Mitchell’s laws: The more budgets are cut and taxes inceased, the weaker an economy becomes. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
That is the question. You can decide for yourself. Here is the link to the entire article:
The Logic and Fairness of Greece’s Program. Here are some excerpts:
The Logic and Fairness of Greece’s Program
By Olivier Blanchard
To get back to health, Greece needs two things. First, a lower debt burden. Second, improved economic competitiveness. The new program addresses both.
Some countries have been able to work down heavy public debt burdens. Those that were successful did it through sustained high growth. But in Greece’s case, it had become clear that high growth—let alone sustained high growth—was not going to come soon enough. Debt had to be restructured.
Not come “soon enough”? Under the euro system, the correct adverb would have been “ever.”
The PSI (private sector involvement) deal—the largest ever negotiated write-down of public debt—has reduced the debt burden of every man, woman, and child in Greece by close to €10,000 on average, a sizable contribution on the part of foreign savers.
Of course, no thought is given to the Greek people and Greek institutions that may have owned Greek debt and were royally screwed.
Greece now has to do its part―with sustained political commitment to implement the difficult but necessary set of fiscal, financial, and structural reforms that have been agreed as part of the program.
First, it has to bring down its fiscal deficit further. Otherwise, this will simply negate the progress which was just made on the debt. Greece is still running a primary deficit, and it will soon need to run a primary surplus. There is simply no alternative. Much spending will need to be cut. And, on the tax side, given the harsh measures that have to be taken, much of the focus of the program is on fairness, on making sure that richer people do indeed pay their fair share.
Even cheating creditors out of billions didn’t do the job. Now Greece must cheat its own citizens, further. Raise taxes; cut spending. And disregard that “fair share BS.” This will be huge tax increase on the entire nation, destroying the private sector to aid the public sector.
Equally, or perhaps more importantly, Greece has to reduce its current account deficit. For two separate reasons. First, no country can run a large current account deficit and borrow from the rest of the world forever. Second, as fiscal austerity cuts into domestic demand, the only way to return to growth is to rely more on foreign demand to reduce the current account deficit.
Yes, austerity will cut into domestic demand by impoverishing the people. The more austerity, the more distant is the current account surplus. Visualize mice running on a wheel.
“Forever” is a favorite word of debt-hawks. They neglect to mention that reducing deficits “forever” guarantees total collapse of an economy. However, The U.S., being Monetarily Sovereign, actually can run a current account deficit “forever.”
At any rate, this “solution” is known as the “beggar-thy-neighbor plan.” If one nation runs a current account surplus, another nation must run a current account deficit. So who will Greece beggar? Another euro nation? Or will it be a Monetarily Sovereign nation, the only ones that can afford current account deficits “forever.” The IMF never says who will be expected to pay the price.
By how much does Greece need to improve its competitiveness? It is difficult to be sure, but an improvement in competitiveness―or a real depreciation―of about 20 percent seems to be what is required.
There are two ways to become more competitive: become much more productive, or reduce wages and nonwage costs. The first way is much more appealing. But there is no magic wand. While many sectors in Greece show a large productivity gap, the reforms needed involve changes in regulation and behavior, none of them easy to achieve.
This leaves decreases in relative wages, at least until higher productivity can kick in. In countries with flexible exchange rates, this can be achieved through currency depreciation. In a country which is part of a common currency area, it has to be achieved by decreasing nominal wages and prices.
How will cutting Greek wages improve productivity? Most increases in productivity come from education and automation, not from impoverishing your own population. Education and automation require money, the very thing disappearing from Greece.
And did we see an admission that countries with flexible exchange rates (aka Monetarily Sovereign nations) can do what the euro nations (monetarily non-sovereign) cannot? Oops! How did that admission slip out?
The best way forward would have been a negotiation between social partners to reduce wages and prices. This did not happen. The program tries to accelerate the process, while protecting the most vulnerable.
Who is the “most vulnerable” in the opinion of the IMF? Not the poor. To hell with them. Their salaries will be cut. So who is it? In IMF-speak the most vulnerable are the rich and, of course, the EU and IMF themselves.
Were there less painful alternatives? I do not believe there were, or are.
For example, the notion which is sometimes floated that large infrastructure projects might boost growth, increase productivity, and improve the fiscal and current accounts, is fanciful. The problem of Greece is not primarily a problem of physical infrastructure. Projects financed by state funds would do little to impact growth in the short term, would make the fiscal deficit worse, and would only delay the inevitable adjustment.
Here, the IMF tells the world that hiring thousands of people to build roads, bridges, dams, electrical, water and sewer infrastructure would not stimulate the economy. No, better to cut their salaries.
What about leaving the Eurozone? Euro exit followed by a sharp depreciation could achieve the relative wage and price decline that Greece needs, and achieve it faster. Indeed, if Greece had had its own currency to start with, this would surely have been part of the program. But Greece is part of the Eurozone. And, leaving aside the large costs of no longer belonging to the Eurozone, the dislocations from a disorderly exit—from the collapse of the monetary and financial system, to the legal fights over the proper conversion rates for contracts—would be very, very large.
Translation: What we really fear is the collapse of the euro. We built it. Our reputations and excessive salaries depend on it. So don’t cause anything “disorderly.”
Greece will have to climb a mountain at least as high as the one it has just climbed and success will hinge crucially on the government’s sustained and strong implementation.
But it is also true that the program deals squarely with the two most fundamental issues facing Greece―not only high debt but also low competitiveness. And it is fair, both in asking for shared sacrifices, not only within Greece, but also between Greece and its creditors.
Everyone shares sacrifice — the Greek government, Greek citizens, Greek lenders — everyone except — the IMF and the EU. No sacrifice for them.
The IMF and the EU. They were the ones who convinced the euro nations to surrender their Monetary Sovereignty in exchange for what? Financial security? Monetary stability? Fiscal jurisdiction? How well has that worked out?
And now that they have created an economic Frankenstein, they are reluctant to admit their error and lose their cushy jobs. Rather, they prefer that thousands, no millions, of people suffer.
The title of this post asks a question. The answer is, no, it’s not stupidity or insanity. It’s arrogance that dooms Europe — the very doom I predicted back in 2005.
Rodger Malcolm Mitchell
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports