Used to Hardship, Latvia Accepts Austerity, and Its Pain Eases Post author By Philip Lane Post date January 2, 2013 NYT article here. Categories In Uncategorized 35 Comments on Used to Hardship, Latvia Accepts Austerity, and Its Pain Eases ← Housing Finance → AEA Annual Meetings 35 replies on “Used to Hardship, Latvia Accepts Austerity, and Its Pain Eases” Wow, they came to Ireland to look for respite. It must have been unbeliveable pain. From the article it looks like most of the drop in unemployment has come from young adults fleeing the country. Higgins doesn’t make the connection but reports that unemployment dropped a little less than 6 points while 5 points emigrated in roughly the same period. Success? The article mentions that Latvia’s ”exports are soaring” and this goes a long way to explaining why the economy may be doing better. Bear in mind that for all intents and purposes every Euro is created with an even higher debt to a financial institution. If Latvia is a net exporter it’s receiving Euros while the corresponding debt stays with the importing country. In effect Latvia has an income of effectively debt-free money. While this can work for some countries in the system it’s not possible for all economies to be net exporters and a net importing country will struggle to pay its debts to its banks even more. A net importing country is already somehow expected to repay the principal plus compound interest to its banks while the banks only create the principal of each loan. Obviously there are a number of variables involved here but if we can trace the Latvian success story to an income of debt-free money, could we conclude that other Eurozone economies would thrive under the same conditions? Since simultaneous global net exports are impossible would it make sense for economies to have a source of debt-free digital money as a means of resolving the debt crisis. Indeed we could go a step further and have the central bank create the entire money supply for the economy and remove the ability of banks to create money in tandem with debt altogether. This could end the days ‘When a credit-fueled economic boom turned to bust’. Exports from Latvia are nothing like the proportion of GDP that they are in Ireland. This recovery is based on growth in private demand, in large part deferred consumption of consumer durables, and fuelled by savings. People have come out of the trench for a while. The public sector is being strangled, with serious adverse consequences in terms of access to public services. A large part of the non-financial services growth is ‘other investment’. Interesting to consider what might be in that category, with 40K emigrating. http://www.bank.lv/images/stories/pielikumi/publikacijas/makroekonomikasnorises/MNPOct_2012_eng.pdf Bit out of date but relevant Basically the Latvian economy faces three main problems i) a debt overhang ii) a declining and ageing population iii) a high level of unemployment, low rate of job creation, and a substantial wage differential with Western Europe which encourages young people to emigrate and drift west. The first two problems put a serious brake on economic growth, and it is this that exacerbates the third problem, which then in its turn feeds back and aggravates the first two. Cheap interest rates, supported by the peg and the prospect of Euro membership meant that Latvian households and corporates were able to get themselves heavily into debt. And debt in Euros (which is why the devaluation difficulty exists) – over 85% of Latvian mortgages are Euro denominated. http://latviaeconomy.blogspot.ie/ @Paul I never got that ageing population meme………… Most People don’t really create economic growth , not since the beginning of the Industrial age. They just work within the present Industrial energy system which overpowers human labour. Many people are retiring at the ripe old age of 18 in Iberia because of a mix between energy shortage and a non optimum monetary envoirnment. What “the core” is trying to do to these colonies is pretty simple. Drive them into current account and real physical surplus so that they can remain in physical deficit. However the fat controllers of these core economies just love this human migration of these Baltic peoples as they seem to have zero political awareness. They can thus extract more surplus labour value from the ever declining capital base. Europe is in a classic entropy loop. Its a dead end. The article is a pack of lies. It looks like most of it was ripped wholesale from the Åslund report commissioned by the banking industry — the only Latvian sector which didn’t have “austerity” imposed on it. The truth is that Latvia continues to implode and it will be only a matter of time before they devalue in truth. Losing 5% of your population is not a success story by any half-sane metric. Even the ascendancy in this country would give pause before applauding a result like that. Can we expect more propaganda pieces like this to be appearing on the Irish Economy blog in the coming year? Excellent post. NYT are known to be MSM to the core. Genuine economists probably see the difficulties of accounting for movements in all the various variables? Rather than using them to support the theft of resources, they wish to be able to judge how much is moving where and do so transparently. I look forward to the NYT coverage of Iceland ….. soon….. Didn’t Krugman say something along the lines of: If Lativa is what success looks like then we’re all screwed. @John Foody … and if Ireland is what a poster child looks like….. @ Dork ‘Most People don’t really create economic growth , not since the beginning of the Industrial age. They just work within the present Industrial energy system which overpowers human labour’ Hmmmm… ‘A large long-term drag on past productivity gains has been the steady growth of the service sector and the commensurate decline in first farming and then manufacturing, which is shown in Exhibit 6. (The counter example of China is thrown in for contrast.) Productivity in manufacturing has actually held up remarkably well over the years in the U.S., as can be seen in Exhibit 7. We turn out to have an apparently inexhaustible supply of clever ideas in the making of cars and television sets and solar panels. Services, though, are another matter. As can be seen in Exhibit 7, the productivity of services has declined to a fairly dismal 1.2% in recent decades. Why does it do so poorly? First we must concede that it is hard to measure productivity in many service sectors. However the essence of the problem was revealed to me in Kyoto a few weeks ago in the gardens of a 14th century Buddhist Temple. First, let me say the gardens were remarkable – the trees, shrubs, and moss represented centuries of loving care and artistic thought. There, in a patch of moss and pine trees, were eight or so gardeners, mostly crouched, clipping very small twigs that were not quite perfect from beautifully layered pine trees and pulling small pieces of moss of apparently the wrong kind out of a lush, uniform green carpet. As I watched them silently and steadily working, it occurred to me that for them it could indeed have still been the 14th century. A similar group of gardeners would no doubt then have worked a few hours longer each day and perhaps inherited a few more secrets from their fathers and grandfathers. I am pretty sure, though, that they would have been just as productive per man-hour 700 years ago’ http://www.gmo.com/websitecontent/JG_LetterALL_11-12.pdf @Paul Real as opposed to nominal GDP is a function of energy. However you don’t want a crude Maoist pig Iron drive of useless output. You want refined products that are useful – that is where labour comes into the equation. But in Europe you cannot have real GDP growth because the neo – liberal economy prevents investments in increased energy density. You also cannot have nominal growth in GDP which means you cannot even use the machines available at the moment. We live within a dead air economy. @ Dork ‘Many people are retiring at the ripe old age of 18 in Iberia …’ What a perspicacious insight. You should be working in PR or for the Government’s spinners. Shame on you PR Guy for not coming up with this. When Enda Kenny next deigns to speak to ‘Paddy’ I can imagine him saying to school leavers or College graduates who can’t find a job, “You’re not unemployed, you’ve just taken very early retirement”. So Latvia has an ageing population and indeed a very low birth rate. Could that possibly have anything to do with the emigration of its young people to act as cheap labour and the continued lack of employment and stability. Help this generation can just roam Europe tempting for a low wage never having kids . Instead of fixing a problem like that Europe decided its better to allow it and solve that demographic collapse not by changing society but by using the quick fix. Thanks Latvia you broke yourself as a society & a nation but contributed to attempts to build an optimum currency area. They certainly had and have some challenges,they had their own “Anglo/AIB” themselves,sorry banking crisis. Interesting and provocative video from this site,Dork are you moonlighting. http://m.youtube.com/#/watch?v=IBiYCPfIWFA&desktop_uri=%2Fwatch%3Fv%3DIBiYCPfIWFA “Lawless Latvia provides information about Latvian crimes that are ignored by the corrupt media and authorities………” http://www.lawlesslatvia.com/ @Bunbury I’m not sure Enda Kenny actually speaks to school leavers or recent graduates. He assumes that they just follow the usual Irish tradition and vote the same way their parents do. Seems to me they are voting with their feet though. Another friend’s daughter leaving for Canada next week. @All I’ve just learned that the demand for Australian Dollars has rocketed in the past month or so. It seems that Santy on the sand is the likely new regime for many families in 2013 and beyond. How sad. @ John Gallagher Fascinating links. Funny that there is no mention of those troubling issues in the report of the Latvian Central Bank linked above. Some useful commentary http://www.nakedcapitalism.com/2013/01/latvias-economic-disaster-as-a-neoliberal-success-story-a-model-for-europe-and-the-us.html The NYT article on Latvia is mostly harmless despite the “Austerity does not fail countries, countries fail austerity!” implicit in the title. However, as The Krugman noted almost immediately, Latvia style success is really only for those with more empathy for foreign creditors than citizens – one in twenty of the population have been forced to emigrate since the start of the European component of the global financial crisis. Even though the numbers who have emigrated are presumably those in their young working years employment levels of the remaining portion of the working population is at 95% of the pre-boom level in 2006. In fact unemployment is now at the levels just before Latvia became a full member of the EU despite much of its human capital has been forced to emigrate. There is a thread on Crooked Timber at the moment about how the failure of modern macro relates to unemployment and one of the posts contained a link to a good stomping of the NYT article by Philip Pilkington. http://www.nakedcapitalism.com/2013/01/philip-pilkington-the-new-york-times-bizarre-and-misleading-praise-of-austerity-poster-child-latvia.html “Latvia’s austerity success story” joins “market discipline”, “stability pact” and “fiscal rules” on the least of neoliberal fundamentalists warning phrases. Reason save us all from a similar austerity and fiscal rules led “recovery”. As an insider, I have to agree with what’s beem said before. It’s true that many Latvians have left for the British Isles. Those with children probably for good and all, as far as I know from what my friends there have told me. On the other hand, Ireland itself has seen in the past many of the problems faced by us today. Yes, the population is becoming older, last year some 24 thousand people died (of old age etc.) while only some 19000 were born, so that makes the total number of residents decline year in, year out. You shouldn’t take for granted anything put forward by the current Latvian government as thruthful information. I don’t think one can impose austerity on austerity, although many of us now live much better than 10 years ago. The problem is that there’s a lack of resources to build a prospective society and economy on in the future. There should have been a union of the Baltic States from the start in 1991. @PQ the naked capitalism piece is excellent,one of Ireland’s best know reporters took a very similar view to the NYT,was in Sindo while back. It’s all good….Coleman is at large in Latvia! “Last week I was helping them to emulate our success in generating FDI, growing exports and developing their diaspora, and in tackling problems of rural isolation and poverty.” http://www.independent.ie/opinion/analysis/obama-sees-not-irelands-loss-but-americas-gain-3266217.html @John That was interesting…………………….. These interviews of democrats is quite enlightening……. They are very naive of course , but at least they seem alive inside. http://www.youtube.com/watch?v=hW4SoXMFKr4 My working experience of Baltic people is that they wish to shut out life as it is too painful. Austerity suits seems to suit their black dog temperament. Anglo countries obviously need a Greenback party whose main platform is a vow to never let the bankers inflate or deflate the money /credit supply. Then when people finally see the mechanism of how they get screwed they will not take aristocrats & their media people too seriously. There is often comparison btw. Ireland,an x Irish central banker Michael Bourke,who used to run Detmot Desmond’s Latvian bank Rietumu,MH at FinFacts had some reporting on it,he’s now running down the Latvian “NAMA”. He made a presentation including a comparison/contrast to Ireland,pg 11 specifically. http://www.amcham.lv/data/Michael_AmCham_25_March.pdf A rather unflattering portrait of the Ireland/Latvian connection here,but does use the IRBC/Quinn saga in Ukraine to illustrate the point. http://grahamstack.wordpress.com/2012/12/16/fishy-eastern-business-flourishes-in-murky-uk-and-irish-waters/ @Dork America is a big place,lots of optimistic people some perhaps a little naive.But the “mood” music is positive these days,your links always amuse and enlighten,Santas day out in Austin was cautionary. I can attest that the scariest words a law enforcement officer in the US can say are …stop resisting arrest….in fact after watching your link I got pulled over for running a stop sign,thankfully not in a Santa suit….. My “interest” in Latvia such that it is was sparked somewhat by these comments not too long ago in the Indo. The x Irish central banker Michael Bourke was very scathing on NAMA etc. http://www.independent.ie/business/irish/excentral-bank-advisor-lashes-new-regulations-3296802.html @John He is not my type……….he seems to want to increase leverage again. But you can reduce leverage while increasing the money supply……but you take away banks leverage power over us…….. So that must be bad right ? I do not trust them period – they are a private cartel in control of the commons , in control of government , in control of peoples heads , in control of everything. There is only one mechanism that can teach them something they will never forget. The bill is as good as the bond. http://en.wikipedia.org/wiki/United_States_Note @Dork I took it you were referencing the Greenback Party…he’s not my type either,but Dermot Desmond took quite a shine to him or the bank he was running, Appears to all be all working out quite spiffily…according to reporting in the Indo…oh hold on he’s got some ownership there too! http://en.wikipedia.org/wiki/Greenback_Party @John Yes but we need to get off the oil standard rather then the Gold standard. “The late 1860s and early 1870s were a time of frenetic railway construction and associated land speculation. Rather than a managed system of national railroad construction through public works or leaving the construction of lines strictly to market forces, Congress attempted to spur the growth of the industry through the grant of enormous tracts of public lands to privately-owned railway companies. In May 1869 the First Transcontinental Railroad across the North American continent was completed, bringing many localities to within reach of a national market for the first time. A frenzy to complete additional railway lines to open up new frontier areas for development followed, a situation in which the United States government and the great railroad companies of the day maintained a common interest. In an effort to speed such development, Congress granted cash loans and some 129 million acres (52.2 million hectares) of publicly-owned land to subsidize construction” Sounds familiar does it not ? Just replace railways with the house and road lobby , backed by the banks and their bank credit money system. Beware the Wheelers……………… http://www.youtube.com/watch?v=LRHfWvOg_HI Just replace those wheeler actors with the Tom Parlons of this world. @Dork miles off thread..but ’twas the paddys that helped kill off the Greenback party ! “By the middle of the 1880s, Greenback Labor nationally was losing its labor-based support, in part as a result of craft union voluntarism and in part as a result of Irish defections back to the Democratic Party.” Link above. http://misc.mortgagebrokers.ie/images/blogimages/2008/september/week2/CIF.jpg What really bugs the inflationists about the Baltics is that the people themselves accept austerity – they knew they had a crazy boom and they will work to put it right. They want to become part of serious northern Europe that pays its way rather than the excuse-making, supplicant south. Good luck to them I say; I wish we had more of the same spirit in Britain. @RebelEconomist What really bugs the inflationists about the Baltics… What really borrowers the lifestyle and exercise freaks about the crash dieters is the crash dieters serious desire to become thin. Let’s try that again without mobile phone auto-correct: @RebelEconomist What really bugs the inflationists about the Baltics… What really bothers the lifestyle and exercise freaks about the crash dieters is the crash dieters sincere desire to become seriously thin. Your comment makes no sense corrected either. Perhaps it is supposed to be funny, but I cannot work out whether you agree with me or not. I am afraid that the most appropriate diet analogy is that the country ate some of its seed corn, and now it is trying to eat less to replace it. That may be against the advice of those who say,”there is no need for hardship; you can replace the seedcorn when you have a good harvest”, but the trouble is, that they cannot guarantee that a good harvest will come. Comments are closed.