Now that the Euro Crisis Train is arriving back into the station after a short trip away from the front pages, there will shortly be another round of politicians and pundits calling on the likes of Greece to get out and devalue their currencies. Given these incoming siren voices, it seems time to head them off by revisiting Gordon Kerr’s article for Bloomberg, which takes a look at the supposedly seductive promise of debasing a nation’s medium of exchange to secure economic growth.
Much like Henry Hazlitt before him, Gordon takes a look at what boils down to a “deliberate policy of inflation,” not just as it affects one group but all groups in society and what happens in the long term. Governments like devaluation because it allows them to “reduce the real cost of national debts without the need to declare default or ask for a bailout.” But for savers and creditors, they find their wealth progressively destroyed and the value of their assets cut. The average citizen finds that they are now forced to pay higher prices for goods and services, particularly if they are imported, and as their wage buys less and less they can no longer plan with any certainty for their future.
In the short run, debasement gives a temporary boost to export industries, but this is counterbalanced in the longer term by rising costs for importers and consumers through potentially dramatic price inflation. The Coalition’s policy of export-led recovery via currency destruction is clearly foolish, as history shows – “No nation has achieved lasting prosperity by undermining its currency.” Again, successive policy makers seem to be forgetting Hazlitt’s ‘One Lesson’.
Unfortunately, politicians like to “promise jam and sweeties today” at the expense of a healthy economy in the future, and so refuse to level with the public about the measures necessary to return to a sound footing, instead pursuing recklessly high spending and borrowing plans in the short term, made possible by printing more and more money.
Everyone feels a bit better right now, but no problems are fixed and ultimately this currency suicide leads to economic ruin, as it has done for thousands of years and the pain of recovery will be that much greater. As Gordon sums it up, devaluation can “mask the symptoms of the crisis, but it can’t cure them. Such policies are like plastering over a structural crack in a load-bearing wall: They end in a pile of rubble.”
The expansion of the monetary base (by the Bank of England, Federal Reserve, European Central Bank….) has been used to support the credit bubble – the extended credit ( “broad money” – loans of “money” than no one really saved) by the banks.
“But there is no such thing as the credit bubble – banks only put the savings of people to work….”
Absurd (“borrowing automatically means saving – it is an identity”) Georgia academics aside, in the real world there very much is a credit bubble, and Central Banks have expanded the monetary base to prevent its collapse.
However, not that governments (and the rest of the “liberal” elite) are satisfied with this.
“The banks must start lending again” is the cry – in short the new monetary base (created from NOTHING by Central Banks) must not just sit on the accounts of banks – it must be used as the base for a new inverted pyramid of loans.
Just like the old expansion of the monetary base was – because (of course) the previous credit bubble (the previous, and still existing, inverted pyramid of debt) was encouraged by Central Banks and government policies – for year after year.
Any spark of wisdon that bankers show (and although they are highly intelligent, they are certainly not known for being wise) is ruthlessly attacked by the entire “liberal” establishment.
Not just governments – but also the “mainstream” media. For example, only yesterday the Financial Times newspaper carried an article praising Californian cities who threaten to steal property.
This will serve the banks right (said the article) they have refused to give people the houses they have not paid for (horror of horrors) – and especially as many in Wall Street are not greatful to the great President Barack Obama for all his aid (yes the article was that crude – it was like reading the ravings of the Communist, sorry “liberal”, “Occupy” movement – a bit like the bad guys in the latest “Batman” film).
TARP was a great evil – but it was supported by both Bush and McCain as well as Obama, so it would have happened whoever was elected (so no need to be “greatful” to Barack for that).
And why anyone should be “greateful” for Dodd-Frank (the legislation that, when fully in place, will make the entire financial services industry servants of the state – without doing anything to prevent credit bubble finance) was not explained by the article.
Yet enterprises in the City of London and Wall Street continue to subscribe to the electronic version of the Financial Times.
They subsidise their own persecutors (the news outlets who when they do allow Republicans to write articles pick RINOs who write such things as “Obamacare can not be repealed”, an ideal slogan to make every conservative voter stay at home in November).
It is hard to have any sympathy wih financial enterprises who subsidise their own persecutors.
And anyone who thinks the Financial Times (or the BBC or …..) does not support the same government-must-control-everything position in Britain that they do in the United States, simply does not understand what sort of people such news outlets employ.