What can Italy do with its wealth?

by on October 21, 2011 at 2:17 am in Economics | Permalink

Italian private debt is quite low and yesterday I mentioned that Italian homeowners don’t have much in the way of mortgages.  David Henderson then asked a good question:

“Were more Italians to take out mortgages on their houses to buy government bonds, for example, Italy could eliminate its interest-payment problem.” How is that good news? The government would still have to pay interest on this debt.

The Italian government has high debt and productivity is not going up any time soon.  We can expect a mixture of lower government spending and higher taxes, otherwise the country defaults, maybe the country defaults anyway.  Ideally “they” would like to send equity in Italian homes to bondholders in lieu of making the interest payments.  Italy doesn’t do a good job collecting taxes and the economy already has lots of distortions, so pulling wealth out of homes would in principle be a way to go.  A CDO tranche instead of an interest coupon, so to speak.  One can imagine the Italians borrowing more against their homes and sending the money to their government as a tax, or accepting lower transfer payments from the government, and that would implicitly serve as a way of paying off the bonds with fractions of homes.  Of course that probably won’t happen.

Italy is house rich, somewhat cash poor, and has a miserable recent history of growth.  If you look at the wealth side of the balance sheet, you can easily work up a heady optimism for Italy.  If you study public choice theory, it is harder to do so.  How many people in that country are either paid to do the wrong thing, or paid to do not so much at all?  TGS reigns.

Italy’s privileges and distortions are so often so local, and so concentrated in inefficient professional services, that it is hard to imagine clearing them up quickly in the form of a big bang, in the way that say New Zealand or Chile or Thatcher’s England did.  And even those successes took some time to pay off and underperformed for years.

Note that if Italy could credibly be expected to grow a mere 2 pct. a year — maybe less — the entire eurozone crisis probably would be messy but manageable.  It’s not.

File under: non siamo cosi’ ricchi come pensavamo di esserlo!

1 Corey October 21, 2011 at 2:46 am

I’ve heard you say on the nytimes Weekend Business podcast that the crisis is in your opinion only 1/3 over right now.

What do you imagine a hard landing in Europe and later in China will look like?

2 WTF October 21, 2011 at 3:43 am

“they” in quotes. Respect.

3 Nemi October 21, 2011 at 4:01 am

Since then you can use words like “they” and “we”, which are crusial as soon as you start to talk about “society”, while still pretending that you don´t.

Intellectual schizofrenia?

What is society you ask? What do you mean? Don´t you see my quotation marks? I did not use any such word.

4 WTF October 21, 2011 at 4:15 am


5 mulp October 21, 2011 at 4:18 am

The Greeks and Italians must take great comfort from the Americans who preach “taxes are theft”.

And great pride in being much better than Americans in responding to the American mantra of “taxes are theft” by not paying taxes.

6 Jay October 21, 2011 at 7:53 am

There has been plenty of taxation in Greece and Italy. When the government spends it taxes, because all (well there are some exceptions like loan guarantees) government spending must be matched by tax collection. Some of that tax collection occurs today. But some of it is deferred to the future (cash basis deficits).

7 Ryan October 21, 2011 at 11:21 am

Silly rabbit. The taxes also thefted away all their market efficiencies.

Socialism is as dehumanizing as it is inefficient. Socialists don’t always hit-and-run toddlers on the streets of China; sometimes they just stop trying to fight an unwinnable war against the almighty government bureaucrats who intend to rule their lives. What results is Italy.

It’s neither Marxian, nor Misesian, nor Keynesian, nor Sumnerian. It’s Kafkaesque.

8 Claudia Sahm October 21, 2011 at 5:53 am

“non siamo cosi’ ricchi come pensavamo di esserlo!”… I don’t know Italian, but babelfish suggest this is something like “we are not as rich as we thought”…Seems to fit the TGS premise for the US too.

9 dearieme October 21, 2011 at 6:52 am

Wouldn’t it be a good deal easier to collect a property tax than income tax or VAT? So I’ll assume the buggers are serious when they opt for a big property tax. Ditto the Greeks.

10 Ryan October 21, 2011 at 11:22 am

Sure, so long as they start accepting pigs and goats as a valid form of payment.

11 chessfish2011 October 21, 2011 at 7:11 am

Italian households are traditionally big savers (even if less so lately). The problem in Italy is how to transfer part of their wealth to the Goverment peacefully!
It is likely that a wealth tax will be introduced in exchange of a big reform of the political system that is at a nadir in credibility among italians.
How to sell this quid pro quo to the italian households is the theme in Italy now.

12 babar October 21, 2011 at 7:50 am

sounds like they would do well to import foreign management

13 Dan in Euroland October 21, 2011 at 9:08 am

The simple solution is to break up Italy. Unification in the first place made little sense. A lot of the governmental gridlock occurs because different regions do not want to bail out other regions. Much like the German people don’t want to bail out the Greeks.

14 Matt October 21, 2011 at 11:29 am

This is true, and I predict that eventually Italy will split in two.

15 Peter Schaeffer October 21, 2011 at 12:22 pm

Matt, Dan in Euroland,

I don’t disagree with you folks on the logic of splitting Italy. However, I don’t agree as to the probability. Most Italians think of their country in a unitary way. They want Italy to remain united.

I really doubt that even Umberto Bossi would split italy. Of course, he would reduce handouts to the south, but actually divide up the nation?

Italy isn’t Belgium. Everyone speaks the same language. Tyrol is the exception. Tyrol would leave Italy and join Austria if it could. For historical reasons, that is unlikely. Of course, Italy goes to some pains to keep Tyrol content with the status quo.

16 The Anti-Gnostic October 21, 2011 at 9:14 am

So this crisis is really just the government’s crisis, the crisis of parasitic bureaucrats, ridiculously leveraged financiers, and net tax consumers. Meanwhile, the net producers are marshalling assets, saving money, paying down debt. Eventually, the net producers will be able to outbid the government for military services.

Also, I love all this talk about property taxes and wealth taxes, and academic economists having wet dreams about people being ordered to borrow money to loan to the government. I’m not sure why we went through several centuries of bloodshed and pulling future wealth forward into the trillions just to decide that feudalism was right all along.

17 Ryan October 21, 2011 at 11:23 am

Well said.

18 Matt October 21, 2011 at 11:28 am

It does make you wonder doesn’t it? Apparently the responsible homeowners are to bail out the irresponsible bureaucrats. This should be an obvious wake-up call of what a good chunk of modern economics is all about.

19 stalin October 21, 2011 at 9:26 am

They speak the same language and……..and…….
Dan in Euroland October 21, 2011 at 9:08 am
The simple solution is to break up Italy. Unification in the first place made little sense. A lot of the governmental gridlock occurs because different regions do not want to bail out other regions. Much like the German people don’t want to bail out the Greeks
“Italy is a geographical expression, not a country”

20 stalin October 21, 2011 at 9:28 am

Comments do not format as posted.

21 libertyfighter October 21, 2011 at 10:53 am

I beg your pardon for my poor english. I’m Italian. I totally agreed with this article.
In my opinion, the italian collapse is inevitable. Although italian are good savers, who can do so despite the politicians, here we have the worst political class in the world. And also, or as a result, one of the worst constitutions.
For these reasons, the natural evolution will be as follows.
Governments do not ever reduce taxes.
They need money to buy the votes that ensure re-election.
Every single administrator must pay for his election with Public Works to sponsoring companies, jobs in public companies, bribes to trade unionists and so on.
Even in the smallest villages, the mayor grants public jobs to the people who vote for him.
A LOT of current spending.

Up to that rule Berlusconi, the situation will remain the same.
After deteriorate rapidly because the others party have
have strongly statist economic concepts. So much more taxation and much more current spending (for fighting crisys). Default assured.
But Berlusconi will not be forever, and however, his government is not doing good things.
So soon they will start to appropriate the private heritage of Italians. It will be a nonsense, because they will destroy that capital like all the others capitals they have destroyed until now.
Without making ANY reform, or worst, doing only socialist reforms.

The only reason why Italy is still alive, is the job black market and the tax evasion.

And here we have tons of managers and trade unionists.

22 libertyfighter October 21, 2011 at 12:08 pm

The last phrase should be placed before “Up to that rule Berlusconi”
” have have strongly statist economic concepts”

Should be “have strong statalist economic concepts”

23 pensionheater October 21, 2011 at 1:15 pm

Well dear friend

do you know that in Italy there are 17.000.000 pensioners with 22.000.000 pensions for an average income of 15000 €?

do you know this? and remember that they are all good voters

this welfare bonanza is accounting for 311 bln for 2011 and 333bln for 2014

this is really shocking

remember that public employment is accounting for 170 bln of euro (3.500.000 workers on 23.000.000 of workers) but of these 170 bln 55 bln are social contribubutions
net earning after direct taxes are 100 bln


in page 20 you can see these data

for 2011 total expenditure will be 800 bln about 80 bln for interest

its really a big number and remember that in Italy there aren’t funds like in netherland (abp ecc..)

well its like a ponzi scheme

this ponzi scheme is workin also in Germany and in France (5.500.000 of workers in public sector) where the employers are paying for the pensioners

not in netherland and denmark this are civils countries

this is really worring

net public debt 100% of gdp what is worring is the labour market and welfare follies (220% of gdp unfunded liabilities)

in italians banks there are 2200 blns of cash and bonds but italians are scared and are buying schatz bund or financial bonds (unicredit intesa ecc..)

you can’t short this type of bonds 🙂

net financial position with other countries is -400 bln

a lot but non a big number spain is -1000 uk -2000 ecc..ecc

24 Lou October 21, 2011 at 5:23 pm

At least they prevented the Jersey Shore cast from making a mockery of the country.

25 berlusconi4ever October 22, 2011 at 7:14 pm

“non siamo così ricchi come pensavamo” would have sufficed. I guess it was a machine translation.

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