Europe’s problem is Austerity?

[miami_thomas]

This cannot last forever. In fact, the longer interest rates are artificially repressed, the more and more short term becomes the rollover of our debt

Why is that? The long term rates are very low too, why would the rollover become shorter?

and this will blow up in our faces when interest rates rise again.

No, it won't -- the economy has to recover before the rates can rise. So by the time we see high rates our fiscal situation will be much better because the government revenues will be much higher.

Why would you buy long term treasuries over short term when the rates are almost the same? We are in trouble and when the fear starts it will happen overnight just like every bubble burst. Then people will be surprised just like always. History has always taught that where there is credit there is always a burst to eventually follow. Just this one will be like a 100 times worse than all previous ones combined because it will be government debt that causes it and not private debt.

 

[miami_thomas]

Yes, but the interest rates do not move at random! Something has to happen to cause the rates increase. And that something will affect other things, not just rates. Other things like the government revenues.

You cannot compare the future rates with the current level of revenues -- that is a bogus approach.

Rates can also go up if there is fear that the US cannot afford to pay its debt and either will have to default or devalue its currency. That is why there is a current movement to replace the dollar as the world reserve currency to ensure the devaluation of the dollar has a lesser impact on the world economy.

We can thank Boehner's Tea/Rep Congress for that. Upping the borrowing limit, prior, was never an issue. It passed with ease, since obviously, it funded what Congress had already appropriated. Stupid, and it hurt our credit rating, which has real effects, which are negative. But then they can blame Obama, and say he shouldn't be re-elected, in part because our lower credit rating is a sign of a bad economy, which it was not. It was because our full faith a credit was made less certain, by a lunatic Congress.

That is because our debt had never grown so fast so high in such a short period of time with the exception of World War II and at least then the economy had began to boom because of the war engine. A collapse is coming ignore it if you want but at the end of the day baring a World War and us becoming a manufacturing giant over night to produce the weapons of war for other countries we will collapse.

 

[miami_thomas]

Yes, but the interest rates do not move at random! Something has to happen to cause the rates increase. And that something will affect other things, not just rates. Other things like the government revenues.

You cannot compare the future rates with the current level of revenues -- that is a bogus approach.

Rates can also go up if there is fear that the US cannot afford to pay its debt and either will have to default or devalue its currency. That is why there is a current movement to replace the dollar as the world reserve currency to ensure the devaluation of the dollar has a lesser impact on the world economy.

We can thank Boehner's Tea/Rep Congress for that. Upping the borrowing limit, prior, was never an issue. It passed with ease, since obviously, it funded what Congress had already appropriated. Stupid, and it hurt our credit rating, which has real effects, which are negative. But then they can blame Obama, and say he shouldn't be re-elected, in part because our lower credit rating is a sign of a bad economy, which it was not. It was because our full faith a credit was made less certain, by a lunatic Congress.

By the way, our credit was downgraded because they did not think we could get our deficit in order not because of the debt ceiling and they are right which is exactly why we are looking at another downgrade next year.

 

[Koios]

Rates can also go up if there is fear that the US cannot afford to pay its debt and either will have to default or devalue its currency. That is why there is a current movement to replace the dollar as the world reserve currency to ensure the devaluation of the dollar has a lesser impact on the world economy.

We can thank Boehner's Tea/Rep Congress for that. Upping the borrowing limit, prior, was never an issue. It passed with ease, since obviously, it funded what Congress had already appropriated. Stupid, and it hurt our credit rating, which has real effects, which are negative. But then they can blame Obama, and say he shouldn't be re-elected, in part because our lower credit rating is a sign of a bad economy, which it was not. It was because our full faith a credit was made less certain, by a lunatic Congress.

By the way, our credit was downgraded because they did not think we could get our deficit in order not because of the debt ceiling and they are right which is exactly why we are looking at another downgrade next year.

And why do you suppose that is? Hmmm? Maybe a GOP dedicated to blocking all attempts to raise the taxes needed to PAY FOR IT????

 

[ilia25]

It's a credit rating thing. Spain ain't Germany. Best olive oil on the planet, hands down. But no German cars, precision instruments, etc, etc, etc.

Look, what you are doing is just listing the differences between the countries and claiming, w/o any evidence, that they are responsible for the differences in borrowing rates.

I mean how the euros earned by selling the best olive oil are somehow less credible than euros earned by selling best cars? The creditors would somehow refuse to accept the olive oil euros, and demand the car euros instead?

It just does not make sense.

Come on. You can do better than that. What have you got, that makes Spain's output potential look as rosy as Germany's? Anything?

I know what Germany always had and Spain sorely lacks -- it is support from European Central Bank (which conveniently has its headquarters in Frankfurt). Span and Greece and other troubled countries would be fine if ECB:
1) Stands ready to buy their debt in unlimited quantities
2) Actually do make some purchases to promote higher inflation in Eurozone.

Spain had high inflation for many years since it had joined euro. ECB did not mind that because it helped Germany to lower its labor costs relative to the rest of the Europe w/o falling into recession. After 10 years of that policy Spain labor costs are too high relative to Germany. The best way to reverse it is by allowing higher inflation in Germany.

But Germans object -- mainly because they are stupid and want to blame Spain problems on Spaniards (not unlike they were blaming everything Jews not long ago). So the only way for Spain to lower it labor costs is through years of depression. That makes it harder for Spain to service its debt, but that is not what makes buying Spanish debt so risky. The main reason is that there is a good chance that at some points Spaniards decide that they had suffered enough and leave the euro -- converting their euro debt into pesetas.

And if it wasn't bad enough, Germans and ECB demand more austerity from Spain, which further depress their economy. Are you still wondering why investors are running away from Spanish debt?

 

[ilia25]

Say our interest rates went up to 7 percent that would almost instantaneously increase our interest payments from 120 billion to nearly 1.2 trillion.

Yes, but the interest rates do not move at random! Something has to happen to cause the rates increase. And that something will affect other things, not just rates. Other things like the government revenues.

You cannot compare the future rates with the current level of revenues -- that is a bogus approach.

Rates can also go up if there is fear that the US cannot afford to pay its debt and either will have to default or devalue its currency.

Why there would be such fears about the US, if investors are confident that a much smaller Japan will have no troubles servicing their 13 trillion debt?

There could be a point when the debt is too high -- but the US is far, very far from that point.

The only way the rates can go up is when they are drived up by the recovered economy -- which will fix the fiscal problems as well.

 

[Koios]

Yes, but the interest rates do not move at random! Something has to happen to cause the rates increase. And that something will affect other things, not just rates. Other things like the government revenues.

You cannot compare the future rates with the current level of revenues -- that is a bogus approach.

Rates can also go up if there is fear that the US cannot afford to pay its debt and either will have to default or devalue its currency.

Why there would be such fears about the US, if investors are confident that a much smaller Japan will have no troubles servicing their 13 trillion debt?

There could be a point when the debt is too high -- but the US is far, very far from that point.

Japan has higher median income, and a manufacturing sector the increases confidence they can sustain it. Also no Tea Party loons in their parliament hellbent on blocking the necessary tax increases needed to pay for stuff, like interest on their debt.

 

[Koios]

Look, what you are doing is just listing the differences between the countries and claiming, w/o any evidence, that they are responsible for the differences in borrowing rates.

I mean how the euros earned by selling the best olive oil are somehow less credible than euros earned by selling best cars? The creditors would somehow refuse to accept the olive oil euros, and demand the car euros instead?

It just does not make sense.

Come on. You can do better than that. What have you got, that makes Spain's output potential look as rosy as Germany's? Anything?

I know what Germany always had and Spain sorely lacks -- it is support from European Central Bank (which conveniently has its headquarters in Frankfurt). Span and Greece and other troubled countries would be fine if ECB:
1) Stands ready to buy their debt in unlimited quantities
2) Actually do make some purchases to promote higher inflation in Eurozone.

Spain had high inflation for many years since it had joined euro. ECB did not mind that because it helped Germany to lower its labor costs relative to the rest of the Europe w/o falling into recession. After 10 years of that policy Spain labor costs are too high relative to Germany. The best way to reverse it is by allowing higher inflation in Germany.

But Germans object -- mainly because they are stupid and want to blame Spain problems on Spaniards (not unlike they were blaming everything Jews not long ago). So the only way for Spain to lower it labor costs is through years of depression. That makes it harder for Spain to service its debt, but that is not what makes buying Spanish debt so risky. The main reason is that there is a good chance that at some points Spaniards decide that they had suffered enough and leave the euro -- converting their euro debt into pesetas.

And if it wasn't bad enough, Germans and ECB demand more austerity from Spain, which further depress their economy. Are you still wondering why investors are running away from Spanish debt?

Well sure; Germany and France exert far more influence, and like us can bully their way to things being weighted in their favor. That doesn't help them gain the affection of other EU members' citizenry. Indeed the opposite.

But it's not why S&P rates them a better credit risk The rating goes deeper, into fundamentals that indicate ability to pay.

 

[ilia25]

Come on. You can do better than that. What have you got, that makes Spain's output potential look as rosy as Germany's? Anything?

I know what Germany always had and Spain sorely lacks -- it is support from European Central Bank (which conveniently has its headquarters in Frankfurt). Span and Greece and other troubled countries would be fine if ECB:
1) Stands ready to buy their debt in unlimited quantities
2) Actually do make some purchases to promote higher inflation in Eurozone.

Spain had high inflation for many years since it had joined euro. ECB did not mind that because it helped Germany to lower its labor costs relative to the rest of the Europe w/o falling into recession. After 10 years of that policy Spain labor costs are too high relative to Germany. The best way to reverse it is by allowing higher inflation in Germany.

But Germans object -- mainly because they are stupid and want to blame Spain problems on Spaniards (not unlike they were blaming everything Jews not long ago). So the only way for Spain to lower it labor costs is through years of depression. That makes it harder for Spain to service its debt, but that is not what makes buying Spanish debt so risky. The main reason is that there is a good chance that at some points Spaniards decide that they had suffered enough and leave the euro -- converting their euro debt into pesetas.

And if it wasn't bad enough, Germans and ECB demand more austerity from Spain, which further depress their economy. Are you still wondering why investors are running away from Spanish debt?

Well sure; Germany and France exert far more influence, and like us can bully their way to things being weighted in their favor. That doesn't help them gain the affection of other EU members' citizenry. Indeed the opposite.

But it's not why S&P rates them a better credit risk The rating goes deeper, into fundamentals that indicate ability to pay.

Look, the only fundamentals that undermine Spain's ability to pay (in euros) is a hostile position of ECB and Germany. It needlessly forces Spain into a deep depression and that is the only reason why buying Spanish debt becomes a risky proposition.

Otherwise there is absolutely nothing wrong with Spanish economy, and certainly there is nothing wrong with earning money by selling olive oil.

 

[Koios]

I know what Germany always had and Spain sorely lacks -- it is support from European Central Bank (which conveniently has its headquarters in Frankfurt). Span and Greece and other troubled countries would be fine if ECB:
1) Stands ready to buy their debt in unlimited quantities
2) Actually do make some purchases to promote higher inflation in Eurozone.

Spain had high inflation for many years since it had joined euro. ECB did not mind that because it helped Germany to lower its labor costs relative to the rest of the Europe w/o falling into recession. After 10 years of that policy Spain labor costs are too high relative to Germany. The best way to reverse it is by allowing higher inflation in Germany.

But Germans object -- mainly because they are stupid and want to blame Spain problems on Spaniards (not unlike they were blaming everything Jews not long ago). So the only way for Spain to lower it labor costs is through years of depression. That makes it harder for Spain to service its debt, but that is not what makes buying Spanish debt so risky. The main reason is that there is a good chance that at some points Spaniards decide that they had suffered enough and leave the euro -- converting their euro debt into pesetas.

And if it wasn't bad enough, Germans and ECB demand more austerity from Spain, which further depress their economy. Are you still wondering why investors are running away from Spanish debt?

Well sure; Germany and France exert far more influence, and like us can bully their way to things being weighted in their favor. That doesn't help them gain the affection of other EU members' citizenry. Indeed the opposite.

But it's not why S&P rates them a better credit risk The rating goes deeper, into fundamentals that indicate ability to pay.

Look, the only fundamentals that undermine Spain's ability to pay (in euros) is a hostile position of ECB and Germany. It needlessly forces Spain into a deep depression and that is the only reason why buying Spanish debt becomes a risky proposition.

Otherwise there is absolutely nothing wrong with Spanish economy, and certainly there is nothing wrong with earning money by selling olive oil.

Gotcha. Has nothing to do with GDP Espana, nor median income, poverty, state of their industry, natural resources or anything like that. Just wipe out the debt, and they can return to the econmic nirvana they were prior to borrowing and won't borrow again.

Makes perfect sense. It's a mystery why S&P, WMF, me, everyone else, didn't think of it first. Go figure.

 

[Wiseacre]

Yes, but the interest rates do not move at random! Something has to happen to cause the rates increase. And that something will affect other things, not just rates. Other things like the government revenues.

You cannot compare the future rates with the current level of revenues -- that is a bogus approach.

Rates can also go up if there is fear that the US cannot afford to pay its debt and either will have to default or devalue its currency.

Why there would be such fears about the US, if investors are confident that a much smaller Japan will have no troubles servicing their 13 trillion debt?


I wouldn't assume Japan will have no troubles, I think they've been very fortunate thus far even though they had that terrible tsunami and nuclear incident. Doesn't necessarily mean they'll be able to continue growing their debt and servicing it.


There could be a point when the debt is too high -- but the US is far, very far from that point.


Could be, but my question is how long are you willing to forego the tough decisions that will be necessary when we get to that point? And are you willing to pass that timebomb off to our kids and grandkids? Tome, that is simply unconscionable, but that is exactly what we're doing.


The only way the rates can go up is when they are drived up by the recovered economy -- which will fix the fiscal problems as well.

Half right IMHO. If and when our economy finally does recover, there's a lot of money that will begin to pour in and that means inflation. Investors that used to buy US securities for less than a 2% return will no longer be willing to do so, and you're right, rates will go up dramatically. But by then the genie will be out of the bottle, and the $300 billion or so a year we spend now will grow to over a trillion dollars just on servicing the debt.

Personally, I'm not a big fan of waiting for the shit to hit the fan. Nor do I like the idea of putting off the tough decisions until later when they are bigger and more problematic. Fuck that, we should be responsible enough to deal with our fiscal problems now, or at least come up with an acceptable short and long range plan that will really work.

 

[ilia25]

Well sure; Germany and France exert far more influence, and like us can bully their way to things being weighted in their favor. That doesn't help them gain the affection of other EU members' citizenry. Indeed the opposite.

But it's not why S&P rates them a better credit risk The rating goes deeper, into fundamentals that indicate ability to pay.

Look, the only fundamentals that undermine Spain's ability to pay (in euros) is a hostile position of ECB and Germany. It needlessly forces Spain into a deep depression and that is the only reason why buying Spanish debt becomes a risky proposition.

Otherwise there is absolutely nothing wrong with Spanish economy, and certainly there is nothing wrong with earning money by selling olive oil.

Gotcha. Has nothing to do with GDP Espana, nor median income, poverty, state of their industry, natural resources or anything like that. Just wipe out the debt

No, the debt is not a problem The problem is high labor costs relative to Germany, and austerity that is forced on them -- those two things lead to economic depression (high unemployment). And that, in turn, makes Spanish debt risky.

The debt problem is not the cause of the crisis. It's the other way around -- the economic depression made it hard for Spain to service its debt. And even if you wipe the government debt completely, the Spanish economy would remain deeply depressed for long time -- because this is what forced on them by ECB.

 

[ilia25]

Rates can also go up if there is fear that the US cannot afford to pay its debt and either will have to default or devalue its currency.

Why there would be such fears about the US, if investors are confident that a much smaller Japan will have no troubles servicing their 13 trillion debt?


I wouldn't assume Japan will have no troubles, I think they've been very fortunate thus far even though they had that terrible tsunami and nuclear incident. Doesn't necessarily mean they'll be able to continue growing their debt and servicing it.


There could be a point when the debt is too high -- but the US is far, very far from that point.


Could be, but my question is how long are you willing to forego the tough decisions that will be necessary when we get to that point? And are you willing to pass that timebomb off to our kids and grandkids? Tome, that is simply unconscionable, but that is exactly what we're doing.


The only way the rates can go up is when they are drived up by the recovered economy -- which will fix the fiscal problems as well.

Half right IMHO. If and when our economy finally does recover, there's a lot of money that will begin to pour in and that means inflation. Investors that used to buy US securities for less than a 2% return will no longer be willing to do so, and you're right, rates will go up dramatically. But by then the genie will be out of the bottle, and the $300 billion or so a year we spend now will grow to over a trillion dollars just on servicing the debt.

And how much money the government will be receiving in tax revenues by the time it would have to pay 1 trillion on servicing its debt?

 

[ilia25]

Rates can also go up if there is fear that the US cannot afford to pay its debt and either will have to default or devalue its currency.

Why there would be such fears about the US, if investors are confident that a much smaller Japan will have no troubles servicing their 13 trillion debt?

There could be a point when the debt is too high -- but the US is far, very far from that point.

Japan has higher median income, and a manufacturing sector the increases confidence they can sustain it.

Japan economy (and incomes) were growing much slower than those in the US in the past 20 years (partially because of shrinking population). That is the fact, and it puts Japan in worse position fiscally, its manufacturing sector notwithstanding.

Again, you are still thinking that money earned from making cars are somehow more valuable and credible. And that's simply not true.

Also no Tea Party loons in their parliament hellbent on blocking the necessary tax increases needed to pay for stuff, like interest on their debt.

Yes, but loons are much more easy to fix than the economic fundamentals, which are much worse in Japan. BTW, Japan has lost its AAA credit rating way back in 2002.

 

[Koios]

No, the debt is not a problem The problem is high labor costs relative to Germany, and austerity that is forced on them -- those two things lead to economic depression (high unemployment). And that, in turn, makes Spanish debt risky.

The debt problem is not the cause of the crisis. It's the other way around -- the economic depression made it hard for Spain to service its debt. And even if you wipe the government debt completely, the Spanish economy would remain deeply depressed for long time -- because this is what forced on them by ECB.

I never said the debt caused the problem. It became the problem, when the world economy was dragged down with ours. Thank you GWB and Reps for the New World Disorder ... and Clinton, for whacking Glass-Steagall and making credit default swaps possible. Also Obama for not fixing it, when we gave him a Trillion in leverage to get any reforms he wanted. Plenty of blame to go-round, sadly. But anyway ...

Spain is lovely. My company has some customers there, and I loved it second only to, Germany, Brasil, France and Italy, as a vacay destination. Nice place. Truly.

Plus many thanks to the Spanish Crown for bankrolling Chris in his discovery of India ... uh .. Carribean and South America. Nice folks, sort of, except that a war, money and the brave efforts of Simon Bolivar were needed to get them back to Spain, where once again, it's really nice ... just not an economic powerhouse.

And by the way, wages in Germany are higher than in Spain, which obviously has lower median income than Germany or ...

Belgium, Denmark, Sweden, Netherlands/Hague, Ireland, UK, Switzerland, Norway ...

 

[Koios]

Why there would be such fears about the US, if investors are confident that a much smaller Japan will have no troubles servicing their 13 trillion debt?

There could be a point when the debt is too high -- but the US is far, very far from that point.

Japan has higher median income, and a manufacturing sector the increases confidence they can sustain it.

Japan economy (and incomes) were growing much slower than those in the US in the past 20 years (partially because of shrinking population). That is the fact, and it puts Japan in worse position fiscally, its manufacturing sector notwithstanding.

Again, you are still thinking that money earned from making cars are somehow more valuable and credible. And that's simply not true.

Also no Tea Party loons in their parliament hellbent on blocking the necessary tax increases needed to pay for stuff, like interest on their debt.

Yes, but loons are much more easy to fix than the economic fundamentals, which are much worse in Japan. BTW, Japan has lost its AAA credit rating way back in 2002.

Hardly. Try as I may to have all Tea Party folks "fixed," even with the more humane chemical castration method, I've yet to get any Congresspersons keen on my idea.

Not as easy as you think. But join me, and maybe we can make progress, godwilling.

 

[ilia25]

Makes perfect sense. It's a mystery why S&P, WMF, me, everyone else, didn't think of it first. Go figure.

Well that is a mystery. Even more so because they were repeatedly told what is going on by some economists. IMF, BTW sees its mistakes and recently had published studies showing that the negative effects of austerity were greatly underestimated.

The thing is that conventional wisdom stops as soon as the interest rates hit zero lower bound. Then it is a different world, when vice becomes a virtue, and virtue becomes a vice. For example, the deficit spending should be increased to pull the economy out of depression and improve the ability to service debt. Also, inflating the money supply through the usual channels does not cause an inflation (and does not help the economy).

People were not ready for this as the last time the economy was in that state happened in 30s during the Great Depression. Economists were not ready either (though some knew immediately what is going on).

 

[ilia25]

And by the way, wages in Germany are higher than in Spain, which obviously has lower median income than Germany or ...

Belgium, Denmark, Sweden, Netherlands/Hague, Ireland, UK, Switzerland, Norway ...

It is not about absolute numbers. Spain had lower productivity, which is fine as long as you wage is also lower. But since Spain joined the euro, this is what happened:

Spanish workers are now paid more than they worth (not their fault, it was the result of ECB policy). And, absent inflation in Germany, the only way for Spain to lower its labor cost is by reducing their salaries, which, in turn, can only be achieved by years of high unemployment.

 

[Koios]

Makes perfect sense. It's a mystery why S&P, WMF, me, everyone else, didn't think of it first. Go figure.

Well that is a mystery. Even more so because they were repeatedly told what is going on by some economists. IMF, BTW sees its mistakes and recently had published studies showing that the negative effects of austerity were greatly underestimated.

The thing is that conventional wisdom stops as soon as the interest rates hit zero lower bound. Then it is a different world, when vice becomes a virtue, and virtue becomes a vice. For example, the deficit spending should be increased to pull the economy out of depression and improve the ability to service debt. Also, inflating the money supply through the usual channels does not cause an inflation (and does not help the economy).

People were not ready for this as the last time the economy was in that state happened in 30s during the Great Depression. Economists were not ready either (though some knew immediately what is going on).

Conventional wisdom had little to do with it. Banks are not always the brightest bulbs in the ...

Due to the Euro, every member country was being lent to based on the full faith and credit of the EU, in effect, Greece, Spain and Italy being lent to as if they were Germany, which they are not. We could have told them that. But the commissions were huge, and thus appealing. No point in screwing that up with conventional or any other wisdom, it seems.

So indeed, while auserity is the opposite of what grows economies, when lots of what you get in revenue goes to servicing debt, it's not an option. It just happens, and indeed, if the EU is to sustain itself, the big "guys" (Angie and Frank) are going to have to spend some Euros fixing the mess, and you cannot blame them for wanting Spain, etc, to tighen their belts at the same time.

It's an imperfect world, with competing interests, not to mention folks who need votes to stay in charge. So while stupdity was rampant, they're paying closer attention today. But they've faced worse, and we won't need a Marshall Plan redux. They'll grow their way out. It's a remarkably resilient continent, not unknown for equally remarkable stupidty throughout its history. But it'll be okay, in time.

Just not today, no matter how many fingers of blame we point.

 

[ilia25]

Japan has higher median income, and a manufacturing sector the increases confidence they can sustain it.

Japan economy (and incomes) were growing much slower than those in the US in the past 20 years (partially because of shrinking population). That is the fact, and it puts Japan in worse position fiscally, its manufacturing sector notwithstanding.

Again, you are still thinking that money earned from making cars are somehow more valuable and credible. And that's simply not true.

Also no Tea Party loons in their parliament hellbent on blocking the necessary tax increases needed to pay for stuff, like interest on their debt.

Yes, but loons are much more easy to fix than the economic fundamentals, which are much worse in Japan. BTW, Japan has lost its AAA credit rating way back in 2002.

Hardly. Try as I may to have all Tea Party folks "fixed," even with the more humane chemical castration method, I've yet to get any Congresspersons keen on my idea.

Not as easy as you think. But join me, and maybe we can make progress, godwilling.

Well, I won't argue that the US political system has everything to become deeply dysfunctional. Electing independent parliament and President creates two centers of power, which can (and does) lead to almost complete paralysis of the government. A much better system was the original British way -- when people elect only the parliament and it appoints the government. That is much more effective system and... don't get me started