Monday, 6 July 2015

Let's recap & summarize the Eurozone situation...

Ok, let's get some things straightened. One, banks create money endogenously - loans create deposits is an operation in endogenous money which creates no new net assets for the economy. The only way net financial assets are created is via fiscal deficits. The only way financial assets are eroded is via fiscal surpluses. Loans create deposits expand the money supply. The money supply shrinks when those loans are paid off or defaulted on. Private debt deflation puts negative pressure on aggregate demand levels. Spending is Income. Higher private sector saving desire leads to less private sector spending which leads to fewer sales - less income, less production, and more unemployment. As such, the automatic fiscal stabilizers (always work counter-cyclically) work to expand the deficit in the downturn. It's the system trying to correct itself - but Maastricht arbitrary neoliberal rules don't allow this to happen with a political crisis. So it's not a question of Greece borrowing someone else's hard-earned money. The euro is a foreign currency for all member states. The currency issuer is the ECB. The ECB creates, according to the fiscal policy of each individual member state, all the euros that go to paying taxes and buying government debt. When the first bailout to the banks was made, Merkel didn't go with a hat to European taxpayers to raise money - the ECB simply credited the bank accounts of the recipients and debited the Greek gov's securities account. Problem with the first haircut was that it was correlated with austerity policy (i.e. pro-cyclical fiscal policy in the downturn). The Greek private sector cannot deleverage while the foreign sector and the government sector are working to be in surplus. If shortfall in nongovernment sector spending is not covered by government spending, then output remains unsold and the result is unemployment. Greece is in depression and has been for years. (G-T)= -(S-I) -(X-M) Austerity didn't work for Chile, din't work for Argentina, din't work for the Weimar Republic (on the contrary, it paved the way for Hitler and the Nazis to come to power - which they did & subsequently rebuilt the economy and ended unemployment via fiscal stimulus), didn't work for Argentina, didn't work for Romania (under Ceausescu), and it didn't work for Greece. It wouldn't have worked for Germany post-WW2, that's why the Allies annulled it. All money is credit. All money is debt. In all of human history, those debts which could not be paid were not paid - and that's what responsible sovereigns did in order to protect their interests and those of their people. Besides, every net exporter of goods and services is a net importer of aggregate demand. Germany is shooting itself in the foot mid to long term by imposing needless austerity to the Periphery, as less aggregate demand will be available for them to import - thus less business for their exporters. The EuroZone is just an arbitrary scheme of hard pegs between countries. All member states are de jure and de facto currency users, and the ECB is the currency issuer. The member states share the ownership of the ECB, but they refuse to take charge of it politically. Varoufakis, Hollande, and Galbraith in their Modest Proposal give a simple solution/alternative to austerity without need of changes in the arbitrary Maastricht Treaty - by making the EIB (the European Investment Bank) act as Federal Treasury for the EZ. The EIB sits on a mountain of idle capital, by the way. Money is not a physical resource! Money is just records of transactions. The ECB's balance sheet can hold negative equity indefinitely without going bankrupt - so that the economies of the EZ can hold the corresponding positive equity. Government debt = private sector savings.

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