What would a posting be without some comments about Greece? Here are some quick ones.
One of the interesting dynamics in Greece is the continued attachment of the Greek population to the Euro. All the polls show 60-70% majorities for staying in the Eurozone, notwithstanding the ravages of austerity. But there is a very simple explanation for this paradox. As much as the Greeks blame the rest of Europe, and especially the Germans, for their problems, they understand very well that nothing is worse than their home-grown politicians. Although some Greeks and their sympathisers bemoan the loss of economic sovereignty, the continued support for the Euro proves that most Greeks still want to outsource their financial and economic policies to anyone else. As usual, Krugman has been the slow deer on this one. He was recently quoted on CNN as saying that “I, you know, I may have overestimated the competence of the Greek government.”
But there were plenty of warning signs for Krugman and the world. A big one was the self-proclaimed adherence to Marxism by the leaders of Syriza, the governing party in Greece. I am not writing as a knee-jerk conservative here. I am willing to admit that it is possible to hold many political and economic views without immediately qualifying for the Flat Earth Society, but Marxism does not fall within this range of the allowable. There is no doctrine in the social sciences that has been more thoroughly debunked, in both theory and practice, than Marxism. It is not possible to be a true believer in Marx unless you are an imbecile or willingly self-deceptive. In either case, this does not make you an ideal negotiating partner, something to bear in mind when you are deciding where to place your sympathies in the battle between Greece and the troika.
There is also a beautiful irony in the recent negotiations, where the Greeks massively overplayed their hand, in large part because they failed to read the signals sent by the capitalists. True to their ideological leanings, the Syriza leaders would never think to consider the judgment of the markets. When these reacted to a potential Grexit with calm, the Greek negotiating position – which was always based on blackmailing the rest of the Eurozone with the risk of contagion – disappeared. The German press caught it just right when they published a doctored photo of Greek Prime Minister Tsipras pointing a gun at his head and saying “pay up or the idiot gets it.”
For their part, the Germans (and the other northern and central Europeans) were clearly trying to make the Greeks an offer they could not accept. They want the Greeks out and they were actually wrong-footed when Tsipras caved to all their demands, thus denying German Chancellor Merkel the immaculate expulsion she needed politically. Although the negotiations on the third Greek bailout are generally reported as a victory, I think the Germans know that it will be a Pyrrhic one. They will get sucked further into the Greek quagmire and will lose even more money when the inevitable occurs. And Greece will remain a toxic distraction for the Eurozone.
Finally, as an example of the type of muddled thinking that the Greek crisis has produced, consider an article entitled “Germany, Not Greece, Should Exit the Euro” by Ashoka Mody, a Princeton economist who formerly worked at the World Bank and the International Monetary Fund. Mody makes a pretty strong case for a German exit – followed, he acknowledges, by the Netherlands, Belgium, Austria and Finland, although he misses out on the central Europeans who would also certainly head for the door – being less disruptive than a Greek one. The argument all seems pretty reasonable and logical, until you realize that a Eurozone shorn of Germany and these other countries is also totally shorn of its raison d’être: a zone created to facilitate trade and impose discipline on lagging members would be stripped of its strongest traders and its only examples of rectitude. Like the crazed Vietnam War colonel, Mody wants to destroy the Eurozone in order to save it, whereas the logical conclusion from his reasoning is that the entire thing should be dismantled. The fact that this article was even published in a medium such as Bloomberg, and then seriously discussed in a video segment, shows how far down the rabbit hole the Greek crisis has dragged us all.
Student Loans Update
Bloomberg reports on a recent study by the Federal Reserve Bank of New York on student loans. According to the study, private colleges raise their tuition $0.65 for every extra $1 of federal student loans and $0.55 for every extra $1 of Pell grants to low income students. Since there are $1.2 trillion of government student loans currently outstanding, this is equal to a $780 billion subsidy, much of which has found its way into the pockets of professors, most card-carrying Democrats who are often on their way to Washington (like Barack Obama, Elizabeth Warren, etc., etc., etc.). They will now cry crocodile tears over the burden these loans impose on students, after having pocketed a significant amount of every dollar lent.
The only thing surprising about this article is the introductory sentence: “The surging cost of U.S. college tuition has an unlikely culprit, the generosity of the government’s student-aid program.” Only unlikely to the economically illiterate.
The economic news out of Russia goes from bad to worse.
Real wages are falling at a pace never before seen in Putin’s 15-year reign, in part due to the falling rouble (which has driven up the prices of imported goods). In the face of the falling currency, Putin’s government has chosen to funnel money to old-style industry and military contractors, while allowing consumers to take the full blow. The economy, still massively dependent on commodities, is bracing for its longest recession in decades with the slump in oil prices; this will certainly get worse if the Iran deal is signed, unleashing further supply into a glutted market. Russia also needs at least $80 a barrel to balance its budget. Meanwhile, Russia’s newest province of Crimea is proving to be a bit hard to swallow. Kremlin auditors cannot account for two-thirds of the money sent by Russia last year and four regional cabinet ministers have been forced from office due to corruption. Russia has to pick up 75% of the region’s budget and is now threatening to renege on the $18 billion of aid it promised Crimea prior to its accession vote. Crimean Governor Sergey Aksyonov, elected in April 2014 with Putin’s blessing, has been recently quoted as saying “we did not reunite with Russia to be subjected to the same horrors we had experienced” when they were part of Ukraine. I sure hope that there is a Russian proverb equivalent to “out of the frying pan, into the fire.”
All of this fills me with a sense of déjà vu all over again. Nothing has changed in Russia. In the absence of a rule of law, only the foolish will create, rather than just extract, value in this country. Building a business in Russia is tantamount to painting a target sign on your back, which is why Sergey Brin, one of the co-founders of Google, is sitting in Silicon Valley with a large number of his most talented compatriots. To understand this, you only have to read the chapter entitled “Then You Wake Up and My God You’re a Convict” in Nothing is True and Everything is Possible: Adventures in Modern Russia. This chapter details the surreal horrors, including a lengthy period in prison, experienced by one Russian businesswoman who got caught in the crossfire of a bureaucratic turf war.
The fundamental backwardness of Russia, which Putin has done nothing to change, has been masked during much of his rule by a favourable commodity cycle. This is now coming apart. Like his communist predecessors, Putin will ultimately be undone by the inability of his primitive economy to provide both guns and butter and through the cost of reckless foreign adventures. The West needs to play a long game of attrition and patience.
Obama in Kenya
On Sunday morning, I watched President Obama speaking at a Nairobi school gymnasium to a crowd of 5,000 Kenyans. I only watched it briefly, since it was a little early in the morning for platitudes and saccharine, but I did catch Obama making four points. One was the importance of combatting corruption and economic backwardness, including through cultural change. The next was about the importance of education, especially for young women, who would pass the habits and benefits of education to their children. The third was a warning about the dangers to Kenyan democracy from voting based on tribal and ethnic lines. And the last was pointing to himself as proof of the unlimited opportunities available to the youth of Kenya.
Watching this, I couldn’t help but thinking that he could have saved a lot of time and money and delivered the same speech much closer to home. In fact, some of us who voted for Obama in 2008 hoped that he would have been doing a lot more of this. Think of the good he could have done if he had chosen the path of courage and statesmanship instead of pandering.
Canary in the Coal Mine
I have always considered the London residential property market as a leading indicator of the world economy. The reason is simple: a huge amount of the demand for London residential properties comes from offshore investors, especially ones from Asia. It is not at all unusual to hear of new developments selling entirely “off-plan” (ie., pre-sales) years in advance of their construction, much of it to Malaysian, Singaporean, Chinese and Indian investors. I am told that you just don’t count in the Mumbai cocktail party circuit unless you can talk authoritatively of your investment properties in London.
If this is true, then the recent news out of London property market is pretty disturbing. The London Evening Standard has recently headlined its paper with “Stamp Duty Rise Hits Home Prices”. The story goes on to claim that London property prices are falling at their fastest rate since the financial crisis, with prices down about 10% this year. Since real estate agents can never admit to a softening market, the story goes on to attribute much of this weakness to a recent increase in transfer taxes, but this is nowhere near large enough to account for the sharp decline. A more likely explanation is the weakness in China, which is spreading to other Asian countries and commodity producers. It could also just be the inevitable popping of a bubble, which doesn’t really require a reason.
Roger Barris, London
I Wish That I Had Said That…
“Here, here in this world. Where do we go? Where can we turn? When we need some love, it seems that love just can’t be found. Where, where do we stand? When love’s supply don’t meet love’s demand,” Cher in the song Love and Understanding, explaining why the price of love has to rise
“I am fond of pigs. Dogs look up to us. Cats look down on us. Pigs treat us as equals,” Winston Churchill
“I want my dignity back, which is something that no one can offer me; not the corrupt politicians here, not the rapacious creditors abroad,” a Greek citizen recently quoted in the English newspaper i