Tobold's Blog
Friday, February 10, 2012
 
Living out of other people's pocket

Imagine you lose your job and have trouble finding a new one. Would it be wiser to keep up your standard of living using borrowed money, or to reduce your spending to adjust it to your reduced income? Imagine your neighbor lost his job, should you be forced to give him money so that he can keep up his standard of living? To most people the answers to these questions are very obvious: If you earn less, you should spend less. And you shouldn't be forced to pay for somebody else spending more than he can afford. What I find remarkable these days is how these simple and fundamental truths are very much forgotten when discussing the European debt crisis. Except for the Germans, who find themselves in the position of being the ones asked to pay for the folly of the others, everybody is stating the need to keep up the spending.

If you spend more than you earn, you accumulate debts. That is as true for states as it is for individuals. And this debt accumulation cannot go on forever, because at some point it becomes increasingly unlikely that you will ever be able to repay your debt. The whole European debt crisis is about debtors realizing that we are approaching this point.

Still even economic newspapers clamor for "solutions" which are not about spending less, but about how to get access to more borrowed money. Whether it is Eurobonds or officially making the ECB a lender of last resort, none of these "solutions" actually solves the problem of increasing debt. At some point in time either the states will have to default on their debt, or they will have to find somebody else paying their debts for them. Even if the debtor states could turn the European Union into a transfer union in which money flows from Germany to the less rich member states, that would at best be a temporary solution. Germany has lots of debts too already, and can't pay for other countries for long before running out of money. Thus in the end any further accumulation of debt will mean saddling future generations with it.

All these solutions: debt default, transfer union, or letting the next generations pay back the debt at some point in the future all are variations of the same theme: Living out of somebody else's pocket. The only thing which varies is who is supposed to pay, that being either the debtors, the Germans, or your children. And still nearly everybody speaks about the need to keep up spending, as if continuously rising spending is a human right. Well, it isn't. If a nation produces less added value, it has to adjust spending downward in consequence, just like any individual who finds himself with a lower income. The only political choice we get is whether we reduced our spending ourselves, gradually, and trying to minimize the hurt, or whether we keep on spending like crazy until the whole system implodes and we have to reduced spending by far more at once, because the borrowed money has run out too. I find it extremely sad that governments all over the world appear to have opted for the second option, because they are too timid to tell their voters that a state in which everybody receives more money from the state than he pays in can't possibly work. Governments can print money, but they can't print value. In the end, somebody has to pay. It is a shame how everybody hopes that somebody else will be paying.
Comments:
When people talk about the need for spending, they talk about investment loans: Funding a project that'll allow you to profit in addition to paying the loan back with interest. For example, loaning money to buy a car to get a long-distance job. Or renovating infrastructure that'll allow more taxable business to take place and therefore increase long-term revenue.

The problem is that the loans taken for consumption (that you rightfully denounce) are frequently disguised as investment loans, either due to incompetence or malice.
 
Two thoughts:

Not that that is what is happening (I don't think it is), but what about when an individual, say, takes out a loan to buy a car so he can get to a new job that will allow him to eventually pay for the car? That could perhaps be compared to the times when states have spent more in order to invest in things that increase the value they add. Though again, I don't see that happening right now, so the point is academic.

And I was also thinking about who pays when a state prints money. Increasing the amount of money decreases it's individual value. So would that mean that printing money essentially drops some more of the cost on those who have the money money? In other words, the rich?
 
I think the reason they want people and governments to keep spending is to keep the economy moving. If you lose your job for example and stop spending, that in turn affects the income of the people you used to purchase products from. Some guy out there livelihood is based around you buying a bagel and coffee every morning. If the amount of people who stop buying increases to a certain level you start to see a recession.

Sometimes I wish had paid more attention in my economics classes. As I understand it, its a balancing act used to soften the financial impact to everyone. There are no good answers though when it comes to debt.
 
So would that mean that printing money essentially drops some more of the cost on those who have the money money? In other words, the rich?

Unfortunately not only the rich, but everybody who has rights to a fixed sum of money. Prime example would be a pensioner, who has pension rights to X dollars per month. Reduce the value of the dollar, and he still gets those X dollars, but they buy a lot less.

But yes, in principle printing money transfers wealth from those who have money or entitlements to those who have debts. It is the fable of the ant and the grasshopper in reverse, where the ant is punished for saving and the grasshopper is rewarded for spending more than he could afford.
 
It is very difficult to compare household finances with sovereign countries that have the ability to print their own money. The values between the two have very little overlap.

Consider reading more about MMT: http://pragcap.com/resources/understanding-modern-monetary-system

A quote from the above article as follows: "...improvements in our standards of living provide us with the ultimate form of wealth – they give us more time to do the things we think will help us achieve happiness (whatever that might be to any particular person). This is the ultimate form of wealth. The entrepreneur gives us more time to consume more goods and services and do the things we want in our lives.

If we look at the modern economy we can see how streamlined this process has become. For instance, last night at 7 PM I put my laundry in the wash, I put the dishes in the dishwasher, ordered dinner from a local restaurant and went upstairs into my office where I did an hour of work. At 8 PM my dinner arrived, my laundry was done, I ate dinner on a fresh clean plate and I had done an hour of work in this period.

Imagine trying to do all that 100 years ago? How long would it take you? Days? Perhaps even weeks? That is a remarkable increase in living standards. And why are we able to do all these things in such a condensed period of time? Why am I able to consume so much more than I could have 100 years ago? Because entrepreneurs created a machine that cleans my clothing for me, they created a machine that cleans my dishes for me, they created an oven that cooks my dinner, a car that allows the deliveryman to deliver my dinner, and invented a computer which allows me to efficiently and effectively accomplish work.

We live in a remarkable world. If, as a people, we are not productive and our government is a poor steward of our currency then it’s not unimaginable that our real living standards will stagnate or even decline."
 
"the analogy between a sovereign government’s balance sheet and a household’s balance sheet is never accurate. The reason this analogy always fails is due to the difference between being a currency issuer and a currency user."

Another blogger used the following satire to discuss modern monetary theory and the above:

"King Jeremy of Vividavia is an issuer of porn. The rest of us are users of porn. In order to live in King Jeremy’s country you have to give up 35% of your porn collection every year, otherwise you go to jail. The King buys all the stuff he needs to keep the country of Vividavia serene and secure from all of it’s hard working citizens. He pays his bills in porn. All of the citizens also buy goods and services in exchange for porn. This way everyone accumulates enough porn to pay their porn tax every year.
Can King Jeremy run out of porn?"
 
I live in a country that is currently surviving on EU / IMF money so this has personal impact for me.

We have been "behaving ourselves" meeting IMF/EU targets for expenditure reduction and I have no doubt that if we continue on this route we will get back to solvency eventually but how long is eventually? Our government is still spending more than it earns so the national debt is ever increasing. It could be decades before we get it down to manageable levels.

Unfortunately there only seems to be two alternatives: Either keep borrowing more money from EU/IMF to plug the gap between income and expenditure or else face complete collapse of the economy and the consequent pain and suffering that brings.

I would prefer a third approach if anyone would offer it: No new money to increase indebtedness but a moratorium on interest payments on existing loans. That would allow us to quickly balance income and expenditure and start rebuilding the economy to a point where we could actually repay some of the capital of existing loans.

Of course letting a country off interest payments would be a "gift" and might not sit well with those who made the loans. Nevertheless it is a move that banks use sometimes with distressed borrowers and it might be a more sensible strategy in the long term than just lending more and more money to distressed states.
 
Can King Jeremy run out of porn?

No, but he can run out of goods and services, because at some point people refuse to take his porn in exchange for them. At that point the king will realize that the porn didn't actually have any value, it was just a convention to use it as medium of exchange.
 
Tobold,

Although Greece did indeed spend more than it could produce and Portugal had a huge private debt you cannot simply reduce the problem to a "they spend too much."

If you are so moral about debt, then write a post on how Germany still hasn't payed Greece the agreed and signed compensation for the destruction your country wreaked on Greece 70 years ago.

Also please remember the following:

- Germany and France, through the EU governance made rules so that the poorer countries of the south destroyed their productive capabilities (fishing, agricultural and industrial) so they could place their products there.

- Germany basically designed the Euro so the currency would be lower than what the mark would be to gain an cambial advantage.

- all the countries that are applying austerity are suffocating their economies. spending and borrowing are not solution but crippling your economy isn't a solution as well.

- banking is a risky activity although a very profitable one. If you made bad decisions and granting credit to those who cannot afford it then too bad. don't lend recklessly next time.

- Germany only wants to save their own banks which means their own economy. A year ago if Greece defaulted German banks would fall like dominoes but now German bankers are safe and all it took was to almost destroy a country.

So yeah, countries in trouble should spend less. But you cannot compare a household with a country and you cannot reduce the problem to "those irresponsibles spent too much."
 
You know, in the case of the EU, Germany has reaped most of the benefits of the Euro but now doesn't want to be left holding the bag. Prior to the Euro, their currency was expensive, and made their exports expensive. Bringing all of Europe into the Euro lowered the value of their currency making their exports cheaper. The problem is that it raised the cost to countries like Spain, Italy, and Greece of doing business, and now, here we are. So, no sympathy for Germany in this situation, especially given they basically forced one of their bankers into a political leadership position in Greece.
 
The biggest problem with the 'austerity measures' is that they will plunge these countries into much worse economic situations for a long period of time.

Severe reductions in government spending will contract the economy, meaning that the tax revenue the government is relying on won't happen, meaning that they won't have enough money to pay their bills anyway.

That said the two choices are either a) limp along and hope that they can turn it around before the handouts run out, or b) declare bankruptcy and take a massive blow then rebuild. Either way, the worldwide economy suffers.

For everyone who says "If you don't have it, don't spend it" that kind of logic only works way back up the top of the slippery slope. Half-way down running at breakneck speed, you need to do more than just tighten your belt. Places like Greece are already so far gone that simply home-spun logic doesn't work.

Micro-economics =/= macro-economics.
 
@Wyrm: It didn't take long for Godwin's law to kick in and you dragging the Nazi into the discussion. I am disappointed how your standards aren't higher than that.
 
Tobold,

It's not "goodwin's law" to point out that Germany hasn't payed the compensation it was supposed to pay Greece for the occupation.

The low standards are on your part that you prefer to pretend I'm calling nazi to anyone rather than address my comments.

Germany still owns Greece the money Germany agreed to pay after WWII and never did. If you are so concerned with debts in exactly what way reminding you of a still existent German debt, "goodwin's law?"
 
1) I agree that ango-saxon, that is english, news are ridiculous.

2) You are very one-sided in this post, too.

3) More interesting than what should happen is often the question "what will happen?"


Here's what will happen: The ECB will not allow the Euro to stop existing. Of all institution, the ECB is the one with the strongest incentives to keep the Euro (itself) alife. It also have all the weapons it needs to make the Euro survive in any short term (the print press).

This will eventually lead to inflation, or at least bubbles in some markets (shares, bonds, ressources, mortages..). This can take months, years or decades. Trickle down effects of money are very hard to predict.

If the Euro Zone breaks up then as a result of a POLITICAL DECISION. Most probably after one or more elections.

While it is not in the interest of any party including countries like Greece or Portugal (let alone Germany) to allow this to happen - elections can make countries behave irrational. We, Germans, of all people should know that.

At the end of the day we shouldn't so much talk about guilt and the past, but rather about what we want (prosperity, little moral hazard).

We should also consider that this century will see a world where countries like China, India and Brazil will gain incredible political power compared to tiny countries like Germany, let alone Britain or Greece.

And, watching those 'debates' in the US I sometimes feel shivers running down my spine ... We should want a strong political union here in Europe ...
 
Of course that is Godwin's Law. You are dragging a legal dispute into the discussion which has nothing to do at all with the finances of the Greek state. Even if they had won that case, the money would have gone to some Italian and Greek citizens who made a claim for compensation.

But as the International Court of Justice in The Hague declared the claim to be bogus, who are you to supersede that judgment?
 
An Guardian article on the same subject:

http://www.guardian.co.uk/commentisfree/2011/jun/21/germany-greece-greek-debt-crisis
 
Tobold, the various countries in the EU can't print money. At least not to pay back debts. That's why things have gotten so bad.

Greece's debts (for example) have to be paid back in euros, so they can print more drachmas all they like, but the value of the drachma will drop relative to the euro so they're right back where they started. So as confidence in Greece's economy falls, the relative ability of Greece to pay back their debt falls, and as the relative ability of Greece to pay back their debt falls, confidence in their economy falls, and on and on. It's one step up from a terrible gangster film where it doesn't matter how much money you pay back to the mob, the debt's not gone until Don Biscotti says so.

European countries outside the EU, even those that have notionally pegged their currency to the Euro, aren't having the same problems getting loans at reasonable rates as countries inside the EU that are hard-locked to the Euro. Compare Finland (inside), Denmark (outside, pegged to Euro), and Sweden (independent). Their interest rates all track until the periphery countries of the Euro start having trouble repaying their loans, at which point Finland starts inching upward.
 
Goodwin's Law:

http://en.wikipedia.org/wiki/Godwin%27s_law

I don't think remind you of past debts is "goodwin's law."

You're just avoiding the issue and as you always do, when you don't have any arguments you make your best to feel insulted and the slightest so that you can avoid debate.

And by the way can you provide a link for:

"But as the International Court of Justice in The Hague declared the claim to be bogus"
 
From the article:

"The question that remains, however, is what will happen on Greek territory. Because, as lawyers stressed, the Court made a decision only that Italy had breached international law by authorizing the execution of Greek solutions in Italy. It is only a matter of interpretation whether the same reasoning would apply to the Greek courts, which are not mentioned therein."

So it's not a done deal...

But anyway, any comment on the rest of the post? I must be right at something since you're just, falsely, accusing me of evoking "goodwin's law" thus stopping the relevant discussion...
 
I don't think remind you of past debts is "goodwin's law."

You mean the past debts that have been cancelled in 1953 and which even if you considered paying them with interest are just a tiny fraction of what Germany is actually paying Greece in the current crisis?

I know that British history stopped in 1945, but it very well is Godwin's law if in any discussion involving Germany you make a case that Germany should pay everything in Europe because of Nazi crimes. There is no internationally acknowledged financial debt of Germany to Greece.

In any case my post is a lot wider than just Greece, because it applies to any nation that spends more money than it earns. Combined public and private debt in Britain and Japan is over 500% of GDP, in Spain and France over 300% of GDP, and even in the US and Germany it is 250% of GDP. If I had personal debts like that, my bank would have foreclosed on me long ago.
 
"Combined public and private debt in Britain and Japan is over 500% of GDP, in Spain and France over 300% of GDP, and even in the US and Germany it is 250% of GDP. If I had personal debts like that, my bank would have foreclosed on me long ago."

Finally some relevant comments.

It's an economic fallacy to consider a nation finances like a household's.

But let's look at Japan. They have a huge debt. What about their interest rate in ten year bonds? So debt "per se" means nothing. Japan's economy is robust enough to service their debt and lenders are quite eager to lend to Japan.

Even Portugal was able to service the country's debt and only stopped being able to do so because the ratings were lowered thus increasing the interest rate. The argument for lowering the rate: "in the long term Portugal won't be able to pay it's debt." Talk about self fulfilling prophecies...

Although debt should be minimized and the PIIGS did make some bad decisions (one that all the PIIGS made was entering the Euro) the main problem is the broken currency that was created. You can't have common currency without common debt and being unable to control your currency means that poorer countries are more vulnerable to speculation (fortunes were made lending at criminal rates that were guaranteed by EU/IMF, basically Germany and France bailing out their own banks disguised as "aid" to those southern indisciplined countries).
 
But feel free to explain me how the Greeks having declared 324 swimming pools in Athens on their tax returns while Google Earth find 17,000 of them, and the Greek government losing 13 billion in taxes annually is the Nazi's fault, so that of course it has nothing to do with Godwin's law that you bring them up.
 
Wyrm, You don't seem to be offering for any European state to compensate the US for costs incurred in the multiple wars the US has funded to keep those same states free. That makes you a money grubber, instead of a reasoned debater.
 
"Unfortunately there only seems to be two alternatives: Either keep borrowing more money from EU/IMF to plug the gap between income and expenditure or else face complete collapse of the economy and the consequent pain and suffering that brings."

I can tell you that at least in the US, the only option is complete collapse. It's sad, but most people simply won't vote for any politician that gives them the cold hard truth about our economic situation. People have come to regard their standard of living as a right, not a privilege. If given the choice between a candidate that promises fiscal responsibility and one that promises free Ferrari's for all, people will choose the Ferrari. Your average US voter is either too stupid, too selfish or too apathetic to care what type of impact that will have on them and the country long-term.
 
"Germany you make a case that Germany should pay everything in Europe because of Nazi crimes"

No, I didn't write that.

This is what I wrote:

"If you are so moral about debt, then write a post on how Germany still hasn't payed Greece the agreed and signed compensation for the destruction your country wreaked on Greece 70 years ago."

Meaning, if you get on the moral high ground towards an entire nation, please make sure your own hasn't glass roofs.

Turns out the decision came, so far, in favour of Germany. So great, you can continue to portray Greeks, Portuguese, Spanish (well, basically everyone from the south) in the not at all insulting and not at all simplistic way you did in your post.
 
It's an economic fallacy to consider a nation finances like a household's.

Why?

In the details the two are different, but at the heart of things the two are the same: Even if you individually or as a nation can service your debt today, it is inevitable that one day you will be unable to service that debt if all you ever do is increasing it.

Britain's debt increased by 177% of GPD between 2000 and 2008, and that was BEFORE the crisis. The conservative / liberal government had to slash public spending by 25% when they came into office, and still are far from achieving even a balanced budget, much less paying back their debts.

The only fundamental difference between the debts of nations and households is that nations can print money to make the debt magically disappear. But that is just a form of expropriation. The equivalent for an individual would be robbing a bank to pay his debts, which isn't really a good solution.
 
Germany still hasn't payed Greece the agreed and signed compensation for the destruction your country wreaked on Greece 70 years ago

As I already said:

A) That debt was officially cancelled in 1953.

B) The debt was significantly less than the 20 billion Euro Germany already payed Greece during the current crisis.

C) The "moral" debt of Germany towards Greece for Nazi crimes has absolutely nothing to do with the subject matter of my post, which is nations spending more money than they make. Even in a hypothetical world in which Germany had paid those debts in 1953, the situation today would not be any different. And yes, that is EXACTLY what Godwin's Law says, that anybody running out of real arguments is just bringing up the Nazis instead.
 
And this is the entire argument over here in the US. The government and government workers are getting fantastic benefits that far exceed what the private sector gets. Yet they want higher taxes (let the 'rich' pay their fair share crap) to keep their lifestyle while those paying the bill (private sector workers) see theirs declining.
 
The only fundamental difference between the debts of nations and households is that nations can print money to make the debt magically disappear.

Actually it is just a very subtle but powerful tax for everybody. If inflation get's out of hand it can also harm the real economy.

What is certainly correct is that countries aren't private households. Even though there are obviously many similarities. The most important difference, however, is that households don't really have a separation between government and the electorate.

This is also a shortage of your post, Tobold. Germany doesn't have much debt. We are very rich.
The German government has debt! This is a very, very important difference!
 
Wait, is Gevlon guest-blogging here?

I keed, I keed.
 
So, if Greece has to start earning more money than it spends, who is going to start spending more than they earn in order to compensate?
 
"But feel free to explain me how the Greeks having declared 324 swimming pools in Athens on their tax returns while Google Earth find 17,000 of them, and the Greek government losing 13 billion in taxes annually is the Nazi's fault, so that of course it has nothing to do with Godwin's law that you bring them up."

No, what I brought up was your stance towards debt and reminded you that your country still have those. So far the ICJ ruled in favour of Germany so great, I won't beat that horse.

But invoking "goodwins law" when I pointed at a case of German debt just because said debt was incurred in WWII is not at all debating.

Is someone that would get your comment deleted if you posted in Tobold's MMORPG Blog...
 
"The only fundamental difference between the debts of nations and households is that nations can print money to make the debt magically disappear. But that is just a form of expropriation. The equivalent for an individual would be robbing a bank to pay his debts, which isn't really a good solution."

How many banks has Japan been robbing so far? And those stupid bankers and hedge fund managers continue to lend to Japan!

A country also has a lot more leverage than a household. A country has far more natural resources than a household. And a country can apply sensible Keynesian solutions to kickstart it's economy and work their way out of debt. And yes, libertarians will do backflips to prove that Keynesian economics are just borrow till bust. They are not.
 
How many banks has Japan been robbing so far?

One. But as it is one of the richest banks in the world, the Japanese Post Savings Bank, that was quite enough.
 
"The "moral" debt of Germany towards Greece for Nazi crimes has absolutely nothing to do with the subject matter of my post, which is nations spending more money than they make. Even in a hypothetical world in which Germany had paid those debts in 1953, the situation today would not be any different. And yes, that is EXACTLY what Godwin's Law says, that anybody running out of real arguments is just bringing up the Nazis instead."

You are just putting words in my mouth.

I said that YOU didn't have morality to point your fingers at other countries not paying their debts since Germany didn't paid theirs in full as well. I wasn't aware that the ICJ already ruled in favour of Germany.

And yes, you are so right, i used Goodwin's Law for the lack of arguments... Quoting from myself:

"If you are so moral about debt, then write a post on how Germany still hasn't payed Greece the agreed and signed compensation for the destruction your country wreaked on Greece 70 years ago.

Also please remember the following:

- Germany and France, through the EU governance made rules so that the poorer countries of the south destroyed their productive capabilities (fishing, agricultural and industrial) so they could place their products there.

- Germany basically designed the Euro so the currency would be lower than what the mark would be to gain an cambial advantage.

- all the countries that are applying austerity are suffocating their economies. spending and borrowing are not solution but crippling your economy isn't a solution as well.

- banking is a risky activity although a very profitable one. If you made bad decisions and granting credit to those who cannot afford it then too bad. don't lend recklessly next time.

- Germany only wants to save their own banks which means their own economy. A year ago if Greece defaulted German banks would fall like dominoes but now German bankers are safe and all it took was to almost destroy a country.

So yeah, countries in trouble should spend less. But you cannot compare a household with a country and you cannot reduce the problem to "those irresponsibles spent too much.""

I count at least 6 arguments. In bullet points even...
 
"One. But as it is one of the richest banks in the world, the Japanese Post Savings Bank, that was quite enough."

Yes, I can see people fleeing Japan and complaints being filled in the ICJ.
 
"Wyrm, You don't seem to be offering for any European state to compensate the US for costs incurred in the multiple wars the US has funded to keep those same states free. That makes you a money grubber, instead of a reasoned debater."

Was that the arrangement?

"Yeah, you pussy europeans, we'll go and save you and you pay us money, yeeeehaaaa!"

I don't think so. And I also think that the power and influence the US gained after WWII was payment enough.
 
People generally don't flee countries just because a part of their wealth is expropriated. The Japanese don't flee Japan for getting effectively negative interest rates on their saving in the state monopoly bank. And most of the inhabitants of most countries stay put even if hit with rather unfair taxes.

You are just putting words in my mouth.

No. I write a post about the necessity of nations to not spend any more money than they earn. The word "Greece" doesn't even appear in that post. In response you mention German war crimes from 70 years ago which have absolutely nothing to with my post. And when I point out how Godwin's Law predicts precisely that, you write a dozen comments with more bogus arguments than anybody could possibly hope to answer to and try to weasel out of the situation that way.

And all your arguments are basically anti-German propaganda. How are those relevant for example in the context of the US debt burden? Or Japan? The only valid argument you make is mentioning Keynesian economics. But you fail to mention that while Keynes was very much for spending your way out of an economic crisis, he didn't advocate to spend more than you earn during the good years too. Which is exactly what most states did.
 
The underlying issue is that since the 1950's there has been a dramitic increase in technological improvements that increase the amount of productivity per person every 5 or so years.

We have become so productive that there isn't enough work to keep everyone employeed. This has put the whole system at risk because it is set up with the expectation that if productivity rises people will buy the mass amounts of product you make. People mocked those that complained factory jobs were being outsourced to computers and people in third world countries. Now its legal work,medical work, engineering work etc. Higher and higher paying people are being moved out of the work force because they aren't as efficient as computers. It's gonna get worse before it gets better. Technology isn't suddenly going to become less efficient.
 
Also, how is inflation an immoral expropriation, while taxation is not? Unless you think taxation is in fact an immoral expropriation, although in that case I would think you would care less about the flow of money between governments since they would all be illegitimate.
 
Germany and France encouraged this problem when they broke their own rules on fiscal responsibility. They set a very bad example for countries like Greece.

Still Greece is an example of what happens when you let socialism run rampant. Thatcher said it best.

"Socialism fails when they run out of other people's money"

or to give it the full quote

Margaret Thatcher, in a television interview for Thames TV This Week on February 5, 1976. Prime Minister Thatcher said, "...and Socialist governments traditionally do make a financial mess. They [socialists] always run out of other people's money. It's quite a characteristic of them."
 
Also, how is inflation an immoral expropriation, while taxation is not?

The problem with inflation is that it not only takes money from those who have it, but it also gives money to those who overspent. Taxation doesn't do that. Inflation also takes money away from future fixed earnings, like pension rights. And it is a flat tax, taking the same percentage from the millionaire and the pensioners piggy bank.
 
They [socialists] always run out of other people's money. It's quite a characteristic of them.

If that was a characteristic of socialists, that would make George Bush junior a socialist. I do agree that left wing governments are more likely to spend money than right wing ones, but the US had some notable counter-examples in Clinton and Bush.
 
Why do we talk about entire countries as if they were one person or a single consciousness? They are a collection of individuals, not a hive mind.

The situation in Greece looks a lot like a family where the father kept telling his children and wife how great his job was and how much money he was making. The kids got a generous allowance. Now we're trying to take that back, saying the kids should have been putting the money in the bank because they should have known they were being lied to. But that's the entire point of a lie, that it is thought to be true.

The Greek government lied and it is the Greek government which should be held accountable, especially the individual officials and their banking friends who did the lying. They are the criminals, not the person who received a generous pension.

"Socialism fails when they run out of other people's money"
Whereas capitalists do an excellent job of not running out of other people's money.
 
One should understand that economy is not, and will never be, a morality play. However it may surprise and anger those who have provided the money, all big debt crisis in history have been solved the same way: those who have more money lose (usually a little of) their money, those who have been borrowing will lose (usually a lot of) their livelihood. The biblical exhortation of “not a borrower nor a lender be” reflects the obvious parallels between their plights.
Regarding the current crisis I expect inflation rather than outright taxation will be used to cancel part of the debts for this it to be solved (though I’m certain that taxes will also be used, but on the politically more popular idea of “strengthening OUR banks”).
The problem obviously is that EU is an imperfect democracy (or rather, an imperfect union with some democratic constructs), and where even those few democratic constructs (e.g. the European Parliament or in parts the European Commission) have been sidelined. This is not an environment where you can keep asking sacrifices from the people, moreso if the only true justification you can present is moral (since no one can believe that the borrower nations or the majority of the Europeans will be better in the short/medium term with the “solutions” proposed).
 
European Debt Crisis - coming soon to an American economy near you!
 
"sensible Keynesian solutions"

I just about peed myself from laughing.
 
Surprinsingly, it's the Germans who profited from the interest they earned on dubious loans to Southern countries and the exports they made to the same countries, paid with the money from those loans. Now they refuse to assume their part of their responsability as lenders when those investments fail, and instead they tried for years to pretend that no renegotiation would take place (this way they could pretend that they wouldn't need to bail out their banks).

I'm not implying that the Germans are the bad guys in this crisis, but asserting that the Eurocrisis is just about the reckless Greek trying to live out of the Germans' pocket shows a poor understanding of financial crises, currency areas and international political economy. There are powerful reasons behind the fact that debt forgiveness, restructuring and default have been the norm in historical financial crisis. It's an especially unfortunate analysis because the German mistakes have been worsening the financial and economic situation of the Eurozone for years, and while the Greeks overspent and completely failed at economic and fiscal policy, they are not the ones screwing EU policy and they are experiencing one of the most painful recessions in the Eurozone.

All that is going on is pseudo-moralistic (God said that lenders should never lose a penny!), populist, "us-vs-them" economic nationalism, where "living out of other people's money" is bad only because the one who pays and the one who receives have different birthplaces. It's fine if a German bank shareholder or bondholder lives out of the German taxpayer money, but it's super wrong if an unemployed Greek receives help financed by German taxpayers. Rational economics can do nothing against primitivist group zeal.
 
As a conservative libertarian I can say that george bush was NOT one. He touted what he called compassionate conservatism which equals socialist lite.

The reason GWB had low approval numbers was because real conservatives were against his economic policies.
 
Sorry for the double post but I just say this tidbit:

"sensible Keynesian solutions"

Can anyone name me anytime that Keynesian economics has ever worked in the real world? Anytime or for any country. There is not one single documented example of it working. The best they can come up with is "it would have worked if they just spent more".
 
Again, I mentioned a litigation of debt whose ruling, favouring Germany, is quite recent and I didn't knew about it.

I mentioned this case, let me explain once again, to counter your morality reasoning on debt. Fortunately for you, the ruling favoured Germany or you wouldn't be able to cling to the Goodwin mantra instead of providing arguments on why debt is immoral as you imply in your post.

It's the third time I address your false accusation thus proving I'm not trying to weasel out of nothing.

If anything you are trying to weasel out of the debate and also fishing for more insults as you always, always, do when someone disagrees.

As for Japan you keep ignoring that Japan can finance itself with low interest rates. 500% debt and they can easily borrow more and service their debt. We cannot compare the PIIGS to Japan, of course, but this throws your morality tale out the window.
 
http://www.nytimes.com/2012/01/02/opinion/krugman-nobody-understands-debt.html
 
"Whereas capitalists do an excellent job of not running out of other people's money."

In the UK we've had 13 year's of Socialism, and we've been lucky to escape from it. A Government that promised 'No more boom and bust', and borrows increasingly large amounts of money to keep this true

The UK's Brownite regime found it easier to invent new rules to justify the borrowing, than to say no to spending. The same happened in Greece, after all in most countries people would vote for cake today.

Borrowing should be for investing or for emergencies, not for living expenses.

Hmmm Odd.. A discussions about the evils of Socialism - and no Gevlon.
 
I mentioned this case, let me explain once again, to counter your morality reasoning on debt.

And it was a complete coincidence that the case just happened to involve Nazi war crimes? Because Germany had absolutely no other case involving debt for the last 70 years? Yeah, right, very believable. I must ask Mike Godwin whether his law includes "accidental" mentioning of Nazis. He just said "As an online discussion grows longer, the probability of a comparison involving Nazis or Hitler approaches 1."
 
Did Goodwin actually say that once a discussion reached Nazid it will stay there till the end?

Because .. if he didn't that seems to be true, too :)
 
Thank you all for today's vigorous debate!

One thing though: isn't it a great thing that countries aren't households. Sure, one shouldn't be irresponsible and all that, but... how many of you own a home? What's your household income (closest analogy to GDP, I suppose) relative to your household debt? Me? Around 550%. (still paying our loans nicely, though I can't say we celebrate in joy at the end of the month)

Greece? Amateurs!
 
"Can anyone name me anytime that Keynesian economics has ever worked in the real world? Anytime or for any country. There is not one single documented example of it working. The best they can come up with is "it would have worked if they just spent more"."

America: World War II, as well as pre- and post-war infrastructure. It triggered a social, economic, and technological expansion which can only be compared with that of the industrial revolution itself.

As for the "it would have worked if they just spent more", I'm just trying to imagine you as a doctor in an ER. "I tried giving him some blood, but he still died, and don't you dare say it wasn't enough."

If theory suggests doing X will achieve Y and you do .5X, failing to achieve Y doesn't disprove the theory.

Applying Keyensian economics is like trying to push a rock up a hill with someone constantly trying to pull you back down screaming that it will never work.
 
I really do not buy the moral arguments. Bankruptcy is an outcome bankers/investors are supposed to consider in the pricing of their loans. Greece was doing "fine" (for a given value of fine) before the Euro. After the Euro, it was drenched in cheap debt, which any rational economic individual, just like any rational business, would consume. There is an argument to be made that many investors took Greece's incorrect inflation rate claims on face value, but again, whose fault is that?

The real morality play here is the notion of "privatizing the profits, socializing the losses." Banks made bad loans? Banks deserve to get soaked. Except governments can't let banks get soaked, because banks are where everyone's pensions and 401ks are stored. So, we are now in a situation where the people that ACTUALLY caused this crisis, i.e. the banks making bad loans, are bailed out by the people, who then have to suffer the further consequence of austerity measures while banks get repaid 1:1 on their bad investments.

Seriously though... morality in capitalism? Even if it was the Greeks' collective fault, even if the US housing crisis was entirely the fault of American families, why should they care? Why is it immoral for individuals to not care, and moral when corporations are similarly reckless? That's right, it's socialism for the rich, capitalism for the poor.
 
"If you spend more than you earn, you accumulate debts."

So why not earn more, as in tax more?

The obvious answer, which no one seems to want to put forward, is to both increase taxes and trim spending.
 
"The obvious answer, which no one seems to want to put forward, is to both increase taxes and trim spending."

Because increasing taxes will cripple the economy, and the spending that's being trimmed in no way involves the people who are wasting all the money i.e. the bureacrats and politicians who control government expenditure. You won't solve Greece's problems until you find some honest Greeks with political power.

There's plenty of honest Greeks, there's plenty of Greeks with political power... but never the twain shall meet.
 
Tobold, you are correct. Do not let any of these comments weigh too heavily on you...It is "the new way" of doing and living, especially among people/govts who do not care to provide for themselves.

It is a learned appetite and lifestyle...govts want it (to buy votes), and now that they have instituted it, it is causing bankruptcy everywhere it has a hold...God help us
 
Tobold,

I'm reading this book now after a long and very positive review recently. The author is firmly established on one side of the political spectrum, but the historical exposé is certainly very well done.
 
"So why not earn more, as in tax more?

The obvious answer, which no one seems to want to put forward, is to both increase taxes and trim spending."

Haven't you heard of Laffer curve?
http://en.wikipedia.org/wiki/Laffer_curve

From a certain point, increasing taxes leads to decrease of the government income.
 
Well, if Mitt Romney pays an effective tax rate of 15% on a multi-million dollar annual income, I would say we can increase taxes quite a bit before reaching the peak of the Laffer curve.
 
I'm seconding the recommendation on Debt: The first 5000 years, even though I haven't finished it yet.
 
"Well, if Mitt Romney pays an effective tax rate of 15% on a multi-million dollar annual income, I would say we can increase taxes quite a bit before reaching the peak of the Laffer curve."

This could be in US, but in some countries here in Europe I think the effective tax rate is about 40-50%, if not more, especially for the richer.
 
Jogy,

Europe's well-off like to promote that view. In fact, the top earners in many traditional high-tax countries (think Sweden, Denmark, etc) see significantly lower tax rates than the "common rabble", often down towards 20%
 
To expand on Oscar's comment: Your tax rate both in the USA and in Europe mostly depends on where your money is coming from. Higher taxes apply only to salaries, so yes, people with high salaries pay high taxes. But once you put some money aside and get interest payments and dividends from that, the tax on those are much lower.

Thus Warren Buffet revealed that he paid half the tax rate that his secretary pays, 17.4% for the millionaire, and 35.4% for his employee.

The more of your money comes from capital gains, the closer your tax rate will be to 15% in the US, the capital gains tax. In Europe the details are different per country, but the overall effect is the same: You pay much less taxes on income from capital gains than from income from work.
 
Re: Buffet and his secretary --

First, we can do away with the notion that she's the "average" secretary. For it to even be possible for her rate to be that high, she has to be making over $200,000 a year -- and remember, Obama has already said that anyone making more than $250K is definitely rich and won't rule out people making as little as $100K. Really, unless she is intentionally jiggering her accounting so that she pays as much as possible (which might be the case if her boss asked her to) then she likely makes in excess of seven figures to pay that rate -- meaning she would be a millionaire herself.

Second, Buffet still owes taxes through Berkshire Hathaway dating back to 2002. Maybe he should pay the taxes he already owes before he starts jacking with the rate.
 
I wouldn't hold up the U.K austerity programme as an example:

-Economic growth is flat (-0.2% last qtr)
-Inflation is high
-Unemployment is rising, particularly for young people
-University applications are in decline
-Universal healthcare is on its way out
 
Economic growth is flat (-0.2% last qtr)

And that is a good thing! I hate this cult of the GDP which pretends that a higher GDP is always better and growth is imperative. But the GDP counts all spending, including wasted spending. Thus if you stop wasting money, you automatically reduce GDP as well, without necessarily reducing productivity.

Same thing for university enrollments. The problem with those is not the total number of enrollments, but what classes students enroll for. There are a LOT of them studying rather useless stuff, and very few studying hard sciences and engineering. You could imagine a more productive university system with much less students and a higher contribution to national output.
 
"I hate this cult of the GDP which pretends that a higher GDP is always better and growth is imperative."

When growth is flat/declining and inflation is high, people see a loss in their living standards.
Some economies are 'bouncing back' faster than others.

The 'useless degrees' argument is one I see being thrown around a lot by rightwing newspapers in the U.K.
Tripling student fees twice in the last decade is more likely to impact the social mobility of poor people than the sale of useless degrees to rich people.

Less graduates = less engineers and scientists
 
Less graduates = less engineers and scientists

That is simply not true. There are hard data available from the US which show the overall number of graduates increasing, but the number of engineering and science students decreasing. (See http://nsf.gov/statistics/seind02/c2/c2s2.htm )

When growth is flat/declining and inflation is high, people see a loss in their living standards.

Imagine a completely hypothetical nation in which people are paid for doing nothing. At some point that nation is broke and stops paying people for doing nothing. These people will see a loss in their living standards. But how is that a bad thing?
 
Tobold,

The whole "useful degrees" discussion is surely a slippery slope. I have the outmost respect for engineers, but if you study "national output" (your phrase) I think you will find that there are several groups of graduates from the "less useful" fields that actually contribute more to that national output than the hard scientists. Of course, whether those people actually save the world is an entirely different question. :)
 
Who knew you had so many budding economists in your readership, Tobold? :)

As others have pointed out, countries don't work like households, principally because most of the demand for a country's goods and services is internal. It's easy to forget this if you're Germany and you're an export-led economic powerhouse, but most economies don't work this way. Germany could practice austerity at home and export its way to growth (if the rest of the world was buying). But the Greek economy isn't like that. The austerity program is killing their tax receipts faster than they can pay off debt. They are in a classic death spiral. I think the German elite know this, they were playing for time to capitalise their own institutions, and now that this has been largely accomplished, Greece will be forced out of the Euro.

It's easy to moralise about the obvious failings of the Greek economy, but we should be open about the fact that Germany was the primary beneficiary of the Euro North-South structural divide; Southern nations borrowed at low rates (calculated on the basis of German fiscal prudence) and Germany benefited from an export boom financed with this money. In addition, as others have pointed out, Germany benefited from the weaker Euro, which was weaker primarily because of the Southern nations it so disparages. In the meantime, traditional export rivals such as Italy and France, now that they're chained by the Euro, can no longer beat the Germans on price, so have to compete on quality alone, gradually hollowing out their export industries.

So, all in all, Germany saw a huge upside in the structural imbalance of the Eurozone, and is now seeking to avoid the downside by sacrificing the Greeks. I understand it, it's rational; I'm just a bit more sympathetic to the Greeks than you seem to be. Turning it into a morality tale is not the correct reading of the situation, I think.
 
"Can anyone name me anytime that Keynesian economics has ever worked in the real world?"

America: World War II, as well as pre- and post-war infrastructure.


So for Keynesian economics to actually work we need a world war that destroys most of the infrastructure of the world? Is that whay you really want?

BTW it did not work for pre-war recovery. The US after the 1938 election was sliding back into depression once again.
 
It is curious to me why Greece has not een suggested raising funds by selling state assets.
 
"So for Keynesian economics to actually work we need a world war that destroys most of the infrastructure of the world? Is that whay you really want?"
Not at all. It's just unfortunate that that seems to be the only thing that motivated people to actually pay for basic research and infrastructure. If people cared, we could do the same during peace-time.

"BTW it did not work for pre-war recovery. The US after the 1938 election was sliding back into depression once again."
You mean when Roosevelt was told he should stop spending and balance the budget?
 
So now you are saying that FDR didn't use Keyensian economics (which is true since it wasn't till 1936 that keynes published his book).

So the pre-war recovery (which really wasn't one) was not keyensian.

You are now just left with WW2. And that is not Keyensian. So my point stands that no time in history has it ever worked. You might argue that it has never been fully tried, but I can argue that nuking the whole planet has never been tried either.
 
Where in anything I wrote did you find "Roosevelt didn't use Keyensian economics"?

How was World War II not Keyensian? It was a large government spending program which increased employment. The fact that the materials produced were blown up rather than put in closets doesn't change the basic action of spending and stimulating. We could carry it out further after, to the construction of the highway system, and see how that spending program created jobs while also reducing the costs of interstate trade and travel to comparatively trivial levels.

As for nuking the whole planet, that has no theoretical mechanism for improving the economy. In fact, the destruction of so much labor and physical capital would cause a huge contraction in the economy, in addition to adding a burden on future growth as otherwise productive activity is redirected toward fallout cleanup and shielding. Were you trying to create the worst comparison possible?
 
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