Germany takes a stand against Keynesian stimulus

Re: US urges EU to do more to stimulate its economy

At the recent meeting of the G20 US Treasury Secretary Jack Lew led the majority of the industrial world’s finance ministers and central bankers to urge Europe to increase its spending in order to pull the continent out of its economic doldrums.  Fortunately for Europe Germany is taking a stand against this Keynesian nonsense. According to the Financial Times, “Any hope of a change of heart in Berlin was dashed before the meeting had even begun, with Wolfgang Schauble, Germany’s finance minister, warning against debt-financed growth.” Germany is the lone country in the EU that has consistently voted against expanding the European Central Bank’s open market operations to mimic the Fed’s quantitative easing programs. The ECB may go ahead with a QE program of some sort anyway, despite the prohibition of such action in its charter. These decisions are made by majority rule, and Germany was outvoted. Germany refuses to increase government spending, but it cannot stop the ever-increasing debasement of the euro by the European Central Bank. One wonders when Germany will decide that enough is enough, cease using the euro, and reinstate the Deutsche Mark. The steady debasement of the euro offsets many of the benefits that Germany derives from controlling its national budget. Primarily it cannot prevent price inflation and the skewing of its economy toward export industries at the expense of the rest of the the country. Germany is a sovereign country and has every right to control its own destiny rather than tie it in any way to policies that it regards as misguided. Leaving the eurozone would be a non-coercive act of rational self-interest. Only Germany seems to understand the irrefutable logic of economic science that saving and not spending is the path to prosperity.  Patrick Barron
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Europe decides to eat its capital

Re: The Death Spiral of Capitalism, by Martin Hutchinson

We now see why the profligate countries of the European Monetary Union allowed the European Central Bank to institute a negative interest rate against reserves AND now have allowed it to buy both private and public debt in violation of its charter. These profligate countries are the beneficiaries of the financial repression against savings. They now can sell their worthless sovereign debt (worthless in the sense that it cannot be repaid in money of the same purchasing power as borrowed) at a PREMIUM! The banks would rather take a smaller loss from buying sovereign debt at a premium than a larger one from holding reserves. The European Union’s rules against national deficits have been shown to have no enforcement mechanism, so a small negative interest rate can become a large one, just as a small national budget deficit can become a large one. Not only is there now no institutional restraint on money creation, there now is no institutional restraint on government spending. The two go hand-in-glove. Since government spends its budget primarily on welfare and warfare–neither of which activity generates a profit–its spending destroys the capital base of the country. The fact that there are few sectors of society that do NOT partake of the government’s largess means that there is no organized opposition to this process. All Europeans partake of what economist Thorsten Polleit calls “collective corruption“. Europeans are enticed to consume capital and are punished if they do not do so.
Patrick Barron

 

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The insanity of majority vote at the ECB

From today’s Open Europe news summary:

The FT reports that the ECB will press ahead with its plans to purchase Asset Backed Securities (ABS) despite both the French and German government rejecting the bank’s calls for them to provide public guarantees to the riskier tranches of ABS. Separately, speaking in Frankfurt yesterday, ECB Executive Board Member Yves Mersch said that, “The purchase of government bonds would raise substantial institutional, instrumental and legal questions.”
The European Monetary Union’s two biggest members are opposed to action by their central bank, yet the central bank will forge ahead with its asset buying plans anyway. This illustrates the insanity of majority vote at the board level of the European Central Bank and further illustrates the wisdom of Dr. Philipp Bagus’s revelation of the structural failures of the EMU in his 2011 book, The Tragedy of the Euro. Patrick Barron
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Scotland’s goal: Out of the frying pan and into the fire!

Re: Alex Salmond says Scotland could join the EU in 18 months

Why in the world would Scotland want to jump from one socialist union to an even bigger socialist union? Independence from the UK is Scotland’s chance to become the Singapore of Europe.  At one time it looked like Ireland would be the Singapore of Europe, but its socialists made sure that the Irish kept voting until they got it right and joined the EU and adopted the euro.  The result?  Loss of competitiveness and a huge debt that the Irish are still struggling to pay off. Isn’t the EU wonderful? If you are an EU bureaucrat it is! Patrick Barron
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Jurgen Stark exposes ECB lawlessness

From today’s Open Europe news summary:

Jürgen Stark, former Chief Economist of the ECB warns in an essay in Handelsblatt that “the ECB is on its way to becoming a bad bank” citing the “enormous risks” of its recent monetary policy. He adds that the bank is undergoing a strategic reorganisation which is irreconcilable with the Maastricht Treaty and for which there is “no democratic legitimacy”.
Jurgen Stark was a member of the board of the European Central Bank until he resign in disgust over its policies.  You see, the ECB’s board is composed of one member from each member country, making Luxembourg’s vote the same as Germany’s.  All decisions are by majority vote, so Germany is always outvoted. Here is what Wikipedia says about his resignation:
On 9 September 2011, it was reported that Stark would leave the ECB due to disagreement with the bank’s controversial bond-buying programme, according to Reuters,[3] while the ECB officially announced his resignation as being for “personal reasons”. Stark’s term had been set to expire in May 2014.
Here is a direct quote from the Maastricht Treaty that created the ECB:

ARTICLE 104

 1. Overdraft facilities or any other type of credit facility with the ECB or with the 

central banks of the Member States (hereinafter referred to as ‘national central banks’) 

in favour of Community institutions or bodies, central governments, regional, local or 

other public authorities, other bodies governed by public law, or public undertakings of 

Member States shall be prohibited, as shall the purchase directly from them by the ECB

or national central banks of debt instruments.

The real question is why more German politicians, bankers, and economists tolerate this violation of the ECB’s mandate. The ECB has no authority to monetize any debt issued by any agency. Germany has no legal obligation to belong to an organization that violates its mandate. It should leave the eurozone forthwith and reinstate the Deutsche Mark.

Patrick Barron

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Who Will Defend the Rule of Law in Europe?

From Open Europe news summary of September 5, 2014:

ECB surprises markets with rate cut and purchases of private assets;
Ruparel: Pressure rises on eurozone governments as ECB nears end of its policy tools
The ECB yesterday surprised markets by cutting interest rates and announcing a programme to purchase private sector assets, in the form of asset-backed securities and covered bonds. In his press conference, ECB President Mario Draghi said that the decision was not unanimous, with reports suggesting Bundesbank President Jens Weidmann was opposed. Draghi reiterated his call for flexibility in fiscal policy across the eurozone, but warned that structural reforms must come first. In response to the move, the euro hit its lowest level for 14 months and equity markets across Europe hit their highest point for six years.

 

Here is a direct quote from the Maastricht Treaty:

ARTICLE 104

  1. Overdraft facilities or any other type of credit facility with the ECB or with the

central banks of the Member States (hereinafter referred to as ‘national central banks’)

in favour of Community institutions or bodies, central governments, regional, local or

other public authorities, other bodies governed by public law, or public undertakings of

Member States shall be prohibited, as shall the purchase directly from them by the ECB

or national central banks of debt instruments.

It is clear that the Maastricht Treaty, which created the European Central Bank, has been abrogated.  It appears that Herr Weidmann, as president of the Bundesbank, opposes the ECB’s action, but what will he and the German government do? Will the Germans accept as legitimate what can only be described as an illegal action? The fate of the rule of law in Europe now rests in German hands.  Patrick Barron

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Oh, no! Not lower prices!

From today’s Open Europe news summary:

Italian Finance Minister Pier Carlo Padoan has said in an interview that the ECB “has to be consistent and bring [eurozone] inflation close to 2%…which is very far from current levels.” Separately, Handelsblatt reports that the Deflation Risk-Indicator (DRI), an early deflation warning system for the eurozone, currently stands on 0.47 with a score of 0.5 marking the point at which risk of deflation becomes acute.
For someone like me–who lived through the terrible stagflation (high unemployment plus high inflation) years of the 1970’s–to understand that anyone could wish for higher inflation.  Inflation devastated American manufacturing by effectively taxing capital: i.e., highly capitalized industries like autos and steel could deduct only historically low capital costs from their tax bills and did not have the funds to replace them at higher prices.  The very fact that there is a “Deflation Risk-Indicator (DRI)” is itself astoundingly dangerous and indicates the total triumph of the radical Keynesians in the halls of governments and central banks.
Patrick Barron
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Germany cannot carry Europe any longer

From today’s Open Europe news summary:

Persson: Eurozone still an awfully long way from becoming a healthy and vibrant economic bloc
In the Sunday Telegraph, Mats Persson argued that while the risk of a euro breakup has subsided, “the currency zone is still an awfully long way from becoming a healthy and vibrant economic bloc.” He notes that Germany is unlikely to be able to carry the Eurozone in the long-term: “Bear in mind that at the moment, Berlin seems to be doing its utmost to lose its competitive edge: the current coalition has introduced a high minimum wage, lowered the retirement age and is sticking to a commitment to eliminate nuclear power in favour of renewables, raising costs for everyone.”
When the German economy fails, the EU and the euro fail. Germany has subsidized Europe for years without beneficial effect, and now its own economy is ailing.  Furthermore, its own politicians seem determined to weaken it even more.  Philipp Bagus‘ prescient analysis of the inherent flaws in the euro are coming true.
Patrick Barron
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I’ll punish you by starving my own people

Re: Russia bans food imports from US and EU

Putin has banned food imports from the US, EU, Canada, and Japan.  He is waging war against his own people in the misguided view that it is money that people desire and not the goods and services that money will buy.  Those who remember the dark days of the Soviet Union know that the Russian people of that era had plenty of money; there simply was nothing to buy.  So Putin is proving to be a product of Soviet era economic ignorance.
Patrick Barron

 

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Trade does not need to be “managed”

From today’s Open Europe news summary:

Writing in the Telegraph, London Mayor Boris Johnson argues that “It is clear that 25 years ago we made a miscalculation about one of the consequences of EU enlargement. We were right to want to expand the EU… But I think many of us naively and vaguely believed that this enormous expansion would have a beneficial effect on the Brussels imperium… we thought a wider Europe would be looser and shallower – more of a confederal free-trade zone. That is emphatically not what has happened.”
There is nothing that a nation can gain from belonging to the the EU that it could not gain by unilaterally adopting free trade. Why is a supra national organization required in order to trade freely with the world? There are no rules required via international agreements in order to “manage” trade.  The market manages trade.  The beneficial consequences of the British repeal of its “Corn Laws” in the mid nineteenth century should have settled this issue for all time.  Patrick Barron
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