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Europe’s problems as a symptom
Calling Europe’s problem a balance of payments problem as Martin Wolff and some others are doing is a mistake. It confuses cause with effect. BOP imbalances are the SYMPTOM. The causal variable is ‘competitiveness.’ It is the competitiveness differences across the Zone. The Zone has gone wrong by making itself a slave to the currency instead of to true integration. Economies in the Zone sacrifice everything to hold the euro 'peg'. It makes no sense, especially since the euro peg is now the cause of their pain as it truly is.
We can engage in revisionism but we cannot run time backwards. We are where we are and the Zone cannot undo its terrible mistake. It is all but impossible to heal the rift from within. I do not see Germany relating nor do I see Mediterranean countries undergoing a generation of austerity just to keep the euro peg. I see chaos.
Learning from the Euro-undoing
The e-Zone problem is a microcosm (well maybe a Macro-cosm....) of the world economy where, similarly there are no burdens placed on surplus countries to adjust. In the Zone this manifests itself as competitiveness issues as the ECB held macro inflation in check but country by country results undermined the system probably though fiscal excess but also because of poor integration. Germans took the opportunity to cement their position as the most competitive Zone nation and now seem to be in the cat bird's seat of supreme competitiveness. But it’s still a seat on the good ship Titanic and as things worsen Germany will increasingly be called upon to do the bailing. In the end Germany's maneuvering to be the most competitive did not serve it well. It was poking holes in the sides of the same ship that it occupied. By undermining its neighbors competitive position too badly it undermined itself.
Away from the Zone where exchange rates are flexible competitiveness problems are not such an issue, or at least, they take on a different dimension. In this environment policy options are greater. But the global system has not prospered and has built up its own set of rigidities and imbalances because surplus countries are not forced to adjust and the US, the reserve currency takes the other side of the currency value that other nations select. Some countries select a policy of export led growth and ignore their too-low exchange rate. They ride the trade surplus to prosperity. A country that is piling up forex reserves, and does not take that as a sign of an undervalued currency simply undermines the system. Its surplus takes the form of a deficit elsewhere.
Fixed as in set; flexible but broken
So in EMU the adjustment mechanism is fixed in the sense of being ‘set’ or ‘rigid’ while outside the Zone the adjustment mechanism is flexible but nonetheless is broken.
We have created systems without rules, or at least without rules that any one will obey or will be forced to obey (who would force them?) WTO does not even require market-determined exchange rates for its rules to apply. It’s as mad as the e-Zone having had no real fiscal rules (Mass-trick- right).
While I see lots of fingers being pointed what is clear and consistent is that we have invented systems with flaws. EMU has painted itself into a corner (or coroner?). I don’t’ see how it survives unless it can break apart and reform.
ECB bond buying or more LTRO is just more of the junkies fix; it is not a solution but will deepen and worsen the problem.
Why Free is so expensive
Apart from the Zone there are similar issues that go unresolved and that undermine and destabilize the global trading system. NOT agreeing to anything may be worse than agreeing to something that countries don’t want. But trade, even ‘free trade,’ requires rules. Trade may be free, as in ‘free of restrictions’ but it must also be free it the sense than it is supported by other free markets. And when exchange markets are not free and are meddled with they are not efficient and free trade conducted on such a base is a disaster.
How it actually works
We should ponder how we are getting to equilibrium or what passes for that in this system. Since surplus countries won’t appreciate their currencies to trim their surpluses, deficit countries get larger deficits. And goods stay so cheap that deficit countries simply over-consume. They consume so much that they become debt-saturated while financing their ‘cheap’ purchases. Some figure it out before it is destructive; others don’t. Economists generally defend this excess consumption by looking at the ‘consumer surplus’ accruing to the purchaser of the cheap goods but only because they think in terms of the commodity markets and forget about financing. But it’s in the financing of the excessive consumption where the real evil is being done. In our financial crisis the developed world took it on the chin. China has turned to a domestic demand model, away from a model based on export-led growth, not out of the goodness of its heart, but because it saw that the US has become nearly debt saturated and China does not want to absorb a. lot more US debt. It knows the price of its chronic surplus policy is chromic deficits for the US and more debt issuance. This is how equilibrium is being foisted on the system: It is happening because of debt saturation and because the current account signal is being ignored.
‘No rules’ does not mean no consequences
So in the end having a system without rules is not the same as having a system without consequences. It may be hard to figure out the consequences in such a poorly articulated system, but in time the system will tell you. EMU is finding out. The rest of us are finding out and still we have no solutions.
We need to go back to a rules-based system. We need cops and penalties. We don’t need gold we don’t need fixed exchange rates just need rules and to have them followed.
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If we expect individuals to live within their means then we must expect nations to do the same. All imbalances in terms of debts and deficits flow from this simple proposition.
The banking cartel requires interest on their debt. How can nations pay for that interest without borrowing more, putting them deeper in debt?
The plan has always been to seize sovereign assets--the wealth of the nation.
again, this is the test that, historically, politicians from nero to philip ll of spain, who had all the gold and silver of the new world and still ended up in hock to amsterdam, to reagan, the bushes and obama all fail. interest should be paid out of economic surplus and hence interest cannot, in aggregate, be at a rate greater than that of economic/tax revenue/profit growth. it certainly should not, in any long term sense, be paid for by increased debt. oh well.
"We don’t need gold we don’t need fixed exchange rates just need rules and to have them followed."
Sorry, I disagree - because the politicians WILL NOT FOLLOW RULES or maintain fiscal discipline - that is why we MUST have gold and a fixed exchange rate.
The US framers tried - their Constitution FIXED the value of a "dollar" in grains of gold and silver. Later, "smarter, more enlightened" politicians got us in the mess we're in.
Try again.
When you assume or assert that the solution can't work you win by tautology.
What can I say?
Why don't you try again for the first time?
Actually you just need gold. You don't evn need exchange rates. In fact the strange thing is that those who cry out for one world currency ignore the fact that for centuries gold and silver WERE global currencies.
"those who cry out for one world currency"
They are only crying out for one world fiat currency (whether SDR or Bancor, any other marketing name to mesmerize the sheep).
And furthermore, WE ABSOLUTELY NEED GOLD: WE NEED IT TO TRADE FREE OF TAXATION AND DERIVATIVES, so that it's true, free-market value relative to all other currencies is known...
...AND FOR GOLD TO FLOW FREELY ACROSS NATIONAL BORDERS TO RESOLVE BALANCE OF PAYMENTS ISSUES.
THIS WAY THERE IS *NO NEED* FOR COPS, PENALTIES, ETC.
THE MARKET WILL ENFORCE THE NEEDED DISCIPLINE.
+100
the objections above are good ones (however if politicians won't follow rules, how can exchange rates be fixed? they'll change them when rates become inconvenient).
brusca has presented some quality analysis, much of it true. in a way, it's like what j.m. keynes said, run government surpluses in times of plenty so as to be able to run deficits in times of famine. the politicians heard only the second part, because that's what gets them elected.
perhaps we the voters should demand more of them and of ourselves. of course they routinely lie and tell us they will do one thing and then do the exact opposite (most transparent administration in history, humble foreign policy, etc. etc. etc.) we desperately need better people in government and an electorate that demands and rewards law abiding and law enforcing.
it's truly sad that we, apparently, are such fallen creatures that we are unable to have a sophisticated economic system, with freely adjusting exchange rates evening out international deficits and surpluses and with an enlightened government gathering reserves in good times to be able to spend them in bad, but so it seems.
question: is such a broken government of such corrupt politicians one which should be trusted with the powers of unlimited executive imprisonment and execution? i didn't think so.
"...it's like what j.m. keynes said, run government surpluses in times of plenty so as to be able to run deficits in times of famine."
Fuck that.
All that means is they are taking too much out of the private economy. In that scenario, you are being over taxed with the "promise" it will not be frittered away by those who have never been able to walk past a pot of money without grabbing it.
"perhaps we the voters should demand more of them and of ourselves."
That is the key.
We should be demanding less from them. And a return to sound accounting instead of baseline budgeting.
The last 'sound' I heard from accounting was a tortured whimper.
Torture the numbers enough they'll show anything one wants.
But that never equals reality ;-)
what is failing Gentlemen is Government
are we crystal clear?
commentators and wise men moan about the spending, the debt, oh we haven't enough Laws, we need term limits... this is of course all re-arranging the deckchairs on the Titanic (Govt) and barely half-a-job as a proper fix
what is failing is a (monopoly of power) system called Government. It has failed a hundred times in a hundred countries and has never once succeeded at anything it does.. anyone want some more of this crap???
..check out Greece, birthplace of "democracy" (whatever the fuck that's supposed to mean), which goes arse over tit every 14 years into the sewer
"The quality of thinking that got us here is not going to get us out" Albert Einstein
Bin that tragic shithole called Govt. History teaches us time and again what a sad f'n joke this institution is ...any other 'solution' is just yet more half-baked trash talk and truly crap problem solving
+1.
The govt should take exactly what it needs to do the functions it's been charged with doing and not a penny more. In times of famine, it should still take that amount and not a penny more, or less; if there is no pain felt in harsh times, then there is an insulation from reality and no-one has much of an incentive to work harder / smarter to make sure that next time things are better organised and the pain won't be as deep or as long. Pain is there to warn you there's a problem that needs dealing with, economically as well as biologically. Sometimes you medicate, sometimes you operate, sometimes you can fix it with a lifestyle change.. but you can't ignore it.
"Pain is there to warn you there's a problem that needs dealing with, economically as well as biologically."
Very well stated.
I'm not a masochist...lol...but pain is a very good indicator we are still alive ;-)