Posted by on February 8, 2015

Greece: Lots of Losers and a Few Winners

I have just finished reading an article that claims that some married women in Greece are turning to prostitution to make ends meet.  Turned away from the legal brothels, they are becoming streetwalkers.   So, this gets added to the 28% unemployment, the 25% decrease in GDP and the 61% youth unemployment that Greece is enduring in this modern-day depression.  And in return for all of this suffering, Greek government debt, even after the partial write-off accepted by creditors in 2012, has risen over the last 6 years from 109% to 175% of GDP, the highest in Europe and clearly unsustainable.

But here’s the worst thing: it didn’t have to be this way.  There was an alternative that would have almost certainly left the Greeks, and probably the rest of Europe, better off.  Well, at least most of the Greeks and most of the rest of Europe.

Following the financial crisis, Greece had two problems:  a very uncompetitive economy (with a balance of payments deficit equal to over 14% of GDP in 2007 and 2008) and towering debts.  The problem was that, as part of the Eurozone, it couldn’t do anything about the former without making the latter worse.  With no control over its currency, the only solution to the lack of competitiveness was to reduce costs through grinding deflation.  But any deflation would only make its indebtedness a bigger problem.  Greece was, in essence, trying to solve a single equation with two unknowns, which, as I think I remember from my algebra classes, can’t be done.

Greece is not the first country in history to find itself in this situation.  Nor is it even the first time for Greece – far from it.   And there is a traditional solution: devalue your currency to solve, at least temporarily, the competitiveness problem and default on your debt.  And this is precisely the route that Greece would have followed if it had left the Eurozone in 2010.

The consequences of a devaluation and default would have been a sharp economic contraction as domestic confidence and foreign funding collapsed, capital fled and inflation raged.  The Greek population would have suffered tremendously, but it is hard to believe that they would have suffered more than they currently do.  But, after all that, they would have come out the other end with the slate wiped clean and at least the possibility of starting over again.  After a few years, a new generation of international bankers would be proclaiming “this time it’s different” and once again offering the Greek government and its favoured clienteles the opportunity to live beyond their means with foreign debt.  Rinse and repeat, as Greece has done throughout its roughly 200-year history.

Also, very importantly, they might have come out the other end without the left-wing lunatics whom the Greeks have, in their desperation, elected.  Unless Syriza backtracks hugely on its electoral promises to roll back the free-market reforms, insufficient though they may be, that Greece has recently enacted, the Greeks will find themselves saddled with many of the terrible policies that got them into this mess to begin with.

So, if the Greeks had pursued the alternative strategy, their suffering would have had a point: the possibility of starting anew.   They would have been better off, at least if you think (as I do) that the Eurozone, and certainly Greece’s inclusion in it, was a mistake from the beginning.  But I also think that the rest of Europe would have been better off, at least if you believe (as I also do) that a further Greek default is inevitable.  In other words, the actions of the European Union and the Greeks so far fall into the category of “extend and pretend” which has become the favoured solution of governments around the world.  And, as usual, this will only make the ultimate problem bigger.

The Greek debt is now 80% owned by official bodies, other countries, almost all European, and the International Monetary Fund.  When the Greeks default on this debt, the burden will fall overwhelmingly on other Europeans.  But this is only the front door.  In addition, as depositors have fled the Greek banking system, the European Central Bank has increasingly been the “lender of last resort” to the Greek banks, taking more Greek government debt as collateral.  Which means more losses for the rest of Europe through the back door.

In fact, as far as I can see, there have only been two groups that are clear winners from the policies pursued to date.  The first is the private sector holders of Greek government debt, predominately banks and hedge and other funds, that have been redeemed with the proceeds of the debt provided by the EU and the IMF.  The second is high net worth Greeks and Greek companies that have taken their cash out of Greek banks, fearing a forced conversion into a devalued drachma or a Cypriot-style “bail in”, to be replaced by the funding provided by the ECB.  Although the first group has not escaped unscathed – they did have to participate in the 2012 “haircut” – it should have been much worse.  The second group has escaped damage totally and continues to hit the exits: an additional EUR 14 billion is reported to have fled the country in the run up to the recent elections.

Now, I am not normally a believer in financier conspiracy theories, if only because, having known a large number of bankers, fund managers and high net worth investors over the years, I just don’t think that they are smart enough to pull them off.  However, when something like this happens, you really have to wonder.

(This article was originally written for the Huffington Post.   As I have mentioned before, the HP readership seems to have a disproportionate number of ADHD sufferers, so things have to be kept short and simple for them.   In fact, my views on the current battle – you can’t really call them “negotiations” – between Greece and the Troika are more nuanced than this piece would indicate, with the most likely outcome being some new mechanism for “kicking the can down the road”.   However, I believe that the three main points remain correct: first, that Greece will default again, however it may be dressed up; second, that Greece will leave the Euro, which will be one step – and maybe the only necessary step – in the demise of this misguided currency union; and, third, that so far the attempts to keep Greece in the Eurozone have primarily benefited the financial community, like so many “bailout” efforts since the financial crisis.  As always, for the first two of these observations, it is much more difficult to predict when than if.)

American Sniper

This is not a great movie, but I don’t want to talk about the quality of the movie.  I want to talk about the reaction it has generated.

Here is a particularly hysterical response, from a full-fledged member of the Hollywood “luvvie” set, documentary producer and director, Nick Broomfield: “I think that Adolf would have been proud to have made it.”  Branding it an example of “American fascism”, Broomfield (who is a transplanted Brit) said it made him question his decision to live in the States:   “After you’ve watched a film like American Sniper, you think “My God, what the fuck am I doing here?””   Some libertarian circles have been equally scathing.   Here is a quote from a blog in David Stockman’s Contra Corner entitled “’American Sniper’ – Tawdry Commercial For The Empire of Carnage”: “It is nothing less than an odious homage, indeed literal horrific (sic) hagiography to wholesale slaughter.”  (As an aside, not only do I think that the tendency of many libertarians to characterize America as a nation of war-mongering imperialist is factually incorrect, it is also extremely bad politics.  But that is a subject for another day.)

I wonder if these people saw the same film I did.  Because the overwhelming emotion I experienced was pity.  Pity for the young troops killed, and for those who returned physically destroyed or mentally traumatized, in an unwinnable and pointless war.  Pity for sending them into a battlefield where it is impossible to tell friend from foe, and with “rules of engagement” that can send them to Leavenworth if they mistake one for the other.  Pity for their abused idealism after they are taught that fighting radical Islam “over there” is somehow necessary to prevent it from surfacing in the West, when in fact retaliatory “blowback” attacks are by far its most likely product.

In the end, Chris Kyle is killed by a mentally ill man whom he is trying to befriend and help.  Which actually strikes me a pretty good metaphor for America’s entire recent experience in the Middle East and Afghanistan.

Debt: Hair of the Dog

Out of all the responses to the Great Financial Crisis, without a doubt the worst has been the immediate reversion of governments and central banks to the “borrow and spend” policies that caused the GFC to begin with.   In a world suffering from excess debt, the response has been to pile on more.   Confirmation of this has just come from the McKinsey Global Institute in a report entitled “Debt and (Not Much) Deleveraging”.

If you are prone to depression, make sure you double up on your medication before reading this report.  The key takeaways from McKinsey’s sample of 47 countries are:

  • Since 2007, non-financial debt has risen by $57 trillion, to reach $199 trillion, an increase of 17% compared to GDP.
  • Government debt alone has grown by $25 trillion to reach a point in many countries that, according to McKinsey, cannot be resolved by growth or austerity alone and must be resolved by alternative means, including “more efficient (!) debt restructuring programs”.
  • Household debt has really only shrunk in the UK, Ireland, Spain and the USA (the latter, largely through default) and it has risen in 80% of the countries, including some of the recent “stars” of the global economy such as the Nordics, Canada and Australia.
  • And China merits special notice for a debt that has increased by $21 trillion since 2007, dwarfing the $5 trillion increase in GDP, with over 50% of the loans linked to real estate (which figure may not even include the loans indirectly linked to real estate, such as the loans to local governments that depend on real estate sales and taxes for their income), with a “wild, wild east” shadow banking system growing at 36% per annum, and with a debt-to-GDP ratio rarely seen in a developing country.  (A recent Bloomberg article cites a prediction that debt grew  in January 2015 at the highest rate since the financial crisis.  And this from the “reformist” government of Xi Jinping, which is supposedly weaning China off its debt addiction, but which reverts to the monetary spigot the minute that growth slows.  China truly has a “tiger by the tail”.)

But the numbers are probably even worse than this.  As David Stockman has pointed out, debt not only increases the numerator of the ratio, but it also inflates the denominator by artificially pushing up GDP.  Which means that the already excessive debt numbers are actually worse when compared to a sustainable level of economic activity, particularly in a place like China.

Probably the most amazing thing of all is that, in a world of massive debt, huge monetary and currency manipulations, increasing geopolitical and domestic turmoil, and a “hair of the dog” and “kick the can” policy response, stock markets continue to hit new highs.  I get, but I don’t entirely buy, the argument that the risk free rate is extraordinarily low, but what about the equity risk premium?  Shouldn’t investors be pricing in an exceptionally large risk premium for financial, economic and political conditions that have literally never been seen before?  Maybe I need to hit the Prozac, but it is hard to see how this doesn’t all end very badly.

Roger Barris, London

I Wish That I Had Said That (Not Always)…

Those who can make you believe absurdities, can make you commit atrocities,” Francois-Marie Arouet (aka, Voltaire)

Now, now, my good man, this is no time to be making new enemies,” a death-bed quote wrongly attributed to Voltaire after supposedly being asked by a visiting priest to renounce Satan.

We shouldn’t have to pay for [management’s] defects,” George McGregor, the president of the United Auto Workers, commenting on the exclusion of recall costs from profit-sharing calculations.   I am sure that he is equally willing to exclude the results of management’s good decisions from the calculations.

It’s true that Greece got itself into trouble through irresponsible borrowing (although this irresponsible borrowing wouldn’t have been possible without equally irresponsible lending),” Paul Krugman equating borrower and lender responsibility.  (You’re right, Paul, they have both been irresponsible and let’s punish them both.  But what do we do about this: for every dollar of loan that we write off to punish those “irresponsible” lenders, those “irresponsible” borrowers get a one dollar windfall, since they have already had the benefit of the loan?  In this context, how are we “fair” to lenders and borrowers who were both irresponsible?  Because, Paul, contrary to what you apparently believe, a dollar borrowed is really not a dollar earned.)

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