–The most shocking statement about the euro

Mitchell’s laws: To survive, a monetarily non-sovereign government must have a positive balance of payments. Economic austerity causes civil disorder. Reduced money growth cannot increase economic growth. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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Read this short excerpt and tell me what you think is its most shocking phrase:

The Telegraph, By Ambrose Evans-Pritchard, in Lindau, 24 Aug 2011
Germany fires cannon shot across Europe’s bows

German President Christian Wulff has accused the European Central Bank of violating its treaty mandate with the mass purchase of southern European bonds.

In a cannon shot across Europe’s bows, he warned that Germany is reaching bailout exhaustion and cannot allow its own democracy to be undermined by EU mayhem. “I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EU’s workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank’s independence,” he said.

“This prohibition only makes sense if those responsible do not get around it by making substantial purchases on the secondary market,” he said, speaking at a forum of half the world’s Nobel economists on Lake Constance to review the errors of the profession over recent years.

As readers of this blog know, I long have said there are two, and only two, long-term solutions for the euro mess:

1. Each nation using the euro, return to Monetary Sovereignty by re-adopting their own sovereign currencies ala the UK, Sweden et al,
or
2. Merge financially into a quasi “United States of Europe,” in which the European Union supplies euros to each nation on an as-needed basis. This is similar to the way the American states (which like the euro nations are monetarily non-sovereign) survive on dollar inputs from the federal government.

Long term, a monetarily non-sovereign nation, not having the ability to create sovereign currency, needs money coming in from outside its borders. The current situation, in which each euro nation is monetarily non-sovereign simply has no legs. I said so as far back as June of 2005, in a speech at the University of Missoury, Kansas City: “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.”

So what is the most shocking phrase? Is it, “. . . Germany is reaching bailout exhaustion. . . ”? No, the only shocking part is how long it took Germany, which survives on exports, to realize it cannot be the endless sugar daddy for all the other euro nations.

Is it “. . . Christian Wulff has accused the European central Bank of violating its treaty mandate with the mass purchase of southern European bonds”? No, the euro nations always have been more interested in legal details than in economic reality.

In my opinion, this is the most shocking phrase: “. . . speaking at a forum of half the world’s Nobel economists . . .”

Here, in one room, sit more than half of the world’s Nobel economists, and these people don’t have a clue! Hello sleepy-heads. Wake up. Monetary non-sovereignty is a guaranteed, long-term disaster, unless there is a Monetarily Sovereign entity supporting the whole system. Otherwise, small financial problems force austerity, which leads to bigger financial problems, in an endless downward helix to bankruptcy.

How the heck are these Nobels awarded, anyway?

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. The key equation in economics: Federal Deficits – Net Imports = Net Private Savings

MONETARY SOVEREIGNTY

–Should banks be public utilities?

One of our readers named “Pete” said, “There’s a great interview with Yves Smith over on NC today about turning the banks into public utilities. I’m curious what your thoughts on that would be.”

Yves Smith is the pen name of Susan Webber. She is the brilliant author of what may be the best economics blog on the Internet, Naked Capitalism. She also is the founder of Aurora Advisors, Inc., a management consulting firm.

In the interview, which you can see at Interview with Yves Smith, Yves suggests that banks are:

Too economically and politically powerful
Too reckless
Too unregulated and
Too dependent on federal support.

I agree with the first three “toos,” not the last.

She suggests the cure would be to make banks public utilities. I disagree. Public utilities do not have a sterling record for serving the public, because they twist the politicians and regulators, just as the banks do now. Anyone who has gone through voice mail hell, trying to reach the electric company, or waited days for service to be restored after a storm, or suffered a 4-hour window waiting for the service person to arrive, understands that public utilities can be as uncaring about the public as can any private corporation.

Yves does not suggest that banks be owned by the federal government, so in essence, her “public utility” recommendation merely moves banks from their current set of government regulators to a different set of government regulators. I believe more fundamental steps must be taken.

Suggestion #1: Separate the banking function from the rest of the investing/speculating functions, something akin to what savings & loans did, but with broader lending capabilities than S&Ls had. Bank investments would be limited to federal securities.

While we did have an S&L crisis, also involving real estate lending, it was not as economically pervasive and damaging as what we have today, with banks using their massive lobbying power to run Congress and the President. (Anyone who does not think the executive and legislative branches of our government are run by the banks, has not been paying attention, and never has heard the name, Tim Geithner. )

Suggestion #2: Do not allow banks to pay lobbyists or to contribute to political candidates or action groups. Banks would be allowed to spend only on banking operations. Bank employees would retain their rights to make political contributions (freedom of speech), but every dollar would have to be made public, and not reimbursed by the bank.

Eliminate the culture of failed/rescued/rewarded, where bank executives have absolutely nothing to lose by stealing, cheating and criminal speculation. In fact, they have been given with big bonuses. To my knowledge, no banker has been jailed for these transgressions.

Suggestion #3: The top officers of any bank requiring federal support to survive, not only would be fired, but personally liable to reimburse the government for all FDIC payments. Bank officers would be civilly and criminally liable for all customer losses. (No bank customer ever should lose money in a bank).

As the the fourth “too,” I have no problem with banks being dependent on federal support, since federal support adds dollars to the economy, and thereby is economically stimulative. In fact, one approach might be:

Suggestion #4: Limit banks to zero profits before executive compensation, and to receive federal support for profits and executive compensation based on a percentage of deposits. This would focus executive motivation on providing the customer services that build deposits, rather than on investment profits.

As for the value big banks have in supporting big projects, these all could be handled by non-bank organizations.

So that is my quick answer to Pete’s comment. I’d welcome yours.

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

MONETARY SOVEREIGNTY

–From Hoover to Obama; what has been learned? Not much, apparently.

The Great Depression actually began in 1920, though we didn’t know it then. In the next ten years, the U. S. Federal Debt was reduced 36%, causing a series of recessions, and finally the Depression officially began in 1929. It continued to worsen through 1932. Here is why:

Annual Message to Congress, Herbert H. Hoover, December, 1931

I must at this time call attention to the magnitude of the deficits which have developed and the resulting necessity for determined and courageous policies. These deficits arise in the main from the heavy decrease in tax receipts due to the depression and to the increase in expenditure on construction in aid to unemployment, aids to agriculture, and upon services to veterans….

We must have insistent and determined reduction in government expenses. We must face a temporary increase in taxes. Such increase should not cover the whole of these deficits or it will retard recovery. We must partially finance the deficit by borrowing. It is my view that the amount of taxation should be fixed so as to balance the Budget for 1933 except for the statutory debt retirement. Such government receipts would assure the balance of the following year’s budget including debt retirement.
[…]
Even with increased taxation, the government will reach the utmost safe limit of its borrowing capacity by the expenditures for which we are already obligated and the recommendations here proposed.
[…]
We must avoid burdens upon the government which will create more unemployment in private industry than can be gained by further expansion of employment by the Federal Government. We can now stimulate employment and agriculture more effectually and speedily through the voluntary measures in progress, through the thawing out of credit, through the building up of stability abroad, through the home loan discount banks, through an emergency finance corporation and the rehabilitation of the railways and other such directions.

I am opposed to any direct or indirect government role.

And a year later, having learned nothing, while the Depression continued to worsen, President Hoover said:

Annual Message to Congress, Herbert H. Hoover, December, 1932

The first (suggested) action is the continuing reduction of all government expenditures, whether national, state, or local. The difficulties of the country demand undiminished efforts toward economy in government in every direction.

Embraced in this problem is the unquestioned balancing of the Federal Budget. That is the first necessity of national stability and is the foundation of further recovery. It must be balanced in an absolutely safe and sure manner if full confidence is to be inspired.
[…]
In the Budget there is included only the completion of the Federal public works projects already undertaken or under contract. Speeding up of Federal public works during the past four years as an aid to employment has advanced many types of such improvements to the point where further expansion can not be justified in their usefulness to the government or the people.

As an aid to unemployment we should beyond the normal constructive programs substitute reproductive or so-called self-liquidating works. Loans for such purposes have been provided for through the Reconstruction Finance Corporation. This change in character of projects directly relieves the taxpayer and is capable of expansion into a larger field than the direct Federal works.

The reproductive works constitute an addition to national wealth and to future employment, whereas further undue expansion of Federal public works is but a burden upon the future.
[…]
Many of the economies recommended in the Budget were presented at the last session of the Congress but failed of adoption. If the Economy and Appropriations Committees of the Congress in canvassing these proposed expenditures shall find further reductions which can be made without impairing essential government services, it will be welcomed both by the country and by myself. But under no circumstances do I feel that the Congress should fail to uphold the total of reductions recommended.
[…]
The time has come when, if the government is to have an adequate basis of revenue to assure a balanced budget, this system of special manufacturers’ excise taxes should be extended to cover practically all manufactures at a uniform rate, except necessary food and possibly some grades of clothing.
[…]
It is today a matter of satisfaction that the rate of bank failures, of hoarding, and the demands upon Reconstruction Corporation have greatly lessened. The acute phases of the crisis have obviously passed and the time has now come when this national danger and this failure to respond to national necessities must be ended and the measures to end them can be safely undertaken.

In 1935, New Deal federal spending programs such as the Works Progress Administration (WPA) were begun. By June 1937, the economy had begun to recover. Industrial production was greater than in 1929. However, President Roosevelt, himself having learned nothing from history, increased taxes and cut spending in yet another attempt to balance the federal budget. And predictably, the economy again crashed (The “2nd Depression”).

Now comes President Barack Obama, who has learned nothing from the the lessons of the past 80 years:

At certain times -– particularly during war or recession -– our nation has had to borrow money to pay for some of our priorities. And as most families understand, a little credit card debt isn’t going to hurt if it’s temporary.

But as far back as the 1980s, America started amassing debt at more alarming levels, and our leaders began to realize that a larger challenge was on the horizon. They knew that eventually, the Baby Boom generation would retire, which meant a much bigger portion of our citizens would be relying on programs like Medicare, Social Security, and possibly Medicaid. Like parents with young children who know they have to start saving for the college years, America had to start borrowing less and saving more to prepare for the retirement of an entire generation.
[…]
To meet this challenge, our leaders came together three times during the 1990s to reduce our nation’s deficit — three times. . . As a result of these bipartisan efforts, America’s finances were in great shape by the year 2000. We went from deficit to surplus. America was actually on track to becoming completely debt free, and we were prepared for the retirement of the Baby Boomers.

Yes, America’s finances were in such great shape we had a recession that began the end of 2000. And of course, if America were debt-free it also would be money-free.

But after Democrats and Republicans committed to fiscal discipline during the 1990s, we lost our way in the decade that followed. We increased spending dramatically for two wars and an expensive prescription drug program -– but we didn’t pay for any of this new spending. Instead, we made the problem worse with trillions of dollars in unpaid-for tax cuts -– tax cuts that went to every millionaire and billionaire in the country; tax cuts that will force us to borrow an average of $500 billion every year over the next decade.

The 1990’s marked one of the longest recession-free periods in U.S. history.

To give you an idea of how much damage this caused to our nation’s checkbook, consider this: In the last decade, if we had simply found a way to pay for the tax cuts and the prescription drug benefit, our deficit would currently be at low historical levels in the coming years.

But that’s not what happened. And so, by the time I took office, we once again found ourselves deeply in debt and unprepared for a Baby Boom retirement that is now starting to take place. When I took office, our projected deficit, annually, was more than $1 trillion. On top of that, we faced a terrible financial crisis and a recession that, like most recessions, led us to temporarily borrow even more.

In this case, we took a series of emergency steps that saved millions of jobs, kept credit flowing, and provided working families extra money in their pocket. It was absolutely the right thing to do, but these steps were expensive, and added to our deficits in the short term.

Hmmm . . . Let’s see. When times are bad, we increase the deficit, which cures the recession. Then when times are good, we cut the deficit, which causes the recession. Could there be a hint buried in that history?

So that’s how our fiscal challenge was created. That’s how we got here. And now that our economic recovery is gaining strength, Democrats and Republicans must come together and restore the fiscal responsibility that served us so well in the 1990s. We have to live within our means. We have to reduce our deficit, and we have to get back on a path that will allow us to pay down our debt.

What more can one say? More than 80 years of doing the same things and seeing the same results, and still our leaders haven’t learned a thing. How is it that the least competent and least knowledgeable seem to rise to positions of power?

That is the great human mystery.

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

MONETARY SOVEREIGNTY

–Perryisms: The world according to Rick Perry

Here are a few Perryisms for your amusement, amazement or terror.

“The way that we were able to stop the drug cartels in Colombia was with a coordinated effort. It may require our military in Mexico working in concert with them to kill these drug cartels and to keep them off of our border and to destroy their networks.”

“They have seen the headlines in the past year about doctored data related to global warming. They know that we have been experiencing a cooling trend. . . It’s all one contrived phony mess that is falling apart under its own weight. Al Gore is a prophet all right, a false prophet of a secular carbon cult, and now even moderate Democrats aren’t buying it.”

“I don’t put myself in the ignorant category. I put myself in the, you know, thoughtful skeptic.”

“I’m thinking Texas is the real economy.”

“If you don’t support the death penalty and citizens packing a pistol, don’t come to Texas,”

“I hear your mom was asking about evolution. That’s a theory that is out there – and it’s got some gaps in it. In Texas we teach both Creationism and Evolution in our public schools — because I figure you’re smart enough to figure out which one is right.”

“I am a firm believer in intelligent design as a matter of faith and intellect, and I believe it should be presented in schools along side the theories of evolution.”

“Shall they stand before God and brag that they fought to scrub His glorious name from the nation’s pledge? Shall they seek His approval for attacking private organizations merely because these organizations proclaim His existence?”

“I am concerned that some the highly diverse Magnet public schools in this city are becoming hotbeds for liberalism. Do we really need free school bus service, Black History Month, Hispanic Heritage Month, Asian-Pacific Heritage Month, ESL, special needs and enrichment programs like music, art or math Olympiad? I think we should get back to the basics of the three Rs, reading writing and arithmetic. I mean when is the last time a 6th grade science fair project yielded a cure for a disease? . . .I really don’t see why high schools should have to teach college level courses like calculus, economics, physics, chemistry or biology. Not all children go to college anyway. Texas has plenty of on the job training programs that teach skills and trades. Oil field workers need to know how to operate machines that extract oil. They don’t need calculus to do their job. . . I have no problem if curriculum specialists and teachers decide to replace language arts and literature with bible study.”

“The Christian Coalition voter guide [is] one of the most powerful tools Christians have ever had to impact our society during elections.”

“The vaunted New Deal did not bring the country out of the Great Depression. Its numerous programs never died, and like a bad disease, they have spread. . . By far the best example of this is Social Security.”

“Consider that it is our courts that routinely decide, with little of no chance of further appeal, how and where we may and may not pray to God, when life begins, whether contraception must be allowed to be sold, whether and how we can celebrate religious holidays, what those other than man and woman must be allowed to marry, what level of discrimination may carried out (in the name of ending discrimination), whether a state must allow women to attend an all-male military academy, who may be executed and whether we may execute criminals at all, and generally any issue involving social preference, morality, and our collective concept of right and wrong.”

“Why is the federal government even in the pension program or the health care delivery program? Let the states do it.”

“I support the federal marriage amendment and I also support the same with the issue of abortion.”

“I don’t know what y’all would do to him (Bernanke) in Iowa, but we would treat him pretty ugly down in Texas”

“It is three agencies of government when I get there that are gone, Commerce, Education, and the — what’s the third one there? Let’s see, I can’t. The third one, I can’t. Sorry. Oops.” “This ain’t a day for quitting nothing.”

“There’s something wrong in this country when gays can serve openly in the military, but our kids can’t openly celebrate Christmas or pray in school.”

““When you see his appointment of two, from my perspective, inarguably activist judges whether it was …” Perry said in the Des Moines Register editorial board meeting, pausing for six seconds. “Not Montemayor …” “Sotomayor,” a member of the editorial board interrupted. “Sotomayor, Sotomayor,” Perry said. “And Kagan are both activist judges.”

“For Washington to tell a local school district that you cannot have a prayer and a time of prayer in that school is, I think, offensive to most Americans. I trust the people of the states to make those decisions. I trust those independent school districts to make those decisions better than eight unelected, and frankly, unaccountable judges.”