Would this put pressure on the bottom line of German companies? Sure! But what use is those profits when Düsseldorf just blows them on US mortage-backed securities anyway?

Peak oil is not an energy crisis. It is a liquid fuel crisis.

Devaluation means lower wages and lower profits denominated in a hard currency.
I've lived through two major devaluations. The effect on the ostensible quality of life was negligible. This time it is worse than war.

The road of excess leads to the palace of wisdom - William Blake

We want devaluation. Devalutation means lower real wages.

True, but misleading. Suppose that price levels are 34 % above where they need to be for balanced trade. Wages are approximately 67 % of GDP. Assuming an import quota of 1/3, achieving balanced foreign trade through wage suppression alone means that nominal wages have to drop by just a hair over 50 %, of which a quarter or so is recouped by the deflationary impact, for a real wage drop of 30-35 %. Add to this the total homeowner and business insolvency that is virtually guaranteed all debt loads are suddenly increased by 34 % in real terms.

For a country which imports to the tune of 1/3 of its GDP, depreciating your way out of a 34 % price level gap reduces real wages by something on the order of 15-20 %. However, the debt load is lightened in compensation, by approximately a full third of the previous real value.

So just in the real wage reduction depreciation is a full 15 percentage points better in this example. And the way the debt load behaves under the two scenarios reinforces this conclusion. And this is before the higher-order costs of imposing a generalised industrial depression are booked to the "wage suppression" option.

- Jake

Friends come and go. Enemies accumulate.

Not necessarily lower wages relative to domestic prices tough.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

Treaty of Versailles.

So you are one of those Germans who, a few months ago, I suggested might be favoring the current treatment of Greece on the grounds that this was what was done to Germany via the Treaty of Versailles! The repetition-compulsion neurosis of Freud: do unto others as has been done unto you.  And my suggestion was dismissed here as being unlikely. By the way, the problem with that behavior is not just that it is unjust, but that it doesn't even work - at least to relieve the anxieties which provoke the behavior.

We never learn. The stupidities of our ancestors we compulsively repeat. But this reminds me of descriptions of my behavior at age 3 with my cousins. My girl cousin was a year older and larger. My boy cousin was my age but smaller. She would hit me and I would hit him! Not very noble, but that is how children are.

The response of visiting on Greece the sort of devastation that was visited on Germany after WW I is, at best, neurotic. Greece never attacked Germany, quite the opposite. And Hitler repaid France in spades for Clemenceau's infamous 'pound of flesh' revanchist treaty. But that didn't stick, so now you want to accomplish by economic means what could not be accomplished by military!  Q.E.D.

Having read accounts of Versailles, including Keynes' The Economic Consequences of the Peace, which reads like a summary of inter war events but was written in 1919, I felt that France, if not the other countries attacked by Germany in the late '30s, had brought a good portion of its disaster upon itself, (by no means to excuse Nazi Germany for its actions).

Thank you for confirming my suspicions.

"It is not necessary to have hope in order to persevere."

Except, of course, you, and me, and just about everybody else understands that Greece is neither able nor willing to ever pay that money back.

Which makes that "loan" what?

It makes that loan a transparently obvious effort to disguise the bailout of the German banks who made bad loans as an attempt to help to feckless southerners one last time to comply with their obligations - at the cost of seriously increasing those obligations and seriously degrading the ability to pay, via the 'austerity' conditions. This makes no sense economically, but plays well politically to the popular press while giving still more claims for which German banks can be reimbursed by foreigners.

The maddening thing about this is that Greece, like Ireland and Portugal, have been foolishly noble about trying to honor their obligations, and, instead of recognizing that effort and helping them do so, this is seen as a justifiable opportunity to make more money off these countries via the 'rescue'. In reality this is most likely to end up simply as one more way for the German financial elite to milk the German public while getting them to cheer on the efforts, as Greece is suffering far more.

This is similar to what lower class whites in the US South long accepted as their final consolation for being screwed over, bankers and plantation owners, officials, etc.: "At least you ain't no nigger!" I come from that background, have rejected that thinking and know with whom I stand. Such manipulation is most pathetic when it is most successful.

"It is not necessary to have hope in order to persevere."

Germany ran "austerity" politics for most of its recent history and yet has one of the most advanced social networks in Europe.

Germany's austerity was a protectionist exercise in which Germany piggybacked on the rest of the Eurozone to pay for the reunification.

Colour me unimpressed.

And of course it won't work for the Eurozone as a whole, because the world outside the Eurozone is not going to let the Eurozone piggyback on their recovery.

Basically, what got us off track, financially,

A creative rewriting of the present. There is no European government finance crisis. There is a European trade imbalance crisis.

were three things: the unsuccessful Keynesian episode in the 70ies,

Historical revisionism. The Keynesian policies in the '70s were perfectly successful at their objective - which was to maintain output and employment.

They were not successful at containing inflation, but (a) inflation doesn't matter, so fuck that. And (b) the '70s inflation was imported and therefore not amenable to fiscal policy solutions.

The point of prudent financial policy isn't a balanced budget per se. Others have noted that one method of dealing with debt is growing out of it (which, fwiw, is only sustainable as there actually is long term growth,

False. The government can simply elect to pay zero per cent interest on its bonds.

And if THAT is austerity, well, its the only long term sustainable policy at all. All other policies lead to the Greek end game.

False. Look at Japan.

The problem with Keynesian reality is that there is no political system that ever managed to implement the "and in boom years we pay back the debt we incurred in a bust period" part.

Because it is totally unnecessary. Governments do not have to pay back their "debt," ever.

- Jake

Friends come and go. Enemies accumulate.

"As a side note - it wasn't abandoned. Treaty of Versailles."

Yeah, well, the treaty of Frankfurt (1871) imposed to France greater payments in terms of percentage of GDP, and it was paid in two year -despite there having been major fighting in France in 1870 against not a single shot on German soil in WW1.

It was a political decision to pretend that Versailles was an economic impossibility.

Germany loves giving debt morality lessons despite having been the worst debt offender of the 20th century.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

Except, of course, you, and me, and just about everybody else understands that Greece is neither able nor willing to ever pay that money back.

Which makes that "loan" what?

Default does not equal lack of eventual payment. You can bet Greece will pay these loans back. I hope you also realize that the amount loaned to Greece so far is 80 billion, 13 billion of which come from Germany.

In all prior defaults, even when the money wasn't loaned to Greece but instead to a Bavarian prince who used the cash for his own purposes, Greece paid the money back (unlike in Germany's defaults) at often incredibly high interest rates (20%+++).

The troika loans have seniority over all other loans, and now we find out the ECB just swapped its bond purchases in the secondary markets for senior notes.

Except, of course, you, and me, and just about everybody else understands that Greece is neither able nor willing to ever pay that money back.

It's not able, yes (it's elites are very willing, it's not like they're going to pay for it) but that realization and the actions that should follow it were never allowed to be articulated, and no policy implications were drawn from it. Quite the opposite, the whole episode was used as a time saving device so the ECB (i.e. the EU taxpayer) could be burdened with the private debt of German and French banks, so it could default at taxpayers expense not the bankers.

Germany ran "austerity" politics for most of its recent history

No. Germany had austerity of the type we're talking here under Heinrich Brüning, AFAIK, and the results of that are well known

But in order to restore a primary budget surplus it's the standard treatment

What? destroying democracy? And why is a primary budget surplus more importance than independence and why does it make mass suffering OK? And again destroying the economy worsens debt and destroys much more than the current economy. One has also to look beyond first order effects...

The road of excess leads to the palace of wisdom - William Blake

cris0:

long term growth, which leftists tend to oppose for ecological reasons)

Does. Not. Compute.

supporting real growth in quality of life for populations well served by their governments, enacting intelligent, especially ecologically intelligent policies are what being a 'leftist' is all about.

supporting the present giveaways to the already rich, plundering resources for short-term gain, these are the bailiwick of the right.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

So, you think it's reasonable for the troika to show up in Greece 1 1/2 weeks ago and demand austerity measures, which the Greeks duly pass despite huge demonstrations and a general strike.

The next morning the Eurogroup demands 325 million in additional cuts.

Commentators everywhere say they have moved the goalposts. Some even predict the Eurogroup will come up with lame additional demands after Greece approves the bill.

Roesler and the Dutch FM talk of Greece not meeting deadlines immediately about an hour after the new demands.

Huge demonstrations occur as the Greek Parliament votes on the new demands and passes them.

The very next morning, Schauble and others mention new increased requirements. Signed affidavits. On Sunday the day before, Samaras said of course he would sign such a document. He assured that everything would be ready for Wednesdays meeting.

Monday the Eurogroup rejects Greece's plans to cut 300 million from the procurement of military weaponry (gee, I wonder why!!???). They say Greece has not done it homework. They will not proceed with the bailout if Greece cuts its military.

On Tuesday morning as Greece assures it will come up with a different mix for the 325 million (all within less than the span of 24 hours) the Wed. meeting is canceled. Why? Because they don't trust Samaras to sign the document. Meanwhile, in Athens, Samaras is wondering what all the fuss is about. He assured two days earlier he would sign the document by the Wed. deadline he had been given. He signs it and sends it, and not only that, he takes a .pdf of it on Tuesday morning and plasters it on the ND website.

Wed. comes and the meeting has been canceled. The Greeks have long met all the additional requirements. Schauble makes his black hole comment and says Greece has not met the requirements of the debt sustainability prerequisite (a study which shows Greece's austerity program is not working -- NO SHIT, SHERLOCK!!!). A Dutch Deputy FM weighs in that the bailout program will be split and Greece will not receive its answer until AFTER new elections.

Wed. night the Greeks receive word that a new permanent viceroy will be appointed for Greece, that there will be a new escrow account. The Greeks meekly accept.

Surprised by the level of scorn and humiliation the Greeks have accepted, Schauble adds one more heaping spoonful: the elections will be canceled, no Democratic elections for Greece, the two party leaders in the unity gov't have to step down for technocrats.

Apparently, the Dutch flunkie doesn't get the memo because he's still bleating about giving the Greeks an answer after the next election.

Friday morning coms and we hear of yet another new demand: all minor parties even outside of gov't, even splinter parties and tiny parties, must sign the document avowing fealty.

People like Hans Werder Sinn come out discussing how Greece must leave the euro, the CEO of Bosch comes out and says the same thing, several others in and out of German gov't...

...and here we are on EuroTrib discussing whether deliberate and very silly demands were made on Greece in order to get them to leave the eurozone!!!!

While this "humiliate them until they break" is imagination, it is quite conceivable that the surplus states, as a plan B, methodically prepare for making the case to cut Greece off, both to their own electorates and the EU public at large.

Nice spin. You realise, of course, that when you strip out all the newspeak, what you're saying is "deliberately and methodically forcing Greece out of the Eurozone after plundering it to the greatest extent possible is pure fantasy, but deliberately and methodically forcing Greece out of the Eurozone after plundering it to the greatest extent possible is quite conceivable."

Contrary to certain newspapers I fail to see this as evil. To the contrary, it is good political craftmansship.

The two are not mutually exclusive. McCarthy's House Unamerican Activities Committee was excellent political craftsmanship.

- Jake

Friends come and go. Enemies accumulate.

No, they can't start competing with nations outside the Eurozone. Floating exchange rate, remember?

Nor is it desirable for them to do so.

- Jake

Friends come and go. Enemies accumulate.

You're being too harsh here. In the long run, Greek wages will fall enough to make the Greek economy, or whatever is left of it, competitive. Wages are sticky - they aren't solid. They do, eventually, shift downward. In the long run. In which we're all...

Peak oil is not an energy crisis. It is a liquid fuel crisis.

I dont see Greece competing much with German products, are making Audi more expensive will help the Greek auto industry ??
macroeconomic fallacy, this blog use to be much more interesting, but at least this tread is funny.

What do you say to Dexia's "banksters", as many bank Dexia as lended to Greece.I guess all these banks will be soon only shadow of themselves (retail part only) if Greece default, and there will not be anyone left in Europe to invest in wind energy.

again, you are jumping to conclusions.

But regardless - the scenario of yours is certainly debatable, except for the fact that we don't live in a vacuum.

My job isn't going to disappear to Greece (If you'd be so kind as to raise my salary by 40%), my job is going to disappear to China, Taiwan, maybe even Egypt or Malaysia.

Until that issue is solved we have to account for it.

We can't just all descend to the level of Greek productivity and then live happily ever after.

Of course you could then start the money printing presses again to tackle THAT problem - but in the process I would not only find myself at the same or lower standard of living than before (as inflation would eat up all those gains) - I also would lose a good part of whatever meager savings I might have in the bank. Thank you very much.

Perfectly possible, sadly, in the case of a collapse of the exchange rate, such as what you would see under a poorly implemented fuel rationing scheme in a country which is import dependent on fuel and has a primary trade deficit and no access to hard currency borrowing.

You need to distinguish between imported and domestic inflation. The domestic economy can be in deflation (that is, the absolute nominal markups, including wages, can be falling due to a general industrial depression) while the consumer price index shows runaway inflation due to deteriorating terms of trade.

It's not the sort of inflation the BundesBank idiots think of when they say inflation. But then, the BundesBank subscribes to a remarkably simple-minded theology. So that should, perhaps, not be surprising.

It is, however, more probable, that the state will use the newfound freedom to conduct economic policy to increase nominal markups and wages. You have to have a pretty extreme commitment to austeritarian idiocy to allow domestic deflation to persist in an environment of hyperinflationary foreign accounts positions.

- Jake

Friends come and go. Enemies accumulate.

sigh

You might want to stop thinking in scholarly rules. This isn't the economy 101 exam. We have a political as well as an economic problem here.

The debate was about what Greece would do to restore productivity and/or competitiveness and get a grip on its debt.

Why on earth would Greece, in your opinion, want to go the "New Drachma" way? Even though that is, by all reasonable predictions, incredibly painful?

The only advantages are that Greece could

• create high inflation in a number of ways
  
• print serious amounts of money (which creates high inflation as well).

The only reason to go New Drachma is that it wants one of these badly enough.

As long as Greece actually strives for a hard currency, it could stay in the Euro just as well, default or not.

The nice thing about inflation for politicians is that it is comparatively easy to implement, politically, and that it solves their competition problem.

>Those Germans in control do not appear to care one bit about the welfare of any but the financiers and uber wealthy and the majority of Germans are just being 'good Germans' and going along quietly, mostly, without realizing the price they are paying.>

Did you just compare a economic policy you don't like with support of the holocaust?

I've long defended the view that drawing parallels with the Nazi period is not fruitful.

This entire subthread confirms me in that view.