Wednesday, October 5, 2011

Will the Euro survive?



Lately there has been a lot of mention of whether the Euro has a problem, whether it will survive and whether it was a good idea.
This has of course come from the credit crisis that has been going on in the eurozone for the last while.
With the imminent controlled collapse of the Greek economy (any other final outcome really is unrealistic if you ask me.) there are fears that this event will transplant itself throughout the eurozone and drag other countries, like Italy, Ireland, Portugal and Spain, with it down the drain.

Now it may not be immediately obvious to everyone why that is.
The fast explanation is that a lot of the Greek debt is owned by banks in other nations, a good chunk of it is also owned by those other countries that are also in  economic problems at this time. If Greece crashes, especially in an uncontrollable manner, that debt will be defaulted on. When this happens the real possibility and fear is that these other financial institutions will also collapse due to all of that defaulted on debt and annuities on that debt, causing both a dramatic drop in capital held in government bonds but also a decline in income from the annuities on those bonds.

If the banks and other financial institutions go down then, well the fear is that what happened in the US with the collapse of several large financial cornerstones, will happen in the eurozone as well.
That is the fast and dirty explanation on what is going on with that situation at the time.

Now, the Euro.
Do I think that the Euro will collapse as a common currency of the EU?
No I don't.
The reason is that so much political capital has been invested in it that to many the thought, if it comes down to it, will be unthinkable.
The Euro was a significant step on the road towards European unity and a collapse of the Euro will mean a significant setback on the path towards that, a path that has been more difficult and much slower than one might have expected when work started on the idea of a truly united Europe.
This will make it very difficult for a lot of actors to let it collapse and the political ramifications alone will make it unlikely when we get down to it, though some member nations may drop out of it again for a little while.

Was it a good idea?
The answer there is both a yes and a no.
With the vision and the plans that were held at the time it was a very good idea. A single united currency binding together member states and forming a close-knit union of countries. In many ways one could say that the idea was "The United States of Europe". As both a part of this, as well as a prod to further this closer connection it was, and continues to be a good idea. It helps in creating a more united and common identity, it helps greatly with trade between member countries and generally eases a lot of the problems and risks of currency when it comes to international trades, easing the risk for private sector companies to engage in such as well.

The problem however was that things never got far enough when it was implemented. While the dream may have been "The United States of Europe", and in time this may still happen (and will, eventually, I believe personally.) it didn't go as quickly as some might have thought back then. While a union of currency was born, each member nation still had independent financial and economic policies as well as great influence locally on fiscal policies and regulations on banking and other financial institutions.
The problem with this is obvious enough. A common currency is not a good idea if you do not also have at least somewhat common economic and financial policies.
This was the problem really, the Euro as a common currency was introduced too early for the political climate. It should have waited until the political climate was more unified within the EU first.
Possibly the belief was that the single currency would expedite this and therefor they chose to accept it in that belief.

However this early or premature adaptation led to problems as we now see. it worked well while things were, or at least seemed to be going along just fine but under times of stress the lack of a true political unity is showing.

I do however think it will ride off this wave and emerge on the other side of it still standing, if with some battle-scars.

It was a good political idea, which wasn't implemented perfectly, it should have been implemented together with greater implementation of united financial and economic policies as well. This may still be a ways off, but possibly this crisis will show a need for such and lead to them. Of course it may instead lead to greater doubt and an upcoming schism about European unity, at which point the EU will have bigger concerns than just saving the Euro.
This latter possibility however I think more unlikely.

Sunday, September 18, 2011

Actions speak louder than words

While I would like this blog to handle other things than just US politics and US economy, I saw a piece today about the GOP answer to the AJA (American Jobs Act) that just made me shake my head again.
The piece is available here: http://bit.ly/rmD7Nz

For those who haven't followed along with US media, the AJA is a bill proposed by the White House with the goal in mind to lower the US unemployment, which is currently at 9.1%, or at least it was in august, which are the newest numbers available from the US Department of Labor.


  • The bill is estimated at an expense of $ 447 billions and is divided between such things as 
  • Payroll tax cuts
  • Funds for preventing the layoff of teachers and first responders
  • School construction work
  • Building of infrastructure (both public and private)
  • Preventing home foreclosures and vacant commercial structures
  • Unemployment insurance
  • Temporary assistance for needy families
  • Summer jobs
  • Work training and retraining


All in all sensible projects that go hand in hand with lowering expenses somewhat for companies and getting people to work and putting more purchasing power in the hands of consumers so the economy can be restarted a little as well.

Well, that was the theory of course.

Then a memo went out in the Republican caucus about what was acceptable in this bill, which parts of it they could support.

What they figured they could support was.. $ 11 billions... 1/44 of the bill.

Ok..somewhat disappointing and disturbing, considering the bill really is a good outline for getting the unemployment down and getting money circulating again.

Then we move on to the more disappointing part, which parts of the bill they would support.


  • A 100% tax cut on depreciation expenses for businesses
  • A tax credit to businesses hiring veterans
  • A job training program in the style of "Georgia works"


Almost half is tied up in the first post.

Most surprising of all (though not really) is the fact that the GOP, the ones that are opposed to taxes..are actually opposing the tax cuts that would help the common working man, their official reasoning being forced and nonsensical at best.

And what they are supporting is pretty pointless, at least on it's own.
Why?
Well the tax cut on depreciation expenses would be helpful if  businesses were needing to purchase new equipment to contend with increased demand, but there is nothing in what they are agreeing with that will increase demand so it is worthless and in the end only puts a bit more money in the pockets of companies, pockets it is not coming out of again in a hurry.

The tax credit to hiring veterans is a laudable one, if companies were in a position where they were actually hiring people, they aren't. And who will hire someone they don't need to get a tax credit of X when they have to pay salaries of 10X the first year?..No-one.

The Georgia Works programs.. job training programs can be effective, if there is a demand for labor trained in skills which there is currently no supply for. This isn't really the situation today. Also the Georgia Works program which is to be the foundation for this is pretty much a failure even small scale in southern Georgia with the states own Labor Commissioner saying that the program has significant flaws and would not work as a federal initiative. IT basically is a program that no matter what it was supposed to do basically has ended up supplying unpaid interns to businesses for a couple of months, with no incentives for them to actually retain them. (http://bit.ly/pLTB1d)

Well, for a political party that claims to be pro jobs, pro the little guy and all that.. Actions do speak louder than words..empty words as it turns out.

Friday, September 16, 2011

Debt insanity

Reading yesterdays bit on the attitude of  John Boehner towards the Debt Panel: http://wapo.st/ng7yCC I find myself wondering.
Wondering just how reckless the GOP is going to be in it's chase for more power, and whether it's members are as ignorant of the realities of economics as they seem.

It's no surprise by now that the US is in a recession. You can put any spin on it you want, or try any definitonal trickeries you want but the truth of it is that in reality it is a depression. It's also not one that the economy is bouncing back from quickly, as it did in '58, '61, '75 and '82, which are the post-war recessions of similar severity to the current one. These were also the worst ones in this time period.

How do you get out of a depression? You grow the economy. How do you grow the economy? Elementary economics tell us that; you grow the GDP.
What is the GDP? The GDP is a measure of the value of all final goods and services produced in a country in a certain timespan. There are three ways to determine GDP, without going into the specifics of each here I will jsut mention that in none of these ways is government investment something that lowers GDP. There are many factors but in general they are: consumption, compensation of employees, corporate profits, government spending, investment (private/corporate and government), taxes (yes taxes grow GDP) and some others, which ones you use at any point is dependent on which model is being used, the outcome is supposed to be the same whichever model you use though.

So lets see here. Taxes increase GDP..Government spending and government investing increases GDP, employee salaries and wages improve GDP, consumption improves GDP...

And the GOP wants to cut government spending, cut government investments, cut taxes, cut the minimum wage cut regulations on corporations and so on.

Their mantra is that this is ok because all this will create more jobs.

WRONG!
The reason why so many people are unemployed in the US right now is because companies have no use for their labor. Why is this? Because the consumption is too low for the corporations to max out their production potential.
This means that as it is they are capable of producing more than people are willing to, or able to buy.

No private company is going to invest in further production capability when it has capability to spare already, unless it is expecting a massive rise in consumption in the near future. They are not expecting this...

So that means there are less salaries and wages to go around. There is also a higher supply of labor than there is a demand so wages will also sink, unless protected by say..oh a minimum amount of wages you must pay. Simple supply and demand.

So now corporate investments are gone, employee salaries and wages are down.. which means consumption is also down.
What is the likely outcome of this is something called a "Devil's Spiral" consumption goes down, corporate profit goes down..wages and salaries goes down..consumption goes down..etc..etc..etc.


What will corporate tax cuts and deregulations, the old GOP solution to everything, do to help this?
Nothing...

Why not? Seems corporate expenses will go down and then profits up right? Well, there is some logic to that. But then we forget the fact that at the moment corporations can produce more than they need to so those profits will not be funneled into new investments at all. They will simply pocket them.
There is no need to blame corporations for this, it's simply good business, and that is their reason to exist.


Let's see what's left? Ah yes..Government spending and investment and taxes...
See where this is going?

This problem needs to be solved from the bottom up. First you need to increase consumption. How do you do this? You put money into the hands of the common person so they can afford to raise their consumption again. This will increase demand and through that production. Then you increase demand further through government investment in big things like infrastructure, building, renovating and so on. This leads to a bigger need for labor again, which leads to more jobs, more salaries and what do you know, things are looking up again.

But what about the debt?
Well I am not going to deny that the US has put itself in a hole there. One that it should be ashamed of since there really is no way it couldn't be seen coming a long long ways off. years and decades really.

Thing is, that if you can restart the economy and get it going back up again. The US economy is substantially sound, at least in the short and medium run (Medium here meaning at least a decade or more).

Unlike a private household a country can, without problem, run on a deficit for a long period of time.
Now if the economy is sound again there is no reason why the US should not be able to talk to it's creditors and come to agreements on paying down debt, extending debt by rolling it over and so on and get some breathing-space there. Then with a moderate, well thought out plan for reforming and adjusting the economy over time, servicing that debt should be fairly undramatic and far from the excruciating pain the GOP policies are pushing towards.

Also there is no need to raise taxes really. The tax level in the US is perfectly fine. What needs to be done is close all the loopholes and the tax cuts for the mega rich and the corporations. These are what makes the effective tax level among the lowest in the world. Among..the..lowest..in..the..world.. Companies aren't going to go somewhere else over a few percentage points.. But the effect of those few percentage points on the economy as a whole, will be drastic.

So, how long will they let political ideology and dogma win out over science and common sense?
How much pain will they put the common person through in their chase for power?

I fear to consider..