STOCK MARKET WATCH -- Monday, 27 February 2012

[Demeter]

16. Why the U.S. Is Nothing At All Like Greece

NO OUZO, FETA, AND OLIVES?

http://www.alternet.org/story/154199/why_the_u.s._is_nothing_at_all_like_greece?page=entire

....What follows is a self-defense lesson on why the United States is not Greece—or Europe. The U.S. economy is far larger and more productive than Greece. The United States has many more tools in its macro-economic policy box than countries in the eurozone. And while calls for austerity have kept the United States from undertaking government spending and investment large enough to support a robust economic recovery, at least thus far, the United States hasn’t undertaken the same self-defeating austerity measures Europe has. If we learn the right lessons from what is happening in the eurozone now, we never will. When economic activity plummeted during 2008 and 2009 in the United States, Europe, and throughout the world, coordinated stimulus spending of nations across the globe prevented the collapse of world output from becoming another Great Depression. Today, deficit spending remains critical as working people continue to struggle through an economic recovery that has done little to create jobs or to lift wages, but much to restore profits....

...The central banks of most other countries have much the same abilities as the Fed has to inject money into their economies and to buy government debt. As with the Fed, they may or may not choose to use this power. But the power is unquestionably there. The 17 countries in the eurozone, however, relinquished their ability to print money, expand their money supplies, and lower interest rates when they adopted the euro as their common currency. Only the European Central Bank—known as the ECB—can authorize the “printing of euros,” and the ECB maintains control over the money supply of the eurozone. Unlike the Fed, the ECB does not have a dual mandate to pursue low employment as well as low inflation. The ECB’s authority is limited to maintaining low inflation, known as “price stability,” which the ECB defines as an inflation rate below 2 percent. And the ECB is prohibited from directly buying government bonds. The ECB is authorized to buy government bonds only on the “secondary” bond market, when original purchasers resell them.

The result of these policies is that eurozone countries must sell their bonds on the open market. That leaves them entirely dependent on private bond buyers (i.e., lenders), whether from their own country or other countries, to finance their government deficits. Governments must offer their bonds for sale with rates of returns (or interest rates) that will attract those bonds buyers. Each uptick in the interest rate adds to the debt burden of these countries, and makes deficit spending to stimulate the economy that much more expensive...Eurozone guidelines prohibit budget deficits that exceed 3 percent of GDP, or national debt in excess of 60 percent of their GDP. And there is no central fiscal authority with deep pockets to turn to. Contrast this with the United States, where states also share the same currency and the Fed targets one interest rate, but where states can turn to the federal government for assistance in times of economic stress. In effect, the eurozone countries were left to confront the global downturn and the sovereign debt crisis with one policy hand tied behind their back, and a couple of digits lopped off the other. Market pressure on interest rates made it yet more difficult for eurozone countries to get out of trouble by undertaking countercyclical, or stimulus, spending when economies slowed.

In the few cases where eurozone authorities have provided loans to indebted countries, they have insisted on austerity measures ranging from slashing government spending to public- and private-sector wage cuts as the pre-condition for providing relief. But since cutting government spending in a downturn leads to both a fall in demand and rise in unemployment, this emergency lending is making it even harder for eurozone countries to recover...