Paul Krugman: When Austerity Fails

@Kevin
Ah yes, Kevin, nothing like a carefully-reasoned rebuttal.

@ Peter Stapleton

To be fair, Kevin’s original rebuttal appeared as carefully-reasoned to me as Krugman’s article, which suggests:
(i) Talking about default in the US is ‘irresponsible’ and ‘scary’
(ii) Not talking about default in Europe is ‘incredibly foolish’ and a ‘failure of fantasies’
(iii) The only solution to more over-spending is more spending (I wonder how he sold that idea to elected politicians)

Krugman may be a fantastic economist and well-deserving of his Nobel price, but this article strikes me more as partisan swipe at the ‘pain causcas’ than economic analysis.

@ Edward v2.0

I would agree. Kevin Donoghue might like to read the attached recent editorial from the FT and explain to others in what respect “austerity” is not working in Europe as maintained by Krugman. Even the Greek economy grew in the first quarter of 2011.

http://www.ft.com/intl/cms/s/0/553d6ec4-8311-11e0-85a4-00144feabdc0.html#axzz1MywTiqCB

P.S. On re-reading the editorial, and there is no better paper than the FT to catch a changing wind, I noted that it could still not resist some mischief making.

“In either case, more decisiveness will be needed – of the kind displayed in planning the post-2013 European stability mechanism. This had unfortunate short-term market effects, but is the right model for the future. It should be firmed up with a legal requirement to haircut the creditors of insolvent states”.

This is exactly the main bone of contention between Germany (and Austria) and the rest of the EZ 17 in drafting the treaty to establish the ESM, if other press reports are to be believed. The “unfortunate short-term market effects” will seem a picnic in retrospect if such a provision sees the light of day.

The valid question is whether there is a situation in which Krugman would NOT recommend additional government spending, even at the cost of sovereign default.

For instance, it is hard to explain the Irish situation as anything other than the natural consequence of a massive property bubble that everyone from banks to government “Texas-hedged” by increasing their exposure to property. The amount to which austerity contributed to the contraction seems quite small, based on what we know about the structure of unemployment, which is still concentrated most heavily among construction workers.

However, arguing for/against austerity is a useful political exercise for American pundits, so expect Americans to continue to treat Ireland as a large ajar economy, like the ones they’re used to on their continental landmass.

FT articles kindly linked by DOCM on this and the last thread

http://www.ft.com/intl/cms/s/0/34cb428a-849a-11e0-afcb-00144feabdc0.html#axzz1NADZPJ5g

http://www.ft.com/intl/cms/s/0/553d6ec4-8311-11e0-85a4-00144feabdc0.html#axzz1NADZPJ5g

for non-sunscribers.

Sensible article that. What left leaning types in Ireland have to understand is that he is writing to complain about austerity being applied too early in the cycle in countries like the US and UK.

These countries have their own currency and central bank and the market doesn’t think they might be forced to, or choose to default. They are choosing the wrong policy. To some extent he is also criticising some of the EZ core – as they kind of have their own currency and central bank too.

Also key to this analysis is that you have to decide whether you are looking at a cyclical contraction or trough, or like in Ireland, you are looking at a more fundamental disruption than that. You are supposed to substitute government spending for temporary downturns in private spending – if its just cyclical.

With respect to Ireland Krugman has been consistent and they key line is this one:

“The problem was made worse by the fact that the 1999-2007 boom left prices and costs in the debtor nations far out of line with those of their neighbors. ”

He used to go on to say that the country therefore faced years of deflation as an inevitable result of the currency union, by I think he has got bored of repeating that because his US audience is no longer scared of deflation there.

The question Irish economists should be asking the Irish people is basically, “Do you want to drag the deflation out over a divisive decade or get on with it now by actively squeezing prices and costs to get back in line quickly”.

If they want to get a move on then the Croke Park fairy needs to be dumped and fast – ether that or start using government IOUs as a parallel currency to simultaneously hit domestic costs and prices.

“Austerity would actually be expansionary, it was claimed, because it would improve confidence.

Nobody bought into the doctrine of expansionary austerity more thoroughly than Jean-Claude Trichet, …”:

I would have liked to see a quote or two in support of that.

“Realistically, then, Europe needs to prepare for some kind of debt reduction, involving a combination of aid from stronger economies and “haircuts” imposed on private creditors, who will have to accept less than full repayment.”:
And I would have liked to see a reference to a post ’07/08 meltdown instance where this generated growth.

I am more concerned by Ivan Yates epistle in the Examiner:
http://www.examiner.ie/opinion/columnists/ivan-yates/there-is-a-way-for-entrepreneurs-to-survive-get-out-of-the-country-154987.html

Yates is correct. However, he doesn’t touch on the ongoing efforts of bodies to improve their security to the detriment of unsecured creditors in situations where there are already serious doubts about a borrower’s capacity to repay their debt.

It is a truism that one should spend more time worrying about those things one can affect rather than those things one cannot affect.

There are three things this country could do to rapidly ameliorate its situation:

1. Bring in a specific temporary emergency process for dealing with defaulting mortgages. Provide the accounting certainty banks need. Require banks to reach a settlement or else be limited to a judgment which reflects the borrowers net assets and future ability to pay and not necessarily the full debt. Moral hazard my backside. If you are broke you are broke.

2. Introduce sensible bankruptcy legislation IMMEDIATELY.

3. Put the bank resolution framework in place. It is in the IMF programme and we are shut out of the markets anyway so it is not going to “panic the hoop”.

The US Senate already has new bills published to deal with mobile phone privacy and FBI snooping of private information in data centres where these scandals are only weeks old.

The bankruptcy legislative reform has been rumbling on for years. It is time for a wholesale reinvention of the drafting process. There is too much consultation and not enough cojones at this time of appalling crisis.
The Law Reform Commission should only be asked to comment on emergency legislation already drafted.

It is certainly a great regret that neither Richard Bruton nor Joan Burton, who both displayed awareness of these priorities, are in the Department of Finance. Instead, we have Michael Noonan and Brendan Howlin chasing their tails in relation to cuts and the EU.

Patrick Honohan said in relation to getting Blackrock to analyse the banks that it is amazing how the talent comes to you when you splash the cash.

It would be worth splashing the cash to get in a few of the people who help Senators daft legislation and a few of the people who helped the UK Conservatives have their Office for Budget Responsibility Bill ready before they even got into Government.

@Kevin – “It was more of an attempted prebuttal, so to speak.”

Much more austerity being heaped on those that didn’t actually cause this mess and I can see some head-buttal happening.

@zhou

Paul Hunt has been abducted by aliens so I will make the point. “You can’t swing a cat in Ireland without hitting a sacred cow or a vested interest”.

Lawyers and bankers and public sector unions are all unprepared to be thumped by a swinging cat and the politicians just slot into their places in the system of accommodating them. It gets them their turn in office and if they can stay there for two and a half years they get a whopping pension for life. Everybody is incentivised to fit in and play the game.

The absence of bank resolution legislation two and a half years after it was apparent they were probably bust, the Croke Park blanket guarantee against further pay cuts and compulsory redundancies as it was becoming apparent the state was going bust……oh, but wait, wait, we can do something, there’s always the carers and the disabled…..

Krugman is just pissed off as the Euro continental priesthood is mounting a serious challenge on the Anglo-American Buccaneers of old.
That model may be buckling under pressure as there is less bounty on the high seas now.

Oh what is poor Hibernia to do ?
Priests or Buccaneers ?
Perhaps becoming slaves of Barbary pirates is a option………………..

http://www.youtube.com/watch?v=hukIJJcCdFs

@Yields

The official funders are going to insist on austerity. That is very clumsy pressure from outside and it is a domestic political choice how to distribute that. They are imposing an adjustment trajectory and in return for this they expect to be able to tell Ireland that private bank creditors must be repaid in full no matter what. That’s the deal. No debt writedowns – and that effectively includes mortgage debt, is part of that deal. The market will lend to the state for it to apply a different deflationary trajectory – that may be more sensible – but the state does not find the rates of interest acceptable or tenable.

So If it wants to borrow, the state does as it is told by, basically, the EZ (Germany – which did its own deflationary trick years ago and is not going to be told by Ireland and Greece that it didn’t work).

Getting the deflation done quickly is not some frothing at the mouth right wing plot – in the case of Ireland, it is a way of regaining economic and political sovereignty at least to some extent, by using its reality or its prospect as a lever. Lets be clear, it is something you would do reluctantly.

Employing government IOUs for paying some government expenditure as a de facto parallel currency (usable for the purchase of some domestic services) might be a way of and smoothing the effect of a sudden closing of the Euro deficit by doing some of the borrowing domestically, bypass the Croke Park stranglehold to enable quick, simultaneous deflation of costs and prices

However, in a while the past and current government policy will have done what the Serbs and Israelis did as their basic tactic – created facts on the ground. The creditors are being repaid and / or re-guaranteed, so unless you want to say some of the sovereign debt should not be repaid – because it came from socialised bank debt – its game over.

You don’t need to be pushing for a one year return to primary balance in order to point out that there is a rational policy of “me last” towards Ireland’s deflation and that the vested interests and powerful, organised groups are set to resist the most effectively and further distort the economy to its detriment. That is a separate phenomenon and I find it disappointing that so few Irish economists are warning the public about this.

If the slower deflation via the “bailout” is to be followed then you still have to try to structure it appropriately. a sophisticated form of mob rule is more or less what is currently distributing the effects of the deflation. That is not good enough.

Krugman is right..the confidence fairy has not appeared. Today Greek 10 year at 17% and two year at 26.17% and according to Greek media the PM is announcing a raft of measures including further pay cuts. But the markets obviously don’t believe that further austerity will work. So what is the point? Is Trichet destined to be the banker who broke the Euro…it’s looking increasingly likely that could be one outcome.

@Grumpy
Regaining economic and poltical soverginity ?

You were reading those Christian brother text books again weren’t you.

Hibernia has always been somebody’s else’s bitch – her only limited option given her feeble mind is who to sleep with and even then that is not always a choice based on any affection.

@Grumpy.

Lawyers and bankers and public sector unions are all unprepared to be thumped by a swinging cat and the politicians just slot into their places in the system of accommodating them. It gets them their turn in office and if they can stay there for two and a half years they get a whopping pension for life. Everybody is incentivised to fit in and play the game.

…The official funders are going to insist on austerity. ………

Outstanding analysis of situation.

@Zhou.
There are several things that can be done to get the deficit down, that would not have a very severe effect on growth. Essentially it boils down to hitting the savings component of income rather than the consumption component. The problem is that the savers are the ones deciding policy.
It may be less crude than the Galway tent, but vested interests tend to get their way.

Here are few issues that would help.

1. Politely ask that all Irish pension funds put 25% (or indeed 50% ) of funds into cash and lodge on PO savings (approx 4%) for next five years.
2. Impolitely change the tax free (income and CGT) designation of any fund that does not do the above.
3. Sur Tax all State pension payments at 40% (ie 41%+40%) where total income less State pension >€60,000pa.
4. Stop increment payments on all scales below €40,000.
5. Stop, by order futher increases in Semi States (see today’s paper).
6. Stop the clear-felling policy that Coillte seems to have embarked on for the past two years with a significant loss of jobs.

Where there is a will to share the pain, there is a way. The problem is there is not a will. We are not in this together.

@Gavin: Wouldn’t know exactly what Krugman is thinking of, of course.

AFAICR, Krugman, like Mark Thoma, noted what Karl Whelan had to say about Trichet and his expansionary fiscal claptrap. But I ration my trips to Krugman’s blog these days since I’m too stingy to pay the subscription.

@zhou
“I don’t think the banks are canvassing for the preservation of the current bankruptcy regime which is unwieldy and expensive for them. I also don’t think they would be that opposed to a mortgage resolution scheme as long as it was harsher than no-recourse mortgages and there was no room for fraud as suggested by christy.”
Unfortunately, the banks are not the only vested interests. What political price a resolution scheme that also made repossession and resale easier? It would suit the very rich and the already destitute, but most Irish people under payment stress want to have their cake and eat it. The clarion call is for a mortgage write-off, not a limited recourse bankruptcy scheme.

@Ceteris Paribus
“But the markets obviously don’t believe that further austerity will work.”
I believe this is a political calculation rather than just an accounting one.

Clearly (well, clear to most non-politicians) at projected levels Greece’s debt is unsustainable. It is also clear, though, that even debt relief is not going to fill the hole in current spending.

It is a remarkably similar position to the one Ireland is in. Without austerity, there will be no return to market access. With austerity the debt burden is unsustainable. With debt relief, the political pressure against austerity will rise to a level that precludes it. There’s always another election to win…

@zhou

“I don’t think the banks are canvassing for the preservation of the current bankruptcy regime which is unwieldy and expensive for them.”

In effect the ECB is doing so. No restructuring, restucturing bad.

The banks are though, canvassing for the preservation of the current bankruptcy regime for banks which is non existent, so the status quo can be preserved. It has been expensive for the state. With the brilliant logic of the ECB, if the banks can’t go bust then the banks can’t go bust; ergo there is no banking crisis……..move along please.

Not sure anyone blamed the lawyers principally for all of that.

@ceteris paribus
“Maybe MK was right??”
Shhh. Only numbers that already exist are allowed to be counted. Contingency be damned.

@hoganmahew

“most Irish people under payment stress want to have their cake and eat it. The clarion call is for a mortgage write-off, not a limited recourse bankruptcy scheme.”

I am ignoring their clarion calls because they simply won’t get what they want in the simple terms they want it!

It is a truth universally acknowledged, that blog commenters who demand links by way of evidence for some claim, will not click on the links provided and locate the evidence. Nor will such a one be swayed by direct quotation, notoriously the most uncharitable form of paraphrase; not even if emphasis is added:

There is the additional argument positing that credible fiscal deficit reductions through expenditure cuts lead the private sector to expect a lower future tax burden, especially when the nature of the cuts make future tax reductions more likely. This can generate higher consumption expenditures and more investment. In countries with healthy household balance sheets, a virtuous effect can take place when governments announce and implement a reduction of the deficit. Expansionary fiscal contractions arise when the virtuous effects are large enough to offset the negative government demand effects. There is some evidence suggesting that this outcome is not just a theoretical curiosity.

As Krugman likes to say, reality has a well-known Keynesian bias. It must therefore be rigorously excluded from the discussion, in the interests of balance.

@Brian Woods Snr

Fiscal rectitude dictates that second and third class get both an income cut and a tax hike. Problem is, both second and third class are the primary consumers.

It could certainly be argued that the concentration for the austerity measures on both those catagories you have mentioned have made a deep recession even deeper.

@Dork

re your comments on forestry.

Its best to just clear fell and graze on a more sustainable basis.The last thing most sensible people want to see is useless wind farms and forestry on the last of our pristine hills.

The hillsides may be pristine but the hillsiders are either unemployed or emigrated.

I try to operate in the realm of common sense rather than economics.

You compare the returns with sheepfarming. Try comparing the returns at a virtually zero labour cost and then see what the answer is.

As for not being able to compete with Russian timber. Well, you would find yourself on the side of the IFF with that one. They want to buy mature forests for nothing, clearfell, dump the timber on the world market and not even bother with replanting or indeed restoring grassland. Just leave a wasteland seems to be the idea. A wasteland for the citizens, full pockets for the financiers.

And Coillte are now doing their work for them. It is not that new land is not being planted. Existing mature forestry is being clear-felled.

There will not always be cheap timber or Gas from Russia. The Ukrainians have felt the cold chill of Russia interests a few times now.

In summary your view of forestry does not stack up but at least you are open about it.

Coillte on the other hand is carrying out a radical new policy by subterfuge.

I do not work in forestry but I am aware of several people who got seasonal work for years replanting for Coillte, but none in the past two seasons.

Now that is a neat way to improve profits at Coillte.

Who knows the Chief Executive, one of the best paid people in the country, may even persuade the board to give him a bonus for 2010, in spite of government policy.

The Chief Executive of Coillte is reputedly paid more than Barack Obama and David Cameron together. Both those people have to stand up, outline their policies, subject them to public scrutiny and defend them.

We should do the same with Coillte and all Semi-States. And if we are going to do ROI (return on investment) calculations, we should at least ask the question. Whose R and whose I are we talking about.

@Brian Woods snr
I have been a avid hill walker for many a year sleeping in pretty much every hill and bog west of Cork and most of Scotland / some of the continent – I have a good back country feel for our hills and know enough about ecosystems to tell how degraded they are relative to their wild state.
So I have to confess I hate sitka spruce forests with a passion – they are dark damp places that do tremendous damage to our soil and its natural drainage.
Scots Pine or larch plantations if planted with care are much friendlier and brighter places and although more slow growing (hybrid japanese larch is no slowcoach however) provide valuable timber – although I think the larch cannot be exported to the UK because of some Beetle or insect infestation.
Anyhow the fragmented small holdings of plantations are frequently badly kept by farmers with more experience with livestock so therefore unless there is a recreational / environmental role they do not make much sence.

Its best to keep highland cattle on the hills with the steeper rougher ground turning to Birch scrub over time and thus preventing erosion and bog slippage ( the experiment on Mount Brandon with Kerry cattle has never been environmentally successful as the sheep densitys have not dropped enough when the cattle graze in the summer)

The Irish hills are in a very bad state especially since the crazy sheep ranching / subsidy farming of the 70s and 80s.
Bog hags are endemic on the tops of hills that still hold peat and you even get crazy fencing on ridges at 600 , 700 and even 800 metres !
This practise is particulary bad on the hills of Coomsaharn lake west of Glenbeigh but its pretty much everywhere.
Such a effort to put up new fencing at such a altitude must be extremely taxing and require a gross subsidy – certainly in a tradional cattle based grazing system this would not be needed when using Gascon and British highland breeds.
Some scattered planting of Birch may be nessary to help recovery as the tree itself introduces nitrogen into the soil much like clover (its a natural coloniser and improver of highland soils).
Anyhow the entire highland land management area of Ireland needs to undergo a revelution and could learn much from some of the scottish Highland estates who since the 80s have begun to reform their practises – however it needs to be tailored for farmers with small holdings in comparison to Highland estates and therefore a heavy emphasis on Highland , Dexter , Kerry and Gascon cattle is called for as this would be more self regulating then a formal park / estate structure and possibly much cheaper.

@Joseph
I remember having interesting conversations with Scottish foresters during the summer of 2009 – a estate which previously was running nearly half a dozen stripping/cutting machines was down to just one due to lack of demand , also a nearby silica mine was recently closed as it supplied Waterford crystal with raw materials !
Forestry simply does not provide the employment it did in the 50s and 60s as technology has moved on

http://www.youtube.com/watch?v=CD2V8GFqk_Y

If you want a higher labour density then sheep ranching, well then Bolleying cattle is your man – it is by far the most productive use of the land and always has been given the neolithic energy constraints of prehistory and now since sheep farming was just a moment in time (200 years or so ) when the empire needed wool in vast quantities – its time is up , it is merely a economic legacy and is present due to inertia in the minds of men (and mismanaged subsidies)

@ JR and DoC: Thank you both. Very interesting comments. I have a small forest (its more like a large wood!) of oak, ash and beech. Coming along nicely. Given a long-term perspective – say 30 years, then a properly instituted, regionally integrated forestry programme should be a mandatory strategic objective. Much to think over. Thanks again.

That comment about CEO of Coillte salary is astonishing. GUBU in Spades!

Brian Snr.

@ Kevin Walsh,

Perhaps something of a rounding off of this:

Krugman says: “In Europe, by contrast, the pain caucus has been in control for more than a year, insisting that sound money and balanced budgets are the answer to all problems.”.

He seems to be ridiculing Trichet policy with some kind of inference that it has not paid off after more than a year. But he implies the policy involves “balanced budgets”. Maybe he would tell us where the conditions have been met, such as balanced budgets.

@ Peter Kinane, and all

Have just posted some links which are hanging for moderation but I do hope they get through.

I have been emailing prof Krugman about this and he has emailed back with relevant links, plus this final comment from him for now.

“There was also an interview with La Stampa, I think, on the ECB site.”

‘Of course’, it depends where one is starting from. If one is starting from extremely depleted resources, then soft money robbing of savers and of those trying to be productive, into the hands of others, is not a good idea – “a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors”. If starting from plenty of idle (concentrated) savings and low productivity, then ‘robbery’ helps to move resources to new, possibly more active hands.

@ Peter Kinane, and all

For the sake of debate I’ve also emailed Jean-Claude Trichet on this, and will post any reply here as it comes.

One of the articles (his own articles) that Krugman references in support of his criticisms of Trichet says that Trichet’s argument for fiscal consolidation is overblown because – and I quote – “the reality is that bond markets don’t look at all worried”.

That was July 2010.

It seems to me that Krugman is simply badly informed about the situation in Europe and the opinions of various decision makers. His interpretation of Trichet’s views is a case in point.

Let’s dissect the evidence regarding Trichet so far:

1. The FT opinion piece quoted by Kevin Donoghue. Trichet is speaking about a general economic issue and is very careful in framing his statement. He limits his argument to “countries with healthy household balance sheets”, for which there is “some evidence” that the expansionary credibility effects can outweight the “negative government demand effects.” He is certainly not making a statement about the effects of austerity programmes in the crisis countries, which hardly can be included in countries with “healthy household balance sheets”.

2. Trichet’s main argument for public consolidation is the following: ” In extraordinary times, the economy may be close to non-linear phenomena such as a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors.” In the light of events, this does not sound unreasonable to me.

3. Krugman’s claim “austerity would actually be expansionary, it was claimed, because it would improve confidence”is, in case of the crisis countries, simply wrong. If you look at the program documents for the three crisis countries, for each one the economic projection underlying the program assumed a sizable decline in output. The ECB was a party in preparing this documents, so to claim that Trichet was expecting expansionary effects is just complete rubbish.

@Hugh Sheehy
I’m not sure what your problem is with Krugman’s statement that “the reality is that bond markets don’t look at all worried” in July 2010.

Note that he is responding to Trichet’s claim that “an overwhelming majority of industrial countries are now in those uncharted waters, where confidence is potentially at stake. Consolidation is a must in such circumstances.”

Neither of them is discussing the market for the PIIGS’ bonds.

@Anonymous.

Let’s dissect the evidence regarding Trichet so far:

There is an old maxim which says: ‘What what I do, not what I say’.
maybe we should use that maxim is assessing the evidence against Trichet’s performance.

Regarding your point 2 above:

Trichet’s main argument for public consolidation is the following: ” In extraordinary times, the economy may be close to non-linear phenomena such as a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors.” In the light of events, this does not sound unreasonable to me.

If Triichet is concerned about non-linear events lets consider a few non linear events that should concern him.
1. The imposition of private debts on public persons. That is surely a a pretty major non linear event that he has promoted and has his full support.

2. The collapse of the Interbank market in Sept 2009 and the continuing problems since then in bank funding. Another non linear event, but not a surprising one, as the whole interbank market was a castle built on the sands of a ponzi scheme. He is the person with responsibility for managing this non linear event. Not very successfully either.

3. The deliberate downranking of depositors in the status of their security right throughout Europe, but particularly in Ireland as bank funding went from unsecured bond holders who ranked equal to depositors to secured ECB or bond funding that ranks above depositors. A downranking not yet fully appreciated by the masses but they will in time.

4. The non-linear event of the complete loss of confidence of probably a majority of Europeans in the ability of a nominally named Cenrtal Bank to fulfill that role as it understood in the minds of ordinary citizens. That includes the an LOLR capability and the promotion of an economic and monetary policy that has the welfare of all the citizens at heart as distinct from the welfare of elite financiers.

If some of those actual non linear events were addressed perhaps the anticipated non-linear events that Mr Trichet is concerned about may not occur at all.

An additional wrinkle to all this is the absolute levels of debt and deficit and their growth rates across the EU.

Looking at that most unreliable of sources, http://en.wikipedia.org/wiki/Economy_of_the_European_Union , 2010:
Debt to GDP: 80%
Deficit: 6.4%

The Maastricht criteria weren’t just chosen as arbitrary numbers. They were chosen as striking the best balance between long-term growth and strictness. That some governments have seen them as a target rather than a limit is regrettable.

Reinhart & Rogoff are reasonably clear that a debt of over 80% GDP is the point where an economy starts to slide into decline. In that context, Mr. Trichet’s words, as quoted by Peter Kinane above:
“Second, given the magnitude of annual budget deficits and the ballooning of outstanding public debt, the standard linear economic models used to project the impact of fiscal restraint or fiscal stimuli may no longer be reliable. In extraordinary times, the economy may be close to non-linear phenomena such as a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors.”
are apposite. We have seen the effects of disbelief in sustainability in Greece, Ireland, and Portugal. Now it appears to be infecting Belgium and Italy.

The question becomes what is the best way to reduce the risk. Some of us argue that stopping adding to the debt and starting to pay some of it back is the best solution.

Others are arguing for inflation. I find it difficult to conceive of wage inflation given global pressures, so absent a reintroduction of protectionist tariffs, I think it would be an impoverishing experience.

Still others want debt writeoffs with at least some monetisation. In the past this has been considered inflationary. Personally, I doubt that it would be these days (given deflationary forces still extant). Would it be enough? Well, not if all it meant was that debt could be accrued again…

Brain Woods Snr

Heroes of the Great Patriotic Debt Campaign.

A beautiful image.

Though a great price was paid by the common person we have preserved the three pillars of modern European civilization, the FIRE sector, the hard Euro and most of all – our dignity <pulls trigger, slumps forward, bleeds on EU growth estimate fantasy>

As an aside, if anyone failed to catch Adam Curtis’s new documentary “All Watched Over By Machines of Loving Grace “ on the BBC last night it contained, almost as an aside, the repeating pattern of the last few crises of international capitalism where the IMF and the exchequers of larger economies are subverted by the financial sector to save itself by sacrificing the nation inhabited by the current ungrateful peasants (that would be us).

Curtis is the gentleman who did “The Power of Nightmares” and “The Trap”, both entertaining syntheses of the modern political condition.

@gavin kostick

“On the subject of scrip, have you looked at the One4All, available via the PO?

I was given one of these as a Christmas Gift. The range of places you can take it is impressive.

Is this the sort of thing you have in mind?

http://www.anpost.ie/anpost/christmas/the+perfect+gift/the+perfect+gift.htm
”

I think “scrip” may confuse some people. It is debt that the state owes, which has to be accepted for some domestic payments. That makes it “money” – a parallel currency.

In essence yes, but the extent of the goods and services that are obliged to accept payment in IOUs would be important in determining where the Ireo / Euro exchange rate settled. An alternative way to manage / influence it is by putting a future date at which the Irish state promises to convert them into Euros and at what rate.

You pay 50,000 in Euros to say, a part time radio presenter earning 570,000 currently at the state broadcaster, with the additional 520,000 paid as Ireos (IOUs). The split it something youy would have to thrash out.

This way you get the state’s employees and contractors to effectively fund a substantial part of the country’s borrowing requirement – by lending long term to the state.

If there was a market exchange rate that devalued the Ireos then you deflate quickly costs in the domestic economy in Euro terms, and as for the effective pay cuts – does anybody without a vested interest still think they can and should be avoided?

It is one way of doing it, a swift way that reduces the dependence on foreign lending – and no, I am not claiming it would be totally straightforward.

@ Gavin Kostick,

I am not clear what your point is regarding the quotes. I see the Trichet piece as saying, perhaps based on his understanding of economics, that consolidation is necessary. I agree with that position, indeed we probably need some shock therapy to cause big money which expects 20% profit every five minutes to change their spots – *”‘Of course’, it depends where one is starting from. If one is starting from extremely depleted resources, then soft money robbing of savers and of those trying to be productive, into the hands of others, is not a good idea .” (G7 (USA) policy for years has been to ‘solve’ problems by “debt issuance”. Thereby economics eventually becomes farce. Consolidation becomes necessary, thereby helping to provide an environment more suited to expansion- -production, as distinct from speculation on inflation). So, nothing new for me in Krugman referring us to that piece.

Trichet says that his “understanding is that an overwhelming majority of industrial countries are now in those uncharted waters, where confidence is potentially at stake.”.
Krugman says he provides no support (of whatever type he expects) of that position. I accept that it is presented as pretty much self-evident, as it probably is to the German sphere – but then Trichet was hardly going to be explicit about, his possible opinion of, USA policy and its consequences. So, Krugman dismisses this position on the grounds that it is not supported as he would expect. It would probably be difficult to find much ’empirical’ support if we’ve had a debt issuance policy to recessions in the G7 for decades.

Re “… which makes them irrelevant to our current situation.”: Our current situation is probably extremely unique, in several ways, and I do not necessarily see that the causes are being adequately addressed and hence don’t necessarily expect expansion any time soon, short of very good fortune in the dynamics of life. I think the model that Krugman seems to recommend, albeit perhaps a very stretched version of the original, is now exactly what is _not_ required.

If a model – “debt issuance” – has reached the point where it is no longer delivering growth, indeed is delivering G7 bankruptcy, helped, I suggest, by rapid trade liberalisation and Bronze Age premises – then it is probably appropriate to carefully consider alternative conceptual positions, which involves higher level intellectual faculties, unfortunately for an age when programming to a job passes (via a subtle secondary programming) as very good education. Even then, I would not expect a rapid recovery from disaster.

@ Kevin Donoghue, I was not aware of that site, might be useful.

@ Shay B.

Noted that little piece – wonder who actually persuaded Clinton ( I just caught a snippet)?
Did the ‘persuadors’ actually realise the potential consequences? – sure as shooting the politicians didn’t.

@ceteris paribus
“Of course other factors also influence growth.”
Clearly they do and surely not one of them is absolute, but still, whether it is chicken or egg, high debt levels and low growth go together.

Making a leap of faith, it could be that high debt levels, apart from the fiscal cost of them, reduce the ability of government to borrow more when required by the business cycle, as government has not been putting money away when times were good. It seems to make a nonsense of the idea that governments don’t repay debt…

@ YoB: “… that austerity in the manner contemplated simply cannot happen without some form of debt relief.”

I’m 101% with you on this one. Let’s imagine its the Irish Divorce campaign again. Now you see it, now you don’t. “Oh gosh! There it is again!”

In the advent of a debt write-off (of res property mortgages) I expect that the Vested (like the Mitered) will make a religious-like whinge about the morality, the ethics and the need for vigilance against temptation. Now remind me about the chap who overturned the Bankster’s desks and kicked them out of the Temple precinct. Some folk have VERY selective belief systems.

Brian Snr.

@MH

In Ireland, those who argue against ‘austerity’ tend to be also against change.

I think you are absolutely right on that point.
For many, arguing against austerity is a cover to protect their vested interests. Most of those people couldn’t give two hoots about austerity as long as it didn’t hit their pocket.

These people also use the ‘burn the bondholder’ issue for the same reason. Firstly they know it probably won’t happen (though it should) but more importantly it keeps the focus away from top level and other necessary restructuring issues.

Lets be realistic with the English language, the country doesn’t have to endure austerity in order to move more quickly to closing the deficit. Again, to focus on the language, it is true that a lot of the low hanging fruit have been picked. I am using low hanging as in the lower strata of society.

The juiciest fruits on the top branches are as ripe and as unyielding as ever.

There are formidable alliances from across the political spectrum preventing the country from takings the steps necessary for the recovery phase. And there are formidable rewards to be garnered by hanging in there, for a year, two years and now coming up on three years.

It is remarkably similar to the 1980’s in that sense.

All that said, Mr Trichet and the ECB have no moral right (or indeed legal right) to foist an austerity package on any nation. They failed at the first fence with the bondholders. Ireland also failed at the first fence with the top 600 civil servants.
In both cases it is the modern day equivalent of ‘Royalty looking after their own.
It is difficult to be optimistic in a situation where,

Is feidr linn. Ach ni fheadar is mian linn.

@ Michael Hennigan

Reading your post above it struck me that you were really talking about Ireland and not Greece. I believe they call it transference. So, I replaced the word “Greece” with the word “Ireland” and it reads as follows:

“This seems like an interesting academic debate which as regards ‘Ireland’ in particular seems a little divorced from the reality on the ground.

The elite in Ireland gains massively from corruption and evasion of tax at the expense of the poor who for example cannot afford to bribe for priority on hospital lists.

So should the IMF pull out?

The trade unions up to now have a veto on disposals from the state’s property company holdings valued at €280bn.

If ‘Ireland’ wants to retain its corrupt system, it should be faciliated to leave the euro and an agreed restructuring.

It would likely end up much poorer with limited access to int finance markets for years.

It would end up having to go back to the IMF for help.

In Ireland, those who argue against ‘austerity’ tend to be also against change.”

Bottom line, is that where Greece goes Ireland will go, accept we will link to sterling.

@Shay Begorrah

The Curtis docu was, as ever superb, if a little chilling (he’s definitely read Le Bons “Crowd”) reminded of the quote about Lord of the Rings and Atlas shrugged, that one engenders a lifelong obsession with unbelievable heroes, leading to emotionally stunted adulthood, unable to deal with the real world. The other involves orcs.

NB: JC Trichet and Peter Sutherland are talking at the LSE 13th June, ticketed.

@MH

The ECB stipulation that it provide liquidity only to solvent banks against adequate collateral has been pushed to the limit.

What a pity that stipulation didn’t apply to all institutions a few years ago.

There are some definite actualities on the ground right now.

1. There are still hidden losses within the European banking that are being camouflaged by the insistence that bond write downs cannot happen and that banks cannot be allowed to go bust.

2. The Interbank and bank bond markets are finished for several years for all but the biggest banks. Thinking of a return to the market for Irish or other peripheral country banks even in medium term is uterly delusion in terms of the ‘non-linear’ banking events that have happened.

3. The Interbank/bank bond market is so fragile even for supposedly good banks, that to allow it to continue in its present form is economic and social lunacy. But it is being kept that way beacase of the vested interests in the financial industry.

There is a simple solution to all this for EZ banks and countries.

All EZ bank funding be coordinated through a ECB clearing house that determines the rates based on a rating of each bank. A small insurance premium is charged on all bank funding (Bond and interbank) to cover potential losses and to ensure funds are available to close banks.
It is so simple that I for one cannot understand why it has not been done a long time ago.

@ Gaston Kostick,

It seems to me Trichet was saying in July 2010, that current monetary-fiscal policy of heavy reliance on stimulus, G7 wide, had brought us to the brink of disaster, policy which Krugman seems to recommend we continue to employ. Was there proof when adopting that policy that it would _not_ bring us to the brink of disaster. I do not see that the continuance of stimulus policy in the USA brought growth or removed the threat of financial disaster.

Trichet is recommending a change of policy, to consolidation. Krugman seems to want proof in advance that it will work and seems to ridicule Trichet that, given whatever slowing of stimulus has occurred in the PIGS countries, they are not already thriving.

I suspected from the outset that Krugman was making cheap noise. Having looked into the matter in this thread, I see my two paragraphs above as a summary of what I’ve found and, based on it, my suspicion stands.

@Brian Woods Snr

I’m on your wavelength insofar as this issue is concerned.

The time for fairness and/or equity for all is long gone. We require solutions and a fix and by its very nature a fix guarantees winners and losers.

But waiting and hoping for the economic tooth fairy is a guarnateed loser. Hope is not a strategy.

Others have questioned if a debt forgiveness program would in fact deliver the demand catalyst so desparately required to re-ignite the domestic economy – my answer to this is that we’ll never know until we try.

In any disaster zone risk taking is normally a prerequisite before recovery – following the party line and the rule book is always a loser strategy – insofar as bank recaps and Basel III rules is concerned we have followed the rules to the letter and its failed to deliver. And it will continue to fail.

So the OECD can today suggest that the bank recaps are fundamental to recovery but as indicated here before the evidence with respect to this strategy actually delivering anything other than pain for the bank financiers aka the citizens is non existant.

Reverse course and try a new tack.

@ BW,

“Marginal Product of Credit (diminishing).”:

Probably, indeed perhaps has been flogged to disaster stage. And it seems to be what Trichet is saying needs addressing (and for which he is being ridiculed).

@ Kevin Walsh,

You don’t actually quote me or give a summary of you understanding of what my position is, before launching into a reaction. I find that it is important to be clear where one is starting from, if one is to go anywhere.

In any case:
I should think it is very difficult to find reliable figures for stimulus at federal level and cuts at state level in the USA, and I would be looking at a period of at least twelve years, so as to include the ‘stimulus’- -liquidity at the time of the dot com crash. It would probably also be difficult to provide hard data on the change in wealth of the USA over that time, and what factors to include. However, using my wits, as you have used yours, I think the USA economy is increasingly becoming a basket case. For a while after the dot com stimulus, you might have said it was growing. Perhaps the 97 crash would then have caused you to change your mind. Likewise, a current assessment based on some figures, to be fairly rigorous, would require a look at the underlying principles.

You say the UK was recovering until Osborne introduced austerity. I wonder if that opinion calculates borrowing for consumption as borrowing for production. Again, my opinion is that the UK is not doing well.

Germany may be a different case. If a country is not nearly bankrupt and the economy is dragging a bit, then stimulus could have a positive effect.

In the case of the ROI, again I wonder what formula you are using – whether continued massive incurrence of debt would have been treated as a negative, or ignored, in the calculation which one would then presumably contrast with the figures subsequent to the “severe tax hikes and spending cuts”.

When a country virtually goes bankrupt and during that process the general equilibrium of the economy gets very skewed, recovery is likely to be a very slow process.

In any case, I was really only picking up on Krugman’s ridiculing of Trichet.

To go on and actually attempt to make rigorous sense of the issue of stimulus versus austerity, and the optimum levels of those, and under what starting conditions, then pretty basic principles have to be looked at, such as the factors to “budget/fiscal deficit”.

@ Kevin Walsh

We could have had a fiscal stimulus in Ireland but those with power in the economy wanted to retain their bubble gains and the ones who had to take either unemployment or huge drops in income have been in the unprotected private sector business areas.

Almost all the 400,000 net jobs added in the economy were bubble-related and the washout was bound to be brutal.

http://www.finfacts.ie/irishfinancenews/article_1022395.shtml

@Kevin Walsh, Michael H

If you want a less than encouraging view on how the previous government allowed the Irish economy to become totally distorted with public sector and construction spending and the current govt is still in dream land then do the following.

1. Read Michael’s article on jobs in Ireland, linked above
2. Add a datapoint like the fact that Google Ireland’s revenues alone must be nearing 10billion Euro a year (almost all export revenue – http://www.guardian.co.uk/technology/interactive/2011/mar/24/google-accounts )
3. look at the jobs data I mentioned from the CSO report which shows that only public sector jobs have increased.

It’ll give you a view of an economy that still has its good bits, but where the overhead has been blown out of all proportion, where much of the “exports” are not adding anything like their nominal value to the Irish economy, and where the current government still doesn’t “get it” at all. Parts of the economy are gone and – as in the Springsteen song – these jobs ain’t coming back. We have to build new jobs and we will struggle to do that anywhere as quickly as we might because the govt is likely to insist that a few insiders maintain their bubble gains at the expense of others.

As for Krugman, the recent data for the US and an increasingly apparent need for a QEIII does not clearly support his assertion that digging an even deeper debt hole is the best way out of a debt hole.

@ Gavin Kostick,

I think you should show what they would be replying to

@Michael H

I’m not terribly interested in arguing the causes of Ireland’s swift fiscal deterioration, and I see it as a distraction from the topic of the thread, which has little to do with the follies of McCreevy et al. I will say that regardless of whether the fiscal consolidation that has taken place in Ireland has been fiscally productive or counterproductive (a truly daunting counterfactual), it was done for sensible reasons. I don’t see a sensible reason for the ECB’s recent rise in interest rates. Given the debt levels in peripheral economies, it seems reckless and irresponsible, to put it frankly.

Reply from ECB, 8th June, following email sent above.

Dear Mr Kostick,

Thank you for your email of 24 May 2011.

Please find below the following references that might be of your interest:

Introductory Statement of 5 May 2011:

Turning to fiscal policies, current information points to uneven developments in countries’ adherence to the agreed fiscal consolidation plans. There is a risk that, in some countries, fiscal balances may fall behind the targets agreed by the ECOFIN Council for the necessary and timely correction of excessive deficits. It is essential that all governments meet the fiscal balance targets for 2011 that they have announced. Where necessary, additional corrective measures must be implemented swiftly to ensure progress in achieving fiscal sustainability. The implementation of credible policies is crucial in view of ongoing financial market pressures.

At the same time, it is of the utmost importance that substantial and far reaching structural reforms be implemented urgently in the euro area in order to strengthen its growth potential, competitiveness and flexibility. In particular, countries which have high fiscal and external deficits or which are suffering from a loss of competitiveness should embark on comprehensive economic reforms. In the case of product markets, policies that enhance competition and innovation should, in particular, be further pursued to speed up restructuring and to bring about improvements in productivity. Regarding the labour market, the priority must be to enhance wage flexibility and incentives to work, and to remove labour market rigidities.

http://www.ecb.europa.eu/press/pressconf/2011/html/is110505.en.html

Interview with L’Agefi:

In Europe there are genuine concerns about the Union’s capacity to overcome the debt crisis facing the peripheral countries. The markets are highly sceptical. What can they be told in order to convince them of the relevance of the measures undertaken at the European level?

– On the issue of fiscal policies, I believe that the European Central Bank, through me, can reiterate certain points. Firstly, we always said that when there was a single currency but no political federation, there was a clear need for budgetary supervision. This was hotly disputed. I can remind you how in 2004 and 2005 major countries, notably France but also Germany and Italy, were telling us that we did not need this surveillance framework for fiscal policies. We had to fight very hard to preserve it. Today, this episode obviously seems totally outlandish, bearing in mind what has happened since. Some, moreover, said that the Stability and Growth Pact itself was “stupid”. We always said that the careful monitoring of fiscal policies was essential, as were healthy policies. This remains true today. However, one should add another pillar of governance, particularly within the euro area, in the form of monitoring competitiveness indicators, and unit production costs especially; the changes to these must also be tracked extremely carefully. For six years at least, we have been telling all European governments to monitor very closely changes to competitiveness indicators and imbalances within the euro area. We emphasise the three pillars necessary for European governance, all three of which must be improved substantially: supervision of fiscal policies, supervision of competitiveness indicators, and structural reforms. The central banks across the whole of the Eurosystem – the ECB and the national central banks, i.e. the Banque de France in France’s case, for instance – have a very clear message for governments: Europe’s governance must be improved decisively, and governments are not going far enough. We expect a great deal from the dialogue with Parliament in order to push governments towards taking a decisive step.

http://www.ecb.europa.eu/press/key/date/2011/html/sp110518_2.en.html

Contribution to Bild am Sonntag:

Several member states of the euro area have to adjust rigorously their economic and fiscal policy after having made mistakes in the past. All member countries must respect the principles of prudent fiscal policies. Substantial reforms are needed to ensure that common rules are improved and respected by all.

http://www.ecb.europa.eu/press/key/date/2011/html/sp110515_1.en.html

The speech in Frankfurt:
We have seen more than ever the importance of a timely correction of fiscal imbalances. Therefore, we cannot wait months or even a year until policies are corrected. In the meantime, spillovers would hurt other Member States.

In the past, the Council has often suspended the procedures of the Stability and Growth Pact, thereby weakening its credibility. This must not happen again. The newly agreed ‘comply or explain’ principle under fiscal surveillance still leaves too much room for discretion. Moreover, it does not cover the new macroeconomic surveillance framework.

http://www.ecb.europa.eu/press/key/date/2011/html/sp110318_1.en.html

We hope that this information is helpful.

Kind regards,

EUROPEAN CENTRAL BANK
Directorate Communications
Press and Information Division
Kaiserstraße 29
D-60311 Frankfurt am Main
Tel: +49 69 13 44 74 55
Fax: +49 69 13 44 74 04