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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Before you read the excerpts from the following article, visualize this scenario:
The eurozone proudly builds an airplane with their own hands. They feel it’s a great achievement.
But unaccountably, they have bolted both wings to the same side of the hull. The plane won’t fly. Rather than admit they did it wrong, and move one wing to the other side of the hull, they install a gyroscope in the plane, to override the imbalance, and force it to fly.
But the gyroscope needs to be heavy — too heavy for the plane to get off the ground. So they insert a huge helium balloon in the hull to make the plane lighter. But the balloon needs to be big. It takes up so much space in the hull, there in no room for passengers. So the eurozone bolts some chairs onto the wings, but the chairs interrupt the aerodynamics.
The eurozone insists everything is O.K., but when they try to fly their plane, it wobbles so much, it almost crashes.
Insight: Greek exit could cost eurozone 100s of billions of euros
Inflation Is Coming
The World’s Financial System Is Crumbling. Here’s The Worst-Case.Under a scenario described in German weekly Der Spiegel, the euro zone’s EFSF bailout fund could be used in the event of a Greek default to continue funding Greece’s debt obligations to the ECB.
However, this would eat into the resources of the ‘firewall’, eroding its capacity to help other euro zone states which might well need to be protected if a Greek exit sparked contagion.
An alternative scenario could see the national central banks turning to their governments to recapitalize the ECB. But going cap in hand to politicians for money they are desperately short of risks undermining the ECB’s independence.
Or, the EU, being Monetarily Sovereign, simply could pump euros into the ECB, to give to the monetarily non-sovereign euro nations.
ECB loans to Greek banks are another way the central bank is exposed but in this case, although the ECB conducts these lending operations, the funds are distributed via the national central banks and carried on their balance sheets.
A Bank of Greece financial statement showed that as of January 31 it had lent out a total of 73 billion. Berenberg Bank economist Christian Schulz said that in the event of a Greek exit these loans and most of the collateral may be converted into a new Greek currency.
“The ECB/Eurosystem would not bear the risk anymore,” he added, noting that the Bank of Greece would instead be left with the – likely devalued – loans and collateral.
Is he saying that loans to Greece, which Greece has no hope of servicing, are not a risk?
The ECB could monetize any net loss in the event of a Greek euro exit by printing money but that would come with an inflationary effect unpalatable to policymakers in Germany, the bloc’s most powerful player.
Germany still has not recovered from the trauma of the Weimar hyperinflation. Never mind that that inflation lasted only three years, could have been cured even sooner, never was repeated, and immediately preceded the greatest military buildup in history, all paid for by “printing” money — with no hyperinflation.
“If (savers in other periphery countries) see that Greek savers have seen their euro savings overnight being converted into drachma, which could depreciate by 50-70 percent, then it would be a fairly simple hedge strategy for them to take out some of their savings and put them into Luxembourg, or pounds sterling, or Swiss francs,” said Bosomworth.
First, there is nothing to say the drachma will depreciate. Second, if the drachma does depreciate, Greece’s exports will soar and tourists will flock there. Unemployment will disappear and Greece will become one of Europe’s wealthy nations.
That’s the real reason for the EU’s concern — having the world see what a failed plan the euro was.
ECB President Mario Draghi said on Wednesday that “our strong preference is that Greece will continue to stay in the euro zone”.
Translation: If the euro disappears, I, Draghi, will lose my job.
“What they can do is try to prevent contagion – where they have a very significant role – and they will probably also try to convince participants on all sides to keep Greece in the euro area,” said Citigroup economist Juergen Michels.”
Next step the eurozone takes: Attach their plane to an Atlas rocket and shoot it into the stratosphere, from where it can glide down — but the lower pressure causes the helium balloon to inflate, splitting the hull, so the gyroscope falls out, causing the plane to crash, killing all the passengers who still are sitting on the wings.
My advice to passengers: Get off that plane while you still can.
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
“Germany still has not recovered from the trauma of the Weimar hyperinflation. Never mind that that inflation lasted only three years, could have been cured even sooner, never was repeated, and immediately preceded the greatest military buildup in history, all paid for by “printing” money — with no hyperinflation.”
I know this is Godwin’s law here, but it totally fits right here since people think it’s appropriate to keep making allusions to the pre-WW2 antebellum period of Germany’s economy.
Frankly, I find it completely ridiculous and more than a little frightening that people fear Weimar-style hyperinflation more than prolonged recession/depression. Especially considering that it was AUSTERITY that created the Nazis, not hyperinflation. Why are people more afraid of easily-tamed hyperinflation than the actual unemployment and deflation that created actual Nazis? I am completely baffled as to why anyone would think it would be an acceptable tradeoff.
Amen, brother Lyles,
Isn’t it amazing? A perfect example of human inability to judge probability — something like why poor people spend their scant dollars on the lottery.
By the way — off point — watch for inflation comparisons with Zimbabwe, another debt-hawk favorite. Here, the hyperinflation is attributing wrongly to money “printing” rather than to the correct cause: Robert Mugabe’s stealing of farm land from white farmers who knew how to farm, and giving it to black people who did not.
The result: A massive food shortage, leading to inflation, to which the government mistakenly responded by printing notes, that led to hyperinflation.
Weimar and Zimbabwe are the last refuges of the economically ignorant.
These points needed to be repeated over and over and over again. Keep up the good work RMM.
Instead of making yet another unpayable “loan” to Greece, the ECB should just make a grant, interest AND principal free. Ironically, because Greece would then be able to stimulate job creation, and would have wage-inflation instead of asset inflation for a change, they would actually be a in a better position to pay off the remaining debt.
Of course, that would expose the fiction that fiat money is something one can “run out of.” It would make the banks look like the leeches they are.
We can’t have that.
Better to condemn millions of Greeks to poverty and ruin their country.
Great post. Agree with Scott about the grant. And indeed, the “run out of money” is one of the most difficult (mental) problems people have, preventing them from understanding modern economy/money creation. But these ordinary people cannot be blamed for that misunderstanding. People know from personal experience that owing someone money (a debt) is bad. And all the politicians do is talk about the government debts being just as bad. Like the federal government of the US can run out of dollars or the Euro/ECB can run out of euros.
It’s just mind boggling why they do that. It took me a couple of months reading about this stuff and thinking logically about it in my spare time to figure things out. With no formal economic training/background at all (but maybe that’s an advantage in this case). Why would these people in charge, supposedly having knowledge about it, don’t understand it?
Europe consortium did build a aeroplane…the airbus. Like most european products, since its first test flight to present day – hasn’t survived one year without serious problems. Latest, cracked wing spans. But, keep on flying on an Airbus. Vivre la France? Socialism never, ever produced anything having a positive impact on humanity…like herding a bunch of cats.