#53. Greece – symbol of our times


Having dragged on well beyond the point of tedium, it would be easy to dismiss the Greek debt crisis as of purely local concern.

In fact, all of us should be studying the Greek situation, because it looks increasingly the dress rehearsal for some kind of global crisis.

Though often likened to tragedy, the Greek debt saga actually looks more like an uneasy combination of black comedy and badly-scripted soap. Like the worst of soaps, the plot is repetitive – everyone warns of dire consequences, both sides talk tough, one or both walks out in a huff, a last-minute reconciliation is effected, and the ritual begins all over again.

And, like a period drawing-room comedy, what we actually witness is farce, the comedy lying in the characters’ apparent ignorance (until the finale) of facts well-known to everyone in the audience.

Greece – the facts

Since the repetition has gone on long enough – whilst the farce is becoming tiresome – let’s examine the facts which are surely known to everyone except, apparently, the characters on the stage.

First, Greece cannot ever repay its debts. Indeed, it can only keep up the payments if its creditors will keep adding to the capital amount (the immediate, almost surreal issue being whether the lenders will provide €7bn so that Greece can “pay” current instalments of €1.5bn).

Second, the proposed “reforms”, designed to create a budget surplus with which Greece can tackle its debt, would actually exacerbate the problem by inflicting severe damage to the country’s GDP.

Third, the only solution to the Greek problem is devaluation, something which would have happened long ago were not Greece tied in to the Euro.

Finally, the Euro is dysfunctional anyway, because it tries to combine a single currency with a multiplicity of sovereign budgets. The plain fact is that this cannot work, as monetary and fiscal policy need to be aligned. All that Euro membership really does, then, is to force the competitively weaker member countries into painful internal devaluation, where what is really required is conventional devaluation. Add to this the fact that Greece should never have been allowed into the Euro in the first place, and the only workable solution becomes self-evident.

That solution is devaluation, meaning that Greece has no option but to leave the Euro. The country’s existing debts, which can never be repaid anyway, would balloon to surreal levels if redenominated into a weak “new drachma”. What this means is that Greece must default, at least on debts owed to international institutions.

As Wolfgang Munchau has explained in a brilliant analysis in the Financial Times, Germany and France alone stand to lose €160bn when this happens, making Mrs Merkel and Mr Hollande the biggest losers in the history of money. They have a lot more to lose than Mr Tsipras.

This should remind us of old adage: “if you owe the bank £1,000, you have a problem – but if you owe it £1,000,000, it has”.

Why a crash is coming

Just lately, there has been a lot of discussion about whether some kind of crisis is impending. In its modest way, the Greek situation encapsulates why those who do anticipate a smash are almost certainly right.

Consider the elements of the Greek soap-come-farce. Debt is excessive, and can never be repaid, yet borrowing continues to escalate. The monetary system is dysfunctional, and any form of growth – other, that is, than the simple recycling of borrowed money – has become elusive. Greek government spending is unaffordable, the public is both bewildered and angry, nobody has any solutions, and nobody is willing to face facts. At the end of the day, a huge amount of value is going to be lost.

This encapsulates the world picture pretty neatly. First, globally as in Greece, debt is excessive. Second, and far from acting more conservatively after the pain of 2008, we have gone on borrowing, adding $57 trillion to the global debt pile since the banking crisis.

Third, the measures implemented after 2008 have been short-term, unplanned expedients which make the problem worse. Finally, no-one is yet prepared to recognise that vast amounts of value are going to be wiped out.

The continued – indeed, the increased – propensity to borrow in the years since 2009 surely indicates one of two things. First, it might reflect global idiocy. Though I don’t rule this out, the second implication seems far more likely. This second implication is that growth, other than the spending of borrowed money, has become almost impossible to find.

As with the Euro, the global monetary system is becoming dysfunctional. In the aftermath of 2008, the realisation dawned that the immediate problem wasn’t the sheer scale of global debt but an impending inability even to keep up the payments. This virtually forced the authorities into ZIRP – zero interest rate policy – as the only way of staving off disaster.

It quickly became clear that simply slashing the policy rates operated by the Fed, the Bank of England, the ECB and other central banks wouldn’t be anywhere near enough. Market rates had to be reduced as well.

As you know, the market interest rate is the yield on bonds, which express the annual payment (or “coupon”) as a percentage of the price of the bond – so, if the price of the bond doubles, the yield or interest rate is halved.

To this end, the authorities poured newly-created money into the capital markets with the specific aim of increasing capital values and thus depressing yields. To the extent that this has kept sovereign debt serviceable, it has worked – but, in the medium- and longer-term, the medicine is likely to be worse than the disease.

Far from tackling the debt bubble, we have compounded it with a capital market bubble. One investor put this very well, saying that, whilst he now understood the concept of QE, he no longer understood the concept of money.

Put very briefly, we have debased the monetary system in order to cope with the debt problem.

To complete the analogy with Greece, almost everyone – apart, seemingly, from the decision-makers – know where this has to end. They also know that, when it does, it will crystallise huge losses of value.

If you’ve read John Stuart Mill, you will know that a crash of this sort does not, of itself, destroy value. Rather, it simply reveals a loss of value that has already taken place.

Technically, money lent to Greece will not have been “lost” until the day of default, but the reality is that that money has already been lost, the loss actually occurring when money was lent to a creditor who could never conceivably pay it back.

It’s pretty much the same globally. Vast debts, though not yet written off, cannot possibly be honoured. Hugely inflated capital markets represent sums that seem certain to be lost when the game of monetary “musical chairs” comes to an end. Other over-inflated asset classes – in the British instance, the property market – are all poised to reveal already-incurred losses when the crash comes.

As Keynes put it, “markets can remain irrational longer than you can remain solvent”, so the timing of a crash remains conjectural. What we do know, however, is that the longer it is put off, the worse it will be when it happens.

This being so, we need to bear in mind that the authorities will face a far bigger problem than they faced in 2008, and with even fewer available tools than they had at that time.

For a start, they cannot cut interest rates that are already at zero.

The bail-out of the banks cannot be repeated, because governments’ existing debt levels preclude the credible provision of yet more support. In other words, the trick of transferring banking losses to taxpayer balance sheets can’t be repeated without calling sovereign viability into question. This time, we may have no alternative to letting failed banks actually collapse.

This in turn means that value loss could overwhelm institutional structures, and that whole systems may cease to function.

52 thoughts on “#53. Greece – symbol of our times

  1. The person who said he didn’t understand money is just admitting the fact that 99’9% of people do not understand money. MMT is the best explanation, but many refuse to see that.
    With Greece’s government debt it is and always was fiat money “thin air” stuff. Like every sovereign money country government debt , the sum of T-securities is in spreadsheets at the central banks. T-securities are not spent money so to pay back the investors all that has to be done is to reverse the transactions. There is no “debt” in the sense we usually imagine.
    Greece’s debt can ,with a few keystrokes, be reduced or entirely wiped out of existense and NO taxpayers will be affected.
    It’s highly likely the $160 billion mentioned will just vanish back into thin air. It came from thin air and can be returned there,so to speak. Wiping Greece’s debt will strengthen the Euro, in so far as the supply of money will decrease.
    But it’s a solid analysis Tim. thanks, and you are certainly on the money regarding future troubles!

    • Thanks John

      I know you are wholly convinced by MMT, whereas I have my doubts – and, as you know, I’ve set out a detailed analysis in these pages, which stimulated much debate, and which I hope provides a balanced view. I am grateful for your input on this.

      I have to wonder, though – if this debt can indeed just be wiped out at a keystroke as you describe, why is everyone in authority getting so aggravated about it.

      This ties in to the coming crisis, as I see it. MMT might (?) imply that it won’t matter if huge value is lost, whilst bank and sovereign balance sheets are ravaged, but I’ll take some convincing!



    • It’s pure ignorance, Tim. Little doubt about it. None of those who pontificate in government understand money. Also there is a follow the leader sheeplike behaviour. I don’t know what it will take to change, but a lot of careers are based on misunderstanding and misreading the science.
      MMT’s problem is that it is factual and describes what actually happens today, rather than what is seen as a prolonging of commodity money principles.

      Yes, I did see your piece from February about money but I didn’t see any examples showing where MMT was in error. I’d like to see because I just may be able to set the record straight. I seriously don’t know how someone can doubt what is factual, unless their view of economics is what Paul Samuelson said is “an old fashioned religion” [it applies to most economists!]
      Lord May also said “it is a faith based discipline”
      Even the Bank of England is saying the old view – mainstream economics- is fanciful;


      I think the writing is on the wall now. Time to get with it, I’d say.

      I don’t think there is any doubt that Greece’s debt is a book debt. The CBs are just record keepers. They don’t own any of the reserve deposits held there. T- securities are just entries in accounts and no money ever changes hands. Any money the government has is held in Treasury, and it’s Treasury who issues instructions to the CB to mark up the relevant reserve account.
      When the reserve account is debited by the bank and credited to the customer who invoiced the government that then becomes stuff which can be spent,i.e. money! The CB net credits the economy. Tax net debits the economy. Your tax payment is debited away from your account, but the sum is never credited to Treasury or anywhere else. Only non sovereign transactions in Tax are used for payments into the economy. Governments are a mix of sovereign and non sovereign branches. States, as in the Euro, [Greece] or Kansas or Queensland plus all local governments are not monetarily sovereign. They have to manage budgets, being Users of money, like us.
      MMT explains all this. Bank governors know this, but prefer to keep mum most of the time.

      Re the 160 billion figure the article is behind a paywall so I can’t say how that sum is made up.
      But if it’s bonds and the like it’s not debt.

  2. Some notes:
    -Greece debt has already been extended in duration and reduced in rate (other periphery countries were paying higher rates in the market compared to the loan rates they were giving to greece).
    If Greece solved its issues then it is obvious that the duration will be extended and at some point in near time it would be written off. It would be stupid from Germany to do a write-off now and it would not make sense since GR would go into debt asap.

    The big question is that why the political parties have been unable to do real changes in Greece.

    -Why no serious reform of pensions? Even now the S party has shows that as per his plan the public sector pensions (too high) will be in line with the private sector by 2040! If that is not a joke, than what is it (and in line i mean by perspective of retirement year/sum).

    -Why are farmers so well treated from a perspective of taxes etc?

    -Why are the highly paid unions of the electricity sector so we taken care? We are talking about big money here.

    -Why are they giving pensions to unmarried daughters of the public sector workers?

    The last 5 years were a wasted opportunity for them but they have not taken advantage of it. Everywhere you find unions and public sector fighting for their “rights”. Monopolies/ entrenched rights and a big old mess.

    There is a world debt and asset price problem but Greece is a special category on itself.

    As for the crash you are mentioning, I hope it does not happen. If it does, I feel that people that the people on debt will get away free as well (See the calls for debt jubilee). And they will have assets. While the savers who have £, will be left with nothing of value..

    • Lots of good points here, Nick.

      There seems no doubt at all that there is some ridiculous profligacy in Greece – you give some good examples here. There seems also to be widespread dishonesty – apparently, even private hospirals will give a discount for cash, whilst bribery of tax officials is supposed to be rife, EUR 10.000 being the “going rate”. In all these ways, money could be saved – and should be.

      But it seems to me that such savings would be pretty small in context, i.e. wouldn’t get Greece meaningfully nearer to any form of solvency.

      The big problem here is that Greece in the EUR has been like a child let loose in a chocolate factory. Greek defaults, pre-EUR, were almost as regular as buses. Letting Greece borrow at German rates, and effectively secured against the EZ/German balance sheet, was insane – it virtually guaranteed recklessness. Greece only met the EUR criteria in the first place by fiddling the figures.

      I can see why the IMF (etc) might insist on reforms, and I note from Blanchard’s blog that the terms have already been softened a lot since 2012. He is right, too, that the taxpayers of other countries do not have bottomless pockets. But, if Syriza accepted what’s on the table now, there could be serious unrest, and the likelihood is that a party to the left of Syriza would outflank Tspiras. And these reforms wouldn’t make Greec a viable borrower anyway.

      Most Greeks, it seems, don’t want to leave the EZ – but they don’t want to pay up either, and arguably they can’t. That’s their idea of an easy ride!

      Let’s say Greece agrees to go along with this, and EUR 7.2bn is released. Well, in June they have to pay EUR 1.5bn, not including EUR 5.2bn in short-term bills to be refinanced (how?). In July they have to pay EUR 4.0bn, plus ST paper of EUR 2.0bn. Then in August they have to pay EUR 3.4bn, plus STs of EUR 1.0bn….. So the EUR 7.2bn buys us, what, six weeks before they either come back for more, or default.

      My point isn’t that Greece should be given an easy ride. Rather, why throw good money after bad? The point is that Greece is bust anyway, by any realistic measure. Grexit and a new drachma would be incredibly painful, and write-offs would be unavoidable. But, in this situation, the best solution for Greece might be to accept the pain and rebuild – very very slowly – with a more realistic FX position. The best solution for the creditors might be to take the hit and turn the taps off now, rather than putting it off until even more money has been poured into a leaking vessel.

    • The paradigm of Greece getting loans at Germany rates reminds the HTB where FTB get loans (with lots of debt) at lower LTV rates..

      Yes it does look like Greece has to select one of the options. But they dont want to. They want to keep their pie and eat it. I still think that they are a unique example and dont think that rest of EU will be impacted.

      I agree but living in SE means that any asset is overpriced and you need lots of debt. This obviously answers that anybody with fiat assets needs to move out of SE asap.

    • The world is a mean place. Savers will be crucified and debtors will keep their properties. That will still be because of the banks, who lend and bet uncontrollably. Just the same, savers should divest themselves of fiat assets and buy land or real assets. Debtors still have to service their mortgages or lose out prematurely. When the time comes the banks will not be able to foreclose as the mortgages are all caught up in the derivatives market and I believe no longer owned by the banks.
      So, become a debtor!!!

    • Indeed. I think that the world isn’t just a mean place but – financially speaking – a crazy place as well.

      There are several books about the “death of money”, and they seem to have a point. Figures I’ve seen suggest using banks in the normal way costs us typically 6% of incomes. Then of course there’s inflation, and “fiscal drag”. So, however you assess it, using the monetary system is costly enough even in “normal” times. To this is now added the cost of bailing out and propping up the banks with cheap money, the zip returns on cash investments, and the big risk element in the monetary system.

      So tangible assets have to make sense. But the prices of some assets (i.e. farmland) have already risen to reflect this. Gold might make sense, but only in physical form, as paper entitlements to gold are just that – paper.

  3. Umm, can I just point out that not all of us understand all acronyms. I’m pretty sure Holy Trinity Brompton or First Tennessee Bank are not relevant, Loan to value might be…… ;0)

  4. “This in turn means that value loss could overwhelm institutional structures, and that whole systems may cease to function” – would this be bad?

    Rather, it would be an excellent opportunity to, as John says, do a reset at the stroke of a key and yes savers with cash deposits will “lose” whilst those with physical assets remain the same and borrowers will be reminded of their debts and will stay the same.

    Bonds and equities in such a scenario should retain some value as long as the underlying companies are actually producing something of value that people want.

    This would be painful for all concerned but I don’t see it as any more painful than the current situation and we would then have a chance to build a better future with a 20 year perspective so I am comfortable with what you view as a financial genocide and yes I am a saver and investor and no I do not have any debt other than my monthly credit card expenditure which is always paid off.

    Greece will probably die if it defaults alone as the EZ will exact retribution and other countries fear doing business with Greece due to uncertainty over payments for goods/services supplied and doubt as to the “value” of anything purchased from Greece along with further doubts around the future “value” of new drachma’s they are paid in exchange for goods/services. If there is a global reset then what’s left of the banks will become our servants instead of the current position and to paraphrase Cameron “we’ll all be in it together”.

    • Interesting thoughts. My take on this is that the rescues carried out in 2008 won’t be repeatable – in the UK, just for example, bailing out RBS and the others couldn’t be repeated because the state’s balance sheet is already overstretched. So, this time, bankrupt banks won’t be, or can’t, be rescued in the same way. If the coming smash is as big as it could be, we won’t squeak through it this time.

      But the same principles are likely to apply. The people at the top will be first in the queue – government needed to rescue the banks in ’08, but bailing out the bankers as well was unnecessary. Likewise, oligarchs and similar are likely to find room in the lifeboat. At the other extreme, savers will receive as much consideration as they did last time – none. Investors did rather better – governments bought bank shares whose real value, without state support, was nil.

      So I don’t think we can count on a reset being equitable. I don’t think it will be orderly, either.

      It seems to me that institutional collapse poses issues for which there is no precedent. Obviously, if the whole system collapses then government’s concern will be to keep things going – because, if the payments system (which was within 15 hours of breakdown in ’08) does go down, nothing will function, including medical services, food distribution and communications. No one would be able to draw out cash, pay by card or issue a cheque.

    • Tim, You are dead right about the need to avoid a breakdown. Shipping would stop as Letters of Credit are lifeblood for shipping. No shipping equals no oil for many countries. Australia is almost out of its own supplies and only 3 weeks is stored. That would impact farming, therefore food and transport for food to the city. In the Weimar hyperinflation the countryside would not supply food to the city as an acceptable means of payment was not available.

      MMT can come to the rescue however [no need to scoff]. The government is never constrained in issuing it’s own currency. The limit is controlling inflation. Well, in a crisis inflation will be not of much importance, so everyone , and I mean everyone can be paid fiat money into their bank accounts. This will keep money circulating and allow everyone to buy necessities. It may be required to control hoarding that they will issue coupons for any important item, like for butter during the war.
      We need though for all governments to have plans afoot, to be as we hear “shovel ready”
      This is my fear, that no one will make any plans – except for themselves maybe. Governments must continue functioning to keep police, health services, the grid, the sewers etc all going.
      Otherwise only chaos will reign

    • John,

      In such a crisis MMT wouldn’t really be of much use to anyone. While the government can indeed create sufficient units of currency to buy any real resoruces denominated in that currency, this relies on there being sufficient real resources available in the first place.

      Some kind of shock to output, such as an oil crisis which would be out of the governments control, would have serious repercussions regardless of the economic implications of MMT.

      While I think MMT is a largely correct view of how the monetary system functions, I still think said monetary system has some deeply flaws. Specifically, in an economy which is fundamentally based on the extraction of finite resources the concept of an interest rate (one which is greater on the lending side than the depositing side) is an eventual recipe for disaster.

    • Sorry Sam, apart from the confidence thing, I can’t agree with you. You mention the intermediary theory of money. It is wrong, as is fractional reserve lending. Private banks are not restrained in their credit creation except by the total worth of the bank,. Nothing to do with deposits held in their accounts. Prof. Richard Werner explains this in his talk;

      I find it extraordinary that someone, you for instance, can find themselves unconvinced by MMT.
      Why? Because MMT describes what is happening today in macroeconomics. It is a description, not a theory. Of course one can theorise after knowing the descriptive part, but we are not talking about that here.
      Let me see if I can set you straight; Tell me what it is that you disagree with? Give me an example, because I would like to see what you might have discovered or might be erroneous. No one I have asked has ever responded with an example. I think the issue is that it is so different from mainstream thought it is a sea change in understanding, and that can be hard. It’s taken me many months.

      I certainly disagree with blaming the CB’s in the way you do. CB’s do not control the money supply. All they can do is use their control mechanisms to steer a course in line with the inflation target. They do this with taxation, with the discount window and with auctioning bonds. Auctioning bonds ties up private bank and corporate money [they get interest though]. Tax takes spending power away from the public. That’s all Taxation does, Federally, today. Tax paid disappears. It pays zero towards government expenditure.

      The problem with private banks is simply the interest motive. When the government sets up say an infrastructure project, private finance through banks can double or even triple the total cost. The alternative is the central government can finance the project without debt. It spends money into circulation and that money is what drives the economy. Commercial bank money is not a net credit into the economy.

      Re confidence, that’s the governments responsibility, not bankers or corporations. The acceptance of the national currency is ONLY dependent on the “full faith and credit” of the Government. Taxation has to be paid in the national currency, and that also legitimises the currency.


  5. John raises some particularly important points here. So some comments for all to consider and comment on.

    The modern economy runs on an extremely tenuous architecture, and has high load-factors built in to it. Almost everything is designed to work only at close to full capacity (something I touched on a while back with “utility death syndrome”). An airline with a load factor of less than 90% will lose money. A toll bridge will go bust if traffic is below assumptions to any significant extent. Ships less than 90% loaded are barely viable. The loss of 10% of customers would break the power utilities. And so on.

    Then, the systems that we depend on are fragile in the extreme (the obvious weakness that can cripple Just-in-Time systems). The obvious one is electricity – in a power-cut, shops can’t sell anything, computers can’t function, food cannot be supplied, hospitals cannot operate, indeed our homes can barely function.

    The vulnerability to electricity is very obvious, and so too is the internet. We depend on both, and even the briefest outage can be critical. But the same applies, less obviously, to the payments system, the spine of the economy as currently organised.

    Taken together, a vulnerable structure and the need for near-100% load factors mean that the system is fragile in the extreme. In the appropriate quarters, this is recognised – not that long ago, I was invited to an ultra-low-profile conference on economic fragility.

    Governments are probably well aware of these weaknesses, and have contingency plans – but how effective can these be? How do you feed millions of people if any critical system – energy, electricity, road transport, the net, the payment system – suffers an outage of more than a few hours? In some cases, even a gap of minutes or just seconds could be critical.

    • Both you and John are talking of keeping remnants of the old system alive. I’m talking something completely different with no reference to the current system other than as a lesson in how not to do things.

      In a reset all forms of money, notes, coin cheques, promissory notes, loan agreements, letters of credit etc would be meaningless. The concept of “money” would be re-invented with standard values attached to items, services and assets. Having
      established and introduced these values in the first 24 hours companies/individuals etc would know what their new value/worth was and the sovereign debt would be abolished by the global Governments acting in unison whilst the private debt would continue. Those privateers who lent too much to sovereigns would go bust taking investors/savers with them. Yes it would be a very painful, duisorderly and anarchic reset which would go on for a couple of years and then we would emerge.

      My concept does not allow for any type of further handout to the banks of any shape, form or description whatsoever so Governments would not have to find any money for them when the “re valuation” was complete. Many would find themselves bankrupt and go into insolvency taking other banks/investment houses with them whilst the Government would step in scooping up the outstanding loans for free and disseminate those loans to the remaining banks for a price.

      In this way the incompetent uncompetitive banks go to the wall and the competent ones stay – capitalism.

    • Noo 2, I don’t think you understand money, except perhaps for what used to work in days of a gold standard. For a start Private Banks are not a necessary part of the economy! Although they have made themselves seem vital, because they have helped construct the economy to suit them. As clearing houses they have a useful role, but beyond that it can be reorganised to suit a future world.

      The fact is money is created today by fiat [let it be, in latin] It is a means of exchange which barter cannot accomplish being time constrained.
      Today all Central Banks in nations that are monetary sovereign issue new money to fuel economies, Non monetary sovereign nations cannot do that, like Greece or Kansas, or Queensland or Local governments or corporations or us.

      If and when we crash we will not be bothered reorganising money. There will be no spare time for that. The CB can step in and take over all wages and costs.
      It will need to be done in half a day while people are still shell shocked and before starting to panic. The money we know will be the money we continue to use.

      It all depends on having a plan and like Tim mentioned done super low key , out of public awareness.

    • Tim,

      I’ve been doing more reading around this in recent months, and it seems like there are a few other people who’ve been exploring similar lines of thought. You might enjoy the following paper by James Galbraith and Ping Chen on the issues of a high fixed cost system (eg a complex industrial state) in the context of increasing resource costs:


      He basically says the same thing, large complex high fixed cost systems are much more efficient and better at throughput and have an advantage, but when conditions change these systems are then poorly optimised and are hence very fragile. An example being the collapse of the USSR due to increasing costs of resource extraction, among other factors.

      An interesting argument that Galbraith has made elsewhere runs as follows: increasing resource costs make running a legitimately profitable business increasingly difficult. The run up to the financial crisis was such a time. In these periods, the temptation to generate fradulent profits increases (eg the widespread mortgage fraud in the US). The government recognised this, but tolerated it and allowed it to develop as it was the only way to keep economic growth figures looking good. This would explain why in the aftermath no criminal charges were brought, with the exception of Bernie Madoff.

    • Very good points – the last one in particular.

      As my book explains, the way to see things is “two economies” – the “real” economy of goods and services, labour and resources; and the “financial economy” of money and credit. These ought to work in sync, but have moved totally out of balance. Whenever excess risks in the financial economy cause a crisis, there is a bad blow-back to the real one, which ends up paying for the rescue (so taxpayers in the real economy bail out the banks and, worse, the bankers as well).

      I think it was Eisenhower who warned the American people about the “military-industrial complex”. If he’d said the “financial-political complex” he would have been describing where we are now. So the idea that government accepted financial shenanigans in order to keep growth looking good may, whilst true, ignore a simpler explanation – the finance-government nexus.

      Kevin Phillips, my favourite US analyst,m is good on the “financialization” of the US economy, where FIRE (finance, insurance and real estate) now dominate business, instead of the dominant industrial corporations of the past. This is at least the second time this has happened, the first being the 1920s. The new era of financialisation began in the 80s, with a radical change in attitudes to debt, and was boosted by Big Bang in Britain and the abolition of Glass-Steagall in the US.

      Bankers, logically the servants of the real economy, have become to a large extent its masters. Unfortunately, banking is intrinsically non-productive, its job being allocation of wealth created by the real economy. If not quite slavery, “indenture” might describe the relationship of the real economy to the bankers. “Another day older, deeper in debt – I owe my soul to the company store”.

    • Yeah, I kind of think of banking and money as being like the software and operating system of a computer, and the real tangible world as more like the hardware or real components which the software controls. For whatever reason I think we’ve gotten our wires a little crossed and are these days trying to optimise the performance of the software as opposed to the hardware, or at least the link between improving the performance of one always improving the performance of the other has been broken.

      I’d recommend Galbraith’s book “the end of normal” if you get a chance. I think you’ll find he has some overlap with your point of view when it comes to things like real resources, as he’s the first serious economist I’ve ever heard name checking Charles Hall and the EROI concept. He also looks at the current issue of government debt and deficit from a post-Keynesian viewpoint, which shares some ground with the MMT crew (which I know you don’t necessarily agree with), but with some differences. As a friend of Wynne Godley he is very strongly influenced by the sectoral balances framework, and what it ends up saying about macroeconomic behavior.

      Anyway it’s a really interesting book, not least because it marks a real shift from Galbraith being a fairly optimistic Keynesian to becoming much more pessimistic about the future, as he’s clearly started doing his reading about energy and biophysical production theory.

  6. We’re entering the realms of preparedness now Tim. The last fuel crisis at the turn of the century led to huge queues at the pumps with priority given to hospital workers. If I recall correctly the previous one led to the government almost issuing rationing and similarly the one before that. In each case the government’s plan seemed to have involved considerable finger crossing! I don’t hold out much hope for much better although it was gratifying to see the Bank of England exploring the possibility of a Grexit.

    The 70’s was a wild ride, I earnt £500 a year in the early 70’s and £500 a month a couple of years later and wasn’t that much better off! Rolling power cuts and a three day week wasn’t much of a plan. Didn’t inflation reach 25% at some point? In addition we hadn’t long since abandoned £ s d (it still annoys me a little that £1 can’t be divided by three anymore – it used to be 6/8d) and for some inexplicable reason we voted to join something called an EEC, look how that turned out.

    Anyway I digress, a proper prepper pooh poohs possible parliamentary plans. It’s much safer to assume the worst and hope for the best. A deep pantry, a jerry can or two of fuel and some cash will buy some time and really isn’t that difficult to organise. A jug of wine a loaf of bread and…..sorry… An old car battery, a 12 volt charger and a cheap inverter will keep a light burning without the need for candles during rolling power cuts.OK, so you could go the whole hog, live off grid with solar panels, water turbine, spring water, house cow, chickens, bees, orchard etc. but that might be going too far, then again, you never know……

  7. John, it is exactly my contention that those private banks that are still solvent are indeed a necessary part of the economy as they take the role of competent and efficient intermediaries for the new money (in my system).

    The intermediary that is completely unacceptable is the Government operating via the CB as they have a well proven track record of failure in almost anything they touch, otherwise why is it that the initial liquidity problem identified in 2008 and “resolved” by Governments forcing oodles of cash into the banks via “loans” and QE which was characterised as “it will all be over by Christmas” (Gordon Brown) remains with us today – 7 years later and has in fact worsened giving rise to further actions e.g. QE1, QE2, QE3, Operation Twist, Funding for Lending Scheme. Help to Buy, European Financial Stability Facility, Abenomics and on and on and on?

    I understand money as a means of exchange ascribed a certain agreed value by it’s users for items that individuals feel they may gain utility from. If you want to call that a gold standard then you can, but I call it exactly what I’ve written above, as to my mind gold is not required as a final guarantee of “value” in my definition of money.

    In terms of money supply and creation, which is what I think you are really talking about, then I am with the 99.9% remaining unconvinced by MMT although parts of it make sense. According to my understanding, MMT asserts that all money is created and supplied by Government but offers no explanation of fractional reserve banking which creates new money with no reliance upon any sovereign for new fiat money to be supplied to it. The sovereign of course is required in times like now, as we descend into a credit squeeze.

    If money is not re-organized following a crash related to excessive debt the ordinary person will have no confidence in the “old currency” which, as they would see it led the world into the crash.

    Think of the Weimark and the authorities “solution” to a valueless papiermark – the rentenmark backed up by….land?? Yet the people accepted it, as to them, it was not the papiermark which they had been using in the midst of the crash and hyperinflation.

    Admittedly, there were other things around American loans to German industrialists and a partial default and extended duration of reparations Germany had to pay to the Allies iro WW1 but without the acceptance by and agreement of the people none of this would have worked. The people agreed because they had confidence in the “new” money.

    At the end of the day that’s what it’s all about- confidence, and I don’t see how you’re going to achieve that by telling people that the bunglers who got them into this mess are getting them out using the same currency they were using during the mess and immediately before the great crash because, to every one else that currency will be effectively debased and valueless and they will do everything they can to avoid using it – Argentina.

  8. John, I’m guessing your reply to Sam was aimed at me given it’s content. So I’ll reply to it, firstly apologies, I used the term “intermediaries” out of context in the sense that you have taken it literally as a middleman who in this case disseminates money. That is part of what I meant because in the granting of loans private banks do 2 things:

    1. Create new money(credit) via fractional reserve banking.

    2. disseminate or distribute that money (credit).

    I didn’t say that private banks were constrained in money/credit creation, indeed, I said it had no constraints in terms of sovereign fiat money (other than the original printing of the first few notes of currency).

    I agree with your idea that a bank is ltd in it’s credit creation by it’s total worth and that worth is constrained by deposits and loans held along with cash flow, ergo it is constrained partially by deposits held.

    Richard Werner has in fact confirmed what I said originally – that private banks create new money (credit) via fractional reserve banking and goes on to give an example of that creation which is the precise example I put to you that makes me unconvinced by MMT. Maybe I’ve misunderstood MMT so here is my understanding of it again – “all money is created and supplied by Government”. If that understanding is correct then it’s flat wrong as demonstrated by Richard Werner when he talks of the private bank creating $9900 out of $100 – no Government involvement at all.

    In fact I’d go farther and say the Government struggles to control money supply due to fractional reserve banking but attempts to via it’s agent, The Bank of England applying capital reserve requirements to private banks moving them up or down according to the state of the economy and financial system (but with little success in controlling money creation and supply). Of course the Bank also uses interest rates too in a only partially successful attempt to control money creation and supply. Then there is QE etc none of which should be required if the Government is the sole creator and supplier of money.

    I blame the CB’s because they do as their respective Treasuries tell them to do, irrespective of alleged “Independence”. So the Treasury tells the Bank of England to buy £375 billion of assets from the private banks and it does just that with freshly printed (or electronically created) money courtesy of the Treasury and that is an increase in the monetary base.

    I can agree with your idea of private banks inflating costs of any economic activity, but regards the Government spending money into circulation (printing money) isn’t this what the Weimar did?

    The CB really would have a job on it’s hands then trying to control inflation with politicians in charge of money supply and intermediation (deciding who gets how much).

    I didn’t say confidence was the responsibility of banks or corporations.

    I completely agree with you that confidence is the Government’s responsibility but the only way to achieve that with a discredited currency, which is what you will have following a crash of the proportions we are talking about here is by re-organising and re-naming the currency a la the Weimar and that is most certainly the Government’s responsibility.

    • Several questions here from you, Noo 2!
      First, Prof Werner’s example of 9900 pounds from 100 really seemed to me strange at first, but I think he is not giving an example of fractional reserve lending but an example of lending within reserve requirements by the Central Bank. Here in Oz we don’t have reserves like that nor do they in the USA. I have a paper on this topic which I could not locate when I wrote last time, but I hope I can add it here. However let me repeat, only credit creation operates today.

      The CB has no control over the money supply, which is left up to the banks, although every individual can create money, i.e., credit cards. The governments have outsourced it to banks. The alternative is the government creates money without debt, by spending it into circulation. The federal debt IS the money supply, which is why the federal accounts have to be in deficit. Surplus leads to recessions, draining money from the economy. Deficit spending grows the Economy.
      GDP = Federal spending plus non federal spending plus nett exports.

      The limit to federal spending is an inflation that cannot be cured with interest rate controls. There will be no loss of confidence below this level.

      I repeat that there will not be enough time when a crisis looms to change the currency identifiers.
      We could only do that in peacetime.

      The Weimar event is not a lesson for today as it was still working under the gold standard.
      Back then changing the currency’s name did work, but the economy had mostly stabilised by then.
      The next crash will be an existential one.

  9. Let me try a little summarising here.

    Opinions differ – and certainly the degree of emphasis differs – over how the monetary system works. According to the BoE, fractional reserve banking doesn’t happen in practice; money is loaned into existence by commercial banks; and in normal times, the interest rate set by the CB is the “throttle pedal” for this, determining, not directly how much money banks can lend (= create), but how much they can lend profitably. Of course, this tool doesn’t operate in both directions once rates reach “zero bound” (where they now are).

    Here I think we need to distinguish between “base money” (the preserve of the Central Bank) and “broad money” (loaned into existence by the commercial banks).

    I’d like to bring in three things here.

    First, the two distinct “economies”, the “real” economy of goods and services, and the “financial” economy of money and credit. My view, as you know, is that these have drawn much too far apart. Basically, reflecting these “two economies”, there are two ways of earning money – by producing goods and services in the real economy, and by moving money (etc) around in the financial economy and skimming a margin. To my mind, the former creates value, but the second merely diverts it.

    Now, holding this thought, my second point is that capitalism isn’t a free-for-all, law of the jungle – rather, it relies on competition within parameters of transparency and integrity. Maintaining competition (i.e. preventing monopoly), and ensuring transparency and integrity, require the state. So, the state isn’t – as some so-called free marketeers like to claim – some sort of costly, meddling, bolt-on nuisance. Instead, it is integral to the maintenance of a capitalist system. Of course, oligarchs and monopolists don’t like the state, because it restrains their ability to corner concentrated power.

    This said, my third point is that the state cannot be all-seeing, all-regulating. So the system also relies on integrity – basic norms of behaviour are essential if capitalism is to function effectively.

    Pulling these three things together, the optimum is free competition, protected by the state and underwritten by moral norms. The financial system should serve this “real” economic system, but has instead distorted it. It makes money by skimming the real economy; it seeks to subvert the proper functioning of the state, not least by gaining a taxpayer guarantee against failure, such guarantees not applying in the “real” economy of goods and services; and, on my third point, the financial economy seems to have subverted the basic moral norms required by a free, fair and transparent market.

    To a limited extent, financial activities serve the economy, and should be paid for – but the financial economy has now become too big, too powerful and too much of a drain on resources. It also has too much influence over the state, and too much input to the moral norm.

    Can we measure the scale of this problem? Yes. We can measure the scale of credit as a % of the real economy. We can measure the FIRE (finance, insurance and real) sector as a % of market caps, aggregate corporate earnings and GDP as a whole. We can also measure the size of the financial economy and compare this with the size of the real one – my book actually sets this out.

    So, my tentative conclusion is that the financial economy (or sector, if you like) has become (a) too big, (b) too costly to the real economy, and (c) too influential.

    Remembering that it’s the real economy that creates wealth, the financial economy becomes a parasite when it out-grows its proper role, and accumulates too much power and influence. And that, ultimately, is why a smash is coming.

    Over to you…………………

    • Fine analysis, Tim. My only quibble is where you mention “taxpayer guarantee” I suppose it is shorthand for government guarantee via central bank money creation. Apart from broad money and base money, there is vertical money and horizontal money, signifying the same thing except the latter is more descriptive.
      The financial economy will surely come a cropper in its wasteful consumption of resources, the main crossover point between the two camps. This behaviour accelerates consumption well beyond sustainability. Therefore our collapse, always inevitable with overpopulation and resource consumption, will arrive on our doorstep sooner rather than later.
      Once ERoEI gets to 2 the game will be up, although the finance overhang might get there first.

    • John

      Thank you. The financial economy will indeed come to grief, the only issue being “when”, not “if”. Unfortunately, I don’t think there’s anything that anyone can do about it now. It’s like some old movie where the ship is being driven to disaster by a deranged captain, drunk on power!

    • Excellent analysis.
      “First, the two distinct “economies”, the “real” economy of goods and services, and the “financial” economy of money and credit. – To my mind, the former creates value, but the second merely diverts it.”
      Exactly. I get so frustrated when I read (again and again) that financial services create ‘wealth’ and that as we can tax that ‘wealth’ we are all better off. They create money. I could do the same running a printing press in my basement and give the government a percentage as tax.

  10. Tim, thanks for your summary. I confess that the discussion had left me miles behind in utter confusion but now the simplicity is explicit: one issue – when….

  11. Some thoughts:

    “Finally, the Euro is dysfunctional anyway, because it tries to combine a single currency with a multiplicity of sovereign budgets”, so perhaps the real agenda is to have a single sovereign budget?

    Maybe connected but, I don’t recall, as a taxpayer ever having paid anything to bail out the banks.

    Perhaps the ‘debt’ is purely academic and the only true problem is what our currency is worth to other nations who we need to buy from.

    • Tax payer underwrite the debt via Government guarantees. In fact as the coupon becomes payable and eventually the debt matures requiring repayment of the principal tyhe Government borrows more money to meet these out goings.

      You tax indirectly as if the Government didn’t have these outgoings it would have more money left over for better Public Sector services or tax cuts, whichever the electorate prefer.

    • I wonder how many Germans think the same as me, “I don’t recall ever bailing out the Greeks”

      – but in German of course!

      As to the debt, I get your point, we borrow from Peter to pay Paul (or from Mario to pay Christine) which in theory could go on forever – we’ve barely touched quadrillions let alone quintillions, the crunch comes (correct me if I’m wrong) when confidence in our currency dissipates and we can’t buy a single foreign carrot for a nonillion £s (nonillion is my personal favourite!)

    • I fail to see the difference John between “not constrained” and “no constraints”??

    • I agree but think John would disagree as he thinks any Government can simply spend and print it’s way out of trouble and confidence will be restored…..

    • If you refer to this John, you are mistaken. Governments are per se not constrained. It’s not saying they have no constraints. There are plenty of them but the government has options to choose denied to the rest of society.

  12. Thanks Adam, that’s something I didn’t know. I do wonder whether these African States have a welfare state and how generous it is; whether there is much disparity between them – a larger defence budget in one perhaps, a more generous pension in another or whether the complexity of the European situation is what makes it unworkable without sacrificing financial sovereignty.

    • Maybe Dr Tim will have something to say about that, Nigel.

      The East Caribbean States also run a currency union:


      I wrote something in our coin forum about the different ways of issuing money and how it affects coins:


      And, of course, more than one territory uses sterling, though this cannot really be considered a currency union:


    • Thanks all.

      The big difference is that the Euro isn’t a single currency used by others, but a shared currency.

      Each American state has some autonomy, and sets a budget, but there is one dominating budget for the USD – the Federal budget. Likewise, the Westminster budget controls the sterling area, even though Scotland, Wales etc have their own budgets.

      Now, if Scotland became independent, but used sterling, the London budget would still dominate, and would work in conjunction with London fiscal policy. That might mean that monetary policy set in London (for example, interest rates) might be adverse for Scotland – which is the price a country pays for using someone else’s currency. At the end of the day, though, there would still be one budget (westminster) and one central bank (BoE).

      The euro area doesn’t have a single budget. If it did, the euro could be viable. But if there was a central EZ budget, the individual countries would lose control of their own taxes and spending, thus ceasing to be sovereign states.

  13. One last bit about the carrot and then I’m done, if we can’t buy that single foreign carrot for a nonillion it isn’t just our problem it’s also a problem for the foreign carrot producer. Or, the end of world trade….

    ummm, we’re basically b******d…..

  14. There’s another critical point to be borne in mind here, which is “automatic redistribution”.

    Imagine that, say, the economy of northern England weakens, whilst the south prospers. If this were to happen, resources are transferred from the prospering south to the struggling north. Critically, this happens automatically, without any action being taken by government.

    If the north is suffering a downturn, taxes paid there diminish, and benefit payouts increase. The reverse would happen in the south, where taxes paid would rise, and benefit payments would fall. The effect is an automatic redistribution from the prospering to the struggling area.

    This can’t happen in the EZ, so prosperity in, say, Germany, doesn’t result in transfers to a struggling place, i.e. Greece. This is another big weakness in a single currency operated without fiscal union.

    • Thanks, Tim. I didn’t know about that . I mean it’s easy to understand. But I hadn’t seen it described before. The EU is full of difficulties that don’t benefit individual nations.

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