Friday, July 31, 2015

My letter to the Wall Street Journal re: A strange definition of "good news"

Re: Consumers Prime the U.S. Pump

Dear Sirs:
Your definition of "good news" for the U.S. economy is defined as an increase in "real, or inflation-adjusted, personal-consumption expenditure", which was driven by a "savings rate, which slipped to 4.8% from 5.2%." An economy can expand only from savings; i.e., deferring consumption in order to invest capital resources in productive assets that will provide more goods in the future. Your definition assumes the opposite. Surely, you would not recommend such a policy for individuals: i.e., that one should spend one's savings in order to be more financially secure in the future. And, please, do not resort to the fallacious argument of the "paradox of savings" and/or the "savings glut", which assumes that what is bad for the individual somehow is good for the economy as a whole.

Monday, July 27, 2015

My letter to Wolfgang Munchau of the Financial Times, London

Re: The make believe world of eurozone rules

Dear Sir:
In your otherwise fine column today--Monday, July 27, 2015--you conclude with this statement:

"...Germany does not want to grant Greece debt relief for political reasons, and is using European law as a pretext."

Earlier in your column you pointed out that Article 125 of the European Treaty on the Functioning of the European Union prohibits countries from taking on other members' sovereign debt. You criticize--rightly, in my opinion--the ECJ for ruling that this very clear prohibition can be violated. You then point out that the German Constitutional Court twice had not supported the ECJ's position. It seems to me that the German view can be interpreted as a defense of the rule of law, which your column says has been ignored by the ECJ, and that Germany's objection to another bailout is more than merely a political pretext. Not only has the violation of the rule of law by the EU led to the Greek financial crisis, it strikes at the heart of Western civilization.

Saturday, July 25, 2015

Economic Fallacies about Greece

There has been much unscientific economic pronouncements about Greece's financial problems and especially how to solve them. Below is a short list of three of these economic fallacies.

1. The euro is too strong a currency for Greece.

This statement usually is accompanied by a reference to Greek productivity being lower than that of the northern tier EU countries. The logic, such as it is, states that the euro is not a suitable currency for countries with vastly different levels of productivity. This is followed by a recommendation that Greece leave the European Monetary Union and reinstate the drachma. The National Bank of Greece then would set a very low exchange rate between the drachma and the euro, making Greek products more competitive.

 Well, there is a semester's worth of economic fallacies embedded in this chain of logic. A currency is an indirect medium of exchange. Two countries with different levels of productivity can use the same medium of exchange just as two individuals can do so. You may pay the kid next door to mow your lawn with dollars that you earned in a highly skilled and highly compensated profession. Yet you both use dollars. There is no reason that the Greeks and the Germans cannot use the same currency. In the age of the gold standard, national currencies were defined by their exchange rates to gold and were redeemable in specie; therefore, in effect, all countries were using the same currency-- gold.

2. Debasing the currency will help the Greeks export their way to recovery.

Correlated to the above fallacy is the notion that debasing the currency will aid the Greek economy by the stimulative effects of an increase in exports. The idea is that the Greeks can give more drachma for the currency of its trading partners, making Greek exports cheaper in terms of the foreign currency. Increased exports will stimulate the entire economy. But currency debasement merely causes a transfer of wealth within the monopolized currency zone. The Cantillon Effect tells us that the early receivers of the newly printed money benefit by their ability to purchase resources at existing prices. The losers are those furthest removed from the initial increase in spending, such as pensioners. They will find that their money doesn't buy as much, due to price increases that are an inevitable consequence of an increase in money spending. Eventually the exporters find that the cost of their resources has risen, at which point they demand another round of money debasement in order to prop up foreign sales and avoid business losses. They will be forced to pay more for their factors of production and must raise prices in local currency terms. In order to avoid losing sales they need their foreign buyers to receive more local currency so that their goods do not increase in price in foreign currency terms. This policy masks real structural problems. It is not a currency problem.

3. Instituting one's own currency will enable government to avoid unpopular spending cuts.

In other words, debasing the currency is a way avoid the dreaded austerity monster. Governments would have the people believe that there are sufficient real resources to redistribute from the wealthy to alleviate all poverty. It is assumed that the wealthy have nefariously confiscated the people's wealth, and redistributing it along socialist lines will result in plenty for all. The socialist "plenty for all" slogan has been around a long time and has yet to prove its worth in alleviating poverty.

The Greeks (and Europe) Need Monetary Freedom


In conclusion, too much of the commentary about the Greek crisis has focused on whether or not Greece should drop the euro and not enough on the structural problems arising out of decades of socialism. The Greek government has borrowed more money than the Greek people can possibly repay. Debased money will not make this fact disappear and, on the contrary, will cause even more harm. It is telling that in poll after poll the Greeks themselves show that, although they do not desire austerity, they also do not wish to abandon the euro. They know that such a move will allow the government to destroy what little wealth remains in the country. The Greeks see the euro, with all its flaws, to be superior to a reinstated drachma. The best alternative for Greece right now is to abolish legal tender laws, which would allow the Greek people to trade in whatever currencies they deem most desirable. The Greek government may be forced to default on its euro loans. It is hard to imagine what good can come from another bailout just as it is hard to imagine what good can come from harnessing the Greek people to the yoke of high taxes. The Greek government itself responded rationally to the structure of the European Union and the European Monetary Union. It borrowed heavily at low rates of interest from willing lenders. It accepted all the newly printed euros so eagerly offered by these flawed organizations' various funds. It is not the only country to do so, merely the first in which the adverse consequences of the EU's flawed structure became apparent. There will be others and the adverse consequences will be greater. What is important now is that Europe stop destroying its capital base in pursuit of a socialist dream that has become a nightmare.

Wednesday, July 15, 2015

An economic myth that just will not die

An excerpt from today's Open Europe news summary:

Luc Coene, a member of the ECB’s supervisory board and a former Belgian Central Bank Governor, told Belgian daily De Tijd that a Grexit may have been a better option, arguing, “Because of the depreciation of the currency, one can achieve more through increased exports in a less painful manner.”

No. Debasing one's currency does NOT solve anything. There is no way that a country can force others to subsidize its economy through debasing one's own currency or that one can "jump start" or "stimulate" one's own economy by debasing the currency. All currency debasement accomplishes is a transfer of wealth from the non-exporting sectors of an economy to exporting sectors and foreigners. In other words, increased exports are subsidized by one's own citizens.

Friday, July 10, 2015

Greece wants to burden its people with even more debt!

Specifically, $5,400 more per person!

It wants 53.5 billion euros. With a population of only 11 million, that works out to another $5,400 per person at an exchange rate of $1.11 per euro. Insanity! It cannot and will not ever be repaid. It is just more kicking the can down the road. There is little enthusiasm from the common people of Europe to throw away even more money, although that may not prevent Europe's elite from doing so.

Pat Barron

From today's Open Europe news summary:
Greece makes further concessions to creditors as it seeks €53.5bn 3-year bailout
Greece yesterday submitted a proposed list of reforms in return for the €53.5bn new three-year bailout package the country is seeking from its creditors. The Greek government has made further concessions on VAT and pensions, although some discrepancies with the creditors’ proposal remain – notably on labour market reform and military spending cuts. According to the International New York Times, France sent a technical team to Athens to assist the Greek government in drafting the new plan. The new proposals are being assessed by the three institutions – the European Commission, the ECB and the IMF – and are expected to be put to a vote in the Greek parliament today, ahead of tomorrow’s meeting of Eurozone finance ministers and Sunday’s meeting of EU leaders.

Tuesday, July 7, 2015

The depth of the European problem is stating to get recognized

From today's Open Europe news summary:

William Hague: Greek crisis could be only the beginning

Writing in The Daily Telegraph, former UK Foreign Secretary William Hague argues that “this is not just about one country. It is in Greece that the fundamental tensions created by a single currency have first broken through, because Greece is a particularly indebted and less competitive country. But the same tensions will ultimately surface in other nations facing a less immediate crisis but a similar prognosis.” He adds, “There is a clear risk that the economic performance of the south will diverge from, not converge with, the north. Unless this is averted in the coming years, it will bring problems to Europe for which Greece has only been a minor rehearsal.” His comments resonate with an op-ed written by Open Europe Co-Director Stephen Booth for The Daily Telegraph last week, in which he argues that the Greek crisis shows the need to redefine ‘ever closer union.’


Hague believes that the problem is the old "north-south" issue, whereby the northern countries supposedly are industrious and productive and the southern countries are not. But this is not the case, because productivity is a relative term. The problem is the structure of the European Union, which gives an implicit guarantee by all members to honor whatever profligate debt any of its members may incur. Greece is just the tip of the iceberg, the canary in the coal mine. No one in Europe quite yet seems to be willing to admit that it is foolish to place entire nations on welfare. The real instigators of this problem are the European socialists, who just cannot bring themselves to recognize that socialism will not work, even if practiced on a grand, continent-wide scale with the ability to print fiat money in vast quantities. I humbly disagree with Mr. Booth that the Greek crisis shows the need for an "even closer union". It shows just the opposite. Each sovereign nation must balance its own books and live within its means. No collective of nations will be willing to tax its own citizens to support the lifestyle of the citizens of other nations for long, which is what the "ever closer union" implies.

Pat Barron

Greece should repeal legal tender laws and not print drachma

From today's Open Europe news summary:
Ruparel: Greece is going to have to start printing its own money
Open Europe’s experts have been widely cited in the UK and international media discussing the latest developments in the Greek crisis. Writing for The Daily Telegraph, Open Europe Co-Director Raoul Ruparel argues that “The negotiations may rumble on for a bit but the gaps between Greece and creditors as well as within the creditors look too large to bridge. Ultimately, if Greece ever wants to reopen its banks it will have to start printing its own currency, marking an important step towards full Grexit.” Raoul also appeared on BBC Radio Four’s Today programme and on BBC Radio Two’s Jeremy Vine Show arguing that it will be very hard for Greece to avoid leaving the Euro now, since its demands remain incompatible with the political situation and democratic mandates of most other Eurozone governments. Raoul is also quoted by the International New York Times and El PaĆ­s. Open Europe’s Co-Director Stephen Booth is quoted by Die Welt arguing that Grexit would reinforce David Cameron’s argument in favour of a more flexible EU.


With all due respect I most vigorously challenge Mr. Ruparel that the Greeks should start printing their own money. Greece should repeal legal tender laws, as a starter, and allow the people to use whatever money they deem most useful. There is little doubt that the world, including the Greeks themselves, will have no confidence in a new drachma; it will be worthless upon arrival.

Pat Barron