Ad Hoc Commentary – and the weak suffer what they must
Yanis Varoufakis’ (Greece’s former Finance Minister) recently published book entitled: “And The Weak Suffer What They Must?” is an interesting read. The most important piece is probably the “Appendix to Chapter 7”, entitled “A Modest Proposal”. The appendix is not new, and is extracted verbatim from his white-paper “A Modest Proposal for Resolving the Eurozone Crisis,” by Yanis Varoufakis, Stuart Holland and J. K. Galbraith, Jul 2013. The full text can be found online at:
Long term readers know that yours truly believes that Europe is the biggest headache. As we mentioned in our last post:
“…The main problem today is the meltdown of Europe, and the concomitant economic hardship that millions of individuals will increasingly find themselves in the coming years…”
https://tradehaven.net/ad-hoc-commentary-yellen-keeps-the-faith/
We also know that the prevailing mindset in Europe is austerity as a penance for past profligacy. Aesop’s Fable entitled The Ant of The Grasshopper comes to mind:
https://en.wikipedia.org/wiki/The_Ant_and_the_Grasshopper
Greek grasshoppers ought to be taught a lesson, and serve as a reminder for the rest of us on the virtues of hard-work and thrift. However, the lesson we are trying to impart on the Greeks are more than what the Greeks can bear. It thus risks the rise of totalitarianism and the scourge of unemployment within Europe. The European bureaucrats at Brussels need to realize that it is time for some forbearance. Forbearance, not forgiveness. Yours truly calls for forbearance in the same way that the US Department of Education shows to well-intentioned students:
“…Under certain circumstances, you can receive a deferment or forbearance that allows you to temporarily postpone or reduce your federal student loan payments. Postponing or reducing your payments may help you avoid default…”
https://studentaid.ed.gov/sa/repay-loans/deferment-forbearance
There is no doubt that justice calls for austerity based on the level of past profligacy. However, one needs to realize that there are limits to austerity. Brussels should listen to Madame Lagarde who was effectively telling them that their demands is excessive and needs rethinking:
“[Lagarde] questioned Greece’s ability to meet its budget targets…”
http://www.wsj.com/articles/imf-chief-lagarde-skeptical-greece-can-meet-budget-targets-1460654306
The current level of austerity will implode Greece economically, and add to anti-victor sentiments. While history does not always repeat itself, we remind ourselves that Europe had been in similar situations before. The Treaty of Versailles after World War I saw the victorious Allies placing a burden more than the Germans can bear. The economic crisis that followed was largely blamed for the rise of Adolph Hitler. Is the victim turning into perpetrator today? If we are to break the cycle, we must remind ourselves that justice without mercy is self-defeating. It would ultimately strike back at the perpetrator’s self-interests.
Going back to the proposal by Varoufakis et al, it is worth noting that the word debt forgiveness was not even mentioned once. The Greeks do not need debt forgiveness. What they need from the heart of Europe is forbearance and solidarity. Despite the title, Varoufakis’ proposal is not modest at all. It is bolder than the cowardly austerity measures that the bureaucrats had put in force. Yours truly believes that the most powerful recommendation is policy 3 “An Investment-led Recovery and Convergence Programme” (IRCP). The IRCP are bonds backed by investment projects. In other words, it is an infrastructure asset class. We had mentioned countless times before that an infrastructure asset class that the bond market can understand is essential for global economic recovery. Unfortunately, progress had been glacial. America’s pre-2008 securitization engine is arguably the largest surplus recycling mechanism that the world had ever seen, and it is unlikely to return anytime soon. China tried to negate the impact of the securitization engine’s demise but instead found herself needing to stop a real-estate bubble. If Europe, and the world, cannot get their act together to provide a surplus recycling mechanism in the form of an infrastructure asset class, the economic recovery that everyone is hoping for will remain elusive.
Good luck in the markets.