Morally, austerity makes more sense because it rewards the savers and punishes the debtors. Inflation does the opposite. But how do the two different policies play out on a macro level? I think it's still too early to make a judgement. But I'll compare Greece and the US: In terms of metrics, Greece and the US are not that far apart. the US has not accounted for Fannie and Freddie debt, and thus seems to have a lower debt to gdp but in reality, it is well over 100% IMHO. Greece obviously has breached 100%. And they're under an IMF magnifying glass. Greece and the US also have about the same percent of public employees as well. Actually, the US public employee salaries has well surpassed the average private sector salary - unlike Greece. Greek civil servants are not paid as much in comparison (except of course, higher up officials - same in the US.) The US and Greece both have a budget deficit at or slightly above 10% to GDP as well. So what's the difference? Whereas Greece has no control on monetary expansion - the US does. Granted, the ECB has acted as an inflator and guarantor to maintain a sovereign debt market for Greece that for all intents and purposes, would have likely ceased to function - or at least would have exhorbitant interest rates. BUT... the US has the world's reserve currency. Thus inflation is exported by the US, giving the US a lot more leeway than any other country in the world. There is a globally implied understanding, post WWII, that the US would be the world's policeman and in return, US debt would be bought by everyone else thus maintaining a dollar reserve currency status. This absorbs a lot of inflation for the US. The US is also experiencing extreme debt deflation but for the Fed's printing as well. In my opinion, Greece has obviously entered debt deflation, and the results of this tourist season will play out over the winter. That's when I think the monetary contraction within Greece will accelerate. I may start a thread in a couple months describing how this plays out. As for the US - so long as it has the world's reserve currency, it can inflate. Japan too has unique circumstances - high exports - a strong domestic debt market - asset deflation - that allow it to inflate much more than most countries can. The issue or future risks for the US is geopolitical and financial. China plays a huge role here. Russia to a lesser extent. They both want to challenge US hegemony, which would affect the dollar. Should the US experience a currency or debt crisis - which I believe it will within a couple years - then the US will experience severe inflation. I think there's a reason why M3 is no longer being reported. I think the next two years will be very telling for both types of policies - countries that are experiencing austerity, and those (US, Japan) that choose to inflate away. So basically, I have no current view on which is better. I fear both currency destruction (inflation) and severe economic contraction/depression (austerity) equally. There's no avoidance of pain in my opinion. Ian's post on the truck drivers dilemma is correct. But I will add that the current licenses for operating a truck are exhorbitant - 5 to 6 figures. It's basically a monopoly they have. Business is down, and so are deliveries, so the truckers want to raise rates. Yes, they are being greedy. But I'll borrow a phrase from Warren Buffet to describe what's going on: When the tide goes out, you find out who was skinny dipping. Buffet used this phrase to describe the risks of over-leveraging, which is not apparent during good times, but dangerous and obvious during a contraction. But it also applies to countries. During an economic contraction, bad laws, and government mismanagement become obvious due to decreasing revenues. In the US, the mayor of Bell, California, with a population of 35,000 middle and lower class citizens, was found out to have a salary of $787,000 a year! Where was the outrage during the good times? The facts and the subsequent outrage come out during severe economic times when people feel pain and governments, local and national, feel the unavoidable end of the gravy train. That's what's going on in Greece. The tax dodging, the exhorbitant pension system, public mismanagement of funds, etc... all become painfully obvious when the economy tanks. Not so much during the "good times." But keep in mind - the "good times" of extreme public debts also artificially stimulated aggregate demand. I think most western countries will experience this "outgoing tide" effect - which is far from over. The smaller, weaker countries first, and then the others. The global financial system is just too intertwined - risks and crises spread. If anyone is in Ireland, Spain, or Portugal - I would like to hear what they are seeing. By the way, the gas situation seems to have improved with the government intervention. The gas station across the street from me is still closed, but I see traffic is still pretty much the same. High mileage vehicles and motorcycles helps I guess.
Misthos, your on-the-ground reporting is fascinating, please keep it coming. May I ask what you do on the island? Born there, on assignment, retired to the Med?
Mithos: "I think the next two years will be very telling for both types of policies - countries that are experiencing austerity, and those (US, Japan) that choose to inflate away." If you have to bet, which way you would go? I think that Europe (particularly UK) is similar to Japan and would be better to follow Japan, but Europe has the problem that it is not one country. If GDP in Europe were to fall more than saving in budgets, what is the likely hood of a desire of countries to go to Japan-style policies, and the risk of breaking up of the financial union?
The strike is over. Fuel deliveries are picking up again. As of yesterday, a couple hundred union truckers broke ranks and went back to work fearing criminal and civil fines. The union had no choice but to negotiate. It was easy for the government to push the union, IMHO. The disruptions caused by the strike were severe and unpopular amongst those involved in the tourist industry. Ironically, one of the more strike prone segments of the population - the farmers - were extremely pissed off. I guess watching your vegetables rot instead of making it to the market is not a good thing. The effects I think will be felt for a long time. There was and is definitely a hit to tourism, and with increased taxes and austerity led cuts, that doesn't bode well for the domestic money supply. You can't grow or even maintain an economy with so many cuts to the money supply. What's interesting to note is that the truckers feared that increased competition - which is a good thing - would devastate the value of their licenses. That, I can understand. It was a foolish government policy to begin with to make trucking licenses so expensive. The increased competition to trucking program was one of the IMF's conditions for the loan. So keep in mind, this wasn't just a strike for benefits and income - but a challenge to the IMF. someyoungguy - I'm here on the island for a few reasons. I basically checked out of the corporate world, liquidated everything, and decided to try something new. My costs here are ridiculously low. My American expat health insurance is under a grand for a year (compared to NJ costs when I was self employed a few years ago - nearly 5 grand!) So I can basically do nothing for a few years, but plan on freelancing online - I cut down on trading due to risks - and I will also involve myself in pet projects like restarting some family vineyards and olive groves. A change of scenery, if you will. I have access to two empty family homes in the off-season so housing is free for me. But I would be disingenous if I didn't mention my doomish streak. I'm also waiting this financial shitstorm out as well. Why work in NJ to see your money all go to taxes, a soon to be underwater home, health insurance, and a crappy job market? Fuck it - I left to chill out on an island that produces citrus fruits year round, has a large freshwater aquifer, I have family in agriculture as well - fresh local food is awesome. So overall, my stay in Greece - probably one of the worst countries to be in due to it's economic contraction - may not make sense for the average person. But my ties and unique circumstances here make it economically, socially, and personally advantageous to be here. But apparently I'm not the only one. There are many people with roots to this island - from South Africa, Australia, the US, etc... that are coming back - for similar reasons. I even know Greeks that are originally from this island that recently moved from Athens. There are a lot of young people moving out of Greece as well - a brain drain of sorts, of young professionals. Many are going to Germany. I don't know what luck they'll find, but they have given up and are emigrating as many Greeks did in the 1950s-1960s. Others are leaving Athens, as I said, to live with family members in small towns and villages on the islands and outlying areas on the mainland. Athens is an extremely expensive city and the economic contraction there is affecting many people. tradingjournals - honestly, I don't know which is better yet - austerity or inflating. Every country has their own unique circumstances. At times I feel that Greece should have just told the French and German banks to fuck off and go back to the Drachma and inflate away. But there are severe geopolitical consequences to that as well. That's not to say that some type of "organized" default sanctioned by the stronger Euro members isn't underway. It's anyone's guess. Japan has been able to inflate due to the domestic high savings rate and the economic boom the past couple of decades. But those factors are whittling away - can they honestly keep it up without eventually experiencing a currency crisis of there own? I fear the global economy has become a warden of larger deep-pocketed governments worldwide. That any economic "growth" we're experiencing is illusory. The global burdensome debt must be addressed and it's not. Does it end in severe economic contraction/collapse? Or does it end in currency destruction? Do we "grow out of it" Yeah right. Either way, I don't see it ending well. You can't kick start an economy suffering a balance sheet recession by creating more debt and expecting that emerging weak economy to handle the recently created new debt.
Mithos, Thanks for the great updates. I see the economic crisis more in terms of demand exhaustion than credit destruction. Although both are inextricably linked (demand pulls credit), and the effects of systemic deflation in hugely over-weight debt-based economies - both from a consumer and industry standpoint - is nightmarish. The flipside troubles me even more, although promises a few years of normality before an epic explosion in asset prices. There's lots of examples of thriving deflationary economies, and the natural state of a fixed or slowly growing money supply. Granted, most difficult to implement in todays debt-bloated world, but what choices aren't, at this point? I know everyone wants to prolong D-Day. I understand. But a currency crisis - vis a vis other fiats or commodities - is worse. That much more production and wealth gets suckered into the bubble before it pops. There's really nothing that can be done now. The US - like other G8 sovereigns - are boxed in. The debt is too big to raise rates. And economies implode if deficits get cut. In my view, Greece hasn't hit the wall. ECB supporting their debt-market, still running 10% deficits, with a 1 Trillion IMF backstop. And look how ugly it is. That should frighten anyone. Greece and Iceland are really just the canaries. Europe has embraced deferment. Obama won't acknowledge the problem. Soon, the rotting fish get too big even for the IMF, and then panic is right around the corner. At the end of day, we're talking the livelihoods of billions of people with jobs, debts and families to support. I don't like talking about this with such a cool disposition. It's not my feeling, at all. People really have no idea what's 2-4 years out. None. I am preparing for the worst here in Canada. What disturbs me the most, is that our leaders saw this coming decades ahead, passed free trade, ran up the debt, kept rates low and long, then refused to police asset bubbles. This is where Martin counters, 'the nature of democratic politics favor short-term performance'. I say bullshit. I think the Social Controllers perverted Keynes to destroy what's left of Western Democracy. These trash want an economic implosion to get everyone beholden to the State. Confessions of an Economic Hitman revisits the G8. It's the political endgame to the next Great D that scares the hell out of me. It makes perfect sense for these scum to wrap it all up in the next couple years. Bye bye, Freedom and Democracy.
Agreed!!!!!! They may have been necessary in the early 1900's. Now, they are as necessary as a screen door on a submarine.
Here it comes..... Greek security forces have warned of a wave of violence reminiscent of the terror that stalked Italy in the seventies after urban guerillas threatened last week to turn the country into a "war zone". "Greece has entered a new phase of political violence by anarchist-oriented organisations that are more murderous, dangerous, capable and nihilistic than ever before," said Athanasios Drougos, a defence and counter-terrorism analyst in Athens. "For the first time we are seeing a nexus of terrorist and criminal activity," he said. "These groups don't care about collateral damage, innocent bystanders being killed in the process. They are very extreme." The threats came from a guerrilla group called the Sect of Revolutionaries, as it claimed credit for the murder of Sokratis Giolas, an investigative journalist. Giolas was shot dead outside his Athenian home on 19 July, in front of his pregant wife. http://www.guardian.co.uk/world/2010/aug/01/greece-war-zone-revolutionaries-tourists
IMO, the global intertwining and everybody's dependence on both imports and exports ensures the end result for both camps will be essentially the same. And since the US can't inflate the world, that implies austerity/deflation is the terminal condition (until the next cycle starts up again). IMO.