–The world parade: Europe marches over the cliff. America follows. Tea Party cheers.

Mitchell’s laws: Reduced money growth never stimulates economic growth. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

Latest news on the world parade:

Merkel vows faster eurozone reform after S&P downgrades
Yahoo Finance, Reuters 1/14/12, By Robin Emmott and Brian Rohan

European leaders promised on Saturday to speed up plans to strengthen spending rules and get a permanent bailout fund up and running as soon as possible, a day after U.S. agency S&P cut the ratings of several euro zone countries’ creditworthiness.

In a conference call with reporters and analysts after downgrading nine of the euro zone’s 17 countries, Standard & Poor’s said it saw continued risks from the debt crisis that has overshadowed Europe for the past two years and said the single currency area was heading towards recession.

It also warned that France, which suffered a downgrade to AA+ from the top-notch AAA, was at risk of further cuts if a recession further inflates its debt and budget deficit.
“The policy response at the European level has in our view not kept up with the rising challenges in the euro zone,” S&P credit analyst Moritz Kraemer said on the call, forecasting a 40 percent chance of euro zone gross domestic product contracting by up to 1.5 percent in 2012.

Hmmm . . . I wonder why a group of nations, each having surrendered their single most valuable asset — their Monetary Sovereignty — would suffer GDP contraction.

(German) Chancellor Angela Merkel said the downgrades underlined why a so-called ‘fiscal compact’ must be signed by member states quickly, and the next bailout mechanism, known as the ESM, should be funded soon.

“We are now challenged to implement the fiscal compact even quicker … and to do it resolutely, not to try to soften it,” she said at a meeting of her conservative Christian Democrats (CDU) in the northern city of Kiel.

The “fiscal compact,” which I refer to as the “suicide pact,” mandates more centralized EU control over national budgets and sanctions for countries that do not meet deficit and debt reduction targets. Just what anemic nations need: Blood removal.

European Central Bank policymaker Joerg Asmussen warned that Europe’s drive to tighten fiscal rules was being softened, considering the latest draft of the agreement a “substantial watering down” of budgetary discipline because it would allow extra spending in extraordinary circumstances, the Financial Times Deutschland reported.

It’s hard to know whether to laugh or to cry.

Leaders including Merkel have urged countries to tighten their belts with higher taxes and deep spending cuts to rein in massive budget deficits. But that has heightened market concern about their ability to grow their way back to health, pushing borrowing costs even higher for heavily indebted governments.

By what economic mechanism can higher taxes and deep spending cuts rescue an economy? Tea Party insanity has infected Europe as well as the U.S.

S&P said it was not working on the assumption of a euro zone break up, although it blamed its leaders for focusing too much on cutting debts and not sufficiently on competititeveness. “We think that the diagnosis of policymakers regarding the crisis is only partially recognising the origin of the crisis,” said Kraemer, mentioning the focus on budget austerity.

“The proper diagnosis would have to give more weight to the rising imbalances in the euro zone in terms of the external funding positions, current account positions, much of it is based in diverging trends of competitiveness,” he said.

Total gobbledgook. S&P favors austerity — and also doesn’t favor austerity. It straddles the fence, and later, when the whole thing comes crashing down, will say, “I told you so.”

“The downgrade is bad news for Austria but it should wake everyone up when such a thing happens,” Finance Minister Maria Fekter said. “Now everyone recognises that this … is a matter of debt and deficits, not primarily of the economy.”


“The downgrade is far too broad, it effects too many countries, it effects the very credibility of the euro,” (Spain’s) Treasury Minister Cristobal Montoro said on the radio.

The euro has credibility?? Since when? Readers of this blog remember the line, “Because of the Euro, no euro 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.

I said it on June 5, 2005, in a speech at the University of Missouri, Kansas City.

Germany’s Merkel backed a proposal to reduce the reliance of institutional investors on ratings agencies. The idea would be to introduce legislation to allow institutional investors to evaluate risk themselves and make decisions independent from the U.S.-based agencies.

Don’t like the ball game score? Change umpires. Ironically, while the euro nations are angry at S&P, if anything, the ratings are too high, and absolutely, positively will continue to be lowered, unless the EU gives (not lends) euros to member nations.

European leaders are set to meet at a summit on January 30 to discuss how to boost growth and jobs, and Merkel’s words on Saturday suggest she will also be looking for faster progress on tighter common fiscal rules.

That’s the guaranteed-to-fail plan: Try to boost growth and jobs with more austerity. Help a runner by cutting off his feet. Sadly, that’s the same plan the U.S. Congress and President have borrowed from the Tea Party.

However, Merkel is no fool. Austerity will weaken the rest of the euro nations, making Germany even more dominant. That’s the real plan, and the euro nations are falling for it.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports


22 thoughts on “–The world parade: Europe marches over the cliff. America follows. Tea Party cheers.

  1. You now should see why I don’t like the EU – these people are crazy! And I’d say they started with the austerity madness, because here, they are in charge – they lead Germany, Portugal, Spain, Netherlands, Greece, Italy, etc.

    I don’t have a good opinion of the rating agencies, but right now I’m thinking – what happened to the rest? What are they waiting for to downgrade the entire euro, Germany included?


  2. Talvez,

    The euro nations don’t understand Monetary Sovereignty, nor do the rating agencies. They still operate under the old “balanced budget” paradigm, which is appropriate to monetarily non-sovereign governments (euro nations, U.S state and local governments), but not appropriate to Monetarily Sovereign governments (U.S., Canada, Australia, UK, China).

    So, the rating agencies ignorantly downgraded the U.S., and also ignorantly failed to downgrade the euro nations.

    Treating a Monetarily Sovereign government the same as a monetarily non-sovereign government demonstrates abject economic ignorance.

    (Hello U.S. Congress)

    Rodger Malcolm Mitchell


  3. More on clever Germany.

    Yahoo News:
    Germany shows EU solidarity but keeps up demands
    By Daniel Aronssohn

    Germany displayed unflinching solidarity with its European partners after nine saw their credit ratings downgraded but did not let up the pressure for stricter policing of spending.

    Both Finance Minister Wolfgang Schaeuble and Chancellor Angela Merkel were at pains to reassure investors after France and Austria were stripped of their top triple-A credit ratings.

    They both sought to downplay the impact of Standard and Poor’s decision which also saw nine of the 17 eurozone countries have their ratings downgraded while Berlin maintained its triple-A status.

    Get it? Germany is the big brother to those naughty nations that don’t have an AAA rating. “Oh, an AA rating isn’t so bad; those children just can’t help themselves.”

    What Germany couldn’t accomplish during WWII, it is accomplishing now.


  4. However, Merkel is no fool. Austerity will weaken the rest of the euro nations, making Germany even more dominant. That’s the real plan, and the euro nations are falling for it.

    Not everyone is falling for it, Rodger. I posted a link to an article about the rising use of the expression “The Fourth Reich” in the EZ periphery. Those people are not stupid and they remember recent history. This is another European powderkeg in the making.


  5. And now for more,”Your right on target news”

    24/7 Wall St. – Insightful Analysis and Commentary for U.S. and Global Equity Investors
    Search this site HomeSpecial ReportsRumorsThe WireCommoditiesBuffettOil & Gas Your email address subscribe terms and conditions
    ESFS Downgrade »Retail Trouble »Public Employees »Ireland GDP »Ireland Continues to Fall Apart
    Posted: January 16, 2012 at 6:21 am

    Print Email inShare.10 Ireland’s economic problems have been largely forgotten as concerns about a financial collapse of Italy and Spain have taken the spotlight. That likely will change now. Research firm Davy has significantly cut its 2012 GDP forecast for Ireland to 0.4% from a previous number of 1.7%. Ireland’s national economy has worsened as much as those of the most troubled eurozone economies. It is a reminder that the sovereign debt problem goes well beyond each day’s headlines.

    Late last year, Ireland received $113 billion in bailout funds from the EU and International Monetary Fund. The set of loans is relatively small compared to the money that Italy and Spain may need. However, it is another straw on the weakening back of newly planned European bailout facilities. These “imminent” rescue programs have already hit political resistance in France and Germany. More beggars at the table could cause a tipping point that would further damage plans for a systemic set of solutions.

    Ireland is easily forgotten as the size of the region’s financial problems grow. But its GDP is as large as Portugal’s, and nearly three-quarters the size of Greece’s. So its negative contributions will rattle anxious finance ministers as they try to craft a set of solutions to calm the global capital markets.

    Ireland is back near the center of the sovereign debt crisis, and it only took a few short months for its return.

    Douglas A. McIntyre

    Read more: Ireland Continues to Fall Apart – 24/7 Wall St. http://247wallst.com/2012/01/16/ireland-continues-to-fall-apart/#ixzz1jffQOsIX


  6. RMM,

    Do you know of any historical precedents that European countries could look to for an example of how to regain their monetary sovereignty? Argentina comes to mind. Are there any others that you know of?

    I just started an M.A. Economics at UMKC. I’m considering my first big research project to be on how the European Union can break apart in an orderly way.

    Any thoughts or leads you can offer I’ll definitely consider and pursue.


        1. You might also drop Warren Mosler a note. I believe he has an opinion on this, and as I recall, he agrees with me that it is no big deal to return to Monetary Sovereignty.

          My belief is Greece et al, merely should declare that henceforth, they will pay all bills, now denominated in euros, at the rate of one [sovereign currency] for one euro, and after a certain date (perhaps one year off), all taxes must be paid in [sovereign currency].

          Instantly, their debt becomes easily manageable.

          Rodger Malcolm Mitchell


        2. RMM,

          When monetary sovereignty is regained, its likely that the new (old) currency will rapidly depreciate in the immediate aftermath. As a result, this will provide the soil for a positive current account balance (boosting exports).

          How would you suggest that a country (in this case, Greece, Italy, etc) maintain a high level of employment and avoid deflationary pressures in this environment of a sudden and severe currency depreciation?

          Likwise, I assume your prescription for inflationary pressures is for the central bank to increase the value of holding money, i.e. raise interest rates.

          I have tentative plans to meet with Wray and Kelton next week to discuss this topic. But I know you have a different take than the MMT crowd on policy prescriptions.

          Also, is the best way for me to get ahold of Warren Mosler through the Contact section at The Center of the Universe?



  7. J Kra,

    Not sure I agree about currency depreciating. Initial exchangeability with euros could prevent that. Later, Greece’s credit rating will rise, because all bills will be paid. People will like drachma-based debt.

    ” . . . boosting exports . . . ” “maintain a high level of employment”

    The former begets the later.

    ” . . . avoid deflationary pressures in this environment of a sudden and severe currency depreciation?”

    Currency depreciation = inflation, not deflation.

    MMT says increasing interest rates exacerbates inflation by raising costs. MS agrees, but says the effect is minuscule compared with the increased demand for dollars, which is deflationary. History agrees that raising interest rates has not caused inflation. That’s how we got out of the only true inflation we’ve had since becoming Monetarily Sovereign. Randy and Stephanie think I’m full of sh*t on this point, but I’ve seen no data to support their hypothesis.

    Yes, go to Center of the Universe.


  8. Thanks for the clarification on depreciation and inflation/deflation. We just began discussing this very thing in Kelton’s international finance class and I’m still trying to fully understand the relationships.

    I think I see where we are talking past each other: I’m assuming that, Greece for example, defaults on it’s debts. Whereas It seems you are implying that there is no need for Greece to default… just convert the currency, and then once Greece is monetarily sovereign, they now have the ability to meet all debt payments?

    Is that what you suggest that a country like Greece should do? e.g regain it’s sovereignty and make it’s debt payments in its own currency? No need to default on its Euro denominated debts?


  9. I’m still confused… deflation must be the wrong word:

    For example, when Argentina defaulted, and left the peg, the peso devalued. This depreciation/inflation was accompanied by an economic contraction.

    Is this stagflation?

    If so, can you link me to your post(s) on stagflation?


      1. Let’s see if I got this right.
        Argentina defaulted,their currency was devalued which then was accompanied by an economic contraction.Wouldn’t that be understandable.If anyone defaults no matter why they do, has to have “less than full faith and credit” because they have taken away some of that good faith and credit.One must pay some way.
        Now Greece would by “paying its debt” albeit in its own new currency will show good faith and credit. You gotta accept their currency and even help them to succeed.


  10. Since the Eurozone is Monetarily non-Sovereign, is it the case that the countries who have been net importers since its launch have fewer Euros in circulation in their economies today than at the point when their domestic currencies were exchanged for ECB-issued Euros in 2002? I understand the exchange rates were fixed in 1998.
    If this is the case, since they cannot run deficits, how were they able to achieve GDP growth in the years prior to the Global Financial Crisis in 2008?


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s