|A Weekly Newsletter for Sunday, April 8th, A.D. 2012
||Between Friday, March 30th, and Friday, April 6th, the bid prices for:
| Gold fell 2.3 % from $1,668.70 to $1,631.10
Silver fell 1.8 % from $32.28 to $31.71
Platinum fell 2.6 % from $1,635 to $1,592
Palladium fell 2.0 % from $652 to $639
DJIA fell 1.4 % from 13,241.63 to 13,060.14
NASDAQ fell 1.3 % from 3,122.57 to 3,080.50
NYSE fell 2.5 % from 8,288.79 to 8,081.34
US Dollar Index rose 1.2 % from 79.03 to 79.94
Crude Oil fell 1.1 % from $103.22to $102.02
EU: Breaking Up Is NOT Hard To Do
Edited by Alfred Adask
The EU may soon suffer some sort of breakup. One or more of the “PIIGS” (Portugal, Italy, Ireland Greece and Spain) may leave or be ejected, leaving the balance of the EU to survive. Some argue that the EU was doomed from the start and must eventually suffer complete disintegration.
The probability of an EU breakup is supported by the Wolfson Economics Prize. According to England’s Daily Mail, that £250,000 prize challenged the world’s brightest economists to prepare a contingency plan for a EU break-up. There were five finalists each of whose essays offers insight into why the EU may disintegrate, how that disintegration could be controlled, and what might happen if that breakup is improperly managed.
Some of these essays warn of dire consequence; others are surprisingly optimistic.
• If I were called to choose the winner out of the five finalists, I’d reject two of the finalists for advocating plans to withdraw from the EU that relied on absolute secrecy. Under these plans, a nation’s withdrawal from the EU would be revealed to the public and even to other EU nations only hours before the subject nation (say, Greece) actually withdrew.
One finalist explained the need for secrecy as follows:
“I recommend the formation of a secret Task Force by either Germany alone, or (possibly) with France as a junior partner. I deem absolute secrecy and deniability to be essential, because if the markets get wind of any plans for the dismantling of the Eurozone in its current form, then events will accelerate and spiral out of these Governments’ control, rending the Task Force’s plans irrelevant.”
While the dire warnings may be valid, I reject the need for secrecy because secrecy in the internet age is virtually impossible. Does anyone believe that a plan for a nation like Spain to suddenly exit the EU can be concealed for long? If the plan is kept in secret until the “last possible moment,” how will the European public and other EU nations react when a nation’s exit is announced just hours before it leaves? They’ll react with the same sense of betrayal and outrage as a wife whose husband suddenly announces that he’s leaving her for a younger woman.
I doubt that secrecy is possible, but even if it is, the resulting animosity may be greater than the plan is worth. I believe any plan to exit the EU that depends on secrecy is sure to fail.
Therefore, I wouldn’t award the Wolfson prize to any contestant who advocates secret planning for an EU exit. Instead, I believe that any viable plan to exit the EU should be revealed to public several months before the actual exit takes place. Such revelation entails some risk, but on balance, openness and lots of advanced notice of a nation’s departure may be the safest course.
• A third finalist, Jens Nordvig (“Planning for an orderly break-up of the European Monetary Union”) agreed with the first two that dire consequences were likely:
“Two types of break-up scenarios for the Eurozone are possible, from a practical perspective: A very limited break-up scenario, involving the exit of one or a few smaller countries—and the ‘big bang’ break-up scenario, which would see the Euro cease to exist. A full-blown break-up scenario could be highly disruptive . . . complications . . . have potential to cause significant disruptions, with dramatic macro-economic implications.”
Nevertheless, Mr. Nordvig advised that “Communicating guiding principles for redenomination of Euro-denominated assets and obligations ahead of a break-up would be a crucial first stepin an orderly redenomination process.” Thus, unlike the first two finalists, Nordvig did not advocate secrecy but, instead, wants to tell everyone everything well in advance so as to avoid panic.
Mr. Nordvig also proposed a multi-point plan for dealing with nations that exit the EU. Two of his objectives are: 1) creating a new European Currency Unit to supplement the euro; 2) creating a new hedging market for EU currency risk.
These two objectives seem impractical in that they may take years to implement. Leaving the EU is like using the toilet. If you gotta go, you gotta go. Soon. Not several years from now.
Mr. Nordvig is smart enough to avoid secrecy, but his plan seems too impractical to win the prize.
• Roger Bootle is a finalist who wrote “Leaving the euro: A practical guide”. In his essay, he argued that the “euro-zone needs radical economic adjustment” and supported the case for an EU break-up. He implies that “doom and gloom” may persist so long as the EU holds together but “happy day will be here again” once the EU fragments.
“As a result of poor competitiveness and/or the burden of excessive debt, several members of the euro-zone suffer from a chronic shortage of aggregate demand, which results in high levels of unemployment. This worsens the debt position of both the private and public sectors, thereby weakening the position of the banks. Meanwhile, other countries enjoy current account surpluses, often accompanied by more favourable debt positions in both the public and private sectors.”
In broad strokes, Mr. Bootle described two incompatible “sets” of countries united under the EU. He distinguished between these two sets based on economic indicators like “account surpluses” and “favourable debt positions”.
I agree that there are (at least) two “sets” of EU nations, but their distinctions go much deeper than mere economic indicators. These two “sets” have been described as Europe’s “North” and “South”. Each set of nations has values and economic conditions that are fundamentally different from the other. But the EU, itself, has adopted a single system of values (a culture) that is conducive to only one of these “sets”: the North’s. The result is a disability for Southern nations that prevents the use of their natural values (culture).
The nations of the South aren’t better or worse than those of the North, but they’re like sumo wrestlers forced to play basketball—they’re not built to play that game; they can’t compete. They will therefore languish until they’re freed from basketball and allowed to again compete as sumo wrestlers.
The EU must ultimately fragment because the EU is composed of (at least) two fundamentally different kinds of cultures. This isn’t news. But the EU was built on the premise that once the “North’s” culture was offered to (or even imposed upon) the “Southern” nations, the “South” would quickly abandon their former culture to adopt the North’s culture and thereby become prosperous.
Surprisingly, the South apparently wants to keep their cultures (including relative poverty) more than they want the prosperity of the “North’s” culture. I.e., the people of Greece would rather retain their Greek culture and remain “Greeks” than adopt the North’s culture and become prosperous but generic “Europeans” (“Germans”). The peoples of Spain, Ireland, Italy and Portugal may also prefer to retain their distinct national identities rather than abandon their national cultures to become rich, but generic “Europeans”.
The EU was built on the presumption that no nation can resist the temptations of western materialism. However, the EU might now collapse on the discovery that national culture may be more important than national prosperity. If that discovery is confirmed, it will not only threaten the EU—it will also reduce the New World Order’s fundamental premise (global materialism is irresistible) to an unworkable delusion. If the PIIGS prove that they prefer their national cultures to NWO materialism, the NWO dream of global government might end.
“On its own, devaluation [inflation] would not be adequate to solve the [PIIGS’] problem of excessive indebtedness. Indeed, the depreciation that would follow from euro exit would initially worsen the debt problem, because debt is denominated in euros. Accordingly, an exiting government would have to default on its debt, and perhaps substantially.”
In other words, the PIIGS’ debts are already too great to be repaid. Inflation caused by the European Central Bank won’t reduce the PIIGS’ debts fast enough or to a sufficient degree to stimulate their sagging economies. We will therefore see both some inflation from the ECB and widespread debt default from the PIIGS.
Mr. Bootle’s plan didn’t rely on secrecy and made good sense. However, I’d only award him with Second Place.
• For me, finalist Jonathan Tepper (author of “A Primer on the Euro Breakup: Default, Exit and Devaluation as the Optimal Solution”) makes the most sense and deserves the Wolfson prize. In essence, he argued that disintegration of the EU and/or loss of the euro isn’t unique or unprecedented. In fact, similar events have happened so often that we already know from experience: 1) how to deal with problem; and 2) that it’s not the end of the world.
“Many economists expect catastrophic consequences if any country exits the euro. However, during the past century sixty-nine countries have exited currency areas with little downward economic volatility. The mechanics of currency breakups are complicated but feasible, and historical examples provide a roadmap for exit.
Europeans don’t need to reinvent the wheel. A multitude of other nations have abandoned currencies over the past century without long-term adverse consequences. Leaving the EU (and the euro) will be difficult, but the process is already well understood and can be implemented without risking catastrophe.
“Orderly defaults and debt rescheduling coupled with devaluations are inevitable and even desirable. Exiting from the euro and devaluation would accelerate insolvencies The European periphery could then grow again quickly with deleveraged balance sheets and more competitive exchange rates, much like many emerging markets after recent defaults and devaluations (Asia 1997, Russia 1998, and Argentina 2002).”
Mr. Tepper plan offers a number of insights, including:
“There’s no need for theorizing about how the euro breakup would happen. Previous historical examples provide crucial answers to: the timing and announcement of exits, the introduction of new coins and notes, the denomination or re-denomination of private and public liabilities, and the division of central bank assets and liabilities.
I.e., the PIIGS are overly indebted and on the verge of depression precisely because each nation does not have its own central bank. Therefore, each nation is unable to inflate their currency in order to surreptitiously default on their debts. Unable to inflate/devalue their national currency and national debts, each overly-indebted nation has no option but to openly default and be deemed bankrupt.
“The move from an old currency to a new one can be accomplished quickly and efficiently . . . in [just] a few months.
“European countries could default without leaving the euro, but only exiting the euro can restore competitiveness. As such, exiting is the most powerful policy tool to re-balance Europe and create growth.
“Peripheral European countries are suffering from solvency and liquidity problems making defaults inevitable and exits likely—Greece, Portugal, Ireland, Italy and Spain have built up very large unsustainable net external debts in a currency they cannot print or devalue.”
Modern economies built on fiat currencies depend on two governmental powers:
1) The ability to “spin” currency out of thin air (which is commonly recognized); but also,
2) The ability to cause inflation which “spins” existing debt back into thin air (which not commonly recognized).
A fiat monetary system must include both the government’s ability to create debt-instruments, but also on the government’s correlative power to inflate and thereby destroy much of that debt. Because the PIIGS didn’t have their own central banks, they couldn’t inflate their currency to destroy their excess debts. As their debts became too great to repay or endure, the PIIGS could only default openly on their debts and be deemed bankrupts.
If a nation chooses to have a fiat monetary system, it must have both of the fiat monetary powers: 1) to spin/create currency out of “thin air”; and 2) to destroy the resulting debt with inflation. A nation that can create currency is destined to be overwhelmed by its own debt and then collapse—unless it also has the power to destroy the resulting debt.
The governments of the PIIGS could unilaterally create significant debt (by borrowing, deficit financing, etc.), but they could not surreptitiously destroy any part of that debt with inflation. Those nations must therefore either collapse into bankruptcy, or exit the EU to create their own inflatable national currencies.
“The experience of emerging market countries shows that the pain of devaluation would be brief and rapid growth and recovery would follow—Countries that have defaulted and devalued have experienced short, sharp contractions followed by very steep, protracted periods of growth. Orderly defaults and debt rescheduling, coupled with devaluations are inevitable and should be embraced. The European periphery could then grow again quickly, much like many emerging markets after defaults and devaluations (Asia 1997, Russia 1998, Argentina 2002, etc). In almost all cases, real GDP declined for only two to four quarters. Real GDP levels rebounded to pre‑crisis levels within two to three years.”
Thus, even worrying about an actual default on a national debt might be unnecessary or even counter-productive. If there’s a default on a national debt, the usual result is 2 to 4 quarters (1 year) of hard times followed by revived economic prosperity.
Apparently, life goes on, even after national debt default or serious devaluation.
Mr. Tepper implies that the fundamental drag on the economy is debt—both national and private. Reduce or eliminate the debt and the nation can return to prosperity. Keep trying to pay a debt that’s too big to ever be repaid, and the nation will only stagnate or slide into depression.
If so, you can bet that in the event of any economic decline, the government will devalue its currency by means of inflation to reduce the debt and thereby rob creditors. Thus, during an economic decline, anyone saving their wealth in a medium denominated in a fiat currency (like dollars), is certain to lose their assets.
Mr. Tepper concludes:
“Many economists expect catastrophic consequences if any country exits the euro. However, during the past century 69 countries have exited currency areas with little downward economic volatility. The mechanics of currency breakups are complicated but feasible, and historical examples provide a roadmap for exit.
• Mr. Tepper deserves to win the Wolfson prize for eschewing secrecy and fear-mongering while embracing common sense.
“Orderly defaults and debt rescheduling coupled with devaluations are inevitable and even desirable. The European periphery could then grow again quickly, much like many emerging markets after recent defaults and devaluations (Asia 1997, Russia 1998, and Argentina 2002). The experience of emerging market countries after default and devaluation shows that despite sharp, short-term pain, countries are then able to grow without the burden of high debt levels and with more competitive exchange rates. If history is any guide, the European periphery would be able to grow as Asia, Russia and Argentina have.”
He also deserves to be hired to teach the US gov-co that if the US repudiated much of its national debt, Americans might also soon regain their capacity for rapid, economic growth.
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