–The solution for France and the other Monetarily Non-Sovereign Governements (MNSGs)

The debt hawks are to economics as the creationists are to biology.

(Reuters- 10/13/10) – French unions voted on Wednesday to extend a rail strike and blockaded supplies from oil refineries and the country’s largest fuel port, but the government stood firm on its pension reform plans . . .I’m not denying there were a lot of people in the streets but at the same time what can we do? Not reform the pension system?” Labour Minister Eric Woerth told RTL radio.

France is in deep trouble. As a monetarily non-sovereign government (MNSG), it cannot afford to pay the generous pensions with which previous politicians bought votes. So look for one or both of two events: The unions will surrender, in which case more than a million people will not receive the pensions they had planned for — a national calamity. Or the nation will have to steal money from other sources – health care, roads, the military and all the other places the French government spends money. This later step would deprive hundreds of thousands of French citizens of their jobs — also a national calamity.

In either case, France is doomed, unless – unless the EU comes to its senses and realizes MNSGs cannot survive on taxes alone. Not being able to create unlimited money (as the U.S. and other monetarily sovereign nations can), the EU nations must have money coming in from outside, either through exports or support from the EU itself.

I predicted this problem back in June 5, 2005, in a speech to the University of Missouri, Kansas City, when 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.”

Why are MNSGs unable to survive on taxes alone? Primarily because of inflation, and secondarily because of imports. MNSGs pay bills with tax money, so with no imports or exports, the same money recirculates within the nation. But, each year, inflation makes that money worth less in buying power, so over time, the nation is impoverished. If the nation’s imports exceed its exports, money leaves the nation, which exacerbates the problem.

Germany, a MNSG survives because it has significant exports – a positive balance of trade – which overcomes the negative effect of inflation. But mathematically, all nations cannot have a positive balance of trade. And those MNSGs that do not, must suffer.

I should mention again that the U.S. does not need a positive balance of trade, as being monetarily sovereign, it can pay any debt of any size, any time. But the EU nations (except for the UK, which wisely held on to the pound sterling), all are in deep trouble, unless the EU itself changes the rules, and provides euros to its member nations, not by lending but by giving.

And that is what I think will happen.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity