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

Posted in News/ Lessons | Leave a comment

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
Posted in News/ Lessons | Leave a comment

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

Posted in News/ Lessons | Leave a comment

US inflation up 47.1% and real GDP down 21.4% since 2011!

Alasdair Macleod compares the Chapwood Index to the official CPI

Government has been lying to everyone, including itself, about the rate of inflation. The government claims that cumulative inflation since 2011 is 7.2%; whereas, the Chapwood Index claims that real prices of the top 500 items purchased by Americans in America’s 50 largest cities have risen a cumulative 47.1%.
The Chapwood Index also challenges the government’s claim that nominal GDP has grown by 18.1% since 2011, which would mean that real GDP is up by 10.9% (the difference between nominal GDP of 18.1% and inflation of 7.2%). But Chapwood claims that real GDP has FALLEN by 21.4%!
Patrick Barron
Posted in News/ Lessons | Leave a comment

My letter to the NY Times re: Why laid off Americans can’t find jobs

Re: The Perils of Globalization

Dear Sirs:
I believe that Binyamin Appelbaum may have unwittingly answered his own question about why American workers who lose their jobs–as illustrated by the former Maytag employees in Galesburg, Illinois–have such a difficult time finding alternative employment of the same standard. Mr.Applebaum reports that America is trying to negotiate international trade agreements that would build a “shield against globalization that would move closer to American standards for environmental protection, worker rights and intellectual property.” These very policies are the cause of America’s economic problems, and our trading partners would be foolish to adopt them. They are more likely to adopt the common sense policy of gradually incorporating these standards over time on a cooperative rather than an adversarial basis, in full knowledge that adopting them too early would create a barrier to economic growth. These standards are the consequences of economic growth. In effect, economic growth pays for them. The adverse consequences for believing otherwise are there for all to see in the US and Western Europe–a falling labor participation rate and out of control government debt to pay so-called welfare entitlements.
Patrick Barron
Posted in News/ Lessons | Leave a comment

Greeks get Mercedes and BMW’s; Germans get depreciating euros

Re: Where Greeks Are Stashing Their Cash

Ludwig von Mises characterized the third and final stage of a currency’s collapse, where people are desperate to exchange their currency for almost anything of real value, as a “crack up boom”. Notice the “boom” part. The German automobile industry is booming, because Greeks (and others) are converting their depreciating euros into real goods. Apparently Greek pharmacies cannot get drugs, because they or their government do not pay their bills. But luxury cars are still available and Germans are happy to sell them. OK, now the Germans have euros instead of cars. What can they do with these depreciating euros? Well, for one thing, these euros are stacking up as credits at the Bundesbank’s TARGET2 account at the European Central Bank. Unlike other clearing systems run by central banks, which require member banks to fund their deficit clearing accounts with real assets on a daily basis, the ECB allows its national central bank members to run overdrafts. A close look at the latest TARGET2 accounts reveals that Germany and Luxembourg are running significant positive balances; whereas, Spain, Italy, and Greece are running significant negative balances. The other ECB members carry somewhat less significant positive (Finland, the Netherlands) or negative (Ireland, France, Portugal) TARGET2 balances. Another way of looking at this is that Germany and Luxembourg are not getting paid for the goods and services that their hard working population provides to Spain, Italy, and Greece. It’s all funny money. Germany, especially, carries a huge positive balance of around a half trillion euros.
ECB president Mario Draghi is determined to drive down the value of the euro vis a vis other world currencies and generate positive inflation in the euro zone. So Germany’s TARGET2 balance is officially under attack. Draghi is a fool for believing that his bank can peg inflation to a low number once inflation gets a good hold on the people’s psyche.
Germany should get out of this monetary loony bin forthwith, reinstate the Deutsche Mark, and treat its euro credit at the ECB as a bad debt. One of the rules of debt collection is to stop lending the debtor more money! A strong Deutsche Mark exchange rate vis a vis what’s left of the euro and especially vis a vis a reinstated Greek Drachma and/or Italian Lira would reveal that Germany in effect has been giving its products away for almost nothing. This used to be called slavery.

 

Pat Barron

Posted in News/ Lessons | Leave a comment

The problem isn’t overproduction; it’s malinvestment

Mr. Max Ehrendfreund, writing in the Washington Post’s Wonkblog, believes that he has discovered something new: that the world is producing too much and doesn’t know what to do with it. His solution, of course, is to confiscate the overproduced products, such as oil and cotton, from its rightful owners and give it to the people who need it. This phony problem and its statist solution goes back at least as far at the 1930’s socialist calls for “production for use” vs. the hated capitalist concept of “production for profit“.

 

Mr. Ehrenfreund commiserates that a “surplus…challenges some basic principles of conventional economics…”. Ah, now we see why Mr. Ehrenfreund has a problem; he understands only “conventional economics”. Austrians have no such problem understanding why many commodities are currently in surplus. Our understanding of Austrian business cycle theory tells us that years of interest rate suppression by monetary authorities worldwide has disrupted the time structure of production; i.e., that artificially low interest rates have led entrepreneurs and their business partners to believe that sufficient resources exist for the profitable completion of longer term projects, such as increasing investment in oil and cotton production. Austrians do not contend that there cannot be a surplus of some goods. Of course, there can! But we know that a surplus of some goods means that there is a scarcity of others. Resources were “malinvested” in some projects instead of those more urgently desired by the public.

 

Here’s a rather humorous example.  A good friend was teaching in West Germany during the age of Tito, when he and his wife decided to vacation along Yugoslavia’s beautiful Adriatic coast. While there they tried in vain to find swimming accessories, like fins and masks, but shop after shop sold only one product. That one product? Panama hats! True story. So here is a good example of zero demand for Panama hats and a scarcity of swimming accessories in one of the most beautiful seaside vacation spots in the world. But these surpluses and scarcities are not always so obviously related. A surplus of oil and cotton may mean that there is a scarcity of millions of other goods that could otherwise have been produced.

 

The socialist dogma, to which Mr. Ehrenfeund seems to be enamored, blinds him to the concept that a successful economy does not need centralized control. In fact a successful economy needs no guidance at all, except the rational decisions of the owners of the means of production to put their resources to the most desired use. How do they know what that “most desired use” is? The price system tells them! A dynamic economy is controlled by millions upon millions of people making billions upon billions of decisions that are in constant flux. Manipulating the price of any factor of production, such as cotton prices, will cause disruptions. But our governments have done much worse than manipulate the price of a few major factors o f production; they have manipulated the price of money itself, the medium of exchange that is the lubricating and knowledge transmission device for ALL economic decisions.

 

So, Mr. Ehrendreund, brush up on your Mises, Rothbard, Hayek, Habeler, and Garrison. Your confusion will disappear to be replaced, no doubt, by exasperation that you ever could have harbored such silly notions as those you espouse in your article.

Patrick Barron

Posted in News/ Lessons | Leave a comment

Give the free market a chance!

Re: US jobs relapse raises fresh doubts on Fed tightening

This link to a recent Telegraph (of London) Ambrose Evans-Pritchard (AEP) report is typical of the trap that Keynesians have built for themselves. AEP well articulates their dilemma, stating:
“…the developed world has yet to shake off the legacy of the Lehman crisis, is struggling with record debt ratios and has already used up most of its fiscal and monetary ammunition.”
The Keynesian tools of choice for escaping a recession are increased government spending and monetary stimulus. It must work, they believe, because their models tell them so. But when governments spend themselves to unsustainable debt levels and central banks expand base money and drive down the interest rate and STILL the economy refuses to budge, these Keynesians are trapped. And like all trapped animals, they are dangerous. But their conundrum is a mental trap only and one that is easily conquered, if only they have the courage to admit it and take appropriate action. The cure is simplicity itself. They must give the free market a chance. Governments must CUT spending, and central banks must STOP EXPANDING base money. This means that governments must tell their citizens that the welfare/warfare state is ending. And central banks must tell their governments that they will no longer monetize debt or intervene in any way to influence the interest rate. The resulting recession, perhaps even depression, is the necessary and inevitable workings of the free market to shed itself of what must now be massive malinvestment. It is the market working to realign the structure of production to economic reality. This will take time, but there is no other way.
Patrick Barron
Posted in News/ Lessons | Leave a comment

My letter to the NY Times re: Rattle those bones, blow that smoke, and bleed the patient until he recovers!

Re: Is 2% Inflation enough?

Dear Sirs:
As you note, the Fed has held “its benchmark rate near zero…since December 2008″, but without the result promised by econometric models. Therefore, those Keynesian economists you quote want even more money printing. They sound like witch doctors who have stood over a patient for six years, rattling bones and blowing smoke to no avail. Now they are consulting Colonial era specialists, who advocate bleeding the patient until he recovers. I recommend that they advance at least one hundred years to the era of the marginalist revolution of the Austrian school and stop money printing all together. Money is a medium of exchange and nothing more. Its uses as a means to settle accounts and as a store of value derive from this foundational utility. Printing more money simply reduces each unit’s usefulness, what Austrians call its “diminishing marginal utility”. The witch doctor and Colonial era physicians are going to drive the dollars marginal usefulness to zero, and America will experience the same wonderful benefits of cheap money as did the Germans of the Wiemar Republic and more recent Zimbabweans.
Patrick Barron
Posted in News/ Lessons | Leave a comment

My letter to the NY Times re: Statism vs. Liberty

Re: In Japan, Bid to Stifle Criticism Is Working

Dear Sir:
In your chilling report of the Abe government’s efforts to limit Japan’s free press, you use the terms “right-leaning” and “conservative” to describe his government. May I suggest that a better term is “statist” vs. one of “liberty”. The right/left and conservative/liberal descriptions do not convey real differences. An extreme example would be the usual references to Nazi Germany as right-leaning and conservative and Stalinist Russia as left leaning and liberal; whereas, both were statist regimes intent on grinding their citizens under the boot heal of government repression. Nobel Laureate F. A. Hayek characterized both regimes as two sides of the same coin in Road to Serfdom. The alternative to a statist regime is one dedicated to liberty, in which the individual is allowed complete freedom of expression.
Patrick Barron
Posted in News/ Lessons | Leave a comment