Thursday, July 9, 2015

Understanding the Greek Debt Crisis With the Help of Paul Krugman and Its Significance in the Neoliberal Overclass Global Order

Hermann Josef Abs, the head of the then-Federal Republic of Germany ("West Germany") delegation in London signing an agreement on February 27, 1953 that effectively cut his country's post-World War II payments in half.


So let's talk about the Greek crisis in some depth ...

For starters, as Thomas Piketty pointed out last month, Germany has no frickin' standing to lecture anyone about the morality of paying in full all debts given its own history.

Prof. Piketty is also one of five economists who penned a joint letter to German Chancellor Angela Merkel stating that austerity has been massive disaster, humanitarian and otherwise.

German Chancellor Angela Merkel, June 29, 2015.


This especially applies to debts that become ever-more-crushing, unpayable, and the source of endless suffering over time as a result of all the frickin' austerity and the depression economics that ensues.

I realize that this a hard topic for too many Americans to grasp -- weaned, as they are, on a puritanical hyper-morality about the evils of being a debtor (no matter the reason) and how close-to-Godliness it is to pay them back (even when that is actually impossible). (It doesn't matter that most Americans don't actually live that way -- they will go all apoplectic fighting for the "right" of the ultra-rich, banks, credit card companies, insurers, sundry mega-corporations, and indeed the whole casino economy to take advantage of them according to "free market" principles.)

Huffington Post headlines on the Greek debt crisis, screenshot at 8:22PM July 3, 2015.


That aside, what I want to emphasis is that the Greek debt crisis and how it plays out (the situation is still very bad with banks effectively closed in Greece and the country running out of euros) is such sprawling and multi-faceted and yet vitally important topic in a world dominated by a morally and ethically anti-democratic, reverse-class-warring neoliberal oligarchical overclass that is ultimately decaying* that I think it best if I just post some links to pieces discussion the situation and its context.

A man walks past anti-euro graffiti on a wall in Athens, June 30, 2015.

The word in Roman letters the German word "Nein" (No), but using the euro symbol "€" for the "e". The "no" is for the referendum that just happened in which the "no" vote won with 61% versus 39% for yes.


*To be clear, what eventually replaces this corrupted oligarchy of corporate and banking hegemony, hyper-financialization, and working class-destroying deflationary economics is up-in-the-air and could easily be far-right fascist far worse, not some old-school Scandinavian-style social democratic quasi-utopia. However, let's save that topic for another time.

Most of these are Paul Krugman links -- both from his New York Times twice-weekly op-ed columns and his New York Times -hosted blog. Prof. Krugman is the best in this situation and needs to be read on a daily basis as events unfold. However, there are some other pieces including a discussion in of a March television interview of Noam Chomsky.

In that interview, Chomsky calls what the European Central Bank, the European Commission, and (most shamefully because it knows better) the IMF are doing -- at the bidding of the German Government and German (and other European) banksters -- exactly what it is: Outright class warfare.

There is also a nice piece by Patrick L. Smith in on the matter.

Huffington Post headlines on the Greek debt crisis, screenshot at 10:57AM July 7, 2015.


Disregard whatever nonsense you read in the right-tilted and larger neoliberal business media, all lap dogs and tools of oligarchy and its bankers. Oh, and pay absolutely no mind to whatever crap the "Very Serious People" of the Washington Consensus put out. Suffice it to say, this is embodied in its House Organ, the Washington Post editorial board with its "disembodied voice" of Fred Hiatt and his gang.

Anyway, here are the Paul Krugman pieces (all with links embedded and, as appropriate, the charts from the entries):

Ending Greece's Bleeding


The truth is that Europe's self-styled technocrats are like medieval doctors who insisted on bleeding their patients — and when their treatment made the patients sicker, demanded even more bleeding. A "yes" vote in Greece would have condemned the country to years more of suffering under policies that haven't worked and in fact, given the arithmetic, can't work: austerity probably shrinks the economy faster than it reduces debt, so that all the suffering serves no purpose. The landslide victory of the "no" side offers at least a chance for an escape from this trap.

Huffington Post headlines on the Greek debt crisis, screenshot at 12:20AM June 29, 2015 (and featuring an upside picture of and bad pun on the word the Parthenon).


Austerity Arithmetic

Scatterplot showing Greek output gap versus the rate of change of the GDP deflator.


Yes, it's a crude Phillips curve, but it sort of works. And it suggests that a 1 point rise in the primary surplus, which requires austerity that causes a 3-point fall in real GDP, will reduce inflation by about 0.7 percentage points (3*0.23). And if you start with debt of 170 percent of GDP, this raises the debt ratio by more than a percentage point each year. That is, the attempt to reduce debt by slashing spending actually raises the ratio of debt to GDP, not just in the short run, but indefinitely.

OK, we can soften this result by bringing in the effect of falling Greek prices on exports, which should boost economic growth. I'm still working this one out, but at best it makes austerity successful at reducing the debt ratio in the very long run -- think decades, not years. Austerity for a country in Greece’s position appears to be an unworkable solution even if debt is all you care about.

And just to be clear, I'm basically doing textbook macroeconomics here, nothing exotic. It's the austerians who are inventing new economic doctrines on the fly to justify their policies, which appear to imply not temporary sacrifice but permanent failure.

Simply put, this model shows that austerity can ever work out on its own terms because a declining economy causes no improvement in the debt-to-GDP ratio and (in the context of "hard money", which is what the euro is for Greece -- see below), it only gets worse over time. Thus, austerity produces quasi-permanent suffering for no purpose (well, actually, there is a purpose but it's ugly --see very bottom of this entry).

A line of unemployed people in Athens back on Oct. 24, 2011 waiting for unemployment assistance.

The situation today over 3-1/2 years later -- nearly 26% unemployment rising to 50% among the young -- has not gotten any better.


Scattered Notes on the Euro


It's becoming hard to see any path that doesn't lead to Grexit; it is also, although this is still something few want to accept, becoming increasingly obvious that Grexit is Greece's best hope. Otherwise, where is recovery ever supposed to come from? Even with massive debt relief, Greece will be forced to run huge structural primary surpluses -- that is, pursue tax and spending policies that would produce huge surpluses if the economy were anywhere near full employment -- and in so doing keep its economy depressed for the foreseeable future.

Or to put it a bit differently, what would be a straightforward policy problem if Greece had its own currency becomes an almost insoluble mess because it doesn't. At some point the argument that the costs of a transition are too high wears thin.

A homeless man sleeps by a graffiti-covered doorway in Athens, January 21, 2015.

Homelessness is rampant now in Athens as a result of the economic crisis.


Loan Star Bailout


[A German economist asked Jared Bernstein]: "How do you think the people of Manhattan would like bailing out Texas?"

Ahem. As it happens, the people of Manhattan did bail out Texas, big time. I wrote about it here. The savings and loan crisis, which was very costly to taxpayers, was mainly a Texas affair:

The cleanup from that crisis cost taxpayers about $125 billion, back when that was real money. As best I can tell, around 60 percent of the losses were in Texas. So that’s around $75 billion in aid -- not loans, outright transfer.

Texas GDP was about $300 billion in 1987. So this was equivalent to giving -- not lending, not even taking an equity stake -- Spain 25 percent of its GDP to bail out its banks.

But of course Manhattan was never asked to bail out Texas; we had a national system of deposit insurance, and the big Lone Star bailout was automatic.

A rather clever bit of graffiti showing Angela Merkel with Mickey Mouse ears under the caption euro (symbol) Disney (a pun on Euro Disney, now Disneyland Paris), Athens, June 15, 2015.


Debt Deflation in Greece

Percent change in debt, GDP, and debt-to-GDP ratio in Greece from 2009 to 2014.


However things play out from here -- I find it hard to see a path other than Grexit -- the troika's program for Greece represents one of history's epic policy failures. Even if you ignore the economic and human toll, it was an utter failure in terms of restoring solvency. In 2009, before the program, Greek debt was 126 percent of GDP. After five years, debt was ... 177 percent of GDP.

How did that happen? Did the Greeks continue massive borrowing? As the chart shows, the answer is a definite no. Greek debt at the end of 2014 was only 6 percent higher than it was at the end of 2009. Admittedly, that number reflects a significant haircut on private debt along the way, but it was still nothing like the continued borrowing binge some imagine.

What happened instead was, of course, the collapse of GDP -- itself largely the result of the austerity program.


Milton Friedman, Irving Fisher, and Greece

Excerpt of a key passage in a 1933 article by Irving Fisher entitled The Debt Deflation Theory of Great Depressions explaining the self-defeating interaction between deflation and debt.

Fisher's whole point may be summed up by this sentence: "The more the debtors pay, the more they owe."**  Fisher is talking about deflation and debt. Milton Friedman talked about why wage deflation is a very poor way to bring about price adjustments as opposed to having a free-floating currency. (Friedman's argument applies to the euro but it also applies to any "hard money" situation including the frickin' gold standard.)

**As an aside, the entire Ebola-like American credit card industry and sky-trillion dollar student loan racket is predicated on the truth Fisher spoke.

Undated picture (recent, I assume) of young Greeks on a hill above Athens (probably around sunset).


Policy Lessons From The Eurodebacle

This entry discusses the time of austerity policies in Canada in the 1990s and why it really worked (hint: current depreciation that offset the drag from austerity).


It's now clear, or should be clear, that the Greek program was doomed to failure without major debt relief; no matter how hard the Greeks tried, austerity would shrink GDP faster than it reduced debt relative to the baseline, so that the debt situation was bound to worsen even as the attempt to balance the budget imposed vast suffering.

So, how does this play into U.S. policy debates? Well, Republicans love to warn that America might turn into Greece any day now. But look at the policy mix that is now de facto GOP orthodoxy: sharp cuts in government spending (maybe offset by tax cuts for the rich, but these won’t provide much stimulus), combined with a monetary policy obsessed with fears of dollar "debasement". That is, the conservative side of the US political spectrum, while holding up Greece as a cautionary tale, is actually demanding that we emulate the policy mix that turned Greek debt into a complete disaster.

No surprises there. Today's GOP, consisting of radicalized neo-Confederates at the bottom and Koch Brothers-type corporate oligarchs at the top, by definition "achieves" the opposite of the stated goal. Just don't tell Ron Fournier that.

A woman walks past wall graffiti showing a hypothetical zero euro coin, Athens, Greece, June 4, 2015.


Deflation and You-know-who

The BrĂ¼ning Deflation in Germany encompassing the period 1924 - 1939 with the line showing the GNP (not GDP) price deflator.

In this Krugman piece, he takes some issue with an otherwise excellent must-read piece by Eduardo Porter in the New York Times (also linked at the top of this entry) discussing the time that Germany had about half its World War II debts forgiven (in 1953) by the Allies.

Porter stated as fact that it was the Weimar hyperinflation (itself Germany's way of inflating away its crushing Treaty of Versailles debts) that facilitated the rise of Adolf Hitler. Prof. Krugman writes:

Yes, there was a hyperinflation in 1923, which may have helped radicalize German politics. But the proximate factor in Hitler’s rise to power was the great deflation of the 1930s, brought on by a disastrous attempt to stay on gold.

A woman walks past street art (not graffiti??) by street artist "Achilles" in Athens, June 4, 2015.


Finally, here are the links to the Chomsky interview and Patrick L. Smith pieces:

Austerity is Just Class War

This is actually from an interview this past March with Democracy Now! The direct link to the interview is here.

Paul Krugman and Noam Chomsky


Smith argues that the battle of the Greeks against all this endless austerity and resulting mass suffering is identical to the one we need to be waging in the U.S. for fairness over markets and banks, lest the neoliberal world order crush our country as well.

A man identified as Pantelis Lembessis, a harbor traffic controller in Greece.

This picture is one of a series of people in the New York Times article "Portraits from Greece as it Endures a Crisis" (link here).


This raises the larger conceptual issue, namely, that all this austerity and deflationary (or quasi-deflationary) economics is really about helping the superrich (the 0.1%) in their endless reverse class warfare against everyone else, especially the working poor and middle class.

It's about returning to a 19th Century world of servant underclass and Gilded Age overclass but in a 21st Century context.

Christina Economou, a restaurant owner in Greece.

This picture is from the same series as the one directly above it.


Oh, and just for fun, here's a July 7th psychobabble piece from the UK Guardian (link embedded): Tsipras and Merkel: polar opposites who depend entirely on each other.

Yes, this appears to be an actual photograph of Greek Prime Minister Alexis Tsipras standing next to and leering warily at German Chancellor Angela Merkel in a meeting in Berlin that was held on March 23, 2015.


They are a study in contrasts, the yin and the yang of Europe’s epic battle for mastery of its destiny. But Angela Merkel and Alexis Tsipras are now almost umbilically linked -- the political fate of the one hinging on the policy choices of the other.

You can read the rest at the above link if you like.

OK, I think I posted the bulk of what I wanted to post. My next planned update might not be until Friday.


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