Friday, August 21, 2015

The Greek Debt Crisis

There’s a great explanation of the Greek debt crisis by the authors of the excellent book Economix by Michael Goodwin and Dan Burr. Check it out:

I learned something too. I was unaware that the payout of bonds always remains the same. Thus, if the interest rate declines, the price changes to maintain the same rate of payout. High interest rates reflect a high risk of default, hence high interest rates = low price and vice versa. Greek debt was sold at a much higher price than it should have been, reflecting an unreasonably low default risk (paid in Euros), and the buyers did not take into account the default risk. Now they are insisting on getting paid every cent they are owed rather than accept a writeoff. This just reinforces my view that the medieval system of the buying and selling of debt is a ridiculous way to run a global technology-based economy and is responsible for most of the lack of progress and suffering as a species (including our inability to get our numbers and resource use under control). Can’t we do better? If only economists put their allegedly big grains to use doing that instead of analyzing and rationalizing the current clusterfuck of a system.

Another note on the crisis – in case you didn’t know, Germany received a substantial debt writeoff in 1953 at the London conference. Over half their debt was eliminated. And these were the Nazis! The very incarnation of evil. Just ten years earlier they were shoving people into incinerators at Dachau, and yet they get a break that the Greeks apparently don’t deserve.

Of course we know why. Germany was cleaved in two. The eastern half was run by Communism. It wouldn’t look too good to have the “free” Germans in the West living impoverished in a hollowed-out economy while their compatriots in the East had higher living standards, would it? It wouldn’t be good for propaganda to have people climbing over the Berlin Wall to get into EAST Germany. It wouldn’t make capitalism look good to have lower living standards than the Communist regimes of eastern Europe in Europe’s biggest industrial economy.

Today, of course, no one cares what happens to the Greeks. In this almost comically sociopathic post, the author explains why the Greeks don’t deserve debt repayment: Germany Deserved Debt Relief, Greece Doesn't (Bloomberg) Unfortunately for the Greeks, there is no Communism for them to appeal to. And that's the problem. The author frankly acknowledges that Germany needed to be saved from debt servitude to provide a "bulwark" against Communism by upholding the free market (although the author speaks disapprovingly of all the "illiberal" social welfare programs).
As for the post-war debt, here's what Frankfurt, Germany's current financial center and seat of the European Central Bank, looked like in 1953...There are ruins at the center of Athens, too, but they are rather more ancient.
Not that ancient - only from 2004.
...after Germany was split in two by the World War II allies, 10 million refugees from the Soviet-controlled eastern part of the country -- about as many people as there are in Greece now -- flooded the west, creating a humanitarian catastrophe of major proportions. 
Too bad for the author that Greece is also suffering a major humanitarian crisis being flooded with refugees from Syria and Iraq trying to get into Europe. Greece has to deal with being the front line of "Fortress Europe." without any help from those cowering farther north, who instead want them to suffer. Also, Greece, unlike Germany, did nothing to bring this situation upon itself.
The circumstances under which Greece accumulated its debt are strikingly different. After restoring democracy in 1974 after seven years of military rule, the Greek government splurged on a full range of socialist benefits, including higher pensions and universally accessible health care, as well as on a big government. It financed a railroad that had more employees than passengers; even before the military coup, it started paying salaries to Orthodox priests, and it still does so, though there has been a pay cut after international creditors demanded it.
So let me get this straight. Germany borrows money to start a massive war on the continent that kills millions of people and to build concentration camps to mass murder entire ethnic groups. Greece borrows money to pay for free education, universal healthcare, pensions for the elderly, a railroad, and paying a salary for Orthodox priests (who are not known for lavish living). Clearly, Germany deserves forgiveness and the Greece must suffer!
Part of the reason West Germany was granted debt relief lay in the Federal Republic's importance as a Western bulwark in the fight against Communism.... It was less economically liberal than it is now, and it built a sizable welfare state over the years, but it was still a center-right, capitalist force that believed that only private initiative could lead to more or less universal prosperity.
Yes, too bad we had to put up that unfortunate welfare state and all that, but they were still "center-right," and thus acceptable. And we needed them on our side to fight the Commies. But Greece, we have to make them suffer for daring to elect a "far-left" government:
The far-left political forces were outside the London process in 1953; they were in the GDR. Now, far-left Syriza wants to be on the inside, with its plans to nationalize banks and utilities and its costly promises to voters. It will use the debt relief to provide free electricity to households, subsidize rents, restore Christmas bonuses to pensioners, raise minimum salaries -- that is, to return to the practices that led to the accumulation of Greece's debt.
That's right, unlike Germany's war debt, the Greeks want to do horrible things like give people money at Christmas and stop them from losing their apartments. What a bunch of monsters! We need to teach these "leftists" a lesson! One's jaw had to drop at the awesome sociopathy and rationalization of this author.What's the real agenda here?

Yes, circumstances are entirely different. Germany benefits from an artificially cheap currency. If a country's economy is doing well, their currency's value rises and their exports are less competitive. If a country's economy is doing poorly, their currency's value falls, and exports become cheaper, boosting their economy. Germany's currency is yoked to the poorer countries of Southern Europe making its exports artificially cheap, and it cannot be adjusted because of the yoke! Thus Germany is a massive exporter, meaning it can undercut other economies who do not benefit from that situation (Japan, Britain, U.S), and gains from a massive inflow of currency. Rather than acknowledge this situation, Germans prefer to fall back on racist stereotypes of "lazy Greeks." Also, Germany's generous social benefits allow them to hold down wages and prevent prices from rising to further give them an advantage. Germany also absorbed millions of highly skilled workers from the East who worked for far less than average Western wages.
China is widely accused of “currency manipulation,” keeping the renminbi weak to boost its exports. But few see that the eurozone—the now 19- country bloc sharing the euro as its common currency—has functioned for Germany as a built-in currency manipulation system. And much like China, Germany used a lethal combination of wage repression and an undervalued currency to boost its exports and output at the expense of its trading partners...Germany’s reliance on foreign demand for its exports drained spending from elsewhere in the eurozone and slowed growth in those countries. That, in turn, made it less likely that German banks and elites would recover their loans and investments in southern Europe.
German Wage Repression: Getting to the Roots of the Eurozone Crisis (Naked Capitalism)

You cannot have a monetary union without a political union. In the U.S., the richer states subsidize poorer states. California, Texas and New York subsidize Mississippi, Alabama and Kansas. Their economies and corporations receive benefits from those states such as plentiful commodities (no tarrifs, etc.) and cheap labor (why your catalog orders get filled in Middle America and your credit card bills go there too). But Germany does not want to subsidize weaker economies despite being monetarily yoked to them and enjoying the benefits of that. So yeah, circumstances are totally different.

Too bad Greece doesn't have war debt and an alternate economic system just over the border.

RELATED: Did socialism keep capitalism equal? (Branko Milanovic). yes.

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