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Back to the Deutschmark

July 28th, 2015

The debt crisis has upended lots of my assumptions about European politics, so it’s perhaps not surprising that I find myself agreeing with just about everything in this piece from The Telegraph by Mehreen Khan, advocating a German exit from the euro. Less surprisingly, I also agree in general with this NY Times article by Shahin Vallee, who also concludes that the (virtually inevitable) breakup of the euro would be better achieved by an orderly German departure.

One point made clear by the Greek disaster is that the mechanics of exit from a currency union are feasible only if the new (or, in this case, revived) currency is stronger than the old one. So, the appropriate way to break up the euro is for Germany, and other countries that want to remain in a German currency union, to switch to the Deutschmark. That way, existing euro-denominated contracts and accounts stay in euros, which can be freely exchanged for marks. Since the mark is expected to appreciate, there’s no reason for a run on banks in advance of the switch.

All this assumes that a breakup of the euro is desirable. In my view, the euro has failed on every count.

* The euro has failed in the aim of creating an Europe-wide currency union. The countries still outside are counting their blessings, and will almost certainly never join.

* The fallback position, based on the idea of the eurozone as the core of “two-speed” Europe has also failed. This idea was always based on the assumption of a vision shared between France and Germany, an assumption that has been destroyed, in large measure, by the euro. Far from being a unifying force, the euro has gone a fair way to reviving the demons the EU was created to keep at bay

* Economically, the euro has been a disaster, producing a deep depression in most of Europe and not even doing much for Germany. It’s an open question whether this was an inevitable consequence of a common currency, or the result of ECB mismanagement in the crucial years after the crisis, but either way, this is a failed experiment.

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  1. Matt
    July 28th, 2015 at 11:07 | #1

    the appropriate way to break up the euro is for Germany, and other countries that want to remain in a German currency union, to switch to the Deutschmark. […] Since the mark is expected to appreciate, there’s no reason for a run on banks in advance of the switch.

    Wouldn’t we expect that the euro would depreciate upon the exit of its richest members? And so we might still see a run on Greek, Spanish, Portugese (etc. etc.) banks in advance of the exit of Germany and friends?

  2. Ernestine Gross
    July 28th, 2015 at 11:20 | #2

    @Matt

    Yes, Matt.

    Maybe the word ‘run on banks’ in Spain and Portugal is putting it a bit too strongly. Lets say, unusual and significant deposit outflows, enough for at least some banks to fail the ‘stress test’.

    We are talking hypotheticals here. Hopefully, the EUROzone members would agree to temporary capital controls before the event such that a Euro40billion deposit outflow from Greece (since Varoufakis left the gate open and then blames the ECB for closing it) during the 6 months to 13 July could be prevented.

  3. Nevil Kingston-Brown
    July 28th, 2015 at 11:38 | #3

    Depreciation of the rest of the Eurozone would be a good thing for their economies.

  4. John Quiggin
    July 28th, 2015 at 11:52 | #4

    @Matt

    The point is that it’s impossible to convert euros into DMs in advance of the (re)introduction of the DM. And euro liabilities don’t get converted to DM. So, the banks are solvent both before and after the switch.

    Of course, the euro would depreciate against external currencies, while the DM would appreciate, but that’s not a problem – we’ve seen plenty of currency depreciations before.

  5. July 28th, 2015 at 12:30 | #5

    @John Quiggin

    I question the banks being solvent after the switch.

    Whether if a ‘bank run’ will be triggered after the switch causing banks to go insolvent depends on the composition of the liability (deposits) on the bank’s balance sheet. If the composition of the deposit liability is majorly owed to average (or below) income earners and wealth holders then banks becoming insolvent is unlikely as most of the deposit holders are unlikely to exchange euro which they will still be using for day to day transactions to DM. If the composition of the deposit liability is majorly owed to high income earners and wealthy people, then they can exchange a large amount of deposits into DM anticipating for DM’s appreciation and Euro’s depreciation; which depending on the amount of deposit withdraws, can make banks become insolvent.

    Given the long period of depression which in most cases cause middle class or the poor to run down their savings and wealth, I highly suspect the latter rather than the former would be the case.

  6. Uncle Milton
    July 28th, 2015 at 12:34 | #6

    The French will never, ever let it happen. A one currency Europe suits the French very well. The French economy benefits from the strength of the Germans and the weakness of the southern Europeans. But if Europe was divided into strong and weak currency groups, economically, they would belong in the weak currency group. But politically, that would be a national humiliation like May 1940.

  7. Newtownian
    July 28th, 2015 at 12:34 | #7

    Three thoughts arise here.

    Firstly what would have happenned if the Pound had also been incorporated given the Pound is not just about Britain but is traded enormously and is linked to who knows how many off-shore fiefdoms of capital? An even bigger mess no doubt so the UK staying out was indeed a good idea even if it benefitted the City which doesnt seem a great idea.

    “Economically, the euro has been a disaster, producing a deep depression in most of Europe and not even doing much for Germany.”

    I have seen many claim that German exports benefit greatly from the depressed exchange rate. But conversely having the rest of Europe depressed means they cant sell as much locally because people dont have the money to buy. I wonder about where the balance lies here.

    Finally whither Greece now? The solution doesnt seem to have solved anything but just kicked the can down the road again for another six months before it finally breaks.

  8. Ikonoclast
    July 28th, 2015 at 12:34 | #8

    JQ, I agree with your asterisk points. In fact, I am in furious agreement with these asterisk points. It is always good is it not, to begin a dialogue by first agreeing on the common ground before coming to issues possibly in contention?

    To get on to the possibly contentious issues, why do you say this?

    “One point made clear by the Greek disaster is that the mechanics of exit from a currency union are feasible only if the new (or, in this case, revived) currency is stronger than the old one.”

    Could you expand on the reasoning that leads you to this statement? In context, the words “feasible only” almost seem to suggest that you are saying exiting a currency union for a (very likely) weaker currency is impossible. I am not sure if you mean politically impossible or economically impossible (or both combined).

    I wonder if you think Roger Bootle’s 2012 paper, “Leaving the Euro: A Practical Guide” covers or does not cover the basic relevant legal, political, financial and technical issues of leaving the Euro.

    I wonder why you think that the very likely devaluation which would follow a Euro exit and a “New Drachma” would be an insuperable obstacle? Are there not benefits in devaluation for a weak economy? Also, would you consider stratagems (some or all) such as debt default, floating currency (obviously), capital controls (for a time), nationalisations and confiscation of wealth of rich (and likely corrupt) oligarchs as viable or not viable?

    The stratagems above are precisely the ones I would vote and agitate for if I was a citizen of Greece.

    You say;

    “Economically, the euro has been a disaster, producing a deep depression in most of Europe and not even doing much for Germany. It’s an open question whether this was an inevitable consequence of a common currency, or the result of ECB mismanagement in the crucial years after the crisis…”

    I think both factors contributed. The Euro and the technocratic-neoliberal rules surrounding it put the Eurozone in a kind of financial straight-jacket which became a manifest constriction on policy options once the GFC or Global Recession hit. The Eurozone is not an OCA (Optimum Currency Area) and it does not have a fully Federal structure which permits true federations of states like Australia or the USA to make the necessary horizontal and vertical fiscal transfers (at least in theory and partly in practice if they do not always do that adequately).

    Perhaps it’s high time orthodox economists paid a little more attention to unorthodox economists like Bill Mitchell and Steve Keen. Their predictions about the GFC (about its happening, not its timing) and about the “designed-in” or “programmed in” inevitability of failure of the Eurozone now look like very good predictions. Perhaps some of their theories are right as they are starting to show some predictive power.

    It’s getting harder and harder to shrug off this empirical evidence with the same old appeals to dogma and orthodoxy.

  9. hc
    July 28th, 2015 at 13:08 | #9

    I thought Germany did well out of the Euro because its currency unit is depreciated by the inclusion of other countries such as Greece, Italty and Spain.

  10. John Quiggin
    July 28th, 2015 at 13:51 | #10

    @hc

    Germany does relatively well, for this reason, but that’s offset by the negative effects of fiscal austerity and ECB monetary policy. So, its overall economic performance has been mediocre at best.

  11. John Quiggin
    July 28th, 2015 at 13:54 | #11

    @Ikonoclast

    I saw the announcement of the Wolfson contest, but missed the award of the prize to Bootle. I’ll read with interest.

  12. Ernestine Gross
    July 28th, 2015 at 14:29 | #12

    @John Quiggin

    Given the hypothetical situation of the current Eurozone being split into DM-zone and a Resteuro-zone, a date has to be announced, say t*. You are perfectly correct in saying at times t*-1, t*-2, …..t*-k Euros cannot be exchanged for DM, only as at date t*. But this is neither the beginning nor the end of the process.

    1. Consider multinational firms with accounts in a future Resteuro-zone and in a future DM-zone. There is nothing to prevent these firms to drain their accounts and borrow in the Resteuro-zone and transfer the total to their account in a future DM-zone. After the conversion, and assuming as you seem to assume too, the DM will appreciate relative to the Resteuro. The loans in the now Resteurozone are repaid at a time of their choosing and at a profit.

    2. Any positive net wealth person or agency can do the same as a multinational. (Given current interest rates on bank deposits – approximately zero – withholding tax is effectively zero).

    3. Bank deposits are not the only place (type of financial security) to park speculative funds. There are Bunds (German government bonds), there are shares, there is real estate, there are pre-payments.

    4. There are several time zones to be considered.

    5. How the dynamic would work out is difficult to know. However, ruling out banks in the Resteuro-zone not becoming stressed if not worse is something I wouldn’t bet my money on.

    In the early 1970s when the convertibility of the US Dollar into gold ceased, the US Dollar was not convertible into DM for several days and special capital controls were put in place. This was at a time when the international financial system was not as integrated and as easily accessible to almost everybody in the EU, the USA, Japan, Australia, Canada, Switzerland, Singapore, Hong Kong as now.

    Euro40billion have been withdrawn from Greek deposits during the past 6 months. Of these about Euro9billion were withdrawn shortly before the end negotiations. An emergency bridging financial facility of about the same amount was then requested.

  13. Peter Chapman
    July 28th, 2015 at 16:31 | #13

    When you write that “the euro has failed”, are you not actually saying that the political management of the euro and the eurozone has “failed”? The discussion of economic policy here seems mainly technical, and objections are raised in large part because the realities of politics in Europe lead in different directions. The shared currency has not been matched by a shared political commitment. What has failed is not the currency, but a shared “vision” of (and we should say shared understanding and politically practical plan for the management of) Europe as a common political and social community. Instead we have seen Europe purely as an economic zone, which has come to be managed by technocrats (of a certain tendency, and dominated by financial capital) who claim expertise in economic management, but without accounting for political forces, the exercise of power, the social consequences of policy, etc. Often enough we might observe that our political leaders could benefit from having done Economics 101, but we might equally expect that our economists have done some Politics 101.

  14. Uncle Milton
    July 28th, 2015 at 17:13 | #14

    @John Quiggin

    its overall economic performance has been mediocre at best.

    The German unemployment rate is 4.7%, and has been trending down for 10 years.(Compare to France 10.6%, Italy 12.4%.) At the start of the euro, German unemployment was nudging 12%.

    http://www.tradingeconomics.com/germany/unemployment-rate

    Germany has done very well out of the euro. It’s a beggar-thy-neighbour racket run for the benefit of German mercantilism.

  15. rog
    July 28th, 2015 at 18:37 | #15

    @Peter Chapman I think that the failure of the euro is in part due to the euro not failing – despite the best efforts of supporters and detractors the euro is still holding value.

    The $US also went for (what seems to have been) a long time where it was judged to be worthless.

  16. Jordan from Croatia
    July 28th, 2015 at 20:35 | #16

    Position of Germany in EU is that of an empire and its allies over its colonies. An empire needs resources and the most important resource today is labor, as cheap as possible. Germany is declining nonEU imigrants like from Midlle east and accepting southern and Baltic nationals.

    Asking of Germany to exit EU is akin to asking UK to exit India or South Africa.

    Isn’t it much easier to change the ECB to become a real Central Bank and solve EU and EZ issues?

  17. Tom Davies
    July 28th, 2015 at 21:44 | #17

    John, if you are (say) a Spaniard who expects Germany to leave the Euro, can’t you withdraw your Euros from your Spanish bank account, put them in a German bank account where they will be converted to New DM, and then move them back to Euros after the DM appreciates?

    Hence deposit outflows from non-German banks?

  18. Uncle Milton
    July 28th, 2015 at 22:27 | #18

    @Tom Davies

    Exactly right.

    The only way to (attempt to) stop this kind of thing is with capital controls.

  19. Tom Davies
    July 28th, 2015 at 23:02 | #19

    @Uncle Milton Or is John saying that there is no conversion to the DM — that your existing deposits stay in Euros, but all your transactions after the cutover are in DM, so your next paycheck and next grocery bill are in DM, and you get a DM bank account alongside your Euro account?

  20. rog
    July 29th, 2015 at 04:14 | #20

    How much of anti German sentiment is based on envy? Post GFC German companies have done well, better than other comparable nations, as has their employment and economic situation. A lot has to be said for codetermination, a regulated system where labour and capital work to a common purpose.

  21. rog
  22. John Quiggin
    July 29th, 2015 at 07:40 | #22

    @Tom Davies

    That’s exactly what I’m saying

  23. Uncle Milton
    July 29th, 2015 at 09:19 | #23

    @John Quiggin

    What’s to stop a bank offering a new DM account to a Spaniard after it is official that the new DM will exist in the future but before the new DM does exist? It could be a cyber currency, like bitcoin.

  24. Tom Davies
    July 29th, 2015 at 09:37 | #24

    @Uncle Milton The bank will have a liability in ‘future DMs’. It will need to buy real DMs at some point, with the Euros the Spaniard gave it, at whatever exchange rate it can get. I don’t see any arbitrage here — the bank will need to hedge with a DM futures contract which will cost a lot more than 1:1, if devaluation of the Euro with respect to the DM is expected.

  25. Tom Davies
    July 29th, 2015 at 09:38 | #25

    @Uncle Milton P.S. If the account is denominated in bitcoin, it isn’t a DM account, is it?

  26. Uncle Milton
    July 29th, 2015 at 09:54 | #26

    @Tom Davies

    I meant new DM (until the real new DMs exist) could be a cyber currency, like bitcoin is a cyber currency.

  27. John Quiggin
    July 29th, 2015 at 13:42 | #27

    @Uncle Milton

    Nothing stops this. But so what? There’s no reason for the Spaniard to bet on, or against, the DM relative to the futures price.

    The big problem is a shift in which existing euro accounts are converted to pesetas on D-Day.

  28. Richard
    July 29th, 2015 at 14:25 | #28

    Why are German cars so cheap ? Now Volkswagen is the world’s largest car maker. I can’t help but think that this German ‘success’ has more to do with the Euro than genetic superiority, and is built on the pain and suffering of southern Europe.

  29. Collin Street
    July 29th, 2015 at 16:02 | #29

    > The only way to (attempt to) stop this kind of thing is with capital controls.

    The idea that obligations owed to you in valencia must be tradable at par in Malmo is, bluntly, just silly. “International capital mobility”, stripped of the reifications, is a pretty way-out concept and, honestly, not one I can support.

  30. Ernestine Gross
    July 29th, 2015 at 16:20 | #30

    Whatever happened to the argument that the financialisation of ‘the economy’ (so-called financial capitalism) is a problem?

    The Telegraph article, linked to by JQ and linked to again below, bears the heading “Why its time for Germany to leave the Eurozone”. The authors of the article argue that “Germany’s trade surplus is the biggest thread to the euro” and they provide a set of graphs showing the behaviour of the trade surplus of various countries.

    http://www.telegraph.co.uk/finance/economics/11752954/Why-its-time-for-Germany-to-leave-the-eurozone.html

    It seems to me the articule encourages the reader to jump to the conclusion that ‘Germany’ is ‘the creditor’ to ‘countries’ which experience financial distress and this, in some mysterious way, is going to ‘threaten the euro’.

    But the data on external debt does not support the idea that ‘Germany’ is ‘the creditor’ (ie the issuer of financial securities). If ‘Germany’ would be ‘the creditor’ (in the financial sense) than its external debt should be negative.

    As can be seen from data recorded on the following web-site (scroll down until you find data on external debt), there are only two countries which have negative external debt (ie ‘the creditor’ in the world of finance). These are the U.K. and the USA.

    http://www.tradingeconomics.com/italy/external-debt

    What happened to the argument that debt (private and public) are a road to serfdom?

    Where are the centres of ‘financialisation’? In Brussel or in N.Y. and ‘The City’?

  31. Ernestine Gross
    July 29th, 2015 at 16:24 | #31

    My post with two links is in moderation. I’ll re-submit in 2 parts.

    Whatever happened to the argument that the financialisation of ‘the economy’ (so-called financial capitalism) is a problem?

    The Telegraph article, linked to by JQ and linked to again below, bears the heading “Why its time for Germany to leave the Eurozone”. The authors of the article argue that “Germany’s trade surplus is the biggest thread to the euro” and they provide a set of graphs showing the behaviour of the trade surplus of various countries.

    http://www.telegraph.co.uk/finance/economics/11752954/Why-its-time-for-Germany-to-leave-the-eurozone.html

  32. Ernestine Gross
    July 29th, 2015 at 16:25 | #32

    continued

    It seems to me the article encourages the reader to jump to the conclusion that ‘Germany’ is ‘the creditor’ to ‘countries’ which experience financial distress and this, in some mysterious way, is going to ‘threaten the euro’.

    But the data on external debt does not support the idea that ‘Germany’ is ‘the creditor’ (ie the issuer of financial securities). If ‘Germany’ would be ‘the creditor’ (in the financial sense) than its external debt should be negative.

    As can be seen from data recorded on the following web-site (scroll down until you find data on external debt), there are only two countries which have negative external debt (ie ‘the creditor’ in the world of finance). These are the U.K. and the USA.

    http://www.tradingeconomics.com/italy/external-debt

    What happened to the argument that debt (private and public) are a road to serfdom?

    Where are the centres of ‘financialisation’? In Brussel or in N.Y. and ‘The City’?

  33. ZM
    July 29th, 2015 at 18:05 | #33

    “* The euro has failed in the aim of creating an Europe-wide currency union. The countries still outside are counting their blessings, and will almost certainly never join.”

    I think that rather than giving up on the Europe-wide currency union due to current problems, they should try to solve the problems.

    This is because to my mind the EU and the Euro-zone is the only practical example for how a global political federation and global currency could work. Unlike the examples of the US or Australia, the EU and Euro-zone example is suitable due to consisting of countries with very distinct cultures and languages, and which have often gone to war.

    These reasons also mean that the EU and the Eurozone are more difficult to make work than, say, out own Federation where the States and Territories have their differences but not as distinct. So I think it would be better to look for solutions to the current problems, as this would serve as a practical example for greater global co-operation and integration. I think probably to make the Euro-zone work solutions are going to be found in greater rather than lesser political and economic integration.

  34. NM
    July 29th, 2015 at 18:33 | #34

    If Germany left the Euro, don’t you think that the entire ‘German bloc’ (Netherlands, Estonia, Finland, Latvia, Lithuania, Luxembourg, Slovakia, Slovenia, Austria) plus possibly Ireland and Belgium would leave immediately as well? As I’ve pointed out before on CT in reply to your posts on Euro-matters, whatever you may think to the German approach to economics, it is actually popular in large parts of Europe.

  35. Ernestine Gross
    July 29th, 2015 at 19:05 | #35

    @Richard

    VW has evolved into a rather large multinational company, employing at least 370 000 people in 17 European countries, in Brasil and in Asia.

    My data source may be a little dated because 2013 is the last year in the data set in which a plant has been opened and VW is not listed as the world’s largest car manufacturer. I believe the data is good enough to provide an insight as to how the ‘global economy’ and multinationals within it is evolving.

    https://en.wikipedia.org/wiki/List_of_Volkswagen_Group_factories

  36. Megan
    July 29th, 2015 at 19:29 | #36

    “Automatic Earth” has been following and discussing Greece quite closely and has an interesting piece today:

    http://www.theautomaticearth.com/2015/07/what-happens-when-economists-talk-politics/

    It boils down to: This is not an economic problem, it’s a political one.

    Which at first seems a bit weird, but I get the point:

    See what the real intentions are amongst those that have real power, and only after that, have staff, like economists and lawyers, discuss specifics and fill in details.

    The problem for Tsipras is that he doesn’t seem to have dealt with it that way, folding 100% and throwing Greek sovereignty under the bus to play along with the neo-liberal rulers of the world.

  37. Ikonoclast
    July 29th, 2015 at 19:53 | #37

    @Ernestine Gross

    You have stated: “As can be seen from data recorded on the following web-site (scroll down until you find data on external debt), there are only two countries which have negative external debt (ie ‘the creditor’ in the world of finance). These are the U.K. and the USA.”

    You are totally incorrect in your conclusions as you are not looking at the figures directly relevant to this debate.The figure that matters in this context is the net international investment position (NIIP) of each country.

    “The difference between a country’s external financial assets and liabilities is its net international investment position (NIIP). A country’s external debt includes both its government debt and private debt, and similarly its public and privately held (by its legal residents) external assets are also taken into account when calculating its NIIP.” – Wikipedia.

    “A country’s international investment position (IIP) is a financial statement setting out the value and composition of that country’s external financial assets and liabilities. A positive NIIP value indicates a nation is a creditor nation, while a negative value indicates it is a debtor nation. The USA, as recently as 1960 the world’s largest creditor, has now become the world’s largest debtor, and since the 1980s, Japan has replaced USA as the world’s largest creditor nation.” – Wikipedia.

    If you find this table in Wikipedia “Net International Investment Position in absolute terms; OECD Countries, 2013” then you find as of 2103;

    1. The USA was the largest DEBTOR nation with US$ – 5.382000997 Trillions. The minus sign means “in debt”.

    2. Spain was the second largest debtor with US$ -1.389621918 Trillions.

    3. Australia was third largest debtor!!! with US$ -743,491.296 Billions.

    4. Italy was fourth largest debtor with US$ -643,874.027 Billions.

    5. Mexico was fifth largest debtor with US$ -433,000.527 Billions.

    6. France was sixth largest debtor with US$ -433,000.527 Billions.

    At the end of the table;

    Germany was second largest creditor nation with US$ +1.660000721 Trillion owed to it.
    Japan was largest creditor nation with US$ 3.086000434 Trillion owed to it.

    Ernestine, you are diametrically wrong according to these figures. The NIIP is what counts.

    The scarey thing according to these figures is that Australia has to be totally stuffed if it ever repays all that net debt. One can probably predict from these numbers that a terrible collapse is due for the Australian economy IF the world financial system enforces all these debts as ruthlessly as it has dealt with Greece to date.

  38. Ernestine Gross
    July 29th, 2015 at 23:23 | #38

    @Ikonoclast

    The data I linked to pertains to external debt which is part of the total debt that is owed to creditors outside the country.

    The net international investment position (NIIP) includes equity investment (either shares or physical assets usually referred to as direct investment)

    While it would be misleading to say the financial affairs of a country are idential to that of a household or a corporation, it is equally misleading to say there is no comparison at all, given the current international financial system that drives ‘globalisation’ with multinational firms in the vanguard.

    When one talks about ‘a country’s NIIP’ one is talking about the net asset value recorded by the statistical office of a juristiction. Except for official purchases of foreign securities by say the monetary authority (‘official investment in a foreign country’) the assets are privately owned and controlled.

    It is possible ‘a country’ has a positive NIIP and the government of this country faces financial distress. This is the case if the government has sold debt securities to foreigners ( the government in question cannot tax the foreign owners of these securities and it cannot nationalise their assets) and its internal budget position (tax revenue – expenses) are insufficient to meet the debt obligation to foreigners. The opposite is also possible . Australia is a good example. The situation becomes a little more complex when government issued debt securities are internationally traded.

    Similarly, a corporation can have a positive net asset position (positive owners’ equity) and still go bankrupt. This is the case if the corporation cannot meet its debt repayment obligations and cannot ‘roll over’ the debt. That is, it cannot find buyers of newly issued debt securities (eg a bank loan or sell debt securities, previously known as debentures) and attempts to raise equity funds fail.

    Similarly, a household can have a positive net asset position and still be taken to the bankruptcy court if it cannot pay its bills.

    Now consider the case where the monetary authority of ‘a country’ bought junk securities from private banks which, without this ‘quantitative easing’ would have become bankrupt. Subsequently, these private banks have become profitable again. Banks can only be profitable if they sell loans (of various types) to anybody anywhere in ‘the global economy’.

    I do believe I am looking at meaningful data.

  39. Ernestine Gross
    July 29th, 2015 at 23:33 | #39

    @Richard

    My comment on your post is in moderation, apparently because I linked to a web-site.

    I wrote:

    VW has evolved into a rather large multinational company, employing at least 370 000 people in 17 European countries, in Brasil and in Asia.

    My data source may be a little dated because 2013 is the last year in the data set in which a plant has been opened and VW is not listed as the world’s largest car manufacturer. I believe the data is good enough to provide an insight as to how the ‘global economy’ and multinationals within it is evolving.

    You can google my data source by entering
    en.wikipedia.org/wiki/List_of_Volkswagen_Group_factories

  40. Ernestine Gross
    July 30th, 2015 at 01:40 | #40

    “Economically, the euro has been a disaster, producing a deep depression in most of Europe and not even doing much for Germany. It’s an open question whether this was an inevitable consequence of a common currency, or the result of ECB mismanagement in the crucial years after the crisis, but either way, this is a failed experiment.”

    To the extent that Grecce entered the Eurozone too early (ie without having introduced internal institutional reforms which even Paul Krugman says are essential), ‘the euro’ has turned into a disaster for Greece two years after the onset of the GFC. A private creditor debt write-off (EU banks, primarily the Deutsche Bank) of Euro100billion in 2012 was not enough to solve the problem.

    The “deep depression in most of Europe” is firstly a rather significant exaggeration of the actual state of affairs in ‘Europe’ (eg the UK is in Europe but not in the Eurozone) and second, the ‘deep depression’ (eg very high unemployment in Spain) is a direct result of the significant misallocation of resources created by the growth of private sector debt. To believe, as you seem to suggest, deficit financed government expenditure could result in the immediate re-employment of a significant number of excellent Spanish building and construction workers raises the question: What are they supposed to build? Building is the skill they have. This is what they do. There was demand for their skill when they took up the trade. Now there is little. There are still large numbers of rather beautiful but empty houses on the coast line around Bacelona and elsewhere, there are new highways with few cars, a partially constructed small airport in a tourist town has recently been sold for Euro 10,000 – removing the unfinished constructions is costly. And so forth.

    Several years before the GFC the ECB warned about the growing debt levels and the associated risks of financial distress. Who listened?

    As for “failed experiment”, I would say the attempt to achieve a Eurozone failure failed. Witness, Yanis Varoufakis as well as Tsipras confirming that they had no mandate from the Greek people to get Greece out of the Eurozone. Witness the USA proposal of the Transatlantic Trade and Investment Partnership agreement. A little more has transpired about this secretive agreement process. It is not only the investor protection clause with private dispute resolution processes that does not meet with approval of the EUC, there is worse. It has transpired that this agreement is conceived of as a “living agreement”, meaning a group of experts is supposed to write details which could affect social policies in various European countries after the agreement has been signed. According to news reports in the SZ, the UK (non-Eurozone), France and Germany have raised objections.

    It seems to me the evolution of the European project, imperfect and full of difficulties as it may be, is much more democratic and transparent than the TTIP thing.

    Finally, the financial ratio rules of the Eurozone, which seem to be a thorn in the eyes of Keynesians, are first of all public knowledge (in contrast to the TTIP rules to be written after the event). Furthermore, they do address the glaring problem of an unbounded financial system which evolved after the Bretton Woods system collapsed. This is not to say improvements aren’t to be negotiated by the Eurozone members.

    Incidentally, short term Keynesian crisis management has been practised by Germany (public works and all this) at the time of the GFC. The unemployment rate in Germany is currently 4.7%. I can see why financial middleman, traders of financial securities and banks would love the German government to issue more debt securities. But they don’t have to pay the interest.

    On the other hand, there is evidence of popular resistance to ‘neoliberalism’ all over Europe.

    .

  41. Ikonoclast
    July 30th, 2015 at 05:25 | #41

    @Ernestine Gross

    I still don’t understand the figures you linked to. They do not accord with other figures I have found. Do the figures you linked to measure total external debt or government external debt? Furthermore, are they gross or net of amounts owed the other way (i.e. back into each country)?

    When I look up the definition of external debt I get;

    “External debt, otherwise known as foreign debt, is the component of total debt held by creditors of foreign countries, i.e. non-residents of the debtor’s country.” – InvestingAnswers.

    “External debt (or foreign debt) is the total debt a country owes to foreign creditors. The debtors can be the government, corporations or citizens of that country. The debt includes money owed to private commercial banks, other governments, or international financial institutions such as the International Monetary Fund (IMF) and World Bank. Note that the use of gross liability figures greatly distorts the ratio for countries which contain major money centers such as the United Kingdom due to London’s role as a financial capital. Contrast net international investment position.” – Wikipedia.

    The list you linked to indeed shows the numbers you say but it does not accord with other lists I find. For example, in Wikipedia look up “List of countries by external debt”. (I won’t add a link as it will put this comment in moderation.) This list seems to show gross debt as the US is the biggest debtor and all nations listed are shown as debtors. There are no creditor nations in this list.

    So whilst this Wikipedia list of external debt is clearly a gross position, your list must show something else I assume? Question 1, is it a net position? Question 2, is it a public sector position, a private sector position or both?

    At this stage, I think I would have to hold to the line that net international investment position (NIIP) is what counts and what affects international finance overall. In particular, it is what affects domestic politics, as Germany and the German people with a positive NIIP are creditors and want their investments back. This to my mind explains the “no haircuts” call from certain parties.

  42. Jordan from Croatia
    July 30th, 2015 at 05:39 | #42

    Euro has been a succes and it still is marginally. Most of the south is still in better shape then before entering EZ. Unemployment is still better in countries then before Itally, Germany, Portugal, Ireland, east europeans entered EZ. Only greece and Spain have worse unemployment rate now then before accepting euro..
    In actuality, being in Europe alone did improve employment after the birth of euro. Irational exuberance ruled over europe due to the birth of euro that was a beacon of hope for united Europe. This improvement in standards and employment probably does not have any other connection to euro but psychological that overcame years of melancholy in Europe.

    This is why Greeks refuse to abandon euro no matter future problems but still tying past years of growing prosperity with existence of euro.
    Euro should stay, not only because of sense of unity among Europeans but alao because is the great attempt to unite an area of diffeering nations by peacefull means, not as it was the historic rule by wars as it was the case with every country in Europe.

    I still argue that it is easier to save euro by changing stupid 3% defict rule and making ECB a real central bank that is freeing up nations budgets from guaranteeing private bank debts which is where problems started. Taking on bank’s debts onto nation expense is where problems started. If EU have had bankruptcy provisions for defaulted loans as it was the case in US before 2005 this problem of national debts would be much smalller.

  43. rog
    July 30th, 2015 at 07:41 | #43

    @Ikonoclast There seems to be some confusion between gross and net debt.

    The Maastricht Treaty requires that member states limit debt to 60% of GDP and budget deficits no greater than 3% of GDP. There is no room for stimulus, bailouts of temporary stress or automatic stabilisers. Politics has been overruled by bankers.

  44. John Quiggin
    July 30th, 2015 at 08:36 | #44

    @rog

    1.5 per cent growth is “enviable” only by the miserable standards of recent eurozone performance. And it’s only been achieved by an exchange rate policy that guarantees depression in most of Europe.

  45. Ikonoclast
    July 30th, 2015 at 09:09 | #45

    @John Quiggin

    Agreed, but it is not only the exchange rate policy. We must re-iterate that the austerity policy has a lot to do with it too.

  46. Stockingrate
    July 30th, 2015 at 12:02 | #46

    @John Quiggin
    I envy it. Germany’s population is not growing so per capita 1.5% is equivalent to about 3.4% pa if population was growing at Australia’s rate (using 1.9%pa for Australian pop growth). More of the growth will translate into income -assuming more of the domestic economy is owned by Germans. Less of the growth is based on short term stimulus of selling mortgaging and PPPing assets to foreigners. Their export economy should benefit from action on renewables given their electrical and wind expertise and the substantial energy transformation already undertaken- bit different from Qld and Australia. El Nino should not hit them as hard as it might Australia. Their leadership seems to be less complacent and self-absorbed than ours. They are not damaging their environment with pop growth. Finally, and reflecting these things, the future DM looks strong and and the AUD weak, so give it a few years and their per capita GDP (in some foreign currency basket, from first half 2015) might have grown remarkably against Australia’s, despite the shocks of a future DM strengthening, and the severe globalisation pressures in manufacturing.

  47. Ikonoclast
    July 30th, 2015 at 12:37 | #47

    I don’t envy Germany. They are busily making themselves lots of enemies unlike Australia… Doh! We are making more enemies than Germany and we are much weaker. Not a smart move.

  48. Uncle Milton
    July 30th, 2015 at 12:43 | #48

    @John Quiggin

    most of Europe.

    Who is in depression besides Greece and Spain?

  49. rog
    July 30th, 2015 at 12:43 | #49

    If Germany left the eurozone the remainder would still be stuck with the terms of the treaty. They need to revisit the treaty and apply the principles of codetermination in reviewing those terms (IMHO of course).

  50. Troy Prideaux
    July 30th, 2015 at 13:47 | #50

    @Stockingrate
    Agree with everything you said. I also envy Germany but I wouldn’t be so worried about the future pressures on their manufacturing. They strongly support manufacturing which provides a strong base for high tech manufacturing. The world (especially China) loves German cars for their quality. The smartphone manufacturers need the bleeding-edge-state-of-the-art ICs the Germans and Koreans make to provide the most important (and expensive) components of such devices. They’re a lot smarter than us with industry and trade governance.

  51. Ikonoclast
    July 30th, 2015 at 16:05 | #51

    I have a question related to this topic. It is about debt and Australia’s Net International Investment Position (NIIP).

    In this table in Wikipedia “Net International Investment Position in absolute terms; OECD Countries, 2013? you find as of 2103;

    1. The USA was the largest DEBTOR nation with US$ – 5.382000997 Trillions.

    2. Spain was the second largest debtor with US$ -1.389621918 Trillions.

    3. Australia was third largest debtor!!! with US$ -743,491.296 Billions.

    4. Italy was fourth largest debtor with US$ -643,874.027 Billions.

    5. Mexico was fifth largest debtor with US$ -433,000.527 Billions.

    6. France was sixth largest debtor with US$ -433,000.527 Billions.

    and so on.

    This looks bad for Australia, however probably more relevant is the figure NIIP as a percentage of GDP. A table of this can be found at;

    https://en.wikipedia.org/wiki/Net_international_investment_position

    On this table Cyrpus is worst and Greece second worst. There are no surprises there. Australia comes in at 12th worst with a NIIP that is 64.3% of GDP.

    Now for the question. Is this of concern? Is it sustainable and payable? What does it mean for Australia’s economy? Have we built the productive infrastructure to help pay these debts or have we used the borrowings (which must be paid back) to fuel assets bubbles like our housing bubble?

    Bear in mind a country in the negative is paying “rents” (in the rentier sense) to the rest of the world. A country in the positives is receiving rents.

    When you look back at the positives in absolute terms in US dollars (the other table of Net International Investment Position in absolute terms; OECD Countries, 2013), Japan is receiving the greatest absolute rents from other countries and Germany the second greatest. The great rentier nations currently are Japan and Germany. Relative to their small size, Switzerland, Norway, Netherlands and Belgium are also great rentier nations. It gets curiouser and curiouser does it not?

  52. Megan
    July 30th, 2015 at 16:05 | #52

    @Troy Prideaux

    Although BMWs are absolute rubbish these days (at least the ones in Australia are – always breaking down and cost a fortune to fix and service).

  53. Ikonoclast
    July 30th, 2015 at 16:09 | #53

    Correction to a sentence in the above. I should have written;

    “Australia comes in at 12th worst with a NIIP that is -64.3% of GDP.”

    Note: The minus means Australia is in a net debt position.

  54. Ikonoclast
    July 30th, 2015 at 17:42 | #54

    @Megan

    I wouldn’t know Megan, I can’t afford a BMW. I have a 2006 Mazda 3 I bought second-hand. Actually, Mazda cars of that era are very reliable in my experience but then I don’t do a lot of kilometers.

  55. Stockingrate
    July 30th, 2015 at 18:20 | #55

    @Ikonoclast
    Yes it is of concern. It is payable with pain. It means bad things for the economy. Productive infra? -to support more people eg utilities, and to support extraction, not infra that will earn exports outside of tourism and resources.

  56. Ikonoclast
    July 30th, 2015 at 19:14 | #56

    @Stockingrate

    I should have said “productive industries and infrastructure”. That would have been a more accurate description of how we needed to spend the borrowed money. But if we have just borrowed to fuel an asset price boom on relatively unproductive housing (it does produce domestic housing services) then I think we are in trouble when the bubble bursts.

  57. rog
    July 30th, 2015 at 19:15 | #57

    I suppose you could say that the EMU has been a disaster but compared to what? The U.S. achieved Union after massive slaughter and the Russian led Union fell apart, despite a similar slaughter. The UK are now getting cold feet over a deeper union with Europe but their own experience has not been exactly plain sailing.

  58. Jordan from Croatia
    July 30th, 2015 at 19:18 | #58

    Ikonoclast
    Creditors also have a responsibility to keep crediting debtors, this is the nature of international finance. Look at the greek debt, why they keep refinancing and loaning evermore to Greece?
    Nothing is black and white regarding NIIP position.

    Total amount of NIIP is irelevant to a national economy, what matter is a political standing of a country, is it politically with allies that credit it? They will keep crediting a debtor country without economic questioning. Greece elected an openly leftist party and it had to be crushed. Ukraine is in much much worse financial position then Greece but got credited, no questions asked as long as they fight their “enemy” Putin.

  59. Jordan from Croatia
    July 30th, 2015 at 19:38 | #59

    @Stockingrate
    “Yes it is of concern. It is payable with pain.”
    That is why no country ever does it. Can you find a country that ever lowered its nominal debt? No country can do it but by defaulting.
    It is quite impossible for a country to lower its nominal debt, so no country even attempts to do it except if creditors decide to destroy a country in order to control it and then openly colonise it.

    The nature of agregate debt is to keep growing. Agregate private debt has to grow, agregate public debt has to grow. If one side stops growing then other one has to pick up a slack, otherwise an economy will enter recession. If both sides, private and public debt stop growing, economy is in depression.

    Old debts can be payed off only with new debts or liquidity will dry up. It is why Moses ordered debt jubilees every 7 years 5000 years ago. He learned it from egiptians where he was educated.
    And it is the reason Gold Standard was abandoned.

  60. Jordan from Croatia
    July 30th, 2015 at 19:51 | #60

    @Ikonoclast
    I think that your definition of a bubble using productive and “unproductive” use is a side issue. A bubble is when debt grows but income that is used to service the debt does not grow. What debt is used for is irelevant, but supporting income has to grow and the bubble will not be visible.

    You going into debt to pay for housing, or for you kids wedding or gambling loses is irrelevant as long as your income is growing. You will pay off your debt. If you keep taking more debt and your income is flat, you will enter a bubble that will burst. It is mathematics. Uses for debt are irelevant.

  61. Ernestine Gross
    July 30th, 2015 at 20:37 | #61

    “Can you find a country that ever lowered its nominal debt? ”

    Yes. Consult readily available data bases.

  62. Stockingrate
    July 30th, 2015 at 21:25 | #62

    @Ikonoclast
    You were clear. I agree we have borrowed etc to boost housing, and also for infra to support a larger population (but a larger pop is a net negative for per per capita wealth), and to live too well. Outside of tourism and extractive industries and maybe ag, I cannot think of a large profitable productive and internationally competitive industry sector we have substantially increased investment in- not cars at any rate, maybe “education” but that is has a substantial visa sale/pop growth component.

  63. Ikonoclast
    July 31st, 2015 at 01:00 | #63

    @Ernestine Gross

    I do think the Net International Investment Position (NIIP) matters. Precisely how it matters and how much it matters, I am not certain in detail, so I am hoping a trained economist will tell me.

    The Europa (European Commission) site states;

    “The Net International Investment Position (NIIP) is the stock of external assets minus the stock of external liabilities. In other words it is the value of foreign assets owned by private and public sector of a country minus the value of domestic assets owned by foreigners. NIIP is usually expressed in relation to an economy’s size – NIIP to GDP ratio.”

    It further states;

    “NIIP is a sum of past current account deficits or surpluses adjusted for regular valuation changes, i.e.:

    – the non-performing debt sometimes needs to be written off;
    – the value of equity (stocks) is revalued upwards or downwards depending on the
    performance of individual stocks on the stock market;
    – valuation is also affected by changes in an exchange rate between domestic and foreign
    currencies.

    Financial investors use NIIP to GDP ratio to gauge the creditworthiness of a country. The more negative the NIIP to GDP, the more country becomes vulnerable to volatility in international financial markets. Many countries that accumulated a large negative NIIP in the run-up to the crisis lost access to financial markets when the crisis struck and needed to accept international financial assistance to cover the deficit in their budgets.”

    Here is a link to the page I am looking at;

    http://ec.europa.eu/economy_finance/graphs/2014-12-08_net_international_investment_position_en.htm

    The graph on the page is worth looking at.

    It is clear the European Commission is concerned by the countries with large negative positions. They say: ” To reduce the NIIP to safer levels over the next decade, moderate to relatively large surpluses is necessary are all these countries.” (sic).

    It seems clear to me, from the context, that they are talking about current account surpluses not government budget surpluses though these might be involved too. Am I right in thinking that?

    Also they say;

    “However, a mere stabilisation of external indebtedness may not be enough to restore full confidence, in particular for countries where the large NIIPs essentially reflect high level of debt (as opposed to countries where large negative NIIP is driven by significant inflows of FDIs).”

    What is FDI? Is it Foreign Direct Investment? Why is it not considered so much of a concern? My guess is that it at least drives wages and production in the country concerned. As opposed to borrowing to buy imports or borrowing to create a domestic asset bubble. The issue of assets bubbles continues to come to my mind when I think about contemporary Australia. Our house prices for example are absurd IMO and I believe are out of kilter with fundamentals like average household income.

  64. Ikonoclast
    July 31st, 2015 at 01:02 | #64

    I have a comment in moderation. Please oh please can a reply to someone in this blog not count as a link?

  65. Ikonoclast
    July 31st, 2015 at 07:37 | #65

    Blow it, I will re-post without linking it as a reply to anyone.

    I do think the Net International Investment Position (NIIP) matters. Precisely how it matters and how much it matters, I am not certain in detail, so I am hoping a trained economist will tell me.

    The Europa (European Commission) site states;

    “The Net International Investment Position (NIIP) is the stock of external assets minus the stock of external liabilities. In other words it is the value of foreign assets owned by private and public sector of a country minus the value of domestic assets owned by foreigners. NIIP is usually expressed in relation to an economy’s size – NIIP to GDP ratio.”

    It further states;

    “NIIP is a sum of past current account deficits or surpluses adjusted for regular valuation changes, i.e.:

    – the non-performing debt sometimes needs to be written off;
    – the value of equity (stocks) is revalued upwards or downwards depending on the
    performance of individual stocks on the stock market;
    – valuation is also affected by changes in an exchange rate between domestic and foreign
    currencies.

    Financial investors use NIIP to GDP ratio to gauge the creditworthiness of a country. The more negative the NIIP to GDP, the more country becomes vulnerable to volatility in international financial markets. Many countries that accumulated a large negative NIIP in the run-up to the crisis lost access to financial markets when the crisis struck and needed to accept international financial assistance to cover the deficit in their budgets.”

    Here is a link to the page I am looking at;

    http://ec.europa.eu/economy_finance/graphs/2014-12-08_net_international_investment_position_en.htm

    The graph on the page is worth looking at.

    It is clear the European Commission is concerned by the countries with large negative positions. They say: ” To reduce the NIIP to safer levels over the next decade, moderate to relatively large surpluses is necessary are all these countries.” (sic).

    It seems clear to me, from the context, that they are talking about current account surpluses not government budget surpluses though these might be involved too. Am I right in thinking that?

    Also they say;

    “However, a mere stabilisation of external indebtedness may not be enough to restore full confidence, in particular for countries where the large NIIPs essentially reflect high level of debt (as opposed to countries where large negative NIIP is driven by significant inflows of FDIs).”

    What is FDI? Is it Foreign Direct Investment? Why is it not considered so much of a concern? My guess as a non-economist is that it at least drives wages and production in the country concerned. This is as opposed to borrowing to buy imports or borrowing to create a domestic asset bubble. The issue of assets bubbles continues to surface in my mind when I think about contemporary Australia. Our house prices, for example,,are absurdly high. I believe they are much out of line with fundamentals like average household income.

  66. Ikonoclast
    July 31st, 2015 at 07:44 | #66

    Correction to the above: The fundamental in this case would be median household income not average household income.

  67. Ikonoclast
    July 31st, 2015 at 08:08 | #67

    At the risk of over-posting, here is Australia’s NIIP as per the ABS.

    http://www.abs.gov.au/ausstats/[email protected]/mf/5302.0

    This looks decidedly unhealthy. Neither major party talks about Australia’s foreign debt any more. That is interesting. They used to argue with each other all the time about it. Now, one hears nary a peep about it. It’s probably because it is so bad and they might have to admit our asset bubbles and high household debt have something to do with it.

    Now, they just argue about the government budget surplus or deficit. A budget surplus might help the NIIP a little but not if the policy settings encourage excessive private borrowing overseas. And a government budget surplus might even damage the NIIP position as people borrow overseas to make up the shortfall of government spending. Governments with a fiat currency can run deficits up to a point IMO without borrowing. That is to say, they can “print money”. Printing money could help I believe if there is capacity under-utilisation and until bottlenecks in the economy come into effect. I don’t support wild money printing but we could try more deficit budgeting and tolerate a little more basket inflation and a lot less asset inflation.

  68. hix
    July 31st, 2015 at 10:53 | #68

    @Richard

    At least my genes are capable of figuring out that German cars are expensive.

  69. hix
    July 31st, 2015 at 11:12 | #69

    @Ernestine Gross

    Arround 600k right now. Much to the despair of economists who insist VW should be more like Toyota and outsource at least 300k of those (flexibility! Cost savings!).

    Anyway, unfitting for the thread a little excourse in semi-seriousness. VWs art is product differentiation. They got those cars that are bascially the same they sell as Audis, VWs and Skodas. Also, their main brand VW is positioned significantly above your run-the-mill massmarket car.

    Thats not a personal value judgment, i drive a small Honda.

  70. Collin Street
    July 31st, 2015 at 11:22 | #70

    Ikon:
    Please oh please can a reply to someone in this blog not count as a link?

    Just do it like this; if people want the ref they can ctrl-F for it.

  71. Jordan from Croatia
    July 31st, 2015 at 16:45 | #71

    Ernestine Gross
    It is obvious that saying an absolute like i used it is absolutly incorrect.but it is also obvious that you did not consult “readilly available data”. Historic nominal debts vary from site to site and you can find one year or two of lower nominal debt then previous years and then soon it shoots up back above. Governments refuse the pain that lowering nominal debt creates and go back to trend of everincreasing nominal debt.

  72. Ernestine Gross
    July 31st, 2015 at 19:00 | #72

    Jordan from Croatia,

    In short, the answer I gave to your first question is correct.

  73. Ernestine Gross
    July 31st, 2015 at 21:58 | #73

    @Ikonoclast

    Lets take it in steps, starting with your clear question on what is DFI (direct foreign investment).

    In terms of the national accounts, foreign investment involves 2 broad categories: Direct foreign investment and portfolio investment.

    Direct foreign investment in country A involves non-residents of country A buying existing physical assets or the right to build phyisical assets on land, either bought or leased, in country A. For example, if a foreign corporation buys an existing Australian corporation then this transaction is recorded as a decrease in NIIP for Australia, assuming nothing else is happening during the same accounting period.

    Foreign portfolio investment involves non-residents of country A buying financial securities issued by residents (registered organisation) in country A. Financial securities are shares, which may or may not be traded on a stock exchange, bonds issued by private or public sector organisations, various types of bank deposits (eg term deposits, cash accounts, savings accounts), and hybrids (eg combinations of debt and equity). (We’ll set aside derivatives because they don’t fit into the balance sheet model of money). For example, if an Australian superfund acquires shares or bonds or both issued outside Australia then the NIIP of Australia increases, assuming nothing else is changing during the accounting period.

    So we are talking about the transfer of ownership of physical and financial ‘assets’ between non-residents and residents of ‘country A’. A negative NIIP for country A says that foreigners have a higher ownership share of country A’s monetary transactions, as measured in GDP, then the residents of country A have in the rest of the world’s GDP. By implication, foreigners have a relatively higher share to the returns from their investments in country A, which of course may also be negative.

    This data does not tell you how the foreign purchases of ‘domestic assets’ (our country A) are financed.

    There are two basic types of financing: equity and debt. For illustrative purposes, a foreign corporation may directly invest in country A, paying for the acquisition of physical assets with money borrowed from a bank in country B. Similarly, a foreign ‘investor’ may acquire financial securities, issued in country A, paying for the acquisition with money borrowed from a bank in say country C. (It doesn’t mean that the respective banks in country B and country C lend the money they have sitting in a safe somewhere; it means that the banks sell a security, called a loan contract, to the buyer of the security, called the borrower. How many such securities the banks in countries B and C can sell depends on the regulatory framework of the countries and on the degree of risk aversion of ‘the management’ of these banks as well as their shareholders.

    Now I am asking you to go back to my post #38.

    The data from Eurostat is interesting. I’d like to comment on this separately, after receiving a reply from you.

  74. Ikonoclast
    August 1st, 2015 at 04:46 | #74

    @Ernestine Gross

    I am feeling obtuse because there is still something here I don’t understand. When I go to the Wikipedia “List of countries by external debt” (the best easy source I have as a non-academic), I see that all countries have listed a positive number with the US listed first as having the highest external debt. All debts are listed in US dollars.

    This suggests to me that this is Gross External Debt owed “outwards” and it takes no account of debt owed “inwards” to each country so it is not a net position.

    However, the data you linked to shows every country listed as having positive external debt except for UK and USA which are most remarkable outliers with very high negative external debt which I assume means they are big creditors as you say. This could only occur if this is a net position (I am guessing).

    I don’t understand the discrepancy between these two tables. This is leaving aside the fact that the Wikipedia table is in US dollars and the other table is in domestic currencies. That affects the size of the number but not its sign. Why does one table say that the USA has huge external debt and the other table say that the USA is huge international creditor nation?

    That confusion explains why I turned to the NIIP as net position. I thought: “Well what counts is the net position. If I owe entity A $100,000 and entity B owes me $100 then I am clearly a debtor owing $99,900.”

    So, in summary, I just do not understand the table you linked to. How can UK and USA be creditor nations when their NIIP position is negative?

    One Wikipedia entry gives me a hint perhaps under its definition of external debt or foreign debt:

    “Note that the use of gross liability figures greatly distorts the ratio for countries which contain major money centers such as the United Kingdom due to London’s role as a financial capital. Contrast net international investment position.”

    Is the table you linked to a gross liability figure? I just don’t know. As I say, I am confused. I can understand NIIP and that would seem to me to be the figure that matters. I don’t understand the discrepancy between the table you linked to and the Wikipedia table “List of countries by external debt”.

  75. Jordan from Croatia
    August 1st, 2015 at 06:33 | #75

    Ernestine Gross
    All i am trying to do is to get everyone to check the reality and see for themselves to learn that public debts are never paid back, that our children wil not pay for government spending as such narative is strong in shaping our beliefs about finance and money.
    Did you check it for yourself?

  76. Ernestine Gross
    August 1st, 2015 at 15:52 | #76

    @Ikonoclast

    Wikipedia is a double edged sword in many respects. On the one hand one can get basic information on say medicine or law. On the other hand one can’t do much with it. It is not only Wikipedia which is a double edged sword, but so are many other data sources, including the one I linked to.

    The information regarding the NIIP concept (as distinct from measurement problems) is identical to what I wrote twice, the first time in short hand, the second time in a longer hand to answer your question on direct foreign investment.

    Please accept that a negative NIIP for ‘country A’ is NOT debt owed by ‘country A’ to ‘foreigners’. National accounting data does not include banking and finance data. You cannot find in the data in these accounts which is not in it.

    The banking and finance data is partially collected by monetary authorities, national as well as international.

    As can be seen from the following paper by the Bank of International Settlement (BIS), there is no satisfactory data collection system even after the global financial crisis, although some efforts are being made to improve the data collection system.

    http://www.bis.org/publ/qtrpdf/r_qt1212h.pdf

    There is no need for me to summarise this paper. It should be read in one piece. I draw particular attention to the difference between the English law on debt and the Greek law on debt. It was the former which prevented a write-down of privately held debt.

    So, why did I introduce a link which caused great consternation for you? There are several reasons. The most important being my hope it would raise questions in the minds of those who were so sure as to what is the nature of the problem with Greece and the EUROzone. I do hope the paper by the BIS challenges pre-conceived ideas and the uselessness of debates based on these ideas.

    The link to the Eurostat data surely should raise questions in the minds of the same people who were so sure as to what the nature of the problem with Greece and the EUROzone is. The arguments directed toward Germany (not only by blog commenters but also by a quite vocal Nobel Laureate would seem to pertain more to Luxemburg. No? May I suggest you look up the current account data for Luxemburg. You’ll find tiny numbers, relative to those of other EU countries. So, what is going on?

    The ‘global economy’ is now very different to what is was during the Bretton-Woods international monetary system. IMO, the entire discussion of Keynesian stimulus policy vs Austerity is caught up in an outdated mental model. Why? Because the relevant data is not recorded in the national accounting data framework that evolved during the Bretton-Woods era. The relevant data I am talking about are financial contracts, called financial securities. There are many types. Who issues which type under which juristiction and in which currency unit and bought by whom in which juristiction at what price in which currency unit, traded where and redeemed under which conditions are questions that cannot be answered satisfactorily as yet, as per the experts, the BIS. We live in a partially segmented global economy with multinational firms, including banks, and an incredibly fast communication system. And the problem is, there is no natural limit on the amount of financial securities that can be generated (as per Radner’s mid-1970s theoretical model)

  77. Ernestine Gross
    August 1st, 2015 at 16:14 | #77

    Ikonoclast, my reply to your last post is in moderation. I’ll copy it below to overcome the apparent 2-links restriction.

    Wikipedia is a double edged sword in many respects. On the one hand one can get basic information on say medicine or law. On the other hand one can’t do much with it. It is not only Wikipedia which is a double edged sword, but so are many other data sources, including the one I linked to.

    The information regarding the NIIP concept (as distinct from measurement problems) is identical to what I wrote twice, the first time in short hand, the second time in a longer hand to answer your question on direct foreign investment.

    Please accept that a negative NIIP for ‘country A’ is NOT debt owed by ‘country A’ to ‘foreigners’. National accounting data does not include banking and finance data. You cannot find in the data in these accounts which is not in it.

    The banking and finance data is partially collected by monetary authorities, national as well as international.

    As can be seen from the following paper by the Bank of International Settlement (BIS), there is no satisfactory data collection system even after the global financial crisis, although some efforts are being made to improve the data collection system.

    http://www.bis.org/publ/qtrpdf/r_qt1212h.pdf

    There is no need for me to summarise this paper. It should be read in one piece. I draw particular attention to the difference between the English law on debt and the Greek law on debt. It was the former which prevented a write-down of privately held debt.

    So, why did I introduce a link which caused great consternation for you? There are several reasons. The most important being my hope it would raise questions in the minds of those who were so sure as to what is the nature of the problem with Greece and the EUROzone. I do hope the paper by the BIS challenges pre-conceived ideas and the uselessness of debates based on these ideas.

    The link to the Eurostat data surely should raise questions in the minds of the same people who were so sure as to what the nature of the problem with Greece and the EUROzone is. The arguments directed toward Germany (not only by blog commenters but also by a quite vocal Nobel Laureate would seem to pertain more to Luxemburg. No? May I suggest you look up the current account data for Luxemburg. You’ll find tiny numbers, relative to those of other EU countries. So, what is going on?

    The ‘global economy’ is now very different to what is was during the Bretton-Woods international monetary system. IMO, the entire discussion of Keynesian stimulus policy vs Austerity is caught up in an outdated mental model. Why? Because the relevant data is not recorded in the national accounting data framework that evolved during the Bretton-Woods era. The relevant data I am talking about are financial contracts, called financial securities. There are many types. Who issues which type under which juristiction and in which currency unit and bought by whom in which juristiction at what price in which currency unit, traded where and redeemed under which conditions are questions that cannot be answered satisfactorily as yet, as per the experts, the BIS. We live in a partially segmented global economy with multinational firms, including banks, and an incredibly fast communication system. And the problem is, there is no natural limit on the amount of financial securities that can be generated (as per Radner’s mid-1970s theoretical model).

  78. Ikonoclast
    August 1st, 2015 at 17:25 | #78

    @Ernestine Gross

    Thank you for your patience and long replies for a blog. I am now going to publicly eat crow. I mean at least as public as this blog gets. I didn’t know and I don’t know what I am talking about in this debate. I have displayed an egregious lack of knowledge and an outrageous smug certainty which existed in inverse proportion to my level of knowledge.

    “A little learning is a dangerous thing;
    Drink deep, or taste not the Pierian spring:
    There shallow draughts intoxicate the brain,
    And drinking largely sobers us again.” – Alexander Pope.

    I don’t understand all of what you put before me but I do understand enough from it to understand that I really know next to nothing on this topic.

    This raises some quasi-philosophical issues which I will touch on briefly and then bow out.

    1. It seems to me that the pace of innovation that is going on in this sphere is so great and the data collection issues so great that perhaps nobody really knows what is going on. This a slight over-statement perhaps. Some specialist economists and researchers (not to much the leading-edge innovators themselves) do perhaps know a portion of what is going on.

    2. The average layperson-citizen has not a hope in Hades of understanding anything about this. He must give up like a modern Candide (forsaking not the optimism illusion like Candide, for in the self-honest modern mind optimism is already dead, but rather forsaking even the knowledge illusion). The image of Candide “cultivating his garden suggests his engaging in only necessary occupations, such as feeding oneself and fighting boredom.”(*) To attempt more is the epitome of self-delusion.

    * Wikipedia.

  79. antoni jaume
    August 3rd, 2015 at 10:20 | #79

    @Jordan from Croatia

    Asking of Germany to exit EU is akin to asking UK to exit India or South Africa.
    Isn’t it much easier to change the ECB to become a real Central Bank and solve EU and EZ issues?

    Not from the EU, only from the Eurozone.

    AFAICT, the main reason the ECB cannot be changed is Germany.

  80. Ernestine Gross
    August 8th, 2015 at 08:51 | #80

    Below is a link to an English translation of an article by Hans Werner Sinn, a German economist and head of a research organisation in Munich. The article is a reply to an article by Jeffrey Sachs. Jeffrey Sachs is a US economist who is well known and respected in general and specifically in the area of development economics including environmental and financial matters.

    I found the historical and institutional detail interesting and helpful.

    http://international.sueddeutsche.de/post/125998423130/exit-devaluation-and-haircut-for-greece

  81. Ikonoclast
    August 8th, 2015 at 09:26 | #81

    @Ernestine Gross

    That raises some interesting points. But let me backtrack a little. Clearly, I admitted in post number 78 that I don’t know what I am talking about when it comes to the current Greek economic crisis.

    However, a backtrack and admission that I don’t know something is not the same as an admission that I think others know. All I can honestly say now is that I don’t know what the causes and cures of Greece’s economic crisis are and that I don’t know if others know. My general scepticism leads me to think nobody else knows either.

    It sometimes seems a reasonable assumption that if we know what is going with something then on we can fix it. This however is not always the case. Medical doctors can know someone has a certain kind cancer and how it is progressing but it may be untreatable with current knowledge.

    Roughly similar analogies may be applied to the Greek crisis. Do we;

    (A) Not know what is going on and thus not know how to fix it?;
    (B) Know what is going but still not know how to fix it?; or
    (C) Ignore and maginalise those who do know?

    One could pose other questions.

    The only consistent position I feel I can take now is the overall position that we do not understand our economy. We have generated it but we don’t understand it. I mean that in the sense that we don’t know enough. One does not need perfect knowledge, just good enough knowledge, for knowledge to be effective in practice. The evidence is that our knowledge about our own global economy is not sufficient to be effective in certain kinds of crises of which the Greek Crisis is one. Or if some economists have the right theories (meaning right enough) they are not recognised and/or these prescriptions are not put into practice by the mainstream. However, any prescription must be just a theory. Until the theory is fully tested we could not be sure the theory was correct.

    Short version of above? I now tend to the view that there is a high probability that nobody knows what is going on nor how to correct it.

  82. Ivor
    August 8th, 2015 at 09:54 | #82

    @Ikonoclast

    Just delete the text bracketed by the greater and lesser symbols.

    You end up with:

    @Ikonoclast

  83. Ivor
    August 8th, 2015 at 10:22 | #83

    @John Quiggin

    I would have thought that there is only benefit if currency depreciation is relative. If many countries depreciate there is no benefit.

    This could set off a race to the bottom. Why would Germany (an exporter) maintain its currency value if all around them are collapsing theirs?

    If contracts are written in US dollars, it makes it harder for depreciating currencies to pay off US dollar debts. It also makes it easier for foreigners to compete for local housing assets.

    It seems to me that depreciation is only good for exporters as a quick hit.

  84. Ernestine Gross
    August 8th, 2015 at 17:55 | #84

    @Ikonoclast

    IMHO, Jeffrey Sachs is the economist among the big name US economists whose writings on Greece is informed by economic theories (not schools of thought and not limited to macro-economics) and by empirical observations as well as practical experience. To the best of my knowledge Jeffrey Sachs is not a political economist. Given your interest in environmental matters, his work may be of interest to you beyond matters concerning Greece.

    There are many EU economists, not known in the Anglo-Saxon press, who nevertheless have the same theoretical knowledge as their US counterparts, but much more detailed empirical and institutional knowledge about the Eurozone and the EU.

  85. Ikonoclast
    August 8th, 2015 at 19:30 | #85

    @Ernestine Gross

    Thanks, I will follow up.

  86. Ikonoclast
    August 9th, 2015 at 09:30 | #86

    @Ernestine Gross

    Second reply…

    I have some questions though. In a post some way above, you mentioned that Keynesian economics no longer applied to the world economy (or words to that effect). I assume you mean, in total or in part, that Keynesian stimulus economics no longer apply due to the different ways the currencies and finances work post Bretton Woods and post financial deregulation.

    This is an interesting thought. I wonder if you are referring to the difference that (rampant) credit money creation makes to the system? Now don’t stop reading. I am going to mention MMT in a critical way not a credulous way.

    MMT makes a big song and dance about national accounting identities or axioms. You know what I mean. One thing it says is the government must print money (create money ex nihilo) for the private sector to be able to net save in the fiat currency. This is perhaps technically true but to my mind it does not take account of credit money creation in the time dimension. Whilst creation of credit money does not technically increase the overall net savings (the debt equals the credit and they cancel out in accounting terms), the creation of credit money does increase the extant circulating money supply. I mean, so far as I can see it does.

    The thing about debt money creation is the time lag between when the money is created (loaned) and when it is extinguished (paid back). In the time space of that lag it increases money supply so far as I can see. And if loans are growing over time (expanding economy and/or expanding loan books) then the money creation from loan making will expand faster and faster compared to money destruction from loan extinguishment. This could go on for decades at least one would think or even until a GFC style recession in a long-ish cycle.

    Thus my questions are: Does this form of relatively uncontrolled and deregulated money supply expansion obviate the standard considerations of, and assumptions behind, Keynesian stimulus? Is the credit money expansion something that now outstrips Keynesian stimulus even if Keynesian stimulus is supplied? If this is true, how do we explain continued capacity under-utilisation (unemployment, some idle capital equipment etc.)? In particular, how do we explain this capacity under-utilisation running parallel to excessive asset inflation while on the third track, so to speak, goods and services inflation (outside of certain asset inflations) is very mild?

    It seems to me there are number of conundrums here. I honestly can’t figure it out. Are there any explanations extant which cover this particular conglomerate of economic phenomena?

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