In theory it should, of course, be the creditors. You buy an asset (govt bonds), you're implicitly and knowingly shouldering a risk of default. The institutions that bought these assets should have known what they were buying. Caveat Emptor.
Of course in practice you need to ask what the wider implications of default are. Greece _should_ be allowed to default. Absurd austerity budgets are penalising the average Greek whilst minimising the bottom line impact to (arguably wealthy and powerful) European banks. It's no wonder they're pissed. The short-sharp shock of a Greek default will be over in no time. Rolling debt and refinancing terms etc etc is likely to make things worse in the long term.
But of course Italy is different, given the size of the economy. The impact of a default is likely to be far, far wider than a write-down to the creditors. But to be honest I think this worry over contagion is being over-blown. Markets often over-react. It only takes a single hedge-fund these days to move a market - even a big one like Italy debt. It's probably just Bluecrest or Moore selling the market :)
Indeed. But the reason why you try to avoid a default (or the prospect of one) is that you want to continue to borrow money to finance your deficit spending. Otherwise you get the worst of both worlds: forced austerity and creditors that want nothing to do with you without high interest rates.
Edit: don't know why you've been dv'd, your point is absolutely relevant.
Let's be honest, tax evasion is pretty much a national pastime in the US too -- the difference is that here the IRS will come after you if you cross the line.
The only way forwards I see is for the Germans to take over the collection of Greek taxes, and to control Greece's spending too, at least for a generation.
I think we'll also see them sell their half of Cyprus to Turkey too, for a few billion Euros, once the austerity starts to bite. And the Germans have their eye on a few of the Greek islands too.
The Republic of Cyprus is a sovereign state, it's not part of Greece.
"US Treasury Bonds downgraded because of the Deficit Cap row? OK, so the Americans can just sell their half of Canada to France."
This Cyprus diversion of yours was just wrong to the point of surrealism. Let it go.
To my knowledge, the U.S. has never encouraged Canadians to overthrow their government, nor do they use Canada as an excuse to justify an expensive cold war against, say, France.
Canada hasn't been turned into a warzone in recent history by France and the US arguing over who owns it.
The other issue is that Greece couldn't keep up with exports in terms of cost with other EU member states. It isn't able to keep up with other high export countries for the same goods.
Meanwhile, employees in the private sector work 11-13 hour days, 6 (sometimes 7) days a week, so calling Greeks lazy is unfair. Most of my friends are amazed and envious when I tell them I don't work on Saturdays.
Pissing off your creditors is like pissing off a business partner - you do so at your own risk; the more powerful the partner, the larger the fall out.
So if you could explain, why is it important for the banking system to be able to handle a Greek default? I mean throughout the financial crisis everybody is saying that it is absolutely important to save the banking system - every politician repeats this like a parrot. But why? Most of the middle/lower class population in Europe does not have spare money in a bank account but in contrary has debts for housing or other stuff. And I would guess that this is by far more than 80% of population. These people would not necessarily suffer from banks collapsing, but they are suffering from the economic cuts that the governments are doing everywhere in order to save banks - who are actually responsible because they did not mitigate the risk and triggered the subprime crisis.
So if you have a good explanation, please share with me.
The Greek government has bond payments to make and needs money to make those payments. The funds recently released by the ECB are for Greece with the understanding that it is just going to take the money and pay make the bond payment. The ECB wants Greece to sell assets. There is money to be made by for foreign companies buying national assets of Greece. The ruling elite stand to make money from this as well. The average Greek stands to lose big time. Hence the demonstrations.
Greece should default. It should leave the euro. Its government should not exist to serve the interests of the banking elite.
The population of Average Greeks doesn't maintain economic productivity sufficient for any kind of significant export economy.
The population of Average Greeks doesn't pay enough taxes to finance the government at even a basic level, never mind the more luxuriant indulgences like a bloated military.
To the extent that it's unionised, the population of Average Greeks values job security for themselves above overall employment and economic solvency.
You are right that the average Greek will be on the losing side of any sales of national assets. But from the looks of things, the average Greek is unwilling to consider the structural improvements that that are the viable alternative.
One of the things that the greece government has to do is cut back on those social services and ACTUALLY start collecting taxes it is owed to make up for that debt.
The greek people are unhappy to cut social services and are not willing to pay taxes... that doesn't work.
Actually, unlike their government, most Greek households do not have high debts:
"Greek consumers are relatively frugal, with household debt equal to just 61% of GDP, compared the American household debt of 95.7% of GDP"
It probably would have been much worse though had it not passed second time around. Tremendously long cues like the British bank Northern Rock worse.
But, by increasing public claims on private wealth and opening the country up to foreign direct investment (read: selling the Sistine Chapel to China to rent) you can tap the capital stock. This should be increasingly seen as a way out for wealthy yet cash-poor Euro countries.
Without structural improvements in the US it will also be the only way forward 30 or 40 years for now. Be prepared for a "Sponsored by India" sticker on the Washington Monument.
I suspect sales of national assets are unlikely to tap their full value, subject as they are to corruption and to the likelihood that the sellers are over a barrel.
From your well made point I infer that we should make a dispassionate evaluation of the value of public assets during good times so that they won't be sold for a song during bad times.
Things usually go, "No we will not sell off pieces of our nation" (during good economic times) so nobody actually evaluates the options for doing so --> "We need cash now!" And we become subject to market forces when leveraging public assets.
You think it's going to be China that buys the Sistine Chapel, or India that purchases the Washington Monument?
No, it will be crony capitalist groups (formulated by the banksters and politically connected) that do so. The fact that these groups may be involved with some sovereign wealth fund of a BRIC or other country is incidental.
Then they'll rent it out at obscene prices and gouge the public further.
By capturing private wealth, what will most likely happen are taxes on existing wealth (national property taxes, increases in the estate tax, etc.). National debt is uncollateralized and will always be this way, so sovereign debt holders will never have claim to the physical assets of a nation. It is country themselves that can change laws to appropriate private wealth. Constitutions and laws vary in the extent to which this is allowed. There is the notion of an unconstitutional level of taxation in the US.
As for the rest of your ideological rant.
As with most political enterprises, the EU is a compromise. Much like the original Articles of Confederation  it took a very touchy situation (pretty much independent political nation-state entities) and attempted to craft a framework around how they might co-operate politically, financially, and militarily.
Early criticism of what was produced was once called 'a bus where every passenger has their own steering wheel' by a Swiss delegate. We can see the literal effects of that as participating countries, have their wheels apparently turned 45 degrees to the direction of travel. If enough countries do that the bus can, and will drive off the road. (ok that's enough torturing of that analogy!)
Europe remembers what it was like to be dominated by Germany involuntarily. One of the sub-themes of the original EU discussions had very real tension about effectively handing over the soverignty to the 'big' economic powers (France, Britain, and Germany). So there were a number of checks and balances in the final treaties that provide very real limits on what the EU can do (mostly they left in the ways to 'help' and took out most of the ways to 'discipline'). That compromise may ulitmately be untenable and the events of the next few years will test those compromises to the breaking point.
I predict several things will be true after this crisis that are not true now. One, I think there will either be a way for the EU to expell a member or to put it under 'federal' control. Second there will be a trans-EU judiciary system which allows for injecting change (either through impeachment, imprisonment, or both) into member states leadership. If such a system existed it would have allowed the joint-EU leadership to demand (and get) corrective action on destructive behavior.
Those changes will effectively mean handing national soverignty over to a central authority. And either the Europeans will be able to swallow that change, or the EU will disintegrate back into independent nations.
It may be that they reach a compromise somehow, but my expectations that the EU will survive unchanged are low.
Europe countries have been at war with each other on and of (mostly on) at least for a thousand years and while Poland and Russia suffered far more, very few have forgotten what happened to Rotterdam, London and the occupied cities in France.
The horror of the first world war broke one of the most militarized countries in the world (laugh at France all you want, but it was Napoleon who fought Russia). France has never been the same since. It was only a few months ago that they allowed a (tiny) German military base in France.
My maternal grandparents where children during the occupation and was thrown out of their house by the Nazies. To this day they still hate them.
Don't forget the historial rivalries between the UK and France either, though they don't hate each other nearly as much as the French hates the Germans.
Europe is a cross section of old scars and grievances and relative recent wounds that haven't healed all that much; Even the old scars can easily be ripped open.
Europe will never go for what you suggest.
That doesn't mean that anyone's going happily hand over their sovereignty, but the picture you are painting of Europe does not fit with my experience at all.
The worst case outcome I can imagine is that the EU will dissolve, the Euro will be abandoned, and Europe will return to its previous state of decline in terms of competitiveness in the world economic stages. China and India will fill the gap and except for the self supporting economies the rest of Europe will slide into a long and deep depression.
That will be followed by a lot of externalized accusations of conspiracies and general hatred ultimately leading to an insurrection which results in the loss of soverignty for between 1/3 and 1/2 of the current nations.
One 'law' that I've never seen fail is 'Nature abhors a vacuum.' and when the EU collapses, it will create a very, very large vacuum.
The EU will not dissolve, that's just crazy talk. The EU is something _totally_ different than the Euro, not all members of the EU even have Euro's.. Saying that the EU will dissolve is almost as unlikely as saying that the US will dissolve.. although countries in the EU are of course much more individual than states, we work together on so many levels that it would just be nuts.
It would seem the most likely course would simply be the unraveling of many of the treaties that created the EU in the first place.
I cannot conceive of a country ever allowing others to have impeachment/imprisonment powers over their head of state. This prediction makes absolutely zero sense to me. Much more likely, we may see some member countries leave the union over the next several years.
It seems that some kind of serious crash is inevitable. But it is yet to be seen whether Europe (and the world) will come out of this united or in flames.
I think that the market forces an underestimation of risk as the only viable long-term strategy (ironically).
If I can run my finance house on a "I will blow up on a once-every-5-year event" I will outgrow a business running on "I will blow up on a once-every-50-year event". So I outcompete my competitors and acquire them or steal their best employees with high salary etc.
Basically, short-termism seems to be the optimal solution in the game theory of risk management.
(Of course, the real problem is the frequency of such events is poorly understood. What happens is that a finance house pursues a 'more profitable' course without perhaps fully understanding their increased exposure. See Taleb, sub-prime crash etc)
As such, there's actually not much of a difference between debt, insurance, and synthetic derivatives such as credit default swaps. (Modern debt and insurance practice both originate from the shipping industry.)
Of course, if you believe the world's a better place without corporate finance, you're entitled to think so, but we'll have to disagree.
Much more fundamentally, it is a mechanism for moving things around -- tangible capital like tools and buildings. Interest is in part a payment for risk of default, but it is also payment for use of capital (the debtor gets to use it, the creditor gives up his ability to use it). There would still be interest even if there were no risk at all.
I tend to think of the time value of money, loosely speaking "opportunity cost", as a sort of risk (the risk that you needed the money right now to go do something else with it), but that's a pretty idiosyncratic way to think about it, really.
Just want to make sure that'd be OK.
(You might say “if the government weren’t doing that, then lenders would be more careful with their money and things wouldn’t go pear-shaped”, but the string of crashes in the late 19th and early 20th centuries, before the Federal Reserve was created, suggests otherwise.)
http://www.wolframalpha.com/input/?i=log%2812000+%2F+4600%29... -- first time period. Per-capita GDP starts at $4600 and ends at $12000 over 49 years.
http://www.wolframalpha.com/input/?i=log%2847300+%2F+12000%2... -- second time period. Per-capita GDP starts at $12000 and end at $47300 over 93 years.
Of course, depressions didn't become Great until our friends at the Fed got involved. Maybe another twenty years of flat to down real growth will change some minds. Although, the Japanese show no signs of changing course.
Who can claim to understand humans, let alone economics?
With this in mind, it is clear that blanket statements like "debts are a bad thing" are useless. Bad with respect to what?
For example, when citizens save some amount of their income in government bonds to have some buffer to protect them against future individual troubles, then can you honestly say that this debt is a bad thing?
The problem of the Eurozone is that there is no fiscally sovereign government which can safely (and in a politically legitimised fashion) carry an unlimited amount of debt.
Gold is a form of money with no counterparty risk; if I own gold it's nobody's liability.
One complication is that some central bankers and governments try to suppress gold being used as money through enforcement of fiat money monopolies at gunpoint...
Edit: I am incorrect in saying gold is a financial asset.
I hope you do not seriously believe that the reason gold is not used for trade is that governments suppress it. The fact is that using gold is actually extremely impractical compared to modern forms of payment.
The use of gold in trade in the past developed naturally because sufficiently stable fiat money systems did not exist. However, once such fiat money systems do exist, they are simply better and there is no reason left to use gold as a medium of exchange (outside of goldbugdom).
As to gold being impractical for use in everyday transactions, I don't think that's true anymore. You can look at companies like Goldmoney for a real world example of what is possible. Any trusted third party can hold the physical gold, while allowing electronic transactions of said gold in whatever increments, without any physical exchange taking place. In fact, this is generally how the dollar worked before it went off the gold standard.
I'm not sure why you think fiat money is better. The history of fiat money has been one of short lifespans and dramatic failures, while gold's history of use as money spans over 6,000 years.
Would it? Gold has gone up nearly an order of magnitude in a decade. Has this caused your computers cost to go up dramatically? Are there industrial alternatives to gold? Would stability of the value of your currency be worth an increase in the cost of consumer electronics?
I know no right thinking person, especially with an elite education, would consider a gold standard.
All the more reason to consider it carefully.
However, if you know that there are about 140,000 tons of gold in existence and somewhere around $9(M2) trillion in US money supply in existence, you do the math on how much gold would be worth.
The main point of my post was that this is such an obvious point that is not addressed, meaning that even the idea of moving to a gold standard is not well-thought out. Poor analysis is enough for me to dismiss the idea without a second thought -- only idiots play roulette with a nation's entire money supply.
I'm being a bit hyperbolic, but $2000 gold is around the corner, and the bottom in the early 2000's was well under $400, depending on the market you look at. The move in gold has been hyperbolic. Have you seen that pass through to consumer electronics? Are there alternatives to gold for these industrial uses?
I agree entirely that only idiots play roulette with the nations's entire money supply, which is precisely why we should take the roulette wheel out of the hands of the money printers at the privately owned Federal Reserve.
As to the question of what is better, my answer to that is two-fold.
First of all, history paints a misleading picture of the strength of gold-backed currencies. After all, when things go seriously wrong economically under gold-backed currencies, ending convertibility is usually one of the first things that governments do. Then the final death of the currency happens after it has become a fiat currency, but of course the failure is ultimately one of a gold-backed currency. Generally, whether a currency fails is not related to whether it is fiat or gold-backed anyway (such as with the failure of the Weimar mark, which happened to be fiat money; but both the move away from gold convertibility and the hyperinflation were caused by the First World War).
Second, while it is obvious that fiat money can be rejected totally, and gold will always retain at least some minimum value based on its use in jewellery and industrial production, this is not a useful measure to decide which system is better.
I claim that the real measure should be: How well does the economy fare, how well does it serve society, under a modern fiat money system vs. older systems.
Here, there is a great amount of evidence in favour of modern fiat money arrangements. Compare the cycle of booms and busts in the 19th century with the relative calm of the second half of the 20th century. In fact, that period was so calm that economists even claimed that the business cycle had been tamed! (They called it the Great Moderation.) Of course, this was hubris as the current crisis has demonstrated, but it should give you a taste of just how successful the combination of modern central banking with fiat money has been.
(I do not think this calmness was purely due to using fiat money, but I would claim that using fiat money certainly helped. The correlation is obvious, one can debate over the causal link of course.)
Exchange of gold is subject to capital gains tax; exchange of the US dollar is not. It is clearly suppressed as a currency.
(As would any other attempt at private commodity currency, nothing unique about metals).
The fact is that using gold is actually extremely impractical compared to modern forms of payment. [...] However, once such fiat money systems do exist, they are simply better and there is no reason left to use gold as a medium of exchange.
I do not follow your reasoning at all. Are you perhaps confusing paper money (exchange of documents certifying ownership of wealth instead of physical goods, as a logistic convenience), with fiat money (ability of a state actor to create money and force its creditors to accept it as payment of debt, as a variation of its power to impose taxes)?
There's nothing inconsistent between gold and paper money -- in fact the US dollar was at one point both at the same time, paper bills backed by gold. You have a dollar bill, you have gold; you want it in your physical possession, you trade in your dollar bill and the US redeems your gold. But for convenience you trade in paper bills.
How is that inherently better than fiat money? You are essentially trusting that the government will provide you with the gold on demand. The government could overprint & not actually have enough in reserves to cover all gold requests.
Additionally silver/gold certificates were redeemable for silver or gold dollars. The world gold market started making these coins worth more than the face value. You started to get speculators who would cash in & then sell the gold for more than the currency was worth. This also happened to Britain with their gold standard. Not to mention the overhead required to maintain & store large volumes of gold as well as punching out expensive gold coins.
I can see the nice concept of having a currency independent of government, but when you boil it down, money is all about trust. Even if we were on a world gold standard we would have to have faith that gold will keep a stable value & that other players in the market are being truthful about their reserves.
About the US tax system, which I don't know too well: what about exchange of foreign currencies? Are they subject to capital gains or some other form of tax? Does the capital gains tax actually apply if you use gold for payment, and not just if you sell the gold in exchange for US$?
Most people are willing to pay a few cents on the dollar (whether that rears its head as actual risk of theft, risk of default or risk of inflation, or as insurance against those possibilities) in order to be able to trade things with other people.
The modern economy is very good about keeping its costs stable and low, while steadily increasing the speed and ease with which we complete transactions. I'd say that's a pretty good thing.
Would, among those qualities, you list the ability of a privately owned bank to create as much of it as it sees fit?
Can you think of a way that shortcomings of physical gold coins could be overcome given the technologies available to us today?
Let's take a very simple example. Say there are two people on an island. The first can build boats, the latter can fish. There is no currency. What should happen?
Case 1: No transaction. Both die.
Case 2: The first builds a boat (boats are very resource intensive!) and gives it to the second. The second fishes and has fish. The first dies because he has no fish.
Case 3: The first agrees to build a boat and rent it to the second in return for part of the first's weekly catch for the next 10 years.
To support Case 3, you basically need contract law. But the contract in question is very inflexible. Does the boat maker enter into similar contracts to cover his needs for clothes, etc? Ideally the boat maker could just sell the fisherman the boat and use the money to buy fish or clothes or anything. So you need currency.
The key question is: how much currency do you need?
Obviously, you need enough to be able to serve as a proxy for the goods and services in your economy and promises thereof. The Fed may not be great at estimating that amount, but pegging it at how quickly you can mine gold out of the ground doesn't make any sense either.
Would new entrants in the market attempt to find more efficient ways to extract gold?
Would alternatives to gold as a currency arise?
I'm not convinced that a gold standard would be perfect. I am quite convinced that the current private exponential issuance of debt-based fiat currency by a money printing madman is insane.
I really don't know. I just don't think that our academic betters know either, despite their pretenses. I tend to think that any idea that our friends in economics dismiss is worth considering carefully, given how wrong they've been in the last decade plus.
The U.S. grew at its fastest rate under a hard money gold standard, with heavily restricted immigration and almost no government, financed with tariffs, of all things. Does that mean we should adopt those policies? I dunno man. I do know we were industrializing at the time and, hey, look at that, there was a literally unbelievable explosion of goods, services and promises thereof.
So I try to keep an open mind on this stuff.
Now, the only way the Germans would have agreed to an ECB would have been a bank at least as strong (and printing-averse) as the Bundesbank. So the so-called 'stability pact' was signed in order to placate them (max 3% of GDP deficits and max 60% debt to GDP ratio, working toward zero deficits at some point).
What happened was the Euro states continued or increased their spending, producing deficits even during the great boom years right before the collapse. Today, the Stability Pact is a dead letter and members (the PIIGS in particular) are trapped without an ability to print themselves out of trouble. Of course, the ECB has been issuing a lot of new money, but just to rescue the major banks, the governments are on their own.
This isn't to say that it's a good idea to print oneself out of debt, but governments find it the easiest thing to do. The crisis would not exist if expenses could have been scaled down as easily as they have been increased. It's better in the end to have a strong currency and balanced budgets, but balanced without low expenditures, not high taxes.
The argument for debt goes like this: in the future "we" will be wealthier, so why don't we borrow against our future income to make the investments that will ensure that, in fact, in the future we will be wealthier.
"We" can refer to a person, business, or nation.
The careful and strategic use of debt has been used to build great empires. A quote:
"Chart 2 tells, in stark detail, the story of the British Empire. It was built on the National Debt. Throughout the 18th century the National Debt grew and grew, from nothing at the end of the 17th century to about 60 percent of GDP by the end of the War of Spanish Succession in 1715."
To win World War II, the USA drove up debt to 100% of GDP, a level much higher than what it faces today.
To finance business, an interesting difference has developed between the English speaking nations (I mean those who inherit their legal codes from English Common Law) and those nations of continental Europe. In the English speaking nations, it became common, by the 1800s, to finance growth by offering equity for sale at public auction. The continental nations developed along different lines -- banks played a larger role. In Germany, most firms operate with higher levels of debt that what would seem normal in English speaking nations.
To get an understanding of the importance of debt, and its history, I'd suggest you read Fernand Braudel:
As he points out, debt and civilization tend to go hand in hand. Debt was illegal in many European nations during the Dark Ages. Nations in the Mideast and India all had flourishing markets in debt, and flourishing trade, while Europe was sunk in poverty. When Europe revived and began to expand again, it helped itself along with the revival of credit, and credit markets. By the time the 1600s came around, Amsterdam was able to offer the world the full range of modern financial instruments: put and short and forward contracts, options of every kind (save for the exotic derivatives of recent vintage).
There is no civilization without debt, no advanced commerce without debt, no growth without debt. The wheels of commerce are greased with credit.
That's a fifteen-year period, not throughout the 18th century, and for that entire period, England was at war. It's absolutely true: debts help win wars. This isn't surprising: war is one of those times when there's a good argument for borrowing against the future, because the alternative is annihilation. On the other hand, during most periods of peace, historically, debt as a percent of GDP has fallen.
The thing is we don't have any more wars worth fighting. Maybe in twenty years the precarious situation of "the largest economy in the world is totalitarian [i.e. China]" will boil over, but that definitely isn't happening any time soon. These days, we just accrue debt for no reason, or to fight a war on nothing (drugs, terror, cancer, tobacco).
Debt by country:
Growth by country:
(I wanted to say something about this but I'm having trouble distinguishing between five identical shades of green)
That said, all the volumes are pretty wonderful. Braudel is my favorite historian--materialism without nutty Marxism.
Edit: Bit coin is an interesting experement with the idea that simply because something is finite it has value based around the idea that at some point people might want it. Even the most simplistic analysis suggests the market will quickly become prone to bubbles but what's intresting is how it will recover after a major crash.
PS: I don't know why people ignore the link between Taxes and Money but try paying your taxes in gold bullion and see how far you get.
Supposedly it's the original money, since it arises spontaneously in a barter system. Suppose you have a matching problem in a barter system (I want X from A, and A wants Y, but I only have Z...) The way to solve it is with a series of intermediate barters which cancel out, whose only purpose is to coordinate exchanges (I first give Z to B in exchange for Y, which I then trade for X with A). Some commodities are better at being intermediates than others: they have to be persistent, subdividable, popular (so it's easy to find counterparties who want it). So you have several commodities which end up universally used as exchange.
You have a good point that if there are multiple currencies (say they are privatized), then there could be major confusion as to how to denominate debts, which currencies are acceptable payment, people being confused by different units and fluctuating exchange rates, etc. Like dealing with international currencies, except everywhere.
It was called the gold standard. It worked quite well for a very long time.
No respectable academic economist takes it seriously.
Which is why you should.
You need money to function as a proxy for the economy. Every time grows up and enters the workforce, you need to add money to the economy to be able to serve as a proxy for his or her labor. As population and economic activity grows exponentially, you need to add exponentially increasing amounts of money to the economy just to avoid deflation.
Now, explain to me how we could've sustainably kept mining exponentially increasing amounts of gold out of the ground?
Can you name an industry in which the much-feared deflation has occurred in the last fifty years? How has that industry done in terms of wealth creation?
Why do you think that the economy isn't capable of adding money if necessary? Are there any historical examples of the opposite occurring?
Why do you think that exponential growth makes sense in a finite world?
Keep an open mind: the banks would prefer that you didn't.
What we have here is a communications breakdown. So anyone from those countries themselves want to explain what went wrong, when and where?
Newsflash: countries have armies, banks do not. Guess who will ultimately prevail?
All the Red horses and all the Red men could not put Soviet economy together again.
Historically, financial crises and disputes haven't often lead to armed conflict.