Volatility

June 10, 2010

Eurozone Lethal Zone

 

An update on the latest stage of the crash in the tottering Eurozone. Over the past week the calls for calm were throttled into incoherency by new waves of bad news. Redolent of Greece last fall, Hungary announced that its impending budget deficits will be worse than expected. This resounded ominously among the similarly precarious budgetary perches throughout Eastern Europe. It’s unclear how exposed Austrian banks are. (By which I mean, whether they’re far more insolvent than we previously thought. Of course, all the banks are insolvent.)
 
Meanwhile Ireland, already deeply enmeshed in bailouts and “austerity”, indicated that its own ongoing bailout will soon need another bailout. But all of us who scoffed at there being any such thing as a final, sustainable Greek bailout were of course just being silly, right?
 
The Greek and Icelandic protestors who are in combat against embarking upon the bailout-austerity path in the first place are now proven correct. They saw what happened to Latvia, how the austerity immolation is burning the people alive while the bailout helped the banksters only. Now they see the same thing playing out in Ireland. Keep fighting.
 
Meanwhile the speculators, the finance terrorists, are extending their attacks from the Mediterranean countries to Belgium and France itself. Suddenly all “safe havens” other than the dollar itself don’t look so safe.
 
The response among the Eurozone’s stronger ( a relative term) economies looks to be pre-emptive austerity. Germany and the UK have announced the usual package of cuts in public sector jobs and spending. They’ve made the usual failure to announce any “sacrifice” on the part of the banks or the rich whatsoever.
 
Meanwhile Timmy Geithner of all people was in Europe to suggest that the trade surplus countries should NOT be thinking about austerity and what in the US would be called “fiscal responsibility”, that is gutting public spending in order to benefit the banks. Instead they should forget about deficits for now and focus on increasing domestic consumption.
 
Needless to say Timmy’s not becoming a born-again Keynesian. Rather, as he thrashes about looking for a way out of Bailout America’s debtor predicament, one of the mutually contradictory things he wants is to correct “trade imbalances”, and that would mean Europe imports more from the US. Trade imbalance of course means lowering the US trade deficit. So the euro has to become stronger relative to the dollar, which seems like it shouldn’t be so hard given the Fed’s churning out of free money to the banks and the US treasury’s continued profligate borrowing. But then in the same breath Geithner also wants the Chinese to stop “manipulating” the renminbi, by which he means they should let the Fed’s currency manipulation prevail to the point that the dollar strengthens vs. the renminbi. But how devalued can a currency get? The Fed already wants Goldman’s and JPM’s borrowing costs to be zero or better. The “primary dealer” banks actually lend the money they borrow from the Fed to the Treasury at a higher rate; they’re thus being paid by the government to borrow from the government. (Since, as MMT demonstrates, the currency is public property, if the Fed prints the currency it’s by definition part of the government. Having the Fed exist at all is simply adding unnecessary complexity for the purpose of enabling bank looting. It’s obvious from the public interest point of view the Treasury should directly issue the currency.)
 
So how can any of that work? Ask Timmy. It’s a complete mystery to sane people. Meanwhile, in spite of the Fed’s and Treasury’s heroic efforts to destroy the dollar, it’s still even now the last resort of for the markets, the last “safe” haven. Therefore try as they might they can’t weaken it enough against other currencies.
 
Prior to the crisis the EU was close to being in trade balance, and that’s the course Geithner was trying to convince them to maintain. But instead they’re starting to bail out on the Bailout, each man looking out for himself.
 
To Geithner’s pleadings, Merkel responded, “NEIN!” The Germans are trying to break free of the external round of bailouts (where they’re expected to dig deeper as bailout creditors, even as Geithner wants them to stop being such immense trade creditors; the contradictions abound), while they of course try to continue to bail out their domestic finance sector, and do it all while scapegoating those nasty spendthrift deadbeat “PIIGS”. But Germany has been so much in surplus and the Mediterranean economies so much in debt because the Eurozone strait jacket relatively devalued the euro in France and Germany while overvaluing it in the South. That can no longer hold. Therefore Merkel also shouted, “ACHTUNG! AUSTERITY!” It turns out she wants the German people to have to pay after all. Just, instead of being liquidated to directly bail out the Greek rich and indirectly bail out the German and French banks, they’re to be liquidated to directly bail out the German banks. I wonder how many German teabaggers will fall for that one? So far election polls and results look somewhat better than in Bailout America. Merkel’s neoliberal coalition’s being rejected.
 
At the same time French prime minister Sarkozy was heard to chirp happily, “I see only good news in parity between the euro and the dollar”. (Which is too much for the Germans, not wanting that much of a euro devaluation; thus we see more daylight between tottering France and the relatively stronger Germany. But don’t worry, in the end every debt domino will fall.) ECB honcho Trichet is mouthing the party line of deficit terrorists everywhere, we must give the markets what they may someday want, much lower deficits.
 
For everyone it’s going to be “beggar thy neighbor”, try to make him go into debt and not you. (Why this moral slogan? Funny how capitalism and “free markets” are supposed to be so dispassionate and “rational”, except where the game is going against a player. Then it’s suddenly immoral. How dare you try to beggar thy neighbor! Don’t you know we’re all in the same boat?)
 
As I’ve written, the system’s reaching the limits of what the Bailout can do by itself. The bailout’s unsustainability is now manifest, as mass defaults are imminent at every fractal level. As always, the entire bubble wants to deflate, and gravity becomes ever more insistent as more bailout weight is added to the agglomeration of debt. Perhaps in most places (but not in the US, alas) we’re at the political limits of the Bailout as well.
 
That’s why they’re moving on to the next step, “austerity”. They already foreclosed and repossessed your car. Now they’re going to directly mug you for what’s in your wallet. That’s also the purely economic reason (as opposed to any Peak Oil reason) why “free trade” will have to break down. It was always a scam to benefit the elites only, but now those elites will have to start throwing one another overboard, beggaring their neighbors.
 
But all of this can be swept away at any moment if the whole Tower of Babel simply crashes down all at once. That’s a possibility, and who knows what will trigger it. But whatever happens, our journey into the post-debt, post-oil age has commenced, and we should be preparing. That’s why I hope we in America look to a new convention.
 
As for Europe, they better look to their nation-states where relevant, and in most cases to their medieval cities. Because the ridiculous “European Union” sure won’t be making the trip with us.
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4 Comments

  1. Around a year ago, I started following Bill Mitchell’s billy blog; after several months I was led to read LR Wray’s ‘Understanding Modern Money’. That book, combined with the extensive examples provided in Dr Mitchell’s billy blog, allowed this retired non-economist to recognize the utility of the MMT paradigm for government control of the fiat currency system (a major justifications for the existence of a federal government), namely, to facilitate full employment of the citizens in performance of useful works. Apparently, the principles of MMT have been bastardized by the PTB (controllers of the Federal Reserve Bank) to convince the decision-makers in the Federal government to continue to accept the nonsensical neo-liberal policies promoted by the M Friedman acolytes who appear to comprise the economists upon whom President B Obama relies for guidance. No wonder things are so confusing to the average American citizen who does not spent time to try to learn more about current events.

    As I previously commented, the recent Supreme Court decision to allow corporations to exert undeserved economic power to facilitate their designs via their control/selection of politicians provoked Lawrence Lessig to propose a constitutional convention (CallaConvention.org):
    http://www.callaconvention.org/pages/about/
    This effort has been underway for several months; it would be of interest to get Russ’ input on the focus of that effort.

    It would appear that the banksters became the successful financial crooks they are because of their cleverness and relationships. They appear to control the MSM, the government, most aspects of the financial system, insurance and ratings agencies, and on and on and on. It is not clear that there is any way their present status could be thwarted as they appear to be capable of mind/thought control of such magnitude that both the governmental PTB, but the majority of American citizens, are unaware that they are mere pawns/proles. If you assumed that the super-wealthy, super-powerful were also smart or responsible, then you should wonder what they do with their wealth which might have any lasting or survival value. Questions, questions! One wonders when awareness facilitates devolution into recognition of futility? Maybe the casino mentality is the most satisfying technique for anticipation of plugging the leak in the Gulf of Mexico as well!

    Comment by William Wilson — June 10, 2010 @ 10:04 am

  2. Any novice who attempts to understand some of the complexities of current events, might find that MMT (modern money theory) provides an understanding of basic macroeconomic considerations as to how a Soverign economy, such as that which exists in America, might work to facilitate avoidance of unemployment and all of its’ undesirable consequences. In order for MMT to work properly, the persons who assume responsibility for regulation (presumably, the Dept of Treasury under leadership of a responsible non-political individual/group) would have to agree not to screw the citizenry. This is, of course, a non-attainable situation in the real world at present, though things may change sometime in the future (or not). In any event, there are many components of the micro-economy which, while not integral, could certainly be accommodated and influenced by MMT as noted by Tom Hickey’s reply to NickB:

    Responses to “Australian labour market data – mostly discouraging”
    http://bilbo.economicoutlook.net/blog/?p=10204#more-10204
    Comments:

    ‘NickB says:
    Thursday, June 10, 2010 at 21:52

    Dear Bill,
    I’ve just started reading your blog having recently got into monetary economics after encountering ‘the Ecology of Money’ by Richard Douthwaite, ‘the Grip of Death’ by Michael Rowbotham, and ‘New Paradigm in Macroeconomics’ by Richard Werner. Some of your own books are on order. I was heartened that you also take an interest in climate change and permaculture, topics that really motivate (and concern) me. I was wondering how you square the following circle. Judging by the blog, your basic normative economic perspective is growth oriented, to maintain full employment. But economic growth, particularly within the developed world, is the main driver of climate change. What would the implications be for MMT of non-growth economics and can this be squared with full employment? Or do we need to abandon full employment, if we think (as I’m inclined to) that saving the planet is more important? I would love to hear your views on these issues, which to me are where the real frontier social and economic issues are currently at.
    Best Wishes,
    Nick

    Tom Hickey says:
    Friday, June 11, 2010 at 1:45

    NickB, good questions. They are questions I encounter regarding MMT also, which some progressives see as just another way of continuing business as usual.

    MMT just describes the modern (post ‘71) monetary system and explains how it works. This suggests principles of monetary and fiscal policy along the ones of Abba Lerner’s functional finance. It also provides a version of macro based on sectoral balances, as developed by Wynne Godley.

    This view then has to be applied to specific data and particular circumstances to be useful. One on hand, it provides an understanding of current conditions, and on the other, shows what the different policy options are. Choice among options is a political matter, hopefully to be decided democratically after informed debate and due deliberation.

    MMT just deals with what is possible given the data. Why is this such an advance over the present mainstream approach. The present approach is theoretical, based on assumptions that are not empirically grounded and often just implausible if not already disconfirmed. MMT is non-ideological, and it can be applied in a variety of ways, across the political spectrum.

    Moreover, in approaching problem-solving at the global, international, and national levels, everything relevant has to be taken into account, not just economic “efficiency” in producing unlimited growth. It is obvious that unlimited growth is unsustainable with limited resources. The challenge facing humanity is to optimize resource use for general welfare and prosperity. This is going to involve conservation, technological innovation, and what R. Buckminster Fuller called “design science,” as doing more with less, e.g., by removing dead weight. This is as much an engineering problem as an economic one.

    Moreover, moral and ethical issues are involved, so it is at bottom not just facts but also norms that are at issue. Without acknowledging the genuine philosophical issues, the debate revolves around arguments over subsidiary issues like efficiency. Political differences are philosophical ones, although they are often disguised as economic ones. In general, MMT’ers generally take the philosophical position that government is about providing for public purpose, rather than merely providing personal security and protecting property rights. This does not imply that MMT’ers are “socialists,” however.

    Many MMT’ers are libertarians of the left without being social anarchists. They agree that while democracy may be flawed in many ways as it is practiced, it is the best system yet devised. They also agree that markets are the optimal means for price discovery. So MMT should not viewed as any kind of proposal for government takeover. They are aware that democratic government is susceptible to capture from the right and left, and many see present governments as being largely captured intellectually by the right at present. Since this is generally the direction “pro-growth” comes from, I would say that most MMT’ers are opposed to that in its present form, which clearly is not working.

    MMT provides a solid financial and economic understanding for approaching this challenge based on how the system presently works, how it might be changed to improve it, and what the options are for dealing with present challenges. One of the greatest “obstacles” is thought to be insufficient funds. MMT shows that this is not the real problem. Economics always comes down to real resources and their distribution. Money just facilitates transactions as a medium of exchange, provides pricing or resources and accounting records (unit of account), and stores value, allowing for saving as deferred consumption, as well as debt financing that draws demand forward. Money just “greases the wheels” of commerce, and the issuer must ensure that just right amount of grease is provided to reduce friction to prevent seizing up (deflation) without gumming up the works (inflation).

    So MMT per se says nothing a priori about conditions, e.g. through assumptions. It provides a lens for viewing data a posteriori, and a matrix (sectoral balances) for organizing it and extrapolating from it. This suggests possible options for fiscal and monetary policy, as well as dealing with money creation by banking as a public/private partnership, e.g., in light of Hyman Minsky’s financial instability hypothesis and Irving Fisher’s debt deflation theory of depressions.

    It is quite clear at this point in time that present conditions require a sustainable approach. MMT offers a reality-based framework for approaching that challenge in contrast to an ideological one that is based on myths.’

    As regards LR Wray’s views on current events, check the following blog entry:
    Bye-bye to Bernanke’s ‘Insidious Banks’: End ‘Too Big to Fail’ in 2 Easy Steps
    Monday, 03/22/2010 – 1:18 pm by L. Randall Wray |

    http://www.newdeal20.org/2010/03/22/bye-bye-to-bernankes-insidious-banks-end-too-big-to-fail-in-2-easy-steps-9120/conomicou

    Comment by William Wilson — June 10, 2010 @ 2:35 pm

  3. William, thanks for the Lessig link. I’ll check it out.

    I haven’t delved deeply into MMT, but based on the summaries I’ve read the takeaway point for me was the fact that only the “government”, i.e. the public society, can “create” money, so in its store of value function money is really public property. Rather than use wealth for a productive purpose one chooses to store it using the existence of society as a bank.

    So in effect hoarded wealth stored as public money no longer exists as “private property” for the time being, though it can be reconverted to a private holding as soon as you use it to buy a real good or service.

    (Needless to say, financial “products” aren’t real good or services; that’s just another form of fictive “money”, i.e. publicly stored wealth.)

    It follows that it’s pointless as a practical matter and criminal from a moral point of view to alienate this public money-creation function to the bank rackets. E.g. the Fed should be abolished. The money should be directly created by the public in proportion to the real wealth created by the farmer and worker.

    It’s similar to the Greenbacker demands of the 19th century Populists.

    So any MMTers out there, how badly did I mangle that? 🙂

    Comment by Russ — June 10, 2010 @ 3:19 pm

  4. On 4_30_2010, Pavlina (one participants in the ‘Fiscal Sustainability Conference’ held at GWU on 4_28) wrote:
    Do Not Confuse Solvency with Sustainability
    By Pavlina R. Tcherneva
    http://neweconomicperspectives.blogspot.com/2010/04/do-not-confuse-solvency-with.html

    Note also: Tom Hickey’s comment (ignore a few typos) which points out the utter lack of relavence of the neo-liberal deficit-hawk arguments.

    As many are currently aware, the great influence of economic proposals put forth by Economics Nobelist M Friedman seemed to correlate in a positive manner only temporarily with the real world performance of Chile’s economic performance under dictator Pinochet’s regime (at best, a rather sorry example). Friedman’s example is another reason why a Nobel prize in Economics is at best a sort-of bad joke!

    In the following article, Randall Wray explains the nonsensical nature of the ‘Social Security solvency’ argumnets which the Pete Peterson-funded deficit-hawks keep harping on:

    Thursday, March 25, 2010
    Tell your representative to leave Social Security alone
    SOCIAL SECURITY CANNOT GO INSOLVENT
    By L. Randall Wray
    Ok, here is the dumbest headline the NYTimes has run in recent days:

    http://neweconomicperspectives.blogspot.com/search/label/L.%20Randall%20Wray

    Comment by William Wilson — June 10, 2010 @ 7:54 pm


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