The article describes what is happening in terms of sovereigns trying to find a solution to their predicament. However, much more interesting are the themes the author touches upon but does not explore further. To wit:
“Greece’s labour federation immediately called a general strike for February 24, dashing hopes that Europe’s provisional backing for Greek crisis policies would restore investor confidence.”
Unions, students and all unemployed will fight tooth and nail any austerity measure needed to put things right. As I remarked in many previous posts, over past decades society has developed an acute sense of entitlement vis a vis the state and rightly so. In a fiat monetary system, the authorities will always and everywhere confront a political or economic crisis with increased spending. Since 1913, subsequent administrations in the USA and then gradually in Europe and then the rest of the world, have always and still are resorting to inflation in order to solve any problem real or perceived as it may be. Inflation has thus come to be viewed as the natural state of the world and the state as the natural provider and the problem solver of last resort.
Of course, if you read this blog you will know that government spending can and does palliate the tragedy that is the political process in a society based on democratic principles. But that’s all it can do. Excess spending can only postpone the problem for as long as inflation can be expanded into a monetary system. When inflation hits the inevitable brick wall, then drastic measures are needed to re-create the conditions to allow the inflationary cycle to start again. In the meantime, deliberate inflationary policies pander to interest groups including unions and sundry political interest groups thus fostering an acute sense of entitlement. Thus, when the cows come home and spending must be curtailed, society will resist.
“Mr Almunia said concerns have spread beyond Greece to other eurozone countries where public finances are spinning out of control, chiefly Spain and Portugal. “In these countries we have seen a constant loss of competitiveness ever since they joined the eurozone. The external financing needs are quite big,” he said.”
Considering that less than a year ago Almunia was boasting about the presumed commercial and financial advantages of EU membership, this is quite a change of heart. But then again. Almunia contradicts himself week in week out because, once again, political pandering is more important than effective action.
“Brussels invoked new EU powers under Article 121 of the Lisbon Treaty, allowing it to reshape the structure of pensions, healthcare, labour markets and private commerce – a step-change in the level of EU intrusion.”
Right there is the more interesting tid bit of info that gets no attention whatever. Remember the Lisbon Treaty? Do you remember that it gave us a whole new layer of politicians that despite not being elected by the people have nonetheless serious executive power? Well there you go. But wait! This is not what is important. If you understand what is going on here, then you surely can understand the degree of political sovereignty we have surrendered to what is for all intents and purposes an entity that is very Fascist in inspiration… and now in deed. The more long range ramification of the Lisbon Treaty (and this so far is only speculation on my part) is the ability for the EU to declare war bypassing all traditional political mechanisms that would necessarily require various levels of approvals from civic and political entities alike.
“The EU told Greece to “spell out the implementation calendar of (budget) measures within one month”. Athens must be ready to “adopt additional measures if needed” and to submit quarterly updates.”
So that’s what it comes to; threats. Which begs the question: what if Greece doesn’t play ball? Then what could the EU do? What; we are going to send the army to straighten the country out? What does this threat imply?
“The gap between what EU demands and what ordinary Greeks seem willing to accept is so wide that it may prove extremely hard for Mr Papandreou carry the country. The top union bloc said the government had “succumbed to the will of the markets” but would now have to face the stronger will of the people.”
The top union bloc, like all unions around the world and particularly in the West (with the exception of Germany) fails to grasp the situation. When the monetary authorities can no longer push inflation any farther, there is no money left for political pandering. Certainly there is no money left for political pandering at the level of the great unwashed. And this is what is going to light the tinderbox. The unemployed, the homeless, students, the elderly, the retired and, at some point, even the employed will notice that although we are contributing billions to save the banks, we have no money left for society… that is the point at which the masses begin to get twitchy… that is the point at which, Western governments are going to need a drastic solution…. which speaks to the whole point of this entire blog…
Our options are few and well defined. In order to avoid doing what is necessary, our leaders will plunge us in a world war. I stand by my prediction. War by 2013/2015.
Tags: almunia, bankruptcy, boondollge, crisis, deflation, fascism, fiduciary duty, greece, inflation, insolvency, lisbon treaty, sovereign default, unions, war, white collar crime
Guido's temple of the absurd 
February 5, 2010 at 4:05 am |
Guido, try the following on for size. It’s from David Frum, and it appeared in the March 17, 1998 edition of the Financial Post:
Ideas matter. At the centre of the standoff between Indonesia and the International Monetary Fund – a standoff on which depends the economic future of East Asia – are the ideas of a thoughtful, ascot- wearing professor of economics from Johns Hopkins University named Steve Hanke.
Hanke is an expert on the once-obscure subject of currency boards. Currency boards flourished in the 1920s as an advantageous method of regulating the money of poor countries. They passed out of favor after the Second World War, but have made something of a comeback in recent years. Argentina’s President Carlos Menem snuffed out that country’s chronic inflation with a currency board and Estonia has also prospered thanks to its board. Hanke proposed to Indonesian President Suharto that he stabilize his country’s collapsing currency the same way. Suharto took up the idea, but the IMF is furiously opposed, and has made it clear no aid will be forthcoming unless Suharto forgets it.
Who’s right? What’s at stake?
A currency board is a substitute for a central bank. A central bank, like our Bank of Canada, issues local money more or less at will. It watches local inflation rates, interest rates, unemployment rates, keeps an eye on the value of the currency relative to gold and other countries’ currencies, and guesses as best it can how much or how little money to emit. When conditions are favorable and the central bankers are skillful, this method works pretty well: look at Alan Greenspan’s US$. When conditions are not so favorable and the bankers not so skillful, it can fail miserably.
The particular danger of central banking for a country like Indonesia is this. When times are good, lax bankers make a lot of flimsy loans. You operate a successful running shoe business in Jakarta and your bankers let you borrow, borrow, borrow. Every time a new loan is booked for you, new money is created. Where you used to have a million rupiahs in your bank account, you now have three million. Theoretically, the bank is supposed to issue only so many loans for every rupiah it has in reserve, but hey, who wants to ruin the party? Soon rupiahs are floating around everywhere and, for a while, people accept them more or less at face value.
Then comes a crisis. Rupiah holders start trading their wobbly local currency for US$s. The selling turns into a stampede, then a panic. The value of the rupiah plunges: from 2,600 to the US$, to 5,000, to more than 10,000. In a few days, 75% of the wealth in the country has been wiped out.
A currency board is a way to prevent this sort of panic. Instead of a central bank issuing rupiahs at whim, to suit the owners of the lending banks (who have a funny way of being friends and relatives of the president), the currency board takes over the job. It holds on to the government’s dollar holdings, and then issues local currency in strict proportion to the amount of dollars it has on hand. If the board sets the value of the rupiah at 5,500 to the US$, and it holds $10 billion, then it may issue 5.5 trillion rupiahs: no more, no less. Anyone who has 5,500 rupiahs has an ironclad guarantee they may trade it for US$1, no questions asked. If Indonesia prospers, if it earns dollars from its exports, then the currency board will issue new local currency up to the extent of the additional dollars; again no more, no less. A currency board works more or less the way the gold standard works, only with a foreign currency in place of gold.
So why is the IMF opposed to a currency board for Indonesia? Partly because the IMF, which is itself a club of central bankers, likes central bankers to have discretion. It believes in powers for bureaucrats, not in hard and fast rules.
But the IMF also has a valid concern: the Indonesian government is so corrupt – President Suharto was “elected” unopposed to his seventh five-year term on Wednesday; a relatively poor man when he took power, he is now a multibillionaire – the currency board will be used by the president’s family and friends to cash out their rupiahs for dollars, exhausting the country’s dollar reserves, and will then be abandoned without a thought for the welfare of everyone else.
When currency boards work, they work because they operate entirely beyond the control of the local government. That’s why they served the former European colonies so splendidly; and that’s why they are unlikely to work in an authoritarian regime like Indonesia’s. Which is maybe just a fancy way of saying the East Asian financial crisis is at bottom a political crisis: what has failed is not just the rupiah, but Indonesian authoritarianism and nepotism.
February 5, 2010 at 6:29 am |
Hi David,
I am not at all opposed to a currency board. If you notice Frum’s closing paragraph, he too realizes that: “Which is maybe just a fancy way of saying the East Asian financial crisis is at bottom a political crisis: what has failed is not just the rupiah, but Indonesian authoritarianism and nepotism.” Failures in monetary systems, come about because of political failures. It matters not what system you are running for as long as the guardians of the system abide by the they have set out.
I suppose it is telling that at the time of this article, Frum thought Greenspan was doing a sterling job. If you look at chart 110 on page 1, you will notice the article was written during the only period of time when it was profitable to be invested in the US stock market. But beyond any other consideration, yet again, Frum lays the problem with our monetary system at the feet of the banks. Of course, you know that I contend that the failure of our system is due not only to politics but to the inevitability that comes enshrined in the logic brought about by an environment of competing nation states.
In the West we have gradually made our central banks independent purely as a means to put-on a dog and pony show aimed at giving the impression of separation of power. We could have just as well established currency boards. It would have made very little difference. Who would have been put in charge of the board? An elected official? An appointed official? If elected, elected by whom? If appointed, appointed by whom? And once the board is set up, who would have oversight?
More importantly, who would have executive power to decide when to increase or decrease the money supply? Who decides what parameters to take into account in the decision to increase or decrease the money supply? Think about this. Let us assume a currency board were truly independent. Great. Where would this board get the economic data needed to make its decisions? I mean, unless the board were charged with the task to collect and collate economic data, then government might still retain overall control by manipulating this information.
What matters is not what monetary system is used. What matters is the degree of fiduciary duty that government is willing to extend to society. But in en environment of competing nation states, it is inevitable that eventually the survival of the state becomes predicated upon inflation.
And this is where my other contention comes into play. There is no way on God’s green earth that inflation can be avoided in a country operating on personal freedoms and democratic principles. No way. Technically, the logical evolution of inflation could be contrasted an modulated only in an autocratic political environment. But the historical record shows that rarely have there been enlightened autocracies and of the few that have existed their life span was relatively short.
I suppose our role is only to understand what is happening and why and position ourselves accordingly in order to protect our families and our societies as best we can. Change can be brought about of course but in order to do so you need critical mass. Critical mass can be achieved in numbers of people or in quantity of resources you can accumulate legally.
What matters is the logic of the evolution of an economy and a society and the logic is that inflation is inevitable.
February 7, 2010 at 3:41 am |
One way to get government’s attention is to attack its pocket book. My priest, before Vespers, this evening, was talking about a case where Revenue Canada was running rough shod over the Charter of Rights and Freedoms of a person.
The case can be made that governments have mismanaged money to such an extent that it is dangerous to have it have the only say in how tax revenue is distributed.
A new paradigm is needed, Guido, and frankly it gives us something to aim for. Money for the training and equipping of the military, but not for hyper subsidizing the agriculture market, thereby running competitors with smaller pocket books
out of business.
Along those lines.
February 8, 2010 at 2:52 pm |
Far from me to agree with what priests say usually but your priest is right.
Accumulating gold and silver bullion does directly affect the government’s ability to run roughshod over the people AND it is a perfectly legal and bloodless pursuit. When sufficient gold and silver stocks will be depleted in the money centers warehouses and when governments will have lost what little intrinsic backing the currencies might have had and when the implosion of credit markets will have reached levels critical enough whereby nominal asset values will be taken down in unison… government will be helpless…
Hence a world war I am afraid.
February 4, 2010 at 9:46 pm |
Guido, we have had this to and fro before. I am confident that the EU and its diktats will be distanced by the ordinary person, and those who govern them, who are in countries that frankly are in EU-imposed straitjackets in dealing with the country’s balance sheets being in such disarray.
The acronym PIIGS has been used. Well, I see Portugal, Spain, Iceland, Ireland, Italy, Greece and Spain joining with the Baltic countries, the Balkans, and the other countries which were behind the iron curtain – they would have the freedom to deal with the balance sheets in such disarray, plus a unifying foreign policy and defense policy. Probably even their own currency. This would be one of three groups that would be regarded as the Alliance of Democracies. The other two would be the successful parts of the British Commonwealth (India would be included), and the Asian Tigers.
When the inventory is taken of natural resources, and then finishing them, we are dealing with a lot.