Thoughts on the Austrian business cycle theory

As announced in a blog post couple of weeks ago, I will be undertaking a series of posts on certain business cycle viewpoints and I will try to make my first blog post as concise as possible. As described in the previous post, this specific post will be my thoughts on the Austrian Business Cycle Theory, which will involve a short discussion on Hayek and Mises. Despite the particular lengths of which I could go about this particular theory, I will talk specifically about the basics of the Austrian Business Cycle with an objective point of view.

The Austrian business cycle theory, posited by Carl Menger, Ludwig Von Mises and Friedrich Hayek, has been analyzed and refuted many times. Almost all of the mainstream Neo-Classical and Keynesian economists have rejected all components of the Austrian business cycle theory, which Paul Krugman has previously started a particularly interesting edit war on Wikipedia about. Many prominent economists from several different perspectives, like Paul Krugman and others, believe that the Austrian business cycle theory is seriously flawed in all of its various components. While there are various enormous flaws in the details that the theory postulates, I believe it is wise to ruminate about at how the current policy of low interest rates that various central banks are pursuing is effecting the bigger macro-economic picture and to predict possible future crises by utilizing the Austrian business cycle theory.

To those who are not familiar with the Austrian business cycle theory, it was formulated by three prominent economists, Carl Menger, Ludwig Von Mises and Friedrich Hayek, as a possible explanation of how business cycle works. In the theory postulated by these two well-known gentlemen, it regards business cycles as the unfounded result of improper interests rates set up by central banks, which consequently results in a boom and a bust from this malinvestment of excessive business lending by banks. The theory favors an almost completely laissez-faire approach to the resolution of financial crises caused by what they see as a malinvestment of assets. The favored resolution to the crises could momentarily cause abrupt bank failures, but the resolution that the Austrians prefer is a proper liquidation of all debt and assets. This is a cause for consternation among mainstream economists and they see the Austrian business cycle theory as nonsensical, especially its recommendation for a completely laissez-faire economy. By looking at certain components of the Austrian business cycle theory such as interest rates, empirical research and successful predictions of downturns, we could not completely discount its role in the world of economics.

(For those that are interested in more extensive explanations of the Austrian business cycle theory, here are two links: One by Professor Roger Garrison of Auburn University and another by the Better Living Through Liberty blog. Here is a a more simplistic video explanation by Tyler Cowen, Professor at George Mason University.)

The Austrian business cycle has the most peculiar way of utilizing interest rates to explain the mechanisms of business cycles. This approach combines an unique approach of analyzing interest rates in how they interfere with certain market forces, especially since it predicts that most of the booms and busts created by the fractional banking system comes from tinkering with interest rates. The ABCT believes that by tinkering with certain interest rates, the central banks create the impetus for the crises with the setting of interest rates, usually one that is too low compared to the actual interest rate. The Austrians have mentioned that the last financial crisis was caused by the central bank's insistence on keeping the interest rates lower than what is particularly possible, which might be a feasible analysis of the situation.

Despite the numerous other factors that might discount the ABCT, the theory has proven accurate at utilizing the analysis of interest rates in determining the coming financial crisis. There are obvious pitfalls to the Austrian business cycle theory due to the sheer fact that the theory does not come up with an exact interest rate that is required to not cause a catastrophic recession that happened in 2007-2008. The Austrian business cycle also mentions that interest rates should be decided entirely by the market and it could potentially mitigate long recessions such as the one we just witnessed. There are obvious pitfalls in letting the markets decide the "natural" interest rates and permitting a natural market recovery without central bank intervention. Natural interest rates could potentially cause large fluctuations within the market and could also possibly price out certain people out of the market. (such as low income families, small businesses, etc.) Permitting a natural market recovery could have massive fluctuations in employment and could put a potential strain on the workforce, which could cause acute social problems in society. Despite all of these problems that the ABCT faces, I believe it is wise to look at both the ABCT's record in looking at interest rates and also correct predictions of future economic recessions.

Empirical research conducted by prominent mainstream economists have indicated that the Austrian business cycle theory is not entirely feasible. Let's just compare the opinions of the prominent economists versus the Austrian economists in terms of the conclusions of their empirical research. Let's start with a couple of economists who are rated as libertarian by the mainstream economic community:

Milton Friedman - The late Milton Friedman is considered by everyone as one of the top economists of the last 100 years, with many considering him to be the one of the top two libertarian economists of the last 100 years, along with the Austrian economist, Friedrich von Hayek. Friedman's brand of libertarian economics was not too different than Friedrich von Hayek's theories, but they maintained a lot of the Keynesian semblances that Friedman had been influenced by in his younger economist days, especially in the expansionary benefits of money-financed debt spending.

In Studies in the Quantity Theory of Money, the late Professor Friedman promoted the approach that the monetarists at the Chicago School of Economics had developed and rejected the approach that Hayek theorized in his works denouncing Keynes. From an interview excerpt with Professor Friedman, we can conjecture that Friedman felt that the ABCT was incompatible and has done "a lot of harm to the world". From the observations in his book and from the conversations with the late Professor Friedman, we can accurately conclude that Milton Friedman does not agree with the ABCT in its basic tenets of a completely laissez faire approach and the simplicity that it offers. Despite Milton Friedman's promotion of laissez-faire capitalism, he stops short of endorsing of it as intervention could have potentially saved the banking system during the first Great Depression. I might agree with Professor Friedman's conclusions in requiring some sort of intervention in times of crises, but it's interesting that someone who is one of the mainstream proponents of laissez-faire capitalism would be so overtly critical of market corrections in terms of theory and systemic banking failures.

Tyler Cowen - A more recent and less well-known mainstream economist that has been listed as libertarian by both economists and by the media is Tyler Cowen. Tyler Cowen is the Chair of economics at George Mason University in Fairfax, Virginia. Along with Professor Alex Tabarrok of George Mason University, both of them write in  a very popular blog called the Marginal Revolution, which happens to one of the quick links on the right hand side of my blog. In a blog post, he condemned the Austrian Business Cycle Theory and even gave a pretty interesting logical response to the basic tenets of the ABCT. I found the analogy particularly interesting and I have posted in his blog without the official sanction of Professor Cowen!:

"Let’s say that the government subsidized the price of bananas, you bought so many bananas, put them on your roof, and then the roof collapsed.  Is that government failure or market failure?  The price was distorted, but I still say this is mostly market failure.  No one made you put so many bananas on your roof."

I must say that this is a quite interesting observation of Mises and Hayek's business cycle theory and I must presume that I agree with most of statement, with the presumption that government is sometimes and not always the problem.

Many Austrian economists (including the original Austrian economists) have presented their particular economic theories in great detail about the great mysteries that have stumped economists from time to time about the booms and busts in the business cycles that nobody has ever managed fully figure out. We will give two separate examples where Austrian economists have published the empirical evidence that supports the final observations of those that adhere to the Austrian School of Economics.

The first example is an article entitled An Empirical Examination of Austrian Business Cycle Theory, published in the Quarterly Journal of Austrian Economics, written by Professor Robert F. Mulligan, goes through an thorough examination of the Austrian Business Cycle Theory by exploring the basic tenets of Hayek's capital theory, which has to deal with the unsustainable expansion of credit. This expansion of credit is characterized by quantitative easing (QE) and other monetary tools that are available to both policymakers in the US Federal Reserve and other similar central banks. He utilized interesting pieces of data to explore Professor Hayek's theories in how a distorted non-market price for interest rates, often lower than sustainable market-determined interest rates, will eventually create an unsustainable bubble in short-term economic outputs. There is an interesting graph in the article on the major differences between the Austrian and more mainstream (Monetarist and Keynesian approaches), which is located in the middle of the article that I will post in this blog post:

Here we can see the main differences listed between the approaches in monetary policy, but what has the evidence gathered in this article relevant for my particular thoughts on the Austrian Business Cycle Theory developed by Professor Hayek and Mises?

In the empirical data gathered from the Federal Reserve Bank of St. Louis, we see a potential hypothesis answered based on the author's particular biases in the model that he utilized. He concluded from his mathematical model, which was a simple statistical T-test, that the Austrian Business Cycle Theory did indeed exist. What is particular about the results is that it does not offer much hope of any policy or monetary prescriptions beyond the basic Austrian catch-phrases, which are both stated throughout the document and in its conclusion. We have arrived at an interesting
The second example of the Austrian Business Cycle Theory is an article entitled Empirical Evidence of the Austrian Business Cycle Theory, published in the Review of Austrian Economics, written by Professor James P. Keeler. In this particular article, Professor Keeler goes into similar lengths that the previous article fails to cover. I find his particular empirical evidence quite interesting and I'll point them out here:

1. This article goes into very much the basics of the Austrian Business Cycle Theory, which was also stipulated in the section on the previous article. The difference here is that Keeler provides more statistical evidence than Mulligan in how the data is presented. Keeler talked about how the theory contains such a strong adjustment of market to natural rates of interest and how this was implemented and how it offers an interesting perspective on monetary shocks.

2. Keeler strongly covers analysis of stationary measures of interest rates, with the result similar to that of the previous article. However, Keeler mentions Wicksell's notion of the "correct interest rate" that is often torn between market and the nature rates of interest. For those that are are interested in reading Knut Wicksell's "correct interest rate" theory, whom was also one of the economic giants of the late 19th and early 20th century, here is a brief introductory article on the Economist website that introduces the idea to those who are not familiar.

3. As with the previous article, Keeler shows a strong correlation between the empirical data and evidence that the Austrian Business Cycle Theory does indeed exist, which is quite interesting, because there are various ways to collate the data to suggest otherwise. What's fascinating is that the Austrian Business Cycle Theory will continue to be rejected mostly as a matter of its reliance on monetary inaction, rather than the aggressive monetary policy that people from diverse point of views such as Friedman and Stiglitz would recommend. Even though, an interesting development has surrounded Stiglitz's most recent view of the economic situation that we are facing as he has come out and very much validated what some Austrian economists have said for a long time! While curtailing the influence of supply-side economics might be beneficial if supply siders were really in mainstream these days, it's interesting to see how Dr. Stiglitz has similar views towards certain issues as his "ideological opposites".

Ludwig Von Mises in 1929 before Great Depression And the Great Recession

The last interesting part of the Austrian Business Cycle Theory is how two of the landmark Austrian economists, Ludwig Von Mises and Friedrich Hayek, predicted the coming of the economic crisis against some mainstream neoclassical economists who had simply missed predicting last two serious recessions (The Great Depression of 1929-1939 and the Great Recession of 2007-2008). Ludwig von Mises and Friedrich von Hayek had constituted the Austrian Business Cycle Theory with the influence and application of Carl Menger's ideas, which is stipulated in many of his works but most notably in his literary masterpiece, Principles of Economics. This seminal work had a huge influence on the intellectual thought of both of these gentlemen and prompted the start of the marginal revolution, which happens to be the name of a popular economics blog. Here is an article by Victor Aguilar on what the reactions of the prominent Austrian economists would have been to the Great Recession and to the Great Depression (This is because at that time, Mises and especially Hayek were extremely prominent in the economics community). In a quote from the article is that the Austrian economists had predicted the subsequent crash and the depression that followed. Despite the relative accuracy of their predictions, there is much to be desired from their responses. What good does it come when you have correctly predicted the Great Depression, but not offer any ways to counterbalance the negative effects of the boom and bust cycles. The idea of central banking is a nadir to the economic point of view of Austrian economists and Von Mises famously accused many of his classically-liberal minded colleagues at the famous classical liberal society, Mont Pelerin Society, as big government socialists. As listed by the interesting article, Aguilar talked about Austrians' disdain for the full utilization of mathematics, because they associated heavy usage of mathematics as perhaps another tantamount to socialism. While there is nothing wrong with ridiculing most tenets of socialism, it is ridiculous to consider those who don't come up with the same conclusions as Von Mises to be a heretical Keynesian or a "socialist" New Classical.

From the evidence presented here, we should take a look at the textbook definition of the Austrian Business Cycle Theory to analyze what exactly went wrong with the theory as it comes to the mainstream audience in economics. The web link to the definition posted online, but is located in the Business Cycles and Depressions encyclopedic guide that I have been browsing for my series on business cycles. (Of course this just scratches the surface on the related literature that I have been browsing concerning this particular subject and this particular blog post series on business cycles.) For those who are interested in exploring more about the Austrian Business Cycle Theory, there is a tremendous amount of literature out there that covers all kinds of perspectives, but I hope I had covered some of the introductory material in this particular article.

While there is much about the field of Austrian economics that are not particularly relevant due to the rigidity of many of its various policy prescriptions, but I believe it is worthwhile to take a look at the evidence presented by the various Austrian economists such as Hayek and Mises, especially when it pertains to the analysis that surrounds finding the correct interest rate. The presentation of the evidence that they have given to us has been great in predicting the part in interest rates where there is real change in the economy, whether conducted in a partial or a nominal way. As we look at particular ways and methods in studying the booms and busts of the business cycle, we should look at examples such as the Austrian business cycle theory, not because of the unestablished axioms of their origins, but as an addition to the base of knowledge that we have accumulated concerning the study of the nature of the business cycle. As we try to find the perfect linear model to this particular dissimilar equation of solving the mysterious nature of how the markets work, we need to return to the question of linearity within the spectrum of economic models. There are many mysteries to finding the right model in figuring out the various theoretical components of how a business cycle works and based on the record that Austrian economics have set, it should be hard to cross off this particular heterodox approach as completely wrong. As shown by Eugene Fama's much scrutinized efficient-market hypothesis to Ben Bernanke's profound confidence in the financial markets before the Great Recession has shown that various mainstream approaches could sometimes be on the wrong footing with reality as well. From the evidence that we have here and despite the obvious flaws of the theory itself that I had abundantly pointed out here, it would be wrong to completely write off the Austrian business cycle theory.

(For those that did not see the newest update on my particular blog, I will now be writing a blog post on Fischer Black's book, Business Cycles and Equilibrium. This particular book has brought a lot of attention to me based on both his views in this book, but also of his legendary status in the academic discipline of monetary economics and of business cycles. In my next two sequential posts, I will talk about the Real Business Cycle Theory, which is quite popular among those adhering to new classical macroeconomics. They are also blamed by many adherents to the other varying competing schools, for various different and contradictory reasons, for failing to have anticipated the Great Recession of 2008-2009.

Thoughts on "Firm Leverage and Unemployment During the Great Recession"

There has been several articles, papers and books I have been reading during the last week. The one I will write about today is an article written by Xavier Giroud and Holger Mueller entitled Firm Leverage and Unemployment During the Great Recession. (For those interested in reading the paper, I cannot seem to find the PDF link online, but you can perhaps contact the two professors for a copy of the paper.) Both are professors of Finance and affiliated with the NBER (National Bureau of Economic Research) and the CEPR (Center For Economic Policy Research) , one at the MIT Sloan School of Management and the other at the NYU Leonard N. Stern School of Business. The paper is interesting in that it listed an interesting conclusion in that there is a strong correlation between high-leverage firms and job losses in response to the household demand shocks during the Great Recession. This is an interesting observation that both professors were able to make, but with any article there are significant gaps in which the data was compiled. Due to certain lack of data, I think there needs to be significant improvements to potentially the next paper that they can gather. 

The 3 potential improvements that the two esteemed gentlemen can make are as follows:

1. Utilize more wage/labor data that is available, which could perhaps include statistics by the Bureau of Labor Statistics. This could be utilized perhaps in determining relevant wage levels of certain households within the two sets of data between the change in both high-leverage (ΔLev 02-06 > Median) and low-leverage (ΔLev 02-06 < Median) firms between the years 2002 and 2006. By utilizing wage and labor data, you can also factor the significance that the drop in employment that are caused by both high-leverage and low-leverage firms especially in the realm of (ΔLog Emp) 07-09, which could possibly confirm the conclusions, especially under the Alternative Hypothesis: Growth, Productivity, Wages (Tables 8, 9, 10) sections of the data tables that the paper had presented. With this wage and labor data, there could be potentially another set of information the user could interpret about the changes that are caused between the two time intervals of which the data is measuring.

2. Another striking improvement that I could potentially see is a change in the dependent variables on the regression model that the two professors have used to compute their data. One possible way is to shift the focus towards labor/wages versus unemployment. With this new information, they could generate another new set of information, which could possibly further validate their results that are written under Firm Leverage and Unemployment (Table 2), Instrumental Variable IV Estimation (Table 3) and Industry Sectors (Table 4). With the change in certain dependent variables, they could see a change in the data results in Establishment Closures (Table 5), in Firm-Level Analysis (Table 6), Within-Firm Spillovers (Table 7), Alternative Hypothesis: Growth (Table 8), Alternative Hypothesis: Productivity (Table 9), Alternative Hypothesis: Wages (Table 10) and in the County-Level Analysis (Table 11). The main piece of data that could be changed is how they measured the two corresponding variables: (ΔLog (Emp) 07-09) and (ΔLog (HP) 06-09). By introducing a dependent variable into the design, they can add another dimension in their measurements in order to incorporate better analysis at the end of the day.

3. The last improvement that they could incorporate is by organizing the time and the date each locale  had a significant drop in a better way that represents the drop in employment versus the drop in housing better. Perhaps by compiling a couple of new data tables with different time ranges than just the standard ranges that the data used (02-06, 07-09), we can perhaps see where the most striking changes are and what pertinent macroeconomic results are corresponded in the findings. 

Overall, the paper is a fantastic read for those who are just getting into reading published papers on financial economics, but also an interesting find in that unemployment is correlated heavily to firms that tightened their debt capacity in the run-up in response to household demand shocks than to certain firms that freed their debt capacity. Maybe the authors weren't exactly correct in their predictions and percolations on potential ramifications to macroeconomic theory, but they found an interesting correlation in the data from their current research.

Greek Finance Minister, Game Theory and the Big Showdown

In an earlier and rather detailed blog post, I had talked about the Greek debt situation and the stories that surround it. I have decided to post another blog entry primarily about the game theory and the Greek financial minister, Yanis Varoufakis, especially due to his showdown with Germany and the developing crisis in the European Union. The news has just hit today that Germany has rejected the Greek proposal to extend the bailout program by an additional 6 months. The Syriza government had been under enormous pressure by both the European monetary authorities and the officials of various European financial ministries to continue the bailout program despite rejecting the program itself. This article will try to explain the background of the Greek Finance Minister, Yanis Varoufakis, in more detail, but also will go deeper into how his research interest in economics, Game Theory, has also come into play during the midst of this big showdown between the new leftist Syriza government and the European monetary authorities.

The Greek Finance Minister, Yanis Varoufakis, has now become very well-known within the politics of the continent due to his showdown with the European monetary authorities and his penchant for his plain dress combined with a defiant attitude towards what the Troika had committed to his native country of Greece, but also within the economic world with his unorthodox economic views. In two articles, one commentary article written by him in the Guardian newspaper several years back and another article on the left-liberal activist site, CounterPunch, it illustrates a man who is determined not to just change the policies of austerity and liberal capitalism in Greece, but throughout the entire European Union. In the first article, we can picture a man who was trained within the confines of mainstream economics, but had defined himself in 2012 as a Marxist. He did not describe himself as the prototypical Marxist, but one that is committed to changing the economic dimensions within Europe. In the article, he described the economics within the continent as one that is committed to the form of neoliberal capitalism, but his progressive politics of the left will be rejuvenated from the doldrums to saving European capitalism. From this article, we can see a man who is dedicated to the leftist ideology of changing Europe and the economics within the continent towards one that is certainly socialist both in policy and in application.

The second article describes Mr. Varoufakis' plans in detail about changing the dynamics of the European economic system into one that promotes growth and not austerity. The tone of the article also described how a previously unknown Greek economist had stared down the monetary bureaucrats of the European Union and sent some of them scared. It could be best said that Varoufakis had utilized some of his training as an economist, especially in the arts of game theory, to give what little the Greek government had previously into an enormous advantage over the people at the Eurogroup. For those, who are not familiar with Game theory, here's a short BBC article that explores the dimensions of the games (which include possible applications of zero-sum games and of the prisoner's dilemma) that Greece has been playing with the Troika, the Eurogroup and other European countries like Germany. He also has written an article in the New York Times on the big showdown with the European monetary authorities, which includes Germany and Angela Merkel. In the article, he lambasted how they "should not" be utilizing game theory with each other over the debt deal, but should be best focused on how to provide the average population a way out of desperate poverty and destitution. It does make a lot sense to anyone who has read his article, but Varoufakis has been utilizing all sorts of strategies that are based on game theory in dealing with the European monetary authorities! In an article by a popular Forbes contributor, Tim Worstall, there's absolute no room for game theory here! Regardless of whether most people have agreed with Greece's accession into the Eurozone or with the following policy decisions that the European monetary authorities have undertaken, Greece and the European Union are in trouble.

Exactly how much trouble are the European Union, Greece and the Eurozone in? A good question might be to ask about the other debt troubles that various European nations such as Spain, Italy, Portugal and even France have in the future. Germany is not even immortal with its enormous debt burden that it has also managed to start decreasing in the last couple of years, but another crisis could exacerbate the debt levels even in Germany which are already alarmingly high. I strongly disagree with a recent Economist article on how Greece could have made the Eurozone work better. Greece could not have made the Eurozone work better, as there are numerous other economies that are facing similar problems as Greece. I believe that with the Greek Finance Minister's dangerous moves may put the European Union and the Eurozone at its brink, but there is also ample room for finding a balance between the views of both Germany and Greece. By rejecting each other's counter-proposals, they are putting the world economy at risk with their latest proposals. Worried Greek depositors and international investors will now brace for the final showdown between Greece and the European monetary authorities. Let's hope we don't wake up to see an avoidable financial crisis.

The Greek Debt Situation, the Troika, Syriza and Few Thoughts

As eyes of the world has turned towards the recent developments in Greece, I can admit that this will be an interesting period of time for Greece and the other member states of the European Union. Following the election of Syriza in the latest election, the leader of the Syriza party, Alex Tsipras, has promised the Greeks an end to the crippling austerity that the Greeks have faced ever since the start of the European debt crisis in 2009. The party aims to boost economic growth through stimulating the depressed Greek economy through Keynesian policies that will the new Syriza government promises to generate economic growth and to promote "social solidarity". What has really shocked the markets lately is Syriza's promise to stop negotiating with the Troika that consists the IMF, the European Central Bank and the European Union. The government has promised to return to the government-heavy policies of the past and to negotiate a write-off in Greek government debt. The decisive action in the economic and the political policies of the Marxists and the Keynesians that make up the intellectual leadership for the now ruling Syriza government has ran into a lot of controversy with the mainstream economic institutions that has been bailing out the Greek government and the Greek economy. In this particular blog post, I can hopefully explain the Greek situation in more details, but also impart my opinion on the state of this interesting situation that has been developing in Greece and the European Union.

Debt Situation Background and the Economic Crisis
The debt crisis in Greece had started even before the 2007-2008 Global Financial Crisis with the entrance of Greece into the Eurozone and the overspending that occurred during the Olympics was blamed for the current debt crisis that had its seeds all the way back in 2004. While the Olympic Games was one of the many financial debacles that the Greek government has had in the last two decades, I would say it compares nowhere to the other pressing problems that led up to their debt implosion that occurred after the Global Financial Crisis.

A combination of a corrupt government bureaucracy that struck shady back room deals, a culture of endemic tax evasion and a burdensome public sector led to one of the most serious debt crises that any country has faced. It has been said that the corruption of Greek officialdom led Greece into the Eurozone by utilizing the services of Goldman Sachs to make their debt situation comfortable enough for the not as corrupt European bureaucrats to let Greece into the European Union. The mistake of letting one of the most corrupt nations in Europe to enter the Eurozone was compounded by the fact that much of this debt could have avoided if Greece undertook an immense political restructuring program that changed the way politics in Greece had been operating. From the bribes that the officials had extracted from the Greek taxpayers in order to bribe corrupt European Union officials to the bribes that Greek political parties had handed out in public sector jobs led to one of the worst possible economic environments in all of Europe. The public also engaged in one of the most institutionalized tax evasion schemes in the world. Here are two articles that explain the tax evasion problem that had plagued Greece: One published by the Economist and another by the New Yorker. The Greeks had also simply been living way beyond their means for a long time with the government deficit financed growth and when the financial crisis had hit the country, the entire corrupt Greek political and economic system fell apart.

The US economic crisis caused a huge breakdown in the global debt pyramid that had partially relied on the US mortgage-backed securities for further growth. With the entire debt pyramid collapse, there it unleashed an onslaught of bad debt and bad loans. It triggered a tidal wave of debt crises around in Europe and the worst basket case example in the Hellenic country of Greece. Countries like Greece that had largely been living beyond their means through cheap interest rates that the Eurozone had brought. Through years of unnatural interest rates and a horribly mismanaged national economy, Greece paid the ultimate price for being in the same economic zone with countries like Germany. The Greeks had to be bailed out several times and here's an article from 2012 that described the situation in Greece 3 years ago.

The International Lenders and Greece
The 'Troika' of the International Monetary Fund, the European Union and the European Central Bank had to bailout certain failed European economies, but they also wanted these economies to restructure their economies based on the rules and the regulations of the IMF's "Washington Consensus". Here's an article by the English economist, Dr. John Williamson, which had coined that term as a way to disapprove of the policies that the IMF had implemented in many countries. In Greece, the Troika have demanded the exact same policies as John Williamson had lambasted in his article, especially when it comes to privatization of state industries. This leads to an interesting situation in Greece, where the bloated public sector has been connected to previous political election campaigns of both the major Greek parties as a way of institutionalizing corruption through vote purchasing. The anger of the crowds could be linked to these new policies which should have goals of liberating the Greek economy from the malaise of having an extremely unproductive and corrupt public sector. This has not really worked in Greece as it is very difficult to get rid of the old culture, plus the downward spiral of the Greek economy, which has been exacerbated by the cuts in benefits for ordinary citizens.

The crisis has caused tremendous hardship for many of the normal members of Greece with sharp increases in unemployment, cuts in state spending on welfare and on healthcare, reduction in the state infrastructure and a massive program of privatization. This has not just led to a breakdown in the Greek economy, but also numerous other social problems. Over 25% of Greeks are unemployed, with youth unemployment at 50% of above and many talented Greeks are moving out of Greece to find a more high-paying and desirable job within the Eurozone and in countries such as the United States. There has also been a tremendous breakdown in the normal social order, with countless people living on the streets, rummaging through trash cans to find out and the official poverty rate has increased to 45% by some estimates. Here's an extremely glaring chart that I found on Zero Hedge categorizing the tremendous poverty that has been accelerated acutely by the austerity that has been imposed on the Greece by the Troika:

From this chart, we can talk about the very sharp and very acute increase in poverty that Greece has suffered ever since the start of the financial crisis. There has been reports of a huge resurgence of crime and lawlessness in Greece, which radical political groups such as the anarchists, the fascist Golden Dawn and some say, the current government, Syriza, have all seized the opportunity to increase their following. There have been countless numerous riots and incidents where there have been clashes between the different political elements in Greece. By browsing the internet and YouTube, you will be able to see these many incidents that has happened in a very unsettled and impoverished country. The radical leftists of the Syriza party have seized upon this crisis and by promoting an anti-austerity, pro-stimulus policy program, they have made the rest of the world look at that with a wary eye.

The Recent Election of Syriza and Current Situation
With the rather explosive situation in Greece, the radical leftists of the Syriza party was able to defeat the Troika's favored political party, the mainstream conservative party of the New Democracy. With this election of the Syriza, there has been a tremendous amount of both media coverage in what Alexis Tsipras and the radical Syriza might offer for the country. Here are two articles on Syriza: one that talks about the Syriza intellectuals that were educated in British universities and another on the roots of Alexis Tsipras. What's interesting from this particular situation is the clash between the leftist ideologues within the Syriza party, such as the Finance Minister, and the European finance and banking bureaucrats. Ever since the situation, Syriza has overturned many of the Troika's economic policies, such as the reduction of public sector workforce, the privatization of key publicly held companies and most importantly, they want to overturn the Troika's loan and debt policies. Alexis Tsipras has declared the end of the crippling austerity that the reforms have caused in Greece, but will face a tough battle and an intense clash with the authorities that have been dictating the terms of the Greek economy for the last 5-6 years.

Within the election of Syriza, financial markets at first reacted negatively to the possibility that Syriza would do great harm to the reform process that the Troika had implemented on the Greek economy, but now it has emerged that the European Central Bank will most likely dictate the terms to the Greek government. The Greek government had hoped to renegotiate the terms of the bailout package and the other economic terms that the Troika had implemented on Greece, but it looks like Alexis Tsipras and the Syriza have not completely backtracked from their strong anti-austerity rhetoric. Despite the fact that the European monetary authorities have a strong stranglehold on the Greek government's ability to operate as they had originally promised, they have found little common ground between them and the monetary authorities of countries like Germany. According to a recent article, Greece has been isolated in a previous meeting of finance ministers just before the Eurogroup meeting that will take place on Feb. 11th, which will be an important meeting in which the new Greek authorities will put forth a proposal that they want to be implemented in order to save their country from actually going bankrupt. With this meeting, Alexis Tsipras has just set up a clash with these ministers after laying out concrete plans to end the reforms that the Troika had implemented, especially the crippling austerity that has trapped millions of Greeks into long-term poverty. It will be a very interesting next couple of months for those who will be following how this interferes with the financial markets.

Possible Results and Possible Macroeconomic Effects
I believe that a Greek default and a Grexit of the euro are both entirely impossible. A more realistic solution to this confrontation is a negotiated write-offs of small amounts of Greek debt, while still not solving the problems in the structure of the economic institutions within Greece. Greece will still be continued to be saddled with massive public debt, institutional corruption and an extremely inefficient public sector. To improve the situation in Greece, there must be a change in how Greece functions as a democratic country. There needs to be more transparency in how the bureaucracy is managed, as debts could be potentially saved without resorting to drastic privatization or the massive public sector layoffs. I still don't believe that the institutional corruption or the entrenched political interests within Greece could be fixed overnight, since the new Syriza government wants a return to the statist government that promotes 'social justice' versus an economic model that promotes business growth. I believe that they will be able to get some debt concessions, but it does not address the long-term debt issues that Greece will have to face. The new Syriza government and the European monetary authorities will most likely end up kicking the can down the road.

There are many possible solutions and results that could come from this particular and interesting situation that Greece is facing, not just against its creditors, the Troika and the financial markets, but also against the underlying principles of liberal economics that has been prevalent throughout the world since the 1980s. There has been a resurgence of a previous dominant Keynesian thought in economic thought that has expanded beyond the confines of the New Keynesians and the followers of Paul Samuelson's neoclassical synthesis. I believe the election of Syriza in Greece will continue to trigger the resurgence of left Keynesian economic thought throughout the world, but also other left wing alternatives that might spurn the IMF's Washington Consensus and the general Monetarist and New Keynesian approaches to economic policy. I also believe we could potentially see the development of new economic models to explain the problems that countries such as Greece went through. Maybe there are possible solutions that could be utilized without the pitched ideological battles that has raged within the European community and beyond. I think there are a tremendous sets of new data that could be extrapolated from this particular situation and that data could be analyzed from the resulting resolution to the Greek crisis.

World Addicted to Debt (McKinsey Report)

I was rummaging through my usual several articles to begin the day and I came across a particularly interesting article in the Economist that talked about a McKinsey report on the debt binge that the world has undertaken in the past and in the recent years. Unfortunately, the trend has accelerated at a trajectory that has been quite frightening to those have followed this. Personally, I have followed this ever since I started following the financial markets and the finances of certain countries such as the United States and China. Both countries have had significant problems with the debt, especially when it came to bad debt that had accumulated from the wrongful policy decisions that led to further market turmoil. The most troubling aspect of this debt addiction is the amount of advanced economies that have extreme turmoil in the last decade or so, with some countries more addicted to debt that ever. What's interesting about the article is that some countries have debts that are at extremely dangerous levels, which are at or above 300% of GDP. In this blog post, I will focus on two other situations about debt, but isolated to two of the largest economies in the world in the United States and in China.

In a connected Guardian article about debt, global debt has grown tremendously ever since the financial crisis especially in China. What's interesting about the fact of this tremendous growth in debt is that China has been one, if not the main driver of global economic growth ever since the financial crisis. The chart in the Guardian article gives us several amazing representations of how China's debt has grown since 2000, with the country's total debt quadrupling in the space of 7 years between 2007 and 2014 alone. China's total debt to GDP ratio has reached the levels witnessed in the advanced industrialized economies of the United States, Japan and Western Europe. This curious rise in debt has been especially troubling as the Chinese economy has become an important cornerstone in the world economy.

According to the data gathered by the McKinsey Global Institute, most countries have been leveraging their debt, while the growth rates for many of these countries have not matched the outstanding growth that a country like China has witnessed in the last 35 years. From the new data on debt that McKinsey has out, we can surmise that there is a significant amount of countries that have racked up enormous debts, such as China, but many of these countries cannot utilize these particular instruments to boost growth to Chinese levels via either government stimulated or central bank stimulated growth. What we're seeing here is that with the economic engine of growth that China has been for the world economy in the last 35 years is stalling at the present moment, due to the style of economic growth that China has been pursuing. For this long and sustained period of time, the export engine that is China has been working overtime to ensure that the world economy, which was led by the advanced economies of the United States, Japan and Western Europe, has been running smoothly. With this new piece of information about the Chinese manufacturing Purchasing Manager's Index (PMI) and the continued industrial slowdown that has dented world confidence in China's growth potentials, we are right to be worried about the future growth trajectories of the Chinese economy and the world economy.

Like China and various other economies, the debt in the United States has reached similar troubling levels as total debt has reached close to the 300% threshold, with the debt to GDP ratio at around 269%. While this number is reputed as tremendously higher than perhaps a more ideal debt to GDP ratio, the growth in the debt in the United States is slowing compared to various countries like China, where debt has grown more rapidly. This signals an improvement over the debt battles that have raged within the country's intellectual realms, but there needs to be work done on this to combat the unsustainable growth in the country's government debt.

From the McKinsey report, we can easily picture that the sustainable growth in debt is an extremely worrying trend for the world as a whole, especially in countries like in China, where the growth in debt risks putting the world's largest economy by PPP terms in grave danger. I believe that reports like this particular McKinsey report reveal a world that is needing a new path towards a new economic consensus on growth that is not entirely based on debt and on deficit financing.

Interesting article on the Chinese money supply and first day of the annual Davos World Economic Forum

I was just scrolling through the several blogs that I read every single day, which include the Marginal Revolution. I have found a very interesting article on the Chinese money supply that Tyler Cowen had posted as a blog earlier in the wee mornings on the first day of the annual World Economic Forum in Davos. The article was quite striking for two reasons:

1. The first reason was the point about the Chinese M2 money supply being 70% higher than the "rather tight" US money supply despite the much "smaller" size of the real Chinese economy versus the US economy. This is particularly interesting as it just shows how the much maligned Federal Reserve is actually more fiscally tight and conservative than their much more activist Chinese Central Bank counterparts. From what I gather, this might also be a false indicator of what the actual GDP growth in China is.

2. This is where my second reason for writing this thought bubble that I had about reading this particular blog that Tyler had written. From the Financial Times article that Tyler had posted in this blog entry, written by Derek Scissors from the American Enterprise Institute, we can conjecture that the Chinese economy will face an extremely rocky road in the coming years. It's a pretty cool article to check out, especially with his particularly interesting views. The Chinese economy might be in trouble in the short term, but I think it might still go pretty smoothly in the longer term.

It is also the first day of the annual Davos World Economic Forum! For those who are not familiar: The Davos meeting is the annual gathering of some of the world's most powerful economic elites, where they gather to discuss some of the pressing challenges that our world faces. It has been around for 40 something years and here are two articles that are worth reading about the contents of the meeting.
2012 New Yorker article 
2015 The Guardian Opinion article

Interesting topics that these powerful people will discuss over the course of the meeting include increasing political instability, global income inequality, climate change, oil and their most pressing topic: financial instability! As many of us know about the rocky world economy and they will be discussing the financial instability that the world is currently/going to face in the coming years. The videos on the earlier World Economic Forum link that I had posted will hopefully interest those that might be interested in the World Economic Forum!

It's been a while since I've posted a blog entry, mainly because of other more urgent tasks that I had to handle this week. I will be posting lots of entries the next couple of days, as it is the exciting week of the World Economic Forum! I will be watching/following the events that unfold in the lovely Swiss resort city of Davos, Switzerland, but also I will be posting another blog post on thoughts about a rather marginal economic theory that I think has some relevance in the current economic turmoil.