Portugal Debt Crisis: Flawed Media Coverage, Bad Economic ‘Thinking’

16 April 2010 By David Caploe PhD, Chief Political Economist, EconomyWatch.com

Several regular readers have asked why we haven’t covered the “solution” to the Greek debt crisis –

16 April 2010 By David Caploe PhD, Chief Political Economist, EconomyWatch.com

16 April 2010 By David Caploe PhD, Chief Political Economist, EconomyWatch.com

Several regular readers have asked why we haven’t covered the “solution” to the Greek debt crisis –

16 April 2010 By David Caploe PhD, Chief Political Economist, EconomyWatch.com

Several regular readers have asked why we haven’t covered the “solution” to the Greek debt crisis –

since we had written several pieces about it already,

characterizing it as the beginning of a structural crisis in the Euro-zone,

and especially highlighting the destructive role of Goldman Sachs, and their favorite “financial weapon of mass destruction” – derivatives – in helping create the problem –

and our answer has basically been, “Well, we don’t really think it’s over yet”.

So it was with definite mixed feelings that we saw this article in the New York Times about the rolling Euro-zone debt crisis that is now, as predicted, moving to Portugal. [br]

On the one hand, we were glad to see our reluctance to call the Greece situation settled confirmed –

not that we’re happy for either the Greeks OR the Portuguese, both peoples who have a rocky future ahead –

just that our analysis of the Hellenic scene is, unfortunately, being borne out by events.

On the other hand, it was infuriating to see the way both the Portuguese and Greek situations were being analyzed in what is supposed to be the most authoritative media outlet in the world,

specifically the way in which conventional academic economic “thinking” about these situations leads not to clarity about them, but, rather, as Jimi Hendrix would say, “just, uh, confusion.”

Now regular readers will not find any surprise in this attitude on our part.

We’ve already made clear in several Features on China –

one having to do with the irrelevance of the Western, especially American, obsession with China’s allegedly “undervalued” currency,

and, just two days ago, discussing how China’s March trade DEFICIT needs to be seen as a potentially fatal anomaly in the dominant US paradigm about China –

how destructive conventional academic economic “thinking” is for any real understanding of what’s going on in this ever-crisis-ridden world.

But it was really annoying to see this same sort of flawed “thinking” once again organizing media coverage of events that need to be understood.

To be nice, though, let’s start with the parts of this piece that actually make sense –

all with due apologies to Landon Thomas of the Times, towards whom we have no animus at all 😉 –

namely, how the supposed “solution” of the Greek crisis is already coming apart at the seams.

[quote]

The rescue package agreed on last weekend — aimed at calming fears of a European country defaulting — has not yet had its desired effect.

The yield on Greek 10-year bonds briefly spiked to more than 7.3 percent Thursday, not far from the 7.5 percent level before the rescue package was announced.

Interest rates on 10-year government bonds for Portugal have also been jumpy, hitting a high of 4.5 percent on Thursday.

All of which raises the prospect that last weekend’s package for Greece, the result of months of political haggling,

may well have been nothing more than a bandage on a wound that shows little sign of healing.

In fact, a view is taking hold that the Greek bailout may even have an opposite, more deleterious long-term effect.

Instead of ushering in a period of lower rates and market calm, it could prompt investors to test Europe’s — and in particular Germany’s — stomach for a Portuguese rescue.

[/quote]

Now the basic point here is correct, and, worrisome.

But even here, we can see how unexamined assumptions – and unconscious word use – can radically distort the representation of ANY situation.

In this case, it’s the use of the term “investors”.

Now, usually when you think of an investor, you think of someone who has a commitment to the success of whatever project is at hand.

However, as the Greek situation had made amply clear – and as the Portuguese scene seems about to repeat –

the people referred to here are NOT involving themselves so either Greece or Portugal can solve their problems, ie, SUCCEED.

Rather these people are betting on the FAILURE of the governments and peoples here to be able to overcome their difficulties,

and are hoping – with all due respect to George Soros – to make a huge bundle of money betting AGAINST the success of these efforts.

Now wouldn’t a more accurate term for such folks be SPECULATORS, and NOT investors ???

But if this were the only problem, while it would still be significant, it wouldn’t necessarily be damning.

There are, however, some even more serious examples of how UNEXAMINED use of key terms leads to a distorted understanding of what’s going on here.

And the sad thing is, as you’ll note, what’s being touted as a “novel approach” to the analysis of these situations,

is shown IN THE VERY NEXT SENTENCE to be exactly the same as what it’s supposedly replacing as an explanation for what’s “really” happening.

[quote]

In the view of Tim Lee of pi Economics, a consultancy based in Stamford, Connecticut, it is a country’s savings rate,

more than the more frequently deployed measures such as deficits or debt-to-G.D.P. ratio,

that is the truest measure of an economy’s ability to pay down its debt.

[/quote]

Ooh, radical.

And yet, when we see this apparently unconventional thinker Tim Lee –

whom we ALSO don’t know and have nothing personal against 😉 –

it really doesn’t seem like what’s he’s saying is in any way significantly different than the “more frequently deployed measures” he claims to be transcending:

[quote]

“Both Portugal and Greece are stuck in the trap of nominal G.D.P. growth being lower than financing costs, and therefore have little prospect of stabilizing the debt-to-G.D.P. ratio,” Mr. Lee said.

[/quote]

Gee, that sounds awfully, er, conventional, Landon. Where’s the innovation ???

[quote]

“The severely negative net national savings rate highlights the fact that the government deficit cannot easily be financed domestically — making it difficult for these countries to emerge from their debt trap.”

[/quote]

Well, that’s true, Tim – but how is it any different from what you just said about the supposedly “conventional” debt-to-GDP ratio than your focus on the savings rate –

and, more to the point, how is it SUPERIOR TO that “conventional” measure,

since it all ends up meaning the same thing, even when YOU analyze the situation.

And not to be too tough on either Landon, who is apparently bewitched by him, or Tim ;-),

but, as the case of India makes clear, huge domestic indebtedness can be just as paralyzing as debt owed to foreign creditors.

Ah, but as always with economists, they’ve left themselves a trap door – only it actually DOESN’T give them the “out” they think it will.

Here’s how this one is supposed to work.

Now in our first Feature about the Euro-zone crisis,

we pointed out how belonging to the Euro made it difficult to for Greece to get out of its difficulties by de-valuing its currency,

which is part of the structural problem of the Euro-zone situation,

namely, that monetary policy is made for 16 countries by the European Central bank,

but fiscal – or government spending – policies remain in the hands of each individual country.

And this is precisely the “out” that Landon is going to refer to here:

[quote]

Unlike the United States and Britain, Greece and Portugal, as members of the euro zone, do not have the luxury of printing money to depreciate their currencies

[/quote]

so far so good … but then catch what this “luxury” is supposed to enable them to do:

[quote]

and thus export their way to recovery.

[/quote]

Now why is this so laughable – and it really is a joke, although not a funny one ???

Because the US – which supposedly has this “luxury” – has run a consistent balance of trade DEFICIT for almost 40 years !!!

So how on earth does being able to manipulate the value of one’s own currency –

which the US has had since the end of World War II –

have ANYTHING to do with being able to “export” your way to economic recovery,

when the US hasn’t been able to generate an export surplus –

which is supposedly the way out of this terrible mess in which Greece and now Portugal find themselves –

since 1971 ???

It just doesn’t make any sense at all.

But, as the Emperor said in Amadeus, “well, there it is.”

And if you want to get an idea of why the world is in such a terrible mess,

you could do a lot worse than looking at the supposedly distinguished campuses all over the West, but world-wide in fact,

where the fraud that is the academic economics “profession”

exercises such powerful sway over the minds of not just undergraduates,

but, it seems, correspondents for the New York Times as well.

David Caploe PhD

Chief Political Economist

EconomyWatch.com