Mystery Economic Theater 2010

[xilman]

Originally Posted by ewmayer

So when we say the U.S. and its allies "won the Cold War",what is really meant is that the Cold War ended up bankrupting the soviet Union first.

To those of us who were paying attention at the time, this was obvious long before the end of the Cold War.

Back in the day, I was convinced that Star Wars the Strategic Defense Initiative was an instrument of economic warfare. Gorbachev later said as much.

To those who were too young, or were not paying attention: it was clear that the Soviet Union could not implement their own version of SDI so their options were limited. One option was a nuclear first strike before SDI was fielded. Decades of their own modeling had showed that the SU could not survive the counterstrike. Another option was to convince the US that they could not afford SDI either. They tried it but the Reagan administration didn't blink and continued to spend the money. The option finally taken was not to try to out-spend the US but to re-align their priorities (Afghanistan, perestroika, et al.) and to try to keep Russia and its empire intact. By and large they didn't do a bad job, considering the alternatives. The Soviet Union passed away but its successor isn't doing too badly. Like the SU, the US is still feeling the consequences of that economic war.

Paul

[ewmayer]

Originally Posted by S485122

in the repartition model the current working people pay for the current retired people. There is no unfunded liability because it is not a capitalisation model. It has worked for many generations.

It works as long as the retirement benefits don't get too out of whack, and as long as productivity gains and/or population growth keep the demographics favorable. This may have been the case for "many generations" - although I'm not seeing all that "many" post-WW2 - but whatever ... let's focus on recent history and the present. For simplicity, let's approximate most of western developed "modern" Europe as having zero net population growth. Now consider e.g. Greece, where the average retirement age has plunged to 61, and a huge percentage of the workforce is engaged in nonproductive or downright parasitic "employment" during the short time span in which it is "on the job." Doing the rough math it's getting awfully close to the point where each full-time productively-employed working person must support one retiree or public-sector employee... how the hell is that going to be remotely close to sustainable? In effect, such a system has turned the retirees themselves into unfunded liabilities.

Originally Posted by xilman

The option finally taken was not to try to out-spend the US but to re-align their priorities (Afghanistan, perestroika, et al.) and to try to keep Russia and its empire intact. By and large they didn't do a bad job, considering the alternatives. The Soviet Union passed away but its successor isn't doing too badly.

Good points, but note that the Soviet Union's successor has already defaulted on its debt and moved on ... and as I recall, the result of the default/currency-devaluation for e.g. pensioners was devastating. Also, someone looking at the average life expectancy trends in the FSU over the past few decades might wish to debate your definition of "not too badly". The one major economic positive the Russians and the luckier of their fellow FSU*istanis have going for them is the pure happenstance that they are blessed to be sitting on huge reserves of natural resources (mainly mineral and petrochemical) ... but the resulting "easy money" from such nonrenewables may be having the perverse effect of stunting the development of any real depth and diversity in the Russian economy. They are far behind the Asian tigers when it comes to the high-tech, green-tech and automotive sectors, for example. "Oil and gas prices must remain high" is not a long-term economic strategy, for the FSU nor for the other OPEC and mineral-export-overdependent states.

[cheesehead]

Originally Posted by S485122

in the repartition model the current working people pay for the current retired people. There is no unfunded liability because it is not a capitalisation model. It has worked for many generations. With the productivity gains the system is completely viable (even when the population decreases).

Can you link to some official explanation? I'd like to see more details of how it works.

people like those Cato Institute "economists". I am afraid they are not mentally able to understand it.

(* sigh *) knee-jerk?

[ewmayer]

Here's a perspective on pension reform (specifically, how it tends to go by the wayside at election time) from the German Die Welt newspaper - translation is mine:

Null Round 2010 - Revenge of the Pension Guarantee: Politicians have been reckless in using pension guarantees to buy votes in the general election. The day of reckoning for that practice has arrived. The Pensioners will probably have no increases [null rounds] for years to come, while the younger have had their trust in the generational contract shaken.

The pension guarantee is a classic example of how politicians run electoral campaigns at the expense of citizens. At the height of the global financial crisis, the governing coalition [of the Christian Democratic Union (CDU) and the German Social Democratic Party (SPD)] announced that pension benefits will never be reduced in the future - irrespective of trends in prevailing wages. And shortly before the vote the CDU and SPD approved a greater-than-originally-planned increase in pensions. With these ad hoc decisions, the legislature simply cut the coupling of old-age benefits to wages.

But the 20 million pensioners are by no means the winners in this volatile social policy. By law planned pension cuts can at best be delayed, not repealed. In the fat years before the crisis one wanted the retirees to partake of the bounty, so since 2005 there has been regular tampering with the pension formula. The result is that there are many null rounds in store for the elderly in coming years, as the long-put-off savings measures are implemented.

The elderly have thus gained nothing from the pension guarantee. In fact the opposite holds: trust in the reliability of the state pension has been shaken as a result of the capricious decisions. When pensions decouple from wages, in the long run it is the elderly who are likely to suffer. The loss of trust also inhibits the willingness of the younger generation to continue supporting the generational contract. For many workers the prevailing view has now become that they are over-burdened by the pension system. The pension guarantee has made them feel justified in their suspicions.

[cheesehead]

Originally Posted by ewmayer

Null Round 2010 - Revenge of the Pension Guarantee: Politicians have been reckless in using pension guarantees to buy votes in the general election. The day of reckoning for that practice has arrived. The Pensioners will probably have no increases [null rounds] for years to come, while the younger have had their trust in the generational contract shaken.

... so we in the US have just seen a "null round" (zero COLA) for our Social Security recipients, and will see another next year. But our COLAs (cost-of-living-adjustments) are based on prices, whereas the repartition model has changes based on production ... theoretically, that is, absent "tampering" ... in either case.

[xilman]

Originally Posted by ewmayer

Good points, but note that the Soviet Union's successor has already defaulted on its debt and moved on ... and as I recall, the result of the default/currency-devaluation for e.g. pensioners was devastating. Also, someone looking at the average life expectancy trends in the FSU over the past few decades might wish to debate your definition of "not too badly".

I'm happy to continue the debate if anyone wishes.

I meant "not too badly" to be taken literally. Developments could have been much, much worse. For a start, the SU military could have taken the first-strike option which, I claim, would have been too bad for the SU --- not to mention everyone else.

The Russian empire, by and large, was pruned back very skillfully. The European buffer zone states were most unlikely to remain part of the Empire willingly. Repression had been tried many times in the previous 40 years and, again by and large, it had worked. Note that the Soviets only made the mistake of abiding by election results once --- in Austria. At the end of the 80's it was decided that perhaps Russia might be better served by withdrawing from the inimically hostile states and maintaining good relations with the Asian buffer zone. By and large, that also worked, exceptions such as Chechnia and South Ossetia notwithstanding.

To be continued if there is interest.

Paul

[Random Poster]

Originally Posted by S485122

Perhaps a thorough study of the Scandinavian models would be profitable for people like those Cato Institute "economists".

Possibly, but not for the reason you seem to think. The economies of Norway and Denmark are completely dependent on their oil and gas reserves; they do a very good job of distributing that income throughout the entire population, but that's the only reason they appear competitive in other areas. Sweden and Finland don't have oil or gas, and they are facing severe structural problems in the not-too-distant future. They may look good now because other countries are so much worse, but things will be quite different in the next ten years (or maybe even sooner).

[ewmayer]

Originally Posted by xilman

I'm happy to continue the debate if anyone wishes.

I meant "not too badly" to be taken literally. Developments could have been much, much worse. For a start, the SU military could have taken the first-strike option which, I claim, would have been too bad for the SU --- not to mention everyone else.

The Russian empire, by and large, was pruned back very skillfully.

Ah, I see now where you're going with this theme ... yes, this might make for a good FSU-themed "nebenthread" (pardon the bastard hybrid of Germ-lish).

I was one of the millions of Austrians who benefited from the "little anomaly" you note about the Soviets ... I used to always get especially excited when the Austrian/Allied/Soviet Staatsvertrag was discussed in my grade school classes (I spent grades 3-5 in the Austrian schools, in between our first and eventually-final stints in the U.S.), because it was signed on my (future) birthday.

[ewmayer]

Papandreou Gives EU One Week to Seal Aid Plan as Germany Pushes IMF Option: Greek Prime Minister George Papandreou set a one-week deadline for the European Union to craft a financial aid mechanism for Greece, challenging Germany to give up its doubts about a rescue package.

Papandreou said he may turn to the International Monetary Fund to overcome Greece’s debt crisis unless leaders agree to set up a lending facility at a summit March 25-26. The IMF option has already been dismissed by European Central Bank President Jean-Claude Trichet and French President Nicolas Sarkozy, who say it would show the EU can’t solve its own crises.

My Comment: So what the Greek PM is really saying to fellow EU members amounts to: "Look, we`ve given you this fabulous offer to lose many billions of dollars throwing money at our fiscal recklessness ... but, hey, if *you* don`t want to lose your oh-so-precious money on this sure-fire limited-time offer, we can always get the IMF to lose theirs."

G-Pap (that`s his gangsta-rapper name) may have attended college in the U.S., but it appears he played little or no poker during his university days, because as any poker player worth even a tiny grain of salt knows, a bluff only has a chance of succeeding IF THE OTHER PLAYERS CAN'T SEE YOUR HAND. In this case, Greece is acting like it`s got hand, when all it has is a dire debt crisis and no realistic way out not involving brutal austerity and default on much of its debt, followed by a currency devaluation. And the latter is only viable if Greece leaves (or gets kicked out of) the EMU, which is fact - despite the chauvinistic "we cannot appear to be seen as incapable of fixing our own problems" lies from French-contingent folks like (French Finance Minister Chrisine) Lagarde, Trichet and Sarkozy - the way things appear to be heading, especially as the Germans leadership would rather see riots and countrywide strikes in Greece than at home. German PM Merkel of course has so far only mentioned using the IMF, because being a politician, the necessary (but in the short term possibly quite disruptive and non-reassuring-to-the-holy-markets-who-are-in-constant-need-of-reassurance-that-their-casino-gambling-will-continue-to-be-government-subsidized) step of kicking the insolvent members of the EU - mainly the PIIGS - out of the EMU is simply far too risky:

Merkel Favors IMF-Led Solution for Greek Crisis as Germans Oppose Bailout: Chancellor Angela Merkel is moving toward an International Monetary Fund-led solution to the Greek budget crisis as she navigates between European Union leaders who say the EU should take charge and a German public unwilling to foot the bill.

As he`s not an elected official who needs to buy votes, The head of Germany`s Ifo economic research institute understands that IMF "rescue" would be at best a band-aid:

Ifo's Sinn: Greece Should Solve Its Crisis By Leaving Eurozone

[BotXXX]

http://www.businessweek.com/news/201...ks-unrest.html

North Korea Executes Official After Currency Grab Sparks Unrest

North Korea executed an official of the ruling party last week, holding him responsible for unrest sparked by a botched currency revaluation aimed at reasserting the regime’s grip on power, according to media reports.

Pak Nam Gi, who was fired earlier this year from his post as Workers’ Party head of finance and planning, was shot to death in Pyongyang for intentionally harming the country’s economy, Yonhap News reported, citing people it didn’t identify. Free North Korea Radio, run by North Korean defectors in Seoul, yesterday reported widespread rumors of the execution.

I follow this thread unregularly and enjoy reading your posts. This one is related on the side. The currency devaluation in NK had a big impact on NK with high price jumps etc. The "responsible" man has now been put to "justice". Question would be how much could he have done without the approval of the "Party" and/or Kim Jong Il. ANd if he is being used as a scapegoat.

[ewmayer]

Originally Posted by BotXXX

The currency devaluation in NK had a big impact on NK with high price jumps etc. The "responsible" man has now been put to "justice". Question would be how much could he have done without the approval of the "Party" and/or Kim Jong Il. ANd if he is being used as a scapegoat.

You can bet he was just a patsy for the latest failed experiment in economic lunacy by the Dear Leader.

-------------------------------

Sarkozy Opposes IMF Loan to Greece, Widening Rift With Germany Over Rescue: President Nicolas Sarkozy opposes Germany’s push for an International Monetary Fund loan to Greece, pitting the euro area’s biggest members against one another over a rescue plan.

A French government official, who declined to be named under government ground rules, said today France backs a European solution to help Greece and said the monetary union must act to restore investor confidence and shrink Greek borrowing costs.

“There is general confusion,” Daniel Gros, director of the Centre for European Policy Studies in Brussels, said today in an interview. “Maybe politicians from France and Germany should stay silent a bit. Greece is a sovereign country and will do what it wants to.”

My Comment: Excuse me, but if Greece is really so "sovereign and independent", then it should get its own fiscal house in order and stop crying to the rest of the EU for a bailout. They necessarily gave up a little of their "holy and eternal sovereignty" when they joined the EU.

“The markets been concerned about the game of brinkmanship that’s been there for the last few weeks,” said Steven Major, global head of fixed-income research at HSBC Holdings Plc in London. “From the Greek perspective it’s all about the cost of the funding and at the moment, Greece is paying a lot more than at this time last year.”

Greek Prime Minister George Papandreou yesterday called on EU allies to give details on aid to Greece at next week’s summit, saying the country’s risk premium would decline if investors were convinced the EU stood behind Greece.

“I want to be very clear: if it were necessary, the states of the euro zone would fulfill their commitments,” Sarkozy said in Paris March 7 after a meeting with Papandreou. “There can be no doubt in this regard.”

My Comment: Pardon the hyperbole, but isn`t that the kind of blustering pan-national chauvinism that led to the first World War? By lying about its fiscal state from the point it applied for EU membership, Greece certainly didn`t honor *its* commitments ... the rest of Europe doesn't owe it a frickin` thing.

Angela Merkel defies IMF and France as anger rises over German export surplus: German Chancellor Angela Merkel has defied France and the IMF, refusing to modify Germany’s strategy of export reliance or boost growth to help alleviate the deep crisis sweeping Southern Europe.

"Where we are strong, we will not give up our strengths just because our exports are perhaps preferred to those of other countries," she told the German Bundestag.

Mrs Merkel swept aside criticisms that Germany and other surplus countries are partly to blame for the widening North-South rift that has led to Euroland’s worst crisis since the launch of monetary union.

"The problem has to be solved from the Greek side, and everything has to be oriented in that direction rather than thinking of hasty help that does not achieve anything in the long run and merely weakens the euro even more," she said.

Instead she called for EU treaty changes so that serial violators of EMU rules could be expelled from the euro, and insisted Germany would stick to its own path of hairshirt austerity.

The tough words came as the IMF’s chief Dominique Strauss-Kahn said it was time for Berlin to rethink its single-minded pursuit of exports, warning that both Germany and China need to play their part in rebalancing the global system rather than relying on huge structural surpluses. "This must change. Internal demand must be strengthened with more consumption," he told the European Parliament.

French finance minister Christine Lagarde infuriated Berlin earlier this week by suggesting that Germany’s relentless wage squeeze was making it impossible for Club Med states to claw back lost competitiveness within monetary union, forcing them into a deflation policy that must ultimately rebound against everybody.

"Clearly Germany has done an awfully good job in the last 10 years or so improving competitiveness. When you look at unit labour costs, they have done a tremendous job in that respect. I’m not sure it is a sustainable model for the long term and for the whole of the group. Clearly we need better convergence."

My Comment: Memo to Ms. Lagarde: "Clearly 'we need convergence' in the sense you use it means 'we need the Germans to stop being so bloody competitive, to ramp up their unit labor costs until they are more in line with the bloated ones in the Club Med states, and to start buying more shit they don't need on credit'."

The article continues with more anti-competitive "can`t we all just be equally lazy and inefficient?" blather from some political economist (which equals "double loser" in my book):

Germany has gained some 30pc to 40pc in cost advantage against Italy and Spain since the mid 1990s, and over 20pc against France, according to EU data. Germany’s current account surplus is expected to reach $190bn this year, or 6pc on GDP.

The achievement is remarkable, but is also upsetting the structure of monetary union. David Marsh, author of `The Euro: the Politics of the New Global Currency", said the Germans never faced up to the political implications of EMU. "They thought everybody else should become more German. You can’t blame them for having a desire for a competitive industry and surpluses built into their genes, but they are not thinking holistically," he said.

My Comment: Echoes of a similar theme in the recent ramping up of the political rhetoric in the U.S. about China being a "currency manipulator". And the fiscally-reckless-blaming-the-prudent gets even better - fittingly, the next quote is from a fellow whose last name tempts one (or at least tempts me :) to pronounce it 'dumbass':

Charles Dumas from Lombard Street Research said the Club Med states and Ireland cannot deflate wages below German levels without causing havoc to their economies, so the EU policy creates a profound bias towards a deflationary slump for the whole system.

"The Germans are not very good at arithmetic. If they want to run surpluses near $200bn (£130bn), others must run deficits near $200bn. It is not appropriate that Germany’s dismal growth performance be exported to the whole of Europe, but that is what is going to happen," he said.

So "prudence", "living within one's means" and "culture of savings" translate to "dismal growth performance" ('growth' here referring to growth in domestic consumption) in this moron's worldview. Like the name says, he's a dumbass.