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Main Point: Way Trump reacts to #grabyourwallet campaign against Nordstrom shows he is (1) easily provokable and (2) emotionally connected to his “brand”.
Terrorists as much as activists aim to provoke and have learned that Trump-branded properties worldwide are good targets if they aim to inflame Trump.
Interesting WashPo article re Germany truck attack:
Islamic State officials have explicitly sought to link such attacks to the larger goal of making Europe intolerable for faithful Muslims. A 2015 article in the group’s English-language magazine, Dabiq, warned that the terrorists would soon begin targeting the West with the aim of deliberately provoking a backlash against Muslims living there.
“Muslims in the West,” the article said, “will quickly find themselves between one of two choices: they either apostatize and adopt the [Western] religion . . . or they emigrate to the Islamic State and thereby escape persecution.”
Somewhat consistent with our paper but generates some new questions – unlike Al Qaeda, ISIS is a near state not a terrorist group. The main threat to its survival is Western tacit support to a Putin-Assad (and Trump?) coalition against ISIS. If these terrorists attacks lead to such a coalition, provocation will backfire.
My prediction for the Trump Presidency is still that it will be a Bush Presidency with some Trumpian twists (e.g. infrastructure spending). But there is a worse scenario.
Who thinks that President Obama will say on January 20 that he is NOT stepping down because his “replacement” lost the popular vote and won the electoral college because of Russian hacking? The whole idea seems farfetched. On the other hand, if PEOTUS Trump loses the election in four years, who thinks he might say the election was rigged and try to stay on? This does not seem farfetched.
So the most important job of Congress is to check-and-balance PEOTUS’s excesses. How should Congress do so? As usual, Roger Myerson is ahead of the rest of us in thinking about this. In a blog post he writes:
America’s constitutional system depends fundamentally on a balanced distribution of power between the separate branches of government. Over the past century, a long expansion in the size and scope of federal agencies has entailed a steady growth of presidential power. Now, with a President-elect who has never exercised public power within constitutional limits, our best hope is that the next four years should be a time for strengthening the effective authority of Congress. For this vital goal, Democrats today should support the constitutional right of congressional majorities to legally direct the policies and actions of the federal government, even when those majorities happen to be Republican.
His blog post makes many points including regarding the paradoxical impact of term limits for Congress and the misuse of the filibuster.
Eat at Tacqueria El Milagro:
Chile Relleno tacos
State outcomes are highly correlated with one another, so polling errors in one state are likely to be replicated in other, similar states….If Clinton loses Pennsylvania despite having a big lead in the polls there, for instance, she might also have problems in Michigan, North Carolina and other swing states.
The correlating factor appears to be the white working class vote which abandoned Clinton in the Rust Belt States. For reasons we do not yet fully understand, this vote for Trump did not appear in polls. The polls were then all off the mark in all Rust Belt states.
The others poll aggregators assumed independence and gave less thought to a simple theory of voting that might generate independence let alone whether such a theory might be plausible. If they hand, it would have led them to a more plausible way to look at the data, like Silver, and hence better predictions.
(HT Georgy Egorov though I may not be doing justice to his point.)
The most likely outcome for the Trump Presidency is that it will Bush 2.0 with some Trumpian twists. Specifically:
- Tax cuts for the wealthy: No brainer
- Rolling back financial regulation: No-brainer
- Comeuppance for 1 and 2: Either another bubble like 2008 or huge deficits leading eventually to a tax increase (like Reagan to (H.W.) Bush).
- Another war: Trump is thin-skinned and hence a prime candidate for manipulation by terrorists who seek to escalate conflict. So, another war beckons. Probably, Syria in a coalition with Putin.
- Construction: Trump is will try to build roads, bridges, infrastructure etc. This is an anathema to Paul Ryan et al. They will try to prevent this so not clear how much will happen. Democrats of course will be into this and will try to help Trump achieve it.
- Russia expansion: Putin will co-opt Baltic States. NATO will not defend hence this will be the end of NATO credibility.
- Trade: Token tariffs will be imposed. Maybe Carrier Air Conditioner will be made into an example. But given threat of retaliation by trading partners, Ryan/McConnell will dampen trade controls. Whatever happens, there will be little impact on jobs as technological change means fewer workers needed in manufacturing.
- The Wall: He will build a tall but small wall. TV crews will film it. Construction will stop but Trump will lie and say he built whole thing.
- Racism will go up: No-Brainer.
President-elect Trump main framework for organizing human interaction is the zero-sum game. If he gives you anything, he wants something in return. He will soon be able to apply this deal-making philosophy to our strategic partners like Japan and South Korea.
We can measure the costs of the bases, the personnel and the nuclear weapons that are helping given them security. The benefits – stopping nuclear proliferation – are hard to measure. Are we giving them something for free? That is Trump’s perspective it seems. Can he get a better deal? If not, why not let these countries go nuclear? From the perspective of out strategic partners, if the US is not holding them up, why not go nuclear?
So, chances are, we will see nuclear proliferation among our “allies” in the Trump Presidency.
Evangelical Christians knew who Trump was, had seen the videos and ads and yet still voted for Trump. Their main issue is the make-up of the Supreme Court and Trump gave them a list of potential nominees they liked . He was more likely to choose an anti-abortion justice than Hillary. So, the vast majority worked out their constrained optimal choice and went for it.
Greens could register a protest vote for Jill Stein in the election or choose between one of two electable candidates. No doubt, Jill, if elected, would have tried to implement a first-best environmental policy (and failed to get it past a Republican Congress) but realistically it was choice between Hillary getting nothing done or Trump ripping up the Obama legacy. The obvious legacy of interest to Greens is the Paris agreement and this is now the Paris disagreement. And in Michigan and Wisconsin, Hillary’s margin of loss is smaller than Jill Stein’s vote. Of course, this is not enough – Robby Mook would have to have had the foresight to get Beyonce to come to Philly not Cleveland.
So why are Evangelicals better than Greens at this kind of reasoning? Are Greens just crazier? My colleague Jorg Spenkuch found a clever way to measure the fraction of crazy Greens in Germany – I think he finds it is 60%. Not sure if he has a way to measuring crazy German Evangelicals (if they exist)! Another theory would be based on learning. Evangelicals have been around the block a while and have learned the optimal strategy but Greens have not. But a counterargument is the Gore vs Bush Florida battle where Ralph Nader played a crucial role. Surely the Greens voters could remember having screwed up the election of the person who would have been the best President on the environment ever? I parry this thrust by positing the Greens who voted for Jill Stein are so young that Bush v Gore is not part of their recalled history.
I was discussing some forecasts of what might befall under a Trump Presidency with a friend. He was skeptical of one of them but it turns out Henry Kissinger agrees with me:
JG: So there is some chance of more instability.
HK: I would make a general statement: I think most of the world’s foreign policy has been in suspense for six to nine months, waiting for the outcome of our election. They have just watched us undergo a domestic revolution. They will want to study it for some period. But at some point, events will necessitate decision making once more. The only exception to this rule may be nonstate groups; they may have an incentive to provoke an American reaction that undermines our global position.
JG: The threat from isis is more serious now?
HK: Nonstate groups may make the assessment that Trump will react to a terror attack in a way that suits their purposes.
It was great to wake up this morning and find that Oliver Hart and Bengt Holmström were awarded the Nobel Prize in Economics for 2016. Their research is the bread and butter of modern economic theory and hence is taught in all first-year PhD microeconomics courses and more applied versions are taught to MBAs in electives on organizational economics.
Let me begin with the work of Bengt Holmström. The prize announcement begins with his work on the principal-agent model with moral hazard: An agent privately chooses an action that impacts the welfare of a principal. The principal observes noisy signals of the action and rewards the agent as a function of the signals to align incentives. Holmström asks: Which variables should be included by the principal is her performance measure and which should be omitted? In the “sufficient statistic” result, he shows that variables should be included if and only if they contain information about the action. Adding more signals into a performance measure would add superfluous noise into payments which the a risk-averse agent would have to be compensated for. On the other hand, subtracting informative signals from a performance would eliminate useful information for aligning incentives.
This result poses a puzzle which Bengt turns to in later work: Real-world contracts are rarely as complex as the informativeness principle would suggest. Why is that the case? In joint work with Paul Milgrom, Holmström introduced the multi-task principal agent model. The main innovation was to allow the agent to perform multiple tasks and to substitute from one to the other. Holmström and Milgrom show that in certain circumstances it is better not to may pay responsive to performance. Suppose someone working in a fast food restaurant can look after the kitchen or sell burgers. Burger sales are measurable but time spent looking after the kitchen is not. Then making pay depend on burger sales can backfire as the agent substitutes away from looking after the kitchen. Better to have low-powered incentives which are relatively flat in burger sales.
Bengt has made at least two other seminal contributions to moral hazard models. In his work on moral hazard in teams he shows that it might be impossible achieve total value maximizing outcomes when joint output is measurable but individual output is not. In his career concerns model, he shows that an agent trying to prove he is high ability to a market might work too hard at the start of his career and then tail off at the end. All these papers are workhorses of applied theory. They show Holmström’s flair of coming up with models that serve as vehicles for others to make interesting contributions to understanding incentives.
I want to end my appreciation of Bengt Holmström by pointing out that several of these papers were written when he was an Assistant Professor in the MEDS Department at Kellogg. Roger Myerson has already won a Nobel Prize for the work he did when he was in MEDS.
Oliver Hart took contract theory in a different direction by emphasizing the role of property rights. In the principal-agent model, the principal might be an employer and the agent an employee. Or the principal might be one firm and the agent an independent subcontracter. In other words, the model cannot address the question of when trade should take place within a firm or across two firms. Building on some informal ideas of Oliver Williamson, Oliver Hart with Sandy Grossman and John Moore used the idea that contracts are incomplete to offer a unified theory of the optimal allocation of property rights. The key idea is that ownership of an asset confers residual rights of control so you can use it for production should a relationship break down. Suppose a buyer and a seller are trading a widget. They can both invest ex ante to increase the value of trade but because contracts are incomplete they must haggle over the price ex post. This means both are subject to hold-up: the benefit of any costly investment is shared with the other trading party. Hence, both will underinvest. This underinvestment is mitigated by the fact that if a player owns an asset he can use it to trade with others so at least he can capture some value from his investment. So, if one player’s investment is particularly important for value creation he should be own all the assets and employ the other – so we have an integrated firm. If both players’ investments are important, then they should both own assets and then we have trade across two independent firms.
Debt and equity confer decision rights in different ways. So, Oliver Hart’s way of looking at control rights has proved to be very fruitful in corporate finance. But there is a lot to be done. In particular, without a theory of why contracts are incomplete there is a tension between the lessons of mechanism design and the ideas in Grossman-Hart-Moore. This tension was pointed out by Maskin and Tirole. Eric Maskin was my PhD advisor at Harvard and Oliver arrived at Harvard just as I graduated. At that point, my friend, co-author and advisor Tomas Sjöström, who was sitting at the podium during the announcement as he is on the Nobel Committee, was an assistant professor at Harvard and I would visit to work with him. We became interested in Oliver’s ideas and also knew of the Maskin-Tirole critique. So, Tomas and I wrote a few papers studying optimal decision rights when agents can collude or renegotiate inefficient outcomes without falling afoul of the Maskin-Tirole critique. I continue to work on these questions still. I would never have worked on those papers without Oliver’s seminal insights to build on. So, I am particularly happy personally with this prize.
Trump excites the “base” but not independents or traditional Republicans who believe in free markets etc. The temptation for Congressional Republicans up for election is to use “strategic ambiguity” and have their cake and eat it. That is, say you support the Republican Presidential nominee but not embrace his positions, e.g like Ayotte and McCain. This way, you hope ticket-splitters vote for you to check and balance Hillary.
Unfortunately, Obama moves second. He will say Trump is unfit to be President, is not a Republican and will tar supporters with the same brush. This way he will seek to slice off the base vote from the non-base. A vote for a supporter is a vote for Trump. How will they check and balance a demagogue when they are not splitting with him now? Also – and somewhat unexpectedly – Trump is helping Obama out here by refusing to endorse Congressional Republicans employing strategic ambiguity. He refuses to endorse Ayotte and McCain because of criticisms etc. Hence,he is signaling to his base not to support them (not sure if his strategy makes sense but I will take him at face value).
So, on the one hand, Obama will attack anyone on the fence by saying they support Trump (hoping to peel off independents, “real” Republicans and ticket-splitters) and Trump will attack anyone on the fence by saying they do not support him (hoping his base will not support them?!!).
So, strategic ambiguity is going to backfire so you have to pick a side. Which side? Can you win if you support him and he loses your state? If the answer is a likely Yes, you support Trump (e.g. Rubio) and if it is a No, you Dump Trump. The more likely your state is to go for Hillary, the more plausible your “I will check and balance Hillary” argument and the less costly it is to Dump Trump. Hence, Toomey and Ayotte are likely in this category. If the state is 50-50 like AZ, your choice is difficult, eg McCain, but you have to pick a side otherwise both may not vote for you.
Henry VIII (the right-wing of the Tory party) wanted to divorce his first wife (the EU) and marry Anne Boleyn (stop immigration and transfer payments to the EU ) but the Catholic Church (Angela Merkel) would not let him. So, he renounced Catholicism and became a Protestant, a new form of Christianity conceived by Martin Luther (Nigel Farage). But then Mary Queen of Scots (Nicola Sturgeon), a Catholic, married a French Prince when Elizabeth I (Boris Johnson) eventually came to the throne. Mary got beheaded and the Elizabeth’s reign turned out pretty well.
But here Boris’s and Elizabeth’s paths diverge. The Protestant Reformation was forward looking and emphasized the work ethic. Faragism – to the extent it is a philosophy – is backward-looking and is about denying globalization. Not clear then who gets beheaded, Boris or Nicola.
Trump is the Principal and a Republican Congress member is the Agent. Trump wants their support and wants to compel them to support him. There is no money to align incentives and all Trump can do is shower with praise (e.g. people who cave in to him are “brave” like Megyn Kelly who went to visit him in Trump Tower after their dustup) or rain down abuse (e.g. the Republican Governor Martinez of New Mexico who dared to text during one of his speeches).
From the Agent perspective, since there is no money, there is only re-election probability. This leads to two cases. In one case, the Agents reelection probability is increasing in being seen as pro-Trump. Then, Trump should allocate praise and abuse in the natural way. In the other case, the Agent’s re-election probability is decreasing in being seen as pro-Trump but Trump would still like Republican support to increases his election chances. Then, Trump should visit the Agent’s district if the Agent does not support Trump. He should say the Agent is brave and lie and say the Agent does support him. This threat maximizes compellence.
Marco Rubio provides the most interesting example. He has lumped in with Trump as he decides whether to run for re-election. If he throws his hat into the ring and Trump’s polls tank in Florida, Donald should threaten to campaign there heavily if Rubio shows signs of weakening in his support of Trump.
You are a lifelong Republican and think Trump is not a conservative. You would never vote for him. You go into the voting both and see Clinton’s name and Trump’s name. What do you do? Either you bite the bullet and vote for Clinton or you abstain. Either way you have increased the probability that Hillary wins – OK not by much but since you are in the voting booth in the first place, you’re not a fully rational voter and so you care about the infinitesimal impact you have. So, you decide to make sure she’s hamstrung by a Republican Congress. You vote for the Republican Congressional candidates.
You would vote for Cruz but suspect he is a bit nuts. You vote for the Democratic Congressional candidates to make sure Cruz is ineffective.
(Kasich would actually be best all round but has no chance of making it.)
Suppose politician C goes negative on politician M. Politician’s M’s support declines..where do his supporters go? If there are just two candidates, they either go to politician C or stay at home. But if there are three or more candidates, they might go to politician A, B, or K etc etc. So, to a first order, it is less profitable to go negative the greater the number of candidates.
This resembles the Holmstrom teams model but with unproductive effort.
HENNIKER, New Hampshire — In town halls, pizzerias, and high school auditoriums, hundreds of voters are carefully evaluating the three governors who have pinned their presidential hopes on Tuesday’s primary in the Granite State — Jeb Bush, Chris Christie, and John Kasich.
Some have made their choice of the three; others are still undecided. But they all agree on one big thing: The Republican Party needs a strong contender coming out of New Hampshire to take down Donald Trump.
With the stakes so high, these “non-angry voters,” as described by some, are wrestling with whether to ultimately vote for their personal favorite — one of the three governors, or go by the polls in favor of a more practical favorite, Sen. Marco Rubio.
Of course, Ted Cruz and Donald Trump would disapprove or approval voting.
ISIL has taken war out of the Middle East by bombing a Russian plane and attacking Paris. These attacks follow increased Russian and Western involvement in Syria.
What was the purpose of these attacks? It is useful to examine two polar opposite cases : ISIL’s acts seek to provoke or seek to deter.
If they seek to provoke, the best case scenario for ISIL is that Russia and the West respond by repressing Muslims domestically. This anti-Muslim fervor will generate propaganda that is useful for recruitment. But of course, the attacks will provoke a strong counter-response by France, Russia and their allies in Syria. Finally, a Russia-Western coalition may even come into being. Al Qaeda’s diminished fate then awaits ISIL. A provocation cannot be targeted into only a domestic response and the international response will be so dramatic as to counterbalance any domestic response though, of course, it would also be wise not to give in to the temptation to cave in to anti-Muslim fervor.
If ISIL seek to deter – i.e. they are making us pay a price for increased involvement in Syria and giving us an incentive to retreat – well that’s totally going to backfire. The French, British and Russians are more likely to engage than less as I said above. In this case, ISIL’s strategy would be a complete misreading of the situation.
So, either way, the ISIL strategy is going to fail.
My colleagues are multi-talented:
HT: Bob McDonald for telling me first song is also by Dave Edmunds.
Uber drivers are competing with each for fares. The smaller the number of other drivers on the road, the greater the chance a driver get business. Also, when demand for rides outstrips supply of drivers, Uber might activate surge pricing to increase supply. Not only does a driver stand to get more business, he gets a higher fare/mile. The incentives to deviate from the strike are huge.
So, in Chicago, during the supposed strike, the number of Uber Drivers on the road was huge. Surge pricing was not activated because it was not necessary.
HT: An Uber driver.
I was on Chicago Tonight very briefly discussing Purple Pricing (see around 4 minute mark).
In 2008, the New South Wales government announced plans to build a coal mine here, promising jobs and cheap power. The coal business was booming because of demand from China. The government bought up 177 square miles of land for the mine project, boarding up 114 farms and homes.
Since then, coal prices have plummeted to their lowest level in years and the government has not been able to find a mining company willing to open a mine here. In 2013, the government abandoned its plans to develop the mine and last December appointed Goldman Sachs to sell the land.
By then, the district had lost 95 families, about 10 percent of its population. A sense of loss pervades the town, and residents feel blindsided by forces beyond their control.
Party A steals something of value to Party B and demands a ransom for its return. But once the ransom has been paid, what is to stop Party A from coming back and demanding more?
One mechanism that purchases commitment is reputation. Party A has more ransoms to extract in the future and seeks to be seen as a fair player despite being an extortionist. An interesting example is provided by Cryptowall. This “company” sends an email with a devious attachment, a virus that encrypts your harddrive if you click on it. They demand a ransom in Bitcoin to send the decryption key. The price changes over time.
The fact that they do not take your data means that they cannot come back and demand another ransom for the same data if you pay.
Because the price changes, there can be errors – you pay a ransom of 500 and by that time the price has gone up to 550 and you do not get the decryption key. What to do? A good credit card company would waive a late fee to keep a good reputation and so does Cryptowall. From the New York Times:
Use the CryptoWall message interface to tell the criminals exactly what happened. Be honest, in other words.
So she did. She explained that the virus had struck the same week that a major snowstorm hit Massachusetts and the Thanksgiving holiday shut down the banks. She told them about the unexpected Bitcoin shortfall and about dispatching her daughter to the Coin Cafe A.T.M. at the 11th hour. She swore she had really, really tried not to miss their deadline. And then a weird thing happened: Her decryption key arrived.
(HT: Alex Wearn)
You are debating a point with a colleague. Your colleague is wrong but to prove they are wrong you have to use information you know but cannot share. So, you leave things unsaid. Of course, someone who does not know the facts would also leave things unsaid by definition.
The listener knows that silence either conveys the fact that something is known but cannot be said or that nothing is known. Their inference takes the fact that you might know something but cannot say it into account. They should give you the benefit of the doubt. The benefit depends on how likely you are to know things that cannot be said. Hence, if the person leaving things unsaid is senior to the listener, the listener might defer to the speaker. Hence, seniority leads to authority via the inference content from leaving things unsaid.
“I consider that a man’s brain originally is like a little empty attic, and you have to stock it with such furniture as you choose. A fool takes in all the lumber of every sort that he comes across, so that the knowledge which might be useful to him gets crowded out, or at best is jumbled up with a lot of other things so that he has a difficulty in laying his hands upon it. Now the skillful workman is very careful indeed as to what he takes into his brain-attic. He will have nothing but the tools which may help him in doing his work, but of these he has a large assortment, and all in the most perfect order. It is a mistake to think that that little room has elastic walls and can distend to any extent. Depend upon it there comes a time when for every addition of knowledge you forget something that you knew before. It is of the highest importance, therefore, not to have useless facts elbowing out the useful ones.”
A GrAgreement has been semi-signed. Originally, the Eurozone/Germany has offered two debt relief plans for Greece.
Under Plan A, Greece votes on a number of structural reforms and puts E50blln of assets in a privatization fund in return for more bailout money and possible debt relief. Assets are sold off to recapitalize the banks.
Under Plan B, they get a time-out from the Euro and debt relief. Plan B is unpopular with the majority of voters in Greece as they want to stay in the Euro but may actually be better economically depending on the terms. (Will the EC, ECB and IMF actively help to create the new currency and give humanitarian aid? What are the terms of the debt relief?)
But both plans have significant risk: Plan A involves more austerity, declining GDP, Greek Groundhog Day and probably eventual Grexit; Plan B causes the banks to collapse unless the Troika comes up with some active help.
A better plan is variation on Plan B, if you will a Plan G: Germany should leave the Euro. Deutschit will not cause a bank run in Germany as the mark will be strong and no depositors are at risk from a haircut. The Euro will devalue helping not only Greece but Portugal, Spain, Italy, Ireland and Finland. The New Eurozone can bail out Greece and give debt relief. Germany will not have to participate in any of this and this avoids one of the main political problems domestically. There is an economic downside for Germany: the mark will appreciate so exports will be more expensive. But imports will be cheaper so there is less inflationary pressure. Plus Grexit would cause some appreciation of the Euro anyway so even Plan B has that implication.
The main problem with Plan G is it appears to signal the end of the Eurozone. This is a blow to Merkel’s record as Chancellor. But Deutschit makes the rest of the Eurozone stronger as they can deal with the the overvaluation of their common currency. Plan A, Plan B and European economic performance post-2008 already demonstrate that monetary union without political and fiscal union does not work. In fact, Deutschit signals that Germany will take a somewhat costly action to help fellow EC members. It is more likely to stabilize the Eurozone than the other options. It is success for Europe if Deutschit occurs not a failure. Once the New Eurozone has stabilized, Germany can rejoin. Of course, it will have to meet fiscal targets to be accepted by the New Eurozone including Greece. If Germany can’t return because they carry too much debt, that would both be eironikos and cause for epichairekakia (schadenfreude).
Greece and the Troika are engaged in a war of attrition. The player with the higher cost to staying IN vs conceding and dropping OUT is in a stronger position in a war of attrition.
Greece has capital controls, is about to renege on a payment to the IMF, faces an offer from the Troika that is impossible for the Greek government to get through Parliament and the offer consigns the Greeks to more austerity and economic stagnation. They have little to lose from staying IN.
The IMF does not face an existential crisis if it sticks to its guns. The EC suffers from staying IN if there is contagion but they have protected themselves.
So both sides have low costs to staying IN. They have to increases costs on the other side to persuade them to concede.
For the Troika, the strategy is straightforward: they can’t accede to the Greek request to extend the bailout for the referendum, give extra money to banks etc. This is basically what they are already doing.
For the Greeks, the strategy is more surreal: To inflict maximum cost of the Troika, Greece should default on its payments but remain in the Eurozone. Greece is cut off from international lenders anyway and the default will not have any incremental effect on their ability to borrow. With Greece insolvent, the ECB will be the key decision-maker. Do they keep on lending to Greece as they are still technically in the Eurozone? The German Finance Minister says this is the case (via Bloomberg):
German Finance Minister Wolfgang Schaeuble told lawmakers in Berlin that Greece would stay in the euro for the time being if Greek voters reject austerity in a referendum scheduled this week, according to three people present.
Schaeuble also said the European Central Bank would do what’s needed to protect the euro if Greeks voted against the bailout terms in the July 5 referendum
This is ideal for Greece. They keep the Euro and get the debt restructuring they want via default. And other countries in the Eurozone are infected by Greece being in the Euro. If Greece needs anything from the EC, this is an ideal threat point for them.
What if the ECB denies Greece credit? This state of affairs may need to be maintained by the Greek government issuing GrEuros as a medium of exchange. GrEuros can be used to pay the government as if they were Euros. GrEuros will not be accepted outside Greece by wary investors but they would trade internally in Greece. The GrEuro/Euro exchange rate will float. There is less risk of contagion here as GrEuros are not the same as Euros. Eventually GrEuros will become drachmas.
All these tactics will prolong the war of attrition. They will mask the bigger problem: How sustainable is the Eurozone with a monetary union but no political union?
I found this discussion paper by Stergios Skaperdas offered a useful perspective on the crisis. Here is a passage on default:
If Greece had defaulted in early 2010 Greek debt could have become sustainable in the long run with a writeoffs imposed on bondholders of considerably below 50% of total debt. The country would have had to borrow internally, perhaps issue IOUs (as it has done already), and impose a few modest cuts. The effect of such a policy would have been mildly recessionary.
What was done in 2010 instead by the troika was to provide Greece with loans so as to cover its budget deficit without default, in exchange for increasingly draconian budget cuts, tax increases, and institutional changes of dubious value. The effect of this policy was a fast downward spiral of the economy. Since debt kept increasing and the country kept getting poorer fast, debt was becoming ever less sustainable. Thus, the second bailout in 2012 restructured Greek debt, with the main losers being Greek pension funds and Greek banks. The Greek state had to borrow 50 billion euros just to recapitalize the banking system and continues to have to cover the losses of the pension funds (in addition to cutting pensions, cutting health expenditures, and increasing retirement ages). The continued contraction of the economy, deflation, and a few additional loans from official sources have brought the debt-to-GDP ratio close to 180%, the highest it has ever been.
Now, default would be considerably more difficult both because Greek public debt is under English law and because 80 percent of it is official and owed to official sources (the IMF, the ECB, and other Eurozone member countries). Yet, that debt is unsustainable and there is virtually no chance it will be fully paid back. Default is still a taboo but it is bound to occur in one way or another, regardless of how it is named.