Behold: one of the largest Ponzi schemes of all times

[Vandroiy]

Welcome to the EU government bonds market.

Bankrupt countries pay back bonds by printing new bonds. Last buyers: bag holders.

I really wouldn't want to play the game they're currently starting. EUR inflation is at its limit before a feedback may hit all bond interest rates, however, Italy and Spain are at the limit of destabilizing their rates because their finances are too bad. Now the ECB tries to buy just the right amount with newly printed money to walk the edge. But with each further mistake or inefficiency of the participating governments, the path grows narrower. And these "inefficiencies" might even be of short-time advantage for the governments in question, possibly causing a Tragedy of the Commons in which the debt increases further.

An attempt to solve the problem with printing money. No, I really wouldn't want to play it like that. These people are either too good at this for me to understand their plan, or they're just not giving a shit anymore. My guess is the latter, politicians never gave a shit before.

Let's see who the bag holders will be. According to interest rates, the market does not consider banks any safer and has already switched from making profit to limiting losses. Some big deals have negative yields even before inflation is factored in.

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[SgtSpike]

And here I thought this was going to be yet another thread about Bitcoins...

Yeah, the EU is screwing things up.  Though, the screwups really started many years ago, it's just that the consequences weren't realized until now.

[kloinko1n]

And here I thought this was going to be yet another thread about Bitcoins...

Yeah, the EU is screwing things up.  Though, the screwups really started many years ago, it's just that the consequences weren't realized until now.

I think they were realised, only wat they also realised, was the truth in "après nous le déluge".

[johnyj]

An attempt to solve the problem with printing money.

Even there is no problem, money still needs to be printed more and more every year, and printing more money does not necessary cause inflation, as long as printed money have somewhere to go (in this case paying the debt), and the productivity of goods and services can catch up

Actually this will encourage the loan activities, since the borrower will always be backed by printed money in a worst case scenario

[Vandroiy]

Even there is no problem, money still needs to be printed more and more every year, and printing more money does not necessary cause inflation, as long as printed money have somewhere to go (in this case paying the debt), and the productivity of goods and services can catch up

Actually this will encourage the loan activities, since the borrower will always be backed by printed money in a worst case scenario

Am I the only one who thinks this is completely insane?

You can't fix the speculators at negative interest rates after inflation, and if you don't, they will end up with more money, causing inflation, bang feedback to the interest, game over.

You have to trust the governments to not play a Tragedy of the Commons in which they compete to borrow just at the limit and spend, inflation, double feedback to the banks, kills you in just a few years. But simply deleting the debt gets you a burst of bankruptcy filings together with the financial equivalent of an MW 9 earthquake due to illiquid markets.

How the hell is this supposed to work? Who should pay the bill of the debt that is never intended to be paid back? I don't have the feeling that someone thought this through to the end.

One simple question is: once locked in debt feedbacks, can you ever reduce inflation again without the governments dying instantly?

[Rassah]

So, any speculation as to how long until I can buy a small Italian villa near the beach for very cheap? I'm hoping for something in Nettuno...

[Wekkel]

An attempt to solve the problem with printing money.

Even there is no problem, [...]

Ending [Krugman] here. First start with your definition of 'inflation'. In my perspective, that would be the increase of the money supply (in the broad sense).

[M4v3R]

I live in EU and from my perspective, most of things you have said are correct. Add to it that "wealthier" countries are helping paying depts for "poorer" countries, which don't give a damn about this help and continue to increase their depts.
Sweet place to live, eh?

[Prze_koles]

Ending [Krugman] here. First start with your definition of 'inflation'. In my perspective, that would be the increase of the money supply (in the broad sense).

And how would you measure it?

[Boussac]

They can go on printing euros (actually letting banks create money out of thin air) until the end of times for all I care as long as they let the productive economy use another currency (like bitcoin).

The thing is since the euro and the dollar are in a simultaneous free fall, everybody can pretend nothing is happening: its only showing in the cost of living, affecting the poor much harder than the rich who has disposable income.

[Wekkel]

Ending [Krugman] here. First start with your definition of 'inflation'. In my perspective, that would be the increase of the money supply (in the broad sense).

And how would you measure it?

I guess I am condemned to believe the official data from Central Banks.

[Prze_koles]

Ending [Krugman] here. First start with your definition of 'inflation'. In my perspective, that would be the increase of the money supply (in the broad sense).

And how would you measure it?

I guess I am condemned to believe the official data from Central Banks.

Yes, but they're not providing data about inflation by your definition. They're just measuring price changes of various goods. I was asking, how would you measure increase of the money supply.

[paraipan]

Ending [Krugman] here. First start with your definition of 'inflation'. In my perspective, that would be the increase of the money supply (in the broad sense).

And how would you measure it?

I guess I am condemned to believe the official data from Central Banks.

Yes, but they're not providing data about inflation by your definition. They're just measuring price changes of various goods. I was asking, how would you measure increase of the money supply.

exactly as you say, measuring various price changes in goods. Imagine you have measure the water level in a huge lake then you would take measures on various scales previously set-up. Hope this explanation helps

[Matthew N. Wright]

Aww....thread topic fail.

[cryptoxchange]

http://www.businessweek.com/news/2012-01-10/germany-to-enter-recession-on-eu-debt-crisis-deutsche-bank-says.html

[Vandroiy]

They can go on printing euros (actually letting banks create money out of thin air) until the end of times for all I care as long as they let the productive economy use another currency (like bitcoin).

The thing is since the euro and the dollar are in a simultaneous free fall, everybody can pretend nothing is happening: its only showing in the cost of living, affecting the poor much harder than the rich who has disposable income.

I'd be very careful about that statement. The governments and all their patched-up markets are inside the loop between the ECB and lending. I wouldn't claim to know what happens if the ground starts shaking there.

Aww....thread topic fail.

Why? It's central (ECB, EU, government controlled) and it involves a bag-holder game about the bonds. At some point, they massively lose value, and whoever holds them then pays the bill.

It is exactly a Ponzi scheme. Sorry if you thought I was talking about Bitcoin.

[Wekkel]

Ending [Krugman] here. First start with your definition of 'inflation'. In my perspective, that would be the increase of the money supply (in the broad sense).

And how would you measure it?

I guess I am condemned to believe the official data from Central Banks.

Yes, but they're not providing data about inflation by your definition. They're just measuring price changes of various goods. I was asking, how would you measure increase of the money supply.

The ECB publishes various data on money supply (such as M3).

[johnyj]

Even there is no problem, money still needs to be printed more and more every year, and printing more money does not necessary cause inflation, as long as printed money have somewhere to go (in this case paying the debt), and the productivity of goods and services can catch up

Actually this will encourage the loan activities, since the borrower will always be backed by printed money in a worst case scenario

Am I the only one who thinks this is completely insane?

You can't fix the speculators at negative interest rates after inflation, and if you don't, they will end up with more money, causing inflation, bang feedback to the interest, game over.

You have to trust the governments to not play a Tragedy of the Commons in which they compete to borrow just at the limit and spend, inflation, double feedback to the banks, kills you in just a few years. But simply deleting the debt gets you a burst of bankruptcy filings together with the financial equivalent of an MW 9 earthquake due to illiquid markets.

How the hell is this supposed to work? Who should pay the bill of the debt that is never intended to be paid back? I don't have the feeling that someone thought this through to the end.

One simple question is: once locked in debt feedbacks, can you ever reduce inflation again without the governments dying instantly?

Too extreme, most of the time it's in the middle.

The concept of debt is vague, depends on peoples relationship, the debt can be write off. I just send 1000 dollar to my father to celebrate his birthday, does he owe me that sum of money? I have seen many private debts end up with nothing, either paid back in a discounted form, or not at all. At government level I think it is more or less the same

Printing money to pay back the debt is a very good test of how much money actually there is available. If there is really a liquidity problem, then newly injected money will not cause inflation. Otherwise, if injected money caused high inflation, then there are plenty of money in circulation, these money will be able to refinance those debts easily

[Vandroiy]

Too extreme, most of the time it's in the middle.

The concept of debt is vague, depends on peoples relationship, the debt can be write off. I just send 1000 dollar to my father to celebrate his birthday, does he owe me that sum of money? I have seen many private debts end up with nothing, either paid back in a discounted form, or not at all. At government level I think it is more or less the same

Printing money to pay back the debt is a very good test of how much money actually there is available. If there is really a liquidity problem, then newly injected money will not cause inflation. Otherwise, if injected money caused high inflation, then there are plenty of money in circulation, these money will be able to refinance those debts easily

Why should money refinance debt just because it is in circulation?

How do you prevent an explosion of interest rate on government debt that would cancel out its benefits after a write-off? Or is the intention to delete all and have all the banks die?

Sorry, but this doesn't refute any of my points.

[johnyj]

Why should money refinance debt just because it is in circulation?

How do you prevent an explosion of interest rate on government debt that would cancel out its benefits after a write-off? Or is the intention to delete all and have all the banks die?

Sorry, but this doesn't refute any of my points.

If you get 5% return by refinance someone's debt, it is better than sitting there and collect 0 interest

In reality, governments can never write the debt off, they just refinance, and this refinance could go as long as several centuries... Have you heard the FED reinvesting short term loan income and principals into long term loans? For those who can borrow without debt limit, the only cost is interest, and that interest could be 0 (Germany bonds already reached negative interest)

[Vandroiy]

If you get 5% return by refinance someone's debt, it is better than sitting there and collect 0 interest

In reality, governments can never write the debt off, they just refinance, and this refinance could go as long as several centuries... Have you heard the FED reinvesting short term loan income and principals into long term loans? For those who can borrow without debt limit, the only cost is interest, and that interest could be 0 (Germany bonds already reached negative interest)

Digging this up because nobody else answered. Again, I don't think the problems I named were addressed.

Someone has paid that money, and it entered the system afterward. These people will make losses if the debt vanishes, and therefore massively raise interest rates. If this is paid with new money, the funds that were initially distributed cause inflation, as they are left on the market as extra money after the whole operation.

Can you draw a graph of how the money flow, including the initial lending, is supposed to look like? I claim this is not possible, or will show that the position at the end includes an unsolved problem.

[Hawker]

If you get 5% return by refinance someone's debt, it is better than sitting there and collect 0 interest

In reality, governments can never write the debt off, they just refinance, and this refinance could go as long as several centuries... Have you heard the FED reinvesting short term loan income and principals into long term loans? For those who can borrow without debt limit, the only cost is interest, and that interest could be 0 (Germany bonds already reached negative interest)

Digging this up because nobody else answered. Again, I don't think the problems I named were addressed.

Someone has paid that money, and it entered the system afterward. These people will make losses if the debt vanishes, and therefore massively raise interest rates. If this is paid with new money, the funds that were initially distributed cause inflation, as they are left on the market as extra money after the whole operation.

Can you draw a graph of how the money flow, including the initial lending, is supposed to look like? I claim this is not possible, or will show that the position at the end includes an unsolved problem.

People are going to make losses anyway.  The whole reason for buying government bonds is that you have absolutely nowhere else to invest your money.  So you buy UK debt at a loss of 2% of your capital per year...thats preferable to losing more than 2% per year on the stock exchanges.

One particular group will take extraordinary losses.  Hedge funds that have bought heavily into Greek bonds at over 7% on the assumption that the Greeks would never be allowed to walk away from the bonds.  Now the Greeks are walking away from 70% of the face value and the hedge funds will take a loss.  Does anyone really care?

[johnyj]

Digging this up because nobody else answered. Again, I don't think the problems I named were addressed

Someone has paid that money, and it entered the system afterward. These people will make losses if the debt vanishes, and therefore massively raise interest rates. If this is paid with new money, the funds that were initially distributed cause inflation, as they are left on the market as extra money after the whole operation

Can you draw a graph of how the money flow, including the initial lending, is supposed to look like? I claim this is not possible, or will show that the position at the end includes an unsolved problem

Money flow can be simplified like this: I borrow 1 million from bank, buy 1million worth of services from you; you borrow 1 million, buy 1 million worth of services from me, and we both return our 1 million sale at the end of the cycle to write off our debt

However, if we have to return more than 1 million (banks want interest), and even have some earning for ourselves, then there must be new loans enter the system to let us make more money than we initially borrowed

The concept of profit from macro point of view: If money supply stay the same, then if some one make some profit, some one else must made a loss. If everyone is making some profit, then money supply must have increased

There could be hot money in the market and they could not find a suitable investment target, but that does not necessarily cause inflation. FED's balance sheet has quadrupled since financial crisis and we barely see some sign of inflation

[Vandroiy]

johnyj: If a country is unable to pay, a lot of debt does not get paid back, and simultaneously, interest on private lending will rise because of generally elevated risk due to the caused instability.

If everybody pays back, it's all nice, but this is not the case with Greece. That said, the analogy doesn't hold.

[Hawker]

johnyj: If a country is unable to pay, a lot of debt does not get paid back, and simultaneously, interest on private lending will rise because of generally elevated risk due to the caused instability.

If everybody pays back, it's all nice, but this is not the case with Greece. That said, the analogy doesn't hold.

Private interest rates already have a Greek and Portuguese default "baked in" so there is no reason interest on private lending would rise if either country defaults. 

[johnyj]

johnyj: If a country is unable to pay, a lot of debt does not get paid back, and simultaneously, interest on private lending will rise because of generally elevated risk due to the caused instability.

If everybody pays back, it's all nice, but this is not the case with Greece. That said, the analogy doesn't hold.

At enterprise level, the risk model of interest works, but at sovereign level, it's different. A sovereign country can always produce a little extra money to pay back the interest of its debt, or refinancing, thus buying time to improve the economy situation

But Greece and other EU troubled countries are different, after they joined EMU, they have lost the ability to print their own money, thus totally dependent on ECB to produce money. But ECB might not have enough motivation to produce money due to pressures from other countries like German and France

All the children owe their parents a lot and their parents seldom want it paid back. So, debt not being paid back is a norm in everyday life, but the real problem is that not everyone have access to easy loans when they are in trouble

[runeks]

johnyj: If a country is unable to pay, a lot of debt does not get paid back, and simultaneously, interest on private lending will rise because of generally elevated risk due to the caused instability.

If everybody pays back, it's all nice, but this is not the case with Greece. That said, the analogy doesn't hold.

At enterprise level, the risk model of interest works, but at sovereign level, it's different. A sovereign country can always produce a little extra money to pay back the interest of its debt, or refinancing, thus buying time to improve the economy situation

But Greece and other EU troubled countries are different, after they joined EMU, they have lost the ability to print their own money, thus totally dependent on ECB to produce money. But ECB might not have enough motivation to produce money due to pressures from other countries like German and France

All the children owe their parents a lot and their parents seldom want it paid back. So, debt not being paid back is a norm in everyday life, but the real problem is that not everyone have access to easy loans when they are in trouble

Isn't the real problem that they borrowed more money than they could pay back in the first place? Perhaps because they erroneously assumed they would always be able to borrow money at a low interest rate.

[johnyj]

Isn't the real problem that they borrowed more money than they could pay back in the first place? Perhaps because they erroneously assumed they would always be able to borrow money at a low interest rate.

It's a good question, but the answer is complex at macro level. I have not worked out all the scenarios, anyway here is a simplified example:

In an island with only 2 people, A and B yearly production and consumption is 50 shells worth of goods and services. And one day, they both get approved a one year loan of 100 shells (0 interest), then natually A and B would worry about if they could spend and repay those loans in one year, because that loan is 2 times bigger than their annual sale

But soon, they both find out the other guy now have many shells to spend, then they will produce new type of products and services to earn other's shells, those new products/services will come at a higher price than they previously did. At the end of the year, they both earned 100 shells extra and returned them to the bank. During this year, their production and consumption both increased a lot

Of course this is a simplified case, in the real world, they are most likely to spend less than they borrowed, but the important thing is: if only A get loan, B get nothing, then A won't be able to make any money at all since B do not have extra money to spend

[Hawker]

The Greek problem is more like an island with several people where one needs to borrow 10 shells.  He borrows all 10 off one other person, then another and keeps going until he runs out of people to borrow from.

Since he has such a good living from borrowing, he doesn't notice that he is over paying fro everything and eventually runs out of cash.

Then all the other islanders discover the truth and not only is the borrower broke, he is distrusted and being penalised as well.

http://www.nytimes.com/2012/02/11/business/global/greece-is-in-a-class-by-itself.html?ref=europe

Basically Greece is being treated as a fraud rather than as a sovereign country. 

[runeks]

In an island with only 2 people, A and B yearly production and consumption is 50 shells worth of goods and services. And one day, they both get approved a one year loan of 100 shells (0 interest), then natually A and B would worry about if they could spend and repay those loans in one year, because that loan is 2 times bigger than their annual sale

It's important to point out here, that if this scenario is to correctly reflect the current situation (where the central bank who gives out the loan "make up" the money), then the total shells in existance on this island before the loan would be 50. These 50 shells are traded back and forth between A and B.

Now someone comes in, who can produce shells easily, and loans both A and B 100 shells. From the perspective of A and B, it looks like they each got richer, but in fact, the money they now have has the exact same value as it did before. Only now, the total number of shells in this two-person island economy will be 250. Both A and B still consume and produce for 50 shells, and have 100 shells safely stowed away in a safe. Neither of them can use the 100 shells they borrowed to create additional growth, because the amount of actual resources remains unchanged.

So in fact, it's impossible to increase production on this two-man island by giving out loans; the amount of available resources have to increase in quantity in order to increase to production.
Now scale this up by a factor billion and you have the essence of our current economy. Only the obvious truth from the example above is obscured by the complex interactions of 2 billion people instead of 2 people. Yet the fundamental truth stays the same: productivity cannot increase by increasing the money supply and loaning it out to banks/businesses/individuals.

[johnyj]

Now someone comes in, who can produce shells easily, and loans both A and B 100 shells. From the perspective of A and B, it looks like they each got richer, but in fact, the money they now have has the exact same value as it did before. Only now, the total number of shells in this two-person island economy will be 250. Both A and B still consume and produce for 50 shells, and have 100 shells safely stowed away in a safe. Neither of them can use the 100 shells they borrowed to create additional growth, because the amount of actual resources remains unchanged.

It's amazing that you get the idea right away, now if you just tweak this simplified model a bit to be closer to reality:

Although the amount of resources are unchanged, but the technology advanced and A and B accumulated experience, their productivity increased by 10 shells a year, thus the money supply should also increase by 10 shells per year, otherwise their increased productivity will be blocked by fixed money supply. In such case, that 100 shells loan will provide them with enough liquidity: They borrow 100 shells, but maybe only spend 10 shells in new products/services

On an island with only 2 people, maybe it is very easy to feel the increased money supply and adjust the price for products immediately (inflation), but in a society with hundreds of millions of people, the increased money supply will be not felt directly

There is another possibility that both A and B might have already reached a wealthy status thus any extra money won't stimulate significant amount of increase in production and consumption, that is a common problem in developed countries

[bb113]

So even if these austerity measures are put in place and the bailout happens my understanding is that something like 80% of the budget will go to paying off debts to these banks that stupidly lent them money, so in effect this is another bank bailout. Perhaps it would be better for the people living there to let the government default. I have no idea how a Greece default would play out.

[johnyj]

Soros recently said, those European Banks want to slave Greece

It seems those countries in warmer climate tends to get a deficit and those countries in colder climate tends to get a surplus, due to the weather: Warmer weather tends to encourage outdoor activities and spending, colder weather tends to encourage working (in house)