Yes, Ireland’s Economy Is Actually Growing As Fast (Even Faster In Fact) As China’s

The Wall Street Journal has an article trying to deny that Ireland’s economic growth is almost as fast as China’s.

Their argument is that in Ireland GDP is misleading as that largely reflects tax avoidance schemes by multinational corporations due to Ireland’s low corporate income tax rate, and that the quartely increase of GNP was weaker than the quarterly increase of GDP.

That is true, yet even GNP was more than 10% higher in Q1 2015 than in Q1 2014. While that refers to nominal GNP, real GNP increased roughly as much considering that inflation was zero.

Advertisements

The Euro & Greece’s Woes

Many argue that Greece’s current woes are largely a result of Greece’s membership in the euro zone. They’re actually partially right. However, they’re wrong about the reason why the euro has contributed to its crisis.

They usually asserts that it’s because the Greek economy needs devaluation to kickstart its economy. But while devaluation will boost nominal GDP as nominal export revenues (which in Greece is mostly from service exports in the form of tourism) increases it will also reduce domestic demand as domestic purchasing power is reduced by higher inflation. And so, real GDP won’t increase as the increase in inflation cancels out the increase in nominal GDP.

The link between the euro and Greece’s woes instead consists of the fact that in a monetary union, like in a gold standard, there is a separation between the state and the “printing press”. As long as a state has a “printing press” that prints the currency that it borrows in, and that the currency has a floating exchange rate, it is shielded ( except under very extreme and rare circumstances) from market pressure as the central bank can buy unlimited amounts of government debt, so even if no private investors want to buy government bonds, it won’t face a debt crisis.

If a government, like Greece (or Puerto Rico), however lacks a “printing press” then they will face a debt crisis if investors refuse to buy the bonds they need to issue to finance deficit spending or refinance expiring bonds.

For those of us who oppose deficit spending, that is to some extent a virtue with monetary unions, as it creates a strong incentive for governments not to spend more money than they earn. However, just like for example reductions in unemployment benefits or harsher punishments for criminals hurts those who for whatever reason don’t respond to the incentive these measures create, this incentive will hurt countries that don’t respond to that incentive and still engage in irresponsible deficit spending, like Greece.

The fact that Greece chose to have monetary arrangements that created an incentive against deficit spending and yet still engaged in irresponsible deficit spending partly reflected that the political class was corrupt and short-sighted and partly reflected ignorance of the fact that giving up the “printing press” makes deficit spending far more dangerous for a country.

How To Deal With Greece

As much as I hate to discuss Greece again, I feel compelled to after yesterday’s referendum with its irrational outcome. As I’ve said (or technically speaking written) it before, and unfortunately, I’m forced to say it again: Greece, thousands of year ago more or less the cradle of modern civilization and philosophy (including the far greatest philosopher, Aristotle) as a nation has sunk increadibly low. A majority of Greeks apparently thinks that they can vote to get money from other countries.

Yes, many Greeks have suffered a lot during the crisis, but it was self-inflicted (though admittedly that only holds for Greece as a nation, many innocents have suffered, while many corrupt politicians and bureaucrats have benefited) by too much borrowing, fraud, corruption and incompetence and Greece has already received massive amounts of aid, which is of course what the combination of new “loans” and writedown of previous debts in effect amounts to (plus there’s the aid it receives from the EU budget).

While it would be a good idea for other EU leaders to make some “face saving” (for Greek far-left leader Tsipras that is) compromises on the specifics in order to allow Tsipras to assert that he has “won” in the negotiations (and so allow him to make his Marxist party accept any hypothetical future deal), there should be two principles EU leaders shouldn’t compromise on: first, no debt writedown and interest payments which should match borrowing costs of creditors (which, conveniently, is near zero these days) plus at least a small premium and second, no increase in debt levels, which is to say Greece should run a so-called primary surplus matching or exceeding its interest payments.

If Tsipras refuses to accept that then there should be no more money to the Greek government. And the ECB should cut of liquidity to the Greek banking system as their exposure to the Greek government makes them insolvent. Meanwhile, all EU funds to Greece should be cut off (Greece is the biggest net recipient of all countries that wasn’t part of the communist bloc during the cold war). If the Greeks don’t like the terms for cooperation, then let them fend for themselves.

The False Case For Another Greek Debt Writedown

Today is then the day for the questionable Greek referendum about whether other countries should give them money.

I’ve already written countless times about why the Greeks don’t have a right to other’s money, and why they would have been better off if they had done like Baltics, the Irish and to a lesser extent even Spanish and the Portuguese and focused on producing more instead, so i won’t elaborate on that again.

Instead I will focus on one commonly used argument for a second debt writedown for Greece, namely that they’re is no way that they’ll be able to repay it. Well, it is certainly true that there is no way that they’ll be able to reduce their national debt level to zero.

But here’s the thing, unlike debts of private individuals or households, central government debts are pretty much never repaid, and only rarely even reduced. In almost all countries, debt levels instead in fact just keeps increasing, at least in nominal terms and usually in real terms as well. Sometimes relative to the size of the economy too.

Greek Referendum Symptom Of Unrealistic Mentality

As all (or almost all) of you have probably heard after the breakdown in talks between Greece’s far-left Syriza government and its creditors, the former chose to have a referendum on the creditor’s offer.

There are several problematic aspects of this referendum, the most important one being that few Greeks (or non-Greeks for that matter) really know the details of the disagreement between the Greek government and the creditors. Not even I know as news reports give contradictory descriptions. The fact that most Greek voters won’t know what they’re voting about is obviously problematic.

What I do know however is that the basic mentality of the Greek government, both in the election that sweeped it into power and in this referendum is : “We want creditors to give us money while also write down our debt levels because that’s what our people want”. Now, within families, it often happens (usually between parents and children) that “loans” are given that aren’t meant to be repaid, meaning that they are in effect gifts. And that is of course OK. But none of Greece’s creditors want to give away money to Greece, and neither elections nor referendums in Greece are going to change that.

So the position of the far-left government is completely unrealistic. If they get their way in the referendum (the polls released so far show contradictory results) then they will run out of money as creditors have been very clear that they won’t be getting any more if that is the result.

And the whole idea of voting (whether in a general election or a referendum) displays a kind of robber mentality where you get to decide whether you should get other people’s money. Except the Greeks, unlike street robbers, don’t have the threat of violence to force others into giving them money.