2014 March 06 Thursday
Euro Currency: Bad Idea That Is Still Alive
Kevin Hjortshøj O’Rourke says the Euro currency is a bad idea.
The euro area economy is in a terrible mess.
In December 2013 euro area GDP was still 3 percent lower than in the first quarter of 2008, in stark contrast with the United States, where GDP was 6 percent higher. GDP was 8 percent below its precrisis level in Ireland, 9 percent below in Italy, and 12 percent below in Greece. Euro area unemployment exceeds 12 percent—and is about 16 percent in Portugal, 17 percent in Cyprus, and 27 percent in Spain and Greece.
Europeans are so used to these numbers that they no longer find them shocking, which is profoundly disturbing. These are not minor details, blemishing an otherwise impeccable record, but evidence of a dismal policy failure.
The euro is a bad idea, which was pointed out two decades ago when the currency was being devised. The currency area is too large and diverse—and given the need for periodic real exchange rate adjustments, the anti-inflation mandate of the European Central Bank (ECB) is too restrictive. Labor mobility between member countries is too limited to make migration from bust to boom regions a viable adjustment option. And there are virtually no fiscal mechanisms to transfer resources across regions in the event of shocks that hit parts of the currency area harder than others.
Will the United States remain as civilized as Greece or Spain if its unemployment rate ever gets as high as theirs?
Greeks and Spaniards can, out of desperation, go work in Germany or the Netherlands and send money home. But if the economy gets that bad in America where could Americans go to do work to send money home? Um, nowhere.
America's next economic downturn might turn out to be much worse than the 2008 crisis because the last time the US government could run up big debts. This time the US government would start out with a much larger existing debt and the economy would start from a higher initial unemployment rate.
The American people have voted for expensive old age entitlements (Medicare is by far the biggest) and voted against the very high level of taxes that would be needed to fund them. The American people have also voted for a large military without the taxes needed to fund it. The American people have even voted for lots of entitlement programs for poor people. Again, not enough taxes to pay for them. This gap between promises and revenue is widening as a result of aging. Plus, the young folks aren't doing as well as previous generations (thank you immigrationists) and therefore aren't earning enough to pay enough taxes either. So the US government's financial condition will be far worse going into the next financial crisis. My advice: be prepared.
Come the next financial crisis will the Euro survive? Will some countries exit?
By Randall Parker at 2014 March 06 07:58 PM
Credit money is created and destroyed. During the creation process a debt instrument is created as a mirror of the credit/debt money. Credit/Debt money is also called banker money (BM). When the BM refluxes to the ledger, it disappears from existence. A positive number meets a negative number drawing down the ledger. The debt instrument sometimes is attached to the ledger, or it may travel a path away from the originating bank e.g. mortgage backed securities.
The Euro is a debt money system, and due to the treaty of Lisbon, governments cannot be directly funded by the Central Bank. (They have since found ways around this restriction.)
Spain, Greece, Ireland, Portugal created government securities (sovereign bonds) and would give them to commercial banks. These commercial banks were usually located in Germany, France, or Britain. The commercial PRIVATE bank would take the bond and put it on their double entry ledger. The ledger then has a debt instrument and new BM creation. This BM is not really money, it is credit – given to the sovereign. The sovereign country would then spend their new credit Euro’s into their economy. The Euro’s would promptly leave, as they purchased goods outside of their borders. The credit creating banker felt secure with the sovereign bond, because after all, the country could always tax its citizens.
Let’s say somebody in Spain wanted a Mercedes, they would spend their newly created BM Euros, and said Euros would leave Spain and a Mercedes would import in proportion. Money leaves, and the Good imports.
Note the defect in the mechanism here: 1) The Debt instrument is denominated in Euros and it is outside of Spanish law. Most likely said Debt instrument is held in a German private commercial bank where it was used to hypothecate BM into existence. 2) The BM Euro’s have now left the local economy and vectored to Germany. From there, the Euro goes into somebody's savings account, because Germany exports more than it imports. Germany is a mercantilist country absorbing other countries credit euros.
Since the former BM cannot find its originating debt instrument, the credit creation mechanism becomes broken. The debt instruments will probably be rolled over by the Spanish government as they create a new bond. Whenever you roll over a debt instrument into a new one, the usury on the former bond becomes the principle of the new one. This causes an exponential function to unleash, making the debt even more unpayable than it was before.
The PIGs broke monetary laws by allowing their money to be denominated outside of their law. They also engaged in credit mechanisms which are dysfunctional at their root level.
The usury cannot be paid unless it comes outside of the banking system. Usually it comes from deficit spending. The other way to collapse debt contracts is from depression, where real assets are harvested by the banker in foreclosure. Of course, the PIGs have the “bond holders” demanding islands and public infrastructure. That way the rentier class can charge tolls on the public commons forever, creating a financial elite oligarchy.
It absolutely has nothing to do with IQ. The finance system has nothing to do with industry and productivity. It’s understandable that even well educated people are stupefied by the money system, because the usury flows pay for a tremendous amount of propaganda. Most economists are gripped in a hallucination, because they are not even taught monetary history.
Why did Germany go from being the poorest country in Europe in ’32 to being the richest in ’39? Why did England’s economy triple its output when WW2 started? Why did England’s economy stay above prewar levels despite being bombed? Did England’s IQ suddenly triple?
The only thing that could reverse the relentless decline is radical change, but instead the System is becoming more conformist than at any time in human history.
The young adults with no future are the System's strongest supporters.
They may be the most hidebound PC-thinkers of all, at least based on their self-loathing, pro-immigration, pro-tax, pro-bureaucracy Reddit postings.
Actually, it is too late for Southern European countries to revert back to their original currencies because too many of their corporations are already bankrupt and dismantled, which means that even after they start using their national currencies, they still will not have enough companies to hire their unemployed workers. Absolutely tragic. For instance, even with the euro currencies, the Southern European countries could have prevented this disaster a decade ago by doing equivalent internal devaluations by using competitive lower wages for their industries. For example, right now Spain has some export industries that are growing fast because by applying wage cuts their workers became very competitive even with the euro currency.(This is a step in the right direction, but already too many qualified Spaniards have become rusty and they lost their know how or they became obsolete due to the disruption.)
And yet there are those like InSane/Palin. No matter how 'hot' you think she is, she has NEVER told the man who NEEDS to be returned to Vietnam and NEEDS to be returned to that tiger cage, THAT HE IS WRONG!
I expect they will get the debts so high that all the Western economies collapse simultaneously. In fact, they are engineering a simultaneous failure. Once all the economies go down at once, they can move to their long-awaited Next Stage in which we are all subject to a (private) Global Central Bank with its own Global Bank Currency. And isn't the prototype already in place? the Special Drawing Rights?
Perhaps I'm a monetary dunderhead, but I never understood what was backing the Euro in the first place. Sure, national currencies are fiat currencies, but at least they are backed by the full faith and credit of their respective national governments. The Euro is a fiat currency that's backed by nothing as far as I can tell. If the the various national governments start pulling out, there is no government that is standing behind the currency. Trillions in wealth could vanish.
I am not the only one hoping for a zombie (minority) apocalypse.
Randall, do you really have an idea -even a very foggy one- on how much money is collected from tax revenue? Everything you pay for has taxes. Inflation is a hidden tax. When you buy a car you pay a tax; for every gallon of gas that you buy you pay taxes; for the food you buy you pay taxes; when you work, you pay taxes for earning money. And youngsters are still not getting free higher education. Randall, please listen, the amount of money collected by all those pricks in power is unbelievable. With only the taxes of half of the people in the U.S. you can have free health care, education, retirement funds for everyone. But your tax money is being given by the politicians to their friends, the big corporations. I know it takes a while calculating and doing the math on how much in taxes we pay, specially in hidden taxes.