Greece, Euro and Reality

[Addendum: Tweaked on 12 February 2015, links added.]
[Addendum: Tweaked on 17 February 2015: de-simplification of explanation of high-powered money creation and destruction processes in the interests of accuracy (brevity can mislead).]

Now to Grexit, a.k.a. Greece’s possible exit from the Euro and Eurozone. I’m not going to trawl mainstream articles as I did in the last post, as their narrative is unanimous on one key point, “Syriza has to [insert preferred prescription here] to get Greece growing again.” The disagreement is on how. The why is not examined, for reasons I explored in my last post.

Syriza is a party of hope for those bearing the horrible weight of austerity. The party’s electoral success is an historic event. It is the first time, certainly in decades, that a non-mainstream and very young party (DOB 2004) has defied mainstream opprobrium to sweep to power in Greece. It calls itself a “radical left” party, but seeing as Syriza campaigned on staying in the Euro and Eurozone and that it wants growth, this label is more theatre than substance, regardless of its composition of various smaller left-wing parties. Syriza’s promises on a minimum wage (the UK and US have that), the reinstatement of pensions, more transparent politics, renationalisation etc. are not particularly radical historically speaking. In other words, they are what we might call centre-left policies (with renationalisation being an exception, though still hardly radical). Perhaps the reason the “radical” label goes uncontested in the media is due in part to how right wing consensus has become, and also to the party’s open defiance of the Troika, its willingness to speak its truth to power and vociferously reject the austerity narrative so favoured by Germany, Finland, Holland and others. But I do not want to get bogged down in that swamp of pedantry about neoliberalism, right- and left-wing politics, thrift, debt obligations, etc. Others do that far better than I care to: all of it stays within the mainstream’s preferred narrative of paying back debt no matter what, perpetual economic growth as an imperative, and never questioning the underlying system.

A little on Grexit briefly before I get to the meat. Syriza campaigned on staying in the Euro, but can they do so and defy Germany, Brussels, the Troika and a host of others? Can the powers ranged against Greek defiance allow Greece to defy and succeed? Surely they have to stamp down hard on Greece to discourage Spain, Ireland, then Italy and others from acting on similarly “radical” ideas that are favoured by their populations. In the other corner, Syriza wants to stay true to their anti-austerity programme, so they must defy. If they buckle and continue with austerity, they were a waste of the electorate’s time and hope, and the fascist Golden Dawn party are guaranteed to make hay in that bitter sunshine. My sense is that Syriza politicians are passionately and ideologically committed to their programme, and thus will not buckle.

So something’s got to give. Germany has made it plain they don’t fear Grexit, but I suspect this is a bluff. If Greece exits and makes a decent fist of life outside the Euro’s embrace, this will encourage the others. (And Germany has a small but growing and vocal anti-Euro segment while around 75% of the public does not trust the mainstream press.) This means that all efforts would be made to turn the country into something resembling a failed state. On the other hand, there’s Russia waiting to adopt the abandoned baby (China, Brazil, India?), so Greece might be tempted away from the Euro should circumstances coalesce in that direction, as I think they will. So, in other words, I think Grexit is coming sooner or later and believe it will be messy.

What I want to examine here in more detail is what can be accomplished within the current money system and broader growth-based paradigm, primarily by Greece but by extension any other nation. My operating assumption is that the economic growth required by capitalism is over, and that this fundamental situation is causing constant economic and political disruptions across the globe. The reasons for this are varied, but primary among them are:

1.       Automation blocking the flow of money through the economy, and attendant weak wages are contributing to anaemic demand and insufficient purchasing power

2.       The bumpy peak oil phenomenon

3.       Consumerism losing its appeal at the edges (and increasingly in the centre)

4.       Peak debt in the private sector a.k.a. tapped-out consumers = insufficient purchasing power (see below)

5.       The decline of ecosystem health across the planet.

While each factor receives sporadic attention from the mainstream media as isolated issues, it is their interconnected, cumulative effects and profound implications that are studiously overlooked. The powers that be are systemically required to continue to flog this dead-horse system to mincemeat for fear its death spells their demise before they reach sufficient escape velocity and fully decouple from the hoi palloi. A delusion on their part no doubt, but I think we all know how hard it is to drop cherished delusions, especially those we believe define us.

Given these conditions, Greece can accomplish very little indeed within or outside the Eurozone, since neither location changes any one of them. Even leaving these vital issues to one side, as a member of the Eurozone Greece cannot raise money by its own fiat, as that power has effectively been ceded to the ECB: when a member state’s debt exceeds 60% of GDP it may no longer issue its own bonds. Greece is at around 175%. In effect, Greece needs permission from the Troika to pay out pensions at the level that makes sense to it, to pay teachers and police the higher wages it believes they deserve, to invest in infrastructure development etc. Being granted permission to take on more debt to pay off existing debts comes with a whole raft of neoliberal demands that rule out such state largesse. Yanis Varoufakis, Greece’s finance minister, has put forward a “Modest Proposal” that, riddled with the language of perpetual growth, suggests debt swaps to get the ball rolling again. However, considering the country’s anti-austerity ambitions, its hostility to the Troika but loyalty to the perpetual-growth paradigm and the overlooked boundary conditions, not only are such band-aid measures falling on deaf ears, they will fall short of producing the desired effects, even though a short bounce back from the depths of a very nasty economic depression is achievable. Should this New-Deal proposal be green lighted by Russian backing and thus outside the Eurozone, the boundary conditions do not change. I am not aware of any plans to change the money system itself, though a proposal has recently been made (German article) to that end by Professor Franz Hoermann and Sarah Hassel-Reusing.

So, these are the current rules of the money game, and the Modest Proposal sticks to them, Euro or Drachma. Money is created as debt one way or the other. Interest-bearing debt in this model is backed (sustained, kept going) by expanding economic activity, not gold or other single physical resource, though cheap oil is of course critical to strong growth. If there is too-low, zero or negative growth, the debt-money system implodes, i.e. recessions, depressions and anaemic growth are invariably Bad Things. I examined this in my last post from a narrowly money-system angle, I want to examine it here from a crude, structural angle to make a very simple point. I’ll start by sketching the economy as a whole then proceed to some thought exercises.

A modern economy is basically composed of a public (state) sector and private sector at the broad, macro level.

There is, in keeping with this, both state debt and private debt.

Following from that there is high-powered money and bank money. Both are brought into existence as interest-bearing debt one way or the other.

A state creates new high-powered money when it repays its debt. Private debt is incurred when commercial banks create new bank money (issue loans) to firms and individuals.

High-powered money resides in central-bank accounts held at commercial banks. These accounts are currently awash with high-powered money after the various tranches of quantitative easing. This money represents, theoretically speaking, the “reserves” against which commercial banks are said to issue new bank money via loans to private firms and individuals (fractional reserve banking, though banks in Canada and the UK are allowed to loan money into existence against no reserves, i.e. how it happens in the real world is different). If banks don’t create bank money as loans, high-powered money does not lead, as it were, to more bank money via lending. More simply, it does not reach the consumer. This system feature lies behind all the talk of getting banks lending again.* Commercial bank lending is how our economies are kept lubricated.

Both sectors are thus always indebted, because money is created as debt in both. One corollary of this is that if all debts were repaid tomorrow morning, there would be no (bank) money in the economy (about 97% of the money supply). Money is debt. However, there is nuance. I.e., commercial bank money disappears from the economy as commercial loans are repaid, while high-powered money is added when government repays its debts (government debt is replaced with high-powered money). 

The relationship between central and commercial banks thus mirrors (slightly) that between oxygen-emitting plants and oxygen-breathing animals, only the relationship is nowhere near 50-50, but about 3-97. The trick is how money is moved through the economy to effect economic activity (wages, buying and selling) and how to keep the relationship between that movement and the overall money supply on the one hand balanced with economic activity and growth on the other (i.e. controlling inflation/deflation). We can’t just spend money into existence with total abandon without somehow destroying it too; the money supply would balloon far beyond what economic activity could bear. The system is designed with this in mind: debt repayment removes bank money from the economy, taxes and selling government debt remove high-powered money from the economy. However, there is always interest to pay, and that requires exponential economic growth: one systemic effect of interest is that there is never enough money available to cover the interest owed. This creates a musical-chairs atmosphere of constant competition, where survival tends to be about being the biggest, i.e. always growing, always increasing profits and market share. And this dynamic dutifully adheres to the state (or civilisational) project of Human Ascent.

So, were money not created as debt, it would be printed (or spent) into existence, as a government might do faced with the thought experiment below. But I think most of us know how taboo that is in real-world circumstances. It should also be apparent why the problem of growth is such an intractable problem, institutionally speaking.

(As an aside, if you think your money is yours, that because your current account is in the black and you owe nothing to anyone you are thus not debt, ‘your’ money is nevertheless owed by someone to a bank somewhere and is thus someone’s debt. To make matters yet more counterintuitive, money at the bank is in fact the property of the bank. You are allowed to use ‘your’ money while the bank deems it permissible for you to do so. Banks may close their doors during a bank run, for example. (Remember the Cyprus bail in?) The system is more important than the individuals of which it is composed.)

The reason we constantly hear of debt mountains during busts (but not booms), is because low growth inhibits commercial banks from issuing and consumers and private firms from taking on new debt (tapped-out consumers). The system stops functioning as debt repayments gradually exceed earnings throughout the economy. Low, zero or negative growth and debt-as-pain are thus synonymous, hence the mantra Growth is Good. When the economy is growing, debt is invisible or not generally problematic at national and international scale. When it is contracting, debt becomes an issue.

After quantitative easing, poor economic growth in the ‘real’ economy of manufacturing and widget production means banks increasingly seek their profits by gambling high-powered money on the stock and commodity markets, hence that is where we currently see very visible growth, or bubbles. This means the financial sector rises and falls in a volatile way while everyone else suffers worsening malaise. What to do?

Back to Greece. Syriza’s solutions stay within the system and broader paradigm. They want to swap out painful debt for less painful debt to free themselves to stimulate their economy by directing purchasing power via restored pensions, public-sector salary increases and infrastructure investment directly into the pockets of consumers, thus bypassing commercial bank lending. The consumers will then dutifully go out and buy with renewed abandon, thus collectively causing an uptick in GDP. This will boost business confidence, which will lead to banks again seeing profit on the other end of issuing credit to businesses and individuals, and we return to normal. Après le bust, le boom!

This looks relatively sound on paper and would no doubt conjure a recovery from the bottom (not in itself a bad thing considering the suffering of the Greek people), but let’s look at this (old) idea in light of the boundary conditions I listed above. To do so we’ll start with some simple thought experiments that, hopefully, will bring into relief important economic distinctions between the public and private sectors.

Imagine that all commercial manufacture, retail, food production and distribution, i.e. the entire private sector, is now automated and requires no human labour whatsoever. All that remains for humans to do is teach, police, put out fires etc., all paid for by the state. What happens to money flow in this bizarre scenario? The state pays money into people’s pockets, they buy stuff over the internet that is delivered by driverless vehicles to their door. From whom do they buy? The owners of the means of production who continue to attach price tags to their goods and services. So money flows from state coffers through consumers’ pockets and on to the owners of capital. Either the state taxes back that money 100% to pay its workers next month, or it borrows and borrows and borrows, going deeper and deeper into debt.  Private individuals do not exchange money among themselves at all in this scenario, so the number of times money changes hands is one: from consumer to owner of corporation. Money flows straight to the owners of capital who earn pure profit, more or less (I’m leaving out the costs of raw materials, utilities and land for the sake of argument). Therefore, the only point at which the state can realistically exact tax is from the owners of capital.

There’s an obvious pointlessness to the above highly fantastical sketch. Of course, I haven’t added banking and interest rates nor considered who builds those websites etc. because it doesn’t illuminate my central point, which is this: What balance of public and private economic activity is healthy for an economy? This is of course the stuff of endless and heated debate, but it should be obvious that it can’t be 100% state. I’ll repeat and italicise that: it can’t be 100% state.

Back to the boundary conditions. The commercial sector needs fewer and fewer human workers to produce the abundance of consumer goods there is not enough effective demand (purchasing power) to consume. The environment cannot cope with the amount of resource depletion consumerism is exacting on it. More and more people are unsatisfied with consumerism. Peak debt, peak oil, peak other stuff are coming home to roost. In short, demand is too weak for the system’s perpetual-growth needs. If the state stimulates demand via direct spending (not via commercial bank lending), will increased consumer spending lead to meaningful and secure private sector jobs for a sufficient number of people? Or will corporations’ increased profits resulting from this state largesse free them to rationalise, invest in new automation technology and further increase their profits? Will ecosystems allow this game to go on indefinitely? Will ordinary folk be forever enthralled by the hollow allure of consumerism as ecosystems fail, as their hunger for authenticity and community grows?

I have worked in the automotive sector as a translator and translated documents that detail how wages are the only cost companies can tweak (downwards) to increase profits. Staff are an unwanted overhead best minimised. The competition is very fierce in the automitive sector, and no doubt elsewhere. If Corporation A doesn’t downsize to stay price competitive, Corporation B will and then eat into A’s market share via lower prices. As this pattern increases and meaningful, well-paid work disappears, the state will be under pressure to take up the slack more and more so as to furnish consumers with enough purchasing power to buy what is on sale. If they want it. If the planet can cope. If Neoliberalism permits or yields to Neokeynesianism.

Now imagine the energy problem is attacked with vigour. Oil and other fossil fuels are no longer needed. There is suddenly an abundance of cheap, renewable energy. Now is sustainable growth possible? Not really. Cheap, green energy does not change the spectre of technological unemployment, in fact it makes it worse. It also does little to nothing to reduce consumerism’s environmental footprint (mining, soil fertility, plastic crap, toxins etc.), except on the carbon-emissions side.

Consumerism, a.k.a. the inevitable Cancer Stage of Capitalism, is the wrong economic model for current realities, regardless of Grexit, Euro success, austerity, government-side economic stimulation and so on.

We are already asking too much of the state and in pursuit of the impossible anyway: perpetual growth. For systemic reasons we cannot ask the state to carry 100%, or 90%, or 80% etc. of the economy. Indeed, 50% is probably too high for systemic reasons, and I believe some countries are steadily approaching that figure. Neoliberals probably want to see it down at 10 or 20%, but purchasing power would collapse.

As ever, short-termism prevails in the desperation austerity has wrought, medium-term thinking is the best we can do in the circumstances, and that at the fringes of political and business activity. We will thus stay mired in this systemic problem (absent little, short-lived growth spurts here and there) until the underlying perpetual growth dynamic and the boundary conditions I set out here are seriously, openly and wisely discussed right across the planet, and until radical change is pursued. Syriza appears not to want to address this and is thus nowhere near radical enough, though I commend them for their courage and integrity.

* From Bloomberg:

Banks may now be less reluctant to pass on negative rates to clients thanks to surplus liquidity.

“Banks don’t have a need for deposits, and the demand for loans by households and firms is weak,” Niels Storm Stenbaek, chief economist at the Danish Bankers Association, said in a phone interview.

Source

“[T]hanks to surplus liquidity” references quantitative easing. There’s a tonne of money out there in commerial bank accounts. Consequently, banks no longer need customer deposits, and on top of that demand for debt is weak. Banks are making huge profits nevertheless, not by lending to the private sector, but by gambling all that high-powered money on the markets. This explains the divorce between market boom and real-economy malaise.