by Gary North: The
Federal Debt Elevator: Going Up
Have you noticed
the media reports on the intolerable nature of austerity in Greece?
Have you read anything that praises this austerity and calls for
more? You're about to.
we read about is a code word for "government spending cutbacks."
In a media world run by Keynesians, the thought of cutbacks in government
spending is a nightmare scenario. Keynesians believe that government
spending is the source of both stability and growth in an economy.
Any suggestion that the government has been spending far too much
money is regarded as heretical.
The idea of
the economic benefit of imposing greater austerity on all governments
rests on a presupposition that is antithetical to Keynesianism,
namely, that private spending should be overwhelmingly dominant
in an economy, with government combined spending national,
state, and local preferably in single digits. (See the warning
of Samuel to Israel in 1,100 B.C.: I Samuel 8:14, 17.) In an era
in which this figure is always above 40%, and even higher in Western
European countries, austerity on this scale is considered economically
insane. Yet this lower level of taxation was universal prior to
the First World War. The war justified a massive ratcheting up of
taxation and debt, a ratchet that never reversed.
austerity for governments is the equivalent of austerity for the
people. The idea that the government should tax less, borrow less,
and inflate less is anathema to Keynesians. Such austerity would
supposedly cut the flow of wealth to the people. Without the state
acting as the source of the funds to buy goods and services, we
are told, an economy would fall into unemployment and despair.
The news from
Greece is bad from the point of view of Keynesians and commercial
bankers. The expected bailout from Northern Europe's politicians,
on behalf of large European banks, did not appear over the weekend.
All week, the media had reported on the softening of Germany's Merkel
toward the idea of another bailout. She had resisted a year ago,
but at the last minute, she capitulated. The 2010 bailout arrived.
This time, without warning, her last-minute switch did not produce
the expected result. The weekend meeting of finance ministers did
not produce the expected extension of government-to-government loans
to the Greek government.
had risen as the weekend drew near. Investors believed the headlines.
They thought that European politicians would conduct another raid
on their national treasuries, so that the Greek government could
still make regular interest payments to Northern European banks.
The bailout, as always, was to be a big bank bailout, disguised
as a bailout to the Greek government. But then, without warning,
the finance ministers decided not to do it. They issued a statement.
hinges critically on Greece sticking to the agreed fiscal consolidation
path, the plans of collecting €50 billion in privatization proceeds
until 2015, and the structural reform agenda which will promote
Greek protesters once again took to the streets. They sent a message
to the Greek government: no budget cuts. In a sense, the decision
of the finance ministers over the weekend sent a counter message.
If the cuts do not proceed as promised by the Greek government,
there will not be a new bailout.
Push has come
to shove. The Greek government is facing a squeeze. The demonstrators
seem to represent the majority of Greek voters. If the government
makes the cuts, it will probably lose the next election. If it refuses,
then it may not get the next round of loans.
Europeans may be bluffing. They are putting big European banks at
risk. If Greece defaults on its debt, big banks will take a hit.
So will large American banks, which sold default insurance to European
This is a political
game of chicken. The fate of the euro is on the line. If Greece's
government decides to pull out of the European Monetary Union and
to return to its own currency, the governments of Portugal and Spain
may see light at the end of their respective fiscal tunnels.
resist austerity. Politicians buy votes with spending. But because
they do not control their domestic currency systems in Europe, they
must rely on borrowing and taxes to fund their spending. They cannot
call their respective central banks and demand that the banks buy
bonds by means of newly created fiat money. This puts them at the
mercy of bond buyers, who are notoriously unmerciful. They have
their own bond vigilantes. These investors can veto plans of politicians
by refusing to lend at low interest rates. By holding out, they
force the politicians to pay higher interest rates. Politicians
hate that. If rates go too high, this can cause a recession. Politicians
prefer to conceal this by having a central bank become the lender
of last resort. But the European Central Bank resists playing this
Greece is now
the test case. Iceland stiffed the European bankers by defaulting
on its external debt. This has led to a revived economy, something
that the media do not discuss in detail. Iceland has done better
than Ireland, which capitulated to the EU and the European Central
this enormous advantage: it never joined the European Monetary Union.
It now enjoys low rates on its bonds. This indicates that Greece
can escape from the trap by pulling out of the EMU and defaulting
on its external debt. This would send a message to Portugal and
Spain: deliverance is available. Stiff the foreign creditors and
abandon the euro.
As for government
austerity, it is good for the private sector. It is bad for government
trade unions. The unions resist austerity measures.
We see union
members in the streets of Greece. We see or at least hear
from the finance ministers of the European Union. But the
famous silent majority remains silent.
Voters in Germany
do not want another bailout. But they didn't want the first one
a year ago. That did not constrain Merkel's government. Germany
remains the paymaster, just as it has for a generation.
the West have been educated in tax-funded schools to believe in
Keynesian economics. Nevertheless, they are growing restless with
the endless calls for bailing out spendthrift governments and the
creditors who lent them the money at low rates.
man pays his taxes, pays his bills, pays his debts, and shows up
on time every morning. He understands austerity. Austerity for him
means doing his job and paying his bills. It means foregoing luxuries
that he cannot afford. For him, austerity means a monthly budget.
He then hears
that austerity for the politicians of Greece is unthinkable. He
may believe this with respect to his own government. He has imbibed
Keynesianism. But Keynesianism has always had a problem explaining
to voters why they ought to pay higher taxes in order to bail out
spendthrift foreign governments. This is why government-to-government
foreign aid programs have always been unpopular. When voters hear
that they must pay higher taxes in order to bail out foreign governments,
they rebel. They are not convinced.
real reason for the bailouts is the investment risk of large, government-protected
banks, the politicians have trouble persuading voters that another
round of bailouts is a good idea. If politicians said that a failure
to bail out the Greek government would lead to the bankruptcies
of specific banks, this could probably would cause
a run on these banks. They don't want to risk this.
The big banks
of Northern Europe have put the politicians in a trap. The politicians
face the wrath of the voters, who are sick of the bailouts. But
the politicians are afraid of crippling the biggest banks, since
these banks are the source of funding for the domestic governments.
If the banks stop buying domestic government debt, the politicians
will have to raise taxes or else suffer the ultimate indignity:
austerity. They want to avoid both.
man is the backbone of every social order. In his name, politicians
and bureaucrats write the checks. The common man is supposed to
grin and bear it. The bailout policies come out of his hide, yet
politicians insist that they are bailing out Greece's government
on his behalf. He isn't buying it any more, if he ever did.
politicians and their finance ministers are going through the motions
of driving a hard bargain. If they were serious, they would tell
the Greek government that there will be no further bailouts, no
mater what. They would quit deferring the event that most analysts
think is likely: Greek default. The only questions are: (1) the
timing of the default, (2) the amount owed when it happens, and
(3) the language that the Greek government uses to disguise default.
will remain forgotten. He does not control the decisions made at
the highest levels. The move to monetary and political unification
in Europe did not come as a result of a mass movement. It came because
Jean Monnet, working from no later than 1918 on, pushed for this.
He did so on behalf of corporate, banking, and political interests
that favored the centralization of money and power. Monnet, Robert
Schuman, and the band of brothers who pulled off this centralization
from behind the scenes were never seen by the common men of Europe
as the architects of the demise of the old Europe. They, too, have
become forgotten except for a handful of historical specialists,
most of whom approve of what they did.
There was only
one man who reported on this for half a century: Hilaire du Berrier,
the "spy from North Dakota." He died in 2002. His small-circulation
newsletter, HduB Reports, chronicled these events and the
players. I have a set of this remarkable newsletter on a CD-ROM.
This has never been released publicly. Someday, I hope to make it
available to serious researchers.
In a 1999 interview
with him, another remarkable historian, Jim Lucier, discussed the
advent of the euro. Du Berrier made some observations that have
gone down the memory hole. They need to be dredged up.
on the first of January Europeans are supposed to get the euro,
and lose their national currencies. When the proponents of European
integration first set up that European movement at the end of World
War II, they told Europeans it was just a common market in order
to drop trade barriers and eliminate customs duties. Then when they
got the European countries in so far they couldn't back out, they
told them it was to form a Republic of Europe a country,
a supernation, with a parliament in Strasbourg and Brussels and
a central bank in Germany. Now they have gone so far that 11 nations
are committed to this new money and are being told that it
is a political move and they are going to be governed by a central
The men who
set it up did so in secret meetings in the U.S. Embassy in Paris
shortly after the war. David K. Bruce was the American ambassador
then, and his wife, Evangeline, in her memoirs said that she saw
the European movement take shape before her eyes. She said, "It
could have been done elsewhere, but it was done there, and one
could actually see the idea crystallizing. The talks went on daily,
and in the end they beat out what was really the original plan
for the Common Market."
from the United States and Jean Monnet and Robert Schuman from
France did the planning. George Ball, an American, was a lawyer
for Monnet. John Foster Dulles was part of it, too.
By 1999, du
Berrier had been writing for 40 years about what was taking place.
He summarized it.
these countries that have gone into it will see that their sovereignty
is being taken over because the Parliament of Europe, this superstate
Europe, is to take precedence over their native parliaments, laws
and constitutions. So the once-independent countries are becoming
is still going on. But the Greeks have thrown a monkey wrench into
I heard a speech
almost 40 years ago by a Yale economist, now at Harvard, Richard
Cooper. He said that by 2000, there would be an integrated currency
and central bank in Europe. He was right. But
du Berrier saw that it might not hold.
What's going to happen to the euro? Will it be a strong currency
or will it cause a depression in Europe?
best authorities in Europe are divided. Some say that it will
cause trouble; some say that it will be so strong that it will
cause loss of confidence in the pound sterling and the dollar.
What this is going to do is to strike at tradition. At the very
same time that Europe is hit in the solar plexus of its traditions,
you are going to have the start of the Islamic war. Between the
two, Europe is going to have a rough ride.
The euro is
not going to hold. The domestic crisis of unemployed Islamic men,
who have not integrated into the European nations that house them,
is accelerating. The best laid plans of mice, men, and one-world
bureaucrats are not going to come true. But it will take a shaking
of the economic foundations to dislodge rule from Brussels. That
shaking has begun.
of the finance ministers to come to agreement over the weekend indicates
that the Greek debt crisis is worse than the public was led to believe.
The media indicated that there would be a short-term papering over
of the crisis. But the strategy of kicking the can has been abandoned
for now. The finance ministers decided to let the Greek government
make the next move.
is no way that Greek politicians will impose the austerity measures
required by northern European politicians and bureaucrats. So, one
side or the other is going to capitulate. Given the success of Iceland's
politicians, the Greeks seem to have the upper hand.
domestic Keynesianism is going to triumph over the EU's international
Keynesianism. Sooner or later, northern Europe's politicians will
say no to another bailout. Greece's politicians will also say no
to austerity. That will mark the beginning of the end of the euro.
Berrier would have loved this. I know I do.
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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