Currency Wars
Posted: February 13, 2013 Filed under: Central Banks, Federal Reserve, Forecasts | Tags: Credit Suisse, Currency war, Exchange rate, Financial Times, Foreign exchange market, Gold Standard, Niall Ferguson, Richard Nixon Leave a commentYesterday, the G7 issued a statement about everyone’s favourite topic: Currency Wars.
The statement was seen as very weak and of no implication at all: “We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate.” To compare what’s going on today with the “currency wars” of the 1930s may be wrong.
Economic historian, Niall Ferguson, recently highlighted in the Financial Times (via Credit Suisse), “Back in the 1930s, it was obvious who was waging a currency war. Before the Depression, most countries had been on the gold standard, which had fixed exchange rates in terms of the yellow metal. When Britain abandoned gold in September 1931, it unleashed a wave of competitive devaluations. Today, however, we live in a world of fiat money and mostly floating rates. The last vestige of the gold standard was swept away in August 1971, when
Richard Nixon suspended the convertibility of the dollar into gold. For one country to accuse another of waging a currency war in 2013 is therefore absurd. The war has been going on for more than 40 years and it is a war of all against all.”
Greek Euro Zone Update : The Banks and The Euro Economy Have Collapsed
Posted: February 6, 2013 Filed under: Euro, Euro Zone, Forecasts, Greece | Tags: Alexis Tsipras, Ancient Greece, European Central Bank, Financial Times, Greece, Greek, Politics of Greece, Tsipras 1 CommentWe Won’t Be Fooled Again
The AMP has presented the case that the financial media is trying to literally ” paper over ” the problems in Europe . In my presentations I tell each audience not to be lulled into a belief problems and problem banking have been with. Here is today’s column from from John Mauldin after a visit to Greece:
The Greek banking system has collapsed. Banks simply have no money to lend. First they had to take huge losses on their Greek government debt. Then they incurred large losses on their regular bank portfolios, as Greek GDP shrank 20% and businesses had no ability to pay and went bankrupt. Finally, their deposits dropped significantly (€86 billion fled), either converted to cash or sent to banks in other countries, as Greeks worried that the country would leave the euro and return to the drachma.
Depending on what document you read (or who you listen to), Europe has arranged up to €50 billion to help recapitalize the Greek banks. €27 billion has been injected to capitalize the four largest banks; but they have to be able to come up with about 10% of the money from private sources, and that money is just not showing up. The Financial Times writes this weekend: “Greece’s banks have begun a frantic lobbying of the bodies behind the country’s bailout, in an effort to ease the conditions imposed on their recapitalisation and avoid full nationalisation.” (Sound familiar? Shades of TARP!)
The only other option on the table right now, other than laying hands on the rather paltry amount of private money, is full nationalization. “One banker who declined to be named said Greek banks’ books were worse than many realise, given that asset valuations and recapitalisation estimates date back to 2011. ‘Greece has performed worse than in the adverse scenario,’ the banker said. ‘The macroeconomic contraction was much bigger in 2012 than forecast. Loan portfolios are still deteriorating.’” (FT)
All the other, smaller banks will be nationalized outright. This will certainly help. More than one businessman told us he or she was no longer worrying about profits but simply managing for cash flow and survival, hoping that at some point a stable banking system would return. “New investment laws, maybe the approval of some large project, must give people a reason for money to come back. Greek investors and citizens must be assured that Greece will be a part of the euro. We must do things to make long-term money feel safe. There is a dilemma: money has left because of fear of leaving the euro, and now it is not coming back because of concern about taxes. But if we grant amnesty for repatriation, it will create ill will. This is not easy to do.”
And taxes are on everybody’s mind. They have gone up, and there are serious efforts to collect them. But there is still suspicion everywhere that others are not paying. I heard from numerous sources that the worst offenders are doctors and lawyers, the upper-income earners.
A Deep Sense of Injustice
And that opinion was echoed by the leader of the left-wing SYRIZA parliamentary group, Alexis Tsipras, who spoke to Wall Street Journal columnist Bret Stephens last week:
But Mr. Tsipras takes a dimmer view of health delivery in his native land. “Why in a public hospital, in order to have an operation, do [patients] have to slip [doctors] an envelope with a certain amount of money?” he asks. “Why indeed? ” I ask back.
“Because the state gives low wages to doctors, thinking it’s completely natural for them to add to their salary” by accepting those cash-stuffed envelopes.
I suggest to Mr. Tsipras that maybe the difference between Greek and American doctors is that the latter have so far operated in a mainly private market, though that’s about to change. He demurs and instead says something about the need to have a “revolution in conscience” by Greek citizens, plus “the will of the state” by Greek leaders. It sounds like the sort of thing you’d expect from someone who names Karl Marx and Antonio Gramsci as sources of intellectual inspiration – romantic in its impulses, repressive in its implications.
But I don’t think Mr. Tsipras is the budding totalitarian or demagogue his detractors say he is. He talks of the “deep sense of injustice” that pervades Greek society, the sense that they have been systematically used and betrayed by their own economic elites and elected officials.
The short article is well worth reading. Stephens is a very good writer.
That sense of betrayal Tsipras mentions, palpable to me while I was there, is also part of the system. In the ‘70s a leftist government came in and began to put “cousins and nephews” of their supporters into jobs in the bureaucracy. And when a conservative government came to power they did the same thing. I kept hearing that 30% of government workers don’t even show up for work. (I’m not sure where that actual stat came from, but it gets repeated.) Some bureaucrats even hold down jobs in the private sector while they continue to collect a government pay check. And because the government is such a large sector of the economy, everyone has someone in the family or a friend’s family who is part of the problem. If you change things, they lose their jobs. Up until recently, the impetus for change was just not there. But that may be changing:
“In the ‘60s every Greek wanted to own his own business, in the ‘80s they wanted to be public servants, and now they want to be in business again.”
But the problem is that there are no jobs. Unemployment is 27% (the government’s number); and the Chairman of the Council of Economic Advisors, Panos Tsakloglou, told us he was worried it could rise to 30% before it finally begins to turn around.
Tsakloglou was quite candid. He said that the IMF, ECB, and EU would have to accept some form of debt forgiveness and not just put it all on the private sector. Greece still has too much debt for the private sector to be able to service.
Evidently, more is needed than just debt extension. That has happened already. The chart below shows extensions out for 35 years. I invite my US readers to think back to 1978 and ponder the notion that the US national debt was extended for 35 years from that point, and then try to imagine what the dollar would be worth by now if it had been.
Unemployment among Greek youth is over 50%. That worries Tsakloglou, because young people are leaving the country. If things turn around quickly, they can come back. But if you stay away long enough, you have kids, and then it’s harder to come back. That was echoed in other meetings: “The problem is, young people are leaving as salaries are going down. There is opportunity if these guys leave and then come back, but in five years we’ll need to repatriate the Greek diaspora.”
Greeks think about Europe a lot. Many are ready to see a stronger Europe, with less sovereignty for their own government. “But something must happen about the trade imbalances.”
Remember that quote from Econ Journal Watch at the very top of the letter? It noted Barry Eichengreen’s conclusion that “monetary integration would limit fiscal independence. He argued that the extent of fiscal transfers in the European Union would have to significantly exceed the extent of fiscal transfers in the United States to be successful, as regional shocks were likely to be significantly greater in EMU countries than in the states of the United States.”
I was already writing a few years ago about the extremely unfavorable balance of trade that Greece endured. That imbalance is going away (that happens in depressions, as there is no money to buy imports), as is the wage differential with the rest of Europe. Estimates are that by the end of 2014 the wage gap will be nearly gone. One business manager said that his Greek plant was as productive as his German plant. The cost difference came in dealing with the bureaucracy. “Not just the cost of bribes, but even worse is incompetence.”
Related articles
- European Authorities Still Punishing Greece – Can They Be Stopped? by Mark Weisbrot (zcommunications.org)
- Samaras Last Best Greek Hope With Compliance Instead of Defiance – Bloomberg (bloomberg.com)