A couple of weeks ago, I severely criticized another writer (by name) in a commentary (“Fiscal Follies: Greece versus the U.S.”): the Telegraph's Ambrose Pritchard-Evans. Given how I singled-out Mr. Pritchard-Evans, and given that I acknowledged the positive contributions he also makes with his writing, this is an opportune time to look at one of his more notable pieces.
On January 31st, Pritchard-Evans wrote Should Germany Bail-Out Club Med or Leave the Euro Altogether? In that commentary, he constructs a very persuasive argument that the European Union is headed for one of two fates: a precedent-setting bail-out of Southern Europe's “PIGS”, or a political “divorce” with affluent Northern Europe going one way, while Southern Europe is left to flounder in its own, fiscal nightmare.
The reasoning of the author is solid. Given current parameters, the EU's disparate economies cannot remain united without “rescuing” those members who cannot cope with the fiscal constraints of the EU – due to their reckless/incompetent fiscal policies, which have resulted in massive debts. Conversely, an economic (and political?) “divorce” would solve the problems of the current economic schism – by having EU members willingly group themselves into the “strong” and the “weak”.
The nations of Northern Europe would go to economic “heaven”: an economic grouping with a strong currency, high standard of living, low inflation and (most importantly) solvent economies. Meanwhile, the near-bankrupt southern members of the EU would be left to descend into their own fiscal Hell: the only currency which could rival the weakness of the dollar, a low (and crumbling) standard of living, high inflation (leading inevitably to hyperinflation), and economies still heading toward certain bankruptcy.
It is here where Pritchard-Evans' logic breaks down, in my opinion. He argues that this option would be equally appealing to the South as it would with the North. He is correct that over the very short term that this “helps” those southern nations by allowing them to continue their reckless expansion of their debts – in order to continue totally unsustainable social spending. But it is only a respite of (at best) two or three years, before those debts would spiral so far out of control that hyperinflation or total, debt implosion becomes the only possible options (as it is now with the U.S.).
Here, once again, I would argue that Pritchard-Evans' cultural bias is showing. While the incentives for Northern Europe to “go it alone” are unequivocal, I think that he gives too little credit to the peoples of those southern nations – and even (what passes for) their “leadership”. The future consequences of economic “divorce” would be obvious to the governments of the “PIGS” (Portugal, Italy, Greece, Spain), and I submit that even these weak-willed opportunists would be extremely reluctant to willingly seal their own fates in this manner.
All that would be required for these governments to reject the path to fiscal Hell would be to offer them some sort of economically – and politically – viable alternative to the current EU economic-straitjacket, or fiscal suicide. I believe that such an alternative can be created; more importantly I would argue that such an alternative must be created.
There are two, parallel reasons why most Western nations (and Japan) are currently heading toward economic Armageddon – most likely through crippling hyperinflation, followed by an even more devastating deflationary debt-implosion. Those nations which could offer the assistance to debtor-nations are reluctant to do so, for fear of creating the precedent that these economically healthier nations would always bail out the spendthrift debtors – otherwise known as the “moral hazard” argument. This is what the U.S. government succumbed to, and we can all see the horrific outcome to which that led: the “too big to fail” oligarch-moochers.
The other “side of the coin” is that for those nations which have dug their own economic graves, they are not being presented with any economic alternative which would not lead to political and social chaos (along with all those politicians being thrown out of their own cushy positions). It is in this respect that I believe there is a “third choice”.
Because it hurts everyone when the economies of the debtor nations disintegrate, it is in everyone's interest to avoid that fate – but in a way which does not encourage more of these situations in the future. The problem is that whenever a problem arises which cannot be solved with the same solutions which have been used in the past, the inclination of our (totally unimaginative) “leaders” is to give up – and go back to doing whatever is easiest (even if it leads to certain, economic destruction).
However, all problems have “solutions”, in the sense that there is always a least-worst option available. In the current scenario, the “solution” required must allow the debtors to salvage their economies without the assistance being provided by the creditors being so attractive as to encourage these scenarios in the future.
In other words, what the global economy desperately needs is a mechanism for “benign default”. While I am sure there are other people in the world who could construct their own “models” as to how such “defaults” would be handled, here is my own model.
To begin with: there can be no debt “forgiveness”. This must be the paramount principle – for two reasons. Generally, it will discourage other nations from allowing themselves to get into this predicament, and (more specifically) for those nations already in this position, it will discourage them from racking-up even more debts before they are rescued.
Second, there must be a total elimination of interest on those debts. Again, there are two important reasons for this principle. First of all, it is actually the interest payments rather than the original debts, themselves, which doom the debtor nations. Wiping away the interest immediately makes these economies salvageable. Secondly, with interest payments no longer a problem, this will end the insanely self-destructive policies of certain governments (are you listening Gordon Brown and Barack Obama?) of artificially lowering interest rates through hyperinflationary money-printing in order to “buy” all of their own bonds.
All that short-sighted stupidity accomplishes is to make hyperinflation-followed-by-debt-implosion a more likely fate than a mere Soviet Union-like implosion.
Already, it should be obvious to readers that this does offer a viable path for salvation for debtors and creditors alike. However, to make this model workable on a practical basis would require both a “carrot” and a “stick”. The “stick” is that debtor-governments would be absolutely bound to follow the repayment provisions of the “benign default”. Any deviation would cancel that agreement – and lead to the economic destruction of the government which defaults.
The “carrot” would be for creditors to provide “humanitarian assistance” in much the same way we currently band together as a species after natural disasters. People don't mind helping people. What enrages those people (and voters) is that invariably all of the “bail outs” and “rescues” we have seen have only been bailing out corporations and rescuing politicians.
With food, clothing, and other necessities being donated to the debtors, this further reduces the economic strain of making payments on the existing debts while actually reducing the total size of the debt burden. This model makes “rescuing” other nations politically and economically attractive to the creditor nations, while making the “benign default” tolerable, but so humiliating for the nation receiving assistance as to make such a rescue in the future unappealing to the debtors.
The problem with all of the feeble “fixes” attempted to date is that they don't solve any problems at all from a long-term perspective – because they don't reduce the size of these debt mountains. Blame the bankers for this. The bankers devote their entire lives to creating these mountains of debt (with the bankers being the ones who collect all the interest), so it is the bankers who never want to allow any nation to escape from their debt-trap.
The point for all of us ordinary people to focus upon is that these problems can be genuinely solved – in a manner which does not leave us remaining as economic slaves to the bankers. When you listen to corrupt, political “leaders” and the mindless, media talking-heads spouting their anti-solutions (i.e. policies which preserve our enslavement to the bankers), remember that these suggestions are not the least-worst options, but rather (almost always) the 'most-worst' options.
The current economic and political stresses on the EU should be seen as an “opportunity”, not a “crisis”. We have one, final chance to pull back from the economic Abyss – which leads only to hyperinflation and/or debt-implosion. If politicians can muzzle the bankers, find their backbones, and demonstrate some small amount of intelligence, we can come up with a model to fix broken economies – as opposed to simply applying one “band-aid” on top of another.
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