A reply to an emotional blogger

R. G. Danon | July 28, 2012 at 1:37 pm | Reply

Greece does not need compassion it needs a clear vision and a road map to prosperity. Unfortunately, the vested corrupt interests of the few have resulted in policy decisions with disastrous effects for the country and its citizens. It is not the implementation of the evil Troika directives but unequivocally misplaced Greek government choices of where to cut and whom to tax. When this selection had the inevitable depressive outcome, politicians blamed the Troika, the ultimate scapegoat.
Greece needs to understand its problems, a made in Greece unsustainable deficit which was condoned long enough to nurture a second monster in the way of its debt. Both of these are clearly successive Greek government creations being blessed of course by the easy money of the EU.
As masters of our own predicament and beneficiaries of unprecedented debt forgiveness, we need to ask ourselves what is the road to restoration, embracing EZ membership in a world economic environment hostile to new initiatives.
1- Greece needs a simple tax system which punishes tax avoidance and evasion not based on Objective (miscued) values or Inferred income which are both subject to increased bureaucracy and distortions. A system conducive to the promotion of private investment.
2- Greece needs to become extraverted to promote foreign direct investment because it’s highly expansionary and deficit reducing particularly through the process of privatizations. To claim this would be a fire sale of Greek government assets is a complete misrepresentation of facts playing to the aspirations of political demagoguery and private interests.
3- Greece has to reduce and shut down redundant public companies created for no other purpose but to gain politicaly leveraged votes, a major misallocation of scarce resources.
4- Above all Greece’s legal system must be simplified protected and enforced in every aspect of everyday life. The notion that illegal behavior remains unpunished is the incubator of corruption.First & foremost though Greek politicians need to take this initiative by abolishing immunity, as the minutest symbolism of the sacrifices demanded of its people.
Greece can. Will it?

A short blog explaining Greece to a follower

Greece’s popular uprising takes aim at the austerity measures undertaken by the previous government in trying to bring Greece’s finances under control. These have to a large extent been dictated by the Troika, the EC, ECB and the IMF as to the size of reduction in deficit or addition to revenue however, without reference to the mix those policy measures might take. Greece is currently running a budget deficit of around 10% of GDP and a debt to GDP ratio of around 150% after the recent haircuts.  

Unfortunately, the previous government imposed the simplest form of implementation but probably also the harshest, reducing pensions and salaries in the public sector and increasing taxes across the board. This resulted in a severe contraction in economic activity and brought what little dynamism Greece’s economy had to a standstill. Unemployment in the private sector increased dramatically whilst revenues from higher taxes did not have the desired effect as the economy contracted. At the same time the budget deficit although initially contracted reversed direction as  government was unwilling to reduce its bloated size falling hostage to  its own predicament. Equally banks stopped lending as it became apparent that they were insolvent thereby accelerating the contraction.

Instead of putting blame therefore on their own incompetency and inadequate half measures, politicians blamed the Troika and the signed Memorandum of understanding which had an aim at deregulating markets and creating a more competitive environment for entrepreneurial Greece.   

So coming back to your two points laying blame on the greedy banks and or the lazy protesters unwilling to forego their hard won privileges my comments are:

1-      As far as banks are concerned Greeks have never really identified them as the cause of their problems only in as much as they form part of the world financial system which was to blame for the initial financial crisis. To a large extent Greek banks did not participate in this frenzy of lending which was commensurate with the crisis, if anything the banks were quite prudent in their lending practices. The mistake was that they were forced to invest in Greek government bonds as a gesture of solidarity, a quid pro quo, a token for their existence. This meant that as these securities were marked down by more than 50% owing to the well documented haircut, they became insolvent as banks had a very large proportion of their assets invested in them. It was the spendthrift government that brought down the banks as opposed to the banks creating the problem in countries like Spain, Ireland and of course the US.

2-      In the case of lazy protesters there is a lot of truth to this assertion. Over the course of the last three decades we had to a large extent a socialist government run by PASOK with a manifesto of deficit spending and promises of increased electoral public employment in exchange for votes. The centre right NEW DEMOCRACY party also lay claim and embraced this modus operandi effectively condoning this behaviour. This was effortlessly carried out as Greece was the beneficiary of very low interest rates courtesy of the Euro and the party euphoria that ensued having no regard to the longer term structural imbalances prevalent throughout this period. Equally, massive transfers of wealth occurred to help the periphery catch up with the core. It goes without saying that this money did not find a home in productive investment but rather in excessive consumption, lavish living and Swiss and local bank accounts. Europe turned a blind eye as it was in many ways easier. At some point Greece had to pay the ferry man. Lending seized and the Troika imposed its lending conditions. The problem is this bloated Government sector of spoilt (un)public servants has never been cut to size, a large part of which earn excessive salaries, a large part of which is totally redundant and of course is being maintained at the expense of the private sector which in neglect is being asked to pay an ever increasing share of taxes. It is self-evident that this process has a dead end and we have reached it.

This  is what is currently happening in Greece.  I hope it is of some use

Catastrophic Credibility

By Paul Krugman

A little while ago Ben Bernanke responded to suggestions that the Fed needed to do more — in particular, that it should raise the inflation target — by insisting that this would undermine the institution’s “hard-won credibility”. May I say that what recent events in Europe, and to some extent in the US, really suggest is that central banks have too much credibility? Or more accurately, their credibility as inflation-haters is very clear, while their willingness to tolerate even as much inflation as they say they want, let alone take some risks with inflation to rescue the real economy, is very much in doubt.
Yesterday I pointed to the German breakeven, a measure of euro area inflation expectations, which has plunged lately. Here’s a longer view:

Note the peak in April 2011. It wasn’t very high; slightly above the ECB’s target, but arguably still too low to make the needed adjustment within the euro area feasible. Nonetheless, the ECB raised rates — and that was when the euro really began falling apart. The direct effects of the rate increase can’t explain that unraveling, but the effect on expectations — aha, so they really are that fanatical about price stability! — can.
Now the breakeven is plunging. I’d like to think that the ECB is holding frantic meetings and planning to announce a surprise sharp rate cut, preferably to zero, the day after tomorrow. But I doubt it. The fact is that the ECB is highly credible: most observers, me included, are quite sure that it is totally allergic to inflation and relatively indifferent to the collapse of the real economy.
The Fed has conveyed a milder form of the same message, issuing forecasts that show inflation slightly below target and unemployment far above target; given its dual mandate, this should be a flashing siren calling for more action. Yet these forecasts have been accompanied by statements to the effect that no action is currently called for. The Fed has therefore created the credible expectation that it will move only if inflation is far below the claimed target, and doesn’t really care about unemployment.
My earnest hope is that both central banks will rethink the meaning of credibility, and in particular what kind of credibility they really want to have, very soon. And by very soon I basically mean tomorrow.

And my response:

RGDanon

Greece

Authorities have three choices:
1- Go through many years of austerity and or growth enhancing policies to reduce both deficits and debt to sustainable levels a very long process of perseverence.
2-Central banks abandon their narrow mindedness and allow inflationary EXPECTATIONS (it is this variable expectations, that is important to trigger demand side incentives)
3-Even more importantly design a process to redistribute wealth to households by increasing motgage debt forgiveness and thus wealth, allowing for increased final demand as net worth and prosperity values rise.
In summary, it is a function of transfering wealth from creditors to debtors. If this process is not accelerated then it will be imposed by market forces and or political and ultimately social repercussions. This effectively, is what is currently happening in Greece.
It goes without saying that a combination of all is also another desirable mix.

Inflation credibility and debt forgiveness

If Central Banks are so averse to heightened inflationary expectations in order to protect their proclaimed and hard won spoils of battle then another way to tackle the consumer demand problem is to direct efforts at the heart of the problem. Households still suffering from their indebted balance sheets should through a combination of government financed programs and financial industry initiative agree on a level of debt forgiveness. It should be remembered that the tax payer saved Wall Street salaries and bonuses and it is high time for payback. A small attempt at redistributing wealth in order to provide/ create a healthier footing to the US Economy at large.  

The Dilemma

Clearly there is a very reasoned response to those who wish to find blame on the current state of Greece’s predicament. The road to perdition is long and really at this stage not worth delving in.

Ultimately though the dilemma boils down to what type of a future does the Hope generation wish to have in its pursuit of the ray of light at the end of the long tunnel?

1-Will youth opt to become part of the current corrupt system of public (dis)service, a life of zero expectations and the abuse of tax payer money, a system abandoned by all mature societies or will

2- The Hope generation enter a world where government becomes its guiding torch, where it does not need to tax the future of the next generation to sustain its current existence, where the rule of law works efficiently for all its citizens, where its political system is socially sensitive and not self-serving, where it is able to unleash the power of individual creativity adding value to its community & society.

The real question therefore confounding Hellenes is which world they aspire to live in.    

The World Financial Order

During the last three decades there has been a massive transfer of wealth from debtors to creditors with the blessings of the world’s Central Banks at the forefront, those of the developed kind, in the pursuit of zero or inflation intolerance and continuously high real interest rates.

This has been so successful that, in the most part, for the last two decades the world has experienced unfettered growth, low inflation and as a consequence of collapsing inflationary expectations, ever falling long term interest rates. Windfall profits to creditors. 

In turn those low rates and the anticipation of unequivocal sustainable long term growth further induced the financial world at large (creditors) to open the lending spigots and provide cheap credit to sovereigns all along the lending chain down to households, at unprecedented levels.

As in all mature expansions, particularly those which have been extended with the ever supportive Central Banks, this culminated in a financial frenzy where prudent regulatory mechanisms, where they existed, were ignored on the unfounded premise that markets know better, on some occasions coercively, in favor of ever expanding balance sheets reflecting ever questionable assets.

Like a pack of cards sitting on frail foundations, the stack came tumbling down as participants began to doubt the strength of their investment convictions. The chain effect didn’t take long to ripple from the US financial system to the peripheral sovereigns of Europe. Most affected were those whose debts were directed towards private consumption and were not invested for the furtherance in the productive process.

In an attempt to solve the problem created in large part by their own actions, creditors continued to impose strict adherence to their modus operandi as a means of restructuring debtor’s balance sheets and ultimately avoid insolvency.

However, this adjustment process was too austere particularly to those same debtors it was supposed to help as their economic well being was reliant on these same transfers of debt. The resultant effect was to bring debtors one step closer or to bankruptcy per se. Furthermore, the automatic safety net of too big to fail contributed to the totally miscued process of equitably sharing the consequences of what should have been their professional risk taking enterprise. The burden fell once again on the shoulders of the ever supportive debtors. Windfall profits to creditors.

In a globalised economy with all factors of production and consumption interacting this was bound to come to an end. And it has. As debtors became insolvent en masse the balance sheets of creditors began to suffer and without the help of debtors had no alternative but to commence a process that would ultimately lead to a market imposed transfer of wealth to debtors.

It is only once the world economy begins to rebalance the scales in favor of debtors, will it be able to continue along the path to prosperity. This however will require massive addition of liquidity by all participating Central Banks to the extent that not only should they totally abandon their aversion to  non existant inflation but embrace and welcome the pursuit of increased inflationary expectations. Only then will the world financial system begin to strengthen its footing.