Greeks are working longer and harder than anyone else in Europe. But they’re still producing less than many other nations who are working a lot less hard. The OECD suggest that this is due to the shape of the Greek labour market:
Pascal Marianna, who is a labour markets statistician at the OECD says: “The Greek labour market is composed of a large number of people who are self-employed, meaning farmers and – on the other hand – shop-keepers who are working long hours.”
Still, I think it’s high time we put the lazy Greek myth to bed, because the evidence just doesn’t support it.
What we had overnight is an agreement in principle, not a final definitive rescue of Greece. Before we crack open the vintage Ouzo, let’s just see how it goes down with the relevant private-sector lenders, politicians in the only creditor country that really matters — Germany — and Greek citizens.
Even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole over the course of the new €170bn bail-out.
Even in best case scenario, the country will need at least €50 billion on top of €136 billion.
A German-led group of creditor countries – including the Netherlands and Finland – has expressed extreme reluctance since they received the report about the advisability of allowing the second rescue to go through.
“The funds that are coming in are not staying in Greece, are not being invested in Greece, are not here to help the Greeks get out of this crisis,” Constantine Michalos, president of the Athens Chamber of Commerce and Industry, told the BBC.
“It’s simply to repay the banks, so that they can retain their balance sheets on the profit side.”
This reminds me of a comment made by Andrei Canciu yesterday:
I think that even the original (i.e. current) architecture of the Euro would have been workable if it were not for the “innovations” in the banking system during the last 10 years. That is, overindebtedness would have always been solved through defaults by punishing the the irresponsible lenders (i.e. those tight spreads between Northern and Southern European countries), while the defaulting countries would have gotten some post-default aid.
I read somewhere that a Greek default would have been totally manageable 10 years ago. That’s no longer the case with the shadow banking system and the incomprehensible web of derivatives.
And there we have our problem: this isn’t really about Greece at all. It’s about the fundamentally perverse nature of the global economic system that cannot withstand a default or liquidation without bringing down the entire system. Even if China and Japan threw all their FX reserves into bailing out the Eurozone this would merely postpone the systemic breakdown. Because, the problem is the system. The global economic system needs to be able to withstand defaults, liquidations, crises. It needs to be robust. And the Byzantine workings of the shadow banking system — where everyone owes money to everyone else, and if one falls they all fall — is a hyper-fragile juggernaut that is bound to come down eventually. If it’s not Greece it will be something else. And that will be a good thing — because we will be abe to switch to an economic system less prone to absurd bubbles, hyper-fragility, and forced bailouts.
Anyway, I am still virtually certain that this bailout is a total sham, and — even if stomached by Germany and international creditors — is doomed to abject failure.
Why?
It’s demanding even greater and deeper austerity from an already-bleeding Greek nation. As I’ve said before, austerity in a depressed economy usually results in larger budget deficits as a result of falling tax revenues. Simply, this medicine is poison. Very shortly, Greece may well be back in the hole.
Does the hypochondriac who is ultimately diagnosed with a real, physiological illness have the right to say “I told you so”?
Well, maybe. Sometimes a “hypochondriac” might be ill all along, but those diagnosing him just did not conduct the right test, or look at the right data. Medical science and diagnostics are nothing like as advanced as we like to hope. There are still thousands of diseases and ailments which are totally unexplained. Sometimes this means a “hypochondriac” might be dead or comatose before he ever gets the chance to say “I told you so.”
Similarly, there are are many who suggest that their own nations or civilisations are in ailing decline. Some of them might be crankish hypochondriacs. But some of them might be shockingly prescient:
Is Marc Faber being a hypochondriac in saying that the entire derivatives market is headed to zero? Maybe. It depends whether his analysis is proven correct by events. I personally believe that he is more right than he is wrong: the derivatives market is deeply interconnected, and counter-party risk really does threaten to destroy a huge percentage of it.
More dangerous to health than hypochondria is what I might call hyperchondria.
This is the condition under which people are unshakeably sure that they are fine. They might sustain a severe physical injury and refuse medical treatment. They brush off any and all sensations of physical illness. They suffer from an interminable and unshakeable optimism. Government — or, at least, the public face of government — is littered with them. John McCain blustered that the economy was strong and robust — until he had to suspend his Presidential campaign to return to Washington to vote for TARP. Tim Geithner stressed there was “no chance of a downgrade” — until S&P downgraded U.S. debt. Such is politics — politicians like to exude the illusion of control. So too do economists, if they become too politically active. Ben Bernanke boasted he could stanch inflation in “15 minutes“.
So, between outsiders like Ron Paul who have consistently warned of the possibility of economic disaster, and insiders like Ben Bernanke who refuse to conceive of such a thing, where can we get an accurate portrait of the shape of Western civilisation and the state of the American empire?
Professor Alfred McCoy — writing for CBS News — paints a fascinating picture:
A soft landing for America 40 years from now? Don’t bet on it. The demise of the United States as the global superpower could come far more quickly than anyone imagines. If Washington is dreaming of 2040 or 2050 as the end of the American Century, a more realistic assessment of domestic and global trends suggests that in 2025, just 15 years from now, it could all be over except for the shouting.
Despite the aura of omnipotence most empires project, a look at their history should remind us that they are fragile organisms. So delicate is their ecology of power that, when things start to go truly bad, empires regularly unravel with unholy speed: just a year for Portugal, two years for the Soviet Union, eight years for France, 11 years for the Ottomans, 17 years for Great Britain, and, in all likelihood, 22 years for the United States, counting from the crucial year 2003.
Future historians are likely to identify the Bush administration’s rash invasion of Iraq in that year as the start of America’s downfall. However, instead of the bloodshed that marked the end of so many past empires, with cities burning and civilians slaughtered, this twenty-first century imperial collapse could come relatively quietly through the invisible tendrils of economic collapse or cyberwarfare.
But have no doubt: when Washington’s global dominion finally ends, there will be painful daily reminders of what such a loss of power means for Americans in every walk of life. As a half-dozen European nations have discovered, imperial decline tends to have a remarkably demoralizing impact on a society, regularly bringing at least a generation of economic privation. As the economy cools, political temperatures rise, often sparking serious domestic unrest.
Available economic, educational, and military data indicate that, when it comes to U.S. global power, negative trends will aggregate rapidly by 2020 and are likely to reach a critical mass no later than 2030. The American Century, proclaimed so triumphantly at the start of World War II, will be tattered and fading by 2025, its eighth decade, and could be history by 2030.
Significantly, in 2008, the U.S. National Intelligence Council admitted for the first time that America’s global power was indeed on a declining trajectory. In one of its periodic futuristic reports, Global Trends 2025, the Council cited “the transfer of global wealth and economic powernow under way, roughly from West to East” and “without precedent in modern history,” as the primary factor in the decline of the “United States’ relative strength — even in the military realm.” Like many in Washington, however, the Council’s analysts anticipated a very long, very soft landing for American global preeminence, and harbored the hope that somehow the U.S. would long “retain unique military capabilities… to project military power globally” for decades to come.
No such luck. Under current projections, the United States will find itself in second place behind China (already the world’s second largest economy) in economic output around 2026, and behind India by 2050. Similarly, Chinese innovation is on a trajectory toward world leadership in applied science and military technology sometime between 2020 and 2030, just as America’s current supply of brilliant scientists and engineers retires, without adequate replacement by an ill-educated younger generation.
Wrapped in imperial hubris, like Whitehall or Quai d’Orsay before it, the White House still seems to imagine that American decline will be gradual, gentle, and partial. In his State of the Union address last January, President Obama offered the reassurance that “I do not accept second place for the United States of America.” A few days later, Vice President Biden ridiculed the very idea that “we are destined to fulfill [historian Paul] Kennedy’s prophecy that we are going to be a great nation that has failed because we lost control of our economy and overextended.” Similarly, writing in the November issue of the establishment journal Foreign Affairs, neo-liberal foreign policy guru Joseph Nye waved away talk of China’s economic and military rise, dismissing “misleading metaphors of organic decline” and denying that any deterioration in U.S. global power was underway.
Frankly — given how deeply America is indebted, given that crucial American military and consumer supply chains are controlled by China, given how dependent America is on foreign oil for transport and agribusiness — I believe that the end of American primacy by 2025 is an extraordinarily optimistic estimate. The real end of American primacy may have been as early as 9/11/2001.
Some commentators believe that the best way for Greece — and by extension, everyone with a debt problem — to deal with debt is introducing some mild-to-moderate inflationary pressure (or least, the expectation of such a thing).
The problem is, the evidence (thanks to regular reader Andrei Canciu) suggests this isn’t in the least bit effective:
The real solution for the terminally indebted is not to get into debt in the first place. Once you are there, the pressure of creditors means that the chosen path will generally be a succession of unsuccessful Keynesian can-kicks (or, in Europe, crushing austerity) up to a slow, painful default.
As Keynes put it:
The boom, not the slump, is the right time for austerity at the Treasury.
Greeks angry at the fate of the euro are comparing the German government with the Nazis who occupied the country in the Second World War.
Newspaper cartoons have presented modern-day German officials dressed in Nazi uniform, and a street poster depicts Chancellor Angela Merkel dressed as an officer in Hitler’s regime accompanied with the words: ‘Public nuisance.’
She wears a swastika armband bearing the EU stars logo on the outside.
The backlash has been provoked by Germany’s role in driving through painful measures to stop Greece’s debt crisis from spiralling out of control.
From a Greek perspective, it seems shatteringly obvious. For them, the Euro has become a battering ram for a kind of fiscal austerity that is set to benefit Germans (price stability) and penalise Greeks (austerity).
As advantageous as the Euro once seemed, it is becoming ever clearer that the union is suffering from deep political fracture. It is a union built without a common language (other than perhaps the belief in bureaucracy — and an unwillingness to give bankers haircuts), without a political head (or even a coherent political structure) without a common culture of work, and without an integrated economy.
That’s why decisive action is proving impossible, in spite of all the rhetoric.
Worse (because it shows contagion at work), it looks like Portugal is about to sink into the mud.
Cashflow problems (making it much, much harder to pay down debt) — that’s what you get when spend-as-much-as-we-want-and-then-print-money mediterranean nations entrust their nation’s monetary to stern-looking austerity-minded German central bankers.
European leaders reach an agreement; markets are enthusiastic. Then reality sets in. The agreement is at best inadequate, and possibly makes no sense at all. Spreads stay high, and maybe even start widening again.
Another day in the life.
Of course, his solution — much, much deeper integration, with a good dose of money printing — is politically impossible, so whether or not it would work (clue: it won’t) is irrelevant.
Meanwhile Americans smoke their hopium (“GDP is up! Stocks are up! The recovery is here!“) hoping that the whirling Euro conflagration will just go away.
The European financial system is financially unsustainable, for reasons I have explained before, and reasons which were enunciated at the very start of the Euro project. Without deep, palpable reforms, all “victories” (or partial victories) are just another kick of the can down the road. The route to bedlam is interesting (and contrary to this chart, pock-marked with black swans) but the destination is the key: Europe must choose between meltdown and full fiscal integration. Neither choice is particularly appetising.
Look at the following graph from the St. Louis Fed. It is the amount of deposits at the US Fed from foreign official and international accounts, at rates that are next to nothing. It is higher now than in 2008. What do they know that you don’t?
Here’s another sign that powerful insiders are increasingly running scared.
Back in the summer of 2007 two important things happened: the market hit an all time high, and the smart money realized what was about to happen (following the subprime and the Bear hedge fund blow up, it was pretty clear to all but Jim Cramer) and bailed out of stocks and into bonds, with Treasury holdings of Primary Dealers soaring at the fastest pace in history.
Finally, disgraced ex-President of the IMF Dominique Strauss-Kahn has weighed in, to confirm what everyone already knew.
The former International Monetary Fund’s Managing Director, Dominique Strauss Kahn, Sunday said Greece is unable to pay its debt and its creditors will have to take losses on the debt they hold.
“Greece got poorer, we can say Greeks will pay on their own, but they can’t,” Strauss Kahn said in an interview on French TV channel TF1. “There is a loss and it must be taken by governments and banks,” he said.
Yes — and so the real question, which nobody in a position of global or national authority has addressed — is just how will the global financial system be made to cope with the another Lehman-style cascade of defaults?
“Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said.
The emergency plan involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece’s bailout is withheld, said the people, who spoke on condition of anonymity because the deliberations are being held in private. The successor to the German government’s bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said.
The existence of a “Plan B” underscores German concerns that Greece’s failure to stick to budget-cutting targets threatens European efforts to tame the debt crisis rattling the euro. German lawmakers stepped up their criticism of Greece this week, threatening to withhold aid unless it meets the terms of its austerity package, after an international mission to Athens suspended its report on the country’s progress.”
Meanwhile, global monetary players step up their calls for more global monetary easing. First, the Federal Reserve’s John Williams:
The global financial system is experiencing great stress as it adapts to the new, post-crisis rules of the game. Those new rules are both explicit and implicit. They call for more capital, reduced leverage, lower risk appetites, more thorough supervision, and stronger regulation, at both the systemic and individual institution levels. In this environment, open dialog is all the more important as we collectively reach a common understanding of how the new rules should work in practice.
Post-crisis? Really? With Europe on the edge, America slipping back into recession, this is what the “post-crisis” is supposed to look like?
Investors are not only asking themselves whether those responsible can summon the necessary willpower to overcome this crisis, but increasingly also whether enough time remains and whether they have the needed resources available.
Imagine that inflation was running at 5 percent against our inflation objective of 2 percent. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn’t any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market.
And as we speak, the DJIA has slumped 2.5% on fears of Greek contagion. Undoubtedly, policy makers will be looking to stabilise the market. This is absolutely the most anti-capitalist thing imaginable: for capitalism to work, good ideas must be rewarded, and bad ideas, risky and fragile systems must break. For far too long bad decisions, bad management and dangerous corporate behaviour has been rewarded with taxpayer bailouts, crony capitalism, and subsidies. And quite simply, until those practices are rewarded with utter abject failure we are totally fucked. Which brings us to one of the very few sane things I have read today, from Nassim Taleb:
The triplet. Three bankruptcies that would save the world from fragility: 1) Goldman Sachs, 2) Harvard University, 3) the New York Times.
European leaders reach an agreement; markets are enthusiastic. Then reality sets in. The agreement is at best inadequate, and possibly 
azizonomics 