Something economists thought was impossible is happening in Europe

[pmaitra]

Again!! You don't have to bring in fractional reserve banking in every discussion.

Bond rates were worst for Switzerland because it was pegged to Euro. Now people knew sooner or later it would become impossible for Swiss central bank to maintain the peg with Euro. And once it happens, Swiss Franks would rise. So essentially, there was negative bond rate but positive exchange rate expectation. And indeed that happened. Swiss Frank rose phenomenally once they took it off peg. Now I do not know where does fractional reserve banking come in this explanation.

I am bringing in Fractional Reserve Banking because this concept is a common problem for most financial systems all over the world. Please see the video posted by @Mad Indian. Can you please tell us where all the money that was being loaned to Greece came from? Also, why what the money loaned to Greece in the first place? Banks don't give loans for charity, you know. They do it because they want interest on those loans.

Please read this article: The Fed and the ECB: Two Paths, One Goal

We never address the root cause of the problem, but try to apply fixes where there is nothing wrong. I am not defending Greece's actions, but Greece is not the only country that is suffering.

My point is you cannot flood the market with printed paper money or money created by the click of the mouse in some server, when there is no real wealth generation. Such systems are bound to flounder, and it is happening right in front of our eyes.

 

[Mad Indian]

I am bringing in Fractional Reserve Banking because this concept is a common problem for most financial systems all over the world. Please see the video posted by @Mad Indian. Can you please tell us where all the money that was being loaned to Greece came from? Also, why what the money loaned to Greece in the first place? Banks don't give loans for charity, you know. They do it because they want interest on those loans.

Please read this article: The Fed and the ECB: Two Paths, One Goal

We never address the root cause of the problem, but try to apply fixes where there is nothing wrong. I am not defending Greece's actions, but Greece is not the only country that is suffering.

My point is you cannot flood the market with printed paper money or money created by the click of the mouse in some server, when there is no real wealth generation. Such systems are bound to flounder, and it is happening right in front of our eyes.

I think you missed the point of my video entirely. the video was a very good example of why monetery policy is different from fiscal policy and here you are arguing that monetery policy is what caused the fiscal effects in EU.

Switzerland Debt Clock :: National Debt of Switzerland

For example, the Switzerland has a national debt to GDP ratio of just 20%. Is not the Swiss Frank not have a fiat currency too? So why was Switzerland immune to the debt fiasco of the EU? Simple- it has a responsible fiscal policy

 

[Mad Indian]

^^^ Correction, I should have written "is not the Swiss Franc a Fiat currency too?"

 

[pmaitra]

I think you missed the point of my video entirely. the video was a very good example of why monetery policy is different from fiscal policy and here you are arguing that monetery policy is what caused the fiscal effects in EU.

Switzerland Debt Clock :: National Debt of Switzerland

For example, the Switzerland has a national debt to GDP ratio of just 20%. Is not the Swiss Frank not have a fiat currency too? So why was Switzerland immune to the debt fiasco of the EU? Simple- it has a responsible fiscal policy

No, I did not miss the point in your video. Your video makes several different points. I am focusing on one point in the video that you are probably missing. Check out the part where Greece gets more money with Germany as the guarantor.

 

[Khagesh]

@Mad Indian

To your first point -
Germany and Sweden are at the root of Finland being what it is. Germany is also a part and biggest beneficiary of the military pact for which, Ukraine today and Finland in its history has been 'used and abused'. It is natural for people and populations to take up collective responsibilities if they collectively benefit out of the pact. Germany benefited from Finland's conversion and civil war and Germans have helped them to a considerable extent afterwards. Similar should have been the case w.r.t. other states of europe. Germany is today not a frontline because Greece and eastern europe exist to act as a buffer for Germany's existence. But what do Spain and eastarn europe and Greece get in return. Except may be they will allow inward immigration. But that is hardly a contribution. But I guess it is a matter for which both of us can stop bothering.

To your second point -
when do you think would you be willing to buy a zero or negative coupon bond?
When you expect significant gains in some other manner or see an opportunity to avoid a much bigger loss that could arise in some other manner. Right.

 

[Mad Indian]

No, I did not miss the point in your video. Your video makes several different points. I am focusing on one point in the video that you are probably missing. Check out the part where Greece gets more money with Germany as the guarantor.

But you are linking debt crisis caused by irresponisble fiscal policy with fiat currency. I dont think thats how it works

 

[Mad Indian]

@Mad Indian

To your first point -
Germany and Sweden are at the root of Finland being what it is. Germany is also a part and biggest beneficiary of the military pact for which, Ukraine today and Finland in its history has been 'used and abused'. It is natural for people and populations to take up collective responsibilities if they collectively benefit out of the pact. Germany benefited from Finland's conversion and civil war and Germans have helped them to a considerable extent afterwards. Similar should have been the case w.r.t. other states of europe. Germany is today not a frontline because Greece and eastern europe exist to act as a buffer for Germany's existence. But what do Spain and eastarn europe and Greece get in return. Except may be they will allow inward immigration. But that is hardly a contribution. But I guess it is a matter for which both of us can stop bothering.

To your second point -
when do you think would you be willing to buy a zero or negative coupon bond?
When you expect significant gains in some other manner or see an opportunity to avoid a much bigger loss that could arise in some other manner. Right.

1. I dont know what you are talking about? EU started as an economic block and it is still largely an economic one first rather than a political one. I think you are confusing NATO with EU both are not synonymous

2. Yes. So I want to know what benefit is there. I cant think of any?!

 

[Khagesh]

I don't think what is highlighted is a crisis much less a debt crisis. The user of this zero cost or negative cost money would be happy to use it merely for the fact that it comes for free. Its just that there is no good use for this money. A situation that arose because..........

 

[Khagesh]

1. I dont know what you are talking about? EU started as an economic block and it is still largely an economic one first rather than a political one. I think you are confusing NATO with EU both are not synonymous

Off course they are not synonymous. Both got different names

Only you cannot be a part of one for long without ending up in the other. Had it all been so simple Pakistan would have been a proud NATO ally without being in EU.

But jaane bhi do yaaron. There are better things to do. Take it in jest.

2. Yes. So I want to know what benefit is there. I cant think of any?!

Use! well I don't think there is any.

 

[pmaitra]

But you are linking debt crisis caused by irresponisble fiscal policy with fiat currency. I dont think thats how it works

Irresponsible financial decisions cannot be taken unless someone paves the way for irresponsible financial decisions.

Greece could not have taken out massive loans if the financiers did not dole out those loans. Focus on what happened first. Again, I am not defending Greece's actions. What I am saying is, if loans are given by a bank to Greece, then they expect Greece to pay back the loan after some time, and also the interest. This means Greece will have to produce enough wealth that will back up the principal and interest after that period of time, which Greece was not able to do. So, the point here is, would things have been different if Greece was not allowed to take out loans in the first place and was forced to sell its products to earn money?

What is your answer to this hypothetical and alternative scenario?

 

[Mad Indian]

Irresponsible financial decisions cannot be taken unless someone paves the way for irresponsible financial decisions.

Greece could not have taken out massive loans if the financiers did not dole out those loans. Focus on what happened first. Again, I am not defending Greece's actions. What I am saying is, if loans are given by a bank to Greece, then they expect Greece to pay back the loan after some time, and also the interest. This means Greece will have to produce enough wealth that will back up the principal and interest after that period of time, which Greece was not able to do. So, the point here is, would things have been different if Greece was not allowed to take out loans in the first place and was forced to sell its products to earn money?

What is your answer to this hypothetical and alternative scenario?

Again dude, what you are talking about is the fiscal policy of the Greeks and not the Fiat currency.

 

[Mad Indian]

Off course they are not synonymous. Both got different names

Only you cannot be a part of one for long without ending up in the other. Had it all been so simple Pakistan would have been a proud NATO ally without being in EU.

But jaane bhi do yaaron. There are better things to do. Take it in jest.



Use! well I don't think there is any.

1. Then why are you blaming Germans for the mess PIIGS created for themselves. And no one forced anyone into EU/NATO. Blaming someone else for someone else concious choice is wrong

2. People dont do things without any incentive. If something happens there should be an incentive for it to happen. I want to know the incentive so I can understand economics and financing better

 

[Khagesh]

1. Then why are you blaming Germans for the mess PIIGS created for themselves. And no one forced anyone into EU/NATO. Blaming someone else for someone else concious choice is wrong

Forget PIIGS, come back to India.

In Delhi today and West Bengal and Bihar in the past, Kejri/Commis/Laloo told the people that everything can be had for free. People agreed so people must bear the consequences. Till here you and I are in agreement.

But from here on I claim that people of delhi are aam admi and do not understand the intricacies of budget preparation and the guile/lies that Kejri/Commies/Laloo had used.

Something similar happened to the normal people of eastern europe and PIIGS too. They were lied to and they agreed because they did not know any better or because they were already in too poor, too compromised a position. Marta kya na karta.

I further claim that all nationalists have a duty to pull the people of Delhi/West Bengal/Bihar out of the clutches of Kejri/Commies/Laloo. But what happens to PIIGS is not my concern nor do I have an idea what can be done for them and by whom.

So ab jaane bhi de bhai.....

2. People dont do things without any incentive. If something happens there should be an incentive for it to happen. I want to know the incentive so I can understand economics and financing better

The currency exchange risk of a weak economy also gets reflected in the returns the debt that gets denominated in that currency, must yield.

For example you run a company that performs poorly so any debenture issued by you will have to bear a higher return for it to be useful. Now if you also happen to be based in Pakistan then you have to give even higher returns. OTOH if you are in India you can pay a lower return, simply because the debenture issued by you are denominated in Indian Rupee and the risk to the currency is that much less.

Essentially Spain must give a return on the debt it issues. Greece must pay even more than Spain. Germany can afford to pay nothing. All this purely on commercial grounds. But story goes further German currency is not going to experience a run. Spain may. Greece absolutely will. But if Greece is incapable of paying any better, then merely because of the strength of the German currency Germany will say I will give a nil return. You will be forced to say yes, because the only other option is Greece.

Hope this was useful.

 

[pmaitra]

Again dude, what you are talking about is the fiscal policy of the Greeks and not the Fiat currency.

Ok, let me present it to you in a simplified way.

When the bank gave loan to Greece, the bank created money. In other words, Greece got money, without actually producing any tangible wealth. However, before Greece got the money, the bank itself had to create that money. Did the bank add anything to its reserves to back the extra money up? The answer is NO, because, it is a loan. So what happened here? The backing of the currency (Euro) was fractured, in other words, only a fraction of the currency is now backed by the reserves. Is this making sense to you?

 

[Mad Indian]

Ok, let me present it to you in a simplified way.

When the bank gave loan to Greece, the bank created money. In other words, Greece got money, without actually producing any tangible wealth. However, before Greece got the money, the bank itself had to create that money. Did the bank add anything to its reserves to back the extra money up? The answer is NO, because, it is a loan. So what happened here? The backing of the currency (Euro) was fractured, in other words, only a fraction of the currency is now backed by the reserves. Is this making sense to you?

Dude, again you are talking about the Fisca policy and not on fiat currency. Fiat currency is just a tool how it is wielded does not make it bad or right.

For ex., if Instead of using on useless welfare garbage like Greece did, if the Greek govt had spent it on infrastructure and other such expenses so that the economy grows increasing revenue generation in such a way that it pays off the debt, what is the problem with such a borrowing? So what happened in Greece was due to Bad fiscal policy and not Fiat currency

Another example, I take am earning 10000Rs. pa and can only spend 10000 pa. Consider two scenerios involving the same irresponsible creditors, who give out credit at the same interest rate without any security deposit(or minimal security deposit)

1. Now I borrow money Rs. 10000 from a creditor at some interest rate of 10% pa for engaging in drinking and wasting away. So when the Creditor comes knocking my door after 1 year, I have no money and so to pay it, I borrow more(Rs. 20000 at a interest of 10% pa) from the Creditor and use it to clear my initial debt to the creditor, promising to be responisble- which will be now 11000 rupees. Now, I owe 22000Rs. to the creditor in the second year BUT, I waste in again on drinks and others for another year . Note that I have a steady income of 10000Rs.(GDP) as assumed and so my debt to my Income ratio(Debt as a % of GDP) is 220% at the end of 2 years., ie I owe 2.2 times the income of a single year to the creditor

2. I borrow rupees 10000 from a creditor at the same interest rate of 10% p.a and use it to start a business with a growth rate of 100%. SO that when the creditor comes after 1 year for his money, I will owe him rupees 11000 . But My company would be worth Rs. 20000. So , I borrow from the same creditor a sum of Rs. 20000 at the same rate and pay off the initial debt showing him my success. So , now, I have a debt of 20000Rs. to the creditor in the second year and Rupees 9000 in my hands and 20000 rupees worth company at my hand. I invest in the company again and it again has a 100% growth rate. So at the end of the 2nd year, I will have 29000*2=58000 rupee company in my hand. So when the creditor comes looking for his money back, I would have a 58000rupees company and 10000rupees standard income, and so my total worth in that year would be 68000rupees. Now, the debt 22000 is only 32% of my total wealth(.ie my total debt is only 32% of the GDP) at the end of 2nd year

Here, the "me" is the nation with the fiscal policy and creditor is the "fiat currency" . in the 1st example , Me(the nation state) being irresponsible about my spending(Irresponsible fiscal policy of the nation state) caused me the debt crisis with the same Creditor(Fiat currency). In the 2nd example, me(nation state) being responsible about my spending(responsible fiscal policy by the nation state) has caused me to be more prosperous using the same creditor(fiat currency)

So Conclusion is , Fiat currency is just a tool. It cant be held responsible for the stupid welfare policies of the stupid socialist governments- just like how Knives cant be blamed for murders caused by psychopaths, when the same knives can be used for surgeries saving people by the surgeons. That is wrong

@Sakal Gharelu Ustad I am correct in my interpretation and example ?

 

[pmaitra]

@Mad Indian, look at your example. You say Greece spent on welfare. I am not arguing whether they should have spent on welfare or not. My point is, how could Greece spend money on welfare? Where did it get the money? The answer is, Greece took out a loan, only after that it was able to spend the money.

Now, how was the loan created? By creating money that is backed by thin air.

 

[Mad Indian]

Forget PIIGS, come back to India.

In Delhi today and West Bengal and Bihar in the past, Kejri/Commis/Laloo told the people that everything can be had for free. People agreed so people must bear the consequences. Till here you and I are in agreement.

But from here on I claim that people of delhi are aam admi and do not understand the intricacies of budget preparation and the guile/lies that Kejri/Commies/Laloo had used.

Something similar happened to the normal people of eastern europe and PIIGS too. They were lied to and they agreed because they did not know any better or because they were already in too poor, too compromised a position. Marta kya na karta.

I further claim that all nationalists have a duty to pull the people of Delhi/West Bengal/Bihar out of the clutches of Kejri/Commies/Laloo. But what happens to PIIGS is not my concern nor do I have an idea what can be done for them and by whom.

So ab jaane bhi de bhai.....




The currency exchange risk of a weak economy also gets reflected in the returns the debt that gets denominated in that currency, must yield.

For example you run a company that performs poorly so any debenture issued by you will have to bear a higher return for it to be useful. Now if you also happen to be based in Pakistan then you have to give even higher returns. OTOH if you are in India you can pay a lower return, simply because the debenture issued by you are denominated in Indian Rupee and the risk to the currency is that much less.

Essentially Spain must give a return on the debt it issues. Greece must pay even more than Spain. Germany can afford to pay nothing. All this purely on commercial grounds. But story goes further German currency is not going to experience a run. Spain may. Greece absolutely will. But if Greece is incapable of paying any better, then merely because of the strength of the German currency Germany will say I will give a nil return. You will be forced to say yes, because the only other option is Greece.

Hope this was useful.

1. The problem is that you are blaming the Rest of India( like Germany) for the crappy choices West bengalis(like PIIGS) made. Rest of India( like Germany) has no power over them(.ie over PIIGSS). Thats why you Blaming Germany in this fiasco is wrong. Thats like blaming rest of India for the crappy communist rule they themselve voted into power

2. Your example does not help me understand why people would buy negative interest bonds though? It simply goes over my head. @Sakal Gharelu Ustad 's example was kind of okish, but I would still need more clarification for me to understand it

 

[Mad Indian]

@Mad Indian, look at your example. You say Greece spent on welfare. I am not arguing whether they should have spent on welfare or not. My point is, how could Greece spend money on welfare? Where did it get the money? The answer is, Greece took out a loan, only after that it was able to spend the money.

Now, how was the loan created? By creating money that is backed by thin air.

The same money(Fiat currency) could be used for creating more prosperity as I point out in my example. So blaming the Greek fiscal policy on Fiat currency is wrong. The fault lies with faulty fiscal policies and not in the Fiat currency.

 

[Bangalorean]

Interesting discussion. @Mad Indian, what @pmaitra is saying is that the lender needs to exercise due diligence before extending credit. If the borrower fails to repay, the creditor has only himself to blame.

I like to break things down to a personal level, so that I can understand it better. When banks give out housing loans in India, it is considered the safest loan, since there is always guaranteed security in the form of the property itself. BUT:

1. The bank takes great care to ensure that the property is valued right. They have 2 (sometimes 3) independent valuators submit their valuation of the property. If the house you are buying is valued at Rs. 50 lakh by the valuators, you will not get a loan more than that. If you approach the bank for a 1 crore loan, they will reject it outright.
2. The bank takes great care to ensure that the customer has the capacity for repayment. They take your current salary, multiply it by 5, and that is the upper limit - they will never give you a paisa more than that. Of course, salaries increase and people have other sources of income, but the bank plays safe.
3. The bank forces you to pay 15-20% of the total amount out of your pocket. This "down-payment" is mandatory. This is so that you also have some kind of "stake" in the investment.

So, if you ask for 1 crore loan, but the property is valued at 50 lakh, and your 5 years salary is 40 lakh, and you have only 2 lakh with you in hand - the bank will give you a loan of just 10 lakh.

In spite of this, there are problems - lots of loan defaulters. But the bank easily recovers its money by selling the property. They are well-covered. But here, the bank cannot initiate legal proceedings against the borrower for non-payment. They are authorized to auction the property, but the defaulter cannot be thrown in jail. This follows the simple dictum from the state to the banks: "you loaned money to someone, it was your bloody business to check. Now if he doesn't pay, you try to recover money by selling the asset. If you cannot, then fcuk yourself."

So, the lenders are certainly responsible to a great degree here. They did not exercise due diligence while extending credit.

 

[Khagesh]

1. The problem is that you are blaming the Rest of India( like Germany) for the crappy choices West bengalis(like PIIGS) made. Rest of India( like Germany) has no power over them(.ie over PIIGSS). Thats why you Blaming Germany in this fiasco is wrong. Thats like blaming rest of India for the crappy communist rule they themselve voted into power

No I blamed all three parties for Delhi - People of Delhi, Kejri and nationalists. All three take their shares for different reasons. What is true for Delhi was true for West Bengal and Bihar too and tomorrow for Kerala its going to be the same.

And all three will continue to take blame unless at least 2 of these mend their ways and assert their full capacity.

Germany did take the benefit of the security and economic architecture of Europe.

With respect to security they share the joint capacity by way of NATO but they follow a different standard w.r.t. economic benefits where they help out the Eurozone only reluctantly.

Before WW-2, eastern europe was producing good amount of technology too and germany benefited out of a take over of that too but eastern europe got raped in return for that.

You have to give something to take something. But in respect of three aspects of international cooperation - technology, security and economics, Germany has followed three different standards.

That may be ok for you. I choose to stand separate on that issue.