June 27, 2012
by mktgeistmike
If you have seen the stage version of Peter Pan, you know the scene in which the audience is asked to clap if they want Tinker Bell to live. It’s time.
Janet Daley wrote a provocative essay in London’s The Telegraph on the day before the Greek election (June 16). She did her best to explain why the eurozone is in crisis. Europe’s leaders are living in an illusion of their own making.
She began with what should be obvious to the financial markets by now. By entering into the eurozone, the politicians surrendered control over the money supply.
The problem is not that politicians surrendered control over the money supply. It is that they surrendered it to the European Central Bank. They should have surrendered it to the free market.
The politicians of Europe asserted control over the international money market in 1914, when they abandoned the international gold standard. They set the precedent. Everything that has followed has been one fiat money crisis after another. But only Austrian School economists teach this. In Europe, bureaucratic control over money has run the show ever since 1999.
The economy is now beyond the control of national governments, and therefore outside the remit of democratic politics. It has become truly global, and thus a law unto itself; nation states have gone broke in their attempt to feed its gargantuan appetites for consumption and debt.
It is not the “world economy” that has a gargantuan appetite for debt. It is each nation’s politicians, who want something (increased spending) for almost nothing (borrowed money at low rates). That was what northern commercial bankers gave the PIIGS’s governments at German rates of interest until the spring of 2010, when the Greek socialist government announced that its predecessor had cooked the books.
The losses must now be parceled out. The losses are in the past. They cannot be avoided. They can only be postponed by covering them up. In short, the eurozone must do what the Greek government did before 2010: cook the books. Thus, the bailouts continue.
The remedies for this began in panic and are now ending in delusion: first the banks went bust and were bailed out by governments; then the governments went bust and needed to be bailed out by – whom? International funding agencies which get their cash from – where? From central banks which will have to print gigantic amounts of money to replace all the money that simply disappeared in the bad debt that bankrupted the banks in the first place. And if we all agree to accept the illusion that this newly printed cash has actual value – if we all clap really hard and say that we believe in fairies – then the whole show can get back on the road and we will be rich again.
It was exactly a century ago that Ludwig von Mises’ book, The Theory of Money and Credit laid out the case against central bank wealth fairies, but few listened then, and fewer listen now. The message is unpleasant to politicians, who want to spend more than the government takes in through taxes. They do not want rising interest rates that will result if the government is to cover its deficit.
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