situation, despite the rating agency claiming that the fiscal austerity plan in place was credible. Tomorrow, European leaders meet in Brussels but the German leader doesn’t even want the crisis on the agenda. The Germans only want to discuss imposing even tougher restrictions on the ability of governments to govern in the interest of their citizens. It is like a B-grade horror movie script. But all the intrigues that are playing out in the Eurozone at present demonstrate (albeit tragically so) the dynamics that led to the collapse of the fixed exchange rate system (the Bretton Woods arrangement). Same old story – bullies and the bullied. It means the only viable solution is to abandon the EMU as soon as possible and restore some sanity … and democracy.