European Bond Bask
Krugman is at it again, arguing that the (now visible) bond vigilantes who are attacking Europe aren’t doing so because of excessive government borrowing. Rather than this being about too much debt, it’s about governments not being able to borrow in their own currency. So I have two questions:
(1) For people who think this is basically right, how do you explain the progression of the crisis in Europe? It didn’t start with Germany or France, and then bounce around. No, it started with the country everyone–even Krugman–acknowledges was fiscally irresponsible, Greece, and then it started spreading to the other governments that were also in objective (fiscal) trouble. It was only fairly recently that the crisis spread to governments that have relatively low debt-to-GDP ratios. So why should the crisis have developed in this fashion, if this is a story about currency areas and not government profligacy?
(2) Can anyone dig up data on corporate bonds in the countries in question, so that we can look at (say) what happened to the spread between government and major corporate yields in various European countries? It would also be good to look at the spread between corporate yields across countries. (Part of where I’m coming from is that the German government might be in trouble now, because it is on the hook for the ECB’s foolish commitments to bailing out the PIIGS. In contrast, major corporations in Germany wouldn’t be affected nearly as much, so their yields shouldn’t have spiked as much as German sovereign debt did recently. But if it’s just a matter of currency, then obviously every entity in Germany that issues debt should have been affected the same. Or another way: Krugman likes to show that euro governments see their interest rates going up, while non-euro governments have rates that are falling. OK, does the same thing hold for the corporations in those countries?)
Bob, I think the correct analysis combines “not being able to issue your own currency” with “being profligate.” Bond holders are like girlfriends: they prefer to be let down slowly then dumped unexpectedly and all at once. Greece at al. were profligate, but they huge worry was default, which is never necessary if you have your own currency you can freely issue. So combine your story and Krugman’s.
Every time I see a statist pundit advocate that a group of people in an arbitrary geographical territory (e.g. a country) should have monetary “sovereignty” vis a vis everyone else NOT in that arbitrary geographical territory, on the basis that having monetary sovereignty brings about an improvement in people’s lives over NOT having monetary sovereignty, I chuckle, because the logic of their worldview, when consistently applied (as all logic should), it leads invariably to abolishing all central banks and all legal tender laws, where the principle of monetary “sovereignty” is extended all the way up to individuals, after which the logic cannot be further extended.
I mean, if the pundits say that the people of Greece would be better off if they had monetary sovereignty vis a vis the rest of Europe and the world, then doesn’t it stand to reason that myself, and every other individual, would be better off if we had monetary sovereignty vis a vis everyone else as well? Aren’t us individuals, as American citizens, worse off by having to incur debts in a currency that we can’t create ourselves but only a select few in the Federal Reserve System? Shouldn’t all individuals have monetary sovereignty and be able to incur debts in a currency that we can produce ourselves, like in, oh I don’t know, what’s that yellowish metal called again?
But of course, for statists, logic is never a decisive factor, since their whole worldview is based on a double standard of “You ought not initiate force (steal, kill, etc), but THEY ought to be able to do so.” So it’s not surprising that they would take the logic of “monetary sovereignty” and apply it inconsistently, to include individuals in government but nobody else.
But if you extend monetary sovereignty up to individuals, then with each having his own money it just seizes being money at all.
No, eventually you’ll just have the most saleable good serving as money.
Not really. It just becomes difficult as you negotiate currency trades with your neighbors, and your neighbors’ neighbors, and your neighbors’ neighbors’ neighbors. (This assumes that said currencies are paper, not yellowish metals.) The logic is sound. Why shouldn’t I, and say, my local homeowners’ association in conjunction with the neighboring mall and grocery store not issue a currency on which we can sell bonds to each other and run up debt in order to grow our little economy?
But with gold you still don’t have sovereignty. You don’t issue money, seet interest rates, just accept what the gold diggers do. Basically the same as fiat money.
MF: “Shouldn’t all individuals have monetary sovereignty and be able to incur debts in a currency that we can produce ourselves, like in, oh I don’t know, what’s that yellowish metal called again?”
Regarding the first half of your question MF, yes, all individuals should have “monetary sovereignty.” From what I gather, I think we do have “monetary sovereignty,” it’s just that we fail to recognize it and assert it.
“Monetary sovereignty” is asserted when you as a REAL creditor, accept only specific THINGS as payment from your debtors. For example, you as an employee (and REAL creditor) credit your employer (REAL debtor) with your REAL labor for one week. At the end of one week your employer (REAL debtor) agreed to settle their debt with you, as stipulated by your contract. Depending on your “accepted forms of payment” as specified in your contract , your employer (REAL debtor) could tender you many THINGS to settle their debt with you. Perhaps your “payment terms” allowed tender of gold, silver, oil, FRN’s, VISA credit, MasterCard credit and bank draft. So, in theory, your employer (REAL debtor) could tender anyone of those items as payment to you, and the whole transaction would be considered legitimate in the eyes of the “law.”
Don’t take my word for it, do your own research. To help you get started, here’s an interesting statement from the U.S. Treasury regarding “legal tender”:
“There is […] no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise” (http://www.treasury.gov/resource-center/faqs/Currency/Pages/legal-tender.aspx).
I could be wrong, but isn’t the government saying: “we call coins and currency ‘legal tender,’ but we don’t force you to accept them as payment”?
If the government doesn’t force people to accept “U.S. coins and currency” as payment from their debtors, doesn’t that negate the very definition of “legal tender?”
From Merriam-Webster’s Dictionary of Law:
“[Legal tender is] money that is legally valid for the payment of debts and that must be accepted for that purpose when offered.”
From what I gather, this is the definition of “legal tender” according to the U.S. Treasury website:
“…money as […] a valid and legal offer of payment for debts when tendered to a creditor.”
Did you notice the absence of the phrase, “and must be used for that purpose when offered”?
It seems to me that “legal tender” does not operate outside of being a “proclamation” from government. A proclamation is an announcement, not a law. I think government views “legal tender” as a form of “consent.” You have the government’s “consent” to use and accept “U.S. coins and currency” as payment for debts you owe or owed to you, respectively.
Regarding the second half of your question, not everyone can “produce” that “yellowish metal,” so it does not make sense for everyone to incur debts denominated in it.
As I mentioned above, I think we have “monetary sovereignty” we just fail to recognize and assert it. Do you not have the legal right to issue your own “bills/orders of payment” (promises to pay) so as to purchase goods and services from another on the *credit* of yourself? We as individuals hold the same power as central banks/governments: the power to issue debt (claims against our current or future production), it’s just that we fail to recognize it and assert it.
One of the reasons I think we fail to assert our “monetary sovereignty” is that there is no clear and cut way of determining “credit-worthiness.” If people could easily figure out who was “credit-worthy/trust-worthy” and who was not, I’m sure people would assert their “monetary sovereignty” en masse. With the great power of “monetary sovereignty,” comes great responsibility. This includes vigilantly accounting for ones accounts receivable and payable with others (taxes and currency debasement for governments = expiring claims and claim debasement for people), and ensuring you have the individual capacity to fulfill the personal money (debt) you have issued to name just a few.
I apologize for the book-length response – I didn’t intend for it to be so long.
“Don’t take my word for it, do your own research. To help you get started, here’s an interesting statement from the U.S. Treasury regarding “legal tender”:
“There is […] no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise”
As long as US citizens have to pay taxes in US dollars even if they transact in something other than US dollars, and as long as alternative currencies like gold and the concomitant “capital gains” tax in US dollars remain in force, and as long as the government’s courts enforce contract settlement in US dollars, and forbid private contract enforcement, there is a de facto legal tender law in US dollars, despite the Treasury claiming that “businesses are free to develop their own policies.”
One of the reasons I think we fail to assert our “monetary sovereignty” is that there is no clear and cut way of determining “credit-worthiness.”
I have good news for you. The market process of human interaction can be used to eliminate suboptimal methods and adopt optimal methods. This is what will happen if the government ceases to enforce the things I listed above.
Before the government took over money production, people were able to determine credit worthiness. Remember, government is secondary to private property and free exchange.
<i.I apologize for the book-length response – I didn’t intend for it to be so long.
No worries. I actually appreciate such detailed and thought out arguments. I dislike short talking points.
MF: “As long as US citizens have to pay taxes in US dollars even if they transact in something other than US dollars, and as long as alternative currencies like gold and the concomitant “capital gains” tax in US dollars remain in force, and as long as the government’s courts enforce contract settlement in US dollars, and forbid private contract enforcement, there is a de facto legal tender law in US dollars, despite the Treasury claiming that ‘businesses are free to develop their own policies.'”
Agreed. So long as the government forcibly transacts with you, it will always want you to settle the forced debt with its money (debt issuance).
Speaking of “de facto,” do you have an opinion on the theory that the U.S. is operating with a “de facto government” as opposed to a “de jure government”?
Speaking of “de facto,” do you have an opinion on the theory that the U.S. is operating with a “de facto government” as opposed to a “de jure government”?
I think that is becoming more and more true each day the government moves away from the set of laws that were originally designed to constrain it.
But then again, any economist will tell you that a monopoly tends to increase in cost and decrease in quality over time, and so I don’t think a thinking person should be surprised to observe a monopoly of law making attracting more and more morally unscrupulous people looking to aggrandize themselves by hurting innocent people, eventually rewriting its own rules ad hoc.
The courts enforce contract settlements in other thing too.
What’s interesting for the Austrians is this.
Greece has effectively borrowed in a currency that they can’t debase. Just like moving to the gold standard.
However, Greece is up the proverbial creek as a result.
Now no doubt the Austrians would say, don’t over borrow. Well quite right there. Personally I would say don’t borrow at all. Governments shouldn’t be allowed to have any liabilities. However, that doesn’t solve Greece’s mess, and it wouldn’t solve any country in a similar mess who was on a gold standard.
Perhaps its time for countries to leave the Euro. The best one to go, would be Germany.
Just because the Greek government lacks the ability to issue/debase the Euro doesn’t mean their system is “just like moving to the gold standard.”
The ECB fixes interest rates just like any other monetary authority, which allows people/businesses/governments to overborrow. Under a reliable gold standard, interest rates would rise to prevent this from happening
Some austrians (me in particular) argue that its good that greece cant print money.
Id prefer Greece to blow up and wipe out those irresponsible enough to lend to it, then greeces government to print the money and hurt the citizens. then in future its citizens wont let its government borrow so much.
Problem is keynesians and monetarists dont have the courage (also I reckon they are on the books) to watch a system collapse.
Sometimes its better to have a bunch of small fires (individual bank runs etc.) then banning fires and ending up with one catastrophic one.
EZ countries bond yields reflect perceived likelihood of default from the bond markets. So debt levels play a some role for monetarily non sovereign countries, clearly in the case of Greece. But Spain, Portugal and Ireland until the bank bailout did not have very high levels of public debt. Italy did and had no problem until the voluntarily haircut on Greek debt was announced.
Corporations were always currency users. Corporate bond yields only reflect their default risk with the spread with the ECB interest rate. I don’t think the government debt problem will influence corporate yields much apart from what the prospects on the economy can be.
So Krugman is right, when he embraces MMT wisdom.
I have 10y Euro-data for 2001-11, This stuff is really hard to find.
https://stats.ecb.europa.eu/stats/download/irs/irs/irs.zip
Yes, Eurostat is a maze of investigatory splendor. All the info is there, you just have to really work to find what you’re looking for. You will think you’re clicking on the link to the data that you want, only to find that 30 clicks later you may or may not have arrived at the point that you initially set off to reach.
“t was only fairly recently that the crisis spread to governments that have relatively low debt-to-GDP ratios. So why should the crisis have developed in this fashion, if this is a story about currency areas and not government profligacy?”
Do you see any government debt crisis in the Norway, Sweden or the UK? No.
Because they are not in the Eurozone and have currency/central bank indepedence.
Some figures:
Nation Public Debt as a % of GDP
Japan 197.5%
Italy 118.4
Greece 116%
Germany 83.2%
France 82.4%
United Kingdom 79.9%
Netherlands 62.9%
Spain 61.0%
Norway 48.9%
Sweden 39.7%
http://en.wikipedia.org/wiki/List_of_sovereign_states_by_public_debt
If this isn’t about currency/central bank indepedence, then why isn’t Japan being hit by surging bond yields and a public debt crisis, as investors flee Japanese government bonds? By your argument above, Japan must be the most profligate government on earth.
Yet the yield on the benchmark 10-year bond Japanese government bond is 1%.
http://www.tradingeconomics.com/japan/government-bond-yield
http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=143.FM.M.JP.JPY.RT.BB.JP10YT_RR.YLDA
That same question “Do you see” could have been written about the countries in trouble today 5 years ago. Past is not prologue.
That question “Do you see” has a counterpart “Did you see” that could have been asked about the countries in trouble today. Ask about Japan and the UK 5 years from now, and the answer may be different.
If you have a situation where the inability to exercise independent monetary policy is an important obstacle to recovery, wouldn’t you expect the governments in a worse position to go before the governments in a better position?
Debt deflation dynamics are still going to be more burdensome for debts that start out more burdensome, right?
I don’t understand why you’re acting as if Krugman’s point implies that there’s not going to be this natural progression of crisis. The point, I think, is that if this didn’t happen in the economic conditions we have currently, perhaps Greece would have its own crisis due to its irresponsibility, but not one that would necessarily bring down other economies.
Perhaps a better thing for me to do is ask – why WOULDN’T the crisis have this progression, given Krugman’s view? What progression would you have expected it to have?
Right, Daniel: I don’t see how this is a challenge to Krugman at all.
Oh, and sorry for the awful writing in my first post: I was rushing to leave the cafe, as my ride had come.
If you have a situation where the inability to exercise independent monetary policy is an important obstacle to recovery
That can never happen, because that presumes that legitimate recovery can even be founded upon central bank inflation, rather than free market money production and whatever results from that on the “real” side of the economy.
He might have expected 10yr Bund yields not to be within 20bp of 50+ yr lows at this point in the progression.
He might have expected 10yr Bund yields not to trade under 10yr USTs during the crisis.