Soros: Europe's Three-Month Window
Tea Party Economist
by Gary North: Economists
vs. the Gold Coin Standard
Soros has laid it on the line. The eurozone will begin to break
up, followed by the break-up of the European Union, within three
months if the politicians do not come to an agreement to re-write
the treaties and centralize power. No other figure has been this
apocalyptic and this specific as to the timetable.
He sees this
outcome as a catastrophe. I keep thinking: "Free at last! Free at
the price movements of currencies better than anyone else. This
is how he became a multi-billionaire. He has used massive leverage
extremely high risk to speculate in the currency futures
markets, often taking the opposite side of trades with central banks.
When a man has enough wisdom to beat the currency futures markets,
I give him credit. He knows something about currencies.
In a recent
essay, he points out that the 2008 crisis created a new realization
that there is no consensus about economic theory. He insists that
"economic theory has failed." On the contrary, economic theory has
triumphed Austrian economic theory. In 2007, numerous non-academic,
non-tenured Austrians predicted the recession of 2008. I called
it in late 2006, predicting a 2007 recession. The National Bureau
of Economic Research retroactively dated it as having begun in December
2007 just in the nick of time!
even further. This failure is the failure of academic economic theory.
believe that the failure is more profound than generally recognized.
It goes back to the foundations of economic theory. Economics tried
to model itself on Newtonian physics. It sought to establish universally
and timelessly valid laws governing reality. But economics is a
social science and there is a fundamental difference between the
natural and social sciences. Social phenomena have thinking participants
who base their decisions on imperfect knowledge. That is what economic
theory has tried to ignore.
This is the
criticism made repeatedly by Austrian economists, beginning with
Ludwig von Mises exactly a century ago: The
Theory of Money and Credit (1912). I cannot imagine a better
statement of Austrian theory's rejection of mainstream economists'
no explanation for the business cycle. Austrian economics does:
central bank policies of monetary inflation and monetary stability.
Here is Soros'
view. "I treat bubbles as largely unpredictable." That is, he has
no theory of economic causation. Bubbles are followed by busts,
he says, which are followed by government regulation. This really
is the pattern, but he does not explain how bubbles get started.
"According to my theory financial markets may just as soon produce
bubbles as tend toward equilibrium." In other words, there is no
known cause. He has no economic theory. But he has this much right:
"Behind the invisible hand of the market lies the visible hand of
He blames policy-makers
for the crisis. "The authorities didn't understand the nature of
the euro crisis; they thought it is a fiscal problem while it is
more of a banking problem and a problem of competitiveness." Yes,
it is: the problem of fractional reserves and fiat money, all supported
by the central bank. But he will not admit this.
the joint conclusion of mainstream Keynesianism, monetarism, and
supply-sidism: "And they applied the wrong remedy: you cannot reduce
the debt burden by shrinking the economy, only by growing your way
out of it." But how? He has no clue. The Austrians do: cut government
spending, cut taxes, reduce government regulation, and stabilize
money none of which is going to be done.
OF FAITH: THE EUROPEAN UNION
He says there
has been a bubble of misplaced enthusiasm: the European Union. I
like this idea.
contend that the European Union itself is like a bubble. In the
boom phase the EU was what the psychoanalyst David Tuckett calls
a "fantastic object" unreal but immensely attractive. The
EU was the embodiment of an open society an association of
nations founded on the principles of democracy, human rights, and
rule of law in which no nation or nationality would have a dominant
The EU was
in fact the embodiment of globalism: bureaucratic rule, government
regulation, and fiat money. "The process fed on its own success,
very much like a financial bubble. That is how the Coal and Steel
Community was gradually transformed into the European Union, step
by step." It was transformed by bureaucratic power from above. Jean
Monnet's idea had been operational at the Paris Peace talks in 1919.
He says that
Germany used to be at the forefront of this movement in the 1950s.
The politicians wanted a united Europe. "The process culminated
with the Maastricht Treaty and the introduction of the euro." Then
was followed by a period of stagnation which, after the crash of
2008, turned into a process of disintegration. The first step was
taken by Germany when, after the bankruptcy of Lehman Brothers,
Angela Merkel declared that the virtual guarantee extended to other
financial institutions should come from each country acting separately,
not by Europe acting jointly. It took financial markets more than
a year to realize the implication of that declaration, showing that
they are not perfect.
Treaty was fundamentally flawed, demonstrating the fallibility
of the authorities. Its main weakness was well known to its architects:
it established a monetary union without a political union. The
architects believed however, that when the need arose the political
will could be generated to take the necessary steps towards a
He is saying
that the architects imposed a flawed system on Europe, but in the
hope of tightening fiscal control at a later date. That date is
retrospect it is now clear that the main source of trouble is that
the member states of the euro have surrendered to the European Central
Bank their rights to create fiat money. They did not realize what
that entails and neither did the European authorities.
The power to
create national money is the heart of Soros' vision of what is positive.
This is nationalism with a printing press. It means competing rates
of monetary depreciation. A precious metals coin system alone has
prevented this in history.
the stupid bankers. They thought the PIIGS were Germany. They believed
in the equality of debtors.
the euro was introduced the regulators allowed banks to buy unlimited
amounts of government bonds without setting aside any equity capital;
and the central bank accepted all government bonds at its discount
window on equal terms. Commercial banks found it advantageous to
accumulate the bonds of the weaker euro members in order to earn
a few extra basis points. That is what caused interest rates to
converge which in turn caused competitiveness to diverge.
The 2008 collapse
exposed this faith as naive. But critics had said this throughout
the 1990s. No one listened. The leaders believed in the EU bubble,
to use Soros' words. Germany was at the forefront of this faith.
struggling with the burdens of reunification, undertook structural
reforms and became more competitive. Other countries enjoyed housing
and consumption booms on the back of cheap credit, making them less
competitive. Then came the crash of 2008 which created conditions
that were far removed from those prescribed by the Maastricht Treaty.
Many governments had to shift bank liabilities on to their own balance
sheets and engage in massive deficit spending. These countries found
themselves in the position of a third world country that had become
heavily indebted in a currency that it did not control. Due to the
divergence in economic performance Europe became divided between
creditor and debtor countries. This is having far reaching political
implications to which I will revert.
some time for the financial markets to discover that government
bonds which had been considered riskless are subject to speculative
attack and may actually default; but when they did, risk premiums
rose dramatically. This rendered commercial banks whose balance
sheets were loaded with those bonds potentially insolvent. And
that constituted the two main components of the problem confronting
us today: a sovereign debt crisis and a banking crisis which are
nations now want out: ". . . the creditors are in effect shifting
the burden of adjustment on to the debtor countries and avoiding
their own responsibility for the imbalances." Of course they do.
And everyone wants a bailout from the central bank.
the center, meaning the Eurocrats and politicians in the North.
"center" is responsible for designing a flawed system, enacting
flawed treaties, pursuing flawed policies and always doing too little
too late. In the 1980's Latin America suffered a lost decade; a
similar fate now awaits Europe. That is the responsibility that
Germany and the other creditor countries need to acknowledge. But
there is no sign of this happening.
authorities had little understanding of what was happening. They
were prepared to deal with fiscal problems but only Greece qualified
as a fiscal crisis; the rest of Europe suffered from a banking
crisis and a divergence in competitiveness which gave rise to
a balance of payments crisis. The authorities did not even understand
the nature of the problem, let alone see a solution. So they tried
to buy time.
He has this
much right. The authorities do not understand the nature of the
crisis. He blames politics, not central banking. ". . . the financial
problems were reinforced by a process of political disintegration."
Now, it's every nation for itself! Soros hates this. He is a globalist.
the European Union was being created, the leadership was in the
forefront of further integration; but after the outbreak of the
financial crisis the authorities became wedded to preserving the
status quo. This has forced all those who consider the status quo
unsustainable or intolerable into an anti-European posture. That
is the political dynamic that makes the disintegration of the European
Union just as self-reinforcing as its creation has been. That is
the political bubble I was talking about.
At the beginning,
the disintegration of the euro was inconceivable. Today, it is quite
conceivable. The system is coming apart. There is no time to fix
it if there is not immediate action. The banks are de-leveraging.
They are selling assets outside their nations. "So the crisis is
getting ever deeper."
real economy of the eurozone is declining while Germany is still
booming. This means that the divergence is getting wider. The political
and social dynamics are also working toward disintegration. Public
opinion as expressed in recent election results is increasingly
opposed to austerity and this trend is likely to grow until the
policy is reversed. So something has to give.
has to give. But what? Or, more to the point, who? Answer: Germany.
my judgment the authorities have a three months' window during which
they could still correct their mistakes and reverse the current
trends. By the authorities I mean mainly the German government and
the Bundesbank because in a crisis the creditors are in the driver's
seat and nothing can be done without German support.
But will German
politicians bite the bullet and bail out the PIIGS? If they wait
until this fall, it will be too late. "By that time the German economy
will also be weakening so that Chancellor Merkel will find it even
more difficult than today to persuade the German public to accept
any additional European responsibilities. That is what creates a
three months' window."
must be revised, now. But how? The crisis is here.
be bank insurance. "Banks need a European deposit insurance scheme
in order to stem the capital flight." Paid for by whom?
need direct financing by the European Stability Mechanism (ESM)
which has to go hand-in-hand with eurozone-wide supervision and
regulation." Paid for by whom?
indebted countries need relief on their financing costs. There are
various ways to provide it but they all need the active support
of the Bundesbank and the German government." All roads lead to
Berlin. It's bailout time!
say no. "That is where the blockage is." Got that? Blockage! People
hanging onto their wallets! Why, the short-sighted fools! It's time
to bail out the PIIGS again. Time is running out. It will never
stop running out. Germany must suck it up and fork it over. Again.
authorities are working feverishly to come up with a set of proposals
in time for the European summit at the end of this month. Based
on the current newspaper reports the measures they will propose
will cover all the bases I mentioned but they will offer only the
minimum on which the various parties can agree while what is needed
is a convincing commitment to reverse the trend. That means the
measures will again offer some temporary relief but the trends will
continue. But we are at an inflection point. After the expiration
of the three months' window the markets will continue to demand
more but the authorities will not be able to meet their demands.
happen next? "It is impossible to predict the eventual outcome."
The system could break down. "But the trends are clearly non-linear
and an earlier breakup is bound to be disorderly. It would almost
certainly lead to a collapse of the Schengen Treaty, the common
market, and the European Union itself."
In other words,
the entire experiment in European central government is on the line.
They have three months to put the system back together. "Unenforceable
claims and unsettled grievances would leave Europe worse off than
it was at the outset when the project of a united Europe was conceived."
Is all lost?
No. Deliverance is coming.
the likelihood is that the euro will survive because a breakup would
be devastating not only for the periphery but also for Germany.
It would leave Germany with large unenforceable claims against the
not return to its own currency. Why not? That would reduce exports.
"And a return to the Deutschemark would likely price Germany out
of its export markets not to mention the political consequences."
Soros is a
Keynesian mercantilist. They all are. "So Germany is likely to do
what is necessary to preserve the euro but nothing more.
That would result in a eurozone dominated by Germany. . . ."
not be budget cutting. There must not be austerity. There must be
spending, spending, spending all at Germany's expense.
German public cannot understand why a policy of structural reforms
and fiscal austerity that worked for Germany a decade ago will not
work in Europe today. Germany then could enjoy an export led recovery
but the eurozone today is caught in a deflationary debt trap. .
. . In these circumstances it would require an extraordinary effort
by the German government to convince the German public to embrace
the extraordinary measures that would be necessary to reverse the
current trend. And they have only a three-month window in which
to do it.
to do whatever we can to convince Germany to show leadership and
preserve the European Union as the fantastic object that it used
to be. The future of Europe depends on it.
Soros is just
another Keynesian. He is just another mercantilist. He is just another
globalist. What makes him different is his willingness to say that
time really is running out on Europe. The politicians must get something
in place to replace the disintegrating euro, which will in turn
break up the European Union. It all boils down to this: centralized
control over each nation's spending and taxing, and Germany's endless
trade surplus, i.e., the German banks' willingness to buy foreign
I hope we
get to test his theory: three months to go, maximum. I hope he loses
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.
2012 Gary North
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