Guest Post: Bad Advice For The Greeks

Tyler Durden's picture

Authored by Patrick Barron via the Ludwig von Mises Institute,

This summer Roger Bootle won Lord Wolfson's £250,000 prize for the best advice for a country leaving the European Monetary Union (one may assume that this advice is aimed at Greece). A more statist, anti-liberal policy than his could hardly be envisioned, which is a sad commentary on the mindset of the judges chosen by Lord Wolfson. His advice contrasted sharply with that of Dr. Philipp Bagus, whose liberal, transparent, and free-market-oriented policy advice was rejected in favor of Mr. Bootle's call for state secrecy and coercion.

Mr. Bootle's statist advice stems from his misunderstanding of basic economics in which he views symptoms as causes. He offers no explanation for Greece's unsustainable debt burden, high cost structure, and high unemployment other than the standard Keynesian explanation of inadequate aggregate demand. Once this fallacious view is swallowed, the prescription follows axiomatically, i.e., devalue the currency to restore competitiveness vis-à-vis foreign markets, which will increase aggregate demand and reduce unemployment. Oh, and the Greeks may have to default on their foreign debt, but history shows that this is not a problem. Really?

Despite his lengthy and repetitive prize submission, Mr. Bootle's recommendations can be summarized in this one sentence:

In complete secrecy and with no prior discussion, redenominate all Greek euro-denominated bank accounts into drachma-denominated accounts and devalue the drachma.

That's it! There is no need to cut public spending. Quite the contrary, because public spending adds to the Keynesian concept of aggregate demand, and aggregate demand cannot be allowed to fall. The secrecy part is essential for Mr. Bootle's plan. If the Greek people got wind of what was to happen, they would take measures to protect their property, such as transferring their euro-denominated bank balances to banks in Germany. Mr. Bootle refers to such a development as a crisis, but a crisis for whom? Taking measures to protect one's property would not be a crisis for the common Greek citizen. It would be exercising rational self-interest. Mr. Bootle's so-called plan is nothing more than robbing Greek citizens in the middle of the night!

Give the Greeks a Better Currency

The aim of currency reform — and do not mistake my intention; currency reform is needed — should be to replace a poor currency with a better one. But Mr. Bootle (and his Keynesian colleagues) see the world upside down. In their world of aggregate demand, a weaker currency always is preferable to a stronger one, because a weak currency purportedly makes a nation more competitive in international markets. But this is pure propaganda. A weak currency not only makes necessary imports more expensive, reducing prosperity, but it also is an outright subsidy to foreign buyers of a nation's goods. As I have argued in "Value in Devaluation?" and as James Miller has argued in "Mark Carney's Zero-Sum Game," currency devaluation is merely a transfer of wealth from all of a nation's citizens to politically favored industries, usually export industries. It is no different from giving a subsidy to any domestic producer. The subsidy is paid by all the citizens of the subsidizing country, not by the foreigners who buy the subsidized good. They get a bargain.

Furthermore, devaluation does not make a nation more competitive. It does nothing to spur increased domestic saving or external capital investment, which lead to the increased application of capital per capita, the only sources of increased worker productivity and the only sources of increased real wages. Devaluation does not reveal the onerous, wealth-destroying effect of economic regulation, not does it reveal the true costs of the welfare state, which relies on high taxes to fund present consumption at the expense of future prosperity. What the state spends cannot be saved and invested, no matter how cheap the currency.

And, contrary to Mr. Bootle's statement that "improving competitiveness is at odds with the objective of reducing the debt burden," Greece will not be able to reduce its debt until it does become more competitive. It may well be impossible for Greece to pay all of its debts, but this merely reveals the dire reality of current policy; it does nothing to change that reality. The increase in the debt burden must stop! It must stop now!

Mr. Bootle misses the cause of the euro debt crisis completely when he fails to see that ECB euro-denominated loans to captive national banks, with worthless sovereign debt as collateral, is the manner in which the European Monetary Union subsidizes failed economic policies. As long as the Greek government can get unlimited euro loans from the ECB, there is no real reason to reform the nation's economy and there will be no end to the debt crisis.

So, Mr. Bootle proposes an even worse currency, a devalued drachma, as the replacement for a bad one, the euro. And if the Greek people resist outright theft through devaluation, then the government must trap their wealth internally, where it can be plundered later, by using capital controls to stop euro transfers to safer, foreign banks. The fact that the free movement of capital was one of the pillars of the European project apparently must be sacrificed for the benefit of the state. In fact Mr. Bootle admits that capital controls are illegal under current EU law, but he recommends them anyway. All tyrants love a crisis, because it can be used as an excuse to break the law.

Truly Liberal Alternatives

Dr. Philipp Bagus of King Juan Carlos University, Madrid, offered the truly liberal alternative. He proposed a long period of public discussion about alternatives to leaving the euro, which would allow ample time for Greeks to move their property out of the greedy reach of their own government, should they decide to do so. The currency crisis might be solved in this manner as Greek banks closed and the Greek government shut down its welfare and regulatory system for lack of funds. The Greek government could repeal legal-tender laws, which currently require Greek citizens to transact business in one currency only — always that issued by the state itself. Concomitantly it could reinstate the drachma as a strong currency backed by gold. Then good money would drive out bad, as people freely chose which currency to use. They would choose the one that is most marketable. One element of that marketability would be that it would retain its purchasing power.

Of course, Mr. Bootle desires the opposite, i.e., an ever depreciating currency that robs currency holders of their purchasing power. Naturally Greeks will resist this; therefore, the Greek government must install capital controls. Yet the essence of self-government and democracy and the great triumph of postwar Europe was the freeing of the individual first from fascist tyranny and then communist tyranny, whose primary means of enforcement were control of the economy.

The future of Europe will emerge from the euro debt crisis. Mr. Bootle desires a return to state currency controls as a means to prop up the decaying welfare state. Dr. Bagus desires a step back from this unfortunate detour, which took concrete form with the formation of the euro. Rather than compound the errors of the euro with even more state intervention, the alternative is to anchor currencies in gold. This will force individual nations to engage in true democratic processes to determine the scope of state action. It will end the stealth transfer of wealth via euro monetary expansion. In that regard it will force each nation to live within its own means. What's wrong with that?

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JustObserving's picture

"Concomitantly it could reinstate the drachma as a strong currency backed by gold."

The US and UK would never approve of a currency backed by gold since it is a threat to all fiat currencies. A gold-backed currency would take away their power to print.  There would be no more expensive wars (the cost of the Vietnam war led to US moving off the gold standard).  Peace and justice may break out.  The banksters will never stand for that.

prains's picture

Good Advice For The Greeks; don't eat the meat

ShortTheUS's picture

In complete secrecy and with no prior discussion, redenominate all Greek euro-denominated bank accounts into drachma-denominated accounts and devalue the drachma.


Thomas's picture

Roger Bootle once made a very interesting observation: "inflation occurs when different classes start competing for their share of the pie." During tranquil periods, everybody thinks they are getting a credible deal. During times of stress, people start sniping. That is inflationary.

Ghordius's picture

interesting, indeed.

on the other side a British Peer having a pet hate for a currency grid or union on the european continent is just... British as usual

the US Mises Institute notes that nearly all advice to the Greeks is NeoKeynesian, "soft", inflationary and predatory, and so it proposes a gold backed currency, that would be even "harder", more deflationary and would cause lots of defaults (the price for a fast return to competitiveness) that would give the feeling of being fleeced (to the defaulters), too.

for me it's not a wonder at all that between those two very radical medicines the Greeks prefer the middle way: the EUR

I don't see any British Peer proposing that the UK should offer it's currency to Greece, btw. But Mother Russia could still open it's arms (again).

economics9698's picture

Inflation occurs when supply decreases and demand remains the same.  When the credit card is ripped up supply decreases.

Tapeworm's picture

I read it as being voluntary. Dump the Legal Tender laws and let folks choose their own currency.

 Nah, that would put an end to the gutting of the middle classes.

Stoploss's picture

Some body slap the shit out of the Booty an tell him Angie took all the gold months ago. She came back to make damn sure there wasn't any left.

You can't back shit with gold if ya aint got none...


Freegold's picture

We' have seen the last of the classic backing by gold. If any nation would try it they will fail much sooner than before. It is gold that prices currency in the long run. What we will have eventually is a new kind of goldstandard.

Physical only gold market where currencys find their value. Most of the gold these days are in the hands of savers, some of them REALLY big kahunas. In the end it is always about the savers choiche of store-of-value. Forget the bankers, elites etc. What they want doesn't matter. We will evolve our monetary system to "freegold", no matter what gets decided.

The flow of gold is very tiny compared to the total stock. When their owners hear the great sucking sound from the dying dollar financialssystem it will begin to flow at it's true value north of 50k per ounce. Get your gold while it's still on sale :)

max2205's picture

Back it with feta.

A Lunatic's picture

If only stupidity could serve as money.......

Schmuck Raker's picture

What took you so long to get here?

LetThemEatRand's picture

I was running my small business, enemy of the Mises Institute.  Yes, Mises claims to be my friend.  I don't buy it.

Monedas's picture

Black is beautiful, your check is in the mail, and "I'm Greek and I got your back" !   

Crtrvlt's picture

"If the Greek people got wind of what was to happen, they would take measures to protect their property, such as transferring their euro-denominated bank balances to banks in Germany."

This has already happened. See one of many charts of Greek deposit outflows. It is also the well off who have done this hoping to pounce on a devalued drachma

Pancho Villa's picture

Concomitantly it could reinstate the drachma as a strong currency backed by gold.

Yeah, right! No one would trust a note backed by the Greek government. Actually, there is no government on earth whose gold certificates I would be willing to trust. The Swiss government probably comes closest, but I wouldn't trust even them. Only gold coins are safe. And then only if you carefully weigh and measure them and check for tungsten using an ultrasonic thickness gauge.

cornflakesdisease's picture

Greece will not leave the Euro-Zone.  Will not be allowed to happen.  They haven't even started using real bullets yet.

prains's picture

that's because they can't afford them

margaris's picture

what are you talking about, ... even african countries can afford weapons and bullets...

q99x2's picture

Give Bootle the boot and move to bitcoin. Just say no to banksters and corporatist anarchists.

margaris's picture

I agree, but wait.... don't use the word "anarchist" in this derogatory way.

Statism and government is where the problem lies. Anarchy is the solution.

Anarchy meaning NO government ruling class.

Anarchy doesn't mean barbarism. Statism and government have already claimed the title of barbarism for themselves.


In the 20th century, democide passed war as the leading cause of non-natural death...

miltiadis's picture

If Greece leave the Euro will then the Euro remove the Greek Letters from it.....?

millennia's picture

The EU will not let Greece leave the Eurozone...they are not done with the looting yet.

luckylongshot's picture

Leaving the Euro and reverting to a gold backed Drachma would simply be swapping one bankster controlled currency for another as guess who controls the gold market. Greece needs to kick out the banksters, start issuing Drachma linked to productivity, prevent their currency being traded and trade by barter...This would work although it would derail the banksters plans for looting Europe and probably see the US and British funded mercenaries in Syria get sent to Greece...and we would get fed some rubbish about it being a popular uprising in support of the Euro...

shovelhead's picture

Greeks should default and introduce a gold backed Drachma to be used with the Euro.

This will cause an immediate invasion and a subsequent Marshall Plan rebuilding effort.

Greece is saved and the Euro remains King.

This Democracy business is highly overrated since nobody seems to be getting it right and they end up with an unaccountable oligarchical bureaucracy in every instance.

Better to have them put the billions of wasted campaign ad money in their pockets so I don't have to look at their faces plastered over everything I see and listen to bullshit about how they're gonna make things better.

"We rule, you work for us...get used to it."

Keep it honest.

dadichris's picture

shouldn't the market determine the relative value of a nations currency, not monetary policy? there isn't even an "ism" that describes this unsound policy, but it surely isn't free market capitalism...