Mystery Economic Theater 2010

[Andi47]

Greece has to quickly present a recapitalization plan (is this the right word for "Sanierungsplan"?) for the next 3 years in order to get bailed out by the EU and the IMF.

First details of the plan have now became public:

* Rising the VAT to 23% or even higher (from now 21% resp. 19 % until march)
* freeze saleries in private enterprises
* stop hiring new magistrates in the next three years (so no retired magistrate will be replaced for the next 3 years)
* saleries of magistrates have been cut down by ~7 % one month ago.

source: http://www.orf.at/100428-50669/index.html

errrmmm... HOW does it help to reorganize the national budget when the saleries in private enterprises are frozen??

[ewmayer]

Originally Posted by Andi47

Greece has to quickly present a recapitalization plan (is this the right word for "Sanierungsplan"?) for the next 3 years in order to get bailed out by the EU and the IMF.

"Sanierung" translates better as "reform", "overhaul" or "restructuring", although yes, in this case the *aim* is to stem the bleeding, i.e. to slow the "decapitalization".

They really need a credible plan to deal with the social unrest which necessarily will ensue form austerity measures of the kind needed to make a dent in the deficit, too -- withdrawal from a long-term national addiction to entitlements is a real bitch. As crass as it might sound, my take is, if we don't see large-scale rioting and a real crisis-level facedown of the powerful public-sector unions (possibly involving mass firings), then the government ain't doing enough to cut the budget. It is truly that bad.

But here on the "everything's bloody great and we have made the world safe for the Wall Street crooks" side of the Ponzi-pond, no reason for a little pan-European debt crisis to keep the markets from rallying. Dow to 36,000! Take that, you imprudent European socialists! We laugh at your panic over structural 10-percent-plus budget deficits ... those (and more) are no problemo over here, Ben Bernanke told us so.

[Andi47]

Originally Posted by ewmayer

"Sanierung" translates better as "reform", "overhaul" or "restructuring", although yes, in this case the *aim* is to stem the bleeding, i.e. to slow the "decapitalization".

Thanks for the translation - it is sometimes a bit difficult to chose the right word out of the dictionary.

About freeze / cut-down of salaries in *private* economy: The government doesn't have to *pay* any money for these salaries - in contrary, the government can collect income-taxes from them.

So (if my thoughts are correct) on the one hand, freezing salaries in private economy might help to rise the economy's competitiveness (and therefore possibly induce a growth of private economy). On the other hand, freezing the salaries will weaken the purchasing power and thus have a weakening effect on the economy. AND - freezing the salaries will freeze the amount of collected income tax.

So the effect of freezing salaries in private economy might as well have a negative effect on the national budget... (or no effect at all, if the positive and the negative effects are in balance.)

[R.D. Silverman]

Originally Posted by Andi47

Thanks for the translation - it is sometimes a bit difficult to chose the right word out of the dictionary.

About freeze / cut-down of salaries in *private* economy: The government doesn't have to *pay* any money for these salaries - in contrary, the government can collect income-taxes from them.

Let's bring back Eisenhower! A true Republican.

The highest marginal tax rate under Ike was very very high.

[garo]

Originally Posted by R.D. Silverman

Let's bring back Eisenhower! A true Republican.

The highest marginal tax rate under Ike was very very high.

Your wish is my command. A visualization of income tax brackets in the US is attached.


BTW, a good article on Eurozone difficulties by Boone and Johnson
http://economix.blogs.nytimes.com/20...e-save-itself/

[ewmayer]

Originally Posted by R.D. Silverman

Let's bring back Eisenhower! A true Republican.

The highest marginal tax rate under Ike was very very high.

My take on that is this: Ike knew that fighting the cold war meant unprecedented "peacetime" military expenditures, and at least had the fiscal discipline to pay-as-we-went for that huge expense.

OTOH, after a couple decades of that, one would be right to wonder what all that military spending is really accomplishing ... the military-industrial-complex becomes a kind of huge entitlement program in its own right, and its members and leaders have an interest in perpetuating it, hence constant saber-rattling and fearmongering.

The long-term answer is not perpetually high taxes, it's slashing the size of government, the military and all the bloated entitlement programs that sprang up in the past 50 years.

A healthcare-related aside:

And BTW, I do very much believe in some kind of national healthcare program, but firmly believe that such a thing is only long-term viable if one does a few things first:

1. Dismantle the for-profit medical industry, not by way of fiat ban, but rather via a "hey, you wanna operate a private care facility, fine, but no government subsidies for that, and no tax breaks for patients who use it";

2. Slash the per-patient cost of care, e.g. by disincentivizing excess testing and overtreatment (this also requires tort reform to get the malpractice lawyers under control), and also by taking serious measures to discourage unhealthy lifestyle choices (you wanna smoke? Fine, your national-healthcare premiums just doubled. Are you obese, and not due to a rare medical condition? Ditto.)

3. Design the health system structurally to prevent bureaucratic bloat and "mission creep", by rewarding for high benefit/patient-cost performance. There should also be serious direct-to-doctor performance incentives to retain excellent physicians, especially ones whose approach is based on prevention-is-the-best-medicine. (E.g. if you demonstrably help a patient quit smoking or lose weight in a durable fashion, you get rewarded.)

Of course it'll never happen ... to many powerful vested interests would scream about one or more of these cornerstones.

[Andi47]

Yesterday Moody's has downgraded the rating of nine Greek banks, including National Bank of Greece (NBG), the Alpha Bank and the Emporiki Bank. Moody's still rates Greece with A3 (which would be equal to A- of the other rating agencies) - they want to wait for the bailout to be started before doing a possible downgrade.

http://www.orf.at/100501-50743/?href...txt_story.html

In the meantime the IMF says that a financial restructuring of Greece might take up to ten years.

http://www.orf.at/100501-50743/index.html

[Fusion_power]

So what happens when a sovereign nation borrows so heavily that the market decides they can't possibly repay and therefore debt auctions by that nation are avoided by investors?

The first and most obvious answer is that the required interest rate goes up. This can trigger a situation where the lack of money to service the debt can cause a spiral into oblivion. Eventually the nation may reach the point that they cannot meet their obligations and therefore defaults on the debt. This happened recently with Russia. The major difference between Greece and Russia is that Russia has huge oil reserves and other natural resources that permitted a rapid retrenchment and in less than 10 years Russia became a net lender in the world market. Lets extend this to have a major economy on the ropes. Not Greece which in the overall scheme makes little difference, no, lets put the U.S. in the shredder. You say it is unlikely? Maybe you should investigate the fundamentals a bit more. The U.S. has the largest debt in the world. Fortunately, it also has a huge economy so that the ratio of debt to production is not as extreme as Greece or some other EEC nations. But lets ask the question - What if the U.S. were on the ropes like Greece?

DarJones

[Andi47]

Originally Posted by ewmayer

"Sanierung" translates better as "reform", "overhaul" or "restructuring", although yes, in this case the *aim* is to stem the bleeding, i.e. to slow the "decapitalization".

Hmmm... I just see that "financial restructuring" not only translates to "Sanierung", but also to "Umschuldung" which means a downgrading (=loss of value) of bonds and debts by a substancial amount in case of a (partial) default.

So just for clarification: In post #227, with "restructuring" I intended to say "reforming with the aim to slow/stop decapitalization", and NOT "downgrading in case of default".

[ewmayer]

Originally Posted by Fusion_power

But lets ask the question - What if the U.S. were on the ropes like Greece?

Barring drastic and rapid imposition of austerity, it is inevitable that the U.S. will similarly face a debt-issuance crisis in the not-too-distant-future ... but I believe of the big overly-indebted sovereigns, the U.S. will be the last domino to fall. (Although the falling will be catastrophic.) First you're going to see crises engulf the likes of the remaining PIIGS, notably Portugal and Spain, then quite likely Italy ... the ones which will likely immediately precede the U.S. on the road to debt blowup will be the UK and Japan. (And I wouldn't count China out, the way they've been throwing bubble-inflating stimuli around).

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

Meant to post these last Friday,but was so busy right up the end at work that I plumb forgot:

Moron of the Week:

Multiple MotWee laureate (and onetime Bank-of-Sweden-Nobel-Memorial-economics laureate) Paul Krugman looks at the Greek budget crisis, recognizes its seriousness and threat to the EMU, but once again draws exactly the wrong lesson - namely that it`s not structural budgets deficits and living-way-beyond-ones-means that are the problem, rather it`s "lack of vigorous unified policy responses", a thinly disguised euphemism for Kruggie`s favorite invention of all time, the massive deficit-financed humongo-economic-stimulus package:

Op-Ed: The Euro Trap

The fact is that three years ago none of the countries now in or near crisis seemed to be in deep fiscal trouble. Even Greece’s 2007 budget deficit was no higher, as a share of G.D.P., than the deficits the United States ran in the mid-1980s (morning in America!), while Spain actually ran a surplus. And all of the countries were attracting large inflows of foreign capital, largely because markets believed that membership in the euro zone made Greek, Portuguese and Spanish bonds safe investments.

Then came the global financial crisis. Those inflows of capital dried up; revenues plunged and deficits soared; and membership in the euro, which had encouraged markets to love the crisis countries not wisely but too well, turned into a trap.

My Comment: Rather a bizarre and highly-selective rewriting of history there - it`s now well-known that e.g. Greece was running major deficits previous to and at the time the joined the EMU, but were using accounting tricks to hide the fact. Krugman argues that the global financial crisis *caused* the Greek budget crisis, when in fact all it did was bring the inevitable day of debt reckoning closer.


DOJ Looking at Possible Criminal Charges Against Goldman:

ZeroHedge has a copy of the letter sent by Ohio congresswoman Marcy Kaptur and 60 fellow house members - only of whom is a Republican, disappointingly enough - to Eric Holder at the Justice Department - were this an e-mail, an appropriate subject line might be "Just because your boss is too conflicted by his ties to Wall Street to uphold the law here doesn`t mean we have to stand idly by":

As the SEC notes, financial manipulations such as this contributed to the near collapse of the U.S. financial system and cost American taxpayers hundreds of billions of dollars. On the face of the SEC filing, criminal fraud on a historic scale seems to have occurred in this instance. As an ever growing mountain of evidence reveals, this case is neither unique nor isolated.

If both global and domestic confidence in the integrity of the U.S. financial system is to be regained, there must be confidence that criminal acts will be vigorously pursued and perpetrators punished.

While the SEC lacks the authority to act beyond civil actions, the U.S. Department of Justice (DOJ) has the power to file criminal actions against those who commit financial fraud. We ask assurance from you that the U.S. Department of Justice is closely looking at this case and similar cases to further investigate and prosecute the criminals involved in this, and other financially fraudulent acts. Furthermore, if the DOJ is not currently looking into this particular case, we respectfully ask you to ensure that the U.S. Department of Justice immediately open a case on this matter and investigate it with the full authority and power that your agency holds. The American people both demand and deserve justice in the matter of Wall Street banks whom the American taxpayers bailed out, only to see unemployment and housing foreclosures rise.

This matter is of deep importance to us. As you may know, H.R. 3995, the Financial Crisis of 2008 Criminal Investigation and Prosecution Act, has been introduced, which authorizes you to hire more prosecutors, Director Mueller of the Federal Bureau of Investigation to hire 1,000 more agents as well as additional forensic experts, and Chair Mary Shapiro of the U.S. Securities and Exchange Commission to hire more investigators to continue to pursue justice and route [sic] out the criminals in our financial system.

My Comment: Question is, with both the Obama administration and the Republicans bizarrely united in giving Big Finance a free pass, does HR3995 stand a late-2007-vintage Alt-A mortgage-backed-securities portfolio`s chance of passing?

[imwithid]

Originally Posted by ewmayer

...the ones which will likely immediately precede the U.S. on the road to debt blowup will be the UK and Japan.

I would be hesitant to throw Japan into the mix. Although they have the highest debt to GDP ratio in the world (with one or two exceptions - they are insignificant in terms of their global impact if they were to default), only about 3% of their debt is foreign held public debt. Their external debt runs at about 35%. As a sovereign nation, with their own currency, they can always inflate their debt away by increasing the money supply beyond money demanded (not good idea considering the medium to long term), they can increase taxes or cut back on spending (they have much they can cut in their budgets) or some combination of the preceding.

The PIIGS are in a unique situation where monetary policy is shared among the EU countries. They have little to no control over interest rates and hence liquidity. They must fiscally behave within some range or bounds or else they end up like Greece who has been playing rebel prior to joining the EU.