Tuesday, May 25, 2010

The European Crisis Is the Latest Over Political Unification

The reports from Europe that the Greek debt crisis may bring down the Euro and/or the European Union (EU) must seem bizarre to most people. How did this one little country at the edge of Europe, storied ancient history notwithstanding, become so important? The short story line is that Greece can’t pay its debts, or at least that Greece has to pay higher rates to finance its growing sovereign debt, but this leaves open the question of how this threatens the European Union and the Euro. In fact, it does not…or at least it need not. But ancient and historical forces are at work to transform a Greek tragedy (sorry, I just couldn’t resist!) into a European crisis that either will propel Europe into a federalist direction or break it apart.

First, we need some recent history. Greece joined the European Union (EU) in 1981 and then the European Monetary Union (EMU), whose European Central Bank (ECB) issues the Euro, in 2001. As a member of the European Monetary Union, Greece abolished its central bank and exchanged drachmas, the national currency, for Euros. The Euro now enjoys legal tender status within Greece, meaning that only transactions denominated in Euros are legally enforceable. Greece qualified for joining the EMU by supposedly proving to the rest of the EMU members that its annual budget deficit would not go above three percent (3%) of GDP and that its total sovereign debt outstanding would not go above sixty percent (60%) of GDP. But now Greek debt is well above these numbers and climbing. When Greece had a central bank of its own, it could have solved its problem, in the short run anyway, by printing drachmas. But Greece does not have a central bank, so it must pay penalty rates to borrow Euros. It might even default. The Greek government has cut back spending somewhat and raised taxes somewhat, but these moves have angered the Greek people, who have rioted in the streets.

So far so bad for Greece but what has this got to do with the EU and the Euro, you might ask. Nothing, for there is no requirement in the various EU treaties that compels member EU countries to buy one another’s debt or that would compel the EU to eject Greece from its membership or force it to give up the Euro. Nevertheless, from the very beginning a powerful and vocal group within the EU has been calling for a bailout. Last week they succeeded in getting EU members and the International Monetary Fund (IMF) to pledge the Euro equivalent of one trillion dollars to bail out Greece and any other EU members who get into financial trouble, and there are several waiting in the wings. Why did this not make the crisis go away?

World War Two and the EU

Now we get to the crux of the latest crisis. For centuries the many European nations have been at war with one another. Empires have been ebbing and flowing across Europe for centuries, all the way back to the ancient Roman Empire, the Medieval Holy Roman Empire, then the Swedes, the French, even the Muslims, and in the 20th Century the Germans and the Russians. All wanted to unite Europe under a single government, some for religious reasons and some for reasons of naked power. At the end of World War Two there was universal agreement among the victorious allies, excluding the Soviet Union, and the new leaders of the defeated Axis powers that a permanent solution had to be found to prevent a future European war. France and Germany had fought three wars within a period of eighty years, each becoming more destructive and more vicious than the previous one. All could agree that it was important to unite Europe economically. The trade wars of the 1930s had destroyed international good will in addition to destroying production. The maxim that “when goods fail to cross borders armies will” was generally accepted by all. Not only was this sound economic advice for friends, it was even more important for enemies. Robert Schuman, considered to be the founder of the EU movement, stated that making France and Germany economically interdependent not only would make a future Franco-German war less desirable but it would make war an impossibility. In an age when coal and steel were essential for military might, it was recognized that Germany made the best steel and that France had the largest coal industry. French coal mines should feed German mills. Neither would desire to wage war or be able to wage war against the other without destroying the economic basis for being able to do so. Thus was born the European Coal and Steel Community (ECSC) in 1952.

Over the decades this initially modest economic integration of the coal and steel industries of six nations—France, Germany, Italy, Luxembourg, Belgium, and the Netherlands—was expanded into 27 members with free trade and free mobility of labor within their union. This major achievement does seem to have ended any hint of war among its members, which today includes almost all of Europe outside Russia. The crowing achievement of this movement was the establishment of a common currency, the Euro, and now most of the EU members are also either using the Euro, in the pipeline for doing so, or, as is the case with the U.K., have not ruled out completely the possibility of future monetary integration.

Europe today should be tranquil and prosperous. Its leaders should be finishing up the final details of its grand economic integration. Europe should be a peaceful continent, funneling its energies into competing economically with the most advanced nations of the world. Yet it is about to be pulled apart by another vision that has run in parallel with its economic integration, namely the vision of a politically united Europe. It is this vision that is threatening to tear apart all the good works of the economic integrationists.

Euro Federalists Co-op the EU Ideal

As successful as have been the economic integrationists, the political integrationists (or Euro federalists, on the America model) have been failures. The first failure was the French veto of a common European Defense Community (EDC) in 1954. Then Charles de Gaulle, a staunch French nationalist, pulled France out of Euratom, the European Atomic Agency, when he returned to power in 1958. Even today, long after the French nationalists (as opposed to Euro federalists) have exited the scene, the EU does not command any military forces of its own. One reason could be that most EU nations are also members of American-led NATO, and there is little real call in Europe to break up one of the most successful military alliances in history.

The most controversial proposal of the Euro federalists is to field an EU foreign minister that would be recognized as speaking for all of Europe. But this seems to be going nowhere. Amazingly there is even a question of who is the EU head of state. When President Barack Obama attempted to “call on Europe”, he eventually cancelled his visit when the EU could not tell him upon whom he should call. Nevertheless, there is a large bloc of Euro politicians who fervently desire to extend their power over matters that were previously strictly national.

Euro Federalism Vs Economic Liberalism

Whereas reducing internal trade barriers and allowing the free mobility of labor within the EU are truly liberating of capital and labor, the Euro federalists have sought to impose uniform economic and social policies. At first blush this sounds innocuous enough, but the purpose is to stifle economic competition so that EU bureaucrats can micro-manage the entire economy. The most egregious example is that of agriculture. Fully three-fourths of the EU budget goes to agricultural subsidies. I witnessed the result of these subsidies first hand last year in Strasbourg, France, one of the two (!) impressive headquarters of the EU. Farmers paraded through the streets, pulling large wagons with rather professional-looking displays, and even herding a few cows along with them. Later French television explained that the farmers were seeking increased subsidies from the EU Parliament. It seems that the previous increase in subsidies did not stop the free fall in the market price of farm products. So the farmers “needed” higher subsidies in order to survive. I regret to say that they found sympathetic sponsors. Of course, any economist could explain that subsidies lead to over-production, which leads to falling market prices, which leads to calls for more subsidies. Europe literally is eating its capital!

The Euro federalists are also campaigning to equalize taxes across the EU…at a high level, of course. Likewise with myriad regulations on just about every aspect of economic life imaginable, from the size of bananas that may be sold in stores (I kid you not!) to the number of paid holidays workers are guaranteed. When these interventions cause entirely foreseeable ‘unforeseen’ and adverse consequences, the root cause of the problem is never addressed; instead the Euro federalists see any problem as an opportunity to tax, regulate, and increase their own power. In effect, the Euro federalists are creating a corporate state along the lines of Mussolini’s Italy, with high tariffs to keep competing goods out and high welfare payments to salve the sting of high unemployment that is a source of dangerous unrest.

Now back to Greece. The small political entities are always the first to feel the adverse consequences of bad policy, for their opportunities to shift costs are limited. Greece is suffering from the combined poison of its own welfare state and added costs imposed by the European Union. As I stated at the top of this essay, Greece cannot inflate its way out of this crisis, because it does not have the ability force its captive central bank to monetize its debt. Its situation is similar to that of an American state like California. But the reader should see now that the problem is a bloated welfare state and EU policies that make things even worse.

Were Economic Integration and the EU Necessary?

In hindsight an outside observer of the Austrian school can say that Europe did not need integration of its economies as much as it needed to free its economies. It does not matter whether Germany gets its coal from France or some other country, such as Great Britain or America. France could buy its steel from Germany, Italy, or any number of countries, depending upon the best combination of price and quality. Competition among the independent European nations would illustrate that the freest economies were also the most prosperous, so that interventionist tendencies would be punished in the marketplace and could not be forced upon unwilling, captive citizens by an EU superstate. The Euro itself was not really necessary. After World War II there were many economists and finance ministers with memories of the gold standard, the only truly successful international currency that has ever existed in the history of the world. The Bretton Woods meeting of 1944 could have resulted in an agreement to reinstate the gold standard, reduce trade barriers, and free labor markets. Instead it established an untried monetary regime of fixed exchange rates that allowed one nation, the U.S., to inflate its currency until the regime collapsed with the world holding unredeemable dollars. Since the U.S. went off the gold standard in 1971, all the world’s nations have inflated their national currencies in order to monetize government spending sprees. Either through drastic collapse or through fundamental and substantial reform, the Era of Irresponsibility is drawing to a close.

Since no European government seems courageous enough to live within its means, the prospect for the Euro and the EU are dim indeed. Germans and Frenchmen are not interested in lending money to Greeks who have no intention of paying it back. (The Germans must be the most incensed over the matter. Germany was forced to join the EMU as a condition of reunifying the country. As one of the four occupying powers, France threatened to veto German reunification unless it gave up the vaunted deutschmark. France viewed joining the EMU as the ultimate integration of Germany into a united Europe.) The fabled trillion-dollar rescue fund will guarantee that the purchasing power of the Euro will fall. The European Central Bank will be forced to print the money that it lends--via the backdoor, of course—to Greece and other EU nations on the verge of bankruptcy.

None of this needs to happen. European countries could admit that they are broke and that their welfare systems are to blame. They could scrap their welfare systems, liberate their economies, reduce taxes, and open the EU borders to the world market. The result would be an economic boom that would restore Europe’s place in the world and make the current crisis nothing but a bad dream. It can be done, but the will must be there to do it.

Sunday, May 23, 2010

Thwarting North Korea's Dangerous Power Play

Did you know that North Korea considers itself to be at war with the U.S. and its UN allies? The end of hostilities in 1953 did not result in either a victory for one side or a peace treaty. There is a cease-fire in Korea; that is all. The protracted negotiations, that never have really ended, merely stopped the fighting. Periodically North Korea reminds us that it intends to win the war and unite the Korean peninsula under its hard-line Stalinist regime. Last May North Korea announced that it no longer considers itself bound by the 1953 cease-fire.

Achieving Victory via Intimidation and Blackmail

The recent sinking of a South Korean warship by a North Korean submarine--although North Korea officially denied culpability--is part of its strategic plan for victory via intimidation and blackmail. North Korea has detonated at least two nuclear devices and has conducted ballistic missile flight tests over Japan. Neither Japan nor South Korea has nuclear weapons, but the U.S. has extended to them its nuclear umbrella. Most observers believe that this is sufficient. Since a nuclear attack on South Korea or Japan would be met with an overpowering nuclear retaliation from the U.S., it is felt that North Korea cannot achieve its goals. This is a variant of the Cold War era’s Mutual Assured Destruction (MAD) strategy, but with a significant and dangerous twist. Whereas the Soviet Union and the U.S. targeted one another with nuclear weapons and vowed retaliation upon one another's territory if either should initiate a first strike, the U.S. nuclear umbrella strategy for South Korea and Japan assumes that the U.S. would retaliate even if American territory were not attacked. This is the opening that North Korea seeks to exploit.

By attacking South Korean forces and then denying involvement, North Korea feels that it can drive a wedge between the U.S. and its allies. If South Korea retaliates militarily for the submarine attack, North Korea could threaten it with nuclear annihilation unless it surrenders. (If South Korea does not retaliate, North Korea will step up the attacks.) Furthermore, it could claim to be responding strictly in self-defense and would be justified in attacking American forces wherever they are located, perhaps with nuclear weapons.

A New Korean War Would Drag in Japan

This threat brings Japan into the picture. Because America has significant military forces on Japanese territory, Japan sees that it could be the target of a nuclear attack in a war for which it is not directly involved. Last year Prime Minister Hatoyama campaigned to end America's military occupation, but recently he reluctantly admitted that Japan is unable to defend itself and must continue to accept America's strategic umbrella. (See Japanese Prime Minister Accepts U.S. Base) In effect, Japan admitted that it is a vassal state--despite the fact that it is the number two economic power in the world--and might be dragged into a nuclear conflict against its will. This demeaning and dangerous situation will not be tolerated by the Japanese for much longer.

How to Thwart North Korea’s Dangerous Gambit

There is a solution, although it is very controversial. If Japan and especially South Korea had nuclear weapons themselves under their own control with a credible means to deliver them, North Korea's strategy would fail. Whereas, North Korea might conclude that America would not risk nuclear war to defend South Korea, due to both American and Japanese public opinion, there is much less doubt that South Korea would defend itself and do so successfully, if it had nuclear weapons. Therefore, North Korea's strategic power play can be checkmated by selling to both South Korea and Japan nuclear weapons and the means to deliver them. These weapons must be under the sovereign control of the Japanese and South Korean governments, not under de facto U.S. control. The MAD strategy that prevented a U.S.-Soviet war would operate to insure peaceful, if not friendly, relations on the Korean peninsula.

The purpose of military and diplomatic strategy is to move from a condition of less security to one of more security. The U.S. is more secure when its allies take personal responsibility for their own sovereign defense. For example, the U.S. is more secure because France and Great Britain control their own nuclear arsenals. Their ability to ensure their sovereign defense removes a layer of uncertainty and complexity in international military affairs. Likewise, it became less likely that India and Pakistan will fight again over Kashmir since both became nuclear powers.

North Korea needs to know that South Korea has the will and the ability to defend itself. The same goes for Japan. With its own nuclear retaliatory forces, both South Korea and Japan will not need U.S. forces as some sort of “trip wire” whereby U.S. entry to a war would be assured by an attack upon American forces as part of an attack upon one of our allies. Our allies will not be attacked in the first place. American boys can come home. America can reduce its worldwide military empire, saving both cost and rebuilding its tarnished reputation as a non-imperial power. Our relationship with our allies will improve, for our defense pacts will be among equals. Furthermore, the need for one member of the alliance to call upon another for assistance will be carefully defined and greatly circumscribed. This strategy is a win/win all around.

Monday, May 17, 2010

My Letter to the New York Times

To: The New York Times
Date: 18May10

Re: Preventing Future Debt Crises in Europe by Jack Ewing

Dear Sirs:
I am surprised that Mr. Ewing failed to recognize the fatal flaw in the proposal by Mr. Delpha and Mr. Weizsacker that EU nations socialize--via EU bonds--their debts up to 60% of GNP. Sovereign debt above the 60% threshold--which was a requirement for entering the EU itself that became unenforceable afterwards--would continue to be the individual member nations' responsibility. But who but the EU members themselves will pay off the EU bonds? No one. And how will they be in the financial position to do this, if they continue to run higher debt-to-GNP ratios? This is just more woolly-headed thinking that somehow the member nations can guarantee one anothers' debts and the financial markets will not recognize that there has been created no new ability to repay.

Patrick Barron

Monday, May 10, 2010

Greece Needs Capitalism and Freedom

The mainstream media would have us believe two myths about the Greek financial crisis: one, that the inability of the Greek government to meet its debt payments is a threat to the Euro and perhaps to the European Union itself; and, two, that Greek “austerity” would be a disaster for the Greek people.

The mainstream media takes it for granted that the proper “solution” is for some entity to bail out the Greeks—perhaps the European Union (EU), the European Central Bank (ECB), the International Monetary Fund (IMF), or some combination. Furthermore, the assumption is that when markets go up it is due to speculation that a bailout is imminent and that when markets go down it is due to some roadblock to an expected bailout. When the governments and their agencies agree upon the proper form of new loans, and/or loan guarantees, along with a token reduction in Greek spending, all will be well. In other words, the mainstream media portrays this financial crisis as one that can only be resolved by more government intervention.

First lets look at the so-called threat to the Euro, which is equated as a threat to the EU itself. Greece uses the Euro as its legal monetary unit. When Greece joined the EuroZone (not all EU members are members of the EuroZone, meaning they have not yet exchanged their national currencies for Euros), the Greek drachma was exchanged for Euros. Now all transactions in Greece are denominated in Euros. Greek citizens buy and sell using Euros. The Greek government spends Euros and, when it runs a budget deficit, it borrows Euros from private banks…the ECB being restricted by treaty from buying sovereign debt. The Greek crisis is simply that the Greek government is spending more Euros than it receives in tax payments, and private banks are balking at lending it more. Since the Greeks no longer have a national currency, they cannot debase it and pay off their creditors with cheapened drachmas. So, the Greek government is left with the choice of raising taxes, cutting spending, or some combination of the two that will satisfy its creditors. Now, would someone please tell me why and in what form this Greek financial crisis, serious as it is to the Greeks themselves, constitutes a threat to the Euro?

What Do Zimbabwe, Panama, and California Have in Common?

This past weekend I was a special commentator on Michael McKay’s excellent weekly radio show “Radio Free Market”. Mr. McKay interviewed Mr. Doug French, president of the Ludwig von Mises Institute, a free market think tank in Auburn, Alabama. Mr. French described the mindset and policies that brought hyperinflation and economic chaos to Zimbabwe. The central bank of Zimbabwe inflated the “Zim” out of existence. But the economy is functioning with a new currency. Can you guess what it is? The dollar! Now, is there anything that the Marxist government of Robert Mugabe’s Zimbabwe can possibly do to cause a crisis in the dollar? No! Likewise, is there any way that the Marxist government of Zimbabwe can destabilize the U.S. because its citizens voluntarily use the dollar? Again, no!

Here’s another example--Panama is a dollarized economy, meaning that it has exchanged its national currency for the dollar. If you travel to Panama, it is not necessary for you to exchange dollars for a local currency. All transactions are in U.S. dollars. Again, is there anything that the Panamanian government can do that can threaten the stability of the dollar? No. The Panamanians have linked their monetary system to that of the United States, just as the Greeks have linked their monetary system to that of the EU.

One last example, and one that is closer to home. The state government of California has run up tremendous budget deficits and may not be able to pay back its loans, all denominated in dollars, of course. Would a California default threaten the stability of the dollar or the stability of the United States? Again, no. Banks may fail. Private creditors may lose. But the dollar and the stability of the U.S. would be unaffected by this disaster. Remember, the dollar and the Euro are merely mediums of exchange. Others may choose, voluntarily, to use dollars or Euros. The countries using dollars and Euros may undergo internal crises that truly do disrupt their citizens’ lives, but none of this threatens the currency…as long as central banks refrain from printing money in order to bail out the profligate governments. In other words, a fiscal crisis need not lead to a monetary crisis.

An “Austere” Government Would Speed Recovery

Next we turn to the commonly held assumption that the Greeks would be harmed by government “austerity”. The Greek government might not be able to spend as much as in the past, whether on pensions, healthcare, defense, whatever. Again, the mainstream media treats this as a complete disaster. The New York Times runs daily articles decrying that the Greeks will have to live within their means. Now, I am certain that SOME Greeks will suffer should the Greek government reduce its spending. All those who believed that their government could pay generous retirement benefits and who planned their lives accordingly will face hard, cold reality. But, let us not forget that every penny spent by government is taken from someone else by compulsion and coercion.

The best explanation of the predatory impact of government spending is to be found in Murray N. Rothbard’s America’s Great Depression. Whereas the Keynesians view government spending as an addition to gross domestic product, Rothbard explains that the more government spends the worse the economy gets. If we think of the REAL economy as the private economy, then it is clear that every dollar or Euro spent by government must come at the expense of the private REAL economy. And not only must government spending be subtracted from private purchasing power, but all the regulatory burdens of government add even more to the negative impact of government upon civil society.

Since Keynesians add government spending to consumer spending to arrive at gross domestic product, they perpetuate the myth that government spending is good for the economy. But Rothbardian Austrian economists harbor no such illusions. We subtract government spending from private purchasing power and recognize that this spending is only part of government’s predatory impact upon the people. Every line of government regulation reduces the efficiency of the private sector to propel the nation forward, for it must prevent actions that a free people would value more highly or compel them to do something that they value much less.

How much government action is interventionist and, thusly, harmful? George Reisman has studied government action and claims that no less than eighty percent of government action as interventionist! So, reducing government spending, whether voluntarily or at the behest of creditors, is a boon for the private, real society. Wherever government cuts back, that area becomes freer, reducing its burden on society.

The Miraculous Recoveries of Germany and Japan

Many economists have chronicled the almost miraculous economic recoveries of Germany and Japan following World War II. Most have rightly focused on savings, hard work, freer trade, reduced military spending, capital loans, etc. But one area that is not appreciated is that the old order was washed away. People were truly free from the accumulated decades of burdensome government. Both Germany and Japan marveled at the productive capacity of America and adopted the best of our practices. And both countries could adopt these practices with little cultural and political resistance, because the old political and cultural order had been discredited by war.

As difficult as it may be for the Greeks to give up their cherished welfare state, that socialist/Keynesian predatory state has been discredited. The Greeks need capitalism and freedom, not socialism and the bureaucratic welfare state. Rather than being the poster boy of another failed state, by scrapping its welfare and regulatory burdens Greece could become an example of how to transition from a half-century of socialist predation to a free, prosperous, and successful nation. Greece does not need more debt from a bailout that will perpetuate the predatory welfare state as a burden upon the people.

Sunday, May 2, 2010

Phony Government Economic Numbers

To: The Wall Street Journal
Date: April 30, 2010

Re: U.S. Economy Expands 3.2%

"Stocking up on goods" is nothing more than building inventories of unsold goods. It is reductions in inventories that signal increased production in the future, because these inventories must be replenished.

Furthermore, lets not buy the government definition that energy and food are not really part of "core inflation". Since when can an economy survive without energy and food?

Inflation is low because banks are not lending and people are not buying. The banks are sitting on a trillion (!) dollars of excess reserves. There are no decent loans, and even if there were, the banks cannot expand their lending because their capital ratios are so low from previous loan losses. People are holding onto their money, because government spending and regulations threaten their livelihoods.

Spending will not turn this economy around. This economy needs savings in order to rebuild the capital that was destroyed in the recent Fed-induced bubble. You do not cure the destructive effects of one bubble by creating another. The people understand that increasing the public debt by a trillion dollars a year mortgages their future and threatens currency collapse, even if the government itself seems unconcerned. Apparently it is not following the Greek crisis in Europe. Oh, I forgot...we're America and it can't happen here.

Patrick Barron
20 McMullan Farm Lane
West Chester, PA 19382

Surprise, Surprise! The Cost of the Greek Bailout Rises!

To: The Wall Street Journal
Date: April 26, 2010

Dear Sirs:
For weeks your newspaper has blindly reported as fact the unsubstantiated hopes of European politicians that an EU bailout of Greece would "stop the contagion". No one ever offered one shred of theoretical evidence to support such a claim, especially when all common sense tells the average citizen that the opposite would occur. Now the EU is in the process of destroying its currency in order to pay the retirement incomes of featherbedding Greek bureaucrats. Yet this is the norm everywhere in the world, treating paper money as if it were capital in order to buy off powerful interest groups.

It is in no one's interest that the Euro or any other national currency fall, yet governments everywhere are destroying the purchasing power of their currencies. Without legal tender laws we citizens would have abandoned our national currencies for better, private ones long ago. Who will invest long term when his investment may be repaid pennies on the dollar? Since it is against the law to write contracts with gold clauses, the future value of one's invested capital cannot be predicted. Yet Keynesian economists reign supreme in the halls of political power everywhere, telling politicians exactly what they want to hear--tax, spend, and regulate.

Patrick Barron
20 McMullan Farm Lane
West Chester, PA 19382
Phone: 610-793-3605