Too Many Emergency Meetings in Europe
by Gary North: Gold
Standard or Nixon Standard
If the sovereign
government debt situation in Europe is anywhere near a final economic
solution, why do the heads of Germany and France keep meeting? These
meetings are getting more frequent.
all the previous meetings solve the economic problem of PIIGS debt?
relations statement do they expect will bring financial stability
to the PIIGS?
What new program
will they suggest, only to be disavowed as impractical by the European
Central Bank, and then adopted a week or two after the official
will they ever submit to their respective parliaments, to be debated
openly in front of voters? None, you say? I see. Just like before.
will voters in France and especially Germany be given to express
their view of the new program? None, you say? I see. Just like before.
will investors see that there is any new program that is not merely
other than more deficit spending by France and Germany to lend more
money to the PIIGS, will ever come forth from one of these meetings?
other than more purchases of the IOUs of PIIGS bonds by the ECB,
will ever be presented?
they ever suggest, other than more of the same?
will ever be presented that the latest round of more of the same
will not be followed in a few weeks and months and years by even
more of the same?
investors dream of a final economic solution. They keep returning,
like a dog to its vomit, to the capital markets, euros in hand,
to get in on the boom that lies ahead must lie ahead
because of the final infusion of capital, the final expansion of
the monetary base, the final round of more of the same.
BY ANY OTHER NAME
York Times published an article by two European correspondents
Europe is moving into a recession. It is obvious from the official
numbers that it is doing just that, but an open admission of this
in a news report would of course be unprofessional.
began with a human interest story of some hard-pressed Englishman
whose small company has laid off workers. The company installs home
heating systems. These days, there is not much construction going
on. The owner says it is the toughest market he has ever seen.
to me that heating systems break down. They must be replaced. People
still need to keep warm in the winter. But selling heating systems
in summer is tough. The firm should be promoting discounts for installing
heating systems. This is a hard sell. Most people do not turn on
their heaters in summer. They do when it gets cool, and some find
that the system does not work. They call the repairman. He may try
to sell them a new system.
I get their
main point. The new housing construction industry is comatose. It's
comatose in the USA, too. The bubble has popped, and it will not
fly again prior to mass inflation.
economies are service economies to an extent that we do not perceive.
This sector is also slowing. The official numbers for the overall
economy are bad.
the second-largest economy in the European Union after Germany,
growth came to a standstill in the three months through June,
according to official figures. Meanwhile, industrial production
in the 17-nation euro area fell 0.7 percent in June compared with
May, more than analysts had forecast.
economists expect a report on euro area economic activity to show
that gross domestic product slowed to 0.3 percent in the second
quarter, from 0.8 percent in the first three months of the year.
When GDP is
at 0.3%, the economy is as good as in a recession. Statistical errors
in sampling are in that range. An economy that is slowing, but which
is already at 0.3%, is heading into a recession.
admitted that there are recessions in Greece and Portugal. It follows
the Keynesian party line. It blames austerity measures. Even if
this assumption is true, these are not true austerity measures.
Nobody in power in Europe suggests that these governments can or
should balance their budgets this year, let alone run fiscal surpluses
in order to pay off their debts slowly over time. Oh, no. Nothing
that radical. But still there is austerity compared with a year
AND OTHER MYTHS
pushed the thesis that the recession is due to austerity measures
imposed on PIIGS by the north.
austerity measures have cut into consumption in countries like Ireland
and Italy, and the belt-tightening is spreading. President Nicolas
Sarkozy of France, in an attempt to reassure bond investors that
the country can service its debt, last week told his budget and
finance ministers to come up with new measures to cut the budget
deficit to 3 percent of gross domestic product by 2013, from a projected
5.7 percent this year.
is not the preposterously named austerity measures, contrary to
the financial press, which is Keynesian to the core. The problem
is far more fundamental: the end game for Keynesianism.
game has been to spend, spend, spend: tax, borrow, and print. This
is not working any more. It is in fact visibly failing.
Now the gray
sky Keynesian politicians in northern Europe are demanding that
the sunshine Keynesian politicians of southern Europe (and Ireland)
cut back on government spending, meaning slow the rate of growth
in government spending. Why? So that the happy-go-lucky PIIGS can
make interest payments on their debts to northern European banks.
Then what is the reward offered by the north to get the south to
change? Cheap loans from northern European governments, the ECB,
and the IMF. To be used for what? To make interest payments to the
banks. And what is the result? Greater debt. With what result? Even
larger interest payments to northern banks.
Get the picture?
The key phrase is "interest payments to northern European banks."
This is the
meaning of the so-called austerity: an austerity for governments
and therefore also for those citizens who are dependent on government
funding. That is a lot of people. They resist this austerity. They
vote in blocs. The politicians are afraid of them. So, there is
no real austerity. There are no government surpluses to pay off
existing debts. The opposite is taking place in the PIIGS. The northern
governments, the IMF, and the ECB are lending money to them, so
that they can sell additional IOUs.
There is a
hue and cry by Keynesian economists against any austerity measures.
economists warn that the austerity measures could be counterproductive
by making people fearful of unemployment and afraid to spend. "Austerity
has become the problem, not the solution," said Ian Harnett, a managing
director at Absolute Strategy Research. "Me saving is great. You
saving is great too. But if we all save it's not good."
are contemptuous of saving, by which they mean investing in the
private sector. They love saving when it means purchasing government
bonds. This, they call investing. They think of private saving as
crowding out true investment, which is government spending. They
resist private saving, for it reduces consumption and the sale of
But does government
austerity reduce consumption? No. The money that would have been
loaned to the government is now either loaned to the private sector
or else spent on consumer goods. It has to go somewhere, after all.
If it goes to investments in the private sector, the money will
be spent on producer goods.
in capital allocation from the purchase of government bonds into
the private sector changes the structure of production: the array
of capital prices. It makes old investments look foolish
rather like the popped real estate bubbles. But it does not reduce
overall consumption. It merely changes the income streams of the
nation. Who gets how much will change, but everyone will get something.
What the government does not spend, private participants will.
deficit requires saving to fund it. Keynesians are always favorable
to government spending, with or without deficits, but preferably
with. They want government spending to crowd out private spending.
The more that a nation's GDP is based on government spending, the
more they like it. The more that private spending is based on being
on the receiving end of government spending, the more that consumers
become dependent on the government.
This is the
Keynesian game. It always has been. It is fascism the corporate
state by salami slicing. It is fascism on the installment
plan. This is why Keynes wrote this in the Foreword
to the 1936 German edition of his General Theory.
theory of aggregated production, which is the point of the following
book, nevertheless can be much easier adapted to the conditions
of a totalitarian state [eines totalen Staates] than the theory
of production and distribution of a given production put forth under
conditions of free competition and a large degree of laissez-faire.
This is one of the reasons that justifies the fact that I call my
theory a general theory. Since it is based on fewer hypotheses than
the orthodox theory, it can accommodate itself all the easier to
a wider field of varying conditions. Although I have, after all,
worked it out with a view to the conditions prevailing in the Anglo-Saxon
countries where a large degree of laissez-faire still prevails,
nevertheless it remains applicable to situations in which state
management is more pronounced.
If there were
real austerity a reduction of government spending by at least
30% the private sector would have to adjust to a world in
which economically productive customers, not those receiving government
handouts, increasingly drive their economies.
costs of making this transition would be high. Capital is not homogeneous.
It is not digits on a balance sheet; it is a structure of the tools
of existing production. It has been misallocated because of the
Keynesian interference with the economy for six decades. Today's
capital must be re-priced and re-allocated. There would be a stock
market crash, as capital is re-allocated. Today's tools are priced
in terms of government spending. This is the benefit of austerity:
a shift back to greater private sector productivity. It would come
at a cost.
for the PIIGS' economies is the same as the solution for all economies:
to get out of the government debt trap, not to take more debt. But
Keynesianism is based on government-subsidized debt. So, there is
therefore no solution for Keynesians, other than more of the same.
in two or three small PIIGS nations points to the future of German
exports. The authors warn: "Worse-than-expected results from companies
like Daimler, Deutsche Bank and Siemens in the last month have reinforced
the feeling that Germany's extraordinary boom is near an end." Indeed!
That is because it really is near an end.
once again felt compelled to get into another of her famous gurgling
sessions with Sarkozy. She was expected once again to reassure the
PIIGS that Germany's government will come to the rescue.
How many times
will Germany come to the rescue? How many times will Merkel write
a check on the personal bank accounts of German taxpayers before
the taxpayers revolt? Many more, I suspect. Voters refuse to throw
out all politicians who do not oppose the bailouts. But at some
point, they will.
Then what will
happen to the PIIGS?
It is clear
what is coming: a great default. It is clear to everyone except
Keynesians. They believe that government debt will grow forever.
There will never be a default. What Latin American governments have
done over and over for 180 years cannot happen here. Why not? Because
it just can't.
This is the
religion of Keynesianism: government debt forever, interest payments
to big banks forever, and bailouts by other governments forever.
nonsense sells fairly well in political circles in surplus trade
nations like Germany, China, and Japan. Why? Because the export
sectors want it. They want government subsidies. They get these
subsidies directly and indirectly. The main way they get them is
to pressure their governments to pressure their central banks to
inflate, using the newly created money to buy IOU's from negative
trade nations. This holds down the value of their domestic currencies:
more sales to foreigners. It also holds down interest rates on government
debt in negative trade nations, which is always acceptable to politicians
go on. So, it will stop. It will stop only when the PIIGS default.
They will default.
To find out
what will happen after they default, read
this. It will scare you. It scared me. (Skip page 2, which is
It does not
scare conventional investors. They believe in assurances by Keynesian
economists that this can go on indefinitely, and in any case must
go on for the foreseeable future.
You may think
you are out of touch because you see no solution coming out of these
You are out
of touch . . . not with reality, but with Keynesian economics.
You are out
of touch with the politicians who reassure their listeners endlessly
that the latest meeting has provided a framework for a long-term
solution to the PIIGS problem.
You are out
of touch with the fund managers who believe them.
This is the
price of being in touch with reality.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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