My letter to Wolfgang Munchau of the Financial Times, London

Re: The make believe world of eurozone rules

Dear Sir:
In your otherwise fine column today–Monday, July 27, 2015–you conclude with this statement:
“…Germany does not want to grant Greece debt relief for political reasons, and is using European law as a pretext.”
Earlier in your column you pointed out that Article 125 of the European Treaty on the Functioning of the European Union prohibits countries from taking on other members’ sovereign debt. You criticize–rightly, in my opinion–the ECJ for ruling that this very clear prohibition can be violated. You then point out that the German Constitutional Court twice had not supported the ECJ’s position. It seems to me that the German view can be interpreted as a defense of the rule of law, which your column says has been ignored by the ECJ, and that Germany’s objection to another bailout is more than merely a political pretext. Not only has the violation of the rule of law by the EU led to the Greek financial crisis, it strikes at the heart of Western civilization.

 

Patrick Barron

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Economic Fallacies about Greece

There has been much unscientific economic pronouncements about Greece’s financial problems and especially how to solve them. Below is a short list of three of these economic fallacies.

 

  1. The euro is too strong a currency for Greece.

 

This statement usually is accompanied by a reference to Greek productivity being lower than that of the northern tier EU countries. The logic, such as it is, states that the euro is not a suitable currency for countries with vastly different levels of productivity. This is followed by a recommendation that Greece leave the European Monetary Union and reinstate the drachma. The National Bank of Greece then would set a very low exchange rate between the drachma and the euro, making Greek products more competitive.

 

Well, there is a semester’s worth of economic fallacies embedded in this chain of logic. A currency is an indirect medium of exchange. Two countries with different levels of productivity can use the same medium of exchange just as two individuals can do so. You may pay the kid next door to mow your lawn with dollars that you earned in a highly skilled and highly compensated profession. Yet you both use dollars. There is no reason that the Greeks and the Germans cannot use the same currency. In the age of the gold standard, national currencies were defined by their exchange rates to gold and were redeemable in specie; therefore, in effect, all countries were using the same currency– gold.

 

  1. Debasing the currency will help the Greeks export their way to recovery.

 

Correlated to the above fallacy is the notion that debasing the currency will aid the Greek economy by the stimulative effects of an increase in exports. The idea is that the Greeks can give more drachma for the currency of its trading partners, making Greek exports cheaper in terms of the foreign currency. Increased exports will stimulate the entire economy. But currency debasement merely causes a transfer of wealth within the monopolized currency zone. The Cantillon Effect tells us that the early receivers of the newly printed money benefit by their ability to purchase resources at existing prices. The losers are those furthest removed from the initial increase in spending, such as pensioners. They will find that their money doesn’t buy as much, due to price increases that are an inevitable consequence of an increase in money spending. Eventually the exporters find that the cost of their resources has risen, at which point they demand another round of money debasement in order to prop up foreign sales and avoid business losses. They will be forced to pay more for their factors of production and must raise prices in local currency terms. In order to avoid losing sales they need their foreign buyers to receive more local currency so that their goods do not increase in price in foreign currency terms. This policy masks real structural problems. It is not a currency problem.

 

  1. Instituting one’s own currency will enable government to avoid unpopular spending cuts.

 

In other words, debasing the currency is a way avoid the dreaded austerity monster. Governments would have the people believe that there are sufficient real resources to redistribute from the wealthy to alleviate all poverty. It is assumed that the wealthy have nefariously confiscated the people’s wealth, and redistributing it along socialist lines will result in plenty for all. The socialist “plenty for all” slogan has been around a long time and has yet to prove its worth in alleviating poverty.

 

The Greeks (and Europe) Need Monetary Freedom

 

In conclusion, too much of the commentary about the Greek crisis has focused on whether or not Greece should drop the euro and not enough on the structural problems arising out of decades of socialism. The Greek government has borrowed more money than the Greek people can possibly repay. Debased money will not make this fact disappear and, on the contrary, will cause even more harm. It is telling that in poll after poll the Greeks themselves show that, although they do not desire austerity, they also do not wish to abandon the euro. They know that such a move will allow the government to destroy what little wealth remains in the country. The Greeks see the euro, with all its flaws, to be superior to a reinstated drachma. The best alternative for Greece right now is to abolish legal tender laws, which would allow the Greek people to trade in whatever currencies they deem most desirable. The Greek government may be forced to default on its euro loans. It is hard to imagine what good can come from another bailout just as it is hard to imagine what good can come from harnessing the Greek people to the yoke of high taxes. The Greek government itself responded rationally to the structure of the European Union and the European Monetary Union. It borrowed heavily at low rates of interest from willing lenders. It accepted all the newly printed euros so eagerly offered by these flawed organizations’ various funds. It is not the only country to do so, merely the first in which the adverse consequences of the EU’s flawed structure became apparent. There will be others and the adverse consequences will be greater. What is important now is that Europe stop destroying its capital base in pursuit of a socialist dream that has become a nightmare.

 

Patrick Barron

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An economic myth that just will not die

An excerpt from today’s Open Europe news summary:

Luc Coene, a member of the ECB’s supervisory board and a former Belgian Central Bank Governor, told Belgian daily De Tijd that a Grexit may have been a better option, arguing, “Because of the depreciation of the currency, one can achieve more through increased exports in a less painful manner.”
No. Debasing one’s currency does NOT solve anything. There is no way that a country can force others to subsidize its economy through debasing one’s own currency or that one can “jump start” or “stimulate” one’s own economy by debasing the currency. All currency debasement accomplishes is a transfer of wealth from the non-exporting sectors of an economy to exporting sectors and foreigners. In other words, increased exports are subsidized by one’s own citizens.
Patrick Barron
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The depth of the European problem is starting to get attention

From today’s Open Europe news summary:

William Hague: Greek crisis could be only the beginning

Writing in The Daily Telegraph, former UK Foreign Secretary William Hague argues that “this is not just about one country. It is in Greece that the fundamental tensions created by a single currency have first broken through, because Greece is a particularly indebted and less competitive country. But the same tensions will ultimately surface in other nations facing a less immediate crisis but a similar prognosis.” He adds, “There is a clear risk that the economic performance of the south will diverge from, not converge with, the north. Unless this is averted in the coming years, it will bring problems to Europe for which Greece has only been a minor rehearsal.” His comments resonate with an op-ed written by Open Europe Co-Director Stephen Booth for The Daily Telegraph last week, in which he argues that the Greek crisis shows the need to redefine ‘ever closer union.’

Hague believes that the problem is the old “north-south” issue, whereby the northern countries supposedly are industrious and productive and the southern countries are not. But this is not the case, because productivity is a relative term. The problem is the structure of the European Union, which gives an implicit guarantee by all members to honor whatever profligate debt any of its members may incur. Greece is just the tip of the iceberg, the canary in the coal mine. No one in Europe quite yet seems to be willing to admit that it is foolish to place entire nations on welfare. The real instigators of this problem are the European socialists, who just cannot bring themselves to recognize that socialism will not work, even if practiced on a grand, continent-wide scale with the ability to print fiat money in vast quantities. I humbly disagree with Mr. Booth that the Greek crisis shows the need for an “even closer union”. It shows just the opposite. Each sovereign nation must balance its own books and live within its means. No collective of nations will be willing to tax its own citizens to support the lifestyle of the citizens of other nations for long, which is what the “ever closer union” implies.
Pat Barron
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Greece should repeal legal tender laws and not print drachma

From today’s Open Europe news summary:
Ruparel: Greece is going to have to start printing its own money

Open Europe’s experts have been widely cited in the UK and international media discussing the latest developments in the Greek crisis. Writing for The Daily Telegraph, Open Europe Co-Director Raoul Ruparel argues that “The negotiations may rumble on for a bit but the gaps between Greece and creditors as well as within the creditors look too large to bridge. Ultimately, if Greece ever wants to reopen its banks it will have to start printing its own currency, marking an important step towards full Grexit.” Raoul also appeared on BBC Radio Four’s Today programme and on BBC Radio Two’s Jeremy Vine Show arguing that it will be very hard for Greece to avoid leaving the Euro now, since its demands remain incompatible with the political situation and democratic mandates of most other Eurozone governments. Raoul is also quoted by the International New York Times and El País. Open Europe’s Co-Director Stephen Booth is quoted by Die Welt arguing that Grexit would reinforce David Cameron’s argument in favour of a more flexible EU.

With all due respect I most vigorously challenge Mr. Ruparel that the Greeks should start printing their own money. Greece should repeal legal tender laws, as a starter, and allow the people to use whatever money they deem most useful. There is little doubt that the world, including the Greeks themselves, will have no confidence in a new drachma; it will be worthless upon arrival.
 
Pat Barron
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My Advice for Greece

 

  1. Leave both the European Union (EU) and the European Monetary Union (EMU).

These are very flawed institutions. In his prescient book Tragedy of the Euro, Professor Philip Bagus uses the term “misconstructed”, which I think is very descriptive of the EU and the EMU. There is nothing that the European Union can offer any member that it cannot grant to itself by adopting unilateral free trade. EU economic regulations are  systematically destroying what little remains of free market capitalism in Europe. The Euro is a fiat currency without any real political protection. All members can abandon the euro at any time, which would relegate the euro’s purchasing power to that of the Zimbabwean dollar…in other words, worthless. Greece is running out of euros, which is causing the Greek economy to come to a standstill. Staying in the EU and the EMU will perpetuate Greece’s loss of sovereignty.  Leaving will force the Greeks to rely upon themselves. It very well may end the Greek welfare state, because it will become clear that the welfare state is at the heart of Greece’s financial problems.

  1. Repeal legal tender laws in Greece.

Allow Greeks to use whatever money they find useful. Do not reinstate the drachma. Forcing a people to use one currency is a form of tyranny, because whoever controls the currency controls the economy, and whoever controls the economy controls the people. Freeing the Greeks to use whatever currency they find useful will immediately get the economy moving back to some form of stability.

  1. Liberalize ALL business and labor regulations.

Greece needs free market capitalism. Business and labor regulations are the means to enforce the socialist welfare state’s predations upon the people. All Greece needs is enforcement of normal criminal and commercial law to prosecute theft, fraud, negligence, etc. These concepts are the result of the common law and can be different in different countries.

  1. Scrap all government agencies that enforce the regulatory state.

These agencies are nothing more than predators upon the people. They do not contribute to the capital wealth of the nation, but destroy it instead. Obviously, scrapping all of these unnecessary and counterproductive agencies will go a long way to solving Greece’s budget deficits by shedding their unnecessary yet highly paid bureaucrats.

  1. Welcome investment from the entire world.

This is a crucial part of becoming a free trade nation. Allow outside capital to invest in Greece and give such investment maximum legal protection. Above all resist the temptation to nationalize or heavily tax foreign investment once it become clear that such investment is productive and profitable.

  1. Reduce taxes to the minimum required to protect life, liberty, and property.

The sole purpose of the state is to provide such protection to its citizens and to provide an honest court system to punish criminals and resolve honest disputes. Extend such protection to foreigners and foreign investments. Again, shrinking government to these essential services will help cure the budget deficit.

  1. Scale back and eventually eliminate all state provided pensions.

It may be inhumane to eliminate all old age pensions in one swift repeal, but the government should adopt policies that will end the provision of state pensions entirely over time. In his magnum opus Capitalism: A Treatise on Economics, Professor George Reisman presents one such method to eliminate Social Security in America. This method could become a template for Greece.

Patrick Barron

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Patrick Barron interviewed on Mises.org re: The Greek Crisis

Patrick Barron: The Greek Crisis and the Impossibility of the Euro

Published on Jul 2, 2015

Jeff Deist and Patrick Barron discuss European integration, which pits creditor nations like Germany against hapless debtors like Greece under the yoke of the Eurozone. With the Euro operating as a political project rather than a real currency, spendthrifts like Greece chronically find themselves unable to service debt. Greece, says Patrick, represents an example of Say’s Law in action and a clear refutation of Keynes’s belief that creating artificial demand via cheap credit stimulates production.

Think Greece can’t happen here? Look no further than California, with its public pension crisis and huge debts.

If you’re looking for a sober and hard-hitting analysis of what’s really at issue in Greece, stay tuned for a great discussion with Patrick Barron.

https://www.youtube.com/watch?v=h5g9i9Y_mqs

https://mises.org/library/patrick-barron-greek-crisis-and-impossibility-euro

http://www.stitcher.com/podcast/mises-weekends/e/39588738?autoplay=true

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Greece illustrates 150 years of socialist failure in Europe

Greece cannot pay its debts…ever. Nor can several other members of the European Union. That’s why Europe’s elite are loath to place Greece in default. If Greece is allowed to abrogate its debts, why should any of the other debtor members of the EU pay up? The financial consequences of massive default by most of the EU members is hard to predict, but it won’t be pretty. Europe has built a financial house of cards, and the slightest loss of confidence will bring it crashing down.

The tragedy of Europe has socialism at its core. Europe has flirted with socialism since the late nineteenth century. Nineteenth century Bismarckian socialism produced two world wars. Leninist socialism slaughtered and enslaved hundreds of millions until it collapsed, mercifully without a third world war. Yet, not to be deterred, in the ashes of World War II Europe’s socialists embarked on a new socialist dream. If socialism fails in one country, perhaps it will succeed if all of Europe joined a supranational socialist organization. Oh, they don’t call what has evolved from this dream “socialism”, but it is socialism nonetheless.

Socialism will not work, whether in one country, a multi-state region such as Europe, or the entire world. Ludwig von Mises explained that socialism is not an alternative economic system. It is a program for consumption. It tells us nothing about economic production. Since each man’s production must be distributed to all of mankind, there is no economic incentive to produce anything, although there may be the incentive of coercion and threats of violence. Conversely, free market capitalism is an economic system of production, whereby each man owns the product of his own labors and, therefore, has great economic incentives to produce both for himself, his family, and as surplus goods to trade for the surplus product of others. Even under life and death threats neither the socialist worker nor his overseer would know what to produce, how to produce it, or in what quantities and qualities. These economic cues are the product of free market capitalism and money prices.

Under capitalism man specializes to produce trade goods for the product of others. This is just one way to state Say’s Law; i.e., that production precedes consumption and that production itself creates demand. For example, a farmer may grow some corn for his family to consume or to feed to his own livestock, but he sells most of his corn on the market in exchange for money with which to buy all the many other necessities and luxuries of life. His corn crop IS his demand and money is simply the indirect medium of exchange.

Keynes attempted to deny Say’s Law, claiming that demand itself, created artificially by central bank money printing, would spur production. He attempted, illogically and unsuccessfully, to place consumption ahead of production. To this day Keynes is very popular with spendthrift politicians, to whom he bestowed a moral imperative to spend money that they did not have.

We see the result of one hundred and fifty years of European socialism playing out in grand style in Greece today. The producing countries are beginning to realize that they have been robbed by the EU’s socialist guarantee that no nation will be allowed to default on its bonds. Greece merely accepted this guarantee at face value and spent itself into national bankruptcy. Other EU nations are not far behind. It’s time to give free market capitalism and sound money a chance: it’s worked every time it’s been tried.

Patrick Barron

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My letter to the Financial Times, London re: Do bank regulations actually work?

Re: Banks face pushback over surging compliance and regulatory costs

Dear Sirs:
Nowhere in your excellent article about shareholder concern over whether banks are spending their regulatory compliance money wisely is there any discussion over whether such regulations actually work. Banking regulators and their supporters would have us believe that the banks themselves are inherently unstable businesses likely to destroy themselves, their customers, and their stockholders unless properly regulated by those of superior insight. The promise from such financial critics is that more regulations more vigorously enforced by more examiners will prevent bank losses. This is a fantasy. Systemic financial panics are caused by central bank expansion of the money supply that drives interest rates below their natural level, encouraging unsustainable debt that must eventually be liquidated en mass. The unregulated so-called “shadow banking” sector, so decried by ECB president Mario Draghi, is funded by investors who are willing to bear their own losses. Any investment bubble that threatens this industry is caused by Mr. Draghi himself.
Patrick Barron
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How does it know?

IMF Says China’s Currency No Longer Undervalued

The International Monetary Fund announced on Tuesday that for the first time in over a decade China’s currency is no longer undervalued (SCMP). U.S. policymakers have long criticized China’s artificial weakening of the renminbi, and the issue of currency manipulation has been at the center of deliberations over trade deals in the U.S. Congress.

With currency markets rigged everywhere and central banks intervening either to support or devalue their currencies according to the politics of the day, there is no free currency market. Only free markets deliver real prices; therefore, in a free market no good is ever undervalued or overvalued. There is only the latest price at which buyers and sellers agreed to an exchange.

Pat Barron

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