Has the Jury Reached Its Verdict?

The hypothesis: austerity now will increase growth rates because businesses will invest because they will be confident that interest rates (or inflation, or something) will remain low.

The counter-hypothesis: austerity now will reduce growth rates (which can go below zero) because the government will spend less and tax more, which will cause businesses to be uncertain about having enough demand for their products, and thus to hold off on investments.

The test: austerity.

The results: Austerity has reduced growth because the government is spending less and taxing more, which has left business uncertain if they will have enough demand for their products and causing them to hold off on investments.

The verdict: suck it, austerians.

Ancora! Ancora! Ancora!

While there seems to be a temporary lull in Eurozone action, I don't think the developments on Friday and over the weekend amount to a turning point.  Installing "technocratic" elites doesn't make a lot of sense, because it was unaccountable technocrats who created the mess in the first place.  That the specific technocrats have links to Goldman Sachs, which arranged the accounting fraud that allowed to Greece to enter the Eurozone in the first place, doesn't inspire confidence, either.  Stergios Skaperdas has written another op-ed on Greece leaving the Euro.  I wish Greek politicians would read it but, like national-level politicians everywhere, they seem to be tightly encased in their own little bubble.  Even when they make noises about the austerity being imposed on the country, it is to position themselves in the next election, not because they have a better alternative.

The most immediate impact of the change of Prime Minister in Italy has done is given everyone a chance to write about how awful Silvio Berlusconi has been for Italy.  It's not a new topic; people have been writing about Italy's Murdoch+Buffett for years.  A lot of Italy's "structural" problems would have existed if he had stayed out of politics.  And some of the uniquely Italian problems have been around for decades.  But having as Prime Minister someone who was arguably in politics to keep himself exempt from prosecution as much as anything else has taken amoral familism to a new level.

So while having Silvio gone will improve Italy's long-term prospects, in the immediate future the problem is basically one of math.  Unless bond rates come down, and the economy either grows or inflates (a.k.a. currency devaluation), Italy will probably join Greece in exiting the Eurozone.  The problem is that the economy is unlikely to grow fast enough to convince bondholders to accept lower rates.  And the ECB is still the ECB, so it's unlikely to help in one way or another.   That has prompted more calls to end the common currency.  Both a recession in Europe and a collapse of the Euro would affect the United States, something the country can't really afford on top of our own past and potential future stupidity.

Mio Dio, Cosa Hai Fatto, Silvio?

The ever-wise markets seem to have skipped ahead in their script by a few countries, because today the world woke up to find Italy on the verge of financial ruin.  Or at least that's what everybody is saying the markets are saying.  Unfortunately, as long as everyone believes it to be true, it's likely to come true.

I find it suspicious that right after the Greek mess has been "resolved" that the Italian crisis would suddenly come to a head.  Shouldn't the agreement of the Greek parties to unite to screw the Greek people give everyone else at least a few weeks of relief?  Apparently not.  Nothing else about Italy's underlying financial condition, which isn't that bad, has changed since last week.  But sharply increasing yields means that whenever Italy has to roll some debt, which most indebted countries do on a regular basis, it will have to pay substantially more.  Thus the problem in Italy has become self-fulfilling.

The failure to resolve the crisis is mostly the European Central Bank's fault.  It has basically refused to do the job of a proper central bank, which is to regulate the macro economy for the greater good.  The origins of the crisis are much more structural, which quite a few people still don't understand.  But rather than do the right thing and forgive gobs of debt, or exit the Euro themselves, the core Eurozone countries may be to be planning to kick the GIPS countries out.  I can't see how that would be a good solution economically or politically.  Not only would it create immense amounts of ill will in the region, it would still leave the GIPS countries with their external debt denominated in a foreign currency.  That class of debt is the only justifiable reason for Greece not leaving the Euro that I can see, and forcing the issue on multiple countries at once couldn't possibly help.

If things do really unravel in Europe, which they haven't done quite yet, I think US markets won't entirely collapse due to flight-to-safety inflows.  I could easily be wrong about that, though.  But obviously a breakdown overseas would fall through to front-line jobs within weeks, and that would exacerbate what is already a crisis.

Update 2011-11-09: Italy's problems may very well be Silvio's fault.

Update 2011-11-10: Italy's bond sale was successful but at a rate that is a good deal higher than last year.

More Χάος

News is breaking on an hourly basis in Europe these days, with Greece still being the center of attention.  The latest loop is the sudden appearance and disappearance of plans for a referendum on the bailout and austerity measures being put to the Greek people.  It is quite likely that Papandreou was bluffing his fellow politicians into joining him in sharing the political pain, which he may have done successfully.

As I said over here, I just don't see how the situation can be sorted out while Greece still uses the Euro.  I don't know how much adjustment of one kind or another is necessary to bring Greek labor costs down to where they are in line with the productivity* of its workers, but I suspect it is a lot.  And by a lot, I mean 15-30%.  Deflation by that amount implies that as long as Greece still uses the Euro, its citizens will, on average, have to take pay cuts of 15-30%.  This would be painful but not devastating if individuals and businesses were basically debt-free.  But that's not the case in Greece, though it must be said that they aren't close to being the most indebted.  But debt doesn't automatically shrink when wages and prices deflate.  In fact, the real burden goes up.  And substantially greater real burdens means substantially more foreclosures, bankruptcies, and corporate bond defaults.  That's why devaluation makes a lot more sense, and which would happen automatically in the markets if Greece still had its own currency - provided, of course, nobody is manipulating their currency.

So the mystery continues - why are Greek politicians pursuing such awful policies?

* - saying that Greeks are less productive doesn't mean they don't work long hours.  It just means that for one or more reasons their output is less per hour.

Galaxy-class Assholes

This really takes the cake, a Nobel, several Olympic Gold medals, and as many Peabodys as O'Reilly thinks he has won:

“Who do you think pays the taxes?” said one longtime money manager. “Financial services are one of the last things we do in this country and do it well. Let’s embrace it. If you want to keep having jobs outsourced, keep attacking financial services. This is just disgruntled people."

He added that he was disappointed that members of Congress from New York, especially Senator Charles E. Schumer and Senator Kirsten Gillibrand, had not come out swinging for an industry that donates heavily to their campaigns. “They need to understand who their constituency is,” he said.

Most of us who talk about pitchforks, tumbrels, guillotines, and the like are joking.  There's not going to have another French Revolution, and the people who want something like to happen that are idiots.  Besides, the government has too much firepower, and employees too many people who actually get off on kicking people while they're down.  But assholes like the one quoted above prove that the Occupy Wall Street protesters have valid reasons to take on banksters.  Not only does he brazenly assert that American legislators should respond to campaign donations, not the voters, which should be enough to get everyone out on the street by itself.   But he also shows that Wall Street doesn't understand the American economy or the role of finance in it, and needs to be beaten down for that reason, too.  A large, continent-spanning country of 310 million people can't survive on a financial sector concentrated in one city.  Only very small countries (less than 1 million people) can.  Even Switzerland, which is basically synonymous with banking secrecy and profiting from illicit wealth, has a large and healthy manufacturing sector (albeit with a higher portion of luxury goods makers than most).  A big country like the United States has to be good at making stuff.  And it is, in some sectors - airplanes and software most notably.  The role of a financial sector in such a country should be to facilitate the rest of the economy.  Instead, Wall Street has taken to profiting from the decline of other manufacturing sectors, and from increasing inequality.  It has both fed and gotten wildly rich from the increasing amount of debt Americans have accumulated in order to maintain their way of life as their incomes have been squeezed.  OWS is an entirely legitimate response to the problem the US financial system poses for the vast majority of the citizens of the US.

Another Dismal (Social) Scientist

Via Atrios comes this short column in the Guardian by Stergios Skaperdas that goes into a bit more detail about the mechanics of a Greek default and exit from the Eurozone.  The shorter on the column is: default is better than massive deflation, and default will bankrupt Greek banks, and to recapitalize them Greece will need its own currency, and it will have to institute tight currency and capital controls for a while, and all of that requires planning, which hasn't been started as far as anyone knows.  So, either the Greek government is executing masterfully, as evidenced by there being no indication whatsoever that it is about to default, or it is failing the Greek people.  I'm going to say it's the latter, as governments are failing their citizens all over the place these days.

The Dismal (Social) Scientist

I think Krugman is getting a bit frustrated.  Well, more frustrated.  So frustrated, in fact, he Godwined-in-all-but-name his own column.  Today he also comes about as close to calling the Eurozone elites idiots as is possible within the NYT's civility rules.  He's done so more-or-less explicitly on his blog, but that probably has a readership that is smaller by a factor of 10 or 20.  Maybe a more prominently-place tongue-lashing will have an effect, though I wouldn't count on it.

One reason for Krugman to lash out is that The Big, Fat Greek Depression continues.  The NYT has a good color article today on what the austerity is doing to the typical Greek family.  Real household income for the Firigou family has fallen about 40% between pension cuts, salary cuts, and increased taxes.  But at least they still have income.  Lots of families are undoubtedly doing much worse.

I still haven't found a good explanation for why the Greek government, which is currently controlled by the nominally left-wing Panhellenic Socialist Movement, refuses to default.  Is it national pride, or are they genuinely worried about private external debt problems?  Those would remain, and get much worse, if Greece defaulted and switched to a new currency.  I suspect most wealthy Greeks have transferred most of their liquid wealth to some other location, so that reason should not be holding the politicians up.  It's a puzzle I can't crack from afar.

ETA: Some schnitzel from Germany expects Greece to suffer for a whole decade?  That will certainly happen if it doesn't default.  On the up side, the Italian Economy Minister Giulio Tremonti is pushing back on Germany's approach pretty hard, at least in that article.

Default Already, Dammit

This is fucking nuts.  The Eurozone is experiencing a self-inflicted disaster, but the perpetrators won't be made to pay.

Update 2011/09/23: Krugman lists some of the perpetrators, and then wonders about the social dynamics inside those organizations.  It's a good question.  It seems to me that in the West, the financial industry has triumphed in several countries, most notably the US and the UK.  And there have been conservative governments in many countries which have appointed conservative-leaning people to those institutions.  Those countries include the US (2001-2009), Canada (2006-present), Germany (2005-present), France (1995-present), Australia (1996-2007), and Italy (2001-2005 and 2008-present).  The UK also had a nominally left-wing but very finance-friendly government from 1997 to 2010, when the Conservatives took over.  Ditto for the US from 1993 to 2001.  The policies and opinions of the international financial institutions (BIS, IMF, ECB, and WB, plus the OECD which is a data and analysis operation) reflect those factors.  The low-inflation, low-regulation leanings of the leaders have filtered down from the top, as well as in from the side, though lower-level channels, from the finance industry, which those organizations deal with on a regular basis.

CowabungAA+

Ho-ly cow.  Stocks down, bonds up (yields move opposite of prices).  Thanks, S&P.

Up, Down, Turn Around

I want to thank S&P for providing me with this evening's quota of humor.  If you're going to do something as momentous as downgrading the U.S. Government's credit rating, at least get the numbers right first.  And after embarrassing itself so thoroughly, I suspect S&P went through with the change mostly so it could distract everybody from its foolishness.

On the sober, serious side, Salmon has some good comments on the situation.  The US remains the richest country in the world, with very low tax rates compared with other industrialized countries.  But the political risk of default is very, very real.  Heck, if "the deal" had been bad enough, I would have been willing to bring on the default.  As it turned out, the deal is merely mildly counterproductive - at least until the new and improved Catfood Commission II reports in.  But the entire crisis was purposely contrived to extract spending cuts that the Teahadists wouldn't have been able to negotiate with the Senate and White House.  The best analogy I can come up with is a doctor holding a pneumonia patient hostage by threatening to shoot the patient unless the doctor is allowed to amputate a leg.  The US is suffering through a huge jobs crisis, but the Teahadists want to cut government spending, and they were willing shut the US government down and ruin its credit rating in order to get what they wanted.  Fortunately (or not), all they got was a promise to consider amputation in a few months.

BREAKING!  MUST CREDIT... just about everyone.  Okay, here's some text from S&P's release:

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.

Heh-indeedy.  Unfortunately, the rest is worse.  But that's not surprising, as the way S&P inserted itself in the debate to begin with showed that it was clearly on one side.  The release as whole is basically a continuation of their pressure to act in a certain way.

Added: Krugman weighs in with a somewhat harsher view of S&P than Salmon.

Added: Drum thinks the risk of actual default was and is remote.  I used to think that, but I no longer believe that the Teahadists are under anybody's control.

Added: Here's a good post on why the practical effects of a downgrade - even by all three agencies - are likely to be minimal.  I largely agree, though I would qualify it with "in the short term" more explicitly. Another qualifier that I would add is "provided nothing bad happens elsewhere."  A breakup of the Euro would send investors piling into any US asset, especially Treasuries, driving down yields sharply.

Shit Sandwich, or Just Plain Shit?

There's very little positive to say about the deal reach today, except that it's better than default, and it's better than other possible deals.  The details floating about earlier in the day were skimpy, but awful.  The final deal seems to be better, though there are conflicting versions.  It's not over yet, however, as one or both House caucuses might reject the deal.

Given a choice between shit or a shit sandwich, I think most people would take the latter.  But it's not really something anyone would celebrate.  Similarly, default is a worse option than the deal, but the deal is still bad in the absolute.  We need more deficit spending now, not less.  The economy is very weak, and the longer it stays weak, the bigger our long-term problems will become.  We shouldn't be making big cuts to domestic discretionary programs, because they are already insufficient.  We should be making more cuts the national security budget, and moving that money over to the domestic side.   And so on.

It's crazy that we are even having this discussion.

Update 2011/08/01: Also, not a grand bargain, but no guarantees that the hostage-taking won't happen again with the 2012 and 2013 budgets. And some of the language in the spin from the White House is horrid.

Et vos, Italia?

People have been talking about Italy's problems for years, but about two weeks ago they suddenly burst into the news for some reason - due to either a coordinated attack by speculators or squabbling within the governing coalition.  And the by now predictable response: an austerity package, passed on Friday.  Early in the week an important part of the bond mafia indicated that the markets would be reassured by such budget-cutting moves.  But that wasn't the case in Ireland or Greece, so such declarations seem premature.

As in Greece, and Ireland, and the other countries in trouble, there are real problems in Italy.  The net national debt is currently over 110% of GDP.  The current Prime Minister, Silvio Berlusconi, manages to combine all the negative aspects of Rupert Murdoch, George Bush, and Anthony Weiner in one human body.  The country is easily the most corrupt major EU country; only Greece ranks lower out of the 27 countries in the union.

Of course, that's not the whole story.  While the Italy has a high level of debt, it has been able to sustain it for over a decade now.  Because the country has had a relatively high savings rate, the debt is mostly internally financed and its net foreign investment position is nearly neutral.  Despite pervasive corruption and a political culture that is a complete mess, it has still managed to raise its citizens' (adjusted) per capita income to over 30,000 dollars, and it is a top 25 country in the Human Development Index.

I would say that like America, Italy's problems are mostly politi-cultural.  But that doesn't mean that market forces can't force a crisis.  Italy is a relatively populous country, and its bond float isn't trivial.  But it doesn't necessarily take that much money to move markets.   So the "crisis" is likely to continue as long as bond traders are able to exploit the market for personal gain at the expense of taxpayers.

Update 2011.07.22: Calculated Risk reproduces a Bloomberg chart that illustrates the futility of bailout packages (which included austerity measures) in other countries.

Update 2011.08.06: The Economist said it better.  And it turns out that Italy has the third largest sovereign bond market (or sub-sovereign, because Italy doesn't issue its own currency).  However, the amount that is likely to be traded could be much smaller.

Predictable Expectations

ATHENS (Reuters) - A deeper-than-expected recession caused Greece's central government deficit to widen by almost one third in the first half of the year, widely missing an interim budget target under the country's bailout plan, the finance ministry said on Monday.

...

Hurt by austerity, the Greek economy contracted at an annual pace of 5.5 percent in the first quarter. The Greek government revised downwards its 2011 growth forecast for this year to 3.9 percent.

Hoo-boy, another nobody-could-have-predicted moment.  Of course, it's not.  The Greek economy is going to contract until the cutting is stopped, or until it re-adopts its own currency.

Update 2011.07.12: As always, I'm hardly the first one to make the observation.

A Greek Tragedy

It really didn't have to turn out like this. After a couple of years the internal discussions will leak out, and we'll get a better sense of why the current government led by (and consisting entirely of) the Greek Socialist Party pushed these draconian neoliberal reforms (liberal as in as in classical liberal, not American librulz) on the country. The only justifiable reason I see is that the leadership of the party thinks that they can't pull off a switch to a "new Drachma" because it would be impossible to keep it a secret long enough to implement the change successfully. But I don't believe that will turn out to be the real reason, or at least the main one.

Update 2011.06.30: An article from the BBC explains why Greece can't default as long as it continues to use the Euro.  As long as the primary budget - the budget minus interest payments - is unbalanced, default is not possible because the Greek government is depending on more loans of Euros to pay its employees and vendors for the foreseeable future.  The neoliberal economic organizations that are pushing the austerity package on Greece in exchange for the loans are projecting sufficient positive economic growth to bring the budget into surplus, when coupled with spending cutbacks.  But as we've seen in the UK, cutting government spending (demand) when there is insufficient private demand to make up for the cuts leads to economic contraction.  It's a vicious circle:  cuts lead to slowdown which reduces revenue which increases the deficit which leads to more cuts.  So the latest package just another kick at the can.

Take This Debt and Shove It

In response to this article about the crisis in Greece, recovering economist Atrios wonders why the Greeks don't default on the huge amount of government debt that the country will never be able to (entirely) repay.  The answer is (probably, I can't read the minds of Greek politicians) that there are competing interests in every country.  It's safe to say that Greek politicians and the Greek elites (whoever they are) haven't been acting in the people's interest over the past decade, given the bookkeeping fraud and tax evasion perpetrated by the two groups.  So, for some reason the Greek politicians must not see it in their interest to default, or at least default right now.  They may change their minds due to factors like being threatened by rioters, or finishing the transfer of their assets to Malta.

In general I remain a bit surprised at just how much the ECB is being run in the interests of Germany and the other core countries (NL, FR, and perhaps BE).  That's been happening for months now.  As bad as unemployment is here in the US, it is much worse in Spain and other countries at the periphery of the Eurozone.

Update 2011.06.23: Krugman summarizes the case for default in one handy graph.  Greece is not Argentina, of course, and global economic conditions are quite different now compared to 2002.  But the outcome for the Greek people is guaranteed to be better than suffering through years of austerity-induced economic contraction.

We'll Shoot the Patient Unless You Let Us Amputate

Shorter Republican leaders.

Worthy Fellows: 1Q 2009 Edition

There was much wailing and gnashing of teeth in Blogistan today once the latest Flow of Funds report revealed that overall debt still going up. Well, we expected that given how much the government is borrowing. Duh.

The line we need to watch for a few years is the solid red line, which shows liabilities. And it went down slightly last quarter. But remember this data is not adjusted for inflation (because I'm too lazy to dig out the GDP deflator and apply it to the data) so liabilities actually are down slightly more than the slightly indicated on the graph.

So, again, the question is what do we want the household debt level to be? 50% of GDP? 25%? 66.67%? Pie? Let's say 50%, which is the long-term average. It's currently at 100%, or $14.1 trillion. So, to get it down to 50% in 10 years means a rate of reduction at 5% per year (I'm leaving out compounding and inflation - laziness again). That yields - ta da! - $700 billion again. Unfortunately, the $700B derived a few posts back was just the total for consumer credit. So the other $6.3T would have to come out of mortgages. The current total for outstanding mortgages is $10.4T. The total was last at $4.1T in1Q 1999. For reference, in 1Q 1999 the total value of household real estate was $9.8T. Now it's $17.8T, down from $21.8T in 1Q 2007. If the 1Q 1999 value had grown at about the rate of inflation, or 4%, the current value of household real estate would be about $14.5T. But since home prices were already a bit high in 1999, extrapolating the 1995 number results in a value of 13.3T.

Where am I going with all this? Nowhere, really. It's just something ponder.

What Goes Around: 1Q 2009 Edition

There has been a lot of talk scattered across the tubes about consumers "deleveraging" as in actually reducing the amount of debt they owe. (Deleveraging is not really the appropriate term for consumers because they don't "lever up" as financial companies do in an attempt to control assets far in excess of what their own capital could achieve. But I digress.) The Flow of Funds Report (Z.1) showed that consumers had stopped accumulating new mortgage debt, but that consumer debt was still increasing. A more current data set (G.19) shows that accumulation of consumer debt has stopped. (Note that this data set is in nominal dollars so the YoY numbers are NOT adjusted for inflation.)

Revolving credit (mostly credit cards) is actually being paid down in both nominal and real terms. Non-revolving credit (mostly car loans) is still increasing slightly in nominal terms and is probably decreasing in real terms.

I'm less familiar with this data set as of now, so I don't know how far consumer debt "should" be paid down. Eyeballing the chart suggests that debt levels of 10% of GDP for non-revolving credit and 5% for revolving credit might be good targets. But since revolving credit is usually very-high interest credit card debt, that target should probably be lower. If the targets were 10% and 3% of GDP, that would mean consumer credit would fall by 5% of GDP, or $700B. That translates to about 7% of 2008 consumption - which is not to say the debt would all be paid off in one year. But even spread over 4 years the hit to the economy would be huge. Unfortunately, it has to happen at some point.

Worthy Fellows: 2008 Edition

One final graphy post for today. The set contains some slightly encouraging news about debt, but very discouraging news about assets.

Assets are evaporating but debt isn't, as expected.

We can safely say we've never seen wealth destruction like this before.

Real estate is actually increasing its share of Americans' net worth.

That is because financial assets are more volatile than real estate.

I forget what "other" liabilities are, and I'm too tired to look it up right now.

In nominal terms mortgage debt has stopped increasing. That means it is falling in real terms, albeit slowly because inflation is near zero.

Slavery for the Free: 2008 Edition

I'm a wee bit behind in posting this, but nonetheless here is the latest debt data.

Debt accumulation marched on, at least through December of last year.

Taking out intergovernmental debt doesn't change the overall picture.

Hooray! Consumers almost stopped accumulating debt last year. Too bad it took a major recession to force the change.

Here we see the spike in publicly-held federal debt that started last year. This year's increase will dwarf all previous years.