Tag: Greece

–Three Equivalent Standards: Gold, Euro and Dollar

An alternative to popular faith

A gold Standard, indeed any Standard, consists of two parts: An asset (gold) and a system. Of the two, the system plays the leading role.

In any Standard, the system requires that for every unit of currency a country issues, that country must own a fixed amount of the chosen asset. The fundamental purpose and effect of a gold Standard, or of any Standard, is to restrict the ability of a nation to issue money.

Gold has been a popular asset with attractive attributes. It’s consistent, malleable, permanent, pretty and scarce. But, other assets can be part of a Standard, for instance: silver, platinum, copper, wheat, the euro. The euro?

Yes, nothing says the asset in a Standard must be a physical substance. The only necessary attribute is some degree of scarcity. Today, much of Europe is on a “euro Standard.” This means that to spend money, each nation first must obtain euros. The fact that the money and the euros are identical is irrelevant. Rather, the necessity of owning euros restricts each nation’s issuance of money. This restriction is the key to any Standard.

The United States abandoned the gold Standard in 1971 because it restricted the issuance of dollars. The U.S. found itself unable to obtain enough gold to fund its growing economy. It easily could have been unable to service its debts, i.e. gone bankrupt. With the elimination of the gold Standard, the U.S. government demonstrated it is able to service any size debt, while creating unlimited money to fund economic growth.

Today Greece finds itself in the same restricted position. Being on the euro Standard, Greece is now unable to create sufficient currency to fund its growth, and having been forced to borrow, now faces the (unlikely) prospect of bankruptcy. The EU has ordered Greece to reduce its debt supply (aka money supply) by raising taxes and reducing expenditures – a prescription for recession and depression.

Any political entity that cannot create money eventually will be unable to service its debts, and faces economic stagnation and ultimately, bankruptcy. American states, counties and cities are on the “dollar Standard.” Unlike the federal government, they cannot spend money without obtaining dollars. Over time, all must obtain money by raising taxes and/or cutting expenditures, both of which have a depressing effect on their economies.

To save the state, county and city economies, the U.S. federal government increasingly must support local spending. Roads, bridges and dams are local initiatives, once the financial responsibility of local governments, that will need to be funded by the federal government. Education, local transportation, infrastructure, health care and anti-poverty programs also will require federal support to prevent local economic disaster or bankruptcy.

The federal government, because it can create unlimited money without taxation, ultimately will fund the vast majority of local programs, the key political question being: Who will have the power to direct these programs, local agencies or the federal government? The anti-“big government” people do not take this reality into consideration.

Just as the American states, counties and cities can, must and will be supported by the U.S. government, the members of the EU can, must and will be supported by the only entity with the unlimited power to create money: the EU itself.

Eventually, it will become apparent that forcing EU nations to raise taxes and reduce spending only will serve to make economic growth impossible. At that point, the EU will assume the money-creation role for the euro. Thus, the euro will force a de facto “United States of Europe,” well before formal treaties are ratified.

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

–The Greek tragedy

An alternative to popular faith

Observe a Greek tragedy, courtesy of the European Union, which insists that Greece reduce its deficit, i.e. reduce its money supply in the face of a recession, where money already is in short supply. This is akin to applying leeches as a cure for anemia.

Read this quote from an article today (2/27/10):

“ATHENS (Reuters) – Greece must take further measures to reduce the deficit or it will face sanctions, Eurogroup chairman Jean-Claude Juncker (said) . . . Greece has until March 16 to convince EU . . . that proposed measures to cut its budget shortfall this year to 8.7 percent of gross domestic product from 12.7 percent in 2009 are sufficient.

“‘Greece must intensify its efforts and move to further actions to reduce its deficit,’ (said) Juncker, ‘If it doesn’t convince us then it will possibly face sanctions. Greece must understand that the taxpayers in Germany, Belgium or Luxembourg are not ready to fix the mistakes of Greece’s fiscal policy,’ Juncker said.”
(Reporting by Lefteris Papadimas; editing by Ingrid Melander and Philippa Fletcher)

The mistakes were not of Greek policy, but of EU policy. The creation of the euro pegged all nations to the same money, exactly what the failed gold standard did.

In short, the EU expects Greece to tax itself into prosperity. Sadly, this may be a perfect test of the debt-hawk theory that cutting deficits benefits an economy. Heaven help the Greeks.

And don’t think it couldn’t happen in America. The debt-hawks control most of the media, politicians and economists. Congress’s and the President’s stated mission to minimize or even eliminate federal deficits, could make the Greek tragedy resemble a musical comedy compared to what would happen here.

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


–The End of the Euro

An alternative to popular faith

Greece is criticized for secretly borrowing. The fault is not with Greece. The fault is with the euro.

The European Union wants Greece to cut its debt, either by raising taxes, reducing expenditures or both. If Greece does any of the above, it will dive into a depression and pull the other members down with it.

The current situation exposes the fundamental flaw with the euro: It is a gold standard in fancy clothes. Like the gold standard, the euro precludes any member nation from controlling its own finances. The solution to a recession, and indeed, the requirement for economic growth, is government deficit spending. Yet no member of the European Union has the unlimited power to do this. They are restricted by the covenants of the Union.

The grouping of countries under the euro banner is akin to a gold standard, whereby every country is required to peg its currency to a value over which it has no control.

The gold standard failed, and always must fail, because it prevents countries from taking the necessary steps toward economic growth. A growing economy requires a growing supply of money, and deficit spending is the system by which a government increases its money supply.

In 2005, noted economist Professor Randall Wray invited me to speak at the University of Missouri, Kansas City. In this speech I said, “Because of the Euro, no European 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.”

The Euro will fail, just as the gold standard failed, and for the same reason. To attain the modest convenience of easier intra-European trade, the European countries surrendered control over their individual financial destinies. Only a total merger of national governments — a United States of Europe — could make the euro viable.

Rodger Malcolm Mitchell
www.rodgermitchell.com