Debt and democracy - Page 2 - Politics Forum.org | PoFo

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Everything from personal credit card debt to government borrowing debt.

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#14257144
Why are you spending so much time sending people love with this democracy shit? The truth is Profits over people, get it? Economics will always top political jurisdiction. One plus one equals two. Bang, boom, infinite, this is the formula that each and every sinister human abides. I hate to burst your philosophical bubble, if it was ever inflated, you don't understand what this kind of mentality produces. No one will listen to you, dubbing you as crazy, minute men that will be for show, intimidation, this nation has no patience.
#14259058
Greece is artificially constrained by the Euro; as a non-sovereign state, it lacks control over it's monetary policy. Leaving the EU would be the best policy for it, allowing it to pay back loans by increasing the supply of money. This, btw, would be non-inflationary as loan repayments decrease the supply of money, thus offsetting each other.

The problem with the analysis of debt being inherently evil is that with a sovereign currency, increasing the supply of money, by debt-finance or by direct spending, decreases the value of existing debt. Because Greece lacks the ability to increase the supply of money, the nominal value of debt there remains the same or grows; however, if they had control of their supply of money, continued deficits would shrink the value of existing debt over time. There would be a point, though, that a deficit ought to focus on economy-expanding investments.
By Baff
#14260321
Stormsmith wrote:
[Baff]I might want to edit that statement a little. Most governments run a tab, just as most households do these days. But I can remember the days when most households did not run a tab. When the very thought of running any kind of tab was considered socially irresponsable. Immoral even. Now everyone is doing it. This social transformation occoured in a period of under 15 years.[/baff]
If I was to amend my statement it would be to say most households ran tab much of the time, with mortgages being a significant cause. Your idea that consumer debt wasn't an issue until 1998 is wrong. Society has a long history in money lending, and for usary.



But not on the scale it is today.
I'm old enough to remember the times when not so many people could get mortgages. (Or even credit cards). Only the secure of career.
And then under Tony Blair.. all this changed. We were actively encouraged to spend for the economy. To get in debt to make us all richer.
"Retail Therapy". Good for you, good for the economy!
Spend to grow!
Lower the interest rates!
Take out a mortgage and a second mortgage too!
Get a credit card and a store card too!
Buy a car on Hire Purchase. A new fridge too!
Cash back (yay) when you buy some Rizla's with your student credit card.


Just a slight correction, the 15 years I was discussing were not the last 15 years. Think 1992-2007 perhaps.
When people worked out that all the savings in the world had now been spent...(the liquidity crisis) the conventional wisdom changed and people have since been advised to repay their debts before interest rates go back up..
Image

Image

Household debt sky rocketed at this time. 4 X what it was according to that last graph.
By Baff
#14260332
Figlio di Moros wrote:Greece is artificially constrained by the Euro; as a non-sovereign state, it lacks control over it's monetary policy. Leaving the EU would be the best policy for it, allowing it to pay back loans by increasing the supply of money. This, btw, would be non-inflationary as loan repayments decrease the supply of money, thus offsetting each other.

The problem with the analysis of debt being inherently evil is that with a sovereign currency, increasing the supply of money, by debt-finance or by direct spending, decreases the value of existing debt. Because Greece lacks the ability to increase the supply of money, the nominal value of debt there remains the same or grows; however, if they had control of their supply of money, continued deficits would shrink the value of existing debt over time. There would be a point, though, that a deficit ought to focus on economy-expanding investments.


The Euro isn't Greece's core problem. The size of it's debt and stupid things they spent the money on is.

Greece having the ability to alter it's currency exchange rate would have alleviated it's problems in some way but hardly cured them entirely.
For example, the UK, Japan and America all still have massive debt issues even though they have their own soveriegn currencies.
And the Euro has been devaluing like a bastard (although I think Greeces creditors are within the Eurozone themselves so this won't help Greece's repayment much).

The knock on problem for Greece if it devalued to repay it's debt would be much higher borrowing rates as potential lenders are wise to this tactic or indeed... no further willing lenders at all. (Plus higher costs of living due to increased price of imports).
Pretty much the only people buying govt debt these days are the very same govt's themselves using QE. That or those who are legally required to like banks and insurance companies etc.


So the core problem for Greece is the same core problem so many of our countries have. We consume more resources than we produce.
Debt fills that gap temporarily but you can't persist with this indefinitely. No matter what tricks you may try with monetary policy.... the physical reality will always catch up with you. We are spending more than we earn.

There is no possible accounting trick out there that will make 1 kg of potatoes into 2 kg of potatoes. You can redefine 1kg as 0.5 kg if you like, but the amount of potatoes you have still stays the same.
No way around this. No monetary magic wand.

We consume more than we produce and this will end. Nothing we can do about it.
User avatar
By Eran
#14260510
Figlio di Moros wrote:Greece is artificially constrained by the Euro; as a non-sovereign state, it lacks control over it's monetary policy.

Greece is a perfectly sovereign state. It is constrained by the euro, but then until about 100 years ago, being constrained by money supply wasn't considered a sign of being less than perfectly sovereign. Otherwise, and by that standard, none of the states under gold standard were sovereign.

Further, Greece has chosen to use the euro, and, as a sovereign state, can choose to stop using the euro any day of the week.

Because Greece lacks the ability to increase the supply of money, the nominal value of debt there remains the same or grows; however, if they had control of their supply of money, continued deficits would shrink the value of existing debt over time.

In other words, Greece could default on its debt by inflating it away. As things stand, it can only default on its debt by defaulting on its debt.

Either way, Greece would find it very difficult to secure additional debt. Finding themselves in a position where they critically depend on ongoing injections of more and more debt is the real trouble Greek politicians find themselves in. Note - not past debt, but the ongoing need for new debt.

That need cannot be "inflated away".
#14260764
Baff wrote:The Euro isn't Greece's core problem. The size of it's debt and stupid things they spent the money on is.


The size of it's debt is directly related to no having a sovereign currency. They're incapable of altering their currency to repay debt.

Greece having the ability to alter it's currency exchange rate would have alleviated it's problems in some way but hardly cured them entirely.
For example, the UK, Japan and America all still have massive debt issues even though they have their own soveriegn currencies.


Greece possessing sovereign currency would, as I pointed out, be able to repay it's debts w/ increasing taxes or borrowing more; it would also be able to simply issue the currency it needs for it's deficit.

Yes, the UK, Japan, and America have problems, but not because of the debt itself- it's because they refuse to operate as a sovereign currency. All three adamantly stick to austerity measures. Every time Japan issues a stimulus, their economy grows; afterwards, they cut their deficits and see their growth stop, forcing them to provide another stimulus later. However, at no point has this caused a problem to their ability to finance their government, and if they would provide the adequate stimulus in the first place they would have ended their "lost generation" twenty years earlier, and would be out of this by now.

As for the US and UK, more of the same. The UK has a pretty strict austerity policy and recently "narrowly avoided" a triple-dip recession when they managed to be a fraction of a percent above where they were six months before after being worse off for most of that period. The US saw decent growth after it's stimulus during "the recession" (as if it's ended), but continually declining growth rates since then. As we continue to tighten our belts, we see worse and worse performance- each year, the deficit is lower, and so is the growth rate.

Contrast this to China, where they managed to avoid slowed growth at all during the recession by using a massive stimulus that focused on infrastructure and development. They continue to increase their currency supply, allowing them to improve infrastructure, make investments, and increase domestic consumption. Or compare this to Ecuador, who followed a neoliberal program until '06 that failed them miserably but, after performing a strategic default, increased their deficit to improve roads, healthcare, and education, and whose living standards today are vastly improved. On one side of the coin, we see shitty growth and recovery from non-sovereign nations and from sovereign nations who stubbornly adopt austerity measures; on the other, we see strong growth from nations who have a decent deficit and invest in programs their country needs. Greece, if not fettered by the Euro, would readily fall into the second category.


The knock on problem for Greece if it devalued to repay it's debt would be much higher borrowing rates as potential lenders are wise to this tactic or indeed... no further willing lenders at all. (Plus higher costs of living due to increased price of imports).


Increasing the supply of currency is not inherently "davalueing" it. Particularly, I mentioned issuing new currency to repay it's debts; this offsets eachother, as repaying loans shrinks the supply of currency. Further, it would have no need of borrowing at all. Really, there's not much of a point in any nation issuing securities instead of currencies.

We consume more than we produce and this will end. Nothing we can do about it.


If it wasn't produced, how were we able to consume it?

Eran wrote:Greece is a perfectly sovereign state. It is constrained by the euro, but then until about 100 years ago, being constrained by money supply wasn't considered a sign of being less than perfectly sovereign. Otherwise, and by that standard, none of the states under gold standard were sovereign.

Further, Greece has chosen to use the euro, and, as a sovereign state, can choose to stop using the euro any day of the week.


In this instance, sovereign refers to the currency. States under the gold standard did generally lack sovereignty, but still managed seignorage in several different methods (increasing liquidity, changing gold/currency exchange rates, etc.)

In other words, Greece could default on its debt by inflating it away. As things stand, it can only default on its debt by defaulting on its debt.


1) Businesses default on their debt all the time. It often strengthens their performance, and rarely hinders them from taking on new assets. If this is true for businesses, it's far more true for governments.

2) Greece wouldn't be defaulting on it's debt; it'd be repaying it. It would be well within it's rights to tell it's creditors to fuck off and simply issuing the currency it needs for it's deficit. However, repaying your debts in a timely manner is not and never will be defaulting, regardless of inflation; by your logic, anybody who pays off their mortgage has defaulted on their debt because the value of that debt was lower than when it was originally issued.

Either way, Greece would find it very difficult to secure additional debt. Finding themselves in a position where they critically depend on ongoing injections of more and more debt is the real trouble Greek politicians find themselves in. Note - not past debt, but the ongoing need for new debt.


Completely false. All nations undergo inflation, limiting the value of debt overtime; it never hurts their capability to take on new debt. If they issue new currency in order to repay debts, which would in reality be a simple electronic transfer, than they'd have a better standing, as people would be more assured of their ability to repay debts and more willing to purchase securities from them.

Furthermore, they might choose not to issue debt at all, and instead directly issue currency. In this case, not only would their credit rating remain good, but it wouldn't matter in the first place. The reason their debt is hurting them in the first place is because they're constrained in their ability to repay it; as a sovereign currency, they are neither constrained in repaying it nor required to borrow.
User avatar
By Eran
#14260958
1) Businesses default on their debt all the time. It often strengthens their performance, and rarely hinders them from taking on new assets. If this is true for businesses, it's far more true for governments.

When businesses default, they go into reorganization which is judicially-supervised, done in coordination and cooperation of debtors, and often strips control off existing management. Equity holders are often wiped out.

How can that apply to governments?

Further, businesses who default on their debt find it very difficult to raise new debt. The problem of the Greek government (as well as many others) is that it must continue to raise new debt to survive. No business can continue to survive under those conditions.

2) Greece wouldn't be defaulting on it's debt; it'd be repaying it. It would be well within it's rights to tell it's creditors to fuck off and simply issuing the currency it needs for it's deficit. However, repaying your debts in a timely manner is not and never will be defaulting, regardless of inflation; by your logic, anybody who pays off their mortgage has defaulted on their debt because the value of that debt was lower than when it was originally issued.

The degree to which inflation is equivalent to default varies. Individual homeowners have no control over inflation, but may well enjoy the windfall profit of inflation at the expense of creditors, savers and investors. Inflation through the manipulation of the money supply is always problematic. When it is orchestrated by the debtor himself, it is morally equivalent to default, even if it is technically legal.

Questions of technical legality, however, are really secondary here. Greek is a sovereign nation, and can declare all its existing bonds legally non-binding on itself. It will have to fear no enforcement for contract violation.

But whether it does so through inflation or an outright default, Greek cannot avoid the problem of needing ongoing borrowing to sustain its operations. Whether what it does is "legal" or not matters much less than whether what it does is conducive to further, essential borrowing.

All nations undergo inflation, limiting the value of debt overtime; it never hurts their capability to take on new debt. If they issue new currency in order to repay debts, which would in reality be a simple electronic transfer, than they'd have a better standing, as people would be more assured of their ability to repay debts and more willing to purchase securities from them.

Let's see. You are an investor (say a pension fund manager) who purchased 100,000,000 euro's worth of Greek government debt. The following week, Greece leaves the euro, and your bond is converted to 100,000,000 new Drachmas with an initial exchange rate of 1:1 with the euro.

Over the next year, Drachma inflation reduces the value of your bonds to 50,000,000 euro (still equal 100,000,000 Drachmas). Greek inflation continues to stand at 100%/year. Now you face a new opportunity to purchase a new issue of Greek Drachma bonds. How likely are you to bite? Why on Earth would you buy such bonds just to see their value in your currency slashed?

Furthermore, they might choose not to issue debt at all, and instead directly issue currency.

It doesn't matter. The Greek government consumes more resources (real-world resources) than it brings in. By inflating its own currency, it can effectively increase its intake by grabbing a fraction of the value of cash holdings by Drachma holders. That, however, is a quickly diminishing pot. Sooner rather than later, the logic of this approach results in a hyper-inflation spiral.
By Baff
#14261017
Figlio di Moros wrote:
The size of it's debt is directly related to no having a sovereign currency. They're incapable of altering their currency to repay debt..


Altering their currency doesn't repay debt. It's a form of defaulting on it.

If I lend you 2 Mercedea Benz worth £50,000, and you deflate your economy so that you can pay me back £50,000 which is now worth only 1 mercedes benz. You have not repaid your debt to me. You've just fiddled your books to try and cheat me.

The size of the debt is directly related to what they borrowed. Nothing else.
Yes you can use currency manipulation to help default on your debt. I don't however see any govts embracing deflation to help repay their debt. Only inflation to help default.


Sorry but exactly how stupid do you think lenders are?
You think you can rip people off gazillions of pounds and they won't notice?

Accounting tricks don't cut it mate. When I lend you something I expect to get it back. Not a pile of monopoly money you printed just to fob me off.
Get a clue please.

So anyone who talks the way you talk... doesn't get a loan from me. Ever.
I have no interest in such people. No wish to help them. No wish to co-operate with them and absolutely nothing to gain from them financially.
Better to let them starve to death than let them starve me to death first.... and then starve to death


.
If it wasn't produced, how were we able to consume it?


Someone who was not us produced it and lent it to us.

Also, we have savings. Conserved resources.
Once our savings are spent, they are gone.
cf the credit crunch.


So for many years we have been operating beyond our productive capacity by a combination of two methods.
Number 1.
Spending our savings.
Consuming our capital. (The unforgiveable crime).
Not only have we been getting poorer but our ability to create wealth, our capital has been reduced. Our capacity to produce is shrinking because we are living off of our capital and not just our income.

(The correct thing to do is live on less than your income so that your capital eternally grows, thus ever increasing your capacity to produce).
For an economy to grow, savings must grow, not debt. We need a greater capacity to make investment. Not a lesser one.

Number 2
Foreign aid.
Borrowing from those poorer than us.

Now, the savings all ran out 5 years ago. Banks folded.
So lenders are few on the ground.
Last edited by Baff on 25 Jun 2013 13:35, edited 3 times in total.
By Baff
#14261027
Eran wrote:Let's see. You are an investor (say a pension fund manager) who purchased 100,000,000 euro's worth of Greek government debt. The following week, Greece leaves the euro, and your bond is converted to 100,000,000 new Drachmas with an initial exchange rate of 1:1 with the euro.

Over the next year, Drachma inflation reduces the value of your bonds to 50,000,000 euro (still equal 100,000,000 Drachmas). Greek inflation continues to stand at 100%/year. Now you face a new opportunity to purchase a new issue of Greek Drachma bonds. How likely are you to bite? Why on Earth would you buy such bonds just to see their value in your currency slashed?


This is a great example but a bit "banky". aah Haha

The same is true of cars. More sexy as we know.


If I am to build a car factory in your country, and I invest 100,000,000 Euro's in the factory, and you are about to deflate your currency to half in under a year.
Then my factory will be worth half what I paid for it within a year.
Obviously the whole purpose of me building a factory is to make money, and not lose half of it.

This is the current problem for all Euro countries. Because the Euro is devaluing like a bastard, no one can invest in it until it stops.
And that's why being in the Euro is good for Greece. It's a very stable currency compared to the Drachma. It allows them to attract foriegn investment that they otherwise would never be able to.
They won't leave.
#14261191
Eran wrote:Further, businesses who default on their debt find it very difficult to raise new debt. The problem of the Greek government (as well as many others) is that it must continue to raise new debt to survive. No business can continue to survive under those conditions.


Odd, neither Donald Trump nor Ecuador seem to have had that problem. Perhaps some statistics are valuable, after all?

The degree to which inflation is equivalent to default varies. Individual homeowners have no control over inflation, but may well enjoy the windfall profit of inflation at the expense of creditors, savers and investors. Inflation through the manipulation of the money supply is always problematic. When it is orchestrated by the debtor himself, it is morally equivalent to default, even if it is technically legal.


It's not a "windfall profit", they're paying back more than they own; furthermore, paying it back to an institution which created it out of thin air. Whether you consider it "morally equivolent" is irrelevent, paying back debts w/ newly issued currency is a viable solution, and the creditors readily accept it's value and even find it more secure knowing that gov. debt cannot be defaulted on.

But whether it does so through inflation or an outright default, Greek cannot avoid the problem of needing ongoing borrowing to sustain its operations. Whether what it does is "legal" or not matters much less than whether what it does is conducive to further, essential borrowing.


The difference between our positions is that I do not consider it a problem, but a viable and intelligible option for sustained growth. As I said, borrowing is an option, one in which they could simple overlook and choose to spend into existence as well. By using "newly issued currency" for the repayment of debts, they are not causing inflation- the amount of the currency and the size of the repayment of debt, being deflationary, offsetting each other. What it does do is guarantee creditors the repayment of their debt, and if they so choose to continue borrowing instead of spending new deficits into existence, than they are improving their standing by having a more secure option for the repayment of debts than as a non-sovereign currency.

[quote=Eran]Let's see. You are an investor (say a pension fund manager) who purchased 100,000,000 euro's worth of Greek government debt. The following week, Greece leaves the euro, and your bond is converted to 100,000,000 new Drachmas with an initial exchange rate of 1:1 with the euro.

Over the next year, Drachma inflation reduces the value of your bonds to 50,000,000 euro (still equal 100,000,000 Drachmas). Greek inflation continues to stand at 100%/year. Now you face a new opportunity to purchase a new issue of Greek Drachma bonds. How likely are you to bite? Why on Earth would you buy such bonds just to see their value in your currency slashed?[/quote]

Ah, the obligatory "appeal to hyper-inflation". Of course, that's an incredibly unlikely scenario- more likely would be 7% inflation, so that the supply doubles over ten years. Of course, creditors usually ensure interest, so 7% interest on 7% inflation w/ a secure option for repayment, than such securities are very low-risk debts. Certainly, much safer than an inflation-less security in which repayments must be financed by taxation which promotes deflation and inefficiency.

Furthermore, they might choose not to issue debt at all, and instead directly issue currency.

It doesn't matter. The Greek government consumes more resources (real-world resources) than it brings in. By inflating its own currency, it can effectively increase its intake by grabbing a fraction of the value of cash holdings by Drachma holders. That, however, is a quickly diminishing pot. Sooner rather than later, the logic of this approach results in a hyper-inflation spiral.


The first point worth addressing is, again, hyper-inflation; hyper-deflation has been a much more common scenerio, especially given your gold-standard policy. If you look at the value of debt during the Great Depression, you'll see that it rose 250% due to deflation; inflation, on the other hand, reduces it's value, making repayments more secure. On the one hand, you have a policy that heavily favors bankers by rapidly increasing the value of debt and crushing homeowners, car-owners, small businesses, etc. On the other, you have a policy that reduces the end-value of principal, but also reduces risk by ensuring a smaller burden on debtors while allowing lenders to provide a greater quantity of loans.

The second issue, or the direct point you raised, is this idea inflation is "grabbing a fraction of cash value". This is based on the inflation-tax misnomer, that increasing the supply of money inherently decreases it's value. This is only true if new currency does not increase circulation or value; this is dependent on what they spend it on. As new currency tends to increase GDP, it increases the capacity for consumption and GDP, offsetting value decreases.
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By Eran
#14261624
Odd, neither Donald Trump nor Ecuador seem to have had that problem. Perhaps some statistics are valuable, after all?

Sure - if you have any to show. Random anecdotes don't make statistics.

As for your barb, Austrians aren't categorically opposed to using statistics. They only believe statistics are worthless in economics, not to be confused with economic history.

find it more secure knowing that gov. debt cannot be defaulted on.

Why on Earth would anybody feel secure knowing that they will get 100,000,000 Drachmas back in 10 years, while suspecting that those 100,000,000 Drachmas won't be worth their weight in paper?

By using "newly issued currency" for the repayment of debts, they are not causing inflation- the amount of the currency and the size of the repayment of debt, being deflationary, offsetting each other.

Let me make sure I understand you. A sovereign government (say the UK) borrows funds from foreigners and domestic savers by issuing bonds in its own currency.
As the bonds come due, the government prints their face value in newly-created money, and hands those new notes back.

Do you claim that this process can be continued without limit and without creating inflation? If so, why are so many governments in trouble? Why aren't we living in a world of government-funded nirvana?

Certainly, much safer than an inflation-less security in which repayments must be financed by taxation which promotes deflation and inefficiency.

The scenario is one in which the country only starts the money printing after the debt has been issued. Let's take your premise and assume that money has "only" lost 50% of its value in 10 years. Still, as an investor, I have lost half my money - not something that puts me in a state of mind conducive to lending more money to that government!

To the extent that inflation was known in advance and factored into the rates at which the bonds were originally issued, printing money doesn't help the government - it merely prints enough money to cover the interest costs. To repay the principle, inflation must be much greater than the rate implicit in the original interest rates.


Where I do agree with you is that there is no painless way for governments to repay their debts. Inflation, outright default or heavy taxes all have their disadvantages.

On the one hand, you have a policy that heavily favors bankers by rapidly increasing the value of debt and crushing homeowners, car-owners, small businesses, etc.

I am not advocating deflation as a policy. Deflation in the early '30s was the result of Fed policy, not of free market operations. On a strict gold standard, the only deflation experienced is secular deflation due to increased productivity in the economy. Debtors do not "lose" due to that kind of deflation.

You analysis is also wrong in identifying winners. Bankers are not net lenders. They tend to lend in proportion to the assets they bring in as liabilities. It is investors, rather than bankers, that potentially benefit from deflation.

By contrast, bankers (especially money-center, national bankers) do benefit greatly from the current policy of endless monetary expansion. As early recipients of new funds (e.g. by selling governments bonds to the Fed as part of QE), they benefit in having excess to money before it had its inflationary effects. By contrast, late recipients of the new funds lose by first suffering through its inflationary effect, and only later obtaining the new funds.

As new currency tends to increase GDP, it increases the capacity for consumption and GDP, offsetting value decreases.

What makes you think new currency tends to increase GDP?
By Baff
#14261673
It does. Simply because GDP is measured as a currency value.

The amount of goods and service produced may stay the same, but the GDP score will rise as the numerical values attributed to those same goods and services rises.
It's an accountancy trick.


Bankers are lenders. But more accurately they are lending managers. A middle man service connecting lenders with borrowers.
The money they lend is not their own, but the decision on who it gets lent to and at what price is.

Figlio di Moros wrote: and the creditors readily accept it's value and even find it more secure knowing that gov. debt cannot be defaulted on.


Government debt can be defaulted on and often is.
Examples would be... most of Europes government debt to America post WW2 or more recently Greece.

Expect more of this to come.


The problem for Greece with an infinite growth through infinite debt model... is that there is not an infinite supply of lenders.
Convincing lenders to continue to lend more and more to you for ever and ever with no hope of a return is never going to happen.

A subsidy model would be better.
For example, in the UK most of the country is not profitable. We have multiple entire regions the size of Greece with the same economic problem.
The profitable parts instead eternally subsidise the unprofitable parts in exchange for shared national identity.
User avatar
By Eran
#14264528
It does. Simply because GDP is measured as a currency value.

The amount of goods and service produced may stay the same, but the GDP score will rise as the numerical values attributed to those same goods and services rises.
It's an accountancy trick.

GDP is always measured in "real" terms, i.e. correcting for inflation. New currency that causes inflation would tend to reduce rather than increase GDP.

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