In this thirty minute interview on Power Trading Radio I discuss fractional reserve banking, the euro, and the beneficial effect of a reinstated German deutsche mark.
Interview with Patrick Barron on Power Trading Radio
Re: Germany’s Insistence on Austerity Meets With Revolt in the Eurozone
These two article in the New York Times from Wednesday of this week illustrate the confusion and increasing stridency of Keynesian school economists. All the Eurozone countries except Germany are heavily in debt with no real prospect for reducing their annual budget deficits. Only Germany has a balanced budget. This is what Keynesians falsely label as “austerity”. It is no such thing. It is merely being responsible. The I.M.F. and other nations of the Eurozone want Germany to spend more as the cure to other nations’ debt problems. Their sole rational is the typical Keynesian dogma that it is spending that drives an economy forward. The I.M.F.’s chief economist, Olivier Blanchard, states that large scale infrastructure projects funded by debt, if properly undertaken, are beneficial and will bring quick growth benefits. How German infrastructure projects will cure Greece’s bloated welfare state bureaucracy is beyond me. It is well past time for the other nations of the Eurozone to stop criticizing Germany and start emulating her. Patrick Barron
From today’s Open Europe news summary:
Hans-Werner Sinn: Some countries should be allowed to temporarily leave the euro
Open Europe yesterday hosted the launch of Professor Hans-Werner Sinn’s new book, ‘The euro trap: on bursting bubbles, budgets and beliefs’. At the beginning of his presentation, Professor Sinn described Open Europe as “one of the most important platforms for the public discourse on the continent.” He argued that “there is no real solution” to the Eurozone’s problems, therefore “we need to choose among evils”. Professor Sinn suggested three steps: forgive part of the debt of the Eurozone’s peripheral countries; let some countries leave the single currency temporarily to regain competitiveness while giving them the chance to re-join later; impose stricter budget constraints on central banks.
Andrew Sentance CBE, senior economic adviser at PwC and a former external member of the Bank of England’s Monetary Policy Committee, said that “real depreciation” of the euro would be a “more hopeful” solution than a break-up. He added, “There are too many hidden barriers to trade in services in Europe. Removing them would be a very pro-growth measure.” A video summary of the event will be available on the Open Europe website shortly
I fear that Professor Sinn squandered an opportunity to educate the public. The true problem with the euro is that it is a fiat currency managed by a central bank that is under constant political pressure to print money as the solution to all ills. Mr. Sentance’s comments confirm this view. But a nation cannot become more competitive by depreciating its currency. An honest currency reveals problems that need to be solved, such as onerous labor laws, restrictive business regulations, high taxes, and lack of adequate defense of property rights. The solution to Europe’s economic problems is to reverse its century old retreat from free market capitalism, most importantly its retreat from sound money. Patrick Barron
Here’s an interesting little calculation of how many dollars the Fed would have to charge for an ounce of its gold reserve in order to cover all of M1. (M1 is the narrowest definition of money, which includes cash and bank checking accounts.)
- In 1960 the Fed owned 506 million ounces of gold and M1 stood at $140 billion. So the Fed could “cover” its gold reserves at $277 per ounce.
- In August 2014 the Fed owned 261 million ounces of gold, slightly more than half of what it owned in 1960, and M1 stood at $2,856 billion. So today the Fed would have to charge just under $11,000 per ounce in order to buy back all of M1 and not run out of gold.
Even the comparatively low cost of covering M1 in 1960 does not mean that the Fed had been an honest bank up until that time. At the 1944 Bretton Woods Conference the Fed promised to maintain a dollar price of gold at only $35 per ounce. The International Monetary Fund (IMF) was created to ensure that the Fed did not print money unless its gold reserves increased. Needless to say, the Fed did print money and the IMF did nothing. Patrick Barron
From today’s Open Europe news summary:
Germany hits out at ECB plans to buy asset backed securities
ECB plans to purchase Asset Backed Securities (ABS) have taken a lot of criticism in Germany, with Bundesbank President Jens Weidmann warning that the ECB could get stuck with “low-quality loan securitizations” at inflated prices. Former ECB chief economist Jürgen Stark termed the programme “an act of desperation”. Separately, Welt reports that other members of the ECB Governing Council have raised concerns over the plan with Bank of France’s Governor Christian Noyer reportedly voting against ECB President Mario Draghi’s plans to use external firms to purchase ABS due to the ECB’s lack of experience in the market.
Of course the ECB will get stuck with low-quality loans purchased at inflated prices! Economic logic makes this a certainty. If the institutions selling such loans could get as high a price in the open market as the ECB will offer, they would sell them now. This program is nothing more than a back door bailout to politically connected, privileged, special interest groups. It is corruption on a grand scale. Of course the ECB has a good role model–the US Federal Reserve Bank. Patrick Barron
I have started reading a new book about the collapse of the Zimbabwean dollar–When Money Destroys Nations, by Philip Haslam and Russell Lamberti. One of the main causes of the hyperinflation was the decision of the Zimbabwean government to give army veterans of its recent wars a big bonus. The promise was too much for the Zimbabwean economy to manage, so the government printed money…and lots of it. Why is this relevant? Well, look at America. We have been fighting wars around the world for twenty-five years and recently promised universal healthcare to all citizens. The baby boom generation is retiring and will draw unfunded Social Security and Medicare benefits in ever larger amounts. There is no way that these promises can be funded by the American economy. We will print money, too, just like the Zimbabweans. The Zimbabwean economy went into hyperinflation, because the Zim dollar was not held as a reserve anywhere in the world. The US hyperinflation may be delayed, because our money printing is being sopped up by foolish central banks worldwide in order to reward their export industries. In a non-manipulated currency market, the US would have to fund its budget with honest debt and repay it with honest money. But the chickens eventually will come home to roost for the US, just as they did for the poor Zimbabweans. The political pressure to print money is the same everywhere as are the laws of economic science. Patrick Barron
From today’s Open Europe news summary:
ECB disappoints markets by holding policy
The ECB yesterday held interest rates and revealed the details of its purchases of covered bonds and asset backed securities – the former will begin in the second half of October while the latter will start later this year. The ECB also said it would buy products from Greece and Cyprus event though they are not of investment grade rating, although such purchases would require added security including the fact that the country must still be under a bailout programme.
This month’s meeting was held in Naples with significant protests against the ECB taking place. In his press conference ECB President Mario Draghi said that such protests were “understandable” due to the economic pain but stressed that this is why reforms are needed and warned that such reforms would take place whether countries were in or out of the Eurozone.
The ECB will buy “…products from Greece and Cyprus…(that) are not of investment grade…” and only if “the country…(is)…still under a bailout programme.” In other words, the ECB will buy worthless bonds from Greece and Cyprus only if it gives them additional money to repay the bonds. What more evidence do the Germans need to convince them that the ECB and the euro are nothing more than vehicles of capital destruction? Time for Germany to put an end to this nonsense and get out. Patrick Barron
From today’s Open Europe news summary:
German economist Hans-Werner Sinn writes in the FT, “Deflation is not a danger for southern Europe, but an essential precondition for restoring competitiveness.” He describes the ECB’s latest asset purchase plan as “nothing less than a fiscal bailout – something the ECB has no right to undertake.” Open Europe will host the London launch of Professor Sinn’s new book on 9 October. For details click here.
FT: Sinn Open Europe event: Sinn
Herr Sinn calls upon German Chancellor Merkel to stand up for the rule of law. He states that, should she fail to do so, “…any German citizen can petition the court and force them to act
.” Perhaps Herr Sinn can emulate Martin Luther and nail his own Ninety-Five Theses to the door of the ECB.
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
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.