Tuesday, 14 July 2015

It’s Not Just Greek Government Debt: Government Spending and Easy Money Fuel(led) the Greek Crisis

GreeceThis morning we all woke up to “the Greek deal” heralded in the media and the markets as some sort of “Great Revelation”

– a solution to fix all prior non-solutions, a final fixing of the Greek economy and the end to all the endless bailouts of the past. Of course, cynics noted that solving government debt overhang (already officially recognised by the IMF as unsustainable) by issuing more debt may not be a good idea… but cynics are here to be ignored by the Euro optimists who define their own reality. But never mind all the ‘long run’ stuff. Five hours into a ‘unanimous’ Eurogroup decision on Greece, there is neither much of unanimity, nor much of a decision left.

The “decision”:

  • The Greek government will be – in principle – granted new funding of some EUR82-86 billion … but the actual amount will not be known until there is a full and ‘comprehensive’ assessment of the banks books (to be carried out in September-December 2015).
  • While nothing is certain about this ‘longer term’ EUR82-86 billion package, there are immediate needs for funds that the Greek government has to meet [to repay previous borrowing]: a total of EUR6.477 billion is due to the ECB alone. And before ECB can be paid (a default on ECB will trigger a cascade of cross-defaults and a closing of the banks’ oxygen line, the ELA), the IMF arrears have to be cleared in full. So “bridge financing” is still needed.

The “unanimity”:

The conclusion was: err… no unanimity and:

  1. A new delay in sorting out longer-term financing (from today’s morning expectation of 2 weeks to more realistic 4 weeks); and
  2. There is no agreement on bridge financing.

All sorted then.

Meanwhile, in Germany, where taxpayers are hated the more they’re required to stump up more cash, I have a friend expressing a fairly common sentiment:

Another black day for Europe. While a week ago Motherfakis was calling us terrorists for financing their lifestyle we now caved in again and give them more German taxpayer's money. The lesson learned is that it is not worth going to work - better be a fraudulent bank or government and you get billions thrown at you. The fact that Schäuble wants some securities (like any bank) makes us colonialists at best. Old war time rhetoric is up again and some call for a boycott of German products. Meanwhile the € will further loose value since no-one can take our currency serious any more... I have to stop watching the news...

So as David Byrne might say about now, how did we get here? Answer:

It’s not just the government debt. Because thanks to years of government spending and easy money, the Greek economy long ago turned away from true wealth-generating activities and embraced a bubble economy instead...

Or, in short:

It’s Not Just Govt Debt: Government Spending and Easy Money Fuel(led) the Greek Crisis

Guest post by Frank Shostak

[…] Commentators are of the view that the key factor behind the troubles in Greece is high government debt, which as a percentage of GDP stood at over 177 percent in 2014 against 79.6 percent in 1990.

Greek Government Debt % of GDP

But it is not government debt as such that is behind the current crisis in Greece. Large government outlays and strong increases in the money supply are being ignored in most analyses of the Greek crisis.

Since early 2000, the underlying trend in the growth momentum of government outlays was heading up with the yearly rate of growth closing at 45.5 percent in March 2009. Since then, the trend in the growth momentum has been declining.

Year on year the rate of growth of Greece’s monetary measure AMS stood at 20 percent in July 2004. It stood at a lofty 18 percent in August 2009 before sliding to minus 13.8 percent in April this year.

%chang Greece Government Outlays and AMS

Loose fiscal and monetary policies have been instrumental in the generation of various non-productive activities that have been squandering wealth.

Easy Money Weakens the Wealth-Generation Process

A fall in the growth momentum of both government outlays and the money supply is good for the wealth-generation process.

In other words, a decline in the growth momentum of government outlays and money supply (see charts) has arrested the diversion of wealth to non-productive activities from wealth generating activities.

The current crisis is centered around non-productive activities that can no longer divert wealth from wealth generating activities on account of a fall in both government spending and the rate of growth in the money supply.

From this perspective this is good news for the Greek economy, and what is now needed is a tight grip on government outlays and to allow the plunge in the money supply to continue.

Greece’s wealth generating process has been badly damaged as a result of past loose fiscal and monetary policies. Thus, reverting back to loose fiscal and monetary policies, as suggested by various famous economists such as a Nobel Prize Laureate in economics Joseph Stiglitz, is going to make things much worse.

Remember, neither more government outlays nor more monetary pumping can generate real wealth. Only the strengthening of the wealth generating private sector can do that.

The Damage That Has Been Done

Now, since currently non-productive activities are likely to comprise a large portion of total activities, the effect that is generated from their demise appears to be very severe.

After closing at 122 in April 2008, the industrial production index plunged to 91 by March this year — a fall of 25.3 percent. The unemployment rate climbed from 7.3 percent in May 2008 to 25.6 percent in March this year.

Greece Industrial Production and Unemployment Rate

Any threat to the financial systems of other European economies is not due to the Greek default, but instead is a result of loose fiscal and monetary policies that have damaged the savings bases of various European countries.

Rather than continuing to support wealth-squandering activities and thereby making things much worse, a better way is to allow wealth generators to step in and let them restart the wealth-generating process. This means that all the loopholes of money creation should be sealed and government outlays should be cut to the bone. Obviously such measures will be painful for various individuals employed in non-wealth generating activities. Failing to reduce non-productive activities however will only prolong the agony — it is not possible to create real wealth out of nothing.

Image result for Frank ShostakDr Frank Shostak is the head of Australian research firm Applied Austrian Economics Ltd, and one of the world leaders in the applied Austrian School of Economics. An adjunct scholar at the Mises Institute in the US, Dr Shostak has been an economist and market strategist for MF Global Australia (previously Ord Minnett) since 1986. During 1974 to 1980 he was head of the econometric department at the Standard Bank in Johannesburg South Africa. During 1981 to 1985 he was head of an economic consulting firm Econometrix in Johannesburg.
This post first appeared  at the Mises Daily. It has been lightly edited.

Image source: iStockphoto

1 comment:

  1. I'm curious how reliable any figures out of Greece about production and unemployment (and anything else) are. The only reliable figures would appear to be those that originate outside the Greek system - like how much they owe.

    The Greek bailouts will continue for the time being because the EU's political will to preserve the EU and the Euro are greater than the cost of doing it.



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