Euros, Dollars and Morals

The Greek people overwhelmingly rejected the austerity demanded by the European Elites on Sunday, and the media filled up with opinions about what should happen, and predictions for what will happen, none of which is worth a bucket of spit. What we do know is that whatever happens next will mean more misery for the people of Greece. There are two lines of thinking that seem sensible to me.

First, there is the historical line. Steve Randy Waldman at Interfluidity writes about the history of and rationale for European Unification, including currency unification. In the wake of the last war, the leaders of Europe wanted to avoid more wars. Unification was a long-term project. All such projects face tremendous hurdles and should expect huge problems. The projects succeed or fail based on the skill with which the problems are managed.

Everyone has always known that Greece has weak governmental institutions, but once the Euro was rolling, private lenders poured money into the country. That was stupid. These lenders would be punished if they were operating in a capitalist economy. They would have taken huge haircuts, their managements would have been fired, their shareholders would have lost money. But in neoliberal land, the debtor is required to pay. If the nation has to sell its assets, its ports, water supplies, gas companies, whatever, so be it. If the people are condemned to misery for years, with unemployment among the young at 50%, so be it. If the government has to be replaced with one acceptable to the lenders, so be it. Democracy and the individual lives must be sacrificed to the demands of the creditors.

If the debtor still cannot pay, then the money has to come from taxpayers in other countries, or so the neoliberals tell them. There are no circumstances in which the creditors can lose money in a neoliberal society.

The leader of this tribe is Germany, with strong assistance from Finland and the Netherlands. None of these countries are explicitly neoliberal. Foucault calls the German system of governance Ordoliberalism in The Birth of Biopolitics. Ordoliberalism is a market system where the government has a powerful role in assuring functioning competitive markets through regulation, and through steps to insure that the interests of workers are considered in the operation of businesses, among other things. This system can work in a state with strong institutions, a strong central bank, and a general acceptance by the citizenry. That’s the opposite of Greece as Waldman describes it.

If things had worked according to plan, the failure of Greece would just be one of the obstacles in the progression to a unified state of some kind. Lenders to Greece would take their losses and would be recapitalized or bailed out, and life would go on. That would impose losses on the rich. As Waldman puts it:

And explicit bank bailouts are humiliations of elites, moments when the mask comes off and the usually tacit means by which states preserve and enhance the comfort of the comfortable must give way to very visible, very unpopular, direct cash flows.

The choice Europe’s leaders faced was to preserve the union or preserve the wealth, prestige, and status of the community of people who were their acquaintances and friends and selves but who are entirely unrepresentative of the European public. They chose themselves. The formal institutions of the EU endure, but European community is now failing fast.

In a similar historical vein, we find Thomas Piketty, in an interview with Die Zeit. There was a nice translation up, but apparently it ran afoul of German copyright law and was taken down. Here’s a link to the article in German, and google translate is your friend. Piketty is famous for his long-term historical approach to economic matters. The interviewer is blunt; his questions come from the overt position that German intransigence with Greece is just. Piketty is his usual calm self, secure in his knowledge of history. Here’s the money quote, with some of my feeble German in the last sentence:

Piketty: When I hear the Germans now say that they maintain a very moral dealing with debt and firmly believe that debts must be repaid, then I think: That’s a big joke! Germany is the country that has never paid his debts. It has no lessons to teach other countries.

He is referring to the reparations demanded of Germany after the two world wars. Germany did not pay either time. In both cases, the reparations were substantially reduced and forgiven because they were deemed to be unpayable and unreasonable. In the second case, the elites thought that the reparations in the Treaty of Versailles contributed to the rise of Hitler and to WWII, and they didn’t want that.

Piketty compares that to the British Government’s payment of bonds incurred to fight the Napoleonic Wars. As he explains it in Capital in the Twenty-First Century, Britain ran a primary budget surplus to pay those bonds which were all held by the rich. In other words, the British could have taxed the rich to pay for those wars, which, after all, were fought solely for their benefit. Instead, they borrowed from their richest citizens, and repaid those bonds with enormous interest, mainly with taxes on the poor. The French and the British incurred enormous war debts themselves in both world wars, and paid those with a judicious combination of inflation, taxes on wealth and something unrecognizable, maybe haircuts.

The German interviewer agrees that the debts of Germany were slashed in 1953, saying it was the desire of the creditors to forgive the Germans for their sins. Piketty says it’s nonsense to talk of morals. It was a practical decision. It’s not right to punish the children of Germany for the sins of their parents, and it’s not right to punish the children of Greece for their parent’s (lesser) sins. The interviewer claims that the German people think the Greeks are bad and just want to continue high government spending. Piketty points out that it would have been easy for Europe to make a similar argument against Germany in 1953, and as a side note, a bit of research shows that many historians think Germany could have made the payments at that time.

More importantly, like Waldman, Piketty points out that the German stance threatens the European Union. People must have a future. Piketty suggests a debt conference like the one that ended German reparations, and thinks it should include all of the nations still facing financial problems.

The worst part of this is that this punitive attitude towards debtors is everywhere. The comment sections and the twitter are full of people fulminating about how they pay their debts, so why doesn’t Greece? Here’s one from [email protected] who ought to know better.

Hey @WellsFargo, what gives? This morning my family voted 60-40 to stop making mortgage payments but you still haven’t restructured our debt

This is one of the milder forms of the morality about money that we see in every context of debtors who can’t pay, whether it’s homeowners with underwater mortgages, students with heavy debt, or citizens of Ferguson going to jail because they can’t pay ridiculous traffic fines. The notion that not paying debts is a Sin pervades the public discourse.

I’m used to it: I practiced bankruptcy law for 25 years. When I counseled people, I always told them that their duties, their responsibilities, ran first to themselves, because if you can’t take care of yourself, you can’t take care of anyone else. Then their duties run to their families. Only then should they consider the interests of their creditors, and only to the extent that it would not interfere with their primary duties.

That’s how I understand this situation. First take care of yourself. Then take care of your family. Tsipras and Syriza understand that. They are taking care of themselves by keeping their electoral promises. Then they are working to take care of their Greek families.

The Troika practices the morality of a leg breaker for a loan shark.

Notre Dame undergrad (math); JD, Indiana University at Bloomington; 1st Lieutenant, US Army.; private practice in corporate and securities law; Assistant AG in Tennessee for consumer protection and securities; Blue Sky Securities Commissioner, Tennessee; private practice, bankruptcy and corporate law.

I have had a lifelong interest in economics. For most of my career, that interest was practical, focused on the problems in front of me. Lately I have been more interested in economics as a theory, especially its impact on the lives of people like those I met in my bankruptcy practice, and on the politics of money in the US. I also enjoy reading philosophers, starting in college and steadily expanding my reading ever since. I wrote at FireDogLake for a number of years.

Generally, I think the problem facing the US is the dominance of neoliberal discourse. I think it clouds the vision, and limits the kinds of problems that can be identified and solved. For example, the existence and danger of climate change can easily be identified in a scientific discussion. However, the problem does not fit the neoliberal discourse because science insists that the pursuit of individual and corporate self-interest will lead to devastation. In neoliberal discourse, the pursuit of self-interest always leads to Eden.

The neoliberal project has two prongs. One is the police function of crushing dissent and alternative views. The police function is provided by government agencies and private and institutional actors. The counterpart is the economic system , which is operated by government and by private and institutional actors. Some of these actors operate in both spheres. I focus on the second prong.

34 replies
  1. bloopie2 says:

    I think this is an excellent article; so many good points; thank you. The moneylenders took the risk; let them pay the price for their bad judgment.

  2. orionATL says:

    i hold the harsh view that germany reaizes that, due to the size of its economy, it can rule europe through finacial/politican means rather than thru warring conquest. the p.r. response to an assertion like this is typically to say “how dare you say that!” or alternatively “how absurd” or “what a bizzare thought.” in reality, mine is a reasonable assertion.

    i also hold the belief that the german ruling party’s obsessive focus on greek, greek, greek fiscal misfeasance is a desparate effort to direct attention away from its own failure to provide a more rewarding path for its own citizens out of a very deep recession. germany’s jobs growth, like britain’s, has lagged behind that of the u.s. despite all three having access to the same macroeconomics.

    at least some observers have recognized that the repayment of greek national debt by the people of greece is functionally an enormous transfer of wealth from the greek people and nation to bank beneficiaries and other nations.

    what puzzles me is the fact that all media covering this long-unfolding event have focused far more on greece, tsipras, and verufakis, rather than on germany, netherlands, belgium, their leaders, and those leaders’ likely political motives.

    in all respects, imbalance and unbalance have been the name of this game – one supposedly being played in the name of preserving european unification.

  3. Bay State Librul says:

    Interesting take from Business Insider


    “Greece isn’t actually a country full of crazy socialists who don’t understand how the foreign-exchange markets work. In fact, a huge chunk of the country’s tax-collection problems stem from the fact that there are two and a half times more self-employed and small-business people in Greece than there are in the average country. And small businesses are expert at avoiding tax, Greece’s former tax collector told Business Insider’s Mike Bird recently.


    Conservatives who hate paying taxes and urge small businesses to pursue tax-avoidance strategies take note: Your dream just came true in Greece.
    If Greece were more socialist — more like Germany, with its giant corporations that have massive unionized workforces paying taxes off their payrolls — then tax collection would be a lot higher in Greece.

    Greece is now most likely an international pariah on the debt markets. It may have to start printing its own devalued drachma currency. It will have no access to credit. Sure, olive oil, feta, and raki will suddenly become incredibly cheap commodities on the export markets. Tourism in Greece is about to become awesome. But mostly it will be awful. Unemployment will increase as Greece’s economy implodes. But the awfulness will be Greece’s alone. Greece is now on its own path. It is deciding its own fate.
    There is something admirable about that.


    Read more:

    • RUKidding says:

      Thanks for the link and for that info. Of course, the USA M$M has portrayed Greek workers as mainly LAZY shiftless slobs who faked being employed by the govt; somehow got paid big salaries for doing nothing; and then somehow also never paid taxes. I’ve stuff like this often.
      I am ignorant of the make-up of the Greek economy and most esp how/where Greek citizens are employed, but the Business Insider info about a large percentage of the Greek populace being either self-employed or working for small businesses seems to ring true. And yes, isn’t it *ironic* that such businesses would seek the means to avoid paying taxes… as our USA counterparts most certainly do (I know many small business owners in the USA. Most BRAG about how they fiddle around to avoid paying taxes. It seems like a badge of honor or something).
      The irony is that most public sector workers here in the USA – and possibly also in Greece (I don’t know for sure) – all pay their taxes bc it’s hard to avoid them. Yes, public sector workers make their salaries FROM taxes, but then at least some of that is paid back into the system.
      The USA is all gung-ho Libertarian-y these days with US citizens being adjured to “stand on our own two feet” and how we shouldn’t have to pay any taxes ever under any circumstances because it’s just so “unfair.” And yes: here’s the end result of that tax avoidance – Greece. But these same Libertarian-y types in the USA are all up in arms tsk-taking the lousy, shiftless, lazy Greeks for ruining everything for everyone else.
      Most US citizens are ignorant and have lost the ability to think critically, much less do a little homework about what’s going on, connect dots and make rational decisions.

      • Bay State Librul says:



        I do taxes and about 400 insurance audits per annum.


        80% of the businesses show losses on a year-to-year basis and pay zippo in federal income taxes. You are right — they avoid/evade taxes — and then complain… very bad, very bad


        If the Republicans win the Presidency we will be in quite the mess. A bad Democrat is better than a very good Republican…..

        • orionATL says:

          yeah. once the rrepublican president and congress get rid of the irs entirely, your services (and that of one of my daughters-in-law’s) won’t be needed. then we will be greece writ large :) *
          * wait though, we will still have our foreign trade accounts to dicker with.

        • RUKidding says:

          Thanks for that input about small business owners in the USA doing funny business to avoid paying fed income taxes. I also know small bus owners in CA who brag about avoiding paying some/all CA bus taxes, as well.
          Funny bc I do recall in the 2012 general election how Mitt RMoney got busted for whining about how the 47% – by which he meant the horrid dreadful deadbeat poor people – never ever ever paid Fed taxes…. which makes them VERY BAD. All those high rolling 10%ers in the room with Mitt were yowling at the sheer utter perfidy of teh poorz for not paying their “fair share.”
          Yet really the biggest scofflaws are small business owners… some of whom probably proudly *defended* RMoney’s speech.
          The layers and levels of hypocrisy in this nation knows no bounds.
          Of course, the same small bus owners would also defend to the death the right of the avaricious and rapacious .0001%ers – like the Koch and the Walton spawns – to never ever pay any taxes because it’s just so “unfair.”
          Speaking as one who doesn’t mind paying taxes, except when I realize that the fabulously wealthy pay much less than I do (proportionately), plus what I do pay ends up funding Murder, Inc., I wish these rich people & small bus owners would belly up and pay what they owe. We’d all be a lot better off.
          blah de blah… most annoying but typical hypocrisy USA style.

  4. scribe says:

    A couple points:
    1. This was always a case of loan-to-own by the Euros against the Greeks and the other, lazy, no-account southern Europeans.
    2. The issue about German reparations for the World Wars isn’t quite correct. At least as far as the British were concerned, the Brits took their reparations in kind, as credits for what NATO countries called “maneuver damage”. In other words, while NATO troops were stationed in Germany during the Cold War getting ready for the next war with the Soviets, they did their training in the countryside where the battles were expected to be fought. In the course of 19 year-olds driving tanks and armored vehicles and trucks and such, things got in the way and were broken. Hiding a tank in a barn is a valid tactical thing to do, but sometimes there’s a basement that swallows the tank. Vineyards make good places to hide, but running over someone’s vines is ex-f’g-pensive. Americans paid in cash for the damage they caused. The Brits took it as a credit against what the Germans owed for trashing their cities, finally balancing the books sometime in the late 80s.
    So, it’s not that there were no crushing burdens of reparations. Rather,there was a recognition everyone’s places were trashed, the payments/obligations were more reasonable in amount, payment spread out over time, and no American President (Coolidge) reminding the Euros that “they hired the money, didn’t they?” when someone needed more time.
    3. The new Greek finance minister is, per German reports yesterday, a Marxist. The commentators on German radio seem to take this with a little bit of giggling at (what they consider) the Greeks’ naivete.
    4. The smartest thing the Greeks can do is leave the Euro-zone. And if Putin pays a state visit to Athens, the Eurocrats have no one but themselves and their ideology to blame.

    • orionATL says:

      thanks for these comments. it is helpful to read someone who follows the german press and has a good feel for german society.

      • scribe says:

        You guys would’a loved the Bild Zeitung last night (US time). It’s a brash tabloid in the vein of a Brit tabloid – loud headlines, topless young women, yadda, yadda.
        The lead article on the website last night was headed “Now we need an Iron Chancellor!” over a photoshopped image of Merkel (mouth contorted, looking like a lemon-sucking Manning) wearing a Pickelhaube. That’s one of those old German military helmets with the big brass eagle and the spike on top.

  5. orionATL says:

    and while the european lords obsess about the immoral conduct of their greek peon, rome burns. i refer to events in china and possible serious trouble in the chinese stock market. now may not be the time, but the current ruling junta in china is being tolerated only because of extended, monied good times. when those monied good times come to an end so will communist rule in china and there will likely be hell to pay for some years as chinese society reorganizes itself around a more modern political system (or systems :) ).

    then what for the u.s., european, japanese, and russian economies ? a year-round northwest passage ? an improved vladavostok to rotterdam railroad? who will use them ?

  6. Alan says:

    A perspective from a small country at the other end of Europe that also recently elected an anti-austerity party and is being told to sod-off by the mass media and its larger neighbor from which it seeks independence.

    • Ed Walker says:

      Link highly recommended:

      Who knows? Today in Parliament as the Commons debate on the nature of EVEL and Alexis Tsipras grins into the stony face of Angela Merkel, it may well be that we have reached the limits of democracy, the limits of debate, of logic in the face of the crass arithmetic of power, of any real hope of social and cultural progress. It may be that “progress” has passed its sell-by-date. But just as it is the business of life to defy the death that always wins in the end, it is surely the business of civil society, of politics, to act as if we had faith. Just because every life ends in death, is that really an argument that we should be on death’s side?

      • Alan says:

        Yes, not much that’s democratic about neoliberalism.
        That article was from Bella Caledonia, one of a number of alternative media sites that grew up to cover the Scottish Independence movement. Most of the media in the UK is controlled by a very small number of media moguls, Rupert Murdoch being the most prominent. The BBC is notoriously biased towards the southeast and the British establishment. One of the other alternative sites, Wings Over Scotland, focuses on covering the endless lies and propaganda spread by the mainstream media.

      • thatvisionthing says:
        “The illusion of freedom will continue as long as it’s profitable to continue the illusion. At the point where the illusion becomes too expensive to maintain, they will just take down the scenery, they will pull back the curtains, they will move the tables and chairs out of the way and you will see the brick wall at the back of the theater.”
        Frank Zappa

  7. Ed Walker says:

    I wonder about that statistic in the Business Insider article. Most of the small businesses I know about paid little in taxes in the US. That makes me doubt the impact of tax cheating at the bottom of the income distribution there.
    This is the iconic article on taxing institutions in Greece: It discusses the swimming pool tax, which only a tiny number of the more than 16000 pool owners paid. It’s certainly true that the tax collection institutions in Greece are weak, but I suspect that’s the way they were designed. The design should be laid directly at the door of the richest Greeks, who could easily have insisted on better rules and better systems. Of course they didn’t because it benefited them. And once your elites don’t comply with the law, respect disappears, and everyone looks for ways to emulate them.
    But that could never happen here.

  8. scribe says:

    The part about a large majority of small businesses showing a loss and therefore paying no taxes has a collateral ownership benefit no one has yet mentioned. When the small-business owner (usually a male) decides it’s time to trade in his spouse for a newer model (the secretary, salesperson, etc., usually female), those jiggered books that showed losses all those years come in mighty handy to try to prove that, no, 50 percent of that business just isn’t worth all the millions the missus is claiming, notwithstanding the style to which she became accustomed during the marriage. No, it’s worth a lot less.
    There are accountants and lawyers who make their entire career representing one side or the other in matrimonial matters involving small businesses with crooked books and trying to straighten it out or avoid straightening it out. And a very remunerative living it is. About 20 years ago, I worked on a matrimonial case where the husband’s deposition opened with:

    Q.: What was the sale price of your house in [very-high-rent district]?
    A.: I respectfully decline to answer based upon my rights under the Fifth Amendment.

    He liked to do side deals and the sale had involved an “inaccurate” HUD-1 and a bundle of cash. That was one of the simpler schemes….

    • RUKidding says:

      My ex-brother-in-law (now deceased) paid huge bucks to have attorneys fight my sister tooth and nail to prove that his very lucrative (at that time) small business had no money, etc. Then whined and complained to his kids (who believed him for a while until they figured it out) about how outrageously expensive the divorce was – blaming it all on my sister, as if she was the “cause” of the expensive divorce proceedings. My sister has many faults, but in truth, she just fought for a fair settlement. Sad to say, a lot of money that both she and her ex could have had to spend on other things got totally wasted on divorce lawyers (who laughed all the way to the bank).
      All my sister did was force him to provide accurate figures. But both sides of the family were also well aware that he had double bookkeeping and ran things at a putative loss in order to avoid paying taxes… because taxes were highway robbery, and they “couldn’t afford it.” Of course, during the marriage they lived the high life in a mansion (my opinion), driving very expensive cars, my sister had numerous fur coats, including a Russian sable, plus they went on very expensive vacations several times per year, belonged to one of the most expensive country clubs blah blah blah….. But taxes were “highway robbery” and would’ve driven them into the poor house!
      Same deal with a couple I know now. Constantly vetching about the “highway robbery” of taxes, which they cook their books to avoid paying. Yet when their oldest daughter got married recently they spent upwards of a $100k (not joking) on the wedding & all the trimmings. The bride’s gown + veil, shoes, etc cost $30k!
      For me, such lifestyles of greed and avarice are not appealing, but it’s made doubly disgusting by the unwillingness to really pay their “fair share.”
      Note: my family and the family with the wedding are all rightwing, watch Fox & listen to Rush constantly. I have come to the conclusion that the reason – now – why such people love Fox, etc, is that it *endorses* their greed, avarice and gives them a metaphorical “get out of jail free” pass to be dishonest and to look down on poor people, who they’ve readily agreed are the root of all evil in this nation.

  9. Alan says:

    Media in the US seems to have more sympathy for the Greeks than UK press which are mostly behind Cameron and another round of UK austerity. Joseph Stiglitz (quoted in LA Times): “I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences. … It is startling that the troika has refused to accept responsibility for any of this or to admit how bad its forecasts and models have been.”

  10. orionATL says:

    the knowledge and understanding exist in economic science to prevent a tragedy from unfolding in greece, e.g., :
    […Sen published Poverty and Famines: An Essay on Entitlement and Deprivation (1981), a book in which he argued that famine occurs not only from a lack of food, but from inequalities built into mechanisms for distributing food. Sen also argued that the Bengal famine was caused by an urban economic boom that raised food prices, thereby causing millions of rural workers to starve to death when their wages did not keep up.[10]

    Sen’s interest in famine stemmed from personal experience. As a nine-year-old boy, he witnessed the Bengal famine of 1943, in which three million people perished. This staggering loss of life was unnecessary, Sen later concluded. He presents data that there was an adequate food supply in Bengal at the time, but particular groups of people including rural landless labourers and urban service providers like haircutters did not have the means to buy food as its price rose rapidly due to factors that include British military acquisition, panic buying, hoarding, and price gouging, all connected to the war in the region. In Poverty and Famines, Sen revealed that in many cases of famine, food supplies were not significantly reduced. In Bengal, for example, food production, while down on the previous year, was higher than in previous non-famine years. Thus, Sen points to a number of social and economic factors, such as declining wages, unemployment, rising food prices, and poor food-distribution, which led to starvation. His capabilities approach focuses on positive freedom, a person’s actual ability to be or do something, rather than on negative freedom approaches, which are common in economics and simply focuses on non-interference. In the Bengal famine, rural laborers’ negative freedom to buy food was not affected. However, they still starved because they were not positively free to do anything, they did not have the functioning of nourishment, nor the capability to escape morbidity…]

    • thatvisionthing says:

      Great quote, thanks:

      His capabilities approach focuses on positive freedom, a person’s actual ability to be or do something, rather than on negative freedom approaches, which are common in economics and simply focuses on non-interference. In the Bengal famine, rural laborers’ negative freedom to buy food was not affected. However, they still starved because they were not positively free to do anything, they did not have the functioning of nourishment, nor the capability to escape morbidity…]

      Reminds me of:

      The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.

      ~ Anatole France

  11. Jonf says:

    Bill Black has an article on Greek debt. As I understand it, this all stems from loans made by French and German banks to Greek banks and corporations and municipal governments. He calls them liar loans and a fraud at the outset, since they knew or should have known they could never be paid back. I am not sure how it happened but the Greek government picked up the debt. ( bailed out ?) The ECB then loaned Greece money to pay off the original loan. But Greece could not pay it off. And here we are today.

    I mention all this bc the original liar loan losses should have stayed with the lenders. Now we have a loan that cannot be repaid. It should be forgiven and we should move on. Failing that we risk another contagion, which is increasingly what we face in this capitalist heaven. Wall Street, judging from recent moves down, seems to understand this.
    A debt that cannot be repaid, won’t be. Whoever said that is pretty smart.

    • thatvisionthing says:

      “Debts that can’t be repaid won’t be” — Michael Hudson

      Governments are sovereign with regard to their creditors. They still posses the alternative power to wipe out the debts – along with the savings that are their counterpart on the opposite side of the balance sheet. The German Currency Reform of 1948 remains a model. But it calls for creditors to take a loss.
      This has happened again and again in history for the past five thousand years. Until recently it was the normal result of financial crashes – the final stage of the business cycle, so to speak. But as economies have been financialized, creditors have gained political power – and also the power to disable realistic academic discussion of the debt problem. What they fear most of all are thoughts of how to avoid today’s arrangements that have given them a free lunch at the rest of the economy’s expense.

  12. Alan says:

    More analysis here on the skirt capitalism of the banks and the Troika. Nice graphs on the Troika’s abysmal Greek GDP predictions.

    I think the explanation is quite simple, though. Having recast a crisis caused by a combustible mix of regulatory failure and elite venality into a morality play about profligate Greeks who must be punished, Eurocrats are now engaged in what might be described as “loan-shark theater”. They are putting on a show for the electorates they inflamed in order to preserve their own prestige. The show must go on.

    • Alan says:

      Oops. Missed that Ed already linked to the Waldman article above. Note that Waldman now has a follow on post.

  13. Stephen says:

    If you think Greece is drowning in deep water over its debt mountain, the US is heading the same way itself! Check out this graph (and accompanying table):
    from the wikipedia article on the US national debt. As the lower graph illustrates, as of 2011 that debt was approaching 100% of GDP and climbing at a rate of knots. Unless the problem is addressed, sooner or later the US will find itself vanishing down the same debt sinkhole that Greece is trapped in.

  14. thatvisionthing says:

    To Ed and Marcy,

    Piketty: When I hear the Germans now say that they maintain a very moral dealing with debt and firmly believe that debts must be repaid, then I think: That’s a big joke! Germany is the country that has never paid his debts. It has no lessons to teach other countries.

    Apologies for the mess but I still can’t access my e-mail (still F* yahoo!) so I’m leaving a realllllllly long comment here and hope it may reach your attention in this unorthodox way. Stuck in moderation is fine if you see it.
    The thing is, doesn’t Germany have a lesson to teach us, perhaps? I listened to some Renegade Economists podcasts from Australia last year, and unfortunately I see now that the podcasts been pulled and I can’t find them in the Wayback Machine either, so I have the .mp3 but can’t link you to it. In lieu, am pasting in transcript here. And the guy who was being interviewed, Adrian Wrigley, is tragically dead now and so we won’t be hearing his voice on Greece. Point is, he tells us in a quite reasonable and familiar way about “the miracle of the Rentenmark,” in a way I don’t find anywhere else. He says that’s what ended the wheelbarrows of ever more worthless cash that was a result of the unpayable German debt. (“And of course, the consequence of unrepayable debt is currency collapse.”) I know people talk about parallel currencies, but the key thing and perhaps difference here is that I think the thing the Germans came up with, the Rentenmark, was a share of a fixed pie, not gold or floating but the land itself of Germany, via the mortgages (I don’t understand this), and that it was part of an early 20th century global movement that banks/capitalists couldn’t tolerate and put a stop to. (Is that why communists were so demonized when I was a kid that we had to duck and cover and couldn’t talk?) The Rentenmark lasted a year basically, 1923, before Charles Dawes, an American banker, put a stop to it in 1924. Wikipedia says, “For his work on the Dawes Plan, a program to enable Germany to restore and stabilize its economy, Dawes shared the Nobel Peace Prize in 1925,” but Wrigley says the Rentenmark was already working. From below (2012): “It was interesting because it was just so rapidly successful. People talk about the current situation and say it will take 10 years for the Greek problem to be solved. It’s taken more than 20 years for the Japanese problem to work through and it’s still not concluded. But the Rentenmark was an immediate success.”
    Here it is, thanks, hopefully you can reconstitute the paragraph breaks. There were two related podcasts that I caught (all gone now), one from Wrigley in August 2012 and one from Deirdre Kent in October 2013 (excerpt here, it’s where I got the bug: ), which I can do this same kind of comment maneuver to get to you if it’s useful. But this is the one where he told the story of the Rentenmark.

    Renegade Economists podcast
    Miracle of the Rentenmark
    February 12, 2012
    Karl Fitzgerald interviews Dr. Adrian Wrigley

    36 min

    KF: And welcome to the Renegade Economists with your host, Karl Fitzgerald. A huge weekend at the SLF had by us sharing fantastic support from the public, and why not when you hear interviews like this one. Jump in and put your listening ears on. Some interesting revelations about the motivations behind good old World War I.

    KF: This week we’re luck to speak to Dr Adrian Wrigley. He’s based in Brittany, France, and he’s involved in a group called the Systemic Fiscal Reform group. They have some innovative angles on how to get the whole land and banking system in order. And as was seen overnight with the latest Greek bailout fiasco, how long will it be, Adrian, do you feel until the Greek debt situation raises its ugly head?

    AW: I think it will raise its head pretty much every few weeks until there’s some major event. I think the situation will develop with Portugal and Italy and, I don’t know, further afield as well. That’s an ongoing situation I watch very closely.

    KF: Interesting that they actually got the bondholders to write down beyond 50% of the debt, some 53½ percent there, but it’s really only a short-term measure, isn’t it, and there’s the finance minister saying, “Look, the Greek people, all we have to do is work work work,” but yet thousands are booking plane tickets now to leave the country, no doubt, as this onerous debt burden stretches everyone’s pockets, and as we’ve seen, so many public sector worker jobs and wage levels have been cut. What could they be doing to bring about a more realistic sense of change there?

    AW: Well that’s a very good question. And it depends on what constraints, what limits they place on it. Because the problems are not very difficult to solve. You just have to accept that debts that can’t be repaid won’t be repaid. So I think that that default should actually be part of the solution. But the system is wired to blow, Karl, unfortunately, because the debts have been guaranteed through credit default swaps, CDS instruments that have been issued by the top U.S. banks. So if there is a default event, then those come into play, and that will render the U.S. banks insolvent. So I think what’s needed actually is a comprehensive bank holiday, in other words, shutting the banks down not only in Greece but the banks in America and the U.K., and really reestablishing them after netting out the liabilities and obligations. But that’s—I think we’re a long way from that. It really takes it to the complete collapse that’s perhaps on its way.

    KF: And one of the big issues is that those CDS swaps are around 30 trillion dollars and the three American banks, the big ones, Citibank, JP Morgan and Bank of America, have 19% each of the total worldwide derivatives market, and it seems like there’s behind the scenes games going on with insuring against these credit default swaps. These guys have backup plans on backup plans. So do you know much about this level of insurance taken out against the Greek debt and whether they’ll default or not and how that relates to the CDS market?

    AW: Well, I’m not sure about backup plans on backup plans, that’s news to me, but it’s clear that the major focus in the negotiations is how to arrange for the bondholders to voluntarily agree to not get their money back. And it seems quite perverse that bondholders would voluntarily agree, but the alternative, as I say, is the triggering of these CDSs, and so there’s plenty of motivation on the part of the troika, the powers that be, the banking system, to give the bondholders nothing but not default, which is really a derangement of the words themselves.

    KF: Mmm! I know. Isn’t it? And it seems like so much of this battle going on, you know, the International Swaps and Derivatives Association, they’re the ones who actually determine what a default is, and even though they’re writing off more than half the debt owned, that’s not deemed an official default. But some of the reading online we’re seeing is that, you know, there could well be a legal case announced against the ISDA, which of course happens to be owned by and controlled by many of these big U.S. banks, whether some of these private bondholders will take the ISDA to court, because if they could prove that it was in effect a default, they would get their insurance payout on this default.

    AW: And it’s been very cleverly constructed, and I think JP Morgan was involved in the design of these systems, having had similar involvement with Argentina. I think JP Morgan was on both sides of the table at various points in time and designed the contract so that they never have to pay, which to my mind is nothing less than fraud. So I think if the association is taken to court, they would lose. It’s a tough one because if the swaps are triggered, then that will trigger more defaults and a cascade. So we live in difficult times, Karl.

    KF: Really in mainstream analysis you’re not getting any sense of hope that there’s a way forward through this. It’s just more and more rioting pictures and, you know, more and more stories on the size of police riots both here and Melbourne doubling in size over the last couple of weeks, so, you know, where is the preventative economics, you know? Well, where’s the thinking that this can never happen again? But yet all we’re seeing is that the world of derivatives and sovereign debt, private debt, that is the way forward.

    And we’ve got you on the show today because you’ve got some innovative takes on a country that, you know, not so many people know about, but in terms of economics, especially down here in Australia I’m talking, you know, the German way of thinking and Bismarck was such an influential force in the development of economics. Can you perhaps take us back in time back to Bismarck, the founder of the German empire, and run through some of the innovative policies he had in place to keep in check the privileged echelons of society?

    7:28 AW: Well there is a very interesting topic, Karl. I’ve been researching this trying to understand how economic systems have developed, how it is we got to where we are today, and if you go through history you see step by step it seems very reasonable each step which is taken but that the direction overall has been problematic. But I think the occurrence of the world wars was a major change in the system, because before World War I, for example, the world economy was changing quite rapidly. Bismarck, as you say, was a founder of the German empire in 1871, and one of the things he did was create a strong banking system, a central banking system focused on the Reichsbank, which became a note-issuing bank. It could issue bank notes. And private banks associated with that which were only able to issue money backed by gold. There’s a requirement for one-third of the money supply to be backed by gold, and that model held right up until the start of World War I.

    But a second thread of what was happening in Germany, in the German Empire, prior to World War I, was the development of property taxes, and in particular land tax and land value tax, really inspired by the writings of Henry George and Sylvio Gessell and so on. They were pioneers in the theory of the field, but Germany was actually implementing it in the municipalities across Germany. The New York Times was writing in 1910 that this is really the secret of a German economic miracle as the towns started implementing what they called “suvaroya??”” property tax. They were becoming more and more commercially vibrant. And in fact the theory that the land should be owned publicly and not privately was being tested to its fullest in the German colonial 9:45 concession? of “GowChow,” which people may know now as the ”Sing Kow.” They have a well-known brand of beer from “Sing Kow” from the German influence. And the basis of “Sing Kow” was a trading colony in China which was obtained as a 99-year lease on the Chinese land, though they were prohibited from selling the land in perpetuity, they could only lease the land or rent out the land, and as the colony developed it was obtaining revenue for government services through the ownership of land while allowing free movement of goods and free labor. People could work without paying income tax or anything. So that was a demonstration of the German system in microcosm.

    KF: Why I love 3CR. Subscriber drive is on this week, so please support 3CR, support the Renegade Economists, and give us a call here at the station now, 9-419-8377, that’s 9-419-8377. We do need your precious cash to keep the station kicking over. Just a handful of volunteers keeping the front desk running and answering all those e-mails, all that sort of jazz. How many live broadcasts have we done here at 3CR this week? Had a great time at SLF broadcasting there. So thanks to all the team. So, yeah, hopefully you can dig deep into those pockets and support this show, support the station, and yeah we’re going to head back now with the interview with Dr. Adrian Wrigley from the Systemic Fiscal Reform Group, that’s

    KF: What were the employment and inflationary aspects when they had some system of rent recycling, that, you know, where the value of the earth is going to go up naturally and that’s what these property taxes do, they capture a share of the land component, which of course is our most prominent natural resource.

    AW: Well, the key thing to understand here is that the money system of 12:08 only for government money in an area is backed by the taxation. So taxation gives the root demand for the money, and if the taxation is based on land it effectively means you have a land-based money system, and in “Sing Kow” it means that the money supply was growing as the colony grew while avoiding inflation. It gives an ample supply of money for the government.

    KF: Germany under Bismarck had had these strong banking laws and it developed a property tax. We’re always talking about, you know, having some sort of land tax in place, but the strong banking angle is what I’m interested in. You know, it seems that there was a lot of movement prior to World War I towards this, a more equitable system in Germany where, you know, the banking was encouraged to focus on industrial lending rather than the speculative sort of mindset.

    AW: The problem in the modern system is that the money is being issued against land and inflating it, and when you have a gold-backed system that limits the amount of money available for land speculation and without the burden of taxation on transactions or taxation on labor, you can get greater returns from investment in industry versus speculation in land. So it’s really a system which directs the economy to the industry, and of course Germany was very, very strong in developing education in university level and that powered economic growth up until the start of the war.

    KF: And so how were, how strong were they on fractional reserve banking? Was that encouraged?

    AW: Well, it was permitted. I wouldn’t say it was encouraged. The requirement is to have one-third of outstanding debt backed by gold. So that places a limit, provided the bankers are genuinely honest to apply that.

    KF: Can you compare that to the modern-day situation?

    AW: Modern banking has either very low reserves or in fact just no reserves at all. But behind that there’s a question of what are bank balance sheets in reality? Are they telling us the truth? Are they putting the assets they hold at the true market value or are they using mark-to-model accounting where they have a financial model of what the assets ought to be worth, or even what people call mark-to-fantasy model.

    KF: Let’s break that down a little bit. So we’re saying that in the modern era we have this speculative mentality that booms the price of land and then banks set their balance sheets and their fractional reserve lending against this hyperinflated price of land?

    AW: That’s right. The bank balance sheet has debts on one side and assets on the other. The assets would represent the mortgages, fixed assets and so on. But the debts of the bank are the private depositors’ money. So if they can falsify the assets, if they can inflate the value of the assets, they can also inflate the value of their deposits.

    KF: We’ve seen, you know, much of the mainstream analysis blaming this global credit crunch on the derivatives market and sort of what we’ve played through here is the fact that derivatives are an insurance policy against this speculative heat in the market. Are the derivatives a cause or are they sort of second or third down the chain?

    AW: Well I would say they’re second or third down the chain, that the original problem was with mortgages that—of course, we saw the mortgage crisis in the 1980s with the U.S. savings and loans crisis, and that wasn’t heavily derivatives based, as I’m aware, but the banks like to issue new money against land assets or housing assets because they can be so easily repossessed if necessary and the owner has an income stream generally to pay for them. So the innovation was with the mortgage-backed securities, that the first level of derivatives that really allowed the risks to be passed on from the banks onto third parties, and that really is a very hazardous, it’s full of moral hazard, allowing the people responsible for generating the loans not to be responsible if they go wrong. And I think the high-level derivatives of CDSs come on top of that, and of course there’s the general futures market, futures markets in precious metals and so on which are another layer of central instability.

    KF: We had Sun Yat Sen trying to build the [17:40 new GA?] capitalist Republic of China around 1911, Canada, Australia and New Zealand all had land tax programs at various levels of government back in that sort of era, Germany taking land tax nationwide, the People’s Budget of 1909 in Great Britain leading to the House of Commons passing it very quickly and the House of Landlords, the upper house in the Westminster system in that period of time, locking down that debate and forestalling it for 18-odd months in the longest debate ever in the House of Lords, and one of your articles here you write that Mexican land reform was taking place around that time too, so what on earth went wrong? How have we gone from that sort of phenomenon to, you know, this situation today where it’s property speculators who are the ones who are getting all the subsidies and all the bailout?

    AW: Yes, you raise a catalog of issues before the First World War relating to the introduction of land taxation, and it really does fit a very wide pattern. You mentioned Australia, of course, but even China moving from the imperial system to a capitalist republic, which of course was failed with the Communist revolution, but that would open a huge land mass to a capitalist system, and in the end the Republic of China became just Taiwan as the government fled the mainland. So the picture here is that land taxation was taking off everywhere right across the world and that was posing a grave threat to the powers that be, what the Occupiers would call the 1%—in fact it’s probably more like the 0.1%—because their landed income was being threatened by democratic government, and the solution was the Federal Reserve system and World War I. World War I, of course, created a massive amount of debt, and that debt had to be paid back somehow. We had the reparations against Germany from the Treaty of Versailles. Those were to be paid in gold, 1½ billion ounces of gold if I calculate it right. But these gold reparations were really to bail out England and France, who had gone into debt with the United States government and with the Federal Reserve system bank. So the money was going around in a loop or a chain from Germany through England and France to America.

    KF: And these were extortionate debts, weren’t they, that the American banks were asking. You know, the history of the French-American rupture really came through in this era because of course the French had lent the Americans a lot of money in their war of independence against the UK and dropped a lot of those debts in that time, but of course when it came to World War I America didn’t, you know, had selective memory and didn’t do the sort of reciprocal rights that the French were expecting.

    AW: Yes, and of course it was France that was instrumental in the final collapse of the gold standard under Nixon, because the French central bank was demanding the gold back which was stored, I believe it was stored in, supposed to be stored in Fort Knox, and under the gold exchange standard France had a right to get the gold. But it became obvious that the U.S. couldn’t supply gold for all the dollars that it had created, and so effectively the U.S. defaulted and dropped us out of the gold standard entirely. But going back to the time following the First World War, France was trying to pay its debts to the U.S. banking system then and it was the reparations of gold under the Treaty of Versailles which was the only means that it had to repay those effectively, so what it did was it left the German economy in tatters. Having had the war, having had the loss of human capital and the loss of financial capital, Germany was unable to pay the debts, and this of course was well understood by John Maynard Keynes, who wrote about it in his book that Germany would be unable to repay the debts under the Treaty of Versailles. And of course the consequence of unrepayable debt is a currency collapse.

    KF: We’re listening to Dr. Adrian Wrigley from Systemic Fiscal Reform Group. Remember why I love 3CR, all you podcasters out there, please, tune into the website, website, and flick us some coin. Come on, support the Renegade Economists! Love to hear from all you podcasters, as always.

    So we’re hearing about the weight of debt following World War I, and yes of course that led to a radical nature with Hitler coming through. But before that there were some very interesting banking innovations in the 1920s. Have a listen to this.

    AW: We talked about the Bismarck banking system based on the gold standard and based on a government-owned central bank, the Reichsbank. The gold standard was dropped, of course, during the First World War as they effectively switched to a paper standard, but after the Treaty of Versailles, the money system really no longer had its backing. It didn’t have sufficient taxation to support the values at the old gold standard level, so this exposed the German currency to a speculative attack. In fact it was, I think it was in 1922 that Germany was forced to privatize the central bank, and that really triggered an escalation of the inflation, because the Reichsbank could now print money for profit based on private debts that were taken out. So the Reichsbank was printing money heavily. But also there were emergency issues of money called the “notgelt” by the municipalities, because they would be running out of money as the inflation took hold. They’d print their own notes and then exchange them for money later. And even the railway company, the nationalized railway company, was issuing its own money system. So we have a situation where you’ve got several different money issuers competing to print as much as they could, and by the summer of 1923 it was taking, you know, the proverbial wheelbarrows of money to buy the loaf of bread. But still the government wasn’t acting to influence a solution. And the solution really only came about when the economy was in complete collapse, and the solution was to ban the Reichsbank from involvement in currency issue completely. The government created a new central bank called the Rentenbank, and the new central bank was to issue its own new currency, the Rentenmark, and that was issued on the 15th of November, 1923, as a paper-backed currency or a paper-based currency that was backed by mortgages on the entirety of the property of Germany including industrial property and farmland and so on. The mortgages gave a root demand for the money, which was to be paid in twice annually, I think in April and October, and that really stopped the hyperinflation completely. It took a matter of weeks for the financial problems to, I wouldn’t say be cured, but the inflation stopped and people began getting back to work under the Rentenmark. In fact the Rentenmark was so successful, it was called The Miracle of the Rentenmark, and that survived until 1924, the following year, when an American banker, Charles Dawes, brought in the Dawes Plan as a plan to bail out the financial system to switch out of the Rentenmark. The Rentenmark was a danger, or a danger to the status quo, because the system was backed by mortgages and not backed by income tax or customs or excise taxes, and so it had the effect of being a land-backed currency, and that’s what the ruling classes want to avoid. It was interesting because it was just so rapidly successful. People talk about the current situation and say it will take 10 years for the Greek problem to be solved. It’s taken more than 20 years for the Japanese problem to work through and it’s still not concluded. But the Rentenmark was an immediate success. And the reason the Rentenmark was an immediate success is that it was based on the sound principle of collecting the money through the land and issuing it from the government. It creates a flow through the economy which is stable and effective rather than having it issued privately and then collecting it through income tax, for example.

    29:49 KF: And so there we have, that’s Dr. Adrian Wrigley. Going to have to cut that short. Podcasters you will get a special extended interview and, yes, regular listeners tune into the 3CR website to hear the last six minutes of this fascinating conversation with Dr. Adrian Wrigley as we delve through the history. You know, this is why economic history is being removed from the curriculum. We need to reinstate the classical economics. This is back when the people were aware of the power of monopoly, and that’s why we’re here each and every week on the Renegade Economists. My name’s Karl Fitzgerald. I’ll look forward to being with you next week. Check out, that’s…

    KF: How on earth did Dawes manage to fly in and you know, this U.S. banker come in and axe this program and replace it with what, some sort of gold-backed system?

    AW: Well, I think it was obvious to the U.S. bankers that Germany was again moving towards the land-backed system, and the Rentenmark wasn’t internationally tradable. It was effectively a local currency for the whole of Germany. So under the Dawes plan, which in Germany is known as the Dawes Loan, the U.S. came in with a very large sum of money to buy up German industry and to form cartels. The cartels in Germany were modeled on Standard Oil, the Rockefeller outfit, and also the J.P. Morgan cartels which had been so successful for the ruling classes in the U.S. So that created in Germany I believe it was three major cartels. They had an electrical cartel, which we know as AEG, there was an oil and steel cartel, and there was a chemicals cartel known as I.G. Farben. So these major cartels were established really with the backing of Wall Street with U.S. money in order to allow the German business to develop to collect economic rent from the German economy and to make payments of reparations and debt to the U.S.

    KF: What can we take out of this for the Greek situation now?

    AW: Well, what we see is that currencies have to be backed by taxation, at least government-issued currencies do, and the type of taxation you choose is critical to the operation of the system. The optimal form of taxation is through land values, and we’ve seen that in Germany through the Rentenmark. We’ve also seen it through Hong Kong, which is very successful because of its avoidance of the capitalist system. It uses what I like to call a geocapitalist system where the land is owned by the government or the land is taxed by the government, and so in Greece what we need to see is a currency which is land-backed. Now ideally that could perhaps be done across the entire European Union, but the difficulty with this is that it would require a fiscal policy to be set across the union, and it’s only the monetary policy which is set across the union and not the tax policy. So in November last year we saw a simulation by the Greek government of a, what is in fact a new currency. They call it a voucher; the Greek government would be issuing vouchers for 50% of pensions, 50% of wages, and so on. Well, this would allow it to halve its wages in Euros but prop it up with these vouchers. And the vouchers would be redeemable against tax. And in particular the vouchers could be redeemed against the new property tax that they developed. So will this be seen as a drastic emergency measure in Greece, it would be in fact quite closely modeled on the Rentenmark, which was very successful. So I think this is the way forward for Greece if they can persuade the people in charge to permit it, a system based on government issue of vouchers and then redemption against taxation.

    KF: How then does that actually create an income flow, because wouldn’t one be canceling out the other?

    AW: Well they wouldn’t be going into debt, deeper and deeper into debt, because of this, so you avoid the problem that the Greek government is running out of Euros. They can issue any quantity of vouchers, provided that they withdraw them at the same rate against the tax obligations and the property. And I think that’s sufficient to create a stable flow of currency in a system.

    KF: Adrian, fantastic stuff. If there is anything you wanted to just add in closing?

    AW: Well, we’ve been working on this in the Systemic Fiscal Reform Group for three or four years now, and we find that you need to look through history very carefully to see how things are structured, and why they succeeded or why they failed, but what we see at the moment is that all this expertise that can be drawn from history, all this understanding, is completely lost, and it’s what some people call the corruption of economics. Economics now seems to be more cheerleading for the status quo than a sound science based on the theory of flows of economic value. One of the things we have developed in the Systemic Fiscal Reform Group is a system of converting the current financial system into a land-backed system, which we call the Location Value Covenant, and we’ve got some information on our website, which is, which explains the Location Value Covenant as a voluntary tax reform similar to what perhaps your group is pushing in the land value tax but without the need for compulsion.

    KF: Yes, we need a diversity of tactics, and Dr. Adrian Wrigley, it’s fantastic to have you on the show. I wish we had more time to really get stuck into this, but we will have to get you back in the coming months to discuss that in more detail.

    AW: Thank you very much, Karl. It was a pleasure.

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