THE DISASTER OF AUSTERITY…
Today’s Greek GDP data was a total disaster with the economy sinking -7% in the 4th quarter of 2011:
“Greece’s economy shrank at an annual 7 per cent rate in the last quarter of 2011 as the recession deepened, following a 5 per cent decline in Q3, flash estimates by the country’s statistics service (ELSTAT) showed on Tuesday.
The projection, based on seasonally unadjusted data, means the economy contracted by an average 6.8 per cent for the whole of 2011, more than earlier estimates of 5.5-6 per cent.
The size of the contraction will make it harder to meet revenue targets to cut the country’s budget gap.”
The math here is simple. With the Greek private sector in a balance sheet recession, a current account deficit AND a shrinking government sector, there’s only one way for growth to go. This is the conundrum of austerity and the power of understanding the sectoral balances. All three sectors can’t contract without the economy shrinking. At least one of them has to be expanding.
We know there’s a continuing balance sheet recession in Europe. Richard Koo highlighted this the other day. We also know the austerity is biting. And we also know the periphery countries in trouble are running current account deficits. The math just doesn’t add up here. Europe’s crisis will get worse. It’s only a matter of time before the markets begin to price in the continuing turmoil and disaster of austerity….
This is what happens when austerity is forced upon you. Unfortunately the time to manage a transition is before you need to do so but of course that apparently goes against human/political nature.
No one ever got a parade for preventing a fire – we give medals to the heroes who save people from death in fires.
Facing up to reality is unpleasant in most circumstances.
Something the USSA will never grasp.
Until it does…………………
The End.
What is “reality,” Jo?
That because certain people say you have to sit and suffer 20% unemployment? People sit and unlearn skills while society deteriorates?
Explain to me what “reality” the USA is not facing up to?
Marshall Auerback: Greece – A Default is Better Than the Deal on Offer
By Marshall Auerback
http://www.nakedcapitalism.com/2012/02/marshall-auerback-greece-%e2%80%93%c2%a0a-default-is-better-than-the-deal-on-offer.html
“On the other hand, I happen to think a rescue of the sort that is now being publicly mooted is worse for both sides. The imposition of yet more fiscal austerity on Greece will exacerbate the debt deflation dynamics which are destroying the country and will provide Greece with ZERO means of servicing even the reduced levels of debt. The country will still remain uncompetitive and depression like conditions will continue, with the ongoing burden of more euro denominated debt servicing.
More dangerous is the risk that comes if there is a “successful” deal: It come with the pending question- ‘if Greece doesn’t have to pay, why do I’- The Irish are asking that question already, and I’m sure the Portuguese and Spanish will soon be asking the same thing. As my friend Warren Mosler has noted:
Possible immediate consequences of that discussion include a sharp spike in gold, silver, and other commodities in a flight from currency, falling equity and debt valuations, a banking crisis, and a tightening of ‘financial conditions’ in general from portfolio shifting, even as it’s fundamentally highly deflationary. And while it probably won’t last all that long, it will be long enough to seriously shake things up.
Longer term, a Greek default could well provoke the question, “What on earth do governments issue bonds for anyway?” That might well provoke a far more provocative debate on the nature of modern money and the self-imposed legal constraints with which sovereign governments bind themselves in their conduct of fiscal policy. But that’s probably best left to the pages of another blog post!”
I don’t know whether a default and a return to the Drachma will be better in the longer run, but it sure will be MUCH worse in the short run – and most Greeks know it. Greece is a country with nothing. It has no energy reserves, it imports food, it has little manufacturing industry, and its one real industry – shipping – is currently in the dumper due to overcapacity. If the Greeks defaulted and left the Euro, they would be suddenly unable to import anything. All those nice German cars in their garages would be dead, since there would be no gasoline. There would be no electricity. Much less food to eat – limited to what they grow themselves, and no fertilizer either. The country would freeze and starve in the dark. Ordinary tourist revenue would not be enough, particularly with political instability scaring away Americans. The Greeks would be forced by sheer destitution to turn to sexual tourism catering to wealthy Germans. Now, talk about a national humiliation!!! (Btw, the Germans are VERY fond of that kind of tourism, particularly in Africa and Thailand)
Now you understand why >75% of the Greeks want to stay in the Euro at any price, and why all their political parties are willing to sign onto punishing austerity deals. The only alternative is renting your children to depraved Germans.
This is pure hyperbole. No electricity ? – 50% is generated with local lignite. Another 15% hydro. Another few points in renewables. No food ? -Greece is a major exporter within the EU of cotton, rice, olives, tomatoes and fish. The resource base of Greece is no worse and in some aspects much better than the other countries in the region. If Croatia can get by without renting its children to depraved Germans, so can Greece.
El Stat is not a resort in Egypt but the Greek Statistics Agency. I ‘d suggest you take a look at numbers before making such claims. Greece goods and services balance was balanced in 2011 excluding fuel/energy which was 5% GDP (and 4% GDP in 2010 when prices were lower). In other words, the only net demand for foreign currency is for fuel (i am pressuming that Greece would re-denominate its debts to the new local currency).
You are describing a world that does not exist, where countries with external deficits cannot find foreign currency. In reality they always find foreign currency by exchanging their own. Greece would face a logical depreciation until economic expansion returned. That’s all there is to it.
Hey, it’s the Internet; everyone is entitled to an opinion, no matter how weak their grasp of the facts.
Yeah, Greece is in a depression, worse thing it’s in the classical deflation-hyperinflation spiral.
These kind of numbers for two years and Greece won’t have any real capital left in the country, social fabric in total chaos and on the verge on revolution and forced to quit the euro nightmare and print money like there is no tomorrow or default on its debt, with a terrible situation for the balance of payments and unable to import essential goods and commodities.
Kinda like Argentina but with the difference that the dependency on imports there is higher and the potential for disaster bigger. I fear the worst is yet to come to Greece unless the population (greek and european) force the situation before it’s too late.
At this point best thing they could do is default, quit the euro, cut funding from european union and they may have hope yet, but if they hold one or two years more Greece will become a third world country in bad shape fast.
The question is if this is the path for countries like Italy and Spain, because these are two big fish to fry and hate can spread fast if poverty and inequality increases.
There is indeed a lot the Greeks can learn from the Argentina experience – there’s a lot of similarities.
The proplem to me is that Greece has the wrong financial advisors – the politicians are clearly advised to be shit-scared of leaving the Euro – they seem to think a massive void will open up in the Agean Sea and swallow them for all eternity.
So we go like we are now until Greece leaves anyway, but not will untold damage is done to the country and the exit is totally disorderly and way more painful that it need be.
This is all making me so sad – I feel for you Greece!!
Don’t forget that the EU is a gravy train for politicians.
Or the Iceland experience. Their economy has returned to growth after defaulting on the biggest per capita foreign debt in the history of mankind.
Greece cannot be compared to Iceland. Greece has almost no resources and 10 million people. Iceland has 3% of its population and lots of resources – especially on a per capita basis. Iceland has geothermal energy, fish, and fluorine. Greece only has tourist sites. While a Greek default could make it cheaper for tourists to visit, political instability tends to chase ordinary tourists away. No one wants to be around violent mobs wielding Molotovs.
My point is that, like Iceland, the Greek domestic economy can return to growth rather quickly if the debt overhead is lifted and the currency is sovereign. The real living standard then becomes dependent on the resource base of the country, which may or not be as rich as Iceland’s. I don’t think your examples make the case one way or another. Iceland’s current account position before the crisis was also worse than Greece’s. With devaluation and renewed growth that has turned into an export surplus.
indeed – and in addition there’s nothing like a massive default leaving you with no debt to restore the market’s confidence to lend to you. All this talk about them being locked out of debt markets forever?? – stupid – they will be borrowing money again within 18 months…
And people still believe the EMU has any chance of surviving?
http://www.ifre.com/eu-to-punish-spain-for-deficits-inaction/20048665.article
1. Just a reminder of what’s in store for the US when China starts to implode.
2. I’m watching the US T-bond market and I see a change in character in the last say, two months.
You need to go back to MMT (or MMR now, I guess) 101. We don’t need China’s dollar bills (to buy our Treasuries). We can make plenty of our own.
we all know who you are, so no need for the “aka”. You keep repeating the same sad, tired points every other day, but without the laughs that someone like, say, Jo or Gary_UK provide.
no one here believes in what you preach, because you never answer the well-reasoned critiques that Cullen, DCA, JKH, Fullwiler, et al have for your doomsdayish scenario.
You call my predictions “”doomsdayish”" ? If I would tell everything what’s in my opinion possible in the near future (say 5 to 10 years) then I better use another TPC alias. Like Nuclear Armageddon, Doomsday, Apocalypse Now, “”Back to the Stone Age”" or “”Goats destroy our future”".
Let me give one hint: I think in every country in the Middle East could be submerged in a civil war. Think what e.g. $40 oil would mean for a lot of oilproducers. E.g. Saudi Arabia needs $ 60 to $80 oil to keep the welfare/benfits state afloat and its population happy.
One other thing I came across recently: Greenspan was asked by CNBC (???) why he kept interest rates so low for so long from 2001 up to mid 2004. Greenspan replied: I didn’t do it. It was the market that did it. Source: “”Conquer the Crash 2.0″”, 2009, Robert R. Prechter.
Yet again, you deflect the discussion. Greenspan’s testimony means absolutely zilch. The man was completely inept.
The power of a Central Bank is asymmetric. A CB can always drive any interest rates (short or long term) DOWN by printing more money, but it is very hard, even impossible, for a Central Bank to drive long term rates UP – especially if the country is running trade deficits. A CB’s power to raise rates is limited to the short term. Greenspan raised the short rate from 1% to 5%, and yet the long rate did not budge. His famous “conundrum”. The long rate did not rise because the Chinese had to put their dollars somewhere, and so they put them into long term US Treasury and mortgage bonds. Of course Greenspan is not stupid. He realized that this fueled an unsustainable real estate bubble, he knew a big crash was coming, so he got the hell out of dodge in 2006 and dumped this mess in poor old Ben Bernanke’s lap. What a Guy!!
I’m so happy to give you reason to laugh. Of course there may be others lurking here with minds that are still open, so here, do have another little chuckle on me:
Meantime, the ongoing financial war against the US continues:
http://www.zerohedge.com/news/russia-dumps-treasurys-14-consecutive-months-china-slashes-holdings-lowest-over-year
Virtually the whole world has already decided the game is over for the States, it is literally just a matter of time before Ben’s ever-increasing monetizations destroys the dollar. Reality: it always bites.
Unless of course he can magically QE confidence in paper? Oh no, he can’t can he. With every QE, in fact, confidence diminishes.
Oh the fun and games to look forward to in the next few years, I can hardly wait.
Yes, I know I sound like a broken record. But all this MMT stuff is so self serving for the US. “”We (the US) can do whatever we want”". And I continue to believe, until proven otherwise (and I still have to read the first article that makes me a MMT believer), that Mr. Market determines interest rates and NOT the FED. The FED can increase or decrease liquidity, the FED can increase or decrease reserve requirements for banks but that’s about it.
“2. I’m watching the US T-bond market and I see a change in character in the last say, two months”
pls elaborate
you see jswede, 10-year yields jumped from 1.85% to 2.05% ! Bond vigilantes bitchez!! Next stop total implosion!
(In case you can’t tell I’m being totally sarcastic – we know that there’s a lot of things to worry about right now, but the USA bond market isn’t one of them…)
Look at the $TNX:$TYX ratio or the $UST:$USB ratio over the last three years at Stockcharts.com. See what happened to these ratios when rates went up in the last 4 months of 2011.
Correction: Look at the $TNX:$TYX ratio over the past three years and combine that with what happened with both TNX and TYX individual. I just checked today the $TNX:$TYX ratio and it seems we could see another rally in Treasuries. I thought I saw a change in character but today I am not so sure any more. The action today seems to suggest that we could see a scathing and final rally in T-bonds.
Currently I am long T-bonds.
Cullen, I’ve been meaning to ask you about Greece’s eventual conversion to New Drachma. How would they go about enforcing such a change in currency? Surely the mechanism would be to demand that taxes/fees/etc. be paid in New Drachma. It would have nothing to do with productivity. How would this square with MMR vs. MMT?
It would have everything to do with production. Why else would they want a currency in the first place? Taxes and laws and any rules enforcing the new currency would merely be the infrastructure within which the new currency allows the public to utilize the new currency….
So taxes and laws are required to enforce the use of the new currency. This is the mechanism. No mechanism for enforcement, no new currency.
I see your point, though, that the desire for productivity is what will ultimately force the Greeks to find a new currency.
So then as I understand it:
Why would the Greeks want a new currency? = Productivity = MMR
How do they implement/enforce the use of a new currency? = Taxes and Laws = MMT
To me these ideas don’t seem contradictory. And who cares which one is more important? What’s more important your heart or your brain? Well, sure, technically the brain tells the heart to pulse, but that doesn’t matter much if you don’t have a heart.
To me, the purpose of a monetary system and a state currency is the desire to more efficiently mobilize resources (in both pvt and public domain). There are certain things needed to establish a govt and a monetary system that make the institution of state money possible. Taxes and laws are two of the cornerstones. That’s no great insight. It’s obvious. So, state money isn’t established by taxes or coercion. It’s established by a public understanding that a public institution can mobilize resources more efficiently (think military in most cases as a starting point). This is why states like the USSR failed. Their money and govt is inherently at odds with the very reason state money is created….
What drives demand for this currency? The efficiency and effectiveness of the currency union in generating superior living standards through resource mobilization. MMT just takes the state theory and jumps ahead to an illogical starting point (taxes)….They ignore the real driver behind any public money or even any money for that matter….MMR establishes a much more logical starting point in my opinion and comes to different conclusions because of this….
Simple. The greek government tells its creditors something like this: “”We’ll acknowledge only 30% of our debts. And that will be paid in New Drachma’s. Take this paltry compensation or get nothing at all.”" This is the same thing Argentina did after it defaulted on its debts in 2001. Wall Street didn’t like it but they had no choice.
Argentina did something else. It ordered that all argentine mortgages/debt denominated in USD were changed to a denomination in Argentine Pesos.
I don’t know much about Greece, and maybe I don’t know much about Mexico, and the situation in Mexico is not the same as Greece tied to the Euro.
But the way I see it, Mexico is fundamentally a poorer country with a lower standard of living and reduced opportunities for earning a good living relative to the U.S..
Why is Mexico poorer? Maybe because it doesn’t have the same natural resources or good-quality agricultural land as the U.S. Maybe because the political system hasn’t quite recovered from the various phases of the Mexican Revolution that threw of colonial and aristrocratic rule. Maybe because the appetite for illegal drugs in the U.S. has increased the level of violence in Mexico to supply drugs. Maybe for a whole lot of reasons.
So one response is for Mexican laborers to migrate to the U.S., legally or illegally, although there is a big move in the U.S. to try and discourge both kinds of migration. Maybe another response is for enterprenurial U.S. people to migrate to Mexico and build plants to take advantage of lower wages and NAFTA and all of that, and yes, Ford Fusions are built in a border factory meant to take advantage of all of that, the claim is those Fords based on good ol’ Japanese Mazda engineering have good build quality in the hands of the Mexican workers.
But somewhere, I get the feeling that there are all manners of “friction” in the Mexican economy. There is a lot of talk about restricting migration and immigration from Mexico, but I heard that it is not the simplest thing for someone from the U.S. with entreprenurial talent or business ideas to get into Mexico. But they when a U.S. person gets there, there may be various manners of “friction” in terms with dealing with the authorities to get business licenses, etc., etc. I don’t know any of this factually, but I am posing this as conjecture and hypothesis.
So what I am saying, is that with the common Euro currency and with the open EU borders, it should be much easier for someone from Germany to do something entreprenurial in Greece, taking advantage of what must be lower wages in Greece compared with Germany? It should be more like setting up a factory in South Carolina than setting up a factory in Mexico, no?
So all of the focus is on those bad, bad spendthrift Greek people and their retire at age 50 policy and their generous pensions and everything. But why isn’t Greece to the Germans like someone in the U.S. moving their factory from the Rust Belt to the South? Is it much more like the U.S. and Mexico with various kinds of restrictions and frictions on business opportunities in Greece but with the common currency thing?
Tell me more of the fundamentals and of the culture of Greece and why Germans aren’t moving their factories there in pursuit of a wage differential along with a much nicer climate instead of “The Greeks are bad because they borrowed too much and they get austerity to lock their heels down that they don’t think they are any better than the rest of us.”
The German capitalist model is quite different from the Anglo. Boards are for example required by law to have worker representation. As a result, German jobs tend not to be outsourced.
It’s also somewhat doubtful that you could achieve significant wage savings by moving to Greece. Prices across the Eurozone are quite similar so the cost of living only varies by 20-30%. Greeks receiving Chinese wages while facing close to German prices would literally starve.
It’s doubtful that a German factory could achieve significant wage savings by moving to Greece. Prices are broadly similar across the Eurozone so the cost of living doesn’t vary by more than 20-30%. Greek workers facing near German prices and receiving for example Mexican level wages would find it almost impossible to survive.
There is very little labor mobility in the EU, which eliminates one of the best adjustment mechanisms for disparities between states. There are huge barriers of language, closed guilds, closed state systems, etc… If there was more labor mobility, a Greek could simply go to work in Germany. But for most intents and purposes they can’t.
And this is why us commentators talking about fiscal unions are way out of their field.
There simply doesn’t exist the infrastructure and social union for a fiscal union. the EU is a burocracy monster but nothing else. Neither political system, nietehr society is ready.
And believe me, I would like it to happen, but I can’t see it happening without further trouble down the road. Comparing it to the beginnings of USA is pure non-sense.
There is a problem in using the sectoral balances: they tell nothing about the dynamics that will take place between the three terms. An increased government deficit can only cause an increased current balance deficit rather than a reflation of the private sector.
Apparently it is happening in Greece, where the private sector balancce is merely +0.5% GDP in 2010 and probably negative in 2011. Amazingly, the chart of cars registrations closely matches the chart of the bond spread against Germany!
I guess the conclusions you can draw from the sectoral balance are different fron an economy to another.
Look at this:
http://static.mediapart.fr/files/imagecache/300_pixels/Martine%20Orange/voitures_grecques.png
No deleveraging with these guys.
I am not so sure that this deep recession in itself is a bad thing. It will certainly force a lot of people to look for new ways to make a living. Many Greeks have lived off jobs that were based on subsidies imported from richer EU countries, or just in general paid for by their own domestic tax payers. Those jobs were unsustainable and now people will have to use their ingenuity to create new jobs that are sustainable. Small entrepreneurship is bound to see a renaissance. A restructuring of the Greek economy along those lines is a good thing. Naturally, leaving the euro would lend a powerful hand in this, at least short-term… But it would also lessen the incentives for the Greek government to free their economy from all that red tape, the subsidies, the large public sector etc. If I were Greek, I would rather stay in the euro and see the old system crumble under the pressure. But of course, I am not Greek..
I would not cry too much for the Greeks. The population has lived beyond it’s means far to long, it’s Civil Servants, (Reputedly 1 in 5 of the Population) only now facing cuts , and lots of taxpayers avoiding taxes.
Instead of rioting in the streets, perhaps their children should be asking Mom or Dad why they are not paying their taxes ?
Public servants represent 18 % of the work force, 2 points above the OECD average, but hardly unusual in European countries where the majority of the health sector is public.
The total tax take as a percentage of GDP is around 30%, substantially higher than the U.S.A. However, the black economy is estimated to be 3 times bigger. Nevertheless, the tax issue is a sideshow. Cracking down on tax avoidance now would simply suck more money out of the economy.
Signs of dilusion: thinking Greece will not go bankrupt and exit the EU; believing Spains economic numbers are real; assuming the peripherals won’t follow Greece but instead submit to having their sovereignty stolen by banksters.
Signs of dilusion: thinking Greece will not go bankrupt and exit the EU; believing Spains economic numbers are rwal; assuming the peripherals won’t follow Greece but instead submit to having their sovereignty stolen by banksters.
Small entrepreneurship is all well and good but it’s not going to pay for 300,000 barrels of oil / day. Industrial cotton farming (Greece is the biggest cotton exporter in the E.U), fishing (Greece takes 1/5 of the total Mediterranean catch), the merchant navy (biggest in the world), light and heavy manufacturing, tourism. Those are the sectors that are going to earn Greece’s foreign exchange and underwrite Greece’s future prosperity or lack thereof. Only tourism has much scope for the small entrepreneur. A depression may well encourage small entrepreneurship but it destroys the industrial base upon which genuinely rich countries rely.
The Way Greeks Live Now (NY Times)
By many indicators, Greece is devolving into something unprecedented in modern Western experience. A quarter of all Greek companies have gone out of business since 2009, and half of all small businesses in the country say they are unable to meet payroll. The suicide rate increased by 40 percent in the first half of 2011. A barter economy has sprung up, as people try to work around a broken financial system. Nearly half the population under 25 is unemployed. Last September, organizers of a government-sponsored seminar on emigrating to Australia, an event that drew 42 people a year earlier, were overwhelmed when 12,000 people signed up. Greek bankers told me that people had taken about one-third of their money out of their accounts; many, it seems, were keeping what savings they had under their beds or buried in their backyards. One banker, part of whose job these days is persuading people to keep their money in the bank, said to me, “Who would trust a Greek bank?”
They are already in the classic deflation-hyperinflation spiral, it will end in disaster, probably with blood on the streets.
European elites are playing with fire, play this game for a couple of years more and the same will happen even in France (but I don’t think, or hope, they are that suicidal).
“They are already in the classic deflation-hyperinflation spiral…”
Agree. But there’s something non-classical about it to me from another perspective. The fact that they are apart of a currency union, and may face possible hyperinflation while moving to monetary sovereignty or once moving to monetary sovereignty is a unique situation (as far as I know). Perhaps it’s not unique but Greece has a documented problem with taxation, which makes it unique (again, as far as I know).
While my enteric nervous system (my gut) puts me on the MMR “side” (I can’t see them as opposing each other, I see them as 95% complimentary, which makes some MMTers reaction to MMR disappointing) of the ‘disagreement’ over what drives money. Pretty simple to me, if there’s no economic productivity (or not enough) present in the first place to incentivize the people of an economy to transact in one currency, what can taxes do?
This is an interesting point to notice about Greece and their likely move to a sovereign currency. It reminds me of, “Money might be a creature of the state, but the state is ultimately a creature of the people.” All forms of government are an agreement between the people governed and the entity they have created to govern them. In the discussion of the drivers (yes, plural) of money this agreement takes specific form. The agreement between people and government over ‘money’ is that the people agree to transact (an exchange not only of, but to optimize productivity) in the state currency and the state is to act as a steward not only of the currency in general, but also of all laws and regulations or lack thereof that may affect the currency. I am becoming highly circular here for which I apologize, but this would showcase exactly what Cullen has pointed out in his hyperinflation paper- that a hyperinflation is caused by whatever causes the people to spurn the currency. I would prefer to say that hyperinflation is, specifically, caused by whatever has incentivized the people to reject the agreement. This is a de facto rejection of the steward because they would never reject the benefits of the optimization of a state currency on its own. The steward’s summation of actions and inactions must outweigh the benefits of having the state currency. That tipping point is where hyperinflations are born.
I dare say I border on ‘excited’ to see the transition should Greece make it. I feel immoral in feeling this way as the transition could very well see significant turmoil and suffering for the Greek people and, God forbid, other European States as war is not out of the realm of possibility. But it will provide an interesting, real time, case study of what Cullen has shown is the cause of hyperinflations.
It should provide, at the same time, proof that the people of a State can be economically productive (in the efforts of increasing the standard of living) while the state currency is rejected. Proving not only that taxes are a component in driving money, but that they are not the sole component; they are possibly the last component put in place for the agreement to be fulfilled. That does not seem to me to be a position that would sit atop the hierarchy.
Sorry for rambling.
The greek situation may be unique but there are similar cases, you can take any regime change which ended (or began really) with the rejection of the currency, specially the cases of the collapse of the soviet regime or some eastern Europe nations (ie. Yugoslavia).
Also even if some nations had their own national currency, not having a free-floating currency makes the different unit of account redundant. Argentina for example was running a pegged currency right before the hyperinflation (when floated the currency).
Currency rejection is part of a political process, but the political process is usually pushed by the economic situation (which forces governments to start the hyperinflation spiral). In my opinion, the most important process in the hyperinflation path and rejection of the currency is a dysfunctional economy with a destruction of the capital base.
This can happen because of the continuous debt-deflation spiral where corporations continue to close and default, and income-to-equity falls for households progressively which is the case of most capitalist economies which have gone through this process. Or because trade chain is disrupted somehow and essential inputs cause soaring prices or disruption of production eroding again the production capacity of the economy (this was for example the case of the Yugoslavian regime, which was actually shut down by the rest of the world even if it was actually not that bad and had balanced trade).
The argument between “MMT” and “MMR” on the origins and conditions for fiat regimes while interesting from an academic point of view is largely irrelevant IMO, is kinda like ‘what was first, the egg or the chicken’ argument. I doubt any MMT’er says that a fiat currency can remain functional without a working economy behind it; and that’s all that matter really. IMO the question can be solved with one sentence: taxes are a necessary condition to enforce a fiat regime properly, but are not a sufficient condition to maintain it, as ultimately without a functioning economy to support the claim on future productivity and rule of law that is the state money the currency will be rejected (and it’s then when it’s substituted by foreign currency or even by barter when the population exchanges are reduced to pure survival and capital markets are in total disarray).
Meant income-to-debt (and equity-to-debt).
Also will expand a bit on what I mean by a political process: usually, a regime could hold straight hard currency and force a deflationary path all they want, the problem is that this is rarely acceptable by the public and any population has its own limits 8and the end is revolution) unless the regime is an orwellian nightmare (like N.Korea).
If the process is very severe and there are not capital flows into the nation from the exterior and new investment it can literally destroy the nation capacity. Therefore political authorities will try whatever monetary trick to solve the situation, but when they do it’s too late and either the productive capacity has been highly eroded or the regime is totally dysfunctional (and there is a rejection of taxes and an expansion of black market and survival economy) already.
So doomed if you do, and doomed if you don’t, if you cross the event horizon.
“The argument between “MMT” and “MMR” on the origins and conditions for fiat regimes while interesting from an academic point of view is largely irrelevant IMO, is kinda like ‘what was first, the egg or the chicken’ argument”
Couldn’t agree more with that.
“This can happen because of the continuous debt-deflation spiral where corporations continue to close and default”
Couldn’t it be argued that the government could/should ‘intervene’ and ‘backstop’ the currency at that point? Regardless your point stands.
Always appreciate your comments here, Leverage.
Best
I guess the main problem is that Germany endured a defaltionary period when integrating the East German state into a united Germany. Extra taxes were levied to help pay the cost.
The problem is a fundamental difference inattitude towards debt. Germany is characterised as being a country with low levels of personal debt and where renting homes is much more popular than purchasing with a mortgage. In this environment, the personal cost of deflation is lower, because bankruptcies will be lower.
Greece is being given the option of deflation with assistance of IMF and ECB, deflation without assistance or exiting the Eurozone.
Exiting the Eurozone would be a calamity in the short term as Greeks would resist having their Euros converted into Drachma, a currency that would be introduced for the sole purpose of being devalued.
I don’t know what they should do, given that the best solution for them is not being offered as an option.
The Greeks have been living beyond their means for as long as I can remember. The idea that they can solve their economic problems without a contraction in GDP (or an inflationary confiscation of national wealth to normalize their GDP with their capacity to produce) is just not possible (in my view). What am I missing?
I agree Lukey. I’ve just changed one word though, see if you can spot it:
‘The Americans have been living beyond their means for as long as I can remember. The idea that they can solve their economic problems without a contraction in GDP (or an inflationary confiscation of national wealth to normalize their GDP with their capacity to produce) is just not possible (in my view). What am I missing?’
The only difference between the two is time, and a willingness on the US side to destroy their currency to try in vain to save their lifestyle (the inflationary route).
Tick tock.