When the music stops

Many are asking what will happen to Greece and the Eurozone and what will it mean for Australia? It seems to me that economists generally, with some exceptions, do have a bit of a monopoly on delusion. Fallacious assumptions ground their theories, information everywhere seems to be skewed, predictions are made without an acknowledgment of the full extent of fraud and corruption (which is rampant), and conflicts of interest regularly creep in.

I was fortunate to catch up with economist Professor Bill Mitchell at a recent speaking engagement.  An economist who doesn’t sugar coat statistics is a rare find indeed. I was pleased (and surprised) that our views were quite complementary rather than being at odds.

In high school or university we are taught: “that markets are a system and systems have structure. The structure of a well-functioning market is defined by the theory of perfect competition. Well-functioning markets of the real world are never perfect, but basic structural characteristics can include many small buyers and sellers; buyers and sellers have equal access to information; and products are comparable.” It’s all bullshit.

What we have nowadays is a market of late degenerate capitalism.  Morality is negotiable. Players want to take advantage of economic freedom but don’t want to pay the price of their strategic errors.  They use political resources to influence peddle, to gain advantages from the governmental process that aren’t achievable in the “free market”. We have bureaucrats who transcend political parties and politicians, and a political culture of abuse and misuse of government power for private ends.  Cheap or free money, speculative assets, tax relief, tax incentives, loan guarantees, market intervention. “Regulatory arbitrage” (aka dodging the spirit of the law) is the name of the game. Banks bet against investments they actually bundled and sold to their own clients. When it goes belly up the taxpayer takes the hit and the bankster buys a Bentley. In a situation where we’ve already suffered the financialisation of our entire existences, this economic philosophy puts our individual and social existences at risk.

Rational economic policy aimed at true growth has been replaced by greed and the short-sighted quest for “shareholder value”. A mad obsession with high stock prices. “Eat the cake and have it too.”  Growth without savings and capital investment?  The tobacco haze of late, degenerate capitalism is dense and thick. Dark pools form as marauders take people’s money and gamble with it. Politicised credit rating agencies engage in fraud.  Counterfeiting is renamed quantitative easing.

How did it come to this? Professor Mitchell and I seemed to agree that the explanation starts with neoliberal economic philosophies.  Their essence being, according to Professor Mitchell: “The neoliberalism era of self-regulation of markets unfettered by the destructive powers of government would maximise wealth and we’d all be better off.” C’est la vérité, c’est la vie.

The Euro was established in 1992 with the Maastricht Treaty. To participate in the currency, member states are supposed to meet strict criteria:  budget deficit of less than three per cent of their GDP, a debt ratio of less than sixty per cent of GDP, low inflation, and interest rates close to the EU average.  But Eurozone countries are at the mercy of the bond markets, or so they think, because they can’t print money: only the European Central Bank (ECB) can print Euros.

With the push to European economic unity banksters descended on European capitals offering derivatives “solutions” as an attractive proposition for countries seeking to join the Eurozone. According to the PBS documentary ‘Money, Power and Wall Street’, the first known case of a country using a derivative to window dress its accounts was Italy.  In 2003 Nick Dunbar revealed details of a similar deal between Goldman Sachs and Greece.  Goldman Sachs sold Greece several giant swaps to help Greece “meet its targets”.

Money flowed into those countries and, surprise, surprise, the availability of cheap credit created consumption bubbles. As the PBS documentary points out, “by 2009 the deficit was twice as big as thought and six times as big as originally planned, so bond holders from New York to London started dumping Greek sovereign bonds.  The very same institutions who had happily fuelled the euro spending spree pulled back.  Other euro countries had no plan in place to deal with the situation.   In 2010 the value of the euro dropped.  Ireland, Portugal and Italy were in a downward spiral…”

Professor Bill Mitchell raises this important point:

“The so-called period of stability in the Eurozone – this was the period leading up to the crisis – there’s an aggressive element in the Euro debate that Germany is the model for every European country to follow.  That if every country behaved like Germany then there would be no problem.  That’s the greatest nonsense you could ever imagine.  Before the Eurozone was created the German Central Bank played a very important role.  It managed the exchange rate through buying and selling foreign currencies to ensure that the Deutschmark was as low as possible, to make sure that their manufacturing sector was as internationally competitive as possible. And they did that as a matter of daily practice. They pegged the exchange rate as low as possible to make them as competitive as possible because manufacturing was its economic strength.  Once they entered the European monetary system they gave up their flexible exchange rate and so the way they then devised, a series of deregulation which were known as the Hartz reforms…, set about undermining the capacity of the workers to gain minimum wages. So real wages in Germany hardly grew at all. Virtually zero.  Why was that important? Because that was the way they kept their export sector competitive by not allowing the exchange rate to be kept down by reducing domestic costs.”

He adds:

“The introduction of the European Central Bank then meant that there was a one size fits all monetary policy. In other words, there was one interest rate set for the whole Eurozone instead of each of the individual central banks setting an interest rate that was more appropriate for any particular nation….  So if you’re suppressing the capacity of your domestic economy to spend, which is what the Germans were doing, by stopping their workers from getting real wages growth, and building up massive real income shifts in the profit sector, you’ve got low interest rates in the periphery countries and then there was a massive flow of German capital South to take account of profitable opportunities outside of Germany because there were no profitable opportunities in Germany because they had suppressed the capacity of the workforce to spend.  The so called period of stability was really setting up the Eurozone for the crisis because it was obvious that there were going to be massive trade imbalances emerging between the nations of the Eurozone. So when Germany puffs out its chest and describes itself as an export powerhouse, who do you think is buying German exports? All countries can’t have exports and growth because you need some countries to buy exports…”

Professor Mitchell makes the point that political scientists suggest that the whole thing was part of a push for political integration, to get over WW2. For the “ugly German” to become a citizen of Europe again.  Germany succeeded spectacularly, particularly from the 1950s through to the 1980s, but with the unravelling financial system their political integration has been undermined and they are lapsing back into the “ugly German” and the “lazy Greek or Italian”, which is unfortunate.

Professor Mitchell says the system as currently designed is unsustainable.  He says those countries have either got to have their own currency sovereignty, or they’ve got to have a federated fiscal policy capacity. One or the other.  The option of retaining the Euro requires that they have a Federal fiscal capacity, and there’s no way they’ll do that:  politically it won’t happen.  The other option is to break it up.  The problem is that they won’t do that, and so we’ll see a disorderly breakdown.

There’s confusion on the ground, too, which Professor Mitchell describes as an education gap:  polling in Greece clearly shows that the people are against austerity, yet they want to remain as part of the Eurozone.  To demonstrate the viability of Greece exiting the euro and returning to the Drachma, Professor Mitchell refers to Argentina’s experience. Although it’s not regular table talk for IMF executives, in 2001 Argentina gave the middle-finger salute to the IMF, devalued its currency and defaulted on $100 billion of debt. It is now regarded as the model for economic recovery.

Professor Mitchell accurately observes that someone will always lend money to a country that has defaulted:  it’s the nature of capitalism, of those seeking profit. Ideology doesn’t come into it.

But economic theories apart, it’s important to understand what austerity really looks like when austerity economics is casting its spell over international governments (or perhaps more accurately, their advisors).

In December last year Noëlle Burgi , of Le Monde diplomatique, described in graphic detail the dire situation in Greece. The picture she paints shows how grim an exercise life in Greece has become.

The Greeks are accused of living beyond their means, but one wonders what’s gone awry when recent OECD data reveals that Greek workers work 2,017 hours per year, making them the third hardest working nation on earth, after Chile and Korea. Perhaps we should listen to the average Greek citizen’s indignation about these slurs and look through the microscope to see exactly who is not paying their taxes.

Austerity means significant cuts in public sector salaries, pensions, spending on education, health care and so on.  It involves raising taxes, high unemployment, particularly youth unemployment, and the slashing of spending.  And it’s spreading through Portugal, Ireland, Spain, France, Italy and Britain.  As former US Secretary of Labour, Robert Reich, now an academic at the University of California at Berkeley, points out, it doesn’t work.

In April the International Labour Organisation released its “World of Work Report 2012”. It concluded that 50 million jobs are still missing compared to the situation that existed before the financial crisis. In 2011 74.8 million youth aged between 15-24 years were unemployed.  Youth unemployment adds to the risk of social unrest. As well as dealing with that, governments face the task of creating 600 million productive jobs over the next decade in order to generate sustainable growth and maintain social cohesion.  What are our chances of doing that?

What does the Eurozone crisis mean for Australia? If Australia has the world’s greatest Treasurer, isn’t that enough to save us?  Statistics suggest we have low unemployment, low inflation, high minimum wages, high household income, a healthy ratio of net government debt to GDP, a mining boom, a strong currency, solid economic growth …. you get the picture.

But there are other issues that rarely get aired, like Australia’s gross foreign liabilities.

As at 7 March 2012 Australia’s gross foreign liabilities stood at $2.067 trillion.  That debt includes all government and private debt, state debt, corporate debt and foreign ownership of shares and real estate. Everything that can be sold or called, particularly if banks who are counterparties to bad debts want their money back to cover losses, or if there is a deleveraging contagion.

On the other side of the ledger Australia’s gross foreign assets allegedly amount to $1.212 trillion. If that’s accurate, and if my maths is correct, our liabilities exceed our assets by about $40,000 for every man woman and child in the country.  Here’s hoping that those assets have no counter party risks and that people would repatriate straight away even if the Australian dollar is falling.

In December last year the Reserve Bank of Australia’s deputy governor, Rick Battellino, warned that Australia’s indirect exposure to Europe “through the effect on some of our important trading partners, could be significant”.  Significant enough for Australia to kick the can for $7billion?  I guess that’s only $350 each from me, from you and from every other person in the country, but it’s a pity some of it couldn’t go to help fend off crises like the coming famines in Africa.

And much of Australia’s private debt is locked up in houses.  Australia’s home ownership rate is frequently quoted as 70 per cent. How many people actually own their homes, unencumbered? It’s now about 33 per cent. The other two thirds are subject to the vagaries of the financial markets, like all debtors.  Little wonder that there was such a push for new home owners, such incentives for first home buyers, to sign on for long term debt commitments at the height of the GFC and its mad uncertainties. And another statistic to cap it off: Australia’s household debt as a percentage of disposable income has been stuck around 170 per cent – the highest in the world – for about five years.

What happens if the lenders to our banks suddenly want their money back? To what extent have banks here borrowed short and lent long?  It will be interesting to see how interest rates go as European banks repatriate their capital, and commodity prices fall in our rubble economy.

To translate this back from money to people, this whole situation brings to mind the effects of the “ownership society”. In 2005 a conservative publicist James Gleeson wrote in the “Ownership Society” issue of the magazine of the American Enterprise Institute that:

“Studies show home ownership boosts civic participation and educational success and reduces behavioural problems for kids.  Ownership, of any sort, makes people more conservative, both personally and politically.”

This sort of thinking makes it easy to understand why governments and banksters have a common interest in getting us all signed up for a lifetime of financial obligation.  No need to roll out the water cannon or call in the riot squad for these people, who are so heavily invested in the status quo.  And the only real risk of default by such conscientious borrowers lies in a systemic collapse, which the banksters know from experience will lead to their losses being quarantined and socialised.

Ask yourself why we’re kept in the dark about opaque markets and bodgy financial arrangements.  In November 2011 Michael West reported that the Reserve Bank of Australia and the federal Treasury have been systematically purging public information from their databases at the request of the big banks.  Almost all detail relating to more than $100 billion in taxpayer-guaranteed funding has vanished.  Why?

And in December 2011 it was reported that a freedom of information request for Australian Prudential Regulation Authority risk registers was rejected because of the dangers to the economy if the registers were to be released.  So much for free markets, level playing fields and information equality.

Australia does have the advantage that it can print money, so it is unlikely our banks will be allowed to fail.  The problem is that banks realise that.  But what will the crisis mean for interest rates or inflation or unemployment, for the person on Main Street? It’s a dangerous sign when the Shadow Treasurer is already playing the “End of the age of entitlement” tune.

Professor Mitchell sums it up in this way:

“…Australia’s problem is the current government. The other problem is the next government.  Australia has the fiscal and monetary capacity to ensure that everybody has a job in Australia; to ensure that we have an adequate welfare state, which doesn’t mean we support sloth, but it means we support need; we have the capacity to generate an environmentally sustainable future through properly targeted industry policies and we can maintain all of it, our regions, in good shape, if we want to. What we’re doing is choosing not to and are electing a sequence of governments that undermine our future. My latest estimate of teenage unemployment is 38.8% once you take into account those who have dropped out of the labour force, those who are underemployed and those who are officially unemployed.  Since February 2008, which was the end of the last cycle, and the start of the downturn before we had growth again, teenagers overall lost jobs.  Full time jobs lost since that time are about 90,000. The Government bats on about the need to save up for our future because we have an ageing population etc. Well we’re undermining our future every day by not engaging with our teenagers into education.  We’re undermining our education.  When the Gonski report came out in late March and said we needed $5 billion straight away to bring our public education system up to standard – not to improve it, to bring it up to standard – from its appalling state in literacy and numeracy and the rest of it, the first thing the responsible Minister, Peter Garrett, said was that our priority is a budget surplus….”

We can suffer these sorts of plays and tricks and do nothing, until one morning we will have to wake up to greet each other, “Welcome to the world of the austerity” and hope like hell we aren’t the one on its receiving end.  Or, instead of being pushed to austerity, we can use adversity as the opportunity to push for a more cooperative approach, bearing in mind that the current system is built for growth not sustainability nor stability: for money to be taken out of politics, for trading operations that call themselves investment banks to be kept separate from banking proper, for the end of speculative currency trading, and for corporations no longer being seen as people.  Some would go as far as nationalising the banks and scrapping derivatives altogether, and even though these options now sound extreme to our neoliberally-conditioned ears, they should all be considered and debated.

Austerity inevitably will lock us into a badly flawed economic order, but instead we can use adversity to fan the winds of change.


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