Note: see update below
Paul Krugman has a recent post about how the country of Estonia is apparently pissed at him over his objections to the assertion that Estonia’s austerity-policy has been a stunning success. It’s a fascinating story that holds a number of relevant lessons for the conundrum the globe finds itself in at the moment.
The gist of Krugman’s argument is that the Estonia recovery hasn’t actually been all that great: A 20% drop in GDP from 2007–2009 followed by rebound that’s brought Estonia back up to around 92% of its peak 2007 GDP. While this may be true, the austerity-defenders make the case that this is really all a matter of selective data-manipulation and the government’s austerity policies. Plus, Krugman really pissed off Toomas Hendrik Ilves, the president of Estonia. And, apparently, a lot of the rest of Estonia:
Business Week
Krugmenistan vs. Estonia
By Brendan Greeley on July 20, 2012In May 2009, months after the passage of a $787 billion stimulus package in the U.S., Estonia’s government took the opposite tack: the hard line. It did not dip into the country’s reserves or borrow money. Ministers say they never even considered devaluing what was then Estonia’s currency, the kroon, which would have derailed a 10-year plan to adopt the euro. To maintain the country’s balanced budget, a tradition it had honored since the end of the Soviet occupation, Estonia’s government froze pensions, lowered state salaries by about 10 percent, and raised the value-added tax by 2 percent. The gross domestic product dropped more than 14 percent that year.
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On June 6, in a blog post titled “Estonian Rhapsody,” Krugman took on what he called “the poster child for austerity defenders.” In his post, he graphed real GDP from the height of the boom to the first quarter of this year to show that, even after a recovery, Estonia’s economy is still almost 10 percent below its peak in 2007. “This,” he wrote, “is what passes for economic triumph?”
“It was like an attack on Estonian people,” says Palmik, in an office above his plant, surrounded by blueprints for his new production line. “These times have been very difficult. People have kept together. And this Krugman took all these facts that he wanted.”
Over the course of a week’s visit to three cities in Estonia, I met only two people who didn’t know what Krugman wrote about their recovery. This is not because Estonia is a country of blog-obsessed amateur economists. It’s because Toomas Hendrik Ilves picked a fight.
Ilves is the president of Estonia. The night Krugman wrote his post, Ilves was in Riga, on a state visit to Latvia. He gave a talk to the city’s business community, offering what he calls “moral support” for Latvia’s own austerity policy. He went to a reception on a boat, then returned to his hotel and pulled out his iPhone. “I read somewhere ‘Krugman attacks Estonia,’ and I thought, well, let’s look at his blog,” says Ilves. “I said ‘What the f …’” Ilves does not complete the word.
Estonia’s president has little formal power. As in the U.K., the prime minister runs the government. Like the Queen of England, Ilves has only a bully pulpit. On June 6, standing in front of the Riga Radisson, he linked to Krugman’s post and wrote five tweets in 73 minutes.
8:57 p.m. Let’s write about something we know nothing about & be smug, overbearing & patronizing: after all, they’re just wogs
9:06 p.m. Guess a Nobel in trade means you can pontificate on fiscal matters & declare my country a “wasteland.” Must be a Princeton vs Columbia thing
9:15 p.m. But yes, what do we know? We’re just dumb & silly East Europeans. Unenlightened. Someday we too will understand. Nostra culpa.
9:32 p.m. Let’s sh*t on East Europeans: their English is bad, won’t respond & actually do what they’ve agreed to & reelect govts that are responsible.
10:10 p.m. Chill. Just because my country’s policy runs against the Received Wisdom & I object doesn’t mean y’all gotta follow me.The tweets made the Estonian papers and the international press. The next morning Jürgen Ligi, the country’s finance minister since 2009, had to comment on them at a press conference. “Maybe the style can be argued,” he tells me. “For example, the reaction was really sensitive, blaming Krugman, but the general idea was right. Krugman was clearly wrong. He clearly doesn’t understand differences of choices between America and in a small economy. By a Nobelist, it was a shame.”
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Since independence, Estonia has focused on becoming part of the West. It joined NATO, the Coalition of the Willing, and the European Union. Mart Laar, Estonia’s first post-Soviet prime minister, likes to say that when he was elected, he had read only one book on economics, Milton Friedman’s Free to Choose. The country is open, efficient, and wired. On the World Bank’s Ease of Doing Business Index, it ranks 24th out of 183. Estonia speaks a language close to Finnish, and its strongest trade ties are with Finland and Sweden. At the Kadriorg, Ilves produces a colored map ranking the most competitive economies in the European Union. Estonia sits in the second tier, behind the Nordic countries, grouped with Germany and the United Kingdom.
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Note that Estonia isn’t the the only former Eastern-Bloc country to embrace laissez-faire economics with a fervor in the last two decades. According to this piece by George Mason University professor Peter Boettke, the writings of economist Milton Friedman played a role in the collapse of the Soviet Union. Now, since Boettke is Boettke is an Austrian-school economist and director of the Koch-founded/funded Mercatus Center, we shouldn’t be surprised by the Friedman-oriented enthusiasm. Ok, we should be kind of surprised. But generally speaking, think of Friedman as the leader of right-wing “Chicago School” counter-attack against Keynesianism in the latter half of the 20th century (and you can think of the Austrian School as the crazy aunt living in the attic that went mad from her gold obsession).
Skipping down in the article...
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Ilves divides Europe into countries that follow the rules and countries that don’t. And he has started worrying about a new kind of populism in Europe: people who play by the rules and are unwilling to help those who didn’t. Ilves points to Finland, where the True Finns party has won votes by rejecting bailouts, and to Slovakia, where the prime minister lost a confidence vote last year for her support of Europe’s bailout fund.
Estonians, in their own eyes, have always followed the rules, and in 2009 took their lumps to do so. Ilves says Estonia’s average salary is 10 percent below the minimum salary in Greece. He says pensions are also much lower, and civil servants retire 15 years later. “You can imagine why there might be some frustration,” Ilves says.
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The point made by Estonia’s president about the frustrations Estonians feel over the perceived unfairness of the eurozone bailouts is a critical aspect the entire eurozone crisis, and the Estonians aren’t the only ones that share this sense of resentment. They did indeed “take their lumps”, voluntarily. All three Baltic nations were still issuing their own currencies when the crisis hit (Estonia joined the euro in 2011), and so all three had the option of devaluing their currencies instead of embracing the “internal devaluation”/austerity approach. All three of the “Baltic Tigers” choose austerity and it hurt. A lot. In addition Latvia and Lithuania both had national debts under 20% of their GDP debt and Estonia has had a balanced budget for two decades and almost no public debt at all. Humans are wired to perceive and dislike inequality. Researchers were apparently able to instigate a strike in a capuchin monkey community simply by shifting from a fair to unfair rewards system. We’re wired to perceived unfairness. It makes us tricky critters to rule: we can sense injustice.
The sentiment that “we took our lumps for our success and now you’re asking us to bailout a bunch of layabouts!?” is a very real sentiment across much of EU right now and it’s understandable. And since the Baltic tigers have seen their economies rebound in the last couple of years after swallowing the bitter pill of wage cuts, there’s also the understandable sentiment that the eurozone’s ailing economies (the PIIGS) should simply learn the lessons of the success of the Baltic states’ experiment with crash course austerity. Unfortunately, even when a populace pays dearly in terms of austerity the lessons drawn from their collective experiences may not be entirely applicable to a neighboring nation also undergoing an economic crisis. Many of the same lessons that apply in the Baltics may also apply in the distressed economics of Spain and Italy too. But a lot lessons don’t apply across different economies. So the “we’ve paid, so should they”, sentiment is both an understandable statement, but also a misguided sentiment. Understandably misguided sentiments are a big part of contemporary politics and policy-making:
Financial Times
Myths and truths of the Baltic austerity model
June 28, 2012 12:16 pm by Neil Buckley...
Latvia and its Baltic neighbours Estonia and Lithuania suffered the world’s steepest economic contractions in 2009 amid swingeing austerity measures. But now they find themselves in the frontline of the debate over austerity versus growth as the best way to tackle the eurozone’s debt problems.
Even before Ms Lagarde’s comments, the Baltics were the talk of the economic blogosphere after a spat between Paul Krugman, the Nobel economics laureate and austerity critic, and Estonian president Toomas Ilves.
Ilves called Krugman “smug, overbearing and patronising” on twitter after a Krugman blog questioned whether Estonia’s “incomplete” bounceback from a Depression-level slump should be considered an “economic triumph”.
So are the Baltics really a model for, say, Greece or Spain? The answer is probably not – though they may provide lessons. And that makes the Baltic states’ achievements no less extraordinary.
The three former Soviet states binged on cheap capital in the 2000s, hoping to narrow the economic gap with western Europe in double-quick time. They became heavily reliant on short-term external financing. When Lehman Brothers’ collapse cut off international liquidity, their economies – and tax revenues – hit the wall.
Competitiveness, meanwhile, had been sharply eroded by hefty pre-crisis wage increases. All three had also pegged their currencies to the euro. They were desperate to avoid a monetary devaluation, torpedoing their chances of joining the single currency.
So they pioneered the “internal” devaluation – lowering real wages and costs – that Germany, in particular, is prescribing for wayward eurozone economies. They slashed public sector spending, wages and jobs, while carrying out structural reforms.
Consumption collapsed. Latvia, the most extreme case – and the only Baltic country to receive an IMF bailout – saw its economy contract, peak to trough, by a quarter, and by 18 per cent in 2009 alone. Unemployment tripled in three years to 21 per cent. Lithuania’s economy shrank nearly 15 per cent in 2009, Estonia’s 14 per cent.
But all three returned to growth during 2010, and last year Estonia’s 7.6 per cent, Lithuania’s 5.8 per cent and Latvia’s 5.5 were the fastest growth rates among EU economies.
This recovery appears more than a “dead cat bounce”, instead reflecting a genuine recovery in competitiveness. From spring 2010 to autumn 2011, the three saw year-on-year growth in total exports running at above 20 per cent. Estonia and Lithuania experienced peak export growth of a stunning 45 per cent in the first quarter of 2011, notes Anders Aslund of the Peterson Institute for International Economics.
But the Baltics’ experience may not be transferable, or entirely relevant, to eurozone periphery countries.
First, the Baltics were not, like Greece, struggling under a mountain of debt – which their big falls in GDP would have made, proportionally, an even bigger burden. Each had government debt below 20 per cent of GDP in 2008 – Estonia’s was in low single digits.
The Baltic states also experienced far more explosive pre-crisis growth than, say, Greece. In 2005–2007, Latvia’s economy grew by a third; salaries doubled. The economic crash took it back only to 2005.
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Unions, too, are much weaker than in, say, Greece. That made street protests against spending cuts, thought not entirely absent, much more muted.
And finally, emigration has played a huge role as a safety valve. Latvia’s population has shrunk about 10 per cent since 2000, to 2m. True, people were seeking better-paid jobs abroad even during the pre-2008 boom. But Mihails Hazans, Latvia’s biggest expert on the subject, says emigration rose sharply after austerity was launched, and increasingly involved entire families. Some estimates suggest Lithuania’s population has declined by at least as much.
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As the above excerpt indicates, there are a number of differences between the economic situation facing the Baltic states and the PIIGS but it’s important to keep in mind that nearly ALL the of the EU’s ailing economies had number of big things in common. For starters, they nearly all had a major housing boom (Portugal being an exception). And it was a housing boom that fueled a private — not public — debt binge in the years leading up to the financial meltdown:
Business Week
Krugmenistan vs. Estonia
By Brendan Greeley on July 20, 2012...
In the 1990s, Estonia’s labor costs were low, and the workforce was skilled and educated, so the Finns moved south and started businesses. In a way, Estonia was Finland’s East Germany—close, cheap, and culturally familiar. Around 2004, Swedish and Finnish banks began to compete aggressively to sell mortgages in Estonia, and Estonians began to build new houses. Varblane lists what he calls the “dreadful developments” of the boom years. Private debt increased from 10 percent to 100 percent of GDP. As debt flowed into the country, workers left manufacturing for more lucrative jobs in construction. Wages grew rapidly, and productivity growth flattened out. Manufacturing became more expensive. Domestic debt began to crowd out foreign investment.
The crash was necessary, says Finance Minister Ligi, “to correct our understanding about growth potential.”
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It’s interesting to note that the countries with the highest rates of home ownership in Europe tend to be amongst the poorest nations and vice versa. Keep in mind that the housing bust didn’t just wipe out the private wealth of Europe’s poorest nations. It was also the catalyst for the subsequent spike in public debt. It was classic housing bubble in action: as the construction of new houses freezes and existing home values fall a nation won’t find itself only with collapsing tax base. But there’s also the bailouts. Bubbles pretty much always involve excessive lending by the banks. So when that bubble bursts, homeowners and speculative investors default on their loans. And when enough borrowers default, the banks default...at least if it’s a smaller bank. If the bank is BIG enough (i.e. too-big-to-fail BIG), it’s gets bailed out. And THAT’S REALLY EXPENSIVE.
So have the Baltics followed this strange dynamic of a private-sector/debt-fueled boom and bust? In addition to the self-imposed austerity measures, did the Baltic nations also have banking crises following their housing crashes that lead to a public bailout of their banks? Was an experience like that part of what’s led to resentment in the Baltic nations over the ongoing bailouts in the PIIGS? Well...sort of:
Estonia avoided a crisis with its banking system in large part because its banking system “is mostly dominated by Nordic banks”, and the Nordic banks are doing just fine. Mostly. So while private debt levels are still high relative to the low per-capita incomes, the Estonian banking system isn’t facing a risk of insolvency because that system is, in effect, a subsidiary of the Nordic banks.
Lithuania and Latvia also have banking systems dominated by their Nordic neighbors, but they haven’t been quite as fortunate as Estonia. In December 2008, Latvia received a 7.5 billion euro “bailout” in the form of an emergency loan with lots of austere-strings attached. This was following a run on the nation’s second largest bank, Parex, the prior month. The run was only quelled after the Latvian government stepped in and purchased a 51% share in the bank and assumed it(and did some other stuff). In 2009, Parex got a second round of “state capital injections”.
In December last year both Lithuania and Lativa got to experience a new bank run. Or, more precisely, an ATM-run. This was following the collapse and state takeover of Lithuania’s 5th largest bank, Snoras, and its Latvian subsidiary. The cost of this bailout, 1 billion euros, is enough to raise Lithunia’s public debt from 33% to 40% of GDP. And the cause of this collapse? Good ol’ bad ol’ greed and fraud perpetrated by a constellation of foreign and domestic oligarchs.
So the Baltic states are very much in a position to understand how much it sucks to have to bail out a bunch of banks that made fortunes in the build up of the bubble and/or fraud. Its understandable that there might be an expectation that other countries ALSO bail out their banks using public debt. Anything else would be unfair.
Now, if the Baltic Tigers had to endure years of austerity while also footing the bill for the bailout of private banks, why shouldn’t the same be asked of the PIIGS? It’s a reasonable question for austerity-weary members of the public to ask, even if its coupled to an unreasonable demand. So why shouldn’t the PIIGS also just shrink their economies through “internal devaluation”(austerity) and export their way back to economic health? Well, this gets us back to some of the main similarities and differences between the situations facing a nation like Estonia and, say, Spain and Italy.
First, the similarities: The Baltic nations may have still had their own currencies when the crisis hit (recall that Estonia didn’t join the euro until last year), but their currencies were/are being pegged to the euro as a prerequisite for eventually joining the euro. Similarly, the PIIGS are all eurozone members. So Baltic Tigers and the PIIGS all shared the same underlying currency and the same conundrum of being unable to devalue their currencies in the face of a crisis. And currency devaluation is one of the basic tools in the financial-crisis toolbox. All of the countries we’re talking about lack that basic tool. Similarly, all of the countries in question lack a second primary tool that normally exists for countries with a central bank: the ability to simply print more money. Newly created printed money can be invaluable in the midst of an economic crisis. It can finance emergency stimulus spending via the ind, it can buy up government debt...generically speaking, the ability of a central bank to print create more money simply allows a government to do something in an emergency. But this isn’t an option for the eurozone members or those aspiring to join the eurozone. Similarly, instead of printing more money a government could just borrow more and spend it on a stimulus. But if you’re a member of the the eurozone (or an aspiring member like the Baltics), that option is simply no longer there. This is why the “internal devaluation”/austerity protocol that the Baltic Tigers committed themselves to in the wake of their housing bubbles sort of seemed like the default option for the entire eurozone: once you take the option of printing new money, borrowing more, stimulus spending, and currency devaluation off the table, austerity really is one of the only options left.
Now, obviously, an economy can’t just print its way to prosperity. Part of the reason the eurozone’s top policy-makers are so adamantly opposed to the non-austerity path out crisis for the PIIGS is because the only central bank that could print that new money is the European Central Bank (ECB). All of the individual eurozone nations still have their own central banks, but they can’t just print new euros. Only the ECB can do that. And the ECB was set up with strict controls on how much it could expand the money supply. Now why would the eurozone members have done such a strange thing? Well, in large part its because the eurozone’s most influential member, Germany, has a powerful national memory of how out of control government money creation led to hyperinflation in the 1920’s and the subsequent horrors of the 1930’s. Granted, historians actually point towards the deflationary policies of the 30’s as the real catalyst of the economic calamity of the early 30’s that led to the rise of Hitler, but memory can be a weird thing. As is the case with the Baltics, this hyperfear of hyperinflation may be a misunderstanding, but it’s an understandable misunderstanding.
Of course, other than printing more money or “internal devaluation”, there’s also the option an external bailout. It’s a familiar scenario at this point: call the IMF, ask for a bailout, get bailed out but with a bunch of austerity measures and privatizations of state assets as part of the agreement (e.g. “structural reform”), and declare success. It’s pretty much the template for the eurozone bailouts and that shouldn’t be a surprise since the IMF is one third of the “troikas” we now find running running Greece, Ireland, and Portugal. And, of course, a county can find itself in a situation where it can print more money, devalue the currency, get an IMF bailout, and still end up defaulting. It’s a situation Russia found itself in back in 1998, with a number of relevant lessons for today:
NY Times
The Euro in 2010 Feels Like the Ruble in 1998
By ANDREW E. KRAMER
Published: May 12, 2010MOSCOW — As the financial markets try to absorb news of a rescue package for Greece and other teetering euro-zone economies, some bankers and economists see parallels to Russia’s default in 1998.
A decade ago Russia was walking in the same shoes as Greece is today, striving to restore confidence in government bonds by seeking a huge loan from the International Monetary Fund and other lenders. Then, as now, the debt crisis was roiling global financial markets. And hopes were pinned on a bailout — one that in Russia’s case did not work.
“Greece creates a remarkable sense of déjà vu,” Roland Nash, the head of research for Renaissance Capital investment bank in Moscow, wrote in a recent note to investors. The 1998 bailout designed for Russia, in the form of a rescue package offered by the International Monetary Fund, had the effect of forestalling but not preventing Russia’s defaulting on its foreign debt.
During the month between the announced rescue and that default, Russian and Western banks frantically cashed out of short-term debt as it matured, changed the rubles into dollars and spirited the money out of Russia.
The bailout propped up the exchange rate through this process, enriching those bondholders who got out early and leaving the embittered Russian public holding the debt and having to pay back creditors, including the I.M.F. By Aug. 17, 1998, when the government announced a de facto default on Russia’s foreign debt and said it would allow the ruble to float more freely against the dollar, the World Bank and monetary fund had disbursed about $5.1 billion of the bailout money.
Some analysts say that if a similar pattern takes hold in the euro-zone rescue, it could be European taxpayers paying for the bailout while investors in Greek debt are largely made whole.
In Russia’s case, the monetary fund, spurred to action by the Clinton administration’s worries about the political consequences in Russia of a financial collapse, cobbled together an aid package that was enormous by the standards of the day.
The monetary fund and other lenders first proposed $5.6 billion, but then raised it to $22.5 billion, including previous commitments — the equivalent of $29.5 billion in today’s dollars.
In Greece, the fund and European Union initially proposed a bailout of 110 billion euros, or $139 billion, last week. After markets reacted skeptically, European finance ministers met over the weekend and proposed a nearly $1 trillion financial support package for Greece and other weak euro zone economies. They proposed forming an investment fund guaranteed by the governments of richer European Union countries like Germany and France that would also draw on monetary fund money.
With Russia, the successive bailout proposals were quickly judged by the markets as too little, too late — as happened with the Greek crisis before the latest announcement.
“You need speed to put out a forest fire,” Anatoly B. Chubais, who was the lead Russian negotiator with the International Monetary Fund in the 1998 crisis, said in written responses to questions about the Greek bailout.
Edmond S. Phelps, a Nobel laureate and Columbia University economist, in a telephone interview cited a lesson from the 1998 bailout: lenders should announce their highest number as quickly as possible, to keep interest rates down and lower the cost of a bailout. International lenders, he said, need to go in “with all their guns blazing.”
Mr. Nash, in his investor note, wrote that bond investors analyzing the situation in Greece and the other weak southern European economies may be doing what bond investors did during the Russia crisis — sizing up underlying negative financial forces so potent that many investors bet against even the bigger bailout package.
Back then, as now, a global economic crisis had rendered local economies uncompetitive at the existing exchange rates. Russia at the time had pegged the ruble to the dollar, Greece today is locked into the euro zone.
In Russia’s case, the prices for the country’s mainstay petroleum exports had plummeted the previous year because the economic contraction in Asia in 1997 had diminished demand. The ruble was under pressure to follow this trend downward. For many months, though, the Russian central bank kept the ruble pegged to the dollar — a dollar that was gaining strength as global investors sought a safe harbor.
Only after the Russian central bank finally did devalue the ruble in August 1998, which plunged by 70 percent within a month, did the Russian economy begin to recover. The turnaround was faster than anybody imagined. Within a year, Russia’s economy had recovered to precrisis levels and a decade of rapid growth followed. Banks rushed back to do business in Russia.
Russia’s oil woes back then may be analogous to the gap today between Greece’s and Southern Europe’s low productivity and the high salaries its workers receive in euros. But the fix may be harder to achieve.
“Greece, fundamentally, does not have a debt problem,” Mr. Nash wrote. “It has an economy which is not competitive at the prevailing exchange rate and which lacks the structural flexibility to become competitive.”
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Yes, Russia, in the end, faced a situation with a number of parallels to what countries like Greece or the Baltics face: a currency pegged to a stronger international standard (the dollar in Russia’s case, the euro EU case) was supposed to give foreigner investors the kind of confidence in the country that would spur long-term investments and a dynamic economy. But when a crisis hits — a housing crash in the EU and the Asian financial crisis of 1997 for Russia — that commitment to an artificially strong currency can become a liability. And those efforts to maintain that artificial strength can end up simply providing the foreign investors a “get out of jail free” card, so to speak. The bailout props up the currency during a time when foreign lenders are all tempted to head for the exits.
As the commentators in the above article pointed out, the management of a financial crisis isn’t simply a matter of technocratic manipulation of this or that interest rate. It’s closer to psychological warfare: the central bank and government in crisis has to convince foreign investors that the whole house of cards isn’t going to burn down. THAT’s why the ability ability of a central bank to print its own money at will and in unlimited amounts is such a sharp double-edge sword: When used appropriately, a central bank can assure markets that there won’t be a “liquidity event”. That’s what happens when the market for something freezes up when, for instance, you have tons of sellers and no buyers. When that happens for a commodity or stock the price tends to plunge in a panic. But when it happens to a government’s sovereign debt market the entire economy freezes. Liquidity events in any of the key markets, like short-term government debt, is how economies die, so the ability/threat of a central bank to print unlimited amounts of cash and use it to buy a critical security (usually government debt) is a very powerful tool to use ward of a liquidity event. But once that spigot really is turned on, it’s not especially easy to turn off and it really can potentially overwhelm a country’s money supply. In other words, you don’t really want to turn on the unlimited-money fire hose unless there’s really a fire. But if you’re going to use that fire hose, use it early and use it overwhelmingly. Russia and the IMF had that fire hose in 1998 but didn’t use it in time and ended up defaulting anyways (a 70% devaluation in their currency within an month was basically a default).
So, if currency devaluation — like Russia dropping the ruble’s currency peg to the dollar — is effectively a default, and defaults are to be avoided at all cost, how does currency devaluation avoid spooking foreign investors? Well, once again, one of the primary jobs (and tools) of a central bank is the management of the psychology of the marketplace. When investors or spooked, central banks are supposed to step in and prevent a panic. When investors get overly exuberant and move into “bubble” territoriy, central banks are supposed to step in and “remove the punch bowl”. And when investors are REALLY spooked over about the long-term viability of a nation’s economy, a central bank’s job is convince investors that there really is a future for this country. Currency devaluation is one of the main tools that can give the world a sense that a country really does have a future. When a country can export again, that light at the end of a tunnel might not look so much like an oncoming train, and nothing helps a country export more than a currency devaluation. Think of the ability of a central bank to print unlimited money as one of the primary tools available for dealing with immediate liquidity crises, whereas the ability to devalue a currency is sort of a long-term solution. In a financial panic, you need both short term AND long term solutions and you need them simultaneously.
Now, if the Baltics were able to rebound successfully (well, ok, that depends on you who ask to define “successfully”), why can’t nations like Spain, and Italy just follow that same model? Well, now we return to the similarities and differences between and economies like Spain and Italy, and one like Estonia. One obvious difference between the two nations is that Spain and Italy are simply much much larger than any of the Baltics. If they’re going to export their way back to health someone else has to buy all those exports. That’s a lot easier to do in tiny economies like the Baltics where much of the economic growth of the past decade involved foreign manufacturers moving in and setting up factories for export. In other words, if you’re already an export-oriented economy, exporting your way back to health is just a lot easier to do. And if you’re a tiny export-oriented economy with wealthy neighbors, it’s that much easier.
Nearly everyone agrees that Spain and Italy need more exports, but can they just “internally devalue” and export to the rest of the world in place of the normal currency-devaluation? Well, in theory, and over a long period of time. Austerity measures could remain, unemployment could languish at high rates and wages could continue to fall. But here’s the problem: unlike a currency devaluation, which sort of has the effect of uniformly bringing down everyone’s wages in a nation (at least with respect to the outside world), “internal devaluation” doesn’t rely a nice smooth mechanism like currency devaluation. Instead, it relies on folks just taking a big pay cut. As many folks as possible. And here’s the problem: wages are “sticky”. Unemployment may rise, but that doesn’t smoothly translate into lower wages. Instead, what we’ve seen in Spain and Italy is simply high unemployment, but with little improvement in overall “competitiveness” because wages haven’t fallen. And neither should we expect them to unless a country submits to some sort of centralized wage authority. That’s just the messiness of real life interfering with economic theory. Even Estonia, a country that consciously embrace “internal devaluation”, wages did eventually fall, but they were still pretty “sticky”:
Business Week
Krugmenistan vs. Estonia
By Brendan Greeley on July 20, 2012...
Krugman was right about one thing: Wages were sticky. But they weren’t glued. They declined slightly in 2009 and 2010. They have grown since, but the larger wage trend since 2007 is flat. Anecdotally, some industries reported wage cuts of as much as 30 percent. Productivity, in the meantime, recovered. And both look roughly where they’d be now had there been no housing boom. As hoped, Estonia’s growth in 2010 and 2011 came from exports. The government points proudly to Ericsson’s (ERIC) recent decision to build a plant near Tallinn. Estonia’s politicians seem relieved that the country has resumed its rightful place in the world: manufacturing, exports, and sobriety....
So why can’t this work for Spain and Italy? Well, it could work...in the long run. Once a country’s spirit and economy is sufficiently broken, those wages will eventually fall. But why can’t this work in the short run? Well, once again, it could...in a different world. More specifically, it could potentially work in a world that had the global demand to buy all those newly competitive Spanish and Italy exports. That’s a very different world from the one we live in today and that brings us to one of the central problems with the entire austerity/“internal devaluation” approach to solving these kinds of sovereign debt crises: “internal devaluation” might increase exports and reduce imports, but it comes at an enormous cost that isn’t nearly as costly when currency devaluation is used instead: “internal devaluation” breaks the internal economy:
Newsweek
Spain is More Competitive than You Think
Jun 18, 2012 1:00 AM EDT
Author
Fiona BravoYou know Spaniards are depressed when Coca-Cola broadcasts a television commercial encouraging citizens to “go get ’em.” The spot cuts away from foreign commentators predicting Spain’s imminent collapse to showcase the country’s strengths: engineers, high-speed trains, and, of course, soccer. In the midst of a currency crisis, steep credit downgrades, and a 100 billion euro bailout of its banking system, it’s easy to be pessimistic about Spain. But there are some grounds for optimism.
Start with exports. While Spanish wages rose much faster than the euro zone average during the pre-crisis years, large exporters kept costs under control, allowing them to stay relatively competitive. Meanwhile Spanish employers with more than 250 workers stayed just as productive as their German, Italian, and French counterparts, according to BBVA, Spain’s No. 2 bank.
Consequently, despite Asia’s rise, Spain has managed to hang on to its global market share of exports. That puts it in a league with Germany and well ahead of most of the euro zone. Inditex, the apparel group best known for its Zara retail chain, is a poster child of Spanish competitiveness. It shrugged off the European financial crisis and even delivered a sharp rise in first-quarter profits.
The catch is that exports, which account for about 30 percent of Spain’s GDP, can’t compensate for the steep drop in demand at home. Yet some companies are doing well inside Spain. Mercadona, the largest purely domestic grocer, boosted sales by 8 percent last year, to 17.8 billion euros. Its unique business model is studied in the classrooms of top American business schools.
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Spain’s emblematic companies show that this can be done. But their success has been despite, not because of, the country’s politicians and rigid employment laws. Spain has already implemented painful reforms, particularly in the labor market, but they will take time to feed into the economy. The bank bailout may eventually ease the ongoing credit crunch, but in the short term the country’s spiraling borrowing costs will make it harder for Spanish entrepreneurs to finance their businesses. In the meantime, the hope in Madrid is that the country’s national soccer team, winner of the last World Cup, will provide some respite from the doom and gloom.
As the above article highlights, one of the fundamental problems with the “internal devaluation” approach is that any boost to exports comes at a pretty significant cost to the internal economy: If the Keynesian solution to a fiscal crisis involves more inflation (in the form of currency devaluation and more public debt), the “austerion” solution is more unemployment. And in the inflation vs unemployment debate, the unemployment approach rarely seems to work. One of the main reasons the economic rebound of the Baltic nations has been pointed out as an exceptional example of the power of austerity is because success with austerity alone is exceptionally rare. It just doesn’t help a country to break its non-export-oriented economy. This is partly do to fact that sovereign debt crisis are virtually never only about long-term concerns over the economic viability of a nation. There is always a short-term component to the crisis, and the closer a nation gets to default the greater those short-term concerns become in the minds of international investors. And if there’s one thing those international investors don’t want to see in a country facing a debt crisis it’s a surge in debt coupled with a collapse in confidence. Remember, central banking is as much about waging psychological warfare as it is a task of managing the economy. If a surge in debt is used in a large pro-stimulus manner that creates real confidence that the government is serious about addressing the economic problems both in the short, medium, and long-run, the markets will be willing to accept that surge in debt and a crisis can be averted. But if a surge in debt is taking place amidst austerity measures due to a collapsing internal economy AND this is all taking place in a collapsing international economy...well, that’s just a recipe for disaster. Exactly the kind of disaster we’ve been seeing across the eurozone. Austerity is, at best, a long-run solution. Financial panics are short-term traps that may or may not involve long-term concerns. But regardless of whether or not long-term “competitiveness” concerns are part of what’s driving the panic, any solution that requires long-term patience on the part of international investors is pretty much doomed to fail.
So why is Germany, leader of the eurozone, so adamant about austerity as the only model? Well, partly because Germany tried austerity less than a decade ago and it worked...sort of. Germany may have implemented its own version of austerity/“internal devaluation” in 2005, but that’s also not a great example of the value of austerity in the midst of a sovereign debt crisis. Germany wasn’t in the midst of financial panic and the global economy was still growing...it was a very different situation from what Spain and Italy find themselves in today (Plus, the Germans had some “help” that cushioned the blow). But it’s also important to keep in mind that the wage cuts experienced German workers in the mid 2000’s were real and painful. One again, the desires of the German public to see the PIIGS pay for their bailout might be misguided, but it’s understandably misguided. But that just explains the mass psychology of the general public. The behavior of Germany’s politicians, on the other hand, is less understandable. It’s actually pretty perplexing:
The Irish Times — Friday, July 20, 2012
Bundestag gives backing for bailout of Spanish banksDEREK SCALLY in Berlin
GERMAN FINANCE minister Wolfgang Schäuble will add Berlin’s support for bailing out Spanish banks today after receiving the backing of a large Bundestag majority yesterday evening.
Some 473 MPs voted in favour of contributing almost €30 billion in German loans and guarantees to the Spanish package of up to €100 billion, running over 18 months.
But opposition was more marked than in previous bailout votes: some 97 of a total of 620 MPs opposed the move, including 22 from the coalition ranks, with a total of 13 abstentions.
The government failed to get an absolute, so-called “chancellor” majority, though six coalition politicians were missing from the midsummer parliamentary recall.
Before the vote, Mr Schäuble said financial markets had “doubts” about Spain’s economic health and the bailout would help Madrid buy time to complete cutbacks and reforms already under way.
“Spain is on the right path to solid state finances but this progress is endangered by insecurity over its financial sector,” he said.
“We have a strong interest in allowing Spain to continue to reform.”
He assured MPs that full liability for all loans lay with the Spanish state, dismissing speculation in some quarters that recapitalising euro zone banks would let states off the hook for liability.
Mr Schäuble denied this was the case with the Spain bailout, insisting European leaders would discuss this issue only after a European banking regulator was in place and operating to everyone’s satisfaction.
“Anyone who talks about immediate, direct refinancing of banks through the ESM (bailout fund) or of collective liability for banks in the euro system is shooting his mouth off,” he said, a dig at euro zone bailout chief Klaus Regling.
Opposition leader Frank Walter Steinmeier, parliamentary head of the Social Democrats (SPD), said his party would support the bailout for euro zone stability – but as a show of support for the euro zone and not for the government.
He accused Angela Merkel’s coalition of unsettling voters by spinning a “fairy tale” of fiscally prudent Germans surrounded by fiscally reckless neighbours.
“Germany is no blessed isle. The crisis will hit even export-driven countries [such as Germany] and, as one export market after another hits the skids, we cannot rule out that we will be dragged down,” he said.
Mr Steinmeier put the government on notice that the SPD would not continue to support euro zone bailouts for banks unless creditor involvement was agreed.
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OK, first off, kudos to SPD leader Frank Steinmeier. By calling out Merkel for selling German voters on a fairy tale of “lazy Southerners” we might be seeing a sign that the power of the politics of perceived inequality is fading in Germany. Now let’s hope the same happens in Finland. Soon. Far-right political gains aren’t just being seen in the crisis-hit eurozone members. Finland, with one of the strongest economies in europe, saw the far-right True Finns party surge to 19% of the vote in last year’s elections based on anti-bailout sentiment. And that sentiment hasn’t subsided since then as the southern economies continue to erode. In fact, Finland managed to extract a special concession in exchange for its support of the latest Spanish bank bailout: collateral values at ~40% of its share of the loans to Spains banks. The synergistic relationship between the eurozone crisis and the rise of radical political groups is a growing and most troubling phenomena.
So what are we seeing here with the German parliament demanding that Spain’s public accept the full liability for a 100 billion euro bailout of Spain’s banks? Isn’t that just going to exacerbate the underlying sovereign debt crisis? Well yes, but we’re not just seeing the politics of bailout-resentment on display here. One way to look at it is we’re seeing an attempt to do the unprecedented: central banking doesn’t really have precedent for dealing with financial panics using the austerity-only approach. The accepted paradigm for quelling a panic is for the central bank to act as a “lender of last resort”. In other words, the central bank needs to threaten to do whatever it can to stop the panic. Stimulus spending, buying debt, printing money, anything. It may not be a perfect approach but it does have a track record of working. But in our brave new world of the eurozone, the only central bank in the eurozone with the power to buy bonds and issue euros is the ECB. And not only does the ECB not want to use its power of lender of last resort. It’s mandated to do one thing only: maintain “price-stability”. That’s a fancy way of saying “avoid inflation at all costs”. Deflation is fine, though...you can’t have “internal devaluation” without deflation. And the special funds set up to help “bailout” the PIIGS (the EFSF and the ESM) can’t actually buy sovereign debt themselves. At least not unlimited amounts. Only the ECB could technically engage in these activities and be a “lender of last resort” but it’s mandated not to do so:
Thursday, July 5, 2012
Marshall Auerback: All Roads Lead to the ECBBy Marshall Auerback, a hedge fund manager and portfolio strategist. Cross posted from New Economic Perspectives
We’ve always been a fan of Professor Paul De Grauwe from University of Leuven, who has consistently pointed out the structural flaws inherent in the original structures of the EU. Recently, Professor de Grauwe wrote an excellent analysis explaining why the latest “rescue plan” cobbled together by the Eurozone authorities is destined to fail.
The key points:
1) ECB is not currently a ‘lender of last resort’. The ECB was set up with fundamental flaws, where “… one of the ECB’s main concerns is the defense of its balance sheet quality. That is, a concern about avoiding losses and showing positive equity- even if that leads to financial instability.” This is a profoundly misconceived idea. As we have noted many times, a private bank needs capital – clearly because there are prudential regulations requiring that – but because it can become insolvent. It has not currency-issuing capacity in its own right. While the ECB has an elaborate formula for determining how capital is from the national member banks at an intrinsic level, it has no need for capital. It could operate forever with a balance sheet that if held by a private bank would signal insolvency. There are no comparable concepts for a currency issuer and a currency user in terms of solvency. The latter is always at risk of insolvency the former never, so the ECB’s focus on profitability is not only misguided, but leading to inadequate policy responses.
2) The creation of the European Financial Stability Facility (EFSF) and the ESM has been motivated by the overriding concern of the ECB to protect its balance sheet and to avoid engaging in “fiscal policy”. The problem again goes back to the creation of the euro: no supranational fiscal authority to go with a supranational central bank, which means that the only entity that can conceivably carry out “fiscal transfers” of the sort exemplified by a bond buying operation is the ECB. Sure, the actual fiscal transfers can be ’subcontracted” to the EFSF and ultimately the ESM, but it can only work if the latter’s balance sheet is linked to the ECB’s, giving it the same unlimited capacity to buy up the bonds and thereby deal with the insolvency issue. As things stand now, per de Grauwe: “The enlarged responsibilities that are now given to the ESM are to be seen as a cover-up of the failure of the ECB to take up its responsibility of the guardian of financial stability in the Eurozone; a responsibility that only the ECB can fulfill”.
3) Related to this problem is the fact that the ESM has been given only finite resources as per Germany’s stipulation the minute it begins. It is capitalised at 500bn euros. And it’s unclear that Germany can go much further, given that there are currently 3 constitutional challenges which the ESM is now facing within Germany’s courts. This will delay ratification of the vote taken last week by Germany’s parliament to ratify the ESM’s existence, as well as limiting its firepower going forward. The ESM’s “bazooka” is in effect a pop-gun. Consequently, as de Grauwe argues, “Investors will start forecasting the moment when the ESM will run out of cash. They will then do what one expects from clever people. They will sell bonds now rather than later.”
As is clear from every FX crisis in the past, “A central bank that pegs the exchange rate and has a finite stock of international reserves to defend its currency against speculative attacks faces the same problem. At some point, the stock of reserves is depleted and the central bank has to stop defending the currency. Speculators do not wait for that moment to happen. They set in motion their speculative sales of the currency much before the moment of depletion, triggering a self-fulfilling crisis. “
Until Europe’s authorities have this figured out, the crisis will continue. All roads lead back to the ECB.
Once again, the ECB simply isn’t allowed do what the Federal Reserve of Bank of Japan can do because the ECB’s mandate is limited to one thing: “price stability”. Fighting inflation is pretty much it’s one and only priority. And not surprisingly, that’s also the only mandate of the Bundesbank. As the Bundesbank goes, so goes the ECB. The nightmare of the Weimar Republic lives on, but in reverse and in neighboring countries.
So what is this new paradigm that we’re seeing here? What is the lesson for the world that the ECB (Bundesbank) has in store for the rest of us? Well, in some ways this an unprecedented approach to central banking and economic management. In other ways it’s old school. Austrian old school:
Slate
The Hangover Theory
Are recessions the inevitable payback for good times?
By Paul Krugman|Posted Friday, Dec. 4, 1998, at 3:30 AM ETA few weeks ago, a journalist devoted a substantial part of a profile of yours truly to my failure to pay due attention to the “Austrian theory” of the business cycle—a theory that I regard as being about as worthy of serious study as the phlogiston theory of fire. Oh well. But the incident set me thinking—not so much about that particular theory as about the general worldview behind it. Call it the overinvestment theory of recessions, or “liquidationism,” or just call it the “hangover theory.” It is the idea that slumps are the price we pay for booms, that the suffering the economy experiences during a recession is a necessary punishment for the excesses of the previous expansion.
The hangover theory is perversely seductive—not because it offers an easy way out, but because it doesn’t. It turns the wiggles on our charts into a morality play, a tale of hubris and downfall. And it offers adherents the special pleasure of dispensing painful advice with a clear conscience, secure in the belief that they are not heartless but merely practicing tough love.
Powerful as these seductions may be, they must be resisted—for the hangover theory is disastrously wrongheaded. Recessions are not necessary consequences of booms. They can and should be fought, not with austerity but with liberality—with policies that encourage people to spend more, not less. Nor is this merely an academic argument: The hangover theory can do real harm. Liquidationist views played an important role in the spread of the Great Depression—with Austrian theorists such as Friedrich von Hayek and Joseph Schumpeter strenuously arguing, in the very depths of that depression, against any attempt to restore “sham” prosperity by expanding credit and the money supply. And these same views are doing their bit to inhibit recovery in the world’s depressed economies at this very moment.
The many variants of the hangover theory all go something like this: In the beginning, an investment boom gets out of hand. Maybe excessive money creation or reckless bank lending drives it, maybe it is simply a matter of irrational exuberance on the part of entrepreneurs. Whatever the reason, all that investment leads to the creation of too much capacity—of factories that cannot find markets, of office buildings that cannot find tenants. Since construction projects take time to complete, however, the boom can proceed for a while before its unsoundness becomes apparent. Eventually, however, reality strikes—investors go bust and investment spending collapses. The result is a slump whose depth is in proportion to the previous excesses. Moreover, that slump is part of the necessary healing process: The excess capacity gets worked off, prices and wages fall from their excessive boom levels, and only then is the economy ready to recover.
Except for that last bit about the virtues of recessions, this is not a bad story about investment cycles. Anyone who has watched the ups and downs of, say, Boston’s real estate market over the past 20 years can tell you that episodes in which overoptimism and overbuilding are followed by a bleary-eyed morning after are very much a part of real life. But let’s ask a seemingly silly question: Why should the ups and downs of investment demand lead to ups and downs in the economy as a whole? Don’t say that it’s obvious—although investment cycles clearly are associated with economywide recessions and recoveries in practice, a theory is supposed to explain observed correlations, not just assume them. And in fact the key to the Keynesian revolution in economic thought—a revolution that made hangover theory in general and Austrian theory in particular as obsolete as epicycles—was John Maynard Keynes’ realization that the crucial question was not why investment demand sometimes declines, but why such declines cause the whole economy to slump.
Here’s the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn’t that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?
Most modern hangover theorists probably don’t even realize this is a problem for their story. Nor did those supposedly deep Austrian theorists answer the riddle. The best that von Hayek or Schumpeter could come up with was the vague suggestion that unemployment was a frictional problem created as the economy transferred workers from a bloated investment goods sector back to the production of consumer goods. (Hence their opposition to any attempt to increase demand: This would leave “part of the work of depression undone,” since mass unemployment was part of the process of “adapting the structure of production.”) But in that case, why doesn’t the investment boom—which presumably requires a transfer of workers in the opposite direction—also generate mass unemployment? And anyway, this story bears little resemblance to what actually happens in a recession, when every industry—not just the investment sector—normally contracts.
As is so often the case in economics (or for that matter in any intellectual endeavor), the explanation of how recessions can happen, though arrived at only after an epic intellectual journey, turns out to be extremely simple. A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time. Yet, for all its simplicity, the insight that a slump is about an excess demand for money makes nonsense of the whole hangover theory. For if the problem is that collectively people want to hold more money than there is in circulation, why not simply increase the supply of money? You may tell me that it’s not that simple, that during the previous boom businessmen made bad investments and banks made bad loans. Well, fine. Junk the bad investments and write off the bad loans. Why should this require that perfectly good productive capacity be left idle?
The hangover theory, then, turns out to be intellectually incoherent; nobody has managed to explain why bad investments in the past require the unemployment of good workers in the present. Yet the theory has powerful emotional appeal. Usually that appeal is strongest for conservatives, who can’t stand the thought that positive action by governments (let alone—horrors!—printing money) can ever be a good idea. Some libertarians extol the Austrian theory, not because they have really thought that theory through, but because they feel the need for some prestigious alternative to the perceived statist implications of Keynesianism. And some people probably are attracted to Austrianism because they imagine that it devalues the intellectual pretensions of economics professors. But moderates and liberals are not immune to the theory’s seductive charms—especially when it gives them a chance to lecture others on their failings.
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Keep in mind that Paul Krugman wrote the above critique of the Austrian School of economics in 1998, a decade before the current crisis. It’s also an amazingly predictive critique. What Krugman wrote about the Austrian approach to economics is pretty much what has happened: a financial crisis was turned into a morality play and the ensuing austerity-policies ended up taking down entire national economies. And with Krugman now the biggest opponent of this neo-Austrian School of economics, it’s no surprised that we end up seeing lots of fanfare over the “Krugmenistan vs Estonia” story. After all, if the ECB was to successfully save the eurozone with austerity alone, that would send a powerful message to all future economies around the globe that austerity works. What’s we’re seeing here isn’t Krugmenistan vs Estonia. It’s Krugmenistan vs Austeria. It’s the ultimate morality play where the final moral of the story is that government social spending doesn’t work and only leads to disaster. We are being taught that central banks shouldn’t step in to act as the lender of last resort. That will only put off the necessary pain required for proper reform. One can see how this is an emotionally compelling approach to macroeconomics. And if you’re looking at the consequences of this approach, one can see how it’s also a giant blunder. An understandable giant blunder, sure, but still a giant blunder. The Austrian School of economics isn’t just a piece of our past: it’s intended to be our future too. Our blunderous future.
So how is the eurozone supposed to proceed forward and not continue on as a giant fiscal trap for its denizens? Well, one approach would be for the ECB to drop the morality play and act like a real central bank. We just got a sign today that the ECB may do just that when ECB head Mario Draghi announced that the ECB is ready to start buying sovereign bonds again. As he put it, “these are not empty words now”. Then again, he also said that the ECB must still act within it’s mandate...the single mandate of fighting inflation. So these may, once again, be empty words. Still, it’s progress.
But ECB bond buying is still only a short-term solution. The eurozone needs a long-term solution and tit-for-tat austerity really isn’t going to cut it. If the eurozone member nations end up viewing each other as either moochers or cruel austerity freaks it’s just not going to work. So here’s a free tip borrowed from a billionaire: the eurozone needs to remember the birth lottery. It’s a simple concept popularized by billionaire Warren Buffett and it’s one most useful best ideas the guy has ever had. Think of it like this: We don’t control where we’re born, who our parents are, what our natural traits might be (physically, IQ, etc), and really much else. At least not until we get older and begin to make our own way in the world. And even once we become adults there is still an immense amount of our world that is well beyond our individual control. So with that in mind, if you were a hypothetical future citizen of the eurozone but you couldn’t control anything about which country you were born in and any of your other natural traits, how would you want that eurozone to be structured?
Here’s a second tip: Part of the Austrian School involves a fixation on the going back to the gold standard. There are a lot of problems with the gold standard, but as is the case with austerity-politics there’s just an immense amount of emotional pull to the idea of a “hard” currency. Now, since humanity is facing an imminent natural resource crisis, perhaps the aspiring Austrian School economists could start focusing their mental efforts on something much more useful: an vital natural resources standard. As they say, you can’t eat gold. Fresh water and top soil, on the other hand, really help with eating. A meaningful natural resources standard would no doubt have a number of problems, but at least it’s not a dead end like gold. We’re all dead in the long run, but humanity is dead if we don’t get this resource crunch under control. That’s real austerity.
Here’s a final tip, although it’s not really for the eurozone. It’s for Mitt Romney. And it’s not really a tip. It’s more of a declaration: Mittens, you have some messed up friends.
Update
Well, I guess we know whether of not the ECB’s recent change of heart is real or not. It’s not:
Bundesbank pours cold water on ECB bond buy hopes
FRANKFURT | Fri Jul 27, 2012 6:38am EDT
(Reuters) — Germany’s Bundesbank dampened expectations for further action by the European Central Bank on Friday by upholding its resistance to the ECB buying bonds, a day after ECB President Mario Draghi raised expectations such a move could be on the cards.
Draghi sent a strong signal to markets on Thursday that the ECB was preparing further policy action, saying that the ECB was ready, within its mandate, to do whatever it takes to preserve the euro, referring also to inflated borrowing costs, which some saw as a hint the bank could revive its bond purchase program.
The Bundesbank, which opposes the ECB’s Securities Markets Program (SMP) because it treads too close to the central bank’s ultimate taboo of state financing, said on Friday it was still not in favor of such a step.
“The Bundesbank continues to view the SMP in a critical fashion,” a Bundesbank spokesman said “The mechanism of bond purchases is problematic because it sets the wrong incentives.”
The ECB has spent more than 210 billion euros on government bonds, having bought them in the secondary market.
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Thank you so much for this synthesis and presentation. I feel like I’m actually beginning to understand the EU situation.
Keep it up.
@Grumpus: I think this article’s headline really highlights one of the main reasons this new form of central banking by the ECB (the “just barely enough”-bailout technique) will doom the continent to endless austerity. The headline refers to the ECB doing the “unthinkable”, yet those unthinkable actions — bond buying bt the central bank, etc — are the kinds of things that should be considered standard tools in the central banking toolbox. They may not be routine because they’re intended for emergencies, but they really should be standard practice for those tools to be “on the table” so the market participants know that the 800-pound gorrilla is able to act. Especially, as the article points out, when the ECB already did these actions. It was apparently “unthinkable” that the ECB would do something it’s already done?! This is the kind of posturing that basically tells the bond markets “here’s the keys, you’re in the driver’s seat” and that is exactly the opposite of what a central bank is supposed to be doing when it’s trying to ward off a panic:
So even now, when the ECB is publicly thinking about the unthinkable, there’s still a clear attempt to avoid normal central banking emergency actions at all costs in order to placate to placate the glowering Bundesbank. And as thearticle pointed out, even when the ECB used the “Big Bazooka” of bond buying in the past to shore up the ailing bond markets, it would “sterilize” each bond purchase with the removal of a euro from the money supply in order to avoid inflation. Non-sterilized use of the “Big Bazooka” is called “radical” in our strange new world.
One way to look at it is that the Bundesbank is making a big push to makee “monetary stability” the new gold-standard. It certainly makes a great analog to the gold-standard: an intellectually and emotionally appealing economic paradigm that doesn’t actually make much sense once you sit down and analyze the real-world implications of such a paradigm. Why is inflation considered the one and only great destroyer of economies that must be fought at every opportunity forever? I’m not sure, but the Bundesbank wants to assure us that if we all just stick to this “sound money” path the future will be awesome. That’s the magic of low infation-only economic policy-making: It just works! Trust us! We’ll get to the promised land of a low-debt/high “productivity” economy eventually. Even if we have to destroy the real economy along the way:
One of the things the “expansionary austerity” proponents(i.e. Austrian School economic theories) rarely point out to the public is that the expansion phase doesn’t happen in the economy until after you’ve crushed it:
Record loan defaults with higher default levels still to come...it may not be much but it’s progress!
Spain had better hope Paul Krugman was right about that whole “Reinhart-Rogoff ’90% national debt-to-GDP redline’ ” kerfuffle. Because if Reihart and Rogoff were correct, and 90% of debt-to-GDP really does represent a serious threshold that will create a significant slowdown in economic growth, austerian logic demands that Spain and much of the rest of the eurozone needs more austerity:
Bad news for folks living in the eurozone: Jens Weidmann might be gaining a pro-austerity ally at the ECB:
With a large number of pro-austerity governments set to join the eurozone in coming years, it’s worth keeping in mind that we could end up seeing the Weidmann view — austerity good, inflation bad — become a much more influential philosophy at the European Central Bank by the end of the decade:
Nope. Not good news at all.
Get ready for Krugmenistan vs Swedeflation:
Yikes, Riksbank Deputy Governor Per Jansson just engaged in some “rather crude” smack talking which means this could become a hotter topic going forward. Although it’ll be interesting to see if any intra-Riksbank smack talking takes place in coming weeks because the deputy governors at the Riksbank have been pretty divided all along. Krugmenistan has allies at the Riksbank:
So we had two out of the six duputy governors consistently voting for looser money/anti-deflationary policies all along and now one of the inflation hawk is starting to waiver. That’s pretty close to a 3–3 split! Is the House of Swedeflation a house divided? It sure looks that way.
Skipping down...
Ah, so according to Finance Minister Borg, since there’s been a relatively strong economy (compared to most of the rest of Europe) underpinned by high productivity growth and only moderate wage increases AND a rising housing market and growing consumer debt (which one might expect with a rising housing market doing well in a low-interest rate global environment with suppressed wages) it is therefore ok to flirt with outright deflation...even though deflation would only make servicing the consumer debt that the Riksbank is so worried about even more difficult to service, especially if it derails the economy. If this seems baffling, keep in mind that, back in 2010, the Riksbank was raising interest rates due to supposed fears of inflation and just kept raising rates while inflation fell below the target rate of 2%, so Sweden is in one of those “the faulty reasons change but the flawed policies stay the same” kind of situations and one reason or another is apparently going to be found to keep the pro-deflationary policies in place. This is why even the OECD had a few words with Sweden’s policy-makers back in December. The Swedeflation situation is just that bafflingly bad:
Yep, even the OECD...
Part of what makes the EU’s austerity experience so painful is that you don’t just have the policies imposed that are specifically designed to permanently disempower workers and the middle-class. You also get the fun of having the people pushing these policies tell you how proud they are about how it all worked out and how, for the sake of your future, it must continue:
Just in case you forgot the kind of mentality being dealt with here, note that European Commission vice president Siim Kallas also added that it is “important to embrace structural reforms early on and to stay the course, whatever challenges may be faced along the way”. Apparently policy failure and the need to correct that policy failure are just some of the “challenges” that must be overcome while “staying the course”.
Continuing...
In case you missed it: Government debt has soared during the bailout program by almost a third, to €276 billion, or 129 percent of gross domestic product, compared with 94 percent at the end of 2010.
Continuing...
Notice the bright spot in Portugal’s economy: call centers.
Continuing...
Let’s review the mess that was Portugal’s “bailout”:
By early 2011, Portugal was looking like the next ‘eurodomino’ to fall, primarily due to excessive private debt and not public debt. So Merkel and the rest of the EU’s far right wrecking crew of course determine that the problem facing Portugal is a bloated government and too much social spending. So then Portugal spends the next three years imposing massive public sector austerity in an attempt to impose ‘internal devaluation’ on Portugese economy and what are the results? Public debt spiked by a third, unemployment is still above 15%, and the main factor that appears to be keeping the unemployment rate from going even higher is the fact that the most skilled young workers abandoned their lives in Portugal for a future elsewhere.
And what lessons have policy makers taken from this experience? Oh yeah, that it is “important to embrace structural reforms early on and to stay the course, whatever challenges may be faced along the way”. Because, as we’re reminded at the end of the article, “making Portugal appear like a very successful case and proving that austerity works in the short term is an important political message,” he said, “Not so much for us, but more for Germany.” Yep!
And it’s not just important for Germany’s right wing but, with the EU elections looming, any EU politician that wants to promote austerity — like Jean-Claude Juncker in his drive to become European Commission President — wants to cast Portugal as a wonderful model to follow.
But it wasn’t all bad news. Exports were up as a percentage of GDP, which is what happens when you tank your domestic economy, but at least they weren’t down! And best yet, the call center industry is thriving. *ring* *ring* Your future is calling...:
“We shouldn’t be thinking of a doomed, low-paid economy. We should be thinking of an economy that will remain poor but with some growth, and where wages will have to increase in the near future.”
*ring* *ring*
Your future is calling...
Please hold...
Thank you for holding...You’re fired.
Have a nice day.
Policy makers in Berlin have another reason to oppose any attempts by the ECB to calm the eurozone bond markets: The markets are so calm it might lead to a Germany housing bubble:
“A monetary policy just for Germany would set interest rates at 4.65 percent, according to a Taylor Rule model compiled by Bloomberg, versus minus 10.75 percent for Spain or minus 19.25 percent for Greece”.
So if Germany has a right to complain about a 0.15 interest rate possibly triggering a housing bubble because a “monetary policy just for Germany would set interest rates at 4.65 percent”, don’t Greece and Spain have a substantially stronger case that their being systematically abused if their interest rates should be set at ‑19.25 and ‑10.75 percent?
In related news, Paul Krugman has a post about some new research on the long-term impact of austerity. The conclusion? The insane austerity policies of recent years hasn’t just reduced the short-term potential for the impacted economies. Austerity is also doing long-term damage
Keep in mind that the primary justification we keep hearing from the austerity advocates is that the eurozone needs austerity to harmonize their economies to make them appropriate for a currency union. And now we’re in a situation where there’s a 15% optimal interest rate spread between Germany and Spain and a 25% spread between Germany and Greece. How is permanently damaging some eurozone economies going to “harmonize” them going forward?
Italy’s new Prime Minister has a big new plan for turning Italy’s economy around: More austerity although he’s also asking Angela Merkel for a little easing up on the existing rules. LOL. He’s new:
Note that the argument that the “Agenda 2010” austerity package “helped German businesses turn around” completely ignores the fact that the rest of the continent was in the midst of a euro-inspired borrowing spree during those years with a few German exports sold to Germany’s EU partners. Also note that the austerity package involved repeated violations of the same kinds of EU budget caps that Renzi is committing to for Italy adhere to for the coming years (which is what Renzi was referring to when he cited Schroeder’s willingness to break the rules). And then there’s the fact that Germany’s export success doesn’t really seem to have much to do with lower wages but more to do with the niche for it fills in the global manufacturing marketplace and the fact that the eurozone artificially deflates the value of Germany’s currency (while simultaneously artificially inflating the value of the currency of the weaker eurozone members). And then there’s the fact that the export advantage for Germany from a suppressed euro has only gotten better as the crisis continues (despite that fact that the Bundesbank has been largely demanding strong-euro policies).
Continuing...
Yes, the EU must “quickly change the German-centric policies of austerity and blind rigor and set off down the road of recovery and development”, although it’s very unclear why “a light easing of the euro zone’s restrictive economic policies” would really be anything more than just a “light easing” of those very same policies. Either way, good luck Renzi! Those deaf ears your words are falling on happen to be blind and dumb too:
Since the “Austerity 2010” austerity agenda is apparently going to be cited now as ‘proof’ that ’ economic strength and a balanced budget are the result of sticking to European budget rules’, it really can’t be pointed out enough that Germany and France both flouted those rules for years and it was exports purchased by Germany’s EU neighbors that helped Germany eventually get its budget deficit under 3%.
Continuing...
“We have made serious mistakes by not sticking to the rules. We mustn’t repeat these mistakes. We can see that the other path is the right one. We must continue this consequently.” Again, the “mistake” of not sticking to the rules was initially made by Germany while it was implementing the very same austerity regime that is now being cited as a model for the rest of Europe. Again, good luck Renzi!
And, of course, we can’t have an episode of austerity-fever without some encouraging words from the Bundesbank. What Italy needs, according to Bundesbank chief Jens Weidmann, is not less austerity but more austerity. Who could have seen that coming:
You have to wonder what the long game is for folks like Weidmann because it’s becoming extremely obvious when they talk about “reforming” EU member states that this is the same kind of “reform” that might be laying in wait for someone that blew through all their credit cards and is now in massive debt (and living in a country with legal usury). In other words, it’s becoming increasingly clear that the EU elites, especially those in Berlin and Frankfurt, hold the view that these EU member states are supposed to become significantly poorer based on the arguments that they’re public spending is too high while ignoring the fact that the eurozone financial crises were primarily caused be private sector getting transferred onto the public balance sheets (with Greece being a notable exception). And yet it’s not at all clear that the EU public even remotely realizes that permanently reduced living standards is the “reform” the Bundesbank has in mind. And that makes the entire austerity regime just a shocking betrayal of an entire continent that could drive the masses into a rage if it’s ever widely recognized. And the longer austerity policies rule the day and the more and more absurd the Bundesbank’s arguments get, the greater the probability that we’re going to see a mass realization of a major betrayal.
It’s very similar to the problem the GOP faces in the US: it’s simply becoming harder and harder for average voters to buy into the notion that the GOP’s policies aren’t entirely geared towards enriching the billionaires and the “divide and conquer” techniques that have worked so well in the past are starting to lose their effectiveness as the long-term damage from the GOP’s policies become harder and harder to ignore. This kind of “fraud fatigue” has created an existential crisis for the GOP but it’s taken decades to get there. How long is it going to take for the EU’s GOP analogs to blow through their credibility? Will it take decades there too? What happens when all these countries realize that they were basically forced to destroy their futures and it was entirely avoidable and based on lies and indefensible ideologies?
How is a ‘bond vigilante’ like the Sword of Damocles? Well, they’re both constantly threatening to destroy you at a moment’s notice. Also, they’re both myths. And how is a ‘bond vigilante’ different than the Sword of Damocles? No one actually believes in the Sword of Damocles:
Yes, the bond vigilantes are always out to get you and destroy your economy whenever your nation steps out of line and deviates from super low inflation and strict budget austerity, even for a moment and even if the super low inflation and budget austerity are already destroying your economy. This is why people like France’s Central Banker Christian Noyer needs to constantly caution against outlandish ideas like the one Francois Holland is floating of using France’s record low borrowing rates to make public infestments in France’s infrastucture (what a stunning idea). As Noyer points out below, this plan simply isn’t an option because the bond vigilantes are watching, waiting to pounce at any moment and restrict France’s access to record cheap credit, and there’s nothing France can do about it because “No country today has sufficient credibility to put in place a strategy” of financing public infrastructure with a major debt increase”. The high priests of high finance of spoken. The bond vigilantes will win, but only if you try. So don’t:
Yes, “decades of deficits have created profound skepticism,” according to Noyer. The bizarre circumstances associated with a currency union and self-imposed austerity have nothing with the current crisis, it’s “decades of deficits”. As Krugman points out, one of the bonuses of being a “hard-money guy” is never having to reconsider. Anything. Ever.
Well, almost never. Sometimes the pain of sadomonetarist policies get a little too painful, as we recently saw in Sweden. No, it was the pain associated with high unemployment (that’s pain for the proles and therefore good). It was the worst kind of pain that even a staunch admirer of the bond vigilantes (who are all very John Galt-like) can’t ignore: monetary pain:
As we can see, deflation, one of the only known phenomena that can overrules a hard money central banker’s fear of the bond vigilantes (bond market meltdowns can also do the trick), is already forcing a serious rethink amongst some of the the hard money faith healers. At least those in Sweden. Still, it’s a strong faith in the threatening omnipotence of the bond vigilantes (during a period of record low interest rates) and the corrective nature of economic shock therapy and it’s pretty clear from the comments by France’s Noyer that the faith in economic faith healing is still going strong.
At the same time, the overruling in a 4–2 vote of Sweden’s hard money faith healer in chief, Stefan Ingves, might be a sign of the kind of backlash we can expect against the faith healers at the central banks across the EU and especially at the ECB if the ultra low inflation gets even worse.
So deflation just might override belief in the mythical poweres of the ever-vigilant bond vigilantes and force a serious policy response, although anyhing involve a public stimulus package will no doubt be overruled since it would probably work and be extremely embarassing for almost all parties running in power across the EU. So it’s really unclear what sort of effective policy response can even be considering in the EU nowadays should the threat of deflation linger.
This could be increasingly important to keep in mind because France’s Finance Minister, Michel Sapin, was recently promoting an idea that just might be enough to trigger the kind of sustained deflationary force that could force quite a rethink in the saner segments of the ECB or, more likely, just send the EU economnies further into a depression: The eurozone should promote the replacement of the dollar with the euro for more internation transactions. In other words, according to Sapin, policy makers have plans for the euro. It needs to go global:
France’s Finance Minister presumably doesn’t envision the euro suddenly replacing the dollar’s role in interational transactions. That can’t be easily done but a larger role for the euro is certainly possible and there’s a lot room for growth so this could be a deflationary force for many years to come. All it would require is the appropriate polices, as Mr Sapin is advocating, and, oh yeah, probably deflation.
Still, there are a number of different factors that go into determing the movement of something with as huge a market as the euro, so it’s possible that a “use euros” campaign would have no appreciable effect on the value of the currency, at least not for a while. But let’s keep in mind the ECB, and especially the Bundesbank, have been strangely deaf to all the calls for lowering ECB policies that can lower the value of the euro and that the ECB’s official policy is that the exchange rate does not matter. Only ‘price stability’ matters.
So now that France’s central banker has eluded to a growing concensus that the euro should be promoting as a dollar alternative for international transactions, the prospect for an indirect ‘strong euro’ policy is now on the table. It also raises the chilling possibility that we could be looking at the creation a new reserve currency paradigm that aims to replace the US’s paradigm of “we have the biggest economy and military” (which is what gives the US dollar “credibility” internationally) with a new eurozone “we’re willing to eat our young for price stability” regime. An “Austerity Standard” that’s supposed to be as good as gold.
There’s always been a lot to be desired with the US’s “we have the biggest economy and military” paradigm but if there’s to be a single reserve currency it’s not surprising that it ends up being the currency of the country with the biggest economy and military. Now that we seem to be transitioning to a multi-polar/multi-reserve currency world, however, the possibility for different reserve status paradigms is only going to keep growing so it’ll be interesting to see what emerges.
What won’t be interesting to watch, but instead grim and distressing, will be the rollout of a “we’re willing to eat our young for price stability so have confidence in our currency” paradigm that we can probably expect from the eurozone in its play for greater global status. Faith healing and snake handling is all fun and games until someone gets bitten by the snake. But a school of faith healing that views getting bitten by the snake as a necessary step for purification and healing is the kind of old time religion more deserving of a Darwin Award than reserve currency status. And yet, as we can see, the high priests of the Cult of the Forever Fearful of the Bond Vigilantes are continuing to read the entrails and the message is clear: more socioeconomic disembowelings are needed before confidence can finally return. Anything else will bring about the wrath of the bond vigilantes.
And when confidence does return, the whole world will want to buy a piece of the magic (for international transactions ) and the ECB’s mythical bond vigilantes will finally materialize on our plane of existence and achieve their rightful reserve status over our mortal world as a global force with immense influence over the global money supply. At that point, it mostly involves doing the same thing (austerity for the masses using junk economics as an excuse) in different ways (the excuses might change) over and over and over.
Krugman calls “that’s BS!” on the BIS:
Yes, “the economy should be kept permanently depressed in order to curb the irrational exuberance of investors” by jacking up the interest rates globally. That’s not what the BIS said, but that’s basically what the BIS said. And echoed by the BIS’s fellow travelers:
Yes, it’s always time to raise rates and enforce a little discipline on the proles who have had it too easy. And if “the economy should be kept permanently depressed in order to curb the irrational exuberance of investors” for years and years to come, oh well, that’s just the price that has to be paid for financial stability.
And there’s a new twist to the rate hike fever that’s emerging: The argument that the loose money policies of the post-crisis years were part of a good faith “supply-side” effort to stimulate the economy, but it just wasn’t enough. And now there’s fear of bubbles. So we had better give up on this “supply-side” stimulus idea and try something else...involving a rate hike:
Did you catch that trick? In the new meme, low interest rates and unorthodox central bank measures (the “supply-side” tools) constitute a stimulus! And, sure, these types of central banking measures are an important component of any comprehensive stimulus policy, but they’re just the monetary component of a real stimulus policy required during a significant economic downturn. The fiscal component (government spending) is just completely left out of the analysis. A simple rate cut might get the job done under more normal circumstances, but not when the economy is trying to dodge a depression. So the insane fiscal austerity of the Cameron government in the UK, the madness of the rest of the EU, and the years of GOP-forced austerity in the US just doesn’t even factor into this new “low rates = supply-side stimulus = bubbles” meme.
And while the article doesn’t say that concerned observers are actively calling for a rate hike, it does note that “Weaker supply-side performance may dampen the enthusiasm of developed-market central banks to experiment with their growth/inflation trade-off to elicit strong supply,” and “the problem is that if the supply-side doesn’t improve, then prices risk accelerating at a weaker level of expansion, requiring earlier interest-rate increases”.
So we can be pretty sure that a rate hike is probably the recommended solution to the failure of supply-side stimulus and what a clever rhetorical trick: According to the meme, raising interest rates will stop that unfair and ineffective “supply-side” stimulus. The need for a real fiscal stimulus never gets mentioned. It’s a reminder that the tactic of choice for rolling back the New Deal isn’t an actual public debate. The primary tactic is ‘unpersoning’ good ideas.
Paul Krugman has written a number of recent posts about how the wealthier you are, the greater an income hit you will take from low interest rates and quantitative easing policies, and vice versa:
“Basically, inflation redistributes wealth down the scale of both wealth and age, while deflation does the reverse”. Yep. It’s an idea worth repeating:
This is one of those lessons that cannot be repeated enough these days: inflation hysteria just happens to coincide with the economic interests of the of the top 0.01%. Imagine that.
But it’s also a key insight that might give us an idea of “what’s next?” for the GOP. Specifically, what’s the next strategy by the oligarchs to grab an even bigger share of the pie now that we’ve had several decades of Reaganomics and tax-cut fever. You can’t keep cutting taxes forever, and that means that the GOP’s signature “Santa Claus” can’t keep returning year after year without people eventually growing up and losing their belief in Santa.
So what’s new mantra going to be going forward now that “tax cuts, tax cuts, tax cuts!” can no longer really be relied upon for electoral magic? Well, if we look back at what the GOP stood for before it learned to believe in the tax cut Santa, the party was basically an inflation-phobic pro-austerity Grinch:
So if the tax cut Santa crashes his sleigh, what’s left? The inflation-phobic austerity Grinch, of course. Sure, the Grinch may not have Santa’s electoral appeal, but as Krugman has shown, after three decades of tax cuts and “supply-side” policies, there is A LOT of money in a shrinking number of hands, and that means A LOT of money can be made by the most powerful people on the planet simply by hiking interest rates. That may not have electoral appeal, but it’s going to have quite a bit of personal appeal to the kinds of people that suffer from a financial mass hoarding syndrome. So there’s a huge incentive out there to ensure that as, the rich get richer, interest rates go higher too, whether it’s good for the larger economy or not. There’s just not enough room left for endless tax cuts so the public looting is going have to come from another source. That’s not a Santa-friendly agenda. But it is what it is. So with interest rates set to be below historical averages for the foreseeable future and the ultrawealthy continuing to increase cash hoards, the temptation for the GOP to roll out a Grinch agenda, regardless of the economic or political costs, is only going to grow and grow and grow.
Krugman is continuing to explore the unspoken assumptions that go into the thinking at institutions like the BIS. Well, not so much ‘thinking’. The unspoken attitudes at institutions like the BIS:
Part of what makes the liquidationist attitude of these major entities like the BIS (but also the ECB and Bundesbank), so perplexing is that the expressed purpose of the liquidation phase is supposed to be that it will induce the “structural reforms” in lives of those that either wracked up too much debt or those employed in unprofitable sectors of the economy. That’s the general morality play at work: those in debt need to pay it back by working more for less and those that are employed in unprofitable industries needed to shift into profitable ones. That strategy rests entirely on the private savings still left in the economy getting with the economy moving again while simultaneously destroying the ability to save by causing the entire economy to go into a self-reinforcing deflationary tailspin. Because even the previously profitable areas get hammered when the whole economy is forced to contract. And that means that the only sector of the society with the real ability to pull the economy out of the doldrums are those that had enough in savings before the crisis to withstand the damage inflicted by the economic retraction and can afford to risk some portion of their savings on buying investments in an ailing economy at fire sale prices. In other words, the BIS’s attitude is that only the rich getting richer can save us, but only after the poor get poorer. And the richer the rich are (and the poorer the rest of us are willing to be in exchange for employment) the more they can save us by further enriching themselves. It’s a really strange and unpleasant attitude.
Here’s a few articles relating to the theme of Paul Krugman’s recent series of posts on the propensity for the ‘The Austerions’ of the world to come with with new reasons, any reason, to justify the same junk far right policies, over and over, with a hike in interest rates being near the top of the list these days.
First, here’s the latest from Angela Merkel about how the ongoing weakness in the austerity-ravaged eurozone and new troubles brewing one of Portugal’s biggest banks(that appears to mostly be due to management issues). Guess what: the only justifiable response is a renewed committment to austerity policies:
And here’s an article about Bundesbank chief Jens Weidmann talking about upset he is that interest rates are too low for Germany and that “this phase of low interest rates, this phase of expansive monetary policy, should not last longer than is absolutely necessary”:
And here’s an article that takes a look at the outrageous, raging German inflation that Weidmann was fretting about:
1% inflation. That’s 1% higher than it should be. Apparently.
This is just too perfect: Krugman found this explanation from Larry Kudlow for why low interest rates didn’t cause hyperinflation and the collapse of the US economy. It’s a miracle! That’s explanation:
Well, now we know the hand of God is propping up the US economy and saving us from ourselves while, presumably, God waits for us to come to our senses and follow the advice of the people that have consistently wrong every step of the way. So it’s sort of like a really difficult test of faith: imagine if Indiana Jones had to walk across the invisible bridge to retrieve the Holy Grail, but at the insistence of someone that’s been completely wrong about everything up until that point. It’s quite a leap of faith at that point, but, hey, God works in mysterious ways. Of course, this also means we now have to be on the look out for the influence of the Devil in the economy now that we’ve received this divine revelation, although that shouldn’t be as hard to spot.
Just in case it wasn’t clear that Berlin is intent on destroy our understanding of how economies work, Jens Weidmann and Wolfgang Schauble just reiterated the “you’re on your own!” message to the rest of the eurozone along with the helpful advice that the highly indebted countries that need to export their way out of the doldrums (because internal stimulus is effectively vetoed by Berlin) shouldn’t worry about the high value of the euro. They just need more “structural refors” (austerity) and “greater competitiveness” (more austerity). For the austerians, what doesn’t kill you can only make you stronger even if it never stops trying to kill you:
Yes, according to Jens Weidmann, “the crisis is a structural crisis and has to do with a loss of competitiveness and has to do with indebtedness that is considered unsustainable in some countries,” and yet the high value of the euro, something that exacerbates both export competitiveness AND the debt load, is just this triviality that the ECB cannot and should not address. And just to top it off, Weidmann also points out that the ECB cannot factor in public finances when making it’s decisions to hike interest rates. If the road to hell is paved with good intentions, where does the road paved with bad intentions go? We’ll find out!
One of the recent trends in macroeconomic policy arenas is to use the risk of asset bubbles resulting from loose monetary policies as an argument for tightening those policies (via hiking interest rates, etc). With the ECB considering a quantitative easing (QE) policy centered around buying private debt-based asset-backed securities (ABS), this anti-bubble argument has been used with greater frequency in the eurozone area of late. And it’s understandable given the role bubbles of played in historic financial calamities. But it’s an argument that’s also used as an excuse to implement policies (like hiking interest rates and continuing austerity) that will just make things worse immediately with no real short or long-term benefits.
Moody’s just released an opinion comparing the ECB’s ABS QE plan vs a policy that targets lowering the value of the euro as the primary simulus (which would increase exports and ease the debt load for the whole eurozone). Not surprisingly, Moody’s found that a policy of lowering the euro would probably be preferable to asset-based QE that the ECB could take to help the eurozone economy and ward off the deflation dragons. And Moody’s is quite possibly correct about that, although there’s no suggestion of what types of policies would actually result in a lower euro that don’t involve QE or some sort of ECB open market operations. Policies like a good old fashioned government spending spree stimulus that drives down the value of a currency while simultaneously making much needed investments in public infrastructure and general quality of life improvements and jump starting the economy out of a deep, deflationary recession are never to be mentioned.
Significant government stimulus isn’t always the optimal policy solution, but in the case of the current eurzone situation you almost couldn’t come up with a better solution to the situation than a big government spending spree across the board. The “periphery” nations and the “core”. They all need more inflation. And yet it’s either QE (which can have an inflationary impact on the kinds of assets that really rish people buy) or nothing or austery are the only options really discussed. A meaningful government stimulus is never ever to be discussed within the context of the EU and especially the eurozone. Not in this new normal. You jump start the economy, the currency drops, and the overall debt load eases. It is never to be discussed:
As you can see, the modern macroeconomic debate around the ECB and the eurozone members’ economic policies resembles a zombie-unperson hybrid that looks something like Milton Friedman and Rand Paul.
Here’s an article exploring to the reasons for the euro’s relatively high value despite its ongoing economic malaise. The reason hinted at in the article? Draghi’s 2012 commitment to “do whatever it takes” to save the eurozone must be at fault:
Huh. So according to the market experts in this report, the euro’s strangely persistent strength is primarily due to the psychological impact from the ECB declaring that it wouldn’t simply allow the sovereign bond markets to meltdown while the eurozone implodes even though Draghi has also talked about wanting to see the euro go lower. Also, “big money” just loves the euro (imagine that). So, as long as the ECB isn’t casual about the prospect of a eurozone meltdown and big money still loves the euro (despite weaknesses in the member economies), the euro will stay strong? That’s not exactly a hopeful scenario. Let’s hope it’s not accurate either.
And in other news, Wolfgang Schauble reiterated his views on the merits of the ECB doing anything to lower the value of the euro:
If, according to observers, Draghi’s mere promise to “do whatever it takes” back in 2012 has propped up the euro for the past two years, you have to wonder about the impact of endless statements from Berlin like “I do not believe in political discussions about the exchange rate, which is set by the market...[government intervention has] never led to a good result”.
See no labels, hear no labels, speak no labels...endorse GOP pro-austerity lunatics. It’s the ‘No Labels’ way:
So the only thing you need to do to get the No Labels ‘Problem Solver Seal’ is a pledge to not take any other pledges other than the oath of office and Pledge of Allegiance. And Republican Cory Gardner was granted that Problem Solver Seal. Huh. Speak no pledge, see no pledge, hear no pledge. It’s the ‘No Labels’ way!
Given the intertwined nature of financial profit and real-world austerity, here’s a tale of two profit-driven disasters: First, a tale of a political party dedicated to creating a society ruled by the profit motive and how the profit motive is destroying the party and its country:
Next, here’s a tale of how a lack of profit is destroying a chance to cure Ebola. Yes, Ebola. And since curing Ebola is unprofitable, it is therefore nearly unachievable in our profit-driven system, resulting in a distinct lack of austerity for Ebola:
As we can see, the profit motive is a double-edge sword: Sure, the profit motive might be leading to the implosion of a political party that surely should be imploding for everyone’s sake, but it’s also leading to more Ebola. So, given our profit-driven reality, we probably expect the GOP to continue its highly profitable descent into madness but we shouldn’t expect a cure for Ebola anytime soon. And that means the age of the fist bump may to nigh. Uh oh. Also, uh oh.
The austerity disease continues to fester in Portugal:
On the plus side, Moody’s recently raised Portugal’s government bond ratings. Why? Because, despite the ruling of Portugal’s Supreme Court back in May that the austerity policies violated Portugal’s constitution, The government is still committed to austerity:
Yes, Portugal got a bond rating upgrading by Moody due to the government’s commitment to austerity even though Portugal’s top court explicitly rejected the latest round of public sector wage cuts. So why was Moody’s so confident in Portugal’s ongoing commitment to austerity? Here’s an example:
Well, that sure helps explain Moody’s enthusiasm: On the same day that Moody’s upgraded Portugal’s bond rating, Portugal’s parliament passed a bill containing the kinds of cuts that the Supreme Court threw out a couple months ago.
It’s not over yet, since the Supreme Court still has to rule on the constitutionality of the new wage cuts. But considering that the court rejected these policies two months ago and they just got reintroduced anyways and the credit rating agencies will punish countries that don’t embrace austerity, it’s unclear what’s going to make these kinds of policies finally go away. Well, ok, elections that result in a different government might make these kinds of policies finally go away. Or not.
In other news, eurozone officials are really vexed by the falling wages across southern Europe. Uh huh...
This is kind of amusing: Paul Krugman recently wrote a column about how official economic policy-making was increasingly non-reliant on expertise with a demonstrated track record of success. Instead, what we find is that the policies that get adopted are based on the myths and whims of political con men like Paul Ryan masquerading as policy wonks and behaving as “a stupid person’s idea of what a thoughtful person sounds like”.
In response, economist Lawrence Kotlikoff, an economist fond of declaring the US bankrupt based on dubious chains of logic taken to the extreme (as a justification for gutting the safety net), wrote a column in Forbes imploring Paul Krugman to stop calling people like Paul Ryan names like “stupid” and be more civil instead.
And this, of course, prompted Paul Krugman to respond that, no, he wasn’t calling Paul Ryan stupid. He was saying that Paul Ryan is a deceptive con man that behaves as a stupid person’s idea of what a thoughtful person sounds like:
Yes, living in a world where you could presume that major figures are arguing in good faith would be pretty great.
Also, Paul Ryan totally doesn’t see how the GOP’s decision to sue Obama over his use of executive orders should lead one to conclude that impeachment is coming next. Really.
And Paul Ryan’s new life-coaches-for-the-poor ‘anti-poverty’ plan is totally deficit neutral. Really. You can trust Paul Ryan. Really.
It’s growing increasingly fascinating how the persistently poor economic performance across the eurozone following austerity is almost always ‘unexpected’. The response out of Berlin and the EU Commission to that unexpectedly poor economy, however, should probably be expected by now: More austerity:
Oh well, at least the eurozone citizens can find comfort in the knowledge that this too shall pass, although it would be more comforting if it was at all clear about the approximate number of decades we should expect it to take for that to happen. Does two or three sound about right?
There have been a number of headlines in the news today following Mario Draghi’s talk at Jackson Hole suggesting that the ECB’s chief is pushing tax cuts and government spending as a remedy for the eurozone’s death rattle. So keep in mind that when Draghi talked about more government spending he was specifically talking about Germany spending more and not the countries that most need more government spending:
Yes, according to Draghi, the eurozone countries with the relatively strong economies like Germany (with an economy that contracted 0.2% last quarter) need to impose less austerity on themselves in order to increase the aggregate demand for the eurozone as a whole, while Draghi also emphasized that that the countries most ailing from austerity ‘could not avoid such adjustment’. So Germany, which doesn’t really import all that much from its periphery neighbors anyways, needs to spend more in the hope of balancing things out. Oh well, it could be worse. Draghi could have asked for tax cuts that included additional spending cuts to make them “budget-neutral”. Oh well:
“As a start, it should be possible to lower the tax burden in a budget-neutral way. This strategy could have positive effects even in the short-term if taxes are lowered in those areas where the short-term fiscal multiplier is higher, and expenditures cut in unproductive areas where the multiplier is lower”. While it would be nice to believe that Draghi was truly envisioning a plan where the “unproductive” cuts needed to make the tax-cuts budget neutral, somehow it’s hard not to imagine Grover Norquist whispering in his ear. Draghi’s insistence of unrelenting austerity for the periphery helps with the imagery.
Also note that the proposals for EU level “large public investment programme – which is consistent with proposals by the incoming President of the European Commission”, were actually a 300 billion euro public-private partnership program that appears to be budget neutral without any increase in government budgets:
300 billion euros in public-private partnerships in a budget-neutral environment where governments have nothing to spare probably means a little less than 300 billion euros in private investments are slated to be financing the “large public investment programme” Draghi have talking about. But at least there are tax cuts (with further budget cuts) coming. Have fun with that.
“The time has come for us to take on an alternative leadership, to set up an alternative motor and promote ideas and practices alternative to this destructive ideology”. That time actually arrive a while ago, but since it’s still time to “take on an alternative leadership, to set up an alternative motor and promote ideas and practices alternative to this destructive ideology” this is good to hear:
In other, far less positive news...
You know how the GOP had to be sure to ensure that Obamacare never ever get properly implemented because then the public would suddenly discover that the program might actually help their lives and wasn’t the nightmare plot to destroy the country that the GOP was hyperventilating about for so long. Here’s a story about the similar dynamic taking place in Europe that gets applied to any new helpful government at all. And as the story highlights, sadly, it’s not just the euro-conservatives that are terrified of reminding the public that the government can actually help:
Yes, bond yields are at record lows (largely due to the ECB’s intervention and market bets that the ECB will be forced to buy sovereign bonds in the future due to its massive policy failures so far), but governments can’t possible engage in fiscal stimulus programs. The reasons why fiscal stimulus can never be considered are never made clear but also never to be asked and now you know why: Dangerous ideas, like the idea that government can be a force for good, can collapse the government.
Or maybe Paul Krugman did it.
European stocks and bonds are once again rallying on the notion that eurozone austerity policies are going to continue to fail so miserably that the ECB will eventually be forced to engage in quantitative easing and purchase bonds. If that sounds like a crazy situation, it’s because it is a crazy situation. A crazy situation created and fostered by men and women held in high regard in the halls of power that appear to be totally insane:
Paul Krugman has a theory about why the response from the European left wing establisment’s response to the sudden onslaught of far right economic theories has been so weak in recent years when compared to the push back against similar theories in the US: The George W. Bush administration was so disasterous (and recent) that it sort of inoculated US economists and commentators to the idea that the talking heads and elites in fancy suits must know what they are talking about (or might be cynically lying). In other words, after eight years of the Bush administration’s endless attempts at “creating our own reality”, the “reality-based community” in the US basically developed an allergy to rampant, in-your-face lying about topics that might destroy the nation, but in the EU they didn’t have the same kind of exposure to the Bush-itis Big Lie virus with their own leaders and so never develop that kind of allergic response to their own big elite lies. So....thanks for only exposing us and not killing us George?
As Krugman notes at the end, it’s just a theory. But let’s hope there’s some reality to the theory, because otherwise it suggests that societies are simply incapable of learning and, in the case of the EU, it would also mean that the austerity never ends:
Did you catch that?
Yes, “domestic demand is driving growth in Germany”, at least according to Germany’s finance minister while he’s arguing that the rest of the EU should slash their domestic economies via “internal devaluation” so they can emulate Germany’s high-tech export oriented economic model with a massive trade surplus. And apparently the drop off in domestic demand in all the austerity-sticken nations was due to the consumers suddenly worrying about deficit and not, you know, due to the austerity.
Also note that when Schauble says:
He’s basically saying that the austerity SHOULD NEVER END, even for the countries with the strongest economies. And don’t forget that since Berlin is demanding that the rest of the EU emulate Germany’s high-tech export-oriented economy, and if the rest of the EU actually does that, all those nations will be in very direct competition with each other and therefore the austerity and the drive towards greater “competitiveness” really can continue indefinitely just from internally-driven EU-competition (and that’s ignoring coming robotics/AI revolution).
So, in a way, Berlin really is capable of “creating its own reality” just as the Bush administration was also capable of “creating its own reality”, but only as long as the reality it’s creating is a crappy, broken reality. But creating a reality where “expansionary austerity”, applied across an entire continent (or across the globe, as Schauble called for last year), will somehow lead to greater prosperity for all would require the ability to create a reality where 1 — 1 = 2. And yet somehow economists and policy-makers throughout EU have fully embraced the idea that 1 — 1 = 2. Why? Let’s hope Krugman is right and the EU elites simply didn’t get an intense enough exposure to the lethal Bush-itis Big Lie virus to develop their immune systems, because some of the alternative explanations are far less benign.
Paul Krugman is continuing his spirit journey into the minds of “hard-money” fetishist that remain dedicated to the notion that run away hyperinflation is always just around the corner, ready to destroy lives and the entire economy, unless eternal vigilance is maintained by prioritizing low inflation over the health and well being of lives and the entire economy even though history teaches and sound economic theory strongly suggest suggests that such a strategy for merely ends up destroying lives and the entire economy:
Maybe some wine will help elucidate the mysteries of elite economic Munchausen Syndrome. Or perhaps the whine of billionaires complaining about about how a minimum wage leads directly to fascism will also get the creative juices flowing. Why not poor a glass, take a listen, and let the insights flow:
Well, since the Koch brothers are clearly running a fascist network intent on using an up-is-down “business marketing” strategy to fool the rabble into joining their “Freedom Fighting” crusade to fight the fascist threats of a minimum wage and environmental protections, could it also be the case that the “hard-money” fetishist are also fascists intent on using an up-is-down “business marketing” strategy to fool the rabble into joining their “Freedom Fighting” crusade to fight the fascist threats like a minimum wage and environmental protection? Maybe at least some of them?
Here’s the latest round of “these deficit rules suck, we want to change them” vs “No, you need to stick to the rules just like we did”. Round and round we go:
When you read things like:
and:
you have to wonder how many more policy tussles it’s going to take for the reality to sink in that rules like The Fiscal Compact and the ECB’s single mandate to focus on inflation alone (and completely ignore things like unemployment) constitutionally guarantees that the policies of the German right are now the official default policies for the whole eurozone under virtually all circumstances. There was never a good reason to agree to those rules in the first place but those are the rules nowadays.
WTF?
Well, that was horrible to read. Fortunately, the three regulators that agreed to this rule are also open to changing it. And even more fortunately, that change only requires the Federal Reserve to act. So this may have just been a temporary awful mistake. We’ll see:
Part of what makes the move to strip municipal bonds of their “highly liquid” status is that, as critics have pointed out, municipal bonds have a history of very low rates of default so its unclear why you would have to limit banks’ holding of these assets unless there’s reason to believe that municipal defaults will be much higher in the future. Now why might regulators expect higher municipal default rates? It’s a mystery.
“French and German visions for Europe to clash in Berlin”. Guess which vision is going to win:
When you read things like “A decade ago, past leaders of Europe’s two largest economies reneged on promises to rein in their public deficits — a transgression some say undermined the bloc’s rules on budget discipline and helped set the stage for its sovereign debt crisis five years later.
The difference is that Berlin gradually went about bringing its fiscal house into order, imposing wage moderation and enacting controversial labor reforms. France largely stood still — and missed at least three more deficit targets”, keep in mind that those austerity measures implemented by Germayn were being undertaking when the rest of the world was booming, which is an extraordinarily different situation from today. Mass austerity makes the implementation of “expansionary austerity” policies inapplicable even if one finds the “morality play” aspect of austerity policies appealing.
Also keep in mind that the “wage moderation” and “controversial labor reforms” that Schoeder’s “Agenda 2010” poliices led to the vast growth of underpaid workers that are only able to survive due to government subsidies and that model may not be the kind of thing we want to see the rest of Europe replicate.
Continuing...
While much of the content of that article was a terrifying confirmation that Merkel and her domestic political concerns get to determine EU policy-making, at least it’s nice to see that this reality is not even remotely being hidden anymore. Or maybe that’s also scary.
One of the stranger quirks about humanity is the deeply felt instinct that life must be hard and painful, at least for someone, otherwise civilization will collapse. For instance, if simply giving the masses free money in the middle of a depression was, contrary to our Calvinist instincts, exactly the policy Europe needs to jump start its economy and avoid the deflationary block hole, would the gods of socioeconomic Calvinism approve? Do we need to ask?:
At least the journalist gets it:
“Either way, one thing is clear.
If a central bank offered hundreds of billions of euros worth of cheap cash directly to individuals, there wouldn’t be much humming and hawing over whether or not they’d take it.
And the sudden explosive demand for goods and services that would most certainly follow from such a massive infusion of cash in a climate where saving it pays you less than nothing would almost certainly spawn a powerful rush of inflation.”
Yes, if a central bank offered hundreds of billions of euros worth of cheap cash directly to individuals, instead of other banks, that just might scratch that itch (for consumer demand) that’s been plaguing the eurozone for years. But, of course, that would violate the cosmic rule that says only banks or the ultra-wealthy are morally worthy of free money. The rabble would just be corrupted and grow weak and decadent. Instead, maybe the eurozone can keep beating itself up while waiting for Godot. He’s supposed to arrive any year now.
Paul Krugman has a blog post in response to a hilariously erroneous column written by the Heritage Foundation’s Stephen Moore that got him banned from the Kansas City Star by claiming that the states with Republican governors were outperforming the Democratically run states that didn’t pursue a trickle-down approach to job growth (using incomplete data sets). One of points Krugman make is that both the top and bottom performing states (from a job growth perspect) were run by Republican governors. And if you look at the map in the post, it’s Texas and North Dakota that are leading the way (with 8.5% and 21% job growth since the December 2007, respectively), which is to be expected given the energy boom concentrated in those states.
But as we learned earlier this year, it’s not just energy that’s been fueling Texas’s job growth. Immigration and a population boom have also a major factor too, specifically immigration from Mexico and the state’s high birth rates (which are associated with immigration from Mexico). Yes, Mexican immigrants are part of the secret to Texas’s success. Imagine that.
But what about all the tax refugees from other states fleeing their higher Blue state taxes? Isn’t that driving part of that growth? Well, it turns out that taxes tend to be higher in Texas vs other states...unless you’re rich. It’s a Red State thing:
So, yes, while Texas has done well from a job growth perespective, it’s rather difficult to associate that growth with the trickle-down policies championed by the far right.
Still, here’s some good news for non-rich Texans: After all that job growth wages are finally starting to rise too:
Well there we go! “While employers still have the leverage in most workplaces, the balance is shifting”. That shifting balance is good, right? No?
Uh oh! As the Dallas Fed president Richard Fisher warns us, if the Federal Reserve doesn’t pare back its monetary stimulus policies soon wages might rise! Noooooooooo! And why is it bad for wages to rise in the middle of a new crypto-Gilded Age? Well, as Fisher also warns us, there’s a new study coming out (by Fisher himself) that shows that once the unemployement rate falls below 6.1%, rising wages start kill off job growth. So, you see, we need high enough unemployment to keep wages down to keep inflation down so we don’t ruin the jobs miracle:
Yes, according to Fisher’s unpublished study, once unemployment drops below 6.1% wages start growing faster than inflation which is apparently awful under all conditions. Therefore the Fed needs to slow down the economy to prevent that awful wage growth or else hyperinflation will kill us all!
So meet your new magic number: 6.1%. Here we go again.
Voodoo Economics: The ultimate zombie idea:
The voodoo magic is back for the US! Woohoo! At least, the magic will be if the GOP takes the Senate this year. And that means good times for all...until the inevitable spending cuts are required to pay for the tax cuts that didn’t quite end up paying for themselves. And then it’s just good times for the people that wanted tax cuts and social spending cuts. And, sadly it’s a group that includes much more than the GOP. For instance, France has embraced the voodoo magic too:
Yes, France is unveiling a plan for 3.3 billion euros in tax cuts targeting the poor which is probably a lot more useful than tax cuts for the rich in this situation (although the people making between 9,690 — 11,991 euro should be kind of miffed). But are these cuts really useful enough to offset, for instance, 21 billion euros in cuts to things like healthcare and social spending? Yes. At least “Yes” if you listen to France’s finance minister Michel Sapin. Those 3.3 billion euro tax cuts for the poor, along with additional tax cuts for businesses, mean the 21 billion euro spending cuts on things like healthcare don’t count as austerity. Michel Sapin and Paul Ryan both snort the same tax-cut pixie dust and Sapin is a French Socialist. Supply-side pixie-dust abuse is clearly out of control:
Behold the magic of tax cuts! 3.2 billion in tax cuts should be more than enough to offset the 21 billion in spending cuts. Given the power of “less is more” thinking, just imagine how useful the billions in cuts to France’s public health spending will be in the coming year to France’s overall public health. Just imagine.
One of the big questions of the day is why there hasn’t been more of a global response to deal with the West African Ebola outbreak. As a consequence, we should probably expect a lot more followup questions like this:
Hmmm...what could have contributed to the Spanish nurse to contract Ebola? Human error is certainly a possibility, but let’s not forget: this is Spain we’re talking about here and the ‘human error’ virus infected the country’s leadership a while ago and just kept trickling down from there:
Well, the EU’s Ebola situation could be worse! Much worse. Still, you have to wonder what’s going to win in the end: EU austerity or Ebola. It’s unclear:
Well, it could be worse! Germany could have been running a surplus while holding back on this vital aid as opposed to almost running a surplus. Oh well, at least France has pledged to increase its assistance following President Obama’s urgent call for the world to do more although it will be interesting to see the extent to which France will even be allowed to follow through on that pledge. After all, stopping Ebola isn’t free and the ‘human error’ virus is by no means extinguished.
Here’s a grim reminder that it would be intellectually dishonest to act as if there’s an intellectually honest national discussion taking place about important economic issues. That’s because stubborn stupidity wins during the Age of Derp :
Yes, derp is the rule of the day. And with the GOP within striking distance of taking the Senate, the question arises of just how intense the derp is going to get over the next two years. But since derp is the rule of the day, the question sort of answers itself. For instance, we know that whatever form the yet to come derp takes will include tax cuts for billionaires and Wall Street deregulations. That’s just how GOP derp works. Billionaires and Wall Street don’t buy off politicians for nothing:
Given the GOP’s willingness to threaten a US default in 2012 during the fiscal cliff showdown in order make the Bush tax-cuts for the billionaires permanent, it’s pretty clear that the party is going to demand far more during any upcoming budget negotiations, especially if the GOP takes the Senate. So it looks like gutting both the Consumer Financial Protection Board and repealing the Financial Stability Oversight Council are also going to be on the agenda. Krugman criticized Dodd-Frank in 2010 for giving the Financial Stability Oversight Council discretion over areas like capital, liquidity, making the implementation of rigorous oversight optional. Henserling, on the other hand, wants to see the council repealed entirely (He also said he opposed downsizing banks last year).
So the GOP’s big 2015 government shutdown sales pitch just might include giving people the freedom to use bad financial products and repealing the agency that deals with too big to fail banks on top of the tax cuts for the oligarchs. It will be interesting to see what Hensarling has in mind for the stability council’s replacement. It will also we interesting to see how impressed the public is when another round of supply-side tax-cuts and deregulatory fever. Since full-throated derp is part of the GOP’s public branding at this point we can’t expect the GOP to change its long winning derp tactic. But we shouldn’t expect the public to consume the same brand of derp forever. Stale derp leaves an aftertaste that’s hard to forget.
As many have noted during this year’s mid-terms — even Alan West can attest — the GOP has no national agenda in its congressional campaigns this year other than opposition to all things Obama. That doesn’t mean the party doesn’t have a national policy agenda that it’s going to try to implement should the GOP take the Senate. It just means the GOP’s policy agenda isn’t being talked about:
Note that Paul Ryan has a dynamic fuzzy math trick up his sleeve that just might take care of any of the math problems that would prevent the GOP from “pursuing tax reform” via the reconciliation process given the need to not increase the long-term deficit. So when Mitch McConnell talks about how the GOP is “going to go after them on health care, on financial services, on the Environmental Protection Agency, across the board,” that board can most definitely include budget busting tax cuts too when the GOP controls the math.
Continuing...
Well that was a nice layout of the GOP’s policy option landscape and wow that was bleak. Not just bleak for the American public but the GOP too. What were their options again? Tax cuts that will obviously be targeting large corporations and the super-rich. Granting Obama free-trade fast track authority, because that’s just what the US electorate wants these days: more trade agreements. Then there’s simultaneously passing the Keystone pipeline, allowing more offshore drilling, and gutting the EPA. Plus the intra-party showdowns between picking apart Obamacare via reconciliation or trying to repeal it entirely. And the looming possibility of some sort of nativist freak out over immigration that’s only going to make the GOP even less popular than it already is with Latino voters . The ongoing austerity for public services and social programs only get worse as will the unhelpful hysterics over ISIS and Ebola (with probable calls for ground troops in Iraq and Syria and additional sabre ratting towards Iran too). And, finally, throw in all the random red meat crazy bills that they’re inevitably going to pass to appease the Tea Party base because most of the options above are design to please the party’s real base and something is going to be need for the party’s rabble.
So it’s not looking like the GOP lacks options that doesn’t force the party to seem like either the tool of greed, governmental decay, or general lunacy. Passing the Keystone pipeline is probably the most popular option available but only if the GOP doesn’t simultaneously gut the EPA too much and is that really possible?
Congress’s approval rating is hovering 14% Will tax cuts for the rich, more pollution, more austerity, poison-pilling Obamacare, offshoring jobs, more war and ground troops, and more GOP insanity in general really lead to a Congressional approval ratings above 14%? Yes, at first there will part a partisan bump that might get Congressional approval in the 30’s or something but you have to wonder how likely it is that this contemporary incarnation of the GOP, which has yet to reach peak crazy, will be able to hold at least a 14% approval rating at the end of two years.
Sure, parts of the true believer Tea Party base is going to be pissed for them not going far enough. But most the rest of the country is almost certainly going to be shocked by the realities of GOP austerity once they’re actively increasing the austerity above sequestration levels (which they will almost certainly do). And people just might notice austerity is sugar-coated with tax cuts targeting the super-rich that don’t do any good for the general economy. That’s what always seems to happen: support for the GOP’s policies drops as the service cuts become reality and the tax cuts just result in more money tucked away in offshore tax shelters. Even the “optimistic” agenda described in the article above would be pretty unpopular and that scenario is just not realistic. The Ted Cruzes of the party can’t not go nuts. Thatts their thing.
And yet, as the article lays out, there really aren’t a lot of other options. Really, what else can the GOP do than the craptacular and damaging agenda laid out above? The agenda laid out above is already “GOP-lite” policies. That’s the least extreme agenda we can realistically expect at this point. The really scary stuff, like dismantling the New Deal, comes out when there’s a “Grand Bargain“on the table. And it’s unclear how likely it is that such a scenario takes place. Although, as in the article above, Senator Corker does give us a hint of what to expect from the GOP during a such a Grand Bargain in the article from June below. And he also hints that a Grand Bargain showdown could happen soon:
Oh my! A “Grand Bargain” “oppportunity” might spring up early next year as a consequence of this:
And those demands are likely to include this:
And this might be part of the GOP’s debut performance early next year. At least that’s what Senator Corker was predicting back in June. Deep entitlement cuts via Grand Bargain blackmail right out of the gate. Bravo.
Still, since the GOP has to know this is going to be a deeply unpopular the obvious tools are going to be needed: Distractions. Lots of distractions. Just relentless distractions while it pushes through its core agenda of tax cuts for the rich and general plundering. Especially if a blackmail showdown is how they’re going to push it through. And if there’s one thing the GOP knows how to do better than just about any other organization in the world that’s create lots and lots of artificial distractions while attempting to push through a plundering agenda. Especially if it requires brinksmanship blackmail and obfuscation. It doesn’t always work, but they sure seem to enjoy trying and if Senator Corker’s predictions from June are still applicable (and why wouldn’t the be?) we just might be looking at another round of playing chicken over short-term spending and long-term entitlement cuts early next year.
And since the GOP really has limited policy flexibility (scorched earth campaigns are like that) the only question now, should the GOP take the Senate, is and what kind of distractions are going to be employed to allow the GOP to successfully push that blackmail agenda early next year. Try to enjoy the show.
Here’s some news that would be surprising if it wasn’t so predictably lame: Germany’s Finance Minister, Wolfgang Schaeuble, has announced a German fiscal stimulus plan despite all the prior opposition to any spending that isn’t deficit neutral. That’s the surprising news. Of course, since this is the Merkel government we’re talking about, there’s a catch: the plan doesn’t break the Merkel government’s pledge to eliminate Germany’s deficit in 2015 and be deficit neutral. How? By not starting until 2016. And there’s another catch: the fiscal stimulus is to be stretched out from 2016–2018 and only go up to 10 billion euros, or 0.1% of Germany’s GDP. So the fiscal stimulus plan is to give far too little in stimulus far too late for it to do any good. Also, the extra 10 billion euros in spending will be offset by higher taxes. Surprise:
And now you know why a different Wolfgang feels the need to write pieces like this:
As Wolfgang points out:
This is part of how the New Hopeless Normal settles into place: with increasingly grim choices involving either endless austerity or breaking up the eurozone. Every option sucks so nothing happens beyond the inertial situational decay.
But don’t assume that things won’t change sooner rather than later. the cult of austerity and deflation isn’t limited to the European policy-making scene and the more it spreads, the more potent the austerity damage becomes because even more nations are joining the race the bottom. When it’s not just Berlin, but also the central banks of France and even India (where austerity policies should really not be taking place) are jumping on board the austerity bandwagon, it’s very unclear how much longer the global economy is going to be resist the lure of the socioeconomic deflationary death spiral. But we shouldn’t kid ourselves: The austerians have a global fan base in high places:
The sentiment expressed by former PIMCO CEO Mohammed El-Erian that “This is a world which places too much of a burden on central banks...This is a journey, not a destination. If the journey lasts too long, central banks go from being part of the solution to perhaps being part of the problem,” is an example of what’s on the mind of top policy-makers and it’s clearly more austerity for the masses. That was all pro-austerity language from El-Erian. He was talking about too much of a financial “burden” from the monetary stimulus programs falling on the central banks, the one institution designed to be able to handle seemingly insurmountable financial burdens.
And El-Erian’s view was apparently representative the general of theme of the Bank of France conference in Paris on Friday. The president of the Bank of France and Reserve Bank of India certainly seem to agree. So instead of the horrible burden on central banks of buying financial instruments (which they can do with relative ease), folks like El-Erian and the central bankers of France and India want to see more of that “burden” felt by average people and the poor (where “structural reforms” can never include “prosperity for everyone” as a goal because that would make the system break).
It’s also worth pointing out that with the GOP’s victory last week, that same kind of austerity lunacy is going to start infecting the Fed:
Note that what’s being described above is a strong GOP desire to get rid of the Fed’s dual mandate and follow the Bundesbank/ECB model of prioritizing low inflation over high unemployment as a systematic bias. It would be comically bad policy if it wasn’t growing globally.
Continuing...
And note that when House Financial Services Committee chairman Jeb Hensarling is attempting to pass “egislation proposing a multifaceted overhaul of the Fed that would, among other things, require the Fed to adopt a formal mathematical rule to guide its interest-rate decisions. Ms. Yellen opposes such a move”, that means the GOP is seriously about to try to destry the Fed and turn it into the Bundesbank.
Continuing...
Is the Fed’s dual mandate in danger? Well, in the short-run that’s unclear since President Obama can probably veto anything that truly guts the dual mandate. But now that the GOP is officially out to repeal the dual mandate and legally enforce Bundesbank/ECB-style monetary policies it’s pretty clear that not only is the dual mandate in serious jeopardy but the entire global economy is possibly at risk if Ted Cruz and Rand Paul break the Fed. Some degree of GOP-induced peril is to be expected since the GOP stopped being a responsible party years ago, and this is by no means the first time top Republican officials have called for overturning the dual mandate. But now that Europe has officially gone insane, as Wolfgang Munchau discussed above, and now that the GOP clown car is officially back in control of Congress, the fate of the Fed’s dual mandate and, consequently, the Fed’s ability to play its uniquely important role in the global financial markets and not derail the US recovery is going to suddenly be in peril if the GOP wins the White House in 2016 or manages to somehow ruin Fed policy over the next two years.
So, in 2016 we might also see a GOP president and Congress and the end of the dual mandate for the Federal reserve, with monetary austerity a new permanent Fed policy no matter what. Along with all of the other GOP policy horrors. And other governments around the world are embracing similar policy attitudes.
Leave it to the GOP to make that horribly inadequate 10 billion euros in delayed stimulus spending start sounding pretty sweet. The West is experiencing a bit of a rough patch.
Paul Krugman has a post today that made a point that cannot be made enough in this era of global austerity and endless calls for “structural reforms”: If you think about it, the term “structural reform” is sort of a Rorschach test. It doesn’t mean anything specific except that something needs to be structurally changed. And yet when politicians and business leaders call for “structural reform” as an economic cure-all, you don’t hear a wide variety of different types of “structural reforms” like increasing the social safety-net or minimum wages. Instead, the term “structural reform”, which is traditionally associated with policies used to dealing with stagflation, almost always involves the same policies that have been traditionally called for when dealing with stagflation too. Policies that center around that idea that “to allow better performance you needed to make the labor market more flexible, i.e., more brutal”. Sound familiar?
And as Krugman also points out, these anti-stagflation policies are somewhat dubious approaches to dealing with deflation but at least there’s a kind of underlying logic to it. But when you’re applying those same policies that are designed to reduce inflation to economies that are already facing outright deflation due to collapsing demand, employing stagflation is just insane. And yet, in an era of global deflationary risk, not only has the anti-stagflation term “structural reform” become a vague vogue global catch-phrase for politicians everywhere, but those same anti-stagflation policies of yesteryear are today’s default policy solutions too. Regardless of the economic circumstances.
So the next time you hear a politician mutter something about the need for more “structural reforms” in an economy facing nothing close to stagflation, keep in mind that the “structural reform” verbal Rorschach inkblot doesn’t actually represent whatever you imagine it does. It should but it doesn’t. The “structural reform” verbal inkblot actually depicts something very specific: a rich and powerful man murdering both history and reason simultaneously and then proceeding to kneecap the poor while lecturing them about the need to be better people. It’s kind of a scary inkblot
Stagflation, like Disco, could always make a comeback. So we can’t rule out the possibility that, in the future, a situation could indeed arise where the traditional anti-stagflation policies are just what the doctored ordered. But since the Great Depression could also make a comeback perhaps we should be examining non-1970’s forms of “structural reforms” that might actually lead a a more robust socioeconomic structure during an era of stagnant wages, growing deflationary risks, booming corporate profits, lost generations, and an obscene, damaging, and growing wealth gap. The “structural reform” verbal inkblot doesn’t have to be perpetually scary. It’s all in our heads.
Oh no: The GOP’s two top Republicans on the House and Senate Finance Committees, Jeb Hensarling and Richard Shelby, are both getting big ideas about some major Fed overhauls:
While paring back the New York Federal Reserve’s automatic voting rights is an interesting proposal (it would probably empower the tight-money/deregulation hawks, which sucks, but it’s undeniably fairer from a population standpoint), note this rather significant other proposal:
Yeah, that sounds rather ominous since you don’t want a race to the regulatory situation and it’s not really clear if that’s what Fisher had in mind. So let’s take a closer look at what exactly he said during his speech when he floated the idea:
So it sounds like a “tough central disciplinary authority in Washington” is going to be “dispatching the troops” from the 12 regional Fed banks to the Wall Street giants. Who runs the “tough central disciplinary authority in Washington”? That remains to be seen. It’s an interesting idea, in part because it might reduce the degree of systemic risk to the system if Wall Street banks are operating under somewhat different oversight regimes, but if that’s the case it’s also going to be a situation where the Wall Street giants can shop for regulators (which might introduce ever worse systemic risks). Unless the “tough central disciplinary authority in Washington” is tough enough to resist Wall Street’s allure, it’s hard to see how that can be avoided.
So, yeah, it’s still looking ominous! And the ominousness doesn’t end there. For instance, back in October Jeb Hensarling, the House Finance Committee Chairman who was so excited about former Dallas Fed Governor Richard Fisher’s vision of a multi-regulator model of finance in the US, was talking about a scenario that sounded eerily similar to Fisher’s “multi-regulator” scheme. The similarities included the proposal’s vagueness, although he wasn’t entirely vague. He also wanted to revisit Frank-Dodd and get rid of the Consumer Financial Protection Bureau (CFPB). And generally deregulate stuff:
You read that right at the end: Jep Hensarling, Chairman of the House Finance Committee and fan of Richard Fisher’s plans for spreading bank regulations around to the regions Federal Reserve regional banks, wants to have lax lending standards because he’s super concerned about minority home buyers trying to qualify for loans!
That might sound surprising given the GOP’s long-standing insistence that Fannie and Freddie and the Community Reinvestment Act caused the housing crisis. But it’s not. Back in 2005, Hensarling was saying things like, “with the advent of subprime lending, countless families have now had their first opportunity to buy a home or perhaps be given a second chance”. Deregulating the banks is just what Hensarling is about. And The growth of the subprime sector was just one part of that larger phenomena of lax oversight by both the public and private sectors. That’s one of the reasons the GOP focuses so much on the Community Reinvestment Act: it deflects from the fact that a widespread collapse in lending standards by non-government sponsored entities (i.e. non-Fannie and Freddie lending) was the real cause of the housing bubble and that was heavily fueled by a lack of regulation in the “shadow banking” sector that was playing a growing role in financing the bubble (it’s one of many reasons for the focus on the Community Reinvestment Act).
Still, what exactly does Hensarling mean when he says:
It sounds like he either envisions multiple views on mortgage lending standards coming out of Washington (which doesn’t really make sense) or transitioning to a regional or state-based system. Or maybe it’s something like what Richard Fisher proposes for the Wall Street banks although it’s not obvious how that would work when applied everywhere.
So we know can expect Hensarling’s committee in the House is going to deregulate Wall Street one way or another and seems to like the idea of competing regulators is part of the plan. Plus he wants to overhaul the new Financial Stability Council. It’s all a bit ominous.
And then there’s the fact that over in the Senate Richard Shelby is literally trying to raise the limit on how big a bank can get before it’s “too big to fail”. Plus, he wants to impose the “Taylor Rule” on the Fed that will ensure that the Fed is forced to raise interest rates even the kind of situation it’s faced in recent years where raising the raise would be disastrous.
Yeah, it’s all certainly feeling a little ominous-ish.
And then there’s the fact that Richard Fisher has generally been wrong about everything during his term as the Dallas Federal Reserve Governor. For instance, last September he called for raising rates by springtime (so now). Why? To ward off “wage inflation”:
Yep, the former Fed governor that’s worried about unemployment dropping so low you accidentally get a raise above the rate of inflation is the same guy calling for this rather radical overhaul of how the Federal Reserve functions. And the two top Republicans on the House and Senate Finance Committees think he’s got some great ideas. That sounds ominous.
So it will be ominously fascinating to see how much traction the Fed hawks, the same hawks that want to turn the Fed into more a Bundesbank-style central bank that prioritizes low inflation over everything else (including employment and an occasional raise), get in this quest to break the New York Fed’s traditional voting privileges. Because while the historically cozy relationship between Wall Street and the New York Fed is certainly alarming, the idea of a yet-to-be-created authority doling out regulatory oversight for the Wall Street giants to teams under the supervision of the the 12 different Fed regional governors?! Oooominooouussss!
Ominousness...it’s what the right-wing does best. Especially when it involves money and power and the ability of the Federal government to do anything helpful for the rabble. So with the possibility of a GOP win in 2016, not only should you be very wary of anything proposed by Richard Fisher and embrace by Jeb Hensarling and Richard Shelby, but also keep in mind that this is all a preview.
Since it’s Easter today (you’ve won this round, Easter), and since Jesus would have been a pinko commie hippie in today’s context, here’s a special Easter Day critique of neoliberalism and how the commodification of humanity is fundamentally harming democracy and our ideas of what it means to be human:
Happy Easter everyone!
Paul Krugman has a new post that addresses not just the self-defeating nature of the austerity fetish but also the self-deceiving, but also self-sustaining, nature of austerians’ behavior and logic.
But first, let’s review the ‘Three Stooges’ nature of the whole situation:
Keep in mind that the actual pro-austerity arguments are that austerity is expansionary because the ‘confidence fairies’ promising lower debts and cheaper labor would fill investors with so much confidence in the post-austerity world that they would start investing today! The IMF issued a report arguing exactly that in 2011 (before it issued the ‘oops!’ report in 2014). That was also the argument Mitt Romney’s chief economics adviser was giving him in 2012 (sorta).
So that’s where we were about a year and a half ago: wishing that policy officials in Europe would rise to the same level of analytical rigor and intellectual clarity exhibited by Moe, Larry, and Curly.
Flash forward to today, and it becomes increasingly apparent that the primary ‘structural reform’ implemented across Europe over the last five years after all those blows to the head is that Europe is now position to embrace the ‘Three Stooges’ paradigm permanently:
Yep! After easing up austerity and watching their economies recover, Europe’s austerians are claiming vindication. Putting aside the pathetic nature of a situation where ‘Three Stooges’ logic rules the day, notice the incredible political control the austerians have by virtue of the fact that the austerity-regime can always make the economy relatively better than it used to be in the lead up to the elections. We always hear about the risks that politicians might engage in a politically-inspired spending spree in a lead up to elections, but in the age of endless austerity it’s looking increasingly like easing up on austerity is new political trick that right-wing government can use everywhere: Step 1. Use junk economic theories to justify austerity.
Step 2. Send the economy into a recession, or worse, arguing that we simply have no choice.
Step 3. Mid way through your term in office, ease up on the austerity and/or use some other stimulative measure.
Step 4. Watch the economy improve and attribute it all to your austerity policies.
Step 5. Get reelected.
Step 6. Rinse and repeat!
Part of what makes the situation so perverse is that one of the primary arguments we’ve heard from the most extreme factions of the pro-austerity camp (e.g. the Bundesbank) for why there shouldn’t have even been any easing up on austerity, or QE, or any other helpful measures is that reducing the austerity or adding stimulus would reduce the incentives for to engage in ‘structural reform’. And yet, after QE is introduced and austerity measures eased in some eurozone nations and those economies start improving a bit, the austerians use this improvement as vindication of their austerity policies.
So, in a sad way, the austerians were partially correct: In the places they eased up on the austerity and saw economies improve, that critical ‘structural reform’ of reevaluating the junk macroeconomic theories that led to this entire debacle has been completely avoided! And now the spirit of Curly runs the continent. Sure, you might think that it would occur to people that having their economies improve after they impose the austerity might actually indicate that the austerity wasn’t actually expansionary, but hey, didn’t it feel really good when that austerity was eased and don’t you want those good feelings again? No pain, no gain, proles!
Lots of good times ahead for Europe. Classically good.
Back in March, Paul Krugman had to devote an entire column reminding Britain that, no, the austerity policies of George Osborne haven’t actually done so well, and the UK economy only started picking up after the government pulled back on the austerity, despite the Tories’ pre-election efforts to convince the public of the successes of austerity-onomics. Unfortunately (for everyone), the need for more such public appeals to collective sanity are becoming increasingly urgent going forward because, as David Cameron and George Osborne warned us last month in the lead up to their historic electoral successes, the austerity inflicted on the UK by Cameron and Osborne so far was just a warm up:
That was what Cameron and Osborne were promising before they got elected: super-harsh austerity!
So is that what we should expect for the UK for Cameron’s next term now that voters basically endorsed his super-austerity program? Well, yes, of course that’s what we should expect. But don’t necessarily expect the austerity to end when Cameron is gone. They have much bigger, grander cuts in mind: throwing government into the woodchipper and never letting it out:
So, as is, the Office of Budget Responsibility (OBR) predicts a dramatic increase household debt over the next five year to levels last seen before the crisis. And the 77 economists who wrote him that open letter basically see George Osborne’s “surpluses forever!” plan as transferring large amounts of the public debt burden onto private households.
At least there presumably wouldn’t be endless austerity since Osborne’s plan appears to put the surplus mandate on hold during non-“normal” years which is actually an improvement over the austerity-in-the-face-of-recession policies Cameron and Osborne embrace earlier on. Plus, the semi-perma-surplus policies will just end up destabilizing the economy by increasingly pushing the debt burden onto households so the UK will just have to wait for what will be increasingly frequent private debt-driven financial crises whenever there’s some additional government programs required. Malaise forever!
As we can see, austerity hurts. But, oooooh, it hurts so good. And that’s why it’s so irresistible...assuming you can afford the necessary painkillers.
Here’s one of those articles that almost seems designed to give Paul Krugman a stroke:
Bloomberg View contributor, Leonid Bershidsky, recently penned a piece that made a rather bold call to global action. Why not unite the world under a single Bitcoin-like monetary system for the world because if all nations gave up control of the monetary system everything would go much more smoothly. His reasoning for this call? The lessons from the eurozone experience. The article is also filled with exactly the kind of up is down, black is white type of analysis that, again, going to someday give Paul Krugman a stroke.
And to top if all off, Bershidsky makes clear in the final paragraph that he wasn’t making a serious call for a one-world currency but instead a thought-experiment to give us a sense of just how complicated and ambitious the eurozone project really is, which is certainly true. At the same time, he refer to the global Bitcoin-scheme as a “pipe-dream” and and feels the world doesn’t give the eurozone ambitions (of getting countries to relinquish monetary sovereignty) enough credit for helping teach us all valuable lessons in how to create a closer world. And, in the sense that the eurozone experience is teaching us what not to do, that’s certainly true. But also keep in mind that Bershidsky is a staunch supporter of exactly the kinds of policies that fueled the eurozone crisis all these years, arguing last year that Europe hadn’t actually implemented real austerity and recently suggesting that Apple and other multinationals should bail out Greece in exchange for turning Greece into a permanent tax-shelter.
It’s all a reminder that, for the staunchest austerians, the lessons from the eurozone crisis are that it’s been so great so far why not share it with the world:
“This is where something like Bitcoin could come in handy: a decentralized system that works with little human intervention. “Mining” rules could be established to prevent anyone from cornering the market, but the system would self-regulate.” LOL.
While there was no shortage of stroke-inducing content, this one just might be the most lethal
Yes, apparently the lesson from the eurozone crisis is that countries that control their own currency have elevated financial risks!? Hence, Bitcoin for all!
So will further calls for a global Bitcoin currency as a safeguard for eurozone-style crises be the straw that breaks the arteries in Paul Krugman’s brain? Maybe. There’s a lot of competition in that department.
A lot.
When Paul Krugman was back in school at MIT in the 70’s, there were probably a lot of zany ideas floating around about what the world about be like four decades later, but he probably didn’t expect to one day write columns about how we’re all basically living in an especially dystopian episode of The Twilight Zone involving the collective madness of his profession:
As we can see, when the realm of the political possibilities is limited to craptacular second-best options(like QE, which is better than more austerity but still sucky), the best use of Paul Krugman’s time is actually a rather difficult consideration: the policy-making world has gone mad in multiple major countries around the globe simultaneously, so how much should Paul Krugman spend his advocating for the most optimal of the suboptimal “politically practical” policy solutions that the mad policy-makers will eve consider (where QE is a frequent best second-vest option) vs how much should Krugman spend his time trying to get the world to wake itself up from its Austerian trance and maybe recall the many important economic lessons humanity learned over the last century that we seem to have forgotten after Reagan gave us Alzheimer’s.
As policy-making sanity is increasingly verboten, it’s not at all obvious what Krugman should be investing his time in: Herd the highly ideological econo-cats towards the best second-best solutions chosen from the stunted econo-toolbox of madness? Or point out how the econo-cats have no clothes (except for the econo-rats in econo-cat’s clothing)? Or how about describing what the world could be like if it wasn’t run by highly ideological felines?
What is Paul to do? That’s not clear. But let’s hope he finds plenty of time to articulate a vision for how economic policy-making could work if the econo-cats of today weren’t perpetually hopped up on right-wing catnip. Even if policy doesn’t change today, there’s a whole generation of economics grad school students that are going be the policy-makers of tomorrow and the more sanity they can hear now from their elders during an era of unreality like this the better.
Brian Blackstone over as the Wall Street Journal has an column about the Federal Reserve’s decision next week over whether or not to raise interest rates and he thinks the ECB’s decision in 2011 to raise rates holds a number of lessons for the Fed today. Keep in mind that folks like Paul Krugman view a Fed rate rise as at this point as a major mistake. Also keep in mind that this is an ECB-related historical lesson so, of course, it’s a cautionary tale:
Yes, as the ECB amply demonstrated in 2011, you really don’t want central banks to suddenly raise rates ‘just because’. But also note that when you read...
...that the ECB’s decision to raise interest rates twice in short order didn’t actually make sense:
“Trichet might as well have gone on TV and announced, “My colleagues and I are determined to make the debt problems of southern Europe insoluble.””
That’s how much sense the ECB’s decision made back in 2011. So is Fed about to “pull an ‘ECB’ ” with its upcoming rate hike decisions? We’ll see. We’ll see...
To raise (Federal Reserve interest rates), or not to raise (Federal Reserve interest rates , that is the question. At least that was the question during a recent meeting of international central bankers and other financial big wigs in Lima, Peru, without a consensus answer. On the one hand, you have the IMF continuing to warn that raising rates now could be dangerous for both the US economy but also lead to a flood of money flowing out of emergency markets and back to the US. On the other hand, you have the “Group of 30”, a body of current and former central bankers, leading financiers, and academics which is arguing that the Fed just needs to start raising interest rates now because the uncertainty over when the Fed will raise rates is causing investors to take their money out of emerging markets at a faster rate than they otherwise would be.
So, to summarize, one of the big concerns about what will happen when the Fed starts raising rates is that it will lead to a rush to the exits for emerging markets, but there’s still a sizable contingent of central bankers and financiers that want to see those rates rise because not raising the rates is actually leading to larger outflows due to uncertainty:
So it’s the IMF vs the Group of 30:
Now, keep in mind that the Group of 30 is basically a talk shop and even Paul Krugman is a member. But also keep in mind that the current head of the Group of 30 is former ECB chairman Jean-Claude Trichet, and this is what Krugman had to say about Trichet’s proposal to raise the ECB’s rates back in 2011:
Yes, when Jean-Claude Trichet was head of the ECB, he started raised rates in the spring of 2011 despite the debt crisis because the eurozone inflation rate was at 2.6% instead of 2%, when there was no real indication that the eurozone economies was even remotely on solid footing, and by November of that year it was already looking like that decision was the point at which everything started to fall apart. And now the Group of 30, led by Trichet, just issued a report about how important it is that the Fed start raising rates despite ongoing concerns about a weakening US economy and global economy.
Oh, and about those concerns over the possibility that a Fed rate rise will lead to a surge in money flowing out of emerging markets...guess who doesn’t really care about that:
What a surprise, Uber-hawk Jens Weidmann doesn’t actually see the Fed-induced outflow of money from emerging markets, the thing everyone else seems to be concerned about at the Lima conference, as an actual raise not to raise rates? Why? Who knows, but it appears to involve some sort of circular reasoning:
So a U.S. rate increase, which “would be a reaction to a better economy” would “ultimately be good news for the world economy” even if it caused the Fed-induced capital outflow that everyone else wants to avoid. Wow, that’s almost as compelling as the reasoning by Singapore’s central banker:
Yes, like kids in a car asking “are we there yet?” on the way to a destination they don’t even want to get to just so they can get to the next phase of a trip they know they won’t enjoy, many emerging-market central bank governors pushing for a rate rise “were keener that the Fed just get on with it, not because they were keen to see interest rates rise, but because they wanted to reduce uncertainty”.
So, basically, the IMF and the Doves at the Fed are one of the only things preventing the rate hawks from jacking up rates — first at the Fed, but eventually everywhere — and doing to the world economy what folks like Jean-Claude Trichet did to the eurozone back in 2011. General feelings of uncertainty are probably appropriate.
Remember when the IMF did a big mea culpa over its advocacy of austerity and supply-side policies that helped devastate Europe? Well, check out their new proposal for stimulating growth: fiscal stimulus for nations with the with “fiscal space” to do so (which basically means no fiscal stimulus for most countries because they won’t have the “space”) plus a bunch of supply-side policies:
“But the analysis in the IMF’s annual World Economic Outlook acknowledged arguments from skeptics of such “supply side” reforms that deregulation can cause near-term falls in wages and price deflation and so need to be accompanied by fiscal stimulus aimed at boosting near-term.”
Surprise! Your wages and benefits are gutted and workers have less protections, but don’t worry because there’s a fiscal stimulus, like reduced labor taxes (which presumably aren’t needed as much anymore to fund the things like unemployment benefits which are going to be cut):
“There is a role for complementing structural reform with macroeconomic policy support. That includes fiscal stimulus wherever space is available.”
It sure would be nice if the IMF provided a list of countries it deems to have ‘available fiscal space’. After all, part of the whole premise behind the IMF’s previous calls for austerity was that nations just HAVE to slash spending in the face of a recession because...[insert stupid reason here]. But it’s hard to see what the difference is between that previous stance and what the IMF is currently proposing if countries can only engage in fiscal stimulus if they already have low debt and deficits. Isn’t this basically the same austerity ideology repackaged in non-austerian language? Well, not quite, since you have Berlin recently arguing that G20 nations should employ no fiscal stimulus under any circumstances, but it’s close.
So while the IMF is offering the same stale supply-side garbage that’s been dismantling societies for decades now, it could be worse supply-side garbage. Barely. It’s the kind of update from a major international institution that raises the question of what kinds of structural reforms are required for the world to finally flee the cult of supply-side structural reforms. What could those reforms be that truly unleash a society’s potential? Hmmm...
Paul Krugman has a take on the big Brexit vote that makes a point that’s going to be really important for progressives to keep in mind: whether or not poisonous xenophobia really was the primary factor driving support for a Brexit vote, there really are major flaws with the structure of the EU and especially the eurozone that basically turned the EU into a austerity/social-catastophe machine. So if the Brexit turns out to be a disaster for the UK and Europe, it’s a disaster within the context of a much larger, longer-term disaster that the European Project has become:
“But those worries wouldn’t have gone away even if Remain had won. The big mistakes were the adoption of the euro without careful thought about how a single currency would work without a unified government; the disastrous framing of the euro crisis as a morality play brought on by irresponsible southerners; the establishment of free labor mobility among culturally diverse countries with very different income levels, without careful thought about how that would work. Brexit is mainly a symptom of those problems, and the loss of official credibility that came with them. (That credibility loss is why the euro disaster played a role in Brexit even though Britain itself had the good sense to stay out.)”
Just imagine how much xenophobia and immigrant bashing could have been avoided if the UK and Europe made the protection of standards of living for the people who would obviously be displaced from internal immigration one of the core unifying values of the European Project.
It’s also worth noting that, while the austerity voluntarily imposed on the UK by the Cameron government (the UK never signed the Fiscal Compact treaty, so it can’t blame the EU for its austerity) inevitably exacerbated support for the Brexit, the austerity imposed on the rest of the EU, and especially in the eurozone, almost certainly increased the volume of EU immigration since the start of the crisis. For instance, as this article from 2010 reminds us, one of the political concerns at the time was that the Cameron government wouldn’t be able to stick to its promises to cut net immigration from “hundreds of thousands” per year to “tens of thousands”. Why? EU austerity:
“The figure is set to remain high despite initiatives by the Coalition Government to reduce immigration levels. The IPPR warns that plans will be thrown off course by the economic woes of several eurozone countries, especially if the UK economy continues to perform more strongly than others across the Channel.”
That was the prediction in 2010, before the world realized just how insane the governance in the EU would end up being and just how far Berlin and the EU right-wing would go in demanding an ‘austerity first, austerity at all cost’ model on the entire continent. And, surprise, surprise, the UK’s immigration from the austerity-stricken EU countries made up the bulk of EU immigration for the past 5 years:
“Since 2011, 696,000 EU citizens have moved to the UK. Of these, 553,000 hailed from those six European countries.”
Yep. Given the UK’s relative wealth compared to the rest of the EU it was a guaranteed immigration destination. But thanks to EU-wide austerity, the UK, which kept its currency and didn’t experience the eurozone nightmares, became an even more tempting destination from the eurozone’s new generation of economic refugees and there was no indication of what would change that dynamic.
It’s something worth keeping in mind when pondering the likelihood that the Brexit might inspire other nations to follow the same path. Because with austerity a constitutionally enshrined law of the land across all the EU (the Czech Republic is now the only remaining EU nation not to ratify the Fiscal Compact), the eurozone’s economic refugees have one less wealthy EU nation to flee to but they’re still going to have to flee. So where are the future eurozone austerity refugees going to go? Presumably the remaining wealthy EU nations like Germany and France, which is probably just going to result in increasing the same attitudes in those nations that led to the Brexit. In other words, the EU didn’t just lose one of it’s wealthiest members. It lost one of its socioeconomic safety-valves while the grand experiment in continental Ordoliberalism continues.
What, if any, positive changes the Brexit inspires the EU to implement remains to be seen, but note the part in the above study about wage gaps and the possible utility of a National Living Wage in stemming large volumes of migration:
“The organisation said it is difficult to predict what effect the National Living Wage would have on migration. While moving to the UK from a lower-income EU country to secure a jump in salary is an attractive proposition, the organisation noted that higher wages could force employers to rely less on low-wage workers.”
Well, it looks like there’s a possible solution to the EU’s immigration freakout: raise workers wages to a living wage. That sure seems like a solution worthy of investigation. But since that could end up actually increasing the wage gaps if only the wealthiest nations instituted a National Living Wage, why not do the thing the EU, and especially the eurozone, should have been doing all along if Europe want Europe to actually have a “we’re all in this together” identity: fiscal transfers. Just have the rich nations like Germany and the UK systematically give money to the poorer nations so they can afford the kinds of investments and life-enhancing public services. If you have hope for a life that doesn’t suck in your home country, you’re a lot less likely to move.
So let’s hope the Brexit can at least prompt a rethink of the not just the EU’s austerity madness but also the wealthier nations’ resistance to the fiscal transfers to their poorer neighbors that should have been set up already if the EU ever wants to become a functional “United States of Europe”. Is that possible after a shock this big? Probably not, but we’ll see.