So what the BLINKING BONKERS has gone wrong in the eurozone? A while ago, one of The Register's anonymous cowards posted a question about inflation. Can anyone explain why printing truckloads of money was the correct thing to do for UK and USA while restricting the money supply and austerity was the necessary [thing] for every other advanced country in Europe? Was it simply that all …
+2% Change in Greek corporate tax rate (to 28 percent), required by eurozone creditors for economic recovery
-2% Change in UK corporate tax announced in budget (to 18 percent), required for British economic recovery
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* from the current issue of "Private Eye" (no. 1397), page 5
The quoted item is not available online. However, there is a word referenced in this item on the cover...
http://www.private-eye.co.uk/pictures/covers/full/1397_big.jpg
That (IMHO) describes the difference between the Euro Zone and outside. Can both be right or both be wrong? Only time will tell.
IMHO those inside the EZ are in a financial straightjacket because the member economies are so different.
What works for say Germany is more than likely totally the wrong thing for say Greece.
By not taking the next stage and implementing political union and thus a federal EZ these problems (IMHO) will continue.
Personally, I think that the EZ was introduced far too quickly and new members added without due diligence.
Does it deserve to fail?
Part of me says yes and part of me says no.
None of the people I used to work with in France would vote for it if they had had the chance. Two of them have moved to the UK since the introduction of the Euro because of their disaenchartment with it.
The lack of a EZ wide referendum at the start of the EZ (and the farce in Eire where they ran the referendum again until they got the right result) shows the lack of accountability of the EZ Head Honchos to the general EZ citizens very well.
Not a representative sample but just my 2p worth of opinion.
The member economies of the EZ are very different , but are they very much more different than (say) California and Michigan, where a common currency seems to work reasonably well?
Part (a large part?) of the problem is that (as Tim points out) the German banks were in deep doo-doo. At the start of the EZ, they'd chosen to invest heavily in Greek € bonds paying several percent rather than German ones paying (almost) 0% - what could possibly go wrong?
For the price of a few hundred billion in support, Merkel gave them time to disentangle themselves (at least, sufficiently to survive a Grexit). Now the banks are clear, the Greeks can go swivel.
"The member economies of the EZ are very different , but are they very much more different than (say) California and Michigan,"
Much more different.
And the US has federal fiscal policy to temper the monetary stuff, the EU doesn't. We'd need to be feeding 15-20% of GDP through Brussels to get that sort of effect that the US has.
"Much more different.
And the US has federal fiscal policy to temper the monetary stuff, the EU doesn't. We'd need to be feeding 15-20% of GDP through Brussels to get that sort of effect that the US has."
I can't find it again, but I remember reading that a long time ago (back in the 1980's) some British economist was asked by the Europeans to "design a single currency". Part of this design was exactly that, though I think he'd recommended 25% as a minimum.
So they cheerfully went ahead with the Euro but ignored that important point completely. None of the countries involved was willing to trust the EU and it's associated organisations with 25% of their money. Not surprisingly, it's gone wrong.
Fallout from WWII
These things have to be balanced against other factors, Back in the 1990s when all this was being planned, World War 2 was fresh in the memory of a lot of European politicians, and a prime motivation was to unify Europe as much as possible "no matter the cost" so as to make another European war unlikely. Seeking to make another war impossible is a laudable aim.
I see the Eurozone as the last project of ageing politicians desperate to go to their graves thinking that they had made another war impossible. Like many political ambitions, they're full of folly and impatience.
China
What history has shown us is that economic instability and decline is often masked by war started by the leaders who got it wrong. At least in the Eurozone it is the fault of them all. Who would declare war on who?
Scary thing - if you think trouble in the Eurozone is bad, you'd better hope that we don't see what true economic chaos in China looks like.
"Part of this design was exactly that, though I think he'd recommended 25% as a minimum."
This is the "fiscal union" you see bandied about. So, when one region becomes a cropper and another doesn't (for whatever reason mind) you want less to be paid in taxes from that region and more to be spent by government. You want to be able to vary this by perhaps 3-5% of GDP. It's just the same as running deficit or budget surplus in a nation, same old Keynesian stuff, it's just happening to a region not the entire area within the single currency.
And things like taxes, social benefits, that are 15-25% of the government budget just about do that for you.
some region craps out so less is taken out in income tax, profits tax, VAT, and also more goes in in unemployment benefit, pensions still get paid etc. And so we can get that 3-5% variation through these "automatic stabilisers".
Great. But that does mean that the money has got to flow through Brussels. At that 15-25% of GDP. And that really does mean tha tthe Germans will be paying Greek pensions: which is rather whhere we came in, isn't it?
The US has *political* union, which the EU does not have. The Germans hate sending their money to others; that's why they're refusing any debt reduction to Greece.
In the US, OTOH, the bluest states have citizens who, for example, are fighting politically to expand Obamacare, which will pump more money from the richer blue states to the poorer red states.
So, much as we make jokes about Alabama and Mississippi, we're trying to give, not loan, them money. Call me when your typical German *wants* to do that for Greece, Spain and Italy.
@PghMike: A nice observation. A further point would be that for US citizens living in Alabama, they are still free to go and live and work in California - and this might be obvious - there are no language and educational barriers.
The Eurozone has considerable cultural inertia, and language is one part of this.
Note, the beer icon.
P.
"A further point would be that for US citizens living in Alabama, they are still free to go and live and work in California - and this might be obvious - there are no language and educational barriers."
Educational barriers - well, looking at where the best paid jobs are in California, where the best universities are to feed them, living costs and the rest, I would say that for someone in Alabama there are financial and educational barriers to be overcome that would probably not be experienced by a kid growing up in Marin County.
Language barriers are more of a perceived issue for monoglottal Brits.
@Arnaut: Language barriers are more of a perceived issue for monoglottal Brits.
More of an issue for Brits, maybe, but still an issue. In the USA, an anglophone can consider work in any state without serious linguistic barriers. For a Greek to be similarly mobile in the EZ he'd need a working knowledge of over twenty languages, from at least four different language families. Some businesses may use English as a lingua franca (ha ha), but the vast number of jobs where this isn't possible means that there's a significant language barrier. Why do so many economic migrants end up in camps at Calais? It's more likely because they have enough English to hope to work here than because we have generous welfare provisions (despite what the Daily Mail says - you wouldn't cross a continent just to get slightly higher benefits).
Yes, there are cultural and educational barriers to job mobility in the USA, but these can be discounted because they're constant for all currency unions.
'there are no language and educational barriers"
I'm not so sure about that. I went to dinner with a bunch of people during a world-wide sales organization meeting at a corporate headquarters in Minnesota (which is where I'm from). I could understand the folks from South America, Europe and Asia a lot better than I could understand some of the folks from Louisiana.
"The US has *political* union...." Well, it does, but not by invitation. Just like with the UK, the US union came about by force of arms when the North effectively conquered the South in the American Civil War and stamped federal authority on the South. That was a two-way commitment - the South had to take on Northern law (no slaves) but got the unexpected bonus of economic stability through union (which, ironically, was what most Southerners thought they were losing in the Civil War). The UK example is even more stark in that the English invaded their neighbours. A more complex arrangement is how the countries of Europe formed from individual principalities and states, but did so usually through one party dominating the other. China did not really get itself sorted as a country until after WW2 when Mao's dictatorship came to power.
The big problem with the EU is that no-one has the authority to smack bad governments (like every Greek one since the Generals got kicked out) and impose real financial rules and control. As already pointed out, the current hikes in Greek taxes are pointless as long as the Greeks are doing the tax collecting, and the same goes for the privatisation of Greek assets (which is why the Greeks fought to control that process, they have zero intention of completing the sales). The last time someone tried to establish overall authority over Europe it was some chap called Adolf, and he wasn't really interested in a Greater Europe only a Greater Germany uber alles.....
"....Are you trying to claim "the generals" were GOOD government????" No, I am saying that every Greek government since the Generals have spent too much time (and money) playing popularist politics and buying votes. At least the Generals ran a tight budget and did not run up the debts (indeed, they usually had a surplus). Ironically, the "evil" Generals would have been socially-unacceptable to the EU, but their economics would have made them much better EU members.
For the price of a few hundred billion in support, Merkel gave them time to disentangle themselves (at least, sufficiently to survive a Grexit). Now the banks are clear, the Greeks can go swivel.
Chris Miller,
An interesting point here Krugman (who I personally find too partisan), but is making a good point here.
Edited highlights by me:
As one German economist put it to Jared Bernstein, “How do you think the people of Manhattan would like bailing out Texas?” Fair point, and a non-trivial challenge, for sure.Ahem. As it happens, the people of Manhattan did bail out Texas, big time. The savings and loan crisis, which was very costly to taxpayers, was mainly a Texas affair:
The cleanup from that crisis cost taxpayers about $125 billion, back when that was real money. As best I can tell, around 60 percent of the losses were in Texas. So that’s around $75 billion in aid — not loans, outright transfer.
Texas GDP was about $300 billion in 1987. So this was equivalent to giving — not lending, not even taking an equity stake — Spain 25 percent of its GDP to bail out its banks.
But of course Manhattan was never asked to bail out Texas; we had a national system of deposit insurance, and the big Lone Star bailout was automatic.
In as much as RBOS and HBOS are genuinely Scottish (probably not really as they'd move South if Scotland ever leaves the UK) - we did the same here. We bailed them out, because we're in a monetary union and it was the sensible thing to do. Obviously, being in a political union makes that much easier. But for a monetary union to work properly, banking needs to work properly.
"+2% Change in Greek corporate tax rate (to 28 percent), required by eurozone creditors for economic recovery
-2% Change in UK corporate tax announced in budget (to 18 percent), required for British economic recovery"
Percentage changes are irrelevant, it's the actual tax levels that count. PE are good at spotting the ironic!
One of Greece's major problems is poor tax revenues, partly because their tax laws are rubbish and partly because they're not reliably collected. If a country isn't collecting tax properly then it doesn't really matter what rates are set; no-one's paying them anyway.
What Greece really needs now is to get a government which makes the various government organisations work properly. If anyone is going to do anything helpful for the Greeks, helping them make their civil service run properly would be amongst the best options. Trouble is that means breaking a few cultural, social and political taboos.
What Effective Tax Collection System Did For The UK
One of the reasons why the UK survived the economic down turn is that lenders knew that the HMRC was (despite all it's other faults) a fairly ruthless tax collecting machine; the UK could always tax it's way out of its debts. So lending money to the UK was seen as lower risk. Lenders were practically scrambling over themselves to lend the UK government their money at the most absurdly cheap rates.
And if you look at it from the lenders point of view, they had 100s of billions at risk. With that sort of money you cannot withdraw it all and hold it as cash, you cannot trust a bank to hold it because they themselves might go bust, shares are a risky proposition, you cannot buy that much gold or commodities without having a painful impact on the price. So just where do you place billions and be confident that it will still be there the following morning? Government bonds from a country you are sure won't default, if you can persuade them to take your cash. That meant putting the rates down.
Looked at that way, you could conclude that HMRC has done us all a big favour here in the UK. For every billion that doesn't have to be paid in interest, that's ~£15 not taken as tax out of the pockets of every man, woman and child in the country. We're currently paying £43billion per annum (or £670 taken as tax from every man, woman and child) in interest.
When you start considering that maybe 1/3 of the population are wage earners, that's nearly £2000 per year you're not getting in your family pocket. That's a serious amount of money for your average family.
And no, I don't work for them or have anything to do with HMRC other than moaning about my PAYE.
Useful Industry
Greece doesn't have much in the way of industry, but the one we've all heard of is shipping. So why on earth does Greece have a large shipping industry? It's because there's no real taxation imposed on it.
Whilst it looks good on the international stage to have a world beating large industry of some sort, it is not socially useful at all if it does not pay tax and does not expend much cash in your home country or employ lots of your own population.
Commercial banking needs to be separated from the casino financial instruments of investment banks via a Glass-Steagall regulation, period. Derivatives need to be outlawed and banks that are "too big to fail" need to have their boardrooms lined up against an adobe wall and shot.
Rolo Tamasi,
No. Exactly the opposite.
The casino farmers are the ones who wait until they've harvested their crops, before selling them. That can net them the highest profit, if yields are low, but can leave them with less if it's a bumper harvest.
The more cautious types sell their crops early - and let the speculators take the risk. They can sell for a guaranteed price, that covers their costs and leaves some profit margin - at the cost of missing otu on possible extra profit later.
If you hear interviews with farmers, this is something that they agonise about, then have sleepless nights about once they make their decision.
"Derivatives need to be outlawed" is about as useful a policy as "shorting stocks needs to be outlawed".
There are plenty of circumstances where both are useful, and a blanket ban would be disposing of the baby with the bathwater, almost certainly with deeply unpleasant unintended consequences - very possibly worse than the unpleasant consequences of the worst excesses of both instruments.
As in most of life, we're not in "best option" territory here, but "least bad" territory.
The supply of money shrinks when debt is written off or repaid and it is expanded when new debt is taken on.
Deflation is where debt is destroyed at a faster rate than it is created (the inverse is inflation).
Reducing interest rates to zero is an attempt to encourage new debt creation.
What happens when this doesn't work, negative rates are already available, how low do you have to go before you realise that there is something more going on ?
At this stage even helicoptering money to the masses will be deflationary, the person in the street will simply pay down debt, accellerating the shrinking of the money supply (money multiplier in reverse).
There is something wrong with the money itself.
Money is a fiction and a faith and it only works until it is questioned, once that happens it is inevitable that it will collapse.
Money has many uses but the most important one is demand creation (show me the money)
I'm not sure I agree with your definition of deflation. It is inflation which reduces internal debt, as long as the inflation is greater than interest rates because you have new, numerically more, but value-wise less units of currency paying off old, numerically smaller but value-wise larger units of debt. External currency debt is of course more difficult to repay as your currency devalues.
Apart from that, your point is correct - leaving the gold standard made money a fiction and it inevitably collapses when there is a lack of faith and it is widespread credit which creates the illusion of wealth and the inevitable crash. Is my house really gone up in value five hundred percent in a few years? Of course not - its closer to collapsing than it was. However, the increased credit availability drives a bidding war for limited resources, which is financed by committing more and more of my income (life) to paying the bank to lend me the money. With the way interest works, borrowing more has a proportionally greater cost than the additional value borrowed. The banks make more money, but that is just a concentration of wealth. They have more, everyone else has less. It kind of makes sense as long as everyone keeps doing it, but it is essentially a pyramid scheme and it collapses when the prices get so high that there's no one wealthy enough to at the bottom to get on the property ladder. Investors with existing wealth can keep things going for a short time, until the realise that renters can't afford to cover the mortgage.
Some politicians then think its a good idea to then deregulate the market and "relax credit restrictions" to "help first time buyers." Let's all welcome them to bonded slavery, shall we?
The basic problem is that money is divorced from the value of the thing it is supposed to represent. That provides an immediate incentive to fiddle the books and banks and government have been only too happy to oblige. Worstall is incorrect and slightly disingenuous. "The economy" and "economic (monetary/fiscal) policy" are not the same thing. An economy is not there so you can "get more of what you want." An economy is the generation and exchange of value. If you give people more "money" without more work being accomplished, you've either stolen or lied. As long as the lies are very small, people can adjust - inflation increases the numerical amount in their bank-accounts while simultaneously reducing the real value of that money. When the lies get very large (such as the sub-prime market or hyper-inflation) the results can be devastating. Hitler's policy of just nicking value from defeated countries wasn't that moral either, but the effect is pretty much the same. People are poorer, though stuff being taken away or inflation/devaluation. At least taking the spoils of war limits the damage to what exists at the time. WW2 and the economic recovery from it lasted, hmmm.... half the time of a typical mortgage these days?
We're still hiding from the truth. We see tech companies putting their prices up. No doubt, that will result in another "record year" despite all the layoffs meaning more people are poorer from lack of income and revenue is just being diverted to tech from elsewhere, because its too difficult to cut in the short term.
Could QE fix the Eurozone problem? It could probably paper over the cracks for a bit but it doesn't fix the underlying problem of money divorced from value which leads to corruption of the system. It doesn't help that Europe isn't a country. Many of the people there really hate at least one other community, and I mean hate with shells and mortars. Political union is the pipe-dream of a few, kept alive only by the fact that no-one dares approach the reality of it for fear of the whole thing falling apart. Without political union and common purse-strings, a common currency will be increasingly hard to maintain, resulting in further creative accounting. Like QE and sub-prime, the more you allow it, the harder the bump will be at the end.
Does inflation create Nazis? Let's widen the question: does economic hardship create people with nothing to lose? Does it hamstring governments so that they are seen to be weak and ineffective - creating a desire for someone to come and take firm action to rescue the country? We've seen how a couple of plane-crashes changed US policy. What happens if people are personally affected by something?
The basic problem is that money is divorced from the value of the thing it is supposed to represent.
Of course it is. Money replaced barter, and is therefore a proxy for the perceived value of everything. The determination of the multi-dimensional value of that proxy for everything that could be bartered is, I believe, called "the market' and notwithstanding certain views is far from ideal - because, I'd suggest, of the aforementioned multi-dimensionality.
Agreed, deflation isn't caused by people paying off debt. If that is all that was happening it would be a good thing for the economy in general, as it would free up credit for future purchases (unless you argue it happens because the population all decides having debt is a bad thing, and will never change that viewpoint)
The problem with deflation is that it makes existing debt HARDER to pay off, just as inflation makes existing debt easier to pay off.
If you have a business that has $1 million in debt payments each year and revenue of $2 million and other expenses of $900K, you have $100K a year left over in profit. If deflation causes your revenue to drop by 10% (you have to drop prices because everyone else's prices are falling) and it also drops your other expenses 10% (we'll assume you are able to drop your wages by 10% without your employees complaining) your $1 million debt payment remains the same and suddenly you are losing $20K a year. It is yet another slap in the face that the $20K a year you lose is worth 10% more than it used to be, being equivalent to a loss of $22K a year pre-deflation.
If the opposite happened and inflation went up 10% you'd be making $210K a year - which even when every dollar is worth 10% less than it was before is still a terrific deal any of us would be quite happy with.
The Europeans haven't really thought through all the implications of what they are trying to do, and perhaps they are now coming to a realisation. All this Eurozone austerity is because Germany doesn't want to be on the hook indefinitely for Southern European debt - make the buggers realise what you have to do to live & work in Europe. It won't work, of course. I'm not even sure that a Friedmanite Bundesbank would have been able to sort things - I believe the German Constitution has drawn some red lines.
The Private Eye thing is just the Eye being itself. Why shouldn't diferent things work in different economic conditions? I'm sure George Osborne thanks whatever deity he holds dear every morning that the UK isn't in the Eurozone. We have a similar situation in microcosm. The richer South funds the poorer North & Scotland on a continuing basis but we just get on & do it, unlike the Germans. We even try to even it up a bit ("Northern Powerhouse", anyone?), with variable success.
The Germans (well the politico/financial bods) have no wish to fix the Southern Europeans, if they did then the Euro would strengthen and the German exporting economy would collapse.
Similarly, if the Northern Powerhouse took off the £ would rise and exports would collapse whilst imports would rocket.
"The richer South funds the poorer North & Scotland on a continuing basis but we just get on & do it, unlike the Germans."
Actually, that's not at all unlike the Germans. Since the country has been re-united, a lot of money has been poured into the eastern parts of the country. Most of the infrastructure was completely rotten, large parts had to be rebuilt rather than trying to fix it.
Even prior to re-uniting the country there was an uneven spread of successful industries; Bayern and Baden-Wuerttemberg (in the south) being much more profitable than any other region in the country.
(You should know; you love German cars.) :)
After the country was re-united there was a large financial burden put on everybody to finance the rotten infrastructure. ("Sozialabgabe", which would most accurately translate to: "fix the rot in Eastern Germany tax") It didn't go down well, and a lot of voices could be heard saying "well, I didn't actually want the country to be re-united, let alone pay for it with my hard-earned dosh".
This is one of the reasons why it's extremely difficult politically in Germany to support other countries in Europe. Average Joe needs to make a living for himself and isn't keen on accomplishing that for some other distant people at the same time.
(This isn't my opinion at all; It's what you hear across the board, be it in your local pub, or among those who are better off.)
Hmmmm.
The Germans know exactly what they are doing and in particular regard to Greece.
They went through all of this when East Germany collapsed and was taken on board by West Germany. The even had an entity to absorb all of the public businesses and assets so that they could be sold off in an efficient manner (Treuhand). Thie approach did not work for them either and that entity was vilified in the public mind and lost money hand over fist.
Who was the man behind this calamitous change of events and denudation of the East's assets? Why a chap called Wolfgang Schäuble.
Funny that, I wonder if it will work second time around.
East and West was different, there was a sense of one country finally reunited, Greeks, on the other hand are seen as just want to keep receiving money, for things that are considered "burning money", pensions, government workers and other wasteful expenses. Greek government was able to convince their people (we will keep you happy with others money).
Reminds me of what Peru went through during the 90's, when Alan Garcia's was president. He told the IMF Peru was not going to pay its debts. What did the IMF do? Shun the country while Peru got an anual inflation of more than 7000 %. Then Fujimori came along, he fixed the economy, with very unpopular measures, sincering prices with real market values. Re-organized the government and privatized some areas like Electrical Power company, all while defeating internal terrorism. Too bad he's now in jail, because of some alleged Human Rights violations and alleged corruption, which did happen under his government. Peru now enjoys a relatively healthy economy because of Fujimori's works. Greece could use that as an example of how to become a productive country instead of just saying it's not fair, we are not paying our debts, and keep giving us your money anyway.
Some countries need to be ruled with a harsher hand than others, people mentality varies so much...
Bankers and other financial types invested money they would not otherwise have invested in a dodgy creditor (Greece) in the mistaken belief that the EU/ECB was obliged to bail them out.
When Greece had trouble re-paying the debt the creditors should have taken a haircut (re-negotiate the loan so that most but not all the debt could be repaid).
But wait a minute most of the financial institutions that made the wrong call were based in France and Germany -- so suddenly the EU/ECB was obliged to mount a rescue; Not of Greece, but the idiots who had lent the money to a country that was clearly incapable of paying it back.
Having successfully saved it biggest banks and pension funds the German government balked at actually saving Greece (or even funding the EU bailout which saved their precarious banking system).
So the richest country in the EU, got bailed out at the expense of the poorest country. Then complained about it.
If we are all going to get to the end of the 21st century as anything but subsistence farmers then we really need to find an alternative this antiquated Victorian financial system which has reliably collapsed every 10 or 20 years for the past two centuries.
It's true, but it is slowly changing.
The prime example I have is that I have been living in the Three Border zone, the area where Luxembourg, France and Germany come together (Schengen is the spotlight, yes the Schengen Treaty was signed there).
In my area, it is quite common to go shopping in all three countries in a single day. Today.
But ten years ago, while the French and Luxembourg shops all accepted Visa and Mastercard, German shops held steadfastly on to cash only. Result ? Not so many border shoppers, because cash is a nuisance when you are not planning on just buying one thing and you know its price range.
Consequence ? German shopkeepers realized, somehow, that staying on cash only was preventing impulse buying, because you can have no impulse when you only brought a fixed amount of cash.
It's been around five to eight years that German shops in my area have almost all adopted credit card payments. Now, if you go shopping in Perl, you see Luxemburgers and French. Go to French shops and you see Luxemburgers and Germans, etc. It's all a game of merry-go-round, but it seems everyone is happy about it.
But it still took the German shops until past Y2K to finally cave in to the credit card.
There's another story on this subject. It is said that, when crafting the Eurozone bills, Germany wanted a national side and a Euro side. That idea was refused and, it is said, it's a good thing because otherwise, German shops would only have accepted German-side Euro bills.
I don't how much of that is true, though, but it's always good for a chuckle.
But ten years ago, while the French and Luxembourg shops all accepted Visa and Mastercard, German shops held steadfastly on to cash only.
It might interest you to know that the number of credit cards in Germany peaked about 10 years ago and has been decreasing since. Why? Because the transaction charges of around 4% are not negligible. Where credit card are accepted, it's not unusual to ask for or be offered a discount if you pay cash or use your EC card. Try it the next time you go shopping in Germany.
Credit cards are common in the travel industry but even then you may see surcharges for credit cards (increasingly common when booking flights).
@ Pascal Monett
before the mid 2000s European banking systems were quite different and largely incompatible from country to country.. Each nation had their own entrenched payment system, that worked fine internally but made things difficult for foreigners. The French had the "card bleue", which was mainly a debit card with VISA and Mastercard contract, so it could be used abroad as a credit card. The Germans had their "EC card" system, Foreigners usually had a hard time paying with credit cards anywhere in Europe, however. I remember being in trouble around 2008 in the French Pyrenees, because I could not find any filling station that would accept a foreign credit card. I had enough cash, but it was week-end and the cash counter was closed. At the end I gave some guy cash and he let me use his CB to fill up the tank. Not sure, if British or German cards would have worked. Japanese cards certainly didn't.
Anyway - European credit cards are mostly debit cards with the payment procedure handled by some local VISA or Mastercard contractor. Unlike real credit cards, the debiting of your bank account is done either instantaneous or at most at the end of the month. Generally you need to have the cash at hand quite soon after your purchase.
Chairo,
15 years ago, when the Euro came in and I was living in Belgium, it was actaully cheaper for me to move money from my bank account in England to my Belgian one (including exchange rate costs) - than it was to transfer money to a friend in Germany. Even though Germany was supposedly sharing the same currency as me.
For some strange reason this wasn't considered important when they created the Euro, and was only fixed by the Commission jumping up and down on the banks in about 2002.
As you say, I couldn't have a UK style credit card either. I had a debit card, which took money straight out of my account, or a "credit card" which didn't take the money out of my account until the last day of the month - and then had to be paid in full, or I lost it.
The problem with your credit card in France wasn't its acceptability as such.
The French were way ahead of the rest of the world on card chip "security", and the 24-hour petrol stations only accepted chip cards, not magstripe. The chip system wasn't compatible with the one the UK one when it came in.
Been there, got the badge.
"It wouldn't have been all that bad an idea if the shareholders had lost rather more of their money than they did, just to warn for the future, but the idea that it would be OK for us to wake up and find smoking rubble where we'd once had a payment and banking system was firmly kyboshed."
Around the time of the Lehmans collapse, the standard (OK, Robert Peston) explanation for the crisis was that no-one knew where the bad debts lay and so no-one was lending to anyone else. We knew what the bad debts were (the sub-prime thingies) but each bank was keeping schtum about their holdings in that respect. It struck me at the time that this secrecy was magnifying the problem and that if the truth had been known then only a few banks (holding the debts) would have collapsed and the rest (who were quite solvent) would have taken over the business.
There were certainly banks who resisted the loans that were eventually forced upon them by central government. (Forced, that is, to avoid exposing the *other* banks as ones that actually needed the money.) There was also a large group of mutuals who everyone accepted were almost certainly solvent because they hadn't been allowed to play with the poisonous debts in the first place. Both of these groups were implicitly but massively penalised by the bail-out.
So do we now know where the debts laid? If so, has anyone worked out the consequences of central government forcing banks to declare their positions rather than forcing the taxpayer to burn squillions in a bail-out that was designed to preserve banking secrecy? If not, then I'm afraid that "waking up to find smoking rubble" is actually unproven and the biggest financial crisis in many years might turn out to have been self-inflicted.
What the cost would have been of letting multiple large banks go bust, all the layoffs that would have caused, letting the entire US auto industry go under and all those layoffs, etc. we can't know the number but it would easily have been greater than the whole $700 billion TARP even if that was all handouts and nothing was ever paid back.
https://projects.propublica.org/bailout/
Nobody engages in high finance because of altruism. In recession national economies are controlled by their own wild politics. And the most innocuous statement from a foolish politician can wipe millions from a firm's share prices.
We saw it from Margaret Thatcher's fumblings and we saw it from the chimpanzee's bumblings and when the people running the Autotrades at the demise of Detroit all turned up for government handouts in their company jets.
The only way out of financial close-down is if someone inspired comes up with a good idea and people are willing to back them. What might have saved Stoke on Trent, two decades back is someone supplying free electricity.
http://thoriumremix.com/th/
It might happen to Mitsubishi if the directors of Tepco can be convinced (or forced) to do the "Honourable Thing" and leave the way open for thorium based generation by people who actually know what they are doing. (That is: not anyone from Microsoft.)
Ken Hagan,
We're broke because we've had a recession since 2007. There are several factors to include in this:
Recessions means wages drop and unemployment rises. People retire early to avoid being unemployed too. Plus companies make less profit and pay less tax. In a global downturn you can't eaily grow exports to counter some of the worst effects. All this means we're paying out more benefits and taking in fewer taxes.
This is what's loosely called the automatic stabilisers. Government keeps on spending, and even increases spending, even though tax collections drop. But this keeps demand in the economy, and stops a recession turning into a depression. The government borrows, and waits until the benefits bills drops and the tax take rises again.
It's also the cyclical deficit. i.e. caused by the economic cycle.
Now we have the harder problems. The structural deficit. That which will still be there, even when the economic cycle has turned, and we're back to boom time again. This is a lot harder to measure, and allows for most shennanigans of producing figures to suit certain political arguments.
1. We've just had a nasty financial crisis. The City was paying something like 10-15% of our total tax bill at the height of the madness in 2007. That's not going to be happening again for a while, nor is it really desireable, given the risk of that sector to our economy. So that's many billions wiped off the tax take.
2. We were also having a property and construction boom. Construction was one of the biggest areas of collapse, and still hasn't recovered. That's another wodge of tax not coming in for many years.
3. Between 2002-2007 Labour ran deficits of between £30-£50 billion each year. These weren't catastrophic by any means, and probably would have been easy enough to solve had we only had a "normal" recession in 2008. But it was an extra deep one, with a side-order of banking crisis. So suddenly a government that might be spending say £60 bn on the automatic stabilisers has this extra wodge of say £40 billlion on top of that, plus the tax loss from construction and banking. Suddenly a manageable deficit is starting to look quite a lot more scary. When you're piling £150bn a year on a total national debt of £600bn - it starts to add up, and make people nervous.
4. North Sea oil output has been dropping by 1% of GDP per year for ten years now. Without that constant drop in GDP we'd have recovered much faster. There's never even have been talk of a double-dip recession.
5. Finally debt interest payments went from £20bn-odd to £50bn-odd now. That's another £30bn a year onto the government deficit.
Estimates in 2008 put the structural deficit at between £60-£90bn. So even when the recession was over, and all the jobs, benefits payments and taxes were back to normal the government would still be running a pretty fat annual deficit. The Conservatives decided that it wasn't worth the risk of doing nothing about this until the recession was over - as that might lose us market confidence, and so make interest payments higher, or even make it impossible for the government to borrow over £100bn a year - and force really sudden cuts. The counter-factual is impossible of course, we'll never know if they were right or wrong. But we've probably now got a better idea of what the structural deficit really is.
The problem with the cyclical deficits - raising government spending to stimulate the economy and reduce the negative effect of a recession - is that you need to do the opposite during good times. No one ever does that, because during growth there's plenty of money for the government to spend, and "investing in the future" by building new roads and so forth sounds good as parts of the infrastructure become stressed during the boom (i.e. widening oads to land that is slated to be developed in a year or two sounds good during a housing boom, but is wasted when there's a bust and that development never happens)
It might be better to manage it by adjusting tax rates downward during a recession, and upward during booms. This would obviously have to be done via preset triggers, because you sure couldn't and shouldn't rely on politicians to manage it. I'm not aware of that ever having been tried though, so it may have some issues. Maybe another idea for Tim to throw into his (probably quite large) pile of ideas for future articles.
DougS,
That's what pissed me off so much about Ed Balls. I don't happen to be a Keynsian, but his theories make perfect sense - and it's undeniable that government spending extra in recessions is a good thing for boosting the economy.
But it's bloody easy to be a Keynsian in a recession - particularly when you aren't in government watching every gilt auction and praying that demand doesn't suddenly drop and create a self-fulfilling debt crisis. Much harder to be a Keynsian in a boom, when that means less government spending and/or more tax - and less ability to give sweeties to the electorate to win easy popularity.
And the fact that Ed Balls was at the treasury during that easy boom, and getting it completely fucking wrong, for those years before, didn't make his smug, self-satisfied face any less punchable.
Actually, to be fair, he did get one thing right. He didn't want us to join the Euro. So credit where it's due.
But I've been thinking about this Keynsian lark. It's very hard to do. It's hard to predict what the right dose of intervention in the economy is, so you might take out so much tax, that you cause the very recession you're preparing for. It's the problem of the planned economy. Decent economic data tends to take 3 months to arrive - so anything you do is on information that's already way behind. But worse, the levers of power also have a time-lag, so the full effects of interest rate changes are said to take about 2 years to fully go through the economy. So that's a horrendous time-lag from actual events to the full effect of the policy response.
Being in the construction industry, which took a massive hit in this recession, I can say that our bacon was saved by the Olympics. Just as the recession hit, all the Olympic projects were in full swing, and it stopped a very nasty downturn from becoming an absolute rout - with bankruptcies all over the place. There were an awful lot of companies who survived on no margins for 5 years, and without the Olympics, one or two of the big boys would have probably gone pop, taking hundreds of their sub-contractors with them. It was good for the haulage industry too. Every delivery we made to the Olympic sites had a £60 surcharge for the security paperwork...
But it made me think. Could we do the planning for some road / rail schemes, maybe a few new school / hospital buildings. All that nice infrastructure that needs renewing / replacing or new build. But save it until there's a recession. Then commission a bunch of jobs that have been kept on hold for a few years. With recessions every 10 years or so, it wouldn't be that long to wait, and urgent stuff would get done as needed. Then we could buy them at a time when building costs are at their lowest, do it with debt in good conscience and be helping the economy.
Or would the government just end up buggering it all up?
"Could we do the planning for some road / rail schemes, maybe a few new school / hospital buildings. All that nice infrastructure that needs renewing / replacing or new build. But save it until there's a recession. Then commission a bunch of jobs that have been kept on hold for a few years. "
FFS, are you blind? Its already happening. Have you not noticed the upgrades to "managed motorway" status on the M1, M6, M60, M62 and elsewhere that have been going on for the last few years? The various other road projects which got the go-ahead mid-depression? The various rail upgrades such as the Great Western electrification (OK I accept Network Rail have buggered that up)
But the fact is the Tories have done just what you ask, but quietly, through the back door
What you're talkijng about with "save it until there's a recession" is what the US called "stimulus", with money going to the "shovel ready projects". Basically projects that states had been wanting to do but didn't have the money for.
Like you say, that's great during a recession, it is enforcing the other end of it during a boom that's hard. That's where there must be some sort of automatic mechanism to tamp down the economy, using statistics that can't be gamed by politicians and even more importantly where politicians have no say. Either automatic tax increases, automatic interest rate increases, automatic spending cuts, something. Yes, the data we get is in arrears, and it is not always accurate, but it is "close enough" for us to know the difference between bust, boom, and sort of blundering along in between. And that's really the only three conditions we need worry about - meaning policies for stimulate, discourage or neutral.
We just have to be under no illusion that we will eliminate the business cycle. All we want to do is reduce the damage from a bust, and take advantage of a boom to make up for the additional costs we incur during a bust. In an ideal world you'd run deficits during a bust, a surplus during a boom, and generally break even when the economy is muddling along. The US had reached that point in the late 90s, until the politicians stuck their noses in it and messed up the careful balance we'd achieved by complete and utter accident.
FFS, are you blind? Its already happening. Have you not noticed the upgrades to "managed motorway" status on the M1, M6, M60, M62 and elsewhere that have been going on for the last few years? The various other road projects which got the go-ahead mid-depression?
x 7,
None of this was organised to be part of stimulus though. Some projects just happen to coincide with depression (like the Olympics) as they were already approved. The difference is that unlike private projects, they don't have to get cancelled for lack of funds - the government can almost always borrow. I did a quick survey in June 2008 of projects for one of our customers - and 30% of all the outstanding contracts they had quoted on were now on hold due to lack of funding. An unspecified amount were in "value engineering" - i.e. cutting corners to cut costs. Industries don't do well when 30% of their order book suddenly disappears over a 4 month period - especially not ones that have to work on such long timescales as construction. That's what makes it such a boom and bust business.
Also, ordering a new motorway extension is too late when the bust has happened. Then you've got to wait for architects and engineers to design it, and do all the planning stuff. The serious money doesn't get spent until the recession is already over.
Finally the government might want to try and be counter-cyclical. So construction will be zooming ahead in the boom anyway - and doesn't need more government work. So do less in the boom, and save the work to the bust - when you can buy it cheaper. The downside is this is very hard to organise. Getting the planning consent for example. And if you're going to do compulsary purchase of property - it's a bit cruel to hang the sword of damocles over people's head untilt the recession.
Darling made a misake by cutting capital spending, as the easiest cut he could achieve before the election. As it didn't involve sacking people, just not starting new projects. Osborne made the same mistake, by not reversing that decision. Although it's easy to say that now, from the comfortable position of hindsight - because we didn't have a government debt crisis in the UK. They didn't know that at the time.
The eurozone is only about creating a European superstate - a political ideal that seems doomed to failure..
The free movement of people within the EU is essential to the superstate concept to accommodate geographic variations in the economy. Unfortunately, there is no single government to enforce a single fiscal and economic policy. Free movement of labour is hampered by the absence of a single language and variations in government handout policies also distort the incentives that cause people to move. In my view the euro cannot possibly work unless there is a single European government with a common European language, which seems highly unlikely.
The USA is a single economic unit in which there is free movement of labour and everyone speaks the same language more or less - so a single currency works.
If Greece had not joined the euro, the problems the country has would have been much less severe - the drachma would have devalue, making their produce easier to export, and imports would be more expensive, so reducing them. Being in the euro makes the problems worse - and will continue to do so. The primary reason for Greece being incented to stay in the euro is to keep the European superstate concept alive. The effect is to prolong the problems the country has.
This argument appears to make sense and you should could add in tourism which is a big 'export' earner for Greece. However, there is another alternative that doesn't involve Greece leaving the Eurozone. They could just charge less for beer, in Euros, than they do in Italy or Spain or Germany. If the beer is actually brewed in Greece, that should be fairly straightforward. There is nothing forcing Greece to pay equivalent wages to other EU countries. Some compliance costs, no doubt, but apart from that it's doable, and probably will be done.
"They could just charge less for beer, in Euros, than they do in Italy or Spain or Germany."
That's exactly what is happening. All prices in Greece are being screwed down, one by one. that's what "internal devaluation" is.
The problem is that it's difficult to get people to do this: thus mucho pain to make them.
Much easier just to change the exchange rate. If you've got one of course....
Is it just me or are Tim's articles getting really good these days? I've gone from being a bit dismissive to being very appreciative.
Tim points out that the rise of Hitler wasn't caused by the massive inflation of the 1920s but the deflation of the 1930s. And that was caused by the US Depression, which cut German exports dramatically.
The other reason for the rise of Hitler was that the German military aristocracy had never accepted democracy and were constantly trying to get rid of the Weimar state; the apparently populist Hitler was a useful false front to destroy Weimar from within, but they hadn't reckoned with his private armies being able to defeat the aristocrats easily in turn.
Why is this relevant? The success of Germany is still very dependent on the US and China. And the survival of Greece depends very much on the success of Germany. There is a slowdown in China, commodity prices (but not food) are falling. We may not be looking at a localised crisis (Greece) but the first events in a wider Eurozone destabilisation as German economic policies make it unable to cope with a general world slowdown. The French and some of the Eastern countries are making noises about stopping Russian sanctions, which benefit the US but nobody else. And Cameron now wants a referendum next year, at which time the situation could be still more unpleasant and confused.
We really stand in need of some good, objective economic analysis by some people with a timescale somewhat longer than a Sun editorial to give us any idea of what is best for the UK. I'm pretty sure that we aren't going to get it from the mainstream media or the politicians.
'I'm pretty sure that we aren't going to get it from the mainstream media or the politicians.'
So you are going to have to do it yourselves, because this is The Reg and the readership (should) know something about logical reasoning and the scientific method, what emerges should be good.
"So you are going to have to do it yourselves"
It isn't me or people like me I worry about, it's the ones who are going to vote and haven't the first clue about economics or European history. Because there are more of them. The problem with democracy is that it is bad at dealing with complex issues.
I don't have AdBlock for any site. The vast majority of sites are perfectly usable, the vast majority of the time. Every so often, some poor site gets afflicted with some rude ad that splats itself all over the page, but if you are browsing on a desktop PC then the ads are pretty ignorable most of the time.
I think I'd be much more concerned if I surfed a lot on a phone, where there frankly aren't enough pixels to start with and certainly no surplus to waste on ads. But I don't.
So if you are a long-time AdBlock user, I suggest you try switching it off for a while every year or so. You will notice the difference, but you may equally be able to live with it (at least on a desktop screen) and it isn't in *your* long-term interest to make it impossible to finance a web-site without taking subscriptions.
> if you are a long-time AdBlock user, I suggest you try switching it off.
From time to time a storm of whatever sort rips through televisionland and all the queer ninnies come out of the woodwork. I'm presuming this is a national culture thing. Are there enough pragmatists there to make chimpanzocracy possible?
Or is scatocracy and financial ruin the inevitable result?
I imagine you'd be fairly immune to it if you are still using Windows but it was a culture shock to me. Please be careful.
I take it that you never visit sites like The Verge and The Guardian then?
The sheer numbers of other URL's linked in by their home pages is just huge.
The tracking of you that the Ads bring is also IMHO an invasion of privacy.
Sure some sites are reasonable with their Ads and tracking but in seems to me that it is getting worse as every week goes by.
I do not want adverts in any shape or form invading my life. I have better things to do with my time thanks.
That is my POV and I'm sticking with it. You might have a different view and that's your right.
As time goes by, the number of sites I visit regularly is dropping just because of increased tracking.
Am I rather grumpy this Monday morning? Yep.
I await your detailed takedown so I can assess it.
I kind of walked into that one. Well, I won't give you one mainly because this is mainly a tech site, but I also don't have time for the details.
Suffice it to say that economics is far more politics than it is science, and a "dismal science" at that. My politics are profoundly different to Mr Worstall's: I'm a proud European and he's an insular (ex-pat, I believe). So we are bound to start from different positions and come to different conclusions. I can live with a difference of opinion but do get annoyed by the populist oversimplifications.
Germany didn't bail out its banks more than Britain. You can see the scale of the UK bailout in the public deficit after the financial crisis. Any comparison of the economies should have a baseline in 2008. From 2008 to 2012 Britain managed to shrink its economy and keep inflation above target, leading to a decline in the real standard of living. It's okay though, because nominal asset values were maintained.
When it comes to bullying other economies. Well, people in glass houses shouldn't throw stones. The UK applied enormous pressure to Ireland to bailout its banks and thus avoid British banks taken the hit of the bad loans. It then applied anti-terrorist legislation to seize Icelandic assets from banks that had been correctly licensed in the UK. The hawkish head of the FCA has just been told that his contract won't be renewed so it looks like a return to "light-touch", risk-on regulation. Given that the finance sector was contributing around 25% of GDP before the crash, you can see where the incentive to do this might be coming from.
Germany was one of the fastest countries to be fiscally expansive with the stupid-but-popular cash-for-clunkers scheme. State-subsidised shorter working hours were also hugely popular and are again with Opel recently applying for them now that the Russian market has collapsed. German banks were certainly complicit in stoking Greece's insolvency and the arms manufacturers certainly did a roaring trade, but no more so than any other country.
Translating "Ordnungspolitik" with ordoliberalism is fashionable but wrong. The German post-War political order was largely imposed by the allies so any thoughts of peculiar German traits are misplaced. It is the government's job to create the relevant institutions to manage the various sectors. Afterwards the government is legally prevented from meddling. This is one of the reasons why the Bundesbank is more independent than the Federal Reserve, the other being that the Federal Reserve is as beholden to the commercial banks as it is to the US government.
The hyperinflation of the 1920s is not etched in some kind of collective memory but it did illustrate the futility of getting the central bank to monetise government debt by printing money. This is why there is little desire or understanding in Germany for money printing as a solution. Whether QE has been a success or not can only properly be assessed once the central banks have managed to shrink their balance sheets. Little evidence of that at the moment.
Austerity is much misused word. In the early 2000s Germany certainly engaged in restraint across government and business in order to regain competitive advantage lost by the 1:1 exchange rate of unification. The labour market was significantly liberalised and wage restraint was exercised with annual pay increases well below the rate of inflation the norm for about 10 years. Similar adjustments were, of course, practised by the Baltic countries after-2008 as they strove to join the Euro.
Some of the consequences of this were the nearly disastrous falls in productivity in other Eurozone countries and the export of German savings into high-risk, high-return investments such as American CDOs and Greek bonds. Other consequences such as underfunding of healthcare and pensions will take time to show.
All the historical comparisons with the Great Depression, Hitler's rise to power, etc. can be illuminating but are necessarily simplistic. The 1930s were extremely unstable across Europe which is why Ramsay MacDonald imposed a state of emergency in 1931. This is quite simply not the case today. Not that there isn't considerable hardship throughout Europe but the scale is very different.
Where I do agree is that the Euro is unfinished business. Since its introduction the member states largely turned inwards and tried to ignore the consequences of pooling sovereignty. France is the elephant in the room here with successive governments simply failing to start the same kind of dialogue with the population that Germany did in 2001. It simply is not enough to look covetously at the situation "outre-rhin" and expect some kind of a miracle.
Charlie Clark,
As you say, you haven't done a takedown of Worstall's article, understandably as that's a bit of effort. But you haven't pointed out any of his supposed straw men either. And you've even agreed that the Euro doesn't work - or as you say is, "unfinished business". Which surely was what the article was about.
I agree that economics and politics are intertwined. And that economics is a bad guide in a lot of cases, so because economics doesn't give you definitive, scientific answers, it's easy to just go with whatever your political prejudices are anyway, then find an economic rationalisation for them. Which can make sensible discussions very hard to have.
All the historical comparisons with the Great Depression, Hitler's rise to power, etc. can be illuminating but are necessarily simplistic. The 1930s were extremely unstable across Europe
I'd say this is also a pretty unstable time across Europe. Politics may effect economics, but the effect goes both ways. So Greece are now governed by a party that didn't exist 10 years ago, and only got something like 12% of the vote 6 years ago. The 3rd and 5th parties in the Greek Parliament are equally new. Pasok were in government in 2010, and now are on 7% of the vote. IN Spain 2nd place in the polls last year went to a less than 2 year old party (Podemos), who admittedly only came 3rd in the regional elections, but that performance is still amazing. They could still end up in coalition this year. Ciudadamos (even newer) are also doing well.
In Ireland Sinn Fein were second in the opinion polls last year - having never really been a major political force in the South. In Italy the 5 Star movement (4 years old), the Northern League and Forza Italia are now all calling for a referendum on Euro membership.
Populist and anti-EU, but right wing, parties are doing better than ever in the UK, France, Germany, Finland, Denmark and Sweden.
That's very unstable. If we allow economics to break politics, we'll regret it. In Greece the Troika deliberately punished Pasok for their attempt to have a referendum on the bail-out, they then did exactly the same to Syriza. Pasok are destroyed as a political force, if the Troika manage to deliberately destroy Syriza as well, who do they expect to govern Greece? New Democracy were the corrupt people in charge when Greece were borrowing 10% of GDP, but claiming it was only 3%. And they wouldn't survive being forced to implement this agreement either. If you destroy all the centrist political parties, you'll only be left with extremists. And that's a lesson worth learning from the 30s.
If the debate is allowed to become a choice between the Euro and democracy, then people will eventually choose democracy, and it will destroy the Euro. Or it will end up breaking democracy. Greece is dangerously close to a situation where nobody can form a legitimate government. Surely the greatest achievement of the EU was helping Spain, Portugal and Greece to cement democracy after the dictatorships fell in the 70s - and supporting Eastern Europe after the Iron Curtain fell.
I have just been looking at Californian news bulletins. They all seem to have the attention span of dogs and children. I was so upset by the lack of maturity and the pointless adverts that I was ill and got quite nasty about it. (My usual response to internet folly these days.)
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Nothing every happens in a vacuum and it is an over-simplification to blame Hitler's rise on deflation.
The punitive reparations of WW1 made German antagonism inevitable. These were exacerbated by France annexing part of the Rhinelands when Germany could not pay its reparation fines. Of course this would lead to German aggression.
Looting invaded lands to feed Germany was partially justified by this being restitution for the reparations and annexation. Germans felt France in particular had taken more than it should.
As the saying goes: "Cometh the hour, cometh the man.". If Hitler had never been born, someone else would have done the same.
"Looting invaded lands to feed Germany was partially justified by this being restitution for the reparations and annexation."
There is now an argument that WW1 was, in effect, started by French bankers (they lent money to the Serbs to build up a strong Army and so destabilised the Balkans when the Serbs couldn't pay back except by expansion). To that extent it is possible that Germany started WW1 as a preventive war. But the French had good reason for wanting to contain Prussian Germany - they had lost Alsace and Lorraine as a result of the 1870 war.
There are simply no good guys in the European mainland history from 1870 to 19451, and there was no justification for Hitler's expansionism. In fact the evidence is that without Hitler nobody would have done the same; none of the possible Prussian candidates for President would have ignored the advice of the Army and carried out the initial invasions. I am not generally in favour of the "Great man" theory of history, but I'll make an exception for Hitler - along with Augustus Caesar and a few others.
1With the possible exception of Franz Ferdinand, the one who was assassinated. He at least had the idea of turning Austro-Hungary into a kind of United States, which panicked the Serbs who were worried that Serbs in the empire would settle for State's rights and democracy rather than join Fascist Greater Serbia.
I've slowly been coming to the view over the last few years since the crash that the whole intellectual basis for modern day economics is deeply flawed, and that is the root cause of the economic problems we see around the world.
Take GDP for instance. Does anyone really believe all of the needs/wants/labour/trades of the 65 million people in the UK can be distilled into a single number with a pound sign in front of it?
I remember even as far back as A-Level economics being told that GDP (or might have still been GNP back in the mid-90's) was not considered an accurate measure of the economy and has many flaws. Yet the GDP figure is what is used to determine whether the economy "grew" or "shrank" and even a figure of -0.1% is enough to get politicians hot under the collar and enact policies to try and grow that number - policies that will have unintended consequences like everything politicians do.
GDP does not distinguish between voluntary economic activity between willing participants to produce things that they actually truly value, or government spending to get labourers to dig holes and fill them in again. Though the former is real economic activity boosting prosperity and the latter is not.
And as for the money supply BobRocket above seems to have hit the nail on the head in his strangely downvoted post. Money supply is debt, which is a multiple of "base money" which is itself a fiction in the minds of the people as it is just paper or binary digits.
Mr Worstall mentions the dread the economists have of "deflation" (which I believe he is using in the correct fashion - the reduction in the supply of money), and that this can happen when banks go bust. But that only happens when banks go bust because the money supply is all a load of hot air!
If gold was the basis of the money supply (and was not used in a fractional reserve system), there would be no reduction of the money supply because it would all be real, physical stuff sat there in the vaults. You can't reduce the money supply of gold unless it is destroyed or lost.
So our economists and politicians are all working off a false premise, and manipulating the economy in order to tweak the virtual dials. Why do they do this? I suspect it is because the false narrative of GDP in a fiat currency system is actually very helpful to their political aims. They can manipulate GDP by borrowing and spending more on crap before the election, whether that boosts real prosperity or not, and GDP will rise ("Ooh look GDP up we are all rich - horray!"), despite the fact that prices have risen commensurately with GDP so people can't actually buy any more real stuff with the extra cash in their pockets.
To illustrate the smoke and mirrors the central banks and politicians use we actually have three separate measures of inflation. Most of us have heard about the CPI and the RPI (with RPI including housing and energy if I remember correctly and is therefore higher than the CPI, which is why G.Brown got rid of it to hide his real inflation). But there is the little known "GDP deflator" as well, which is used to convert absolute GDP "growth" to real GDP adjusted for the fact prices are going up as well.
Except of course this GDP deflator is invariably lower than both the CPI and RPI, making it look like the economy grew when in fact it shrank - smoke and bloody mirrors.
We seriously need to have a good hard think about how the economy is measured, or in fact if it even needs to be at all. We could do worse than take a leaf out of Sir John Cowperthwaite's book, the Financial Secretary of Hong Kong in the 60's:
"As for the paucity of economic statistics for the colony, Cowperthwaite explained that he resisted requests to provide any, lest they be used as ammunition by those who wanted more government intervention."
http://www.telegraph.co.uk/news/obituaries/1508696/Sir-John-Cowperthwaite.html
Worth taking a few minutes to read his quotes as well, a real free market hero: https://en.wikiquote.org/wiki/John_James_Cowperthwaite
"If gold was the basis of the money supply (and was not used in a fractional reserve system), there would be no reduction of the money supply because it would all be real, physical stuff sat there in the vaults. You can't reduce the money supply of gold unless it is destroyed or lost."
True, but that also means you can't increase it. And an expanding economy does need an increase in the money supply. So it's a bit swings and roundabouts.
And I'm very taken by the Cowperthwaite story. I even used it in the obituary of his (not at anywhere grand like the Telegraph of course) I wrote.
Well there is gold mining to expand the supply, but I'm not too taken by the theory that we absolutely need an expanding money supply at all. Sounds like a bankers/politicians excuse for eternal inflation which allows them to continue borrowing and buying votes public spending.
A static money supply in an expanding economy means things will simply get cheaper as time goes by, rather than more expensive like now. Not so great for debtors, but savers will be rewarded for once, and as someone who is leaning towards the Austrian side of the economics debate savings are what are needed for proper growth, not debts.
And to head off the inevitable argument "But if savings can buy more stuff a year later (price deflation) people will stop spending and the economy will crash!!!" I would like someone to give me an example of a product that you desire but would NOT buy today if you knew it would be 1-3% cheaper next year?
Food - nope
Housing - nope
Clothing - nope
Home electronics - nope
Car - People buy cars brand new right now and lose 20% of the value as soon as they drive out of the showroom so nope
Perhaps there are some business investment reasons that price deflation would be horrendous but that's out of my area of expertise. I can't think of anything that would stop people spending with price deflation of 1-3% a year.
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@Arnaut the less
You will build a house now, because you then have a house to live in. Otherwise you will presumably be out on the street or giving your money to a landlord for the rest of the year.
My mortgage is 3.29% fixed, so I am, right now, losing 3.29% on interest payments. That's actually worse than waiting a single year and building a house for 3.29% less cost, because I am paying 3.29% for 5 years followed by the lenders SVR for the remaining 20, not just paying one single time over the odds.
As for the seed you are right, the farmer would not. But if every farmer stopped planting the price of the crops would rise pretty sharpish, making it profitable again. Food on average will always make a profit up to the point everyone is stuffed full.
As for your "gold standard idiots" remark, firstly insulting people loses the argument immediately, secondly I did not advocate a gold standard, merely compared it to the present system. I'm with the Austrians on this one; whatever people freely and voluntarily use as money is money, and the thing that performs the function of money the best (whether gold/dollars/pounds/bitcoins) will become the de facto money.
Incidentally, the late 19th/early 20th centuries under that horrible old gold standard was probably the greatest period of economic expansion in human history. Just a thought.
" firstly insulting people loses the argument immediately"
Well, I agree I was intemperate but, you know, insulting people only loses the argument if you are wrong. Ask Richard Dawkins or Wolfgang Pauli (I'm not comparing myself to them, just pointing out the logical fallacy.)
Most of the people who I have heard advocate a return to the gold standard, or something like it, are economic illiterates. I'm sorry, but it is true. And there is no excuse for it; even if you find the textbooks hard going, there's always Terry Pratchett's Making Money to fall back on, and though admittedly at the end he goes back on his own argument a bit you can argue that one two ways (no plot spoiler here.)
I think you will find the greatest period of economic expansion in human history was post WW2. (Just because I can remember it doesn't make it not history.) The 19th century expansion was driven by cheap coal and cheap iron - there was a reason why the geology department at Cambridge was world famous - and it was also based on a lot of IOUs, in the form of shares in speculative companies. Issuing shares and watching their values inflate was a way of creating credit that bypassed any kind of fractional banking rules. However, international trade was handicapped by the need for bullion. My grandfather's equivalent of an international credit card was a small but heavy leather purse full of gold sovereigns. When Britain bought the Suez Canal, the Rothschilds actually bought it for them because only they could lay their hands on enough gold. (This also provided the Rothschilds with their entrée to real political influence, and it's just as well that influence has been pretty benign.)
Perhaps it is also worth noting that the British currency was based on silver, not gold.
@Arnaut the less
In the period of the classical gold standard to which I was referring, the British pound was no longer a pound in weight of sterling silver, it was about 7.32g of gold minted into gold sovereigns along with a little copper.
While I'm certainly not an expert I have struggled through a few economics books in the past thank you for your concern. But as I said in my last post, I was not advocating a return to the gold standard, merely comparing it with the unfettered fiat currency expansion of today.
In fact the gold standard suffers from fractional reserve banking as well, with banks producing more notes backed by gold than the gold they actually have. But at least there was a limit to the amount they could print because at some point people want to see the shiny metal itself.
Since 1971 however there has been no link to gold at all, and inflation took off like a rocket. Debtors consider this state of affairs to be wonderful, savers less so.
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"While I'm certainly not an expert I have struggled through a few economics books in the past thank you for your concern"
I apologise; I have committed demotic English where I should not have done, and the "you" in the bit about reading economics textbooks should have been "one" as a generic, unspecified person. Unfortunately the Reg doesn't provide us commentards with copy editors.
You are of course right about the gold standard in the UK, and I had forgotten (from too many years ago) just how complicated the whole thing was, as silver and gold supplies went up and down. So you can call me an idiot. According to the Wikipedia article the total supply of gold has approximately doubled since the 1950s, whereas the value of the world economy has increased roughly by a factor of 8. That's just one illustration of the problem with gold.
At the risk of starting a bit of an argument but AFAIK, you are losing more than 3.29% on interest.
AFAIK, you are assuming that the inrerest on your savings is 0%
It seems that the current Cash ISA rate is around 1.75%.
You need to add that rate to your Mortgage interest rate to get the real cost. Your mortgage is an outgoing while your savings is an income.
That gives 5.04% loss of savings interest.
Thankfully the years of 0.5% Bank rate has allowed me to pay off my mortgage 10 years early.
Now I can try to save something for my retirement if you think that it is worth it naturally....
@Tim
Oh don't get me wrong I'm a fan of Friedman since first picking up Capitalism and Freedom and agree with him on a range of issues.
But I'm just also a fan of F.A.Hayek and lean more towards his thinking that an expansion of credit (money supply) fuelled by artificially low interest rates leads to mis-allocations of capital, a boom, followed by a bust. 2008 seems to bear that out a little bit more than the Chicago school. Although I admit I'm no expert at all.
Ahh....the nub of the argument is that a little bit is a good thing, an excess is a bad thing. Like pretty much everything in fact. Friedman entirely agrees that excessive monetary growth is bad. Yes, bubble, yes inflation.
However, he also argues that when there's more economic transactions around (ie, there's economic growth) we simply need more money around to be able to facilitate those more economic transactions.
A restaurant serving 150 people needs more plates than one serving 50 people.......
I think you overlook one thing (or perhaps more): inflation makes relative adjustment of wages between sectors of the economy faster (it is more difficult to get workers to accept a pay cut with 0 inflation than no rise with a low inflation). This helps the economy adjusting to changes.
ATOH, most agree that high inflation is problematic in most circumstances, which AFAIR is why the ECB has been told to aim for 2%. Perhaps this should be 2.5%, but anyway.
"True, but that also means you can't increase it. And an expanding economy does need an increase in the money supply. So it's a bit swings and roundabouts."
That's a very temperate response. I keep telling these gold standard idiots that a currency that can be dug out of the ground (or potentially extracted from seawater) has no relationship to the value of the goods and services that constitute an economy. The value of gold is as fictional as fiat money - it is what people agree that it is.
Perhaps its worst disadvantage as a unit of currency is that if the economy expands considerably without the gold supply increasing, the gold hoarders (who have done nothing to deserve it) get richer and the people actually driving the expansion do not.
"Most of us have heard about the CPI and the RPI (with RPI including housing and energy if I remember correctly and is therefore higher than the CPI, which is why G.Brown got rid of it to hide his real inflation)."
I find it difficult to believe that he was consciously using it to hide inflation; I can only assume he thought it was a real measure. Although this may seem an irrational thought it would have been nothing like as irrational as believing RPI was a better measure of inflation and still letting the housing bubble grow.
"consciously using it to hide inflation"
Governments do this all the time. Link benefits to wage growth when wage growth is less than inflation, link them to inflation when inflation is less than wage growth and so on. They're flipped the pensions link at least 3 times in the last few decades alone.
It does not distinguish between production (which strengthens an economy) or consumption (which weakens it).
Nor does it even see subsistence economies like parts of Africa where a large % of people feed themselves, build their own houses, without any money changing hands. and economically live on thin air.
Tim,
You wrote, "It should be said here that they don't think that inflation produces Nazis, no. Because the great German inflation was actually in 1921 to 24 and that didn't bring Adolf Hitler to power at all."
I'm not an economist, but I do remember being told [by a history teacher, which of course does not make it true] that one of the primary factors in the Germany economic turmoil in the early 1920s was in large part due to the somewhat unreasonable restitution burden placed on Germany by the Allies at the end of the First World War. I'm not sufficiently familiar with the economic trends of the time, but I believe that whilst the reparations might have looked like a firm and somewhat punitive response in fair economic conditions, they became untenable as the pan-European situation worsened as time progressed into the early 20s.
Further, whilst I would be very happy for someone to provide more details and correct me if I am wrong, I also understand that one of the reasons for the present Greek financial crisis could easily be described as Germany's own fault. Specifically, this is the fact that, at the time that Greece joined the Euro as one of the "first trenche" of countries to do so, they had in fact failed to meet the criteria for economic convergence as set down by the Bundesbank [um, sorry, ECB]. Because Germany [um, sorry, the Bundesbank... no, wait, the ECB] wanted the Euro to be successful, they turned a blind eye to the massive hole in Greek tax receipts. [The same was true, to a greater or lesser extent, to Portugal, Italy and Spain]. As a result, the Euro accepted into their midst not one but four economies that each carried significant fiscal risk. As if that wasn't enough, what then followed [to varying degrees] were economies [and Britain under Gordon Brown's Chancellorship was the same] that spent far more than they earned, and borrowed to cover the shortfall, relishing the availability of cheap money thanks to falling interest rates.
Except of course the credit has to run out at some point, but the issue for the Eurozone was that the wreck happened at the same time for many countries around the world, leaving them no ability to work around the problem.
But the "root causes" of the Greek situation can be summarised with two simple observations:-
1. At the time that Greece was admitted to the Eurozone it failed to meet the convergence criteria and therefore was nothing more than a problem stored up for the future;
2. At the time that Greece was admitted, the oversight of the convergence process was handled by German banking regulators [since of course the ECB is basically the Bundesbank with a new logo over the door, and run entirely along German banking lines].
This last point is relevant given that Germany runs her economy in a way that is in harmony with ECB policy; Greece does not. Unless or until Greece is willing to run her national economy like Germany, this friction/tension/trouble will remain in the Eurozone. It is a philosophical challenge as much as an economic one.
Oh, one more thought...
If the Eurozone and the ECB doesn't get their act together and sort this out pronto, then other EU economies will start to fall perilously close to the trouble that Greece are in now. And just wait for what *could* happen if France gets into difficulty. Not because their economy is weak: it isn't. But because such a *huge* percentage of France's economy is reliant entirely upon the state, whilst Germany has a smaller state machine and more activity in the private sector. Trouble in France could potentially see the Euro fall apart completely...
p.s. Not an economist, or a historian, don't have a clue what I'm talking about. ;)
Spain (and Ireland) had budget surpluses before the crash, so clearly their tax departments were collecting enough money to pay for everything. Their problem was that they had a real estate bubble due to too-low interest rates, which then burst, causing a banking crisis which meant they needed a lot of money to bail them out.
"I'm not sufficiently familiar with the economic trends of the time, but I believe that whilst the reparations might have looked like a firm and somewhat punitive response in fair economic conditions, they became untenable as the pan-European situation worsened as time progressed into the early 20s."
Always unpayable. Keynes breakthrough book was "Economic Consequences of the Peace" and he was making that point in, erm, 1919 was it published?
Nearly:
"Because Germany [um, sorry, the Bundesbank... no, wait, the ECB] wanted the Euro to be successful, they turned a blind eye to the massive hole in "
Bundesbank was creaming blue bloody murder about it at the time. Told to shut up by the politicians.
"And just wait for what *could* happen if France gets into difficulty. "
Yep....although I would guess Italy before France.
I do remember being told [by a history teacher, which of course does not make it true] that one of the primary factors in the Germany economic turmoil in the early 1920s was in large part due to the somewhat unreasonable restitution burden placed on Germany by the Allies at the end of the First World War.
That is technically correct, but that's not what happened in reality:
Germany Never Pays Back Its Debts
Germany as a serial debt defaulter is nothing new. The same thing happened during the 19th Century:
Germany Never Paid Back Its Debts
To be fair, Germany isn't the only european country with a bad credit score. The UK has defaulted on its debts at least as often as Germany.
These inconvenient facts never prevented Germany from demanding massive war reparations from France after the Franco-Prussian War of 1870 - 1871. By the way, France paid. Or from pontificating economic austerity as means of punishing those irresponsible Greeks who don't know how to control their credit cards.
Interesting fact: Italy has never defaulted on its debts. They always pay. But of course, in today's world, Italian bonds are considered less safe than German bonds. And Italy isn't the country screaming at the Greeks to pay back their debts.
I wonder which European country would be Europe's economic super-power today, if Italy or France had their debts forgiven - or defaulted - as many times as Germany did.
Sentiments wouldn't be as bad if the Greek government would actually be able to, or even actually tried to, get its affairs in order. So far Greece as a nation is the boozing cousin who borrows to keep up his lifestyle, promises to pay back, and never delivers. This tends to tick people off, especially those who are told that their pensionable age must go up, their belts must be tightened, etc.. Because We Must Live Within Our Means. As long as the Greeks insist on being able to live well outside their means that problem stays, and will only grow worse.
Of course, Greece is small fry compared to the absolute whopper that the US is going to be eventually, but that wouldn't affect the current crop of politicians, and will give the Economists something to intellectually tut-tut about a couple of decades from now.
What did joining the eurozone bring for the little people? Low interest rates for the southern countries which means a flood of credit. High inflation because of the credit and the general confusion over the currency changeover (hurray, we can charge twice as much for everything from a cup of coffee to a shoebox flat) meaning effective wage devaluation.
And there was a generally low financial knowledge amongst the population, why would they need it? Until then there was no credit. Even companies structured (and still do structure) their employees' salary so in June and December they receive double months' pay so all the saving's for Summer holidays and Christmas has been done for them *. Saving for retirement is not necessary either as there's very little in the way of private pensions.
* but it's not really a bonus though as a month's pay is calculated to be 1/14th of the yearly salary so the employee is effectively giving the company two interest-free loans a year.
Corrupt "you acratch my back, I'll scratch yours" governments in southern Europe loving the credit and European development subsidies, why would they get their affairs in order? Affairs have never been better.
German banks effectively lending the southern countries money so they can buy their Audis. It was never going to end well.
@Dan 55: Sorry, but you show mainly your ignorance here. There was credit before the euro, e.g. most homes in Portugal and France were owned, not rented. Does not happen without credit, it is plain wrong to say it did not exist.
The 14 month pay was also not universal - in some contries it was often but not always done (to avoid it becoming a right).
I am convinced the inflation in property prices has more to do with cheap credit than the € changeover per se - property prices tend to be limited by the mortgage buyers can afford.
I didn't mean to imply that there were no such things as mortgages but there were certainly no such things as 120% mortgages at Euribor + 1/2 a point.
I don't believe I said 14 payments a year was universal. Some even get 15 payments a year, which is regarded as even better than 14... (in spite of it being worse)
"Sentiments wouldn't be as bad if the Greek government would actually be able to, or even actually tried to, get its affairs in order."
The Greek government trying to get its affairs in order, that was actually the thing that started this whole mess.
The traditional Greek political parties still running the show after the crisis, reducing pensions and unemployment benefits got an attaboy. When a leftist government took over and planned to tax wealthy Greeks and foreign companies, that's when Germany and Europa started foaming at the mouth.
Many good comments but it seems to me that we will always end up with the "too big to fail" regarding banks. A bank that doesn't do proper due diligence when lending money should not be too big to fail. Banks have become "the tail wagging the dog". This is true both in the USA and the EU. I feel sorry for the Greek people, they are suffering because of their earlier governments, not exactly a Greek only problem, by any means To their credit they have outvoted the previous government, for good or for worse.
To be honest I am more concerned with the Wall Street than with whatever is going on in the EU.
The reason the Germans are against expanding the Euro money supply is simple and straightforward.
Expanding the money supply inherently devalues the value of money, which in turns implicitly transfers wealth from creditors to debtors. Since the Germans are creditors, and some other Eurozone countries are debtors, allowing the expansion of the Euro money supply inevitably means an open-ended, indefinite transfer of wealth from Germany to countries like Greece, Italy, Spain, and Portugal.
There is no way the Germans are going to accept this.
That's all very well, but in the middle of the last decade, when the German economy was only growing very slowly, Eurozone interest rates were kept low to help the German economy to grow. This meant that the Irish and Spanish had problems with inflation, which led to real estate bubbles and banking crisis. It also led German banks to lend too much money abroad, as they were exporting well, but had fewer domestic investment opportunities.
Now the situation has turned around. Now the Eurozone periphery are crying out for a bit of inflation to help their economies, but oh no! Germany is doing quite well thankyouverymuch - and why should poor Germans have to suffer from unwanted inflation just to help other people in the Eurozone?
This is what's so infuriating about the Germans, their politicians and most of their commentators (and seemingly from opinion polls) their public. I've no problem with not wanting to bail out the Greeks. After all, Greece's crisis is Greece's own fault. But Spain and Ireland were running budget surpluses at the height of the boom. They just weren't enough to counteract the fact they had the wrong monetary policy. So they took the hit to support Germany then, where the hell is German support for them now?
And also, although the financial crisis was Greece's fault, they were given a bail-out that was piss-poorly designed by Germany, the ECB, and the Commission. The IMF technical department said it wouldn't work in 2010 - but got overruled by the French director Strauss Kahn. So actaully Germany are just as responsible for the current state of the Greek economy as the Greek government. Since they incompetently designed the Greek bail-out to get the Italians, Eastern Europeans (and Greeks) to subsidise the bail-out of their own banks. So they should fucking pay to help sort it out!
Plus, morality aside, Greece can't pay. It can probably pay half that debt back. 5 years ago, it could probably have managed two thirds. That difference is the cost of delaying the inevitable for so long. In a year's time, it'll be none. Those are the practical choices Germany has.
I'd love to read one of Tim's articles with a defence of anti-austerity with the UK's current situation, considering Corbyn wants the government to spend like drunken sailors.
I always write these people off as just populists, saying stupid things that make people happy, but there are plenty of seemingly intelligent people who believe it, so I'd love to hear a reasoned argument on this.
Is there a school of thought that the tax take can go up far enough instead of austerity? Or is it that they believe that the economy ( and therefore tax take ) will actually expand fast enough to cover the expense? Or is the anti-austerity argument it as daft as it seems?
If you contract your economy by 25%, you lose 25% of your tax receipts, and trying to implement that saving structurally means stripping back the state by 25%. "The state" for these purposes being those dependent on it - the poor, pensioners, the unemployed. Exactly what has been inflicted on Greece 2010-2015 .
It's all very well Germany banging on about austerity as it continues to enjoy and exploit a massively undervalued Euro convenient for it's manufacturing-based economy and so never has to suffer it in any real sense, barring it's self-inflicted reunification costs.
In the UK over the last 5 years, Osborne *has* been spending and borrowing like a fucking madman, and his "austerity" moves are simply class-war spite.
There must be some logic behind it other than "I hate tories, pass the credit card".
I'd say, the UK isn't Greece. We've cut spending, but not by such huge amounts as Spain, Ireland or Greece had to do. Or even Italy. But all of that gets lumped together as "austerity" - which gives it a bad name.
Think about one piece of economics. The fiscal multiplier. For every pound of government spending we cut (or £1 of tax we raise), how much does the economy shrink?
The IMF worked this out for Greece in 2013. As between 0.9% and 1.5%. This was when they pretty much admitted that the 2010 and 2012 bail-outs had been failures. Particularly if it's greater than 1. Let's split the difference and call it 1.2. This means that every time the Greek government cuts spending by €1 billion, the economy shrinks by €1.2 billion. And this is why the massive cuts in Greek spending, 25% of GDP over 4 years (the largest peacetime spending cuts in modern economic history), spectacularly failed! And the economy shrank by 26%. Making the debt even more unpayable.
Of course the private sector is also expanding/contracting, and we can't run an experiment where they don't. So knowing the multiplier is near impossible. But what is it in the UK? This would give Osborne a much better idea of what to do. Our economy has been growing, while government has been cutting, so it's likely that the multiplier is less than 1.
However, now reverse your thinking. Don't apply the multiplier to cuts, but to extra spending. Let's say it's 1.2% in Greece and 0.5% in the UK.
So if Greece spends an extra €1 billion, their economy should grow by at least €1.2 bn. That means that it would be best for Greece to spend extra, to grow the economy - and so the Eurozone creditors' best way of getting paid back the maximum amount of cash would be to support Greece to spend a bit more, and start growing its economy. That would then give a larger tax base to pay back more of the existing debt.
In the UK our multiplier is less so we might only gain £500m of economic activity for every £1bn spent. Which makes extra spending look less attractive.
Oops! My apologies for incompetence. Twice I described the fiscal multiplier as a percentage, 0.9-1.5% for example. When that should be 0.9 - 1.5.
Expressed as a percentage that would be 90-150%.
Did a quick check, and there doesn't seem to be an authoritative estimate of the UK's foscal multiplier. The ONS working estimate in 2010 was 0.5. The IMF thought that might be too low later on though.
If Tim W takes up your offer he shouid (IMHO) include the way that Dennis Healy had to go to the IMF cap in hand to get a loan to keep the county solvent.
The austerity implemented by the Labour Party in those dark days was (as far as my failing memory serves me) just as tough as what it is today. The big difference is inflation is low. It wasn't then.
the HMG at the time also cancelled my Uni graduation ceremony as another austerity measure.
That really hurt my family because I was the first member of my family to get a degree.
One topic worthy of Worstallian analysis.
A massive collapse of all banks and the disappearance of money is a probably a bad thing.
Was the bail out, and partial nationalisation, of banks cheaper than simply letting some of them go bust and paying the depositors?
Was billions really given to merchant bankers who made a bad bet and then paid themselves bonuses with the money?
"Was the bail out, and partial nationalisation, of banks cheaper than simply letting some of them go bust and paying the depositors?"
Yes. The bailout itself looks like making a profit.
And we avoided the horrendous economic costs of millions losing banking (and their deposits) for a few months while we tried to clean it up, pay them back.
As I say in the piece, I wouldn't have minded some of the shareholders losing a bit more money but that's a different matter.
"Was billions really given to merchant bankers who made a bad bet and then paid themselves bonuses with the money?"
No, not really: the desks that made the bad bets didn't get any bonuses.
A real profit or a "we bought Northern Rock for £1, wrote off a £Bn of bad debt and sold it to that Branson chap for £1m" sort of profit?
And did we (or the Americans) cure the moral hazard of allowing retail banks to play speculation in the knowledge that they will be bailed out if they screw up?
TARP was profitable for the US taxpayer, in the sense that of the money disbursed, all of it plus about 10% was repaid, or earned via the sale of shares/warrants. That's for everything cumulative, so it wasn't necessarily profitable in every facet - I think the auto bailouts lost a few billion but that was made up by being more profitable in other areas.
If you add in the taxes collected and unemployment payments not made by not doing TARP and thus allowing the economy become much worse with a far greater shrinkage in GDP and far higher unemployment then it was the most massively profitable thing any government has ever done in history.
If you were a shareholder or debtholder in the bailed out banks/companies the answer of whether it was profitable for you is a little more complicated. While you may have had your shares diluted or taken a debt haircut in some cases, if the company had been allowed to go bust you'd almost certainly be worse off unless you had insured against a debt default, and your insurer was actually able to pay.
Quantitative Easing in US has also been profitable on paper, since the Fed returns its 'excess revenue' beyond its operational needs (it had excess revenue before, QE just caused more of it) Though in this case basically the US was paying interest to itself, so that's not really making money, but at least means there was no actual cost to the government. If you believe as Tim and I do that this was necessary to prevent a 30s like Depression then obviously the increased tax collection and reduced unemployment etc. mean it was "profitable" in the sense of avoiding a lot of additional debt the government would have been forced take on.
Bailout as a whole appears to have made money. All that emergency cash from the BoE was paid back yonks ago and the banks were paying real interest on it too.
QE has made a vast profit of course.
Adding up all the N Rock, Llloyds, RBS and so on looks like it will just about scrape into positive figures. Depends what prices they get for the last blocks of shares.
A real profit or a "we bought Northern Rock for £1, wrote off a £Bn of bad debt and sold it to that Branson chap for £1m" sort of profit?
Even the "bad bank" bit of Northern Rock, that we didn't sell to Branson, is making a profit. Last time I looked, that loan book was something like 3% in arrears/default, so 97% were paying as scheduled. A lot of the CDOs that mortgages were packaged up as supposedly "guaranteed" a 95% repayment rate - and many (most?) of the UK ones seem to have made that. So they weren't worthless after all, it's just that no-one trusted the banks who'd stitched them together. And for good reason.
Ironically this could be a bad thing. If Northern Rock could be broken up for a profit, that means it wasn't bankrupt, and maybe its shareholders can sue the government for compensation - for winding it up when it was actually solvent but illiquid.
On the other hand RBS may well have actually been bankrupt (not just illiquid), but got bailed out anyway, because they were too important to let go bust. Their investment banking arm was so complex that their board thought it could be turned around and saved, up until last year. Now they recognise that it's just a big pile of poo, dragging the rest of the bank down.
If you were illiquid in the fall of 2008 you were bankrupt, because if you needed cash and tried to sell assets back then you'd be lucky to get more than a few pennies on the pound for anything connected with mortgages! Any judge with an ounce of financial and economic knowledge would know that and throw the case out of court on its ear. The government was the "investor" of last resort, the only one willing and able to buy up such assets for a price that didn't doom the seller to bankruptcy court.
Well, other than a few crafty guys like Warren Buffett who have been around long enough to know that you make the best deals when fear is running rampant, and earned Berkshire Hathaway a few billion more dollars.
DougS,
That's why we have Central Banks. Banks, by definition, are illiquid. Their economic role is to perform liquidity transformation after all. So Central Banks should always be willing to lend to them, at a profit, so long as the bank is solvent. And as their regulator, the central bank should be in the best position to determine that they actually are solvent.
Hard to see a solution when so much is kept secret and our systems are so manipulated to the advantage of the few by actions that would be criminal if they did not also use money to protect against exposure.
Sure we can see some actions and see some results but due to hidden activity, like manipulation of markets, industries, labour, trade laws and even interest rates, it is difficult to really say what action will lead to what result.
And what we are told by governments and the financial industry is obviously meant to deceive and manipulate.
Your own country gives you many examples if you look.
Canada for example is told that a lower Canadian dollar will help them to afford more of their own products and sell more of their products to the world. But Canadian resources are not owned or priced in Canada. Canadian resources are priced in a foreign currency. Resulting in a farmer selling his cattle cheap in Canadian dollars but consumers having to pay expensive U.S. prices for beef. The same is true for most resources, a devaluing of the Canadian dollar makes even local products and resources more, not less, expensive to Canadians and at the same time resulting in lower pay for labour. A lower currency results in less money for Canadians most of whom have their largest personal assets in Canadian dollars at that is happening when almost everything they buy is increasing in price. Even products made in Canada, with Canadian resources are more expensive to Canadians.
If Canada owned it's resources Canadians (there are only 35 million of them) they would have by far the greatest per capita resource wealth and if they owned those resources, as they are told, they would be the richest citizens. That they are not shows that trade, monetary and economic policy is not as taught or told. Much of what we are told is contradictory and offered as excuses or explanations not meant to be understood or applied to other situations.
The result is the same in your country and when it comes to understanding economies results in endless tail chasing with only the appearance of understanding or control. The only way to see who may be in control is to look at who has profited and who is losing.
Blaming the losers, as we do in the cast of Greece, is great if you are in control, otherwise it is just more manipulation and sets us all up for a repeat of 2008 or worst.
The "Canadian economy" is the housing market in Vancouver and Toronto and the banks that support it.
The rate cut will drive up prices and cut mortgage payments - people will feel richer and vote the correct way in October. After that who cares?
It was obvious throughout the last parliament that the politicians in government weren't being entirely straight with us and banks like RBS and HBOS were still in big trouble and it would take time - and perhaps inflation - to unravel.
What is the situation now? Are we ready to cast them adrift and make monetary policy as a government, not as a zombie bank nanny?
Secondly a lot was made of the fact those banks had turnovers greater than UK GDP and most of it was business outside the UK, though guaranteed by the British taxpayer. How much has that problem reduced? Are we going to see a new bank guarantee system which allows for international banks?
Lloyds are now mostly sold. At a profit. I believe at the current rate the shares will all be gone by February. Assuming they don't sell much over the Summer holidays and Christmas. Quicker if they do.
HBOS are on the way to being sold. RBS, who knows? They've now accepted that they aren't going to stay an investment bank, and are now pruning that bit down drastically - as they just can't fix it. So now reality has set in with the board, it could be time to sell them off quite soon. Although we'll probably make a loss on them. But it still looks like we'll break even or make a profit on all the banks combined. And the Bank of England charged interest on the emergency loans, now all paid back, so that also made money.
And I suspect that QE won't be totally unwound, and that we'll write off at least a few tens of billions of government debt in 5 years time. You can't make a habit of this, or trust breaks down, but as a one off this will have no (or few) downsides.
The banks didn't have turnovers larger than GDP though. It was the size of their loan books that were so huge. And that's been drastically pruned.
The new banking regulation system isn't fully formed yet. Changes may still be made. But what we currently have is an extra tax on profits. This was a change in the last budget, as previously it wa a tax on the size of their assets, but this was felt to penalise Standard Chartered and HSBC - who do most of their retail business abroad. Remember that neither of those two had to be bailed out, and that the UK taxpayer isn't on the hook for their depositors abroad. Though it is a risk if they go pop, as we'd want to bail-out our bits. But Standard Chartered don't have a retail bank here. Anyway, that's sort of their insurance payment, to compensate us for the risk of having to bail them out again in 50-70 years time.
We also have the ring-fence rules. This means that the retail arm of these banks must have separate accounts, and separate assets. So if a bank like RBS needs help again, the government can just let it fall over, but rescue the retail bits like NatWest - and carry on running them as a going concern. This is one reason why RBS are giving up on investment banking. They can no longer use the resources of their retail bank to "invest" with (so called proprietry trading). Thus they have to borrow the money they need for the most profitable trading, rather than use their retail assets - which makes them a good deal less profitable. At this point, it may well not be worth the extra layers of management to try and have joint investment/retail banks anymore, and we may get a natural split, without having to legislate for it.
To be honest, this is still a bit pie-in-the-sky. After the massive shock that Lehman Brothers collapse wrought on the financial system, no one was going to kill a bank as complex as RBS investment arm. The counter-party risk and chaos involved would be too much. But it could be bailed out and wound down under control, with the retail arm easily sliced off and run as a going concern by the government - hopefully with minimal panic and disruption.
What depresses me more is that the actions taken only seem to be perpetuating the grossly inefficient nature of our retail banks.
As a retail bank customer who also has worked behind the scenes in an IT role I'm appalled by the inherent inefficiencies and the addiction to high profit margins at most / many of our retail financial institutions.
Payments and basic accounts ought by now to be a basic commodity service - it really isn't that hard but instead we pay through the nose to support institutions that basically do little more than a bit of bookkeeping. Keep in mind they don't actually produce anything - it is a service industry which needs a lot of people sitting around inventing overly complex "products" designed to hide excessive fees which no-one really wants or needs.
For a short while I held out some hope that the supermarkets or the likes of Virgin would shake things up and we might actually have some competition that would improve matters but that appears to have all fallen by the wayside now. Even the once floated idea that an IT company might enter the online banking fray (Microsoft in the past and maybe Apple in the future) is beginning to sound like an attractive offering to my ears.
After all the bailouts it seems the competition and our options as customers are only diminishing. The regulatory barriers to new entrants are only getting higher while on the other hand it is becoming increasingly impossible to exist without using these services (cash anyone?).
I'd hoped that here in Euro land I might have had the opportunity to choose from any Euro bank but - no. Realistically we are all restricted to local players and cannot shop around beyond national borders.
I personally liked the idea of portable bank account numbers that you could take with you to a new bank (like mobile number portability) to try to reduce the inertia people have with moving accounts but it seems the industry has successfully quashed that initiative.
So, ok I'm venting and this isn't really one for the economists but at least I feel better for getting it off my chest.
Tim, the US didn’t abandon the gold standard until Nixon “shut the gold window”. In 1933 Roosevelt limited the amount of gold that could be held by individuals and corporations in the US, requiring all excess to be delivered to the Federal Reserve and exchanged for other forms of US money at $20.67 per troy ounce of gold; in early 1934 Congress devalued the dollar from $20.67 to $35.00 per ounce, but the fixed exchange rate remained until 1971.
The great depression in the U.S.A. was largely due to the domino effect of banks collapsing as their customers pulled out their money. Bank runs happened in the U.K. and Greece more recently, but the governments stepped in to prevent them from going under. Tim forgets that bank collapsed ceased after Franklin Delano Roosevelt entered the White House and announced the New Deal.
The Federal Reserve Banks believed in laissez-faire, which meant they would not intervene directly in the crisis.
Since 1990 the German Federal Republic has poured like half a billion of Marks annually into restructuring the former German Democratic Republic. After 2010 this strategy has turned out almost into a happy ending, but Chancellor Merkel is not going to bankrupt her nation by pouring multiple billions into South-Eastern Europe.
It would not be so tough if these nations got to keep their favourite coin and their own monetary and fiscal policies.
>but Chancellor Merkel is not going to bankrupt her nation by pouring multiple billions into South-Eastern Europe.
She isn't, she is pouring billions of euros into German merchant banks that made expensive loans to SE europe.
>It would not be so tough if these nations got to keep their favourite coin
But then they wouldn't have been able to borrow to buy German cars and Germany wouldn't have been able to afford to sell them with expensive DMs.
what it boils down to is........"What have the Germans ever done for us?"
Fuck 'em.
Lets exit the EU and accept the fact the krauts are still fighting WWII They couldn't win militarily but they are still fighting economically. They won't be happy till the rest of Europe is bankrupt and they hold the purse strings
After WWII we should have ripped the industry out of Germany and returned it to the stone age
In 1945 there was not much industry left in Germany - so you (or more likely your ancestors) fairly much did that. I met people who as adolescents starved in Germany, there was a "never again" attitude I did not meet in the UK (or Denmark for that sake).
To me it seems it is part of the UK still fighting WWII - Germany has really had to be forced to do much outside its own borders. E.G. the Euro was to some extent France's price for allowing German unification, the Germans were not all that keen.
I think part of the German reading of economics is their post-WWII history. As their economy has done quite well and as they see Bundesbank as one of the cornerstones of this, they don't want to change it
"After WWII we should have ripped the industry out of Germany and returned it to the stone age"
After WW2? My reading of the final year of the war is that the aforementioned task was pretty much complete by the time of the surrender. The usual charge against Bomber Command is that they'd basically bombed the entire country back to the stone age, and *then* two collosal armies has swept across from either side annihilating everything in their path on a house-by-house basis.
In most other conflicts, the loser has surrendered before that point. (The question of why Germany didn't surrender is quite interesting, though perhaps not humanity's finest hour.) If you want a better example of returning somewhere to the stone age, you probably have to go back to Trajan, or perhaps the stone age.
"....Germany was hit so hard by reparations that it raised the resentment which allowed the Nazi's to take power." Er, not exactly. Whilst Hitler railed on about the "harsh and unfair" reparations (in almost exactly the same way as Syriza has in Greece) to stir national sentiment, what drove the Nazis into power in Germany in the first place was the reaction to the attempts of the Communists to seize power in the Novermber Revolution and the Spartacist Uprising of 1919. The German army and establishment were so horrified by the prospect of a Bolshevik revolt (and not at all fond of the socialists' idea of the Weimar Republic) that they virtually turned a blind eye to Nazi violence against Socialists and Communists. Heck, Hitler actually tried to rise a Nazi revolt in 1923 only for the army to grudgingly stop him, yet the army still backed him the minute he was released from his short stay in prison!
Specifically, there are trading banks (the kind you and I deal with) and there are investment banks (the kind that play the stock markets).
Letting the investment banks go titsup is perfectly allowable. They're essentially legalised gambling on a scale noone else can imagine.
It would be the loss of the trading banks which would severely nobble the economy.
The fundamental mistake of both the US and UK governments was to knock down the walls erected between the two types of bank after the Great Crash of the 1920s - walls put there specifically to ensure that an investment crash wouldn't take out the trading system.
Commentators on boths sides of the atlantic were predicting that there would be a crisis within 25 years. They were right.
I have read a reasonably convincing conspiracy theory that the reason Lehman Brothers was allowed to fail was because Goldman Sacks has become embedded in the US Federal government, and Lehman Bros was a competitor.
I'm not sure if that's true, but there's an argument that Goldman Sacks is now not only too big to fail, but a part of the US Government.
Germans are usually pretty smart people, they know their stuff. So how could German economists get it so wrong? They went to universities, they studied economy and passed the exams. And while they have a different experience with history, would that alone explain the opposite view they hold on the monetary crisis the EZ is still in?
I don't think so.
Let's look at Greece. Unemployment is way up, wages are down. Pensions and unemployment benefits are down. The Greek state is not able to collect the taxes from wealthy Greeks, nor from foreign companies.
That may look pretty awful for you and me, but it's the closest thing to paradise on earth for some very influential people.
So when the traditional Greek political parties (all of them) organised this disaster for their own people, everything was ok for Europe. Only after the desperate Greek electorate put a leftist government in place, the European parliament discovered that "the necessary reforms had not been carried out" and the Greek tax system wasn't very efficient.
You just know something is wrong when Guy Verhofstadt is accusing a leftist government about not wanting to tax the rich: www.youtube.com/watch?v=P84tN0z4jqM
When he was pm in Belgium, our tax system was effectively gutted creating very large lope holes for big companies and banks. At the same time, our justice system has been reorganized into chaos so not a single one of the big cases against tax evasion or corruption was successfully tried.
"Franklin D Roosevelt was so cocking the US economy with ill-thought out interventions that, while leaving gold helped, it didn't actually solve all the problems.
Yes, I know, that's not the way the story is normally told: but Roosevelt's thrashing around extended, rather than solved, the Depression."
This is charitably true if by "thrashing around" you mean "giving in to the conservative pipe dream that a balanced budget makes rainbows and ponies spout from the earth and cutting stimulus in 1937-1938, thus predictably causing a double-dip recession that was later fixed by going back to ignoring the Austerians and actually putting people back to work".
Just as with Obama, the lowest point of his presidency was when he actually did what a Republican wanted. He then learned his lesson, which holds very much true today: ignore the Austerians whose solution to upturns, downturns, and anything in between is to scribble out the Laffer Curve on one more napkin, declare that we're still to the right of the X, and grin as if it isn't the eleventy-fucking-billionth time we've heard that joke.
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