Your humble writer had a tense conversation with a former banker yesterday over the points that trigger economies to topple out of their comfortable zone.  Amazingly this banker is convinced the problem is not spending enough money from the government down to the poor.  The belief is printing money or “quantitative easing”, going into debt, eating through reserves and savings, devaluing assets are all good ways to encourage more consumption and investment.

Or simply put, the policy of the U.S. and the European Union is the banker’s idea of a solution.

Nothing could be further from the facts.

In the real world money is supposed to be a medium of exchange.  People are trained to believe and try to insist that the money alone is a form of wealth.  It is so because of credit, with credit systems earning interest income on money is possible.  Without the interest paying for the use of other people’s money, the hot motivator of the earning a profit without people working is missing.  Most of the developed world even guarantees that money in certain circumstances can never be lost with deposit guarantees. Without a credit system money would have to be invested to earn an income and that would make money a medium of exchange again.

When money itself is wealth it becomes a commodity, just like oil, corn or gold and even one’s house.  All those products, on to other agricultural items, other energy, metals and more including the money have less price stability.  It can get pretty confusing and complex for people to make life work when the goods and services in life have changing prices.  Add that money has a price in relation to the goods and other money such as with other countries’ money and its value relative to what it can buy is constantly moving too, then anxiety replaces confidence.

Governments, the press and media insist on overlooking important points.  The spark that set off the financial crises in the EU over how to bail out Greece came from riots over reducing government benefits, some layoffs and cutbacks.  With tax increases off the table, the Greek government chose to threaten a default on the interest paid to its debt holders – and the nation of Greece is getting way with it.

The Greeks have managed to export their profligacy to the whole of the EU.  The answer has been to overlook the honest need to reduce government spending and shift the problem to over the whole EU and countries whose financial firms hold both Greek and EU debt.  The result is the EU’s money has gone down from the mid $1.40s to below $1.30, about a 10% cut shared across the whole EU.  That cut the purchasing power of everyone in the EU by about 10%.  It’s a wonder that riots haven’t spread to all the other countries of the EU.

In the U.S. the first warning signs are taking place as well.  Both Wisconsin and Ohio have tried to face down excessive spending with austerity.  The answer has been, most notably in Wisconsin, the affected folks “occupied” the statehouse. But U.S. states don’t control the money value, so for now the impact is limited while the pressure builds.  If the folks in Wisconsin manage to recall the governor and return to overspending, the profligacy will find a way to spill over the boarders to other states, a sure thing when the Federal government gets involved.

All of us worldwide are using money whose value is determined by the exchange value with other currencies.  There is no place for governments and policy makers to hide the consequences of their actions for long periods of time. We’re all in the foreign exchange market whether we’re aware or not – and very very few people have the resources to hedge themselves a period of safety.

Those sparks of economic destruction are events that push policy to do unwise things.  Riots, occupying government buildings and the reactions they cause put emotions ahead of thinking through the reality for proper policy.

Perhaps everyone can adjust to the circumstances where the value of their work or the income from their investments and savings is subject to the sentiment of market’s views of the policies of governments.  It’s an unlikely idea.  Handling the constantly moving prices of the necessities of life is for most people a significant challenge.  With the volatility of the value of money also at risk for everyone it’s a wonder the economy is a healthy as it is.

To build confidence for consumption and investment, the value of the money has to be stabilized. With everyone trying to keep “whole” on the money they already have the priority ahead of building and improving their lives and the economy as a whole, the economy just stagnates.

Until policy makers realize the job is to keep the value of the money in circulation steady all the events around the world are sparking destruction of money value.  Oddly, many people think research and development funding are not government tasks.  That could be said to be true and when government tries to pick them its seems to always blow up in everyone’s face.

But to stir the economic pot and stimulate activity a steady stream of “new, better and cheaper” have to keep coming.

In the meantime, the government is printing, borrowing, eating reserves and savings, and devaluing assets including the currency. Someday one of those sparks will be one too many.


6 Comments so far

  1. Matt Musson on January 24, 2012 10:45 AM

    Economics is the science of predicting the past. Economists keep devising theories and then apply those theories to explain historicial trends.

    Most of us are shocked that inflation is not roaring through the economy. But, apparrently Deflation is the real monster we are currently fighting. However, once the Deflation dragon is slain – inflation will be back. And, it will be deadly inflation.

  2. Benjamin Cole on January 24, 2012 2:41 PM

    Boy, you are talking out of school. Milton Friedman, John Taylor, Allan Meltzer and Ben Bernanke all advocated QE for Japan. Many conservative monetarists advocate QE for the USA now, usually under a growing school “Market Monetarism.”

    We are seeing Japan-style deflation now, and we know if it sticks (as in Japan) we have two lost decades coming and counting.

    Some inflation is actually a good thing.

  3. Simon Derricutt on January 24, 2012 4:53 PM

    At last – someone who isn’t fooled by the financial pundits and bankers. Stability in monetary value, stability in regulations and stability in wages and material costs are what give businesses the ability to plan ahead. Instabilities make it difficult for businesses and so they do not invest so much and so there are less jobs. Less jobs means that the tax burden on those in work must increase. Tax burden increase means less jobs – it’s a vicious circle that needs to be fixed as soon as possible.

    A funny thing – once it is known or suspected that an entity (person, business, country) has problems meeting the interest payments, they need to pay higher interest. This seems to pretty well guarantee a default and bankruptcy.

  4. Matt Musson on January 25, 2012 7:28 AM

    Simon is exactly right. But he forgot to include government interference in the market as a factor that destroys jobs. That is exactly how ObamaCare destroyed the jobs recovery. According to the BLS the economy was actually creating jobs in a normal recovery fashion until the week ObamaCare was passed. After that lurking monstrosity became law – everyone just quit hiring.

    Check out this graph:

  5. Brad Arnold on January 25, 2012 4:24 PM

    Did you just find out that currencies float? Blaming government spending huh? Sounds like you’ve drank the cool-aid the Republicans have been handing out this election season (I noticed their retoric changed after Bush/Cheney left office – then “deficits don’t matter” was their policy, and they ran up tremendous debt during a period of realitive prosperity).

    Instead, the most important metric is the percentage of GDP the national debt is – and it some ways that is just debt that the nation owes itself. Of course currency fluctuations are vexing, but it sounds like you are particularly bothered by that.

    Are you aware that the Republican fearmongers have been predicting hyper-inflation due to the Fed printing money for as long as their man has been out of the White House? Instead the Fed just announced near zero interest rates through 2014.

    As far as Greece, their government had been particularly irresponsible, appearently politically unable to met the conditions of bail-out bridge loans. Those Greek bond holders are going to have to take a haircut – too bad, they bought realitively high interest Greek government bonds, betting that the EU wouldn’t let Greece default, and they bet wrong. Worse, there are a lot of derivitives (i.e. insurance on the bonds) out there – so not only are our banks stuck with bad Greek debt, but they are also on the hook for the bond insurance too.

    What I do not see in this article – the primary problem is our banks being allowed to invest in risky leveraged speculaion. More regulation is the answer, not cuts in government spending and less regulation. If you don’t believe that you are just a tool of the Republican party and those who benefit when they make successful risky investments, and get government bailouts (per Bush) when they bet wrong.

    By the way, the euro started off at 1 US dollar to one euro. Now it is 1.30 from 1.40 US dollars to one euro – tough. To say euro consumers “lost” ten percent is very naive. It sounds like you are frightened by floating currency fluctuations – maybe this is your first exposure to currency markets?

  6. Brad Arnold on January 25, 2012 4:43 PM

    One other thing: public debts is a function of government spending to government revenue. When an economy is poor, government revenue drops, which is a much more powerful factor than consistent government spending. The best strategy is governmental economic stimulation, because for every stimulative dollar (if spent correctly) government revenue is increased. To only look at it as a government spending issue is destructive, because at the same time as the economy is contracting the government spending is also contracting, then that leads to a vicious circle.

    On the other hand, if your political agenda can be conveniently served by so-called spending cuts (like WI anti-union law)… Besides, even if the government needs to cut spending, all spending cuts don’t have the same adverse effect upon a fragile economy: it has been shown that unemployment payments yield more government revenue than they cost, whereas military spending is a very poor stimulus.

    Yeah, when government spending cuts touch social spending that is depended upon by vulnerable people, no surprise they protest. Why should they take a haircut while investors in risky bonds get taken care of??

Name (required)

Email (required)


Speak your mind