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Amid a Depression and Linked Heavily into Western Europe, Latvia's Government Collapses!
From the UK Telegraph: Latvia government collapses amid economic crisis
The People's Party, the largest group in a five-party coalition, walked
out amid disputes over how to cope with the country's severe problems.Unemployment has now hit 20 per cent and the economy contracted by 18
per cent last year.The People's Party quit after its action plan failed to get the backing
of Valdis Dombrovskis, the Latvian prime minister, who labelled it
"populist".Mr Dombrovskis warned the People's Party's departure could cause yet
further economic instability."Any contradictions in the government are immediately reflected in the
financial markets, and they directly affect the fiscal stability our
country... a policy that is truly responsible for the country cannot be
self-centred," he said.
But he said remained confident that an emergency IMF bail-out worth
£6.7bn would remain unaffected by the political instability.New Era, Mr Dombrovskis's party, confirmed it had already extended
invitations to other parties to join a new coalition in an attempt on
gain the majority in Latvia's 100-seat parliament.It attempted to play down concerns about the prospect of a minority
government at the helm of country in severe economic turmoil.Laila Dimrote, a spokeswoman for New Era, said: "This is not a big
deal. Latvia has had many minority governments in the past, and often
this is the case prior to elections."
Hopefully, subscribers and readers are taking full advantage of the
research at hand. This plays into the fact that Latvia, and its
neighboring countries, are
in a depression. This economic contagion will be both converted into
financial contagion through the banking system and transmitted as both
financial and economic contagion to the wealthier western countries that
have large economic claims on Latvia and do trade with them.
Click to
Enlarge...
Click any
graphic to enlarge...
For more opinion and analysis, see:
- and Financial
Contagion vs. Economic Contagion: Does the Market Underestimate the
Effects of the Latter?
I will be publishing the foreign claims model (which will tie all of the
myriad global risks into one, cogent risk model) and my analysis of
Italy early next week for subscribers, along with a free accompanying
analysis for non-paying subscribers and readers. Ireland, the UK and
Spain are on tap. Earlier installments of the Reggie Middleton's Pan-European Sovereign
Debt Crisis
- The
Coming Pan-European Sovereign Debt Crisis - introduces the crisis
and identified it as a pan-European problem, not a localized one. - What
Country is Next in the Coming Pan-European Sovereign Debt Crisis? -
illustrates the potential for the domino effect - The
Pan-European Sovereign Debt Crisis: If I Were to Short Any Country,
What Country Would That Be.. - attempts to illustrate the highly
interdependent weaknesses in Europe's sovereign nations can effect even
the perceived "stronger" nations. - The
Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western
European Countries -
The
Depression is Already Here for Some Members of Europe, and It Just
Might Be Contagious! -
I
Think It's Confirmed, Greece Will Be the First Domino to Fall - Smoking
Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer
Beware! - Financial
Contagion vs. Economic Contagion: Does the Market Underestimate the
Effects of the Latter? - "Greek Crisis Is Over, Region Safe",
Prodi Says - I say Liar, Liar, Pants on Fire! - Germany Finally Comes Out and Says,
"We're Not Touching Greece" - Well, Sort of... -
The Greece and the Greek Banks Get the Word "First"
Etched on the Side of Their Domino
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pass the salt please
Reggie, Leo ... Good Stuff!
Looks like local governments are starting to "circle the wagons"
Thanks Reggie.....always appreciate your excellent insights and research.
Any thoughts on GECC in terms of Latvia and other eastern europeans? As I recall, GE had a ton of paper throughout that area.
Trying to maintain that euro peg is foolish. It's obvious the Icelanders are sharper than the Latvians. What Reykjavik needs to do is tell the IMF to blow themselves! They can go back to cod fishing and hang a few bankers - by the neck until dead - just to press home the point.
Of course, what will the Latvians turn to? Professional drinking?
There is no reason why the Latvian government should hold onto the euro peg while accepting an IMF austerity regime. Better for them to abandon the euro (which is a sinking ship, anyway) and make a deal with Russia. All they have to do is let the Russians put some air- to- air missiles in the country and the Euros will be falling over each other, Czech - books in hand! Greece, Portugal and Ireland should all ponder the same approach.
Ditto with China. Imagine what a Chinese fighter base outside of Dublin would be worth? A hundred billion euros? I would do it: I would send a high- level delegation to Beijing to sound out the Chinese desire to put a forward 'defense' base on Irish soil. Imagine the uproar!
Imagine what a couple Russian armored divisions might be worth? How about a naval shipyard? How about an nuclear sub base plus an Iranian reactor? A fast breeder with tanks full of glowing plutonium? The Latvians lack imagination: casinos, whorehouses, a tax haven, a dump for European electronic devices, a nickel smelter, some 'clean coal', topless gay bars, some religious cults ... marijuana farms. A training ground for US mercenaries ...
Look to the same sorts of deflationary excesses in Greece if it accepts IMF funds while attempting to remain with the euro commons. Watch the deflationary spiral accelerate in Ireland: austerity cannot allow enough surplus wealth to service existing debts so additional debt is piled on. Simply playing by the rules is stupid. In the new, zero- sum world it is every man - and country - for itself!
Good to see Michael Hudson's work over here. All that is taking place in Europe right now is hard money in action. And it is going to get a lot worse ...
I agree with some of what you say, particularly about abandoning the peg, and telling of the banks.
Though you mention working with Russia, it will not fly. There are a fair number of Latvians that are still very bitter about the occupation years and number of Russians in Latvia. I doubt will not see an alliance between Latvia and Russia, to much bad blood.
As for Chinese bases elsewhere, it will provoke some "fun". The Navy is already losing it's mind about the Chinese trying to set up a naval base in Africa to protect it's investment over there. Remember only USA is allowed a network of foreign bases, because we are magical, awesome, handsome, insane, etc (take your pick).
i'm going with insane.
Now that you mention it Steve......... hush hush ... but there is a secret Irish plan to put all our remaining resources into a covert nuclear weapons program.
This plan will manifest itself first by using all the unemployed construction workers to dig holes in the sides of both the Wicklow and Kerry mountains.
There we can begin to build reactors , enrich uranium and construct the bomb.
once we have weaponized the bomb and built the delivery system we can announce to the world our global ambitions by detonating a super in the Bog of Allen.
We can then proceed to threaten both Frankfurt and Brussels with nuclear annihilation unless they provide us with all of the German Gold and a infinite amount of EU structural funds
We would become the North Korea of Europe and impress the world with our military style parades which will emphasise our organisational discipline
http://www.youtube.com/watch?v=SVBEyVt_7po
I totally forgot about Latvia and Estonia and the other Eastern European countries that are in a depression. No wonder the US news is keeping any news from that country from getting into the US.
Reggie and Leo,
Thank you both for sharing this. The wife and I have friends throughout the Balkans and we just want to cry. We here in the USA will have our turn soon.
Got Religion?
UNlike eurozone countries, Latvia using it's own currency in addition to euro.
So the euro may not get damaged by much.
Thank you Reggie, and 0-H for news I can trust. Maybe my shorts will finally make sense now.
Looking at gold and silver tanking a few hours ago, And the yield on 10 year treasuries falling, I thought somethings up, This is probably the shoe moving the markets. Assuming this is the shoe. Why is gold tanking? I would assume it would be flat at least, GATA will be busy.
No mention of any problems here in the UK in the MSM keep up the good work ZH I would be buying gold now on this dip. If I hadnt already done so.
PPT
Chalk up another victory for the Western banking cartel!
two thumbs up on this article
Monetary control “is more powerful than mega-tons of atomic energy; it reaches into every shop and home; it can be used with precision against one nation, one group, or even one person while sparing or benefiting all others.” ~ G. Edward Griffin
The world is being Latvianized.
That’s the going price for blindly handing over to a few rapacious moneylenders total monetary control of our lives and assets. Follow the money, to the billionaire plutocrats who control the “rate of exchange” of our money, to the international bankers who 24/7 transfer the world’s wealth to their own pockets via their central bank operations.
Is the world witnessing its final step into totalitarian government, where all must surrender sovereignty, wealth and the counterbalance of power in this “emergency”? Or, will this “emergency” fertilize a soil receptive to the freedom seeds of peaceful revolution?
Americans are slowly awakening as the advantages of being paid in the world’s “reserve” currency begin to wan a home. Abroad, Latvians earn and pay their debts in lats—lats that were depreciated by the bankers because they’d “lost their competitiveness,” due to “global financial shock.” This means that the amount of debt Latvians owe to their foreign bankers may have doubled, even tripled, in devalued lats. (Shades of Weimar?) How can this be? Well, the country’s banks are local subsidiaries of Swedish banks and “a real exchange rate depreciation is necessary to restore the country’s competitiveness,” according to Nouriel Roubini.
A blogger from Latvia (Mara) now living in the United States posted these comments on Naked Captilalism less than a year ago:
“Now the average Latvian is getting wages cut (if they aren't being fired outright) and many social and government institutions are cutting back dramatically or closing entirely. Why? Because Swedish banks needed to be bailed out of criminal loans with IMF money and the Latvians will suffer for this for at least a decade…
“The unfathomable part was the government's nodding acceptance to borrow from the IMF to pay for bad private loans given out by mostly Swedish banks (for vastly overpriced real estate). Some of the loans were to locals, some other nationalities that wanted 2nd homes in Latvia. My understanding is that most of the mortgages were full recourse, but certainly not guaranteed by the government…”
She concluded, “I would...outlaw mortgages being denominated in foreign currencies and/or payments tied to forex fluctuations, since agreeing to such terms is similar to prostitution, except it costs you, lasts for 15-30 years and does not come with lubricant.”
It’s too easy for international financiers to decide how much less those lats that Latvians hold in savings and earn in wages are worth on the market “to restore the country’s competitiveness, “ and to destroy the lives of workers, families, savers, homeowners…
Joblessness, homelessness, hopelessness and penury are spreading throughout the world under monetary dictatorship. It is no secret that the proposed global government negotiated at Bretton Woods in New Hampshire in 1944 was designed upon the principles of socialism with two weapons of centralized control. One was a monetary weapon -- the IMF/World Bank (an arm of the Fed) that would issue a world currency; the other a world police force. All under slogans of international trade, growth and globalization.
The Internet is replete with the IMF/World Bank’s sordid history of its members getting rich allegedly fighting poverty. As Graham Hancock noted in Lords of Poverty: "[M]oney has never been easier to obtain… [W]ith no messy accounts to keep, the venal, the cruel and the ugly are laughing literally all the way to the bank… All they have to do…is screw the poor.” And everyone else.
Thanks! Reggie.
hear, hear. Well said
Oh my god, how many books have you read, JR?
A country's "competitiveness" these days is the ability to print large sums of money without causing a violent revolt.
htp, another million dollar definition!
I agree with your comments. In general however the bankers BS is being muddled with the liberal overspending debt that is a distinctly separate issue. Debt created from spending beyond revenues is what the bankers hide but they are not the creation of the debt. They "fund" and service the demand for debt. Until there is accountability on those demanding loans, this problem will not be solved, and the funding of the debt for a pile of non essential programs is THEFT from taxpayers.
You’re right, swamp. And it was done by arrangement in 1913, designed by international financier, Paul Warburg. It’s an arrangement with the politicians. Look who gets the debt; it’s government and the politicians. Every single, tiny, little bullet fired in Iraq was financed by the banks, out of thin air. Fiat currency! They loaned the Congress the money for every one of those bullets. The bullet is fired or corroded and the banker is paid off, with interest. You have an Iraqi villager shot and a U.S. taxpayer raped and another yacht for a banker--all courtesy of the printing facilities of the Fed, sanctioned by the U.S. Congress. But unlike in the days of the Rothschilds in Frankfurt, it’s now the bankers who decide what they want done—corral Middle East Oil—and it’s the politicians who try to see if they can do what the bankers want done. It seems to be a little bit of a turntable on the politicians. Never make a pact with the Devil.
Either way, the people pay.
Again, I agree totally, but the swaps and the rest of the garbage paper was sold on bonds and pie in the sky pension promises and to greedy people who went shopping for houses and "bought" them on money they knew they would never have but for hyperinflation real estate prices, and the demand for the public bonds is for every kind of liberal agenda imaginable, maybe designed by the elite bankers from Jekyll Island, but, bought by the public, at the expense of the few in the public who have been voting down every bond that was ever put on the ballot (me).
I think that we can step beyond this "alliance" between bankers and politicians who create an out-of-control debt scenario to realise that the bankers control and therefore are the government. In the case of many so-called sovereign countries (are there any?), it is the case that the bankers own the store.
It is no longer the Medieval "alliance" between royal house and banker for the convenience of the royal house (and its demise). If it ever was.
and, perhaps, step beyond the idea of government debt (particularly at the national level) as being floated "for every liberal agenda item imaginable". reagan and the bushes presided over the bulk of the rise in u.s. sovereign debt and much of it was spent on the military and related "national security" items. the real issue is increasing debt foolishly (or malevolently) during an expansion so as not to be able to, when desperately needed, in the depression. that is (or should be) the issue.
Read the free research that I made available on CEE, not only is Latvia not the only country that will probably succumb to this, but the lender nations will probably catch it this time around as well.
Greece without Grease?
Reggie, I've read the research! Thanks for this extensive background and logic. Your research and analysis is incomparable. Broadening. One can see the interworking of the banks and the vise they’ve put these nations into…and the repercussions—valuable political and investor information. We have been used to receiving analyses of financial markets from economists who see the financial landscape strictly from the investment bankers’ narrow viewpoint; with solutions that favor keeping the TBTF financial sector (GS et al.) in power as well as the politicians who grease their palms, regardless the outcome for investors or economies, for national sovereignty or local workers. Again, thanks for these links. They are of incalculable monetary and intellectual worth in this political economy!
Austrian gov spreads over Bund look set to widen given their financial system exposure to CEE.
They have LOTS of hot prostitutes over there. FYI.
Gee, Dow down 62 at 12:30. Guess this news dampened the euphoria?
The first of many
There is just too much Hubris and too little or actually no common sense in all this.
Thanks for the heads up Reggie; obviously, none of this will be reported in the US. Euroland seems to be on the precipice again with all the minor players blowing up on the fringes. Like a dying man in frigid waters, the extremities go first, followed by the core. Germany is the heart, but they appear reluctant to pump blood to those extremities.
Sometimes the diseased gangrene limbs need to be amputated.
reply to:
Like a dying man in frigid waters, the extremities go first, followed by the core. Germany is the heart, but they appear reluctant to pump blood to those extremities.
Except in this analogy the extremities simply become seperated extremists.
Michael Hudson and Jeff Sommers wrote this excellent article:
World Economic Crisis: Latvia’s
Neoliberal Madness
You Think Greece Has Problems? Latvia's Road to Serfdom
By Prof. Michael Hudson and and Prof. Jeff Sommers
ISLET
Counterpunch
GlobalResearch
February 16th, 2010
While most of the world’s press focuses on Greece (and also Spain, Ireland and Portugal) as the most troubled euro-areas, the much more severe, more devastating and downright deadly crisis in the post-Soviet economies scheduled to join the Eurozone somehow has escaped widespread notice.
No doubt that is because their experience is an indictment of the destructive horror of neoliberalism – and of Europe’s policy of treating these countries not as promised, not as helping them develop along Western European lines, but as areas to be colonized as export markets and bank markets, stripped of their economic surpluses, their skilled labor and indeed, working-age labor generally, their real estate and buildings, and whatever was inherited from the Soviet era.
What also was inherited, of course, was an extreme reaction against centralized Soviet planning. The result was the political equivalent of Newton’s Third Law of Motion: Every action has an equal and opposite reaction. As a victim of Soviet ideology, Latvia did not say farewell to ideologies as such, but rather swung to the opposite extreme. After the Soviet collapse it felt compelled to adopted the neoliberal ideology.
But this is twenty years later now. For reasons beyond comprehension, the country now sticks to that ideology which has just devastated the Western economies. Latvia itself is experiencing one of the world’s worst economic crises – indeed, demographic as well as economic. Its 25.5 percent plunge in GDP over just the past two years (almost 20 percent in this past year alone) is already the worst two-year drop on record. The IMF’s own rosy forecasts anticipate a further drop of 4 percent, which would place the Latvian economic collapse ahead of the United States’ Great Depression The bad news does not end there, however. The IMF projects that 2009 will see a total capital and financial account deficit of 4.2 billion euros, with an additional 1.5 billion euros, or 9 percent of GDP, leaving the country in 2010.
Moreover, the Latvian government is rapidly accumulating debt. From just 7.9 percent of GDP in 2007, Latvia’s debt is projected to be 74 percent of GDP for this year, supposedly stabilizing at 89 percent in 2014 in the best-case IMF scenario. This would place it far outside the debt Maastricht debt limits for adopting the euro. Yet achieving entry into the eurozone has been the chief pretext of the Latvia’s Central Bank for the painful austerity measures necessary to keep its currency peg. Maintaining that peg has burned through mountains of currency reserves that otherwise could have been invested in its domestic economy.
Yet nobody in the West is asking why Latvia has suffered this fate, so typical of the Baltics and other post-Soviet economies but only slightly more extreme. Nearly twenty years since these countries achieved freedom from the old USSR in 1991, the Soviet system hardly can be blamed as the sole cause of their problems. Not even corruption alone can be blamed – a legacy of the late Soviet period’s dissolution, to be sure, but magnified, intensified and even encouraged in the kleptocratic form that has provided such rich pickings for Western bankers and investors. It was Western neoliberals who financialized these economies with the “business friendly reforms” so loudly applauded by the World Bank, Washington and Brussels.
Far lower levels of corruption obviously are to be desired (but whom else would the West trust, if not the kleptocrats?), but dramatically reducing it would perhaps only improve matters up to the level of Estonia’s road into euro-debt peonage. These neighboring Baltic counties likewise have suffered dramatic unemployment, reduced growth, declining health standards and emigration, in sharp contrast to Scandinavia and Finland.
Joseph Stiglitz and other economists in the West’s public eye have began to explain that there is something radically wrong with the financialized order imported by Western ideological salesmen in the wake of the Soviet collapse. Neoliberal economics certainly was not the road that Western Europe took after World War II. It was a new experiment, whose dress rehearsal was imposed initially at gunpoint by the Chicago Boys in Chile. In Latvia, the advisors were from Georgetown, but the ideology was the same: dismantle the government and turn it over to political insiders.
For the post-Soviet application of this cruel experiment, the idea was to give Western banks, financial investors, and ostensibly “free market” economists (so-called because they gave away public property freely, untaxed it, and gave new meaning to the term “free lunch”) were given a free hand in much of the Soviet bloc to design entire economies. And as matters turned out, every design was the same. The names of individuals were different, but most were linked to and financed by Washington, the World Bank and European Union. And sponsored by the West’s financial institutions, one hardly should be surprised that they came up with a design in their own financial interest.
It was a plan that no democratic government in the West could have passed. Public enterprises were doled out to individuals trusted to sell out quickly to Western investors and local oligarchs who would move their money safely offshore into the Western havens. To cap matters, local tax systems were created that left the traditional two major Western bank customers – real estate and natural infrastructure monopolies – nearly tax free. This left their rents and monopoly pricing “free” to be paid to Western banks as interest rather than used as the domestic tax base to help reconstruct these economies.
There were almost no commercial banks in the Soviet Union. Rather than helping these countries create banks of their own, Western Europe encouraged its own banks to create credit and load down these economies with interest charges – in euros and other hard currencies for the banks’ protection. This violated a prime axiom of finance: never denominate your debts in hard currency when your revenue is denominated in a softer one. But as in the case of Iceland, Europe promised to help these countries join the Euro by suitably helpful policies. The “reforms” consisted in showing them how to shift taxes off business and real estate (the prime bank customers) onto labor, not only as a flat income tax but a flat “social service” tax, so as to pay Social Security and health care as a user fee by labor rather than funded out of the general budget largely by the higher tax brackets.
Unlike the West, there was no significant property tax. This obliged governments to tax labor and industry. But unlike the West, there was no progressive income or wealth tax. Latvia had the equivalent of a 59 percent flat tax on labor in many cases. (American Congressional committee heads and their lobbyists can only dream of so punitive a tax on labor, so free a lunch for their main campaign contributors!) With a tax like this, European countries had nothing to fear from economies that emerged tax free with no property charges to burden their labor with taxes, low housing costs, low debt costs. These economies were poisoned from the outset. That is what made them so “free market” and “business friendly” from the vantage point of today’s Western economic orthodoxy.
Lacking the power to tax real estate and other property – or even to impose progressive taxation on the higher income brackets – governments were obliged to tax labor and industry. This trickle-down fiscal philosophy sharply increased the price of labor and capital, making industry and agriculture in neoliberalized economies so high-cost as to be uncompetitive with “Old Europe.” In effect the post-Soviet economies were turned into export zones for Old Europe’s industry and banking services.
Western Europe had developed by protecting its industry and labor, and taxing away the land rent and other revenue that had no counterpart in a necessary cost of production. The post-Soviet economies “freed” this revenue to be paid to Western European banks. These economies – debt-free in 1991 – were loaded down with debt, denominated in hard currencies, not their own. Western bank loans were not used to upgrade their capital investment, public investment and living standards. The great bulk of these loans were extended mainly against assets already in place, inherited from the Soviet period. New real estate construction did indeed take off, but the great bulk of it has now sunk into negative equity. And the Western banks are demanding that Latvia and the Baltics pay by squeezing out even more of an economic surplus with even more neoliberal “reforms” that threaten to drive even more of their labor abroad as their economies shrink and poverty spreads.
The pattern of a ruling kleptocracy at the top and an indebted work force – non- or weakly unionized, with few workplace protections – was applauded as a business-friendly model for the rest of the world to emulate. The post-Soviet economies were thoroughly “underdeveloped,” rendered hopelessly high-cost and generally unable to compete on anywhere near equal terms with their Western neighbors.
The result has been an economic experiment seemingly gone mad, a dystopia whose victims are now being blamed. Neoliberal trickle-down ideology – apparently being prepared for application to Europe and North America with an equally optimistic rhetoric – was so economically destructive that it is almost as if these nations were invaded militarily. So it is indeed time to start worrying about whether the Baltics may be a dress rehearsal for what we are about to see in the United States.
The word “reform” is now taking on a negative connotation in the Baltics, as it has in Russia. It has come to signify retrogression back to feudal dependency. But whereas feudal lords from Sweden and Germany ruled their Latvian manors by the power of landownership, they now control the Baltics by their foreign-currency mortgage loans against the region’s real estate. Debt peonage has replaced outright serfdom. Mortgages far in excess of actual market values, which have plunged by 50-70 percent in the past year (depending on housing type), also are far in excess of the ability of Latvian homeowners to pay. The volume of foreign-currency debt is far beyond what these countries can earn by exporting the products of their labor, industry and agriculture to Europe (which hardly wants any imports) or other regions of the world in which democratic governments are pledged to protect their labor force, not sell it out and subject it to unprecedented austerity programs – all in the name of “free markets.”
Two decades have passed since the neoliberal order was introduced, and the results are disastrous, if not almost a crime against humanity. Economic growth has not occurred. Soviet-era assets have simply been loaded down with debt. This is not how Western Europe developed after World War II, or earlier for the matter – or China most recently. These countries pursued the classical path of protection of domestic industry, public infrastructure spending, progressive taxation, public health and workplace safety regulations, legal prohibitions against insider dealing and looting – all anathema to neoliberal free-market ideology.
What is starkly at issue are the underlying assumptions of the world’s economic order. At the core of today’s crisis of economic theory and policy are the all but forgotten premises and guiding concepts of classical political economy. George Soros, Professor Stiglitz and others describe a global casino economy (which Soros certainly enriched himself by playing) in which finance has become detached from the process of wealth creation. The financial sector makes increasingly steep, even unpayably high claims on the real economy of goods and services.
This was the concern of the classical economists when they focused on the problem of rentiers, owners of property and special privilege whose revenues (with no counterpart in any necessary cost of production) led to a de facto tax on the economy – in this case, by imposing debt on it. Classical economists recognized the need to subordinate finance to the needs of the real economy. This concern was the philosophy that guided U.S. banking regulation in the 1930’s, and which West Europe and Japan followed from the 1950s through the 1970s to promote investment in manufacturing. Instead of checking the financial sector’s ability to engage in speculative excess, the United States overturned these regulations in the 1980s. From a bit below 5 percent of total U.S. profits in 1982, the financial sector’s after-tax profits rose to an unprecedented 41 per cent in 2007. In effect this zero-sum activity was an overhead “tax” on the economy.
Along with financial restructuring, the main item in the classical tool-kit was tax policy. The aim was to reward work and wealth creation, and to collect the “free lunch” resulting from “external” social economies as the natural tax base. This tax policy had the virtue of reducing the burden on earned income (wages and profits). Land was seen as supplied by nature without a labor-cost of production (and hence without cost value). But instead of making it the natural tax base, governments have permitted banks to load it down with debt, turning the rise in land’s rental value into interest charges. The result, in classical terminology, is a financial tax on society – revenue that society was supposed to collect as the tax base to invest in economic and social infrastructure to make society richer. The alternative has been to tax land, monopolies and asset-price gains. And what tax collectors have relinquished, banks now collect in the form of a rising price for land sites – a price for which buyers pay mortgage interest.
Classical economics could have predicted Latvia’s problems. With no curbs on finance or regulation of monopoly pricing, no industrial protection, privatization of the public domain to create “tollbooth economies,” and a tax policy that impoverishes labor and even industrial capital while rewarding speculators, Latvia’s economy has seen little economic development. What it has achieved – and what has won it such loud applause from the West – has been its willingness to rack up huge debts to subsidize its economic disaster. Latvia has too little industry, too little agricultural modernization, but over 9 billion lati in private debt – now at risk of being shifted onto the government’s balance sheet, just as has occurred with the U.S. bank bailouts.
If this credit had been extended productively to build Latvia’s economy, it would have been acceptable. But it was mostly unproductive, extended to fuel land-price inflation and luxury consumption, reducing Latvia to a state of near debt serfdom. In what Sarah Palin would call a “hopey-change thing,” the Bank of Latvia suggests that the bottom of the crisis has been reached. Exports finally have begun to pick up, but the economy is still in desperate straits. If current trends continue there will be no more Latvians left to inherit any economic revival. Unemployment still stands at more than 22 percent. Tens of thousands have left the country, and tens of thousands more have decided not to have children. This is a natural response to saddling the country with billions of lats (Latvia’s currency) in public and private debt. Latvia is not on a trajectory toward Western levels of affluence, and there is no way out of its current regressive tax policy and anti-labor, anti-industry and anti-agriculture neoliberalism being imposed so coercively by Brussels as a condition for bailing out Latvia’s central bank so that it can pay Swedish banks that have made such unproductive and parasitic loans.
An statement often attributed to Albert Einstein quips that “insanity [is] doing the same thing over and over again and expecting different results.” Latvia has employed the same self-destructive anti-government, anti-labor, anti-industrial, anti-agricultural “pro-Western” Washington Consensus for almost 20 years, and the results have become worse and worse. The task at hand now is to liberate Latvia’ economy from its neoliberal road to neo-serfdom. One would think that the path selected would be the one charted by the classical 19th-century economists that guided the prosperity we see in the West and now also in East Asia. But this will require a change of economic philosophy – and that will require a change of government.
The question is, how will Europe and the West respond. Will it admit its error? Or will it brazen it out? Signs today are not promising. The West says that labor has not been impoverished enough, industry has not been starved enough, and economic the patient has not been bled enough.
If this is what Washington and Brussels are saying to the Baltics, imagine what they are about to do to their own domestic populations!
Contact
mhmichael-hudson.com
www.michael-hudson.com
Lol, yeah it was "neo-liberalism" that caused the failures there. Oh and of course de-regulation in the 80s is why we have our current mess I'm sure. /sarcasm
You may not call this liberalism at all, but this was the way politicians who were undertaking reforms positioned themselves. The policies implemented had nothing to do with liberalism, but they were sold to the populace as such. Barbarianism could be more more appropriate.
deregulation of financial institutions (as distinct from the price of gold, foreign currencies and interest rates) and lax law enforcement during the disinflationary expansion (1982-2007) combined with non-recourse bailouts and no law enforcement during the deflationary depression (2007...) are, imo, precisely why we have our current mess (that and the natural tendency of capitalism to have deflationary recessions/depressions). what do you propose?
I think you are confusing neo-liberalism for legalized fraud and being in favor of out of control paper. I somehow doubt Milton Friedman would have endorsed that the banking industry be able to make credit out of thin air, didn't he believe in more reserves?
Thanks, Leo. I read this when it first appeared but had no idea how timely it would turn out to be.
Leo - Take out the Soviet Union, debts owed in a stronger currency and you could be describing Ireland
really good, thanks.
Thanks.
Why couldn't the Greeks get their bailout so Latvia could get theirs?