The euro should now be put to the sword

Discussion in 'Europe and Russia' started by pmaitra, Jun 26, 2012.

  1. pmaitra

    pmaitra Moderator Moderator

    Joined:
    Mar 10, 2009
    Messages:
    31,663
    Likes Received:
    17,159
    Location:
    EST, USA
    The euro should now be put to the sword

    The 19th crisis summit won’t achieve anything until it faces up to the EU’s economic deceit, writes Jeff Randall.

    Given Rome’s history of staging grotesque spectacles, it’s appropriate that the Eternal City was hosting last week’s gathering of leaders in the never-ending circus of European Union summitry. Spectators looking for a demonstration of gladiatorial courage will have been disappointed. Never mind fighting lions, the main players in the arena seem not to know what form the beast takes, much less how to kill it.

    Since Greece went into meltdown, triggering a crisis of confidence in the euro, there have been 18 EU summits. The format is wearyingly familiar: after 36 hours of unproductive haggling, a communiqué is issued, promising a united effort to boost growth, promote jobs and curb “speculators”.

    Vulnerable countries then brief reporters on the desirability of mutualising sovereign debt and fiscal transfers. This is followed by a statement from Berlin, the subtext of which is that the Germans would rather eat their own eyeballs than give Athens the PIN for a Bundesbank savings account.

    Having rallied briefly on superficial hopes of effective action, financial markets lurch into reverse, forcing up the borrowing costs of weaker eurozone members to “Game Over” levels. Amid rancour and confusion, the unfulfilled alchemists of EU politics retreat to work out whom to blame next.

    All that has changed is Germany’s readiness to dish out its retaliation first. Anticipating (correctly) that Greece’s new order would call for an easing of the bail-out terms, Volker Kauder, one of Angela Merkel’s key parliamentary allies, last week told Der Spiegel that his government should not “send any signal” that agreed austerity measures can be changed.

    At the heart of the disaster is the reluctance of Europe’s self-deluding elite to admit that the single currency was launched on a false premise and shored up by deceit. As long as its members insist that there can be a politically contrived solution to what is essentially a financial crisis, the cost of failure will continue to soar.

    The false premise was, as the high-priest of liberal-Left economics, Princeton’s Paul Krugman, pointed out recently, “the arrogance of European officials, mostly from richer countries, who convinced themselves that they could make a single currency work without a single government”.

    The deceit, highlighted by Harvard historian Niall Ferguson in the first of his Reith lectures last week, continues to be a “fraudulent” system of national accounting, allowing huge liabilities to be hidden by profligate states: “Not even the current income and expenditure statements can be relied upon in some countries.”

    Confounded by events and discredited by outcomes, those who urged us to believe that political firepower would abolish financial gravity inside the eurozone are now tormented by their own hubris. Yet rather than confess to intellectual shortcomings, they thrash about for scapegoats.

    One crackpot theory suggests that it’s all the fault of the Germans for having the cheek to work hard, pay taxes, save money and be competitive. If only they were more like their unproductive, big-spending trading partners, all would be well.

    Another blames the evil of “speculation”. This Anglo-Saxon barbarity, it is claimed, must be rooted out so that near-bankrupt EU countries can once again borrow on terms normally reserved for AAA-rated customers.

    This is nonsense. The problem is not those benefiting from the system but the system itself. In a league table of financial fantasies, the euro is right up there with Tulipomania and the South Sea Bubble.

    Encouraging soft economies to operate with a hard currency is the devil’s work. It ends in financial purgatory. There is, however, one important difference between where Greece is today and Hell: unlike the eternally damned, the Greeks do not have to suffer in perpetuity. They have an alternative; it would not be pain-free, but it offers an escape from diabolical austerity and a chance to rebuild.

    Greece must default and leave the euro. Writing in Le Monde diplomatique, Costas Lapavitsas, professor of economics at SOAS, explains: “Greece needs to stop chasing its tail by seeking to service an unsupportable debt… default ought to be followed by the reintroduction of the drachma.” Yes, there would be short-term economic turmoil, but it has to be better than endless suffering.

    Formal bankruptcy is the financial solution to a financial problem: Greece’s insolvency. Will it happen? Not if self-serving EU leaders and their Brussels flunkies have anything to do with it. Like members of the Flat Earth Society, they cling desperately to a vision of the world that no longer bears scrutiny.

    The dream of a United States of Europe has turned into a nightmare, but confronting reality is too terrifying for them to contemplate. In the absence of voter approval for irreversible fiscal union and a perpetual conveyor belt of taxpayer funding from Stuttgart to Salonika, how does the euro survive?

    For if Greece goes, what about Spain? Many Spanish banks are bust (their property portfolios are a horror show). Madrid cannot afford to rescue them, because its borrowing costs are too high. So the European Central Bank is lending cheap money to the Spanish financial sector so that it can recycle the cash into Spanish bonds at below-market rates. It’s like a drowning man throwing a lifebelt to a sinking ship: both are doomed.

    In the amphitheatres of ancient Rome, there was a grisly form of voter participation. The crowd was invited to pass judgment on defeated gladiators. Thumbs down meant a swift dispatch.

    EU leaders arriving in Italy last week were, perhaps undeservedly, spared death by the sword. They will, however, be held to account by investors, whose dwindling patience is murdering the euro.

    Source: The euro should now be put to the sword - Telegraph
     
  2.  
  3. SADAKHUSH

    SADAKHUSH Senior Member Senior Member

    Joined:
    Sep 7, 2010
    Messages:
    1,802
    Likes Received:
    758
    Location:
    Winterland
    After the dust settles in Europe, how many of southern European countries will head to exit door? How will it effect the exchange rate between Euro other world currencies?
     
  4. ejazr

    ejazr Stars and Ambassadors Stars and Ambassadors

    Joined:
    Oct 8, 2009
    Messages:
    4,518
    Likes Received:
    1,378
    Location:
    Hyderabad and Sydney
    The British have been anti-Euro from the beginning, but until the EU can come up with a common fiscal regime, then a common currency doesn't make a lot of sense.
     
    W.G.Ewald likes this.
  5. p2prada

    p2prada Stars and Ambassadors Stars and Ambassadors

    Joined:
    May 25, 2009
    Messages:
    10,233
    Likes Received:
    3,896
    Location:
    Holy Hell
    Bwahahahahahahahazhahahahahahaahhaahhaah!

    It would be easier to teach a dog to speak.
     
    W.G.Ewald likes this.
  6. SADAKHUSH

    SADAKHUSH Senior Member Senior Member

    Joined:
    Sep 7, 2010
    Messages:
    1,802
    Likes Received:
    758
    Location:
    Winterland
    Some of giants of Europe use to lecture us about fiscal responsibility and they themselves did not foresee the tsunami of bailout heading their way. I think they will have cut back on social programs whether people like it or not besides that workers will have to take pay cuts as well in order to compete with emerging economies. This is the reality of to-days world. This is how we did in North America in order to rescue auto plant jobs.

    The latest one to join rescue club is Cyprus due to the fact they had loaned huge sums of money to Greek Banks. They are releasing the bad news in bits and pieces in order to avoid rush to the banks across Europe. Some of the big Banks in North Europe are going to be on chopping block as well due to the fact they have loaned close to two trillion dollars to South European Banks in the real estate projects.
     
    W.G.Ewald likes this.
  7. p2prada

    p2prada Stars and Ambassadors Stars and Ambassadors

    Joined:
    May 25, 2009
    Messages:
    10,233
    Likes Received:
    3,896
    Location:
    Holy Hell
    @SADAKHUSH

    You are right. The British are already rolling back benefits so that the freeloaders can look for jobs instead.
     
  8. SADAKHUSH

    SADAKHUSH Senior Member Senior Member

    Joined:
    Sep 7, 2010
    Messages:
    1,802
    Likes Received:
    758
    Location:
    Winterland
    Who will gain the most and loose out of this impending break up of Euro?
     
  9. trackwhack

    trackwhack Tihar Jail Banned

    Joined:
    Jul 20, 2011
    Messages:
    3,757
    Likes Received:
    2,573
    The United States. I am waiting for the first book to come out that details how the US systematically killed the Euro.
     
  10. panduranghari

    panduranghari Senior Member Senior Member

    Joined:
    Jan 2, 2012
    Messages:
    1,790
    Likes Received:
    1,245
    Euro will not die. All your half baked theories and unscrupulous Suppositions will fall flat on its face. Benefits for common man will go that's given. But euro will be alive even after rupee has hyper inflated just like the dollar.
     
  11. ejazr

    ejazr Stars and Ambassadors Stars and Ambassadors

    Joined:
    Oct 8, 2009
    Messages:
    4,518
    Likes Received:
    1,378
    Location:
    Hyderabad and Sydney
    True its going to be close to impossible. But doesn't mean EU leaders are trying

    Leaders unveil plan to give EU budget control

    Expect to see more Greece style riots when EU heads start controlling budgets of soverign member states.
     
  12. Armand2REP

    Armand2REP CHINI EXPERT Veteran Member

    Joined:
    Dec 17, 2009
    Messages:
    10,397
    Likes Received:
    2,314
    Who listens to a right wing British rag talking about the Euro? :rofl:
     
    W.G.Ewald and panduranghari like this.
  13. SADAKHUSH

    SADAKHUSH Senior Member Senior Member

    Joined:
    Sep 7, 2010
    Messages:
    1,802
    Likes Received:
    758
    Location:
    Winterland
    That is exactly what I have been thinking for a long time, how will each nation and her citizen react to the central control by EU? Will they compromise and tow the line or escalation in riots across Europe will be norm?

    In my earlier post, I had asked a question as to who will benefit from impending Euro breakup? It was improperly worded. I should have asked what effect will exit of one or two states have on Euro?
     
  14. Nagraj

    Nagraj Regular Member

    Joined:
    Jan 7, 2011
    Messages:
    804
    Likes Received:
    254
    Why so dude!
     
  15. panduranghari

    panduranghari Senior Member Senior Member

    Joined:
    Jan 2, 2012
    Messages:
    1,790
    Likes Received:
    1,245
    Precisely. If truth be told about how precarious the British and American economy is, there would be bank runs.
     
  16. Armand2REP

    Armand2REP CHINI EXPERT Veteran Member

    Joined:
    Dec 17, 2009
    Messages:
    10,397
    Likes Received:
    2,314
    The British economy is in double dip recession, inflation twice as high and a deficit 3 points higher than France. They are in no position to criticise us. :lol:

    The Americans might be growing slowly, but the size of their annual deficit to get it is as big as Spain's GDP. :shocked:
     
  17. pmaitra

    pmaitra Moderator Moderator

    Joined:
    Mar 10, 2009
    Messages:
    31,663
    Likes Received:
    17,159
    Location:
    EST, USA
    PRO-BRUSSELS ELITE IS STILL PLOTTING TO SELL BRITAIN OUT

    Monday June 25,2012
    By Daily Express reporter


    THESE days the facts of European politics are very straightforward. The most important are that the euro has failed and that is has done so in exactly the manner predicted by its opponents.

    Given the annihilation by events of their political prospectus, a period of silence would be welcome from those who advocated the euro and pushed for British membership.

    Instead we are being treated to a new round of pontificating. The EU enthusiasts, exemplified by Tony Blair, suggest that Britain will one day join a revamped and successful euro.

    They point to the creation of a single economic government for the eurozone, by means of fiscal union, as the development that will turn the euro into a success story and leave Britain “isolated”.

    Mr Blair yesterday suggested that in such circumstances Britain would have an “interesting” choice to make. It is
    clear that the European referendum he wishes to see would be on whether to join the fiscal union. Voters would be
    asked to choose between the status quo and an alternative of a final loss of nationhood.

    The swivel-eyed, pro-Brussels fanatics will not give in. The only choice they want voters to have is between the vast excess of EU interference we currently tolerate and total EU domination.

    But the referendum we need is on removing Britain from the EU and restoring national sovereignty. If the Conservatives do not offer it they should not be surprised if the shameless riders of the EU gravy train take advantage of their timidity. They are already plotting to do so.

    Source: Express.co.uk - Home of the Daily and Sunday Express | Express Comment :: Pro-Brussels elite is still plotting to sell Britain out
     
  18. panduranghari

    panduranghari Senior Member Senior Member

    Joined:
    Jan 2, 2012
    Messages:
    1,790
    Likes Received:
    1,245
    “We Wish You A Long Life” – Is A Hyper-Volatility Event Coming? | Pater Tenebrarum | FINANCIAL SENSE

    We are frequently struck by the fact that quite a few market observers in the Anglo-sphere don't really believe it is possible. For all the predictions of imminent doom (see Nouriel Roubini's latest dooming and glooming as an example), deep down nobody thinks it is going to happen. When push comes to shove, so the generally held view, then 'Germany will relent', or 'the ECB will print'.

    But what if they don't, and why is everybody so sure of this? Dalio makes an important point about the ECB, which we briefly mentioned yesterday as well – namely, that its governing board is also split into major factions. Nothing will get done that has not the overwhelming support of all of them. Moreover – and this is our opinion, not a point specifically mentioned by Dalio – the ECB's governing council will simply not do anything that could be interpreted as a breach of the central bank's statutes.

    Mario Draghi himself has made that crystal-clear not on one, but on several occasions. He even went as far as insisting that it is not the merely the letter of the law, but the spirit of the law that is to be adhered to. In short, don't expect any 'clever legal tricks' from the ECB. This does not mean that the ECB has fully deployed its interventionist tools just yet. There is conceivably a lot more it can do (more on that below) – but what it cannot do and won't do, is Fed or BoE-style 'QE'.

    The conventional wisdom espoused by the economists and reporters is ECB should print. You statement quoted above perhaps makes the same observation.

    Here we have from the ECB directly;

    http://www.ecb.int/pub/pdf/other/pp45_57_mb200211en.pdf?24afe9e90d1f0a9d583069fd513e3e72


    As illustrated in Table 1 below, the maintenance of price stability is an explicit, though not the only, objective of the ECB and the other three central banks referred to in this article.

    While the Treaty also assigns a further objective to the ECB, namely that of supporting the general economic policies in the Community with a view to contributing to the achievement of the objectives set out in Article 2 of the Treaty – where this is possible without prejudice to the objective of price stability – it does so with clear prioritisation.

    To maintain price stability the EURO can never be printed. And they will not print. Merkel will win as usual. So what will give?

    Well welcome to QE3 by Ben Bernanke.

    If Ben does not undertake QE3, USA will have to cut 1 of the 3 completely - Defence expenditure or Medicare or Social Security. OR cut 1/3 of each. Is it palatable when Obama wishes to be re-elected?
     
  19. pmaitra

    pmaitra Moderator Moderator

    Joined:
    Mar 10, 2009
    Messages:
    31,663
    Likes Received:
    17,159
    Location:
    EST, USA
    Originally published in The Foreign Affairs

    December 13, 2011

    The Failure of the Euro

    By MARTIN FELDSTEIN
    (PDF Version)

    The euro should now be recognized as an experiment that failed. This failure, which has come after just over a dozen years since the euro was introduced, in 1999, was not an accident or the result of bureaucratic mismanagement but rather the inevitable consequence of imposing a single currency on a very heterogeneous group of countries. The adverse economic consequences of the euro include the sovereign debt crises in several European countries, the fragile condition of major European banks, high levels of unemployment across the eurozone, and the large trade deficits that now plague most eurozone countries.

    The political goal of creating a harmonious Europe has also failed. France and Germany have dictated painful austerity measures in Greece and Italy as a condition of their financial help, and Paris and Berlin have clashed over the role of the European Central Bank (ECB)and over how the burden of financial assistance will be shared.

    The initial impetus that led to the European Monetary Union and the euro was political, not economic. European politicians reasoned that the use of a common currency would instill in their publics a greater sense of belonging to a European community and that the shift of responsibility for monetary policy from national capitals to a single central bank in Frankfurt would signal a shift of political power.

    The primary political motive for increased European integration was, and may still be, to enhance Europe's role in world affairs. In 1956, just after the United States forced France and the United Kingdom to withdraw their forces from the Suez Canal, German Chancellor Konrad Adenauer told a French politician that individual European states would never be leading global powers, but "there remains to them only one way of playing a decisive role in the world; that is to unite to make Europe. . . . Europe will be your revenge." One year later, the Treaty of Rome launched the Common Market.

    The Common Market expanded in 1967 to form the European Communities, and then, in 1992, the Maastricht Treaty gave rise to the European Union, which created a larger free-trade area, provided for the mobility of labor, and set a timetable for adopting a single currency and an integrated European market for goods and services. The European Commission cast this arrangement as a steppingstone toward greater political unity and made the specious argument that the free-trade area could succeed only if its member countries used a single currency. (There is, of course, nothing in economic logic or experience that implies that free trade requires a single currency. The North American Free Trade Agreement, for example, has stimulated increased trade without anyone thinking that the United States, Canada, and Mexico should have a single currency.)

    Germany resisted the decision to create a single currency, reluctant to give up the deutsche mark and the price stability and prosperity it had brought to the country's postwar economy. But Germany eventually gave in, and France and others succeeded in establishing a schedule that would lead to the launching of the euro in 1999. Germany was, however, able to influence some of the characteristics of the ECB: the bank's formal independence, its single policy goal of price stability, the prohibition on purchasing bonds from member governments, a "no bailout" rule for countries that became insolvent, and its location in Frankfurt. Germany also forced the creation of a stability agreement that established financial penalties for any country that had a budget deficit of more than three percent of its GDP or a debt that exceeded 60 percent of its GDP. When France and Germany soon violated these conditions, the Council of Ministers voted not to impose penalties, and the terms of the pact were weakened so that they became meaningless.

    A DEATH FORETOLD

    Long before the euro was officially introduced, economists pointed to the adverse effects that a single currency would have on the economies of Europe. (See, for example, my Economist article from 1992, "The Case Against the Euro," or my essay from these pages, "EMU and International Conflict," November/December 1997.) Single currencies require all the countries in the monetary union to have the same monetary policy and the same basic interest rate, with interest rates differing among borrowers only due to perceived differences in credit risk. A single currency also means a fixed exchange rate within the monetary union and the same exchange rate relative to all other currencies, even when individual countries in the monetary union would benefit from changes in relative values. Economists explained that the euro would therefore lead to greater fluctuations in output and employment, a much slower adjustment to declines in aggregate demand, and persistent trade imbalances between Europe and the rest of the world. Indeed, all these negative outcomes have occurred in recent years.

    Here is why: when a county has its own monetary policy, it can respond to a decline in demand by lowering interest rates to stimulate economic activity. But the ECB must make monetary policy based on the overall condition of all the countries in the monetary union. This creates a situation in which interest rates are too high in those countries with rising unemployment and too low in those countries with rapidly rising wages. And because of the large size of the German economy relative to others in Europe, the ECB's monetary policy must give greater weight to conditions in Germany in its decisions than it gives to conditions in other countries.

    The tough anti-inflationary policy of the ECB caused interest rates to fall in countries such as Italy and Spain, where expectations of high inflation had previously kept interest rates high. Households and governments in those countries responded to the low interest rates by increasing their borrowing, with households using the increased debt to finance a surge in home building and housing prices and the governments using it to fund larger social programs.

    The result was rapidly rising ratios of public and private debt to GDP in several countries, including Greece, Ireland, Italy, and Spain. Despite the increased risk to lenders that this implied, global capital markets did not respond by raising interest rates on those countries with increasing debt levels. Bond buyers assumed that a bond issued by one government in the European Monetary Union was equally safe as a bond issued by any other government in the union, ignoring the "no bailout" provision of the Maastricht Treaty. As a result, the interest rates on Greek and Italian bonds differed from the rate on German bonds by only a small fraction of a percent.

    Before the monetary union was put in place, large fiscal deficits generally led to higher interest rates or declining exchange rates. These market signals acted as an automatic warning for countries to reduce their borrowing. The monetary union eliminated those market signals and precluded the higher cost of funds that would otherwise have limited household borrowing. The result was that countries borrowed too much and banks loaned too much on overpriced housing.

    When, in early 2010, the markets recognized the error of regarding all the eurozone countries as equally safe, interest rates began to rise on the sovereign debts of Greece, Italy, and Spain. Market dynamics put in motion a self-reinforcing process in which rising interest rates led countries to the brink of insolvency. In particular, the fear that Greece might have trouble meeting its debt payments caused the interest rate on Greek debt to rise; the expectation of higher future interest payments implied an even larger future debt burden. What started as a concern about a Greek liquidity problem -- in other words, about the ability of Greece to have the cash to meet its next interest payments -- became a solvency problem, a fear that Greece would never be able to repay its existing and accumulating debt. That pushed interest rates even higher and led eventually to a negotiated partial default, in which some holders of Greek sovereign debt agreed to accept a 50 percent write-down in the value of their bonds. In turn, the Greek experience raised the perceived risk of Italian government debt, causing the interest rate on Italian government bonds to rise from less than four percent in April 2010 to more than seven percent in November 2011 -- a rate that will cause government debt to rise faster than national income, pushing Italy to the brink of insolvency.

    A different market dynamic affected the relationship between European commercial banks and European governments. Since the banks were heavily invested in government bonds, the declining value of those bonds hurt the banks. The banks then turned to their governments to protect their depositors and other creditors, thus magnifying the original problem. In Ireland and Spain, this cycle began with mortgage defaults, harming the banks and leading governments to guarantee the holdings of the banks' depositors and other creditors, thus adding to government debt. The banks' heavy investment in government bonds then meant that the weakness of Irish and Spanish government debt further hurt the banks.

    THE EURO ON LIFE SUPPORT

    By the fall of 2011, several European countries had debt-to-GDP ratios that were high enough to make default a serious possibility. Sharp write-downs in the value of their sovereign debts are not a feasible solution because they would do substantial damage to European banks and possibly to banks and other financial institutions in the United States.

    European political leaders have proposed three distinct strategies to deal with this situation. First, led by German Chancellor Angela Merkel and French President Nicolas Sarkozy, eurozone officials agreed last October that commercial banks should increase their capital ratios and that the size of the European Financial Stability Facility (EFSF), which had been created in May 2010 to finance government borrowing by Greece and other eurozone countries, should be expanded from 400 billion euros to more than a trillion euros. This latter move was meant to provide insurance guarantees that would allow Italy and potentially Spain to access capital markets at reasonable interest rates.

    But the plan to increase the banks' capital has not worked, because banks do not want to dilute the holdings of their current shareholders by seeking either private or public capital, and so instead they have been raising their capital ratios by reducing their lending, particularly to borrowers in other countries, causing a further slowdown in European economic activity. Nor can the EFSF borrow the additional funds, since such a move is opposed by Germany, the largest potential guarantor of that debt. Moreover, even a trillion euros would not give the EFSF enough funds to provide effective guarantees to potential buyers of Italian and Spanish debt if those countries might otherwise appear insolvent.

    The second strategy, advocated by France, calls for the ECB to buy the bonds of Italy, Spain, and other countries with high debt to keep their interest rates low. The ECB has already been doing this to a limited extent, but not enough to stop Greek and Italian rates from reaching unsustainable levels. Asking the ECB to expand this policy would directly contradict the "no bailout" terms of the Maastricht Treaty. Germany opposes such a move because of its inflationary potential and the risk of losses on those bonds. (Two German members of the ECB's executive board have resigned over this issue.)

    The third strategy is favored by those figures, such as Merkel, who want to use the current crisis to advance the development of a political union. They call for a fiscal union in which those countries with budget surpluses would transfer funds each year to the countries running budget deficits and trade deficits. In exchange for these transfers, the European Commission would have the authority to review national budgets and force countries to adopt policies that would reduce their fiscal deficits, increase their growth, and raise their international competitiveness.

    This transfer arrangement has already happened with Greece and Italy. The case of Greece has been the most dramatic. By last October, Greece was unable to borrow in the global capital market and therefore had to depend on credit extended by the ECB and the International Monetary Fund to pay civil servants and maintain its social welfare programs. Merkel and Sarkozy summoned Greek Prime Minister George Papandreou to Brussels and told him that he must abandon the plan he had announced to hold a national referendum on the austerity measures being imposed by the other eurozone members. They told him that instead he must persuade the Greek parliament to accept the tough strategy to reduce the budget deficit created by Merkel and Sarkozy or face expulsion from the eurozone. Papandreou agreed and forced the necessary legislation through parliament. He then resigned, and Lucas Papademos, a former vice president of the ECB, was appointed as a temporary prime minister with the responsibility of implementing the budget cuts designed in Brussels. But the subsequent parliamentary defections and public riots have shown how much the Greek people resent being forced by Germany to change their economic behavior, accept layoffs of government employees who thought they had lifetime jobs, and reduce demand at a time of double-digit unemployment and rapidly falling GDP. At the same time, many voters in Germany resent sending money to the Greeks and seeing the rules of the ECB undergo radical change.

    The situation in Italy is different because Italy is not yet dependent on explicit transfers from the ECB or the International Monetary Fund. But Italy does depend on the support of the ECB to limit the rise of the interest rate for its government bonds. France and Germany pressured Italy to adopt new budget policies, leading to the resignation of Prime Minister Silvio Berlusconi in November and the appointment of a technocrat government committed to resolving Italy's fiscal problems. The euro has thus caused tensions and conflicts within Europe that would not otherwise have existed. Further steps toward a permanent fiscal union would only exacerbate these tensions.

    GREECE'S IMPOSSIBLE MATH

    Greece's budget deficit of nine percent of GDP is too large to avoid an outright default on its national debt. With Greece's current debt-to-GDP ratio at 150 percent and the current value of Greece's GDP falling in nominal euro terms at an annual rate of four percent, the debt ratio will rise in the next year to 170 percent of GDP. Rolling over the debt as it comes due and paying higher interest rates on it would raise the total debt even more quickly.

    Even if a more general write-down of Greek debt were to cut Greece's existing interest payments in half, the deficit would still be six percent of Greece's GDP and the debt-to-GDP ratio would rise to 165 percent of GDP at the end of 12 months. And this does not even take into account the adverse effect the debt write-down would have on Greek banks. The Greek government would be forced to provide payments to Greek depositors, further increasing the national debt.

    To achieve a sustainable path, Greece must start reducing the ratio of its national debt to GDP. This will be virtually impossible as long as Greece's real GDP is declining. Basic budget arithmetic implies that even if Greece's real GDP starts growing at two percent (up from the current seven percent real rate of decline) and inflation is at the ECB target of two percent, the deficit must still not exceed six percent of GDP if the debt ratio is to stop increasing. Since the interest alone on the debt is now about six percent of GDP, the rest of the Greek budget must be brought into balance from its current three percent deficit.

    Cutting the interest bill in half and simultaneously balancing the rest of the budget would reduce the ratio only very slowly, from 150 percent now to 145 percent after a year, even if no payments to bank depositors and other creditors were required. It is not clear that financial markets will wait while Greece walks along this fiscal tightrope to a sustainable debt ratio well below 100 percent.

    The situation in Italy is much better. Italy already has a slightly positive growth rate and a primary budget surplus, with tax revenues exceeding noninterest government outlays by about one percent of GDP. The country's total budget deficit is about four percent of GDP; a reduction of the deficit equivalent to two percent of GDP would be enough to begin reducing the ratio of debt to GDP. That should not be difficult to achieve, since government spending accounts for roughly 50 percent of GDP. The prospect of a declining budget deficit has already reduced the interest rate on new government borrowing from 7.5 percent to 6.5 percent. Eliminating the budget deficit and starting to shrink the debt ratio more rapidly could bring the interest rate back to the four percent level that prevailed in Italy before the crisis began.

    TRADING PLACES

    Even if the eurozone countries reduced their large budget deficits and thereby alleviated the threat to the commercial banks that have invested in government bonds, another problem caused by the monetary union would remain: the differences among eurozone members in terms of long-term competitiveness, which leads to sustained differences in trade balances that cannot be financed.

    During the past year, Germany had a trade surplus of nearly $200 billion, whereas the other members of the eurozone had trade deficits totaling $200 billion. A more comprehensive measure that factors in net investment income reveals that Germany has a current account surplus of five percent of GDP, whereas Greece has a current account deficit of nearly ten percent of GDP. Put another way, Germany can invest in the rest of the world an amount equal to five percent of its GDP, whereas Greece must borrow an amount equal to nearly ten percent of its GDP to pay for its current level of imports.

    If Greece were not part of the eurozone, its exchange rate would adjust over time to prevent this large and growing trade deficit. More specifically, the need to finance that trade deficit would cause the value of the Greek currency to decline, making Greek exports more attractive to foreign buyers and encouraging Greek consumers to substitute Greek goods and services for imports. The rising cost of imports would also reduce real personal incomes in Greece, leading to lower consumer spending and freeing up Greek goods and services to be exported to foreign buyers.

    But since Greece is part of the eurozone, this automatic adjustment mechanism is missing. Greece faces the persistent problem of a rising current account deficit, which has now reached ten percent of GDP, because Greece's productivity (output per employee) increases more slowly than Germany's, causing the prices of Greek goods to rise relative to the prices of German and other European goods. More specifically, if output per employee in Germany increases by three percent a year, real wages can also grow by three percent. If the ECB keeps inflation in the eurozone at about two percent, German wages can rise by five percent a year. If Greek wages also rise by five percent a year while productivity in Greece grows by only one percent a year, the prices of Greek goods and services will increase two percent faster than the prices of German products. That increase in the relative prices of goods and services would cause Greek imports to rise and exports to stagnate, creating an increasingly large trade deficit. This problem could be avoided if the annual rise in Greek wages were limited to two percent less than the rise in German wages. This may, of course, be politically difficult in the highly unionized Greek economy.

    But limiting the growth of Greek wages would address only further deterioration of Greek competitiveness in the future. Stopping a further decline in Greek competitiveness would not correct the existing annual current account deficit of nearly ten percent of GDP that Greece must continue to finance. Eliminating the existing current account deficit would require making Greek prices much more competitive than they are today, by reducing the cost of producing Greek goods and services by about 40 percent relative to the cost of producing goods and services in the rest of the eurozone. Since that is not likely to be achieved by increased productivity, it must be achieved by lowering real wages relative to the real wages of Germany and other countries in the eurozone. This would be a very painful process, achieved at the cost of years of high unemployment and declining incomes. Greece now has an official unemployment rate of 16 percent, and its real GDP is falling by seven percent per year. Continuing such poor performance for a decade or more is virtually unthinkable in a democracy. Moreover, since such a process would shrink the current account deficit only over a long period of time, Greece would need to continue borrowing to finance its current account imbalance. Even if Germany were willing to formalize such long-term financial assistance by establishing a transfer union to provide those funds, the controls that Berlin would demand to keep wages and incomes declining would create severe political tensions between Germany and Greece.

    THE TEMPTATION OF DEVALUATION

    The alternative is for Greece to leave the eurozone and return to its own currency. Although there is no provision in the Maastricht Treaty for such a move, political leaders in Greece and other countries are no doubt considering that possibility. Although Greece is benefiting from its membership in the eurozone by receiving transfers from other eurozone countries, it is paying a very high price in terms of unemployment and social unrest. Abandoning the euro now and creating a new drachma would permit a devaluation and a default that might involve much less economic pain than the current course. This devaluation-and-default strategy has been the standard response of countries in Asia and Latin America with unsustainably large fiscal and trade deficits; they were able to devalue because they were not part of a monetary union.

    Germany is now prepared to pay to try to keep Greece from leaving the eurozone because it fears that a Greek defection could lead to a breakup of the entire monetary union, eliminating the fixed exchange rate that now benefits German exporters and the German economy more generally. If Greece leaves and devalues, global capital markets might assume that Italy will consider a similar strategy. The resulting rise in the interest rate on its debt might then drive Italy to in fact do so. And if Italy reverts to a new lira and devalues it relative to other currencies, the competitive pressure might force France to leave the eurozone and devalue a new franc. At that point, the EMU would collapse.

    Even though Germany is prepared to subsidize Greece and other countries to sustain the euro, Greece and others might nevertheless decide to leave the monetary union if the conditions imposed by Germany are deemed too painful. Here is how that might work: although Greece cannot create the euros it needs to pay civil servants and make transfer payments, the Greek government could start creating new drachmas and declare that all contracts under Greek law, including salaries and shop prices, are payable in that currency; similarly, all bank deposits and bank loans would be payable in these new drachmas instead of euros.

    The value of the new drachma would fall relative to the euro, automatically reducing real wages and increasing Greek competiveness without requiring Greece to go through a long and painful period of high unemployment. Instead, the lower value of the Greek currency would stimulate exports and a shift from imports to domestic goods and services. This would boost Greek GDP growth and employment.

    Withdrawing from the eurozone would of course be difficult and potentially painful. The announcement that Greece was leaving the eurozone would have to come as a surprise -- otherwise, a bank run would be likely, as Greek depositors would have the time to move their euro-denominated funds to banks outside Greece or to withdraw them and hold euros in cash. Since some flight of deposits from Greek banks is already happening, Athens would have to act before this became a flood of withdrawals.

    Another serious problem for Greece in making the transition to the new drachma would be the political risk of being forced out of the EU. Since the Maastricht Treaty provides no way for a member of the eurozone to leave, there is the risk that the other eurozone members would punish Greece by requiring it to leave the EU as well, causing Greece to lose the benefits that the EU offers of free trade and labor mobility. They might do so to discourage Italy and others from pursuing a similar exit strategy. But not all EU members would necessarily seek such a punishment, especially since ten of the 27 EU member countries do not use the euro and Greece's situation is clearly more desperate than that of Italy or Spain.

    The primary practical problem with leaving the eurozone would be that some Greek businesses and individuals have borrowed in euros from banks outside Greece. Since those loans are not covered by Greek law, the Greek government cannot change these debt obligations from euros to new drachmas. The decline in the new drachma relative to the euro would make it much more expensive for Greek debtors to repay those loans. Widespread bankruptcies of Greek individuals and businesses could result, with secondary effects on the Greek banks that those individuals and businesses have borrowed from.

    But as the experience of Argentina after it ended its link to the dollar in 2002 showed, domestic Greek debtors might end up paying only a fraction of those euro debts. For Greece, the option to leave the monetary union may therefore be very tempting.

    Greece's departure need not tempt Italy, Spain, or others to leave. For them, the cost of leaving could exceed that of adjusting their economies while remaining inside the eurozone. Unlike Greece, they can avoid insolvency by adjusting their budget and trade deficits without radical changes in policy.

    Looking ahead, the eurozone is likely to continue with almost all its current members. The challenge now will be to change the economic behavior of those countries. Formal constitutionally mandated balanced-budget rules of the type recently adopted by Germany, Italy, and Spain would, if actually implemented, put each country's national debt on a path to a sustainable level. New policies must avoid current account deficits in the future by limiting the volume of national imports to amounts that can be financed with export earnings and direct foreign investment. Such measures should make it possible to sustain the euro without future crises and without the fiscal transfers that are now creating tensions within Europe.

    Martin S. Feldstein, a professor of economics at Harvard, was the chairman of the Council of Economic Advisers from 1982 to 1984 under President Ronald Reagan.

    Source: The Failure of the Euro
     
    ejazr likes this.
  20. pmaitra

    pmaitra Moderator Moderator

    Joined:
    Mar 10, 2009
    Messages:
    31,663
    Likes Received:
    17,159
    Location:
    EST, USA
    It is not the job of the Greek Parliament to impose instructions from outside onto the people of Greece. It is the job of the Greek Parliament to represent the Greeks, and their opinion.

    The Euro proponents, particularly the nut-jobs running the ECB, are better off changing their profession to that of a sheep herder. They'd be much more successful.
     
  21. panduranghari

    panduranghari Senior Member Senior Member

    Joined:
    Jan 2, 2012
    Messages:
    1,790
    Likes Received:
    1,245
    [​IMG]


    The story I am about to relate to you was first told in a lecture hall at the School of Political Sciences in Paris (L'École des Sciences Politiques) on March 17, 1932, from the depths of the Great Depression. It is, perhaps, more relevant today than it was on the day Jacques Rueff delivered it. Rueff began with this:

    "The story I am going to relate covers a long period. It is the life story of the gold standard, now afflicted with so grave an ailment that only time will tell if the victim will succumb or be left, at the very least, in a state of virtual paralysis." [1]

    He said “only time will tell”… well, some time has passed, and it did "tell".

    So what grave ailment was he talking about in 1932? What did time reveal since then? And how has this important story been misread over the years? I will try to answer these questions and to retell Rueff's story the way I think it should be told today. And my hope is that this will, in your mind, bring together many dissonant concepts, as it did in mine, into a grand, unified, long-line view of Freegold.

    Jacques Rueff told the story of two different monetary conferences, two "committees of experts" that both met in Genoa, and changed the course of monetary history. The first committee gathered in October, 1445, and the second one began in April, 1922, so Rueff's lecture had ten years on this second conference. The two committees gathered under similar circumstances, to respond to monetary disorder in the aftermath of a protracted war, yet they came to opposite conclusions.

    The first committee declared gold the new, sole monetary reserve, unleashing its 500-year reign as the governor of supply and demand that would act as the natural counter-balance to international trade for the next half a millennium. The second committee, under the guise of improving this system, destroyed it, laying the groundwork for the unchecked growth of global imbalance, perpetual malinvestment and the series of periodic monetary crises we have experienced for the last 90 years.


    [​IMG]

    The 1922 Genoa Conference. The British Prime Minister Lloyd George on front row, left.

    Prior to 1922, gold was a vibrant, fertile member of the global economic ecosystem — what I like to call the Superorganism that governs naturally, far above the ability of mere mortals. Rueff put it this way:

    "Gold… governs all the components of our international transactions with faultless effectiveness… it is a forceful but unobtrusive master, who governs unseen and yet is never disobeyed. Nevertheless, it is too wise to oppose the inclinations of men. It never, for example, prohibits the purchase of foreign securities; taking all their actions into account, it guides the conduct of men in order to prevent the upsetting of the balance it is supposed to maintain. We should also point out that while guiding men's actions it respects their freedom of choice. They are always at liberty to buy according to their preferences, but the monetary mechanism, in its omnipotence, will raise the price of those items whose purchase is contrary to the general interest, until such time as consumers decide of their own free will to stop buying them. The gold standard thus resembles an absolute but enlightened monarch; he does not destroy man's freedom, but employs it for his own ends."

    The sustainability (and, indeed, the very survival) of the global economic ecosystem is predicated not on balance in the monetary realm, but on the delicate balance between real production and real consumption. It is the flow of actual physical gold that, at least prior to 1922, moderates and regulates this complex balance because gold, like real production and consumption, exists in the physical realm and is therefore not subject to the politics of easy money. But following the economic destruction of Europe in WWI (1914-1918), the US experienced high inflation accompanied by a dramatic inflow of gold. So in the early 20s, along with raising interest rates and federal budget cuts, the US began a policy of gold "sterilization" to resist the natural price mechanism—inflation—that would have otherwise acted not only as a brake on the inflow of gold all through the 20s, but also as a spur on the struggling European economy:

    Federal Reserve Sterilization of Gold Flows

    When a country imported gold, its central bank could sterilize the effect of the gold inflow on the monetary base by selling securities on the open market…

    Sterilization of gold flows shifted the burden of the adjustment of international prices to other gold standard countries. When a country sterilized gold imports, it precluded the gold flow from increasing the domestic price level and from mitigating the deflationary tendency in the rest of the world. Under the international gold standard, no country had absolute control over its domestic price level in the long run; but a large country could influence whether its price level converged toward the world price level or world prices converged toward the domestic price level…

    Traditionally, economists and politicians have criticized the Federal Reserve for not playing by the strict rules of the gold standard during the 1920s.

    …Federal Reserve sterilization in the early 1920s probably served the best interests of the United States.

    -Leland Crabbe, Washington, D.C., 1988
    Board of Governors of the Federal Reserve System [2]

    The price mechanism is the Superorganism's governor in the delicate balance between production and consumption. It is what keeps the economy in a sustainable balance somewhere between starving shortages and ruinous waste. And the flow of unambiguous real gold has always been a key international transmitter of the price mechanism because gold is the physical-monetary proxy for economic goods and services, subject to the same physical limitations as goods and services. Modern currency, on the other hand, even though it flows and trades like a commodity, is subject only to political limitations, not physical ones, and is therefore qualitatively different (an inferior, infertile transmission medium) from the perspective of the Superorganism.

    The flow of gold is the flow of real capital, even if today it is obscured by an electronic matrix of imaginary capital (infertile media). Today's debt (the bond market) is imaginary capital in that it cannot perform in real terms; with "real terms" defined as economic goods and services (under current economic conditions) plus gold—and this part is important—at today's prices. It is all nominal debt, but the price of goods and services—as well as the price of gold—is what connects it to reality. And at today's prices of each, bonds are imaginary capital. It is our obsessive compulsion to centrally control the price mechanism that sterilizes the vital signals that would otherwise be transmitted to billions of individual market participants keeping the monetary and physical planes connected.

    The outflow of real capital from any zone signals the need to produce more and consume less. The inflow of real capital signals the need to consume more and produce less. The price mechanism transmits this signal to individual actors in the economy. The inflow of real capital will raise prices vis-à-vis real capital, which makes exports more expensive abroad, lowering exports and raising imports. The country with an inflow of real capital will have to start consuming more of its own production or else it will just pile up and rot.

    Likewise, the country with an outflow of real capital will have to start producing more than it consumes. Again, this signal is transmitted to individual actors via the price mechanism. With less real capital upon which credit flourishes, credit will contract, general price levels vis-à-vis real capital will drop, the purchasing power of real capital will rise, and real capital will become more expensive in terms of goods and services. Exports will rise because exportable goods will fetch a higher price abroad, imports will slow because local prices have fallen versus the vanishing real capital, and people will have to begin producing more than they consume in order to survive.

    The monetary plane, that electronic matrix of imaginary capital, obscures the simplicity of what is actually happening today, and it does so by design. But it's really simple, and hopefully I can help you see through all the noise. Everyone knows that the sovereign debt in Europe is a problem today. But all we hear are complex solutions proposed within the monetary realm. Consolidate this paper, roll over that paper, haircuts, pay cuts, job cuts, interest rate cuts, print, sell, buy, repo, reverse repo, reverse-reverse repo, rescue funds, POMO, SOMA, EFSF, SMP, EMP, ETA, ESPN; it can make your head spin after a while.

    The lesson from the monetary changes made in the post-war 20s is that if you want the debtors to ever be able to repay their debts in real terms, you do not sterilize the vital spur and brake function of gold by locking its purchasing power. It is the price mechanism—price changes in goods and services—that transmits the arbitrage signal that causes gold to physically flow to where it has the greatest purchasing power. For a struggling economy to grow and expand to a point at which it can repay its debts, the gold not only needs to flow, but it must be a fertile member of the economic ecosystem so that it can perform its vital function.

    I know this is difficult to see, so I want you to try a little thought experiment with me for a moment. I want you to imagine that the complex and confusing monetary plane doesn’t exist. You can still imagine the debt existing, but imagine that the debt is denominated in physical goods and services. So there’s only real goods and services… and gold—gold being the proxy for goods and services that floats in value against those goods and services.

    (We can eliminate currency from the equation in our thought experiment because we know that we want a relatively stable currency—not too much inflation, not too much deflation—for the purpose of contracts and debt if we want a vibrant economy.)

    Now imagine you have one country with debts denominated in goods and services. Let's call it Greece. Greece owes Germany X goods and services. Meanwhile Germany is still exporting goods and services while Greece is still importing. This leaves Germany with a structural surplus in its Balance of Payments and Greece with a deficit. But gold can reverse this flow in an instant on the BOP at a high enough price. And once it does, it will begin to exert the brake and spur forces on the two countries until the flow of actual goods and services finally corrects and reverses. Once that flow corrects, the gold flow (which is opposite the flow of goods and services) will reverse and subsequently the brake and spur forces will also reverse.

    Gold flows in the opposite direction of goods and services. Remember when ANOTHER said, "gold and oil can never flow in the same direction"? Well it's the same thing with other goods and services. Germany and Greece may both be exporting and importing, but Germany is exporting more, which shows up on the BOP as a Trade Surplus and a Capital Account Deficit. At a high enough price, a small amount of gold can (and will) flow in the other direction, from Greece into Germany, and if its value exceeds the (net) trade difference between Germany and Greece, it will turn Germany's Trade Surplus into a Trade Deficit and a Capital Account Surplus.

    Now jump back to post-WWI. Europe was the debtor with debts denominated in goods and services owed to America. But Europe's economy was struggling to get back on its feet, making it difficult to pay its debt in actual economic goods and services. So the proxy—gold—flowed from Europe to America in unprecedented amounts. This flow should have acted as an incremental brake on the American economy and a spur on the struggling European economy. But instead, the US sterilized the effects of this gold flow in 1920 and '21 while implementing "intelligent and courageous deflation" (President Harding's words), and then in 1922, the Genoa Conference sterilized gold's natural mechanism globally.

    Once sterilized, gold flowed uncontrolled into the US right up until the whole system collapsed and beyond. This would be similar to Greece selling gold at today’s prices to pay off its debt. The gold would quickly be gone and then the economy would collapse. The sterilization of gold may be at least partly responsible for the roaring 20s, the Great Depression, the rise of Hitler and the Second World War.

    You can't squeeze blood from a turnip. That's an old saying. It means that you cannot get something from someone that they don't have. In order to pay its debt in real terms, Greece needs to ultimately get back to producing more than it consumes. And as counterintuitive as this may sound, they will first need to run a BOP surplus in order to get there. You do that by exporting more value than you import.

    I realize how backward this sounds, but that’s only because we haven’t seen gold function properly in more than 90 years—beyond living memory. And this is why the limited stock of physical gold is far more valuable than the paper gold promises of New York and London would have you believe. This is why Greece will never part with its gold at today's prices. It is far more valuable. Greece ultimately needs to get back to importing gold which is what happens when you produce more than you consume. But you can't get back to that place by spewing your real capital at imaginary capital prices.

    At the true value of physical gold set by the Superorganism, Greece will automatically start running a Trade Surplus on its BOP and Germany will automatically run a Deficit with Greece. The high price of gold is the only factor that can achieve this goal. At that point Greece will be paying its debt in real terms and gold will be flowing. This will spur the Greek economy until that flow of gold is reversed and it starts flowing back into Greece. At that point Greece will have a vibrant economy. And then, as the gold flows in, it will start to act as an incremental brake, a natural governor that prevents the overheating of the new Greek economy. This will occur naturally. This is the future in real terms, regardless of all the monetary floundering. And this future cannot be managed by a committee of experts no matter what economic school of thought they practice. This is Freegold.

    The elegance of this natural regulator is that, as long as it is free from systemic counterfeits, it functions regardless of the shenanigans of monetary "experts". That's because the Superorganism's price mechanism is a function of the purchasing power and flow of real capital, not the purchasing power and flow of imaginary capital (paper promises). To wrest control away from this "forceful but unobtrusive master" one must render its purchasing power and flow infertile in the global economic ecosystem.

    What the 1922 Genoa Conference did was to institutionalize the "sterilization" of gold for the rest of the world through the reserve structure of the international banking system. And this bit of genius was decided by a "committee of experts" from 34 different countries. They did this by introducing paper gold—or paper promises of gold—into the international banking system as reserves equal to the gold itself. This wasn't the first paper gold, but it was the first time that specific paper gold (that from New York and London) was used as an equal reserve upon which credit can be expanded. What is acceptable as international reserves is critical because trade settlement is a function of the reserves. This conference was the birth of the $IMFS.

    In 1922, they officially changed the old gold standard into the new "gold exchange standard", which Rueff said was "a conception so peculiarly Anglo-Saxon that there still is no French expression for it." The stated purpose was "the stabilization of the general price level" which you can feel free to read as code for sterilizing the price mechanism and its elegant governance of an extremely delicate and complex balance. This, of course, gave birth to the arrogance of the managed economy and its attendant science, Keynesian Economics (est. 1936) and its step-daughter Monetarism (est.~1956).

    With the gold mostly staying put in London and New York, and paper promises of gold flowing as equal base money elsewhere, the monetary base was effectively duplicated. Credit could now expand without ever having to contract, at least not because of the unwanted flow of gold. But of course that's not how it actually works in practice. The "unwanted" flow of gold is not the cause, but the effect of real imbalances (physical, not monetary ones) between international production and consumption. So, obstructing the adjustment mechanism of real gold settlement set the world up for periodic busts, economically destructive punctuations and regular currency devaluations.

    To use a modern buzz word, they expanded the 500 year-old international monetary base into a more flexible "basket" that included US dollars, British pound sterling, and gold. As dollars began to accumulate abroad, they would be deposited back in the New York banks in exchange for a book entry reserve on the foreign country's balance sheet. In this way, the unbalanced flow of trade acted only as an occasional spur, and never as a brake. The only brake would now come in the form of destructive crises and abrupt monetary resets.

    Here's a comment I wrote back in May, 2010:

    The US exorbitant privilege began at the International Monetary Conference of 1922 when for the first time international banks were allowed to accept not only physical gold, but also US dollars (paper gold) as reserves. But all US dollars held by foreign banks were put on deposit back in New York City banks. And there they were counted as local US deposits, the same as if you and I put our gold into the bank, in addition to being counted abroad.

    These deposits were used as the basis for credit expansion in both the US and in the foreign countries claiming them as reserves. This process doubled the money supply paid out through the US balance-of-payments deficit for the last 88 years (except that money which France demanded in gold). US deficits never contracted the aggregate purchasing power of the US after 1922, the way deficit settlement is supposed to. It also exported US inflation outward. And it continues today.

    The only solution to this problem is the explosive expansion of the gold base (volume x price). Volume can be expanded through mining, but not fast enough to suffice in a crisis. Therefore price will take the brunt of this reset. The price of gold will explode.

    1971 was the first step toward Freegold. The final step is today.

    1445

    Now let's look back at the first monetary committee that deliberated in Genoa from October, 1445 until June, 1447. The Hundred Years' War was already more than a hundred years old at that time, as was the economic and monetary havoc that protracted war brings. By 1420, the French currency, the livre, was under severe market pressure to devalue. The King valued his livres at .78 grams of gold each, relative to the gold mark, the contemporary unit of weight for gold. But the marketplace was trading livres at only about 11% of that official value, or .09 grams of gold. The market had already devalued the livre by 90%.

    Jacques Rueff describes the French King's response: In 1421 Charles VII "resorted to a series of measures bearing a remarkable likeness to those which were to be adopted in France five centuries later: the prohibition of exchange transactions by unlicensed dealers and the fixing of a scale of fees for such transactions; a ban on the export of gold and silver specie; the imposition of fines on notaries who stipulated payments in gold and silver marks, that is, in bullion rather than in livres, the intensive exploitation of France's silver mines; and an attempt to achieve a balanced budget by rigorous and methodical management… But all these efforts did not succeed in alleviating the financial distress. A variety of monetary adjustments—which might be termed devaluations—were devised, as usually happens in such troubled times."

    Genoa spent 15 years under French domination during the war, but by 1445 it was its own city-state, a maritime republic and an important trading center and port for international commerce. It was also home to the Bank of St. George (1407-1805), one of the oldest chartered banks in the world. In 1444, the Bank was chartered to manage the public debt and make loans to the government, not unlike a modern CB or Treasury. "Niccolò Machiavelli maintained that the Bank's dominion over Genoa made possible the creation of a 'republic more worthy of memory than the Venetian.'" [3]

    [​IMG]

    The bank of Saint George

    So when the fluctuations, weakness and debasement of the local and foreign exchange currencies "gravely unsettled" its marketplace in 1445, the Genoese government convened a "committee of experts" consisting of mint officials and Bank of St. George trustees to figure out a solution to all the monetary turmoil. The committee labored for almost two years, but could not come to an agreement. So instead, it issued a report in which the majority and minority set forth their views.

    The minority report, which was rejected, recommended a "basket" monetary standard (although they didn't use the word "basket") consisting of 1/3 gold, 1/3 silver and 1/3 in the depreciating currencies of the countries involved in any transaction. The majority report on the other hand, signed by 15th century "Trail Guide" Benedetto Centurione of the house of Centurione and trustee of the Bank of St. George, recommended the adoption of the gold standard pure and simple.

    Benedetto Centurione appears to have been the head of the house of Centurione, one of the wealthiest influential houses of international commerce. It had many foreign branches, each run by one or more of the Centurione brothers. As Rueff told it, "Nicolo and Giovannie were in Majorca, Raffaelo was at Bruges, and Paolo at Lisbon." They later opened branches in Antwerp and in the Indies, "and Christopher Columbus [a Genoese native] was undoubtedly one of their traveling salesmen."

    But in 1445, as Rueff tells it, Benedetto "was quite aware of the fact that for half a century a large number of trading countries had adopted the gold standard. One after the other, Egypt, Syria, Yemen, Hedjaz, and some parts of the Greek world had adopted… gold." (Reminds me of a more recent Trail Guide who noted a certain Eastern taste for gold.)

    In his majority report, Centurione wrote, "The banks will be obliged to pay in [gold] florins, exchange will take place in [gold] florins; in this way gold will not leave the country and, in time, by driving out bad money, it will constitute the wealth of the people." This was the opinion that prevailed in 1447. Soon the banks were required to settle credit imbalances in gold, the new banking system reserve, and to deposit one hundred gold pieces as security for fines in case they broke the rules. And all bank drafts drawn on Genoa abroad had to also be denominated in gold, thus making it the new international bank reserve, in the modern sense of the term.

    As Jacques Rueff described it in 1932, this "plain and simple" recommendation would "endow the world with the most marvelous instrument of international co-operation in its history… The system was to function perfectly well until it was shattered—also at Genoa—by the second committee of experts, which in April and May, 1922, contrived to demolish the work of the house of Centurione."

    [​IMG]

    Jaques Reuff

    Like Centurione, Rueff also turned out to be a bit of a monetary architect himself in his later years. During the Great Depression, Rueff was a major figure in the management of the French economy. In 1941 he was dismissed from his office as the deputy governor of the Bank of France as a result of the Vichy regime's new anti-semitic laws. After the war he served in political office as the Minister of the State of Monaco, as a judge on the European High Court of Justice, and later as a key economic advisor to French President Charles de Gaulle. The 1958 "Rueff Plan" balanced the French budget and secured the convertibility of the French currency.

    Rueff was highly critical of the use of the dollar as a unit of reserve, which he warned would cause a worldwide inflation. He was strongly in favor of European integration, and always remained a firm opponent of Lord Keynes' ideas. In 1947, Rueff critiqued Keynes' magnum opus, The General Theory of Employment, Interest and Money. After his critique of Keynes, Rueff's main critic became James Tobin, a Keynesian economist who would later serve as an advisor to both the Federal Reserve and the US Treasury where he would help design the American Keynesian economic policy during the Kennedy administration. It is somehow fitting that Rueff's archnemesis, Tobin, would be best remembered for his 1972 suggestion of the "Tobin Tax", a tax on the exchange of foreign currencies in response to Nixon ending Bretton Woods. [4]

    The London Gold Pool

    Jacques Rueff's advice led Charles de Gaulle to begin withdrawing physical gold from the US Treasury during the later years (1965-1967) of the London Gold Pool, and then to withdraw altogether from the Pool in 1968 which ultimately led to the closing of the US gold window in 1971. Here is de Gaulle speaking in 1965:



    And here is a description of the subsequent failure of the London Gold Pool that I wrote for my 2010 post Living in a Powder Keg and Giving Off Sparks:

    The London Gold Pool was a covert consortium of Western central banks, a 'gentleman's club' of sorts, that agreed to pool its physical gold resources at predetermined ratios in order to manipulate the London gold market. Their goal was to keep the London price of gold in a tight range between $35.00 and $35.20US.

    London had become the world's marketplace for gold. For more than a half century nearly 80% of the world's gold production flowed through London. The "London Gold Fix" daily price fixing began in 1919 and only happened once a day until the London Gold Pool collapsed in 1968 and an "afternoon fix" was added to coincide with opening of the New York markets.

    In 1944 the Bretton Woods accord pegged foreign currencies to the US dollar and the dollar to gold at the exchange rate of $35.20 per ounce. At that time gold was not traded inside the US, but in London it continued to trade between $35 and $35.20, rarely moving more than a penny or two in a day.

    Through the first decade of the Bretton Woods system there was generally a shortage of US dollars overseas which lent automatic support to the fixed gold peg. But the US was running a large trade deficit with the rest of the world and by the late 1950's there was a glut of dollars on the international market which began draining the US Treasury of its gold.

    Then, in one day in October 1960, the London gold price, which would normally have made headlines with only a 2 cent rise, rose from $35 to over $40 per ounce! The Kennedy election was just around the corner and in Europe it was believed that Kennedy would likely increase the US trade deficit and dollar printing.

    That October night, in an emergency phone call between the Fed and the Bank of England, it was agreed that England would use its official gold to satiate the markets and bring the price back under control. Then, during Kennedy's first year in office the US Treasury Secretary, the Fed and the BOE organized the London Gold Pool consisting of the above plus Germany, France, Switzerland, Italy, Belgium, the Netherlands, and Luxembourg.

    The goal of the pool was to hold the price of gold in the range of $35 - $35.20 per ounce so that it would be cheaper for the world to purchase gold through London from non-official sources than to take it out of the US Treasury. At an exchange rate of $35.20, it would cost around $35.40 per ounce to ship it from the US to Europe. So the target range on the London markets acted as a shield against the US official gold which had dwindled substantially over several years.

    The way the pool was to work was that the Bank of England would supply physical gold as needed into the public marketplace whenever the price started to rise. The BOE would then be reimbursed its gold from the pool according to each countries agreed percentage. If the price of gold fell below $35 an ounce, the pool would buy gold, increasing the size of the pool and each member's stake accordingly. The stakes and contributions were:

    50% - United States of America with $135 million, or 120 metric tons
    11% - Germany with $30 million, or 27 metric tons
    9% - England with $25 million, or 22 metric tons
    9% - Italy with $25 million, or 22 metric tons
    9% - France with $25 million, or 22 metric tons
    4% - Switzerland with $10 million, or 9 metric tons
    4% - Netherlands with $10 million, or 9 metric tons
    4% - Belgium with $10 million, or 9 metric tons

    And since they, as a group, were doing this in secret, it turned out that they were able to make a substantial profit in the first few years of the pool. Since they were buying low and selling high within a fixed trading range that only they knew was fixed, they reaped substantial profits and even increased their reserves as much as FIVE-FOLD by 1965!

    But with the cost of US involvement in Vietnam rising substantially from 1965 through 1968, this trend reversed and the dollar came under extreme pressure. From 1965 through late 1967 the gold pool was expending more and more of its own gold just to keep the price in its range. Seeing this, France (who was one of the insiders and knew of the price fixing operation) began demanding more and more gold from the US Treasury for its dollars.

    And as this trend progressed, the world was flooded with more and more dollars that were backed by less and less gold, creating an extremely volatile situation. Public demand for gold was rising, the war was escalating, the pound was devalued, France backed out of the gold pool, and in one day, Friday March 8, 1968, 100 tonnes of gold were sold in London, twenty times the normal 5 tonne day.

    The following Sunday the US Fed chairman announced that the US would defend the $35 per ounce gold price "down to the last ingot"! Immediately, the US airlifted several planeloads of its gold to London to meet demand. On Wednesday of that week London sold 175 tonnes of gold. Then on Thursday, public demand reached 225 tonnes! That night they declared Friday a "bank holiday" and closed the gold market for two weeks, "upon the request of the United States". (So much for "the last ingot", eh?)

    That was the end of the London Gold Pool. The public price of gold quickly rose to $44 an ounce and a new "two tiered" gold price was unveiled; one price for central banks, and a different price for the rest of us. Even today official US gold is still marked to only $42.22 per ounce, $2 LESS than the market price in 1968!

    The Architects

    In my opinion, there are two things we learned from ANOTHER via his mouthpiece FOA that outweighed all the other great insights they shared. Those two things are:

    1. The true purpose behind the euro and its architecture, and
    2. The effect the approaching euro launch would have on gold.

    Following ANOTHER's revelations, Jacques Rueff was the first name I put on my own personal list of early ideological euro architects a couple years ago. The ECB itself pegs the beginning of "The Road to the Single Currency, The Euro" at 1962 with the "Marjolin-Memorandum". [5][6]

    The Marjolin-Memorandum was the European Commission's first proposal for an economic and monetary union. Robert Marjolin (1911-1986) was a French economist and politician involved in the formation of the European Economic Community (EEC). He was 15 years Jacques Rueff's (1896-1978) junior and, like Rueff, he was an economic advisor to Charles de Gaulle. I mention this only to further the connection between the modern euro and Charles de Gaulle of the 1960s who complained publicly about the exorbitant privilege afforded the US by the use of dollars as international CB reserves, demanded physical gold from the US Treasury, and pulled out of the London Gold Pool which led to the end of Bretton Woods three years later.

    What we learned from ANOTHER thirty years later was:

    1. The purpose of the euro was to provide an international transactional alternative to the dollar.
    2. The consequence of the launch of the euro would be that gold would undergo "the most visible transformation since it was first used as money."

    Quote - Monday, August 6, 2001 - GOLD @ $267.20 - FOA: "The result will be a massive dollar price rise in gold that performs over several years."

    Tuesday, January 1, 2002 - Launch of euro notes and coins
    Friday, February 8, 2002 - GOLD ABOVE $300
    Monday, December 1, 2003 - GOLD ABOVE $400
    Thursday December 1, 2005 - GOLD ABOVE $500
    Monday, April 17, 2006 - GOLD ABOVE $600
    Tuesday, May 9, 2006 - GOLD ABOVE $700
    Friday, November 2, 2007 - GOLD ABOVE $800
    Monday, January 14, 2008 - GOLD ABOVE $900
    Monday, March 17, 2008 - GOLD ABOVE $1000
    Monday, November 9, 2009 - GOLD ABOVE $1100
    Tuesday, December 1, 2009 - GOLD ABOVE $1200
    Tuesday, September 28, 2010 - GOLD ABOVE $1300
    Wednesday, November 9, 2010 - GOLD ABOVE $1400
    Wednesday, April 20, 2011 - GOLD ABOVE $1500
    Monday, July 18, 2011 - GOLD ABOVE $1600
    Monday, August 8, 2011 - GOLD ABOVE $1700
    Thursday, August 18, 2011 - GOLD ABOVE $1800

    What I can tell you with full confidence is that this is only the very beginning of gold's functional transformation.

    [​IMG]

    Here are a few more quotes from A/FOA:

    It's important to understand that most of the world wanted to at least see another currency that could share some of the dollar's function. It didn't have to replace it. To this end, most every country gave some philosophical and political support in its creation.

    ++++++++++++

    Within this change, gold would undergo one of the most visible transformations since it was first used as money.

    ++++++++++++

    We are, today, at the very conclusion of a fiat architecture that is straining to cope with our changing world. Neither the American currency dollar, its world reserve monetary system or the native US structural economy it all currently represents will, in the near future, look anything as it presently does. Trained from birth, as all Western thinkers are, to read everything economic in dollar system terms; we, too, are all straining to understand the seemingly unexplainable dynamics that surround us today.

    Western governments, the public and several schools of economic thought are attempting to define and explain what extent these changes will have within our financial and economic world.

    ++++++++++++

    Asking more; what if the architects of a competing currency system and the major players that helped guide its internal construction, all took a hand in promoting the dollar's extended life, its overvaluation and its use; so as to buy time for this great transition in our money world?

    ++++++++++++

    The actual debt machine that built much of America's lifestyle is now going into reverse as it destroys its own currency; one built upon a stable debt system with locked down gold prices.

    ++++++++++++

    To compete in the new architecture of a Euro System currency, unrestrained trading of gold will advance its dollar and Euro price significantly.

    ++++++++++++

    This not only has "everything to do with a gold bull market", it has everything to do with a changing world financial architecture. And I have to admit: if you hated our last one, you will no doubt hate this new one, too. However, everyone that is positioned in physical gold will carry this storm in fantastic shape. This is because the ECB has no intentions of backing their currency with gold and every intention of using gold as a "free trading" financial reserve. None of the other metals will play a part in this.
    _____________

    Here's something interesting. In Indonesia, CPI includes gold! This is very $IMFesque.

    Inflation up, exports down
    Esther Samboh, The Jakarta Post, Jakarta | Tue, 09/06/2011

    SNIPS:

    An uncertain global economy has put pressure on Indonesia’s economy, as the yearly inflation rate grew in August for the first time since January over surging gold prices, while export growth slowed due to sliding global demand.

    Core inflation — the primary measurement of the country’s inflation rate, which includes gold but excludes volatile food and government-controlled prices — accelerated faster than headline inflation to 5.15 percent, well above Bank Indonesia’s 5 percent threshold.

    “The increase in core inflation is not across the board. The impact of the gold prices increase is small, as gold is not a primary or secondary need for the people,” Eric Sugandi, an economist at Standard Chartered Bank Indonesia, told The Jakarta Post over the phone.

    “In August, there was no help from lower import prices to offset the surge in gold prices,” Destry told the Post in a telephone interview.

    Rusman announced that the surplus in the nation’s trade balance fell to $1.36 billion in July, its lowest level so far this year, halving June’s surplus of more than $3 billion. “The trade surplus narrows as exports slide and imports surge,” he added.

    Exports slowed 5.23 percent in July as compared to June, reaching $17.43 billion, while imports grew 6.57 percent to $16.06 billion.

    BI governor Darmin Nasution said increasing fuel imports and a slight slowdown in global demand may continue to pressure the nation’s current account — which includes trade balance — to book deficits starting in the fourth quarter of this year. “The fluctuation in the current account will be greater.”

    “If the current account books a deficit, we will need capital inflows” to maintain a surplus in the nation’s balance of payment to build up the central bank’s foreign exchange reserves, he added.

    This is a very interesting news article because it not only demonstrates how 90 years of the $IMFS has distorted foreign government benchmarks at the highest levels, but also how ass-backward this view actually is. Indonesia's Consumer Price Index should include food and exclude gold, not the other way around! In a fiat regime, you want your fiat to be relatively stable against the goods that make the economy healthy. But in this case, what they are registering as inflation (rising price of gold) is actually deflation in real terms because the purchasing power of gold in Indonesia is rising against things like food.

    In Freegold, this rising purchasing power of gold against food would have the effect of an inflow of physical gold and a spur on the economy as exports rise due to being cheaper in gold elsewhere. But here's the catch: the signals are all messed up by the $IMFS! Indonesia is already running a trade surplus. And gold is rising versus food everywhere. It doesn't matter if you're producing or consuming more in your country today, gold is still rising. In this way we can know for certain that today's price of gold is not really the true value of gold (gold priced in goods).

    And that's because the price of gold today still does not reflect the physical flow of gold that would normally be a function of arbitrage, with speculators transporting gold to where its purchasing power is highest. The flow of gold today is still sterilized by the paper gold trade within the LBMA bullion banking system that, by a recent LBMA survey, was around 250 times larger than the flow of new gold from the mines. That's a total turnover in the LBMA (sales plus purchases) of 5,400 tonnes every single day. That's the equivalent of every ounce of gold that has ever been mined in all of history changing hands in just the first three months of 2011. That's what the LBMA members, themselves, voluntarily reported. And that's a lot of paper gold that is still sterilizing the economically beneficial price mechanism that physical gold would otherwise be transmitting.

    Yet things are changing, even today. That's what the rising price of gold since 2002 tells me. This is about much more than just a rising price. It's not just about a gold or even a commodity bull market. As FOA said, "it has everything to do with a changing world financial architecture." Gold's function in the monetary system is changing. And as FOA also said, "None of the other metals will play a part in this."

    Gold will return to its pre-1922 function, but that does not mean we will return to a pre-1922 gold standard. This post is not about the merits of the gold standard. It is not about praising the hard money camp’s decision in 1445 over the easy money camp’s decision in 1922. It is about the choice of the Superorganism over the management of men. The pre-22 gold standard, although it allowed gold to function, still carried the same flaw I point to so often; that using the same medium for exchange and savings leads to regular recurring conflicts between the two camps.

    This is an important distinction to understand. Gold's true function is relative to the real, physical balance of trade, not man's flawed, political-overvaluation of debt and other monetary schemes. In 1971, the entire planet switched to using a pure token money as its medium of exchange. These symbolic tokens do fail miserably and regularly as a store of value, but they work remarkably well as a medium of exchange. They are not going away.

    The whole ECB/Euro architecture was built to turn Genoa 1922 on its head, to reverse the damage done and to restore the function of gold which Jacques Rueff knew all too well. The ECB has one plain and simple mandate, to act with regard to a target CPI that is statistically harmonized across different economies dealing with different economic factors. In other words, the job of the ECB is to maintain stability in the purchasing power of a common currency against the general price level in many different countries.

    This simple architecture is designed to work best in Freegold, where the price and flow of physical gold will automatically regulate and relieve the pressure of economic differences between member states. If the ECB had been designed to assist the European economies, it would likely have been given the second mandate, same as the US Fed. The Fed has two mandated targets: CPI and full employment. These dual mandates are like fair weather friends, because when the heat is on—like it is today—they actually become dueling mandates. The ECB, on the other hand, is not mandated to assist the economy like the Fed is. In fact, FOA wrote back in 2000:

    "Basically, this is the direction the Euro group is taking us. This concept was born with little regard for the economic health of Europe. In the future, any countries money or economy can totally fail and the world currency operation will continue. What is being built is a new currency system, built on a world market price for gold."

    Like I said earlier, the monetary plane, which includes all that nominal sovereign debt in Europe, is only connected to the physical plane by two things, the price of goods and services (CPI or the general price level, on which the ECB has a mandate) and the price of gold (which the ECB happily floats). I think we can all agree that the aggregate debt is doomed at today's prices. It is fictional, imaginary capital. But those of you predicting the imminent collapse of the euro as a medium of exchange need to explain how nominal euro debt is more likely to break its connection with goods and services than its imaginary connection to gold at today's prices.

    I'll give you a few hints. Unlike the US, where the expenses of the same government that calculates CPI rise along with CPI, and where the CB has conflicting mandates that benefit from a statistically-lowered CPI, the ECB has not only met its mandate, but done so credibly. And unlike Indonesia, the ECB does not count gold in its CPI (HICP). Instead, the ECB floats its gold publicly and without worry. So while you're wondering in which of the two choices the disconnect will happen in Europe, consider this: Over the last decade, the general price level has performed more or less as expected while the gold price in euro broke off in 2005 and rose 325% in six years:

    January 1, 2002 – GOLD @ €310.50
    Tuesday, November 15, 2005 - GOLD ABOVE €400
    Tuesday, April 18, 2006 - GOLD ABOVE €500
    Thursday, January 10, 2008 - GOLD ABOVE €600
    Friday, January 30, 2009 - GOLD ABOVE €700
    Wednesday, December 2, 2009 - GOLD ABOVE €800
    Tuesday, May 4, 2010 - GOLD ABOVE €900
    Monday, May 17, 2010 - GOLD ABOVE €1000
    Monday, July 11, 2011 - GOLD ABOVE €1100
    Tuesday, August 9, 2011 - GOLD ABOVE €1200
    Monday, August 22, 2011 - GOLD ABOVE €1300

    And those of you that incessantly argue that gold is just one of many commodities—an asset like any other that, when push comes to shove, will ultimately be liquidated in favor of symbolic token currency units—need to explain how the monetary plane, insolvent at today's low prices, will maintain any grip on reality at even lower prices. The fact is it can't. And that's why you can only maintain your arguments with fantastic stories of modern day all-powerful overlords enslaving the serfs to their graves. But unfortunately, that's not how a diverse global economic ecosystem actually works.

    Our money is credit. “The people’s” money has always been credit. Credit expands and contracts based on the availability of actual money, the monetary base. 1922 was the first time they included a form of credit as the base itself. A Pandora’s box if ever there was one!

    But don't assume there is coercion involved when I say credit is our money. It is the best possible money for a vibrant economy. It is how the pure concept of money emerged in the very beginning. When gold first became money, it was as the mental unit of account. I'll give you five ounces of gold worth of cattle and you'll owe me five ounces worth of milk and other goods and services. When we participate in a vibrant economy, we deal in credit denominated in money. When we withdraw from a mismanaged economy, we withdraw into the monetary base, we hoard the reserves. Holding credit is our vote for vibrancy. Hoarding reserves is our vote against the current economy.

    Gold is in the process of changing functions in the global economy. And in this transition, "the most visible transformation since it was first used as money," it will plateau at a new, mind-blowing level before it resumes its proper function. This is happening. It must happen, because bullion bank paper promises cannot function like gold. So be careful what kind of gold you're holding (physical is what you want), or you might just miss out on the revaluation of the millennium. Gaining a deeper understanding of what is happening, as you can here, here and here, should help those of you that worry about buying gold now because a few analysts, who have no idea what they're talking about, keep saying this is the top. This is the "top range" prediction I made two years ago:

    [​IMG]

    Here's the main thing, gold will work the same way as a reserve asset in Freegold as it did before 1922, even without going back to being the sole monetary base. Gold is superior to even the entire monetary plane in this regard. It is the sole monetary member of the physical realm. Whether it is part of the transactional currency system or not doesn’t matter to its balance-governing role. It can fulfill that role even in Freegold. That’s what the architects figured out! That was their Grand Induction. That’s how the euro architects are comparable to the Genoa Conference of 1445. And that's how Jacques Rueff is comparable to Benedetto Centurione. Probably far superior!

    Sincerely,
    FOFOA


    [1] The Age of Inflation, Chapter 2, Jacques Rueff
    [2] http://fraser.stlouisfed.org/docs/meltzer/craint89.pdf
    [3] Bank of Saint George - Wikipedia, the free encyclopedia
    [4] Jacques Rueff - Wikipedia, the free encyclopedia
    [5] http://www.ecb.eu/pub/pdf/other/whypricestability_en.pdf p. 51
    [6] http://www.ecb.int/pub/pdf/other/ecbhistoryrolefunctions2004en.pdf pp. 15 - 17
     
    Last edited by a moderator: May 10, 2015
    pmaitra likes this.

Share This Page