Lessons from the worst banking crisis in history

 

This is being passed around, a piece by London-based wealth manager Tim Price, author of Price Value International:

It’s ironic that some of the most honest words to come out of a politician’s mouth were, “When it becomes serious you have to lie.”

That was a quote from Jean-Claude Juncker, former Prime Minister of Luxembourg and President of the European Commission (the EU’s executive branch) in 2011 when asked about Greece’s financial crisis.

Greece was on the ropes and the entire system about to collapse, so, of course they lied. Then they lied about lying.

This raises a very reliable rule of thumb to keep in mind during (and before) a banking crisis: don’t trust anyone in the establishment, especially a politician.

It’s good advice these days. Europe’s banks and its governments are caught like Macbeth’s “two spent swimmers that do cling together / And choke their art."

Or perhaps a less elegant comparison-- two drunken sailors holding each other up.

As usual there’s quite a bit of deflection to steer people away from looking too deeply at bank balance sheets, and high-sounding language that everything is just fine.

A review of a historical banking crisis would be highly instructive. So let’s go back to one of the absolute worst in history – the US banking crisis of 1982.

It was so severe, in fact, that as Nassim Taleb writes in The Black Swan,

In the summer of 1982, large American banks lost close to all their past earnings (cumulatively), about everything they ever made in the history of American banking – everything.

Richard Koo, the chief economist of the Nomura Research Institute and author of ‘The Holy Grail of Macro-economics: lessons from Japan’s Great Recession,’ recounts the crisis with extraordinary candour.

Koo was a syndicated loan desk officer at the Federal Reserve Bank of New York... so he was truly at the epicenter.

Late on a Friday afternoon in August 1982, his job, along with those of his colleagues, was to try and convince the rest of the world that the US banking system was solvent (even though it was clearly NOT).

The following is taken verbatim from his presentation.

That was about the worst possible banking crisis in modern US history. Our conclusion was that seven out of eight money centre banks were actually underwater…
    It was so bad because everyone down from Mexico to the southern tip of Chile went bankrupt…
    Paul Volcker, the chairman of the Fed, called central banks and ministries of finance all around the world on that critical Friday in August 1982…
    The Bank of Japan Governor of the time was particularly difficult to locate. A Bank of Japan official who took the call from Volcker recorded Volcker’s exact words for posterity.
    The Fed chairman stated, ‘You better give me Governor Maekawa right away. If you don’t give me Governor Maekawa there might not be any US banks left on Monday.’
    What we at the New York Fed had to do was arrange for all the foreign banks to keep credit lines open to the American banks, knowing fully well that all these American banks were actually bankrupt.
    And we also could not tell the outside world about the situation because if you go out and say ‘American banks are bankrupt’ – the next day they will be bankrupt.
    And so we had to come up with these stories that ‘well, there are some Latin American problems, but they’re all good debt, not bad debt’. . .
    So by keeping this myth going, that everything is fine.. we had to do that for a very long time..

You can watch Koo’s presentation yourself (it becomes extremely insightful after roughly 31 minutes).

Until next time,
Tim Price

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In Greece, Reliance on Public Funds Is the Central Problem

Guest post by Justin Murray

Greece is and will remain a hot topic. Much of the discussion paints either the image that Greeks are lazy good-for-nothings forever fated to debt disaster, or that Greece is only a debt-restructuring away from a stable economic situation.

Without understanding how Greece got into this problem in the first place however, and without identifying the root cause of an over-indebted society, any plan or solution has a high probability of failure. To crack into this root cause, I had to develop an entirely new metric called “implied public reliance.”

Employment Data Doesn’t Tell the Whole Story

The main puzzle behind Greece is simple from a praxeological standpoint — you get more of what you subsidise and less of what you tax. Greece, being a nation with a high tax rate on production, and a high subsidy rate on public assistance, will generate a population that finds greater preference toward public assistance and away from productive labour.

The problem with this is that, on the surface, the data doesn’t support the statement. Calculating the average annual hours worked, Greece actually ranks far ahead of nations that have lower public sector subsidies and lower taxes:

If it were true that higher taxes dissuaded labour, then Greece shouldn’t report higher worker hours than much lower tax-burdened places like the United States and Canada. This indicator would also identify Germany as the European Union’s economic basket case, not its economic powerhouse. Even nations like Spain and Portugal, which have a negative stereotype for sloth, both come ahead of Germany, but are suffering economically.

The problem is these numbers are only applied to those who were actively employed and did not provide us a picture of the overall employment situation. Even other indicators, like workforce participation rates, don’t fully paint the picture. What is needed is a new metric that effectively identifies the core of a nation’s potential growth and prosperity.

Someone Has to Pay for All the “Free” Stuff

This is where a look at “implied public reliance” comes in. Mass starvation, homelessness and sickness are not generally present in modern nations, so virtually every citizen receives food, medicine, and housing from somewhere. Ultimately, in a modern nation, all citizens are provided with the necessities of life in some form or another.

So, we must look to find the source of those resources. Of course it is, by and large, the active employees of any given nation that are tapped to provide the resources for all other individuals who are not engaged in economically-productive activities. In every modern country, these resources are primarily delivered through the public bureaucracy, and are funded with taxation on existing workers.

How to Find Who’s Paying

So, first we must identify a nation’s currently-employed population.

Next, all public sector employees are removed to obtain an adjusted productive workforce. It may be objectionable that certain professions, like teaching, nurses in single payer systems and fire fighters, are classified as an “unproductive workforce,” but as our system is currently designed the salaries of these individuals are not covered by the immediate beneficiaries like any other business but are paid through dispersed taxation methods.

In other words, they are being paid out of someone else’s productivity.

Finally, this productive population is divided into the nation’s total population to identify the total number of individuals a worker is expected to support in his country. To remove bias toward non-working spouses and children, the average household size is subtracted from this result to get the final number of individuals that an individual must support that are not part of their own voluntary household. In other words, how many total strangers is this individual providing for?

As we can see, this Implied Public Reliance metric does a far better job of predicting economic performance:

Greece, the nation with the debt problem, is currently expecting each employed person to support 6.1 other people above and beyond their own families. This explains much of the pressure to work long hours and also explains the unstable debt loads. Since a single Greek worker can’t possibly hope to support what amounts to almost a complete baseball team on a single salary, the difference is covered by Greek public debt, debt that the underlying social system cannot hope to repay. They system cannot hope to repay it, because the incentives instead are to maintain the current system of subsidies.

To demonstrate how difficult it is to change these systems within a democratic society, we just have to look at the percentage of the population directly reliant on public subsidies:

The numbers imply that 67 percent of the population of Greece is wholly reliant on the Greek government to provide their incomes. With such a commanding supermajority, changing this system with the democratic process is impossible because the 67 percent have strong incentives to continue to vote for the other 33 percent — and also foreign entities — to continue covering their living expenses.

How does this equate to GDP growth? While GDP is far from a perfect metric, it can still be a useful comparison: we find that each nation that has breached the 50 percent barrier in public reliance is also showing poor growth -- with numerous nations coming dangerously close to the majority in some form of reliance on redistribution for earnings.

What does this tell us? A nation that allows its citizenry to remain idle and expect the support of a productive worker will eventually undermine its ability to maintain the economy that those recipients of public funds rely on. Nations that do not have a structure to dissuade usage of public assistance or hire too many public sector workers will find their economic growth impeded and, if it becomes too large, recessive.

However, public institutions are not capable of creating these safeguards to ensure thar as few people as possible engage in safety net programs. The incentives instead are all the other way. Government institutions are, in fact, designed to grow public sector employment rolls.

So long as this social structure remains in place, the odds that a Greek default and restructuring will lead to a sustained Greek recovery are very low.

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Justin Murray received his MBA in 2014 from the University of St. Gallen in Switzerland
Image source: iStockphoto. A version of this article appeared at the Mises Daily.

It’s Not Just Greek Government Debt: Government Spending and Easy Money Fuel(led) the Greek Crisis

This morning we all woke up to “the Greek deal” heralded in the media and the markets as some sort of “Great Revelation”

– a solution to fix all prior non-solutions, a final fixing of the Greek economy and the end to all the endless bailouts of the past. Of course, cynics noted that solving government debt overhang (already officially recognised by the IMF as unsustainable) by issuing more debt may not be a good idea… but cynics are here to be ignored by the Euro optimists who define their own reality. But never mind all the ‘long run’ stuff. Five hours into a ‘unanimous’ Eurogroup decision on Greece, there is neither much of unanimity, nor much of a decision left.

The “decision”:

• The Greek government will be – in principle – granted new funding of some EUR82-86 billion … but the actual amount will not be known until there is a full and ‘comprehensive’ assessment of the banks books (to be carried out in September-December 2015).
• While nothing is certain about this ‘longer term’ EUR82-86 billion package, there are immediate needs for funds that the Greek government has to meet [to repay previous borrowing]: a total of EUR6.477 billion is due to the ECB alone. And before ECB can be paid (a default on ECB will trigger a cascade of cross-defaults and a closing of the banks’ oxygen line, the ELA), the IMF arrears have to be cleared in full. So “bridge financing” is still needed.

The “unanimity”:

The conclusion was: err… no unanimity and:

1. A new delay in sorting out longer-term financing (from today’s morning expectation of 2 weeks to more realistic 4 weeks); and
2. There is no agreement on bridge financing.

All sorted then.

Meanwhile, in Germany, where taxpayers are hated the more they’re required to stump up more cash, I have a friend expressing a fairly common sentiment:

Another black day for Europe. While a week ago Motherfakis was calling us terrorists for financing their lifestyle we now caved in again and give them more German taxpayer's money. The lesson learned is that it is not worth going to work - better be a fraudulent bank or government and you get billions thrown at you. The fact that Schäuble wants some securities (like any bank) makes us colonialists at best. Old war time rhetoric is up again and some call for a boycott of German products. Meanwhile the € will further loose value since no-one can take our currency serious any more... I have to stop watching the news...

So as David Byrne might say about now, how did we get here? Answer:

It’s not just the government debt. Because thanks to years of government spending and easy money, the Greek economy long ago turned away from true wealth-generating activities and embraced a bubble economy instead...

Or, in short:

It’s Not Just Govt Debt: Government Spending and Easy Money Fuel(led) the Greek Crisis

Guest post by Frank Shostak

[…] Commentators are of the view that the key factor behind the troubles in Greece is high government debt, which as a percentage of GDP stood at over 177 percent in 2014 against 79.6 percent in 1990.

But it is not government debt as such that is behind the current crisis in Greece. Large government outlays and strong increases in the money supply are being ignored in most analyses of the Greek crisis.

Since early 2000, the underlying trend in the growth momentum of government outlays was heading up with the yearly rate of growth closing at 45.5 percent in March 2009. Since then, the trend in the growth momentum has been declining.

Year on year the rate of growth of Greece’s monetary measure AMS stood at 20 percent in July 2004. It stood at a lofty 18 percent in August 2009 before sliding to minus 13.8 percent in April this year.

Loose fiscal and monetary policies have been instrumental in the generation of various non-productive activities that have been squandering wealth.

Easy Money Weakens the Wealth-Generation Process

A fall in the growth momentum of both government outlays and the money supply is good for the wealth-generation process.

In other words, a decline in the growth momentum of government outlays and money supply (see charts) has arrested the diversion of wealth to non-productive activities from wealth generating activities.

The current crisis is centered around non-productive activities that can no longer divert wealth from wealth generating activities on account of a fall in both government spending and the rate of growth in the money supply.

From this perspective this is good news for the Greek economy, and what is now needed is a tight grip on government outlays and to allow the plunge in the money supply to continue.

Greece’s wealth generating process has been badly damaged as a result of past loose fiscal and monetary policies. Thus, reverting back to loose fiscal and monetary policies, as suggested by various famous economists such as a Nobel Prize Laureate in economics Joseph Stiglitz, is going to make things much worse.

Remember, neither more government outlays nor more monetary pumping can generate real wealth. Only the strengthening of the wealth generating private sector can do that.

The Damage That Has Been Done

Now, since currently non-productive activities are likely to comprise a large portion of total activities, the effect that is generated from their demise appears to be very severe.

After closing at 122 in April 2008, the industrial production index plunged to 91 by March this year — a fall of 25.3 percent. The unemployment rate climbed from 7.3 percent in May 2008 to 25.6 percent in March this year.

Any threat to the financial systems of other European economies is not due to the Greek default, but instead is a result of loose fiscal and monetary policies that have damaged the savings bases of various European countries.

Rather than continuing to support wealth-squandering activities and thereby making things much worse, a better way is to allow wealth generators to step in and let them restart the wealth-generating process. This means that all the loopholes of money creation should be sealed and government outlays should be cut to the bone. Obviously such measures will be painful for various individuals employed in non-wealth generating activities. Failing to reduce non-productive activities however will only prolong the agony — it is not possible to create real wealth out of nothing.

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Dr Frank Shostak is the head of Australian research firm Applied Austrian Economics Ltd, and one of the world leaders in the applied Austrian School of Economics. An adjunct scholar at the Mises Institute in the US, Dr Shostak has been an economist and market strategist for MF Global Australia (previously Ord Minnett) since 1986. During 1974 to 1980 he was head of the econometric department at the Standard Bank in Johannesburg South Africa. During 1981 to 1985 he was head of an economic consulting firm Econometrix in Johannesburg.
This post first appeared  at the Mises Daily. It has been lightly edited.

Image source: iStockphoto

Not #Grexit but #Greviction?

Even in the Eurozone hall of monetary mirrors there is only so long you can keep eating your cake and have someone else unwillingly pick up the tab for it. Greece may not exit; it may simply be evicted.

Five months of negotiations in which its left-wing Government destroyed goodwill among creditors that have lent it hundreds of billions of dollars have cost Greece dearly in its frantic attempts to save its economy.
    With its banks closed, cash machines rationing withdrawals to just 60 ( $99) a day, pharmacies running short of drugs and businesses teetering on bankruptcy, salvation for Greece now lies in the hands of half a dozen European politicians exasperated by what they see as a litany of lies, insults and deviousness….
    "There is a major issue of trust," said Jeroen Dijsselbloom, the Dutch Finance Minister who heads the 19-nation group of countries sharing Europe's single currency. "Can the Greek Government be trusted to do what they are promising in coming weeks, months and years?"

Now they’ve been repeatedly slapped around the face with it, the answer to that question is finally sinking into the minds of those 19 European finance ministers – and with it the Greek government’s chances of continuing the charade. Germany, Finland, Estonia, Lithuania, Slovakia, Slovenia, Holland all want to suspend Greece EU membership for 5 years. Which probably means indefinitely.

What’s happened? Syriza is finally being exposed for its emptiness, explains Liberty Scott. Having removed his “rockstar economist” – who proved even less long-lasting than this hemisphere’s “rockstar economy”—Prime Minister Tsipras  gained parliamentary support for raising a lot of taxes, increasing the pension age, some modest spending cuts and privatisation of ports and airports to seek a third, yes third, bailout with Greece's Eurozone partners. 

The problem for Tsipras is that other Eurozone countries are losing patience, and it is more the Finns, Slovaks and Baltic States that are fed up with Greece, than the Germans.  
    Why?
Because many Eurozone countries don't trust the Greek Government.
     The first bailout saw Greece granted loans between 2010 and 2012 of 107 billion yes billion, Euro on condition that Greece would get its budget deficit down to 3% of GDP by 2014.  Part of this deal was to end the practice of paying public servants two more months of pay a year every year. 

They didn’t.

The second bailout saw 50% of Greece's debts with private bondholders written off and the remaining debt on an interest rate of 3.5% (so much for the rhetoric about the evil foreign bankers profiteering), knocking 100 billion Euro off of Greece's debt.  Again, the Greek government was expected to cut its budget deficit.

Which it did. A little.

However, the extent of reforms of the Greek economy that were expected simply didn't happen. State pensions for "dangerous professions" such as hairdressing (yes really) were still paid out at age 50. Defence spending exceeded the 2% of GDP expected for being a member of NATO (and there was little scrutiny of where that money went).  In short, Greece maintained big government, corporatist for the centre-right, large public sector for the centre-left, but little welfare state besides pensions.   
    Syriza got elected promising an end to "austerity" that was part of the deal for the two previous restructurings of public debt, but found no appetite at all [outside Greece for them] to do this.  After all, why would other governments expect their taxpayers to pay for Greece to continue its corrupt, unreformed bloated inefficient state?
    So Syriza embarked on two rather vile strategies to frighten the Eurozone. 

One was to start talking about German debts from World War Two. The other was to cosy up to Putin. Both backfired. And now too has Syriza’s third stratagem, the “no” vote, leaving them up a creek full of crap with nary a paddle to be found.

And why should any European financier care? Who would want to swallow more Greek government debt, or the lies that always go with it?

The right response of the Eurozone is to say no.  To tell Greece that if it wants to save its banks, it needs to live within its means, default on privately held bonds if it wishes and expect not to borrow any more.  The xenophobic socialists that are governing Greece are the [political] descendants of those [Marxists] who fought on the Soviet side in the Greek civil war.  Had they won then, Greece's fate would have looked a lot like Bulgaria and Albania to its north.  It would be nice if some in Greece realised how much they are to be grateful for and face down the rent seekers of the state that are holding their country back.

That may now have to happen, if it ever does, outside the Eurozone they hoped would forever pick up the tab. Because finally they’re being called on it.

[Hat tip Frances Coppola for the Greviction quip.]

RELATED READING:

• Greece, China, Puerto Rico — Idiocy Knows No Borders – CONTRA CORNER
• The Greek result shows that ‘Yes, we can!’ is over – SPECTATOR
• Distance No Safeguard From Greek Contagion – I.P.A. (AUSTRALIA)
• Tsipras' Choice: Total Capitulation or Grexit; Text of 4-Page Eurozone Demands – MISH
• Greece Offered "Temporary" Grexit in 4-Page Proposal; Merkel's Choice: "No Deal at Any Cost"; Waterboarding the Ward of the Eurozone – MISH
• Greek crisis: surrender fiscal sovereignty in return for bailout, Merkel tells Tsipras – GUARDIAN
• Why Greece Is The Precursor To The Next Global Debt Crisis – ZERO HEDGE
• The Purge Begins: Tsipras To Expel Hard Core Left Wingers, Including Energy And Deputy Labor Ministers – ZERO HEDGE
• Germany's Most Noted Euroskeptic Is Now In Control – ZERO HEDGE

Q: What is the cause of the #GreekCrisis ?

What is inflation? Despite what you’ve heard, it’s not rising prices – although that may be one of the effects. So ask then, what is the cause of the Greek tragedy? Answer: Inflation. The Greek Government borrowed without the means to repay. Never mind prices, this is inflation. And what you’re seeing now is its results.

Let me stress again …

By inflation, I don’t refer to rising consumer prices in Athens. My Greek friends tell me that prices have been steady there in recent years. The focus on prices is the greatest sleight of hand ever perpetrated. It diverts your attention away from the real action. Inflation is the counterfeiting of credit. It is borrowing, when you can’t pay and you know it. Inflation is taking money under false pretences, and issuing fraudulent bonds.
    This describes the Greek finances perfectly.  

That description comes from the Gold Standard Institute’s Keith Weiner, who points out most of that tanker-load of counterfeit capital was spent on consumption – just as good Keynesians’' said it should be.

    Greece doled out a lot of its lenders’ euros. For example, government workers got a sweet deal: 14 months’ pay per year, and then a generous pension in retirement at age 54. Of course, Greece employed an army of bureaucrats to administer all this welfare. Once a euro is spent on a welfare program, it’s gone. Greece didn’t use the proceeds to add to its productive capability, to generate income that will make it possible to pay off the loans.

Like most government spending, it was never in any sense an investment. And it was profligate as hell:

In good times, Greece kept spending more than its tax revenues. This is a colossal failure to govern rationally (inherent in socialism). Loans from outside fuelled a false boom, like alcohol feeds a drunken revel. It seems like great fun while it lasts. All that borrowing juices up spending. People are hired, profits go up, and of course tax revenues are boosted. Then, there’s one heck of a headache when it’s over. Borrowing means consuming today what you would otherwise have to wait until tomorrow to consume. Greece was so desperate to consume that it racked up an estimated €360 billion in debt, quite a lot for a little country with 11 million people. The exact number is not the point, and the total is probably even higher. We will find out, in the coming months. What makes anyone think that Greece will flip the other way?

Of course it won’t. And the reality is that, with a paper debt of €72,000 for each working Greek (and few enough of them are working outside government), all that counterfeit capital “lent” to Greece as part of its Eurozone participation will never be paid back. Ever.

Greece is like that deadbeat nephew who lies to everyone, borrowing whatever anyone will give him. Shame on the enablers who keep helping him buy drugs. Shame on him too, of course. But more importantly, the cash is long gone and only the debt remains.
    Such is the nature of fraud. Lenders expect to be repaid, but sooner or later realize that they’ve been tricked. The counterfeiter never intended to repay. His promises were plain lies. More importantly, he never had the means either. Even good intentions can’t conjure the lost euros out of a hat. The sooner that everyone acknowledges this simple fact, the sooner they can stop doing more damage.
    The Greek inflation was so damaging, because it fooled lenders (including Greek savers) into thinking they had good assets. Based on this illusion, they made other investing, borrowing, and spending decisions. When the government defaults, then reality sets in. Creditors will have dreadful write-offs, and many will be forced to liquidate other investments to deleverage. Formerly busy companies will shut down, their workers laid off.
    Welcome to deflation—a forcible contraction in credit.

So what caused the Greek tragedy? Inflation, pure and simple.

And as Ludwig Von Mises points out, the destruction of deflation is one of the inevitable results.

Obviously the side effects that accompany monetary deflation are never pleasant. However, these bad side effects are not caused by deflation but rather by the previous monetary inflation. All that deflation does, is to shatter the illusion of prosperity created by monetary inflation.

As with all great Greek tragedies, the outcome is inevitable from the outset – made so by the first bad choice of the protagonists.

READ:

• Inflation Caused the Greek Tragedy – Keith Weiner, SNBCHF.COM
• Inflation, Deflation, and the Future – Frank Shostak, MISES DAILY
• Keynesian policy in the United States – Steve Kates, LAW OF MARKETS
• Greece: only the third worst performing euro-area country – Michael Reddell, CROAKING CASSANDRA

Greece, Keynes & intellectual decay: What made it possible?

Greece is in many ways the dead end of Keynesian economics; of the idea that aggregate demand alone, regardless of its source, is what fires prosperity. Like many modern top-heavy welfare states, Greece has abundant demand; but thanks to unaffordable government promises it has few willing to produce enough to pay for it, and –even now!—an infrastructure of credit creation ready, willing and able to underpin it.

The result, of course, has been prosperity’s opposite.

So how does something as intellectually lame as Keynesian apparatus get traction? Why were Keynes’s nonsensical nostrums accepted so readily in the mid-twentieth century by neoclassical economists when they’d been thoroughly exploded decades before by British classical economists?

The answer given by Austroclassical economist George Reisman is: “intellectual decay.” Not just in those (like Hayek and the ineffectual Pigou) who attempted to answer Keynes in the 1930s, or later on post-war when the Keynesian technocrats took control of the academies and their centres of economic “planning” -- because the decay had started several generations earlier.

So, you want to know what made Keynesianism possible, and with it disasters like Greece? Answer: intellectual decay.¹

¹

Doesn’t it make you want to know more about the wages-fund doctrine “and other such essential doctrines of classical ‘economics” like Say’s Law that Keynes was supposed to have assailed? And about that intellectual decay? Because it wasn’t just exhibited in economics – and it didn’t of course originate there. Because, to paraphrase Keynes himself,

So-called practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct philosopher. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

We can identify the scribbler most at fault as German philosopher Immanuel Kant³, that “catastrophic spider” as Nietzsche called him who had declared “a few years back” that it was senseless to seek causes or try to integrate knowledge of phenomena since all these mere appearances – the notion for example that saving was somehow causally related to wage levels and future production, for example – or that production of commodities itself creates a market for the commodities produced -- were only surface manifestations of the unknowable.

Trying to explain these slippery manifestations by means of causality and integrated argument would be, argues Kant, a long, slow path to bedlam. American pragmatist John Dewey essentially holds that the ultimate source of the decay recounted above was  German idealism, noting Kant as “the thinker who for the past seventy-five years supplied the bible of German thought” that would foment a “revolt” against British support and enthusiasm for laissez-faire liberalism in economics and politics.⁴ The Kantian “bible’s” core themes, says Dewey, were skeptical, idealist, and duty-based:

Kant to himself and to many in his own day was a revolutionary. There is no valid intellectual access, he taught, to the things of ultimate importance to man. …

Dewey notes

    the immense interest taken in professional German philosophy in the generation after 1870 — the generation of revolt against the empiricism that reigned in Great Britain from Locke onwards. …
    German philosophy was seized upon [by this generation] as a weapon with which to attack the former official philosophy of England. It is more than a coincidence that the reign of German idealism in Great Britain⁵ coincided with the revolt against laissez-faire liberalism in economics and politics, and with the growth of collectivism … .

… and of intellectual decay.

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1. Reisman’s phrase echoes Mises’s on the rise in those earlier generations of “the anti-capitalist mentality”: [T]he supremacy of those modern doctrines is a proof of intellectual decay … . It demonstrates … the decay of the intellectuals and of the bourgeoisie.” (Mises, Omnipotent Government, pp. 118–19)
2. From George Reisman’s book Capitalism: A Treatise on Economics, p. 865. (You can download a free PDF copy at Reisman’s site, www.capitalism.net)
3. Of Kant, the “all-pulveriser,” H.L. Mencken once observed, “Kant was probably the worst writer ever heard of on earth before Karl Marx. Some of his ideas were really quite simple, but he always managed to make them seem unintelligible. I hope he is in Hell." Mencken was being generous.
4. Quotes from Dewey’s 1929 collected essays, Characters and Events: Popular Essays in Social and Political Philosophy, which also suggests: “It is possible that the Great War [no less] was in some true sense a day of reckoning for Kantian thought” (68).
5. Hard to believe, but one of the prime popularisers of Kant’s “idealism” in England was a book written and intended as an entertainment. Little-known now, for a generation of British and American romantics Carlyle's Sartor Resartus was the populariser of Kant’s philosophy.
The book Sartor Resartus (literally, 'The Tailor Re-Tailored') purports to describe dialectically a 'Book of Clothes' produced by a 'professor of clothing' Doctor Diogenes Teufeldrockh (Dr Heaven-Sent Devil's-Dung), which book, we are told, argues that clothes are simply appearances or metaphors for the true 'inner state' of a thing -"the material world is symbolic of the spiritual world of ultimate reality. Man's creeds, beliefs, and institutions, which are all in tatters because of the enormous advances of modern thought and science, have to be tailored anew as his reason perceives the essential mystery behind the natural world."
Itself written metaphorically (of course), the book is in may ways an ancestor to the books of Umberto Eco.

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Greek Taxpayers Facing a Future of Debt Slavery

Guest post by Ian Daily

The Greek government has spent freely for many years to enrich itself and its special interests at the expense of taxpayers. And now, it is not the Greek politicians who will suffer, but the taxpayers who face a future of unending debt payments.

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Greece has defaulted on its debt to the International Monetary Fund, the first “developed” country to do so. But is Greece merely a casualty of a flawed Eurozone, or a canary in the coal mine?

After hobbling along on “emergency” loans for five years, a $1.73 billion payment due Tuesday night went unpaid — the largest missed payment in the international finance organization’s seventy-one-year history. The IMF tellingly refused to call the missed payment what it was: a default, opting instead for “in arrears” (which, for the uninitiated, is a complex, highly-technical financial term that means default). Greece now shares company in this respect with the likes of Sudan, Zimbabwe, Afghanistan, Haiti, Yugoslavia, and Somalia.

For Greece, the pain has been a long time coming, since it began relying on emergency loans five years ago. And now default — while sending shocks of volatility through global financial markets — has been almost anticlimactic. But the jagged lines on a financial chart tell little of the carnage happening on the ground, or of what is to come.

The problems Greece and the world face now are manifold. For Greeks, capital controls and bank closures have left people without access to the funds in their accounts. ATMs have lines stringing away from them at all hours, even though daily withdrawals are limited to €60. The next weapon in the financial warfare: deposit seizures. While it may be easy to dismiss these afflictions as the result of socialist policy, but that wouldn’t be an accurate characterization of what’s transpired.

No, when Greece resorted to emergency funding, the Troika (the collective pejorative for the European Commission, European Central Bank, and IMF) authorized €110 billion in assistance, in exchange for vague, un-quantified promises of “austerity.” The more recent loans were actually diversion of interest payments on Greek debt owed to other Eurozone countries, lent back to Greece. Even now, after default, there is little doubt in the financial world what the “solution” to the debt crisis will be — more debt.

Of course, it’s easy to dismiss these presumptions as the misguided naïveté of Keynesian central planners, but doing so ignores the more pervasive threat of sovereign debt. As Greeks are learning, the IMF (like many of the world’s central banks) will not accept default; it never has, and never will. Calling Greece “in arrears” didn’t do it any favours. The message is clear: you will pay. So although for a time Greece was comfortable, living beyond its means, it’s soon time to pay the piper.

Government Debt Isn’t Like Private Debt

Sovereign debt isn’t like a credit card, family budget, or a mortgage, no matter how many folksy analogies politicians make. No, government debt is something altogether more sinister. When a state borrows money, repayment is on the heads of its citizenry, without expiration. At one point in the Hellenic drama Germany’s war reparations were at issue. An infinitesimally small minority of the population could recall the war, and an even smaller subset — if any — was even remotely accountable. But the point is illustrated clearly: public debt is interminable.

This trait alone is toothless without its necessary complement: enforcement. Since government revenues are generated through taxes, and government debts are future revenues spent now, then debts are simply future taxes. While this is well-covered ground, most people seem to forget that taxes are one of the only debts for which non-payment results in prison time.

To make sovereign debt even worse, the citizenry doesn’t have the ordinary contractual protections of say, reviewing the terms, choosing how much to borrow, deciding on what to spend the money, or even agreeing to repayment schedules. Apparently, all of these choices are made at the “ballet-box.” But I’d wager that if you asked 100 people how to spend just $100, you’d get at least ninety-nine different answers. The problem gets worse, not better, when you have 300 million people and $1 trillion in debt on the table. In the end, there’s an incentive to pass the buck; the next generation can figure it out, we’re getting ours. But who will ultimately be forced to pay the bill? That demographic is unfortunate indeed, since they will be forced to pay exorbitant taxes without trappings of social welfare, just to make the interest payments on the largesse.

For them, “figuring it out” means a life spent working to service another’s debts, backed by the callous indifference of law. There’s a word for that, isn’t there? Oh, yeah: slavery.

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Ian Daily is a Clerk at the Institute for Justice, pursuing his JD at UCLA, and studied political science and economics at USC. A Marine veteran, he has worked as Field Director of a congressional campaign and State Chair for Young Americans for Liberty.
His post first appeared at the Mises Daily.

Acropolis Now?

The new Drachma? How long?

“Greece has voted No, and resoundingly so…”

“Greece has voted No, and resoundingly so. But the reaction from Berlin tonight does not suggest that Germany is prepared to have any further negotiations with the Syriza government.”
German rhetoric suggests that they are preparing to try and kick Greece out of the Euro – James Forsyth, SPECTATOR

“Yesterday the embattled Greeks delivered still more body blows to the rotten regime of Keynesian central banking and the crony capitalist bailout state to which it is conjoined…
    “[A “no” vote] would clarify that everything at issue between the parties is false. There is no way to pay Greece’s debts, modify the troika austerity plan, save the euro, rescue Greece’ banking system or stabilize Europe’s hideously mispriced and distorted debt markets.
    “It’s all going to blow and it should. The entire European mess has been concocted by statist politicians and policy apparatchiks who falsely and arrogantly believe they can defy the laws of markets, sound money and fiscal rectitude indefinitely.
    “The truth lost in all the meaningless “puts and takes” of the latest negotiations is that the Greek state was bankrupt five years ago …”
Good On You, Greece—–But Don’t Waver Now (Part 2) – David Stockma, CONTRA CORNER

“Our base case is that the pressures coming from a dysfunctional banking system in Greece will shorten the time horizon to negotiate a deal to a handful of weeks. As that pressure builds, there is likely to be a temptation to call a referendum in Greece on euro membership, and for the state to begin issuing I-O-Us or similar and giving these some status as legal tender. To the extent that pensioners and public sector employees find themselves being paid with such instruments, it takes the banks further away from solvency …”
The "Nightmare Of The Euro-Architects" Is Coming True: JPM Now Sees Grexit, Eurogroup "Split In Coming Days" – ZERO HEDGE

“Alexis Tsipras will stay as Prime Minister, and see the result as a mandate to negotiate a better deal. But that’s not how the Germans see it: their economic affairs minister, Sigmar Gabriel, has just told the Tagesspiegel newspaper that  has just “torn down the last bridges on which Greece and Europe could have moved towards a compromise” and furthermore … “With the rejection of the rules of the eurozone … negotiations about a programme worth billions are barely conceivable.”
    “Events could well spiral out of anyone’s control. Here’s what we’re now facing…”
The Greeks have voted ‘no’. Now, the real crisis will begin – Fraser Nelson, SPECTATOR

“ … The problem is thus a lack of political will throughout the country. Too many people are benefiting from the way things have always been done in Greece to risk changing it, even for a promise of greater long-term growth. Seen that way, it's no wonder the guy they elected to represent them has so stubbornly refused to go along with the demands of Greece's creditors.
    “"Lots of things need to be done, but no government—this one or the previous ones—have been willing to do them," Azariadis says. "Some of [Tspiras'] predecessors claimed to believe in reform, but when push came to shove...they promised them but they never delivered. Reform is something that no political party in Greece really wants or is willing to go through with."”
Greeks Say No to Austerity—Again—But There Was No Good Outcome in This Referendum – Stephanie Slade, HIT & RUN

“Here is how the German megabank sees the possible outcomes of what is shaping up to be a "No" vote: … “
A "No" Victory Appears Probable: What Happens Next According To Deutsche Bank – ZERO HEDGE

“That, once again, is the Varoufakis all-in gamble, a gamble which assumes the ECB will be rational enough (in a game theory context) to appreciate the fallout of a Grexit on Europe’s creditors. Here is a qualitative determination …”
Why The Eurocrats Are Petrified——What The Falling Dominoes of ‘Grexit’ Look Like – CONTRA CORNER

“For the point I want to make, it doesn't matter if they vote YES or NO, though that may have significant repercussions for the global economy.  The critical matter from the point of view of economic theory and policy discussions is to sort out the root cause of the fiscal mess -- not only in Greece, but among several EU states. And, of course, by this logic the US situation is not immune from judgement, nor anywhere else throughout the globe.  Democratic fiscal policy appears to have an institutional problem with regard to sustainable public finance.  How do we design our institutions of public administration and finance in a democratic society so they encourage fiscal responsibility?  Lack of such fiscal responsibility entraps economies in, what Adam Smith termed, the juggling tricks of deficits, debt, debasement.  This trick sucks the vibrancy out of an economy, and if left undisciplined sinks an economy altogether in a way we have been witnessing in Greece. …”
Greece and Wrestling with the Fiscal Commons – Peter Boettke, COORDINATION PROBLEM

“They want the Eurogroup to bailout Greece without restrictions. Yup, just take money from other Euro citizens (or print it up) and give it to the Greeks. So they want the Greeks to vote "no" on  the referendum question of whether Greece should accept a recent EuroGroup tax/bailout program .
    “They do not hold the much sounder view that the referendum should be voted down, so that the Greek's can get from under the oppressive demands of the EuroGroup protectors of the banksters and launch a fully free market economy without further oppressive "bailouts." In the end, the lefties just want to make things worse for the Greeks, despite their being on the correct side of the referendum vote itself.”
Lefty Economists are Pretty Good on the Greek Referendum – Robert Wenzel, ECONOMIC POLICY JOURNAL

“Deposit confiscation will be required long before hyperinflation is an option, do note that is not exactly a reassuring thought.  In fact hyperinflation is too slow and inefficient a way to steal from the citizenry in this setting.”
Might Greece see some version of hyperinflation? – Tyler Cowen, MARGINAL REVOLUTION

“Will the euro-fanatics please stop lying to the people of Greece? And while they’re at it, will they please stop lying to the rest of us as well?”
The Eurocrats’ Big Lie——Life Outside The Euro Has Worked Just Swell For Romania, Bulgaria, Poland, Turkey, The Czech Republic Etc. – Brett Arends, MARKETWATCH

“These “emergency” measures were supposed to have healed the problems that caused the financial crisis of 2008 — the excessive leverage, the toxic assets wrapped in complex derivatives, the resultant credit and liquidity crunch that occurred when banks lost faith in each other. Meanwhile, the infusion of cheap money and liquidity into banks gave a select few of them more power over a greater pool of capital than ever. Stock and bond markets skyrocketed as a result of this unprecedented central bank support.
    “QE-infinity isn’t a solution — it’s a deflection. It’s a form of financial subterfuge that causes extra problems. These range from asset bubbles to the inability of pension and life insurance funds to source longer term less risky long-term assets like government bonds, that pay enough interest for them to meet liabilities. They are thus at risk of rapid future deterioration …”
In A World Of Artificial Liquidity—–Cash Is King – Nomi Prins, CONTRA CORNER

“Financial experts in New York, London, and Brussels have tut-tutted Greece’s economic travails as Athens considers its future with the European Union. Why did they borrow so much money? How can they ever pay it back? Do they think that much debt is sustainable?
    “Instead of pointing fingers at the innumerates running Athens, they should consider our own situation.”
Athens on the Potomac – Jon Gabriel, RICOCHET

“Tyler Cowen is on it, with a simple message: Greece is small; China is large. Uh oh.”
Don’t Look Now But . . . China? – POWERLINE
China facts of the day – Tyler Cowen, MARGINAL REVOLUTION
China Scrambles to Put Plunge Protection Team Together: Brokers Pledge Support For Crashing Market – ZERO HEDGE

UPDATE:

“Since 1830 the country has defaulted on its debts five times. Indeed, the only two countries that have defaulted more often are Ecuador and Honduras. To quote Brown: “To a person with any historical awareness, being told that Greece is on the verge of a default is like hearing Dean Martin is on the verge of a martini”.”
Same Greek default, different day – Jason Krupp, NZ INITIATIVE

“Actually it is the middle-class rorts that have really made the system unsustainable, like the “blind” pensioners in Greece and the affluent Australians who have their child-minding subsidised. Plus red and green tape which are the legacy of middle-class activism. Not to mention Keynesianism.”
The rise of the unsustainable welfare state – Rafe Champion CATALLAXY FILES

“Today, on day one after the Greek default, I am angry. So with apologies, here is my Athens rant.
    “The past week must have been the most extraordinary yet in the never-ending euro crisis. I just cannot recall anything like it ever happening before. What we have witnessed is an incredible combination of political dilettantism, chutzpah and aggression.
    No-one in this euro game is innocent. Everyone involved has to take their share of the blame and acknowledge their roles in the escalating crisis.
    “To start with the original sin of the euro crisis, Greece should have never, ever been made a part of the eurozone. And the eurozone should have never happened in the first place. …
    “There is only one hope. Now that Greece is finally and officially bankrupt, perhaps we might eventually see something resembling a solution to the crisis. How about Greece exiting the eurozone, devaluing its new currency, default on its debt and reform its economy? I have been arguing this case for five years in this column, and I am not the only economist who has been saying so.
    “Will European leaders finally listen to us?”
The eurozone must stop playing the blame game – Oliver Hartwich, BUSINESS SPECTATOR

“Dear Prime Minister Tsipras and Finance Minister Varoufakis:
    “You may have won a four-month reprieve of sorts from your creditors, but your situation is desperate, and everyone knows it, most particularly Europe’s paymasters, the Germans. As you just painfully learned, your ability to blackmail your creditors is a fraction of what it once was.
    “If you’re serious about saving your country and rescuing its people from a more dreadful economic catastrophe, there are basic steps you should take that would promptly promote economic growth, while giving you the priceless political opportunity to tell the troika–the IMF , the ECB and the EU (i.e., the Germans)–where to get off.
    “Here’s how you can put away your beggar’s cup for good. …”
Steve Forbes Pens Open Letter to Greek Leaders; Greece Can Teach The World A Needed Lesson – THE PAPPAS POST

“There is now a clear rift between Germany and France, perhaps serious enough to cause long-term damge to the coherence of monetary union. …
    “Italy’s Matteo Renzi said the sight of pensioners weeping in front of banks was a black mark on the conscience of Europe. “We must start to speak to each other again, and nobody knows this than better than Angela Merkel,” he said. …
    “Yet matters will be decided by handful of people in Berlin, Frankfurt, and Brussels over coming days, with the ECB in the unwelcome position of having to decide by its actions whether or not to bring the crisis to a head.
    “Syriza sources say the Greek ministry of finance is examining options to take direct control of the banking system if need be rather than accept a draconian seizure of depositor savings – reportedly a ‘bail-in’ above a threshhold of €8,000 – and to prevent any banks being shut down on the orders of the ECB.
    “Government officials recognize that this would lead to an unprecedented rift with the EU authorities. But Syriza’s attitude at this stage is that their only defence against a hegemonic power is to fight guerrilla warfare.”
Defiant Greeks Contemplate Drastic Actions——Nationalisation Of Banks And Printing Euro Notes W/O ECB Approval – Ambrose Evans-Pritchard, THE TELEGRAPH

“By now it should be clear to all that the only reason why Germany has been so steadfast in its negotiating stance with Greece is because it knows very well that if it concedes to a public debt reduction (as opposed to haircut on debt held mostly by private entities such as hedge funds which already happened in 2012), then the rest of the PIIGS will come pouring in: first Italy, then Spain, then Portugal, then Ireland.”
When The PIIGS Coming Marching In——Why Germany Is Petrified Of Greek Debt Relief – ZERO HEDGE

“Our students are thinking: “At least it’s not Argentina again.” We’re thinking: “This is great, a real-world experiment we can talk about for years.”
    “Some things to think about as the Greeks vote “no” …”
All Greece, all the time – NYU Stern Economics

“On Wall Street in 1929, it was the great banking houses of J.P. Morgan and Guaranty Trust Company. In China today, it’s names like Citic Securities Co. and Guotai Junan Securities Co.
    “They’re separated by 86 years and 7,300 miles, but Chinese financiers are turning to the same playbook used by their American counterparts to fight a crash that’s wiping out stock-market fortunes on an unprecedented scale.
    “Investors in China are hoping it works out a lot better this time around. …”
China Brokers Dust Off Wall Street’s Playbook From Crash of 1929 –BLOOMBERG

Good on You, Alexis Tsipras (Part I) #GreeceCrisis

Guest post by David Stockman

Late Friday night a solid blow was struck for sound money, free markets and limited government by a most unlikely force.
Namely, the hard core statist and crypto-Marxist prime minister of Greece, Alexis Tsipras, set in motion a cascade of disruption that will shake the corrupt status quo to its very foundations. And just in the nick of time, too.

After 15 years of rampant money printing, falsification of financial market prices and usurpation of democratic rule, his antagonists -- the ECB, the EU superstate and the IMF -- have become a terminal threat to the very survival of the kind of liberal society of which these values are part and parcel.

Keynesian central banking and the Brussels and IMF style bailout regime -- which has become nearly universal -- eventually fosters a form of soft-core economic totalitarianism. That’s because the former destroys honest financial markets by falsifying the price of debt.

So doing, Keynesian central bankers enable governments to issue far more debt than their taxpayers and national economies can shoulder. At the same time they force investors and savers to desperately chase yield in a marketplace where the so-called risk free interest rate has been pegged at ridiculously low levels.

That means, in turn, that banks, bond funds and fast money traders alike take on increasing levels of unacknowledged and uncompensated risk, and that the natural checks and balances of honest financial markets are stymied and disabled.

Short sellers are soon destroyed because the purpose of Keynesian central banking is to drive the price of securities to artificially high and unnatural levels. At the same time, hedge fund gamblers are able to engage in highly leveraged carry trades based on state subsidized (free) overnight money, and to purchase downside market risk insurance (“puts”) for a pittance.

Eventually bond and stock “markets” become central bank enabled casinos -- riven with mispriced securities, dangerous carry trades, massive unearned windfall profits and endemic instability.

When an unexpected shock or “black swan” event threatens to shatter confidence and trigger a sell-off of these drastically over-priced securities, the bailout state swings into action indiscriminately propping up the gamblers.

That’s what the Fed and TARP did in behalf of Morgan Stanley and Goldman back in September 2008. And it’s what the troika did in behalf of the French, German, Dutch, Italian and other European banks, which were stuffed with un-payable Greek and PIIGS debt, beginning in 2010.

Needless to say, repeated and predictable bailouts create enormous moral hazard while extirpating all remnants of financial discipline in financial markets and legislative chambers alike. Since 2010, the Greeks have done little more than pretend to restructure their state finances and private economy, and the Italians, Portuguese, Spanish and Irish have done virtually nothing at all.

The modest uptick in the reported GDP of the latter two hopeless debt serfs are just unsustainable rounding errors. The numbers are flattered by the phony speculative boom in their debt securities that was temporarily fuelled by Mario Draghi’s money-printing ukase that is presently in drastic retreat.

This Monday morning push has come to shove; Angela Merkel and her posse of politicians and policy apparatchiks were not able to kick the can one more time after all.

Instead, the troika’s authoritarian bailout regime has stimulated political revolt throughout the continent. Tsipras’ defiance is only the leading indicator and initial actualization -- the match that is lighting the fire of revolt.

But what it means is that there is now doubt, confusion and fear in the gambling halls. The punters who have grown rich on the one-way trades enabled by the money printing central banks and their fiscal bailout adjutants are being suddenly struck by the realisation that the game might not be permanently rigged after all.

So let the price discovery begin. In the days ahead, we will catalogue the desperate efforts of the regime to reassert its authority and control and to stabilise the suddenly turbulent casino.

In riding the central bank bubbles to unconscionable riches, the big axes in the casino have falsely claimed to be doing “God's work.”

As they are now being forced to liquidate these inflated assets, they actually are.

Last autumn one of the most detestable members of the regime, Jean-Claude Juncker, arrogantly issued the following boast:

“I say to all those who bet against Greece and against Europe: You lost and Greece won. You lost and Europe won.”

This morning that smug proclamation is in complete tatters. Good on you, Alexis Tsipras.

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David Stockman was director of the Office of Management and Budget under President Ronald Reagan, serving from 1981 until August 1985. He was the youngest cabinet member in the 20th century.
This article first appeared at the Daily Reckoning.

Greece: “It’s always nice to have your cake, and eat it too, AND send the bill to somebody else.”

Part of a documentary Johan Norberg made in 2012 in Greece – “the canary in the coal mine.”

“Tomorrow all hell breaks loose,” he says. "I am extremely worried."

[Can’t embed, sorry: Click on pic to head to video, or click here.]

Dumping the Euro Isn’t a Cure-All: Easy Money Lets Governments Avoid Free-Market Reforms

Guest post by Frank Hollenbeck

The Greek drama continues to unfold with the risk of “Grexit” becoming increasingly likely. Yet, a large majority of the Greek people want to keep the euro. This, however, would require the Greek government to live within its means — something it has not been able to do for decades. With anti-austerity parties gaining strength continent wide, Greece may be the first, but not the last, to leave.

For many years, it has been fashionable among some economists to blame the euro for all of Europe’s problems. Yet, the problem in Europe is not that it has a common currency, but that it has excessive government regulations, spending, and taxation. Economists who suggest that breaking up the euro will solve the region’s economic problems are like people selling gimmicks promising massive weight loss without either exercise or dieting. They want the gains without the pain.

What they really want is just more flexibility to inflate fiat monies. For them, it’s much better to reduce government debt by simply inflating it away — thus sticking it to creditors — than having to take on the painful adjustment of limiting government size to what can be justified only with direct taxation.

Money Manipulation Allows for More Government Intervention

Suppose you have two regions under a single monetary system — Auckland and Invercargill — with an inflationary economic boom in Auckland and increasing unemployment in Invercargill. Salaries would slump in Invercargill and surge in Auckland. Under such conditions, labour would normally move from Invercargill to Auckland to find jobs, and capital would move from Auckland to Invercargill to find cheaper labour.

If capital will not or cannot move from Auckland to Invercargill, and if labour cannot or will not move from Invercargill to Auckland, then Invercargill will just be stuck with falling wages, while Auckland capitalists will be stuck with expensive labour.

A free market solution to this problem is to allow free movement of labour and capital to where labour and capital are demanded, and to allow for greater freedom in the use of labour and capital.

However, governments can avoid having to allow such freedom in markets if they each have a central bank. If Invercargill and Auckland are under two different monetary systems, monetary policy could be tailored to deal with each region’s economic problems. Invercargill could turn to its own inflationary policy to match Auckland’s existing inflationary boom. This would improve Invercargill’s export situation — by depreciating the currency — and prop up employment in the short term. Thus we find that governments will tend to turn to easy money instead of deregulation.

On the other hand, if Invercargill and Auckland are under a single monetary policy (and Invercargill can’t simply inflate its currency at will), then Invercargill can only address the ills in its economy by making its economy more attractive through rate cuts and deregulation.

We find this sort of thinking prevalent in Europe today. The Europeans know that control over monetary policy can be used to cover up the shortcomings of irresponsible fiscal and regulatory policy. So, it’s no surprise that many of the most fiscally disastrous governments in Europe are now talking about getting rid of the euro. Each government wants its own money supply so it can kick the austerity can down the road, and inflate instead.

In our example, we find that the governments of Invercargill and Auckland are actually restricted in what they can do by a common currency, and naturally, Austrian economists would view such constraints as a very good thing — under a regime of sound money.

A Sound Common Currency Is a Good Thing

The benefits of a common currency can be massive. Transparency is improved and uncertainty and risks are reduced.

Anyone who has travelled overseas knows the hassles of dealing with a foreign currency. You first have to pay a fee to convert your cash, and then you have to make sure you spend it all before you leave the country, otherwise you will be left with useless coins and bills at the bottom of your sock drawer.

But not all currencies are equal, of course. The problem with the euro is not that it is a common currency but that it is a fiat currency which ultimately returns to its intrinsic value of zero.

Indeed, the European Central Bank is now purchasing sixty billion euros per month of government bonds inducing governments to borrow even more.

Why the Southern Bloc of Europe Wants Out of the EU

Advocates of breaking up the euro never talk about the southern bloc’s labour costs relative to those in China or India. They focus instead on German labour, which is more cost-effective. The Italians don’t like that they have to compete with Germany — in the making of automobiles, for example — under a single monetary system. If the Italians had their own monetary system, they could manipulate the money supply to favour their own automobile industry.

With their own central bank, the Italians can put off having to ask themselves why their auto industry is so uncompetitive in the first place (hint: it has to do with Italian regulations and subsidies). Advocates of a breakup expect to gain competitiveness through devaluation, but a devaluation will only create a temporary gain, if at all, by benefiting exporters at the expense of the rest of society.

A Solution for Germany

A stable unit of account and exchange is a great idea, but it needs governments willing to accept the discipline it imposes (or a population that demands it).

Indeed, if anyone should dump the euro it should be Germany. Its current strategy to protect the euro is to use debt to solve a debt problem: to send good money chasing after bad. Germany would be wise to join like-minded countries on monetary policy and create a northern euro backed by gold. Meanwhile, southern eurozone countries are looking increasingly like a lost cause. People are not in the streets rioting for less government, but for more government. Let them have what they want: a worthless currency!

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Frank Hollenbeck teaches finance and economics at the International University of Geneva. He has previously held positions as a Senior Economist at the State Department, Chief Economist at Caterpillar Overseas, and as an Associate Director of a Swiss private bank.
This post first appeared at the Mises Daily. Place names have been changed for effect, as much as anything.