–Recession redux: The EU bailouts. Digging the hole deeper. Lending to deadbeats.

The debt hawks are to economics as the creationists are to biology. They, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.

Our recession was precipitated by the mortgage loan scandal. Too many banks lent too much money to people who had insufficient resources to service those loans. The banks should have known never to lend money to people who do not have the resources to pay it back. Simple?

Now compare that with the EU. Here are some excerpts from an article in the Telegraph, by By Bruno Waterfield:

“After a humiliating week of denying it needed help, the Dublin government succumbed to pressure from other euro zone countries and asked for a ‘very big’ loan.”

“On Monday Irish and euro zone governments will be watching the markets after Greece, which received a £94 billion bail-out in April, warned that the EU’s debt crisis was not finished yet.”

“Portugal has already warned that there is a “high risk” it might need economic help. If investors are unconvinced by the Irish rescue package, the euro could come under pressure while the cost of borrowing for the Dublin government could rise.”

“George Papaconstantinou, the Greek finance minister, warned that the Irish bailout would not be enough to plug the euro zone’s black hole of debt. ‘Even if Ireland is helped, it cannot prevent the debt crisis from continuing,’ he said ‘[It] will focus on other countries: Spain, Portugal.'”

Sound familiar? The EU, rather than using its own monetarily sovereign powers, and giving money to its monetarily non-sovereign members, it is lending money to these already insolvent countries, thereby adding to their inability to pay their debts — just like the U.S. banks did with their mortgage lending.

So now, the load falls on one of the few monetarily sovereign nations in the EU, the U.K. But wait. The U.K., which wisely did not adopt the euro, and so remained monetarily sovereign, doesn’t realize it’s monetarily sovereign, as witness this statement in the article:

“Douglas Carswell, the Conservative U.K. MP for Clacton, said that British involvement in the bail-out would anger eurosceptics who had voted Tory for a tougher line on Europe. ‘Yet again we see that the people we elected to run the country in May are powerless. All they can do is tell us how unhappy they are about it but they continue to hand out billions to Europe at a time of austerity for the country,’ he said.”

So Britain, which retained the unlimited ability to pay any bills of any size, now has opted instead for austerity, meaning money growth and economic growth will fall, leaving the U.K. headed for a second, easily preventable recession.

And finally,

“Negotiations have been tense as the EU and IMF impose tough conditions to force Ireland to cut public expenditure by £13billion (Â 15bn) and to increase taxation on the vast majority of people. Ireland’s last three budgets have already cut spending by £12billion. Trade unions are warning of ‘civil unrest’ on scale not seen for decades as leaks of the spending plan reveal that there will be sharp tax rises for the low paid and middle class families in order to increase state revenue.

Eamon Devoy, general secretary of the Technical Engineering and Electrical Union, said: ‘I think there is going to be huge civil unrest. When the draconian measures being proposed are heaped on top of cuts already implemented, life in Ireland will be unbearable.'”

Austerity. Civil unrest. Massive increases in unsupportable debt by monetarily non-sovereign governments. All unnecessary and all linked to two false beliefs: The belief that monetarily non-sovereign governments can continue indefinitely without financial support, and the belief that a monetarily sovereign nation needs to institute austerity.

In the U.S., the debt-hawks created such debt hysteria, that the only way to recover from a recession and grow the economy — i.e. with federal deficit spending — was partially blocked in the past, and now seems totally blocked. If the debt hawks have their way, we soon will be, like the EU monetarily non-sovereign nations, wallowing in poverty and civil unrest.

Please contact your Congresspeople and your local media, and tell them to educate themselves on the meanings and implications of monetary sovereignty, before it’s too late.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

18 thoughts on “–Recession redux: The EU bailouts. Digging the hole deeper. Lending to deadbeats.

  1. As you have mentioned elsewhere in your blog, most of the labor in Saudi Arabia is performed by foreigners living in the country. Indeed, they have undebatable monetary sovereignty by virtue of the oil under their feet which can be readily exchanged for “all other goods”, which as you know, is an economics phrase meaning “money”.

    Question: If Saudi Arabia’s oil dried up, could she, as a monetarily sovereign nation, simply create riyals backed by full faith and credit and continue providing a lifestyle close to what her subjects have been accustomed?


  2. It’s like war reparations without the war. Sheesh. You would think Germany would remember what it is like to be on the other side.


  3. Ed,

    Having oil or any other physical asset, is not related to monetary sovereignty. A nation with zero physical assets could be monetarily sovereign, so long as its currency creation was the exclusive monopoly of the government and not constrained by any physical substance.

    The U.S. was not monetarily sovereign when its currency was fixed to its supply of gold. It stood ready to buy and sell gold at a fixed price, and if it ran short of gold, it couldn’t create money.

    Similarly, Saudi Arabia currently does not function as a monetarily sovereign nation. It has fixed the riyal to the U.S. dollar. It stands ready to buy and sell dollars at a fixed number of riyals, and if it were to run short of dollars, it couldn’t create more riyals.

    One of the marks of a monetary sovereign nation is that it does not need a positive balance of trade. It can run a negative balance forever. In contrast, the Saudis, not being monetarily sovereign, rely on a positive balance.

    Rodger Malcolm Mitchell


    1. A condition of the question is that Saudi Arabia removes it dollar peg. The question still stands:

      Without oil, can Saudi Arabia simply create riyals and keep the good times rolling?


        1. The Soviet Union is a counter example – how to have a crummy economy in spite of vast natural resources. I guess they didn’t create enough rubles.

          Japan has a large resource of energetic, innovative people. Saudi Arabia does not. Therefore, the yen is backed by the full faith and credit in the Japanese people to remain creative and ultimately pay the debt.

          The riyal is backed by full faith and credit in the existence of the oil under the sand.

          The phrase “full faith and credit” seems to be thrown around without the understanding that “faith” is meaningless without an object – you must have faith IN something or someone. The dollar is backed by the faith that America has huge stores of unregulated human capital and will continue to be a fount of economic activity into the indefinite future – not so much for Saudi Arabia.

          Free money, in time, will turn the United States into Saudi Arabia or the Soviet Union.


  4. Why should the banks stop lending money to people who do not have the resources to pay it back? No matter how reckless they are, monetarily sovereign governments will continue to bail them out indefinitely. In fact, banks should let anyone who wants a loan get a loan. What’s the worry?


    1. Not exactly. Many banks went out of business for making bad loans. It was the BIG banks that were saved. Similarly, many small companies went out of business, but BIG General Motors was saved. See a pattern?

      Rodger Malcolm Mitchell


      1. I know, but that’s not what a monetarily sovereign government was SUPPOSED to do. Every bank should’ve been bailed out. Since the government can create unlimited amount of money, why didn’t it save ALL banks, including Lehman Brothers? Reckless lending should be encouraged in any monetarily sovereign country, it will certainly benefit the economy and nothing bad could happen as long as the politicians educate themselves on the meanings and implications of monetary sovereignty, right?


      2. In a sovereign country, why should BIG banks stop lending money to people who do not have the resources to pay it back? Why should BIG General Motors stop making cars no one wants to buy?


  5. TBTF.

    I sense in your posts the old debt-hawk argument that can summarized: “Why not just have the government give everyone $1 trillion each, and make everyone rich”?

    First, print enough money and you will have inflation. Second, monetary sovereignty doesn’t change the difference between efficiency and inefficiency.

    Debt hawks, providing no data to support their beliefs, love to build extreme straw men to knock down. Perhaps I should ask a debt-hawk, “Why not tax everyone $1 trillion each, and have a really big federal surplus.”

    Rodger Malcolm Mitchell


    1. First of all, I’m no debt-hawk. I’m against spending cuts and tax hikes. So please stop putting words into my mouth.

      As you know very well, financial crises are deflationary, therefore bank bailout will NOT cause inflation. So why didn’t the government save ALL banks, including Lehman Brothers? Since they’ll NEVER fail, why should BIG banks stop lending money to people who do not have the resources to pay it back?


  6. Sorry TBTF, I misunderstood your question.

    Not being privy to government internal debates, I don’t know why they saved some banks and not others. Any ideas?

    The current reason for banks not to lend to deadbeats is they may no longer be able to sell those bad loans to Fannie Mae, as they did in the past. So they would take a loss on the loans. Today, they cannot be confident the government will bail them out.

    My feeling is, depositors and creditors should be protected. I disagree with protecting bank officers.

    Rodger Malcolm Mitchell


  7. Ed, actually full faith and credit has nothing to do with “unregulated human capital” (whatever that may mean). See: https://rodgermmitchell.wordpress.com/2010/02/23/understanding-federal-debt/, where you’ll read:

    “The collateral for federal debt is “full faith and credit.” This may sound nebulous to some, but it actually involves certain, specific and valuable guarantees, among which are:
    – The government will accept U.S. currency in payment of taxes
    – It will pay it’s debts (T-bills et al) and its bills with U.S. currency
    – It will force all your domestic creditors to accept U.S. currency, if you offer it, to satisfy your debt.
    – It will not require domestic creditors to accept any other money
    – It will maintain a market for U.S. currency
    – It will continue to use U.S. currency and will not change to another currency.
    – All forms of U.S. currency will be reciprocal, that is five $1 bills always will equal one $5 bill and vice versa.

    Rodger Malcolm Mitchell


    1. The first question still has not been answered.

      YES or NO:

      Can Saudi Arabia decouple the riyal from the dollar, thus becoming monetarily sovereign, and maintain its standard of living without oil revenues simply by crediting the bank accounts of its subjects with more riyals?


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