Bring back the Mark. And this time tie it to gold.

Recent data in fact shows that the budget deficit might be larger than reported. The Greek outstanding debt rose 16% 2009 compared to a reported budget deficit of 12%……..

How much longer can any country continue bailing everybody and everything out? Here in the US, we would be in a better position already if we would of let the banking and automotive failures run their course.

Do the same considerations not apply to any currency, including the dollar, the pound, etc.?

Dr. Butler

Corruption breeds destruction. Political corruption breeds a nation’s destruction.

Thank you Philipp Bagus!

Paper, fiat, currencies always go to zero.

Sooner, later, every time!

The ECB is more disciplined than some other Central Banks (The FED, Zimbabwe, Canada, U.K.) but there is no difference ultimately.

All Central Banks must be terminated as they currently operate. This is for the good of our dear Earth and Her people and Her environment.

A Rules-Based Money System MUST be brought in for all trading nations — those that wish to continue trading with the others MUST join and conform to these rules.

No more Japan-s and China-s and America-s endlessly printing their local paper money just to prevent it from appreciating agains other currencies — just to try to retain or improve their Export-Oriented Economies, at the expense of others.

As the Maestro wrote in 1967 —

http://www.dailypaul.com/node/112046

http://money.cnn.com/2010/02/05/news/economy/greenspan.fortune/index.htm

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one – so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the “easy money” country, inducing tighter credit standards and a return to competitively higher interest rates again.

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline – argued economic interventionists – why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely – it was claimed – there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks (“paper reserves”) could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve’s attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates. The “Fed” succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930′s.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain’s abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed “a mixed gold standard”; yet it is gold that took the blame.) But the opposition to the gold standard in any form – from a growing number of welfare-state advocates – was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which – through a complex series of steps – the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.

Since trust is the underlying issue, and since gold is regarded as a better store of value than most other items, is there any circumstance under which gold would not hold its value? Its relative value?

Dr. Butler

Fundamentalist,
I certainly hope we’re seeing the end of democracy. It’s done a pretty good job of destroying western civilization, so I sure won’t be crying when it is sent packing.

I cannot agree with you, David Hillary.

Philipp Bagus has constructed his argument very cogently.

“It is ECB debt that is money in the form of Euro bank notes.”

Partly true, since most fiat currency is generated only as a result of new credit being released into the Money System by retail, commercial banks or by Central Banks — in this case it is done by the ECB — the European Central Bank.

But there is one small problem with what you posit here. Namely, neither the ECB nor any other Central Bank really believes that they ‘owe’ the money they have inserted into the Money System to anyone — other than perhaps to themselves.
The ECB will eventually (if it gets the money back that is owed to it by Greece) show a small gain from the interest that Greece would pay back above the principal owing. The principal would be returned to its Balance Sheet as a reduction in its assets (loans made) and a reduction to its liabilities (Cash Printed).

“The ECB invests in loans not to the Greek government but to the banks. The ECB’s exposure to the banks is secured by Greek government bonds.”

IMHO you are incorrect here — ECB loans to Greece are indeed issued DIRECTLY and ONLY TO, and IN THE NAME of the Treasury of the Greek Government.
The banks are ‘merely’ financial intermediaries.
So I wholly disagree with the first statement above that you wrote as “The ECB invests in loans not to the Greek government but to the banks.”

It is correct that the ECB’s ‘exposure’ is indeed ‘secured’ by Greek Government Bonds. If Greece, as a sovereign nation, cannot service its debt, then that ‘security’ loses its meaning, or at least part of its full face value.

“If Greece defaults, the ECB will still get paid by the borrowing banks unless and to the extent that the banks fail.”

This section of yours begins with an incorrect assertion.
The reverse is by definition true — that is, “If Greece defaults” is actually defined as “Payments are not made by Greece back to the owner of the bonds (the ECB).”

“The ECB probably has counter-party limits that will limit their exposure per bank, and the banks have counter-party limits that limit their exposure to the Greek government. And the ECB has capital of its own, as well as debt.”

Since the ‘banks’ that you refer to are, in your mind, probably commercial banks — given the way this section of your logic is constructed — and since I have already disagreed that these retail/commercial banks have the loans issued to ‘them’, then clearly I disagree with your assertion that these banks would have any need to insure such bonds — the loan-monies for the issued bonds are simply not issued to these banks and they have no reason to insure them.
(If you have a reference document to prove otherwise, I would thank you for that, since it would be new knowledge for me that I do not currently have.)

As far as Central Banks around the world go, they provide their own counter-party insurance — they don’t use the commercial market in any case that I have ever seen. The ECB is no exception to this IMHO.

For one thing, who would have pockets deep enough to provide the assurance?
And for another, who else can PRINT their own money? — let me know whey you find that counterfeiter! I would like to meet him/her/them and his/her/their organization!

A. Viirlaid, I’m not really sure but I think most central banks hold government debt and/or loans to commercial banks secured by government debt and other assets.

According to this document: http://www.ecb.int/press/pr/wfs/2008/html/fs080326.en.html most of the ECB assets consists of:
‘Lending to euro area credit institutions related to monetary policy operations denominated in euro’

I will need to research this a bit more to see what the most common practice is.

Dr. Butler writes: “Since trust is the underlying issue, and since gold is regarded as a better store of value than most other items, is there any circumstance under which gold would not hold its value? Its relative value?”

- Yes. If the rate of gold extraction from the ground were to exceed the rate at which wealth increases. Or if an alchemist found a way to turn lead into gold, cheaply.

In the 16th century, gold lost value due to extractions in the New World. In 1849, gold also lost its value.

Thanks for the return post, David.

Further comments from me…

“It is not Greek government debt that is being monetized.

IMHO, yes, indeed it is.

We can deconstruct Philipp Bagus’ argument to show why this is true, but I don’t think that is necessary.

A simple thought experiment will show that it is absolutely Greek government debt that is being monetized.

(There are other things going on as well, but we can leave those for later.)

Take the currently-true-to-life case of the U.S. Treasury issuing American Government Treasury Bonds directly to The FED.

Let’s do an extreme thought experiment first. This example is only phony in the amount involved. But it is easier to understand when the amount is large, rather than smaller, simply because people tend to think that a small amount of “Q.E.” (Quantitative Easing) is NOT Monetization of the Debt, while a Very Large amount makes it clear that it is always EXACTLY THAT and nothing else. (In fact, Ben Bernanke has denied that Q.E. as done by his organization amounts to Monetizing the U.S. Government Debt — I cannot concur.)

Let’s say the Tim Geithner at the Treasury asks his printer to print up 1 Quadrillion in new U.S. Bonds. The Administration needs more money and the tax revenues are simply not keeping up and President Obama has asked Tim to help out. Being part of the Cabinet and the Team, Tim is only TOO willing to help.

Tim sends those, by courier, over to Ben Bernanke at The FED.

Being polite, Tim gives Ben a heads-up by phone or email.

Being a good planner, Ben lets his money-printers know that they might have to schedule a little overtime. Or if Ben intends to enter the money electronically into the Money System, he asks his secretary if perhaps she/he is willing to book a little overtime later that afternoon.

Ben agrees with Tim, that he will be on the lookout for the bicycle courier — since it is a bit snowy in Washington and Ben, being considerate, knows that the courier will have tough-slogging getting over to The FED — and he does not want to leave the courier waiting at the front door too long. Besides the bond(s) is(are) negotiable and there is the issue of (physical) security.

After a few anxious hours, Ben finally receives the bond-package (maybe just one bond if the face value is 1 quadrillion U.S. dollars). Ben gets the money presses and/or computers warmed up to insert the money into the Money System — of course to the credit of Uncle Sam’s account.

What do you think?

Once that 1 quadrillion DOLLARS are in the Money System, has there been any “Monetization of The Debt”?

Of course there has.

This money only ‘needs to be paid back’ to The FED, which means that, effectively, it does NOT have to paid back, if the Government does not have the funds with which to pay back.
Is The FED going to foreclose on the American Government?
Is The FED going to declare the American Government in default?

You can see from this example how the American Government could monetize all of its Debt — simply issue enough Bonds to cover its current Debt and then ask The FED to print up the cash. Then pay the current bondholders (not The FED). Presto = No Debt!

In the case of the American Government, lucky that they are, its Debt is denominated in American Money — otherwise The FED could not help out.

Of course, the American Government is not doing this (yet) at least not in any significant amounts (relative to the total outstanding Debt). If they did do this, the American dollar would not be worth the paper it is printed on when you wake up tomorrow morning.

So what is the difference between this and Greece sending its bonds to the ECB? Well, no snow in Greece, you might guess? I can’t say, I have not looked at the latest weather reports for Athens.

Otherwise, not too different — other than that there is a bigger distance between Greece and the Head Office of the ECB, and perhaps a bicycle-courier might not be practical — of course, Europe does have a lot of good cyclists, so I dunno.

There are the differences that Phillip Bagus has already mentioned.

For one thing the other member countries of the ECB would not let Greece sell her bonds in that amount to be converted into Euros.

The other thing is that Greece cannot do this in its own currency — because Greece uses the common currency, the Euro.

Also, at some point, Greece WOULD be KICKED out the Monetary Union, because no other country would let Greece do this monetization for all of her (Greece’s) debts.

And just maybe, at some point, the terms of The Stability and Growth Pact will be enforced.

In other words, Greece can only do this to a minor degree. It won’t be able, in reality, to send a Bond face-valued at 1 Quadrillion Euros over to the ECB, like Tim Geithner is theoretically able (or might soon choose) to do.

What Phillip Bagus has very adroitly and very precisely IMO outlined in his essay are the very real weaknesses in the current Euro-arrangement.

(And please note how many of these weaknesses can be traced to fiat paper money and the current banking system.)

One of the biggest is the very real temptation to lean on everyone else to shoulder your home country’s deficits.

That is, as in any good welfare system, “from each according to his abilities, to each according to his (perceived) needs”.

Just like Jesus Huerta de Soto outlines in his “A Critical Analysis of Central Banks and Fractional-Reserve Free Banking from the Austrian School Perspective” — Phillip Bagus similarly points out what happens when Property Rights are ignored in setting up any system — most especially The Money System or parts thereof.

Please see http://mises.org/journals/rae/pdf/RAE8_2_2.pdf

Now if things go well, you, David Hillary, at some future point, can accurately claim that the Greek government failed to monetize its debt in total or in any portion whatsoever — but that eventuality depends on whether Greece can pay back all of the debts it owes to the ECB.

If there is even one bond that Greece cannot in full pay back to the ECB, then that PART would have been THE part of Greece’s debt that was entirely ‘Monetized’.

So I will stay tuned to see who ends up ultimately being right about this.

I have a feeling that some portion of the total Grecian Government Debt will not, in the end, be paid back to the ECB and will thus have been ‘successfully’ monetized by the Greek Government.

goldbug is quite right.

I believe it is illegal to destroy or deface ‘ferns’ or FRNs or Federal Reserve Notes.

http://en.wikipedia.org/wiki/Federal_Reserve_Note

http://www.freelawanswer.com/law/3175-3-law-4.html

I don’t know the law re: destruction of Euros.

Total fascism is upon us. My professor, today in class, outlined the future: nationalization of the banking system, and wide-scale “private-public partnerships” (all of which he supports).

“Bring back the Mark. And this time tie it to gold.”

Yes please. Too bad this will never happen. The more the planner fails, the more the planner plans.

Surely the I in PIGS refers to Italy not Ireland? Maybe you mean PIGIS?

Anna, the most-recently used acronym has been ‘PIIGS’ — 2 letter-”i”-s.

That is to say:

Portugal
Ireland
Italy
Greece
Spain

And here we were just 1 short year ago, thinking it was Eastern Europe that was going to do Europe “IN”.

What were we thinking of?

fundamentalist:

“The hyperinflation in Germany in the 1920′s and the huge state deficits gave Hitler the ammo he needed to persuade Germans that democracy had failed them.”

To be more specific, the Germans were convinced that socialism had not failed them, but only voting and the multi-party system had failed. The welfare state didn’t work well with a popular legislature controlling the purse, let’s try it with an unpopular one instead.

It’s hard to say what Europeans will turn to when the EU and the Euro fall to pieces in a couple of years. They have some hard-core Islamic immigrants who anticipate taking over a few of the countries in a generation or so thanks to the miracle of differential birthrates. They have a hard-core minority of conservative-fascist and anti-immigrant nationalists. Where are the rest of the sheep at, mentally? Are they still daydreaming of free university education, a short and undemanding civil service career followed by a long and well-paid retirement with free, deluxe medical care?

When the USSR broke up it seemed that almost everyone hated the previous regime and welcomed a change to relative freedom, but I’m not getting that vibe from Europe. Unless I’m mistaken, the majority don’t possess the intellectual tools to grasp or cope with what’s going to happen.

In America I see a robust tea-party movement and lots of gung-ho goldbugs, survivalists, secessionists, Misesians, etc. These are people who can cope and they will set an example for the rest if given a chance. The Euros only seem to get moving when a government check is at stake.

Thank you Jim Egnor,

I agree — the lights are dimming.

A year or so ago, I could never have predicted what is now unfolding in Europe. (And they, along with China, were supposedly in a position to help the rest of us? What’s next? China?)

I thought that the U.K. and America and Iceland and a few other places were having it ‘bad’.

Turns out Europe was a shell-game too (as ‘mouser98′ wrote).

What a world!

First, the banks here and there.

Now, entire countries, here and there.

How can one Central Bank (even the mighty ECB) ‘save’ 6 countries?

I tend to share your pessimism…

I am getting antsy — I am anything but reassured at this time.

Anna, I wrote:

… the most-recently used acronym has been ‘PIIGS’ — 2 letter-”i”-s.

That is to say:

Portugal
Ireland
Italy
Greece
Spain

I neglected to add Iceland to make up the 6 countries –> so “PIIIGS” with 3 i-s.

berlusconi would like nothing better than to break out of the euro pact, and effect a quick and dramatic devaluation. naturally to occur after the elite have parked their money in some safehaven.

all the blame will be sheeted home to europe, and the stage is already being set. thereafter italians can go back to the time-tested recipe of periodic devaluations to jolt the export sector into life, whilst shafting mr rossi.

this won’t be tomorrow. the death rattle of the euro will continue for a while.

First of all, I want to thank Philipp Bagus for being brave enough to come out and tell it like it is. The Eurozone has always been a disaster waiting to happen. Also, I want to thank the Mises Institute for being here as a forum for the truth. I can tell you that living in the UK, there is no equivalent forum for the explanation of economic events and dodgy government practices. A. Viirlaid – I very much appreciated reading your comments and Ned Netterville – while I agree with your reasoning, as A. Viirlaid says, what alternative have we got?

Sorry to burst your bubble, but democracy in any form is capable of far worse excesses than any “authoritarian” system. It’s not a matter of shuffling around the “limits” on Government until we get the “right” ones. The only way to solve the problems of the State is to eliminate it.

I truly hope the Germans will hold on to the original guiding principles of the Euro: no bail-outs, no money printing and low inflation. Merkel seems to be the only leader in this union with some economic common sense.
Great article Philipp

Daniel
Paris, France

I thought it was “PIIGS” for “Portugal, Ireland, Italy, Greece, and Spain.” Each new commentary I read on the PIIGS leaves out either Ireland or Italy.

We’re agreed that Greece can monetize its internal debt. And, that it can do so without selling national assets. It can also repudiate external debt, at considerable cost to foreign banks and the ECB as well as sovereign creditors and EuroZone countries.

Internally, the Government can create an entity which functions as a state owned bank. Rather than selling national assets, they are monetized and become the capital basis for the state owned bank.

That bank creates local currency-credit using fractional reserve principles, (unemployment is quite high and currency would be supplied to absorb unemployment and redeem all internal debt. Thereafter, it would be issued based on GDP growth.)

There would need to be great discipline in the operation of a state owned bank. It would allow the Government to fund necessary programs to maintain social stability, as well as accelerate economic growth.

Credit extended to local governments could be interest free with local governments responsible for assessing user fees which would flow back to the State Owned Bank. Overall, tax rates could be reduced, and budgets funded without incurring debt.

External debt would be repudiated. The Euro/Eurozone is no more than a control mechanism for central bankers. Allowing it to atrophy, as EU members leave, posses a significant opportunity for EuroZone nations to either nationalize or eliminate central banks control of sovereign currency.

Any nation can create its own central bank where earnings are not siphoned off by foreign share and bond holders. instead they are returned to the “General Fund.”