Daily Archives: October 24, 2011

Bill Black: What I’d Demand of the Fed

Bill Black on The Real News with Paul Jay:


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Greece: the ECB’s Daily Floggings will Continue until the Greek Economy Recovers

The European “troika” that has been driving Greece into adeepening depression has just completed an analysis documenting the failure ofits policies.  The analysis hasleaked.  Here are its introductoryparagraphs.

Greece:Debt Sustainability Analysis
October21, 2011

“Since the fourthreview, the situation in Greece has taken a turn for the worse, with the economyincreasingly adjusting through recession and related wage-price channels,rather than through structural reform driven increases in productivity. Theauthorities have also struggled to meet their policy commitments against theseheadwinds. For the purpose of the debt sustainability assessment, a revisedbaseline has been specified, which takes into account the implications of thesedevelopments for future growth and for likely policy outcomes. It has beenextended through 2030 to fully capture long term growth dynamics, and possiblefinancing implications.
The assessment showsthat debt will remain high for the entire forecast horizon. While it woulddecline at a slow rate given heavy official support at low interest rates(through the EFSF [European Financial Stability Facility] asagreed at the July 21 Summit), this trajectory is not robust to a range ofshocks.  Making debt sustainable willrequire an ambitious combination of official support and private sectorinvolvement (PSI). Even with much stronger PSI, large official sector support wouldbe needed for an extended period. In this sense, ultimately sustainabilitydepends on the strength of the official sector commitment to Greece.”

The leakedmemo helps explain why the Troika always lets the periphery twist slowly in thewind even though doing so hurts everyone – if this memo is representative theTroika must be choking to death on its jargon, theoclassical economics dogma,and its propaganda.  In plain English,the memo concludes:
1.  Greece’seconomy is crashing
2.  Ourclaim that the “reforms” we were imposing would cause productivity improvementsthat would drive a robust recovery has proven false
3.  Ourprediction that the Greek economy would improve and allow Greece to repay itsdebts is inoperative
4.  Ournew prediction is that Greek debt will remain dangerously high for the lengthof our prediction (through 2030)
5.   If anything nasty happens to the economyduring the next 20 years Greece will be unable to repay its debt
6.  Onlylong-term bail outs and requiring Greece’s creditors to take substantial lossescan make it possible for Greece to avoid collapse
Those admissions, while striking, are notthe Troika’s most important admission.  Notethat the Troika’s first paragraph contains the remarkable phrase that Greece is“adjusting through recession.”  Apparently,Greece is adjusting to a recession “through recession.”  One assumes that under this framing Greece“adjusted” to World War II through its troops and civilians dying.  What the Troika appears to be trying to sayis that Greek wages are falling as the Greek economy collapses, which causesthe collapse to accelerate.  Thememorandum claimed that the Troika’s initial model was based on experience inother nations that were forced to adopt austerity during a severe recession andexperienced remarkable recoveries, but admits that the model has failed inGreece.  (The reality is that it failedin the other nations as well, but the Troika is having enough trouble admittingthe truth about Greece.) 
The Troika’s new, more pessimisticforecast is that Greece’s recession is mild by the start of 2012 and is over bythe end of 2012.  That is an extremelyoptimistic assumption, not a pessimistic one. The odds are strong that the Troika’s austerity program will causeGreece to descend into a severe recession. If it does, the Troika’s plan blows up immediately.  But the Troika recognizes that it does notrequire a recession to blow up their projections.  Stresstests to this revised baseline illuminate further the problem with sustainability,revealing that the downward debt trajectory would not be robust to shocks.”  If almost anything material goes wrong – overthe next twenty years – the Troika project that the Greek economy would descendinto a debt and deficit death spiral.  The odds that nothing relevant to the Greekeconomy and government will go wrong over the next two decades are tiny.  The Troika is basing its new plan onassumptions that are so rosy that they could populate a large flower garden.
The Troika assumes that Greece will run avery large “primary surplus” in its budget – and maintain it for decades.  The Troika recognizes that this “requiressustained and unwavering commitment to fiscal prudence by the Greek authorities.”  There are two problems with thisassumption.  It is imprudent to run abudgetary surplus during a collapse of private sector demand that is causing asevere recession.  Doing so will make theexisting recession far worse and trying to do so for decades will cause orexacerbate future recessions.  The Troikaassumes the opposite:  “[S]trong growth willbe very hard to achieve unless Greece’s high debt overhang is decisively tackled.Overall, the scenario emphasizes the crucial importance of frontloadinggrowth-enhancing structural reforms for debt sustainability.”  The Troika concedes that it is critical thatGreece promptly achieve substantial growth. The Troika, however, is insisting on austerity – budget surpluses –during a severe recession.  That is apro-cyclical policy that makes the recession worse.  The Troika is counting on magic –“growth-enhancing structural reforms” to overcome the self-destructive natureof their austerity program and produce a prompt, robust recovery from thereception.    
The second problem is that if the Troikabelieves that the Greek government will display a “unwavering commitment” fordecades to actions that are (deservedly) extremely unpopular among theelectorate then it must have been meeting in a an Amsterdam hash house when itwrote this sentence.
Adopting these new myths about Greece’sprompt recovery from recession and maintenance of very large surpluses fordecades allowed the Troika to abandon two prior myths.  The memorandum shows that the Troika hasdropped the fantasy that Greece will soon be able to borrow funds from themarkets without any guarantees from the European Central Bank (ECB).  The new estimate is that it will take adecade before Greece can borrow and that it will not be able to borrowsubstantial funds “until late [in] the second decade.”  Similarly, the Troika finally admits that aGreek default on its existing debt is certain. “Greece’s debt peaks at very high levels and would decline at a very slowrate pointing to the need for further debt relief to ensure sustainability.” 
The Troika has not given up one of theircentral myths even though it is one of the most pernicious myths in the last 80years.  It is one that Keynes (andreality) disproved long ago.  The Troikabelieves that if Greece fell into a deeper recession it would recover more quickly because of the recession.  The “logic” is that severe recessions lead tosharp drops in working class wages, which makes the nation far morecompetitive, which expands its exports, which accelerates Greece’s recovery under the Troika’s new model.    
“Tomodel this it is assumed that through much deeper recession and deflation thecompetitiveness gap is unwound by 2017, instead of during the next decade. The headwindsfrom the deeper recession are assumed to delay the achievement of fiscal andprivatization policy targets by three years.
Asthe economy rapidly shrinks, debt would reach extremely high levels in theshort run at 208 percent of GDP. If Greece could weather the shock toconfidence this could create, the eventual more rapid recovery of the economywould help bring debt back down towards the revised baseline path….”
This passage “explains” the Troika’s useof the phrase “adjusting through recession.” We can now see what a chilling phrase it is and how little empathy theTroika has for human beings who are suffering. “The competitiveness gap” assumes that the Greek working class isseriously overpaid and that as the recession deepens and causes ever greaterunemployment it will cause Greek wages to fall sharply until it reaches thepoint that the Greeks are competitive with places like Portugal.  The Troika propounds the myth that recessionsare self-correcting and that the more severe the recession the “more rapid[the] recovery.” 
Greece is already a nation beset bysevere income inequality and unemployment, and the Troika claims thatincreasing the income inequality and unemployment dramatically is one of thekeys to recovery.  Slashing working classwages and employment in a Great Recession, however, causes private sectordemand to fall sharply.  The underemployedcut their consumption for obvious reasons, but many workers will cutconsumption because they fear that they will lose their jobs.  The result of the Troika’s austerity policiesin Greece has not been a recovery, but a deepening depression, as the Troika’smemorandum admits.  Greece is notrecovering under the Troika’s self-defeating austerity mandates.  The Troika’s policies are analogous todoctors bleeding their patients centuries ago under the delusion that itimproved their health. 
In the same quoted passage, the Troikapresents an additional myth – “deflation” causes nations in severe recessionsto recover.  Deflation does the opposite,for several reasons.  I will explainbriefly only one of these reasons.  Whenprices are falling on major goods for which it is often possible to deferpurchases (e.g., buying a new automobile or refrigerator), consumers may defertheir purchases because deflation means that they can buy those goods at alower price in the future.  One of thefundamental characteristics of severe recessions is grossly inadequate privatesector demand, so deflation exacerbates recessions by reducing private sectordemand.
The Troika’s memorandum has a revealingaside about what the ECB cares about. The context is the presentation of the necessity of Greece’s creditorsagreeing to large reductions in Greece’s debts.
“DeeperPSI,which is now being contemplated, also has a vital role in establishing thesustainability of Greece’s debt.”
That sentence ends with the followingfootnote.
1“The ECB does not agree with the inclusion of these illustrative scenariosconcerning a deeper PSI in this
The ECB has no statutory mission toprotect the interests of Greece’s creditors. Its decision to side with the interests of Greece’s creditors(overwhelmingly European banks, particularly German banks) against theinterests of a member nation makes clear why the ECB poses an enormous dangerto Europe.  The ECB is dominated bytheoclassical economists who glory in their “independence” from democraticinstitutions but are slavish servants of the systemically dangerousinstitutions (SDIs) – the misnamed “too big to fail” banks.