If I was to become the boss of a sovereign government, the first thing I would do would be to introduce a Job Guarantee and immediately set about restoring jobs and a living income to those who are without either. This would immediately boost aggregate demand and give business firms a reason to start investing and producing. The second thing I would do would be to pass legislation outlawing all the international rating agencies. If I was to become the boss of a government within the EMU, the ordering would be similar except that before I introduced the Job Guarantee I would withdraw from the monetary union, default on all Euro-denominated debt, and reintroduce a sovereign currency. Then I would offer a job to anyone who wanted one at a living minimum wage and outlaw the ratings agencies. All that could be done on the first day of my tenure in official office. The recession would be over within a few months and then I would set about nationalising the zombie banks. It would be a fun ride!
I read a speech delivered yesterday (September 20, 2010) by the Governor of Ireland’s central bank Patrick Honohan. The speech was delivered to the SUERF – The European Money and Finance Forum in Dublin. Reading is normally a pleasurable activity and a central part of my enjoyment. But sometimes you choke on the nonsense that is before your eyes.
The speech was extraordinary in one sense because it was from a central banker delivering commentary on fiscal policy. So the so-called central bank independence goes only one way! When it suits, the central bankers feel it is entirely appropriate to make political statements about the democratic choices of an elected government but will scream if the polity interferes with its (unelected and unaccountable) decisions-making powers.
The Governor claimed that:
As many of you will know, the Government has already taken prompt and painful steps to readjust its spending and tax profile, most conspicuously by effectively cutting public sector pay rates … if the economy stays close to the track originally envisaged, the deficit would come close to 3 per cent by 2014. But as the IMF and others have noted, the real economy, the price level and also interest rates on Government borrowing, have evolved in a less favorable way … Some explicit reprogramming of the budgetary profile for the coming years is clearly necessary soon if debt dynamics are to be convincingly convergent. Recent movements in the yield spread on Government debt – both for Ireland and for some other countries – readily demonstrate the costs that can result unless international lenders remain convinced that the budget is going to be kept on a convergent path, as indeed the Government is committed to ensuring.
This was reported in the press as the central bank governor saying that the Irish government “must bite the bullet “soon” on fresh spending cuts, if it is to bring debt dynamics under control” but that this “message is starting to test political patience. Public wages have already been cut 13pc on average” (Source).
So “bit the bullet” you Irish bastards! Sure and get shot in the mouth! What an example of leadership is that?
It almost beggars belief the audacity that these characters (Honohan and his ilk) have – strutting the conference circuit – presumably drinking and dining well at nice hotels – and then demanding further spending cuts when it is clear that the economy is heading south as a result of the earlier cuts.
When will someone start asking the real questions: Why tolerate the rating agencies holding the welfare of the people to ransom? Why tolerate Europe’s EMU elites holding the welfare of the people to ransom because they refuse to admit their European common currency dream is deeply flawed?
At least, the common currency union is deeply flawed because its design is dominated by neo-liberal precepts which prevented a sensible fiscal capacity being available to meet the challenges of asymmetric demand shocks of the type that has crippled the zone in the last 3 years. But even then the lack of homogeneity between the economies and the relentless German approach to their own needs would suggest the Eurozone is poorly conceived in membership.
But the debate is not heading in the direction at present of dissolution. Indeed, poor Estonia still thinks it is in their best interests to surrender their currency sovereignty entirely and join the sinking ship on January 1, 2011.
It is only a matter of time before debt defaults begin which will bring the logic of the union into even sharper relief and hopefully encourage Greece, Spain, Ireland and Portugal (at least) to bail out.
Which leads to this article in the UK Telegraph (September 19, 2010) – The IMF Itself Has Become the Problem as Europe’s Woes Return – which I found interesting.
The article says that:
Once a quorum of big names says the game is up in a debt crisis, events move fast and furiously. Portugal neared the line on Friday when Diário de Noticias cited three ex-finance ministers warning that the country might have to call in the International Monetary Fund (IMF). One spoke of a “reckless reliance on foreign debt”; another spoke of “runaway public spending”. No matter that all were complicit in euro membership, the policy that incubated this crisis and now traps Portugal in its depression.
I am sure none of the ex-finance ministers are suffering financially yet all should lose all public entitlements for having pushed their nations in the EMU.
Prior to joining the EMU, “Portugal was a net foreign creditor” but now its foreign debt is 109 per cent of GDP as a result of the low Eurozone interest rates and the borrowing boom they engendered.
And, even though Portugal is severely cutting public spending to meet the demands of the Brussel-Frankfurt bullies the financial markets are delivering pain in the form of surging yields on 10-year Portuguese debt.
So it is like blackmail – you pay once, the blackmailer gets greedy and demands more. When do you stop paying? Answer: you have to eliminate the blackmailer by coming clean. In the context of Portugal the only solution that will allow their government to serve the best interests of the people that elected it is to exit the EMU and re-establish their currency sovereignty.
Then who is in charge changes dramatically. What the financial markets think about the quality of sovereign debt becomes irerelevant and what the credit rating agencies think becomes irrelevant.
Then the government stands or falls on whether it delivers financial stability and economic progress. The ballot box sorts that question out. It is a deeply offensive state that we have allowed democratic accountability to be eroded and government policy to be driven by the needs and wishes of amorphous (and unproductive) financial markets.
The Telegraph article says that:
António de Sousa, head of Portugal’s bank lobby, said his members are in dire straits. Banks cannot raise funds abroad, remain “extremely fragile”, and “quite simply” will have nothing more to lend unless foreign capital returns. Portuguese banks cannot survive on local savings. They rely on foreign funding to cover 40pc of assets.
This is the underlying crisis in the EMU. The lack of currency sovereignty means that the national governments are unable to protect their own banking systems in the event of a collapse of the type being signalled here.
In Ireland, the bank bail outs are imposing punishing costs on the standard of living of the citizens. The government chose to “socialise” the losses and restructure the banks (a process that is not complete). The correct thing to do would have been to force the losses onto the shareholders, nationalise all the banks that were insolvent and restructure them within the public sector. So that the socialised losses would lead to socialised benefits.
The extent to which income and wealth has been transferred in most countries from poor to rich by inappropriate government responses to the crisis (and poor policy choices before it) is breathtaking.
The only way the EMU member states can insure their banking systems remain stable is to re-establish their currency sovereignty. That is, exit the monetary union.
But the policy direction in Portugal is distinctly Irish. They are now accelerating their public spending cuts. The Telegraph article challenges the logic of this:
Yet what exactly will austerity achieve? Combined private and public debt is 325pc of GDP (viz 247pc for Greece), so the country already risks a debt compound spiral. Lisbon has been cutting state jobs for several years. This has certainly crimped growth, but not cured the problem. Productivity is stuck at 64pc of the EU average. The brutal truth is that Portugal lost competitiveness on a grand scale on joining EMU and has never been able to get it back. Convergence never came.
Ireland has shown what happens when you grasp the fiscal nettle, slashing public wages by 13pc – to applause from EU elites – without offsetting monetary and exchange stimulus. Irish bonds have spiked even higher to a post-EMU record 6.38pc. Two years into its purge, Ireland has a budget deficit near 20pc of GDP. It is 12pc if you strip out the bank rescues, but the reason why the bad debts of Anglo Irish keep spiralling upwards is that the economy keeps spiralling downwards. House prices have fallen 35pc. Nominal GDP has contracted 19pc.
From a Modern Monetary Theory (MMT) perspective none of this comes as a surprise. It is exactly what happens to an economy when you cut spending in an environment where demand has already collapsed. It is exactly what happens when you insist on tying public debt-issuance $-for-$ to net spending increases. The rising spreads on public debt is exactly what happens when the bond markets know the nation has surrendered currency sovereignty.
But one by one the nations are going down the same path which will systematically undermine the welfare of a vast bulk of their citizens and further transfer wealth and real income to the top-end-of-town, which caused this strife in the first place.
The Telegraph article is interesting because it sheets home the blame, in part, to the IMF. The article quotes former IMF chief economist Simon Johnson who said “Ireland’s debt is ballooning, while its capacity to pay has collapsed” and:
… the country has made a Faustian pact with Europe, able to draw ECB loans worth 75pc of GDP so long as Irish taxpayers shield European creditors.
The problem for EMU nations is that once they surrendered their currency sovereignty they have to “finance” their spending. If debt-issuance becomes problematic the only other option is to raise tax revenue.
The Article concludes that:
In any case, the IMF itself has become the problem, operating as an arm of EU ideology under Dominique Strauss-Kahn. It offers no remedy since it acquiesces in the EU’s ban on debt-restructuring. In Greece it backs a policy that will leave the country with public debt of 150pc of GDP after its ordeal – allowing French and German creditors to shift a big chunk of Greek risk to Asian taxpayers through the IMF, and to EU taxpayers through the eurozone rescue … the Fund has become a font of incoherence, an engine of moral hazard. In August, it abolished its credit ceiling and created a new tool to rush fresh debt to states that need more debt like a hole in the head.
You always have to ask yourself what is the agenda driving these international organisations. Over the last 40 years or more the IMF has not acted to advance the interests of the normal citizens. They have helped protect first-world capital (banks etc), they have helped dictators maintain power and they have been active participants in the transfer of massive quantities of real resources from the developing (poor) world to the top-end-of-town in the rich first world.
Once the Bretton Woods system collapsed in 1971, the IMF lost all purpose. After that time, it has become a haven of neo-liberal thinking and has been one of the principle vehicles engaged in implementing that pernicious program.
The Telegraph say that if “Greece, Portugal, or Ireland restructure debt” then the contagion will spread to Spain and Italy and where will it end given the big French and German banks are so exposed. The point is that the “monetary union has created a monster”.
It is a monster that will not resolve without dissolution. Debt default is inevitable unless the ECB continues to violate the Lisbon rules by bailing out the problem nations. Please read my blogs – Euro zone’s self-imposed meltdown – A Greek tragedy … – España se está muriendo – Exiting the Euro? – Doomed from the start – Europe – bailout or exit? – EMU posturing provides no durable solution – where I discuss the intrinsic design flaws in the Eurozone monetary system.
In this article – Europe’s €440bn rescue fund wins AAA just in time we learn that:
Standard & Poor’s and Fitch have both granted the Eurozone’s rescue fund a AAA credit rating, clearing the way for swift action if needed as the region’s debt crisis threatens to erupt again.
In other words, the non-bailout clause in the EMU treaty is expected to be used again as the European situation worsens.
The EU bosses know full well that their system as designed and implemented has been incapable of meeting its first major challenge. The band-aid remedy is just a way to protect the big French and German banks and the citizens in the southern European states are being punished for sins they didn’t get to enjoy!
The EU bosses know that if they didn’t have this treaty-violating bail-out fund the system would quickly collapse under the weight of the debt default. In my view, all they are doing is forestalling the inevitable. And each day, the social unrest in Southern Europe is increasing which will make it difficult politically to implement continued austerity.
The only short-term solution is for the ECB to continue buying government debt in the secondary markets. But then that rather defeats their purpose. The action manifestly tells the world their system has failed.
Meanwhile, the OECD has put out it latest US Economic Survey and confirms that it has learned nothing from the crisis.
The Survey indicated that the US economy has been growing because it has been “supported by substantial stimulus measures”.
It also suggests that growth will not be strong enough to “put a significant dent in unemployment” which means that long-term unemployment will continue to rise (along with poverty rates).
To see how twisted the logic has become, the OECD claim that:
… support from monetary and fiscal policy is still necessary … [as well as] … the extension of unemployment benefits, job training and tax credits for hiring workers, and the Administration’s target of reducing the deficit to 3% of GDP by 2015 … The establishment of the bipartisan National Commission on Fiscal Responsibility and Reform by President Obama with a mandate to propose additional measures to achieve fiscal consolidation also goes in the right direction … “even if measures are to be implemented only at a later stage, spelling them out now is an important signal”.
Signal to whom? The unemployed? The business firms that will not borrow nor invest because they are haunted by a contraction in public spending that is coming at some point? The consumers who will not spend because they are worried they will lose their job as the fiscal contraction gathers pace? The bond markets who cannot get enough government debt to satisfy their greedy, yet insipidly weak ambitions.
I say insipidly weak because government bonds represent corporate welfare to these unproductive and unnecessary elements in our society. We would all be better off if they got a real job and stopped sponging on the public purse but complaining about it into the bargain.
So the OECD realises that without the fiscal support the US economy and most economies would be in much worse shape than they are now in. The situation in most countries is still very bad given that the fiscal support barely trickled out into the spending stream as the deficit terrorists wages their unrelenting and destructive campaign.
But a far amount of the change in the budget position in each nation has been driven by the cyclical component – that is, the automatic stabilisers. Please read my blog – Structural deficits and automatic stabilisers – for more discussion on this point.
What this means is that the fiscal positions will be reversed when growth returns because tax revenue will rise and welfare support payments will fall. There is very little logic in cutting the structural (discretionary) component of the budget now – just at the time that the recovery process requires the fiscal support.
That will definitely cause the budget to go further into deficit via the automatic stabilisers.
The OECD data accompanying the Survey is used to create the following graph. I also used the harmonised unemployment rates available from the Main Economic Indicators. The graph shows the change in the budget position as a percent of GDP (vertical axis) between 2006 and 2009 (inclusive) and the change in the unemployment rate (horizontal axis) over the same period (percentage points).
The relationship has some statistical veracity (given the R2 shown) which is to be expected given that the deterioration in the labour market prompts the changes in the budget components (as people lose jobs and stop paying taxes etc). I realise that the causality is bi-directional but that is another story. The dominance of the automatic stabilisers is driving the relationship depicted.
The conservatives know that the automatic stabilisers have driven most of the budget change. So how do they justify scorching the earth with fiscal austerity now in the hope that things will get better, rather than maintaining (and even strengthening) the fiscal stimulus to ensure growth gathers pace and reduces the budget deficit in that way?
They introduce another myth – the intergenerational strain on future budgets. According to this logic there is a time bomb ticking within the budget which will explode when we age some more and demand lots more hip replacements and pensions.
I have covered this myth in detail in several blogs – Democracy, accountability and more intergenerational nonsense and Another intergenerational report – another waste of time.
The bottom line is that a sovereign government will always be able to financially afford to buy as many hip replacements that are demanded as long as the titantium is available. It might be that as an outcome of the political debate the younger generations force an anti-aged mandate onto the governments of the day which prevents them from providing first-class health care to the seniors.
So you can see there are only two possible constraints – the real resource availability and the political choices that need to be made. There are no financial constraints on the government budget.
Thus, running austerity now and seriously undermining the recovery is unjustifiable on financial grounds. It is an irony that people will be better placed to pay for their own retirements and health needs in the future and be less reliant on public provision if they maintain continuous employment and enjoy real wages growth now. Fiscal austerity jeopardises both of these advantages.
Further, the capacity to cope with a rising dependency ratio comes from productivity growth and technological change. We typically get that from increased skill levels of the workforce and extensive research and development. In turn, strong higher education and public research institutions are crucial for the development of these advantages. Again, fiscal austerity undermines the capacity of an economy to generate these long-term benefits.
Fiscal austerity is about the “race-to-the-bottom” – where low-wages, insecure employment and low productivity are the salient characteristics. It is a mindless and totally unnecessary strategy.
The best the OECD can suggest is that the unemployed should be churned through training programs “to help workers adapt to the post-recession economy” and the government should provide “tax incentives for companies to hire new staff”.
You get the drift – not a job to be created. The business sector will not invest or employ at present because they are pessimistic. Cutting business taxes will not help consumers spend. Progressive policy would put funds into the hands of those who will spend them and then let the business respond with increased production. Firms will not produce just because it is cheaper if no-one will buy the extra production.
And finally, the credit rating agencies have been ticking the UK government because it has signalled it is joining the austerity train despite being fully sovereign in its own currency.
In the UK Independent yesterday (September 21, 2010) we learn that UK keeps triple-A credit rating as Moody’s backs Government cuts. Since when have been allowing criminal organisations to strut the world stage telling democratically-elected governments what to do?
Here is a fact about fiat monetary systems that is clearly overlooked: A sovereign government issuing its own currency is not at all dependent on what the international credit rating agencies or anyone else thinks. Please read this blog – Who is in charge? – to see where the power really lies if it is exercised.
Yes, only the voters matter for such a government. In that context, if governments do fall prey of these criminal organisations then they also have to lie to the voters because the policies that satisfy the latter (the ratings agencies) are never in the best interests of the former (the voters).
As a result, the voters are deceived into thinking that there are no real choices and that the government is actually doing them a favour inflicting harm on them because they are brainwashed into believing that it is lesser of two evils.
The Independent article said:
One of the world’s premier rating agencies yesterday backed the UK’s economy by maintaining its top credit rating, despite fears that the Government’s cuts could send the country into a double-dip recession.
So good fiscal conduct is to drive your economy back into recession just as the conduct of fiscal policy was allowing it to make some sort of recovery. A fine state of affairs.
You realise how scary the whole ratings gig is when you read the comments from the Moody’s so-called “lead analyst for the UK” – they are scary. He said that:
The global financial crisis of 2008 to 2009 caused serious long-term damage to the British Government’s balance sheet. The country’s economic outlook is also more challenging because private sector deleveraging, the uncertain state of the financial sector and slower growth in the UK’s main trading partners are not conducive to allowing GDP growth to return to its pre-crisis trend rate.
There is no such thing as “long-term damage” to a sovereign government’s balance sheet. What does that mean? There is never a solvency issue. The rising debt is rising wealth and the interest-servicing payments are income to the non-government sector.
The increased net public spending stimulates economic growth and the cyclical adjustments that follow reduce the public deficit substantially. What the hell does long-term damage mean? Answer: nothing!
Apparently, Moody’s is banking on an export-led recovery. Please read my blogs – Fiscal austerity – the newest fallacy of composition and Export-led growth strategies will fail – to see why this is misguided.
The Independent article then misinforms its readership:
A credit rating is essentially an indication as to how risky the agency thinks a debt issuer is. The higher the rating, the less likely it believes the issuer is to default.
There is no solvency risk for the British government. This is a totally misleading statement. The credit ratings rely on the public believing that they are an independent and important arbiter of the quality of public debt. They are irrelevant as Japan showed early in the 2000s.
I cannot say that much of what I read today was enjoyable. I think I will have to read some of my latest Henning Mankell novel tonight to restore some sense of sanity. I am also planning to read up on Acidised multi-track drum loops! That should restore the joy.
That is enough for today!