The Solution to the Worldwide Debt Crisis
by Godfrey Bloom, MEP, and Patrick Barron
May 7, 2013
European Parliament, Brussels
The eurozone debt crisis is the logical and inevitable result of a worldwide delusion that central bank credit expansion is a cure for debt, and that it will stimulate economies to higher levels of prosperity out of which ever increasing welfare entitlements may be paid. The truth is that credit expansion is the cause of the current debt crisis and all its ancillary evils, which include high unemployment, a lower standard of living, and the threat of civil unrest. Central banks have distorted the market mechanism in which the interest rate brings the savings of real resources by real people into harmony with the credit demands of business and industry, creating a sustainable economic process. It is replaced by phony liquidity, which encourages longer term investments which cannot be completed due to lack of resources with which to complete them.
The euro project, which is based upon this delusion of the benefits of unlimited credit, has created a moral hazard monster, whereby risk and profligacy are encouraged and prudence and thrift are punished and vilified. The EMU is a multi-national "tragedy- of-the-commons", a well-known economic term that describes the disastrous consequences that follow from a failure to secure property rights in order to protect a commonly held resource from being plundered to extinction. The commonly held resource is the euro itself.
The "misconstruction" of the EMU rewards high sovereign state deficits with cheap euros, created out of thin air and in unlimited quantities by the ECB. This is the "tragic" mechanism through which moral hazard is institutionalized in Europe.
Moral hazard, brought forth by lower borrowing cost, is the logical result of the implicitly and even explicitly stated promise that the EMU would prevent sovereign debt default by any EMU member. The result was an orgy of speculative lending and extensions of welfare state benefits.
Instead of funding sound, profitable, productive investments, the profits of which would amortize and extinguish the debt incurred, this credit expansion funded speculative loans to overbuilt industries and increased welfare "entitlements". There are no profits from which debt can be amortized and eventually extinguished. On the contrary, both speculative lending and welfare benefits can be sustained only by even more debt or higher taxes. There are natural limits to both, and, as a wise man once said, "that which cannot continue will not continue". He also pointed out that "reality is not optional". We must look upon the world the way it really is.
It may seem as if every nation of the world subscribes to the "more credit" solution to our current crisis, but this is not so. In fact there is one nation--and it belongs to the EMU--that has objected to the EMU's credit expansion policies from the very beginning. This nation's representatives on the ECB board resigned in protest to EMU policy and voted against ECB bailouts of sovereign debt with fiat euro credit expansion. This nation is one of the great trading and exporting nations of the world and a nation with the second largest supply of gold in the world, upon which it could base sound, gold-backed money of its own. Furthermore, ninety years ago this nation experienced the disastrous consequences of the very policies currently pursued by the EMU. And this country, alone in the EMU, has balanced its government's books. This country, of course, is Germany.
Germany's capital, its accumulated wealth, is being plundered via this euro debt expansion process that justifies itself in regulation, law, and treaty. Its effects are delayed and, for awhile, obscure, so that cause-and-effect are not immediately seen.
It takes time for this "Money-Created-Out-of-Thin-Air" to work its way from initial creation to having the effect of diluting the savings of productive people, causing price inflation and ruining the purchasing power of the euro. This monetary dilution makes the entire euro monetary system weaker. Because of the inherent time delay, most observers fail to see this cause and effect, but it is there. It is always there.
Even some who DO understand the effect on Germany, which includes many prominent Germans themselves, justify the plunder out of a false sense of "European Brotherhood" or, even worse, a lingering sense of German war guilt. But all this is false. There is no benefit to Germany's European brothers that would accrue from the destruction of Germany's capital base. This is a political cult born of the delusion that fiat euro credit is beneficial and limitless. But there is always a limit. Reality is not optional.
Europe's prosperity and its very survival as a free and democratic continent depend upon German industry. As Germany goes, so goes Europe. And, as Europe goes, so goes America and, ultimately, the world. At this crucial point in history, which is ruled by great delusions, the entire edifice of Western liberty hinges on Germany.
The solution to the euro debt crisis and also the worldwide debt crisis is for Germany to leave the EMU, re-establish the DM, and tie the DM to gold. These actions are the right of Germany as a sovereign nation and are non-coercive--in that no other nation is forced by Germany to take any specific action. If Ludwig Erhard could do it in 1948 under even more dire political conditions as existed at the time, Wolfgang Schauble and Jens Weidman can do it today.
The beneficial consequences of reinstating sound money in Germany can hardly be overstated. The fiat money house of cards depends upon there being no better alternative money for international trade. By reinstating the DM and backing it with gold, international traders will migrate to the DM as their currency of choice and away from dollars, yen, euros, and yuan. Demand for the DM will increase, causing German production costs to fall and German industry to become even more competitive. The only way for the rest of the world to prevent flight from their currencies to the DM will be for them to emulate Germany's example; i.e., stop inflating their currencies and tie them to their own gold reserves.
I hope you can see that this one non-coercive, peaceful act by a sovereign Germany has the power to change the way the international monetary system works. Rather than each central bank trying to weaken its currency against all others, it will be forced by the market to strengthen its currency or experience inflation and loss of industrial competitiveness. The destructive cycle of money debasement will be replaced by a virtuous cycle of money improvement, all directed by market forces and rational self-interest alone.
We call upon German patriots to explain this to their countrymen.
Germany must leave the EMU and reinstate a golden DM. The world teeters on the brink of monetary collapse, the consequences of which undoubtedly will be massive poverty and possibly revolution and war. Germany can save itself, save Europe, and save the world simply by exercising its right as a sovereign country to control its own currency. It will set an example for the world to follow...and follow it will.