Well this is kind of nice to see: The new ‘pro-bailout’ gov­ern­ing coali­tion in Greece appears to be famil­iar­iz­ing itself with now-taboo basic eco­nomic con­cepts. Con­cepts like, for instance, usury:

Bloomberg
Greece Seeks at Least Two-Year Exten­sion to Bailout Goals
By Maria Petrakis and Tom Stoukas — Jun 23, 2012 7:53 AM CT

Greece will push its cred­i­tors to extend fis­cal dead­lines under the country’s bailout pro­gram by at least two years, accord­ing to a pol­icy doc­u­ment drawn up by the three par­ties in the country’s gov­ern­ing coalition.

New Democ­racy, Pasok and the Demo­c­ra­tic Left agree that plans to cut 150,000 public-sector jobs should be scrapped, the doc­u­ment, received by e-mail from the Greek gov­ern­ment today, showed. Pro­pos­als also include reduc­ing sales tax for cafes, bars, restau­rants and the agri­cul­tural indus­try, and increas­ing the thresh­old for pay­ing income tax.

The gov­ern­ment affirmed its com­mit­ment for the need to reduce deficits, con­trol debt and imple­ment the struc­tural reforms the coun­try needs, the pol­icy state­ment showed.

Prime Min­is­ter Anto­nis Sama­ras held his first Cab­i­net meet­ing on June 21 after his New Democ­racy party won Greece’s gen­eral elec­tion on June 17 on pledges to rene­go­ti­ate parts of the 130 billion-euro ($163 bil­lion) sec­ond bailout from the Euro­pean Union and Inter­na­tional Mon­e­tary Fund while keep­ing Greece in the euro. Sama­ras joined forces with Pasok, which fin­ished third on June 17, and sixth-placed Demo­c­ra­tic Left.

Greece has slipped behind budget-cutting tar­gets that euro– area nations and the IMF imposed in exchange for 240 bil­lion euros in aid pledges in the past two years.

...

The part­ners sup­port state-asset sales, a key plank of plans to reduce Greece’s debt, and will nego­ti­ate with cred­i­tors that some of them, like the national rail com­pany OSE, be car­ried out through public-private part­ner­ships, accord­ing to the document.

The Greek state is seek­ing to raise 50 bil­lion euros from state assets, half of which are real estate, by 2020 to meet con­di­tions of its bailout agree­ment. The process was halted after the country’s first elec­tion on May 6 pro­duced no government.

So the state-asset sales are still on track, but at least there appears to be some sort of push back against puni­tive poli­cies that are lit­tle more than ‘feel good’ mea­sures designed to pla­cate a sense that ‘those lazy Greeks need to be punished’!(amongst other things) Not that a mod­er­ate pull­back in these aus­ter­ity demands will make much of a dif­fer­ence at this point, but still. Baby-steps in the right direc­tion are still bet­ter than long strides down the path to oblivion.

And, of course, there’s always the pos­si­bil­ity that these pleas won’t make a bit dif­fer­ence:

Schaeu­ble says “no” to throw­ing money at euro crisis

BERLIN | Sun Jun 24, 2012 1:53pm EDT

(Reuters) — Throw­ing more money at the euro­zone debt cri­sis will not solve the prob­lem because the trou­bles have to be resolved at the cause, Ger­man Finance Min­is­ter Wolf­gang Schaeu­ble said on Sunday.

Schaeu­ble also said in an inter­view with Ger­man TV net­work ZDF that Greece has not done enough to ful­fill promises it made in exchange for bailout funds. Schaeu­ble also crit­i­cized the recent inter­ven­tions by U.S. Pres­i­dent Barack Obama.

“We have to fight the causes,” Schaeu­ble said. “Any­one who believes that money alone or bailouts or any other solu­tions, or mon­e­tary pol­icy at the ECB — that will never resolve the prob­lem. The causes have to be resolved.”

Schaeu­ble added: “It’s not going to help to take money to it. The deci­sive thing is to cred­i­bly fight the causes of the cri­sis. It’s suc­ceed­ing very well in Ire­land and Por­tu­gal. It’s not suc­ceed­ing very well in Greece. But it must suc­ceed in Greece. There’s no other way to do this.”

Schaeu­ble said Greece has clearly not done enough.

“Greece hasn’t tried enough so far, that has to be said quite clearly,” Schaeu­ble said. “That has to be said with respect for the domes­tic polit­i­cal dif­fi­cul­ties. But no one on earth who has fol­lowed this issue would think that Greece has ful­filled what it has promised.

“Italy and Spain are dif­fer­ent on this ques­tion,” he added. “They’re mak­ing great reform efforts.”

...

Yes Greece, why can’t you sim­ply address the core causes of your eco­nomic funk: inher­ent cur­rency union struc­tural flaws every­one was warned about and the dan­gers of an unproven ‘inter­nal deval­u­a­tion’ scheme Greek sloth. If you finally address this ’cause’, you’ll get a cookie, just like one Spain was given.

Really Greece, why can’t you just be more like Ire­land?

As Krug­man points out, the par­al­lels between today and 1931 include trans-Atlantic pol­icy fail­ures:

Op-Ed Colum­nist
The Great Abdi­ca­tion
By PAUL KRUGMAN
Pub­lished: June 24, 2012

Among econ­o­mists who know their his­tory, the mere men­tion of cer­tain years evokes shiv­ers. For exam­ple, three years ago Christina Romer, then the head of Pres­i­dent Obama’s Coun­cil of Eco­nomic Advis­ers, warned politi­cians not to re-enact 1937 — the year F.D.R. shifted, far too soon, from fis­cal stim­u­lus to aus­ter­ity, plung­ing the recov­er­ing econ­omy back into reces­sion. Unfor­tu­nately, this advice was ignored.

But now I’m hear­ing more and more about an even more fate­ful year. Sud­denly nor­mally calm econ­o­mists are talk­ing about 1931, the year every­thing fell apart.

...

And it’s hap­pen­ing again, both in Europe and in Amer­ica.

...

Yet let’s not ridicule the Euro­peans, since many of our own pol­icy mak­ers are act­ing just as irre­spon­si­bly. And I’m not just talk­ing about Con­gres­sional Repub­li­cans, who often seem as if they are delib­er­ately try­ing to sab­o­tage the econ­omy.

Let’s talk instead about the Fed­eral Reserve. The Fed has a so-called dual man­date: it’s sup­posed to seek both price sta­bil­ity and full employ­ment. And last week the Fed released its lat­est set of eco­nomic pro­jec­tions, show­ing that it expects to fail on both parts of its man­date, with infla­tion below tar­get and unem­ploy­ment far above tar­get for years to come.

This is a ter­ri­ble prospect, and the Fed knows it. Ben Bernanke, the Fed’s chair­man, has warned in par­tic­u­lar about the dam­age being done to Amer­ica by the unprece­dented level of long-term unemployment.

So what does the Fed pro­pose doing about the sit­u­a­tion? Almost noth­ing. True, last week the Fed announced some actions that would sup­pos­edly boost the econ­omy. But I think it’s fair to say that every­one at all famil­iar with the sit­u­a­tion regards these actions as pathet­i­cally inad­e­quate — the bare min­i­mum the Fed could do to deflect accu­sa­tions that it is doing noth­ing at all.

Why won’t the Fed act? My guess is that it’s intim­i­dated by those Con­gres­sional Repub­li­cans, that’s it’s afraid to do any­thing that might be seen as pro­vid­ing polit­i­cal aid to Pres­i­dent Obama, that is, any­thing that might help the econ­omy. Maybe there’s some other expla­na­tion, but the fact is that the Fed, like the Euro­pean Cen­tral Bank, like the U.S. Con­gress, like the gov­ern­ment of Ger­many, has decided that avoid­ing eco­nomic dis­as­ter is some­body else’s responsibility.

None of this should be hap­pen­ing. As in 1931, West­ern nations have the resources they need to avoid cat­a­stro­phe, and indeed to restore pros­per­ity — and we have the added advan­tage of know­ing much more than our great-grandparents did about how depres­sions hap­pen and how to end them. But knowl­edge and resources do no good if those who pos­sess them refuse to use them.

And that’s what seems to be hap­pen­ing. The fun­da­men­tals of the world econ­omy aren’t, in them­selves, all that scary; it’s the almost uni­ver­sal abdi­ca­tion of respon­si­bil­ity that fills me, and many other econ­o­mists, with a grow­ing sense of dread.

Rus­sia and China: You’re friendly neigh­bor­hood lenders you really hope approves your appli­ca­tion for a loan because if they turn you down it’s loan shark time:

NY Times
Cyprus Becomes 5th E.U. Mem­ber to Seek Res­cue
By DAN BILEFSKY
Pub­lished: June 25, 201

PARIS — Cyprus on Mon­day said it was for­mally request­ing a bailout from the Euro­pean Union in a bid to bol­ster its strug­gling banks, mak­ing it the fifth euro zone coun­try to request a rescue.

The announce­ment came after weeks of con­cern that the cri­sis in Greece and a poten­tial Greek exit from the euro could bring down the econ­omy in the small island nation, whose banks are heav­ily exposed to Greece.

The slim vic­tory of a pro-euro party in recent Greek elec­tions helped to tem­porar­ily alle­vi­ate that con­cern, even as econ­o­mists said Cyprus could need as much as €10 bil­lion, or $12.5 bil­lion, to shore up its ail­ing banks and cash-strapped pub­lic sector.

...

Cyprus needs to find €1.8 bil­lion, or about 10 per­cent of its gross domes­tic prod­uct, to recap­i­tal­ize its second-largest bank, Cyprus Pop­u­lar Bank, by a June 30 dead­line, accord­ing to Cypriot offi­cials. In total, Cypriot banks have out­stand­ing loans or other money at risk total­ing €152 bil­lion, or eight times the size of the country’s gross domes­tic prod­uct, accord­ing to the Inter­na­tional Mon­e­tary Fund. Such expo­sure has made the coun­try vul­ner­a­ble to finan­cial upheaval.

Cyprus has asked the Euro­pean Union not to impose demands for harsh aus­ter­ity and to focus the res­cue pack­age on the country’s banks, Cypriot offi­cials say. The coun­try has been so deter­mined to avoid Dra­con­ian caveats — includ­ing calls from some coun­tries that it sus­pend its 10 per­cent cor­po­rate tax rate — that it had recently sought aid from Rus­sia and China.

Michalis Sar­ris, a for­mer World Bank econ­o­mist and finance min­is­ter who is now chair­man of Cyprus Pop­u­lar Bank, said Mon­day that Cyprus was in talks with China over a pos­si­ble loan. China was poten­tially inter­ested in a stake in a Cypriot bank, in return for a toe­hold in the country’s bur­geon­ing gas indus­try, offi­cials said.

But with time run­ning out, offi­cials said Cyprus, which has been shut out of inter­na­tional mar­kets for more than a year, had lit­tle choice but to request aid from the Euro­pean Finan­cial Sta­bil­ity Facility.

Mr. Sar­ris said that exten­sive expo­sure of Cypriot banks to Greece and the country’s exclu­sion from inter­na­tional finan­cial mar­kets had made ask­ing for a bailout a mat­ter of urgency.

But he also said that Cyprus’s prob­lems paled in com­par­i­son with Greece and that the country’s small size and its lack of rel­a­tive profli­gacy com­pared with Greece made it bet­ter posi­tioned to weather the crisis.

“The sit­u­a­tion here is dif­fer­ent than in Greece,” he said. “What we are look­ing at is a rel­a­tively mild adjust­ment that won’t inflict too much pain.”

While Cyprus’s prob­lems threat­ened to add to the finan­cial insta­bil­ity in Europe, more con­cern­ing for offi­cials and investors is the fear that Italy, the third-largest econ­omy in the euro zone, after Ger­many and France, will itself end up need­ing help.

Cypriot offi­cials said Mon­day that they would con­tinue to seek loans from Rus­sia and China to but­tress poten­tial E.U. finan­cial sup­port. Cyprus last year secured a €2.5 bil­lion loan from Rus­sia at a below-market rate of 4.5 per­cent to cover its refi­nanc­ing needs for this year.

Over the week­end, the Cypriot pres­i­dent, Demetris Christofias, the only com­mu­nist leader in the Euro­pean Union, railed against the 27-member bloc, not­ing in an inter­view with To Vima, a Greek news­pa­per, that the Euro­pean Com­mis­sion, the Euro­pean Cen­tral Bank and the Inter­na­tional Mon­e­tary Fund had oper­ated like a “colo­nial force” by forc­ing aus­ter­ity mea­sures and unbri­dled free-market poli­cies on bailed-out countries.

But on Mon­day, as the rat­ings agency Fitch down­graded Cyprus debt to “junk” sta­tus, prompted by the amount of res­cue money that would be needed to bail out its banks, eco­nomic neces­sity appeared to trump all other considerations.

...

Alas, Krug­man still holds him­self within the main­stream of the last cen­tury of eco­nomic prac­tice, even though he lob­bies for a kinder, gen­tler Key­ne­sian­ism. The con­cept that an ongo­ing, ever­grow­ing and per­pet­ual stream of pub­lic debt is a valid way to finance gov­ern­ments is a fraud and against com­mon sense. It is almost equiv­a­lent to an indi­vid­ual who is forced to bor­row ever-increasing amounts to sup­ple­ment his income from real pro­duc­tion, while his lender is free to change terms and inter­est rates on the fly. At some point the debt bur­den will cut into his sub­sis­tence needs and his real pro­duc­tiv­ity will begin to fall. At this point a smart lender would ease the debt squeeze because he knows that the max­i­mum appro­pri­a­tion of wealth involves the vic­tim still func­tion­ing and producing.

That upper limit on theft from an indi­vid­ual doesn’t apply as strictly to state debt because the vic­tim ( the pop­u­lace as a whole ) is vir­tu­ally immor­tal and can be squeezed to the point of gen­eral social break­down. Indi­vid­ual death and suf­fer­ing is not rel­e­vant. This death camp style of eco­nom­ics only requires a never end­ing stream of labor­ers. ( If the Nazis had won WW2 and mur­dered the last Jew, the con­cen­tra­tion camps would have kept going with a sup­ply of Slavs, Africans, etc. )

Eas­ing the debt bur­den of these coun­tries involves lenders vol­un­tar­ily for­go­ing some por­tion of their income stream in order to pre­serve the sys­tem as a whole. It will not be an act of kind­ness. The ongo­ing nego­ti­a­tions are about
who will not get paid and how much. The pub­lic can’t win, since any work­able solu­tion only means that the lend­ing class is func­tion­ing as an aligned body, tem­porar­ily ‘sac­ri­fic­ing’ near-term indi­vid­ual profit for the sake of future profit.

Within the logic of this insane sys­tem, cur­rency infla­tion or quan­ti­ta­tive eas­ing could be used to effec­tively erase a por­tion of the debt of states, but that solu­tion would unhap­pily affect other types of debt as well, less­en­ing the flow of wealth from other sources and expos­ing the bizarre mechan­ics of the over­all system.

Unfor­tu­nately, the planet is entrapped in the machine because it is the cur­rent pri­mary basis for real pro­duc­tion and social order, as crip­pled as both those are. Krug­man is advis­ing the finan­cial elites to tem­porar­ily coop­er­ate to save the whole plan­e­tary struc­ture of debt. If he went as far as to ques­tion the moral valid­ity of that struc­ture, he would be expelled from the main­stream of econ­o­mists who can get space in the New York Times.

@Dwight: I just tuned into the Thom Hart­mann show today and the topic at hand is “what is the pur­pose of an econ­omy?” as a meta-question. It’s a vital ques­tion because we def­i­nitely have to rethink how we struc­ture our economies, fast, now that human­ity and the bios­phere are fac­ing the prospect of hit­ting hard phys­i­cal walls. One of the rea­sons I find Key­ne­sian­ism so impor­tant nowa­days is sim­ply because it injected a whole slew of new ideas into con­ver­sa­tion that just weren’t there before in the days of “clas­si­cal” eco­nom­ics. While I can’t speak for Krug­man, I’d imag­ine that he takes the “we’ve learned a lot about how economies work but we’re still learn­ing” approach, which is fun­da­men­tally dif­fer­ent from the “there can be no other model, this is it folks” men­tal­ity ingrained in clas­si­cal econ. At least that’s how clas­si­cal econ seems to be applied...like a reli­gion with unchal­lenge­able dogma. Key­ne­sian­ism rep­re­sents a sort of eco­nomic Enlightenment...it’s not the end all and be all of eco­nom­ics but it’s an exam­ple of an attempt to rethink our assump­tions. It’s not alone in that (e.g. Marx and Engles had some inter­est­ing insights). I just find Key­ne­sian­ism to be an invalu­able addi­tion to the ideas that might guide the cre­ation of market-based economies.

I also don’t think gov­ern­ment debt-based spend­ing dur­ing eco­nomic down­turns is nec­es­sar­ily a path to even­tual debt-doom (although it could be, espe­cially when it’s all blown on bank bailouts). The jus­ti­fi­ca­tion for deficit spend­ing can be sort of sum­ma­rized by “you got to spend money to make money”, “oppor­tu­nity cost”, and “get­ting more from less using bet­ter technology/design/methods/idea/whatever”: Three con­cepts that the busi­ness com­mu­nity seems to under­stand when it comes to pri­vate enter­prises but can’t quite accept when it comes to a soci­ety at large. If the econ­omy is down and peo­ple are out of work, we can just let them lay idle and erode their skills OR we could hire them to do some­thing the needs to be done, like edu­cat­ing the them­selves and/or the next gen­er­a­tion and just fig­ure out how we can get more out of the dwin­dling resources we have, how we can craft bet­ter rules of play (reg­u­la­tions). That’s a REAL dynamic econ­omy, unlike the “dereg­u­late for dynamism and free-markets for­ever” garbage we’re fed. Under our cur­rent model, and in a col­laps­ing world, get­ting “more for less” is now largely con­strained to “more profit and less costs via more poverty for more people”.

The other really valu­able con­cept we need to remem­ber from Keynes is the idea that we have find new ways to derive enjoy­ment in life while using less AND work­ing less. The 15 hour work­week he pre­dicted was pos­si­ble might be one of the few ways we can come to a new social con­tract where peo­ple forgo some mate­r­ial wealth in return for more time...time we can spend try­ing to get more from less (just imag­ine the inven­tions that would arise if peo­ple had all that time on their hands). We need a new vir­tu­ous cycle fast. It won’t be Key­ne­sian­ism itself. It will be some­thing new. But there are a lot of ideas of his that we really need to remem­ber right now.

@pterrafractyl.. Most of that granted and all noted, yes, there is noth­ing inher­ently evil about gov­ern­ments bor­row­ing — it’s a tech­nol­ogy and it’s neu­tral. From whom and for what are piv­otal ques­tions. Valid debt is that which causes over­all debt to be less, as a per­cent­age of pro­duc­tion. That’s it in a nut­shell. Plus, we can bor­row from our­selves as eas­ily as bor­row from pri­vate par­ties. The money comes from the debt in either case. A full employ­ment model pays for itself in increased pro­duc­tion if cap­i­tal gain is suf­fi­ciently taxed and if the eco­nomic sur­plus is not wasted in war. And, hor­ror of hor­rors for the Ran­dites and con­trary to their pre­dic­tions, the gov­ern­ment can actu­ally shrink when peo­ple are pros­per­ous enough to not need the poverty ser­vices it pro­vides or the enforce­ment umbrella that grows up along­side poverty. That’s the vir­tu­ous cycle I think you mean.

But none of that can hap­pen with­out good intent. Gen­eral pros­per­ity has to be a con­scious tar­get with pol­icy directed at that tar­get, not at sub­si­dies of financiers, hop­ing they’ll pass it down ( bor­row­ing from them in the first place is a sub­sidy ). We have enough his­tory and data to know that gen­eral pros­per­ity is def­i­nitely not a nat­ural out­growth of the unreg­u­lated mar­ket. If that’s rad­i­cal, call me Karl. We’re pretty much on the same page.

@Dwight: Krugman’s lat­est post is a direct answer to the ques­tion of “how does more debt help in the con­text of a debt-driven deprepes­sion”. It’s use­ful in that it pro­vides an expla­na­tion from a purely tech­ni­cal frame­work that oper­ates within the logic of the eco­nomic struc­ture as it exists todays (as opposed to our “if only civ­i­liza­tion wasn’t such a train­wreck” frame­works, heh). The gist of it being that, when debt bub­bles burst and an econ­omy falls into a depres­sion, the “nat­ural” inter­est rates on sav­ings can become near zero or even neg­a­tive (neg­a­tive inter­est rates aren’t so bad in a defla­tion­ary or high risk environment....just ask the investors in Ger­man Bunds this year). And since get­ting neg­a­tive real inter­est rates is such a dif­fi­cult task for some­thing like the Fed­eral Reserve to achieve, the sys­tem ends up with inap­pro­pri­ately high real inter­est rates (even if the nom­i­nal rate is near zero) that encour­age poten­tial lenders to just keep pil­ing their money into bonds or other “safe” assets instead of lend­ing to the bor­row­ers and allow­ing the econ­omy to start turn­ing around. So pub­lic spend­ing becomes the pri­mary tool that’s left because of this “zero bound­ary” quirk in inter­est rates and avail­able pol­icy tools.

This whole sit­u­a­tion also reminds us of what you just brought up: why do we rely­ing on “pri­vate lenders” as the pri­mary source of our money sup­ply (which is what the Fed is) instead of, say, a National Bank that doesn’t charge soci­ety for the ‘lux­ury’ of credit? If money was a social tool, we could turn on the national money-spigot dur­ing defla­tion­ary times to get our­selves out of this mess. Instead, we have to wait for the pri­vate sec­tor to cre­ate that money by issu­ing credit in the form of a loan (i.e. the fun of frac­tional reserve bank­ing). And when they won’t (because of the zero-boundary effects that dis­in­cen­tivize lend­ing), we’re left with option of issu­ing pub­lic debt or just let­ting the econ­omy fall into a tail­spin. Some­how issu­ing pub­lic credit from pub­lic insti­tu­tions is bad and pri­vate credit cre­ation is the only allow­able path forward.

And yeah, there are rea­son­able con­cerns about out of con­trol pub­lic credit cre­ation under such a sys­tem (while pri­vate mega credit bub­bles like what we just expe­ri­enced, com­pli­ments of the banks, are just fine and “nat­ural” appar­ently). But also as you point out, any sys­tem we make will be sub­ject to calamity if the peo­ple run­ning it aren’t doing so with good intent. Rot­ten elites will ruin any nation in any sys­tem, pub­lic or private.

@Pterfractyl... In the west we hold to an ide­o­log­i­cal bias that money means some­thing and so we avoid neg­a­tive inter­est, unlike the Asians, who know it’s all a shell game. I wish Krug­man would dif­fer­en­ti­ate between invest­ment in the real econ­omy and spec­u­la­tion. I believe his delever­ag­ing sce­nario relates to a shift of cap­i­tal from spec­u­la­tion to the real econ­omy. Any invest­ment could be viewed as an admix­ture of the two but they are really dis­tinct processes, each with a dif­fer­ent result. As spec­u­la­tive invest­ment becomes a larger part of over­all invest­ment the real econ­omy dete­ri­o­rates. Here’s my ama­teur take on neg­a­tive inter­est rates. Its a huge gen­er­al­iza­tion and leaves out many ele­ments, as I am wont to produce.

Neg­a­tive inter­est rates are largely a con­se­quence of spec­u­la­tion, elec­tron­ics and tax pol­icy. In the past the global spec­u­la­tive mar­ket ( gam­bling with mostly bor­rowed money ) was held to some lim­its by sim­ple time con­straints, reg­u­la­tion. pub­lic­ity and taxes. It took time to com­plete a trans­ac­tion. The price rise caused by pur­chase ( not the pri­mary rea­son to invest in a par­tic­u­lar thing but still a fac­tor ) could kick in and be seen by oth­ers who might sell, drop­ping the return of the spec­u­la­tor when he sold. Now a spec­u­la­tive buy and sell can be com­pleted before its spe­cific effect on the mar­ket is evi­dent, the trade is untaxed and the lev­el­ing effects of the trade show up only later for oth­ers to deal with. Pic­ture the prob­a­bly apoc­ryphal tale of Mayer Rothschild’s machi­na­tions with British bonds done a mil­lion times daily with high-speed computers.

As spec­u­la­tive return rises and becomes more depend­able, invest­ment in real pro­duc­tion suf­fers. In the abstract we’ve cre­ated a mar­ket where the mere act of buy­ing some­thing causes its price to rise and that price rise can be cap­tured in the ‘sell’ if the trans­ac­tion is fast enough and if tax­a­tion and trans­ac­tion fees don’t cut into the mar­gin. For all that to be pos­si­ble there has to some con­trol of infor­ma­tion flow, even if only a strate­gic delay. and there also must be a large seg­ment of investors not involved in high-speed spec­u­la­tion to absorb the losses from mil­lions of low-margin trades. These ‘investors’ include the nom­i­nally non-investor pub­lic who are invol­un­tary par­tic­pants. Con­se­quently, there are recur­rent bub­bles every­where in every­thing, last­ing min­utes or years. It is an insider mar­ket based on bub­bles. Deriv­a­tives mul­ti­ply the prob­lem but aren’t the source.

When the cen­tral bank to com­mer­cial bank rate goes very low or neg­a­tive it means that the antic­i­pated rate of return on spec­u­la­tion is falling ( because of its over­all destruc­tive effects on the real econ­omy ) and clos­ing in on the antic­i­pated price infla­tion rate, mak­ing even spec­u­la­tion barely prof­itable. This is when every­one sits on their assets and things grind to a halt. Poverty spreads, the cost of labor approaches sub­sis­tence, caus­ing ris­ing return on invest­ment in the real econ­omy, which can then can catch up to falling spec­u­la­tive return. The machine lurches for­ward, reluctantly.

Satan cre­ated both women and the busi­ness cycle to plague us endlessly.

@Dwight: Speak­ing of neg­a­tive inter­est rates, the ECB has been actively con­sid­er­ing tak­ing the euro into the “twi­light zone” over the last cou­ple of days:

Bloomberg
Draghi May Enter Twi­light Zone Where Fed Fears to Tread
By Jana Randow — Jun 27, 2012 6:41 AM CT

Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi is con­tem­plat­ing tak­ing inter­est rates into a twi­light zone shunned by the Fed­eral Reserve.

While cut­ting ECB rates may boost con­fi­dence, stim­u­late lend­ing and fos­ter growth, it could also involve reduc­ing the bank’s deposit rate to zero or even lower. Once an obsta­cle for pol­icy mak­ers because it risks hurt­ing the money mar­kets they’re try­ing to revive, cut­ting the deposit rate from 0.25 per­cent is no longer a taboo, two euro-area cen­tral bank offi­cials said on June 15.

“The Euro­pean reces­sion is wors­en­ing, the ECB has to do more,” said Julian Cal­low, chief Euro­pean econ­o­mist at Bar­clays Cap­i­tal in Lon­don, who fore­casts rates will be cut at the ECB’s next pol­icy meet­ing on July 5. “A neg­a­tive deposit rate is some­thing they need to con­sider but tak­ing it to zero as a first step is more likely.”

Should Draghi elect to cut the deposit rate to zero or lower, he’ll be enter­ing ter­ri­tory few pol­icy mak­ers have dared to ven­ture. Sweden’s Riks­bank in July 2009 became the world’s first cen­tral bank to charge finan­cial insti­tu­tions for the money they deposited with it overnight. The Fed rejected cut­ting its deposit rate from 0.25 per­cent last year. With Europe’s debt cri­sis damp­ing infla­tion pres­sures and curb­ing growth, the ECB may feel the ben­e­fits out­weigh the neg­a­tives.
‘Psy­cho­log­i­cal Effect’

“A rate cut could have an impor­tant psy­cho­log­i­cal effect in the cur­rent envi­ron­ment,” said Christoph Kind, head of asset allo­ca­tion at Frank­furt Trust, which man­ages about $20 bil­lion. “Neg­a­tive inter­est rates aren’t an irra­tional con­cept. I’m not sure, though, whether in the case of the ECB it will have the desired effect.”

The ECB uses three inter­est rates to steer bor­row­ing costs in finan­cial mar­kets. The main refi­nanc­ing rate deter­mines how much banks pay for ECB loans, while the deposit and mar­ginal rates pro­vide a floor and ceil­ing for the inter­est banks charge each other overnight.

If the deposit rate was cut to zero or lower, it would dis­cour­age banks from park­ing excess liq­uid­ity with the ECB overnight, poten­tially prompt­ing them to lend the cash instead. Almost 800 bil­lion euros ($1 tril­lion) is being deposited with the ECB each day.

On the other hand, a deposit rate cut could hurt banks’ prof­itabil­ity by low­er­ing money-market rates, poten­tially ham­per­ing credit sup­ply to com­pa­nies and house­holds and reduc­ing banks’ incen­tive to lend to other finan­cial insti­tu­tions.
Money Markets

“It won’t help the prospect of a func­tion­ing money mar­ket because banks won’t be com­pen­sated for the risk they’re tak­ing,” said Orlando Green, a fixed-income strate­gist at Credit Agri­cole Cor­po­rate & Invest­ment Bank in Lon­don. It would make more sense to lower the bench­mark rate, thus reduc­ing the inter­est banks pay on ECB loans, and keep the deposit rate where it is, Green said.

...

Twin Ben­e­fits

The ECB has been exam­in­ing the pos­si­ble impact on mar­kets of a deposit rate cut, help­ing to ease pol­icy mak­ers’ con­cerns, accord­ing to a euro-area offi­cial who asked not to be named because the delib­er­a­tions are not public.

Cal­low said low­er­ing the deposit rate would encour­age banks in fiscally-sound coun­tries like Ger­many, which are flush with excess cash, to lend to trou­bled banks on the euro-area periph­ery, which are depen­dent on ECB funding.

That would have the twin ben­e­fits of reduc­ing banks’ addic­tion to ECB fund­ing and shrink­ing excess liq­uid­ity in the system.

“A deposit rate at zero will be of par­tic­u­lar sup­port to banks in south­ern Europe because it could help encour­age some flow of credit,” said Cal­low. “A neg­a­tive deposit rate can be dam­ag­ing for money markets.”

Neg­a­tive rates would destroy the busi­ness model for money– mar­ket funds, which would face the prospect of pay­ing to invest, said Soci­ete Gen­erale econ­o­mist Klaus Baader.

‘Twi­light Zone’

Euro­pean money-market funds totaled 1.1 tril­lion euros at the end of March, accord­ing data from Fitch Rat­ings Co.

“But the ECB doesn’t set pol­icy to keep alive cer­tain parts of the finan­cial sec­tor,” he said. “Pol­icy mak­ers want to show that they haven’t exhausted their options yet.”

Another con­se­quence of an ECB deposit rate cut may be that some banks take advan­tage of a clause in the three-year loans allow­ing them to pay the money back after a year, which would reduce excess liq­uid­ity in the system.

That could be the basis for a com­pro­mise between the ECB and the Bun­des­bank, whose Pres­i­dent Jens Wei­d­mann has repeat­edly warned of the risks related to too-generous liq­uid­ity pro­vi­sion, said Carsten Brzeski, senior econ­o­mist at ING Group in Brus­sels.

“Reduc­ing excess liq­uid­ity with a rate cut should sound rather inter­est­ing for the Bun­des­bank,” he said. “Maybe that’s the twi­light zone where Draghi and Wei­d­mann will meet.”

Great, so going neg­a­tive on the ECB’s overight rate will either encour­age the wealth­ier banks to lend to the trou­bled insti­tu­tions (raise their lend­ing risk to make cash) OR turn the banks’ emer­gency ECB three-year loans back to the ECB two year’s early (pulling the out of the sys­tem). And the Bun­des­bank is said to be inter­ested “pay back early”-option. I won­der how this is going to go.

It will be inter­est­ing to see what hap­pens if they go down this route. As the arti­cle indi­cates, the money-markets are a key source of credit for busi­nesses. But it’s also a key source of funds for mak­ing spec­u­la­tive finan­cial bets and credit cre­ation. Bor­row­ing at the low­est rate pos­si­ble and then invest­ing in some sort of riskier debt is credit cre­ation dis­tilled and a basic part of bub­ble­nomic 101 and our econ­omy. And money mar­kets are key to that...they set the floor on short term rates avail­able to investors So if the money mar­kets gets disrupted/starved there’s a lot of delever­ag­ing com­ing. Things could get tense in the world of lever­aged finance if the ECB does, indeed, enter the Twi­light Zone and the money-markets con­tract. Park­ing assets at the ECB is gen­er­ally lim­ited to highly liq­uid assets (like trea­suries) and it’s using that asset as col­lat­eral for cash for a day. For a small fee. In reverse, banks can lend cash to the cen­tral bank, tak­ing liq­uid­ity out of the sys­tem to get the small­est inter­est pos­si­ble. It’s how big banks stash cash under the matress.

And when banks first turn their assets over to bor­row cash, then bor­row against that cash for more cash, and then lend that cash back the ECB, you get some­thing like what’s appar­ently been going on since the ECB’s big tril­lion+ euro three-year lend­ing pro­gram got under­way. In March, the ECB lent out 530 bil­lion euros and saw its overnight deposits jump from 475.2 bil­lion euros on the to 776.9 bil­lion overnight. It’s still around there. So that’s quite a bit of cashthat could be pushed off of the side­lines if the overnight deposit rate goes negatives.

Plus there’s last week’s tem­po­rary “loos­en­ing of col­lat­eral restric­tions” rul­ing by the ECB. They’re acceptng junk. Now banks can hand over home and auto loans with junk rat­ings (-BBB S&P). So if the ECB takes the deposit rate neg­a­tive, it sounds like assets (includ­ing junk) could still be swapped for cash but the incen­tive to take that cash and rein­vest in the ECB overnight funds would be mit­i­gated. With a flood o sub­prime secu­ri­ties head­ing towards the ECB another overnight deposit surge could be in the cards. If that hap­pens the Twilight-Zone of neg­a­tive rates could end up send­ing A LOT of cash scat­ter­ing out of the ECB.

You have to won­der how long it took after the adop­tion of a early forms of mar­ket economies before ancient cul­tures devel­oped a word anal­o­gous to “a giant spec­u­la­tive clus­ter­fuck”. Just imag­ine what barter-bubble dynam­ics look like. Or even wierder, barter-market bub­ble dynam­ics. Fas­ci­nat­ingly, we might actu­ally get to see that last sce­nario, assum­ing things get out of whack in Volos. Let’s hope that doesn’t hap­pen:

Greek Town Adopt­ing Sys­tem of ‘Bar­ter­ing on Steroids’
By Clark Boyd · June 14, 2012

Buy­ers and sell­ers gather in a swel­ter­ing, pre­vi­ously aban­doned build­ing in the Greek city of Volos, some 200 miles north of Athens. There’s a bit of every­thing avail­able here — books, eggs, clothes, kids’ toys, and even an old fax machine.

But there isn’t a euro in sight. On the eve of a vote which may deter­mine whether Greece stays in the euro zone, these Greeks have moved beyond the euro, at least here. This mar­ket is the brain­child of a net­work of peo­ple who have chucked the euro in favor of the TEM — the Greek short­hand for “Alter­na­tive Local Currency.”

“In the net­work, peo­ple can trade their goods and ser­vices. They don’t need money for that. They just need time and the desire to do it,” said Chris­tos Papaioan­nou, one of the network’s founders. It’s kind of like bar­ter­ing on steroids, he added.

“We can see it as exchang­ing favors, if I do a ser­vice for you, then you owe me a favour, and I can use that favour to get some ser­vice from some­one else. So, we don’t have to exchange directly, I can get it from some third person.”

Let’s say some­one offers a hair­cut. The net­work deter­mines that’s worth 10 cred­its. (To make it eas­ier to set prices, one TEM is val­ued at one euro.) The hair­cut­ter can then spend those cred­its on prod­ucts at the mar­ket, or on ser­vices offered by some­one else.

To be clear, there is no real “cur­rency” that changes hands — no scrip. Instead, cred­its are tracked, goods and ser­vices are listed, offered and accepted, through an open-source com­puter pro­gram designed for this kind of “com­mu­nity banking.”

The orig­i­nal idea for the net­work pre­dates the eco­nomic cri­sis, said Papaioan­nou, adding it’s about com­ing up with dif­fer­ent ways for peo­ple to inter­act eco­nom­i­cally, so “that peo­ple do things together, and take things in their own hands, basically.”

It’s an idea that appeals to Euripi­des Siouras, who joined the TEM net­work in Decem­ber 2010. “I thought that the exist­ing eco­nomic sys­tem was some­thing like a war. It wasn’t made for the cit­i­zens,” Siouras said.

...

Please don’t intro­duce us to barter-market bub­ble dynam­ics, Valos. Some­thing like this could be an invalu­able social tool in so many sit­u­a­tions across the world when the finan­cial econ­omy falls apart/blows up and the real econ­omy can’t func­tion. This is one of the coolest sto­ries I’ve ever read. They took the plunge, tried it out and it sounds that this hyprid barter-market thing really works in a pinch. How awe­some. Very very nice Valos.

The Greek expe­ri­ence with credit bub­bles and money lenders goes way back. From ‘A His­tory of Greece to the Death of Alexan­der’ — Bury, speak­ing of events circa 600 B.C.:

Dracon’s code was some­thing, but it did not touch the root of the evil. Every year the oppres­sive­ness of the rich few and the impov­er­ish­ment of the small farmer were increas­ing. With­out cap­i­tal, and obliged to bor­row money, the small pro­pri­etors mort­gaged their lands, which fell into the hands of cap­i­tal­ists, who lent money at ruinous inter­est. It must be remem­bered that money was still very scarce and that the peas­ants had now to pur­chase all their needs in coin. Even in Attica the small peas­ant could not cope with the larger pro­pri­etor. Thus the lit­tle farms of Attica were cov­ered with stones, on which the mort­gage bonds were writ­ten ; the large estates grew apace ; the black earth, as Solon said, was enslaved. The con­di­tion of the free labour­ers was even more deplorable. The hek - the sixth part of the pro­duce, which was their wage, no longer, sufficed, under the new eco­nom­i­cal con­di­tions, to sup­port life, and they were forced into bor­row­ing from their mas­ters. The inter­est was high, the laws of debt were ruth­less, and the per­son of the bor­rower was the pledge of repay­ment and for­feited to the lender in reduced to case of inabil­ity to pay. The result was that the class of free labour­ers was being grad­u­ally trans­formed into a class of slaves, whom their lords could sell when they chose. 

Thus while the wealthy few were becom­ing wealth­ier and greed­ier, the small pro­pri­etors were becom­ing land­less, and the land­less freemen were becom­ing slaves. And the evil was aggra­vated by unjust judg­ments, and the per­ver­sion of law in favour of the rich and pow­er­ful. The social dis­ease seemed likely to cul­mi­nate in a polit­i­cal rev­o­lu­tion. The peo­ple were bit­ter against their remorse­less oppres­sors, and only wanted a leader to rebel. To any stu­dent of con­tem­po­rary pol­i­tics, observ­ing the devel­op­ment in other states, a tyranny would have seemed the most prob­a­ble solution.

This instance of cri­sis was averted by a dis­tinctly non-free-market device. Large swaths of unpayable debt were sim­ply can­celed by decree.

This solu­tion is unlikely in the present. The Greek elites under­stood that their power rested on a bound­aried local pro­duc­tive econ­omy that was being stran­gled and which obvi­ously had been drained of all its spec­u­la­tive value. In a global econ­omy in which pro­duc­tion suf­fers some here and some there and where the pre­dictable results of impov­er­ish­ment are dif­fuse, the point of break­down is not so appar­ent and so the cred­i­tors are each indi­vid­u­ally reluc­tant to release their grip.

Paul Krug­man reminds us of another his­tor­i­cal les­son not learned:

The New York Times
The Con­science of a Lib­eral
Move­able Feast Macro­eco­nom­ics
Paul Krug­man
Feb­ru­ary 1, 2013, 6:58 pm

Ah, Paris in the 1920s. It was the era of Hem­ing­way and F. Scott Fitzger­ald, Gertrude Stein and Alice B. Tok­las, sov­er­eign debt and sta­bi­liza­tion. Wait, what?

OK, I’ve writ­ten before about the notion that France in the 20s offers the clos­est thing I can find in the his­tor­i­cal record to a cri­sis of the kind the deficit scolds keep warn­ing us about. We’re not at all like Greece; we have our own cur­rency, and our debts are in that cur­rency. So we can’t run out of cash, even if the bond vig­i­lantes turn out to be real and lose faith in Amer­ica. At worst, we’re some­thing like France in the 1920s, with its float­ing exchange rate and large wartime debt — except that our debt isn’t nearly as bad as a share of GDP, and we don’t have the lin­ger­ing gold stan­dard men­tal­ity that pre­vailed across the West­ern world back then.

So, what actu­ally hap­pened to 1920s France?

...

Krug­man goes on to show how France in 1921 had over twice as much debt as Greece had in 2009 and how France’s cur­rency did indeed suf­fer a large col­lapse in value. Prices roughly dou­bled from 1919 — 1926 and briefly spik­ing another 20% before taper­ing off. And in spite of the large cur­rency depre­ci­a­tions and steeply ris­ing prices, the French econ­omy grew strongly. If France hadn’t had the option of depre­ci­at­ing its debt and cur­rency at the end of WWI it would have been eco­nom­i­caly screwed. This hap­pened in par­al­lel to post WWI Ger­many, which was egre­gri­ously indebted, and forced to induce hyper­in­fla­tion by cir­cum­stance. The French expe­ri­ence is much more applic­a­ble to the con­tem­po­rary global state of affairs regard­ing lev­els of national debts, deficits, and the “dan­gers” of gov­ern­ment stim­u­lus spend­ing vs aus­ter­ity. It’s a reminder of the his­tor­i­cal les­son that his­tory might pro­vide many lessons but some are more applic­a­ble than oth­ers. It depends on cir­cum­stance:

The New York Times
The Con­science of a Lib­eral
Par­ty­ing Like It’s 1923: Or, The Weimar Temptation

Paul Krug­man
Decem­ber 27, 2010, 3:11 pm

There’s an obser­va­tion I’ve tried to make in a num­ber of columns and blog posts, but maybe haven’t got­ten across as clearly as I should: namely, the extent to which cur­rent eco­nomic dis­course is being warped by what we might call the Weimar Temp­ta­tion, the desire to see every­thing in terms of the evils of deficits and the money printed to cover them.

The hyper­in­fla­tion story is, after all, sat­is­fy­ing both intel­lec­tu­ally and morally. A weak, spend­thrift gov­ern­ment can’t limit its spend­ing to match its rev­enues; it loses the con­fi­dence of investors, so it has to print money to make up the dif­fer­ence; and too much money chas­ing too few goods leads to ever-higher inflation.

Eco­nom­ics teach­ers love this story; hey, I love it. It’s clear, it’s sim­ple, you can walk through it on the black­board, and yes, it really does hap­pen. It’s a great set-piece, both for the text­book and for intro macro classes.

But there’s always the temp­ta­tion to apply the story too widely. Partly this is the drunk-and-the-streetlight effect: you look for dropped keys where the light is bright­est, even though that’s not actu­ally where you dropped them. Partly it’s ide­ol­ogy: the hyper­in­fla­tion story is a com­fort­able one for peo­ple who want to make gov­ern­ment always the prob­lem, never the solution.

And the remark­able thing is how many peo­ple are deter­mined to Weima­rize recent events, even though the actual expe­ri­ence of the past three years has been an object les­son in the fact that some­times that frame­work just doesn’t fit. In late 2008 there was, maybe, an excuse for look­ing at the big rise in the mon­e­tary base and think­ing that infla­tion was com­ing — although not if you had actu­ally looked at Japan­ese expe­ri­ence. At this point, how­ever, it’s just bizarre to use that obvi­ously failed frame­work rather than the well-developed the­ory of the liq­uid­ity trap, which has sailed through recent events with fly­ing colors.

But it keeps hap­pen­ing any­way. A few months back, in a dia­logue in Korea with Niall Fer­gu­son, I sug­gested a macro­eco­nomic ver­sion of Godwin’s Law: the first per­son to bring up the Weimar hyper­in­fla­tion is con­sid­ered to have lost the debate. He was, um, not happy. And despite all the evi­dence, a lot of peo­ple are obvi­ously deter­mined to keep on par­ty­ing like it’s 1923.

Note that Krug­man wrote that blog post regard­ing the per­pet­ual hyper­in­fla­tion hys­te­ria a lit­tle more than two years ago. Its still applic­a­ble. No joke. Soci­eties that worry about the vol­ume of their mon­e­tary bases too seri­ously might over­look the sane and fair solu­tions that fit the society’s cur­rent sit­u­a­tion and instead risk seri­ous calamity.

This has been a Krug­man Moment.

That was then:

The New York Times
Treasury’s Got Bill Gross on Speed Dial

By DEVIN LEONARD
Pub­lished: June 20, 2009

New­port Beach, Calif.

Every day, Bill Gross, the world’s most suc­cess­ful bond fund man­ager, with­draws into a con­fer­ence room at lunchtime with his lieu­tenants to dis­cuss his firm’s invest­ments. The blinds are drawn to keep out the sun­shine, and he for­bids any fid­dling with Black­Ber­rys or cell­phones. He wants every­one dis­con­nected from the out­side world and focused on what mat­ters most to him: min­ing riches for his clients at Pimco, the swiftly grow­ing money man­age­ment firm.

...

And with the col­lapse of Wall Street, Mr. Gross has emerged as one of the nation’s most influ­en­tial financiers. His fre­quent appear­ances on CNBC draw buzz, as do his wickedly humor­ous monthly invest­ing columns on the Pimco Web site. Trea­sury sec­re­taries call him for advice. War­ren E. Buf­fett, the Berk­shire Hath­away chair­man, and Alan Greenspan, the for­mer Fed­eral Reserve chair­man, sing his praises.

“He’s a very indi­vid­u­al­is­tic per­son. He doesn’t come at analy­sis or invest­ment judg­ment in the words, ter­mi­nol­ogy or ambi­ence that I have been used to over the decades,” Mr. Greenspan says. “That may be the secret of his suc­cess. There is no doubt there is an extra­or­di­nary intel­lect there.” Mr. Greenspan, it should be noted, now works for Pimco as a consultant.

...

That’s one of the rea­sons the gov­ern­ment has courted him closely.Last fall, the Fed­eral Reserve Bank of New York, run at the time by Mr. Gei­th­ner, hired Pimco — along with Black­Rock, Gold­man Sachs and Welling­ton Man­age­ment — to buy up to $1.25 tril­lion in mort­gage bonds in an effort to keep inter­est rates from skyrocketing.

Last Decem­ber, when it was press­ing Bank of Amer­ica to com­plete its ill-fated acqui­si­tion of Mer­rill Lynch, the Fed­eral Reserve also looked to Pimco for advice. Accord­ing to recently released mes­sages that Fed staff mem­bers sent one another that month, Pimco eval­u­ated the two banks and con­cluded that Mer­rill wouldn’t sur­vive with­out a cap­i­tal infu­sion or addi­tional gov­ern­ment aid.

Today, Mr. Gross is eager to buy the same sub­prime loans he once refused to touch, as part of the Treasury’s distressed-asset ini­tia­tive. After all, the think­ing goes, if any­body can fig­ure out how much all this debt is worth, it’s Pimco. But Pimco’s involve­ment in so many aspects of the bailout has made many other financiers and ana­lysts uncom­fort­able. They say its prox­im­ity to the Trea­sury Depart­ment and the Fed may allow it to reap bil­lions of easy dol­lars through fed­eral con­tracts and pref­er­en­tial invest­ment opportunities.

A fre­quent com­plaint is this: Why is the Fed­eral Reserve pay­ing Pimco to buy mort­gage secu­ri­ties on its behalf, when the firm is already a huge buyer and seller of the same bonds? “That’s the equiv­a­lent of a no-bid con­tract in Iraq,” fumes Barry Ritholtz, who runs an equity research firm in New York and writes The Big Pic­ture, a pop­u­lar and well-regarded eco­nom­ics blog. “It’s a license to steal.”

...

This is now:

The Wall Street Jour­nal
Sep­tem­ber 13, 2012, 5:40 p.m. ET

Pimco’s Gross Reaps Ben­e­fits from Bets on Fed MBS Pro­gram

By MIN ZENG

Bill Gross, the man­ager of the world’s biggest bond fund, stands out as one of the fixed-income investors best posi­tioned to ben­e­fit from the Fed­eral Reserve’s lat­est mon­e­tary stim­u­lus.

Half of the $272.5 bil­lion Total Return Fund that Mr. Gross man­ages at Pacific Invest­ment Man­age­ment Co. is ded­i­cated to mortgage-backed secu­ri­ties after an exten­sive port­fo­lio shuf­fle in recent months that saw him simul­ta­ne­ously offload longer-dated Trea­sury bonds. After the Fed announced it would buy more MBS as part of its new stim­u­lus pro­gram Thurs­day after­noon, these secu­ri­ties enjoyed a strong rally while the longest matur­ing Trea­surys sold off.

The fund “is well posi­tioned for this announce­ment,” said Mr. Gross in an emailed response to ques­tions Thurs­day afternoon.

Mr. Gross said Fed Chair­man Ben Bernanke “is express­ing an intent to be ‘all in’ until” unem­ploy­ment falls and job growth rises to a suf­fi­ciently high level. “To me that point seems at least sev­eral years away so that mort­gage or other pur­chases will con­tinue beyond 2012,” he said.

Mr. Gross has sys­tem­at­i­cally con­cen­trated his fund on MBS for months as he placed bets that the ele­vated unem­ploy­ment rate and still tepid pace of eco­nomic recov­ery would push the Fed to pro­vide addi­tional sup­port for the economy.

...

This is a reminder that the biggest ben­e­fi­cia­ries of gov­ern­ment finan­cial bailouts tend to be the biggest crit­ics:

MSN Money
Bill Gross fears our bor­row­ing could doom us
The bond king is wor­ried that mas­sive credit expan­sion — not just deficit spend­ing — is a threat to the global econ­omy. His advice includes buy­ing hard assets like gold.
By Charley Blaine Fri 3:31 PM

Even as the stock mar­ket is at five-year highs and the econ­omy is look­ing stronger, Bill Gross is gloomy about the future. Very gloomy.

The prob­lem the man­ag­ing direc­tor of PIMCO sees is that the domes­tic econ­omy is going to be suf­fo­cated by debt. Not just gov­ern­ment debt. But by con­sumer debt and cor­po­rate debt as well.

The result will be that every­one will be work­ing just to ser­vice their debts, and the econ­omy won’t grow. Every­thing will just stall out.

That’s what he told read­ers of his pop­u­lar Invest­ment Out­look essay, released this week.

...

More­over, in Gross’ view, the mod­ern bank­ing sys­tem is set up to pro­duce infla­tion and gen­er­ate real threats to the econ­omy. Hence the title “Credit Supernova!”

If you deposit money in a bank, the bank keeps some of the money as a reserve and lends the rest out. The bor­rower, in turn, deposits the money he’s been loaned, and the money gets loaned out again. The process repeats itself again and again. That’s how money gets cre­ated and an econ­omy expands.

Until the sys­tem gets out of con­trol with way too much bor­row­ing. Which is where Gross thinks it’s headed.

The mod­ern bank­ing sys­tem in the United States and else­where moved through a period of self-sustaining credit to spec­u­la­tive credit expan­sion and now is into what the late econ­o­mist Hyman Min­sky called Ponzi finance. That’s where every­one needs addi­tional credit just to cover increas­ingly bur­den­some inter­est pay­ments, with accel­er­at­ing infla­tion the end result.

...

Ah, gold bug­gery and hyper­in­fla­tion­ary fears. Sounds famil­iar.