Tuesday, 11 May 2010

Greece is the word [update 2]

Greece is “rescued.” One trillion dollars worth of paper. “Europe’s TARP”… and we all saw how well that worked. 

The billion-dollar bailout (a seven-fold increase in just one day) is the signal sign that at the heart of the Euro experiment is the morality of welfare economics that’s dragging down country after country: a system that turns one nation’s “need” into an international claim—that makes resort to inflation “easy, smooth, and above all respectable.” A system promising that those who’ve been profligate will always be able to send the bill for their blow-outs to those who haven’t been; and that to “defend” that currency the strong will always have to stand ready to bail out the weak.

It’s the morality of sacrifice turned into international economics.

Seeking sanity amid the flags and banners of approval at this latest paper shower propping up all the bad positions (which explains in itself most of the cheering from those being propped up), I offer you what sanity I found midst the dross:

_quote Once again the vast majority fails to see a crisis in the making, even as it stares at them from close range. Just as market observers in 2007 told us that the credit crisis would be confined to the subprime mortgage market, current analysts tell us that sovereign debt problems are confined to Greece, Spain, Portugal, and perhaps Italy. They were wrong then, and I believe that they're wrong now.”
            - Peter Schiff, quoted at The Rational Capitalist:
              “Schiff: Is Sovereign Debt Crisis Contained to Subprime?

_quote Basically the European Central Bank is monetizing bad government debt claims.
         - Tyler Cowen, writing at Marginal Revolution:
          “Simple thoughts on Europe

_quote As we see the market rally this morning on news of the near-trillion dollar European bailout, we should keep this point in mind.  What's good for capitalists is often NOT what's good for capitalism, not to mention the long-term well-being of most of the citizenry…
    “The desire for ‘stability’ is indeed the siren's song of the end of freedom.”
            - Steven Horvitz, writing at The Coordination Problem:
              “The "Siren's Song of Stability," European Version

_quote  At a cost of [one-trillion dollars], Europe will pretend to protect Greece from its creditors and the Hellenes will pretend to put their financial affairs in order. Instead, the Greek affair will slide into a larger crisis. As we explained last week, all of modern macro-finance can be understood as an attempt to push problems into the future and onto people who were not to blame for causing them. Now we see the formula at work in Europe.”
            - Bill Bonner, writing at The Daily Reckoning:
              “Say You Want a Revolution?

_quote Notice also that the capital that is used to provide the bailout goes from the hands of savers into the hands of bondholders who made bad investments. We are not only allocating global savings to governments. We are further allocating global savings precisely to those who were the worst stewards of the world's capital.”
            - John Hussmann, linked at Mish’s blog:
              “Greek Debt and Backward Induction

_quote The European Central Bank has flunked the first major test of its independence and its commitment to the single goal of low inflation. It announced yesterday, in so many words, that it will print as much money as it takes to keep prices up and yields low on government bonds issued by Eurozone governments… 
    “This is a solvency crisis, not a liquidity crisis. Eurozone government bond yields have risen not in a scramble for liquidity (base money), but with an upward revision in estimates of default risk. Monetary expansion treats the debt problem only by inflating away the value of the euro.
    “’We are going to defend the euro, [Spanish Finance Minister Elena] Salgado told reporters…  Defending the euro is in fact the opposite of what the ECB has announced it will do. Salgado is not telling the truth. Either she know she is lying, or Europe's fiscal authorities really don't understand. If the ECB is now following the lead of the fiscal authorities, neither of the two possibilities bodes well for the euro.”
            - Larry White, writing at Division of Labor:
               “The value of European government debt is not the value of the Euro

_quote This is a whole new level of global moral hazard - the result of an alliance of convenience between troubled governments in the south of Europe and the north European banks (and implicitly, north American banks) who enabled their debt habit.”
            - Peter Boone & Simon Johnson, writing at The Baseline Scenario:
              “Eurozone: The Kitchen Sink Goes In – Now It’s All About Solvency

_quote Contagion, or contagion theory, is sweeping the euro zone, where Greece’s debt crisis is infecting neighboring countries and threatening to make its way across the Atlantic to U.S. shores.
    “At least that’s what we’re told on a daily basis…
    “I hate to pour cold water on that theory, but healthy countries aren’t susceptible to Greece’s disease…
    “On the other hand, it would be a mistake to interpret the flight-to-quality into U.S. Treasuries last week as a sign of immunity. The U.S. is already infected with the debt virus. It’s still in its incubation period.”
            - Caroline Baum, linked at Mish’s Blog:
              “Greek Contagion Myth Masks Real Europe Crisis

_quote Being Keynesians, the majority of economists primarily only consider aggregate demand/consumption to discern the economy's condition, rarely parsing the relative contributions of the private and public sectors and the sources of growth of consumption, and most always with the assumption that incremental government borrowing and spending will pass through or kick start and sustain private economic activity for the cycle.
    “But when private debt growth and associated increasing returns to financial capital have been the primary source of growth since the early '80s to early to mid-'70s, increasing government borrowing and spending to make up for the loss of debt growth in the private sector only results in government debt eventually growing faster than exponential vs. incomes, production, and GDP, setting the stage for fiscal insolvency atop private sector debt-deflation…”
            - “My Friend BC,” quoted at Mish’s Blog.

_quoteI own the Euro, I hope it rallies. There are gigantic short positions in the Euro, but I would have said that a week ago too and it went down. In the end, I don`t think the Euro will survive, 10 years, 15 years from now. But at the moment it will probably have a rally"
             - Jim Rogers in Bloomberg, May 10

_quote German Chancellor Angela Merkel says this action was necessary to fight a Euro short selling syndicate. ]The eurozone's member states showed yesterday that we have a common political will to do everything for the stability of our common currency,’ she said. ‘This is a determined and united message to those who think that they can weaken Europe.’
    ”I have news for the Chancellor: you are merely building a bigger problem that ultimately will result in a bigger failure.”
            - Bill Cara, writing at his blog

_quoteWhat seems to escape every one of these fatuous macromancers is that, for years now, Greece has been the very essence of Keynesian folly: that the heavy hand of the state, by distributing a corrupting largesse derived from the government-supported evil of fractional reserve banking and constituted of laughably mispriced, fiat-money lending, had so successfully ’stimulated’ the country and artificially boosted the shibboleth of its GDP that it is now reduced to a state of penury so extreme — and is plagued with a false sense of entitlement so engrained — that all conceivable solutions to its woes now seem like bad ones.”
            - Sean Corrigan, linked at The Cobden Report:
              “Greece has been the very essence of Keynesian folly

_quoteThe Wall Street Journal reports on the issue, noting that American taxpayers [and NZ taxpayers!] will be involuntary participants thanks to the financial world’s keystone cops at the International Monetary Fund.”
           - Daniel J. Mitchell, writing at the Cato Blog:
             “Europe’s Über Bailout

_quoteA German reporter with a very poor, or very excellent, sense of humour has been handing out the old Greek currency (Drachma) to Greeks on the streets of Athens, just to record their reaction. He obviously didn't expect to get the worthless paper torn from his hands – literally.”
            - Nickolai Hubble writing at The Daily Reckoning:
              “Chaos No Longer a Theory

_quoteAs the crisis continues in Europe, one aspect remains unmentioned: Why are the Germans the focus of the debate?
    “The answer is of course that they are the Eurozone's centre of growth, stability and fiscal responsibility. Sadly, they gave up their role as the monetary standard of Europe with the Euro. Still, it is the Germans that the world is looking to when it comes to Europe's fiscal crisis.
    “But how did this come to be? Less than a lifetime ago, Germany was little more than a mound of rubble with some metal scraps mixed in…”
            Read on here for the only good-news economics story you’re likely to hear today . . .

UPDATE 1: Who’s been living beyond their means, then?  Here’s a good wee picture of the world’s government debt bubble. It’s easy to see that the counties living most beyond their means are those who’ve been most devoted to the (Keynesian) welfare economics that’s now destroying them.  The colour gives the the debt of the country’s government as a percentage of GDP (i.e., their ability to pay it back); the size shows the absolute size of that debt (i.e., how much everyone else stands to lose when they don’t). Just take a look at the size of Europe.  And Britain…


PS: The tat tip for the map goes to what looks like a surprisingly economic literate British MP, a chap called Steven Baker.

UPDATE 2: Matt Nolan corrects my prose with a point he earlier made here:

    “[The picture] is only telling us government debt as a % of GDP I believe - weirdly, overseas they often called public debt national debt. If we took private + public debt NZ would look a lot bigger ;-)
    “And if we looked at the more important net private+public debt (so taking away assets) NZ looks very ... special.”

I don’t think he means “special” in a good way.


  1. "The colour gives the the country’s debt as a percentage of GDP"

    It is only telling us government debt as a % of GDP I believe - weirdly, overseas they often called public debt national debt. If we took private + public debt NZ would look a lot bigger ;-)

    And if we looked at the more important net private+public debt (so taking away assets) NZ looks very ... special.

  2. PC - The question I have asked myself over Greece's problems, and to some extent New Zealand's on going welfarism is this.
    In the short term (5-10 years?) this will be better for me. My job and company will be more profitable, I can bank some gains, be closer to retirement, and when the shit hits the fan be sunning myself on the Gold Coast. Should I make hay now while the sun shines? Or shall I go through years of lost income, bad debts, struggling financially and then retire with no money just as the climate is coming right?

    David M

  3. The Euro Bank moved to halt round two of bank meltdowns. Banks hold Greece's debt so the bailout is again for banks, not for Greece.


  4. David M

    You can try. Trouble is that unless you are very very careful with your savings they'll be completely eaten away by monetary inflation. Think about the cost of living being an order of magnitude or two more expensive than it is presently, with tax increases to match, and you'll get the picture.

    God luck.



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