2011 July 30 Saturday
Tighter Union Or Bust For European Union?
Ilargi makes an interesting point: if far tighter financial and political union is the only way to save the Euro zone then rejection of that step by voters could break the EU. The Europeans need to scale up the power of their union or it will fall apart.
Europe is, of -financial- necessity, sliding towards a fiscal and subsequent political union (and yesterday was a big step). A union that has zero chance of being accepted by its members. That is how we recognize that this is the beginning of the end. Without the extended powers of the EFSF, an outright Greek default would have been unavoidable. With the revamped facility, there can be a few more months (or is it even just weeks?) of pretending. And then, German, Dutch and/or Finnish voters will hammer it down.
Will voters in a couple of European states throw up so much opposition to bail-outs aimed at saving the Euro that ejection of some Euro zone members will become necessary? Can the Euro at least be saved for the northern European countries?
In a Foreign Policy piece Steven Erlanger argues the European Union faces an existential crisis. The assorted peoples of Europe do not feel themselves Europeans. They distrust and resent those of other nations.
PARIS — Europe isn't going quietly. In this season of continental crisis, both financial and existential, French President Nicolas Sarkozy has yelled at European Central Bank President Jean-Claude Trichet. The European Union commissioner in charge of justice, Viviane Reding, has insulted Sarkozy, who has fired back. Leaders of smaller countries have openly complained about German pigheadedness and French arrogance. The Germans and the northern countries call the Greeks freeloaders, liars, and worse; the Greeks have said Germany should return gold and antiquities looted by the Nazis.
Europe's members are too many and too diverse. Ethnic nationalism is still a potent force. Germany's own growing nationalism is undermining its willingness to provide alms to keep the union together. A common currency stretched over growing list of countries makes no economic sense. Milton Friedman predicted the Euro would cause more harm than benefit.
I expect Peak Oil and an aging population to make Europe's financial crisis grow in the next 10 years. So I am skeptical of the survival of the Euro, at least with all its current members. It can only survive if the big money elite in Europe decide to bribe and otherwise cajole national leaders to adopt policies to ensure the Euro's survival. It is not clear to me the European elite will decide they want to do that.
In Latvia there are third parties running on the third platform. The economics are designed by Dr. Michael Hudson, an American.
Latvia bears watching as they may be a model for Europe. Latvia got in trouble after independence from the soviet union. They found themeselves with no debt after the break up, but also no modern factories, etc. So, they borrowed against their land, bridges, homes, etc. The public commons (what everybody owned) were hypothecated for new credit Euro's. This meant that Euro's were borrowed for new housing etc. Since, the income tax is high in Lativa, they have very low taxes on land/housing. This tax policy and situation caused a housing bubble.
In other words, new money would pop into being in Sweden, and then flow to Latvia, where it would cause housing to bubble up. The housed apprent value would go up, and then the banker would have yet more cash to loan out, to make the housing go up even more. When you get to about 40% of your pay going out for housing, you have hit the wall. Your output is going to pay debts on inflated property, and not going to other consumer goods.
Young Latvians are emigrating away. Even if their house if foreclosed on , they still have to pay the banker. The banker cannot lose.
It is likely that the Latvian politicians will vote in favor of Latvians, and not Swedish bankers.
Here is the policy proposal:
1# Institute the American mail in the keys idea. In America if we get underwater on our house loan, we can just walk away, and the bank owns the house. They cannot come after us to make up the difference, like they do in Latvia.
2) When people start walking away, then home prices will be driven down .
3) At that time, new law in place allows the Latvian's to bid on the home at the new lower price. This is a banker's haircut. The banker will have to adjust his books down and take less profit. Boo Hoo the original money popped into being as a keyboard entries.
5) At this time, the Latvian will buy the house in Latvian currency. (Currency is marked to the Euro.)
6) New fiscal policy changes the Tax laws. Fiscal policy and monetary policy are really flip sides of the same coin, and most people don't know that. So, Latvians are learning from Dr. Hudson. Currently Lativan's pay heavy income taxes, but low land taxes. The new law changes to a land tax like Hong Kong's. They will pay the rent value of their land, rather than income taxes. This means the cost of labor in Latvia will drop 50%, and yet their standard of living and income will not be affected.
Why do land taxes, or rent value of land taxes matter? Because if you don't tax the land value, it ends up becoming usury paid to the banker. For example, if a speculator sees a nice appartment building for sale, he is going to borrow the money from the bank to buy it. His calculation will be, if I can get a little more rent money for it than the cost of the loan, then it is a money maker. Essentially the banker, benefits as long as the market will bear the costs. The economy grows as housing grows in value, but really it is a non-productive economy. By taxing rent value of land #not the buildings or other real wealth builders), that means that income taxes can be low or zero. In Hong Kong they are a low 14%. Texas didn't have a huge property bubble like the other states, because they tax the land and house rather than income. This is free money that would otherwise go to the rent seeking banking sector. Even more important its sets the economy right, so you don't have a false economy (that seems to grow with housing bubble increase).
During our property bubble, people would refinance and live off of the difference. This was false economics, and it is what is happening in Lativa, Austrailia, and in other places around the world.
If Latvia haircuts the Swedish bankers, and institutes the changes, they will become a dynamic economy. It will be like an Earthquake to European politics. I predict it will be a likely outcome, as the Latvian politicians will come down on the side of their people, and not the Swedish bankers. Latvians remember the horrors of communsim, and also European Feudalism. Bankers that are demanding the public commons of Latvia for the debts will not be given said commons. I predict Lativa will not become a toll booth society that vectors its productive output to foreign banking plutocrats.
Interesting comment. Is that Georgist economics that you're recommending? What kind of school of economics are you promoting? Can you recommend any good books to learn more about your perspective?
Dr. Michael Hudson is usually spot on. The economists at the University of Missouri at Kansas City generally are correct. Also, Bill Black (100 percent reserves) and perhaps Randall Wray (MMT). Jamie Galbraith at U.T. All of them are worth listening to.
One hundred percent reserves for private banking is the 1938 Chicago plan revised. The AMI www.monetary.org is proposing this plan in revamped form. Kucinich's bill HR6550 was part AMI work and had Hudson's input. Galbraith, Black, Hudson and the MMT crowd (Wray and Mosler# seem to run in the same circles.
MMT describes the monetary system as it is. Georgists were from Henry George, and he is one of the first to understand how money flows into land. Hudson has incorporated that into his thinking, but I wouldn't call him a strict Georgist.
MMT guys do a bad job of dealing with the problems of credit money. The 100 percent reserve people #AMI) do a bad job of understanding the current system. AMI is good with the history of money and the definitions.
Read anything from the economists I recommend above. Also, you may want to start with a good foundation in the history of money. The 800 page book, "the lost science of money," by Zarlinga at AMI gets my high recommendation.
The point is that the EU has failed.
If the EU actually delvered high yera on year growth and rises in living standards, full employment etc (like the politicians claimed it would), then I'm pretty sure Europeans, being rational people, would accept further integration as the 'way of progress'.
But over the past 40 years or so, all the EU can deliver is yet more stagnation and low growth.
Growth rates were *higher* in the EU states before they enetered the EU!
Yes, of course it has failed. There is a fiction underlying its economy.
The Treaty of Lisbon forbids the EU Central Bank from loaning to Governments. The way the monetary union is set up, various governments float bonds in order to attract capital. Most of this capital is from COMMERCIAL banks.
For example, Greece taxes less than it spends, because after all it is socialist leaning country. The government of greece issues its bond's onto the market. Commercial banks and some investors float the loan (against the bond) to Greece. How do commercial banks create new money? They monetize, also known as hypothecation, Greece in order to do so. The bankers also ask for derivitives backing, which is insurance on the new credit money. Guess who most of the derivitive players are? Yes, the U.S. is heavily involved, which is why Geithner is asking the Euro peons to go into debt servitude.
Credit money that is created in private banks in this fashion is based on counter parties and level of risk. In other words, this kind of money, that is created in private banks, has an element of lawlessness to it. If money equals to law, then credit money is the root problem.
Between the treaty of lisbon, and the EU laws requiring governments to self fund by Bonds and taxation, political power and finacial power has shifted to the commercial banks. Pretty soon most governments end up in hock to the private bankers, and then they have to self off their public commons. Europeons end up in a toll booth society, where the excess output of the people is diverted to usury payments.
The optimum set up for a country is four branches of government: Legislative, executive, judicial, and Treasury. The Treasury is closely related to the Judicial branch, as it understands that money at its root = law. All new money is issued by the Treasury debt free, like Lincoln did with Greenbacks. That new money does not incur debt to come into being, the law lets it come into being based on the needs of the economy. The new treasury is surrounded by constitutional law so that it can't get gamed by populism. The 17'th ammendment should also be repealed so the populism of the Senate doesn't corrupt the new money power held at the treasury.
The next optimum set up is 100 percent reserves at the private bank level. No new money can come into existence at the private bank level via new loans. History shows us this is the mechanism for corrupting governments and causing wars, communism, etc. All private bankers do is match up debtors and creditors and take a fee for their service. All new money that private banks have to loan is already available in the money supply.
The third opitmum set up, is to understand that fiscal policy and monetary policy are flip sides of the same coin. Since money = law, then the law better understand economics. When you tax the rent value of land, you prevent shifting of usury monies into non-labor hands, and prevent the growth of a new plutocracy. This is how the dark ages and feudalism came about. Clever savers and producers will end up owning the productive output of a country. Even in a 100% reserve world, it would be wise for the Governments to tax the rent value of land. Do not tax labor their production, or otherwise the poor will never have a way of rising out of poverty, and you end up with a stratified social structure.
If a EUROPEON has read the above, I just gave you the recipe to a nice future. But, I doubt anybody in your governments would understand a word I said, as the amount of confusion the economists spew out is simply amazing. The credit masters will continue their confusion attack in order to put you into debt bondage.
I like the idea of splitting the Treasury off from the Executive. Make the public reporting of taxes, revenue, borrowing, and future liabilities independent of the desire of politicians to spend to get reelected.
The new treasury would target a certain inflation rate, and if inflation goes outside of the rate window, certain responsible individuals would serve Jail time. How new money is spent should be independent of politics, like you mention in your comments above. But, some of it could be optional monies the country can use for infrastructure, etc. That percentage would come under debate. Personally, I would like to see direct spend by the Treasury into the states, based on head count. This would shift power back to the states, and encourage Federalism.
During the Greenback period, the Congress never allowed more printing than what was authorized. Even before we were a country, the Continentals were printed only in accordance with the law. It was British counterfeiting that made them 'worthless.' Going back even further to Massachusets Bills, which was debt free money good for paying taxes, said Bills were not produced in numbers outside of authorization limits. So, debt free law based money has a much better history than our current system of #mostly# private credit money. I say mostly, because our system today is a mixture of two types of money. Credit money issued as new loans from private bankers, and the other type, which is government money created when the Fed enters numbers into its keyboard.
The notion that money has to pop into being based on debt is a big lie of history. Europe is caught in the grip of the lie, and so are we.
Short of a depression I expect the financial sector to remain politically strong enough to prevent a return to a gold standard or some other system. Wall Street owns both political parties.
Now, depression is a distinct possibility, especially once world oil production starts dropping.
What's a real Depression like? It is important to compare: In A Monetary History Of The United States by Milton Friedman and Anna Jacobson Schwartz they say on the first page of chapter 7 The Great Contraction:
"U.S. net national product in constant prices fell by more than one-half from 1929 to 1933; net national product in constant prices, by more than one-third; implicit prices, by more than one-quarter; and monthly wholesale prices, by more than one-third".
Now, that's a contraction. Currently our total employment is down by about 5% from peak. It probably bottomed at near 6.4% down from peak. GDP shrank by about 5.1%:
As part of an annual revision of data on U.S. gross domestic product, the Commerce Department said that the economy contracted by 5.1% between the fourth quarter of 2007 and the second quarter of 2009, more than the 4.1% previously estimated.
You could make the argument that the recovery from the 2000-2002 period was weak. So the decline is from a lower base. But the bubble in the late 1990s was an aberration.
So I'm still looking at the next depression as coming in the future. I definitely think it is coming. We can't recover much given the price of oil and when we recover the price of oil will shoot up. At some point oil production will turn down and I expect the depression to start in earnest then or sooner.