Monday, May 24, 2010

Left, Left, Left-Right-Left

Yves at NC periodically has articles that claim, to make a long story short, that everyone should just wake up on the same day, say fuck you to their creditors, and go spend the afternoon drinking pan-galatic gargle blasters and just generally outliving the hell out of everyone else.  She's done this with Iceland, and the Lativians, and now she's focused, like everyone else, on what Greece should do.  In this context, comparisons with Argentina come up naturally, and the temptation is to go grab the GDP chart, examine their post-crisis period from 2002-2010, and conclude that it works -- you default, and you play hardball with your bondholders, you get yourself some anti-capitalist religion and swerve dramatically to the left (always rhetorically more than actually of course), and life is grand.  Argentina's strong growth recovery from their crisis is meant to prove this, and the question is, should the Greeks take the same caserolazo to the Germans.

I don't, as a matter of principle, have any trouble with this line of reasoning.  Which is to say that I don't think that anyone should feel some sort of moral obligation to pay their loan shark.  I don't take it as gospel that the right way to divide up the post-bankruptcy value is the give it all to the creditors, and I certainly don't take it as a given that that is what's going to happen.  But let's slow down for a second and consider the analogy, and think about just how cushy life has been in Argentina over the last decade, and just how costless nuclear default really is.

Because it's really not.  Costless, that is.  In fact, it's pretty miserable.  Instead of romanticizing the yanqui-hating Argentinians, let's look at the whole history of the situation, which turns out to be remarkably easy to find (all hail the great and mighty information oracle).  If you click through, you will see that the nominal GDP for Argentina now exceeds the pre-crisis peak by maybe 15% (the numbers stop in 2008, so I'm adding more growth to what they show here).  Looks like a V-shaped recovery to me! 

Except this is to confuse the whole notion of "V".  The idea is not just that it goes up after it goes down.  That's almost inevitable once the whole country is no longer out in the streets beating on pots and pans.  When people talk about a V-shaped recovery, they mean that GDP springs back to the same trendline it was on, as if nothing had been permanently lost, not simply that the economy starts growing again.  Argentina is only just now, one decade later, making the same amount of stuff that it did before the crisis.  This is pretty meagre success when you think about it.

The other thing to remember in all of this is that all of the people who had savings before the crisis in pesos = dollars, now have savings in pesos = 0.25 dollars.  It's true that costs have been re-denominated in cheapened pesos as well, though this had the predictable effect of driving inflation to the moon.  So anyone with the smallest amount of middle class savings has gotten completely fucked in this deal.  Maybe it's true that they would also have gotten fucked by the rising taxes, lower spending, and slower growth necessary to avoid default, but to paint the solution as painless or even to be taken lightly, is irresponsible.

I don't know what the right solution is for Greece.  Probably best is some negotiated default that leaves them in the Euro and imposes serious but manageable deflation.  Or some inflation in Germany.  This isn't going to be fun no matter what.  But the crash that happens when an economy temporarily reverts to barter because no one know what money is any longer is also a pretty painful thing.  All I can do is repeat what an Argentine told me when I said that it looked like Greece had the same problem: "pobres".

Sunday, May 23, 2010

The government is always the problem and never the solution.

You just have to have the correct definition of "government", that's all.  A definition that does not include Goldman Sachs and Halliburton and BP as part of the government is simply delusional.  Once you put lobbyists and media back into the government, once you, in short, stop looking at what you think democracy should look like, and start looking at how it actually functions, it's very easy to see how the government is at the center of our troubles.  Just more of the same government we've got is just going to make things worse, regardless of whether you brand it as capitalism or socialism, which are ultimately nothing but two species of the same parasite that funnels the labor of the many into the hands of the few. 

Show me a government that is sustainably not a kleptocracy and I'll show you how it can be a solution; until then you're just a bunch of royal archists fucking with my an.

Today's rant is brought to you by the always wonderful P-krug (all hail the intertubes yet again) who doesn't always quite get it all right in my opinion.

First, he points out something everyone should keep very ready to hand in the coming years of deficit hysteria -- by and large, the world doesn't have debt problems because they let the government spend too much, but because we had a huge crash that reduced revenue.

You see, what the [IMF] report says is that there has been a fundamental deterioration in the fiscal outlook for advanced countries. Not only are they running up a lot of debt in the crisis, but — and much more important — they will emerge from the crisis with large structural deficits that weren't there before. So spending cuts and tax increases loom.

But here's the question: where are those structural deficits coming from? It's not interest on the debt: the IMF shows a large increase in primary (non-interest) structural deficits. So is it permanent increases in spending? No: the report shows that discretionary spending increases are a minor cause of rising deficits even in the crisis, and these increases will be reversed as stimulus winds down.

It takes careful reading to discover what's really going on:

The persistence of deficits reflects permanent revenue losses, primarily from a steep decline in potential GDP during the crisis, but also due to the impact of lower asset prices and financial sector profits.

Aha. Most people who look at the IMF report will, I suspect, read it as telling a tale of government profligacy getting us into a hole. But what the report actually says is quite different: it says that the financial crisis has made us permanently poorer, which among other things reduces revenue, and governments have to tighten their belts to make up for that loss.

He's right here, and this is very important to remember I think.  Pretending that this was all caused by government waste is counterproductive because it leads you to think that firing some teachers and auctioning off some gold plated toilet seats from the Pentagon will solve all our problems. 

However, he's wrong, because it was in fact all caused by the government.  Not government profligacy but the takeover of the government by finance.  Without the lever of government backed leverage Achilles wasn't going to get far lifting the world.

Next, he points out something very simple and very basic, even if he only points out one side of it

If libertarianism requires incorruptible politicians to work, it's not serious.

I remember Nozick somewhere saying that you really had to put the repeated failures of a given political system back into your definition of the system.  In other words, the idea of communism does not entail the idea of authoritarianism, nor does the idea of capitalism necessarily include inequality.  But how many times do you have to see the same story play out in either case before you stop deluding yourself as to what's really involved in either system?  There is no such thing as a pure system that has been perfectly designed to withstand the idiocy of the apes, which P-dad here aptly points out without going on to confront the flaw in his perspective on the world; his brand of liberalism would require that the whole government be run by ... well ... Paul Krugman, or some other equally brilliant and wide-ranging technocrat.  This faith in an uber-competent regulatory paradise is just as unserious as the faith in markets and incorruptible rules he critiques.

UPDATE: as an aside, he has actually already responded to this critique of his critique of libertarianism.  In my mind there's no question that he's right as far as he goes -- tort law is inferior to regulation in principle in various circumstances and it's easy to find practical examples of this.  Naturally, it's not a question of whether or no this statement is true, but how often.  More directly it's a matter of what principles you use to make this decision, or whether you just assume by default that everything is guilty of needing regulation until proven otherwise.  The whole point of developing a political philosophy is to think through what underlying principles would lead you to lean towards regulation or away from it, so you aren't reduced to simply rooting for the donkeys or the elephants.

Wednesday, May 19, 2010

V.I. Lenin. Vladimir Ilyich Ulyanov

As if we would ever dreeeaaam of taking their bullshit money.
He said: “If banks don’t have enough capital [to meet the new rules] ... they cut assets. We are kidding ourselves if we think they are only going to cut trading desks and activities that some people say are socially useless. There will be real impacts on real businesses.” Mr Green’s call for phasing in the new rules may well find sympathetic ears.

Unlike the Japanese, these guys are obviously not golfers:

Ja,  it seems you have forgotten our little Keynes, Mr. Green.  Without demand there are no fucking loans, and without a hostage to your financial terrorism there is no regulatory ransom.  That's what ransom is.  Those are the fucking rules.

I'm just waiting for Congress to toss their dirty undies out the window so we can double back and beat it out of them.

Wednesday, May 12, 2010

Exterminate Capitalism Lobster Package

Today's graphic is inspired by the wonderful New York Times article on signs in "chinglish"

When countries are very poor, they spend pretty much all their money consuming stuff.  After the basics, there's not much left over.  As they get a little richer, and have a little bit left over, they tend to save and invest it.  They consume a little bit more, but invest a lot more -- building roads and bridges and factories for themselves -- and that's how they get even richer.  Eventually, they get so rich that they run out of good investment opportunities and go back to blowing it all on hookers and cocaine.  I promoted the graphic that shows this process from a vampire squid report I was perusing this morning.

So far so good.  But take a closer look.  Can you tell me which of these countries is not like the others?  Maybe we should call the Chinese system, "chapitalism".  At any rate, something was obviously lost in translation.

Monday, May 10, 2010

The State Racket

So lately, it's all about the government.  This is the next stage in our version of the Great Depression.  Back then, they didn't have the big governments we are using as a fire break to contain the contagion in the financial system. Now, we'll see if ours are big enough.  Today the pages are filled with Greece and Spain, and tomorrow you can be sure the Tea Baggers will claim that the US is next.  And really, they are right.  Just about any way you look at it, the developed world is bankrupt. 

Yeah, there you go, I just said it.  Superficially, it matters a lot whether Greece or Spain or Ireland formally restructure their bonds.  But on a deeper level, all that we are seeing with any of this is the initial stages of a bankruptcy proceeding.  The acute liquidity crisis has passed (though it can always come back).  We've got the Fed and the ECB playing the part of daddy DIP (debtor in possession, for those non financial types).  And now we have to get to the dirty work of sorting out which creditors get what.  The real question is how do we split the pain. 

Consider the European case a little more closely.  Should they just let Greece formally restructure the debt?  How is this any different, you might ask, from cramming further loans down their throat and then demanding that they take a massive pay cut in order to make good on them?  Well, let's look at it as a typical corporate bankruptcy proceeding.  It's really a question of who owns the post re-organzation value of the nation.  Does the creditor (Germany) end up owning the whole company, or do the equity holders (the Greeks) have the upper hand?  Donald Trump's famously serial bankruptcy negotiations were an example of the latter -- if you want there to be any value, Mr. Creditor, you will take a big haircut now.  The bank forclosing on your house is a simple illustration of the former.

These are important questions with real consequences.  And it's not just a question of dividing a fixed pie, as the Trump thought experiment shows.  But if you step back for a second, you will realize that all of this is actually secondary.  The primary thing is facing up to the fact that we're bankrupt.  Maybe the Greek people get stuck with it.  Maybe the German people do the bailing out.  Maybe the Greek government forces a haircut on the creditors.  Maybe this causes banks runs in Greece.  Maybe it causes bank runs in Germany.  Maybe the Germans don't directly bail out the Greeks, but they have to bail out their own banks.  Maybe this time they stick it to the bank equity holders.  Pay your money and pick your color, this is what the big casino we call international finance is all about. 

But don't lose sight of the fact that one group worked because they were promised that they wouldn't have to in the future.  And another group consumed now and promised to work later.  Now they have to get together and sort out whose going to make the donuts.  And there's simply no way around this.

UPDATE:  I wrote this last week after reading some of these related articles.  Superficially, things are completely different now, as the EU put together a massive fiscal bailout and quantitative easing bailout over the weekend.  The division of pain progresses at full speed, even if the realization of how much it will hurt only dawns gradually.  How fast we run to stay in place!