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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

More on Greece and the euro

Posted by WARREN MOSLER on February 23rd, 2012

As previously discussed, all policies seem to be ‘strong euro’ first.

And the ‘success’ of the euro continues to be gauged by its ‘strength’.

The haircuts on the Greek bonds are functionally a tax that removes that many net euro financial assets. Call it an ‘austerity’ measure extending forced austerity to investors.

Other member nations will likely hold off on turning towards that same tax until after Greece is a ‘done deal’ as early noises could work to undermine the Greek arrangements, and take the ‘investor tax’ off the table.

Like most other currencies, the euro has ‘built in’ demand leakages that fall under the general category of ‘savings desires’. These include the demand to hold actual cash, contributions to tax advantaged pension contributions, contributions to individual retirement accounts, insurance and other corporate ‘reserves’, foreign central bank accumulations euro denominated financial assets, along with all the unspent interest and earnings compounding.

Offsetting all of that unspent income is, historically, the expansion of debt, where agents spend more than their income. This includes borrowing for business and consumer purchases, which includes borrowing to buy cars and houses. In other words, net savings of financial assets are increased by the demand leakages and decreased by credit expansion. And, in general, most of the variation is due to changes in the credit expansion component.

Austerity in the euro zone consists of public spending cuts and tax hikes, which have both directly slowed the economies and increased net savings desires, as the austerity measures have also reduced private sector desires to borrow to spend. This combination results in a decline in sales, which translates into fewer jobs and reduced private sector income. Which further translates into reduced tax collections and increased public sector transfer payments, as the austerity measures designed to reduce public sector debt instead serve to increase it.

Now adding to that is this latest tax on investors in Greek debt, and if the propensity to spend any of the lost funds of those holders was greater than 0, aggregate demand will see an additional decline, with public sector debt climbing that much higher as well.

All of which serves to make the euro ‘harder to get’ and further support the value of the euro, which serves to keep a lid on the net export channel. The ‘answer’ to the export dilemma would be to have the ECB, for example, buy dollars as Germany used to do with the mark, and as China and Japan have done to support their exporters. But ideologically this is off the table in the euro zone, as they believe in a strong euro, and in any case they don’t want to build dollar reserves and give the appearance that the dollar is ‘backing’ the euro.

And all of which works to move all the euro member nation deficits higher as the ‘sustainability math’ of all deteriorate as well, increasing the odds of the ‘investor tax’ expanding to the other member nations that continues the negative feedback loop.

Given the demand leakages of the institutional structure, as a point of logic prosperity can only come from some combination of increased net exports, a private sector credit expansion, or a public sector credit expansion.

And right now it looks like they are still going backwards on all three.

21 Responses to “More on Greece and the euro”

  1. John O'Connell Says:

    Warren,

    you cite as “leakages”

    “contributions to tax advantaged pension contributions, contributions to individual retirement accounts”

    Do you mean only to include buying of government debt? Or also buying of stocks?

    If someone buys a hardware store from the previous owner, that would count as spending, right? Not a leakage, or a form of savings.

    If someone buys a share of Home Depot, is that any different? Does it matter whether it is done in a taxable or tax-advantaged account?

    I know we think of it as savings, but if a share of stock is a financial asset like a T-Bill, and not a real asset like land or a house, does that not give everyone and his brother the right to create dollars, by forming a company and selling stock? When Facebook goes public, will that add $100B of money to the economy?

    Reply

    WARREN MOSLER Reply:

    also buying of stocks.

    buying a non financial asset like a hardware store ‘counts’ as spending.

    doesn’t matter if it’s a tax advantaged account. that just provides incentives.

    forming a company and selling stock creates financial liabilities called shares.
    most don’t call the shares ‘money’ but you can if you want.

    Reply

    walter Reply:

    @WARREN MOSLER,
    I thought we limited money to what you can pay your taxes with?
    “Fiat money is a tax credit not backed by any tangible asset” (p3 soft currency economics)

    Reply

    WARREN MOSLER Reply:

    ok, there are scads of definitions of ‘money’ around so I never use the word any more except in very casual conversation.

    today I would say ‘the dollar is a tax credit…’

    John O'Connell Reply:

    @WARREN MOSLER,

    “Money” is the wrong word to use.

    So you would categorize a share of stock as a financial asset, not a “real” asset, even though what it represents is ownership of a pile of real assets.

    So, when the stock market goes up, private net financial assets go up, the same as when government deficit spends?

    How is this incorporated into the sectoral balance equation? It would seem to affect only one of the three arguments, so that if they summed to zero before, they would not after.

    Reply

    John O'Connell Reply:

    @John O’Connell,

    Oh, wait, I see you also called the shares a liability. I guess for accounting purposes, that’s accurate enough, although real assets don’t have corresponding liabilities.

    When government sells a treasury, you say that is not a leakage, just an exchange of one financial asset for another. The asumption behind that is that the purchase is made out of existing savings, not from current income.

    But, in order for the stock of Treasuries to increase, there must also be an increase in the stock of savings, because Treasuries don’t “crowd out” other investments. If there is no crowding out or competition between Treasuries and other forms of holding savings, there could be no increase in the stock of savings without a corresponding increase in the stock of Treasuries.

    One could say that selling Treasuries makes the government an “enabler” of sorts, to the detriment of the economy. Or else the idea of crowding out must be valid?

    WARREN MOSLER Reply:

    govt spending adds to clearing balances/reserves at the fed
    selling tsy secs ‘shifts’ those balances from fed reserve accounts to fed securities accounts

    see ‘soft currency economics’ on this website under ‘mandatory readings’

    Unforgiven Reply:

    @John O’Connell,

    “So, when the stock market goes up, private net financial assets go up, the same as when government deficit spends?”

    I believe it just stirs the water in the pot, rather than adding water (if the share price is realized by actually selling the share to someone).

    WARREN MOSLER Reply:

    yes, a share of stock is a financial asset.

    the market value of both the asset and the liability go up.

    so you can assume the asset and the liability are equal for sector balance analysis

  2. Neil Wilson Says:

    The choice for excess savings is always accommodate or confiscate.

    Looks like the Eurozone has settled ideologically on confiscate.

    Reply

    WARREN MOSLER Reply:

    leaning that way for sure. dangerous precedent seems…

    Reply

    PG Reply:

    @WARREN MOSLER,
    Not a precedent for sure, given human history.
    Everything goes as planned. Sand is being poured….

    Reply

  3. Lev Samarin Says:

    Minister of finance in Estonia made a following statement at the parliament today: “Austerity is exceptionally important part of economic growth”.

    Estonia, of course, is a proud member of the Euro currency system — at least politically — and is doing everything to keep Euro strong. Recent reports, however, indicate some “anomalies” like:
    - One in five babies is born in poverty.
    - 5 counties are in poverty
    - There is a huge line to get children to kindergardens yet many indergardens are in terrible shape
    - Huge outflow of workers to Scandinavia and UK
    - Labor union, student, primary and secondary education teachers protests

    Reply

  4. bond guy Says:

    @WARREN MOSLER,
    in MMT, there’s often a lot of discussion of net financial assets (with regards to the national accounting identies).
    Equities are a bit vague in the definition, as you really should not count them as a liability, but yet the private sector could theoretically finance everything via emitting equity instead of debt. This doesn’t matter in practice, as net equity issuance is often negative, but MMT theorists (e.g. textbook writers, like Wray and Mitchell) will have to cover this at some point.

    Reply

    WARREN MOSLER Reply:

    equity is just the bottom of the credit stack. corps fund via debt, equity, and income.

    what’s the issue?

    Reply

  5. Monica Smith Says:

    Well, it seems to have been fairly definitively proved that economies can be severely slowed or crashed by the financial community. Unfortunately, the notion that the process can just be reversed to get them up and running is also being proved wrong, but not yet definitively.
    Why Republicans are on record that planned economies are bad and then bend over backwards trying to plan is a puzzlement, especially since modern-day Republicans seem to be entirely responsive people who can’t plan ahead in any realistic sense to save themselves.
    (Invading Iraq to deliver democracy is not a plan. Neither is invading Iraq to get oil that could have been bought much more cheaply)

    Reply

    WARREN MOSLER Reply:

    govt can allow financial things to crash the economy, but it does’t have to allow it.

    there is no financial crisis that can’t be offset by a fiscal adjustment

    Reply

    John Zelnicker Reply:

    @Monica Smith,
    Monica — “Planned economy” sounds far too much like the communist countries and their Five-Year Plans. The Republicritters want the planning, they just can’t stand the idea of calling it that. Of course they also talk about “expansionary contractions” so their continual use of oxymorons in language or practice is not surprising.

    Reply

  6. golfer1john Says:

    Krugman sez:

    “It really is an agonizing position for all the troubled peripheral economies. At root, their problems are primarily caused by balance-of-payments rather than sovereign debt issues; they had huge capital inflows between 1999 and 2007, which led to inflation”

    First, as to facts:

    Did the peripheral Euro nations really have more capital inflows and more inflation between 1999 and 2007 than the central Euro nations?

    If they did have inflation, did that not also cause increasing tax receipts, and thus declining deficits?

    Second, as to economic theory:

    If inflation is caused by oil prices, and not national policies (or capital flows), how is it possible (or is it possible) for inflation to vary across Euro countries? They all buy the same oil at the same price.

    If capital inflows do not cause inflation, then how do they affect the sectoral balance equation and what is the appropriate policy in response to them, assuming that growth and unemployment are already at happy values, which I think they were considered to be toward the end of that time period?

    In the long run, Greece and the others are doomed by not being monetarily sovereign, and the GFC was the catalyst for their troubles, but was there anything they should have done differently along the way?

    Reply

    WARREN MOSLER Reply:

    i’ve had proposals all along the way

    Reply

  7. Clonal Antibody Says:

    German government wants Greece to leave Eurozone

    The Google Translation says

    Federal Interior Minister Hans-Peter Friedrich (CSU) advises Greece to withdraw from the euro-zone. This is the first time a member of the Federal Government calls for a radical change in the euro rescue. “To outside the monetary union are the chances of Greece, regenerate and become competitive to, certainly greater than if it is in the euro area remains”, the CSU politician said just before the elections taking place this Monday vote on the second Greece Package in the Bundestag. “I’m not talking about Greece, kick out, but to create incentives for an outlet that can not turn down,” said Frederick continued.

    Reply

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