What will happen to Greece?

[Jason]

There's a lot in your post Dandelion. By "rich" I mean "wealth creators", basically the captains of industry. Their contribution is the jobs they create and the wealth they create for the economy. As a by-product they get very rich, and they spend their money creating more jobs and more prosperity. There are some altruistic individuals who will create jobs and wealth for no financial reward, but not many. We desperately need our wealth creators, and should do everything we can to nurture them. This makes every one of us richer.

There is a socialist mantra (that has been taken up by many in the centre also) that it is right to tax the wealthy. It is a simple and comfortable idea, as old as Robin Hood, and no doubt wins votes for politicians. It is also one of the most dangerous myths of our age. In a developed economy the policy of taxing the wealthy actually causes poverty. It hurts the weakest and most vulnerable in our society because it so badly weakens all of society. But because people have difficulty getting their head round the idea that taxing the wealthy makes everyone poorer the disaster policy of taxing the wealthy (or trying to tax them) keeps getting revisited.

After 13 years of Labour we have a country which is poorer in 2010 than it was at the start of this parliament in 2005 - we are all poorer. And we have the country's finances in a big mess. The biggest since 1945? Or the great depression? Or is it just the biggest mess ever? No-one should doubt that the way out is going to hurt a lot. Economics is truly dismal as it is not fair, just or equitable - the ones who will be hurt are the vulnerable who didn't cause the mess. The correct policies are the ones that minimise this hurt. Key strategies should be:

* VAT rise to maybe 20%, possily higher, alcohol/tobacco as high as they can go. However NI has to come down, as do taxes which hit the rich (eg inheritance tax). And there has to be downward pressure on corporation tax, perhaps income tax also.The challenge is to make some cuts in tax while getting an overall increase in tax take.

* Expenditure in schools and NHS has to be ring-fenced. Cuts therefore have to be in benefits and in defence (schools, NHS, defence and benefits are the big expenditure areas). It may be that the whole benefits system needs simplifying, and benefits more clearly linked with job seeking. Many (most?) senior citizens get pension plus benefits - this needs to be resolved. Probably a higher flat-rate state pension and get rid of most of the benefits.

* Labour costs have to fall (or at least not rise with inflation). There is unemployment right now, and employers would fill jobs with lower wages. This is part of the internal devaluation the UK economy needs. We also need to get rid of hidden costs on labour including a lot of the social legislation.

* There will be inflation and currency devaluation. These mop up the slack that the government's policies alone can't achieve.

Doing this will get the economy moving and the defecit declining. It is painful. It is not fair. But it is fairer than phoney policies which must fail. And however painful it is, because it is the only thing that will work, it is the morally right thing to do.

The key problem remains that no economic system we have will work in reverse. If the world's economy goes into a sustined decline then civilisation as we know it collapses. Never ending growth is unsustainable, but the alternative is unthinkable, so we go for growth in our lifetime. Okay I'll think it - population crash from 6bn (or whatever) to 1bn or less. Famine. Pestilence. Apocalypse?

 

[D_Tully Tunnelrat]

Sounds as if your tax code suffers from some of the same antiquated thinking as our own. The rich will run away, if they have somewhere to run to, but those locales that won't co-operate with our IRS, and perhaps your equivalent, are disappearing by the day. (Que EuroTop...)

I do agree with Jason that greater consumption taxes are required in developed economies, as to what level it's a bit more tricky, but as we have none, anywhere is a good place to start. It's the only way to get the public to save more. Taxing income (here), at the Fed/State,Local taxes, combined with ultra low interest rates penalizes savers/ings, and pensioners, of whom there will be many more, soon. As the US could service it's deficit, if savings return to '70's levels, I would be the UK can too. Japan has done this for 20 years, despite rock bottom rates.

Lastly, a simpler, flatter tax code makes it much harder to fudge. When Russia has a simpler tax rate than either the US, or UK, you know our tax codes have become hidebound.

 

[dandelion]

The rich will run away, if they have somewhere to run to, but those locales that won't co-operate with our IRS, and perhaps your equivalent, are disappearing by the day. (Que EuroTop...)

I do agree with Jason that greater consumption taxes are required in developed economies,

Yep, we need international agreement. Though taxing earnings on profits made in the Uk for non residents (people or companies) might help and we have to show a modest lead in this since other countries cant up their taxes unless we up ours.

I think we all agree consumption taxes are preferable. Where I disagree with jason is that by itself a hike in VAT (value added tax, beautiful name) in the Uk would not be enough. This is not business as usual where politicians argue about a bit more here, a bit less there. By the way, we have a special low level tax on energy so that pensioners dont freeze to death. Another insane politicians idea. Much better to up pensions from the extra VAT receipts.

 

[dandelion]

There are some altruistic individuals who will create jobs and wealth for no financial reward, but not many.

actually, I think the evidence is entrepreneurs are not motivated by money. They tend to be motivated by dissatisfaction with their existing lives, so arguably the poorer they are to start, the better. Dispoportionately they also come from broken homes or suffered some early trauma. Many people have argued that inherited money is a bad thing because it simply encourages complaceny. Taking money from the rich encourages them to go out and make more because they thing they no longer have enough.

There is a socialist mantra (that has been taken up by many in the centre also) that it is right to tax the wealthy.

I have no problem with people being rich. I have a problem with people being poor. Did you ever see the Monty Python sketch where the robin hood character stole so much from the rich they became the poor, so he then had to go into reverse. 'stole from the poor, gave to the rich, silly bitch, silly bitch, silly bitch', sung to the tune of the old robin hood series from 50-60s with Richard Greene?

But because people have difficulty getting their head round the idea that taxing the wealthy makes everyone poorer the disaster policy of taxing the wealthy (or trying to tax them) keeps getting revisited.

It is a fundamental principle that you cannot get money from people who dont have it. You are saying we should not have a redistributive tax system. Im afraid its daft to claim that the rich will voluntarily give to the poor. Its also daft to say that if they are motivated by money, they wont still be so motivated even when you take away a hefty chunk of it. I think it was decided in the UK 80% income tax was excessive, I dont think 50% is.

As to national insurance hikes taxing companies, well of course they do. If you want to replace labours increased payroll tax by increased tax on profits, thats fine. Its the amount raised which matters, and if you want to make labour cheaper compared to machinery, thats a matter of emphasis. Im not sure its right, history says mechanisation is the only way to go and a payroll tax encourages investment in equipment.

After 13 years of Labour we have a country which is poorer in 2010 than it was at the start of this parliament in 2005

Goodness. A conservative government could have prevented the world bank crash. Thats good to know.

VAT rise to maybe 20%, possily higher, alcohol/tobacco as high as they can go.

Fine.

However NI has to come down,

cant. we need the money. The unbalanced budget is unsustainable. Everyones target is only to halve the defecit in 5 years!

as do taxes which hit the rich (eg inheritance tax).

what ever happened to all those american millionares who thought the worst possible thing they could do was give their money to their children, that being broke was what made them successful?

And there has to be downward pressure on corporation tax, perhaps income tax also.The challenge is to make some cuts in tax while getting an overall increase in tax take.

Expenditure in schools and NHS has to be ring-fenced. Cuts therefore have to be in benefits and in defence

Benefits is only 100 billion a year in total. Cutting the lot would not be enough and the country would fall apart. Frankly, schools are going to have to be cut, ditto NHS. politicians are not promising to keep up with inflation costs, and even then they may still have to renege once elected. Thats why they wont comit themselves and refuse to talk details. You cant cut defence unless you stop having these recent wars...

Labour costs have to fall (or at least not rise with inflation). There is unemployment right now, and employers would fill jobs with lower wages.

No they dont. Wages have to be higher than benefit levels. Minimum wages need to rise. Though, of course, most jobs pay well above this and i agree the diffential between low and high needs to be reduce by cutting higher and middle wages.

This is part of the internal devaluation the UK economy needs. We also need to get rid of hidden costs on labour including a lot of the social legislation.

Such as?

There will be inflation and currency devaluation. These mop up the slack that the government's policies alone can't achieve.

Engineered to tax the poor again? But also, did you not learn the lesson that inflation demonstrates to people that there is no point in saving.

The key problem remains that no economic system we have will work in reverse. If the world's economy goes into a sustined decline then civilisation as we know it collapses.

well obviously, because civilisation as we know it relies upon essentially free and infinite resources and presumes that people will throw away perfectly good possesions just to get a new one. This is not sustainable, and never was. The whole model of throwaway culture is broken and needs fixing.

Okay I'll think it - population crash from 6bn (or whatever) to 1bn or less. Famine. Pestilence. Apocalypse?

Global warming people will tell you this is going to happen anyway. The only escape is to reduce our resource requirements now.

 

[Jason]

Dandelion - there is no way we are going to agree! If you vote Conservative you will get to see the alternative in action. It has taken Labour ten years to wreck the economy (other countries have done far better through the recession); it will take Conservatives a decade to rebuild it. Of course if Lib-Lab take power the mess will get worse.

This thread is really about poor Greece. And there is a lot of consensus in the media that the bailout is a sticking plaster for a little while but won't work, that Greece cannot keep its austerity targets, that the real costs are about three times the present bailout, and that Greece needs long-term subsidies. There's more talk about a mechanism whereby Greece could leave the Euro. And more talk of the whole Euro breaking.

The mechanism for leaving now talked about is for an instant change - total secrecy, no lead up. People wake up one morning to find all Greek Euro holdings are denominated in New Drachma. This would need emergency powers by the Greek government. It would need a ratification by the EU so that Greece is not sued in the EU courts. Curiously the best time to do this is when there is a bank holiday so that there is that little bit more time to act while markets are closed. And as this year the Orthodox Easter coincides with the Western Easter one possible date is tomorrow. And no I don't think this will happen. But I do think it is just about possible.

 

[D_Tully Tunnelrat]

People wake up one morning to find all Greek Euro holdings are denominated in New Drachma. This would need emergency powers by the Greek government. It would need a ratification by the EU so that Greece is not sued in the EU courts. Curiously the best time to do this is when there is a bank holiday

It would be a shocker if it happened on Monday. Unfortunately all the mortgages in Greece would still be denominated in euros, so to repay them, as they are legally denominated in euros, it would take 40% more new drachmas to make your house payment. There would not other option for the Greeks then, but to print lots of money.

Ironically, Greece could sustainably afford the 50B in debt, if the interest rate for all of it was at the IMF inter party rate of 1.26%, -- quite a bit less than Thursday's market rate of 6.3%. Talk about a risk premium.

 

[dandelion]

This thread is really about poor Greece.

Yes we have strayed a bit, but on the whole the Greek situation is just the uK situation if we continue as either main party here is curently doing. Have you seen the thread 'your very own manifesto', where perhaps we should continue debating the woes of the UK.

And there is a lot of consensus in the media that the bailout is a sticking plaster for a little while but won't work

Ditto, Uk.

that Greece cannot keep its austerity targets

we havnt admitted we need any

that the real costs are about three times the present bailout

no one has costed it yet for the uk

The mechanism for leaving now talked about is for an instant change - total secrecy

And then the next day the riots really start when people discover their government has stolen all their money. Out of the frying pan, into the fire.

I must say, people talk a lot about the benfits of devaluation, but are there any real concrete examples where devaluation actually was the key, rather than people taking a realistic view of their economic problems and accepting lower incomes? In the UK devaluation did nothing. The key was acceptance that previous aspirations were unattainable. I cant speak for Greece, but there is precious little realisation here that there is any propblem. And with bank profits up again and bonuses..., well, why should they accept cuts?

 

[Jason]

I'm not suggesting it will happen, rather that it is in theory possible, and if it were going to happen a bank holiday is the best time (particularly one which is Europe-wide).

A Greece suddenly on the New Drachma could undertake a process of quantitative easing (ie print money), put some inflation into the economy, allow some devaluation, take lovely cheap IMF loans, get a quick boost to tourism and exports, reduce imports. Of course this is wild stuff. But it is possible to see this working, and leading in perhaps a couple of years to a prosperous Greece - in contrast with a couple of decades of poverty and subsidies. And if, just if, this were going to happen we wouldn't get any prior notice.

There's a completely different view set out in The Times - basically that Greece is doing fine but the Euro is up the creek. Actually this is pretty much my view - and I doubt Greece has the leaders to try a more ambitious future.
Merkel has saved Greece – but not the euro | Bronwen Maddox - Times Online

 

[Drifterwood]

For every £1 of wealth I create, the Government makes £2 (net VAT collected FOC, NI, Corp Tax, Business Rates, not to mention the income tax and NI on the jobs I created). Of the £1 I make, they then take pretty much half. As an entrepneur, the Government makes five times as much out of me.

But sure, they deserve more, and I deserve to be a Labour hate figure.

Any Government needs to live within its means.

 

[D_Tully Tunnelrat]

Merkel has saved Greece – but not the euro | Bronwen Maddox - Times Online

An equally disconcerting prospect is the Greece does refinance, but simply chooses to default as the austerity measures are too draconian. No person or country should suffer servitude in preserve the value of someone else's fixed exchange rate.

The unfortunate part of asking governments to live within their means is that we don't. Virtually all developed democracies expect cradle to the grave services, but are unwilling to pay the bill. Given that there are so many models of government to choose from, all with known costs, it is possible to establish % limits on gov. administration, defense, etc. based upon historical norms. Without enforceable budget guidelines politicians will always choose to increase taxes, defer budget cuts, or choose a beggar thy neighbor option in a trade war.

I see the Tories have a 10 point lead over there, but will the Liberal Democrats function as King makers? I can't see how Mr. Cameron's £1B tax cut for married couples makes sense at a time when you have a 12% fiscal deficit. Sounds like shades of Bush. Well, at least gay couples get the same breaks as hetros. Good luck, and Happy Easter.

 

[dong20]

I can't see how Mr. Cameron's £1B tax cut for married couples makes sense at a time when you have a 12% fiscal deficit.

It's (about to be) an election campaign, very little that eminates from Westminster will make much sense for the next 6 weeks or so.

So, no change there then.

 

[midlifebear]

Sounds as if your tax code suffers from some of the same antiquated thinking as our own. The rich will run away, if they have somewhere to run to, but those locales that won't co-operate with our IRS, and perhaps your equivalent, are disappearing by the day. (Que EuroTop...)

I do agree with Jason that greater consumption taxes are required in developed economies, as to what level it's a bit more tricky, but as we have none, anywhere is a good place to start. It's the only way to get the public to save more. Taxing income (here), at the Fed/State,Local taxes, combined with ultra low interest rates penalizes savers/ings, and pensioners, of whom there will be many more, soon. As the US could service it's deficit, if savings return to '70's levels, I would be the UK can too. Japan has done this for 20 years, despite rock bottom rates.

Lastly, a simpler, flatter tax code makes it much harder to fudge. When Russia has a simpler tax rate than either the US, or UK, you know our tax codes have become hidebound.

Just that one phrase I highlighted in red gave me pause. American's really didn't have great savings in the 1970s. I know. I was there. Anyone with as little as $500 put in in a money market certificate from 1974 to about 1979. During those few years money market certificates regularly cranked out 12% to 18% a year, short term, depending upon what broker you used. It was a great time if you had some savings. But 90% of 'Mericuhns didn't. They lived pay check to pay check, hand to mouth as they do now. The stock market didn't like the situation at all. And mortgage loans were typically 15%, fixed, for 30 years. The real estate market was a much more difficult place than it is now with the exception that we didn't have wave after wave of foreclosures. And, it was during the end of the 1970s that the seminal idea for a balloon mortgage was born. And look where that has led us.

I'm amused at where people get these ideas about the upper-middle class rich (the $250,000 crowd) and how they generate income. The idea of clipping bond coupons still exists, but you had to invest in them in the 70s to be able to live off of them. Nope, the $250,000 crowd is more likely to owe almost, if not more, in unsecured debt. And they will crash like dominoes the second time they miss a boat, car, or house payment. Not pretty, but very true. They have grown up in an economy that never taught them how to save or offered them any incentive. So, you might want to reconsider the idea that we were BIG SAVERS in the 1970s. After all, that's the decade when Hamburger Helper was introduced to the hungry middle class having a hard time buying milk and bread.:smile:

 

[Jason]

I see the Tories have a 10 point lead over there, but will the Liberal Democrats function as King makers? I can't see how Mr. Cameron's £1B tax cut for married couples makes sense at a time when you have a 12% fiscal deficit. Sounds like shades of Bush. Well, at least gay couples get the same breaks as hetros. Good luck, and Happy Easter.

The way in which percentage translates into Westminster seats in a first-past-the post system is counter-intuitive. The Conservatives have a lead of 8-10% over Labour which might appear to suggest a Conservative victory. It doesn't! This is hung parliament territory.

To win the Conservatives need about 41% of the total vote - or 43% to win comfortably. Whether Labour get a percent or two under or ten percent under makes remarkably little difference to the number of seats they would get. The Conservatives badly need to increase their support by 3-5% of present levels to avoid a hung parliament, which is at the top end of what is practical in an election campaign. In the European election 12% voted UKIP, and in the General election it is still likely to be about 6%, as a protest vote supporting a party that will get no seats. 4% or more are natural Conservative votes. My view is that the Conservatives cannot allow these votes to go to UKIP and must therefore come up with a European referendum pledge (this is just my view).

If there is a hung parliament Gordon Brown remains PM and tries to form a government. He has indicated that he would work with the Lib Dems. The Lib Dems have indicated that they could more easily work with Labour than Conservative. Conservative and Lib Dem policies are completely different on Europe and much else. Basically a hung parliament would be a Lib-Lab pact (though probably expressed in different words) with Gordon Brown in power for another 5 years, and with a PR voting system brought in to ensure that the Lib Dems are the kingmakers for ever more. It makes sense for the Conservatives to say up front that they would not work with Lib Dems and that a Lib Dem vote is a vote for Labour.

The tax cuts for married couples is easy to justify as the present system so heavily penalises people who get married that most (ie more than half) don't, preferring to make use of the generous benefits for unmarried mothers. These are way in excess of £1bn.

 

[D_Tully Tunnelrat]

Just that one phrase I highlighted in red gave me pause. American's really didn't have great savings in the 1970s.

Your comments made me laugh, as I do recall that era. It spelled the end of American might (oil embargo), as we knew it then. Sometimes there is a disparity between statistics and real life. Many working families had it tight during the '70's, but that does not mean that nationally we did not save a lot. With the crash in '74, national savings rates went through the roof, peaking at almost 15% in '75. And as rates rose, under Volcker, many continued to stuff money into CD's which were yielding up to 14%, never mind that inflation was even higher. By the early 80's US savings rates fell to 8%. Yet that rate is still fantastic when compared with our negative savings rate which began in '98, and continued to however around zero during the "naughties."

Here's a few illustrations:
Why Are Savings Rates So Low? It's The Income Disparity
Negative personal savings rate: What does it mean?
A History of Personal Savings Rates in the United States

If America could return to a 7% savings rate (about avg. from '44-'94), which we did briefly during the crisis, we could save enough to internally finance our massive deficit (leaving aside the discussion of attempting to balance the budget...). By keeping rates ridiculously low, Bernanke has created a total disincentive for savers, where CDs bring in 1%, but inflation is still running about 2%. Thus we are still dependent on foreign capital, so far, to finance our profligacy.

Back to the Continent, or at least the UK, I love the complications of a three party system. It's got a lot more intrigue than our simplistic winner take all version here. The fascinating thing, at least for me, is that if you have a hung election, which it seems is entirely possible, then Brown remains PM, and has to fashion a government from what is ostensibly a political stalemate, even though the Conservatives have essentially the same statistical representation from the polls and quite possibly in Parliament - they maybe completely frozen out of a ruling coalition, giving the greater sharing of ideals between the Libs, and Labs.

As to the tax cuts, we had the marriage penalty here as well, which was equally absurd, it just seems like a very inopportune time to introduce a tax cut, given the deficit. However I am sure, as with the example you site, of which I am totally ignorant, there are other areas of the UK budget, which may be more spend thrift (and perhaps less politically charged...) than this.

Welfare Mothers Lyrics, Neil Young Welfare Mothers Lyrics - LyricsFreak.com

 

[dandelion]

If there is a hung parliament Gordon Brown remains PM and tries to form a government. He has indicated that he would work with the Lib Dems. The Lib Dems have indicated that they could more easily work with Labour than Conservative. Conservative and Lib Dem policies are completely different on Europe and much else. Basically a hung parliament would be a Lib-Lab pact (though probably expressed in different words) with Gordon Brown in power for another 5 years, and with a PR voting system brought in to ensure that the Lib Dems are the kingmakers for ever more. It makes sense for the Conservatives to say up front that they would not work with Lib Dems and that a Lib Dem vote is a vote for Labour.

curious that despite conservative claims they are unfairly treated by the current electoral system (they need more votes than labour to win because of the way their support is distributed), they would rather put up with this than reform the system. presumably because a fair system would break the death-grip on power shared between just labour and conservative parties. The only people in the country whose votes matter are the ones who choose who will be the lab or con candidate in each constituency. 60-80% of the election results are already known.

The tax cuts for married couples is easy to justify as the present system so heavily penalises people who get married that most (ie more than half) don't, preferring to make use of the generous benefits for unmarried mothers. These are way in excess of £1bn.

People nowadays only get married because they want to, which is how it should be. There should not be any subsidies for having families at a time when we desperately need to cut the UK population.

 

[Jason]

The Greek woes are back in the news.

Greece has tried to renegotiate the terms of the EU-IMF bailout. In a nutshell Greece is not going to keep to the austerity plan the EU has set.

There's also a Eurozone split on the interest rate at which Eurozone countries should offer loans to Greece. Germany is arguing for 6 to 6.5%, France for 4 to 4.5%.

Investors are selling Greek bonds; the Greek banks have told their government they need more support. There's also doubt about the EU/IMF percentage contribution to the bailout. It was thought that the EU would be about 2/3rds (and therefore in the driving seat) but it seems this is not fixed and it may in fact be less than 2/3rds.

So what is going to happen to Greece?

 

[Drifterwood]

So what is going to happen to Greece?

Moneysupermarket.com?

 

[Jason]

Moneysupermarket.com?

Well it's the best answer I've heard.

 

[dandelion]

its as good as any. Not much realism amongst politicians. I cant think now exactly where I saw it, but in the last day or so someone was talking about the uk economy and observing it was much closer to that of Greece than people admit. Basically, no side in the election debate here is willing to talk about how bad the situation is because if they do then they will need to explain what they plan to do about it. I remember, it was a discussion on newsnight from a staff commentator saying the money markets are getting very nervous that the UK has done nothing to solve its budget problems and has no solution in sight.

 

[Jason]

Agreed the UK problems are very serious.

Right now the spotlight is on Greece. And it seems that the bailout package is unravelling already. There is also a lot of activity in withdrawing funds from Greek banks. What the EU have done is (perhaps) buy time for Greece. Presumably plan B is up someone's sleeve.

Next at risk there's Spain, Portugal, maybe Italy and Ireland.

Somewhere further down the list are a lot of other economies with problems, certainly including the UK. What is unsettling the markets right now is the prospect of a hung parliament with Gordon Brown still in power, still in denial, still enacting policies which are motivated by politics not economics. The money markets believe that the Conservatives will do something on the right lines if in power, whatever they might say now. Certainly their comments on the NI increase are right, and the increase in VAT which the markets think is the way forward is pretty much implied by the idea of not increasing NI. The defecit needs to be addressed by pluging around 20% of the shortfall with tax increases (so VAT up), cutting 80% of spending without impacting jobs too much (so first target has to be benefits), and doing the rest through devaluation and inflation while helping business, jobs, the City. No party that promised this would get elected, but that doesn't mean it is not what is needed. If we have a hung parliament we go the way of Greece (though it will take a little while to get there). With Conservatives in power we are in with a chance.