An alternative to popular faith
AP 5/7/2010: “European leaders sought Friday to convince fearful markets that the Greek debt crisis won’t spread to other countries and derail the continent’s hesitant economic recovery. France and Italy approved their share of a euro 110 billion ($140 billion) bailout to keep Greece from imminent default […] EU leaders have insisted for days the Greek financial implosion was a unique combination of bad management, free spending and statistical cheating that doesn’t apply to any other eurozone nation, such as troubled Spain or Portugal.”
As I’ve noted elsewhere, GREECE has problems neither unique nor unanticipated. In a June 5, 2005 SPEECH at the University of Missouri, Kansas City, I said, “I mentioned Germany. They are in trouble, again. Their economy is stagnant. They want to increase their supply of money by cutting taxes. But, because of the Euro, no European nation can control its own money supply. The Euro is the worst economic idea since the recession-era, Smoot-Hawley Tariff. The economies of European nations are doomed by the Euro.“
We have a similar, though thankfully different situation here in the U.S. Replace “Greece” with “California,” and you have an identical problem. Until 1971, the U.S. was on a gold standard, which limited its ability to create money. Today, Greece is limited by the “euro standard”. California is limited by the “dollar standard.” All standards have the same function: Limit money creation.
Like Greece, California is unable to create money at will. It has borrowed as much as it can, and no sources of money are on the horizon. Now try to imagine the other states, Illinois, New York et al, giving or lending money to California to bail it out of its immediate problems. Obviously, that wouldn’t work:
1) The states can’t afford it.
2) The “solution” would, at best, be temporary. It merely would delay the inevitable, while putting California deeper in debt.
3) It would exacerbate the looming bankruptcies of the other states.
Now, the E.U. proposes a “hair of the dog” solution for Greece. It is asked to commit financial suicide by raising taxes, reducing spending and borrowing even more money, the very thing that got it into trouble. Meanwhile, the other E.U. nations will commit suicide along with Greece, by lending it precious money they can’t spare.
The solution for the U.S states is clear: Federal creation and input of money. The federal government has this power, in fact, gave itself this power specifically to prevent American bankruptcies, and has used this power many times, most recently to end the recent recession.
The solution for the E.U. states is equally clear, and that solution is not loans from wealthier E.U. nations to poorer E.U. nations. The solution is for the E.U. to function just like the U.S. Fed. Create money and supply it to the E.U. states. Until then, the E.U. will live in a dream world, or rather a nightmare world of ongoing financial desperation.
More than 200 years ago, the U.S. was a group of independent nations, each with individual mores and beliefs. Yet for mutual survival, they had the good sense to ignore their differences and come together under one rule. The EU should do the same.
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
No nation can tax itself into prosperity
#Monetary Sovereignty - Mitchell 
Rodger,
Question: Greece is in trouble because they have huge public sectors expenses (e.g. retirement at age 50 for hundreds of categories of workers)and minimal tax compliance. Because they cannot create Euros they find themselves in the current crisis.
If they were still on the drachma, this crisis would not exist but they would certainly have other problems such as a constantly depreciating drachma and escalating import prices as a result. So it seems that one way or another there is a price to be paid for a ‘welfare’ society. In other words you cannot pay huge segments of your citizens to not work without some price to be paid. I suspect you see it differently, true?
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If I understand correctly, you believe that were Greece still on its own money, its borrowing and spending would have caused inflation. True?
If so, what is your evidence for that hypothesis? It certainly has not been true in the U.S. See INFLATION. Here, there has been no relationship between deficit spending and inflation, which instead is caused by oil prices.
Rodger Malcolm Mitchell
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That’s not quite what I said. I suspect that if Greece were still on a drachma standard the drachma would be depreciating making imports (including oil) more expensive. I have read that Greece has a long and robust history of debt defaults:
“Greece’s default on debt reached an almost pandemic reoccurrence at the turn of the century… Greece has been in default roughly one out of every two years since it first gained independence in the nineteenth century.”
With a history like that it is difficult to imagine a healthy drachma unlike other sovereign currency countries such as the US and Japan that do not have a recent history of default. Therein lies the difference.
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When the world went off the gold standard, it became unnecessary for a modern sovereign nation to default. I don’t know Greek history, but I don’t see why they would have defaulted when not on a “standard.” If loans to them were made in drachmas, and they are the sole creators of drachmas. why default?
Sadly, Greece joined another de facto gold standard, the EU, which functions exactly the same way: It restricts sovereign nations from creating money.
Just as massive deficits have not caused inflation in the U.S., inflation would not have been a necessary result of Greek deficits. Inflation actually is a complex event, and deficit spending is but one part of that event.
In short, the real problem is the EU, which five years ago I predicted would be a failed concept.
Rodger Malcolm Mitchell
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On a related topic, if a country has a sovereign currency, what is the downside to their establishing massive entitlement programs such as those present in Greece where a huge percentage of the population can retire at age 50 and receive a government pension? We see the problem with that path in a country (like Greece) that doesn’t have a sovereign currency but I assume you’re not claiming that having a sovereign currency enables a country to create massive entitlements with no harmful results?
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Jason,
Taken to their extreme, “entitlement” programs could mean no one would work, and everyone would be supported by the government — a situation that clearly would be untenable. Debt hawks often provide extreme examples to “prove” deficits are harmful.
Of course, virtually anything taken to its extreme doesn’t work.
I do believe the federal government should eliminate FICA (See: FICA ) and pay for universal health care and Social Security. I also believe Social Security benefits should not be taxed.
Unlike my friends Randy Wray and Warren Mosler, I do not believe the government should be the employer of last resort, because this too easily segues into no one doing real work.
We here in Illinois have vast experience with that concept, as friends and family of our politicians have useless “jobs” they don’t even bother to attend.
Rodger Malcolm Mitchell
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I agree 100% but how do you propose solving the unemployment problem if the private sector still leaves millions unemployed?
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Unemployment actually is a symptom, not a fundamental problem. Profitable businesses hire. Unprofitable don’t. The key to creating employment is to help more businesses become profitable.
My very first step would be to end FICA. As it is a tax paid by employers and employees, its elimination directly would stimulate hiring, spending and profits.
My second step would be to begin a steady reduction in business taxes, until businesses eventually paid $0 tax. Forcing business to pay tax is incredibly foolish. It makes our companies less competitive worldwide, and reduces their ability to hire.
My third step would be to begin raising the minimum earning level for paying personal taxes, perhaps with a steady increase in the standard deduction.
My fourth step would be to begin a program of direct federal per capita reimbursement to the states. This would allow the states to hire for infrastructure, education etc.
Rodger Malcolm Mitchell
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