Deficit Terrorism Could Kill the Euro
Thursday, 01/21/2010 - 1:43 pm by Marshall Auerback | 8 Comments
Marshall Auerback has a proposal for how to save the euro - before it’s too late.
On more than a few occasions, we have discussed the insanity of self-imposed political constraints which limit the range of fiscal policy. As well as imparting a deflationary bias to an economy (and thereby preventing full employment), these kinds of constraints preclude the adoption of prompt counter-cyclical policy, which would otherwise cushion an economy when confronted with a genuine financial crisis, as we are experiencing today.
The constraints under which the US operates are more apparent than real. As we have discussed before, these constraints are largely based on 19th century gold standard concepts, which have no applicability in a fiat currency world. Tomorrow, if the US wanted to run a budget deficit equivalent to 20 per cent of GDP, it could do so, politics and demagoguery aside.
Such is clearly not the case in the euro zone.
There, countries like Spain, that have 20 per cent unemployment are being forced into further belt tightening. And the news just keeps getting worse: Expansion in Europe’s service and manufacturing industries unexpectedly slowed in January, adding to signs the pace of the economy’s recovery may weaken.
A composite index based on a survey of purchasing managers in both industries in the 16-nation euro region fell to 53.6 from 54.2 in December, London-based Markit Economics said today in an initial estimate. Economists expected an increase to 54.4, according to the median of 15 estimates in a Bloomberg survey. A reading above 50 indicates expansion.
The euro-region economy may lose momentum as the effect of government stimulus measures tapers off and rising unemployment erodes consumers’ willingness to spend. More significantly, the very viability of the currency is now being called into question even within the councils of the European Monetary Union (EMU), where fears of a euro breakup have reached the point where the European Central Bank (ECB) itself feels compelled to issue a legal analysis of what would happen if a country tried to leave monetary union.
A currency vaporizing before our very eyes! All for what? Some misguided anti-inflation fear? A desire to maintain the euro as a “store of value”? What’s the point of having a “store of value” in your pocket when you don’t have enough of it to buy anything because you’re unemployed?
We have long viewed the principles underlying Europe’s monetary union as profoundly misconceived. In particular, the so-called Stability and Growth Pact is economically flawed and politically illegitimate, given the power of unelected bureaucrats within the euro zone to ride roughshod over the clearly expressed preferences of national electorates. A law that governs economic decisions — yet is economically illiterate — cannot stand for long. It merely invites non-compliance and worse, as we are witnessing today. And the problem is not restricted to the so-called “PIIGS” countries (Portugal, Ireland, Italy, Greece and Spain). The larger — and wealthier — European economies however have never reduced their unemployment rates below 6 per cent and the average for the EMU since inception is 8.5 per cent (as at July 2009) and rising since. The average for the EMU nations from July 1990 to December 1998 (earliest MEI data for the EMU block available) was 9.7 per cent but that included the very drawn out 1991 recession. Underemployment throughout the EMU area is also rising , reaching 20% in Spain and double digits in Portugal, Italy, Ireland, and Greece.
Until now, the Eurocrats have either remained in denial about the mounting stress fractures within the system, or forced weaker countries to impose even greater fiscal austerity on their suffering populations, which has exacerbated the problems further. And there has been a complete lack of consistency of principle. When larger countries such as Germany and France routinely violated spending limits a few years ago, this was conveniently ignored (or papered over), in contrast to the vituperative criticism now being hurled at Greece. The EU’s repeated tendency to make ad hoc improvisations of EMU’s treaty provisions, rather than engaging in the hard job of reforming its flawed arrangements, are a function of a silly ideology which is neither grounded in political reality, nor economic logic. As a result, a political firestorm, which completely undermines the euro’s credibility, is potentially in the offing.
So what are the alternatives? Exit from the currency union would be the most logical, but also potentially the most economically and politically disruptive. As Professor Bill Mitchell notes, to exit the EMU a nation and regain currency sovereignty, the following changes would occur:
• The nation would have to introduce a new/old currency unit under monopoly issue. Within this currency the national government could purchase anything that was for sale in that currency including domestic unemployed labour.
• The central bank of the nation would receive a refund of the capital it contributed to the ECB.
• The central bank would also get all the foreign currency reserves that it moved over into the EMU system.
• The nation’s central bank would then regain control of monetary policy, which means it could set the interest rates along the yield curve and also add to bank reserves if needed.
There is clearly the additional problem of debt which is now denominated in euros, because, as Mitchell notes, the problem exists because the nation that wanted to exit would have to deal with a foreign currency debt burden, and might find itself involved in a painful adjustment process in which the departing nation is forced to experience a punitive negotiated settlement (unless of course it was able to engineer payment in the new local currency).
Personally, we think the whole euro zone system is an abomination and would prefer to see all euro zone states go back to national currencies and thereby get their respective economies back on track with renewed fiscal capacity. But there is also a short term expedient which might prove minimally disruptive to the European Monetary Union’s current political and institutional arrangements, but could well succeed in restoring growth and employment in the euro zone.
Within the euro zone, short of leaving, the most elegant adjustment mechanism is for the ECB to distribute 1 trillion euro to the national governments on a per capita basis, as our friend, Warren Mosler , has suggested. This proposal would operate along the lines of the revenue sharing proposals we recently advocated for the American states. The nation states of the euro zone would the instructions from European Council of Finance Minister (ECOFIN) and the ECB would then change the balances in all of the national member bank accounts, in effect increasing their assets, and thereby reducing debt as a percentage of GDP.
Within the euro zone, this sort of a proposal would likely give the respective EMU nations more bang for their respective euros, given the more elaborate social welfare programs in the EU. There would be less pressure to “reform” them (i.e., cut them back) if the EU nation states debt ratios are correspondingly lower and “compliant” within the bounds of the SGP.
The per capita criteria deployed here means that we are neither discussing a bailout per se of one individual country, and nor a ‘reward for bad behavior.’ All countries would receive funds from the ECB on a per capita basis, which means that Germany would, in fact, become the biggest beneficiary. The fact that all countries are in the euro zone means there’s no possibility of Germany losing competitive ground to Spain or other low wage countries. It would immediately adjust national govt. debt ratios substantially downward and ease credit fears.
If there is no undesired effect on aggregate demand/inflation/etc., which there should not be, given the prevailing high levels of unemployment in the euro zone, it can be repeated as desired until national government finances are enhanced to the point where they can all take local action to support aggregate demand as desired.
The proposal advanced is the most institutionally elegant solution because it maintains the current arrangements, as flawed as they are, and preserves the euro. Yes, a weaker euro would almost certainly result from this action. However, as “national solvency” is an issue for the euro countries (in a way that it is not for the US or Japan or the UK, given that the euro zone nation states are functionally more like American states than independent countries with their own freely floating non-convertible currencies), the resultant higher export growth that comes from a weaker euro is actually benign for everybody, as it minimizes the markets’ solvency concerns.
The formation of the European Union has been largely driven by the extremism of inter-European conflicts that caused millions of people to be slaughtered during two disastrous world wars. Ironically, the political and economic arrangements that have arisen in response to these horrors are creating a different kind of social devastation which is both wholly self-inflicted and profoundly misconceived. Europe’s very currency could well blow up. The US might well preserve its currency, but the EU’s current situation provides a salutary warning of what can happen in a system that prevents individual member’s from using fiscal policy to improve the circumstances of their citizens.
Roosevelt Institute Braintruster Marshall Auerback is a market analyst and commentator.
Dear Marshall,
RE: “Deficit Terrorists”
Many thoughtful commenters and bloggers have voiced concern during the past 12 months that economic and political strain may lead to ideological reaction and political populism with more regressive Governments and Laws.
The economic arguments of Marx were recognised to be too complex for peasants to understand. They couldn’t grasp the logic, significance and importance of Marxism or Communist ideology and global revolution to serve higher “public purpose”. So Communist leaders decided their self-evident higher purpose excused hardline rhetoric and imperious violence needed to achieve a fairer economic world-order. It had to be imposed whether people wanted it or not in order to improve the conditions of everyone, rather than just for a few. For the betterment of the collective we must ruthlessly crush any ‘counter-revolutionary’ terrorists, and subordinate all individual will to our glorious goal, etc. Their idealism was well intentioned, and it all seemed clever, logical and well thought out - in theory. But ‘the system’ that became established was not quite the predicted worker’s utopia-it morphed immediately into an inhumane and vicious caricature of one.
Ardent revolutionaries quickly found to their great disappointment that the political leader clique don’t give a toss about highbrow ideology or cute econo-social theories, except as populist rhetorical window-dressing. Stalin was instead obsessed with identifying, locating and wiping-out hiding intellectuals, and totally expunging their obnoxious economic social and political writings, which enjoin counterpoints which incite irritating and unnecessary protest or resistance. So he either slaughtered them or turned them into hard-labour slaves to ‘re-educate’ them. This for Stalin was the perfect power-sport, and made him and the system even stronger (for a generation anyway).
Which brings me to the use of the very term, “Deficit Terrorist” to support econo-social theory, which aims to change the way things are done. I find that term shallow, intellectually dishonest and thoroughly inappropriate for intelligent discussion regarding “public purpose” of economic systems.
I realise you’re not the only person who’s started to habitually use such crude language in economics blogs. The MMT site ‘billyblog’ is also doing it, and CW and NC have also repeated that term, usually with regard to re-posts or quotes of your writing Marshall. I don’t know who originally coined this term, though I suspect it was you, but you need to think and not just replenish economic debate with vehement ideological tirades and absurd labels.
I understand it’s easy to fall into bad habits, when wrapped-up in protracted intense debate, but this term is the equivalent of offensive obscene-language. You are promoting this here and elsewhere. There’s been a noticeable change in tone within US debate since Sept 2008, and polarised labelling has become the norm, to the extent that it’s not even uncommon anymore-and those who should know much better are indulging in it as well.
I won’t ask you to Google as I’m sure you understand precisely what a terrorist really is, and what they actually do. So are freely painting those who do not share your adamant ideological and economic ideal to be violent inconsolable murderous scum who should be exterminated if they can’t be made to lament their heresy and transform.
Calling ordinary people “terrorists” like this is a convenient device for you to make ultra-distorted theoretical points. By this you are attempting to enforce conformity, and stymie wider discussion, via ridicule of any other viewpoints, for you presume you know ‘the truth’ in all relevant respects with regard to deficit spending.
READ: “Behind The curtain: The Full Monty”, by Martin A. Armstrong, Jan 1st 2010. He presents a horrific insight into how US economic and political sausage is really made, and what a vile and utterly corrupted process it is, and what the ordinary citizen taxpayer and voter is up against. (Google-up links to Part 1, 2 and 3 in PDF).
The deficits are not going towards “public purpose”, sorry, $3 trillion went to banks and serial failed and serial defaulted car companies, while $50 billion only went to foreclosure mitigation that actually served public purpose. And still US commenters overflow with venom that suckered ‘home-owners’ are getting ANY help. Such is the neurotic state of US debate regarding actual public-purpose oriented deficit spending.
In a US MMT economy, it would be no different, the deficits would be 95% wasted on the super-rich and legally unaccountable, while the evil ’socialism’ and labour rights would be condemned, and taxes would rise continually to pay for the ever-increasing debt servicing.
I have already pointed out to you in an earlier comment (see: Spain and the EU: Defict Terrorism in Action) that in 2019 this amounts to about $4,400 per year per head, but that’s just the bland average. If you have a 2-year-old they will not be paying their share, the family ‘bread-winner’ will be. That’s $84.70 USD per week, or $338 per month, per family member, on average. What average wage/salary earner, with average debt levels can afford that, or for it to rise substantially every year, yet the problems causing it are not fixed?
If you think that’s a real-world solution to a fall in aggregate demand today, or in the near future, then you are misguided, and misguiding others. This debt servicing scenario is what Obama is already doing, whilst your solution Marshall, of even larger deficits, would strangle the US economy even more thoroughly in the 2020s. It’s what the Japanese Govt is doing to its people, in the name of relieving their disadvantage, but it will just make it worse and lead to acceleration of deflation (as it is) as secular aggregate demand falls further and spending fails to make up the difference of empty private pockets.
Am I also a “terrorist” for pointing out that flaw in the high deficit spending theory?
If yes, then you must be dismissed, and your theoretical vagary forsaken.
If no, then you’re admitting that maybe other views of deficit spending may also contain relevance, and just perhaps other thinkers have considered points, facts and implications that you have overlooked or not explicitly grasped. It’s very easy, and rather convenient to portray your views as the best possible ‘public-purpose’ option-too convenient, as you’re just excusing yourself from discussion, and using ideological ridicule as ‘reason’ to reject further discussion, and to try and consolidate theory subculture and pet policy agenda.
Sorry, I understand your desire to do that, I wish it was as simple as spending more via QE but it’s not, the notion is not sturdy enough to pass reality-checks. But it may have worked if the high public debt and high deficits were not already pronounced features pre-2008 in the US and Japan (and high foreign denominated debt in the US case).
The situation the US and the wider developed world faces is not going to be helped much by more and even larger misallocated deficit spend-ups. I have no dislike for big-deficits per-se, if they are effective. I just don’t buy the idea that they can be, at this point. They will be a genuine waste that will actually harm those least prepared for economic chaos. Resulting taxes will instead severely hurt these people, right at the point they can least afford it.
So unless and until you can convince everyone why the next $3 trillion USD won’t also just go specifically towards propping-up and favouring the super-rich and unaccountable, then deficit spending is not a solution that serves “public purpose”-at all.
High deficit spending should not occur until that disgusting situation has drastically changed, and when it has, then high deficit spending should occur, because then there’s a realistic possibility of it doing some good, rather than just causing far more economic and social harm than good.
Perhaps that’s why Ed Harrison at Credit writedowns is “leaving behind deficit spending happy-talk”, to focus on funds misallocation and Kleptocracy? The US’s problem is not economics at this point, it’s white-collar-crime non-punishment, plus the desperate need for a complete political ‘new-normal’ in every US Capital.
Until that occurs, any talk of the US deficit-spending its way onto a sustainable recovery path is quite impossible to take seriously as a viable real-world solution of any merit. The super-rich and unaccountable would absolutely love more deficit spending, especially crisis deficit spending. And they’d get it to-if you were to get your way Marshall.
If you’re as interested in ‘progressive’-ness, and serving ‘public-purpose’ in the most efficient and constructive manner, then jailing the super-rich and unaccountables, and their politician lawyers is the very first step to US recovery. That prerequisite alone is going to take years.
Or the people can take direct democratic action and ‘elect’ to greatly speed that process themselves, hence the authoritarian anti-terror laws passed in recent years to suppress, avert or else brutally crush and dissipate mass public action or popular civil resistance.
continued…–>
Posted by Element | January 21st, 2010 at 10:39 pm
…continues –>
Some excerpts from the paper: “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises”. (Google the PDF)
“Major default episodes are typically spaced some years (or decades) apart, creating an illusion that “this time is different” among policymakers and investors. We also confirm that crises frequently emanate from the financial centers with transmission through interest rate shocks and commodity price collapses. Thus, the recent US sub-prime financial crisis is hardly unique. Our data also documents other crises that often accompany default: inflation, exchange rate crashes, banking crises, and currency debasements.”
“This paper introduces a comprehensive new historical database for studying debt and banking crises, inflation, currency crashes and debasements. The data covers sixty-six countries in Africa, Asia, Europe, Latin America, North America, and Oceania. The range of variables encompasses external and domestic debt, trade, GNP, inflation, exchange rates, interest rates, and commodity prices. The coverage spans eight centuries, going back to the date of independence or well into the colonial period for some countries.”
“As Section IV details, [BOLD] serial default on external debt-that is, repeated sovereign default-is the norm throughout every region in the world, including Asia and Europe. [/BOLD] Our extensive new dataset also confirms the prevailing view among economists that [BOLD] global economic factors, including commodity prices and center country interest rates, play a major role in precipitating sovereign debt crises. [/BOLD] … ” (bold emphasis in the original paper)
“Commodity prices have long been thought to be another important global driver of the depression-prosperity cycles in modern times. Our historical dataset combines several different indices of commodity prices, with the oldest dating back to 1790 (see working paper for details).”
“As Kaminsky, Reinhart and Vegh (2004) have demonstrated for the post-war period, and Aguirre and Gopinath (2007) have recently modeled, emerging market borrowing tends to be extremely pro-cyclical. Favorable trends in countries’ terms of trade (meaning typically, high prices for primary commodities) typically lead to a ramp-up of borrowing that collapses into defaults when prices drop. As observed earlier, external defaults are also quite sensitive to the global capital flow cycle. When flows drop precipitously, more countries slip into default.”
“In the working paper version we illustrate the commodity price cycle, which we split into two periods, the pre- and post-World War II periods. Our results suggests for the period 1800 through 1940, (and as econometric testing corroborates), spikes in commodity prices are almost invariably followed by waves of new sovereign defaults. However, we note that while the association does show through in the pre-World War II period, it is less compelling subsequently.”
[NOTE: Element here; that somewhat weaker historical association, since 1940, is again being reinforced post the 2005 to 2008 commodity price spike-crash cycle; Iceland, Dubai, Spain, Ireland, Baltics, US states, UK, Japan, to name a few. We are at the very beginning of the default crisis with many years to run, and as usual, interest rates, leverage and commodity price spike and crash cycles are deeply implicated. In Jan 2010, mineral commodities are again rising strongly towards a new peak, because demand growth is being fanned by giant fast-developing populations, driving up supply stresses and prices, which will eventually shock manufacturing sectors in the massively over-indebted (debt-stressed) developed countries. They can't afford a spike. And don't imagine I'm saying there will be serious inflation, I'm not, as we will barely cope with single digit inflation and tax rises, before a bust and severe price deflation re-occurs.
In Australia, in Jan 2010, iron ore and coal production supply volumes and prices are already breaking the records set during the pre-crisis boom. Australian export trade earnings for 2009 were up 22% above the previous record! There were $283.8 billion AUD in exports from a $1.26 trillion AUD economy (equal to 22.4% of GDP). Queensland alone increased mineral and energy earnings by a staggering 48%, while Western Australia by 24%. i.e. the recent massive investments (debt growth) in new extraction and supply capacity has ALREADY been blown-through. Prices can only rise now, as demand strengthens with general rise in GDP. Yes, some of it is just a credit-bubble, but much of it is genuine broad-based secular demand growth (as Jim Rogers insists-and he could be mostly right). But either way, or both ways, it still has disastrous implications.
We are now amid a rapid-fire commodity price-spike-crash cycle. This is the precursor of the third Asian financial crisis, within fifteen years, only this third crisis will build much faster than the ten-year period between the first two (1998 to 2008). That cycle is going to continue for as long as strong non-linear secular-demand growth for >3 billion people in Asia continues (irrespective of credit bubbles). i.e. the same rapid-fire saw-tooth stagnation/deflation pattern that some US economists have said they foresee for North America.
The problem is this;
We have staggeringly abundant mineral and energy reserves (no problem there), but we have no hope of expanding extraction and supply capacity fast enough to match buyer-country GDP growth and demand growth. i.e. we can not stabilise prices, via sufficiently increasing supply to keep pace with growth forces. Prices WILL spike to a new record, it's just a matter of when, not if. Yes, we will discover how to do more with less etc., but that will only happen AFTER the spike-shock-crash process has run its course, not before. So that semi-denial of the problem doesn't offer much comfort or negate the harsh econo-social impacts to follow.
I'm satisfied nothing practical can physically be done to prevent this at this point-this is in fact the economic 'new-normal', for now.
Not only can we not stabilise commodity prices, the big miners, loaded with new debts from recent massive investments in higher supply capacity won't want to lower prices, they need to make a lot of money fast to make sure they do not go broke in coming cycles. Unless Asia, and in particular China, voluntarily slows GDP growth, and thus resource demand, commodity price records will be continually broken, because 2008 production records have already been broken and prices are next. Supply and demand WILL force China to abandon its unrealistic 10% GDP growth rate goal per annum.
No other country than Australia can supply bulk commodities to the region as cheaply (not even Russia), in very high-grades, or as reliably as necessary, so prices will rise very quickly, if countries in Asia have to try and source commodities from outside the Austral-Asian region. At that point the underlaying debt stress in Asia will surface, especially if there's concurrent currency-volatility as in 1997-98, in which case, global trade and equities will slump then crash, as debt-stress transforms into economy-wide shocks, with another sudden loss of confidence and credit freeze.
Same old super-cycle patterns of earlier centuries.
It's not just a Chinese problem, demand for minerals and energy is inflating all over east-Asia and south-Asia (India for instance just reduced its iron ore export volumes because it needs more for its own development, which reduced supply and raised prices again). And as western countries struggle to grow this will induce enhanced commodity price shocks in developed-country manufacturing-bases (Japan, Europe and US). It's foreseeable that Japan in particular is going to be very vulnerable to all three; debt stress, commodity price-spikes, and currency fluctuation (and not just of the yen). And wilful gross manipulation of currencies WILL occur.
This time is not different it's just much larger in scale, but the same processes are operating, and whether you use gold coins, or fiat dollars, it can make no significant difference to national outcomes. - NOTE ENDS - ]
“Table 5 give a thumbnail summary of events, showing how the 1825 crisis began with a financial crisis in London that spread to Europe, causing global trade and capital flows to plummet. This summary of events, of course, is silent as to the magnitude of the international transmission channel, but the tables are nevertheless illustrative of some of the common shocks that might have sparked the commodity and capital flow cycles seen in the figures in the preceding sections.”
“With these caveats in mind, this “panoramic” quantitative overview has revealed a number of important facts. First and foremost, we illustrate the near universality of episodes of serial default and high inflation, extending to Asia, Africa, and until not so long ago, Europe. We show that global debt crises have often radiated from the center through commodity prices, capital flows, interest rates, and shocks to investor confidence. We also show that the popular notion that today’s emerging markets are breaking new ground in their extensive reliance on domestic debt markets, is hardly new. This brings us to our central theme-the “this time is different syndrome.”"
“IV. Global variables - Global variables have two components: those indicators that are, indeed, global in scope-namely, world commodity prices, and country-specific key economic and financial indicators for the world’s financial centers during 1800-2007. For commodity prices, we have time series since the late 1700s from four different sources (see Data Appendix I). The key economic indicators include the current account deficit, real and nominal GDP, and short- and long-term interest rates for the relevant financial center of the time (i.e., the U.K. prior to World War I and the U.S., subsequently).
Source - This Time is Different: A Panoramic View of Eight Centuries of Financial Crises - Carmen M. Reinhart and Kenneth S. Rogoff - April, 2008.
continued…–>
Posted by Element | January 21st, 2010 at 10:40 pm
…continues –>
Plenty of reasons to be less adamant about sovereign default there Marshall, unless you insist “This Time is Different”, or that any old country can just create digits to pay for its spending. Physical trade materials, others really need or want must always ‘back’ a currency, especially during a downturn when purchasing priorities all change.
It’s reasonably clear MMT is more-or-less theoretically sound, as a framework, but the problem is our global system does not have a reset button and also not a theory, it’s real. We can’t start anew, we are already committed to reaping the result of past practices. You can rail at neo-liberal economics and ill-advised politicians, and pointlessly blame people who can’t afford tax rises, so don’t want big deficit spending, but it won’t help, because we are still going to reap mass insolvency and national default-we already are. It’s just the style and timing of it that’s still up for grabs, and that window is now closing fast.
It isn’t mere NET indebtedness that suddenly creates instability. That only happens once a shock has occurred during a period of high debt-servicing stress (or high taxation and interest, or low wages). Commodity spikes can trigger a crisis at any time in that precondition, which is now everywhere.
READ: “Another Finger of Instability”, John Mauldin, Oct 2 2009 http://www.frontlinethoughts.com/article.asp?id=mwo100209
Then QE will proliferate as never before (and already has), but that will fail to avert global national default (or help much). This is because in the real world, there actually are real-world sovereign spending constraints-in practice.
When a real recovery does finally commence, in the developed world, the next generation will quickly forget or ignore all these painful lessons, and economics will again be misused in every conceivable way. That’s a given.
Just look at how the steam has ALREADY gone out of US banking reform, and changes in accounting rules avoid reality, and how in the week before Christmas 2009, Obama and Geithner were both loudly encouraging unstable banks to “…take a third and a fourth look at all loan applications”, to make as many private-sector loans as possible. They know this is the only ‘hope’ now-and it’s hopeless nonsense. At the same time Geithner adamantly claimed, “there isn’t going to be a second wave, because we are not going to allow a second wave of the crisis” (paraphrased).
This is extreme extend-and-pretend-much worse even than what occurred in 2004 thru 2008!
This time is no different, and it can be no different, no matter what any fringe economic theory asserts, and no matter how logically valid it may appear. Perhaps a public ‘Job-Guarantee’ will make a real difference to the speed of recovery (I hope), but MMT approaches will have no mitigating impact prior to full-blown development of the pending second crash.
It’s because commodity supply limitations, plus huge foreign denominated currency borrowings and debt are already locked-in to a global network of liabilities. Sovereign default in scores of countries WILL occur this decade-and next.
Thus ordinary people have every right to guard their future state, via lobbying and protesting and voting now, to demand a reduction of deficits, as much as it is possible to do so.
Marshall, you have no right to call anyone a “terrorist” for acting in their longer-term interests, rather than for short-term pain reduction-and especially not to boost the narrow interests of mere theoretical argument.
It’s fine to point out that a reduction in deficits and Govt spending, in the current circumstances, will lead to a reduction in aggregate demand. I entirely agree, that’s what will occur, but there’s no way out now. Only the timing, duration and severity can be altered. It’s the same super-cycles of the past.
As many people have pointed out, the very best the US can hope for is a Japanese stag-deflation scenario, for a few decades, with massive public debt growth, and massive debt-servicing growth, and sliding aggregate demand. The later this loss of aggregate demand and delevering can be delayed, the deeper and longer and more painful it will be.
That’s the point you need to keep in sight-at all times-if you are really worried about ‘public-purpose’, and not just flit to some far less significant theoretical finer-point, about deficit spending’s advantages. It is not wrong for the public to insist on deficit reduction policies that may bring this on sooner, but make it shorter, less severe, and much less damaging for ordinary people in general.
In that case, it’s equally ‘valid’ to assert that “deficit doves” are also “deficit terrorists”, but that would be just as silly, misguided and totally beside the point.
Please resist your tendency to use and abuse such labels or it becomes difficult to take you seriously as a thinker, writer or advocate.
Posted by Element | January 21st, 2010 at 10:40 pm
“Personally, we think the whole euro zone system is an abomination and would prefer to see all euro zone states go back to national currencies and thereby get their respective economies back on track with renewed fiscal capacity.”
In addition to which, the banks could rip us off once again with their sky high currency transfer fees, and currency speculators could make a fortune pushing national currencies this way and that. Well, at least we can all see whose side you’re on.
Posted by GJ | January 22nd, 2010 at 5:03 am
Marshall,
I wonder if Element laughed at the episode of “Seinfeld” that featured the Soup “Nazi”? I guess not.
Europe has never been at peace with itself like the point they have reached today, I hope they can make this work out. I like Warren’s proposal for the per capita distribution if the Monetary Union is to be strengthened (saved?).
Enjoy all of your posts!, Resp,
Posted by Matt Franko | January 22nd, 2010 at 7:02 am
GJ,
Yes, I’m on the side of national sovereignty and freeing up governments to create employment. But if you’re really worried about the resultant forex charges you might pay, we could also devise a supra-national entity (”United States of Europe”) so that fiscal and monetary functions are again properly aligned. But I recognise that this is a political non-starter.
Element, it’s going to take me a LONG time to get through your stuff.
Posted by Marshall Auerback | January 22nd, 2010 at 12:22 pm
The financial crises is complex, perhaps so complex that there is no solution. Its like trying to untangle and repair a spider web without disturbing the spider. You are better off just allowing the spider to rebuild its web on its own and start from zero. Maybe that sounds too simple, but the reality of the crises is that you cant fix anything without disturbing some other kind of economic activity. A gigantic black hole exists that is of the US government. It will not go away unless the hole is filled with air. In other words, stop printing money and the hole will go away.
Posted by Carl Stevens | January 23rd, 2010 at 7:35 am
If a country leave or is or is expelled it include leaving EU, participating in EMU is mandatory for EU members expect Denmark and UK who negotiated an exception. That could probably entail complex problems for persons or companies that operate in EU when suddenly being an alien in EU. Countries like Norway, Switzerland and Iceland have treaties that do integrate with EU they have to implement EU laws and other stuff. There might be a risk that the EUcrats will punish apostates to set an example for any other potential apostate.
The Telegraph article have disappeared from their site here is a copy:
ECB prepares legal ground for euro rupture as Greek crisis escalates
Link to the actual ECB pamphlet menacing bull of excommunication for those who don’t toe the line:
Withdrawal and expulsion from the EU and EMU some reflections
“… If the scope for voluntary secession is worth examining, the same is true of the expulsion of a Member State from the EU or EMU (acknowledging the differences between a forcible expulsion and a voluntary withdrawal, especially where the latter is an agreed one). The spectacular rebuffs, in recent years, of further integration initiatives, the alarming wave of reluctance of the peoples of Europe to the perceived loss of their sovereign rights to an allegedly ‘unaccountable’ and ‘undemocratic’ EU as well as the persistent, ‘principled’ opposition of some Member States to further integration, in conjunction with the difficulties faced by some of them in steering clear of excessive budgetary deficits and in complying with their Stability and Growth Pact obligations at a time of acute financial crisis suggest that, however remote, the risk of a non-compliant Member State being expelled from the EU or EMU is still conceivable.
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The prospect of expulsion came to the fore in June 2008, when Irish voters rejected the Lisbon Treaty, an event that was to trigger one of the most acute crises in the recent history of the EU. “
Posted by /L | March 15th, 2010 at 4:55 am