Something economists thought was impossible is happening in Europe

[Mad Indian]

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.

I am not sure what you trying to say

And its wrong to assume that Eastern europe dint not benefit from NATO. They did too. For one, it alomst guarenteed that no soviet aggression will happen against them. So you are wrongly singling out Germany as the sole benefactor of EU/NATO

 

[Khagesh]

I am not sure what you trying to say

And its wrong to assume that Eastern europe dint not benefit from NATO. They did too. For one, it alomst guarenteed that no soviet aggression will happen against them. So you are wrongly singling out Germany as the sole benefactor of EU/NATO

I did not presume anything of the sort. I stated exactly the opposite.

 

[Mad Indian]

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.

The reason why your example does not hold is that unlike in your example, the creditor(in this case the Fiat currency or the Euro) had no control over who gets the loans. Since they lacked the common fiscal union and only shared the common currency(hence the common creditor), the creditor was supposed to issue the debt without any discrimination to both fiscally responsible(like germany) and irresponsible(like PIIGS) members of the EU. So the creditor(fiat currency) is not at fault here. If the nations of EU had the same fiscal policy as that of Germany, then this would not have happened.

Thats my point Fiat currency is a tool to an end - whether for economic growth or debt crisis fueled by irresponsible fiscal policies is a choice the govts make. So we cant blame a tool for the wrongs of the wielder. @pmaitra is claiming that the very existence of fiat currency is wrong and that it causes the debt crisis.

I gave switzerland as an example because it is an excellent example of Fiscally responsible government! I heard that their govt. has to answer their public on why they should do a deficit budget if they ever run a deficit budget ! You wont see debt crisis in such a country with such a responsible government and people!

 

[Mad Indian]

I did not presume anything of the sort. I stated exactly the opposite.

Then why are you saying that Germany should take care of the mess caused by Greece? Both equally benefitted from the EU and NATO. So no one owes the other anything. If Greece does stupid things, greece should take responsibility for such stupid things.

 

[pmaitra]

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.

Thank you, and if I may add, there are credit rating bureaux that can help lenders, but you know in cases such as EU, there is always a political angle to it.

The reason why your example does not hold is that unlike in your example, the creditor(in this case the Fiat currency or the Euro) had no control over who gets the loans.

The lender has control over who gets the loan, but has no control over what the borrower does once he gets the money.

 

[Mad Indian]

Thank you, and if I may add, there are credit rating bureaux that can help lenders, but you know in cases such as EU, there is always a political angle to it.


The lender has control over who gets the loan, but has no control over what the borrower does once he gets the money.

You are right, but again, as I said, the blame should be on the person who wasted it because the money could have as well been used on something productive instead of dead end debts. Will you blame the murder of someone on the knife salesman?

 

[Khagesh]

Then why are you saying that Germany should take care of the mess caused by Greece? Both equally benefitted from the EU and NATO. So no one owes the other anything. If Greece does stupid things, greece should take responsibility for such stupid things.

I did not say that. To the contrary I said jaane bhi do we should not be concerned about Germany and europe, beyond what is relevant to us as Indians (as learning opportunity).

In that context what I said was that Germany has multiple standards for multiple situations and net-net Germany is taking an inordinately large benefit from the security-economic architecture of Europe.

Greece looks good till they get seen as useful for dominating the warm water ports of Black Sea. Once that need is over they become a used condom for the people who had benefited from the strategic location of Greece. This too is an observation, only. What Greece and Germany should do remains their business.

 

[pmaitra]

There is a popular saying that, if you owe a small amount of money to a bank, it is your problem, but if you owe a huge sum of money to the bank, it is the bank's problem.

 

[pmaitra]

You are right, but again, as I said, the blame should be on the person who wasted it because the money could have as well been used on something productive instead of dead end debts. Will you blame the murder of someone on the knife salesman?

How about we change that knife into a rifle? Would you sell a rifle to someone who is mentally deranged?

I repeat, I am not defending Greece's actions. I am just trying to bring some balance and distribute the responsibility, because the video you posted, to me, seemed to be a bit one sided.

 

[Mad Indian]

How about we change that knife into a rifle? Would you sell a rifle to someone who is mentally deranged?

I repeat, I am not defending Greece's actions. I am just trying to bring some balance and distribute the responsibility, because the video you posted, to me, seemed to be a bit one sided.

So is the Gun in this case to be blamed for the death it brings? Because fiat currency is just that- a tool , or a gun. So in that case, I think you might have a point if your stance is that EU should be blamed for not having a fiscal union when having a monetary union, but you cant blame it on Fiat currency. That is my point

 

[pmaitra]

So is the Gun in this case to be blamed for the death it brings? Because fiat currency is just that- a tool , or a gun. So in that case, I think you might have a point if your stance is that EU should be blamed for not having a fiscal union when having a monetary union, but you cant blame it on Fiat currency. That is my point

Nope, not the gun, but the one who sold the gun. If the deranged man kills someone, the damage is done.

Now, coming back to the bank that created the extra money, has already created it, and Greece took the money, and spent it, but did not produce enough goods that it could sell to earn enough money to pay back the loans it took. So, we have a situation that there is an extra tranche of money added to the market, but no extra tangible wealth, such as goods or raw materials, that were produced commensurate to that extra money created.

Now coming to having a fiscal union, sure, that is one solution, and if you see the video you posted, that is a challenge, because that means individuals countries would have to surrender their sovereignty. There is yet another way of looking at this. What if the bank did not give any loan to Greece at all, but asked it to produce enough goods to sell them and earn the money? In other words, want a lot of Euros? Get 'em by selling goods, and not by borrowing Euros.

 

[Sakal Gharelu Ustad]

I am having a hard time understanding your example, pls clarify a bit. For example, in point 6, am I buying the swiss bond with francs or with Euro? and what will be the negative interest rate on such a bond?

Scenario: At time 't' ECB said it would start quantitative easing some time in the future. At 't' swiss franc is pegged to euro, so does not make a difference how you buy Swiss bond. 1 bond for 1 franc = 0.8 euro

Time 't': You buy a swiss bond with 100 francs but negative rate , say 1%. So you get 99 francs next period. Right now 1franc =0.8 euro, so effectively you invest 80 euros and ideally would get <80 euros next period.
Time 't+1': peg is removed now swiss franc is 1franc =1euro. On the above investment you still get 99francs, but now they are worth 99euros.

Effectively you make 19 euros as an investor. Hope that is clear now!
Since markets are competitive so you would not expect such huge arbitrage opportunities. And in fact that is the reason for bond return to go negative to correct for huge exchange rate gain.

 

[Sakal Gharelu Ustad]

@pmaitra- I think @Mad Indian has answered you well on this thread.

We have had this discussion for too long and I do not want to get into it again. I try to explain specific issues and if you do not agree with the explanation, I am ok with it. Well, every social policy might have some issues and fiat currency might be no exception but to bring it on every drop of a hat does not make sense. It has been almost two years since we debated on quantitative easing and there is no evidence in your favor yet. In contrast, the US has recovered and now Fed is going to cut down on quantitative easing, having served its purpose. Germany (although it allows fiat currency) pushed most of your austerity ideas for EU for the last few years with the result that EU on the verge of big collapse with most of its countries are seeing a decline. But thankfully some sanity has returned and they would now indulge in quantitative easing themselves!!

To conclude, fiat money is a tool and it serves you right if used right.

 

[Mad Indian]

Scenario: At time 't' ECB said it would start quantitative easing some time in the future. At 't' swiss franc is pegged to euro, so does not make a difference how you buy Swiss bond. 1 bond for 1 franc = 0.8 euro

Time 't': You buy a swiss bond with 100 francs but negative rate , say 1%. So you get 99 francs next period. Right now 1franc =0.8 euro, so effectively you invest 80 euros and ideally would get <80 euros next period.
Time 't+1': peg is removed now swiss franc is 1franc =1euro. On the above investment you still get 99francs, but now they are worth 99euros.

Effectively you make 19 euros as an investor. Hope that is clear now!
Since markets are competitive so you would not expect such huge arbitrage opportunities. And in fact that is the reason for bond return to go negative to correct for huge exchange rate gain.

Thanks for the explanation. But I still have some trouble understanding the reasoning. For ex., in your case, if you have 80 euros, are you not better off investing in Francs directly without the negative interest rate? I mean, buy 100 Francs for 80 Euros, and when Euro depreciates to 1Franc=1Euro, you have 100 Euros from your initial investment of 80 Euros. In your case, there was a profit of 19 Euros, but in this one, there is a profit of 20Euros. So is it still not better than the negative rated bonds?

The reason I am so gung ho on this is because this is exactly the type of reasoning I tried to apply but in every explanation, Investing the money on something else or just simply holding on to it seemed a better option than investing in the negative interest bond. Can you pls explain why the bonds are better in your example?

 

[Sakal Gharelu Ustad]

Thanks for the explanation. But I still have some trouble understanding the reasoning. For ex., in your case, if you have 80 euros, are you not better off investing in Francs directly without the negative interest rate? I mean, buy 100 Francs for 80 Euros, and when Euro depreciates to 1Franc=1Euro, you have 100 Euros from your initial investment of 80 Euros. In your case, there was a profit of 19 Euros, but in this one, there is a profit of 20Euros. So is it still not better than the negative rated bonds?

The reason I am so gung ho on this is because this is exactly the type of reasoning I tried to apply but in every explanation, Investing the money on something else or just simply holding on to it seemed a better option than investing in the negative interest bond. Can you pls explain why the bonds are better in your example?

How do you invest if you are a pension fund or institutional investor? You don't pile up reserves of foreign currency! You just buy some kind of bond. In this case European investors had pretty good incentive to do that.

But yes if you could hold cash, it would be better.

 

[pmaitra]

@pmaitra- I think @Mad Indian has answered you well on this thread.

We have had this discussion for too long and I do not want to get into it again. I try to explain specific issues and if you do not agree with the explanation, I am ok with it. Well, every social policy might have some issues and fiat currency might be no exception but to bring it on every drop of a hat does not make sense. It has been almost two years since we debated on quantitative easing and there is no evidence in your favor yet. In contrast, the US has recovered and now Fed is going to cut down on quantitative easing, having served its purpose. Germany (although it allows fiat currency) pushed most of your austerity ideas for EU for the last few years with the result that EU on the verge of big collapse with most of its countries are seeing a decline. But thankfully some sanity has returned and they would now indulge in quantitative easing themselves!!

To conclude, fiat money is a tool and it serves you right if used right.

I disagreed with your assertion that the problem with EuroZone Debt Crisis is that is because EU is weird. My reason is this "money as debt" concept is weird, which is just an off-shoot of Fractional Reserve Banking.

On one hand you are saying you are ok with me if I disagree with you, and on the other hand, you are saying bringing in fiat currency does not make sense.

As you accuse that there is evidence to my favour yet, well, the US housing crisis is a matter that lives in our past. The reason I disagree with the theories of your school of economics is that, it appears, it makes every effort to ignore the fundamental flaw in the theories that it is built upon. Printing pieces of paper with some numbers and symbols does not generate wealth. A piece of paper is nothing but a piece of paper. This is one thing your school of economics, and you, have consistently failed to acknowledge. It would be a lot more useful if you could actually counter the point made in the other thread, than come in here and announce that that there is no evidence in my favour.

You mention that the FED is going to cut down on QE. What does this mean? It is still going to continue printing pieces of paper, only, it will be printing less, but it will be printing nonetheless. It is only slowing down the self inflicted spiral of destruction, till the currency will not be worth the paper it is printed on, and folks will be walking around with suitcases stuffed with cash. Has this happened elsewhere before? To you, probably not, since you said there is no evidence in my favour. Denial of evidence is not absence of evidence.

Sure, you have your theory, and I have mine. You present your theory and I will present mine. This is a debt crisis, and I don't think one should complaining when most of the world treats debt as money. I am sorry, I am not obligated to conform to your school of economics.

Let's agree to disagree, but please allow me to counter the points you will be making.

Addendum:

I want to add one question @Sakal Gharelu Ustad, because I want to see your interpretation of it. Please refer to the video by @Mad Indian.

When Greece took out those massive loans, what was the collateral?

 

[Mad Indian]

How do you invest if you are a pension fund or institutional investor? You don't pile up reserves of foreign currency! You just buy some kind of bond. In this case European investors had pretty good incentive to do that.

But yes if you could hold cash, it would be better.

Is there any significance about pension fund or institutional invester? Are they not allowed to have cash or something?

 

[Mad Indian]

As you accuse that there is evidence to my favour yet, well, the US housing crisis is a matter that lives in our past. The reason I disagree with the theories of your school of economics is that, it appears, it makes every effort to ignore the fundamental flaw in the theories that it is built upon. Printing pieces of paper with some numbers and symbols does not generate wealth. A piece of paper is nothing but a piece of paper. This is one thing your school of economics, and you, have consistently failed to acknowledge. It would be a lot more useful if you could actually counter the point made in the other thread, than come in here and announce that that there is no evidence in my favour.

No one from his school of economics claimed that printing paper increases wealth. Printing money increases money supply and it in turn facilitates easier transanctions, which under good conditions create more wealth. You are attacking a strawman if you are claiming that people who believe in Fiat currency believe that printing money increases wealth

 

[Sakal Gharelu Ustad]

I disagreed with your assertion that the problem with EuroZone Debt Crisis is that is because EU is weird. My reason is this "money as debt" concept is weird, which is just an off-shoot of Fractional Reserve Banking.

On one hand you are saying you are ok with me if I disagree with you, and on the other hand, you are saying bringing in fiat currency does not make sense.

As you accuse that there is evidence to my favour yet, well, the US housing crisis is a matter that lives in our past. The reason I disagree with the theories of your school of economics is that, it appears, it makes every effort to ignore the fundamental flaw in the theories that it is built upon. Printing pieces of paper with some numbers and symbols does not generate wealth. A piece of paper is nothing but a piece of paper. This is one thing your school of economics, and you, have consistently failed to acknowledge. It would be a lot more useful if you could actually counter the point made in the other thread, than come in here and announce that that there is no evidence in my favour.

You mention that the FED is going to cut down on QE. What does this mean? It is still going to continue printing pieces of paper, only, it will be printing less, but it will be printing nonetheless. It is only slowing down the self inflicted spiral of destruction, till the currency will not be worth the paper it is printed on, and folks will be walking around with suitcases stuffed with cash. Has this happened elsewhere before? To you, probably not, since you said there is no evidence in my favour. Denial of evidence is not absence of evidence.

Sure, you have your theory, and I have mine. You present your theory and I will present mine. This is a debt crisis, and I don't think one should complaining when most of the world treats debt as money. I am sorry, I am not obligated to conform to your school of economics.

Let's agree to disagree, but please allow me to counter the points you will be making.

Addendum:

I want to add one question @Sakal Gharelu Ustad, because I want to see your interpretation of it. Please refer to the video by @Mad Indian.

When Greece took out those massive loans, what was the collateral?

Let me ask some counter questions.

1) Do you think if you tie the hands of central banks from printing money the world would be much better place?
2) Is pegging money printing to random value of gold dug from earth any better?

You can ignore the above two if you want.
3) How does fiat money explain negative interest rate phenomenon- the topic of debate on this thread?

You mention that the FED is going to cut down on QE. What does this mean? It is still going to continue printing pieces of paper, only, it will be printing less, but it will be printing nonetheless. It is only slowing down the self inflicted spiral of destruction, till the currency will not be worth the paper it is printed on, and folks will be walking around with suitcases stuffed with cash. Has this happened elsewhere before? To you, probably not, since you said there is no evidence in my favour. Denial of evidence is not absence of evidence.

Hyper-inflation is well documented phenomenon. But is it due to fiat currency or not using the monetary policy well? Just because fiat currency allows you to print money, does not mean you will get high and print money. It is a tool and outcome depends on how you use it.

 

[Sakal Gharelu Ustad]

Is there any significance about pension fund or institutional invester? Are they not allowed to have cash or something?

It was an example. Normally when you invest in high denominations running into millions of $ you look for other investment vehicles like public or private bonds.

I do not think central banks allow you to hoard big amounts of cash if you are not registered exchange dealer. But I am not sure about Swiss case. So all I can do is guess.