The New York Times reported in “Bloc in Europe Starts to Balk Over Austerity” that:
“European leaders arrived in Milan for a summit meeting . . . despite gloomy financial news this week of stock markets tumbling and borrowing costs shooting up . . . .
“In past years, the eurozone nations buckled under to German demands to slash budget deficits and roll back public services, and then watched in dismay as unemployment rates shot into the double digits and growth collapsed. Now, France, Italy and the European Central Bank (ECB) have coalesced into a bloc against Germany, and they are insisting that Berlin change course.
“The divisions between Europe’s leaders, at a moment when unity would seem critical, is one reason the markets are rattled—as well as the fact that policy makers still have not found a tool to revive growth in the face of staggering public debt.”
• First, what does Germany mean by “austerity”? It means governments (and individuals) being forced to live within their means. Pay existing debt. Going into no more debt. No more borrowing. No more trying to live on credit in the national equivalent of a man using his MasterCard to pay off his VISA to pay off his American Express.
Critics describe the need to live within your means as “austerity” and make is sound draconian. It’s not. It’s simply a reasonable recommendation, demand or even inevitability that compels us all to live within our means.
• Second, “divisions between Europe’s leaders” reported by the New York Times aren’t between nations, per se, but rather between systems of values.
Germany says people need to work hard, spend less than they earn, save and invest. Germany (which has prospered in large measure from a strong work ethic and inclination to produce and save) says the other nations must behave responsibly.
This is the fundamental idea behind “austerity”: each individual must work and pay his own bills; each generation must work to pay its own bills; each nation must work to pay its own bills. By “work,” they mean productive work—not just make-work in some government bureaucracy—work that actually produces some tangible thing that is desired and valued by the public in the free market.
“Austerity”: each nation, generation and individual should be responsible for his own bills.
Some European nations (including Italy, France and perhaps Spain) have become “Greece-i-fied” in that they reject the idea of personal or national responsibility. They believe that they should be entitled to party hearty at someone else’s expense. They want an easy credit, easy money, high inflation monetary system that will allow them to spend currency that they haven’t actually earned to live the “good life”. These nations have embraced a “welfare mentality” by which they feel “entitled” to live irresponsibly and on the basis of someone else’s work—or at least on the basis of someone else’s (ECB’s) creation of fiat currency.
Germany (a producer/creditor nation) won’t lend any more money to Greece, Italy and France (consumer/debtor nations) at “easy money” rates. The debtor nations are demanding that Germany give them something for nothing. The resulting “divisions” between debtors and creditors won’t be easily resolved.
• Third, what’s caused the EU’s economy to “stagger”?
A: According to the New York Times article, an enormous “public” or more generally, “government” debt.
Q: Why did the EU have so much debt?
A: To allow liberal politicians to win election by persuading voters that they’re “entitled” to live on welfare and/or subsidies provided by government.
What we’re seeing in the EU is democracy in action—exactly as once described by Elmer t. Peterson:
“A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy.”
Just as Mr. Peterson warned, nations that adopt democracy inevitably begin to vote themselves large, unearned subsidies. Greece, Italy ,France—and the United States—have embraced democracy and reached the moment when, instead of working for a living, they vote for politicians who’ll provide “free” welfare and subsidies. If Mr. Peterson was right, the national economies of a number of western “democracies” are in the verge of collapse due to “loose fiscal policy” and there’s a dictator in our future.
For example, in France laws have been in place for over a decade to encourage 35-hour workweeks and 1-hour lunches. The French love it. Like many Americans, they believe they have a moral right to however much credit is required to “shop ‘til they drop”. They believe that their desire to consume entitles them to demand or even steal all they need from the members of society who can produce.
That attitude . . . that system of values . . . is being currently challenged in the EU by German notions of “austerity”. That challenge is being described as a “division” between the European “leaders” who believe in “austerity” (responsibility) and “consumerism” based on credit, inflation and leaving the bills to someone else to pay. This “division” is really a conflict in values between consumers/debtors and producers/creditors.
• The EU’s capacity for economic growth has been strangled by the “staggering public debt” rung up by EU politicians and consumers. They’ve reached a point where they can’t borrow enough money to sustain their “party”. They’re left with two unpalatable choices: They must either go back to work and produce at least as much as they spend, or they must starve.
The debtor nations (Greece, Italy and France) who’ve nearly bankrupted themselves by spending most of their savings and exhausting much of their credit. These debtor-nations are therefore trying to persuade some other productive fool (Germany) into providing more credit and/or welfare/subsidies to allow the debtors to continue to “party”.
The “consumer” nations criticize Germany for advocating “austerity” (living within their means). Germany criticizes the “consumers” for being irresponsible, immoral and perhaps even irrational in their insistence that they should be entitled to spend other people’s money.
I’m betting that Germany won’t play the fool and allow itself to be conned into supporting the parasites who insist on their right to live on credit. I’m betting that Germany will insist that the debtor nations relearn the need to be self-supporting by means of individual work ethic and personal productivity.
If my bet is right, the EU is headed into chaos. There’ll be no easy reconciliation between the needs of the consumers/debtors with the values of the producers/creditors. In the end, the consumers/debtors will have to either go back to work or starve.
The EU is on the verge of running out of “free lunches”.
Investing in Growth
The New York Times article continued:
“We need to show that Europe is capable of investing in growth, and not only in rigor and austerity,” said the Italian prime minister, Matteo Renzi, . . . .
What does Italian PM Renzi mean when he advocates “investing in growth”?
He means that Europe should stimulate its economy by borrowing more currency from productive creditors to allow the unproductive consumers to “party on” by going deeper into debt.
But didn’t The New York Times article begin by declaring that the EU’s primary economic problem was a “staggering public debt”?
Indeed, it did.
So, can the EU reasonably expect to revive an economy crippled by “staggering public debt” by going even deeper into debt?
Of course not.
(In fact, the US gov-co’s attempt to stimulate our overly-indebted US economy with more debt is also likely to fail.)
“Financial investors who had seemingly forgotten about the European crises in 2008 and 2010 now again seem worried about the Continent’s persistent lack of growth and the prospect of falling into a deflationary trap.”
Note that the previous quote links “lack of growth” to “deflation”. It follows that the article implicitly links positive “growth” to “inflation”.
“Inflation” takes place when the value (purchasing power) of a currency decreases. Inflation is great for debtors (like the US government) because it allows them to repay their debts with “cheaper” dollars). More, governments love inflation because it encourages people to go into debt to spend more currency that will stimulate the economy.
But note that the EU’s fundamental problem is allegedly a “staggering public debt” that’s partially due to institutionalized inflation. I.e., inflation is a primary incentive for borrowing and thereby increasing the total debt.
• However, inflation robs creditors. Creditors ultimately are, or represent, the productive members of society. Inflation is a way for the debtor-consumers to rob the creditor-producers.
Although inflation provides a great economic “party” and the temporary illusion of prosperity, it eventually bankrupts the creditors and producers. Then there’s no more real wealth to be lent—only the additional currency “spun” into circulation by the central bank. As the supply or currency grows and productivity declines, prices soar because there’s little left to buy. Therefore, the “party” ends and the people have to go back to work or starve.
Again, that’s what’s happening in the EU right now. Debtor nations like Greece, Italy and France insist on their right to “party” at someone else’s expense. Creditor nations like Germany are saying, “No–let the debtors go back to work and pay for their own damn parties.”
And thus we have a “division” within the EU between those nations that are predominately producer-creditors and those that are predominately consumer-debtors.
The fundamental difference between inflation and deflation is that inflation serves the immediate interests of consumers/borrowers/debtors and the deflation serves the immediate interests of producers/savers/creditors.
But inflation and deflation are similar in that they’re both forms of theft that allow either debtors to rob creditors (inflation) or allow creditors to rob debtors. This kind of theft is easily achieved with a fiat currency, but would be far less likely to occur if the currency were backed by something tangible like gold or silver.
Expand the Budget & Cut Taxes?!
- The New York Times article continued:
“France, which has in modern times been Germany’s indispensable partner in European crisis management, is now in near revolt, and President Francois Hollande has joined forces with Mr. Renzi, who has presented an expansionary 2015 budget that will cut taxes despite pressure from Brussels to meet deficit targets.”
Q: How will France “expand” next year’s budget at the same time it “cuts taxes”?
A: They must either borrow the extra money they want to spend or the ECB must print the extra currency they want to spend. Either way, France will go deeper into debt.
Q: But what did The New York Times article allege is the EU’s primary problem?
A: A “staggering” public debt.
So, can France realistically hope to solve their current debt problem by going more deeply into debt?
Of course not. The most France can do is “kick the can down the road” and buy (actually, “borrow”) a little more time before they have to concede that the consumers’/debtors’ “party” is over. France will be forced to admit that it can’t afford 1-hour lunches, early retirement and overly generous pensions. The spoiled French consumers will scream, shout and riot. We could see a revolution.
But the French will eventually learn that they aren’t entitled to a single euro that they haven’t earned by means of their own productive effort. Consumers won’t like the lesson. It may take a generation or more for the lesson to be accepted. Once that lesson is learned, the French may return to some semblance of prosperity—but not until.
Q: If “staggering public debt” is the EU’s primary problem, why would France be dumb enough “expand” next year’s budget by going further into debt?
A: Because: 1) they are desperate; and 2) there’s nothing else they can do
France is headed for big trouble. So is the EU. So is the US. Politicians know it. They must also know that there’s nothing they can do to prevent that trouble other than borrow enough currency to postpone it for a while longer.
• “Mario Draghi, the president of the European Central Bank, has pressed Germany to temper its insistence on budgetary discipline [“austerity”; living within your means] and to spend more on public works to stimulate the eurozone economy. The French have cheered him on. German leaders have resisted, while making clear their opposition to the more powerful stimulus measures that analysts expect the European Central Bank to deploy soon.”
The ECB plans to print more euros and inject them into the EU economy. If they do, the value of the euro should fall to inflation, creditors will be robbed, and consumers will be placated with a fresh supply of seemingly “free lunches”.
The “teeter-totter” relationship between the value of the euro and the value of the dollar suggests that as the euro loses value to inflation, the US dollar will gain value and tend to deflate—which is typically a hallmark of economic depression.
This implies that if the ECB tries to “stimulate” the EU economy by printing more euros and inflating their currency, one result may be increased deflation for the fiat dollar and an increased tendency for the US economy to slide into depression.
I can’t prove that there’s a direct relationship between euro inflation, dollar deflation and a US economic depression—but intuition suggests that such relationship probably exists.
More, I can see that after several years of the Federal Reserve’s QE1, QE2 and QE3 policies of injecting trillions of fiat dollars into the US economy, the value of the dollar declined due to inflation, the value of the euro increased (deflated) and the EU economy moved to the verge of an economic depression. Again, these events might be only coincidental—but they at least seem consistent with the possibility that the Fed’s QE “stimulation” polices caused inflation in the US and deflation in the EU—and the ECB’s upcoming “stimulus” policy of euro inflation could help precipitate US deflation and even depression.
Majority Rules—but Minority Provides?
• We live in a world where there are far more consumers/spenders/debtors than there are producers/savers/creditors.
In fact, we are all “consumers” in the sense that we must all “consume” food, water, goods and services each day to survive. But only some of us are “producers”. That minority is necessary to support those of us who are net “consumers”.
We all know that “consumers” make up 70% of the US economy. We can presume that “consumers” also make up at least 70% of the electorate.
Therefore, politicians recognize that the “consumers” are the political majority and cater to their desires by fostering inflation (legalized theft of the productive creditors). Unfortunately, the political choice to foster inflation can only continue until we run out of producers and the remaining consumers are left to predate on themselves to survive. Such predation is typically portrayed as a “mob”. That predation can sometimes be as violent and self-destructive as the Russian Revolution of A.D. 1917-23.
We may see that kind of predation break loose in southern Europe in the next year or two.
Soon after, and for the very same reasons, we may see that same kind of predation in the US.
Like the EU, US debt is also “staggering” and unpayable. We’re no longer sufficiently productive to pay for our “party”. We’ve exhausted our savings and our credit is almost gone. Nothing can postpone an economic crash other than printing more fiat dollars. The US is fast approaching the “work or starve” moment.
Faced with that choice, I’ll bet that at least 30% of Americans can’t or won’t work. More importantly, I’ll bet that the 70% who can and will work are so broke that they’ll refuse to support those who can’t or won’t.