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This is not a blog which expresses instant opinions on current events. It rather uses incidents, books (old and new), links and papers as jumping-off points for some reflections about our social endeavours.
So old posts are as good as new! And lots of useful links!

Tuesday, July 7, 2015

Why are most of us Financial Illiterates?

Readers know that, despite my 4 years of economic studies (and some years actually teaching it to others!), I make no claim to understand the nature of the global plague that has befallen us in the past few decades. I buy the books to help me clear the confusion those studies gave me – but find that my eyes soon glaze over….a list of books I pledged to read some 9 months ago lies almost untouched – ditto others I mentioned 3 months back.

Economics was like a snake for me – I was fascinated but scared by it. I toiled in the early 1960s to make sense of its focus on marginal calculations and “indifference curves” and probably took only the following lessons from my four years engrossed in economics books
- the strictness of the preconditions which governed the notion of (perfect) competition;
- the notion of profit-maximisation;
- the belief (thanks to the writings of James Burnham and Tony Crosland) that management (not ownership) was the all- important factor
- trust (thanks to Keynes whose work was dinned into me) in government to deal with such things as “exuberant expectations”  
- the realization (through the report of the 1959 Radcliffe Commission) that cash was but a small part of money supply. Financial economics was in its infancy then.

For someone with my education and political motivation and experience, however, my continued self-confessed financial illiteracy is almost criminal but not, I feel, in any way unusual. 
Most of us seem to lack the patience to buckle down and take the time and discipline it needs to understand the operation of the system of financial capitalism which now has us all in its thrall.
We leave it to the "experts" and have thereby surrendered what is left to us of citizenship and political power.
A future post will hopefully try to explore this phenomenon .

Two rare books which survived the “glaze-over” test were –
-       The Financial Crisis – who is to blame (2009) by the ex-Chair of the British Financial Services Agency (Howard Davies) which identified and explored 39 different explanations of its possible cause. You can see some overheads and videos from his various presentations here, here and here
-       Rebalancing Society (2014) by Henry Mintzberg

Writing about the Greek crisis tends to be governed by tomorrow’s headlines but there is one blog which gives a consistently strategic perspective and its latest post gives some useful graphs and analysis -
Greece’s public and private debt burden is just too large for the Greek economy to service, despite already squeezing Greek labour to the death – literally. The Greek public debt burden arose for two main reasons. Greek capitalism was so weak in the 1990s and the profitability of productive investment was so low, that Greek capitalists needed the Greek state to subsidise them through low taxes and exemptions and handouts to favoured Greek oligarchs. In return, Greek politicians got all the perks and tips that made them wealthy too This weak and corrupt Greek economy then joined the euro and the gravy train of EU funding was made available and German and French came along to buy up Greek companies and allow the government to borrow and spend.
The annual budget deficits and public debt rocketed under successive conservative and social democratic governments. These were financed by bond markets because German and French capital invested in Greek businesses and bought Greek government bonds that delivered a much better interest than their own. So Greek capitalism lived off the credit-fuelled boom of the 2000s that hid its real weaknesss.
But then came the global financial crash and the Great Recession. The Eurozone headed into slump and Eurozone banks and companies got into deep trouble. Suddenly a government with 120% of GDP debt and running a 15% of GDP annual deficit was no longer able to finance itself from the market and needed a ‘bailout’ from the rest of Europe.
But the bailout was not to help Greeks maintain the living standards and preserve public services during the slump. On the contrary, living standards and public services had to be cut to ensure that German and French banks got their bond money back and foreign investment in Greek industry was protected. So through the bailout programmes, foreign capital was more or less repaid in full, with the debt burden shifted onto the books of the Greek government, the Euro institutions and the IMF – in other words, taxpayers.
Greece was ultimately committed to meeting the costs of the reckless failure of Greek and Eurozone capital.The Troika’s plan was to make the Greeks pay at the expense of a 25% fall in GDP, a 40% drop in real incomes and pensions and 27% unemployment rate.
·         The government deficit was turned into a ‘primary surplus’ within the shortest period of time by any modern government. Greece has reduced its fiscal deficit from 15.6 percent of GDP in 2009 to 2.5 percent in 2014, a scale of deficit reduction not seen anywhere else in the world.
·         Total public sector employment declined from 907,351 in 2009 to 651,717 in 2014, a decline of over 255,000. That is a drop of over 25%.
·         Greece has gone from one of the lowest average retirement ages to one of the highest. In this sense, Greece had undertaken the most significant pension reform in Europe even before the latest demands of the Troika.
This was austerity at its finest.But the horrible irony is that this policy failed. Far from recovering, the Greek capitalist economy went into a deep depression.…….That the debt cannot be repaid is now openly admitted by the IMF in its latest debt sustainability report on Greece (here). The IMF now recognises that it got its forecasts of recovery hopelessly wrong
….. Whether there is now a deal with the Troika or alternatively, Grexit, the Greek economy needs to grow. Only this can make any public or private debt burden disappear. Take the US. The US public sector debt is huge at nearly 100% of GDP. But the US can service that debt easily because it has nominal GDP growth of just 4% a year. And the interest costs on its debt are very low at just 3% a year. As growth is higher than the interest cost on the debt, the US government can run a deficit of taxes versus spending (before interest) of 1% of GDP a year, and its debt ratio will still stay stable (but not fall). 
Greece, on the other hand, in 2011, had interest costs of over 4% on its debt and nominal GDP of -5% a year, so it needed a government surplus of 9% of GDP just to keep the debt from rising. The government was applying austerity but still a deficit. Even the small debt restructuring of 2012 in the second bailout program did not stop the rise in the debt ratio. It is still rising.

Also have a look at this very clear discussion - involving someone whose name has been cropping up in the Real Economics website - Michael Hudson. Also this 2012 discussion - how finance capitalism leads to debt servitude

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