Posted Jun 21, 2015 by Martin Armstrong
The summit held Monday of the new superheroes, known as the Euro-Rescuers, are lost in the canyons of their own minds for they do not comprehend how the economy functions in the least. They just cannot see the problem for they lack a mirror and will never question themselves as a problem. Consequently, the same line of thinking that created this nightmare of democracy being extinguished, as they see it for our own good, can never possibly solve the crisis that they created.
The European Union is indeed on the ropes and their arrogance as lawyers cannot see the reality of economics. They view the world only through the power of their pen to write a law and DEMAND under threat of penalty that we do as they command. This group of superheroes lacks the comprehension that people will not follow laws that make no sense or go against human nature.
These superheroes command that everyone shall abide by austerity, which can only lead to the Grexit and the beginning of a period of unprecedented levels of economic destruction in Europe, along with rising civil unrest across the continent. Anyone who has EVER worked on a foreign exchange desk knows far more about the market flows than they will ever think about with all their law degrees. Based upon the botched job they have mastered so far, the EU will descend into the final destruction phase. The idea that one government would end European wars is producing rising civil unrest and the very finger pointing that creates war.
The ultimate consequence of this wrong policy from the outset to create a single currency without consolidating the debts of member states has led to this crisis in the monetary system for the entire world. The consequences will certainly be felt for many decades to come, if not 112 years, impacting generations of Europeans. However, the destruction unleashed in Europe will contribute to taking down the United States from its lofty perch and will shift the entire new economic age to those nations who were once in the firm grip of Marxism.
These Troika superheroes do not comprehend how economies function. The IMF in particular sees exports only and ignores virtually all other aspects of the economy. Under their view, Germany is the champion and Greece is the laggard. Since they do not see Greece as a competitive exporter, they wrongly see its economy as weak and structurally inferior.
This very image created in their narrow minds convinces them that their official policy of focusing upon the current account of Greece is the correct one. Therefore, the policy they have imposed upon Greek people without mercy has been one of demanding internal devaluation, wage cuts, tax increases, and spending cuts. The Troika cannot understand what they are doing to Greece as a nation and its politicians are equally stupid for ignoring the cries of the people against this policy of austerity.
It was David Ricardo who stated that nations should exploit their comparative advantages. What the Troika does not see is that Greece is still the largest merchant shipping nation in the world, with Japan coming in second. It might be nice that Germany exports goods, but it is the Greeks who deliver them. The Greeks have the largest fleet in the world with some 46,948 ships as of 2010. The Greeks hold almost 17% of the entire world merchant shipping and without that, the EU would find its exports collapsing. Yet this amounts to only about 160,000 sailors constituting nearly 5% of the total GDP of the nation. Greece is located along one of the world’s busiest international shipping lanes – the Suez Canal and the Mediterranean – and is at the crossroad between three continents. This makes it a natural gateway for trade between Asia and Central Europe
As foreign loans are given to Greece, that money is recorded in the Capital Account. However, ALL interest that the Troika is demanding be paid by Greece moves through the Current Account, thereby increasing the very statistic they follow, demanding more and more austerity. They do not understand their own statistic game.
Moreover, official export statistics of any nation are typically measured in gross terms, and they will tend to overstate the value of exported goods and services. This only masks the intensifying fragmentation of production and the increasing importance of global supply chains as various parts contribute to the final production of many goods. In order to avoid double counting, we must examine export flows, which include value added (VA) terms that come in as imports and are enhanced and re-exported. A large foreign VA content in a country’s exports will conceal the true impact of domestic production on growth and employment within a given economy. Furthermore, simultaneously a very small foreign VA share hints that the economy is insufficient and lacks the integration into the world economy with its global supply chains.
Against this backdrop, looking at Greece, we see a domestic VA content of exports at 77% in 2009, which is well above average. Diving deeper into the numbers, what emerges is a reflection of Greece’s specialization in service exports. This breaks down into transportation and tourism related services. Comparing 2009 to 1995, the share of transport services has almost tripled, while that of tourism related services has decreased by about one third and has been impacted by the decline in Russian tourists.
Greece’s greatest impediment is its extremely bureaucratic government. While it took 20 days to get clearance for export activities in 2010, the Doing Business report in 2013 states that clearance can now be obtained in 16 days. This type of regulation is really paying fees as rubber-stamping slows the economy down and makes Greece uncompetitive in that respect. This is further impacted by the Troika’s narrow focus on trade without grasping trade and capital flows.
On Monday, the Greek government must choose between the livelihood of its people or these brain-dead visions of austerity that supports the bondholders. This is building up to force into reality either a change in the thinking process of the leadership in the EU, or to continue with this current policy which will eventually force a Greek exit of the euro (Grexit) that will ultimately set off a contagion. Once others see that the Greek economy bounces back rapidly upon exiting the euro, others will soon follow, leading to the destruction of the Troika and the EU.
It was Henry Morgenthau who introduced Roosevelt to a virtually unknown economist from what most considered the Lunatic Fringe, George Warren (1874–1938). In 1932, Warren had written, “Wholesale Prices for 213 Years; 1720-1932”. Effectively, this work was a forerunner to monetary theory by observing that prices rose with the gold discoveries and declined when supplies of gold declined. What Warren proved was gold by no means created a stable monetary system, for inflation rose and fell under a gold standard as well, and the quantity of money was also critical. Roosevelt’s Brains Trust all demanded austerity, just as EU today.
This work was a simplistic monetary view of the world that Roosevelt could understand. Maintaining the gold standard created deflation as prices collapsed and gold became scarce. Warren’s theory thus became a simple relationship that the only way to raise prices and end the deflation of the Great Depression was to raise the price of gold, which meant it would be a dollar devaluation relative to gold. This was a first and important step in comprehending the role of money. But to the classical economists and bankers, this was pure heresy. Clearly, the traditional economists and banks failed to understand the role of money. They did not understand what really happened in Britain or that when it had to abandon the gold standard in 1931 that had marked the end of the depression for Britain.
The market bottomed in July 1932, a bit more than three months ahead of the presidential elections. Markets move NOT on fact, but on pure and simple ANTICIPATION. This is why those who try to use fundamental analysis always fail. Rumors began to spread that Roosevelt would be closer to a communist and would do everything from confiscating wealth to a devaluing the dollar. So profound were these rumors that the night before the election, FDR did a radio address denying he would devalue the dollar.
Between the election and FDR and his taking office, the shit hit the fan when a panic emerged as rumors spread and intensified. After the election there was a major bank run that prompted President Hoover to write letters begging and pleading with FDR to please come out and reaffirm he would not do such a thing as devaluing the dollar or confiscating gold. FDR refused to respond. The amount of bank failures simply became staggering post-election. This set in motion what Roosevelt would do to justify his confiscation of gold. It would be closing all the banks in 1933 where he declared a BANK HOLIDAY.
Indeed, the evidence clearly demonstrates that the 1932 low came into play with rumors that there would be a dollar devaluation. The bank runs set in motion failures everywhere with more than 3,000 banks collapsing and this was a GOLD STANDARD. Those who think a return to a gold standard will end fractional banking are really living a false reality. If Greece leaves, its assets will begin to rise, but first there will be a contagion.
The elimination of paper money is effectively the modern day version of confiscating gold coins. They seek to prevent a bank run by outlawing paper money. This indeed would prevent you from staging a run on the bank for there would be no way to retrieve your money. This is the Troika’s latest answer, rather than considering they just might be wrong.
We are facing the rising likelihood of capital controls and the collapses of the world economy, for these people fail to grasp that they are the cause of the problem, not the solution. We must grasp that the stock market bottomed in 1932 as an alternative to get your money out of banks. Those who understood survived. Those who did not, lost just about everything.