My letter to the NY Times re: The False Choice Between European Federalism and Tribalism

Re: Where's Charlemagne when we need him? , by Istan Deak

Dear Sirs:
Professor Deak fails to understand that the euro project is a tool of the European elite. Its purpose is to force a federal Europe on an unwilling populace through control of the currency. The Maastricht Treaty of 1992 is the culprit. The fall of the Soviet Union and the NATO military alliance had ushered in the promise of eternal peace and prosperity for Europe. But this was not enough for an elite seeking greater glory for themselves. The common currency project threatens to undo all the good of decades of hard work to reduce barriers to trade, capital, and people. Professor Deak is just another European dreamer who would pull all that down for a "new imperial construct". What a dangerous idea.

Another Self-serving Call for Monetary Debasement

Re: Aluminum producer says the high euro is crippling growth

One should not be surprised that heads of exporting industries desire that the monetary authorities debase the currency, because these exporters will be able to sell more product. So, you may ask, what's wrong with that? The answer is that such a policy is a rather complicated and hidden mechanism whereby wealth is transferred from the ordinary citizens of the weaken currency to the exporters' customers. There is no way that one country can force another to pay for its internal growth. Oh, be assured that the exporting industries will show that they increased sales and may even add employment, but the funding for such expansion is provided by a transfer of wealth from the rest of the country via monetary debasement. The exporters' customers receive more of the country's currency per unit of their own currency, so their purchases appear to be cheaper...and, for the exporters' customers it is cheaper...for awhile. But over time the monetary expansion will cause prices to rise in the exporters' country, wiping out any cost benefit that the exporters may have gained. Then the exporters will be right back writing articles about the currency being too expensive and the need for another round of monetary debasement. This is the state of affairs in the entire world at the moment, with monetary authorities everywhere falling over themselves trying to cheapen their currencies faster than all other countries. Madness!

How to think about "Greece's Great Fire Sale"

Re: Greece's great fire sale

One way to look at this phenomenon of Greece's government selling off the country is that this is the mechanism by which Greece financed its bloated bureaucracy and welfare state. Greek citizens are consuming their country bit by bit so they can retire early on state-provided pensions with all sorts of welfare benefits, too...all administered by an inefficient and overpaid bureaucracy. Becoming a member of the eurozone helped conceal the ill effects for many years and speed along the process.

Here's my advice for the Greeks, which applies equally well to all other members of the EU, plus America, plus Japan:

Time to get back to work, reduce one's standard of living, and start saving.

IMF report shows Germans supporting wealthier nations

Study on Wealth Fuels Euro Crisis Debate in Germany

This study by the IMF was reported in the influential German newsmagazine, Der Spiegel, and has created quite a stir. It shows that both Greeks and Spaniards are wealthier than Germans, yet Germany is expected to bail them out of their financial difficulties. A major portion of the Greek and Spanish wealth is held in land; whereas, the Germans hold less of their wealth in land. Nevertheless, why shouldn't the Greeks and Spaniards liquidate their land holdings before going hat in hand to Germans for financial assistance? This situation is analogous to the financial condition of the US. The US runs a huge budget deficit each year, yet refuses to sell its vast land holding in the western part of the US and Alaska. These areas contain huge amounts of valuable natural resources that the US refuses to allow commercial companies to exploit.

The False Choice in Europe Between Austerity and Growth

The debate in Europe over what policies the debt ridden countries should pursue is being falsely constructed as a choice between austerity and growth.  Not only is there another, more appropriate alternative, but these two alternatives themselves are not properly defined.  The misconstruction of the euro has led to unsustainable debt levels.  The simplistic alternatives offered are (1) cutting spending and raising taxes--the austerity option--and (2) even more monetary stimulus--the growth option--which promises that even more credit will stimulate an economy to higher levels of production from which debt can be amortized.  These alternatives emerge out of a failure to understand why the countries are in debt in the first place and why previous credit injections have failed to ignite increased production.  Therefore, if the problem is not understood, the solutions offered are likely to fail.

The Real Cause of the Euro Debt Crisis

 The establishment of the euro led to lower interest rates, as there were explicit and even some implicit statements that no member of the euro zone would be allowed to default.  This led to a classic case of moral hazard, whereby borrowers assume increased risk due to the promise that losses will be born either wholly or partially by others.  The increased debt was supported by euro expansion by the European Central  Bank, which monetized sovereign debt in a backdoor method.  But rather than lead to increased profitable production, the profits of which could amortize the debt, the increased debt led to unprofitable, speculative investment and expansion of welfare benefits.  There were no profits for debt amortization.

The original sin was a scramble for more euros, a classic tragedy-of-the-commons, whereby the debt guarantee created an unprotected common resource--the euro--for all to plunder to extinction.  This fiat money credit expansion led to misallocation of resources that caused disequilibria in the structure of production.  There were no real savings by real people, who preferred to sacrifice in the present for greater economic benefits in the future.  In other words, individual time preference--the relationship of one's preference for present vs. future goods--remained unchanged.  This led to the economic crisis, whereby rising prices in consumer goods forced the abandonment of longer term projects due to lack of adequate resources for their profitable completion.

The commonly stated alternative solutions, austerity or stimulus, do not address the source of the problem.  Austerity proponents offer increased taxation and reduced government spending to reduce the deficit.  This is half right as far as it goes.  Government spending must be cut, since this reduces the drain on resources from productive, private, and profitable uses to non-productive, unprofitable, government ones.  But raising taxes diverts these resources right back to government.  Growth advocates want even more credit expansion, which amounts to little more than a denial of cause and effect and a belief that more of the same somehow will produce a different result.

Indeed, growth is the key to solving the euro debt crisis, but it will not be the result of increased credit expansion.  The first order of business must be to stop credit expansion in order to end the misallocation of resources that disrupts the structure of production and leads, instead, to economic contraction.  This  problem must be solved first, either through a rededication of the ECB to monetary stability (very unlikely, given the common ownership of the bank by irresponsible governments with a vested interest in monetary expansion) or through reinstating national currencies tied to gold.  Then the governments must remove the barriers that stifle the components to real economic growth.

The Three Components of Real Economic Growth

 Real economic growth derives from the application of (1)accumulated capital to (2) modern technology by innovative (3) management techniques.  Technology, capital, and good management lead to greater productivity of labor, the only source of a higher standard of living.  Of the three, technology is the easiest to acquire.  But entrepreneurs need the freedom to use it in innovative ways, not restricted by laws that favor entrenched unions or by other so-call labor friendly regulations.  The least understood component is capital.  Capital is accumulated from savings, not from fiat credit expansion.  Real people reduce their present consumption and invest their savings for a better future.  Anything that inhibits savings must be eliminated.  The interest rate must not be suppressed, so that savings is encouraged and rewarded.  Government spending must be reduced so that taxation can be reduced.  All manner of regulations on business must be eliminated.  Property rights must be strengthened, so that investors will commit to long term projects and not fear future government predation.  Entrepreneurs must have the freedom to buy goods and labor services from anywhere in the world with no tariffs or quota restrictions.  With these liberal policies in place, the economy can grow and eventually help pay off the government debt mountain.

 

Conclusion

 The governments of Europe have spent beyond their means and have tried to bridge the gap with increased debt.  The promise that the debt can be amortized through further monetary stimulus has failed, because it led to capital misallocation and lower, not higher, economic output.  Nor should governments raise taxes in order to balance their books, as championed by the austerity advocates.  The real solution is an abandonment of monetary and fiscal interventions to be replaced with sound money and laissez faire capitalism in all its forms.  There is no path to prosperity other than profitable work and thrift, which will lead to capital accumulation and greater productivity out of which the debt mountain can be honorably extinguished.  The sooner the countries of Europe begin this process, the sooner they will return to real, sustainable growth.

Godfrey Bloom calls for prosecution of central bankers

Godfrey Bloom is a member of the European Parliament representing Yorkshire and North Lincolnshire.  He calls for a financial crimes court, similar to the Nuremberg Trials, for central bankers and their lackeys.

 http://tinyurl.com/colp72k

Now It's Portugal's Turn...What the Euro Experiment Has Wrought

Now it's Portugal's turn, by Ambrose Evans-Pritchard in the Telegraph

My comments on Evans-Pritchard's column:

The misconstruction of the European Monetary Union is responsible for this debacle. It will not stop with Greece, Cyprus, and now Portugal, because the economic forces of "moral hazard" and "tragedy-of-the-commons" that caused such excess debt are still working their damage. This damage will be revealed country by country. The euro experiment has failed spectacularly in just twelve short years. This should be a lesson not to trust governments to replace natural markets with artificial ones. For political reasons the European countries tried to implement Robert Mundell's great experiment in manufacturing a common fiat currency to be jointly managed by an international committee. The euro elite wanted a federal Europe, so they foisted the common currency on a reluctant continent in order to use it as a tool to achieve power over national governments. But there is no public consensus for a federal Europe. Each country's national government used the euro project simply to expand its budget by borrowing at lower costs. At this point the outcome is uncertain, but there are no easy exit strategies. My guess is that the ECB will print more money (that's what central bankers always do), which will just exacerbate the problem. The only sane solution is to admit that the euro experiment was a failure, reinstate national currencies, and tie them to each country's gold reserves. Some countries may prefer to join a deutsche mark zone. It is possible that over time Europe would be one big deutsche mark zone, run by the Bundesbank in Frankfurt. A golden deutsche mark would create the conditions for other currencies, such as the dollar, to be tied to gold out of rational self-interest. Otherwise, the deutsche mark will supplant the dollar as the preferred currency for international trade.

What the IMF would have us believe

Billions of pounds of QE unlikely to cause inflation--IMF

 A preview of likely future research findings by the IMF:

Increasing the minimum wage does not increase unemployment.

Increasing taxes does not reduce capital accumulation.

More regulation of business actually reduces business costs.

Nationalized industries produce higher quality goods.

My letter to the NY Times re: Putting the Portugal Bailout in Perspective

Re: New Trouble for Euro in Portugal

Dear Sirs:
According to your article, just two years ago Portugal received a 78 billion euro bailout from the IMF and its creditors. Let's put that previous bailout in perspective. The 78 billion euro bailout is equivalent to around $100 billion. The population of Portugal is 10 million, so the bailout amounted to $10,000 per person. The gross national product of Portugal is $237 billion, so the previous bailout of Portugal is equivalent to 42% of its GNP. The gross national product of the US is $15 trillion. If the US were to get a similar sized bailout, it would receive over $6 trillion. Yet, incredibly, Portugal is still in financial trouble and its situation is getting worse, because its high court ruled the government's proposed benefit cuts to civil servants and pensioners to be unconstitutional. The members of the European Monetary Union (EMU)--i.e., those seventeen nations using the euro--really must ask themselves if there isn't something structurally wrong with a monetary arrangement that leads to such continuous disaster. Are the other members of the EMU expected to support profligate countries like Portugal forever? Since the Portuguese high court apparently has the power to prevent spending cuts and higher taxes cannot plug the gap, what is the answer? Well, there is none, except to end the common currency experiment, which has fostered one financial crisis after another in only a dozen years.

My interview with the Heartland Institute

Here's the link to my 29 minutes long interview with Steve Stanek of the Heartland Institute. We discuss sound money, the true gold standard, and the future of the euro, among other topics.

http://heartland.org/podcasts/2013/04/01/patrick-barron-simplicity-sound-money

My letter to the NY Times re: The Myth of European Solidarity

Re: Cypriots Feel Betrayed by European Union

Dear Sirs:

The frustration felt by ordinary Cypriots is illustrative of the myth that Europe is moving toward solidarity, prosperity, and greater social cohesion. The Cypriot crisis revealed the reality that lies beneath the Brussels rhetoric. The Cypriots were fools to believe that they could engage in reckless economic practices, moving away from agriculture and into services, and depend upon the EU to bail them out of any setbacks along the way. Just as each individual must rely upon himself and his own resources, the same is true of nations. Just as in Greece, the Germans are being blamed for not coming to the Cypriots' aid. But why should they? Would the Cypriots bail out the Germans, if the shoe were on the other foot? Of course not. Rather than build amity and good will, the EU has triggered massive misallocation of resources that has engendered enmity, distrust, and hatred. This is to be expected from any government-run, socialistic wealth transfer union.

My letter to the Financial Times re: Wrong logic by Wolfgang Munchau

Dear Sirs:
In his Monday, April 1 column titled "The logic of economics will catch up with the euro" Wolfgang Munchau says that the eurozone banking system needs to share risks and keep debt, both public and private, within sustainable limits. First of all, risk sharing is a cause of the continuing crises, because it creates moral hazard, whereby banks take increased risks knowing that others will share in any losses. This is the adverse consequence of any so-called deposit insurance, whether public or private; it encourages the very behavior it wishes to alleviate. Secondly, debts will be sustainable only in a free market with sound money. As long as central banks can create money out of thin air, they will funnel it to profligate governments and failing banks. Under sound money governments are forced to live within their means by the taxpayers and the bond market. Furthermore, Mr. Munchau's claim that Cyprus "had no choice but to impose capital controls" is patently false. I suggest that he read Deep Freeze: Iceland's Economic Collapse by Drs. Philipp Bagus and David Howden. Capital controls have discouraged capital investment in Iceland and have created another bubble economy with the capital that is trapped within the country.

My letter to the Financial Times re: Roger Farmer is not much of a Keynesian heretic

Dear Sirs:
Judging by the proposals in his April 1 column titled "Economic confessions from a Keynesian heretic", UCLA's Roger Farmer is in no danger of being burned at the stake by his fellow interventionists. He wants a "further increase in equity prices, engineered by government", because "households spend more when they feel wealthy" and, as all good Keynesians know, "we need to increase demand" in order to "produce more consumer goods". This is just about as pure Keynesian orthodoxy as you will find; i.e., spend ourselves into prosperity through government interventions of one sort or another. Why don't we try something really radical, such as saving and living within our means? Oh, I see the problem...that really would get a tenured college professor burned at the stake!