A Big PR-Problem For Politicians

As EU and IMF delegations descend on Greece to deliver their verdict on the progress the Greek government has thus far delivered regarding the debt reduction program, protests are once again sweeping Athens. The assembled citizenry rightly denounces its political leaders – all of them, regardless of party affiliation – as 'thieves', which they undoubtedly are.

Although lately most of us have learned more about Greece and its wasteful bureaucracy than we ever wanted to, one doesn't even necessarily have to know all that much about Greece to be in full agreement with this popular assessment of the political class. How well developed can the morals of someone be, who is at regular intervals involved in what Mencken called 'an advance auction of stolen goods'? That was Mencken's definition of elections in case you're wondering.


What is happening now in the streets of Athens and Madrid is the result of the stolen goods having become scarce.

As Reuters reports:


“European and IMF officials are expected to deliver their verdict this week on Greece's faltering drive to bring its budget deficit under control, but ordinary Greeks have warned that their patience is running thin.

Tens of thousands packed a central Athens square on Sunday in a non-partisan protest to denounce the nation's entire ruling class, but they also directed their anger at the International Monetary Fund and its demands for yet more austerity.

Black-hooded youths have been battling police since last year, when the government launched austerity measures under the terms of a 110 billion euro ($157.5 billion) rescue for Greece organized by the IMF and European Union.

But the Greeks who took Syntagma Square, in front of the Greek parliament, on Sunday were a different kind of protesters. They were families, ranging from the elderly to children, who had no class wars to wage.

Prompted by Facebook rather than opposition parties or unions, they vented at Greek politicians and foreign lenders.

"We should take responsibility for our own lives," read one banner.

Despite a party atmosphere, the crowd at Sunday's rally — the biggest in a series of nightly demonstrations on the square for the past five days — booed, whistled and chanted "Thieves! Thieves" as they pointed at the parliament building.

Protesters acknowledged they had been inspired by similar rallies in Spain, which also faces budget and debt problems.

Before the Syntagma Square rallies began, some Spanish protesters had accused ordinary Greeks of being too passive. But on Sunday Ifigenia Argyrou, a 57-year-old insurance consultant, said all that had changed.

"People were indignant but they needed a motivation to express that. The Spanish people gave us that motivation," she told Reuters. "We are not sleeping, we are awake. The IMF should get out. There are other solutions without them."

Police put Sunday's crowd at 30,000 although the protesters, who have few formal leaders and are prompted by Facebook, say official figures usually underestimate the size of demonstrations by a wide margin.”


(our emphasis)

It is nice to see that the control of the mainstream mass media is slip-sliding away. The internet is beginning to destroy memes that have previously been widely accepted (such as 'there is a difference between political parties'). However, we think that austerity is widely misunderstood. One may want to protest it, but the fact that the government has run out of money cannot be wished away.

As we noted before, among the things the Greek government will be forced to do to satisfy its latest batch of creditors is a slew of privatizations.  It is easy to be of two minds about such proposals, given that the banking elite is going to be one of the biggest winners of them (in the form of the generous fees it will no doubt extract). One sympathizes with the Greek population's ire. Many don't understand what has hit them. The eurocracy is famously unaccountable; the European parliament isn't much more than a costly debating club, the real decisions are made elsewhere. For many years, whenever citizens decided against an EU diktat via referendum, the eurocracy reacted by simply repeating the referendums until it got the outcomes it wanted. Hundreds of millions were wasted in PR campaigns.

However, it should be clear at the same time that what the population demands – namely turning back austerity – is based on the illusory idea that the welfare state as it is now constituted can be financed in perpetuity. People  should know from personal experience that when financial difficulties strike, one must tighten one's belt. Why should it be any different for the State? When the protesters demand 'a solution without the IMF' – we agree to the point that bailouts of creditors who made bad investment decisions should simply not happen. We sympathize with their wish not to have yet another faceless, unaccountable bureaucracy interfere with their lives. And yet, their own governments, though elected, have not done them any favors either.

For years politicians have promised easy solutions. The underlying dishonesty of both the political class and its courtier intellectuals, all of whom can in principle be roughly subsumed as authoritarian socialists, in promoting an economic nostrum that is simply wrong – namely that economic crises must be battled by Keynesian deficit spending – is now backfiring. Their claim that the government must be involved in every nook and cranny of the economy, regulating and taxing it to death, while at the same time promising to rob Peter to pay Paul forever and ever has ended in a predictable outcome – with bankruptcy. There are no statesmen-like figures today that are prepared to admit that the economic policies of the past, policies that have always been described as correct and the only way, were in fact based on nothing but  ideas by courtier intellectuals that told politicians what they liked to hear. In the eyes of the people now protesting in Athens and Madrid, austerity is seen as sure to fail, because they have heard for decades that the opposite of austerity is 'necessary' when the economy falters. It has become impossible to connect austerity (which ultimately means that the burden of government spending on the economy is reduced) with economic hope – because no politician wants to bid the old nostrums adieu.


Privatization And Privileges

Certain pressure groups within society that see their access to the State's trough threatened are fanning the flames. In Greece, unions are organizing resistance to privatizations. Let us consider for a moment what the Greek government owns that can be privatized. According to a recent report at the Globe and Mail,


“The privatizations are sweeping and are to include the government’s stakes in public and private companies and land. They include OTE, the largest telecommunications company in the Balkans; the ports of Piraeus, near Athens, and Thessaloniki; PPC, the country’s biggest electricity producer; horse-racing player ODIE; and train operator TrainOSE.”


Is there any good reason for telecommunications companies, ports, electricity producers, horse racing establishments and train operators to be in government hands? Everybody knows the government makes a complete hash out of everything it touches. There is a reason why many governments have ultimately sold their stakes in various industries. Government ownership of them just doesn't work. Government owned businesses mean shoddy services or shoddy products at way too high prices, producing losses for their stakeholders. It should be clear by now that state ownership of the means of production always fails. The Soviet Union did not collapse because its rulers were suddenly going softhearted. It collapsed because it failed economically. It had to fail economically, because government ownership of the means of production – whether it is total as it was in the Eastern Bloc or partial, as is the case with the industries the Greek government owns, runs into the insurmountable socialist calculation problem. One can actually observe that some industries do slightly better under government ownership than others. The reason is that in some cases, freely traded market prices of the goods relevant to them can be observed by their managers, while in other cases this is more difficult. However, government ownership invariably involves corruption that eats away even at the 'better' state-owned enterprises. The Globe and Mail story notes how big this particular problem is in Greece:


“Greece’s first privatization effort was launched in the early 1990s under Stefanos Manos, who was minister of economy and finance at the time. Before he lost his job in 1993, the telecom industry deregulation was well under way and public-private partnerships were put in place. Later, banking was deregulated to some degree. But then the political will to keep going evaporated and the deregulation and privatization processes pretty much stopped.

Mr. Manos says some of the state enterprises are wildly inefficient, make-work projects. He noted that the salaries of the state rail company vastly exceeded the company’s revenues. In an interview last year, he said the government would save money if (it, ed.) closed the rail system and paid for cabs for everyone.

The waste continues. Rail employees get extra pay if their train journeys take them more than 50 kilometres from their home town. Employees of the state oil company receive a daily food stipend even though cafeteria food is free.


(our emphasis)

Just consider the points highlighted above. If anything, they make clear that privatization should be of the utmost urgency, even if there were no debt crisis to spur it on. 'The government would save money if it closes the rail system and paid cabs for everyone'. Who says that railways must be loss-makers? We note that all over Europe, there are loss-making railroads. All of them are government-owned and have become major sinecures of powerful unions that have achieved salaries and benefits for their members that make it impossible for these firms to make money. The deficits that make this possible must however be paid by all those in society who actually create wealth. In spite of democratic elections, their consent to such schemes has never been obtained. By contrast, in the US, a wily investor like Warren Buffett made a privately-owned railway his biggest ever single acquisition. It has been spinning off oodles of cash for its shareholders for a long time (we are well aware that the US has become a state-capitalistic moloch that is moving ever father away from the free market ideals on which it was founded. Alas, it certainly has privately owned railways, and they are wildly profitable. It proves that railroads can operate at a profit).

As the G&M story related with regards to the Greek unions:


“Economists and analysts think the Greek privatizations are both essential and too ambitious. They note that Greece’s historic privatization efforts have been largely unsuccessful and the new effort is already being fiercely resisted by opposition parties and the unions.

“You have very powerful unions who have a very cozy life because of government ownership,” said Michael Mitsopoulos, an economist in Athens for the Association of Greek Industries. “They won’t be happy to accept their loss of privilege.”

Already the unions, backed by most of the opposition parties, are preparing for a fight. Thousands of Greeks took to the streets in Athens and Thessaloniki on Wednesday to protest the reform effort. The day before, employees of Postbank, one of the state investments that is to be sold, blocked the entrance to the retail bank’s headquarters in Athens. The country’s public sector umbrella union, ADEDY, plans to hold a 24-hour strike next month to protest the privatizations.

The GSEE union, which claims to have a million members, also plans to protest the austerity and privatization efforts. “Our response will come in the street,” Stathis Anestis, a senior GSEE member, told AFP. “This is no rescue package, it’s a liquidation.”


(our emphasis)

The maggots are fearing for their bacon. Consider the term 'privilege'. It comes from the Latin term privilegium, which means 'exceptional law' – a law that benefits only some groups and thus exists to the detriment of all others. It is never the result of voluntary contracts – it is always and everywhere a result of state-directed coercion. Why should there be any privileges at all?

Mind that we are not particularly only concerned about the privileges accorded to unions and their members in state-owned industries. There are numerous examples of corporatist welfare in Greece and the rest of the EU as well, endless lists of things that are designed to hold down competition in numerous industries (a litany of absurd licensing regulations for instance). We suspect that Greece's consumers are generally rather under-served and overcharged and should thus be happy to hear that privatizations have become unavoidable.

Thus, no matter what one thinks of the IMF and the lately squabbling and always unaccountable eurocracy, if the end result is a shrinking of the Greek State, the people of Greece should end up more free than they are now. Some of them will also end up less coddled and minus their privileges – which should certainly benefit the majority, whether it grasps it at present or not.


Increased Centralization–A Goal That Becomes More Distant?

Alas, one must not lose sight of the fact that the crisis is used as a lever by the unaccountable eurocracy to expand its own power. The EU project and the single currency are after all small steps toward 'world government' and a 'world currency'. Don't for a moment think such ideas have been given up by the ruling elites. For instance, the idea recently mooted by the IMF about making the artificial SDR into a 'new unified reserve currency' is the revival of the Keynesian dream of the 'bancor' – which to be sure would be a fiat currency, only one without competition, natch. This is to say it could be printed into oblivion without anyone getting wise to the fact by comparing its performance relative to sounder currencies, since no other currencies would exist anymore (making private gold ownership illegal has already been put into practice once. It surely would be possible to do so again. All it would take would be a sufficiently dreadful 'emergency'). Rothbard has written about this plan long before the euro was even on the drawing board and  specifically mentioned the European Union as a stepping stone for the dream of the world currency project. He even predicted that British opposition would mitigate against it (and lo and behold, the UK hung on to the pound).

As we have noted on previous occasions, in Ireland's case this hidden agenda of expanding the powers of the centralized eurocracy came to the fore when the eurocrats demanded that Ireland 'harmonize' its corporate taxes with the EU's high taxation nations. The frequently heard demand that 'Europe must become a fiscal as well as a monetary union' is a thrust in this direction and prominent Keynesians are in its favor – because they argue it would make the alleged 'boon' of even more deficit spending possible.

To be sure, we are all for free trade and enabling free movement of people across Europe. It would be a mistake to condemn the few things that are good about the EU. However, one of the few laudable achievements of the EU, the Schengen agreement that opened Europe's borders, is increasingly in danger of being shut down again, as refugees from Libya and Tunisia pour into Europe.

Meanwhile, the eurocracy in Brussels has invented 100ds of thousands of new regulations over the past decade. These are in addition to the ever-growing jungle of laws and regulations and administrative laws created year-in, year-out in the nation states and their provinces. It is an absurd, impenetrable mountain of regulations that stifles entrepreneurship at every level, is extremely costly to administer and represents an ever growing danger to individual liberty. 

The central bank meanwhile creates money from thin air at astounding rates of growth that is 'backed' by a plethora of dubious assets. Consider the assets held by the ECB of which we can show a rough overview:



Composition of assets held by the ECB, via Der Spiegel – nothing but debt that even in this rough categorization looks dubious – click for higher resolution.



It should be noted that while the ECB only holds about 750 tons of gold, the 'euro-system' as a whole has about 13,500 tons of gold, representing its 'last resort' reserve. However, this gold belongs to the various nation states and some people have raised doubts about its availability (central banks account for gold receipts as though they were gold, but they are not. They are paper promises). Even before the ECB became the main active driver of money supply expansion in the euro area in the wake of the 2008 crisis and merely 'accommodated' the expansion of circulation credit by the commercial banks during the preceding boom, it pursued a highly inflationary policy as can be seen below.



Components of euro area TMS, via Michael Pollaro. From a total of slightly below € 2 trillion at the beginning of the year 2000 , the euro area's true money supply has grown to € 4.72 trillion as of April 2011 – an increase of 136% – click for higher resolution.


It is important to remember that the root cause of the boom-bust cycle that has laid the economies of the peripheral euro area nations low is this money supply inflation. It is this inflation that has caused the malinvestments and overconsumption of the boom. By creating a false prosperity, it also swelled government coffers with fictitious tax revenues that these governments spent with both hands.

It must be kept in mind in this context  that money is the only good the increase in the supply of which confers no societal benefit whatsoever. As Rothbard notes in 'What Has Government Done to Our Money':


“Whereas new consumer or capital goods add to standards of living, new money only raises prices — i.e., dilutes its own purchasing power. The reason for this puzzle is that money is only useful for its exchange value. Other goods have various “real” utilities, so that an increase in their supply satisfies more consumer wants. Money has only utility for prospective exchange; its utility lies in its exchange value, or “purchasing power.” Our law—that an increase in money does not confer a social benefit—stems from its unique use as a medium of exchange. An increase in the money supply, then, only dilutes the effectiveness of each gold ounce; on the other hand, a fall in the supply of money raises the power of each gold ounce to do its work. We come to the startling truth that it doesn’t matter what the supply of money is. Any supply will do as well as any other supply. The free market will simply adjust by changing the purchasing power, or effectiveness of the gold-unit. There is no need to tamper with the market in order to alter the money supply that it determines. At this point, the monetary planner might object: “All right, granting that it is pointless to increase the money supply, isn’t gold mining a waste of resources? Shouldn’t the government keep the money supply constant, and prohibit new mining?” This argument might be plausible to those who hold no principled objections to government meddling, though it would not convince the determined advocate of liberty. But the objection overlooks an important point: that gold is not only money, but is also, inevitably, a commodity. An increased supply of gold may not confer any monetary benefit, but it does confer a non-monetary benefit — i.e., it does increase the supply of gold used in consumption (ornaments, dental work, and the like) and in production (industrial work). Gold mining, therefore, is not a social waste at all. We conclude, therefore, that determining the supply of money, like all other goods, is best left to the free market. Aside from the general moral and economic advantages of freedom over coercion, no dictated quantity of money will do the work better, and the free market will set the production of gold in accordance with its relative ability to satisfy the needs of consumers, as compared with all other productive goods.”


Obviously, the 'startling conclusion' that any supply of money is as good as any other, completely obviates the need for a central bank. If there is one institution that is at the heart of the troubles the euro-area finds itself in it is the central bank and its 'flexible' fiat money. This fact is of course not debated by anyone in Europe, at least not yet. The US Federal Reserve has found it far more difficult to maintain the propaganda lie that the very engine of inflation is an 'inflation fighter'. The ECB has had it far easier in that respect, but as can be seen above, its policy has only been slightly less inflationary that that of the Fed over the past decade.

As we have noted before, there is in principle no problem with using the same currency across different nations – as long as interest rates and the money supply are set by the free market. It is precisely because both are under the control of a central economic planning agency with unlimited money creation power that things have gone awry.

It remains to be seen whether the ECB will continue to escape popular criticism as easily in the future. One thing is clear however – the drive toward ever more centralization of the EU to which the crisis appeared to offer a viable path  has been increasingly disturbed by the reaction of electorates both in the fiscally better and the fiscally less well managed countries. The control over how the future will be shaped is increasingly slipping from the eurocracy's grasp. If this trend continues, then we may well look forward to less rather than more centralization in the future.



We have no current chart updates on CDS prices available (posting of these charts will resume soon), but as a table from a recent article by Prieur du Plessis at istockanalyst shows, Greek government debt is currently the sovereign debt that is rated as the riskiest in the world, even ahead of Venezuela's. Portugal's and Ireland's government debt are currently the  third and fourth riskiest in the world according to CDS spreads.



Insuring Greek debt via CDS has become so costly that it's probably no longer worth doing at all – click for higher resolution.


Charts by:  Der Spiegel, Michael Pollaro, Prieur du Plessis



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