Scotland wants to Keep the Pound in a (somewhat) Independent Scotland

Posted by PITHOCRATES - March 8th, 2014

Week in Review

The Greek crisis happened because there was a currency union without a political union.  The Eurozone set some pretty strict limits on deficits and debt to join.  Why?  Because people in the Eurozone would all be using the same Euro.  So they didn’t want one country running up deficits or their debt.  Because if they did they wouldn’t just be messing with their economy.  They would be messing with the entire Eurozone economy.

Well, that’s what Greece did.  They were spending so much money that they had large deficits that added to a large debt.  A euro-denominated debt.  Which meant a default would raise borrowing costs for other euro-denominated debt.  Raising the borrowing costs for the Eurozone.  So to avoid that required other Eurozone nations to help Greece with their debt.  Requiring higher taxes in the more responsible countries of the Eurozone to pay for the irresponsible spending of Greece.  Neither option (default or rescue package) being a popular option.  Especially for the Greek people.  For the rescue package came with strings.  And the big one was austerity.  They had to stop spending so much.  Which meant a lot of people lost some of their government benefits.  Making them very unhappy.  Leading to some rioting in the streets.

Had there been a political union this would not have happened.  For there would have been only one entity borrowing and spending Euros.  One entity taxing the Eurozone nations.  And one entity printing money.  Much like the federal government in the United States.  And London in the United Kingdom (see Scotland’s referendum: Salmond says independence will benefit whole UK posted 3/4/2014 on BBC News Scotland Politics).

An independent Scotland with a strong economy would benefit the whole of the UK, First Minister Alex Salmond has told a gathering in London…

“I believe George Osborne’s speech on sterling three weeks ago – his ‘sermon on the pound’ – will come to be seen as a monumental error.

“It encapsulates the diktats from on high which are not the strength of the Westminster elite, but rather their fundamental weakness.

“In contrast, we will seek to engage with the people of England on the case for progressive reform.”

But Tory MP Mr Mundell said that Mr Salmond was saying that a choice to leave the UK and become independent “means staying exactly the same as we are now”.

He added: “By definition, that simply cannot happen.

“No one should be under any illusion that voting for independence means getting independence, which means becoming a new country outside the UK.

If the Eurozone sovereign debt crisis has taught us anything it’s that a currency union without a political union is not a good thing.  An independent Scotland would eliminate the political union there is now.  And the reason why England does not want a currency union with an independent Scotland is because of what happened in the Eurozone.  It doesn’t work.  At least, it doesn’t work well.  Which begs the question why do they want independence but not complete independence (keeping the pound)?

One can only surmise so they can have more autonomy over their taxing, borrowing and, of course, spending.  Perhaps to spend more.  Creating larger deficits.  And a greater pound-denominated debt.  Which would be of great concern to other holders of pound-denominated debt.  The rest of the United Kingdom.

It is unlikely that independence would lead to a stronger Scottish economy.  Or a stronger UK economy.  If it did then the whole point of the Eurozone would be a lie.  To create a larger economic zone to compete with the large economic zone that is the United States.  Because bigger is better.  At least in terms of GDP.  The British Empire was bigger than the United Kingdom is now.  And the United Kingdom is bigger than a United Kingdom without Scotland.  And an independent Scotland would be smaller than all of the above.  So if you want to maximize GDP you would want to maximize the size of your economy.  Not shrink it.  Which leads one to believe that the reason for independence is something other than economic.  Because the UK is too English?  Perhaps.  Whatever the reason let’s just hope everything works out for the best.  For the United Kingdom did make the world a better place.  With great people like Adam Smith from Scotland.  And John Locke from England.  To name only two of the greats to come from the United Kingdom.

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Britain and Scotland disagree over Scottish Currency in an Independent Scotland

Posted by PITHOCRATES - February 16th, 2014

Week in Review

The Eurozone was a grand idea to make an economic zone that could compete against the United States.  A United States of Europe, if you will.  But the Eurozone has suffered a sovereign debt crisis that was unavoidable.  As many analysts have identified the problem causing the Eurozone all its sovereign debt woes.  The lack of a political union.

The solution they say is for member states to give up some of their sovereignty and allow a Eurozone government have more control.  Like the United States of America has.  Which means putting even stricter controls on member states when it comes to their spending.  Which, in turn, would limit their deficits.  And their borrowing needs.  Which brought on the sovereign debt crisis in the first place.  Excessive spending beyond their ability to pay for with taxes.  Normally not a problem for other countries when another country spends itself into oblivion.  Unless, of course, there is a currency union with that country.  Which makes their problems your problems.  Problems that are impossible to solve without a political union.

The Eurozone sovereign debt crisis illustrates that a currency union without a political union will not work.  Which makes the movement for Scottish independence very interesting (see Britain warns Scotland: Forget the pound if you walk away by Belinda Goldsmith, Reuters, posted 2/13/2014 on Yahoo! News).

Britain warned Scotland on Thursday it would have to give up the pound if Scots voted to end the 307-year-old union with England, declaring the currency could not be divided up “as if it were a CD collection” after a messy divorce…

The message was aimed at undermining the economic case for independence and one of the Scottish National Party’s (SNP) key proposals – that an independent Scotland would keep the pound…

The debate has intensified in recent weeks with Bank of England chief Mark Carney cautioning that a currency union would entail a surrender of some sovereignty…

The SNP [Scottish National Party] has indicated that if London prevented a currency union, an independent Scotland could refuse to take on a share of the UK’s 1.2 trillion pounds ($1.99 trillion) of government debt which Britain has promised to honor…

Osborne said the nationalist threat to walk away from its share of UK debt would mean punitively high interest rates for an independent Scotland and was an “empty threat”.

“In that scenario, international lenders would look at Scotland and see a fledgling country whose only credit history was one gigantic default,” Osborne said.

Currently there is a political union between Scotland and England.  The United Kingdom (UK).  And Scottish independence would go contrary to what some analysts say is needed to save the Eurozone.  Political unity.  The problem in the Eurozone is that no one nation wants to give up any of their sovereignty and have some distant power tell them what they can and cannot do.  The way some in Scotland feel about London.  That distant power that governs the United Kingdom.

The British pound is one of the world’s strongest currencies.  A product of the powers in London.  Because they have political control across the UK.  If they lose their political control over Scotland will it damage the British pound?  If the Eurozone is any measure of a currency union without a political union, yes.  So it will be interesting to see what happens between these two great nations.  Whose people made the world a better place.  People like the great Scotsman Adam Smith.  And the great Englishman John Locke.  To name just two.  So whatever happens let’s hope it’s in the best interest of both countries.  For countries everywhere enjoying economic freedom and human rights can thank these two countries for their contributions to the British Empire.  Which helped spread the best of Western Civilization around the world from the United States to Canada to Australia to Hong Kong.  And beyond.

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Post Office, Telegraph, Telephone, Cell Phones, Texting, Technology, Productivity, Savings, Investment, Japan Inc. and Eurozone Crisis

Posted by PITHOCRATES - August 13th, 2013

History 101

(Originally published August 28th, 2012)

Ben Franklin’s Post Office struggles to Stay Relevant in a World where Technology offers a Better Alternative

Once upon a time people stayed in touch with each other by mailing letters to each other.  Benjamin Franklin helped make this possible when he was America’s first Postmaster General of the United States.  And it’s in large part due to his Post Office that the American Revolutionary War became a united stand against Great Britain.  As news of what happened in Massachusetts spread throughout the colonies via Franklin’s Post Office.

In America Samuel Morse created a faster way to communicate.  (While others created this technology independently elsewhere.)  Through ‘dots’ and ‘dashes’ sent over a telegraph wire.  Speeding up communications from days to seconds.  It was fast.  But you needed people who understood Morse code.  Those dots and dashes that represented letters.  At both ends of that telegraph wire.  So the telegraph was a bit too complicated for the family home.  Who still relied on the Post Office to stay in touch

Then along came a guy by the name of Alexander Graham Bell.  Who gave us a telephone in the house.  Which gave people the speed of the telegraph.  But with the simplicity of having a conversation.  Bringing many a teenage girl into the kitchen in the evenings to talk to her friends.  Until she got her own telephone in her bedroom.  Then came cell phones.  Email.  Smartphones.  And Texting.   Communication had become so instantaneous today that no one writes letters anymore.  And Ben Franklin’s Post Office struggles to stay relevant in a world where technology offers a better alternative.

As Keynesian Monetary Policy played a Larger Role in Japan Personal Savings Fell

These technological advances happened because people saved money that allowed entrepreneurs, investors and businesses to borrow it.  They borrowed money and invested it into their businesses.  To bring their ideas to the market place.  And the more they invested the more they advanced technology.  Allowing them to create more incredible things.  And to make them more efficiently.  Thus giving us a variety of new things at low prices.  Thanks to innovation.  Risk-taking entrepreneurs.  And people’s savings.  Which give us an advanced economy.  High productivity.  And growing GDP.

Following World War II Japan rebuilt her industry and became an advanced economy.  As the U.S. auto industry faltered during the Seventies they left the door open for Japan.  Who entered.  In a big way.  They built cars so well that one day they would sell more of them than General Motors.  Which is incredible considering the B-29 bomber.  That laid waste to Japanese industry during World War II.  So how did they recover so fast?  A high savings rate.  During the Seventies the Japanese people saved over 15% of their income with it peaking in the mid-Seventies close to 25%.

This high savings rate provided enormous amounts of investment capital.  Which the Japanese used not only to rebuild their industry but to increase their productivity.  Producing one of the world’s greatest export economies.  The ‘Made in Japan’ label became increasingly common in the United States.  And the world.  Their economic clot grew in the Eighties.  They began buying U.S. properties.  Americans feared they would one day become a wholly owned subsidiary of some Japanese corporation.  Then government intervened.  With their Keynesian economics.  This booming economic juggernaut became Japan Inc.  But as Keynesian monetary policy played a larger role personal savings fell.  During the Eighties they fell below 15%.  And they would continue to fall.  As did her economic activity.  When monetary credit replaced personal savings for investment capital it only created large asset bubbles.  Which popped in the Nineties.  Giving the Japanese their Lost Decade.  A painful deflationary decade as asset prices returned to market prices.

Because the Germans have been so Responsible in their Economic Policies only they can Save the Eurozone

As the world reels from the fallout of the Great Recession the US, UK and Japan share a lot in common.  Depressed economies.  Deficit spending.  High debt.  And a low savings rate.  Two countries in the European Union suffer similar economic problems.  With one notable exception.  They have a higher savings rate.  Those two countries are France and Germany.  Two of the strongest countries in the Eurozone.  And the two that are expected to bail out the Eurozone.

Savings Rate

While the French and the Germans are saving their money the Japanese have lost their way when it comes to saving.  Their savings rate plummeted following their Lost Decade.  As Keynesian economics sat in the driver seat.  Replacing personal savings with cheap state credit.  Much like it has in the US and the UK.  Nations with weak economies and low savings rates.  While the French and the Germans are keeping the Euro alive.  Especially the Germans.  Who are much less Keynesian in their economics.  And prefer a more Benjamin Franklin frugality when it comes to cheap state credit.  As well as state spending.  Who are trying to impose some austerity on the spendthrifts in the Eurozone.  Which the spendthrifts resent.  But they need money.  And the most responsible country in the Eurozone has it.  And there is a reason they have it.  Because their economic policies have been proven to be the best policies.

And others agree.  In fact there are some who want the German taxpayer to save the Euro by taking on the debt of the more irresponsible members in the Eurozone.  Because they have been so responsible in their economic policies they’re the only ones who can.  But if the Germans are the strongest economy shouldn’t others adopt their policies?  Instead of Germany enabling further irresponsible government spending by transferring the debt of the spendthrifts to the German taxpayer?  I think the German taxpayer would agree.  As would Benjamin Franklin.  Who said, “Industry, Perseverance, & Frugality, make Fortune yield.”  Which worked in early America.  In Japan before Japan Inc.  And is currently working in Germany.  It’s only when state spending becomes less frugal that states have sovereign debt crises.  Or subprime mortgage crisis.  Or Lost Decades.

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Canadian Public Sector Workers average 18.2 Paid Sick Days a Year

Posted by PITHOCRATES - June 15th, 2013

Week in Review

Nations around the world are suffering financial crises due to the costs of their public sectors.  Which they pay for by taxing the private sector.  Even though people in the private sector don’t enjoy anywhere near the generous benefits the public sector enjoys (see Government to target public service’s sick days in next round of bargaining by BILL CURRY posted 6/10/2013 on The Globe and Mail).

The Conservative government is putting public-service unions on notice that sick days will be targeted in the next round of collective bargaining.

Treasury Board president Tony Clement said the government wants to move away from the current rules, where workers can use up to 15 paid sick days and five family days a year, in addition to vacation time.

The Minister stopped short of accusing public servants of abusing the system, but questioned why the federal absentee rate is higher than that of other governments and the private sector, where he said the average number of sick days is 6.7.

“Look, I think that the great majority of public servants are, when they take time off, they are sick. But there’s no question that the rate of sick leave, when you’re looking at 18.2 days as an average in a year, is well beyond not only private sector norms but other public-sector norms,” Mr. Clement said Monday at a news conference on Parliament Hill…

Union leaders also took issue with comparisons of public- and private-sector absenteeism, arguing the private sector does not document sick days in the same way as governments do…

“Mental illness, stress, anxiety, depression were not admitted to or acknowledged,” he said. “Cancer was much less treatable than it is today. So the workplace has changed dramatically in the past 40 years, but the disability management system has not. Employees are getting lost or forgotten in the system.”

Yes, we admit and acknowledge those illnesses more today than we used to.  And we do treat cancer more than we once did.  However, these illnesses do not affect the public sector differently than they affect the private sector.  So if the private sector is averaging 8.7 sick days there is no reason why the public sector should be averaging 18.2 sick days.  On top of 5 family days.  Holidays.  And vacation time.

One of the arguments for a single-payer health care system in the United States is that people will be healthier.  With access to health care doctors will catch disease early and stop it in its tracks.  Now either the Canadians are milking the system or a single-payer health care system doesn’t make people healthier.

If the organization a person works for can get by for a month (after you add together all that paid time off) without that person being there chances are that they can get by the other 11 months of the year without that person being there.  Which is why you don’t see 18.2 sick says in the private sector.  Because it’s too great a cost burden to pay people for not working.  As private sector employers can’t just raise their prices to cover this cost.  Whereas the government can raise taxes.  Or print money.

But there even is a limit for government, too.  As we can see by the Eurozone sovereign debt crisis.  And the need to cut back on generous sick pay in Canada.  Higher taxes reduce economic activity.  Which reduces government revenues.  Which they make up with borrowing.  Until they suffer a sovereign debt crisis.  Like in the Eurozone.  Where a country is so deep in debt that no one wants to loan them anymore.  For it is unlikely that a nation so deep in debt will ever repay that debt.  Which is why these generous public sector benefits are simply not sustainable.  When you can no longer tax or borrow you have but one option left.  You have to cut costs.  And the public sector will have to live more like the private sector.  Less exalted and privileged.  As public servants should.

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The Problems in the Eurozone may Influence Scottish Voters in their Independence Referendum

Posted by PITHOCRATES - April 27th, 2013

Week in Review

During the Roaring Twenties the American economy was giving the economies of Europe a run for their money.  The Europeans, accustomed to running the world for so long, looked at the economic prowess of America with concern.  And began to talk about a United States of Europe to compete with the economic juggernaut across the pond.  But when Calvin Coolidge chose not to run for a second term the progressives got back into power.  And Herbert Hoover put an end to that surging economy.  Causing a stock market crash.  And throwing the country into recession.  Which FDR turned into the Great Depression.

So there was no United States of Europe.  But there would be a European Union one day.  And after that, a currency union.  The Eurozone.  To compete against the economic prowess of the United States.  But a currency union without a political union.  Without a single fiscal and monetary policy to support that currency union.  Which turned out to be a problem.  For without that political union the currency union was only as strong as its weakest state.  In the Eurozone that state was Greece.  Whose unrestrained government spending caused a debt crisis that threatened to bring down the entire Eurozone.  Unless the other members stepped in to bail out Greece.  Which they have.  But the crisis hasn’t gone away.  For the central governing authorities can only ask Greece to cut their spending.  Which there is a lot of opposition to in Greece.  Putting a lot of pressure on the Euro.

Greece isn’t the only problem.  There was Ireland.  Spain.  Portugal.  And Cyprus.  All sovereign nations.  Sharing a common currency.  Making it all but impossible to maintain a uniform fiscal policy throughout the Eurozone.  Like they can in the United States.  Because the United States of America is a political union.  With one central government.  One central fiscal authority.  And one central monetary authority.  Making it hard for any one state to undermine the currency.  (Though California is making a valiant effort.)  Which is the problem they’re having in the Eurozone.  Many of the states are threatening to undermine the common currency.  Making a very strong case against future currency unions without a political union.  Which is something they are considering with an upcoming referendum on Scottish independence (see UK says “no clear reason” to let independent Scotland use the pound by David Milliken posted 4/23/2013 on Reuters UK).

The euro zone’s experience of countries sharing a currency but not a government shows there is no clear case for an independent Scotland to use the pound, the Treasury said on Tuesday.

The nation of 5 million will hold a referendum on September 18 next year to decide whether to split from the United Kingdom, at the instigation of the Scottish National Party that runs the country’s devolved government.

Pro-independence campaigners want Scotland to keep sterling, at least in the early years of independence, and then to decide later whether to switch to its own currency.

But in a report on Tuesday, the Treasury said there was no clear case for the United Kingdom to agree to a formal currency union with an independent Scotland, which would have an economy of a similar size to New Zealand’s…

“The recent experience of the euro area has shown that it is extremely challenging to sustain a successful formal currency union without close fiscal integration and common arrangements for the resolution of banking sector difficulties,” it added.

Scotland and England have a long history.  Not all of it good.  But if we’ve learned anything from history it is that large economic blocs do better than smaller counties.  As the United States demonstrated.  And as the Eurozone tried to duplicate with their currency union.  But as that experiment showed us a currency union without a political union is a recipe for disaster.  If Scotland breaks from the United Kingdom they will have to go all of the way.  And leave sterling.  Which will make independence more difficult.  Having to set up a new currency with everything else they will have to do.  (Such as dealing with separating their military forces from the UK’s.  And providing for their own defense.  Or forming a military union with the UK.  Which will tie them closely to the UK.  Something many Scots no doubt will consider before voting in the referendum.)

Of course if they do and they devalue their new currency it would make their exports cheaper to those nations with a stronger currency.  But that weak currency will make anything they import more expensive.  As Scotland exports and imports a lot of stuff they won’t get a clear advantage in devaluing their new currency.  So they may peg their new currency to sterling.  The next best thing to keeping sterling.  Which will tie them closely to the UK.  Something many Scots no doubt will consider before voting in the referendum.  Perhaps choosing to stay in the UK.  As Quebec chose to stay in Canada in their past referendum.  Who had less in common with the rest of Canada than the Scots have with the UK.  For they don’t even speak the same language.

They could join the Eurozone.  But recent events in the Eurozone does not make that option as appealing as setting up a new currency.  Or staying a part of the UK.  It would probably be best for the rest of the world if Scotland remained part of the UK.  For the world will need at least one strong reserve currency.  As the Euro is making itself less attractive by the day.  The U.S. dollar may hit the wall soon with the amount of debt the Americans are racking up.  And the Chinese are likely to go the way of Japan before the decade is out.  And have their own Lost Decade with all their malinvestments.  The ultimate cause in the fall of state-capitalism.

Now the UK has its problems.  But their decision to stay out of the Eurozone was clearly sound as a pound.  And pound sterling may grow even more attractive as a reserve currency as these other countries continue to rely on easy credit and debt to pay for their burgeoning welfare states.  And/or their malinvestments.  But one thing the UK is doing that none of these other bloated states are doing is making real cuts in spending.  Even in their venerated NHS.  Giving the UK the edge in responsible governing these days.  And really making a strong argument against Scottish independence at this time.  Even for those who hate England.  For it is better to deal with the devil you know than the devil you don’t.  Especially during uncertain times.

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The EU will have to find another way to Confiscate Private Sector Wealth because the ETS is Kaput

Posted by PITHOCRATES - April 20th, 2013

Week in Review

The Emissions Trading Scheme (ETS) was the European Union’s (EU’s) way of combating global warming.  By making carbon emitters pay for their carbon emissions.  But Europe is mired in recession.  And the Eurozone is suffering a sovereign debt crisis.  Which hasn’t helped to pull Europe out of recession.  And it appears that the economic reality in Europe is dooming the ETS (see If Carbon Markets Can’t Work in Europe, Can They Work Anywhere? by Bryan Walsh posted 4/17/2013 on Time).

But the ETS—and carbon trading more generally—is not doing well, and its problems are taking some of the green shine off of Europe. Since its launch the ETS has struggled, with the price of carbon falling as the 2008 recession and overly generous carbon allowances undercut the market. In the ETS business are given free allowances to emit carbon—too many free allowances mean they don’t need to reduce their carbon emissions much, which erodes the demand for additional carbon allowances on the market and causes the price to drop. Prices fell from 25 euros a ton in 2008 to just 5 euros a ton in February. There was a way to fix this—take 900 million tons of carbon allowances off the market now and reintroduce them in five years time, when policymakers hoped the economy would be stronger and demand would be greater. As anyone who’s taken Econ 101 would know, artificially reducing the supply of carbon allowances in such a drastic way—something called “backloading”— should force the price back up.

But on April 16, the European Parliament surprised observers by voting down the backloading plan. In turn, the European carbon market collapsed, with the price of a carbon allowance falling by more than 40% over the day. “We have reached the stage where the EU ETS has ceased to be an effective environmental policy,” Anthony Hobley, the head of climate change practice at the London law firm Norton Rose, told the New York Times. The ETS is a mess.

Backloading failed because even in very green Europe, economic concerns seemed to trump environmental ones. European Parliamentary members worried that any action that would cause the price of carbon to rise would add to European industry’s already high energy costs.

This should make China happy.  For there was no way no how they were going to pay for the carbon emissions from their airplanes entering European airspace.  In fact they warned they would cancel their Airbus orders and give them to Boeing if the Europeans tried to force them to help bail out the Eurozone in their sovereign debt crisis.  For this was what the ETS would ultimately do.  Transfer great amounts of wealth from the private sector to the public sector.  Which would have gone a long way in helping the Eurozone to continue to spend money they don’t have.

The ETS was nothing but a new tax on business.  Cloaked in the guise of making the world a better—and greener—place.  But the EU is suffering economically.  A large part of the sovereign debt crisis is due to having less economic activity to tax.  So the EU needs to improve the economy.  So they can generate more tax revenue from the current tax rates.  But increasing taxes on the carbon emitters will not help businesses.  It will only increase the cost of business.  Increasing their prices.  Making them less competitive in the market place.  Reducing their sales.  And killing jobs.  Which will generate even less tax revenue from the current tax rates.

The problem in the EU is not global warming.  Or insufficient tax revenue.  They have a spending problem.  This is what caused their deficits.  That gave them their soaring debt.  Just like every other nation that ever suffered a debt crisis.  Including the U.S.  Trying to fix a spending problem with more taxes just doesn’t work.  Only a cut in spending can fix a spending problem.  It’s not like the old chicken and egg question.  Excessive and unsustainable spending always comes before a debt crisis.  Always.

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Cyprus and the Eurozone Crisis shows why we’d be better off with a Gold Standard

Posted by PITHOCRATES - March 30th, 2013

Week in Review

Debtors love inflation.  They love to borrow cheap dollars.  And love even more to repay their loans with even cheaper dollars.  Creditors, on the other hand, hate inflation.  Because they are on the other side of that borrowing equation from the debtor.  And when a debtor repays a loan with depreciated dollars the creditor who loaned that money loses purchasing power.  Causing the creditor to lose money.  Just because they had the kindness to loan money to someone who needed it.  Which is a strong disincentive for making future loans.

This has long been at the heart of all banking wars.  And banking crises.  The fight between paper money and hard money.  Printed dollars versus specie (gold and silver).  People who want to borrow money love paper.  Because banks could make a lot of it to lend.  Something they can’t do with gold and silver.  Because it takes a lot more effort and costs to bring new gold into the economy.  Those who want to borrow money argue that hard money hinders economic activity.  Because there is a shortage of money.  And because governments are always interested in boosting economic activity they are always in favor of expanding the paper money supply.  This generous expansion of credit is currently miring the Eurozone in a sovereign debt crisis.  And launched a confiscation of wealth in Cyprus.  Greatly threatening the banking system there.  As few depositors trust their money will be safe in their bank.  Causing people to return to specie (see Cypriot bank crisis boosts demand for gold by Ian Cowie posted 3/27/2013 on The Telegraph).

The Cypriot banking crisis reminds even the most trusting savers that not all banks or jurisdictions are safe – and is boosting demand for gold, bullion dealers claim.

As if to prove the old adage that it’s an ill wind that blows no good, enthusiasts for the precious metal argue that financial shocks in the eurozone are reminding savers of gold’s attractions…

[Daniel Marburger, a director of Jewellers Trade Services Partners (JTS)] said: “The situation in Cyprus has reignited the wider Eurozone sovereign-debt crisis. At a time like this, people are attracted to gold because it is the ultimate crisis commodity.

“The proposed levy on deposits of Cyprus’s savers has not only shaken confidence in the single-currency Eurozone, it illustrates the fragility of savings held within the banking system. In our experience, clients are attracted to gold because it offers insurance against extreme movements in the value of other assets. Unlike paper currency, it will never lose its intrinsic value…”

“The events in Cyprus prove once again that bank customers do face risks as creditors who are owed money…”

When you deposit your money into a bank you become a creditor.  You are loaning your money to the bank.  Who pays you interest to loan your money to others.  If the inflation rate is greater than the interest you earn your money actually shrinks in value.  And the more they print money the more it shrinks in value.  That’s why as a creditor you won’t like the harmful effects of inflation.  Even if it makes the people happy who borrow your money from the bank.  Because they get a real cheap loan at your expense.

Which is why people are drawn to gold.  Because they can’t print gold.  So it holds value better than paper.  And the government can’t just confiscate a percentage of your savings if it isn’t in the bank.  Another reason why people are drawn to gold.  If the banking system collapses, or if the government seizes people’s retirement savings to ward off a banking system collapse, people can take their gold and move somewhere else that isn’t having a financial meltdown.  And not lose any of their wealth.

Which is, of course, the last thing you want to happen in a country.  For a sound banking system is essential for a prospering middle class (if it weren’t for banks only rich people would own homes, cars, go to college, etc.).  Which is why a responsible monetary policy, and responsible people in government, is a prerequisite for a sound banking system.  Which few nations in the Eurozone have.  As few nations throughout the world have.  For they all want to buy votes by giving away free stuff.  And having the power to print money allows them to give away a lot of free stuff.  Pensions.  Health care.  College educations.  Lots and lots of government jobs.  Etc.  But there comes a point when you give away too much.  And you have sovereign debt crises.  As well as confiscations of wealth.

This was the advantage of a gold standard.  Like when we coupled the value of our world’s currencies to the price of gold.  It did not allow any nation to inflate their currency.  For if they did people would exchange that devalued currency for the fully-valued gold.  A strong incentive not to devalue your currency.  Which was nothing more than a promise to pay in gold.  The gold standard kept governments responsible.  But because it made it so difficult to buy votes everyone cheered when President Nixon decoupled the dollar from gold.  Putting an end to the last vestiges of a gold standard.  Allowing governments everywhere to be irresponsible.  Bringing on financial crises.  And the confiscation of wealth.  As we see happening in Cyprus.  And will no doubt see elsewhere.

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Bad Keynesian Policies cause influx of Romanian and Bulgarian Migration into Germany

Posted by PITHOCRATES - February 10th, 2013

Week in Review

It is interesting that countries that get into trouble using Keynesian economic policies tend to go to countries that relied on Keynesian policies less for help.  States with high government spending and bloated public sectors turn to countries with less government spending and less bloated public sectors for help.  Yet Keynesian economic policies are still the dominant polices of many nations.  Including the US, the UK, China, countries within the Eurozone, Bulgaria and Romania (see German warning over Romanian and Bulgarian migration by Rosa Silverman posted 2/6/2013 on The Telegraph).

German cities have warned that an influx of Romanian and Bulgarian economic migrants will cost them dear and put the “social peace” at risk…

Berlin, Hamburg, Dortmund and Hanover have seen a six-fold increase in economic migration from the two countries since 2006, which they say has left them struggling to cope…

The warning comes amid fears in Britain that tens of thousands more Romanians and Bulgarians will come here each year after formal restrictions on the numbers of low-skilled workers from the two countries end next year.

A report by the campaign group Migration Watch UK warned last month that up to 70,000 migrants could arrive annually from then.

Of course the question that just begs to be asked is why are Romanians and Bulgarians leaving their countries in the first place?  The Cold War is over.  The communists are gone.  These are beautiful countries.  Blessed with farm land.  And natural resources.  With some great people.  And a lot of history.  So why leave?  Because they caught the Keynesian contagion during the Nineties.  Their central banks kept interest rates artificially low to stimulate economic activity.  Which they did.  But a lot of that economic activity was artificial.  A bubble.  Times were good.  They expanded government employment.  And government pay and benefits.  And then the 2007-2008 financial crisis came along.  Bursting that bubble.  Leaving these nations with budget deficits.

Both nations were on track to join the Eurozone.  Working hard to meet the Maastricht criteria.  Conditional for entry into the common currency of the Eurozone.  After the financial collapse meeting the Maastricht criteria became more difficult.  As the fall in economic activity and the rise in the unemployment rates of these countries caused tax revenue to fall.  Creating deficits that approached or exceeded those permitted under the Maastricht criteria.  And the Keynesian cure for a recession, easy credit and more government spending, just made those deficits worse.  And it caused inflation to rise to or above that permissible under the Maastricht criteria.  They had to borrow money to meet their spending obligations.   And a condition of those loans was to bring their spending down to acceptable levels.  Like that to meet the Maastricht criteria.

Long story short the damage these Keynesian policies caused required very painful austerity to fix.  High unemployment and austerity makes people want to leave home for sunnier economic climes.  As Germany has been the bedrock of the Eurozone because of their more responsible governing and restraint in government spending these people went to Germany.  And to the UK.  Who didn’t join the Eurozone.  And aren’t mired in the Eurozone sovereign debt crisis.  Though they are implementing a little austerity of their own to bring down their budget deficits.

High government spending and large deficits cause trouble.  The U.S. has numbers worse than both Bulgaria and Romania.  Which means there is trouble ahead.  But unlike other nations the United States’ population won’t be able to travel to sunnier economic climes.  For no country will be able to absorb that amount of migration.  Not even Germany.  Or the UK.  Combined.

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Welfare State, Tax Revenue, Tax Base, Abortion, Population Gains, Keynesian Policies, Communism and Capitalism

Posted by PITHOCRATES - January 22nd, 2013

Week in Review

Their Welfare Programs continued to Expand even while their Tax Revenue was Falling

Many of the world’s mature economies are having financial issues.  Including chronic deficits, growing debt and skyrocketing spending obligations.  The Eurozone has been mired in a sovereign debt crisis for years.  The UK is trying to slash billions from their costliest entitlement.  The National Health Service.  France tried to raise the top marginal tax rate to 75%.  Japan is spending twice their GDP and their aging population will require even more spending.  And in the United States Democrats and Republicans are getting ready for another round of debt ceiling debates.  To raise the debt ceiling once again.  To yet another record high.

What causes these problems?  A couple of things.  A growing welfare state.  And falling tax revenue.  Not because tax rates are too low.  But because they are too high.  Creating a business-unfriendly environment.  Reducing economic activity.  Which reduces tax revenue.  They further compound their problems with Keynesian economic policies.  Which include massive borrowings to pay for deficit spending.  And expanding the money supply.  Which devalues the currency.  This creates inflation.  Further reducing economic activity.

These countries have a spending problem.  Their welfare programs continued to expand even while their tax revenue was falling.  Often introducing new programs based on the best of economic times with the rosiest projections of continued economic good times.  But once a recession hits, and they always do when using Keynesian economic policies, these governments run massive deficits.  That said there is a revenue component to their financial problems.  Abortion.

An Expanding Welfare State needs an Expanding Population Growth Rate

To increase tax revenue you need to expand the tax base.  To get more taxpayers paying taxes.  And where do taxpayers come from?  Babies.  There is no other way to get a taxpayer.  Even with immigration.  Because those immigrants first have to be born.  So the more babies you have the more taxpayers there will be paying taxes.  The more abortions you have, though, the fewer taxpayers there will be paying taxes.  The following table summarizes population gains and abortions for the years 1970 through 1990 for 12 countries.

Sources: Historic, current and future population of Europe; Abortion statistics and other data;

These dates are important for had these abortions not happened they all would be in the workforce today.  Just to get an idea of what that means to tax revenue consider the United States.  During these 20 years there were 26.7 million abortions.  Assuming a median salary of $50,000 and 33.3% in federal taxes (18% effective federal income tax rate, 12.4% for Social Security taxes and 2.9% for Medicare) that comes to $444 billion in one year.  Or $4.44 trillion over ten years.  It may not have been enough to pay for the massive new spending of President Obama.  But it would have prevented the credit downgrade from S&P.  Who were looking for $4 trillion in spending cuts over ten years.

It’s these aborted taxpayers that are pressuring these welfare states.  For an expanding welfare state needs an expanding population growth rate.  And abortion doesn’t help populations grow.  And if the population doesn’t grow then tax revenue doesn’t grow.  In fact, if you divide the population gain by the number of abortions you can get a feel of a country’s financial health.  And their future health.

A Command Economy cannot Provide for the People like Laissez Faire Capitalism Can

Abortions reduce population gains.  So when you divide population gains by the number of abortions the higher the resulting number the better.  For higher population gains and fewer abortions mean more tax revenue.  The lower the number indicates a high level of abortions that reduces tax revenue.

Spain is one of the countries in trouble in the Eurozone.  With a rich Catholic history that frowns on abortion.  So it is no surprise to see such a large number when dividing population gains by abortions.  But their debt crisis is.  For this number indicates a lot of taxpayers.  Which Spain has.  Yet they have some serious financial problems.  Why?  Because they also have very high unemployment.  Their economic woes began with Keynesian policies keeping interest rates artificially low.  Creating a housing bubble.  And when it burst it created a very bad recession.  So having taxpayers is important.  But they also have to have jobs.  With some good economic policies (i.e., non-Keynesian policies) Spain should be able to rebound into an economic juggernaut.  For if all those taxpayers find employment they can reduce tax rates to very low levels.  Which will explode economic activity.

Greece went on a spending binge.  Including lavish spending for the 2004 Olympic games.  Their problem is a bloated public sector.  And a large welfare state.  That their private sector can no longer fund.  Like Spain Greece may be able to rebound with some sound economic policies (i.e., non-Keynesian policies).  A little privatization.  And a little weaning from the public teat.

At the other end you have the United Kingdom.  Whose abortions exceeded their population gain.  Which wasn’t much for 20 years.  They are currently going through a baby boom.  But it’s this baby dearth from 20-40 years earlier that is depressing tax revenue today.  Requiring those spending cuts in the NHS.  And higher tax rates on the fewer remaining taxpayers in the workforce.  Which, of course, leaves people with less spending money.  Further depressing the economy.

China’s economic miracle is not as miraculous as it once was.  And their Keynesian policies will catch up to them.  As they have with every other country using them.  Their authoritarian regime has been able to keep wages down to help their export economy.  And they have no social safety net despite a rapidly aging population.  Which they will have to take care of.  Eventually.  Either by expanding the money supply so the government can spend more money.  Which will create inflation and hurt economic activity.  Or they will have to raise taxes.  Which will also hurt economic activity.

China has had 171 million abortions from 1970 to 1990.  Which even exceeds the number of deaths in the Great Chinese Famine.  Not uncommon in a communist regime.  Survival.  As their command economy cannot feed or provide for the people like laissez-faire capitalism can.  In a command economy those abortions are seen as a good thing.  A kind thing.  For that’s fewer mouths to feed.  Hence China’s one-child policy.  While in laissez faire capitalist countries their children have obesity problems.  And look at these abortions and see loss tax revenue.

While China is enjoying prosperity in their eastern cities thanks to their export economy fueled by low wages little has changed for the hundreds of millions of peasants in the rural interior spaces.  Where famine is still a real concern.  Some will cite China as an example of out of control population growth.  Like locusts the people will consume all of the available resources.  And leave behind a scorched earth.  Of course what these people don’t understand is the power of laissez faire capitalism.  For across the water from China is Hong Kong.  An Island with no natural resources.  A barren rock.  Yet they were part of the British Empire.  They embraced-laissez faire capitalism.  And flourished while mainland China suffered under communism.  Hong Kong is one of the world’s strongest economies.  With some of the greatest population gains.  During these 20 years their population grew by 43.67%.  The greatest of these 12 countries.  While having the lowest number of abortions.  Yet despite having this massive population gain and few resources this crowded special administrative region (SAR) of the People’s Republic of China (since 1997) prospers.  Suffers no famine.  And is one of the best places in the world to live.

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The European Central Bank taking Steps to make the Eurozone Crisis Worse

Posted by PITHOCRATES - September 22nd, 2012

Week in Review

To increase the money supply central banks can do a few different things.  To stimulate economic activity.  They can lower reserve requirements to stimulate money creation via fractional reserve banking.  They can print money.  And they can buy bonds with money they create that they inject into the economy with their bond purchases.  These actions will put more money into the economy.  In hopes people will use it to generate economic activity.  Of course there is a tradeoff.  Increasing the money supply can also create inflation.  And often does.  Unless the economy is so far into the toilet that no one spends any money even with all of this new money in the economy (see ECB in ‘panic’, say former chief economist Juergen Stark posted 9/22/2002 on The Telegraph).

“The break came in 2010. Until then everything went well,” Juergen Stark, the German who resigned from the ECB in late 2011 after criticising its earlier round of buying up of sovereign debt, told Austrian daily Die Presse in an interview.

“Then the ECB began to take on a new role, to fall into panic. It gave in to outside pressure … pressure from outside Europe.”

Mr Stark said the ECB’s new plan to buy up unlimited amounts of eurozone states’ bonds, announced on September 6, on the secondary market to bring down their borrowing rates was misguided.

“Together with other central banks, the ECB is flooding the market, posing the question not only about how the ECB will get its money back, but also how the excess liquidity created can be absorbed globally,” Mr Stark said.

“It can’t be solved by pressing a button. If the global economy stabilises, the potential for inflation has grown enormously.”

The European Central Bank (ECB) wasn’t trying to stimulate economic activity with these bond purchases.  What they were trying to do was throw a lifeline to those nations in the Eurozone about to go belly up because no one will buy their bonds.  Because the chances of them ever repaying their enormous debts are slim to none.  Because of this these indebted countries have to offer very high interest rates to entice anyone to take a chance buying their risky bonds.  These high interest rates, though, were hurting these countries.  Increasing their financial woes.  And pushing them ever closer to bankruptcy.  So the ECB caved.  And bought their worthless bonds.  By doing something only a central bank can do.  Create money out of thin air.

These additional Euros thrown into the money supply could very well end up depreciating the Euro.  And sparking off inflation.  Which monetary expansion ultimately does.  Unless an economy is so far into the toilet that no one will spend this additional money.  And it just sits in the bank.  But if the economy does turn around there will be a lot more money available to borrow.  At exceptionally low interest rates.  So low that some will borrow it because of those low interest rates.  Which could spark off inflation.  Helping the Eurozone to settle back into recession.

This is not going to help anyone in the Eurozone.  Especially those staring down bankruptcy.  Because this won’t cut spending.  This won’t reduce any deficits.  And this won’t lower any debt.  All of the old problems that caused their problems will still be there.  Along with a new problem.  Inflation.  Guaranteeing that things will get worse in the Eurozone before they get better.

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