Delightful News Out of Greece This Morning (for bankers)

Traders in New York this morning were greeted with this happy headline from The Wall Street Journal:

US stock futures higher; buoyed by Greece

Yes indeed, the Dow Jones index is set to open at least 70 points higher because the Greek parliament approved the additional austerity measures demanded by the European Union, the European Central Bank, and the International Monetary Fund. In exchange for €130 billion in a second bailout by the ”œTroika”, as the three lending institutions are called, Greece will have to cut its minimum wage by 22% and the government will have to lay off an additional 150,000 workers. This is in a country that is in its fifth year of recession, with an official unemployment rate of 21%. Business has virtually collapsed, with many private sector companies on the verge of bankruptcy. The health system is so starved for funds that a bacteria resistant to all medicines is raging through hospitals, forcing the chronically ill to decide whether to even risk seeking professional care. Poverty is reaching extreme levels and is well-entrenched among what used to be the middle class. Children are sent to school so hungry that they are fainting in the classrooms. As of last night, the crowds that were storming through Athens and other large cities no longer were content to throw rocks at the police; Molotov cocktails were used to set at least forty buildings in Athens on fire. The police in Athens, facing crowds estimated from 80,000 to 100,000 people, were forced off Syntagma Square, and appeared to have run out of tear gas. Journalists described the business center of Athens as a war zone. The country is slipping into social disorder, if not anarchy. But stock markets in Europe were up today on the happy news that the Greek parliament approved the additional austerity measures.

One reason equity traders were so delighted with the news out of Greece is because 80% of the bailout money isn’t going to Greece at all; the German and French governments, which are the puppet masters for the Troika, have required that most of the money be sequestered in a fund kept outside of Greece, and used to pay the banks and other bondholders of Greek debt. The bailout, in other words, isn’t really fresh money; it is to be used to allow Greece to make its next principal and interest payment on its debt. Left to its own devices, Greece is out of cash and clearly would have to default on this payment.

A second reason for joy is that most professional traders don’t like Greece (the borrower ”“ they love to vacation there). Most European politicians don’t like the Greek government. Wolfgang Schauble, the Finance Minister for Germany, told a Reuters reporter this morning that ”œGreek promises on austerity measures are no longer good enough because so many vows have been broken and the country that has been a ”˜bottomless pit’ has to dramatically change its ways.” It was Germany that insisted that the Greek parliament approve the new austerity measures, despite the political risk in doing so, before one additional euro would be paid out.

Why don’t the Greek politicians just call it a day and default, pulling themselves out of the euro at the same time so that a reinstituted drachma can give the country a devalued currency with which to build up an export sector? A good many Greeks would like to know the answer to this, since watching the country burn down around them doesn’t seem to impress these politicians. The ostensible reason given by the government for proceeding with one austerity program after another, thereby avoiding default, is that the economic privation resulting from default would be unimaginable. Greek economists are quick to point out that Argentina ten years ago went into default and never suffered the social breakdown Greece is experiencing before default. The more popular reason the public tends to give is that the politicians are all corrupt; there has been no cut in the pay for members of parliament despite several rounds of cuts in the minimum wage. Perhaps a more subtle way of explaining this is that the Greek politicians always liked being part of ”œEurope”, as members of various commissions in Brussels, and as equals to the Germans and the French. The problem now is that there isn’t one politician in Greece who doesn’t feel they are being forced into this situation by the Germans and the French, who are acting very superior to the lazy and profligate Greeks.

Germany in particular is very unpopular now in Greece. The New York Times quotes one 82 year old women out protesting in Athens, Stella Papafagou, a survivor of the Nazi occupation of Greece during World War II:

We’ve fought several times for liberation,” she told the New York Times. ”œBut this slavery is worse than any other. This is worse than the ’40s. I would prefer to die with dignity than with my head bent down.

This is one reason why Greece’s situation is not comparable to that of Argentina. Greece is tied by long and sometimes difficult relations with its European neighbors. As a member of the euro, Greece has the potential to break up the single currency experiment, opening the door to other countries seeking a competitive foreign exchange rate to help overcome chronic trade deficits. These countries, of course, won’t admit to that. Portugal, rumored to be next on the list to need a bailout, has been very quiet about the Greek situation. A German official even said nice things about Portugal last week, though he left no doubt there are economic troubles ahead. Yesterday the Italian government rushed out a press statement letting everyone know they are not like Greece at all. Except everyone knows they are exactly like Greece. They have the same bloated public sector filled with union members who think five hours of labor constitutes a hard day’s work. They are running low on cash to be able to pay their government debt. The only difference with Greece ”“ and it is a big one ”“ is that La Dolce Vita has not come cheap; Italy has the third largest government debt in Europe, dwarfing Greece’s problems altogether.

The Portuguese, the Italians, the Spaniards, the Irish ”“ they all must be watching the Greek situation closely, and asking themselves whether it is really worth going down the road of austerity just to keep bondholders and equity traders 100% happy. Is a collapse of the country worth it all, especially since the worst scenario under default is a collapse of the country, followed by a recovery because now the country would be in charge of its own currency and its own destiny. See Iceland to understand how this can work out with far less social pain.

For now, stock markets are happy because they get their periodic injection of heroin ”“ oops, make that ”œliquidity” ”“ to keep the game going. The game is the one we have all lived through our whole lives ”“ the one where capitalism continues to grow by taking on more and more debt, until now every country is at the point where only the government is big enough to take on the enormous amounts of new debt necessary to keep paying principal and interest on the old debt. At least some countries are: the United States, the UK, Germany, France. Greece of course lost that privilege several years ago, and now even big borrowers like Italy are allowed into the markets only for very short term maturities.

The game, in short, is about over, choking to death on too much debt, kept on a resuscitator by politicians and central bankers who know the public has no way to stop them from raising trillions of dollars or euros with new bond issues. Only the market can stop an out-of-control debtor. Greece has found that out, Italy and Spain and Portugal are close to finding that out, and the UK and the United States are on the list, being no more virtuous than the Greeks. Once the government can no longer borrow, default in some form is inevitable, and austerity follows. The Greeks have austerity handed to them by the Germans; everyone else will be able to choose their own forms of austerity, as different economic and social forces fight with each other in a country that has run out of borrowing capacity and must live off the taxes it is able to raise.

If the stock market had a long term view, it would think about these things. It would look at Greece as a combination horror story and warning sign. Instead, the stock market lives for the day only, and for now the debt binge continues, and the fix of easy credit is being pumped into the financial system once more. Let the celebrations continue.

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Numerian is a devoted author and poster on The Agonist, specializing in business, finance, the global economy, and politics. In real life he goes by the non-nom de plume of Garrett Glass and hides out in Oak Park, IL, where he spends time writing novels on early Christianity (and an occasional tract on God and religion). You can follow his writing career on his website,

38 CommentsLeave a comment

  • “We shall squeeze the German lemon until the pips squeak!”–Sir Eric Cambpell-Geddes, 1919

    After all, what could possibly go wrong!?!

    By the way, what do reductions in Greece’s minimum wage have to do with reducing public debt, and where will all that extra money go when it’s not being earned by minimum wage earners? Will their bosses pay extra taxes or keep the difference? What’s this really all about. . . . . Hmm. . . .

  • and forgive my ignorance here, the u.s. needing to sanitize, probably my word, various new money, that’s what I understood him to be saying, by keeping it out of the regular economy so as to prevent inflation. I seem to recall various swaps of paper between the oil producers and u.s. which would leave oil producers or whomever holding some bag of less valuable money.

    I am imagining a monetary reality where there are two pretty much separate streams of money flowing. A real economy of you and I spending dollars at the grocery store and gas station and another one of banks and finance participating in a global casino of traders or trader corporations passing/trading around of trillions of dollars and each trying not to be left holding a bag of bad debt, so they demand that governments, essentially controlled by them, keep keyboarding new money to inject into their flow, to cover an ever spiraling cycle of increased debt. And since inflation is enemy number one, well maybe after defaults, they dare not allow “their” money fall into “our” hands. Hence their irrational, from our view, love for austerity. It’s almost as if they want to lend us money but not to ever get paid back. They want us, via our governments, to be in debt to them. They don’t want to be paid back because they do not know what to do with money except lend it out to create debt. And now that they no longer trust us to be productive with the money they lend, it’s all done in a “sanitized” way with our government.

    Why do they buy government bonds anyway? The government is not a productive entity. It does not create wealth to pay back bonds. They buy bonds because it is perceived as a safe place to park money. The government’s monopoly on violence, in theory, guarantee’s that it can force its subjects to pay the bond debts back. Well yes subject to the limits of the economies of real people creating real wealth. A reality that is quickly being obscured by the sand swiftly covering their heads.

    Of course, at some point the world wide debt in “their” stream of money begins to exceed the world wide ability of “our” economy to pay. Remember a quadrillion is only a thousand trillion. Except that now with computers there is literally virtually no limit to the number of zeros that a government can “produce”.

  • Greece got a near 70% writedown of their debt together with the 130 billion euro infusion of cash.

    Those were the grown up terms and they took them. The alternative being what exactly? Dropping out getting no infusion of cash, defaulting on the current notes. Losing Euro status, watching all their existing euros flee the country and having NO MONEY AT ALL TO PAY THEIR PENSIONS, ETC.

    The deal was sweet ultimately.

    Spain is improving.
    Italy is fine if they can keep rates low (something the US can actually influence)
    Portugal is dodgy but also somewhat smaller
    Germany keeps getting better so there is more money to throw at the PIGS of Europe
    Markets are stronger because they might get through this

  • that you hate the Greek people (i mean, you’ve repeatedly called them lazy and pretty much worthless, and you know, because you took a vacation there once).

    So, forgive me if you’re basically the last person i’d trust … right up there with a German banker … to give an honest assessment of the situation.

  • Yet.

    Two-thirds of their parliament passed the measure, thereby moving the entire process as I describe into motion. So I guess its not just me who hates them greeks.

    You think the adults in the room know keeping the Euro alive is pretty big shit.

    It’s better than Extend and Pretend, which is obviously your model.

  • Greek comment I read was from a protester who said that parliament should be made to live on 300 euros a month before they demand more concessions from the Greek public.

  • “They’ve all sold out in there, they should be punished,” said Makis Barbarossos, 37, an insurance salesman, as he waved a cigarette toward Parliament on Sunday. “We should put them in small, unheated apartments with 300-euro pensions and see, can they live like that? Can they live how they’re asking us to live?”


    and big deal that their parliament passed it, our govt passes bad shit all the time

  • they would have as much money as they needed to pay their pensions, since those pensions could be paid in drachmas that the government and banks could supply. They wouldn’t have to turn to the markets to raise the funds. The only problem would be how likely foreign countries would be to accept Greek currency.

    The deal is not sweet. It is killing people and wasting lives for the purpose of debt refinancing. What’s more important, people or money?

    The “grownups” in your scenario have ideological blinders on and believe that saving the Euro is more important than saving the Europeans. They are committing a deadly mistake by taking the austerity route.

  • Every piece of legislation that the US Congress has passed was for the good of the country. Because the appropriate number of Senators and Representatives voted to pass it, it must be good. They’re the adults and the people losing their jobs, not able to pay rent, eating rice and beans, and complaining about it are all just children, too spoiled and impatient to see the good works of the adults.

  • and re-read some of Stirling’s writings on that, but I think you’re largely right. The idea was that the oilarchies would develop into bottlenecks for the world’s money, since everyone needed oil and there were only a (relatively) small number of countries with a small number of people at the top who could supply it in the necessary volumes. The current arrangement has them taking much of their funds and, rather than using it to develop their own countries, they re-invest it in the US. I’m not sure I agree with his thinking about inflation, but I’ll have to go back and re-read. Maybe he meant price inflation in oil, in which case I’d agree–developing the economy of, say, Saudi Arabia (which would happen if the oilarchies were to invest their money in their people rather than security and US assets) would lead to higher wages, more oil consumption, etc. and therefore to higher prices on oil. Basically, keep them from consuming much of their own product and keep the people of the oilarchies powerless to overthrow their regimes.

    The government is not a productive entity.

    I’m assuming here (and below) that you’re talking about the US federal government. In which case, yes it is productive… where are you getting this from? Also, it could be made more productive if that were deemed socially acceptable. In the current climate, it isn’t.

    It does not create wealth to pay back bonds.

    Agreed, it creates wealth for public/social utility (ideally–reality is somewhat different). It does not need to create wealth to pay back bonds because it can always pay its bonds.

    They buy bonds because it is perceived as a safe place to park money. The government’s monopoly on violence, in theory, guarantee’s that it can force its subjects to pay the bond debts back.

    Yes, they are very safe investments. Bonds can be thought of as safety investments and also a form of government welfare for bond purchasers–they support the revenue streams of institutional investors and can yield them more money over time with interest.

    The federal government does not need to force its subjects to pay the bond debts back, because it does not need their money to pay for the bonds. If we were still on the gold standard then you’d be correct, as the choices are either raise taxes to bring more money into the government or debase the currency by raising the dollar-to-gold ratio.

    Since government money is currently fiat, it is always good on making payments if the legislature is willing to make them. The main concern is allocation of funds and whether or not the total amount of money being spent in the economy is giving rise to undesired inflation (and how much government spending is contributing to this).

    Of course, at some point the world wide debt in “their” stream of money begins to exceed the world wide ability of “our” economy to pay. Remember a quadrillion is only a thousand trillion. Except that now with computers there is literally virtually no limit to the number of zeros that a government can “produce”.

    Credit is created and spent, while debt is created and destroyed–but it can only be destroyed through repayment or bankruptcy. When credit is extended, an amount of debt is created that is supposed to be repaid. The problem as I would explain it is that more and more of the extended credit is actually used to gamble and construct Ponzi schemes, and this credit will never yield a money flow that is capable of repaying the debt. At the same time, debt is sold and moved around to people who may not know how reliable the debt is (as a guarantee of future revenue).

    When the speculative credit gamble falls through, that credit is gone (spent into the system)… but the debt remains. So you get enormous levels of debt piling up and nothing to show for it. Eventually, a crisis occurs and there is so much debt piled up that everyone freezes and goes into emergency belt-tightening mode. Then the economy falls off a cliff because money circulation slows and you get those viscous cycles of less spending leading to fewer sales, leading to layoffs/budget cuts, leading to less spending, etc.

    Governments could produce as much money as they wanted in the past as well. It’s just that the consequences were different from today. We are potentially much freer today with electronic fiat money, though in reality our political system is using it to keep us in chains.

    Wow, this was a long comment… 🙂

  • What prevents the US government from spending money without borrowing it from creditors in the first place? And what would be the consequences?

  • This is the best Greece can hope for, folks running through the streets notwithstanding. What are the alternatives?

    Go ahead and leave the Euro. Within hours the euros in the country would flee. The new drachma would face drastic devaluation. It would make the agreed to cuts look like a pittance. I would anticipate inflation of 50% in the first 12 months.

    The markets would value any new drachma at less than half the value of the euro. There would be an offset of the low prices benefiting exports bringing in needed currency. But for workers they would all be working for HALF as much.

    Greece could default: They have just negotiated about a 70% writedown as part of the deal and new currency that in part covers interest costs through 2020. What better deal is there, its 70% of the way to default. A 100% default occurred in Argentina, but there the difference ends. Greece has nowhere near the resources of Argentina, and no threat of transitioning out of their currency.

    The deal as outlined leaves Greece with the Euro, a writedown, and bailout that leaves the country left with debts worth 120% of GDP, and with some currency to make interest payments.

    Exactly what else could be done, and what are the alternatives?

  • Would it hurt you to actually supply some evidence for your assertions? Or is this yet another instance where other people have to prove that you’re wrong – and you get to decide (iow, yet another round of “If you can’t make me say I’m wrong I win.”)? Yes, the burden of proof is asymmetrical – but it’s not in your favor.

    “He deserves death.”
    “Deserves it! I daresay he does. Many that live deserve death. And some that die deserve life. Can you give it to them? Then do not be too eager to deal out death in judgement. For even the very wise cannot see all ends.”

  • when one believes that nations should not control their own currency. I don’t believe this. It’s much better for Greece to restart its own currency and begin spending in it. Even if its valued at half the Euro, the government could at least begin hiring back workers, institute a jobs program to help people until the private sector recovers, and provide for the basic welfare of the people. There would be difficulties importing foreign goods, since prices would be so high, but that can be worked on over time.

    Besides, the people of Greece have very little left to lose… As it stands now, the bottom 90% of Greek households have lost, on average, 45% of their annual income in 2011 alone. Unemployment is past 20%. This is not a good deal. This is a shit sandwich.

    Again: If they got off the Euro, the government would suddenly have the funds it needed to support the people. It could orchestrate a restart of the private sector, provide monetary payments to those who need them, and generally get things running again. Instead, the government has its hands tied and the people are being told that they will spend the next decade or more living miserable lives, dying early, and generally decaying into a 3rd world country. And for what? Money. Tokens of exchange. If Greece had its own currency and denominated its government debt in that currency then it would not have to worry about whether or not it’s solvent. It could always pay, though the consequences of issuing more debt would have to be evaluated.

    Never mind that the country has an able and willing work force. Never mind its capital resources (small though they may be) or natural resources. No, let’s leave them idle or working at low capacity so we can enrich a bunch of bankers in foreign nations. This is a very straightforward case of reality bowing to ideology, and the human costs are enormous. It is debt peonage on a national scale and it will lead to either violent revolution or long-term misery. And it will be exported elsewhere, to Ireland, Spain, and Portugal. It’ll probably even make its way to the US in some form–probably just austerity, but that will be ruinous enough.

  • afp
    Posted: 14 February 2012 0729 hrs

    WASHINGTON: Moody’s on Monday downgraded the debt ratings of Italy, Spain and Portugal and placed negative outlooks on France, Britain and Austria, blaming the ongoing fallout from the eurozone crisis.

    Ratings were also cut for Slovenia, Slovakia and Malta, with Moody’s saying all nine countries were increasingly susceptible to financial and macroeconomic risks from the euro area crisis.

    Moody’s said that Europe’s weakening economic prospects “threaten the implementation of domestic austerity programs and the structural reforms that are needed to promote competitiveness.”

    The agency questioned the implementation of institutional reform in the euro area and whether adequate resources will be pulled together to deal with the crisis.

    Moody’s said those factors will keep market confidence fragile “with a high potential for further shocks to funding conditions for stressed sovereigns and banks.”

    “To a varying degree, these factors are constraining the creditworthiness of all European sovereigns and exacerbating the susceptibility of a number of sovereigns to particular financial and macroeconomic exposures.”

    The downgrades came a day after Greece and Europe appeared to pass a major hurdle when the Greek parliament agreed to a tough austerity package despite rioting in the streets of Athens and other cities.

    That appeared to open the way for a comprehensive debt restructuring and second massive bailout of the country, avoiding a default that could have sparked more turmoil in the eurozone.

    In the ratings, Italy was cut one notch to A3 from A2; Spain two notches to A3 from A1, and Portugal one step to Ba3 from Ba2.

    Slovakia and Slovenia both went down one step to A2, while Malta moved one step to A3.

    Austria, France and Britain all remained with the top AAA rating but were put on negative outlooks, a warning that if conditions worsen they could be hit with full downgrades.


  • The US certainly spends money not sourced from debt; it comes from taxes raised. The problem is of course that the US spends much more beyond the amount of tax revenue, and that excess expenditure comes from debt. So technically, there is nothing technically preventing any government from spending the money it receives in taxes.

  • I’m sure ScotJen61 will have many sage things to say when the Greek civil war causes eruptions all around the Eurozone, about how it was all inevitable and unavoidable, and if only they’d seen their dying children were an unnecessary line item, and something about the sanctity of bond holders, and adults use their quiet words instead of assassinating central bankers, and it’s not his problem when people are put in situations that would make him eat his own dog.

    How lucky, lucky, and wise, yes, that the Greek parliament has voted to let the European Central Bank to use them as a conduit to give billions of Euros to the European Central bank’s buddies in the private banking market, and call it a “bailout,” but not a single one of those billions will benefit any regular Greek citizen.

    The alternative to a 70 percent default is a 100 percent default. The alternative to colossal stupidity and shit headedness and civil war in Europe is for the Greeks to hang every banker with the entrails of their politicians from every lamp post in Syntagma Square and leave the Euro. And a far better alternative it is, too. What’s Germany going to do, invade Greece?

  • With economics it seems the more I learn the less I know.

    I’m hip to the fiatness of money and nearly added a riff off of that line as well. But I didn’t see a good opening in Numerian,s line of play.

  • Debasement of the currency, that sort of thing.

    It’s the part of MMT I haven’t fixed properly in my mind. How does MMT avoid this? idk.

  • that they would be paying attention and adjust the creation of fiat money accordingly. However, isn’t the assumption that inflation would be a product of an overheated economy? Too many dollars chasing too few goods? Then don’t you soak up excess dollars with high interest rates on bonds (ala Carter/Reagan) or even through higher taxation? That is to say run a government surplus. Wasn’t that one of the fears of the Clinton budget surpluses, that they would take too much money out of the economy?

    Help is out here bolo.

  • Is it necessary for the US government to issue debt to cover the difference between taxes raised and spending? What if a government didn’t do this (or just didn’t issue enough debt to cover the difference) but just spent needed money? What would be the repercussions?

  • Beyond taxation, the government has no immediate means of raising revenue – let’s call it cash – other than through debt issuance. In any given fiscal year for the US Government, revenue from taxes plus revenue from debt issued during the year should equal expenditures. On the margins there are some things that change this equation. Fees raise a considerable amount of revenue for government these days, especially for local governments. Then there are imposts and duties, such as on imports. A less immediate way to raise revenue is through assets sales, such as if the US wanted to auction off Yellowstone Park (there is a lot of facetious talk that the Greek government is going to have to auction the Acropolis).

    On balance though, the history of US government finance since the 1960s has been the increasing reliance on borrowing to finance spending.

  • is that inflation comes from many places (this is not controversial), but that one of the last places it comes from in a fiat, credit-based monetary system is the money supply itself (this is controversial).

    You will run into inflation due to expanding the monetary base when the economy is running hot–when almost everyone is employed, when almost all capital is utilized, etc. The economy cannot respond quickly to additional spending by activating slack capacity, so instead the extra money goes toward bidding up prices and you get inflation. This is referred to by Bill Mitchell as “hitting an inflationary barrier.” A dynamic economy will eventually adjust by expanding capacity, etc., but there will be inflation from this source in the short/mid term. A dying/stagnant economy will not expand and will see persistent inflation–stagflation, which is business as usual in poor countries (note: this last statement is a merging of perspectives from both MMT and Jane Jacobs).

    Note that monetary inflation will likely occur before the whole economy runs hot anyway, as there are often bottlenecks of supply (say, oil) or powerful sub-groups that will get their hands on money to speculate on prices (Wall Street).

    One final note: The economy’s money supply is “endogenous.” This means that it is not determined by some outside entity (i.e. the government). Instead, the supply of money is dictated by both government spending/taxation and the sum total of private sector decisions–bank loans/debts, firm decisions, household decisions. The money supply is not under the control of the government, though the government can have an impact if it were to, say, give every American $1 billion dollars. It can also decide to act as a stimulus or drag on the private sector by running budget deficits or surpluses, respectively.

    But under more sane scenarios, government spending will not lead to inflation unless it drives us into an inflationary barrier where the larger economy cannot respond (in terms of real goods and services production). The way this can be prevented is by taxing the private sector to make room for public sector spending, averting inflation (well, from this source) and allowing public-goods spending to occur.

    I think that last point may be a weakness of MMT though–if the money supply is endogenous, its difficult for government to tax appropriately to make room for its spending, because the money supply is not under its control. Maybe they have a solution to this… not sure.

    So, all this says that you must think about the type of monetary system (fiat, commodity, etc.), the type of money that is created, who creates it and what rules they operate under, what supply bottlenecks and powerful interests groups exist, whether the economy is dynamic or stagnant, and more. You can’t just say “government creates money = inflation = bad.”

    I should try to write a full post about this stuff sometime soon. For those interested, my reading sources have been Bill Mitchell’s Billy Blog (MMT), Steve Keen’s DebtWatch and his book “Debunking Economics (2nd Ed.)” (anti-neoclassical economics, plus some fascinating insights into alternatives), David Graeber’s “Debt: The First 5,000 Years,” and various texts by Jane Jacobs and Thorstein Veblen. I’m still reading through Graeber, and still have a ways to go with some of Veblen’s stuff.

  • The surplus does take money out the private sector economy. If the economy is overheated then its a way to cool it down. MMT’ers argue that the Clinton budget surpluses did take too much out of the economy and crashed it as a result. Given that the economy was already speculating wildly (Dotcom bubble) I think that may have been a good thing in the long run–though the best option would have been to keep a lid on the speculation in the first place.

    There may be some problems with this aspect of MMT due to money supply being endogenous (see my comment below). I’m not sure how they address this–I’ve seen Bill Mitchell mention that money supply is endogenous (so he acknowledges this), but I don’t know how that gels with the policy prescription of taxing to cool the economy. The government may not have that level of control.

  • without borrowing it? Deficit spend without issuing debt? What prevents the government (federal govt here, not talking about states) from doing this?

    Why does it need to raise revenue before spending?

  • The Guardian

    With every day of prevarication and grandstanding over the future of Greece, Europe’s power-brokers are nudging the crisis-hit country closer to the emergency exit.

    If Angela Merkel, Nicolas Sarkozy and the Brussels elite were deliberately trying to prolong the agony for Greece’s battle-scarred political class, they couldn’t have done a better job.

    After Lucas Papademos finally delivered a deal on the latest package of savage austerity measures last week, following tortuous negotiations with his coalition partners, he might have hoped for a quick rubber stamp from the “troika” of the EU, IMF and European Central Bank.

    Instead, he was sent back to the drawing board to come up with another €300m-worth of cuts, against the backdrop of violent street protests.

    Not only that, but his opposition partners were warned that they too must sign up, binding future Greek governments of whatever colour to detailed plans laid down by Brussels and Berlin


  • It was not too long ago that the nationality of the migrant workers in Holland and Germany was Greek or Spanish. It appears Greece’s and Spain’s episode of prosperity in the EU was merely a brief flirtation. Migration to richer pastures may occur again.

    “OTP – Occupy The Patriarchy” ~ me

  • The government is like any other organization; cash flow is the be-all and end-all of finance. It is ultimately the only thing that matters, especially when an organization gets into financial trouble.

    If the government does not have the cash in its accounts (which by the way are called Treasury accounts and are held at big banks around the country, plus at the Fed), the government cannot make payments.

    This is much more evident in the US states rather than at the federal level, since states must constitutionally have a balanced budget. States can borrow, but cannot deliberately create a budget deficit like the federal government can. Even then, their borrowing capacity is much lower than the federal government since their tax base is much smaller.

    To see how cash matters, look at California or Illinois. California had to issue IOUs to its workers rather than pay their salaries when it ran out of cash a few years ago. It is threatening to do the same again. Illinois is withholding payments to suppliers because it is low on cash. As an Illinois resident, I am still waiting for my 2009 tax refund. Since these states can no longer borrow on the public markets, they have to keep their spending within their revenue at any one time – otherwise they run out of money at the bank, literally (and the banks are not going to give these states big overdraft privileges, which is a form of a loan anyway).

    The minute the federal government gets frozen out of the bond market, its situation is the same. It will have to pay out only what it can take in. At least the states can rely on some revenue from the federal government, but even that is now drying up. There is no one to bail out the US government once the bond market shuts down for Treasuries. Then we will have to literally live within our means.

  • … called the PRINTING PRESS. It’s *only* five hundred years or so old, I know, I know, a fairly recent innovation, but still.

    So there’s two ways you can get money: 1) By removing money from circulation (i.e., taxes or borrowing which removes money from circulation at least *temporarily* though hopefully the money eventually makes it *back* into circulation, unless it’s going into the pockets of foreign banks), or 2) by adding money to circulation (i.e., printing). Which one you want to do depends on what the money supply and inflation are doing. If the money supply is exploding because banks are lending, you want to remove money from circulation. If the money supply is shrinking because banks are contracting lending due to defaults (or because, in this case, all the money is fleeing to European banks outside Greece), you want to print money.

    This is all Keynes 101, and well proven in the Great Depression — i.e., when you have slack resources in an economy (and 20% unemployment is definitely slack human resources), printing money is the correct thing to do, because you will not see price inflation until those slack resources are taken up by the economy. Greece’s problem is that they *can’t* print money — only the Bundesbank is allowed oops European Central Bank (my bad, I keep forgetting! I mean, yes, it’s run by the same authoritarian Germans as the Bundesbank was, but … !!!). Well, you know, there’s a solution to that. A solution the Germans will hate, but is that a flaw, or is that an advantage? Since when are Germans allowed to run Europe anyhow? Didn’t we, like, fight a couple of World Wars or something to stop that from happening?

    My take: Enforcing deflation — which is the SAME THING as enforcing the stripping of all productive assets from the Greek public and transferring them to the ownership of foreigners — is only going to be enforcible at gunpoint. Either the EU is going to send troops into Greece to enforce a dictatorship, or the whole country is going to disintegrate and you’re going to see bodies swinging from lampposts of any politician who voted for this thing. The end game is going to be the same — a Greece that’s on the drachma, with a different government altogether — whether it’s now or later. All we’re doing now is squabbling over how long that can be delayed because every moment it’s delayed is one more moment in which more of the assets of Greece can be transferred into the hands of German and French owners.

  • The original question had to do with ways in which the government, meaning for the US the US Treasury, can spend dollars beyond what it receives in taxation. Borrowing through the issuance of bills, notes and bonds is by far the largest source of non-taxation revenue.

    Bringing the central bank into the picture mixes up fiscal policy with monetary policy. The central bank can print money, theoretically in unlimited amounts, but practically there are limits on such activity (and we are seeing them now in action – look at the just-released minutes of the Fed from January’s FOMC meeting).

    The Fed can print money “out of thin air” by crediting its member banks with additional reserves, or another way to use your analogy, reducing available cash in the economy by buying member bank assets in exchange for crediting them with reserves. This is exactly what has been happening since 2007 with the QE1, etc. programs. In the first program the Fed bought some very dicey mortgage securities and even some hard real estate to remove this trash from the banks’ balance sheets and transfer on to the backs of the American people. The reserves it gave to the banks didn’t just sit there, but they certainly didn’t get lent out to the private economy. Instead, banks bought clean, safe, Treasury securities and made a 2% spread guaranteed profit.

    Here is where the interplay exists between the Fed and the Treasury. If the banks have less trash on their balance sheets, lots of cash to spend, and a desire for safety, they buy Treasuries. This gives the US government that much more borrowing capacity than it had. In fact, you begin to see in 2007 that this process helped the US government continue to borrow at a time when China and Japan were getting nervous about holding so many Treasuries and begin to limit their purchases (they are still doing so).

    All this indirectly feeding of reserves to banks who then bought Treasuries exposed the Fed to legitimate criticisms that it was enabling Congress to add to the deficit in a big way. In other words, it was monetizing the deficit. Even Fed governors are admitting that happened, and several Republican presidential candidates have criticized the Fed for monetizing the deficit and taking fiscal pressure off Congress and the White House. By the way, traders hate seeing any central bank buying up their own government securities directly or indirectly, because it almost always leads to inflation. Hence the big run up in gold and other commodities once the Fed began these QE programs.

    As to your comments on Greece, it is hard to get away from the image of the Germans as trying to force Greece into some colony where Berlin gets to determine Greece’s borrowing, its spending, and even its social policies. Even the Greeks are now beginning to see how much they are being asked to give up so that this charade of bailing out Greece (when it is the banks being bailed out) can continue.

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