Germany vs Greece. The end game?

It looks like it’s crunch time. Either there will be some last minute cobbled together agreement to prolong the agony, or Greece will be forced to leave the Eurozone. Most neo-liberals take the simplistic view that Greece borrowed the money and has an obligation to repay come what may.

When bankers issue loans they have to be sensible and only issue loans to creditworthy customers. If the customer cannot repay the days when they were placed in a debtors prison are long gone. In any case we should not look at macroeconomic problems in microeconomic  terms. Germany has a net annual surplus of over €200 billion which, by definition, it is not re-spending. Another few billion euros, extracted under duress from Greece, would make no difference whatever to the living standard of German workers – many of whom are not at all well paid.

It would make much more difference if Germany moved to abolish its trade surplus. That would certainly increase living standards in Germany and also allow Greece and others to trade their way out of their debt problem.

Germany has been foolish in several ways. Foolish to lend the money, but also foolish in not understanding the basics of macroeconomics. Prof. Yanis Varoufakis reports that he’s done his best to explain some basic theory to their supposed brightest and best but the more he tries the more upset they become!

Simply, they don’t understand that there are consequences to running an annual surplus of over €200 billion. Where do the Germans think those euros come from? They cannot print them themselves like they could with the DM. They cannot come from the UK or USA. They pay for German exports in £ and $.

They have to come from other euro using countries which means they don’t have enough euros left to run their economies properly. It’s not just Greece. Albeit to a slightly lesser extent it’s Italy, Spain, France etc too.

Alternatively, they have to be created by the ECB or by the Bundesbank  with ECB approval. So if the ECB can do that for Germany, why not for Greece?

23 responses to “Germany vs Greece. The end game?

  1. Yanis for Draghi’s job then? No, seriously, wouldn’t it be great if Greece – along with, as I currently understand it, Iceland became the experiment, following Grexit, that spawned a new global monetary system. I’m sure Ms Sturgeon would be first to jump onto the band-waggon with a dual currency system for Scotland – a debt-free unsupported pound alongside a new sovereign capital currency; it might just work! I gather Adair Turner and NEF are backing Iceland so will they take Greece under their wing too – or is she just TOO recalcitrant?
    But perhaps we have to let the whole pile of cards collapse before we can build a less dysfunctional monetary banking system? The ongoing war of words between austerity and stimulus – Krugman vs Rogoff; Keynes vs Hayek – is compounded, confused and ultimately irreconcilable by the spectre of debt. The debt is the problem and it infests both camps and their differences lie in how they try to deal with it but both are effectively in denial that the debt itself is both the cause and the problem. Any debt-based monetary system is ultimately unsustainable and will eventually extrapolate exponentially. It is the duty of any sovereign state to provide its economy with an appropriate supply of money that allows that economy to function efficiently and if feasible expand. Unfortunately that responsibility has been abrogated by the state and the right usurped by commercial bankers so that the money supply has been increasingly provided as debt to those selfsame bankers. It is at last becoming evident that this situation is both dysfunctional and unsustainable. It has to end – and will end – either constructively and timeously or ultimately in one global almighty crash that hopefully will not involve a 3rd World War.

    • “Any debt-based monetary system is ultimately unsustainable and will eventually extrapolate exponentially.”
      Um, no? In an endogenous system it all depends on credit demand. Interest is a monetary flow which means it can’t be responsible for an increasing money supply (stock).

      • Aren’t you forgetting public debt which is financed directly or indirectly by banks creating money for one another? Also any economy can only thrive if there is an appropriate supply of money in the system. Production and productivity cannot on its own create wealth. No matter how many shed-fulls of goods you have made, or how cheaply you acquired them, if no-one has access to the money to buy them they’re worthless – and everyone’s skint together!

      • I’m not sure what you mean with “creating money for one another”. Sth. like buying stocks of another bank (with credit money)? And this leads eventually to unsustainable / exponentially growing paths? Isn’t proper regulation able to solve this?

        Besides energy and resources money (and its distribution!) is the fuel that is driving the economy.

      • No that’s the whole problem with the ponzi derivatives industry. A bank cannot create money for itself but [in simple terms] Bank A creates a loan for Bank B meanwhile bank B creates a loan for Bank A which to all intents and purposes is the same as creating money for themselves!

      • Peter Close,
        No this is not correct. If I give you an IOU then I’ve created money for you. If you give me an IOU then you’ve created money for me. But if we create the same IOU for each other they cancel out.

        Banks do this all the time in the clearing process. It’s where they cancel out IOUs they’ve created when their customers write cheques to each other or do the electronic equivalent. Any imbalance has to be settled from their reserve accounts. Just as you or I would use cash to settle an imbalance.

      • Peter martin: They only cancel out if we trade between one another so effectively it becomes barter. If however I go away and buy a new car with an IOU from you and you go away and buy a luxury yacht with an IOU from me it would constitute fraud as there are ultimately no funds available since the “money” was created by us two crooks!
        Furthermore , as far as banks are concerned yes they square off each day but if they are short in their reserve account with BOE then BOE creates reserves for them – albeit at a greater cost than LIBOR. Credit creation is not controlled by the level of reserves; the reserves are determined by the net amount of credit created – it stinks!

        REPLY: You’ve really got this all wrong. If we swapped IOUs it wouldn’t constitute fraud. There would be no problem providing that we both didn’t default on the liabilities we’d created for ourselves. Yes the BoE will normally lend, not give, reserves to banks on request. Providing the bank is financially sound there is no reason why they shouldn’t. If the bank isn’t sound and needed a bail -out, that would have to be a political decision by government.

      • Peter Close,
        It’s a question on what credit-money is spent on –> financial regulation matters big time.
        The principle you describe is “endogenous money”. Overall money supply can increase / decrease according to user demand. Doesn’t stink at all, only needs proper and adaptive regulation.

      • thewisemansfear: So if it’s all so simple and above board how do you justify a derivatives market whose principal at $600 trillion [!!] is ten times global GDP?

      • Nothing to justify there. Be aware that those $600 tn. are ficitve, they don’t show up in any balance. Simplified: Regulate the financial markets and those are gone.

      • Robert Hutchings

        Debt is essential to keep the capitalist system afloat. Increasing debt is needed for company profits and more saving as we all age.

        The issue is fare too little monetary sovereign Govt debt

      • In reply to Robert Hutchings: I agree some debt to finance SMEs and private debt [especially in a consumer-led economy!] is necessary but much of govt spending – capital and necessary monetary non-inflationary expansion – should be sovereign and debt free – i.e. not created by banks for one another to purchase gilts. Lower levels of Govt debt mean lower taxes and money introduced as capital expenditure will be infinitely more likely to trickle down into the real economy and not disappear into asset inflation as has happened with QE via banks and insurance and pension funds.

      • R Hutchings

        Confusing with two Peter
        Peter M. Please don’t encourage the other Peter with misleading statements. If you follow the journal entries it’s very clear that notes and coins are also backed by Govt debt. Now if money is lost for ever then it isn’t so quite rightly a portion of coins can be written off ie transferred from the liability account to the revenue account. The issue with PM people is they do not understand basic book keeping. And then make flawed statements about debt free money. As a result PM are doing more harm than good.

    • Robert Hutchings

      Reply to Peter Close
      Lower levels of Govt debt equals a poorer non Govt sector. And if debt is decreased by Govt surpluses. This means an equal LOSS to the non Govt sector and lower savings (and an almost certain depression if this was done by the US). We need a lot more MS Govt debt and less non Govt debt. I’m surprised this is not understood on an MMT site.
      Debt free money is complete nonsense. Money is a financial asset and is always backed by a financial liability (called debt). This is a just a fact of life. Govt’s can fund spending by interest free CB reserves (makes the non Govt sector poorer as no interest is received so why would anyone support this) or interest bearing bonds.
      I suggest you read Warren Moslers book on the 7 deadly frauds …

      • Robert! You are, I’m afraid, confusing Government debt and Government spending. What matters is the money in circulation – that it is appropriate to the level of real activity in the economy. The more of it that is present as debt then the more there needs to be to cover the interest and accordingly the more Government debt there is then the higher taxes need to be to achieve a balanced budget.
        Debt free money is not complete nonsense – 50% of UK money was debt free in 1970. Now after the creation of £1.7 TRILLION as debt by commercial banks only 3% is debt-free – such a status quo which I suspect has spawned your confusion and led you to see it as a “fact of life” and to saying that “money is always backed by a financial liability (called debt)”.
        You go on to claim that funding spending – and here I assume you mean capital structural expenditure? – by interest free sovereign money makes the non-government sector poorer. Well it certainly makes the banking sector poorer as they would have directly or indirectly created that money as debt to themselves; but I can’t for the life of me see how you think it makes the real economy poorer. Why on earth should we, totally un-necessarily, pay exponentially extrapolating interest charges on structural projects – hospitals, roads, railways, power stations – that benefit the country as a whole and not just the financial/banking sector.
        As for PFI….. brainless extortion! I suggest you explore what money is, how it is created and what roles it serves!

      • Peter,

        If a currency is based on the value of the metal in the coins then it can be argued that there is no debt involved. That’s not the case with a fiat currency. There is no significant value in the tokens used. They have a value because the government accepts their liability. They are essentially tax tokens. We have the asset.

        What seems to worry “positive money” people is the replacement of central bank issued notes by electronic commercial bank tokens. If I get paid by the government in cash, real government money, does it make any difference to the economy if I spend that cash directly, or if I put the cash in the bank and spend via bank electronic credits? It doesn’t make the slightest difference at all. How can it?

    • With respect Peter. I think you mean well but are clueless about this topic. Please drop the nonsense you have read on Positive Money type sites about impossible debt free money. And read carefully Warrens book(s). aND What’s the point of coming to a MMT site and completely ignoring what the likes of Warren has written. MMT and people like Warren understand this topic. Many well meaning people like PM do not. and these people are in some ways doing more harm than good.

  2. “Germany has a net annual surplus of over €200 billion which, by definition, it is not re-spending.”
    agreed, but what money is
    “Germany has been foolish in several ways. Foolish to lend the money”
    referring to? Can’t be those annual €200bn., b/c those stay in savers accounts (or simply vanish when credits are repaid).
    Too many people assume a current account surplus which is by definition a deficit in the capital account means there’s an outflow of money.

    • A current account surplus means there is an overall net INFLOW of money. But an outflow of net goods and services.

      We should also consider that Germany is not monetarily sovereign but shares a common currency with its neighbours, which is of course the source of the EZ problem! Therefore the “everything nets to zero” argument which would have applied when Germany used the DM may not apply in quite the same way.

      Then, if Germany wanted to run a trade surplus it had to buy bonds in the currency of its deficit trading partners. This would have squared total payments, via the capital account in the way you indicate. In the process, the Germans, or the Bundesbank, created DM to keep down its own currency on the forex markets, and so creating the DM that their exporting companies needed. They couldn’t pay their German taxes and their workers in $ and £ etc.

      It’s different now. They can pay their German expenses directly in the euros they receive from sales of goods and services to other eurozone countries.

      • Thanks for clarifying.
        But which money does Germany lend? Afaik it’s only guarantees we’re talking about, no “tax-payer money” lent out.

      • Germany is no longer monetarily sovereign so it doesn’t have the ability to create euros. Ultimately, if the loans go sour, any guarantees given by the German government could have to be made good by German taxpayers.
        Or, perhaps more likely, the payments will come from Bundesbank reserves or be funded by new bond issues.

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