Under an accompanying heading – “Beyond Greece” – the German Handelsblatt (a daily financial/business newspaper) published the article (July 14, 2015) – The Uncomfortable Truth About Debt. It was meant to be some sort of justification for the touch German stance against Greece. The authors claimed that “Germany has been hounded internationally for taking a hard line on Greece. But there is a bigger problem on the horizon: the debt mountain in Europe, and the world, is too high”. My BS sensors were on high alert as I read the opening paragraphs. There was good reason for my alert – the article, which would have been read by tens of thousands of German corporate sector managers etc, demonstrates a palpable failure to comprehend what the real issues confronting the Eurozone are and how Eurozone Member States (19 of them) are fundamentally different in terms of fiscal capacity relative to nations that issue their own currency. No wonder the political classes in Germany can get away with behaving so abominably.
To start things off, consider this tweet from the Slovak Finance Minister the day after the Troika (via the EU) destroyed the modern basis of the European Union and the European Project. He should learn to spell but then we are all in that camp from time to time!
In other words, there was a ‘bolshie’ Greek uprising that the Syrian (sorry Slovakian) government and its other right-wing thug mates like Germany and Finland had to crush quick smart.
The Handelsbatt article starts of with their motivation:
The mere fact that Germany’s finance minister Wolfgang Schäuble raised the possibility of Greece’s exit from the euro zone during the talks, and that German policymakers have led skeptical euro zone countries in demanding tough structural reforms from cash-strapped Greece in exchange for aid, has been a source of consternation around the world.
But perhaps Germany’s reason for sticking to its principles in the case of Greece – demanding that the European Union’s rules be upheld and that each country in the euro zone be made to keep government spending in line – is that policymakers here see a much bigger problem on the horizon.
So the claim is that Schäuble and his thugs from Finland and Slovakia etc are acting out of greater insight when they pulled Greece back into line after there little moment of rebellion and OXI.
Apparently, the Eurozone “rules” and “principles” are sound arbiters that need to be obeyed or else bigger problems will emerge.
That is the basic bias of the article and the application is the so-called “mountain” of debt – the “bitter truth” – that Greece currently has.
According to the authors it is this:
… €340-billion mountain that has stymied the country’s economy over the past five years …
Which is about as far-fetched as one can get when analysing macroeconomic dynamics. What has “stymied” the Greek economy over the past five years, as they euphemistically call the destruction of the productive capacity of the Greek economy, is not the public debt that the Greek government is currently liable for, that is a symptom of the cause, a response to the cause.
It is also a guaranteed response as a result of Greece surrendering its currency-issuing capacity when it entered the Eurozone and began to use a foreign currency. I come back to that point later.
The reason the Greek economy is in Depression is not the stock of outstanding public debt (which is mostly now at very low interest rates and at rather long maturities), but the catastrophic collapse of spending (aggregate demand) since 2008, much of which has been driven by the ridiculous austerity that the Troika (aided and abetted by Germany dominance in European economic policy making circles) has imposed on the nation.
I provided some data on that collapse yesterday in response to a comment on Friday’s blog – Friday lay day – Surrendering to the Recession Cult.
The facts are obvious:
1. The scale of the austerity imposed on Greece was unprecedented for an advanced nation. Between 2009 and 2014, the discretionary component of the Greek government fiscal balance fell by 20.1 per cent compared to the Euro area average of around 4 per cent.
Fiscal swings of that magnitude in that short a space of time are virtually unimaginable. But they have happened and so the Greek economy was … shall we say “stymied”. More accurately it was choked to near death.
Please read my blog – Greece should not accept any further austerity – full stop! – for more discussion on this point.
2. Real GDP fell by 26.5 per cent between the peak June-2007 quarter and the March-quarter 2015. That is a Depression-type fall.
3. Unemployment remains above 26 per cent (March-quarter 2015) after rising from 7.3 per cent in the September-quarter 2008. That is a Depression-type rise.
4. With national income falling and unemployment skyrocketing, the components of private spending, it is little wonder that
real consumption fell by 24.7 per cent between the peak June-2009 quarter and the March-quarter 2015. That is a dramatic real collapse almost unprecedented in history.
5. With sales collapsing, there was no incentive for firms to continue to invest in productive capacity accumulation. And so, between the March-quarter 2008 and the March-quarter 2015, real gross capital formation fell by 59.8 per cent. The investment ratio fell from 24.6 per cent to 13.8 per cent at a time that the denominator (GDP) fell by 26 per cent. That is a dramatic real collapse almost unprecedented in history.
That is why Greece fell into a massive Depression. The growth in its public debt was just a reflection of the rise in public deficit as its tax revenue fell and the welfare payments rose – that is, the automatic stabiliser component of the fiscal balance.
Please read my blog – Structural deficits and automatic stabilisers – for more discussion on this point.
I repeat the basic rule of macroeconomics – spending equals income, which leads to output and employment.
Someone’s spending is another person’s income. There has to be growth in spending for income and output to grow.
If there is unemployment it means that total spending is insufficient to generate enough output and hence jobs to satisfy the preferences for work of the unemployed.
The solution is always for the government to either directly increase spending to lift sales in the private sector and stimulate further income and/or to cut taxes, which might lead to higher private spending.
If Greece’s debt was the problem rather than the response, then Japan would be similarly in a massive Depression. Yet its unemployment rate barely hit 5 per cent (very high for it). The Japanese government did not impose the fiscal austerity on its people, correctly understanding that as the issuer of the Yen it could freely spend in deficit and maintain support for total spending while the private sector recovered.
But our Handelsbatt geniuses then claim that the Greek debt problem:
… pales in comparison to the wider European mountain of debt, and the even bigger global mountain of debt standing.
Those debts have exploded since the global financial crisis started in 2007. The debt mountain has left a series of global economies around the world at the whim of banks, pension funds, and hedge funds that have filled their coffers in the hopes that this will magically bring about new growth and a better life for citizens.
I will come back to their implied comparison between Eurozone nations and the “United States, Britain and elsewhere” later.
But, if we take the US as an example, who bought the US government debt during the crisis? Well the answer is not the ‘whimsical’ banks etc, but t
I haven’t updated my database on these purchases recently but I wrote about it in this blog – The US government can buy as much of its own debt as it chooses.
In 2011, at the intense stages of the crisis, the increases in the US Federal Reserve’s holdings accounted for 61 per cent of the total increase in US federal government debt.
That proportion fell in 2012.
This New York Times article (February 21, 2014) – No Surprise, Fed Was Biggest Buyer of Treasuries in 2013 – reports that:
THE Federal Reserve financed most of the government’s deficit in 2013, in sharp contrast to the year before, when the Fed did not add to its holdings of Treasury securities.
The 61 per cent in 2011 was topped by the 71 per cent in 2013.
In other words, the US government (consolidated Treasury and central bank) can always assume the role as its own largest lender. That is, the Government can always borrowing from itself!
A currency-issuing government is never at “the whim of banks, pension funds, and hedge funds”. The private banks etc are always beggars at the table of corporate welfare provision if the government asserts its full range of capacities.
Please read my blog – Who is in charge? – for more discussion on this point.
Apparently, this “debt mountain” is the result of:
… a sort of stimulus-driven brand of capitalism that has spread itself around the world, driven by economists in the United States, Britain and elsewhere … [which] … could soon blow up in everyone’s face …
The ‘old-Japan-is-going-to-run-out-of-yen’ trick which characters like the authors have been trying on for the last 25 years – always using words like “could” and refusing to make predictions as to when.
But even the “could” is inappropriate when applied to currency-issuing nations such as Japan.
The article reinforces its lie with the usual metaphors that are designed to mislead the reader (or listener).
So there is a fancy graphic that compares Greece, the Eurozone, Germany, the US and Spain under the heading “A Mountain of Global Debt” and the mountain has “ballooned” from 2007 to 2015. Mixed metaphors even.
The next graphic compares Italy, France, the UK, China and Japan under the same heading.
Thank god, there were only two of these ridiculous representations.
Anyone with any understanding knows that the comparison between Eurozone nations with use a foreign currency (the euro) and the US, UK, China, and Japan, which are fully sovereign in their own currency (they issue it under monopoly conditions) is invalid when discussing public liabilities and their implications.
None of the Eurozone nations can guarantee their public liabilities with 100 per cent certainty. There are varying degrees of risk attached to any euro-denominated liability issued by a Eurozone Member State.
It might be argued that Germany public liabilities are low risk. That is probably true but they are not risk free. Any public liability issued, say by Japan is risk free.
Further, no Eurozone Member State can control the yields (interest rates) that it has to pay when it issues debt. Only the ECB can do that and it has demonstrated that capacity very obviously when it introduced the Security Markets Program (SMP) in May 2010.
All currency-issuing governments can control the yields that they have to pay on their debt anytime that they desire to do so. The fact that in this neo-liberal era yields are mostly determined by auction processes whereby the last acceptable tender bid from one of the private primary bond buyers sets the rate for that tender doesn’t alter the power of the government as the issuer to set whatever yield it likes including zero!
How do I conclude that? Simply, before the issuance processes moved to pure auction formats, tap systems were popular. So the government would announce it wanted to borrow $x and was prepared to pay a interest rate of say y percent. If the yield was below what the private sector thought was desirable the bids for the bonds would be less than the $x amount desired by the government.
In that case, the central bank would absorb the remaining value – that is, buy the private bond purchase shortfall. The yield didn’t alter, just the proportion of the tender taken up by the private sector.
We also know that the central bank could simply purchase all of the bonds if it was instructed to do so by the government. If there are laws that prohibit that now, the legislature can change them. If there are regulations that prohibit that, the government can alter procedures.
The central bank can always announce it will buy whatever bonds are available for sale in the primary market (as above) or in the secondary markets (after the bond is issues) and use its infinite currency issuing capacity to drive the yields to near zero (in secondary market debt) if it wanted to by pushing up the face value of the bond in the markets.
It is a simple, which has been done over and over again. That essentially is what Quantitative Easing does – drives down yields of a particular maturity segment of the asset portfolios held by the non-government sector.
And, to put it in more stark contrast, a currency issuing government, should it desire, can spend beyond its tax revenue without issuing any debt at all. It could simply instruct its central bank to credit whatever private sector bank accounts it desired to transfer purchasing power into – whether it be to purchase private labour, goods and services, or make income transfers.
All of which makes a discussion about ‘public debt’ rather lame when applied to currency-issuing governments.
No Eurozone government has these capacities which makes any comparison with nations such as Japan and the US irrelevant. Anyone who attempts such a comparison thus discloses their fundamental ignorance of the way monetary systems operate and the opportunities that a currency-issuing government possesses to advance societal well-being.
The article wants to apply their appalling logic to the future of the Eurozone.
They point out that “the German psyche and more conservative economic way of thinking” explains “why the German public has strongly supported Mr. Schäuble’s tough stance in talks with Greece over the past days, months and years.”
The message is clear: Germans are morally superior because they are thrifty. The rest of the world including the Eurozone should follow that approach and avoid the “happy now and pay back later” mentality that pervades governments around the world.
Well, that would be a very dangerous piece of advice in terms of Germany’s mercantilist growth model. Should the rest of the world adopt their particular constraints on domestic demand, suppressing real wages growth for their workers and running fiscal surpluses – the German fiscal surpluses would not exist for very long and they would be climbing, dare I say it, the ‘debt mountain’ except for them it would be a mountain of ‘schuld’ (guilt)!
The lectures that the German Finance Minister gives to the Eurozone belie that fact. Their export model can only work if other nations overspend (that is, incur debt) whether it be the Greek government being conned into buying second-hand military equipment or otherwise.
Further, having these other Eurozone nations in the monetary union (overspending) keeps the euro exchange rate lower than otherwise, which provides a boost to German exporters and allows the German government to run fiscal surpluses.
Remember this Reuters report (March 23, 2010) – Broke? Buy a few warships, France tells Greece.
We read that:
In a bizarre twist to the Greek debt crisis, France and Germany are pressing Greece to buy their gunboats and warplanes, even as they urge it to cut public spending and curb its deficit.
I have written in the past about how the Germans had been pushing Leopard tanks and other weapons onto Greece at the same time as claiming the Greeks were lazy and were spending too much. Please read my blog – Hyperdeflation, followed by rampant inflation – for more discussion on this point.
The blackmail element in the recent so-called negotiations between Greece and the Troika is not a new development.
The Reuters report said:
“No one is saying ‘Buy our warships or we won’t bail you out’, but the clear implication is that they will be more supportive if we do what they want on the armaments front,” said an adviser to Prime Minister George Papandreou, speaking on condition of anonymity because of the diplomatic sensitivity.
Apparently, when the Greek prime minister was negotiating at the time about fiscal austerity, the French we pressuring them to go ahead with billions of euros of military ships and helicopters. They agreed!
Germany has continued to flog submarines to the Greeks and has put those expenditures outside the austerity net in its demands through the Troika.
But the Handelsbatt authors cannot see any of this and claim that thus “brand of capitalism” (overspending) is “a brand that runs very much counter to the German psyche”.
Okay, see how far Germany gets if all the importers stop buying German products as part of their new German-inspired thrift measures.
Imagine what would happen to the German car industry if the euro rises too far as all nations engage in German-style thrift. I would welcome less Mercs and BMWs on the Australian roads, arrogantly tooting as they barge by as if they own the roads!
They observe that debt has risen during the crisis and nations are struggling to bring it down. But they fail to explain to their readers that the GFC was a particular type of recession – a balance sheet recession.
Please read my blog – Balance sheet recessions and democracy – for more discussion on this point.
These are generated by a crash of unsustainable levels of private debt and require sustained fiscal deficits by the government for extended periods to support growth and the restructuring of the private debt. It was not a typical V-shaped cycle where usually private capital formation declines, the economy recesses, and stimulus is applied as investment recovers relatively quickly.
All that is required in that case is a return to confidence on behalf of private spenders. In a balance sheet recession, longer term balance sheet changes are required in the private sector as well as a return to confidence.
So it is little wonder that the public debt ratios have remained high. Further, the process of private balance sheet restructuring has been interrupted by the manic austerity that governments have sought to impose, which has kept growth at well-below trend levels and provided very weak income growth.
But the Handelsbatt geniuses don’t mention any of that.
They think the prescription is for European nations to start obeying the Eurozone fiscal rules – the Stability and Growth Pact and its abominable additions (Two-, Six-packs, fiscal compact etc).
And, what they fail to say, is that if the European Commission had have maintained rigid discipline over the rules then the Eurozone would still be mired in deep recession rather than teetering on the brink of recession with massive inflated unemployment rates and rising poverty rates.
The authors, sensing they are on a roll, then really jump over the cliff.
They start railing about private debt claiming that:
Credit has become the new opiate of the people …
But, of course, they fail to tell their readers, they probably don’t know it themselves, that a government deficit (surplus) equals a non-government surplus (deficit) dollar-for-dollar, euro-for-euro.
Not all sectors can run down their indebtedness at the same time (under current institutional arrangements relating to public debt issuance).
Anyway, worse is to come – they start quoting the Excel Spreadsheet Champions – you know the ones that couldn’t (or deliberately didn’t) get some basic Excel arithmetic correct and then told the world, on the basis of the fraudulent or incompetent calculations, that governments were about to run out of money – Rogoff and Reinhart I am referring to here.
So as they predict that “deficit spending won’t be possible for ever” – yes, at this point, they bring the next neo-liberal economics rabbit (myth) out of the hat – the ageing population myth – we read – metaphorically of course – that there is a:
… ticking demographic time bomb.
Which I thought was a beautiful piece of scripting.
This fantasy story then tells us that:
Germany is the success story of exactly such an austerity-driven policy. Europe’s largest economy survived the 2008 financial crisis better than many of its peers, thanks in part to a tough previous decade that was characterized by relatively low government spending, low wage growth and labor market reforms.
Well, not exactly. It ran foul of the EU rules itself in 2002 and if the European Commission had have imposed its rules to the letter, then Germany would have been stuck in a worse recession than it experienced.
And then … as noted above … Germany’s export boom relied on non-austerity elsewhere.
At that point I concluded that the Handelbatt authors are cocooned in a sort of ‘Deutchedelusion’ and I noted my BS sensors had exploded.
I can’t write about this article anymore – but I can assure you there were references to “global debt traps”, “moral hazard” (in relation to debt relief for Greece), and the classic “Sovereignty ends where the interests of creditors begins”, which is the EU mantra.
Democracy is at the whim of the creditors
And if you have a little “Greek Spring” be warned the German “austerity-driven” model is about to crush you. But remember also, that the austerity imposed will exclude all the key items that underpin the German export growth.
These are the rules these days in Europe.
And this sort of nonsense is being read each morning by German industrial leaders. No wonder they support the current government.
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