The MSM is full of apocalyptic visions of why we are doomed if we bail out Greece again and doomed if we don't, largely dreamed up by people who have little clue about banking and finance and so on.
As far as I can see, there isn't much to worry about if we allow Greece to default, leave the Euro-zone etc. History is littered with similar examples, no two cases are ever exactly the same, but as a general rule, the country concerned usually devalues, dusts itself off and is back to normal after a year or two.
A few recent examples are:
1980s Latin American debt crisis
1990 German debt waiver
1992 Black Wednesday
mid-1990s Argentine debt restructuring
1997 Asian financial crisis
1998 Russian Financial Crisis
2008 Icelandic banking collapse (compare the favourable outcome here with the complete and utter mess that the O'Irish made of it).
There have been plenty of instances where a currency has devalued by twenty or thirty per cent in the space of weeks or months (which to a foreign debt holder is tantamount to a twenty or thirty per cent default), sometimes it bounces back, sometimes it doesn't, sometimes it leads to inflation, sometimes it doesn't.
Never forget that the sum total of all the money in the world is always precisely zero, because for every financial asset there is a financial liability, and beyond a certain level of abstraction and on supra-national scale, money really just is numbers on bits of paper, it's not real money any more (as Nick Leeson once said). It's the pretending that these numbers mean anything which causes the damage.
As a silly example, sometimes a tramp asks you if he can "borrow" a pound; if you hand over a quid and say "Keep the change", all is well with the world. What would be stupid is taking him at his word and then trying to track him down asking for your money back.
I won't bore you further with why this is so, but take it from me, it just is.
Tuesday, 21 June 2011
Greek bail-out nonsense: suddenly we're all experts!
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23 comments:
The general confusion by the general public between 'money' and 'wealth' never ceases to amaze me.
I mean, I know lots of wealthy people. They don't have much actual money, but they are certainly wealthy.
You're right about the economic issue, but the crisis poses a very serious threat to the European project.
L, exactly.
TT, but trying to impose all these terms on Greece is an even bigger threat to the European Project. Better for Them to cut their losses.
Unless you think They are so cynical that They can't risk other people see Greece leaving the Euro and then doing rather well for itself, which They quite possibly are.
"Never forget that the sum total of all the money in the world is always precisely zero..."
The relatively piddling amount of notes and coins excepted of course?
What I don't understand is why lending to governments does not seem to be subject to the same rules as other investments. For example, if I lend money to a FTSE100 company by buying shares I know there is a significant chance that I will not get all my money back when I sell them. However if a French bank buys Greek government bonds it gets bailed out one way or another if the investment goes bad. Why is this and perhaps more selfishly, how do I get a piece of the one-way bet action?
Why are governments so scared of letting banks lose money? I thought we had had time to sort out that if a bank goes bust only the small retail customers get compensated. Why do the shareholders and stupid bloody people who thought lending money to Greece was a sensible idea? Why are taxpayers apparently standing behind any bet that stupid city boys make by investing in government bonds?
If I was the Greek PM I would be saying "actually screw you guys, we'll default totally and use the money we have been paying on debt interest to close the deficit and from now on we won't care whether you won't lend us anything because we won't want it".
AD,
1. The face value of all coins and notes is but a few per cent of the nominal value of all 'money' in bank accounts etc.
2. Coins and notes are financial assets from the point of view of the person who has them in his wallet, but they are FINANCIAL LIABILITIES from the point of view of the issuer (and are correctly recorded as such in the Bank of England's accounts). So it still nets off to precisely NOTHING.
BE, why? Because they are stupid, corrupt or power-mad, or any combination of the three, take your pick (or give me an alternative explanation). And if I were the Greek PM I'd do exactly the same as you, of course.
£1 = 1.05euro {tourist rate average today}
£1 = 240 Turkish Lira {tourist rate average today}
We don't know what a coffee costs in Athens or Istanbul to compare. Because my International city costs subscription has lagged. But some tourists among the readers must have an idea which is the more expensive country to visit.
I'm glad you said that, I always had my doubts about QE, but now I can sleep safely, can I?
@bill
http://www.expatistan.com/price/big-mac/istanbul
10.50L for a Big Bac. £1 buys around 2.60L today (not 240!) . So cost = £4.03
http://www.expatistan.com/price/big-mac/athens
E5.38 for a BigMac, cost £4.67 (using the offociail 1.15 to £)
BQ, as Anon points out, the difference is surprisingly not very big.
JM, QE is even less than nothing - all that happens is that the average time to maturity of UK government debt is shortened considerably and the government's interest bill goes down accordingly (but the risk is that it could rise sharply).
BE, because the banks are the government, by and large, so if you are not a banker you don't get in on the one-way bets.
Hmm, not sure what you're saying here.
"QE is even less than nothing". You seem to be saying that inflating the currency is no big deal, when it certainly is, as it devalues the money, taking away purchasing power from ordinary people and giving it to the crooks at the head of the line.
Returning to Greece, certainly the political threat is that if Greece escape then others will follow and the European project will be holed beneath the water line.
TT, you are falling back into the old ways of ad hominem attacks:
"You seem to be saying that inflating the currency is no big deal"
NO I NEVER SAID THAT I HAVE NEVER SAID THAT!!!!!!!!!!! WHERE DID I EVER SAY THAT??????
I was merely pointing out that QE (in the UK version) is when the UK government buys back longer term UK government debt (known as 'gilts') from commercial banks and pays for it with shorter term UK government debt (known as 'Reserve deposits with Bank of England').
QE is about as exciting as the Royal Mint buying back £5 notes using freshly minted 50p pieces.
Quite right. The Money IS NOT wealth.
It IS the common means used to exchange wealth though.
The Money is an amazing labour saving invention. Making trade and exchange that much easier.
The less The Money system costs to operate, the more productive power is available.
You know what that means don't you?
Yup! Rents will rise. All the gains will go into location values. Not producers of wealth.
So even if The Money was a mechanism of purity and zero cost, while private property in land persists, your wages will continue to tend to slave levels.
Oh well!
RS, there is a more mundane point here (which most people fail to grasp, e.g. Andrew D above) that 'money' always nets off to nothing. You can only have 'money' if somebody else has a corresponding debt.
The fact that it is a splendid medium of exchange is a side issue.
MW Yeah I agree with all that in accounting theory.
So how come in practice The Money does NOT zero out?
Its pretty obvious that the profits of operating the money system, are a tax (or rent) to everyone else.
So it goes deeper than even you allude to.
The value of anything, including The Money, is the LEAST amount of work anyone is prepared to give in exchange for that thing... in the end.
If we are being taxed for something, that is normally free, that is slave labour we are giving, which falls below zero of what we want and desire. Unless we are insane. (Which I believe is true too. The Matrix)
THAT is the reality of The Money today.
The effects are lower productive power via slavery(a real cost below zero) and a widening wealth divide.
Fixing The Money perfectly, would only increase productive power. Yet we would still be slaves.
Bloody rain! tcchh
RS: "So how come in practice The Money does NOT zero out? It's pretty obvious that the profits of operating the money system, are a tax (or rent) to everyone else."
The money only zeroes out on a balance sheet basis. Banks make a profit because they charge higher interest on the money they lend out than they pay on the money they borrow in. All in all, there is a net transfer of interest from borrowers to banks and depositors/investors.
And interest is only really 'rent' if it's secured on something like land or any other bubble asset (where a direct payment for use would itself be rent), or the two per cent interest margin which banks can make in their sleep almost without risk (hence and why we'd need a bank asset tax of two per cent).
Yes I agree.
"And interest is only really 'rent' if it's secured on something like land or any other bubble asset"
That would be nearly all of it then. Hardly a side issue.
Lets be careful not to focus on every little counts ?
RS, yes most loans by value are secured on land and buildings (over 80%).
So if you add together the 2% true rental income of banks (the interest margin they can earn in their sleep) and the interest they earn from loans on land and buildings, it's as good as 'all of it'.
But it is still not correct to say that the charging and paying of interest is in any way inherently morally wrong, it's like a knife - you can use it for preparing food or for stabbing somebody.
Did I say that? (See your anger above in CAPITALS)
I am saying that:
...even if The Money was a mechanism of purity and zero cost, while private property in land persists, your wages will continue to tend to slave levels.
Lets stop dealing with the side issues. Every little counts. And get on with the fundamentals. Because avoiding them means nothing will change. That is what requires you to spend a lifetime supplying infinite evidence and making no progress, noble as your cause is
PS What are you going on about knives for? How is that relevant to this?
RS, I was trying to say that sharp knives, like interest, are not inherently evil, but they can be put to evil purposes.
But as you say, it's interest combined with privatised tax collection that is the really poisonous combination.
Apologies: Agreed with the knives analogy.
Interest on money creation = privatised rent
Privatised rent = A tax to everyone else
So what to do about the "knives"?
Abolish all taxation
Collect all rents
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