Friday, September 28, 2012

A Golden Deutsche Mark Can Save the World


The euro debt crisis in Europe has presented Germany with a unique opportunity to lead the world away from monetary destruction and its consequences of economic chaos, social unrest, and unfathomable human suffering.  The cause of the euro debt crisis is the misconstruction of the euro that allows all members of the European Monetary Union (EMU), currently seventeen sovereign nations, to print euros and force them upon all other members.  Dr. Philipp Bagus of King Juan Carlos University in Madrid has diagnosed this situation as a tragedy of the commons in his aptly named book The Tragedy of the Euro.  Germany is on the verge of seeing its capital base plundered from the inevitable dynamics of this tragedy of the commons.  It should leave the EMU, reinstate the Deutsche Mark (DM), and anchor it to gold.

The Structure of the European Monetary Union

The European System of Central Banks (ESCB) consists of one central bank, the European Central bank (ECB) and the national central banks of the EMU, all of which are still extant within their own sovereign nations.  Although the ECB is prohibited by treaty from monetizing the debt of its sovereign members via outright purchases of their debt, it has interpreted this limitation upon its power NOT to include LENDING euros to the national central banks taking the very same sovereign debt as collateral.  Of course this is simply a back door method to circumvent the very limitation that was insisted upon when the more responsible members such as Germany joined the European Monetary Union.

Corruption of the European Central Bank into an Engine of Inflation

When first formed around the turn of the new millennium, it was assumed by the bond market that the ECB would be operated along the lines of the German central bank, the Bundesbank, which ran probably the least inflationary monetary system in the developed world.  However, it was also assumed by the bond market that the EMU nations would not allow one of its members to default on its sovereign debt.  Therefore, the interest rate for many members of the EMU fell to German levels.  Unfortunately, many nations in the  EMU did not use this lower interest rate as an opportunity to reduce their budgets; rather, many simply borrowed more.  Thus was borne the euro debt crisis, when it became clear to the bond market that debt repayment by many members of the EMU was questionable.  Interest rates for these nations soared.

 Over the past few years the European Union itself has established several bailout funds, but the situation has not been resolved.  In fact, things are even worse, for it now appears that even larger members of the EMU succumbed to the debt orgy and may need a bailout to avoid default.  Thus we have arrived at the point predicted by Dr. Bagus in which the euro has been plundered by multiple parties and the pot is empty.  The ECB and many sovereign members of the EMU want unlimited bond buying of sovereign debt by the ECB.  Only Germany opposes this plan, but its is the lone voice against this new bout of monetary inflation.

The Historical Context to German Antipathy to Monetary Inflation

In 1923 Germany experienced one of the world's worst cases of hyperinflation and the worst ever for an industrialized nation.  The Reichsmark was destroyed by its own central bank, plunging the German people into misery and desperation.  Now, after only a dozen years of relative monetary discipline, the euro faces the same fate as country after country demands to be bailed out of its mounting debts by unlimited printing of money by the ECB.  Because Germany is part of the EMU, it must accept these newly printed euros.  This threatened monetary inflation of unlimited amounts has shaken German bankers to the core.  It is the nightmare scenario that they feared when, against their better judgment, the German politicians agreed to give up their beloved Deutsche Mark and place the economic fate of the nation in the hands of a committee of foreigners not as concerned about monetary inflation.  But Germany can put a stop to this destruction and save the world while it saves itself.  It can leave the EMU, reinstate the Deutsche Mark, and tie it to gold.

A Golden Deutsch Mark Is Possible and Desirable

Despite the haughty pronouncements of European Union officials, there is nothing that can stop a sovereign country from leaving the EMU and adopting a different monetary system.  The most likely scenario would be a one-for-one redenomination of euro bank accounts for Deutsch Marks.  Thereafter, the DM would float freely in currency markets in the same way as British Pounds and  American Dollars.  The Bundesbank would be responsible for monetary policy just as it was before Germany joined the EMU.  By leaving the EMU Germany would insulate itself from the consequences of the euro as a tragedy of the commons; i.e., monetary inflation by third parties would end, Germany would not experience higher prices due to the actions of third parties, and the capital destroying transfers of wealth would end.

Yet Germany should go one step further.  It should anchor the DM in gold.  Germany is the world's fourth largest economy, behind only the United States, China, and Japan.  Furthermore, Germany owns more of the world's gold than any other entity except the United States, more than either China or Japan and more than any other European country.  A prerequisite to market acceptance of any gold money would be confidence in the integrity of the sponsoring institution.  Not only is the Bundesbank known for its integrity and reverence for stable money, Germany itself has a worldwide reputation for the rule of law, advanced financial architecture, and a stable political system.  For these reasons, Germany would prove to the world that a gold backed money not only is possible but desirable.  Expect a cascade of similar pronouncements once Germany's trading partners realize the importance of settling international financial transactions in the best money available...which initially at least would be a golden DM.

Germany Should Seize the Moment!

Of course the beneficial consequences of tying money to gold go beyond ending price inflation and capital destroying wealth transfers.  We can expect a return to all the beneficial consequences of a return to limited government, for government could no longer fund itself through the unholy alliance with an inflationary central bank that creates fiat money in order to monetize government's profligate spending.  The people would no longer be so subservient to government, pleading and begging for special interests at the expense of the rest of society, for government would be forced to go to the people for approval to increase its budgets.  The list of benefits goes on and on.  Suffice it to say that it all begins with truly sound money, money anchored in gold.  Germany can lead the way and earn the just respect of a grateful world.  It is in the right place at the right moment in history.  It should seize the moment!

Wednesday, September 12, 2012

Roger Bootle's Award Winning Advice to the Greeks: Sit Still While We Rob You!

This summer Roger Bootle won Lord Wolfson's £250,000prize for the best advice for a country leaving the European Monetary Union (one may assume that this advice is aimed at Greece). A more statist, anti-liberal policy than his could hardly be envisioned, which is a sad commentary on the mindset of the judges chosen by Lord Wolfson. His advice contrasted sharply with that of Dr. Philipp Bagus, whose liberal, transparent, and free market-oriented policy advice was rejected in favor of Mr. Bootle's call for state secrecy and coercion.

Mr. Bootle's statist advice stems from his misunderstanding of basic economics in which he views symptoms as causes. He offers no explanation for Greece's unsustainable debt burden, high cost structure and high unemployment other than the standard Keynesian explanation of inadequate aggregate demand. Once this fallacious view isswallowed, the prescription follows axiomatically; i.e., devalue the currency to restore competitiveness vis a vis foreign markets, which will increase
aggregate demand and reduce unemployment. Oh, and the Greeks may have to default on their foreign debt, but history shows that this is not a problem. Really?

Despite his lengthy and repetitive prizesubmission, Mr. Bootle's recommendations can be summarized in this one sentence: In complete secrecy and with no prior discussion, redenominate all Greek euro-denominated bank accounts into Drachma-denominated accounts and devalue the Drachma.

That's it! There is no need to cut public spending. Quite the contrary, because public spending
adds to the Keynesian concept of aggregate demand, and aggregate demand cannot be allowed to fall. The secrecy part is essential for Mr. Bootle's plan. If the Greek people got wind of what was to happen, they would take measures to protect their property, such as transferring their euro-denominated bank balances to banks in Germany. Mr. Bootle refers to such a development as a crisis, but a crisis for whom? Taking measures to protect one's property would not be a crisis for the common Greek citizen. It would be exercising rational self interest. Mr. Bootle's so-called plan is nothing more than robbing Greek citizens in the middle of the night!

Give the Greeks a Better Currency

The aim of currency reform--and, do not mistake my intention, currency reform IS needed--should be to replace a poor currency with a better one. But Mr. Bootle (and his Keynesian colleagues) see the world upside down. In their world of aggregate demand, a weaker
currency always is preferable to a stronger one, because a weak currency purportedly makes a nation more competitive in international markets. But this is pure propaganda. A weak currency not only makes necessary imports more expensive, reducing prosperity, but it also is an outright subsidy to foreign buyers of a nation's goods. As I have argued in my essay Value in Devaluation? and as James Miller has argued in Mark Carney's Zero-Sum Game, currency devaluation is merely a transfer of wealth from all of a nation's citizens to politically favored industries, usually
export industries. It is no different than giving a subsidy to any domestic producer.
The subsidy is paid by all the citizens of the subsidizing country, not by the foreigners who buy the subsidized good. They get a bargain.

Furthermore, devaluation does NOT make a nation more competitive. It does nothing to spur increased domestic saving or external capital investment which lead to theincreased application of capital per capita, the only sources of increased worker productivity and the only sources of increased real wages. Devaluation does not reveal the onerous, wealth destroying effect of economic regulation, not does it reveal the true costs of the welfare state, which relies upon high taxes to fund present consumption at the expense of future prosperity. What the state spends cannot be saved and invested, no matter how cheap the currency.

And, contrary to Mr. Bootle's statement that "improving competitiveness is at odds with the objective of reducing the debt burden", Greece will not be able to reduce its debt until it does
become more competitive. It may well be impossible for Greece to pay all of its debts, but this merely reveals the dire reality of current policy; it does nothing to change that reality. The increase in the debt burden must stop! It must stop now!

Mr. Bootle misses the cause of the euro debt crisis completely when he fails to see that ECB euro-denominated loans to captive national banks, with worthless sovereign debt as collateral, is the
manner in which the European Monetary Union subsidizes failed economic policies. As long as the Greek government can get unlimited euro loans from the ECB, there is no real reason
to reform the nation's economy and there will be no end to the debt crisis.

So, Mr. Bootle proposes an even WORSE currency, a devalued drachma, as the replacement for a bad one, the euro. And if the Greek people resist outright theft through devaluation, then the government must trap their wealth internally,where it can be plundered later, by using capital controls to stop eurotransfers to safer, foreign banks. Thefact that the free movement of capital was one of the pillars of the European project apparently must be sacrificed for the benefit of the state. In fact Mr. Bootle admits that capital controls are illegal under current EU law, but he recommends them anyway. All tyrants love a crisis, because it can be used as an excuse to break the law!

Truly Liberal Alternatives

Dr. Philipp Bagus of King Juan Carlos University, Madrid offered the truly liberal alternative. He proposed a long period of public discussion about alternatives to leaving the euro, which would allow ample time for Greeks to move their property out of the greedy reach of their own
government, should they decide to do so. The currency crisis might be solved in this manner as Greek banks closed and the Greek government shut down its welfare and regulatory system for lack of funds. The Greek government could repeal legal tender laws which currently require Greek citizens to transact business in one currency only, always that issued by the state itself. Concomitantly it could reinstate the drachma as a strong currency backed by gold. Then good money would drive out bad, as people freely chose which currency to use. They would choose the
one that is most marketable. One element of that marketability would be that it would retain its purchasing power.

Of course, Mr. Bootle desires the opposite; i.e., an ever depreciating currency that robs currency holders ofthei r purchasing power. Naturally Greeks will resist this, therefore, the Greek government must install capital controls. Yet, the essence of self-government and democracy and the great triumph of post war Europe was the freeing of the individual first from fascist tyranny and then communist tyranny, whose primary means of enforcement were control of the economy.

The future of Europe will emerge from the euro debt crisis. Mr. Bootle desires a return to state currency controls as a means to prop up the decaying welfare state. Dr. Bagus desires a step back from this unfortunate detour that took concrete form with the formation of the euro. Rather than compound the errors of the euro with even more state intervention, the alternative is to anchor currencies in gold. This will force individual nations to engage in true democratic processes to determine the scope of state action. It will end the stealth transfer of wealth via euro monetary expansion. In that regard it will force each nation to live within its own means. What's wrong with that?

German Court Allows Germany to Be Plundered

Re: German Court Allows Germany to Ratify Bailout Fund

I posted this comment on the Wall Street Journal's website:

"This decsion is a disaster for the German people and a disaster for the world. The flood gates of unlimited monetary inflation have been opened. German capital will be plundered by its neighbors. This is NOT a victory for Europe but a defeat for the original post war European vision of a peaceful and prosperous Europe. Now it is up to the German people to throw out Merkel and the Euro federalists and return to the original vision of a Europe of free trade, free mobility of labor, and free mobility of capital."

Tuesday, September 11, 2012

Spaniards Turn to Gold

"... in Spain, there are no special taxes or levies specific to the resale of gold bullion. There is thus great potential for gold (and silver) to become a money substitute among the population."

Spaniards may solve their country's euro debt crisis themselves by moving their euro deposits outside Spain, as is their right, and/or investing in a new (but actually old) medium of exchange--Gold. The Spanish government may find itself unfunded by its own people and no amount of increasingly debased euro loans from the ECB will save it. Could this be the ultimate solution to the profligacy of governments; i.e., that the people find innovative ways to keep their wealth out of government hands and the welfare state collapses?

Read the full article: As the Euro Tumbles Spaniards Look to Gold

What the Euro Has Wrought

From today's Open Europe news summary:

Handelsblatt reports that according to the SPD, Germany has a direct exposure of €310bn to the eurozone crisis, in the form of guarantees, although the party’s budgetary spokesman Carsten Schneider notes that in the event of a eurozone break-up the risks could top €1 trillion.

As of the end of August, the Bundesbank had a credit at the ECB of Euros 751 billion. This amount grows each day as Spaniards, Greeks, Italians, etc. move their euros to German banks. But, German banks do not receive real resources from the Spanish, Greek, or Italian banks in exchange for accepting these new deposits. They receive a promise from the ECB! This is the infamous TARGET2 system described by Dr. Philipp Bagus in this article.

Friday, September 7, 2012

My letter to the Philadelphia Inquirer re: Are markets really "rejoicing"?

Subject: Are markets really "rejoicing"?
Date: Fri, 7 Sep 2012 12:40:54 -0400

Re: At last, a plan for Europe
Dear Sirs:
It is a misnomer to claim that markets "rejoice" due to interventions by monetary authorities, in this case by the European Central Bank (ECB), to drive down the interest rate artificially. True, the world's stock markets went up and the targeted interest rates did go down, but this is strictly the result of money printing and not the result of market fundamentals, such as increased profits. When a central bank intervenes to lower interest rates, it buys bonds at above market prices, which is the flip side of the interest rate; i.e., when bond prices rise, interest rates go down (and vice versa, of course). One may view this as nothing more than a counterfeiter paying more for a good than the free market price; there is no market force involved. Consequently, when bond interest rates are forced down by such action, these bonds become less attractive investment instruments. Money that would have been invested in bonds will now flow to stocks, where one may get a better yield. The resultant increase in stock prices is not some sort of rejoicing by the market, but simply arithmetic by investors who have nowhere else to go. This game of ever larger injections of funny money will come to an end when price inflation gets out of hand. Simply stopping the increase in the monetary spigot will cause the whole, corrupt house of cards to come crashing down.

Tuesday, September 4, 2012

My letter to the Wall Street Journal re: Colmes needs basic lesson in economics

Subject: Colmes needs basic lesson in economics
Date: Tue, 4 Sep 2012 10:40:19 -0400

Re: How Democrats Made America Exceptional, by Alan Colmes

Dear Sirs:
In his defense of the interventionist welfare state, Alan Colmes violated some very basic facts of economic reality, best articulated by Henry Hazlitt in his 1948 classic Economics in One Lesson. There are two parts to the "one lesson". In the first part Mr. Hazlitt reminds us that all economics is a trade off and that one must look not just at who benefits but also at the effect of an economic policy or intervention on the rest of society. It is not enough to cite, as does Mr. Colmes, a litany of the beneficiaries of government programs. One must look at the costs, also. The second part of the lesson is that one must look at the long term effects. No government program can be classified as an investment, for example, because an investment generates a return that pays for itself and needs no further cash injections from investors. Food stamps and unemployment benefits are not investments, because these programs need a constant flow of new tax dollars in order to survive. They are transfer payments to support consumer spending, pure and simple. What the US economy needs now, as it did in the 1930s, is not the so-called stimulus of spending, but capital accumulation through increased savings. What is spent cannot be invested. Government must cut its spending just as ordinary households must in order to accumulated capital to provide the foundation for a real recovery. This means more savings not more spending.