Greece Has Chosen to Become a Banana Republic With its No Vote

It was an in-your-face message to the country’s creditors (largely the European Union, the European Central Bank and the International Monetary Fund) that Greece won’t be lectured on repaying debts or pension reform anymore. And it leaves the Troika with few options at tomorrow’s emergency summit—either cut Greece loose and accept the consequences, or give in to the country’s demands.

Not much of a choice, given that if the EU caves, it reads like an open invitation to countries like Cyprus, Portugal, Spain and Italy to do exactly what Greece has done. Since when is the Eurozone a transfer union? It cannot be expected to shift funds from high-productivity countries that keep their public finance in order to poorer ones that don’t. There’s a lesson to be learned here, lest the EU blows its chance.


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Greece Got Only Promises, No Money, from its Friend Mr. Putin

A victim of Putin’s typical negotiating tactics, Tsipras left St. Petersburg with an offer of money from a project that might never be completed. Yet Putin got what he wanted: Tsipras was on record as opposing the extension of EU sanctions against Russia.

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Europe Gives $260 Billion For Anti-EU Greece But Balks At $65 Billion For Pro-Europe Ukraine

Greece’s election of an anti-Europe government showed it wants out. Ukraine’s EuroMaidan revolution shows it was willing to risk its existence to become a part of Europe. Europe has showered recalcitrant Greece with hundreds of billions of bailout funds while begrudgingly giving Ukraine tens of billions just to keep it alive, even though Ukraine is fighting Europe’s war against Russian expansionism.

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Krugman On Austerity: How About Looking At The Facts For A Change?

New York Times economist and editorial writer, Paul Krugman, has headed the Left’s crusade against austerity, both in the United States and across the industrialized world. To Krugman, “austerity” does not denote a careful husbanding of government money. Rather austerity denotes unwisely large cuts in government spending that, he claims, threaten economic growth and recovery. Krugman bases his opposition to austerity on an empirical assertion that we can test; namely: “Across the advanced world, big spending cuts have been associated with deeper slumps.”

Krugman’s testable hypothesis, therefore, is: Countries that experience large reductions in government spending grow more slowly (or not at all or worse).

Just as some people speak before they think. Krugman seems to believe his asserting something to be true makes it true. The scientific method does not work this way, however. It requires that we first gather the facts on government spending and growth. Second, we must use these facts to test the Krugman hypothesis of a positive relationship between government spending and growth.  

The scientific method, so applied, shows Krugman’s facts to be wrong (where are the “big spending cuts”) and it refutes his hypothesis. Not a good day for Mr. Krugman. Next time, he should gather and test the facts before he writes.

 


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No One Ever Learns: The Argentine Price Freeze

Argentina has ordered a price freeze on food products to last until April 1. The price freeze applies to the largest food retailers, which account for seventy percent of the market. It follows a day after the IMF censured Argentina for its manipulated statistics, most importantly its gross underreporting of the inflation rate.  Customers have been urged to keep cash register receipts as proof  if the largest retailers violate the freeze order. 

 

The results are predictable. Market demand will spill over to small retailers who cannot satisfy the demand for food products. Their prices will rise, and there will be two quite different prices of the same food products. Customers of large retailers will stand in line hoping to buy at the frozen price. There is no assurance that there will be anything to buy when they get to the front of the line. Outside Wal-Mart, Carrefour, Coto, Jumbo, and Disco stores, black market sellers will offer customers goods at much higher prices.

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Note to Krugman: Greece Proves Keynesian Economics Wrong

Times columnist Paul Krugman’s continuous railing against austerity reached a crescendo with Greece’s default. In his What Greece Means, Krugman vents his outrage:

“What Greek experience actually shows is that while running deficits in good times can get you in trouble… trying to eliminate deficits once you’re already in trouble is a recipe for depression…Greece is the worst case, with unemployment soaring to 20 percent even as public services, including health care, collapse.”

Bankrupt economies, like Greece, need stimulus, not austerity, Krugman declares indignantly. The “austerity-induced depressions” around the European periphery are proof that Keynes was right.  Germany’s Angela Merkel, her IMF-austerity allies, and world-wide lenders do not understand that we need a massive stimulus to get Greece out of this mess. They need to step up to the plate if they are good citizens of Europe (or the world).

Krugman does not fess up that Greece’s Keynesian policy of endless borrowing to fund wasteful government spending and feed massive welfare programs is exactly what got Greece in the trouble it is now in. The Greeks cannot pay their  bloated public payrolls, out-of-kilter wages, and generous pensions and early retirements unless fools lend them money that will not be repaid. Even the Greeks themselves are not falling for that trick. They are too busy transferring their assets abroad. Merkel and her stingy Germans make for good scapegoats, but it’s not only them. Lenders throughout the world have shut down the lending spigot.

Liberals are gearing up to use Krugman's Greek fable of “Keynes has won” to justify further trillions of U. S. debt and growing government to ever greater heights, as Times columnist Nicholas Kristof reveals in his In Athens, Austerity’s Ugliness:

 

 “Europe declared war on Keynes, and Keynes is winning…If you want to know how well (Republican budget cutting) works, come visit Europe — especially Greece. Yes, Greece needed a wake-up whack and economic reform, but Republican-style austerity knocked the patient unconscious.”

Greece’s Keynesian orgy leaves  it with two unpalatable options. One: Without further European bailouts, Greece exits the Euro zone, its drachma collapses, and its living standards fall to Bulgaria’s. Eventually, after prolonged pain its wages and prices fall enough to restore its competitiveness. Two: It meets the terms of its EU bailout agreements, it stays in the Euro zone, cuts government spending, and reduces wages and prices over an extended period of time until its competitiveness is restored.

One statistic explains why Greece must experience rising unemployment, let wages and prices fall, and fix its broken welfare system under both scenarios. German unit labor costs (the cost of producing one unit of output) have been flat over the past decade, while Greek unit labor costs soared, fueled by borrowed money from abroad. Germany (and the rest of Northern Europe)  kept its costs in check by wage restraint, rising productivity, and checking the welfare state. Greece became a broken economy no longer able to compete either within the European or world market. Keynesian economics brought them to this sad state of affairs.

Greece is not a test of Keynesian economics as liberals would like to claim.  Only economic illiterates could call for deficit spending when there are no lenders. In order for there to be a deficit, someone somewhere has to pay for it.

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Greece: Default or No Default?

Yesterday, 83 percent of Greek sovereign debt holders agreed to “voluntarily” exchange their bonds for new bonds with face value of 53 percent of the original bonds. The Greek finance ministry announced that it would invoke the collective action clause to impose the swap on an additional thirteen percent of bond holders who did not agree to the swap. This thirteen percent purchased Greek sovereign bonds under Greek law and are subject to the parliament’s collective action clause. This seems to leave seven percent holdouts who did not agree to the swap and did not purchase under Greek law. What will happen to them remains unclear.

With this “successful” restructuring, the troika monitoring Greece agreed to release a new tranche of bailout funds to stave off a “disorderly” Greek default. These funds will give Greece a short amount of breathing space.

Notably, the Wall Street Journal referred to yesterday’s actions as  “the largest-ever sovereign-debt default and the first for a Western European country in half a century.” As I write, the ISDA is meeting in London to rule whether Greece’s actions will trigger the 3.8 billion Euros of credit default swaps. Greece and the EU had hoped to label the debt restructuring as “voluntary” and hence avoid the CDS trigger. [Yes, they did agree on the obvious: Greece did default].

These dramatic events simply give Greece perhaps a month of breathing  space. Greece cannot borrow and must meet its austerity pledges to the EU, European Central Bank, and the IMF before it can tap more rescue funds. With parliamentary elections forthcoming and austerity universally unpopular, Greece will not be able to implement its austerity program, in my view. At that point, the troika must decide whether to bail Greece out with no conditions or to let in go under and leave the Eurozone.

The Greece story is only beginning.

I Repeat Again: There Is Still No Greek Solution

The press is again full of reports that the troika (IMF, EU, and ECB) have reached an agreement on Greece. Markets will again rise, until they see that little has happened.

The troika has agreed to release a new tranche of rescue funds to stave off a March Greek default. Private lenders have agreed to their haircut (but that had really been decided a long time ago). The rescue funds will probably be doled out slowly to make sure that Greece meets its end of the bargain and cuts wages and public sector employment.

With an election coming up (and the public vehemently against outside intervention and austerity), Greece cannot meet its end of the bargain. Greece can only do so by agreeing to be governed by external bodies, such as the troika, which spells the end (temporarily perhaps) of Greece independence.

This is one of a hundred of steps that remain to be taken before we can say that Greece has been rescued.

I Repeat: There Is No Greek Solution

The press announced another agreement. The markets rose. The Greek parliament approved more austerity measures demanded by the troika of international agencies to release the next tranche of Greece’s bailout funds. Maybe Greece will indeed get some more international money to stave off default, but this will be a temporary band-aid.

It is too late for Greece.  Greece is no longer governable.  Angry crowds will get angrier and larger. There will be general strikes. With an upcoming election, any parliamentary candidate who backs the austerity program will lose. Greek politicians can promise the Germans, the IMF, and the European Central Bank austerity until they are blue in the face, but they will prove impotent in the face of  public anger and intransigence.

Greece has held on so long by making promises it cannot keep, which its European neighbors pretend to believe. This farce is coming to an end. Either Europe must decide to look the other way and unconditionally bail out Greece or let Greece default. Both outcomes are bad, but the choice must be made and soon.

NYT Media Bias: A Blatantly Misleading Headline (“Budget Cuts Raise Doubt on the Course of Recovery”)

I was taught in junior high journalism that headlines are guides to the content of the article. If the reader skips the article, the headline constitutes the information that the reader takes away. The headline should strive to honestly capture what the article is about.

“Budget Cuts Raise Doubt On the Course of Recovery” (NYT, Business section, April 12) blatantly violate this basic rule. The headline warns that experts (not the writer) think that the $38 billion budget cut (and cuts to follow) will harm the recovery. “The budget deal is a bet by the Obama administration that the loss of $38 billion in federal spending will not be the straw that breaks the back of the fragile economic recovery.”

We then learn that the straw is lighter than the lightest of feathers. The $38 billion equals one quarter of one percent of GDP and “joins a growing list of minor problems impeding growth, economists said.” Whom is he quoting, I'd like to know.

To underscore the impeding danger, the author tells us that a chief economist of a Chicago investment firm has reduced her growth forecast from 4.2 percent to 3.3 percent. There is no corollary statement her move was prompted by the budget cut. If it were, I imagine she would be laughed out of the investment community.

The article changes tone. We learn that things are looking up. The Fed and private forecasters predict that growth will accelerate. Even more surprising (in light of the dire headline), there are experts who think budget cuts will stimulate economic activity, but one such expert is dismissed as belonging to “a libertarian think tank.” However, other economists (in addition to the libertarian) opine that budgets cuts will have immediate economic benefits “by soothing the nerves of foreign investors.”

The NYT writer saves his strongest ammunition for last: an IMF warning that “the cuts proposed by the Obama administration will be challenging to implement in an environment of weak growth and high unemployment.” As I read this, the IMF is concerned that the administration cannot carry through on the proposed budget because of political considerations, not because of the economic consequences. I cannot really tell from the information in the article.

An accurate headline from an unbiased writer would have been: “$38 billion budget cut no threat to recovery, experts say.”