If you’re willing to overlook the tax gap, sure.

Which…no, I’m not. Personal tax evasion being the national sport is a significant element of this.

(Of course, the UK national sport of Corporate tax evasion is biting us in the ass now as well)

Can someone correct the formatting, please? The whole world has suddenly turned italic!

Alex, a great article, and I agree with much of it. I’m particularly pleased that you’ve drawn attention to the attacks on democracy in the Eurozone, and the fact that in effect some member states now have to choose between national democracy and membership of the Euro. This to me is unacceptable.

You don’t delve into the workings of the Eurozone, though – and therefore you don’t mention the effect of the massive trade imbalances between Eurozone countries, which for me is the heart of the matter and the reason why it is not just Greece that is at risk but all countries in the Eurozone including Germany. The Euro project is fundamentally flawed, and the dangers created by the lack of fiscal and political union are exacerbated by the awful behaviour of banks and the desire of governments to avoid having to bail them out. Greece has in effect been asset-stripped so that France and Germany could pretend that their banks are sound when in fact they are highly indebted and under-capitalized. And Germany is determined to hold on to its trade and fiscal surpluses at all costs, even though they were only made possible through the excessive debt of other Eurozone countries. So much for European solidarity.

Stunning article Alex!

In essence, this virulent form of accumulation is incompatible with democracy as we know it and I just wonder how long we can go without the violence seen in the Arab spring coming to the fore!

“Those same banks then bet against nations being able to repay it, amplifying the crisis.”

Rilly?

Gosh, how do you bet against a country being able to repay? You could go short on the debt, that’s one way. However, short positions are very small indeed compared to the size of the market. Trivially small in fact.

You could buy a CDS, that’s another way. It won’t change the underlying price because derivatives don’t, the price of the derivative is determined by the underlying price. And anyway, the sovereign CDS market is small too.

The reason that, for example Greek government bonds, prices have fallen and yields risen is simply that no one wants to buy them. We can all see that there will have to be a default, so who wants to buy something that is, at some point in hte future, going to have a 50% or more haircut? Why would your or my pension want to buy that, or continue holding it if they had already bought it?

That’s what is causing the price changes: and that’s not speculation.

Important to get this straight: the falls in the value of sovereign debt are not the result of bets or speculation. People just don’t think it will be repaid so they won’t buy it.

“Markets are the collective expression of individual greed.”

Let me correct that for you.

Markets are the collective expression of individual opinion.

And that’s all they are: the aggregation of all of our individual views. It may well be that our individual views are wrong but as we know from Galton’s Ox, the more views we have being expressed the closer to the truth we seem to come.

Just as an example, the “market” is valuing Greek debt at 40-50% of par at present. Given that everyone is insisting there should be a 50% haircut on Greek debt, that seems like a reasonably realistic price don’t you think?

“If one were to assess world economies by purely market criteria, the most successful of the large players (by a long way) would be China – huge surplus, record growth, productivity and innovation. ”

No, absolutely not. You’ve getting confused between rate of change and absolute levels. We can certainly say that China is improving better than other large economies: but that would come with the caveat that stopping doing Maoist idiocy is actually a pretty good idea. In terms of who has the most successful economy us market based peeps would be arguing for the US, UK, Germany, Sweden etc. The places which already provide the highest standards of living ever on offer to a group of human beings: we wouldn’t describe as successful those catching up to that after decades of economic insanity.

“Famines in Africa, created and perpetuated by financial speculation on food commodities, ”

Bollocks, entire nonsense. You’ve been listening to the World Development Movement again, haven’t you?

“Whether we should or should not treat patients on the NHS with a particular condition (for which treatment exists) becomes an accounting exercise of considering cost versus benefit.”

Erm, if you’ve an answer to limited resources that doesn’t involve cost benefit analysis love to hear about it. Something that has escaped many millions of very clever people over the centuries.

We have x amount of wealth and y amount of income and we’ve got to have some method of allocating them between the various competing demands. You might want a different allocation to the one that exists, great, fine, make your case. But you’re still going to have to use cost benefit analysis to make it. Even something as crude as take the money from the rich and give it to the poor is cost benefit analysis: you think the benefit to the poor of the extra money is worth the cost to the rich.

“Another topical example is Libya. At the very moment its people were getting shot in the street for rising up against its oppressive regime, it was the only country in the world with zero sovereign debt.”

Eh? Where did that come from? Libya had its foreign currency and local currency debt downgraded in Feb this year. Which certainly implies that there was some external debt. Now, if you want to argue that it had no *net* sovereign debt, that the country had more in assets than it had in debts, then that’s fine. But it’s also not unusual either. There are a number of oil countries in such a position: Norway for example and I don’t see anyone arguing that we should invade there because they won’t borrow any money.

“There appears to be an inverse relationship between democratic deficit and economic surplus; an unbearable tension between human suffering and economic health. To not devote the intellectual capital to exploring this paradox with urgency, is a dangerous form of elective blindness.”

Well, no. If you cast your eye around the world you’ll see that those places which are not democracies are shit poor. Those places which are rich are democracies. Outside very odd places like Brunei and Hong Kong, it’s pretty much a clean sweep actually: rich = democratic.

It’s true, there are poor democracies too, so it’s a necessary but not sufficient condition. But I fear that you’re making the same mistake again. You’re comparing rates of change with absolute levels.

All in all, heartfelt tosh from the OP writer here, sadly disengaged from the actual facts of the matter.

The article was going very well, until it started blaming the markets and the evil speculators. Taking the point on famines, speculators don’t cause famines. If any one factor does, it is war.

Speculation is a part of every human action, because none of us know the future. If speculators drive up the price of a commodity, it’s because they think the demand of it will outstrip the supply. As such, it’s a signal to produce more of it, and it’s a mechanism to allocate the limited supply to the most urgent use.

You are totally right to point out the anti-democratic nature of what has happened in Greece and Italy. These are basically coups d’etat by the banking oligarchy who helped create the mess in the first place.

“Speculation is a part of every human action”

admittedly, I am speculating here, but I think that is rather a sweeping statement.

Seems to be that there are too many who know the price of everything, but the value of nothing. Sad reality is that economists like to pretend that everything that cannot be monetised does not exist.

Agree with on the Greek and Italian Coup d’etats though. Once again, economists thinking the price of security of finances is better than the value of a functioning democracy…

So, we have ended up with two EU countries [Greece and Italy] with appointed, rather than elected leaders. And nobody seems to find this disquieting. Yes, times are very difficult. Yes, they both succeed incompetent and disastrous governments. Yes, they come at a time when urgent action was required. But all three of those excuses have applied to every junta that has ever taken control of a nation by force. But, no matter. Markets like them.

But constitutionally the appointments are above board and, crucially, the two new Prime Ministers currently ‘enjoy’ the confidence of their respective Parliaments. It remains open to their Parliaments to win votes of no confidence against the PMs / Governments and force them out. Neither of them have come to power by force and they can be forced out by vote in Parliament – so in what sense are they comparable to any junta?

Economic Choices for Sensible Humans
In managing the economy in any country, people and their government have to choose between four distinctly different available paths. Let us define them clearly and in simple terms:

Model A:
Maximize production & export; while maximizing consumption & imports. The results are: fast development; environmental degradation; and materialistic corporatism. (Capitalism)

Model B:
Maximize production & export; while minimizing consumption & imports. The results are: wealth accumulation; social disparities; and international hostility. (Communism)

Model C:
Low production & export; while maximizing consumption & imports. The results are: sovereign debts; loss of independence; and dysfunctional state. (Yet to know a name for this stupid system; suggestions are welcome!)

Model D:
Low production & export; while minimizing consumption & imports. The results are: slow development; low qualities; and weak defenses. (which are not bad as they may perceived). (Nationalism)

Only these models are demonstrated in all countries and the citizens can plainly know which way their country is going to, and argue with their governments the wisdom of their path.

So now what do people want? Do they want to be crazy; greedy; irresponsible; or vulnerable?
If people look deep inside their souls the answer will be definitely obvious.

Dear Tim,

Thank you for your reaction. Patronising language aside, I appreciate the time and detail. I find myself, however, unable to agree with the assertion running through it; that what you say is The Truth, based on incontrovertible Fact. It is clear enough from the hostility running through your response that you fervently believe it to be the truth. I don’t doubt that. But your fervour does not make it so.

The blaming of speculation, for instance, was Merkel’s truth, not mine. I am simply pointing out the interesting fact that something she considered “very difficult to explain to people in a democracy” has disappeared from the narrative of the crisis altogether.

For some years now, I have come to sympathise with the position that Economics is not a science, as much as it relishes presenting itself as such. It is a series of logical constructs, based on hefty assumptions which look increasingly unsafe. In this way it is no different than Religion.

The US walked into a full-blown crisis in 2008 out of sheer trust in the assumption that markets would self-correct. They did not. For a century we have laboured under the notion that the market does not make mistakes and that a failing business deserves to fail and that is ultimately a good thing. Then we prop up failing banks.

I find it deeply unconvincing to be offered more pseudo-science in response to my claim that something is pseudo-science. Scratch away and you will find that underneath these “facts” lies a stratum of beliefs. Mine are different than yours. That is all.

Maybe I am the guy who was convinced that by the year 2000 we would all be going about our daily business in hover-cars. Or maybe, just maybe, you’re the guy who is shouting that the earth really is flat.

Kind Regards

Alex

“The US walked into a full-blown crisis in 2008 out of sheer trust in the assumption that markets would self-correct. They did not.”

What you saw in 2008 was a self-correction. What else do you think it was?

Everyone thought that house prices would keep on going up, everyone thought that mbs and cdos were just great and fine. then they realised the two contentions were not true. thus we had a self-correction.

There certainly wasn’t anyone who corrected these things for the markets, was there? No government intervention which said, hey, guys, all these houses are worth half what you think and so you’re all bust? The whole thing simply was a market correcting itself.

“For a century we have laboured under the notion that the market does not make mistakes”

No one sensible has believed anything so absurd. Rather, that when markets do make mistakes, as they do, then they self-correct……often enough. Even uber-neo-liberals like myself will agree that not all markets correct all the time.

But think of it this way, you cannot both say that markets never make mistakes and that they always self-correct. For if they never make mistakes what is there to be corrected?

Which is why the actual neo-liberal belief is that every system maikes mistakes. just that markets make fewer, are more likely to se4lf-correct when they do and to correct sooner than, say, political error gets corrected.

After all, the neo-liberal housing market of oughties USA only screwed up for around a decade. The Soviet fuck up went on for 70 years.

“Scratch away and you will find that underneath these “facts” lies a stratum of beliefs. Mine are different than yours. That is all.”

Perfectly willing to agree that much of the interaction of economics and politics depends upon underlying beliefs; about things like the relative importance of equity and efficiency for example. But my disagreement with you is not based on such underlying points. Rather, you’re in error in matters of both fact and logic.

You view the injection of $85bn by the Federal Gov’t into AIG as a self-correction?

I am more sure of my view now than I was before your response. Keep going.

You view the injection of $85bn by the Federal Gov’t into AIG as self-correction?

I am a lot more confident in my view that Economics have become a quasi-Religion than I was before your response. Keep going.

“You view the injection of $85bn by the Federal Gov’t into AIG as a self-correction?”

No, AIG falling over was the self-correction.

Alex, Tim

I think it’s reasonable to regard the 2008 crisis as a massive market self-correction. The trouble was that governments around the world believed the cost of this correction would be too high so acted to prevent it – hence the bailouts, which prevented catastrophic collapse of the banking system. So you are correct, Alex, to define the current global crisis as merely a continuation of the previous one.

The market – or more accurately, the world economy – is adjusting to a new world order, namely the shift of economic power from West to East. And it will eventually succeed, because no government or supra-government organisation can hold back the tide. The difficulty is that the human cost for people in Western economies is potentially huge – but we can’t stop it. Nor should we – after all, why shouldn’t people in China and India aspire to the same standard of living that we in the West have enjoyed? What governments should be doing is finding ways of protecting people from the worst of the pain to come, not trying to prop up failing institutions.

The Eurozone is feeling the effect of this shift like everywhere else. But it has also created a completely unnecessary disaster of its own and is busy making that much worse by truly appalling economic mismanagement. Political hubris inevitably attracts Nemesis.

But they were not allowed to. Nor were RBS, Northern Rock et al. So, is your case now based on the hypothetical of what ought to have happened?

@11 – Ah right, collapsing the economy is such a wonderful solution to issues.

And the name for model C is “austerity”.

Alex,

No, because it isn’t hypothetical. It’s going to happen all over again – same banks, same calls for bailout. And it will keep on happening until eventually governments can’t bail out banks any more and the whole thing collapses – and emerging economies pick up the spoils.

@18 – So we should start what, machine gunning the poor?

And this is where we disagree. I think it is the rich that pick up the spoils from and the poor that pay. The system is rigged that way – which is why it has such support.

It may be Chinese plutocrats doing particularly well from this one… Potato, potahto.

9 Tariq Anter

Your Model B is very like both China, which is Communist, and Germany, which isn’t – so I don’t think it’s correct to label it “Communism”. Maximising production and exports while minimising consumption and imports would be regarded by many people as simply good economic managment, though this ignores the balance of payments dynamic around the world – not everyone can have net exports! When imposed on people who are used to a more luxurious lifestyle, though, it is austerity.

17 Leon

Model C is not austerity, it is profligacy. Model B is austerity.

Alex,

Quite possibly rich Chinese, Indians, Russians, Brazilians picking up the spoils, of course. But the general standard of living in all these countries is improving (although there are still pockets of awful poverty).

David Hodd,

Agree with on the Greek and Italian Coup d’etats though. Once again, economists thinking the price of security of finances is better than the value of a functioning democracy…

In what sense are they coups d’état?

19 Leon

Why on earth bother to machine gun the poor? Starving them to death is easier and cheaper. Sorry, I’m being facetious – but then I hope so were you. I’m not recommending collapse, just observing that I think it will happen and there is nothing governments can do to stop it.

Governments should aim to protect the poor from the consequences, not sacrifice them to prop up a collapsing system.

@24 – Why? Reducing dead weight, of course. It’s A solution.

I’m being facetious of course, because I’m interested in hearing about solutions, not just the problems.

You’re saying “the collapse will come”, without recommending anything. That’s writing off the poor anyway, because they’ll starve and freeze.

Oh, and model C is most certainly austerity, as experience is showing us.

You can’t get round the need for imports of fossil fuels.

When I was young, th trade balance was the Very Important Thing, noe it is the Markets that seem to have achieved the level of Veneration that’s probably the envy of all organised religions. Why?

Watching “How The West Went Bust” just now on BBC2 and couldn’t resist transcribing what Sir Philip Hampton (Chairman, RBS) just said.

Peston: What’s you view about why we just didn’t see the risks that we were taking?

Hampton: I think we became convinced that Markets would always find a solution. And that if we let Markets operate they would be self-correcting. And that turned out to be the wrong judgement.

Another idiot “sadly disengaged from the actual facts of the matter” no doubt, talking “heartfelt tosh”. Right Tim?

Anyone who does not find the developments in the EZ and the European bodies response disturbing has not really been paying attention. There is a Great Game going on in the EZ as Germany seeks to assert itself. Who knows how all this will be resolved, but the current members will not stay members and retain national sovereignty. This is a long detailed analysis of the Great Game. I don’t know if the EU and German elite are quite as calculating as suggested in the essay, but it is undoubtedly true that they are using events to shape things to where they wanted to go anyway. At face value that might not seem terrible behaviour, but they are not taking people with them and they are willfully disregarding the interests of whole populations.
http://smallwarsjournal.com/jrnl/art/toward-a-gentler-kinder-german-reich#comment-form

To speak about speculation in the peripheral sovereign debt market is nonsense. Most governments sell their debt through auctions. They have a list of appointed primary dealers who must submit a bid at each auction. If you really do not want any of the bonds then you submit what you know is likely to be an uncompetitive bid. The government agency will work through all the bids and sell all the bonds to competitive bids before they reach your uncompetitive bid. They average all the bids they sold at to give the yield that the debt is costing them. What happened and is still happening in the peripheral sovereign markets is all the competitive bids disappeared leaving only uncompetitive bids. No one wants to buy the debt except at low prices and high yields to reflect the risk that they will not get paid back.

The ascent of the technocrats to Greece and Italy were not exactly coups d’état, so long as the technocrats retain the support of the respective parliaments. What we could call the U.S. cabinet is also appointed and approved by the Congress. However, it was regime change in the heart of Europe and the left used to be against the concept of regime change. Seemingly it is OK when the regime changing is conducted by European bodies.

Berlusconi was a corrupt clown who Italy are better off without. However, the way the ECB manipulated the Italian sovereign debt to get rid of him was sinister. Anyone who understands how the bond market operates could see what the ECB was doing. They were attempting to buy enough bonds to stop a crisis escalating, but few enough to keep maximum pressure on him. When the central bank is in a market you do not want to be trying to do the opposite of them because they will blow you out of the water. Yet, here was a central bank specifically signaling that they would not do enough. Investors in the market lost faith and the recurring theme of the last three years is the ECB lost control. Yields spiked and contagion spread.

The ECB sent the Italian government a list of demands that they wanted to see enacted to get their public finances in some sort of order. That has bugger all to do with the ECB. On behalf of who do you think the ECB was speaking?

The most annoying thing about this whole EZ saga is the people involved knew all along that it was a flawed construction and would lead to a crisis. They believed wrongly that they would be able to control events. Watching ECB press conferences for the last three years has been fascinating for the sheer level of self-delusion, denialism and arrogance. They have totally lost control as the peripheral money supply slumps to depression levels.
http://www.moneymovesmarkets.com/journal/2011/11/28/eurozone-money-numbers-confirm-peripheral-slump.html

There is a Greek tragedy going on and I’ve given up any confidence that this will end well. Whatever solutions they come up with this week will certainly not be in the interests of those worse affected. When Germany implies that the Greeks and southern Europeans are lazy, feckless and to blame they miss the point that the real flaws are in the construct of the monetary union. The south are no different to what they were ten years ago and they should not be in a monetary union with Germany. They tell them they must work harder and the Greeks reply that is just a contemporary version of arbeit macht frei. Who can blame them.

Leon,

If you were hoping that I would suggest a dramatic solution that would fix everything, then I’m afraid you are doomed to disappointment. I don’t think there is a “solution” to the economic change we are living through. Governments don’t have sufficient power to resist major economic shifts or influence the eventual outcome significantly. Economic power is moving Eastwards and there is nothing we can, or should, do to prevent that. But governments can and should act to minimize the impact on the vulnerable. That is what governments are manifestly failing to do – not least in the Eurozone, where propping up a failed experiment at the expense of ordinary people is in my view both insane and immoral.

26 Leon

No, model C says MAXIMISING imports and consumption while minimising production and exports. That’s the credit bubble economy that was fashionable in the 2000s – when production and exports are minimised, consumption and imports are funded with debt. The credit bubble burst, and now the fashion is for Model B, which maximises production and exports while minimising imports and consumption – that’s the export-led, low-wage economy that just about every country in Western Europe seems to be aiming for (if you keep wages low you minimise domestic consumption).

The trouble is that countries moving from Model C to Model B are finding that exports aren’t easy to come by (because not everyone can have net exports), so maximising production is pretty nearly impossible while minimising consumption. The “minimising consumption and imports” bit is austerity, and the fact that production can’t be maximised in a low-export economy when consumption is minimised explains the unemployment and recession that results from austerity. I hope that makes sense.

@7 David Hood,

I said: “Speculation is a part of every human action”

You said:

“admittedly, I am speculating here, but I think that is rather a sweeping statement.”

It’s sweeping but it’s true. We act in the present without perfect knowledge. Whatever you choose you do so speculatively, whether it be a restaurant or a film or to stay in or go out, or one job rather than another, or to get married etc etc.

“Seems to be that there are too many who know the price of everything, but the value of nothing. Sad reality is that economists like to pretend that everything that cannot be monetised does not exist.”

This would be a relevant criticism if this was 1870, but economics has moved past the homo economicus paradigm. Value is subjective, and people don’t decide things in life on purely monetary valuation, nor do economists claim that they do.

Speculation? Reported in the news is that the Labour Party thinks it would be a good idea if gambling is included in the curriculum of schools.

As reported by the Press Association:

Labour has lent backing to proposals for children as young as 12 to be taught about gambling.

Shadow Education Secretary Stephen Twigg said pupils needed “information to prepare them for the adult world”.

The call came after an industry-funded body suggested secondary schools should teach that studying the form of race horses, dogs and sports teams can improve chances of winning a bet.

In a submission to a government review of personal, social and health education (PSHE), gambling addiction charity GamCare also said youngsters should play the dice game craps and learn about fruit machines, according to The Times.
http://www.google.com/hostednews/ukpress/article/ALeqM5jAy7F4qBq28-Wd3ppEoWkDC0QwGg?docId=N0228431322873252862A

Why teach gambling to kids at school instead of maths for finance to cover subjects such as mortgage finance, calculating annual percentage rates (APR) on credit sales, present value calculations, the relationship between bond prices and bond yields, the price-earnings ratio of shares and pay-as-you-go versus funded pension schemes.

I suspect many might find that rather more useful in everyday adult life than learning about horse racing and the dogs. It seems that gambling businesses are among the promoters of this proposal.

@32 – Shock, horror, they should be taught all those things and the basics of combinatorial game theory as well. It has LOTS of uses.

Instead, I’m currently writing the lecture which I’ll be delivering to my first year university students this week on it. Basic stuff, which CAN be taught to early teens. Yes, it’s useful for gambling. But also far, far more.

@30 – But if we’ve moved to minimising imports, then we wouldn’t have the balance of trade issues. No, we’re still TRYING to import, we just can’t do so nearly as much.

And right, your answer is to let the poor die slowly. Why not, then, kill them quickly?

34 Leon

You don’t understand balance of trade if you think that minimising imports eliminates “balance of trade issues”. It is simply impossible for all countries to be net exporters. For us to have exports, other countries must have imports. Minimising imports also minimises exports. This is what Germany doesn’t seem to understand – that by forcing debtor Eurozone nations to minimise consumption and imports (austerity) they are clobbering their own exports and production. Germany is heading for deep recession and I think it will be hit harder and suffer more than any other Eurozone country if it continues on its present path, because it is so terribly dependent on exports to the rest of the Eurozone.

And I’ll say this again, since you don’t seem to understand – IT IS THE JOB OF GOVERNMENTS TO PROTECT THE POOR. They should be called to account by their electorates for their failure to do that. What is worrying in the Eurozone is the trashing of democracy to achieve a political end.

@35 – Sorry, wrong person on the balance of trade thing. I’m just arguing that I see no sign of “minimising imports” as a *strategy*.

(Less imports, yes, as a result of lower spending, but..)

And “hold the government to account” is negative. You can’t win with in, except in the short term. We need somewhere to GO. Again, I’m focused on what we can DO.

Take, for example, my proposal for rent caps – it deals with the issue of forced migration due to HB changes, stops SOME of the pressure on food and utility bill cash, puts more cash in many underemployed people’s pockets AND within a few years gets a bunch of bad mortgages out the system without depriving anyone of their main property.

(Then we can start talking about changing tenant’s rights – no reason a sale would have to make people move, it doesn’t in most of Europe…oh, and of course the tax on unoccupied houses and empty brownfield sites…)