Greek Finance Minister George Papaconstantinou said Greece had asked the plan to be activated, and still hoped to borrow on the markets rather than to seek a rescue. "The Greek government has not requested the activation of the mechanism, although this is already readily available , "Papaconstantinou said in Athens. "The goal is, and we believe we will continue to lend freely in the markets." Officials, speaking privately, told The Associated Press they will first see how the markets respond to mandag.Europa Commission President Jose Manuel Barroso said the pledge of cash for Greece showed the 16 euro-zone nations will defend Europe's common currency and help a partner in trouble. "It shows that the eurozone is serious in doing what is necessary to ensure financial stability," Barroso said in a statement. "I am convinced that it will help Greece to pursue energetically correct fiscal imbalances and to provide the necessary structural reforms." Rehn said that the loan agreement will be "the clarification that the markets waiting for. "These markets have so far ignored repeated EU claims for aid to Greece cause commercial lending rates for Athens to get to 7 percent and more in recent uger.På two summits – one in February and one in March – EU leaders made determined noises about their willingness to end the Greek gældskrise.Men conditions were tough, with Greece requires approval by all 15 other eurozone governments and only if it could not borrow any other way. German fear a bailout with soft loans will only annoy German public, already takes a dim view of Greece's financial husholdning.EU and IMF officials will meet Monday to work on details of the IMF and EU loans for 2011 and 2012, especially in amount and loan terms. Officials estimated that over a three year period Greece was offered a total of euro80 billion in economic aid from EU and IMF.Grækenland have been spending beyond its means for years, so it is with a 2009 budget deficit of 12.9 percent of economic output . Revelation of its statistical fudging has slammed the euro and the gutted market confidence, fueling higher låneomkostninger.Athen plans to cut its deficit to 8.7 percent this year and has launched a euro4.8 billion tight program cutting public salaries, freeze pensions and hiking skatter._Associated Press Writer Elena Becatoros in Athens contributed to this rapportFå HuffPost Business PåTwitter, Facebook and Google Buzz! Know something we do not? E-mail us at huffpostbiz@gmail.comWilliam White, former chief economist at Bank of International Settlements (BIS) gave an important speech at George Soros' speech Institute of New economic thinking (INET) conference in Cambridge. While everyone is casting about for the one magic bullet solution that would have prevented this and future crises, he laid the blame for the credit crisis in the short term, pointing fingers, especially at economists and their models. White said that the models, almost all economists use is 'flow' models that do not allow for storage "and therefore completely miss unsustainable secular trends. In essence, were White said: "This is the debt, stupid." When the total debt build entire business cycles, economists focused on the management of the business cycle miss a key ingredient that leads to a systemic crisis. It can be expected to politicians or private sector participants concerned about the day-to-day exhibit short-sightedness. But White says it is particularly worrying that economists and their models show the same trend, because it means that there is no long-term oriented systemic counterweight guiding the economy. This short-sighted that White refers to is what I call asset-based economic model. And frankly, it works – especially when interest rates are falling, as they have in the past quarter century. The problem is that you reach a critical condition where the accumulation of debt and misallocation of resources is so large that the same old politics just does not work anymore. And that is when the next crisis arises. Let me take you through my thoughts on this step by step. This is a pretty long speech because I want to cover a lot of topics. But they must fit together from the economic models of the likely outcome. The topics are: concentration of economic models of flow and the failure to model the external debt of the empirical evidence that foreign debt has increased over a wide scourge of the private sector dimensions of the doom loop of ever-lower interest rates, allowing foreign debt to increase after a secular decrease in interest rates has on an economy's ability to raise debt Loads evidence that monetary stimulus is no longer effective in allowing debt to increase the likely outcome of a balance sheet recession and a secular decline in the debt concentration of economic models to flow only from a post called "Why economists do not anticipate the financial crisis," I repeated White's feelings when revising a widely read piece by Paul Krugman, why economist's failure to anticipate the crisis: Paul Krugman is a Keynesian. So, his prescription is fiscal stimulus. The government has pumped money into the economy and it will relieve pressure on the private sector. There is some merit to this argument on the stimulus. Freshwater Many economists said monetary policy stimulus is what is needed. If the Fed increases the supply of money in the end the economy will react. This is what Ben Bernanke said in his famous 2002 speech at the National Helicopter Economists Club. Yet I could not help noticing that Krugman mentioned the word debt only twice in 6000 words. Indeed, the very passage to which Krugman uses the term for the only time in the entire article. And here Krugman refers to public debt, no mention of private sector debt at all. I have a problem with that …. This economic Ponzi scheme is what I have labeled the asset-based economy. As with all things Ponzi, it must be a spectacularly bad end. One can only Pump asset prices to pursue a debt-fueled consumption binge in the past. At a time. The Ponzi scheme collapses, and we are approaching that point. We still have zero rates, massive amounts of liquidity, the manipulation of short-term rates, the manipulation of long-term rates, and bailouts galore a full 15 months after Lehman Brothers collapsed. It is pure insanity. The reason economists do not anticipate the crisis because they were fixated on avoiding rebound and driving the economy to unsustainable growth rates by using debt to consume today what will be earned in the future. Debt is the central problem. When debt to income or debt to GDP doubles, triples and quadruples, it says you have doubled, tripled and quadrupled the amount of future earnings you eat in the current (see charts here and here). This necessarily means that you will have less to spend in the future. It is not rocket science. Private sector debt stock has been rising, the second argument of charts I referenced above (A brief look at the Asset-Based Economy on economic waves) gives you a visual of the massive leveraging of the U.S. economy, we have witnessed over the last generation . The charts show that debt has increased a secular basis across the entire private sector, despite numerous setbacks. Debt Level at the end of the second quarter of 2009 is 357% of GDP, a massive increase from the 160% that prevailed in 1982. The data clearly show that since 1982 the U.S. has relied on an increase in debt, even during the recession, to avoid setbacks … Debt Management This graph is pretty benign when you look at the aggregate level as a percentage of GDP. Pundits forecast an imminent increase in U.S. interest rates because of too much debt has obviously not seen in these data. But what is striking is the huge and unprecedented increase in debt as a percentage of GDP since the last recession hit. This difference in nominal GDP can not continue ad infinitum … Household debt … increase in debt levels in the household sector is rather surprising. In 1952 it began to 24% of GDP, rising to around 40% in 1960, where it remained through the Ford presidency. Afterwards shot up again to its current 97%, four times the level for half a century ago … Mortgages This pattern is roughly the same as its predecessor. Consumer Credit Debt Consumer Credit seems to be much more volatile than mortgages. You may see fluctuations in relation to nominal GDP is larger. And the absolute amounts are much smaller than in the mortgage market. The conclusion I draw from this is that the degree of household debt levels have risen unsustainably, the mortgage debt, which is to blame. Non-financial corporate debt is much more volatility in capital investments as reflected in non-financial business debt as well. Nevertheless, there has been a secular increase in debt level of the business sector, from 30% in 1952 to the current 78% … State and Local Government Debt Management Since the 1960s, state and local government debt is largely flat as a percentage of GDP … The Federal Government Debt This diagram looks very similar to the total public debt charts as the federal government debt dominates. What you should note is that the debt is lower now than they were in 1950 and has just passed the post-1950's high-water mark in 1993 by 49% … Financial Services Debt … Not only the financial sector debt rising from negligible percentages well above 100% of GDP, but the entire post-1982 period see zero drop compared to nominal GDP until the final quarter. What conclusions can we draw here? The financial sector is six times more important than in 1982 when its debt is measured as a percentage of GDP. The financial sector is protected, the U.S. economy since 1982 by increasing its debt to nominal GDP, even during recession. The financial sector received the second quarter relative to GDP for the first time since 1982. If this is a rear view, that means the recovery could continue. But if it is a canary in the coalmine, which is negative for the U.S. economy. This number bears see. External debt … The Doom Loop of ever-lower prices and greater influence is not only increases in relative debt loads. We talk about debt increases at a rate completely disproportionate to the underlying rate of economic growth. This increase in relative debt burden is very unhealthy and has created an ever-lower interest rates to avoid economic disaster, followed by an increasing severity of financial crisis, Doom Loop. What is the doom loop? It is unstable, crash-prone boom-bust lifestyle we have now lived for about 40 years, a cycle of cheap funding and lax regulation leading to increased risk and credit growth, followed by big losses and bailouts. With interest rates near zero everywhere seem doom loop to have hit a terminal condition where the debt deflation and depression are the only playoff unless serious reform measures. Source: doomsday cycle, Peter Boone and Simon Johnson Because these measures are themselves deflation and depressionary (with a small d), in my opinion, they will not be taken. -Make Markets Be Markets: The Doom Loop Low interest rates make a debt service mentality seductive Why is this debt build up has been allowed to continue? I owe these changes to the mortgage mentality made possible by a secular decline in interest rates. The debt service mentality During the boom and bubble that led up to the financial crisis, many in the financial world looked to the debt service costs in the private sector as the only relevant parameter to assess whether the debt was sustainable – both for individuals and in aggregate. It was the bubble mentality Which I need to take to task now, now that we are seeing it pop up in discussions on public sector debt as well. If not, we will probably see some of the big sovereign bankruptcies in the not too distant future. The debt service mentality goes a bit like this: Bob and Shirley are looking for a new house. They make $ 6,000 per month. So they can rightly afford to pay $ 2,000 per month for their mortgage. With a 7% interest rate on a 30-year fixed mortgage, meaning that they can afford to borrow $ 300,000 – or slightly more than four times income. So if Bob and Shirley put 10% down to purchase a home they can afford one that costs $ 330,000. The problem is when it is the only obstacle to borrowing. What happens to housing affordability, when Bob and Shirley's 30-year yield falls to 5%? Suddenly they can "afford" a $ 375,000 loan. What if they get a 4% rate? Now they can afford $ 425,000 in debt – a loan of more than 40% larger than the 7% and a massive 5.9 times income. Anyone who has a mortgage recognizes this math as an integral part of the home buying process. The lower rates go, the more affordable any debt load is, when debt servicing costs are the only limitation. As rates drop to zero percent, theoretical Bob and Shirley could afford to buy the house no matter how expensive. But obviously does not rate moves in one direction. If rates should go up much when Bob and Shirley wanted to move house, they would face a serious problem. In this sense, artificially low interest rates toxic. And therefore points to debt servicing costs as the only parameter for an affordable price and debt limitations bubble finance simple and straightforward. Here I am talking about the bubble financing, no Ponzi finance. In Ponzi finance schemes in the United States. We looked flat rates instead of lower but adjustable rates unsustainable Finally affordability became passé, as no-doc, zero percent down, ninja loans were the norm. Ultimately it collapsed Ponzi scheme debt in a heap – as always. This is what we saw in the blow-off phase of the bubble after Greenspan lowered rates early this decade. But the debt service mentality is what has preceded it. -On the sovereign debt crisis and debt servicing costs mentality second economic boom? Then you economists use power models completely ignore the debt. This provides intellectual cover to the asymmetric monetary policy, flooding the system with money every time the economy hits a rough patch. As a result. Private sector debt increased dramatically across the board all this continues for a generation because of a secular decline in interest rates, which allows servicing of the growing debt burdens. And do not think a second, this can not continue through another cycle. This dynamic may continue for a very, very long time. In the United States because of America's possession of the world's reserve currency, an increase in total debt is successfully funded for well over twenty five years. Mind you, there have been a number of landmines along the road. But again and again, these pitfalls were avoided by asymmetric monetary policy and counter-cyclical fiscal expansion. So can poor quality growth continues for very long. And it is this fact that makes it possible story about easy money and over to get power. The boy who cried wolf A soothsayer who advice against this type of economic policy, but warns of impending collapse will certainly be seen as the boy who cries wolf. Think back to 2001 or 2002. Have we not witnessed so the same idea, where the bears and Doomsday had slipped out of their holes to warn of impending doom from reckless economic policy? In 2004, unless those people changed their tune, they were long forgotten or even laughed – only to resurface in 2007 and 2008 with their new tales of woe …. The fact is: low-quality growth does not lead to immediate economic disaster. It can continue through many cycles. Even today, it is quite conceivable that we could see a multi-year economic expansion on the back of renewed monetary and fiscal expansion. … Printing money works. The goose the economy as intended and it can induce a cyclical upturn. Nevertheless, the upturn is likely to be of poor quality because of significant mali vestment. Debt levels will rise, and capital investments will be directed towards more risky firms. Look at what is happening in China. Are you telling me the stimulus is not working? It certainly is. The West is also working stimulus. It is designed to stop people from hoarding cash and to consume. It is also designed to get people out of savings accounts and into riskier asset classes. it does just that. The critical condition but at a time, all these things come to an end. In this cycle, we have already reached a critical state, where monetary policy is ineffective. As in Japan for the last decade or more, we hear everywhere that the demand for money has decreased by large corporate clients create significant amounts of cash on the balance sheet. Meanwhile, small businesses are starved for capital. A quote from Paul Samuelson's 1948 textbook bears noting. Today few economists regard Federal Reserve monetary policy as a panacea for the control of the business cycle. Purely monetary factors considered to be as much symptoms as causes, but symptoms with aggravating effects should not be completely neglected. By increasing the size of their government securities and loans and lowering member bank legal reserve requirements Reserve Bank may promote an increase in the supply of money and bank deposits. They can encourage, but without taking drastic action, they can not compel. In the midst of a deep depression just as we wish Reserve policy to be most effective, the State Bank is likely to be reluctant to buy new investments or making loans. If the Reserve authorities buy bonds in the open market and thus swell bank reserves, banks will not put these resources to work but just want to hold reserves. Result: No 5 for a "nothing", only one substitution at the bank's balance idle cash for old bonds. -Obama forgot Samuelson when he told the fat cats to start lending The reason this crisis is different is that we have reached the lower limit on the monetary policy of zero rates. We simply can not lower rates anymore. Indeed, because of the ineffectiveness of monetary policy, politicians have gone to other unorthodox methods of policy to stimulate credit growth remain. None of this has not yet had enough stimulation effect of increasing credit. So where are we going? Balance Recovery recession or not, weak consumer spending will last for years. I happen to believe that we are in a weak economy recovers (based on the last shot of stimulus, we can provide). But once this cycle starts to fade, we be in another world, the world Japan is now in. Listen to Richard Koo tell you about what we can foresee the future and why normal political measures will not work. He makes a very convincing argument. Koo suggested that Japan's huge public sector debt burden owed balance sheet recession, Japan is suffering and sees a similar dynamic likely to hit the Western world. This means that the private sector is in a secular trend downshifts. I outlined some of my thoughts based on Koo's model of private consumption post linked above. But the error in Koo's remedy is that it builds on the fiscal stimulus has been used to maintain the status quo ante, which results in a misallocation of resources and continuing overcapacity and economic malaise (see Evaluation of sectoral balances model in Japan). Furthermore, I see the rise in public sector debt in an equilibrium recession as a socialization of losses. If you look at any economy which has suffered steep decline in GDP, what we've seen is a decline in tax revenue, an increase in government spending and bailouts. This is true in Ireland, Britain and the U.S. in particular. In practice, there is a transfer of risk in particular agents in the private sector on public application-large. The extent of this risk transfer through annual double-digit increases in the debt to GDP is breathtaking. Finally, these debts are unsustainable for the world as a whole. Japan has been able to run the public sector debt at 200% of GDP, because it was only in balance recession and the private sector was willing to finance this debt. But things are different now. Sovereign defaults are likely. Debt Crisis in Greece is an example of what is to come. Those debtors who are trying to bulk increase the risk transfer in public will soon find odious debt a very real problem. And what will inevitably happen is that a systemic crisis will bring. A fiscal stimulus is warranted, but deficit spending as far as the eye can see risks a disastrous outcome. This is a very different world than we lived during the asset-based economy. But it is also a different world than Japan has survived over the last two decades. There are four ways to reduce real debt burden: by paying down debt accumulated through savings. by inflating away the value of money. of reneging partially or fully on the promise to repay by defaulting by reneging partly on a promise to repay in the form of debt relief There are all fixated on the first track to reduce (both public and private sector) debt. I do not believe that private sector balance sheet recession can be successfully solved through collective public sector deficit spending is offset by a private sector downshifts. The sovereign debt crisis in Greece say. More likely, the western world's collective public sector tries to pull this off. But will at some point debt odious force a public sector downshifts as well. And unfortunately, a collective debt reduction across a wide swathe of countries that do not occur indefinitely during smooth glide-path scenarios. This is a result which lowers income, which lowers the GDP, which lowers the ability to repay. We will have a debt crisis. The weakest debtors will default and haircuts will be taken. The question still up for debate in terms of systemic risk, contagion and economic nationalism, because when the first great sovereign default 'when systemic risk will resurface in the world.
