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Yesterday, Europe was back in the news. Whenever Europe is in the headlines, the headlines are bad. And the ideas behind the headlines are absurd. In fact, it is amazing how many crackpot ideas the press can throw at you in a single day.
The immediate problems in Europe were two-fold:
First, it looked like Portugal was going the way of Greece. It would soon need another bail-out, said the papers.
Second, the Greeks themselves were still having trouble settling up with their creditors – despite years of negotiation, bail-outs, rescue plans, and mouth-to-mouth resuscitation.
Bloomberg was on the story yesterday afternoon:
… a stalemate between European policy makers and Greek bondholders over debt relief increased concern that the European credit crisis will spread.
… finance ministers balked at putting up more public money for Greece, calling on holders of its debt to provide more relief. The International Monetary Fund cut its global economic forecast as Europe slips into recession and growth cools in China and India.
“The Greek debt impasse is weighing on the market,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “The IMF warning this morning dampened any economic optimism.”
At the heart of the market’s nervousness was what Bloomberg calls “demand fears”. As near as we can figure, ‘demand fear’ is the worry that there aren’t enough people who want things and have the money to pay for them.
Why not be satisfied with the demand as it is? Why not accept the decisions of willing and able consumers as to how much stuff they need and how much they can afford to buy? Why is it important that they buy more than they need with more than they have?
Because it could lead to another Great Depression, says Christine Lagarde.
No kidding. That’s what the head of the IMF told Germany’s Council on Foreign Relations. The Washington Post:
International Monetary Fund Managing Director Christine Lagarde warned of a “1930s moment” for the world economy if Europe does not solve its financial problems and said Germany must contribute more money to rescue efforts if a disaster is to be avoided.
Without such funds, Lagarde said, “we could easily slide into a 1930s moment. A moment, ultimately, leading to a downward spiral that could engulf the entire world.”
She said the 17 euro-zone countries also must move quickly to integrate their economies as deeply as they integrated their monetary systems with the creation of the common currency. Failure to act, she said, could precipitate a crisis comparable to the Great Depression.
And here’s one of our favourite economists, Larry Summers, writing in the Financial Times. Mr Summers is concerned by a lack of confidence and “uncertainty about future growth prospects,” which he thinks are the causes of the demand shortage.
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What? You can see the problem with Summers’ pensée right here. If “uncertainty about growth prospects” is a problem, it is equivalent to uncertainty about how long our alcohol supply will last in a snow storm. It’s an uncertainty we have to live with. The future is unknowable. We’re always uncertain about growth prospects – particularly now, when the developed economies are doing so little growing.
Europe is expected to contract by 0.5% this year. The US is expected to grow, but only at a 1.8% rate. Japan, the other major developed economy, hasn’t grown in 21 years and most likely won’t growth this year either.
So, you can forget your “uncertainties about growth”. The entire developed world, as a whole, is not growing. Get over it…
Instead, Summers thinks these uncertainties should be addressed… yes, by government! Of course, government is the sector that never produces any real growth. It’s a consumer, not a producer. And it can only consume what it extracts from the real economy. It diverts resources from real, growth-creating activities into zombie redistribution, make-work, and work-squelching regulations.
(An aside: A friend of ours just started up a new biotech company. He moved out of Georgia to Toronto, Canada, to start the business. Why? “Too much regulation and red tape in the US,” he says. “You’d have to be crazy to start a business in the US.”)
Still, Summers believes that government has no higher purpose than to get people to shop.
“Government has no higher responsibility than insuring economies have an adequate level of demand,” he says.
What? Luring people to the mall is more important than protecting them from annihilation? Is it more important that people buy more toaster ovens and more super-size bottles of cherry cola than that they are able to live in peace in a just and honest society?
Apparently.
But how can government increase demand? How can it make people richer and more confident? Of course, it can’t. Government is not a producer. So, it can’t make people wealthier.
All it can do is to bamboozle them. Summers quotes the Great Bamboozler himself, John Maynard Keynes: “[The] public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money.”
Let’s see. The feds borrow $5 from Peter to give it to Paul. How is demand increased?
“Peter was a rich guy,” you say. “He wasn’t going to spend it. Better to give it to Paul.”
Well, we don’t know what Peter was going to do with his money. He might have invested it to create more jobs and output. Or he might have spent it himself. Either way, we’d be better off than if he lent it to the feds. We know what they do with it. Maybe it ends up in the pockets of a rich lobbyist in Washington. Maybe it is used to build a drone that crashes in the desert. Nothing good comes from it.
The other demand-increasing choice is to print the money. Hey, what kind of money is this that you can just create on a printing press?
We’re not going to dignify that question with an answer, dear reader. We all know what kind of money it is. It’s make-believe, counterfeit money, the kind of money that you’d go to jail for creating on your own.
And you’d deserve to go to jail. So do the feds who gin it up.
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