The Weiner Component #130 – The World Economies & the Greek Crisis

On Monday, June 29 2015, the leading indicators on the American stock market took a sharp dive; the DOW dropped 350.33 points and the NASDAQ went down 122.04 points.

All this because Greece was at the point of near bankruptcy, with a massive payment that was due Tuesday June 30, which the government couldn’t and didn’t meet. Negotiations for a new loan broke down the Friday before, when the Greek negotiating team walked out of the meeting. The Greek Prime Minister, Alexis Tsipras and the leftist Syriza party who were elected to end austerity, called for a referendum to be held a week later, letting the people decide what to do. The next day, Tuesday June 30th 2015, Greece defaulted on its debt.  On Wednesday, July 1, the Greek government attempted to come to an agreement with the European Central Bank. When the referendum was held a week later the majority of Greek citizens voted against paying back the debt.

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The Greeks through nefarious practices for the last decade or so were able to hide the fact that the government was spending far more than it was taking in in taxes. They continually kept spending far more than the GDP (Gross Domestic Product), the amount of wealth the country produced. In addition Greece apparently has a lot more tax cheaters than any of the other European nations, consequently they estimate that about 20 million euros worth of taxes and their earnings were/are going into numbered Swiss bank accounts.   The American firm, Goldman Sacks, had earlier engendered creative economics for multi-million dollar fees and allowed the government and people of Greece and other countries, some of which were part of the 19 nations of the Eurozone, to engage in picturesque bookkeeping and spend far more than they should have.

At the beginning of 2010 it was discovered that Greece had paid Goldman Sacks and other banks millions of dollars in fees since 2001 for arranging transactions that hid the actual level of borrowing. The most notable is a major currency swap that hid billions worth of Greek debts and loans which were factiously converted into yen and dollars, thus hiding the true extent of the debt. The purpose of this and similar actions was that these various Greek governments could continue spending. An interesting short term solution to an ever growing long term problem that would eventually explode.

The process of paying back its debt, currently set at 270 billion dollars, began toward the end of 2008 with a massive economic collapse. The financial crash that occurred at this time in the United States and beyond, diversely effected Greece, Portugal, Spain, and Italy of the Eurozone Nations. These countries had been working since that time to get themselves out of debt. They have not succeeded, actually Greece has significantly increased her level of debt.

Greece has now essentially defaulted on a repayment instalment of 1.7 billion dollars that was due on June 30, 2015. She could only meet this payment if she borrowed all of the funds from the European Central Bank plus an addition 50 to 60 billion dollars to keep herself functioning.  It’s a movement of figures in different columns of the banks bookkeeping that seems to go on forever with the debt never disappearing but continually growing.

On the first Saturday in July the people of Greece voted on a referendum determining whether or not they should pay back their debt to the nations of the Eurozone.  I understand that the referendum was fairly complex and that a lot of people had a problem determining exactly what it meant.  Also the government recommended a no vote.  They came out with a strong no vote.  Consequently the Greeks defaulted upon their debt but may still un-default it.

Currently Greece’s unemployment level is over 25%.  For the last six years the government has been paying back this debt without really diminishing the principle because she has to borrow to do so.  And the country has undergone ever increasing levels of privation in order to do this and accomplished nothing.  The banks were closed in Greece by government order and the amount of cash that could be taken out of ATM machines was very limited. The country essentially limped along close to total bankruptcy.  Much more money was needed than the country had in order to make the installment payments that Greece seemed to have or could reasonable get.  A real solution to this matter seemed highly problematic.

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One of the major basic questions dealing with Greece and the Eurozone is what is really National Wealth?  Is it money or the goods and services produced within a given amount of time, usually a fiscal year, stated in terms of money value?

Money, for about the last fifty years has had nothing behind it but the word of the government issuing it.  Its domestic value is determined by what people will sell or take for it and internationally by what other countries will trade for it.  Basically, today, it is a tool, which allows the exchange of goods and services within the particular nation and throughout the world.  In essence it is the grease that allows the economies to function. Without an acceptable form of currency a nation faces complete economic disaster.

The problem with printing more money, which is a power the Greek Government does not have as a member of the Eurozone, is that too much money in circulation tends to force up the price of goods and services as people compete for these items.  It will eventually bring about a depression.  On the other hand too little money in circulation tends to reduce the amount of goods and services needed, as people are limited in what they can afford.  This can also bring about a recession leading to a depression. The trick is to have enough in circulation so that maximum productivity can be reached and maintained.  This also has to be gradually increased as the population of the nation increases.  In Greece today there is not enough funds left to service either the needs of the country or the debt.

People are taking their funds out of the country leaving the banks with a shortage of cash. The banks were closed several weeks ago to end a run on them with long lines waiting to withdraw their cash. The country was either days or hours away from total bankruptcy when the banks were closed.  Currently Greece is trapped in an ever increasing cycle of growing debt in order to just maintain its existence.

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The Eurozone today is in a situation fraught with contradictions.  When the Eurozone were first formed in 1999 the 19 nations agreed to function as a single economic unit with a single currency working through a central bank.  Meanwhile, with the exception of currency control, each of the 19 independent states gave up none of their sovereignty and still continued to act as an independent entity. Some of these 19 nations were far more economically secure than others.  Greece was one of the poorer nations that acted like the wealthier states and continually spent more money than it could realistically afford.

Up until the end of 2008 the U.S. and other industrial nations were a-flow with money. Then, starting with the United States, the Housing Bubble burst and property values in that country went down the toilet.  Internationally the flow of money tightened.  Suddenly Greece and these other countries were heavily in debt.  In order to meet these debt payments the governments had to divert a good percentage of their taxes.  An ever larger percentage of the GDP left these countries and there was not enough left to perform the regular services which the governments ordinarily provided.  This in turn forced the governments to lay off large numbers of government employees which, in turn, exacerbated unemployment and decreased the GDP.  In order to meet these payments Greece had to borrow more funds from the European Central Bank, actually increasing its debt.  With a shrinking economy the government had to further economize in an attempt to meet its payments.  This caused more and more economic shrinkage in the country.

What currently exists in Greece is a lose, lose situation with no hope in sight and well over 50% of the population in the referendum have voted for permanent default.  But if the Central Bank in the Eurozone grants this then Portugal, Italy, Spain and Ireland may demand the same treatment.  In fact it could become a pattern with some of its members.  Yet if it doesn’t grant relief they also face an impossible situation.  Greece is currently just days ahead of its banks running out of money and going into bankruptcy. It’s quite a dilemma.

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In the United States toward the end of 2008 a similar situation existed.  This was caused by the explosion of the Real Estate Bubble brought about by the large banks in the country over a thirty year period.  The banks had divided each of the many home mortgages into hundreds of pieces and the different pieces were combined and sold in a multitude of different Hedge Funds.  Actually no one owned the mortgages, just fractional pieces of them.  The large banks financed or refinanced the mortgage paper, then sold the pieces, administered everything and charged fees for everything they did. Once the mortgages were sold the money was lent out again.  It was an endless process with the banks collecting multimillions in fees. In this way a million dollars could fund one hundred million or more in mortgages.  The banks were in such a hurry to continue the process that they devised an unbelievable sloppy system of record keeping that was fraught with error.  This meant there was no accurate record keeping of the multitude of transactions.

When the Real Estate Bubble burst in late 2008 the large banks began foreclosing on properties that they did not own.  It took a while for the courts to realize the fraud and all the large banking houses were fined heavily for these and other illegal actions.  What the country faced was a possible twenty years or more of insane confusion in the housing industry and a depression greater than that of 1929.  With the addition factor that most of the large banking houses in the U.S. could go under and the movement of money throughout the country would become a trickle.

The first actions were taken by President George W. Bush during his last few months in office when the Federal Government began the process of bailing out most of the banks. This was followed by President Barak Obama who successfully continued bailing out most of the large banking houses and also the auto industry and avoided a deep depression.

The housing crisis was largely solved by the Federal Reserve under the sterling leadership of Ben Bernanke, who for a period of over two years bought 45 billion dollars’ worth of mortgage paper every month, spending well over a trillion dollars.  The mortgages came from all 50 states and were all fractional shares of an endless number of properties.  In essence what the FED did was to contribute well over a trillion dollars to this enterprise with no way of collecting any of it back.  In fact it contributed this amount of money to the general welfare and growth of the economy.  And the process brought back a level of prosperity and solved the mortgage dilemma in a period of just a few years.

The difference between this solution and the current problem in the Eurozone is that no one in the United States has ever mentioned what was being done.  All that the FED announced was that they were buying back mortgage paper.  There was never any discussion about the morality of the issue or the fact that they would never be able to cash these mortgages.  To my knowledge no one questioned the meaning of this statement.  If the country and Congress had been aware of what was happening we might still be in the middle of the mortgage crisis that the banks in their greed caused. People do not like someone else to get something for free even if it indirectly benefits them.

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Over the July 4th Weekend the majority of the Greek population voted to reject the current austerity negotiations with the other Eurozone nations.  As a result the European, American, and other stock markets dropped on the following Monday.

Basically the issue is with what is the Central European Bank dealing? Is the issue the Greek default on an impossible debt?   Or is it a problem the Eurozone is facing regarding one or some of her members?  If it’s the former then default is inevitable sooner or later with the lack of stability that would follow this action.  If, on the other hand, the issue is the latter then it becomes a problem of the entire Eurozone and its solution is one involving all the states of the Eurozone.  The result of this could be a new stability for all the states within the Eurozone.

We’ve seen that dealing with this issue totally as a Greek problem is insolvable from any aspect.  If other members of the Eurozone want to punish Greece for excess spending over a decade that ended 6 or 7 years ago they are not only hurting Greece but also themselves and their own futures.  But if this issue is dealt with as a Eurozone problem then there are possible solutions from which all of the Eurozone states can benefit.

What is required is a consortium of all the Eurozone states to handle not just Greece’s economic problem but also that of Spain, Portugal, and Italy. They are also in debt to the European Central Bank. If it is everyone’s problem they all need to participate in its solution.

Basically what these states have to deal with is the setting up of a central legislative body representing all of the states that can determine what is best for all of the states. They need to bring about a United States of Europe that has the authority to function for the benefit of all the states within the Eurozone.  And all the states need to give up some of their sovereign rights for the good of the union. This, incidentally, was their original goal

Numerous problems will have to be faced and resolved, particularly in terms of the extent of representation each state will have in this new union.  With a union each state would be stronger than it currently is and the euro would be back on a solid footing as one of the world’s safest forms of money. The European Central Bank would be the European version of the American Federal Reserve and the world’s stock markets would again be more stable.

Is this possible? That’s a good question. There are innumerable problems that have to be solved before this can come about.  But if the answer is, yes, then there would be more stability not only in the Eurozone but also throughout all the industrial nations.

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It would seem that the interests of Germany, France, and some of the other members are against Greece defaulting and exiting from the Eurozone.  Rather than fall out of the Eurozone on Thursday, July 9, 2015 the Greek government capitulated by delivering a new package of economic reforms to the ECB, raising taxes and the retirement age. Faced with the collapse of the country’s banking system and total economic catastrophe the government yielded on the issues that led to the previous collapse on a new rescue plan.  The retirement age is being pushed to 67 and government pensions are being cut by 15% for government workers who retired at age 62 after 40 year of employment.  The government will also withhold more taxes from state salaries and pensions and deduct a 6% healthcare premium from retirees’ checks.  The reforms are projected to generate at least 13.2 billion dollars in revenue over the next two years.

Currently the Greek debt is over 175% of its GDP.  It needs to be reduced or rescheduled over a longer period of time with the interest rates kept low to prevent the debt from growing. The Greek people need to take a more realistic attitude about repayment.

On Monday, July 13, 2015, after long hours of deliberation, with some states of the Eurozone arguing that the Greek prime minister’s word could not be trusted, the other states agreed to bail out Greece with a loan of about 50 billion euros.  Presumably Greece will pass further economizing measures and the loan will be implemented gradually. There is a payment due on the debt in about two years and Greece will be able to reduce her debt somewhat at that time if she adheres to her agreement.

The problems that the Greek government has to meet at this time is to economize enough to at least make a payment on her debt and also to restore the confidence of her own population in her banking system. The probability is that as soon as the banks are reopened within the country there will be at least a light run on them.  Presently the Greek Government’s solution is to reopen the banks and only allow very limited withdrawals.  Many people with large enough incomes may deposit the salaries in other countries, fearing that the bank closure could happen again.  It will take time for domestic confidence to be restored.  And a payment must be met in about two years.

Another problem which effects the entire Eurozone is one dealing with the declining value of the euro. The euro when it first appeared was worth about 1.5 dollars.  Last year with the infusion of a large amount of euros by the European Central Bank into the national flow of the Eurozone it dropped to about 100.3 percent of the dollar. On Monday July 13 with the current solution to the Greek Crisis the euro was worth 90.51 cents to the dollar. On Tuesday, July 14, the euro had risen to 1.1034 to the dollar. What will happen to its value in the future?  I suppose that is dependent on how well the Eurozone continues to function.

Greece will have a payment due in about two years. If she is able to make a payment  and not have to borrow more money then, the Eurozone will function properly and the value of the euro will have risen.  If, on the other hand, Greece has to borrow money again to just stay alive then there is no telling what the disaster will be for the Eurozone.

On Monday, July 20, 2015 the banks in Greece reopened; but the amount that could be withdrawn from any account was severely limited. What does this portend for the immediate future?  We’ll have to wait and see.

(Footnote:  To my readers: you must forgive me for not responding to your enquiries.  I get innumerable requests daily.  If I answered all of them I wouldn’t have time left to write the blog.  Virtually all your enquiries are answered in The Weiner Component #122 – Responding To Your Enquiries.)

English: Alexis Tsipras in a press conference ...

English: Alexis Tsipras in a press conference in Komotini. Ελληνικά: Συνέντευξη Τύπου του Αλέξη Τσίπρα στο ξενοδοχείο Ξενία στα πλαίσια της επίσκεψης του στην Κομοτηνή 13.11.2008 (Photo credit: Wikipedia)

 

English: Greece's recent debt history, between...

English: Greece’s recent debt history, between 1999 and 2010. (Photo credit: Wikipedia)

 

The Weiner Component #120 – The Shrinking Economic World: Interdependence

Seal of the United States Federal Reserve Syst...

English: Clockwise from top-left: Federal Rese...

English: Clockwise from top-left: Federal Reserve, Bank of England, European Central Bank, Bank of Canada (Note: Uploaded for use on Wikinews) (Photo credit: Wikipedia)

Logo of the United States Tennessee Valley Aut...

On the one hand each nation today tends to be strongly nationalistic seeing itself as a unique entity while on the other hand each of the national and regional groups are also strongly interdependent. When any one nation is adversely affected economically then all the others are also negatively impacted. A prime example of this would be the late 2008 bursting of the U.S. Real Estate Bubble whose effect was felt throughout the major industrial nations for at least seven years.

We are today in the 21st Century and interdependent; either we all prosper or we are all undergoing stages of recovery from different levels of recessions. This situation seems to be intensified in some of the 19 nations that make up the Eurozone, which is actually a smaller version of the overall economic world. Whether they survive as an economic unit or not depends upon decisions they will make in the next few months

Most countries have a central government bank like the Federal Reserve in the United States or the European Central Bank for the Eurozone but there is a wild card in all these countries or regions and that is the private banks. To some extent they are limited by the National Banking House but mainly they operate for profit in a Market Economy environment. These banks are motivated by profit and their lending policies can create money or shrink the expenditure of funds within an economy.

An example of this would be in the U.S. after the Real Estate Bubble burst in late 2008. The major banks had recently been bailed out of bankruptcy by the Federal Government with loans and were expected to have a loose money policy to enhance economic recovery. The private banks, however, became ultra-conservative, essentially hording their monies and considerably slowing down the rate of economic recovery.

These banks as they exist today are necessary for the functioning of any National economy.  But, mainly, they exist for profit through fees or the interest rate they charge on their depositor’s savings and checking accounts.  The banks are responsible for the flow of money through the entire economy. Their CEO’s or presidents take home salaries in the millions of dollars while the government banking houses like the FED or ECB take home salaries that are in the thousands of dollars. These private banks are necessary, yet they pose a contradiction within the Free Market system.

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The economic system of a nation works simply. It always seems to follow the following

model.

IMG

                                  THE NATIONAL BUSINESS CYCLE MODEL

 

The above model is continuous.  The duration of each cycle can vary from a relatively short period of one to several months to a number of years.  The Great Depression of 1929 lasted until the Second World War, ten to twelve years before recovery was completed.

All of this operates in a Market Economy where the forces of the Market or Free Enterprise determine what is happening.   And what causes the Market to operate is the goal of profit.  During a period of prosperity many businesses that are doing well want to expand and do better.  They generally borrow money from the banks in order to do this. There may in addition be a shortage of labor and wages will be bid up raising the costs of production. Eventually more is produced than can be sold, be it manufactured items or food products; prices drop, there is overproduction, people are laid off, unemployment rises.  The economy moves into a recession which can lead into a depression or if it misses that then directly into the recovery stage, and the cycle eventually begins again with a level of recovery.  This pattern has been endless lasting at times for months and at other times for years, or for some period between the two. And always it has been propelled by profit

This is, of course, a simplification of the many forces at work within each economy during the business cycle but it is essentially the root that powers the economies, the wild card that the Central Banks can never really totally control.  And when one country is affected it is like a virus that then spreads and in different degrees affects other nations.

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It can be and has been argued that a planned economy controlled by central planners in the government, as it was in the Soviet Union, never worked. They were always beset by bottlenecks when production stopped while the factory waited for some necessary part to be produced and shipped to them before they could finish their product. This did occur prior to World War II when the Soviet Union was undergoing its 5 Year Plans that were to turn it into an industrial nation.  And if we check carefully we will find that it did also occur in countries with the Market System.

It can also be argued that this is a form of socialism which is by definition bad and has never worked.  But if one examines the history of socialism he or she finds that it is a late 19th and early 20th century form of utopianism, which in many cases also had religious overtones. They were reaching for a state of being in an early industrial society where everyone could live happily and fairly ever after.  We are looking at a state of being that could not, with the limited resources that existed then, really exist at that time in history.

What we are considering now is a state of being that is utilitarian; that is a possible and logical outcome to what is the most efficient course of action today. Most industrial nations have from some to many aspects of the society that are operated by the government for the public good.

In the United States, for example, there is Social Security, Medicare, and Affordable Health Care to name some social programs.  One can even quote the Tennessee Valley Authority (TVA) which serves only a section of the country supplying water and electricity sold by the Federal Government.  Even some municipalities will sell water and/or electricity to their residents.  These are all social programs run for the public good rather than for profit.

Most industrial nations have many more social and industrial programs that cover their citizens from the cradle to the grave. Their taxes are high but their protections for their citizens are far more extensive than those in the United States where many of these programs cost the citizens far more than these other industrial nation’s people pay for them in taxes.

The problem as it exists in the United States and many other industrial nations is that most of the major banking houses are too big to fail.  They keep a goodly percentage of the cash flowing through the economy.  If they were to disappear by going bankrupt through bad speculation or otherwise then the nation or nations would go into a deep depression.  The banks are in the business of making large profits with their depositor’s money, which generally is insured by the Central or National Government, but their executives make decisions that could lose that money as happened toward the end of 2008 when the Real Estate Bubble burst.  The governments bailed out most of the banking houses like the Bank of America.  The banks were needed for the economy to keep functioning.

If we, as individuals, invest money foolishly we can lose our investment but if the banking houses do it the National Government using taxpayer money will have to pay for the loses. They seem to have an advantage over the rest of the society, a very unfair advantage.

In the March 4, 2015 edition of the Los Angeles Times there was a short article dealing with the J.P. Morgan Chase bank.  They were to pay 25,000 thousand homeowners $50 million for failing to properly review payment-charge notices sent to these homeowners in bankruptcy.  The bank acknowledged that it filed about 25,000 payment change notices without a proper review.  They were signed in the names of employees who no longer worked for the company or who hadn’t reviewed the filings.

If we do a review of the major banking houses from 2009 to the present we find that all of these banks paid fines to the Federal Government of multimillions of dollars for various nefarious and outright dishonest practices with virtually no one going to prison for any of the illegal activities.  Outside of a fine there has been no legal penalty for banking houses instigating illegal activities.  In fact even after the fines were paid the banks, in most cases, still made a profit on these activities.

Are there solutions to these problems?  The banking practices as they now work are completely out of kilter with the needs of society.  In fact in many instances they seem to go against the interests of the general public.  A simple solution to this would be in the United States to expand the powers of the Federal Reserve which would allow them to deal directly with the general public.

The Federal Reserve divides the United States into twelve Federal Reserve Zones. Each has a main Federal Reserve Bank and ancillary banks.  The zones could be expanded to also include Federal Commercial Banks that would deal directly with the public

There are many advantages to this. The Federal Reserve can exercise its power more rapidly over the overall economy as it continually adjusts the business cycle and national cash flow, keeping the economy in a healthier state.  The contradictions in the system disappear with the Federal Banks serving the people for their benefit and not for profit.  It makes for a far healthier economy and the negative shifts in the business cycle should be massively reduced in a positive direction.

As to the concept of interdependence we need a consortium of the heads or leaders from each of the National Banks who would meet regularly and have the power to deal with the problems that affect all the member nations.  They can work toward international levels of prosperity for all the member nations.

Is all of this possible in today’s world?  The major nations are presently cooperating in the direction of ending national flare-ups.  They are cooperating in attempting to wipe out the terrorist group ISIS and other terrorist groups in the Middle East and North Africa.

Setting up an international economic consortium would just be another step in this direction.  Currently there is the G-20, an international forum for the governments and central bank governors from 20 major nations.  It attempts to address issues that are international in content.  Collectively the G20’s nations account for around 85% of the gross world products, 80% of world trade, and 2/3ds of the world’s population.

They have been meeting annually since 1999.  Actually under other names they have been meeting since the end of World War II.  The leaders of these nations confer together and can bring home recommendations to their individual governments.  If the individual nations were to give up a percentage of their sovereignty the group’s representatives could meet more often and they could be given power to implement their economic recommendations as acts of international law.

In addition there is the United Nations which has operated on various levels since 1945, the end of the Second World War.  In part it has been politicalized but that can be changed and it can be brought to operate as a world union

The tools for all these changes already exist. All that is required is that they are positively developed.

German Logo of the ECB.

German Logo of the ECB. (Photo credit: Wikipedia)

The Weiner Component #117A – The United States & the Eurozone: Growing Interdependence: Working For the Common Good

English: A map of the 12 districts of the Unit...

English: A map of the 12 districts of the United States Federal Reserve system. (Photo credit: Wikipedia)

Countries using the Euro de jure Countries and...

Countries using the Euro de jure Countries and territories using the Euro de facto Countries in the EU not using the Euro (Photo credit: Wikipedia)

Toward the end of the year 2008, while George W. Bush was still President of the United States, the Real Estate Bubble exploded in the U.S. causing phenomenal economic misery throughout that nation and, on a slightly lesser level, throughout the Industrial World.  Many of the major European banks and many European citizens had purchased and held onto Hedge Fund Real-Estate bonds that now became worthless or nearly worthless. In essence the entire civilized world took a downward economic fall. This included for both banks and many individuals, particularly in Greece, Spain, Portugal, Iceland and Italy. In fact the three major banking houses in Iceland all went bankrupt. Some nations fared better than others but all were hit to some extent.

The real estate hedge fund sales, dividing up mortgages into microscopic parts, selling them through numerous hedge funds, and continually driving up real estate values,   had been going on for over thirty years. The process had existed through the entire careers of many bankers and investors. It had been a traditional safe hedge or investment which paid reasonable dividends. Suddenly all this ended with trillions of dollars’ worth of bonds being virtually worthless.

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The Federal Reserve tends to supervise the United States and the European Central Bank controls the Eurozone. They can add or subtract money from within their domains. Unfortunately this process can work toward solving economic problems but within a relatively slow period of time.

Economics tends to be a loose science that seemingly becomes better understood as time and situations happen.  Economic recovery is a gradual process and the FED or ECB does not have total control of the tools of recovery.  In the case of the United States the legislators, whether they understand it or not, control fiscal policy and by some of the laws they pass can hinder or aid recovery . In the case of the ECB there are 19 separate nations, with separate histories, languages, and a sense of nationalism, that have agreed to cooperate together with a single currency, for the mutual benefit of all of them.

Some of these 19 nations are currently in a dire economic condition with high unemployment and heavy debts exceeding their GDP and undergoing extreme austerity as they attempt to pay off their killing loans to those members who have supported the bailouts of their economies. Greece, for example currently is the worst off of all the nations in the Eurozone. She has 25% unemployment, has been bailed out at least twice by the ECB and is needing another loan in order to not go bankrupt.

In addition the agencies within each country that control the currency flow, and can increase or decrease it by their actions, are the banks within each nation.  These operate separately and for profit. Under both the Federal Reserve and the ECB the interest they can charge is largely controlled. They, however, until the end of 2008, were the instruments that filled the void where the societies needed freer flowing cash. They did this for three decades and finally continued forcing the process in such a way as to bring about the recessions of 2009 throughout most industrial nations.

In the United States the Federal Reserve, despite the actions of the Republican led House of Representatives whose policies tended from 2011 on to shrink the size of the Federal and State Governments creating even more unemployment, was able by creative Monetary Policy to work toward improving economic conditions within the country

The Federal Reserve largely solved this problem for the United States by both adding money at the rate of 40 billion dollars a month to their economy and by buying up 45 billion dollars a month’s worth of mortgage paper. Without ever announcing what they were doing the Fed forgave the mortgage holders their property debts. This, in turn, added much of this money to the cash flow as it was spent on new productivity rather than retiring debt.

The European Central Bank is currently facing a similar problem; they are currently facing the beginnings of deflation. Their GDP is actually decreasing while their population is increasing. The ECB’s immediate solution for all 19 nations in the Eurozone is to add 60 billion euros to the overall economies every month until September 2016. This is a giant economic stimulus plan that will hopefully boost the sagging economies and fend off deflation bringing about recovery.

Will this help countries like Greece, Spain, Portugal, and Italy who are currently following intense austerity programs in order to pay back their debts to other Eurozone countries?  This is an interesting question?  These nations have been directly aided by the ECB.  At different levels they are undergoing stringent living in order to pay off individual and government debt.  Will the people in these states continually be willing to undergo a lower standard of living than the rest of the Eurozone?

Greece, which is probably in the worst shape of all of these countries, has voted No in its last election. Their new government, with the support of the bulk of their population, is currently attempting to negotiate an easing off or forgiveness of some or all of the debt.  Will they succeed?

If the negotiations break down and nothing is resolved then Greece will be forced to leave the Eurozone and probably, sooner or later, declare bankruptcy and the ECB will collect nothing. If the ECB attempts to force payments from Greece, who currently needs a further bailout of a billion or more euros and attempts to make the repayment even more stringent than its current state, then the Greeks will be forced to withdraw from the Eurozone. If a compromise is reached then, at least, part of the debt will have to be forgiven.

If that happens then the other countries that are in extreme debt to the Eurozone will also want and expect their debts to be modified.  Spain, for example, has an extreme left party that will be running in the next election on a platform of ending stringent living in Spain.

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There are certain factors we should keep in mind.  Up to the 2008 Crash virtually all the banking houses were encouraging all the people and governments to borrow money. Times were good and could only get better was the popular belief. Not all the nations within the Eurozone took this up; some were much more conservative in their borrowing and spending habits than others. Five or six within the Eurozone did take it up and carried the borrowing as far as they could. There was a similar situation within the United States and in some of the other industrial nations.

It should also be remembered that money is no longer gold coins. That ended in the 1930s. Today money is paper which is used as a means of exchange and has nothing behind it except the word of the government that prints it. Also that the amount in circulation is determined by the particular government or the ECB or in the case of the United States by the Federal Reserve.

The amount is arbitrary and can be increased or decreased at any time. The Federal Reserve forgave many of its debtors and the country now seems to be rapidly moving toward recovery. The ECB needs to rethink its position. Many of its members still have the fixation that money is gold or that those who had been living freely through 2008 must pay their debts. It is time for these people to mentally enter the 21st Century and ask themselves what is best for all of its members. After all, Europe is probably one of the major industrial centers of the world and cash or money serves only as a means of exchange. Punishing the people of a country for careless living which was encouraged by the financial institutions does not solve major economic problems. It can, if fact, exacerbate them so that everyone will economically suffer.

In the United States a goodly percentage of the homeowners in 2008 ended up owing more on their properties than they were worth. The Federal Reserve forgave many of them what they owed. It never admitted that it did this. If it had there might have been a hue and cry against this action.   If that had happened the U.S. would probably still be in a deep recession or another Great Depression.

This is a strange issue. Given a choice, what would the American people have chosen? Allowing a large number of people undeservedly to be forgiven their debts and see the country head in the direction of a return to prosperity or fair and equal treatment of everyone and a major depression.

This is actually the problem the Eurozone is facing now. Currently the Greek government is negotiating to either reduce or be forgiven its debts. Germany and France want it to pay its debts.  After all, they have to be punished for overspending prior to 2009.

Is the issue economic justice or a solid return to prosperity for all the nations in the Eurozone? Which is more important to see immediate justice or deal with what is best for all the nations within the Eurozone? An interesting question!

Fortunately the Federal Reserve in the United States was able to act surreptitiously. The European Central Bank does not have that option. The only realistic action it can take is to partially forgive the loan in the present and eventually drop it completely. If it does this, combined with the stimulus the Eurozone will once again reach a high level of prosperity. If the ECB demands the full return of what is currently owed in order to negotiate a further stimulus, that is, equal fairness for every country; then these nineteen countries face a hard economic future.

On Friday, February 20, 2015 at a negotiating meeting of Eurozone finance ministers a compromise was reached giving Greece four more months on its bailout. One result of this temporary compromise sent the Dow Jones industrial average and S&P 500 to new highs. The Euro resounded to $114 and Germany’s DAX index closed at a record high.

Depending upon the actions of ECB in June the situation could be back to where it was a week before the temporary compromise. By then it should be obvious to everyone involved that rigid enforcement of the original agreement would have strong adverse effects upon all the nations involved. What will happen will depend upon the ability of all these people to define the best common goal for all of the Eurozone.

English: The European Central Bank. Notice a s...
English: The European Central Bank. Notice a sculpture of the euro sign. (Photo credit: Wikipedia)

The Weiner Component #117 – Following the Federal Reserve’s Example: the European Central Bank

The 2008 Real Estate Debacle affected not only the banks and economy in the United States but also those in Europe and other parts of the industrial world. And like conditions during the Great Depression each country or region has had to fend for itself, work its way through the economic disaster.

The United States followed a method of creative monetary policy, adding gradually trillions of dollars to its national cash flow in order to bring about a return to the direction of prosperity. In essence it created and added 85 billion dollars a month to its economy for well over two years. The result of this was partial recovery with national unemployment dropping to slightly over 5 percent.

(It should be added that had Congress also applied fiscal policy unemployment would probably be down to 2 1/2 to 3 percent.  But that would today be impossible with a Republican majority in both Houses of Congress.)

The European Central Bank (ECB) is the equivalent of the Federal Reserve, controlling monetary policy for its 19 member Eurozone economy. Mario Draghi, the director of the ECB has begun their version of creative monetary policy to bring about economic recovery within the 19 nations that make up the Eurozone. It should be remembered that this economic union was initially called The Common Market.

The European Central Bank will buy $69 billion or 60 billion euros in bonds each month until September 2016. They do not have the mortgage dilemma that had existed in the United States but they do have a debt crisis in a small number of their member states that they are currently essentially attempting to ignore. The ECB is beginning this process with traditional monetary policy. But even this is a radical step for the ECB because they will be adding 60 billion euros to the cash flow every single month. This will be done by buying back bonds.

In all they will be adding a total of over one trillion euros. Where is all this money going to come from? The ECB will print it and add it over a twenty month period. At the end they will be adding 1.2 trillion euros to the Eurozone cash flow.

Remember, currency has no real value. There is nothing behind it but the word of the agency or country that provides it. This is true for all nations today because there are not enough precious metals in existence to conduct all the business that occurs within and among all the nations. The value of this currency is set in the nations using the money by their governments and by what other countries are willing to trade for it.

There are several major problems the Eurozone is facing. To use a historical example: When the United States was first formed during and immediately after its Revolutionary War in the late 19th Cwntury its government consisted of thirteen separate states and a Continental Congress made up of representatives of these states. In order for Congressional legislation to pass, each of the individual states had to sanction it. Also only the states could tax. Congress had to request money from each of the states which each of the thirteen states could send or not send. What existed was 13 sovereign states with an essentially powerless central government.

This is largely what exists in Europe today, nineteen sovereign nations that largely speak different languages who have bound themselves into an economic union. Some are wealthier and more efficient than others. It is to everyone’s advantage to belong to the union but some of the members are currently in dire straits.

In the period prior to 2009, some of these countries using creative bookkeeping, which was largely created for them and their citizens by large American banking houses like Goldman Sacks, slowly incurred extensive debt. The basic premise, I assume, was similar to that used by the banking houses in the United States that their increasing prosperity would grow the debt out of existence. At the end of 2008 the Housing Industry collapsed in the U.S. shrinking economic growth throughout the world and leaving these nations and many of their citizens hopelessly in debt.

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The Eurozone is a monetary union of nineteen European states that have adopted the euro as their official currency. They are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Other European states are getting ready to join and some have adopted the euro unilaterally.

The current major problem facing the ECB is deflation. Their Gross National Product (GDP) has been slowly shrinking; it is currently down .02%. This means, particularly with their population slowly increasing, that the average standard of living for most of the people is slowly dropping.  In order to avoid this and to begin growing the GDP again the ECB will, using monetary policy, increase the cash flow throughout the Eurozone by 60 million euros per month for about twenty months. Obviously they believe that this will reverse the current pattern. Hopefully in this they are right.

The euro tends to be a far better currency than most of the 19 nations had before the Common Market. It has been between 1.2 to 1.5 percent above the U.S. dollar. The only currency that has been higher has been the British pound which has been between 1.5 and 1.7 cents above the U.S. dollar.

All the nations involved have benefited from this economic union, but all these countries are not economically equal, and all of them have otherwise remained independent sovereign nations with strong feelings of nationalism. Currently Greece, which had a youth unemployment level of 53.5% in November of 2014, had its government for a number of years borrowing off the books billions of euros. In November of 2010 Eurostat revised the debt of Greece putting the deficit at 15.4% of GDP and public debt at 126.8% of the GDP. This was the greatest deficit among all the EU member nations. The European Central Bank (ECB) bailed Greece out with money and an austerity package.

Despite the austerity measures, possibly because of a continuing recession, the deficit continued to grow and in the beginning of July 2014 there was a second bailout of one billion euros that was due to be paid back in late July. Greece ended its six year recession in the second quarter of 2014 but was still facing, economic and political instability and heavy debt

There has been spontaneous protests strikes, heavy unemployment, and large scale discontent ever since the bailout loans were first made. In the January 25, 2015 Election the Left Wing Syriza Party won the majority position with 149 out of 300 seats, 36% of the popular vote. The second, out of the 20 functioning political parties in Greece, was the (NO) New Democracy with 27.81% of the vote.

Syriza campaigned as the anti-austerity party. They are a radical left-wing political party whose platform was to end Greece’s austerity measures. In a manner of speaking by the way they voted the Greeks held out their middle finger to the European Central Bank (ECB).

It’s understandable in a country which, for whatever reason, has been in an ever increasing recession for the last seven years, has seen its GDP decrease about 25% and unemployment rise above 25%, with the ECB now asking for further austerity.

The new Prime Minister, Alexis Tsipras, has promised to renegotiate the country’s 270 billion bailouts. He is also seeking forgiveness for most of Greece’s 270 billion euro debt. He has pledged to reverse many of the austerity reforms, such as cuts in pensions and the minimum wage and public sector layoffs.

Germany and France want the ECB to adhere to the original austerity agreements; in a sense they want to continue to punish Greece and the other nations who overspent and received bailouts from the ECB. Some of the other countries are Spain, Portugal, Ireland, and Italy.  In Spain a radical left party is presently organizing protest marches in the country. They may well emulate Greece in their next popular election.

As of now nothing has been done. The European Central Bank has put off any possible settlement for several months. What will happen then is anyone’s guess.

The ECB needs agreement from all its members in order to act. If it demands that the austerity continue then Greece will be forced to leave the Eurozone and go back to its old currency, the Drachma, and eventually be forced to declare bankruptcy since at the present it is at the point of needing another bailout for which its new prime minister swears he will never ask. If, at that time, the ECB accepts a compromise it will be establishing a precedent that will apply to the other nations that have overspent in the past and need or will need bailout funds.

All this is an interesting dilemma! This is particularly true since the euro has no intrinsic value. Additional funds can be printed and issued as needed. In fact this is the Monetary Policy plan that the ECB is about to start that will hopefully reverse the current deflation cycle the Eurozone is presently undergoing.

This problem is another result of the U.S. Real Estate Bubble bursting in late 2008 and causing a world-wide recessions. Both the Eurozone and U.S. property dilemmas were caused by the major banking houses.

In the United States the Federal Reserve, with the approval of President Barak Obama, by its monthly purchase of 45 billion dollars’ worth of mortgage paper, essentially forgave a large percentage of the multitude of homeowners who found themselves over their heads in debt on their homes. The result of this has been to solve the multi bundling of mortgages and return the housing industry to sanity and to move the country largely in the direction of economic recovery. Hopefully the dual actions will eventually occur.

Ultimately the ECB will have to take a similar type of action, largely forgiving the debt of the few nation’s that are currently in dire straits and add over a trillion euros to their overall economy or see the Eurozone largely fall apart. And if this happens and the Eurozone is largely broken up then Europe could see a return to the conditions of 1929 when each individual nation had to fend for itself during the time of the Great Depression.

(Footnote: Many of my readers have asked me questions in their comments. I carelessly did not number the original publication of “The Weiner Component #114.” However all the questions are answered in that blog: “Responding to Your Enquiries.”)

English: Clockwise from top-left: Federal Rese...

English: Clockwise from top-left: Federal Reserve, Bank of England, European Central Bank, Bank of Canada (Note: Uploaded for use on Wikinews) (Photo credit: Wikipedia)

English: Various Euro bills.
English: Various Euro bills. (Photo credit: Wikipedia)