Kyle Bass: Greece a failed state, Euro will collapse, Japan debt crisis next

[ag]

You either agree to open-ended transfers and expansionary policies which are democratically sustainable, or you don't.

They aren't democratically sustainable. In Germany.

The entire situation is not democratically sustainable, because of a design flaw: there is no European finance ministry responsible to a democratically elected European legislature with a direct taxation authority throughout the euro zone. Until and unless this is rectified (of which there seems to be no sign) it cannot be made democratically sustainable. Period. Therefore, the only thing that's democratically sustainable is a more homogenous euro zone.

Anyways, the consequences of any unilateral steps by a Greek government will be fairly direct and easy to observe, both for the Greek citizenry, and for that of the other countries. They won't be pretty: and they will involve much worse effective cuts then those demanded by Germany today.

[ag]

By the looks of it, a bank run in Greece is starting (according to BBC 0.75% of deposits have been withdrawn just over two days, Monday and Tuesday this week). So, looks like the issue may be mute long before the new election.

[ag]

By the looks of it, a bank run in Greece is starting (according to BBC 0.75% of deposits have been withdrawn just over two days, Monday and Tuesday this week). So, looks like the issue may be mute [moot] long before the new election.

Sorry, but this error drives me nuts. I guess it's because I'm a lawyer.

Shoot. I am an idiot )

Not too bad though: it's such a native-speaker error, I should be almost proud )

[ag]

even if the banking system did collapse, Greece would still need an expasionary fiscal and monetary policy. As would the rest of Europe.

Well, after the collapse of the banking system and the consequent reintroduction of the drachma, Greece will be free to adopt the policy it needs, won't it?

The issue here is that, whatever the policy that Greece needs, it is not the same policy that Germany needs - or, for that matter, not even the same policy that Italy needs. Greece needs to get out from under a mountain of obligations it cannot fulfill and it needs to become a lot more competitive. No plausible fiscal or monetary policy, expansionary or otherwise, is going to do the trick, I am afraid, at this point. The more money you try to pump into the European economy, the more of it is going to wind up in Germany. Some of it might go under an occasional Greek mattrass, but that isn't going to do much good either.

[ag]

With the bank run that has begun, the return of the drachma is inevitable now.  People aren't going to keep euros in Greek banks when they fear they'll be turned in drachmas overnight.  I can't see the current Greek non-government being in a position to halt the run anytime soon, and by the time something could be done, it will be too late, as there will not be the necessary trust for people to put the money back even when what needed to be done to stop the run has been done.

One has to just hope, you are wrong. The spontaneous transition will be very unpleasant. Perhaps, they still can stop the run. One can only hope.

[ag]

To make the dream of one voice come true it would have helped to have one elected government. Starting with one currency was putting the cart before the horse and it produced what it was designed to produce: a pipe dream. If you want to continue dreaming, nothing prevents you from calling all the splinter currencies "euro" (as in Greek euro, German euro, French euro, etc.) You know: close the window shades, sing "tuc-tuc-tuc, tuc-tuc-tuc" and dream of a long and eventful rail travel.  

[ag]

But Greece NEEDS high inflation. Anything else simply won't do the trick, since it would not get Greece from under the impossible obligations. Greece needs to become much cheaper compared to Germany, and doing it through nominal cuts seems to be politically impossible. If the easing you are proposing is not going to cause inflation, it is going to solve exactly nothing, as far as Greece is concerned.

Anyway, don't you find it remarkable that even though everybody (from Merkel to Tsipras) has been consistently claiming they want Greece to stay in the euro, with each passing day we are getting closer and closer to Greece existing the euro?

[ag]

First about the default.

Once Greece defaults it will have to deal w/ a likely bank run and a shortage of cash euros. The former will be dealt with by instituting capital controls. The latter by paying things w/ Greek government IOUs that will become the de facto money: remember, the real obligations that matter a pensions and sallaries to the Greeks themselves, and, it seems, these aren't under the control of the Greek government. Even if these are formally denominated in euros, these will be "Greek euros" traded at a discount. The actual euros will be the store of value under the mattrasses and in accounts Greeks have in German banks.

So, de facto Greece will be out of the euro, even if no political decisions to that extent are taken. Returning to real euros will require either deliberately engineering serious deflation (with all that implies), or reintroducing euro at a rate different from 1:1. There is ample precedent from the 19th century of return to the gold standard after a forced suspension (say, during a war). It wasn't an easy thing to do even then, when financial markets were a lot less developed and important for the actual economy.

[ag]

Now, about the "rendez vous with history." It's not the current generation of the politicians who have it - it's the previous one. Though, of course, they didn't even notice that, when they took the decisions that brought us where we are now. They followed the usual European pattern of pushing through an economic integration project that went far ahead of what the political institutions could sustain in the hope that, once the economic situation is changed, political integration will be forced to follow. This is how European integration had been done for decades - but this time they badly over-reached (and also bit the Greek poison pill - special thanks to Dr. Papademos)

For the single European currency to be sustainable, we would need such a serious surrender of national sovereignty to the European government, that not even the Greeks are willing to discuss it, not even today. So, it looks like it won't happen, and euro system will have to be seriously modified instead. Which modification, probably, includes a smaller single currency area, at least for a while. Even if Greece is somehow kept in the euro zone during the current crisis, it will be out within years - or else, it will be annexed into Bavaria, which doesn't seem likely )

Don't blame Merkel: she's been dealt a crappy hand. Blame Kohl: he dealt it.

[ag]

1. Greece will not stay in Target 2 post-default. If it does, within the next 5 to 10 years euro will be the currency of Greece, and Greece alone.

Target 2 operating like that is, essentially, opening an unlimited back-door credit line for the Greeks. Greece staying in Target 2 would, basically, mean that every European country can print as much cash as it likes, without much control. If that happens, every government that does not print obscene ammounts would be grossly irresponsible towards its own citizens: if you print cash, you spread the inflation accross the euro zone, while concentrating the benefits on your own; if you don't - well, if you don't, you are a sucker and should be voted out of office ASAP. If there is a surer way of guaranteeing that euro won't survive to 2020, I don't know it.

[ag]

2. Yes, Greece needs wage deflation. A big part of the problem is that this is politically impossible to impose. Had Greece been Latvia, there would have been something to discuss. But then, you know full well what would happen if grandma had balls, don't you?

Within 4 (ok, 3) years, at the present rate of political change, Greece will be governed by KKE, the Golden Dawn or the military - and all this duscussion will be moot.

[ag]

3. Big fiscal transfers require a finance ministry, properly responsible to a legitimate elected body. There is only so far you can get by subterfuge. Either Europe is a democracy or not - and, at present, there are no democratic institutions that would make the present euro architecture sustainable. That's the problem.

The problem w/ non-crisis exit is that outside of a crisis it would be very hard to force it. Imagine yourself as a Greek PM when things, are, finally, looking up. Are you going to commit political suicide by voluntarily moving to drachma, when it does not at all seem urgent? You may very well know, that unless you do it, sh**t will hit the fan in another 5 or 10 years. But in 5 or 10 years you will be retired or voted out of the office anyway. Let that SOB Popandopulos (hypothetical leader of the opposition) do it after the next election!

[ag]

It is precisely because the banks are "led by people by people with a capacity for a human thing known as thought" that there is a problem. I would not at all be afraid of "rational automatons", it's the people that are the problem ) (BTW, "rational" in economics means ONLY "having complete and transitive preferences" - it's an extremely mild technical requirement, unless one specifies what those preferences are; anyways, none of my argument really depends on it).

We all know, voters don't care about printing money: they don't know what it is. They will not be voted out of office for refusing to print money. They will be voted out of office for forcing their own countries into deep economic sh**t by refusing to print money.

[ag]

Post-default Greek government will not have money to pay pensions, salaries or suppliers - not in its bank account (remember, the economy will still be shrinking at that point). Having done the default for the explicit purpose of avoiding further cuts, and having come to office with an explicit promise not to impose them, it will be hard pressed to continue cutting. So, either it stops paying salaries/pensions/suppliers, or it starts paying them in scrip (BTW, I believe, in a few cases it has already started - at least as far as suppliers are concerned).

If, as you say, this may be remedied by printing more euros through the Target 2 system, this implies that the Greek Central Bank authorizes the government to issue money, when there is none in its account. At that point, I don't care whether the Greek central bank is legally independent or not - nor would, sorry to say this, ECB care about it. No money means no money. Either you can't remedy it through Target 2 - or, if you can, Target 2 will destroy the euro. As simple as that.

[ag]

The reason I stress the inflation "specter" is twofold.

1. Greece needs inflation, because it seems to be the only way its government can collect taxes/lower its obligations at this point. It's highly inefficient and, generally, horrible, but there seems to be no other way that doesn't involve a revolution. So, unless there is (sizeable) inflation, I do not see how it will prevent Greece from being kicked out of the euro.

2. Every short-term institutional solution to the present crisis that you propose is not sustainable, because it is almost deliberately designed to destroy the euro through inflationary pressures. The problem is not monetary expansion as such (it may very well be necessary, though unlikely to be sufficient) - the problem is in the institutional changes proposed (such as the rape of the Target 2). And once these changes are made, they will be hard to credibly undo post-crisis. That is the real danger: they will provoke the next crisis, and sooner, rather than later.

[ag]

Common Agricultural Policy is a fiscal transfer - and a huge piece of crap, of course. But it is peanuts compared to what's needed now, I am afraid.

The existence of the common currency IS a big transfer. And that's precisely why it's falling apart right now.

[ag]

Finally, note. Nobody really wants to destroy the euro, everybody, from Merkel to Tsipras, is claiming to be doing their best to preserve it. But, collectively, they are tearing it apart. They are NOT doing it because they are mistaken - but because they've been put into a situation, where all their incentives are to pull the euro apart (if they don't, they are national traitors and should be shot - or, at least, kicked out of office). You are seriously claiming that if you give national governments even stronger incentives to print money they won't do it? I am afraid this is ascribing those people an unnatural, almost heroic, ammount of altruism and willingness to self-sacrifice. These folks are human - that's why they are doing it.

[ag]

Greek unemployment will drop after Greece deflates, no doubt. When will that happen? As you say, in 3-4 years. So, are we supposed to have a little military dictatorship till then, or you are fine w/ something like KKE coming to power and taking Greece out of Europe in the meantime? It's not like there are many other realistic alternatives, are there?

[ag]

The incentives US government faces are radically different from those incentives that euro nations would face in the world you propose. Yes, of course, the current system was designed not to create such destructive incentives: that is why enforcement of austerity was hard-wired into the project. What you are proposing is to blow up those defenses - in a hope that agents would somehow act against both their short-term and long-term interest.

US government can cheat once - if it prints too much money and inflates, it will screw the world big time, but enjoy a one-time "debt forgiveness". Of course, thereafter the dollar will loose its reserve status and US will have to pay much higher interest on its debt - and the negatives will so far outweigh the positives that nobody is even thinking of it.

[ag]

Now, Greece/Portugal/Ireland, etc. are tiny. They themselves are not likely to produce so much havoc for this to matter by itself. Financing national economy through the printing press is going to have humongous benefits - with very little cost to them, at least early on. The bulk of the cost will go to the Germans - there economy is much bigger, so it will absorb most of the inflationary pressure. Again, by itself it won't be that much - but all the benefit will go to the Greeks (they will collect the seignorage), while most of the cost will be charged to others. Now, it is extremely unlikely that the Germans themselves will start printing like hell - they are the biggest economy, they will bear much more of the cost, so they will, probably, be somewhat restrained. But even for Spaniards, Italians, etc., etc. it will be very tempting to help themselves - especially given that the midgets are alreayd imposing the cost on everybody.

This, of course, can be prevented - either by imposing limits on what can be printed, or by guaranteeing collective retaliation against the happy printer. Both of these features are in the current framework - and you propose to dispense with them.

[ag]

The defenses would not be blown up because Greece has put forth a strong effort to cut its budget. Had it not put forth such incredible effort, it would not be worth saving perhaps, but it has. The only major area of fail is wage rigidity, but the government spending drop of 8.7 percent of GDP in two years is very impressive.

Yes, it is impressive. Even more (tragically) impressive is that it doesn't look sufficient. We all know, it is just sucking Greece into a depression.

[ag]

Imagine greek government defaulting. People are ALREADY massively withdrawing their money from the banking system in expectation of either the drachma, or bank defaults, or both. Once the government defaults, it will be a stampede. Remember, to use Target 2 banks have to provide collateral to the Greek Central Bank. What are the assets of the Greek banks that can serve as such collateral (on a massive scale)? BTW, at that point the Greek government bonds are worse than junk.

So, ECB would have to vote to accept junk for collateral and just provide as much liquidiy as the Greek CB asks for - nothing less will stop the run. But why should the run stop? What would induce Greek depositors to return their money to Greek banks - the money is safer in Germany or under the mattrass. In any case, everything that has run out will stay out for the forseable future. This is Greece printing money that immediately goes to Germany, not to Greece. Within Greece the crunch will continue. How long is that going to last? Well, unless ECB clamps down on transfers, there is no reason it would stop, while the crisis is continuing. And there is no reason for the crisis to stop any time soon.

So, a gygantic flow of cash is going to be poured into Greece - with all of it leaking out nearly immediately. This is not solving anything, but making the non-Greeks angry. And Greeks can't even promise anything in exchange - they don't even have a government.

[ag]

I don't propose that they be dispensed with, only adjusted. The limits & retaliation were meant to prevent irresponsible behavior; but Greece's problem now is not that it is being irresponsible. It is that the scale of adjustment being asked of it is not feasible without the limits & retaliation being relaxed somewhat.

You are proposing, as far as I can understand, to let Greece inflate the whole European economy to the point it resolves its own financial problems. This is a huge bomb - it's insane. I wouldn't be surprised if the entire Greek economy has never been worth the damage thus incurred. An outright fiscal transfer from the German budget (i.e., Germany assuming all Greek debts and pension/salary obligations) is bound to be cheaper.

[ag]

Unless Greece exists euro in an orderly fashion - which would require a lot of hard decisions and a lot of careful preparation - the "Lehman Brothers" scenario (or worse) might become inevitable in pretty short order. A major bank run on Greek banks is not goign to be easy to stop. And even if it is stopped, it is likely to be repeated.  It would be much easier to stop contagion if Greek departure from euro is viewed as a result of a conscious policy and negotiation than if it is spontaneous. And, of course, it would be much easier to negotiate Greek exit before Greece gets a revolutionary government hellbent on mischief - which seems increasingly likely.

It would have been MUCH easier to manage Greek exist if it were done 6 months or a year go, when Greece still had a government. Alas, we are rapidly approaching the spontaneous collapse point - and right at the moment when nobody is in charge.

[ag]

Yes, ECB has already accepted junk. You are asking it to make an unlimited commitment to accept junk in the future in arbitrary ammounts. That's blowing things up.