–Lawrence Summers: Failing to the top

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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The Peter Principle holds that employees tend to rise to their level of incompetence. They are promoted until they arrive at a position where at which they no longer are competent, where they remain forever.

While the Peter Principle usually describes one company, a variation of it can apply to the ability of some people to rise to a high level in one organization, fail there, then move to another organization at a high level, fail there, and continue to fail, always finding jobs at a high level, the previous title being more important than the previous results.

Common example: Sports managers often are fired, only to be hired as managers elsewhere.

In that vein, I give you Lawrence Summers, who became Secretary of the Treasury from 1999 to 2001, under President Clinton. Summers helped create the disastrous Clinton surplus which led to the 2001 recession (as deficit growth reduction usually does).

Based on his previous title, Summers was hired to be president of Harvard University from 2001 to 2006, then was forced to resign after a no-confidence vote by the faculty. One of several reasons: He said few women were scientists because they had a “different availability of aptitude at the high end.”

Based on these failures, President Obama made Summers director of the White House National Economic Council. (What’s wrong Mr. President, wasn’t Cosmo Kramer available?)

All of which brings us to:

Financial Times
April 29, 2012
Growth not austerity is best remedy for Europe
By Lawrence Summers

Once again Europe’s efforts to contain its crisis have fallen short. It was perhaps reasonable to hope that the European Central Bank’s longer-term refinancing operation to provide nearly $1tn in cheap three-year funding to European banks would halt the crisis for a while if not resolve it.

“Reasonable” only if one agrees with lending money to nations, that because they are monetarily non-sovereign, have no means to repay.

It is now clear it has been little more than a palliative. Again, both Europe and the global economy approach the brink.

What a surprise! Who could have predicted that?

The premise of European policy making is that countries are overindebted and so unable to access markets on reasonable terms and that the high interest rates associated with excessive debt hurt the financial system and inhibit growth. So, the strategy is one of providing financing while insisting on austerity.

Unfortunately, Europe has misdiagnosed its problems and set the wrong strategic course. Outside Greece, which represents only 2 per cent of the eurozone, profligacy is not the root cause of problems.

In this, Summers is right, although profligacy is not the cause of Greece’s problems, either.

Its financial problems stem from lack of growth. The right focus for Europe is on growth. In this context increased austerity is a step in the wrong direction.

At this point, I thought the old Lawrence Summers had disappeared, and a new, well-informed person had taken his place. But it was not to be.

Yes, there will ultimately be a need to raise retirement ages, reform sclerosis-inducing regulations and restructure benefit programmes. Phased in, commitments in these areas would be constructive.

Summers continues to enhance his legacy. He has helped cause a recession (under Clinton), exacerbate another one (under Obama), insulted women’s intelligence and abilities, suggested punishing older people by raising retirement ages, suggested abetting corporate dishonesty and advocated reducing benefits to the poor.

What next for Lawrence Summers? Based on his ability to fail to the top, President of the United States?

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

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

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
or
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
http://www.rodgermitchell.com

#MONETARY SOVEREIGNTY

–Think of China as a mirror, to show us what we are and what we must do

This is the kind of story that makes me proud to be an American — so far. I say “so far” because I don’t know how it will play out.

How the Chen Guangcheng Case Will Test U.S.-China Relations
By JOHN LEE Monday, Apr. 30, 2012

The current asylum request of the blind activist Chen Guangcheng, who escaped last week from house arrest in Shandong province, is (tricky). Chen is currently in Beijing, probably either in the U.S. embassy or a U.S. diplomatic residence.

One country has to give ground: either Chen gets asylum and is allowed to leave China, or he isn’t. But both Beijing and Washington have much to lose from failing to stand their ground.

The U.S. has consistently expressed concerns about the direction of human rights in China, which have regressed since the 1989 countrywide protests that culminated in Tiananmen Square. Chen is far from alone in having suffered torture, malnutrition and isolation at the hands of Chinese security officials.

But he is one of the country’s condemned dissidents whose plight has come to the attention of senior American officials and the public. Secretary of State Hillary Clinton publicly expressed alarm about Chen’s continued arrest as recently as November 2011.

It is the American way to protect the unfortunate and the abused. I believe in this America: “Give me your tired, your poor, your huddled masses yearning to breathe free, the wretched refuse of your teeming shore. Send these, the homeless, tempest-tost to me. I lift my lamp beside the golden door.”

Yes. That is my America, and my pride grew, when I began to read a comment on the article, by someone named “DakotaNM57” who wrote:

As human rights in America decline. As church’s impose their beliefs on those who don’t share them. As the cry to reduce the availability of education for the masses becomes louder from the conservative side of the isle.

In the day when a loud cry to deny even basic health care to those who can’t afford insurance and let them die in the streets grows. While certain creten American politicians demand women’s rights be taken back a hundred years. When one in particular felt children should be at jobs, rather than spending their days in school, so they had a place to go and something worthwhile to do.

When another wants to decimate our Dept. of Education which sets a higher level of education requirement and maintains fairness for all regardlesss of their parents financial status so that America promotes not just the most privelidged minds but the brightest minds also.

Yes. That is exactly what is happening. People who claim to love America, but who hate Americans, have taken the political lead. People who claim to respect the Constitution, but who have no respect for our tired, poor, huddled masses, have taken over the law.

DakotaNM57’s comment also said:

When you read our Constitution and Bill of Rights, the one most obvious element of it is it speaks to how much our founding fathers cared about people and the lives they led. Men who fled not only religious oppression but economic oppression by the wealthy also. The wealthy who took and gave nothing in return. Because they could. Those with even the slightest amount of power exploiting those beneath them that never had the ability to move up.

When Kings charged higher taxes on the poor who were struggling the most. When the so called middle class was what we would call today our working poor. When rights only went to the wealthy and powerful, which were supposed to trickle down, and didn’t.

Our founding fathers also fled from this.

They gave us freedom from exploitation by the wealthy more powerful class. All the things we condemn China for. Interesting the demands we hear today on the part of a certain sector of our political system mimic the very things America isn’t supposed to be. And China is.

Yes. My pride grew, not because of the right-wing extremists who get all the publicity, and not because of the cowardly, power-hungry politicians who lick the right wing’s boots, but because of people like DakotaNM57, who call these traitors out.

Our politicians, especially the Tea/Republican right-wing, so-called “religious,” so-called “patriots,” have lost sight of what is to be American. Our “originalist” Supreme Court has forgotten, or never knew, what our founders dreamed.

To these isolated jurists, lounging far above the fray, our magnificent Constitution is just a sterile set of laws to be followed robotically, mindlessly. These overly honored automatons do not see, feel or know it as the great moral code for the world.

So we cut Social Security. We cut Medicare. We cut Medicaid. We cut education. We cut food and shelter. We cut government jobs. We cut everything that benefits our “tired, poor, huddled masses,” all in the name of a false fiscal “prudence.” How shameful to claim prudence when handing out the bread, while behind us, the warehouse is full.

I agree with DakotaNM57, all but his final paragraph:

I ask, should we really be cleaning China’s backyard at this point? We need to work on our own first and remember what America is about. You bet it’ll test US/China relations. Hypocrisy is an amazing test.

While we absolutely should return to being Americans, we shouldn’t wait until we do it “first.” We don’t need to wait, first to be perfect, before we help others. With such a standard, we never would look outside our borders.

Perhaps China provides us with a good mirror. When we see their cruelty, their inhumanity, their heartlessness toward their own people and others, can we see ourselves? Will we look in this mirror and do what all of us do when looking in a mirror?

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

#MONETARY SOVEREIGNTY

–The United States of Europe: The when and the how.

Let’s begin with this basic truth. The nations using the euro struggle for one reason, and one reason only. They surrendered the single most valuable asset any nation can have: Monetary Sovereignty.

That is the logical conclusion. Yet even more than logic is involved.

TIME
The Future of the Euro: Why Sentiment Alone Can’t Save the Union
By Michael Schuman April 30, 2012 |

Being an American journalist reporting on the troubles of Europe is sometimes an ego-damaging experience. I regularly encounter economists, officials and other Europeans who take the attitude that we Yanks just don’t understand the euro. Americans, in their view, simply analyze the euro based on its perceived benefits and costs.

But, I’m told, the euro is much more than a mere economic instrument. It is a symbol of the grand mission of European integration, a tool to ensure democracy and peace on a continent too often ravaged by war.

The euro, therefore, means more to Europe than mere mathematical calculations of debt and growth can tell us, and the leaders and voters of the euro zone value the common currency based on what it means to Europe as much as what it does for Europe.

I agree, understand and empathize with this. There is nothing like war to encourage strange bedfellows. Russia built NATO. The thirteen original Colonies suffered extreme danger. They compromised. Without the threat from the U.K., I doubt there would be a U.S. today.

Historically, Europe has been the focus of almost continual strife. The very existence of so many countries, so many languages, so many cultures, so many climates, all confined to a relatively small space — a mob of angry strangers crammed into a phone booth — guarantees war.

So, I am sure the love affair with the euro is psychologically, if not overtly, related to the desire for peace.

Unfortunately, the euro nations went only half way. In an inverted “cake-and-eat-it-too” plan (no cake and no eat it), they surrendered their Monetary Sovereignty, but received nothing to replace it.

A sovereign nation should be able to control its currency supply, or at minimum, have an outside source of currency. But who controls Greece’s euro supply, and who provides a source of euros? No one and no one.

Same question for France, Italy, Ireland, Portugal, et al. Who controls their euro supply? What is their source of euros? Being monetarily non-sovereign, these nations cannot control their euro supply, cannot create euros, and have no outside source of euros.

Compare the euro nations with the American states, which also are monetarily non-sovereign. While they too, cannot control their money supply, they do have a source of dollars: The federal government.

When the federal government spends dollars domestically, it adds those dollars to the money supply within states (and when people pay taxes to the federal government, this reduces the money supply within states).

The long term survival of any monetarily non-sovereign government requires money coming in from outside its borders. Germany survives by exporting (i.e. importing euros). The American states survive by having, as a group, a positive balance of payments with the federal government.

The larger the federal domestic deficit, the healthier are the states. The economic formula is: Federal Deficits + Net Exports = Private Saving.

On a regular basis, the 17 countries that use the euro manage somehow to overcome their varied and often competing interests, to forge sweeping agreements to try to strengthen it. Compare that to the gridlock blocking decision making in the U.S., with a mere two major political parties.

Humans are crisis oriented. We tend to endure modest hardship and danger, rather than change. Only extremes seem to move us.

Today’s two American political parties are in no danger. So, they move away from compromise, vacating the middle.

But imagine a third party rising up and claiming a majority. What would the Republicans and Democrats do? I suspect they would combine into a “Democan” party, with the slogan, “The enemy of my enemy is my friend.”

Yet at the same time, I have to wonder if that commitment will be enough to preserve the monetary union. Or will the weight of Europe’s economic problems eventually overwhelm the emotional and political connection Europeans have to the euro? In other words, will the euro’s fate be decided by Europe’s attachment to the idea of the euro, or by economic reality?

As we have said for years, the euro nations have two, and only two possible solutions to a problem dragging them down the hole of recession:

1. Return to Monetary Sovereignty by re-adopting their individual, sovereign currencies
or
2. Combine into a single republic, ala the United States — a United States of Europe.

Which way will Europe go?

I believe they will follow choice #2, because choice #1 returns them to the ongoing wars of yesteryear. There will be a U.S.E., the only questions being, when and how.

They might do it gradually. The EU might begin giving (not lending) more euros to each nation. It might begin as a trickle and segue to flood status. This could require no major political changes. The EU, which itself is Monetarily Sovereign, simply could begin to credit each euro nation’s checking account.

Even this modest act would be traumatic for Europe, because of their aversion to inflation. I suspect war paranoia will trump inflation paranoia.

Or the merger could be more dramatic, with the EU functioning more like the U.S. central government, including an elected President and a Congress.

But first, times will have to get bad enough, perhaps not so bad that the euro nations all reincarnate as Greece, but worse than today. A Europe-wide recession, simultaneous with growth on other continents (for comparison), probably would move things forward.

When viewed from a distance, the euro must have seemed an benign idea. “Let’s all use the same currency as a start of more cooperation.” But Europeans didn’t realize they were giving their souls to those devils that lay in the details, only one of which was, “Who’s in charge?”

Having surrendered their Monetary Sovereignty, they now must surrender more of their political sovereignty, to make the whole thing work.

(As opposed to the U.S.’s presidential system, I’d guess the U.S.E. would adopt a parliamentary system. It provides for an easier transition, and it’s what Europe understands. But that may be a long way off.)

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

#MONETARY SOVEREIGNTY

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