Sovereign debt bubble thread

[MadImmortalMan]

Overall the current account has nonetheless improved quite a bit but it is still very negative.

Then obviously Greek demand needs to be reduced and exports made more competitive.

I did some checking, and Greece is not entirely devoid of export industries. They have decent exports in light manufacturing especially along with agriculture and oil products. Plus tourism needs to be counted on that side of the scale as well since it's on the same side of the current account. I'm really not so pessimistic about their chances of being competitive as others seem to be.

[Sheilbh]

Interesting comments from Schaeuble today. First he did the usual Euro-nonsense about investors not getting it, that the Euro's forever, that the Eurozone is better placed than the US and that rates are unjustifiably high.

But then he said Merkel was considering loosening the Greek program and Germany might support ECB intervention to keep yields below certain limits. From what I've seen this is him testing the waters but very positive if it leads to something.

Edit: Sorry got that wrong Schaeuble's just responsible for the nonsense. It's sources in the Chancellor's office and ECB respectively for the other two.

[The Minsky Moment]

Overall the current account has nonetheless improved quite a bit but it is still very negative.

Then obviously Greek demand needs to be reduced and exports made more competitive.

LIMBO . . . how low do you go?

Answer - until it becomes politically unfeasible, a point that likely has already passed.
Democratic countries can't demand that their citizens reduce their incomes by more than half for the sake of macro-adjustment. 

[The Minsky Moment]

I did some checking, and Greece is not entirely devoid of export industries. They have decent exports in light manufacturing especially along with agriculture and oil products. Plus tourism needs to be counted on that side of the scale as well since it's on the same side of the current account. I'm really not so pessimistic about their chances of being competitive as others seem to be.

Already addressed above.
Oil products is the top earner but it is very difficult to become more competitive through wage cuts.
Textiles (that is big piece of the "light industry") is more labor cost dependent but when your main competition is Vietnam you probably aren't competing on labor cost to begin with.

The Greek economy is just not set up as an export powerhouse, not surprisingly given endowments and economic geography.  Traditionally they cover structural trade deficits with indirect revenue from tourism and shipping.  But both the latter are way down despite considerable internal devaluation.

I don't see where the magical export boom is going to come from or the mechanisms to pull it off, especially since the main tool available for small open country exporters - currency devaluation -  is off the table.

I am not pessimistic as a matter of sentiment, I am pessimistic because the facts lead ineluctably to that conclusion.

[Admiral Yi]

Democratic countries can't demand that their citizens reduce their incomes by more than half for the sake of macro-adjustment.

Greece doesn't have to demand their citizens do anything.  They need to reduce government spending.  This will reduce aggregate demand.  They need to collect more taxes.  This will reduce aggregate demand.  Then they need to sit back while the labor market clears at a competitive level.

[The Minsky Moment]

Democratic countries can't demand that their citizens reduce their incomes by more than half for the sake of macro-adjustment.

Greece doesn't have to demand their citizens do anything.  They need to reduce government spending.  This will reduce aggregate demand.  They need to collect more taxes.  This will reduce aggregate demand.  Then they need to sit back while the labor market clears at a competitive level.

This isn't a classroom exercise in Macro 101 where the only effect is that a chalkboard line moves on a graph.  The jargon you are using "aggregate demand" and "labor market clearing" has real meaning in the real world.  The way that markets clear through a reduction in agg demand via fiscal contraction and simultaneously internal devaluation (real wage cuts) is that output and incomes decline, and becuase of feedback effects, the decline can be very steep.  That means real human beings people have their actual incomes reduced, by a lot.  And real human beings who have that experience and also have votes tend to act on those facts.

[Admiral Yi]

The Greek economy is just not set up as an export powerhouse, not surprisingly given endowments and economic geography.  Traditionally they cover structural trade deficits with indirect revenue from tourism and shipping.  But both the latter are way down despite considerable internal valuation.

I don't see where the magical export boom is going to come from or the mechanisms to pull it off, especially since the main tool available for small open country exporters - currency devaluation -  is off the table.

No one is asking Greece to be an export powerhouse, or relying on a magical export boom.  We are asking them to stop importing so much stuff on credit and reprice their labor so that the tourist trade comes back from Bulgaria.  And stop all the transportation strikes.

[Admiral Yi]

This isn't a classroom exercise in Macro 101 where the only effect is that a chalkboard line moves on a graph.  The jargon you are using "aggregate demand" and "labor market clearing" has real meaning in the real world.  The way that markets clear through a reduction in agg demand via fiscal contraction and simultaneously internal devaluation (real wage cuts) is that output and incomes decline, and becuase of feedback effects, the decline can be very steep.  That means real human beings people have their actual incomes reduced, by a lot.  And real human beings who have that experience and also have votes tend to act on those facts.

No kidding Joan.  People with inflated incomes become unhappy when their inflated incomes are taken away.  So fucking what?

[The Minsky Moment]

No one is asking Greece to be an export powerhouse, or relying on a magical export boom.  We are asking them to stop importing so much stuff on credit and reprice their labor so that the tourist trade comes back from Bulgaria.  And stop all the transportation strikes.

Those are just words, reinforced with the royal "we".  The question is whether factually they make any sense.

Bulgaria's GDP/capita is half of Greece - so when you talk about "repricing" we are talking about the same thing - cutting incomes in half.
The entire tourism revenue of Bulgaria is less than Euro 3 billion - compared to a Greek current account deficit of over Euro 20 billion. 

The "we" you mention presumably would include the Bundesbank - but it that case it doesn't apply because they have been very happy to underwrite trade finance to Greece on credit without any concern over unsustainability because German exporters reaped the profits from those sales.

As for strikes - when a government adopts policies designed to cut people's incomes in half and then responds to citizen complaints with "so fucking what," it doesn't take a PhD in political science to predict labor strife could occur.

[Admiral Yi]

You're assuming perfect price elasticity between Bulgarian and Greek beaches.  That's silly.

And of course the Greek government hasn't said "so fucking what."  I did.  The Greek government has been begging its creditors for more income support.

[MadImmortalMan]

So how would a state theoretically break the debt-default cycle without the ability to inflate? Is it possible? Is that cycle simply what should be done until the end of time?

I mean, should we all simply accept the fact that if we buy government bonds of any kind, we are taking the chance that whatever state issued those bonds will inevitably default at some point in the future and we're simply gambling that it doesn't happen before we get our money back?

[Admiral Yi]

So how would a state theoretically break the debt-default cycle without the ability to inflate?

Keep it's average deficit/GDP at or under average GDP growth rate.

[Tamas]

Interesting comments from Schaeuble today. First he did the usual Euro-nonsense about investors not getting it, that the Euro's forever, that the Eurozone is better placed than the US and that rates are unjustifiably high.

But then he said Merkel was considering loosening the Greek program and Germany might support ECB intervention to keep yields below certain limits. From what I've seen this is him testing the waters but very positive if it leads to something.

Edit: Sorry got that wrong Schaeuble's just responsible for the nonsense. It's sources in the Chancellor's office and ECB respectively for the other two.

I flat-out ECB guarantee of certain level of bond yields sounds like a bad idea to me.

It would be heaven for irresponsible spendrift governments, until a mega-Soros comes by and break the neck of the whole system

[Admiral Yi]

I flat-out ECB guarantee of certain level of bond yields sounds like a bad idea to me.

It would be heaven for irresponsible spendrift governments, until a mega-Soros comes by and break the neck of the whole system

Soros made his money betting against fixed exchange rates.  That's the opposite of what's being discussed here.

[MadImmortalMan]

So how would a state theoretically break the debt-default cycle without the ability to inflate?

Keep it's average deficit/GDP at or under average GDP growth rate.

State spending is part of the GDP calculation. What if all the growth is there and not in the actual economy?