–EU: The only cure for Greek sickness is Greek suicide

Mitchell’s laws: The more budgets are cut and taxes inceased, the weaker an economy becomes. 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.

To solve Greece’s financial problems, the EU and Greece’s creditors demand that Greece commit financial suicide, with increased taxes and reduced spending. (This, in effect, is what our Congress, especially the right wing, prescribes for America.)

Greek Reforms a Must for Deal
The Fiscal Times, Lefteris Papadimas and George Georgiopoulos, Reuters, January 31, 2012

Greece must make “difficult” decisions in the coming days to clinch a debt swap agreement and a 130 billion euro bailout package needed to avoid an unruly default, the government said on Tuesday. Near-bankrupt Greece is struggling to convince skeptical lenders it can ram through spending cuts and labor reform to help bridge a funding shortfall driven by a worsening economic climate and its previous reform plan having veered off track.

On top of austerity measures already taken that regularly bring droves of angry protesters onto the streets, Greece’s lenders have demanded it make extra spending cuts worth 1 percent of GDP – or just above 2 billion euros ($2.6 billion) – this year, including big cuts in defense and health spending. In a sign of the challenges the government faces in pushing those through, a Greek union official said the country’s major unions were gearing up for more anti-austerity protests next month after an early grace period for Papademos’s government.

Talks (with creditors) have struggled over further cuts in labor costs in the private sector, which Athens has resisted over fears they could deepen a brutal recession and impose additional hardship on the poor, Greek officials say. The prospect of elections as early as April has further complicated the talks, with political leaders in Papademos’s national unity coalition eager to distance themselves from any cuts that herald more pain for ordinary Greeks.

Increasingly exasperated by Athens’ failure to live up to pledges on the reform front, European partners have demanded all Greek parties commit to measures agreed under the bailout irrespective of who wins the next elections. A German minister went so far as to call for Athens to surrender control of its budget policy to outside institutions if it could not implement reforms, though Berlin has toned down the debate after an indignant reaction from Greek officials.

Germany, the rest of the euro nations and Greece’s creditors are angry that Greece won’t take the economic cyanide being offered as a cure for what ails them. Sadly, Greece keeps trying to please the mob, because it doesn’t understand there is no solution but to return to Monetary Sovereignty, an asset they never should have surrendered.

Because Greece now seems balanced on the edge of the precipice, I’m taking the liberty of reprinting much of a post I wrote on November 8, 2011, titled “What would happen if Greece returned to the drachma?

The key to a smooth transition from euros to a Monetarily Sovereign currency, the drachma, is to create sufficient demand for the drachma to prevent excessive inflation.

Let’s say the Greek government announced that heretofore:

1. The drachma would be the official currency of Greece. The Greek government would exchange one drachma for one euro, in unlimited amounts. Accounts at Greek banks that currently are stated in euros, would be stated in drachmas.

2. Payments by all Greek governments, local and national, would be made in drachmas, not in euros. This would include payments on domestic and foreign debt, payments of government salaries, and payments for goods and services. The payments would be made at the rate of one drachma for one euro.

3. Domestic business must pay salaries and domestic suppliers in drachmas

4. Taxes paid to the Greek government and to any sub-governments must be made in drachmas, not in euros.

5. Greek banks would domestically lend only drachmas, and all domestic creditors, including banks, must accept drachmas in payment for debts.

6. The Greek government would continue to issue bonds, not because it needs to borrow, but to help regulate interest rates, which in turn, help regulate demand for drachmas. The bonds would carry a high enough interest rate to create demand for drachmas.

Greece would become Monetarily Sovereign. Its “debt problem” instantly would disappear, as it would have the unlimited ability to pay any bill of any size, any time. Demand for the drachma would be established, to mitigate against inflation.

There it is. The “crisis” disappears. I expect one or more of the PIIGS will do this, sometime this year, unless the EU forgets about casting everyone into austerity hell, and begins to give (not lend) euros to its members.

There is no reason for the EU not to become the financial version of a United States of Europe. Remember, the original 13 colonies were separate entities, with different customs and leaderships, in trouble and with many similarities to today’s European nations.

It helped then to have a common enemy — financially destructive British taxes. Today the euro nations have a common enemy: Financially destructive monetary non-sovereignty. As Ben Franklin said, “We must, indeed, all hang together, or most assuredly we shall all hang separately.”

Barring individual returns to Monetary Sovereignty, the euro nations should heed Ben’s advice.

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


31 thoughts on “–EU: The only cure for Greek sickness is Greek suicide

  1. RMM,

    In response to this: “The drachma would be the official currency of Greece. The Greek government would exchange one drachma for one euro, in unlimited amounts. Accounts at Greek banks that currently are stated in euros, would be stated in drachmas.”

    Why would it be better for the Greek government to be willing to exchange all Euros for Drachmas at 1-1 in an unlimited amount, as opposed to…

    Do everything else you said, but let the Drachma float (likely leading to currency depreciation) and allowing Greek citizens to keep their Euros, and then when they need to pay their taxes they’ll be able to convert Euros into Drachmas at a better rate than 1-1?

    Would allowing Greek citizens to exchange their Euros for Drachmas post-depreciation (of the drachma) be worse than offering a 1-1 conversion set my the Greek government?


  2. The goal is to create a demand for drachmas. This helps work against inflation. One path to that goal is to require all taxes to be paid in drachmas. The U.S. uses that approach by requiring all taxes to be paid in dollars.


    1. I don’t think you addressed my main question:

      Why not let Greek citizens keep their Euros and convert them as they see fit?

      Would it even be legal (or moral?) to force Greek citizens that have savings in Euros, to lose their Euros? Wouldn’t any “hint” of this happens lead to a run on the banks as Greek citizens try to move their Euros from Greek banks into foreign banks?

      Why not just let banks temporarily operate with both currencies, allow the exchange rate to float, and allow the Greek citizens to exchange their Euros at whatever the (likely depreciated) exchanged rate is? It seems like this would cause less panic.


        1. Then you haven’t seen hyperinflation environments. Commerce may be conducted in the local currency, but everybody overnights their money into dollars or Euros, even though they have to pay commissions on both ends. Why? Because they have no idea what their local currency will be worth in the morning.

          A fixed exchange rate won’t work because foreign creditors want Euros, not drachmas, and if the drachma is fixed at the same value as the Euro, those getting paid in drachmas will go to the Greek banks and demand they be converted into Euros. Greece quickly runs out of Euros and finds that while foreigners are eager to BUY Euros at 1 drachma apiece, none of them are willing to SELL Euros at 1 drachma apiece. The official exchange channels all but disappear, and all currency exchanges go black market, with the drachma’s street value being a fraction of the official exchange rate. A fixed exchange rate can only work if trade is balanced over time, never experiencing large or consistent surpluses or deficits in the balance of payments.


  3. You are missing a few points.
    1)Drachma will obviously devalue against the euro.Given that Greece is a pretty big net importer it will cause inflation anyway.
    2)The devaluation will “destroy’ those who have private foreign debts.You just cant force a foreign creditor to accept drachmas instead of euros (especially when its obvious that drachma will devalue),so the devaluation will make the debts even bigger.
    Unless the euro is mutually abandoned it will be a mistake for Greece to leave the Euro.
    It would create a lot less problems if Europe as a whole declared Monetary Sovereignty and created an institution such as a treasury that could assume all the eurozone debts.You are basically saying that California should leave the dollar and issue its own currency. (economically speaking its exactly the same)


    1. I agree that the “United States of Europe” concept, or something financially similar, would be superior. But if politically that is impossible, they are left with two choices:

      1. Continue as they are, with repeated and never ending financial crises, or
      2. Return to the drachma

      Which do you prefer?


      1. What the Germans are proposing (and lets not forget they proposing similar stuff to Ireland,Spain,Portugal,Italy) is actually against their own economy.Over 2/3 of German trade is a result of internal-eu trade,and especially of the deficit countries.So they are pretty much asking for a decline in their own production as a result of consumption decline.Thats a death trap.When this situation will start to be being felt IN the German economy the Germans will have to decide weather they want a closer union or they want to get out.If they get out, the euro is over and everyone regains his sovereignty and the situation will be similar to the pre-euro era.If they decide for a stronger union then the debt problem will pretty much be over.
        This means that the creation of drachma while the euro still exists will be like a suicide for Greece,for the reasons i explained above.After all this situation cant go on for ever,Germany will soon have to decide,so the best thing Greece should do is wait.


    2. A devaluation will depend on Greek taxation. Greece will net-import less because its exports will suddenly become very attractive. The real problem is imports of necessities, oil above all. But it’s a problem already.

      Devaluation will not completely destroy those with private foreign debts. Depends on Greek bankruptcy laws. The creditors certainly will accept drachmas rather than Euros – because they are better than nothing.
      They have no other choice but invading Greece, and it is one of the true, great, forgotten achievements of the postwar era that this no longer happens.

      Sure, might be better if the Euro were destroyed in an organized fashion, or sanely supported with a fiscal mechanism, like a Europe wide Job Guarantee. But not much chance of that. Greece should go it alone. You’re understating how bad things already are, and overestimating the obstacles.

      Not at all the same as saying California should leave the dollar – because there IS a US Treasury.


  4. J Kra:

    Re why does a Drachma have to equal one Euro rather than letting the Drachma float…..

    When creating a currency for the first time (or resurrecting it in the case of the Drachma) you’ve got to start somewhere: e.g. one Drachma – one Euro. Or one Drachma equals an ounce of gold.

    Once the currency is established, it can perfectly well float relative to other currencies and relative to a basket of goods and services within the country concerned. Which is what I assume Rodger had in mind.

    Re Rodger’s claim that Greece’s debt problem would instantly disappear, it strikes me Greece would still owe Euro denominated debts to sundry banks around the world – mainly in Europe. If Greece is incapable of repaying those debts, and it looks like it is, the only solution is to default or to compromise with creditors which is what Greece is currently doing.


    1. There are different kinds of default. One is, “I won’t pay you.” I’m not suggesting that. Instead, I suggest, “I will pay you with drachmas at the rate of one drachma for one euro.”

      Greece should legislate that all local debts denominated in euros and all payments to the government, be paid in drachmas, and all Greek citizens should exchange euros for drachmas.

      Outside of Greece, the drachma would float, as do virtually all currencies, but within Greece it temporarily would be mandated against the euro, until euros are cleared from Greek bank accounts.

      Greece would issue bonds, purchasable in drachmas and payable in drachmas. The interest rate on these bonds would be set at a rate high enough to created demand for drachmas.

      Today, Greece is not exactly compromising with creditors. It is begging for forgiveness and for more euros. As a Monetarily Sovereign nation, they wouldn’t have to beg.


      1. Wouldn’t euros clear instantly from Greek bank accounts as the Greek government purchases all euros held in Greek bank accounts with the new drachma? You would think they would do it all at once by announcing a brief bank holiday during which all euro balances held at Greek banks would be ‘purchased’ with drachmas in a single instant.

        Wouldn’t this get the drachma up and running while giving Greek government a supply of euros to help meet its current debt obligations and to protect the new drachma somewhat on forex markets? (I don’t know what the ratio is right now of Greek government debt to euros held in Greece).


        1. Yes, that’s a valid approach, and it doesn’t matter whether or not there are enough euros to satisfy all debt. Greece would pay future debt with drachmas, anyway.

          Notice how Greece instantly changes from an austerity-bound, sick country into a wealthy one. That is the “magic” of Monetary Sovereignty.


        2. If Greece leaves the euro,its debt obligations owed to foreign banks would still be denominated in euros.combined with the drachma devalue this would cause the debt to skyrocket.There is no use for Greece to go back to drachma if it must pay in euro.


        3. Crossover, Greece would have to default on its euro-denominated debt if it doesn’t acquire enough euros when it exchanges euros in Greek banks for new drachmas.

          Most likely Greece would offer to exchange the old bonds with new drachma bonds at 1-1. This would still be a default because it’s a violation of the terms of these bonds and because the new drachma is likely to drop in value once it floats. The creditors would get something out of the deal, but they’ll just have to take some losses. That’s the risk you take when you lend money to an entity that is not monetarily sovereign.


  5. Reduced public spending will lower the interest rates with time. The problem is that government has spent to much. It would have been better if they just stayed away and let banks stand for all of the monetary expansion. The goal of austerity is cheap credits that will boost spending. If the government stays away inflation will be under control.


    1. The problem is that the way the euro is designed,it simply puts governments to the same level with households and businesses ie governments have to compete against households and businesses for revenue.Thats way too stupid considering that government surplus equals exactly to private sector deficit and vice versa,which means that the government can only run a surplus without hurting the private sector if the economy is having a current account surplus.But the one thing that these countries are having in common,is that they are all having current account deficits!


    1. It is harmful for both models,because no matter what model you are using (sovereign or non-sovereign) austerity always absorbs money from the economy,and things are worse when the given economy is on a trade deficit.


  6. @Rodger
    you say: “How do they wait? Creditors are knocking at the door. The EU wants to appoint a supervisor for Greek finances. If they try to do nothing, something will be done to them, and they won’t like it.”

    This rumor,was started from Germany.Greece reacted negatively and so did EU officials.So for now there is not such a possibility.But even if there is,that still doesnt change the fact that a supervisor that simply smashes demand by imposing austerity,hurts not only Greece,but Germany aswell.As i said,the surplus countries of EU,are simply creating those surpluses from the deficits of the other eurozone countries.Eurozone’s trade with the rest of the world is almost perfectly in balance.So obviously the problem arises from internal imbalances.If Germany tries to cut these trade deficits,it will simply cut its own surpluses,unless theres someone outside the EU able to absorb these surpluses,and i dont think there is,especially now that the crisis hasnt subsided at all.


      1. If one agrees that the current plan is leading to a dead end because it hurts everybody,then it is pretty obvious that sooner or later they will be forced by the situation itself to decide if they want to become United States of Europe or quit the euro and reclaim sovereignty.Both senarios are better from whats happening now.And in the end one of the two will happen,the current situation cant go on forever.

        If you ask me what Greece should do now,i’d say Greece should 1st reject the new loan program that is currenty in discussion to be signed,exactly because its not helping nobody.its not helping Greece because you cant save someone who has a debt problem with more debt,and its causing deep recession which means Greece will have to repay the debt while the “money pool’ is becoming smaller and smaller.

        if Greece does that,it will simply force the europeans to decide NOW if they want fiscal union or they want to leave.Remember they will have to decide about this anyway,because of the reasons i described above.And they just cant let Greece default because it will be a chain reaction.


        1. You dont seem to agree that the EU will anyway have to decide at some point,weather they want a fiscal union or leave the euro once and for all.My whole point is based on the fact that EU cant avoid taking a decision because the austerity plan is destroying the EU economy as a whole.

          So what you call “Greece-do-nothing-and-put-the-onus-on-the-EU”,is basically a way to force the EU make a decision sooner rather than later.

          Fact1: The EU considers the bail out less costly instead of a default.If this was not true,they’d rather let Greece or anybody else default instead of wasting taxpayer’s money on loans that will be unrepayable because of the austerity plans they are coming with.

          Fact2:There is no legal way to kick a country out of the euro without its will.Some say that cutting the loans to Greece will force it to willingly leave the euro.Cutting the loans means that Greece will default the next time some of its bonds are maturing (next maturity is in March).Fact 1 proves that thats exactly what the EU is trying to avoid.

          So if Greece rejects the loans,this will force the EU to decide,between fiscal union or going back to old currencies.Either way is better than the situation now.
          Also if the decision is to abandon the euro,this is also better than Greece going back to drachma while the euro still exists,which is suicide,even worse than the austerity measures inside the euro.

          Further more,if Greece decides to leave the euro,the markets will start putting even more pressure to the rest of the insolvent countries.The EU probably doesnt want that.

          PS.Im sorry for sending you to that link,but no real plan can be written in 5 lines.But anyway,the plan is basically proposing a way for the ECB to assume 60% of all the government debts without having to change the current treaties and thus without violating them.Its more or less the same result as creating a fiscal union,but this plan doesnt require a european treasury or anything like that.


  7. Reuters says Greece must make “big cuts” in defense and health spending.” Reuters is lying. This is garbage meant for public consumption. Greece is cutting health spending, yes, but Greece will never cut military spending, since the big German arms manufacturers (and their associated banks) need Greece to keep buying weapons (on credit) that Greece does not want or need. With a population of just 11 million, Greece is the largest importer of conventional weapons in Europe — and ranks fifth in the world behind China, India, the UAE and South Korea. Greece spends a whooping 3 percent of its gross domestic product on military hardware, compared to an average 1.7% in the other European NATO countries, including Britain, France and Germany. All Greeks know this. They know that corrupt politicians get a piece of the arms action, and that wasteful military expenditures are siphoning off billions, and helping to keep Greece in crippling debt. Indeed, that’s one reason why Germany’s economy remains strong. German companies churn out weapons and ram them down Greece’s throat, putting Greece ever-further into debt. It’s a huge scam. Likewise in the USA, when politicians talk about “cutting spending,” they mean social spending. As for military spending, they always want to increase it. And since weapons become more expensive all the time, this is yet another means to concentrate wealth at the top.


    1. I agree.Also i dont know if its true,but there are rumors that USA has offered to Greece for free, personel transport vehicles from its reserves,because Greece is currently in need of this type and Germany forced Greece to decline the offer.
      But anyhow,the defense cuts may not be a lie.If for example they cut the wages of military personell then thats a defense cut..As for health cuts,my personal opinion is that there is room for cuts without hurting the level of healthcare provided.The last decade,healthcare costs have increased exponentially mostly because the ministry of health started subsidizing different (more expensive) medicines for the same diceases,probably in agreement between politicians and big pharmaceuticals…Some people have made a lot of money through healthcare.


  8. Myth buster,

    Re. hyperinflation:

    1. The U.S. never has had it, This, despite recessions, depressions, inflations, massive deficits, external war and civil war. So, it’s quite rare and requires extraordinary circumstances.

    2. The most commonly named hyperinflation was not caused by German deficits, but by the onerous post WWI conditions placed on Germany.

    3. The second most commonly named hyperinflation was caused by Zimbabwe’s Robert Mugabe, who stole farm land from people who knew how to farm and gave it to people who didn’t.

    Worrying about hyperinflation in the U.S. is like worrying about drowning in a bowl of soup — a small bowl.


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