The Gaming Den

So. If you'be been trawling Krugman and Kevin's blogs about what the ECB needs to do (accept a higher inflation target) you'll get some whining about how inflation hurts people on fixed income like Grandma, so, fuck the Greeks and Italians, austerity!

I don't even know where to begin with this. Maybe telling them that unless that money is being stuffed in a mattress or stuck in a long term bond the interest rate will raise on it anyway? That the actual choice is between chopping off a foot now and chopping off both legs in two months? Help me out here, I need a TGD punchy retort here.[/img]

Ooh, ooh! Maybe: that's kind of the fucking point? That we actually want Mr. Potter and granny to stop hoarding their money and reinvest it, maybe even use it to buy some new bonds before inflation eats into it?

Ooh, ooh! How about: deflation and unemployment is fucking stealing, too, and I don't appreciate you trying to use the omission bias to act self-righteous?

Okay, trying to sort this out: the idea with "austerity" measures is that the main threat to the European economy is ballooning government debt because of overspending - and because their debt is so high, the countries are having a harder time issuing bonds to borrow money to cover that debt. Investors that buy bonds believe the governments are less likely to come up with the money to pay off the bonds, and are demanding higher interest rates on the bonds - which is natural, because the riskier a bond, the higher the interest rate should be.

Now, when this sort of government debt issue comes up there are a number of traditional ways to assuage the problem - but the easiest of those (printing more money, borrowing money from a central bank at a lower-than-market interest rate, and getting a government bank to buy the bonds at an artificially low interest rate) aren't applicable because those countries are on the euro, the ECB is their effective central bank, and the ECB does not want to bail out entire governments, even if they had the means and authority to do so. So these countries are facing the real issue of not being able to cover their debts, mainly because they cannot use the traditional means of covering those debts. The ECB is willing to buy bonds from those governments, but only if they conform to austerity measures to lower their spending.

As Krugman et al. likes to point out, this ties in to the inflation rate of the euro. Some inflation on a currency is almost guaranteed, but the Germans (who are, let us admit, the economic powerhouse and posterchild of the EU) want to keep a very low interest rate, for various reasons, particularly horrible memories of hyperinflation that their parents and grandparents went through. As Krugman et al. also point out, the German expectations are unrealistic, and the austerity measures in different EU countries have not led to rapid recovery. They point out that adoption of ECB-enforced austerity measures would basically prolong and heighten the recession in Europe for years.

Because, and here is the juice of it, there is the perception that these countries with the rising bond rates are simply facing the effects of overspending. In a large part, the bankers at the ECB are acting like these countries are poor relations who piss away the money they have, borrow money from around town, and then want someone else to come and bail them out. That is a general simplification, but terribly accurate: the ECB is trying to do a "teach a man to fish" parable with countries, forcing them to control their spending to match German interest rate targets, and if that means a "tough love" approach of watching countries suffer and collapse, then so be it.

Of course, what Krugman et al. also point out is that the European economy is a system, and the monies flowing in and out of countries is more or less balanced; for one country to have greater influx of cash means some other countries needs a greater outflux of cash. Obviously, it is not realistic or mathematically possible for the countries currently at issue to all suddenly be drawing in more money without beggaring some other countries - but that is more or less what Germany did to achieve their interest rate, and that's basically what they're telling these other countries to do.

Lago PARANOIA wrote:I don't even know where to begin with this. Maybe telling them that unless that money is being stuffed in a mattress or stuck in a long term bond the interest rate will raise on it anyway? That the actual choice is between chopping off a foot now and chopping off both legs in two months?

Well Lago, the first thing you need to do in order to begin is to understand what a "pension" is. People with pensions don't have "money." They don't have "bonds." They have a promise that someone is going to pay them money until certain conditions, normally tied with death are met.

Traditionally these have been FIXED payments. The notion of a COLA (cost of living adjustment) applied to pension payments is a relatively new notion. I don't know the status of european pensions to know if there is a COLA attachment (as we have with Social Secutiry) but if there is none inflation hurts big time.

People with pensions don't have "bonds" they have "bond coupons" without the "bonds" (fixed payments over time but no end payment whatsoever).

There is a reason why "FIXED INCOME" is called that. Even for Bonds. Only when trading Bonds can inflation matter. Once you buy a bond the return is FIXED. It is only when you are selling and buying bonds can you take advantage of market conditions.

Rapid recovery is a pipe dream whatever we do. The PIGS are fundamentally uncompetitive, the skills of their population, infrastructure and natural resources fundamentally can not sustain their current standard of living. They have to get more productive, and that will take half a generation and not years.

They have to go back to pre-Euro standards of living. The knock on effects this will have on employment in the more Northern countries are unfortunate, but unavoidable ... with or without inflation.

All inflation does is make their debt forgiveness and wage deflation more politically feasible. It's not without it's own side effects though, one of which is increasing the profits in the financial sector ... which is already way oversized and too politically corrupting as it is.

MfA wrote:They have to go back to pre-Euro standards of living.

Internal devaluation is bullshit. It does not work.

Irish manufacturing wages look like this:



Telling them that they need to get with the program and deflate wages and prices across the board is retarded. That can't happen, because wages and prices have downward rigidity. Germany needs to accept some fucking inflation while the GIPS countries have price stagnation for a few years. Competivieness issue solved. And solved without destroying the standards of living of everyone who lives in Italy.

August 2011 saw the largest contraction of Eurozone manufacturing since September of 2009, and GERMAN EXPORTS FELL LAST MONTH. The issue is 0% that Spanish people are greedy and wanting to live like Germans and 100% that expansionary austerity is a fucking pipe dream. Contractionary policies by the government contract everything.

-Username17

FrankTrollman wrote: Telling them that they need to get with the program and deflate wages and prices across the board is retarded. That can't happen, because wages and prices have downward rigidity. Germany needs to accept some fucking inflation while the GIPS countries have price stagnation for a few years. Competivieness issue solved. And solved without destroying the standards of living of everyone who lives in Italy.

Wouldn't it be rather easy to reduce prices and wages by passing a law requiring that businesses do so and imprisoning anyone who doesn't comply? Perhaps set a maximum wage across the board and making it illegal for anyone in any profession to be paid more than that. It's a bit hamfisted, but if you want to reduce wages and have a functional police force, that seems to be the easiest and most effective way to go about it.

hyzmarca wrote:

FrankTrollman wrote: Telling them that they need to get with the program and deflate wages and prices across the board is retarded. That can't happen, because wages and prices have downward rigidity. Germany needs to accept some fucking inflation while the GIPS countries have price stagnation for a few years. Competivieness issue solved. And solved without destroying the standards of living of everyone who lives in Italy.

Wouldn't it be rather easy to reduce prices and wages by passing a law requiring that businesses do so and imprisoning anyone who doesn't comply? Perhaps set a maximum wage across the board and making it illegal for anyone in any profession to be paid more than that. It's a bit hamfisted, but if you want to reduce wages and have a functional police force, that seems to be the easiest and most effective way to go about it.

How is that going to make people who already make less than the cap spontaneously renegotiate all their contracts? Prices just aren't all that flexible, and asking everyone in a country to accept lower nominal wages at the same time is just a bureaucratic nightmare.

The easiest way to get simultaneous wage decreases across the entire country is to allow your currency to devalue. If people are getting the same wages, but the actual money only buys 80% as much in foreign stuff, that goes over way better than trying to simultaneously adjust all employment contracts in the whole country down by 20%. The problem in the Eurozone is that the ECB refuses to adopt loose money policies that would allow the currency to depreciate. No inflation plus no floating exchange rate means no functional mechanism to reduce relative wages.

And that is why Merkel is confidently predicting that Europe will have low to negative growth for ten years. Because she refuses to accept any of the solutions to the problem.

-Username17

FrankTrollman wrote:Irish manufacturing wages look like this

Ireland is a completely different case than the rest of the PIGS, I should have mentioned that (in my defence I have said it countless times before). They have a highly competitive economy, they have just been sold into slavery by their government.

If Ireland were to simply default they could actually sustain a higher standard of living afterwards ... if Greece were to default they could not sustain their current standard of living without outside help.

MfA wrote:

FrankTrollman wrote:Irish manufacturing wages look like this

Ireland is a completely different case than the rest of the PIGS, I should have mentioned that (in my defence I have said it countless times before). They have a highly competitive economy, they have just been sold into slavery by their government.

If Ireland were to simply default they could actually sustain a higher standard of living afterwards ... if Greece were to default they could not sustain their current standard of living without outside help.

Italy is a completely different situation too. They have a huge manufacturing base and a stable budget. They just have a large inherited debt from years of political turmoil. Italy's problem is pretty much 100% that they have an uncooperative central bank that is attacking them and attempting to destroy their democracy. If they had a normal central bank like the Bank of England, they wouldn't be on the list of countries in trouble at all.

-Username17

Isn't it about time the rest of Europe banded together and invaded Germany again? It seemed to solve the problem all the other times.

On a more serious note, while it is certainly bad that Italy, Ireland, etc. are getting fucked by the ECB, and I certainly care (while accepting I can't do anything), I don't have any stake in it. Nice Europe, on the other hand, is another matter. The personal stake bit, not the ability to do anything.

Is the ECB/Germany spelling eventual bad news for Sweden, or are they basically content with fucking the group of countries they have there/are unable to terribly affect countries that have their own currencies?

Germany's army has been downsized to the point that the Danish army is a threat against them. Now would be the time to invade them

Historically, Germany has bought Swedish guns to invade Norway with. Just saying.

On a more productive note: oddly enough it is currently the United Kingdom who is dragging its heals and vetoing the European Suicide Pact. Which is weird, because Cameron has doubled down on expansionary austerity several times.

-Username17

FrankTrollman wrote:Historically, Germany has bought Swedish guns to invade Norway with. Just saying.

On a more productive note: oddly enough it is currently the United Kingdom who is dragging its heals and vetoing the European Suicide Pact. Which is weird, because Cameron has doubled down on expansionary austerity several times.

-Username17

They wanted to trade their vote in for the ability to have the London banks excluded from stricter regulation, or so the view goes.

FrankTrollman wrote:On a more productive note: oddly enough it is currently the United Kingdom who is dragging its heals and vetoing the European Suicide Pact. Which is weird, because Cameron has doubled down on expansionary austerity several times.

It's certainly weird. I doubt this is because he's seen the results of his austerity bus carrying the country over a cliff and has changed his tune. Presumably it's because he hates the EU and just doesn't want to play by their rules.

And this time it's a good thing.

FrankTrollman wrote:They have a huge manufacturing base and a stable budget.

A stable deficit above inflation rate makes for an unsustainable debt.

MfA wrote:

FrankTrollman wrote:They have a huge manufacturing base and a stable budget.

A stable deficit above inflation rate makes for an unsustainable debt.

That sentence doesn't actually mean anything, and isn't even remotely appropo. Italy has a primary budget surplus. That's not a deficit at all. That's the other thing.

Their problem is that they currently are being asked to roll over their bonds at an interest rate which is high enough that when they pay off some of their bonds with their surplus and roll over other bonds into new bonds, they are still underwater. As long as the ECB says that they won't cover Italian debts, then Italy might default. If Italy has to pay interest rates like a country that might default, they will have to default.

But that has absolutely nothing to do with current deficits or unsustainability or anything. It has to do with the fact that even running a budget surplus, that still only involves you ever paying off your debts if your principal debts aren't increasing in costs faster than that. This is a thing that can happen to countries who don't have strong central banks that is extremely different from household finance - since their debt is in a constant state of being paid off and reissued, they really can have their interest rates renegotiated into unpayability even while they are being responsible and paying their monthly payments on time.

It's the job of the central bank to stop that shit from happening, but the ECB actually cheers this shit on. Apparently because it gives them more power over countries even as it bankrupts and destroys those countries. It's basically an invasion.

-Username17