–Euro nations debate which brand of aspirin to prescribe for their cancer

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.

In a June 5th, 2005 talk at the University of Missouri, Kansas City (the home to the best economics department in America), I said, “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.”

That was an easy call, though I don’t remember anyone making it at the time. The euro nations were monetarily non-sovereign, which meant that in order to survive long term, they all had to have positive trade balances. What was the likelihood of that?

Now comes this article in Time online magazine, “4 Ways the Euro Could Fail,” which discusses how (not if) the euro nations will try to escape from their folly in giving up their Monetary Sovereignty.

4 Ways the Euro Could Fail

All courses of action appear to lead to an eventual financial crisis of some sort. But moderate progrowth policies are the best bet to minimize the damage
By MICHAEL SIVY, May 2, 2012 |

The euro will not die overnight, but it seems increasingly unlikely that the common currency will survive in its present form. European countries and international financial institutions insist that they still expect the euro zone to remain intact, but they are already preparing contingency plans for some sort of breakup.

No one knows, of course, precisely when a fatal euro-zone crisis will occur or exactly what might trigger it. Basically, there are four scenarios, listed here from most to least likely in the short run:

France and other countries persuade Germany to agree to progrowth policies.
Germany has consistently been the strongest advocate of restructuring and austerity as the key to solving Europe’s financial problems.

Germany has survived by having a positive balance of trade. But part of the euro’s initial allure was its facilitation of intra-Europe trade. When euro nations trade with each other, mathematics dictates they all can’t have a positive trade balance. Thus, from the start, there were two opposing incompatible concepts: Easy intra-Europe trade and each nation having a positive trade balance.

The surrender of Monetary Sovereignty plus the need for everyone to export more than they import, doomed the euro as a viable concept.

But one by one, Germany’s economic allies are running into political resistance to those policies. The collapse of the Dutch government has made it difficult for that country to meet its budget targets. And in France, Socialist François Hollande is very likely to win Sunday’s presidential election. He has been calling for more progrowth policies, which has provoked consternation in Germany.

But the balance in Europe has shifted, and Germany may have no choice but to go along with more spending — and more borrowing — by national governments.

In the short run, that would help Europe’s economies by reducing unemployment and limiting the severity of any recessions. But additional borrowing will also contribute to the debt load that governments have to carry.

The fact that it is possible to have more spending without more borrowing, (via Monetary Sovereignty), has not yet occurred to them.

Austerity policies force most of Europe into recession.

Germany may pay lip service to the importance of economic growth but continue to promote austerity. Trouble is, a dozen European countries are now in an economic downturn, including Spain, which officially went into recession earlier this week.

Recession is mandatory for nations that cut spending and or raise taxes (i.e. austerity). If only the U.S. politicians understood this.

In the long run, financially troubled countries need to trim their spending, raise taxes, bring down their labor costs and limit their borrowing. But cutting so fast that a country goes into recession can actually make it harder to reduce debt as a percentage of GDP — because the GDP is shrinking.

No, financially troubled nations need to increase spending and cut taxes — in both the long and short run — to increase GDP.

The weakest countries get pushed out of the euro zone one by one.

If everything continues on present course, then the weakest euro-zone countries will have to offer higher and higher interest rates to sell their bonds, and eventually they will no longer be able to afford to stay in the euro. Greece would probably go first, which would fuel speculation about Portugal, Spain and even Italy. In turn, that would likely push interest rates even higher for those countries, creating a vicious circle.

At which time the weakest countries, having switched to their own sovereign currencies and become Monetarily Sovereign, now will become the strongest countries. They will be able to increase their money supply at will, something the others can’t.

. . . after countries left, they would be able to set their economies on a course for recovery. Argentina, which had tied its currency to the dollar in the early 1990s, suffered a major recession after it devalued its currency in 2001. But by 2003, its economy was booming again.

Tying one currency to another is defacto monetary non-sovereignty. Argentina saw the light.

The euro zone splits into two separate currency areas.

The most rational solution — but the least likely for political reasons — would be for Germany and a few allies, such as the Netherlands, to leave the euro zone and create their own new currency. The euro would remain the currency of the southern European countries and could be devalued, easing the pressure on them.

Rather than one group of monetarily non-sovereign nations, there would be two. This is an improvement??

Bottom line, the euro nations belatedly realize the euro is a failed concept, but they don’t know why. They believe they can tweak it to extend its life, but what they propose is like prescribing aspirin for cancer. The fundamental problems remain.

There are two, and only two, long-term solutions for the euro nations:

1. Leave the euro, adopt your own sovereign currencies, becoming Monetarily Sovereign
2. Merge into a republic, forming the monetary version of a United States of Europe, so that the EU provides to euros to all members, as needed.

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


13 thoughts on “–Euro nations debate which brand of aspirin to prescribe for their cancer

  1. Perhaps a third solution.
    Euro Central Bank makes 1.3 TRILLION available for member nations to borrow with a rate of 2% for 36 years.
    This would produce revenue for the ECB of 72 billion euros per annum which they MUST redistribute 50% (36 billion) in equal proportion of the amount of what each nation had borrowed; as long as they are current.
    The remainder 50% then becomes available to the same nations as funds for borrowing.
    This is a formula that will work, but most economist will shout that it will be destructive becuse of “moral hazard’. I would contend that they will pay and will stay. It is a simple conclusion, it benefits them 100% and does not cause inflation as the currency is merely a transfer of a purchase to an asset,
    an entry on a balance sheet.
    PLUS the added benefit shows the Fed ;
    How The Fed can Stop Spending, Raise Revenue, Lower Taxes, Increase Employment, and lead US to prosperity !!

    Justaluckyfool commented on a must read article:

    A Piece Of My Mind, by Jim Grant

    In the not quite 100 years since the founding of your institution(The Federal Reserve), America has exchanged central banking for a kind of central planning and the gold standard for what I will call the Ph.D. standard. I regret the changes and will propose reforms, or, I suppose, re-reforms, as my program is very much in accord with that of the founders of this institution. Have you ever read the Federal Reserve Act? The authorizing legislation projected a body “to provide for the establishment of the Federal Reserve banks…

    Where they went wrong-they established Federal Reserve Banks owned by private banks, domestic and foreign.
    How we can fix it-establish Federal Reserve Banks owned “by the people,of the people,for the people

    … to furnish an elastic currency…

    Where we went wrong-the elastic currency’s quality and quantity can be controlled by private banks using a legalize counterfeit system called Fractional -Reserve Banking.
    How we can fix it- end Fractional Reserve Banking making the correctly established Federal Reserve Bank the ONLY supplier of new currency.

    … to afford means of rediscounting commercial paper and to establish a more effective supervision of banking in the United States..
    Where we went wrong-allowing private banks to charge compound interest on the paper they create “out of thin air”.
    How we can fix it-private banks will only be allowed to invest, or purchase assets with 100% margin.They will be responsible for all
    losses and entitled to all gains.

    … and for other purposes.” By now can we identify the operative phrase? Of course: “for other purposes.”

    THAT IS -TO ASSIST : ““We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,…””


  2. I hope they choose your second solution, Rodger. They likely will, as they won’t want the Euro to feel like a complete failure. Also, I doubt they’ll want to promote the disunity of packing up their bags and going home to their own nations with their own currencies.

    If you don’t mind, I’d appreciate your opinion on this post from Mike Norman’s blog: http://mikenormaneconomics.blogspot.com/2012/05/mike-kimel-taxes-and-economic-growth.html


  3. Tyler,

    I see that rationale often, (higher tax rates are stimulative) usually backed by suspect data. It’s based on psychology, but omits one key fact:

    Taxes remove money from the economy, which is anti-stimulative. So, only in the case where higher rates actually reduce taxes collected, will the hypothesis be correct. I’ve not seen that.

    By the way, Norman said, ” . . . the higher the tax rates, the lower the less of their wealth people consume in any given period and overall. However, the greater the wealth they accumulate . . .” I have no idea what it means.


    1. Thanks, Rodger. I think the federal government should focus on policies it knows will work.

      For example, we do not know that the Buffett Rule would stimulate the economy, but we are absolutely certain that eliminating the FICA tax would.


  4. Tyler,

    Also, he talks about marginal tax rates, which is deceiving. Every nation has a different tax structure, and different ways to avoid a tax. I never have seen evidence that increasing a tax rate actually reduces taxes collected, all other things remaining equal.


    1. Krugman, operating under the false paradigm that the federal government needs revenue, has written the following:

      “[We should not have] a 100% [top] tax rate, because there are going to be behavioral responses – high earners will generate at least somewhat less taxable income in the face of a [too] high tax rate …”


  5. And what do we do about the Banks, Mr. Mitchell? Do we politely ask them to step aside and relinquish control? Again, all wonderful in theory, the key to prosperity and all. But, please tell me, what about the banking cabal that has bought control of our entire Government?


  6. You once again, rather than answering the question, presenting an idea, respond rhetorically. You present yourself every day as the expert. I asked a question of the master. How about providing an answer rather than a smart assed response?


    1. You asked, with sarcasm, “And what do we do about the Banks, Mr. Mitchell? Do we politely ask them to step aside and relinquish control?”

      As I have said before, we convert them to federally owned banks, not by politely asking, but by law. You may object that the Congress won’t do it, and that may be true. But this is my recommendation.


      1. Thank you. I do believe they will not do it, until, the means of financing the charade of an electoral process we currently possess is altered completely. I do believe they will not do it, until, the influence of lobbyists is somehow removed from the process. I do believe they will not do it, until, the revolving door between private corporations and office holders is checked in some manner. The status quo, should it remain so, will make all of the the great ideas you have impossible to put into action. And, Sir, if I did not find your ideas enlightening I would not read your writings or argue the validity of them at every opportunity. Heck, I’ve even hoped that you could lead us rather than the slop that currently does.


      2. Congress will not do it until the means of financing electoral campaigns is significantly changed. Congress will not do it until the influence of lobbyists is somehow curtailed. Congress will not do it until the revolving door between office holders and their corporate backers is checked. Finally, I would not read your blog, argue the validity of your ideas or as I have done in the past ask that you become our president because I disagree with the things you propose. I’m certainly not the enemy, Sir.


  7. chafsa,

    You may be right, but no one could have predicted Social Security, Medicare or Civil Rights, but when the public was ready, Congress followed along.

    Congress does not lead; it follows. If people begin to feel that federally owned banks are saver, more honest and less tied to the profit motive, even a “bought-and-paid-for” Congress will pass the necessary laws.

    Ultimately, votes are more powerful than dollars.


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