–The confidence fairy meets the panic genie in Greece

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.
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Paul Krugman coined the term “confidence fairy,” to describe the Tea/Republican belief that cutting spending will create jobs by restoring business confidence. Of course, that belief is nonsense. Confidence is a short-term emotion, that doesn’t stimulate the economy; in contrast a stimulated economy creates confidence. All the confidence in the world can’t replace money as the way to grow GDP.

Yesterday’s Yahoo News posted an article titled, “Greece’s grim choice: deep budget cuts or default,” By Christina Rexrode and Paul Wiseman | Associated Press. The article discussed the pros and cons of austerity vs. leaving the euro.

More than 10 years ago, I predicted the euro would prove to be a huge mistake, because euro nations were forced to surrender the single most valuable asset any government can have: Monetary Sovereignty. More valuable than all the land, more valuable than all the buildings, monuments, bridges, dams – even more valuable than (dare I say this?) the citizens themselves, Monetary Sovereignty gives a government the ability to buy anything it wishes, pay any bill at any time, and never go bankrupt.

For that reason, I have suggested Greece should leave the euro and re-adopt the drachma, thus returning to Monetary Sovereignty. Here is what the article said about that:

The pros:
Dropping the euro would leave Greece with a much cheaper currency, its own drachma. That would juice Greece’s economy by making Greek products less expensive around the world. This would give Greek exporters a competitive edge.

In the 1990s, Canada used a weak currency to expand exports and grow its way out of high government debts . . . As long as it’s shackled to the euro, Greece lacks that option.

Exports increase the domestic money supply. As Canada was, and is, Monetarily Sovereign, it could have expanded its money supply, regardless of exports. The Canadian government, being as clueless about Monetary Sovereignty as is the U.S. government, wrongly thought more exports were necessary.

Bernard Baumohl, chief global economist at the Economic Outlook Group, (says)”What is worse for Europe — to have this matter linger on and on, with European citizens having to continue to bail out Greece and Portugal? Or to face the reality that these countries should not have joined the euro in the first place?”

No country ever should surrender its Monetary Sovereignty, so no country, not even Germany, should have joined the euro.

The cons:
Exiting the euro would throw Greece’s banking system into chaos. Lenders would panic over the prospect of being repaid not in euros but in drachmas of dubious value. Adopting a suddenly much weaker currency could also ignite Greek inflation because prices of imported goods would soar.

Here comes to the panic genie, that mythical creature, which once let out of the bottle, would destroy Greece’s economy – according to the authors. In reality, the banking system would not go into chaos, and if any lenders panicked, their terror would be short-lived. Uncertainty causes panic, and if ever Greece’s lenders should be panicked, it’s now, not when certainty has been established.

The lenders would be told, “All debts will be paid in drachmas at the rate of one drachma per euro.” Any panic would begin and end on the same day.

And as for inflation – the debt hawks’ eternal bugaboo — it easily could be controlled by the simple expedient of raising interest rates on Greek debt. How does that fight inflation? High rates create demand for Greek bonds, and the only way to buy Greek bonds would be to obtain drachmas. Increased demand for drachmas would increase the value of drachmas. Stronger drachmas would make imports less costly.

International investors would be reluctant to lend to Greece’s government, its companies or its banks. The freeze-up in credit could cause a depression, worse than what Greece is suffering now. Economists at UBS estimate that Greece’s economy would shrink by up to 50 percent if it left the eurozone.

International investors would love to receive high interest by lending to Greece’s government, its companies and banks. In fact, the surety of a Monetarily Sovereign Greece and its remunerative drachma bonds, compared to the edge-of-cliff uncertainty about the euro, would make lending to Greece an attractive investment.

The pain would also likely spread as European banks absorbed losses on their loans to Greece. The worst-case scenario: A disaster akin to what followed Lehman Brothers’ collapse in September 2008. Banks grew too fearful to lend to each other. Credit froze worldwide.

Nonsense. Blaming the credit freeze on Lehman Brothers is like blaming cold weather on an ice cream cone. The sudden loss of trillions in real estate wealth, had far more to do with the credit problems than comparatively piddling Lehman.

Once again, we see the panic genie at work – the upside-down belief that panic creates the economy rather than the economy creating the panic. Panic, like all emotions, is a short-term phenomenon. When Nixon ended the gold standard, panic ensued. It was termed the “Nixon shock.” Panic ended within days, the world kept turning, and the U.S. became stronger than ever. The ensuing growth of GDP was interrupted only when federal deficit growth fell, which by the way, Tea/Republicans, did not stimulate the economy.

Some economists would like to see European governments produce a rescue package that pairs government cuts and reforms with economic aid designed to spur growth in Greece.

Please do not use the terms “government cuts” and “spur growth” in the same sentence. They are mutually exclusive.

“When you have over 20 percent unemployment, you need to do something,” Papadimitriou says. He wants European countries to propose something like the U.S. aid plan that rescued an impoverished Europe after World War II. “You need something similar to the Marshall Plan,” Papadimitriou says.

He’s right – and wrong. The euro nations need more money, just as the Marshall Plan provided, but they don’t need the U.S. to supply it. The Monetarily Sovereign EU could, and should supply it themselves. That would be the alternative to Greece et al leaving the euro.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

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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

#MONETARY SOVEREIGNTY