Thursday, 18 June 2015

Audacity of Yanis Varoufakis - Understanding Global Macroeconomic Stability and the Greek Financial Crisis

Rough Contents Overview:
  • Varoufakis, a quick profile.
  • Global Minotaur book/concept.
  • Exchange rates, trade surplus issues and history.
  • China, 'Chimerica' & Niall Ferguson, currency wars.
  • Greece - historical context, specific precipitating factors.
  • IMF's ills.
  • Bitcoin and Max Keiser.
  • Piketty, inequality and Gates.
  • Referendum result and Resignation.
[2015-06-18] The ongoing Greek financial crisis dedlock has been continually misreported as if it is a simple, political tug of war: little Greece trying to barter an arbitrarily better deal from big EU lending countries. But this narrative excludes essential dimensions which have massive implications for the entire world! The bulk of this can, I think, be covered by talking about this chap's writings and hopeful approach...

He's the finance minister for Greece's latest Government, Syriza - a rainbow coalition of small, 'radical left' leaning parties. I almost wish this political agglomeration would inspire something similar in the UK, to tackle the insurmountable FPTP electoral system. Syriza united behind a popular mandate to begin rolling back half a decade of failed austerity measures, privatisations and restructuring forced upon Greece by the 'Troika'. This triumvirate comprising the IMF, EU and ECB, imposed these conditions in exchange for further, massive, unpayable debts.

Varoufakis is no career politician. Brought in by Prime Minister Alexis Tsipras, he's not even a party member, persay, more like a passionate consultant. A globetrotting, professional economist, no less, who has continued his blogging despite his new post. We should be so lucky! After graduate and masters studies in the UK, he fled Thatcher's 3rd term for 12 years tenure in an Australian university and a year in Texas. He recently advised Valve on growing their Steam platform globally before being drawn back to Athens and his home land. [Wikipedia-1]

With looks that wouldn't be out of place in a Bond villain, and a mellifluous cadence, he meticulously and gracefully answers any and all questions with carefully selected metaphors and examples. He is a formidable speaker in English, and someone to whom Joseph Stiglitz (Nobel economist and ex World Bank chief) pretty much defers to [New Economic Thinking Video]. In fact, Varoufakis' government position has been described as analogous to Obama appointing the well known Keynesian, Paul Krugman, or the aforementioned, world famous inequality expert, Stigltz [NYtimes via twitter].

With a father who fought on the communist side of Greece's civil war (1946–49) and having set up local (PASOK) youth movement, Yanis describes himself as an 'erratic Marxist' and preaches 'pragmatic egalitarianism'. A term I much like. With contributions to the field of game theory research, and the build of a rugby player, he must truly be an intimidating prospect for the European bureaucrats with whom he has been tasked to negotiate. So its of little surprise that he's had to, cooly and calmly as always, belay the repeated claims from 'leaks' and attacks on him via the (dodgy Greek) press, and distorting, confrontational lens of the international coverage.
The audacious part is that he appears to be out to apply his key macro-economic insights directly to where they could have the biggest, widest reaching beneficial effects on the composition of the entire Eurozone (and beyond)! A step up from the radical academics in fiction: Indiana jones or Tom Mason. I'd go as far as to hold him up besides world super-hero Elon Musk, if he succeeds at all.

Physicists - Yanis' initial interest in this degree subject, before switching to an economics degree (the lingua franca of political discourse) [1], leads me to feel an affinity with him and his approach. It was my first degree, which I chose because it seemed seem to contain the most fundamental factors for understanding everything (and for engineering the biggest changes to the universe).

Elon Musk was also a physicists, dropping out days into a PhD to make his millions on the dot com boom. He's famously talked about the subject's necessary thinking style of "first principles reasoning", "a framework of thinking that would allow understanding counterintuitive elements of reality" [BuinessInsider], that seems obvious to us scientist/engineer types, but seems regarded as a magical secret sauce by standard business types. I've already sung Musk's praises in my hyperloop post.

I hope(d against hope) that the Eurocrats can bring themselves to pay him serious attention, because he's not out to win as much ground for team-Greece as possible. The repayment postponements have been aimed at creating time for constructive dialogue. He's consistently projected far more hopefulness than the prevailing media narrative of political conflict we've heard, which has a perversely myopic focus, seemingly intent on self-fulfilling a doomsday scenario.

He's been penning, and repeatedly revising since 2010, a pragmatic "modest proposal" (with expert co-authors) that would quickly resolve the situation. It uses only existing institutions, without call for fanciful systemic overhaul. Yanis understands the hope and expectations riding on Syriza (and himself), and talk about the opportunity for Europe to "reboot". But has also stated that "we are not interested in imposing our views monolithically on the rest of Europe [Greece] is too tiny and too bankrupt to do that" [at 12:18 in this radio interview].

His ambition is to lay matters bare. Obviously he's been seen by some as rude and too strident, and I'm not sure his core ideas have even been listened to, let alone seriously considered. It feels like it may be a case like a expert employee trying to get their boss, with only qualifications in business management, to understand a fundamental technical limitation or requirement in their business, but the one in charge is blind to any reality beyond their costings spreadsheet. Does not compute and they probably even resent the impudence of their lesser rank knowing more than them. And that's before considering any influence of powerful figures who stand to profit from disaster and failures, via whatever arcane financial mechanisms they've cooked up.

Since starting this piece (several weeks back) a deal has been seeming decreasingly likely [BBC]. It was always going be a last minute compromise, at best, but it does feel increasingly like that may have been unrealistic. Despite haing to work up the details of the exit plan, Yanis is still pushing hard to be heard and save the day (as of 2015-06-19). But with talk of an all out run on their banks this weekend it sounds pretty much like game over [ZeroHedge].

Edited book cover image (from Yanis' blog).
Anyway. Varoufakis' big insight is "The Global Minotaur" - a beastly financial aspect of the United States that has stabilized the world economically (and therefore politically) via its huge, brutal consumption. More specifically, the state of affairs that existed since 1971, when America's world dominating, post world war trade surplus inverted. Instead of re-balancing, Nixon's Government decided to actively feed the country's trade and budget deficits to the max, shooting the moon. They relied instead upon attracted their exported dollars for re-investment in the American pie, vacuuming them back up via the wonders of international investments in Wall Street!

This one-sided flow of capital (goods and investment) was so powerful a sink of capitals as to neutralise the effects of national trade surpluses all around the entire world. It maintained a somewhat grim, global stability. This is comparable to the ancient regional stability fostered by the tyranny of feeding King Minos's labyrinthine bound, hybrid monster of Greek legend; a probable mirror of a real historical situation of lavish (human and economic) tributes proffered to Crete, in subordination to its dominance.

Although perpetuating this state of affairs almost certainly caused a much ill (global labour exploitation and increasing inequality), it also promoted strong global growth and political stability. Varoufakis submits that it was this monster's apparent demise, in the financial crash of 2008, that initiated the world's current economic woes. Its continued absences, more than the shock itself.

Wall Street took such a big hit from the fall of its vast, unrealistic pyramids of financialised debt as to break this global surplus recycling mechanism (GSRM), permanently. The beast's core fare was the excessive output of Japan and Germany (and later China). It is the unchecked German surplus which has proven the most damaging, its unbalancing thrust has been sustained, virtue of being lashed to the rest of the Euro countries. But the union has begun spinning apart as an outcome, damaging the less productive peripheral countries in particular. Greece was just the weakest, so first to crisis, but Italy and Spain have also been lumbered with unsustainable debts, far bigger than Greece's due their bigger size.
The center cannot hold, much like Gav and Dan's slow-mo shattered CD (though even slower).
Trans-national money mechanics (as per my understanding): Key here is the fundamental inability to transform one sovereign nation's brand of money ('fiat' currencies) into another. They are fundamentally separate and are not magically transmuted at their borders. Much like in-store credit that can only be used in the issuing shop.

Normally, when a country gets too productive, selling way more to other countries than it buys in (for an extended period), it accumulates a lot of foreign denominations, while hoarding its own currency. With fewer of its notes outside its boarders, it becomes harder for foreigners to acquire them., thus less able to purchase goods, i.e. making the country's exports more expensive. The exporter's 'stronger' currency is an almost osmotic, restorative force, pushing back against purchases of its exports. This generally causes their relative volume to reduce, suppressing the trade deficit.

Conversely, devaluing a currency 'weakens' it, thus encouraging increased international sales, since outsiders will be able to buy more from them for the same quantity of their own currency (like a "50%-off everything" shop sale).

But neither of these stabilising effects are available to a country that is part of a shared currency, like the Euro. Greece's meagre exports remain relatively expensive to outsiders, since Germany floods the international markets with its productivity, hoovering up most of the available Euros out there. German exports are kept cheap by the weak PIIGS countries. These less productive regions are more dependant on imports, and so hand out Euros to the rest of the world.

Like a demented 3 legged race pairing, the German muscle machine keeps pushing ahead harder against the slowing force, seemingly oblivious that the pull is from her increasingly injured compatriot(s). There is a systemic failure to grasp that it is virtually impossible for the German nation's colleagues to 'tighten their belts' sufficiently unless Germany 'loosens' their own. In a closed (global) system, its two halves of the same equation.

When the monetary union was cemented in 2000 (or thereabouts), it was known to be an incomplete project, lacking combined fiscal and political control [e.g. Yanis explains in a New Economic Thinking Video]. It was seen as too difficult to swing the whole deal in one blow, so the politicians of the time kicked the tougher matters into the long grass, expecting that inevitable instabilities would force the second half of the 'closer union' into motion, a decade or so down the road. Unfortunately the crisis caused public opinions to diverge instead. Nationalism and resentment has risen on the back of financial hardships. 5 years on from the crash's impact in Europe, Germany is still failing to act decisively because it doesn't want to loose its prerogative to simply step out of the common currency. This luxury "Get-Out-Of-Here card" [Varoufakis] is virtue of surpluses and wielded over the other big Euro nations. Issuing shared Euro-bonds, that Germany was jointly accountable for, would end political leverage.

So instead Greece is being strung out on further, ever more expensive loans. "Just like a cruel doctor administering enough medicine to keep the patient alive..." avoiding either cure or release from terminal pain [Varoufakis]. Greece is in a kind of international debtors prison, where they've not been allowed to go bankrupt. Instead they keep having potentially profitable assets forcibly stripped from them, while being told to cut their consumption ever deeper. Its more like an aggressive loan shark who is perversely intent on subjugation, rather than allowing his victim the tools to earn enough for debt repayment.
Colour coded, articulated lorries loaded with palates of €100 notes - breakdown of Greece's debt bearers from demonocracy.
It sets a pretty scary precedent when external forces are dictating such massive national political 'reforms', largely via the private banks with the biggest holes in their books (a "bankruptocracy"). The Trioka's dictate expected to achieve an impossible 4% budget surplus, which its totally failed to reach. Of course, the economy just keeps contracting as money is taken out of the system by slashing spending. "Export growth has been flat", balance has come via crushing imports spending [Varoufakis, Project-Syndicate]. "25% unemployment, a 22% fall in GDP since 2009, and a 35% increase in the debt-to-GDP ratio" [Stiglitz on Project-Syndicate]. With 60% youth unemployment, the parallels to the national conditions that enabled the rise of Hitler should not be totally ignored. There's the apparently troubling popularity of the Neo-Nazi 'Golden Dawn' party [BusinessInsider], although I hope/expect they have a similar electoral ceiling as UKIP of ~10%, because of their more unpalatable views.

The point is that after witnessing the catastrophic events (i.e. WWII) following the 1920 Versailles Treaty that left the defeated Germany crippled with debt, as punishment, American policy was wiser the second time around. Leadership quickly reneged on the plan to demolish German industrial capacity, instead taking them and Japan on as protogés, building them up. Part of the strategy to contain the Soviet Union, with many American military bases present in both to this day. The Deutsche Mark and Yen were chosen as pillars to support strong, democratic capitalism in Europe and Asia, respectively, secondary to global economic hegemony of the dollar.

Europe was rebuilt using American surplus productivity, financed via massive loans: the Marshall Plan. This wasn't pure charity, without the stimulus spending America's economy would have plunged into a recessionary collapse. The New Deal impetus, designated to combat the great depression, was already faltering before America's war spending started. Rebuilding the world helped supply the formidable need of the American productive capacity, keeping workers employed and spending.

This means of US control was expected to endure indefinitely. So, at Bretton Woods Conference, the US avoided implementing a new global monetary system, as suggested by John Maynard Keynes, with an automatic 'global surplus recycling mechanism' (GSRM). They wished to maintain their hegemonic control, much like Germany currently does today. But while post-war Germany had Europe successfully feeding its industrial base with demand, Japan's Asian marketplace vanished unexpectedly with the communist revolution in China. America ended up filling much of that demand, in no small part through expensive military actions in the regions, e.g. Vietnam. This sink of Japanese exports contributed to the eventual reversal of the American trade imbalance at the end of the 1960s.

Varoufakis contends that America's post-World War "Global Plan": all the economic stimulus, boosting of international trade and break-down of barriers, the big institutions still dominating the international scene today (the IMF, World Bank, NATO, etc) and the European union itself, was all fundamentally aimed at safeguarding against another recessionary disaster like the Great Depression. Such a return could have handed the Soviets a win. The key factor for stability was 'surplus recycling' by first handing weakened nations free money, as opposed to having painful austerity all around. Then, instead of belt tightening at home, America graciously began consuming all the excess capital in the period after 1971, getting the rest of the world to fuel the necessary budget and trade deficits! The 'Global Minotaur'.

Watch Varoufakis explain it himself in one of many great videos of talks he's done in recent years. Google for an unofficial (but undisputed) free download of his full book in pdf, or grab it on Amazon. There's an officially free addendum mini-book there too "Europe after the Minotaur: Greece and the Future of the Global Economy" (2015), which adds to, and summarises some of the full 2013 book (both pictured below).

You can probably tell that I find his narrative pretty persuasive. It fills a void in my understanding of the current structure of the world:
  • Why (and how) the dollar became the global reserve currency - by being splashed around everywhere after the war, then a seemingly limitless sure bet for investment. 
  • Even the ludicrous American self centered nature of blockbuster films makes more sense, and the prevalence of making movies by the numbers, with action, explosions and simple plot lines that will translate easily, since cinema is high markup export and bigger studios may even better absorb foreign dollar investment.
  • It adds insight to the pattern or America's wars and economic reasons for the military industrial complex - exporting expensive military machinery to reclaim foreign-spent dollars, and also helping recycle surpluses internally. The US government stipulated that big defence contractors build their operations in states with poor tax revenues, to boost their economies and rebalance.
The situation within a single country, the UK for example, is similar to the Eurozone: the same currency covers a strong economic core (London) and a weaker periphery (the 'North', Wales, etc). Government spending on welfare and other projects helps to rebalance the economic regions. As does free movement of people. House/land prices are of course a factor pushing back against this too. Germans seem much more accepting of immigrant workers than the UK, but movement is slightly more limited across the EU, with language barriers, for a start. So xenophobic sentiments restricting international migration should exacerbate the disequilibrium. And similarly austerity within a country. More pathological side effects of the reaction to the crisis.

The global minotaur was an opportunistic kludge, like most results of evolution, it was just about good enough for survival. Far more perfect systems could have theoretically been implemented, and we currently need one now more than ever. That's why I find it so exciting that Yanis, with his leading insights and steely determination, has been manouvered into such an decent position to catalyse change. Clear not by brute force, but Greece's bargaining power is fairly substantial, as the saying goes "If I owe you £10'000, then I have a problem, but if I owe you several billion then you have a problem!".

Varoufakis is no airy-fairy idealist [Guardian]. As a economics professor he's clearly no communist. He even criticises "vulgar" keynesians, not just "menacing" libertarians. He predicts (at the end of his update book) that it is basically down to the US to come up with a new GSRM replacement stop-gap paradigm, since "Europe is too busy disintegrating" and China "lacks the tradition in mold-breaking on a global scale" or the domestic demand to rebalance the world, Minotaur style.

This doesn't leave us with much hope, given that the US political system is deadlocked (House verses Senate), currently only capable of producing gibberish. Especially scary if the incumbent powers continue to stagnate and backslip whilst holding a virtual monopoly on world institutions and military power.

I find it boggling that China (and others) are not yet included in G8 summits, for example. Although they've been G7 for the last two years, with Russia's exclusion over Crimea's annexation  and Ukrainian issues. China is working diligently to establish a global renminbi zone (the AIB, for example), and could potentially "form a grand coalition of emerging countries".

I wondered if Putin is angling to cement Russia further into the new world powers, courtesy of being shunned by the current ones. "Russia currently holds the chair of the BRICS group, and will host the group's seventh summit in July 2015" [Wikipedia] BRICS -  Brazil, Russia, India, China and South Africa. Although I'm horrendously ill informed on the matter, Russia's recent actions may have done more harm than good and China-America bond may still prove the strongest [Guardian].

'Chimerica' - composite from Guardian illustration and graphic from BBC news.
Popular historian Niall Ferguson has described this intimate economic coupling as "Chimerica" [e.g. Telegraph] since 2006. This would probably be the most significant (and most indicative) international relationship of Yanis' chimera, the Minotaur: "Back in early 2007, it seemed as if China and America were so intertwined they’d become one economy... The Chinese did the exporting, the Americans the importing. The Chinese did the lending, the Americans the borrowing." [NiallFergusson] Yanis refers to it as the "US-Chinese nexus" with China "one of the Minotaur’s favourite feeders", giving the relationship a greater context and more meaning.

After going into some detail on this in his popular 2009 book (and TV series) "The Ascent of Money" Niall goes on to ponder if "‘Chimerica’ is Headed for Divorce"? Making comparison to Britain as incumbent financial power to rising, imperial Germany around 1900: "...economic integration does not necessarily prevent the growth of strategic rivalry and, ultimately, conflict."

Niall Ferguson - I bought his book in 2009 (when the crash piqued interest in economics). I intended it as a counterpoint to Douglas Rushkoff's "Life Inc" (critique of corporatism and centralized currency). But I found it didn't conflict, despite a distinctly different tone. He covers finance as having been necessary, but with many thorny dalliances, flaws and historical anecdotes, trying to shine light on a under covered topic. 

Ferguson is extremely good at spinning events into a narrative, making compelling reading/viewing. But he seems to have used his skills to argue for austerity, or at least support the conservative policy. In the exchange "Skidelsky and Ferguson Debate Austerity[Project-Syndicate] his arguments reak like weak political rhetoric. I'm inclined to agree that Keynes's biographer, on the other side, rightly points out that the coalition's austerity measures were relatively feeble and tailed off mid term (20012), allowing a return to growth after a small negative impact on GDP.

Another side to the G2 relationship, mentioned by Ferguson is that China, keen to maintain its exports, suppressed its currency strength (relative to the US) by buying up huge extra volumes of foreign reserve Dollars. Ferguson mentions Ben Bernanke who called the situation a 'Global Savings Glut' (when he was Federal Reserve chair, in 2005), sounding concern and later blaming it for fueling the housing bubble(s) via unrealistically low long-term interest rates.

There seems to be far more awareness of trade and exchange rate shenanigans in China: Song Hongbing's "Currency Wars" [Wikipedia] and sequels were best sellers, shifting millions of copies. He posits that: the Fed is essential run by private Bank(ers), US dollar loans and currency manipulation systematically extort money from developing nations, they caused Japan's 'lost decade' and Latin American crisis.

Song also "predicted that by 2024, the world's single currency system will mature. He believes that if China can not be dominant in this system, it should not participate, but should be self-hill, have their own sphere of financial influence." So, given that the IMF is still umming over inclusion of the renminbi/yuan in its 'currency basket' [SCMP], this may indicate them taking the BRICS option. That seem the more likely of Yanis two "bright" possibilities (if global inspiration does not transpire). It would leave our Western "bankruptocracies" hung out to dry on the global periphery.

After Gordon Brown called for a new Bretton Woods Agreement in 2008 (to stabilise exchange rates, or rather international trade/finance), following the crash, the governor of the People's Bank of China (Zhou Xiaochuan) proposed aiming for something like Keyne's original 'Bancor' idea. [Wikipedia] Favouring an international currency, seems typical of Chinese thinking; they have no desire to usurp America in a direct or confrontational manner, or replicate it's world domination. This garnered support, but little seems to have happened on the topic since 2012.

[Addendum 2015-06-30]

Historical Context:

Greece's economy did (and still does) have large structural problems. The weakest "climber" (in Yanis analogy) of the Euro currency countries. Historically, this is a nation that bypassed many intermediate revolutionary European periods, from the Renaissance to the Bourgeois Revolution, while part of the Ottoman Empire [theGlobalist 1]. It was then a protectorate of the British Empire up until being officially handed off to the US after WW2, during a bloody 3 year civil war they jointly prosecuted against 'communist' forces [theGlobalist 2].

These are, in turn, the foundation of Greece's 'clientelistic' background (i.e. cronyism/oligopoly) and the crushing of movements that would have reformed it.

Yanis himself laments: "Why does a mile of freeway cost three times as much where we are as it does in Germany?" [ZeroHedge], because of the systemic inefficiency of corruption. Low retirement age and an accepted culture of tax evasion are also things he explicitly want to tackle. But the 'reforms' pushed upon Greece by the troika have been "parametric" [Varoufakis] in nature (i.e. like tweaking knobs): spending cuts and privatisations, which proceeded in a perversely reverse order, with the least corrupt, most profitable state owned assets.

The bailout money itself then went 90% to private institutions [SocialEurope - Varourfakis], recapitalising the bankrupt banks on Greek soil and financing debt (ultimately to wealthy lenders). As ZeroHedge reported, the Greeks saw little benefits from the 'loans' they must repay since they barely received any of them...

Specific steps of Greece's critical finances:
  • Goldman Sachs scandalously helped the Greek government hide some of its national debt [Guardian] 'off balance sheet' using currency swaps, to help it closer towards requirements for joining the Euro, which it adopted fulling 2002. The worlds biggest, most notorious, private investment bank received a sizable commision for their services, then profited further by 'betting' against the country (and winning). While Greece's repayments inflated to double the expected amount.
  • The common currency encouraged excessive (irresponsible) lending to Greece, and all other peripheral Euro-zone countries. Interest rates were set systematically too low (by a couple of percent) based on the incorrect assumption that national debt obligations were also more commonly supported, which was not the case. On the flip side of this financial misfocus, there was far too little investment in Germany (still the 'sick man of Europe', after reunification), leading them to make harsh labour market reforms, for competitiveness. No wonder there's strong sentiment for Greeks to undergo 'belt tightening' too.
  • The 2004 Athens Olympics took place during this period of easy Greek credit. Preparations came in 3 times over budget (in line with Yanis' quote about the excessive cost of Greek infrastructure, due to corruption) at ~$15Bn (US dollar) [Wikipedia, citing CNBC]. According to this source, the expense was pure waste, with no legacy use planned (unlike London 2012, which turned a small profit), with virtually all the venues now rotting and Greece's socialist government having chalked it all up as public debt. Other sources apparently contradict this narrative [Wikipedia also], with the Games themselves profitable and all venues in some kind of use, although there was an estimated £500M maintenance cost in 2012, when the debt crisis caused conversion schemes to stall.
  • Despite the crisis, military expenditure in Greece is currently 2.4% of GDP [businessinsiderwith 2.7% of workers under military employment. Greece distrusts all bordering countries, particularly Turkey (e.g. after 1974 invasion of Cyprus), despite joint NATO membership. The Arab Spring, plus ISIS/civil wars in Syria and Iraq, are not such distant prospects for them either. Ironically, Greece may still be under political pressure to continue their substantial purchase of arms from German and French manufactures (as may have been a condition of aid previously [Guardian 2012]). In the 80s, Greek expenditure was 6.2% GDP, then after entering EU they were the fourth biggest national spenders on conventional weapons, and during their Euro-borrowing-boom, corrupt (German) arms dealers bribed corrupt Greek politicians (including the defense minister, now imprisoned [nytimes]) to buy their products [Guardian]. Historically, military/war spending has probably been the number one cause of sovereign debt (and default), and since 1974 this Greek expense has totalled well over €216bn [Guardian].
  • The financial crash dried up global liquidity, causing their government bond interest rates to suddenly soar, leading to the 2009 crisis point. Many economists, including Yanis, urged the Government to default then, but they took the flawed 'bailout' package instead (with no debt restructuring and the first of 8 trances of austerity measures!). His dire predictions led to the "Dr Doom" nickname and death threats that contributed to him leaving Greece (again) for a teaching post in America. 
  • The 'bailout' process was actually very contrived, and arguably illegal in several respects, effectively transferring the 'toxic assets' from the banks (that had either disappeared or lost all real value in the crash), onto the backs of the Greek people, via obscure new instruments/institution(s) [ - Maria Lucia Fattorelli]. Somewhat like a dodgier version of the UK's bank nationalisations plus quantitative easing. Also without imposing any conditions on the broke banks, while imposing massive austerity on the Greek people, on a scale unimaginable here.
  • The 'cure' is worse than the disease, resulting in the spiral to 24% drop in GDP that also made the national debt and deficit ratios look far worse. Greek exports remain flat, in line with the continued strength of the Euro currency propped up by German export prowess.
[via Telegraph]
Evil IMF?:

An essentially US institution, forged at Bretton Woods (1944), with proportionate participation from some of its international chums. It describes its own success record as patchy. Many would go far further. (This section ties in with my long summary of the "Zeitgeist 2 - Addendum" video, back in 2009, and therefore also with "Confessions of an Economic Hitman".)

John Pilger has made a number of good documentaries, including "War By Other Means" (1992), in which he explores the IMF's use as a debt weapon to force 'developing' nations into neo-liberal 'structural-adjustment' policies. These enable US/Western corporations to reap the benefits of globalised production by taking effective ownership of foreign resources and keeping their labour costs artificially low [via FilmsForAction]. Also "The New Rulers Of The World" (2001), which focuses in on the case of Indonesia, where there was also Western sponsored, brutal regime change and removal state protections as a prelude to IMF lending that enabled Nike sweatshops to produce goods sold on for a 250 fold markup [filmsForAction].

It's a story pretty similar to the greek situation, except now this is the developed EU nation next door. A step too far? If Greece indeed manages to default on its IMF repayments it will be the first developed nation to have ever done so. Perhaps this is a turning point for the end of an era, as the US economic hegemony lapses. China has begun forging it's own AIB (Asia Investment Bank) and initiatives with BRICS. And it is certainly time for a shake up when the IMF's own reports contradict it's standard operating procedures [via FastCoCreate]:

"The drivers of inequality [include] weakening protection for labor, and lack of financial inclusion... We find that increasing the income share of the poor and the middle class actually increases growth while a rising income share of the top 20 percent results in lower growth—that is, when the rich get richer, benefits do not trickle down."

The trap of IMF debt is that governments are borrowing in a foreign currency. Normally, governments issue bonds in their own currency, which they control, so in the worst case scenario they can just 'print' money to avoid default, devaluing their debts. But Greece is beholden to the Euro controlled by the ECB (European Central Bank). Worst still, this supposedly politically independent institution seems to have been clinically pressuring ("blackmailing", even) the Syriza government to agree to troika terms by triggering bank runs via unexpected announcements of removing vital bank funding [ZeroHedge]. Scary stuff.
"Let me issue and control a nation’s money and I care not who writes the laws." - Mayer Amschel Rothschild [themoneymasters].
It's a pretty aborent situation when a multinational bureaucracy clique is contriving to overthrow the elected government one of its constituents so as to impose knowingly bogus ideals. To be generous, perhaps the troika have been acting purely as debt collectors - accountants disinterested or oblivious to the true machinations of the macroeconomics: "The reforms were a smokescreen. Whenever I tried talking about proposals, they were bored." as this Telegraph article quotes Varoufakis in a piece entitled: "Greek debt crisis is the Iraq War of finance".

But the narrative of the political core, with all the influence, is to give no ground to movements in the bigger debtor Euro nations (Spain and Italy) who might seize upon them. Talking of 'moral hazards' if governments escape consequences, while conveniently ignoring the apocalyptic hazards of the banking elite who control our money supply and financial world and the 'bankcruptocracies' that now dictate to governments.

From the US perspective a Greek departure falls in the Russia confrontation narrative. Tsipras indeed met with with Putin [reuters], but towed the EU line of continued sanctions, i.e. "economic warfare", despite it's damage to Greek exports. I can't really imagine Russian military base deal and resulting Cuban style missile crisis here, even if the communist leaning BRICs end up playing a major role in greek re-financing. Ukraine has so far been a much more pressing issue; that bankrupt European nation, in contrast, has had the IMF virtually forcing money down it's throat in an effort to stabilise it.

Then, in the shadows, there is private money, hedge funds and the like, who will have positioned themselves to siphon off huge profits at every plummet and turn of Greek finances. 'Shorting' is one unintuitive way to profit from sudden loss of asset values (e.g. after shocking news 'leaks', later falsified). Banks also take commissions for handling debts. Infinite 'rehypothecation' was/is a speciality of London's uniquely dysregulated financial rules, drawing in the craziest of practices, particularly before the crash. Debt (collateral) can be repeatedly re-sold (recycled, like bank leveraging) but taking a cut each time [KeiserReport-E768].

Big money. But financial instruments are so sophisticated and esoteric that I think there are many people/entities set to make big bucks from a full on Greek crash and burn. It's all pretty opaque and obtuse, I don't really get it, but that's half the point. Anyway there are forces other than rising xenophobic nationalism that are longing to further EU disintegration.

Despite the bullying, name calling, lies and generally abysmal portrayal of hopelessness everywhere, Yanis has remained calm and steadfastly positive in pushing his modest proposal and optimism for re-uniting Europe. But if he doesn't miraculously catalyze completion of the Euro project with necessary financial and political union, it seems invariably likely that Greece will have part ways eventually. If that does happen it could also be an excitingly positive event - more than the necessary return to the drachma to forcibly dilute debt, there might be room for fairly radical new economic thinking with him at the helm. I know what the compelling 'Positive Money' campaign would have Greece do here, they seem well aware of Varoufakis, but I've no idea if he considers this sizeable paradigm shift at all plausible.

Keiser Report, and Varoufakis on Bitcoin - Max Keiser is an infamously animated, long time squawky, talking head with a couple years of his YouTube show now via the Russia Today channel/network. His presentation is off putting, but he's actually far more grounded than fist impressions might indicate. His opinionated rants are not Alex (tinfoil hat) Jones drive, they seem pretty good at cutting through much of the economic jargon and self important nonsense of the field. I broadly trust most of his perspectives.

Where my scepticism closes ranks entirely is with regard to his enthusiasm for bitcoin, specifically with his own current kickstarter crypto-variant: Startcoin/Startjoin. For someone who berates mainstream financial 'ponzi schemes' so much, this looks like a blatant "pump and dump" pyramid.

Max and co-host talk about Yanis' discussion of Bitcoin technology [YouTube], as brought up in an article by Paul Mason [Guardian] (a generally commendable economics reporter). What they gloss over is that Mason (and Varoufakis) tout this digital currency as running only in parallel (to the Euro) in a transition back to the drachma. More key, that they would be "... using Bitcoin’s digital security and transparency, but doing the exact opposite of what the money fundamentalists intend." Namely limiting the money supply as if it were a gold standard outside the control of the state.

Most Bitcoin purveyors are extreme libertarians, looking for perfect apolitical money. Varoufakis calls this a "dangerous fantasy" [Varoufakis Blog], frequently ridicules "metal fetishists" (who idolise gold standards, that this would imitate) and spell out two insurmountable flaws (quite aside from potential cyber security worries):
  1. "[D]eflation is unavoidable..." since the money's limited supply will will cause its spending power to rise ever upwards relative to proliferating commodities, so no one will spend their coins, given an ever higher value tomorrow.
  2. It is a recipe for wealth domination by the first movers, who become super-rich as later comers must pay ever more Euros (etc) for a coin, causing speculative demand to massively outstrip use for exchange. (Sounds much like the London housing 'market' [BoinBoing] currently eating itself [Guardian].)
What Yanis did advocate for is use of the cryptographic 'blockchain' algorithm which allows secure, transparent and distributed storage of the digital 'ledger' of  everyone's balances. Inspiring trust and accountability. He dubs his version "FTCoins" - "Future Tax Coins" because they would be issued by governments in a manner that sounds similar to government bonds: a fixed (e.g. 2 year) maturity and yield rate.

He submits, generally, that money supply is fundamentally a political beast, since different levels of creation necessarily favour people differentially, and compromise is required. This stance is officially termed "modern monetary theory". (Also, I'd point out that an army, or some other way of ensuring continued sovereign existence, is generally necessary too! As many would-be micro nations tend to find out when a fully fledge state decides that your nook of no-man's-land on their border is actually theirs [RussiaToday].)

FTCoin would supposedly be perfect for providing liquidity to governments, free of bond markets, banks and Brussels' laws, thus potentially useful against instability of the flawed ECB. However, this was all very exciting back in February, but only fairly conventional noises have been heard since then, with the ECB having caused plenty of woes in the mean time. So maybe consign this revolution to middle-term future.

[Addendum 2015-07-02] Media coverage of the Greek situation seems to be reaching permanent saturation. While they have effectively defaulted on IMF repayment, and the TV scenes are of fruitless atm queues and talk of 'capital controls', many things are currently still up in the air until after Sunday's snap national referendum to give a yes/no on (possibly) accepting a new Troika deal, with the usual heavy consequences.

So time to write up some more remaining aspects of economics seen through a Varoufakis lens...

Picking at Piketty - Yanis tells that "Capital in the Twenty-First Century" was good for inducting inequality into the 'economics academy', which was previously incapable of acknowledging it, due to it's 'neoclassical' underpinnings. 

However, his 3 'laws' are deeply flawed, unnecessary, and ultimately counter-productive in leaving any followers open to devastating critique. Motivated by wanting to "cover himself in analytical glory" and become the guru of inequality.

Yanis explains all this in the (above) interview, but has also provided a technical breakdown in pdf: "Egalitarianism’s latest foe" (via his blog). 

A key point is that Picketty conflates 'wealth' with 'capital', so that he might quantify capital, which is fundamentally ephemeral - like 'beauty', if you could pin it down precisely, it would evaporate. Capital is a "produced means of production", whereas wealth may include non-productive assets (like rare paitings or princly London homes) that would require some addition or 'blending' of capital to increase GDP, etc. 

In line with this failing, his 'wealth tax' is too vague and untenable: hitting bonds and shares may makes sense, but does one also force grannies to sell the family silver to provide state taxes a share of it's value?! Or tax the value of a productive robotic assembly line?

This chimes with Bill Gates' criticism of the book, on his gatesnotes blog. He prefers a tax on consumption, to extract value from extravagant living while, conveniently, leaving billionaire philanthropists well alone. I'd guess also companies like Amazon, who have historically recycled all profits into an increased productivity base, rather than dividends.

I do sympathise somewhat, as many dynamic tech-billionaires, in particular, have been far more inspiring and forward looking in their investments than any governments. However, it's usually the case that the needy themselves know best how to spending charitable resources to increase their productivity and wellbeing, possibly trumping  the best intentioned, top down schemes. Also, a key problem with the super-rich is that they don't consume, or barely at all, slowing money velocity and GDP. They opt to mostly 'invest' in accumulating more wealth, pumping asset price bubbles and instability in the process.

Also, Bill makes a good point that, globally, inequality is falling! "...thanks to the rise of the middle class in countries like China, Mexico, Colombia, Brazil, and Thailand" [gatesnotes, refferencing this NYTimes article].

[Addendum 2015-07-06] Yanis has resigned his post this morning [Varoufakis], but in triumph! [Guardian] The national referendum on accepting another austere bailout produced a resounding "OXI" (i.e. no). 61% versus 39%, despite polls that had reportedly shown marginally greater support for a "yes" vote (e.g. 47% to 43% [bloomberg]), and a continued slide in that direction with increasing monetary chaos due to the ECB's choking off of Greek liquidity. Something Varoufakis described as "terrorism" [Guardian] in it's intention to spread fear amongst the Greek people.

"OXI" does have deep, celebrated historical connotations for Greece - a public holiday, no less [livingingreece]. The vote also came the day after US independence day celebrations. But opposing these  positive biases was the wall of Greece's oligarch owned media, whitewashing for "yes", most other Greek parties and all EU leaders and officials proclaiming that a "no" equals leaving the Euro (when Greece is still very pro Europe). Yet, as economics reporter Paul Mason puts it [via filmsforaction], this level of voter support goes way beyond the minority 'radical' left, into widespread support from conservative, liberal and center left voters.

It makes a lot of sense for Varoufakis to step aside at this point (see Mason's other video, and great article, from today [Channel4]). He has fulfilled an important role as a political attack dog with huge clout, drawing much international attention. His platform of academic authority let him kick EU bureaucrats squarely up the bum, but his idealistic inflexibility means he now has to make space for the real politicians to get on with grimey necessities of cludgy compromises. Yanis said just before the referendum that he'd rather "cut off [his] arm" than do a deal without proper debt relief [Guardian].

Hopefully this makes it easier for creditor nation politicians to set their assaulted egos aside. When he said "I shall wear the creditors’ loathing with pride" [Guardian], following on from his Franklin D Roosevelt  quote (announcing the second 'New Deal' 1936) "They are unanimous in their hate for me; and I welcome their hatred." [TwitterGuardian], he was perhaps in acting like a lightning conductor for bad sentiments. Having channeled that, played the antagonist, maybe he has defused some animosity...? But given the inertia of the Euro-cratic machine, it still seems unlikely they'll actually change their tune significantly on Greece (let alone make the wide-reaching reforms in fiscal union).
[Guardian] So long, but not goodbye. Yanis remains a backbencher and (previously)
pledged to continue assisting the government and next finance minister.
Regardless, it still feels like an historical turning point against the austerity fallacy, and against the bogus narratives using national stereotypes to obscure the true culprits of global finance and international wealth. Greece fell into this unenviably precarious position, not because of socialist overspending on goods for the people, but because it epitomised corruption and oligarchic inequality to start with. The 'bailouts' cleansed these powers of their toxic assets, letting them flee with renewed capital, while loading the repercussions onto the citizens. Just like QE (quantitative easing) has done elsewhere, the world over. But, even if hopeful the Hellenic are shouldered out of Europe, they have helped turn the tide of awareness.

Japan's mega-debt and Richard Koo's "balance sheet recession":  it is important to note that the pure scale of government debt is not the only indicator of its sustainability. At almost 250%, Japan's debt utterly dwarfs Greece's in absolute terms (given also it is a nation of 11 times the population). 
Gross public debt to GDP ratio graph made in Google Public Data Explorer.
The difference is that Greece owes mostly foreign creditors, effectively in a foreign currency, at very high interest rates. Japan's debt is almost entirely domestic, so, although about 50% of public expenditure goes on financing the debt, this mostly goes back to it's own people (including private pensions and corporations with lots of savings and 70% to the central bank [economicshelp]). Japanese government bond yields (the interest rate they pay to lenders) has stayed well under 1% (while Greece's has soared to over 15%). In fact "betting against Japanese government bonds [AKA 'shorting'] has become known as the 'widowmaker trade' due to their price resilience despite fundamentals to the contrary." [Wikipedia].

The Japanese have been adding to this huge figure since their massive asset and real estate bubble crashed in 1990. But despite a massive 87% reduction in the value of this wealth, they managed to maintain GDP output at peak level (the gaping 'alligator' graph, below) via economic stimulus. They pioneered 'quantitative easing',  albeit a version ruled-out by the German economist who named it [BBC]. In QE, the central bank agrees to buy financial assets from commercial banks, who in practice create most of a nation's money through lending [Wikipedia]. It's an attempt to encourage economic activity, but in practice UK banks (in particular, who received record amounts of QE) simply absorbed the finance, making very few additional loans.

One of graphs Richard Koo referenced in this talk [image sourced from here]
Richard Koo recounts [in videos on NewEconomicThinking, AsiaGloablInstitute] how he advised the Japanese prime minister against cutting the deficit (tax hikes, spending stimulus cuts), as the IMF and others were advising him in 1997. Following the austerity style advice (currently popular in Europe now) produced 5 quarters of GDP loss, a banking crisis and actually ballooned the deficit, until they resumed stimulus spending.

Koo's conceit is that the problem in Japan then (and globably now) was/is not a regular recession, but a 'balance sheet recession' [Wikipedia]. Money printing and inflationary policy does not work here, like trying to push a piece of string. People are 'too traumatised' to borrow, despite 0% interest rates. Businesses are all simultaneously busy trying to pay down their debts, getting balance sheets in order.

Koo says he predicted/warned, back in 2003, that a worldwide balance-sheet recession, like Japan's, would hit Europe the hardest because of it's Maastricht treaty. This set the conditions for EU membership and forbids governments exceeding a 3% current account deficit. They would be legally unable to make the necessary stimulus. In practice, he says, ECB's monetary policy set rates so low to try to stimulate German borrowing, but that massively inflated the other (peripheral) nation's money supply, creating bubbles, while Germany exported it's way out of trouble, by exporting to them.

It's interesting that Koo talks about the beliefs and financial fears of individuals, where others haven't. That is essentially what economic growth is made of: confidence and trust that growth will happen. It's self fulfilling, or self defeating, if everyone's confidence takes a big knock, and no one will borrow, then no spending occurs and there's a downwards spiral, etc. National governments are therefore the bedrock of trust, hence why their assets are so fundamental, and why they must be big, protect their sovereignty with force and exude confidence. To an extent, there is no absolute reality of successful macro-economics, if a government can inspire universal expectation of growth by touting (even counterproductive, austerity) policy with sufficient convincingness, then it might inspire borrowing and growth on the expectation of good times.... For a little while, anyway. AKA: Paul Krugman's "confidence fairy" [nytimes].

UK's "apocalyptic" [zerohedge] 1000% national debt bomb! - public (government) debt is only a small part of the story of debt burden. That (gross) figure doesn't take into account public assets the government could liquidate, of which Japan has quite a lot (e.g. foreign currency reserves). There is also the amount of private debt on the books of companies. Koo claims that Japanese organisations have some of the 'cleanest' balance sheets in the world now, after their crisis scared them into paying off all their debts.

However, thanks to the city of London being the global heart of darkness for funnelling international finance, particularly during the pre-crash boom, we have a monumental quantity of private financial debt/liabilities (green bars, below) sitting on books on UK soil. 6 times more than the government debt which has been causing so much pain and political controversy. However, Robert Peston's 2011 article [BBC], which confirms UK as the world's most indebted nation, referencing a McKinsey Global Institute (MGI) report, places the aggregate national debt ("sum of household debts, company debts, government debts and bank debts") at a mere 492% GDP. Maybe its definitions diverged from Morgan Stanley's (e.g. counting 'rehypothecated' debt multiple times?), or maybe there are just huge ambiguities due to the opaque nature of the 'shadow banking' sector.
From page 26 of Morgan Stanely FX (currency market) Outlook for 2012 [pdf].
Via Zero Hedge tweet. (Also found on businessinsider.)
There has been a highest level meeting, today, about possible UK exposure to the Greek debt, in case of default (which reduced greatly from a megere ~10Bn after the first bailout). Just imagine the shoe on the other foot, and a collapse obliged the UK taxpayer to take on all the private 'assets' within our boarders. Or imagine the global consequences when we inevitably can't! 

This kind of risk might be part of the reason why we've been so keen to retain our own British pound; there would need to be a whole lot of money printing to inflate that away! The UK may only still rated so credit worthy because of this capability...

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