Will Europe Survive?

[Giant Communist Robot]

Is anyone else confused???!?!?!?

The EU acts like it.

[dai bread]

Of course they're confused. As far as I know, not one of their leaders is an economist or banker, or even an accountant. They've never come across anything like this in their lives and the bankers have sucked them in beautifully!

[Giant Communist Robot]

Austerity and cut-backs take money out of the system.

It startles me when someone agrees with me. I've pointed out many times before that the expenditure identity for the GDP shows the economy shrinks when government spending is cut and/or when taxes increase. As I see the basic problem in Europe, the countries have surrendered their monetary policy to the Germans, and they're about to find out the Germans are in charge of a lot more than they thought.

[dai bread]

We had an illustration of the effect of Government cut-backs in 1991.

As a result of Rogernomics, about 300 000 people were officially unemployed ( roughly a quarter of the workforce). Ruth Richardson, Minister of Finance at the time, cut the unemployment benefit. The economy, which wasn't strong anyway, tanked, and stayed tanked until 1999, when there was a change of Government to one that could actually do Economics.

Interestingly, neither that Government nor any subsequent one, restored benefit levels.

[Shapley]

Interestingly, neither that Government nor any subsequent one, restored benefit levels.

Austerity is often needed, but the ones that enact it need to understand that they are making themselves martyrs for the cause...

[Giant Communist Robot]

Keynes said governments need to austere when the economy grows too fast, and spend when contractions occur.

[Shapley]

Keynes said governments need to austere when the economy grows too fast, and spend when contractions occur.

But, because they are not austere during the boom cycles and incur massive debt even when they should be raising surpluses, they can ill-afford to spend during the contractions.

Regardless of whether you accept Keynes view on debt or not, you have to acknowledge that its growth has a negative psychological affect on borrowers and taxpayers...

[Giant Communist Robot]

But, because they are not austere during the boom cycles and incur massive debt even when they should be raising surpluses, they can ill-afford to spend during the contractions.

Regardless of whether you accept Keynes view on debt or not, you have to acknowledge that its growth has a negative psychological affect on borrowers and taxpayers...

It's confusing to call deficits debt. Debt must be repaid. For deficit spending, then, whether or not it can be afforded depends on how much inflation it causes. Inflation is the cost of deficit spending. I think this can be tricky to model so probably central banks would wait to see what happens.

No doubt growing debt has a negative psychological effect.

[Shapley]

It's confusing to call deficits debt. Debt must be repaid.

Budget deficits do not produce true debt, because they are merely spending outlines. However, spending deficits produce debt. The Treasury's 'debt to the penny' website details the daily change in debt. The increase in debt for any specific period of time is referred to as the 'deficit' for that period, at least when it is reported in the papers (I'm not sure if the treasury uses the term).

I generally talk in terms of pure debt, because deficit reporting is often misleading. Reporters talk of 'budget deficits' and 'budget surpluses', despite the fact that our government has not passed a budget for this year, nor for three of the past four. Nor, of course, is everything 'on budget' anyway, so the true debt will not be reflected in the budget, even when one is passed.

Entitlements, which consume a larger and larger portion of the budget, are not budget driven. The budgeted amounts for them are guesswork, at best. If the entitlement pays, say, $100 to every recipient, then the spending will $100 times the number of recipients, regardless of what amount is budgeted. This is true of a number of government expenses, such as Social Security, Medicare, Medicaid, Interest on the debt, unemployment inusrance, and so on.

'Discretionary spending' is budget-allocated. The Department of Agriculture, for example, can only spend what is allocated thereto, unless they receive a special appropriation to spend more than the budget allows. As the 'discretionary' portion of the budget continues to shrink, the need for passing a budget becomes less and less important. It's really naught but a formality nowadays, and one with which we frequently dispense.

[Giant Communist Robot]

The increase in debt for any specific period of time is referred to as the 'deficit' for that period, at least when it is reported in the papers (I'm not sure if the treasury uses the term).

Deficit is a shortfall in revenue, when spending exceeds income. Debt is a bond or note. For some political hacks it's convenient to conflate the two. I think most peoples' lives are already full and they don't have enough time to look into these things.

Deficit here, and debt here.

[Shapley]

The Wiki link does not dispute what I wrote:

"The United States public debt is the money borrowed by the federal government of the United States at any one time through the issue of securities by the Treasury and other federal government agencies. The US national public debt consists of two components:

"Debt held by the public comprises securities held by investors outside the federal government, including that held by investors, the Federal Reserve System and foreign, state and local governments.
Intragovernment debt comprises Treasury securities held in accounts administered by the federal government, such as the Social Security Trust Fund.

"Public debt increases or decreases as a result of the annual unified budget deficit or surplus. The federal government budget deficit or surplus is the cash difference between government receipts and spending, ignoring intra-governmental transfers. However, there is certain spending (supplemental appropriations) that add to the debt but are excluded from the deficit. The deficit is presented on a cash rather than an accruals basis, although the accrual basis may provide more information on the longer-term implications of the government's annual operations.

"The public debt has increased by over $500 billion each year since fiscal year (FY) 2003, with increases of $1 trillion in FY2008, $1.9 trillion in FY2009, and $1.7 trillion in FY2010.[3] As of November 17, 2011 the gross debt was $15.03 trillion, of which $10.31 trillion was held by the public and $4.72 trillion was intragovernmental holdings. The annual gross domestic product (GDP) to the end of June 2011 was $15.003 trillion (July 29, 2011 estimate), with total public debt outstanding at a ratio of 100% of GDP, and debt held by the public at 69% of GDP."

I understand that, by your description, the government could not be indebted for more or less bonds and other securities than it issues. However, since it buys and sells securities to itself to make up or relieve any difference in the deficit or surplus, the distinction between debt and deficits is blurred somewhat.

[Shapley]

That is to say, if there was a sudden demand for U.S. Treasury securities that resulted in twice as many being issued, this would not affect the debt, because the monies paid for the bonds would offset the indebtedness created by them. It is only in spending those monies that an imbalance occurs, created true debt.

That is to say, if you give me a $100 and I give you a note payable for $100 in exchange, no imbalance occurs and the indebtedness exists only as a matter of potentiality. My assets and my payables are in balance. I do owe you the $100 upon presentation of the note, but I have the $100 to pay it, so there is no deficit.

I have no idea what the actual value of our debt is, that is to say the total value of securities issued, but I think it far exceeds our stated public debt of about $9 trillion. I suspect that it also varies markedly, whereas the 'Public Debt' increases at a releatively constant rate.

There are, from time to time, those who try to shock us by posting our actual 'liability', which includes all Municipal, County, State, and Federal indebtedness, along with potential obligations from things such as Fannie Mae, Freddie Mac, TARP, Social Security obligations, etc.. They usually also throw in things like household debt, credit card debt, etc. The last time I saw such a figure posted, I think it ran into the hundreds of trillions. But, the monies to offset most of those exists, and some are only 'potential liabilities', not actual indebtedness. Social Security, for instance, can be altered or abolished tomorrow with no obligation beyond the monies already allotted.

[Giant Communist Robot]

However, since it buys and sells securities to itself to make up or relieve any difference in the deficit or surplus, the distinction between debt and deficits is blurred somewhat.

I think this is wrong. Buying and selling securities--Open Market Operations--are meant to moderate the economy by targeting price stability (inflation) and sustaining economic growth. Typically bonds would be issued to match the deficit, but they don't need to be. A deficit does not automatically mean a debt will be incurred, nor is it a debt. We have fiat money, and the government doesn't need taxes or debt to finance itself because it is the origin of dollars. For accounting procedures both will show up on the balance sheet.

[Giant Communist Robot]

My posts make me look like a nutcase. How could reason lead me here?

[BigJon]

Because you choose to espouse non-mainstream thoughts.

[Shapley]

I still say that even fiat money has to be backed by something tangible to have any value. I can hand you a note that says It's worth 1,000 Floogles, but it is worthless unless the value of the Floogle has been tied to a tangible entity (and I have proven that I have the ability to provide you, not only with 1,000 Floogles, but that those Floogles will maintain their value in relation to the tangible entity).

I realize that flies in the face of the concept of 'fiat money'. As I noted earlier, the Federal Reserve was only able to issue fiat dollars because because Gold-backed dollars were already in existence. Note that they didn't try to call the fiat dollar a 'Yen' or 'Renminbi' or 'Ruble'. They needed the extant valuation in order to make the fiat money feasible.

In that regard, I find the Euro to be a curious animal. I believe it was tied to the extant currencies for valuation purposes at its outset, but it does not appear to be tied to any particular one of them. Perhaps the most curious thing is how it has held its value over the dollar despite all of Europe's woes. This leads me to believe it is tied more to the dollar than to any other entity for valuation purposes.

If so, that's kind of troubling. It implies that the Euro is tied to the dollar which is tied to nothing - a flotilla of currency drifting about with no anchor. Curious.

Maybe the GBP is hanging in there as a sort of sea-anchor, keeping them all grounded?

[Haggis@wk]

-Wary European CEOs Move Cash to Germany

Grupo Gowex (GOW), a Spanish provider of Wi-Fi wireless services, is moving funds to Germany because it expects Spain to exit the euro. German machinery maker GEA Group AG is setting maximum amounts held at any one bank.

“I don’t trust Spain will remain in the euro zone,” said Jenaro Garcia, founder and chief executive officer of Madrid-based Grupo Gowex, which provides Wi-Fi access in 15 countries.“We moved our cash and deposits to Germany because Spain will come back to the peseta.”

The beginning of the end? When the Europeans begin to believe the Euro can fail does that mean there's a greater (emotional) reason it will?

[Shapley]

Maybe the GBP is hanging in there as a sort of sea-anchor, keeping them all grounded?

A bad metaphor, I know. A sea-anchor doesn't 'ground' a vessel to anything but the shifting sea...

'Anchored' would make more sense, but it sounds redundant... "...a sort of sea-anchor, keeping them anchored?". Nah, it doesn't sound right.

[Selma in Sandy Eggo]

My posts make me look like a nutcase. How could reason lead me here?

Logic and reason are dandy tools but some kind of real-world testing is needed to keep the tools calibrated. It's like running your house without a solid earth ground on the electric system: things go awry without a reliable "zero".

I have no idea what sort of zero is needed for economic theory - I don't understand it. I suspect nobody does, and that the people who theorize about it are confuseder than I am.

[Shapley]

I have no idea what sort of zero is needed for economic theory - I don't understand it. I suspect nobody does, and that the people who theorize about it are confuseder than I am.

Economics is a wonderful thing. If you can couch your nonsense in good language, you can appear brilliant. It doesn't matter that it's still nonsense...

Now, if I can just work on that 'good language' part.... ; )