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What if the threat of debt is political, not fiscal?

By Bill Humphrey December 27, 2015 - 8:00 am December 26, 2015 Arsenal Bolt

Arsenal Bolt: Quick updates on the news stories we’re following.

“The Effort to Divert Class War Into Generational War: Lessons On Economics You Won’t Get from Jeff Bezos” – Center for Economic and Policy Research, Dean Baker on Friday:

Lesson Three: Our Children Will Only be Hurt by the Debt Because the Washington Post and Other Elite Types Will Use it As An Excuse to Cut Necessary Spending

Okay twenty somethings, how do you know about our massive debt? Yeah, it’s more than $18 trillion, can you feel it?

You surely can’t feel it from its economic impact. Interest rates in the economy are at their lowest level in more than half a century. Thirty year mortgage rates are hovering near four percent. They were generally in the six percent range back at the end of the 1990s when we were running budget surpluses and making plans to pay off the debt. Interest rates on car loans, student loan debt, and credit card debt are correspondingly lower today.

How about the raging inflation caused by the debt? Well, the Federal Reserve Board has been working hard to raise the inflation rate back towards its 2.0 percent target.

What about the enormous amount of money that has to be diverted from other spending to meet the interest burden? Current interest costs, net of payments from the Federal Reserve Board, come to less than one percent of GDP. By comparison, the interest burden was more than three percent of GDP in the early 1990s. (That’s what lower interest rates will do.) If a twenty something claims that they can feel the economic impact of the debt, it is time for some serious drug testing.

Now there is clearly a political impact. The Washington Post, and other Very Serious People, has hyped the debt endlessly. They have raised fears over the debt to prevent spending that would both help boost the economy back to full employment and meet our needs in areas like education, infrastructure, research and development, and addressing global warming. The damage done by the Very Serious People’s scare stories about the deficit is in fact a very big deal. But it is a bit over the top to blame this one on the older generation as an age group, even if most of the Very Serious People gang is older.

Greece’s default, day one

By Bill Humphrey July 1, 2015 - 10:16 pm September 22, 2016 Arsenal Analysis

National democracy at its Athenian birthplace crashes head-long into the distant technocracy of the wider European project.

On Tuesday night, Greece became the first developed economy to default on an IMF loan (though not its other obligations). The IMF loan was itself a bailout to repay other loans, including those the EU failed to stop years ago:

In a sense, like so many American homeowners before the end of 2007, Greece was given subprime loans it couldn’t possibly repay. Regulators and monetary authorities failed to perform due diligence ahead of the accession of Greece to the eurozone and then ignored the escalating danger as long as the rest of the global and European economy was doing fine. They only stepped in after the house of cards collapsed and then demanded round after round of budget cuts and other measures that hurt average Greeks who had nothing to do with the bad debt decisions that the rest of the Eurozone should have stepped in to prevent years earlier.

Greece now heads into a referendum (full story➚) on the bailout conditions offered by European leaders.

Here are a couple reactions since the referendum was announced and default became very likely.

Flag_of_Greece

“Joseph Stiglitz: how I would vote in the Greek referendum”:

I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences: Greece’s rate of youth unemployment, for example, now exceeds 60%.

It is startling that the troika has refused to accept responsibility for any of this or admit how bad its forecasts and models have been. But what is even more surprising is that Europe’s leaders have not even learned. The troika is still demanding that Greece achieve a primary budget surplus (excluding interest payments) of 3.5% of GDP by 2018.
[…]
In January, Greece’s citizens voted for a government committed to ending austerity. If the government were simply fulfilling its campaign promises, it would already have rejected the proposal. But it wanted to give Greeks a chance to weigh in on this issue, so critical for their country’s future wellbeing.

That concern for popular legitimacy is incompatible with the politics of the eurozone, which was never a very democratic project. Most of its members’ governments did not seek their people’s approval to turn over their monetary sovereignty to the ECB.

Paul Krugman, arguing no to additional austerity; no to the euro:

First, we now know that ever-harsher austerity is a dead end: after five years Greece is in worse shape than ever. Second, much and perhaps most of the feared chaos from Grexit has already happened. With banks closed and capital controls imposed, there’s not that much more damage to be done.

Finally, acceding to the troika’s ultimatum would represent the final abandonment of any pretense of Greek independence. Don’t be taken in by claims that troika officials are just technocrats explaining to the ignorant Greeks what must be done. These supposed technocrats are in fact fantasists who have disregarded everything we know about macroeconomics, and have been wrong every step of the way. This isn’t about analysis, it’s about power — the power of the creditors to pull the plug on the Greek economy, which persists as long as euro exit is considered unthinkable.

So it’s time to put an end to this unthinkability. Otherwise Greece will face endless austerity, and a depression with no hint of an end.

On the other side of the debate there has been some sighs of exasperation, tongue-clucking, and then particularly disturbing responses that are clearly the wrong takeaway from the situation… Read more

June 17, 2015 – Arsenal For Democracy 131

By Bill Humphrey June 17, 2015 - 8:00 am June 17, 2015 Radio Show

Posted by Bill on behalf of the team.

Topics: Voter registration reform and mandatory voting; China and India in a Multipolar World; 21st century Colbertism and political cliches. People: Bill and Nate. Produced: June 15th, 2015.

Discussion Points:

– Voting Reform: Should voter registration be automatic? Should voting be mandatory?
– Multipolarism: What does the military rise of China, India, and other “poles” mean for the United States?
– Cultural Austerity: Why is it now commonplace to assert there’s less money to go around, when it’s really just more concentrated than before?

Episode 131 (54 min):
AFD 131

The language of austerity

By Bill Humphrey February 6, 2015 - 1:30 pm February 13, 2015 Arsenal Pulse

What happens to the politics of word choice when two dozen languages are spoken in a union?

Below are excerpts from “How do you say ‘austerity’ in German? You don’t” in France24:

In Germany, the crisis rocking the country’s EU partners has produced the ugly term “austerität”, but few use it, least of all Chancellor Angela Merkel. She has made no secret of her distaste for the word, prefering to speak of “sparpolitik” – which translates as “the politics of saving money”, or of spending it “sparingly” – and “sparsamkeit” (frugality). Both terms have positive meanings and refer to very reasonable policies. Conversely, anyone opposing “sparpolitik”, like Greece’s government, is necessarily unreasonable.
[…]
“Schuld”, the German word for debt, also means “guilt”. It has a moral quality that doesn’t translate into other European languages. For Keynesian economists, spending one’s way out of crisis, at the risk of temporarily increasing the debt load, is eminently sensible – particularly at a time of low interest rates, as is presently the case in Europe. But to many Germans it is sinful.

EU Elections, the Rising Populists, and Why Europe is Worried

By Arsenal For Democracy Guest June 1, 2014 - 1:45 pm July 1, 2015 Arsenal Guest, Arsenal Research

Guest post by Etienne Borocco in France: Europe went to the polls last weekend and elected a lot of fringe politicians to the EU parliament. So what does it all mean?

Traditionally, the turnout is low in the European elections: only about 40%. This year, it was 43%. The functioning of the European Union is quite complex, as depicted in the chart below:

Illustration 1: Flowchart of the European political system (Credit: 111Alleskönner – Wikipedia)

Why the EU elections matter — and why the media and most voters ignore them:

The directly elected European parliament and the unelected Council of the European Union (Council of Ministers) co-decide legislation. The European Commission has the monopoly of initiative, i.e. it is the only one to initiate proposals. The European Parliament can vote on and amend proposals and has the prerogative to vote on budgets. If the Council of European Union say no to a project and the parliament yes, the project is rejected. So the parliament is often described as powerless and its work, which is often about very technical subjects, does not hold the media’s attention very much. Consequently, the European elections to vote for Members of the European Parliament (MEPs) have a low turnout – and a lot of electors use it to express concerns about national subjects.

For example in France, 37% of the registered voters answered that they would vote by first considering national issues and 34% also answered that they would vote to sanction the government. The proportional vote system (in contrast with America’s first-past-the-post Congressional elections, for example) gives an additional incentive to vote honestly according to one’s opinion, rather than strategically for a major party (or major blocs of allied parties in the case of the EU parliament).

The May 25th European election was a shock in the European Union, even after the small parties had long been expected to do well. The biggest parliamentary groups in the European parliaments lost seats, while parties that reject or contest the European Union rose dramatically.

In Denmark, in the United Kingdom, and in France, the anti-euro right wing took the first place. It was particularly striking in France because unlike the traditionally euroskeptic UK or Denmark, France was one of the founding countries of European integration and is a key member of the eurozone (while the other two are outside it). The Front National (FN), which has anti-EU and anti-immigration positions, gathered one quarter of the vote in France. Non-mainstream parties captured significant shares in other countries, although they did not finish first.

Populist/Right-wing/Anti-EU party vote share by country in the 2014 EU elections. Data via European Parliament. Map by Arsenal For Democracy.

The new seat allocations:

Let’s look at the gains and losses. With the exception of the socialist bloc, the traditional parties lost seats — particularly in the mainstream conservative EPP and centrist ALDE blocs, which virtually collapsed. The May 25 European parliamentary elections also marked the notable appearance of new populist right-wing parties in Eastern Europe, among the newer member states. For example, two conservative libertarian parties (movements that are a bit like a European version of Ron Paul) won seats – the KNP in Poland and Svobodní in Czech Republic. Moreover, the national government ruling parties were hugely rejected in most countries, whether by populist fringe parties dominating (as in France, the UK and Denmark) or by the main national opposition parties beating the ruling parties.

Among the non-aligned (NA) members elected, if we exclude the six centrists MEPs of the Spanish UPyD (Union, Progress and Democracy), the 35 MEPs remaining are from far-right parties.

Among the 60 “Others” MEPs, there are 3 MEPs of Golden Dawn in Greece and 1 MEP of the NPD in Germany, both of which are neo-Nazi parties. The NPD was able to win a seat this year because Germany abolished the 3% threshold. With 96 seats for Germany, only 1.04% of the vote is enough to get a seat. The Swedish Democrats (far right) got 2 seats. In total, 38 MEPs represent far-right parties, out of a total of 751 MEPs.

So why do observers talk about an explosion of far right?

Beyond those scattered extremists, the vote for the more organized euroskeptic, hardcore conservative, and far right parties all increased sharply. The UKIP in UK (26.77%, +10), the National Front (FN) in France (24.95%, +18), the Danish People’s Party (DPP) (26.6%,+10) and the FPÖ in Austria (19.7%,+7) rocketed from the fringe to center stage. The UKIP, the FN, and the DPP all arrived first in their countries’ respective nationwide elections, which is new.

Other parties elsewhere did not come in first but performed unexpectedly (or alarmingly, depending on the party) well this year. For example, although the Golden Dawn only won three seats from Greece, they did so by winning 9.4% of the country’s vote, even as an openly neo-Nazi party. The Swedish Democrats (9.7%, +6.43) and the Alternative For Germany (7%, new) also made a noteworthy entry in the parliament.

Their shared characteristic of all these parties, regardless of platform and country of origin, is that they are populist in some way.

True, under the word “populism,” a lot of different parties are gathered and their ideologies may vary. While most of these parties claim to be very different, we can, nonetheless, put everyone in the same basket for the purposes of this analysis, to understand why the results were so shocking. Their core point in common is that they all claim represent the people against “the elite” and “Brussels” which embodies both “evils”: the EU and the euro.

We could use the following system to classify like-minded populist parties:
Read more

A brief history of the Greek debt coverup

By Bill Humphrey January 29, 2014 - 11:00 pm December 31, 2014 Arsenal Analysis

The problem with not giving anyone central monetary control of a shared currency is that it can become very chaotic and disorganized if everyone is pursuing contradictory fiscal policy at the national level. To avoid this, when the Eurozone was being designed, members agreed that they would have to meet certain deficit and debt targets — keeping the budget deficit (amount spent more than collected) below a certain ratio for a few years — to join and then even below that initial target every year after becoming members.

(Sidebar: The major downside to this strategy is that the economies and parliaments remain separate despite sharing a currency, yet they can’t respond to specific economic conditions in their own countries without violating their deficit and debt targets. This extends recessions in some places, even as other members of the Eurozone continue to do well.)

By 1998, eleven countries had met their targets for joining the Eurozone. Greece was not one of them.

As of 1999, when the currency virtually launched for trading purposes but not ordinary people, Greece had still not met their target to join the Eurozone when it would launch on paper a few years later. In large part, this resulted less from generous social spending and pensions and more from Greece’s chronic inability to collect tax revenues from its citizens – one of the most tax-evading populations in the world.

They were also five years away from hosting the 2004 Summer Olympics, which they had been awarded in 1997. The games had run into huge budget problems and cost overruns, which the government (as a matter of national pride, being Greece) had to help manage. They needed to take on even more debt to pull off the games, which was the opposite of what they needed to join the Eurozone before currency began circulating.

US Investment Bank Goldman Sachs came up with some very elaborate and expensive schemes (see this detailed video explanation of the mechanics from the BBC), which essentially allowed Greece to get the money it needed, while hiding how big their debt (and yearly deficits) had become. This scam allowed Greece to join the Eurozone in 2001, while it was still in its virtual stage, in time to participate when the physical currency launched in January 2002.

Outside observers started exposing the Goldman scam in 2003, and Greek government officials (from a new cabinet) revealed the deal in 2005, but EU regulators essentially pretended it had never happened until well after the crisis hit in 2009 (and continued to deny prior knowledge of it).

Meanwhile, Greece’s already bad debt situation was exploding from 2000 to 2008, as a direct result of the terms of the deal.

In a sense, like so many American homeowners before the end of 2007, Greece was given subprime loans it couldn’t possibly repay. Regulators and monetary authorities failed to perform due diligence ahead of the accession of Greece to the eurozone and then ignored the escalating danger as long as the rest of the global and European economy was doing fine. They only stepped in after the house of cards collapsed and then demanded round after round of budget cuts and other measures that hurt average Greeks who had nothing to do with the bad debt decisions that the rest of the Eurozone should have stepped in to prevent years earlier.

Greece played a part in setting up its own crisis, but the bigger picture is that Greece was failed by its peers and partners in the monetary union, and it was failed by abusive and manipulative lenders, who preyed upon a desperate government and gave them loans it never should have received in the first place.

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