Radio Free Market

Now it’s Portugal’s turn, by Ambrose Evans-Pritchard in the Telegraph

My comments on Evans-Prichard’s column: 

The misconstruction of the European Monetary Union is responsible for this debacle.  It will not stop with Greece, Cyprus, and now Portugal, because the economic forces of “moral hazard” and “tragedy-of-the-commons” that caused such excess debt are still working their damage.  This damage will be revealed country by country.  The euro experiment has failed spectacularly in just twelve short years.  This should be a lesson not to trust governments to replace natural markets with artificial ones.  For political reasons the European countries tried to implement Robert Mundell’s great experiment in manufacturing a common fiat currency to be jointly managed by an international committee.  The euro elite wanted a federal Europe, so they foisted the common currency on a reluctant continent in order to use it as a tool to achieve power over national governments.  But there is no public consensus for a federal Europe.  Each country’s national government used the euro project simply to expand its budget by borrowing at lower costs.  At this point the outcome is uncertain, but there are no easy exit strategies.  My guess is that the ECB will print more money (that’s what central bankers always do), which will just exacerbate the problem.  The only sane solution is to admit that the euro experiment was a failure, reinstate national currencies, and tie them to each country’s gold reserves.  Some countries may prefer to join a deutsche mark zone.  It is possible that over time Europe would be one big deutsche mark zone, run by the Bundesbank in Frankfurt.  A golden deutsche mark would create the conditions for other currencies, such as the dollar, to be tied to gold out of rational self-interest.  Otherwise, the deutsche mark will supplant the dollar as the preferred currency for international trade.  Patrick Barron

Billions of pounds of QE unlikely to cause inflation–IMF

A preview of likely future research findings by the IMF:

Increasing the minimum wage does not increase unemployment.

Increasing taxes does not reduce capital accumulation.

More regulation of business actually reduces business costs.

Nationalized industries produce higher quality goods.

Re: New Trouble for Euro in Portugal

Dear Sirs:
According to your article, just two years ago Portugal received a 78 billion euro bailout from the IMF and its creditors.  Let’s put that previous bailout in perspective.  The 78 billion euro bailout is equivalent to around $100 billion.  The population of Portugal is 10 million, so the bailout amounted to $10,000 per person.  The gross national product of Portugal is $237 billion, so the previous bailout of Portugal is equivalent to 42% of its GNP.  The gross national product of the US is $15 trillion.  If the US were to get a similar sized bailout, it would receive over $6 trillion.  Yet, incredibly, Portugal is still in financial trouble and its situation is getting worse, because its high court ruled the government’s proposed benefit cuts to civil servants and pensioners to be unconstitutional.  The members of the European Monetary Union (EMU)–i.e., those seventeen nations using the euro–really must ask themselves if there isn’t something structurally wrong with a monetary arrangement that leads to such continuous disaster.  Are the other members of the EMU expected to support profligate countries like Portugal forever?  Since the Portuguese high court apparently has the power to prevent spending cuts and higher taxes cannot plug the gap, what is the answer?  Well, there is none, except to end the common currency experiment, which has fostered one financial crisis after another in only a dozen years.  Patrick Barron

Re: Cypriots Feel Betrayed by European Union Dear Sirs:

The frustration felt by ordinary Cypriots is illustrative of the myth that Europe is moving toward solidarity, prosperity, and greater social cohesion.  The Cypriot crisis revealed the reality that lies beneath the Brussels rhetoric.  The Cypriots were fools to believe that they could engage in reckless economic practices, moving away from agriculture and into services, and depend upon the EU to bail them out of any setbacks along the way.  Just as each individual must rely upon himself and his own resources, the same is true of nations.  Just as in Greece, the Germans are being blamed for not coming to the Cypriots’ aid.  But why should they?  Would the Cypriots bail out the Germans, if the shoe were on the other foot?  Of course not.  Rather than build amity and good will, the EU has triggered massive misallocation of resources that has engendered enmity, distrust, and hatred.  This is to be expected from any government-run, socialistic wealth transfer union.  Patrick Barron

Dear Sirs:
In his Monday, April 1 column titled “The logic of economics will catch up with the euro” Wolfgang Munchau says that the eurozone banking system needs to share risks and keep debt, both public and private, within sustainable limits.  First of all, risk sharing is a cause of the continuing crises, because it creates moral hazard, whereby banks take increased risks knowing that others will share in any losses.  This is the adverse consequence of any so-called deposit insurance, whether public or private; it encourages the very behavior it wishes to alleviate.  Secondly, debts will be sustainable only in a free market with sound money.  As long as central banks can create money out of thin air, they will funnel it to profligate governments and failing banks.  Under sound money governments are forced to live within their means by the taxpayers and the bond market.  Furthermore, Mr. Munchau’s claim that Cyprus “had no choice but to impose capital controls” is patently false.  I suggest that he read Deep Freeze: Iceland’s Economic Collapse by Drs. Philipp Bagus and David Howden.  Capital controls have discouraged capital investment in Iceland and have created another bubble economy with the capital that is trapped within the country.  Patrick Barron

Dear Sirs:
Judging by the proposals in his April 1 column titled “Economic confessions from a Keynesian heretic”, UCLA’s Roger Farmer is in no danger of being burned at the stake by his fellow interventionists.  He wants a “further increase in equity prices, engineered by government”, because “households spend more when they feel wealthy” and, as all good Keynesians know, “we need to increase demand” in order to “produce more consumer goods”.  This is just about as pure Keynesian orthodoxy as you will find; i.e., spend ourselves into prosperity through government interventions of one sort or another.  Why don’t we try something really radical, such as saving and living within our means?  Oh, I see the problem…that really would get a tenured college professor burned at the stake!

Patrick Barron

According to The New  York Times, Mr. Artemis “complained that authorities rode roughshod  over him and his board of directors by moving unilaterally to sell  off units of the bank in Greece and planning to hit big depositors  to pay for losses.”

How did this tiny island make it into the European Union (EU) in the  first place? The Financial Times gave an insightful background:
“Many EU leaders had been deeply reluctant to admit Cyprus into the  union in 2004, without a peace settlement that reunified the island.  But Greece had threatened to veto the entire enlargement of the EU — blocking Poland, the Czech Republic and the rest — unless Cyprus was  admitted. Reluctantly, EU leaders succumbed to this act of  blackmail.”
Five years later, we are seeing the fallout of Cyprus due to  Greece’s financial woes. Many accuse Greece of cooking the books to  get into the EU, and then the country proceeded to blackmail the EU  at the expense of other European

Re: Bailout Strains European Ties

Dear Sirs:
This disgusting farce of a week of backroom squabbling by incompetent and clueless politicians and irresponsible bureaucrats over the future of the Cypriot banks should spur a public outcry to get government completely out of money and banking.  The public has too long harbored an inflated opinion of the expertise of government officials that is completely unwarranted, as the Cypriot banking crisis has revealed.  After creating the conditions for massive wastes of resources by manipulating the money supply and interest rate through their central banks, these same politicians and bureaucrats barter with one another like Arab rug merchants, giving no consideration to the legality of their actions or the rights of the parties involved.  Were banks subject to normal commercial law, the courts would appoint receivers to liquidate and/or restructure problem banks in an orderly fashion.  Politicians would have nothing to do with it. It is the politicization of money and banking that has created one money and banking crisis after another all over the world.  Banks should be required by normal commercial law to keep one hundred percent reserves against demand/current accounts.  Such accounts are bailments and not loans to the banker; as bailments, the bankers must be able to satisfy withdrawal demands from all depositors en mass.  Savings are another category of bank liabilities, whereby the public loans its money to the banker for a set period of time.  The banker re-loans this money at interest.  The only possible security for the saving public is the banker’s capital account and his reputation for good banking practices. If his losses become too great, the public can force him into bankruptcy.  Were banks subject to these completely normal requirements of commercial law, there would be fewer problem banks, because bad bankers would be driven from the market.  Patrick Barron

Re: Cyprus Gets New Bailout Deal

Dear Sirs:
In addition to being anti-democratic (“The bank restructuring doesn’t need approval by the Cypriot Parliament. German Finance Minister Wolfgang Schäuble said Monday that the legislation needed to complete the restructuring of the Cypriot banking system is already in place.”), the so-called bailout of Cyrus solves nothing and treats its residents as serfs (“Officials said they believe the country will now need strict controls on money transfers in and out of the economy in the coming weeks or possibly months, cutting off its citizens and companies from much of the rest of the euro zone’s financial system.”).  The cause of the crisis was not the run on the banks but the market’s recognition of the reality.  The misconstructed euro caused massive malinvestment leading to massive bank losses.  So, what has changed to prevent future losses?  Nothing!  In fact the European Central Bank is pumping out even more money in the foolish belief that it can jump start the economies of its members.  All it is doing is causing even MORE malinvestment and making future crises worse.  As is standard operation procedure for incompetent and irresponsible bureaucrats everywhere, the people lose their money AND their freedom.

Patrick Barron