The Chinese are discovering that the stock market falls as well

chinaThe Shanghai Stock Exchange Composite Index is one of the premier stock market indices in China, like the Bombay Stock Exchange Sensex is in India. And it is not having a good time of late.

Between August 20, 2015, and today, the index has fallen by 21.8%. On August 20, the stock market opened at 3744.25 points. As of close today, it was down to 2927.29 points.

In the aftermath of the financial crisis which started in September 2008, the Chinese government resorted to bubbles to keep the economy growing. First there was an infrastructure bubble, which was followed by a property bubble and then a stock market bubble.

Between June 2013 and June 12, 2015, the Shanghai Composite Index rose 153.5%. The government successfully managed to divert a part of around $20 trillion savings into the stock market, and pushed it to astronomical levels. This was just as the property bubble was starting to burst. Since peaking in June 2015, the stock market has fallen by 43%, wiping off a major portion of the gains (as the old adage goes, a 50% fall, wipes a 100% gain). In order to prevent the fall, the Chinese government has done many things.

It has pushed big government financial institutions (or their equivalents of Life Insurance Corporation of India) to buy shares in the stock market. Investors who own more than 5% of shareholding in any company have been banned from selling these shares for a period of six months. Initial public offerings have been banned as well, so that investors invest only in the shares that are already listed and this pushes up the stock market. Many shares have not been allowed to trade at various points of time, as well.

Further, continuing with these measures, the People’s Bank of China, the Chinese central bank unleashed another round of easy money, yesterday. It cut the reserve ratio requirement (RRR or what we call cash reserve ratio or CRR in India) by 50 basis points (one basis point is one hundredth of a percentage) to 18% for most big banks.

This cut will be effective as of September 6, 2015, and is expected to add 700 billion yuan (or around $109 billion at today’s exchange rate of one dollar equals 6.42 yuan). Over and above this, the one year deposit and lending rates were cut by 25 basis points, to their lowest level ever.

The idea is to flood the financial system with “easy money”, and hope that some of it goes into the stock market and the market rallies all over again. The trouble is that Chinese politicians are not democratically elected and in order to appear credible they need to ensure that the Chinese economic growth story continues, as it has all these years.

As John Plender writes in Capitalism: Money, Morals and Markets:  “Unelected Chinese politicians may put the interests of the Communist Party elite before those of the nations. Their legitimacy, after all, rests chiefly on the continuation of high rates of economic growth.” Ensuring that bubbles continue are an important part of this story. Any bubble burst will drive down economic growth. The economic growth has already fallen from more than 10% to around an “official” rate of 7%.

What has helped the Chinese government up until now, is the belief among the Chinese that the government can engineer any economic outcome that it wants. And it is this belief that has allowed the Chinese government to engineer the economic outcome that it wants. Nevertheless, in the process it has ended up with big bubbles—be it in the stock market, the property market, infrastructure, or total amount of debt in the financial system.

The interesting bit is that the Shanghai Composite Index barely responded to yesterday’s decision of the People’s Bank of China to cut the reserve ratio requirement. The index fell by 1.27% during the course of the day today. Of course, if the reserve ratio requirement had not been cut, the market would have fallen more.

The point is that the Chinese over the last one week have discovered that the stock market does not always go where the government wants it to go. And it can have a mind of its own. The market simply does not keep going up, it falls as well.

The situation is a tad similar to what happened when the erstwhile Soviet Union was just coming out of communism and its people were essentially shocked at encountering a system that functioned according to a completely different set of rules.

This is best explained by a question that the British economist Paul Seabright was asked by the director of bread production of the city of St. Petersburg. This gentleman was trying to understand how the new system (which wasn’t like the old system) worked.

As Felix Martin writes in Money—The Unauthorised Biography, the director of bread production asked Seabright, “Please understand that we are keen to move toward a market system … but we need to understand how such a system works. Tell me, for example who is in charge of the supply of bread to the population of London?”

In this context, the point is that the Chinese government would like its people to believe that it is in-charge of the stock market, but it seems to be gradually losing control over it. And that can’t possibly be a good thing for either the Chinese or the world at large.

The column originally appeared on Firstpost on August 26, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

It’s no good blaming just China for the global stock market sell-off

china
It’s around 12.30 am at night as I start writing this column and I am watching the television coverage of the flip-flopping stock markets in the United States.
The Dow Jones Industrial Average started the day on August 24, 2015, around 1000 points down, from its previous close on Friday (August 21, 2015). It recovered more than 800 points and then started to fall all over again. Ultimately, it closed the day at 15,871.28 points, down 588.47 points or 3.58%, from its previous close.

Earlier in the day, the Shanghai Composite Index was down by 8.5% to close at around 3209.91 points. The BSE Sensex also saw a massive fall of 1624.51 points or 5.94% to close at 25,741.56 points. Stock markets around the world fell.

Analyst after analyst has blamed China for this massive fall in stock markets all over the world. And so have politicians. Before I get into this, here is some background. Until August 10, 2015, around 6.2 Chinese yuan made up for one US dollar. Between August 11 and August 14, the People’s Bank of China, devalued the yuan against the dollar. Since then the value of the yuan has moved between 6.38-6.40 yuan to a dollar. This was the biggest devaluation in the value of the yuan in two decades.

The yuan has been devalued in the hope of getting Chinese exports going again. In July 2015, the Chinese exports fell by around 8.3%. The fear is that the Chinese will continue to devalue the yuan in the days to come to prop up their exports.

A devalued yuan will lead to cheaper Chinese exports. Let’s understand this through an example. Let’s say a product exported out of China is sold at $50. At around 6.4 yuan to a dollar, the exporter makes 320 yuan every time he sells one piece of the product. We assume no other expenses for the ease of calculation.

Now let’s say the Chinese gradually devalue the yuan to around 7 yuan to a dollar. Then for every piece of the product that is sold the Chinese exporter makes 350 yuan. Instead of taking on the entire gain, the exporter may decide to cut the price in dollars and make his product more competitive. Let’s say he cuts the price of his product to $46. At this price he still makes 322 yuan, which is a little more than the 320 yuan he was making earlier. Nevertheless, given that he has cut his price by a significant $4, chances are he will sell more pieces of the product and make more money in the process. Chinese exports will go up and this will perk up economic growth as well.

Data from 2014 shows that China exports nearly 63% of its exports to the developed world (i.e. United States, European Union, Hong Kong, Japan, South Korea, Russia and Taiwan). Prices of products made in these countries would have to be cut, in order to compete with similar products which are made in China and exported to these countries.

This would lead to prices falling (or what economists like to call deflation) in these countries and that can’t be good for the overall economy. The stock markets are adjusting to this “new reality”. The Economist estimates that “more than $5 trillion has been wiped off on global stock prices,” since August 11, the day China first devalued the yuan against the dollar.

China has been largely blamed for this massive fall in stock markets all over the world. It is being said that China will export deflation to other parts of the world.

In fact, even Donald Trump, who is a Presidential candidate for the Republican Party in the United States, has an opinion on this. Speaking to reporters after the Chinese started devaluing the yuan he had this to say:I think you have to do something to rein in China. They devalued their currency today. They’re making it absolutely impossible for the United States to compete, and nobody does anything. China has no respect for President Obama whatsoever, whatsoever.
Well, you have to take strong action. How can we compete? They continuously cut their currency. They devalue their currency. And I have been saying this for years. They have been doing this for years. This isn’t just starting. This was the largest devaluation they have had in two decades. They make it impossible for our businesses, our companies to compete.
They think we’re run by a bunch of idiots. And what’s going on with China is unbelievable, the largest devaluation in two decades. It’s honestly – great question – it’s a disgrace
.”

Economist John Mauldin had this to say regarding Trump’s comment on the devaluation of the yuan: “Before you dismiss this as nonsense, remember that it comes from a Wharton School graduate.” These MBAs I tell you.

The larger point is why is everyone blaming China for the massive stock market crash all around the world? What led to China letting its currency fall a little against the dollar between August 11 and August 14, 2015? Now that is a question worth asking and answering.

In October 2012, around 80 yen made up for a dollar. Since then, the Bank of Japan has been printing yen (or rather creating them digitally) to drive down the value of the yen in a bid to make Japanese exports more competitive and Japanese imports more expensive.

The idea was that if Japanese exports became more competitive on the price front (as a result of the devaluation of the yen, as we saw with the yuan example earlier), the total amount of Japanese exports would go up. At the same time, if Japanese imports became more expensive, the sale of goods produced locally would go up.

This would mean that exports as well as consumption of goods produced within the country would go up. And this would benefit the Japanese economy. As William Pesek recently wrote on Bloomberg.com: “The yen’s 35 percent drop since late 2012 made Japanese goods cheaper, companies more profitable and Nikkei stocks more attractive.” Further, with a fall in the value of the yen, Japanese exports became more competitive in comparison to exports from countries like Taiwan and South Korea.

Further, imports into Japan became more expensive and this hit countries like China. The Chinese exports to Japan fell by more than 10% in July 2015. By trying to devalue the yuan, China was only doing what the Bank of Japan has been doing for a while.

Other than the Bank of Japan, the European Central Bank, the central bank of the euro zone(essentially countries which use the euro as their currency), has also been printing money, in the hope of driving down the value of the euro. The ECB is printing around 60 billion euros a month.

As Mauldin points out: “First off, the two largest currency manipulating central banks currently at work in the world are (in order) the Bank of Japan and the European Central Bank. And two to four years ago the hands-down leading manipulator would have been the Federal Reserve of the United States…Today, the euro is off over 30% from its highs, as is the Japanese yen. Numerous other currencies are likewise well into double-digit slides. China has moved maybe 3 to 4%. Oh, wow.”

Also, it needs to be pointed out here that the Chinese yuan had been rising against the dollar, all this while, unlike what Trump pointed out. As Mauldin writes: “The rest of the world (Japan, Europe, Great Britain, Brazil, India, among others) [has been] letting their currencies drift down. The simple fact is that the Chinese currency rose by 20% over the last five years…It is utterly wrong-headed to call a 20% rise over almost 10 years “continuous devaluation.”

Hence, why blame only China? The currency wars are on, and China is just one part of it.
The column originally appeared on The Daily Reckoning on August 25, 2015

Greece is now a political crisis not just an economic one

greece

Last week Greece was bailed out for the third time. The total bailout amounts to 82-86 billion euros. In order to access this money the Greek government has to follow a series of austerity measures like pension reforms, implementing the highest rate of value added tax for business sectors which currently pay a lower rate, etc.
Before the bailout was announced many economists were of the view that Greece should leave the Eurozone. Eurozone is essentially a term used to refer to countries which use the euro as their currency.
The logic offered by these economists is fairly straightforward: Greece needs to get out of the euro and start using its own currency, the drachma. In this situation, the drachma would fall in value against other currencies and in the process make the Greek exports competitive. This would help revive Greek exports as well as tourism, and in turn the Greek economy.
The austerity measures that Greece has had to follow since 2010, when it was first bailed out, have crippled the Greek economy. The economy has contracted by 25%. The unemployment is at 26%. Among youth it is over 50%. Small and medium businesses are shutting down by the dozen.
The government debt as a proportion of the gross domestic product (GDP) has jumped from 126.9% in 2009 to 175% currently. This has happened primarily because the size of the Greek economy has contracted leading to the total amount of debt as a proportion of the GDP(which is a measure of the size of an economy) shooting up.
If Greece leaves the euro and moves to the drachma, it will be in a position to devalue the drachma and in the process hope to revive its economy. This is something that it cannot do currently given that it uses the euro as its currency.
The economists who have been calling for Greece to leave the euro are looking at the situation just from an economic point of view. What they forget is that euro has political origins.
The euro came into being on January 1, 1999. But it took a long time for the countries which originally started to use the euro as their currency to get there. A brief history is in order.
Before the euro came the European Union. The origins of the European Union can be traced to the European Coal and Steel Community (ECSC) and the European Economic Community (EEC) formed by six countries (which were France, West Germany, Italy and the three Benelux countries i.e. Belgium, Netherlands and Luxemburg) in 1958.
The goal of ECSC was to create a common market for coal and steel in Europe. The EEC on the other hand worked towards advancing economic integration in Europe. The economic integration of Europe was deemed to be necessary by many experts to create some sort of bond between different countries in a continent destroyed by extreme forms of nationalism during the Second World War.
As the Nobel Prize winning American economist Milton Friedman wrote in a 1997 column: “The aim has been to link Germany and France so closely as to make a future European war impossible, and to set the stage for a federal United States of Europe.”
The EEC and the ECSC organisations gradually evolved into the European Union (EU) which was established by the Maastricht Treaty signed on December 9 and 10, 1991. After the formation of the EU by the passage of the Maastricht Treaty, the members became bound to start a monetary union by January 1, 1999.
What this tells us loud and clear is that the euro was as much a political project as it was an economic one. Given this, asking Greece to leave the euro, is not an easy decision to make politically, as it goes against the basic idea of the United States of Europe. As long as the European politicians are serious about this basic idea, Greece will continue to stay in the Eurozone.
The issue has taken another political dimension with the United States (US) of America getting involved. The US isn’t directly involved but as is often the case, it is operating through the International Monetary Fund (IMF).
On July 14, 2015, the IMF released a four- page report in which it said that the Greek public debt is unsustainable. Public debt is essentially government debt minus government debt that is held by the various institutions of the government.
As the IMF report pointed out: “Greece’s public debt has become highly unsustainable…Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.”
The IMF wants Europe to handle the Greece issue with more care. “There are several options. If Europe prefers to again provide debt relief through maturity extension, there would have to be a very dramatic extension with grace periods of, say, 30 years on the entire stock of European debt, including new assistance… Other options include explicit annual transfers to the Greek budget or deep upfront haircuts,” the IMF report points out.
Basically there are three things that the IMF wants. First, it feels Greece should be allowed more time to repay the debt that it owes to the economic troika of IMF, European Central Bank and European Commission. The IMF wants to give Greece a 30 year moratorium on its debt.
Third, it wants Europe to help Greece more by giving more money to the country ever year. And fourth, it wants lenders of Greece to take a haircut, which basically means that they should let Greece default on a part of the debt that it has taken on.
The question is why are the Americans doing this? A simple explanation for this is that if Greece is abandoned by Europe it could approach China or Russia for help. And this is something that the Americans won’t be comfortable with. A television analyst used to making flippant statements could even call it the start of the second Cold War.
The trouble is that IMF released this report after the third bailout of Greece had been announced. As Albert Edwards of Societe Generale put it: “I simply do not understand why the IMF did not come out loud and clear…and say they would not participate in this charade without debt forgiveness.”
The mess in Eurozone just got messier.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column appeared in the Daily News and Analysis on July 21, 2015

Milton Friedman is having the last laugh on euro

Portrait_of_Milton_Friedman
The euro came into being on January 1, 1999. On this day, 11 countries in Europe joined together to form what came to be known as the Eurozone or countries which use the euro as their currency. Greece joined the Eurozone on June 19, 2000, and gave up on its own currency, the drachma.

Fifteen years on Greece is in a terrible economic state. More than 50% of its youth population is unemployed. The economy has contracted by 25% since 2010. And its debt to gross domestic product (GDP) ratio has jumped to 175% from 129% in 2009.

Also, the country has voted against a referendum which essentially asked the citizens whether they were ready to face more austerity measures in return for a third bailout by the economic troika of the International Monetary Fund, the European Commission and the European Central Bank.

The country owes around 240 billion euros to the European Commission, the European Central Bank (ECB) and the IMF. The troika has been lending money to Greece for a while now. As Mark Blyth writes in Austerity—The History of a Dangerous Idea: “In May 2010, Greece received a 110-billion-euro loan in exchange for a 20 percent cut in public-sector-pay, a 10 percent pension cut, and tax increases.”

Every time the troika lends money it demands more austerity measures from Greece. The troika wants to ensure that the budget of the Greek government enters into a positive territory so that the country is finally able to start repaying the debt it owes, instead of borrowing more to repay what it owes.

The troika wants the Greek government to run a surplus i.e. its revenues should be more than its expenditure. As Blyth writes that the idea seems to be to: “Cut spending, raise taxes—but cut spending more than you raise taxes—and all will be well.” The trouble is that the austerity that has accompanied Greece has hurt rather than helped Greece. As the GDP has contracted, the debt to GDP ratio has jumped up majorly.

This vote against the referendum has made Germany more aggressive on the question of allowing Greece to continue staying in the Eurozone. While it is difficult to predict which this will go, my guess is that ultimately Greece will allowed to stay in the Eurozone and the current crisis will be postponed for a latter day, for the simple reason that the euro is ultimately as much a political idea as it is an economic one.

A major reason for which countries within Europe came together to form a monetary union and start using a common currency was to ensure closer economic cooperation and integration in order to ensure that countries in Europe did not fight any more wars against each other. The First and the Second World Wars were the deadliest wars that the world had ever seen.

As the Nobel Prize winning American economist Milton Friedman wrote in a 1997 column: “The aim has been to link Germany and France so closely as to make a future European war impossible, and to set the stage for a federal United States of Europe.”

Having said that monetary unions are not always easy to run. As Friedman wrote: “A common currency is an excellent monetary arrangement under some circumstances, a poor monetary arrangement under others…The United States is an example of a situation that is favorable to a common currency. Though composed of fifty states, its residents overwhelmingly speak the same language, listen to the same television programs, see the same movies, can and do move freely from one part of the country to another; goods and capital move freely from state to state; wages and prices are moderately flexible; and the national government raises in taxes and spends roughly twice as much as state and local governments.”

As far as countries coming together to start using the Eurozone were concerned, their residents spoke different languages, they watched different television programmes and movies and did not really move freely from one country to another. And most importantly different countries needed a different interest rate policy at different points of time.

But within a monetary union with a common currency that is not always possible. And this led to problems within the Eurozone. As Ramesh Ponnuru writes on Bloomberg View: “During the boom years a decade ago, Greece and other countries on Europe’s periphery over-borrowed because interest rates were inappropriately low for them.”

In 1992, before the euro came into being, the German government could borrow at 8% and the Greek government at 24%. By 2007, this difference had largely gone. The German government could borrow at 4.02%. And the Greek government could borrow at 4.29%. When the interest rates for the government fell, fell as dramatically as they did in parts of the Eurozone, the government as well as the private sector ended up borrowing a lot more.

And this primarily led to a huge housing bubble across large parts of the Eurozone. In a normal scenario where there was no monetary union the central bank of a country could have raised interest rates and made it more expensive for the private sector to borrow. This would have ensured that the real estate bubble wouldn’t have gone on for as long as it did.

But the European Central Bank had to keep the entire Eurozone in mind and not just Greece and other weaker countries like Spain, Italy and Portugal. Hence, it allowed the low interest rates to remain low.

In the aftermath of the crisis, the weaker countries in the Eurozone needed low interest rates. As Ponnuru writes: “During the bust, the European Central Bank’s efforts to keep inflation low in the core has led to a punishing deflation in the periphery. The European Central Bank raised interest rates in 2008 and 2011 — at both the start and the middle of Greece’s depressions.”

Even if Greece continues to be within the Eurozone in the days to come, these basic problems with the euro will continue to remain. And that would mean that euro and financial crises will continue to be closely linked.
The column appeared on The Daily Reckoning on July 8, 2015

 

Grexit: Why Amartya Sen and Thomas Piketty are right about Germany

thomas piketty
The French economist Thomas Piketty whose bestselling book Capital in the Twenty First Century was published last year, in an interview to the German newspaper Die Zeit recently said: “What struck me while I was writing is that Germany is really the single best example of a country that, throughout its history, has never repaid its external debt. Neither after the First nor the Second World War.”

In the recent past, Germany has been insistent that Greece repay the money that it owes to the economic troika of the European Central Bank, the European Commission and the International Monetary Fund. As Piketty remarked: “When I hear the Germans say that they maintain a very moral stance about debt and strongly believe that debts must be repaid, then I think: what a huge joke! Germany is the country that has never repaid its debts. It has no standing to lecture other nations.”

In order to understand what Piketty meant we will have to go back nearly 100 years. At the end of the First World War in 1918, Germany had to compensate the victorious Allies (read Britain, France, and America primarily) for the losses it had inflicted on them.

At the reparations commission, the British delegation wanted Germany to pay $55 billion as compensation to the Allies. This was a huge number, given that the German gross domestic product (GDP) at that point of time stood at around $12 billion.

The Americans were fine with anything in the range of $10 to $12 billion and did not want anything more than $24 billion. The French did not put out a number of what they were expecting but they wanted a large reparation from Germany.

This was primarily because when the French had been in a similar situation in 1870 they had paid up Germany. After France had lost the Franco-Prussian War, Germany had asked France to pay 5 billion francs to make good the losses that it had faced during the course of the war. The French had rallied together and paid this money in a period of just two years.

Given this historical back­ground, they saw no reason why Germany should not be made to pay for the losses that France had suffered. The French assumed that like they had paid the Germans 50 years back, the Germans would also pay up. As Piketty put it in the interview: “However, it has frequently made other nations pay up, such as after the Franco-Prussian War of 1870, when it demanded massive reparations from France and indeed received them.”
In May 1919, it was decided that Germany would pay the Allies an initial amount of $5 billion by May 1, 1921. The final reparation amount to be paid would be decided by a new Reparations Com­mission.

Finally, the total reparations amount that Germany would have to pay the allies was set at $12.5 billion, which was equal to the pre-war GDP of Germany. To repay this amount, Germany would have had to pay around $600–$800 million every year.

Germany was in a bad state financially and at the end of the war had a budget deficit that ran into 11,300 million marks (the German currency at that point of time). As the government did not earn enough revenue to meet its expenditure due to the high-reparation payments, it started to print money to finance pretty much everything else.

This finally led to the German hyperinflation of 1923. Inflation in Germany at its peak touched a 1,000 million per­cent. Interestingly, one view prevalent among economic histori­ans is that Germany engineered this hyperinflation to ensure that it did not have to pay the reparation amounts. The hope was that, with inflation at such high levels, the Allied countries would deal with Germany sympathetically when it came to deciding on repa­ration payments. And this is precisely what happened.

By the time the hyperinflation came to an end, the economy was in such a big mess that the repa­ration payments had slowed down to a trickle. And it so turned out that over the next few years more was paid to Germany in the form of various loans than it paid the Allies in reparations. After this, Germany regularly continued to default on the pay­ments and finally when Hitler came to power in 1933, he stopped these payments totally.
As mentioned earlier, after the hyperinflation of 1923, money had started to pour in from other nations into Germany. A substantial part of the preparation for the Second World War was financed through this money.

The Second World War started in 1939 and ended in 1945. Given the fact that Hitler had used foreign money to get the Second World War started, the directive at the end of the Second World was that nothing should be done to restore the German economy above the minimum lev­el required to ensure that there was no disease or unrest, which might endanger the lives of the occupying forces.

Eventually, the realization set in that an economic recovery in Europe was not possible without an economic recovery in Germany, the largest economy in Europe. The American Secretary of State, George C. Marshall, after having returned from Moscow in April 1947, was convinced that Europe was in a bad shape and needed help. This eventually led to the Marshall Plan. From 1948 to 1954, the United States gave $17 billion to 16 countries in Western Europe, including Germany, as a part of the Marshall Plan.

So what does all this history tell us? One is that Germany did not repay the debt that it owed to the Allied nations and hence, as Piketty said: “Germany is the country that has never repaid its debts. It has no standing to lecture other nations.”
But there is a bigger lesson here—that demanding austerity from Greece in order to be able to repay the debt isn’t exactly the answer. The German experience after the First World War precisely proves that.

The Nobel Prize winning economist Amartya Sen, writes about the German experience after the First World War, in a recent column. As he writes: “Germany had lost the battle already, and the treaty was about what the defeated enemy would be required to do, including what it should have to pay to the victors. The terms…as Keynes saw it…included the imposition of an unrealistically huge burden of reparation on Germany – a task that Germany could not carry out without ruining its economy.”

And this is precisely what has happened in Greece over the last few years. The country now owes close to 240 billion euros to the economic troika. The austerity measures have had a highly negative impact on the Greek economy. As Nobel Prize winning economist Joseph Stiglitz recently wrote: “Of course, the economics behind the programme that the “troika” foisted on Greece five years ago has been abysmal resulting in a 25% decline in the country’s GDP. I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences: Greece’s rate of youth unemployment, for example, now exceeds 60%.”
Amartya_Sen_NIH
This has essentially led to a situation where the total amount of debt with respect to the Greek gross domestic product (GDP) went up instead of going down. Currently the total debt to GDP ratio of Greece stands at a whopping 175%. And this number is likely to go up further in the days to come. In comparison the number was at 129% in 2009.

The only way Greece can perhaps be able to repay some of its external debt is if economic growth comes back. And that is not going to happen through more austerity. As Sen puts it: “Keynes ushered in the basic understanding that demand is important as a determinant of economic activity, and that expanding rather than cutting public expenditure may do a much better job of expanding employment and activity in an economy with unused capacity and idle labour. Austerity could do little, since a reduction of public expenditure adds to the inadequacy of private incomes and market demands, thereby tending to put even more people out of work.”

As economic history has shown more than once, whenever people in decision making positions forget what Keynes said, the world usually ends up in a bigger mess.

The article originally appeared on Firstpost on July 7, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)