For the past few years, the self-styled 'Economics profession' has faced a direct challenge from the students who formed the Post-Crash Economics Society in Manchester. Their network is growing and spreading worldwide. Several years before that society emerged from classroom frustration at the real-world irrelevance of much that the professors asserted, George Soros - the man largely responsible for Britain having to crash out of the European Exchange Mechanism [ERM: forerunner to the euro] when John Major was the prime minister - funded an institute for new economic thinking which has dissipated the founder's concept by engaging Economists who have released no significant alternative thought. In recent days a well-funded group of recognised Economists [including a couple of holders of the pseudo-Nobel prize] has been set up in recognition of the fact that Economics as taught by the Econocracy does not offer even a sensible explanation of how modern mass poverty has occurred. There might be a slight hope that this group may provide some new insight that is of practical utility; but the experience of similar initiatives is not encouraging.
There is a widely-recognised perception among the general public and much of the commentariat, that formal Economics does not address the issues of living humans in the real world; but that has not led to mass resignations by professors who have become ashamed to draw salaries for preaching irrelevant dogma. Nor have the professors gone into purdah to think anew and recast their propositions: no, they continue to assert them with absolute confidence in the 'scientific rigour' of their abstractions. There is a widespread assumption that groups like Soros' institute and the new 'commission' might just add something to the existing corpus of Economics that will enable the professors and their students to carry on teaching and learning the same stuff; to which a new wrinkle will be added that vindicates the mass of the subject and resolves the outstanding issues without anybody having to eat humble pie.
That will not happen.
Meanwhile, practical politics is bedeviled by the impact of Economics upon it. The rise of 'populism' in the USA, in Europe and in other parts of the world is largely associated with the failure of economic policies based on established formulas that have been formed with the participation of the Econocracy. It has been manifest in the USA for almost three decades that redundant steel workers in the rustbelt states do not mutate into migrants who mystically acquire the skills to gain employment in silicone valley that pays them all enough to get new houses [at Californian prices] and live a west-coast lifestyle. That is what the professors say should happen in a fully-fledged free-trading economy; but it does not happen. People have families and associations and familiar landmarks in the places where they [or their parents] have been settled since when times were good: so they mostly stay there. The brightest graduates, the prettiest girls and other identifiable groups who have characteristics that support social mobility may move on in significant numbers, but they are a minority; and the core population will be left in misery awaiting a saviour: who appeared in the US rustbelt in the highly improbable shape of Donald Trump. Trump will fail, as both Bushes and Obama and even Clinton failed, to turn round the march of economic events and the persistence of people in refusing to behave as textbook specimens.
In the UK the practical irrelevance of Economics has become acute, as the head-banging Brexiteers [mostly in the Conservative party] cite the views of extreme Econocrats: such as Patrick Minford, a Thatcher guru who has suddenly returned to prominence with his confident assertions about how good the world will be for the UK if we leave the European Union with no deal. Minford and his little friends have claimed that the British economy could grow by some 7% if all the restraints [and advantages] of membership of the Union were simple sloughed-off. People who try to form a mature and balanced view of the probable impact of Brexit see summaries of these assertions, and the fact that their advocate is Professor Minford: and they wonder whether they should just dismiss his propositions; might he be right? Might the UK be passing-up a great opportunity if we try to stay close to the European Free Trade Area?
The answer is, of course, on the ground all over the UK. The factories and mines and dockyards that were abandoned at the behest of the Thatcherites may have been prettified into tourism sites like the Titanic area of Belfast; but even there a significant proportion of the consumer-facing staff on minimum wages are immigrants who came to the UK prepared to do such work [and they are mostly better at it that taciturn under-educated Brits]. There is no well-paid long-term highly-productive employment for the rising generation in any of the despoiled regions that were once world-leading hives of industry. The formula didn't work in the nineteen-eighties or the 'nineties: and it is even less likely to apply to the real world now. if the headbangers win, mass misery is the only probable outcome: and the growth in new, longer-term non-employment will be well over 7% per year for several years.
Showing posts with label ERM. Show all posts
Showing posts with label ERM. Show all posts
Monday, 23 October 2017
Thursday, 24 November 2011
Not Another Crisis, Surely!
On this date - November 23 - 1714 the River Thames froze right over by London Bridge and a few weeks later a Frost Fair could be held on the ice. To contemporary Britons in 2011 such an event is unthinkable, at the end of a mild autumn. But the fact is that extreme events occur in nature frequently; and humans are just part of nature so we should expect extreme events to occur in society and in the economy seven though most of us cannot anticipate what extreme events will occur
.
Crises are not only foreseen, by at least a percipient minority of the population [including speculators who both anticipate and exacerbate such events], but many unexpected consequences stem from deliberate actions by worldly-wise decision takers. The present crisis in the eurozone was inbuilt into the system from its foundation; and it was foreshadowed by the behaviour of the members of the ERM - the exchange rate mechanism - that preceded the foundation of the euro. Regardless of what German ministers said, in 1992 the President of the Bundesbank actively encouraged speculators to bet against the British pound with such effect that Britain had to withdraw from the mechanism. Germany thereafter acquiesced in the lies and deceit by which the weaker states from the ERM were enabled to join the euro, once the UK was safely excluded. The Germans hoped that the rules of the EU and the operation of the eurozone would impose sufficient discipline on the member states to ensure that the zone became more integrated and stable. Now Germany is in dispute with France and most of the other still-viable eurozone countries about the next steps that are needed to 'save' the euro. The majority of eurozone members want Germany to guarantee the debts of all the others: the Germans refuse to contemplate any such policy, that would threaten their hard-won recovery from the devastation of 1945. The Germans are right to resist; but they do not really understand why they should resist. That is because their universities long ago ceased to teach sound Political Economy, which rests on just two Laws and one Principle. The Law of Diminishing Returns and Malthus' Principle of Population can be the subject of other blogs: the Iron Law of Wages has several times been mentioned previously and is again the central fact in this discussion. The Law says that no economy may consume more than it produces [net] over a series of years without catastrophic consequences. In controlling its economy every state must seek to limit the total that its people consume plus what is invested by individuals and by firms and by the state to what that economy produces. It need not limit consumption to goods and services that are provided within the economy: it can swap items in international trade, and thereby its exports can pay for imports both for consumers' and for firms' use. It is even permissible in some years to have a trade deficit, provided that is offset by balancing surpluses in other years.The founders of the euro refused absolutely to test whether candidates for membership were in breach of the Law: and thus the failure of the system was inevitable.
The US, British, Irish, Greek and other economies have systematically devoured more than their real national product for several decades: the Germans and a very few other European countries have not been profligate in that way. The present German government appears to be convinced that the recalcitrant states within the eurozone can be commanded to live within their means, and repay debts, over a long enough period to solve the crisis without Germany having to bale-out anybody else to its own detriment. This would require strict discipline to be applied by the indigenous governments over public and private spending, and rigorous tax collection. The prescription would have to be imposed for two or three entire decades without remission. Meanwhile the ridiculously self-important President of the EU Commission has demanded that his unaudited, corrupt bureaucracy should be empowered to oversee the budgets of the member states to ensure that this demand is met: a pretension that Germany treated with the contempt that it deserved.
The eurozone is in crisis: and it will break up.Germany may bounce out of the top, with a select group of viable satellites including Austria, Slovakia, Finland, France [if they recognise the necessity of taking the only good offer in town] and maybe post-Berlusconi Italy: this group could create a new super-euro. Alternatively the weakest euro economies could fall through the bottom of any safety net and be left to work out their own salvation. Either way the fragments of the eurozone will find their own level in the global money system and within the European Union. Meanwhile both France and Germany are telling Britain's Prime Minister to shut up interfering in their business as the UK opted not to participate in the euro. Cameron is sufficiently vain and silly to persist in telling others what to do, while he has had negligible impact on Britain's vast propensity to break the Iron Law [to which he remains oblivious]. By being outside the euro Britain has escaped one manifestation of the crisis, but along with the USA it will have to face up to a catharsis comparable with that to which the majority of eurozone countries are now just beginning to accept. Whether democratic institutions, which cradled the crisis, can survive the catharsis only time will tell.
I recognise that this has been a rather obscure presentation leading to a plain and simple conclusion. It aims to illustrate the mental confusion that prevents machine politicians form a clear understanding of the conditions in which they are attempting to capture and control.
.
Crises are not only foreseen, by at least a percipient minority of the population [including speculators who both anticipate and exacerbate such events], but many unexpected consequences stem from deliberate actions by worldly-wise decision takers. The present crisis in the eurozone was inbuilt into the system from its foundation; and it was foreshadowed by the behaviour of the members of the ERM - the exchange rate mechanism - that preceded the foundation of the euro. Regardless of what German ministers said, in 1992 the President of the Bundesbank actively encouraged speculators to bet against the British pound with such effect that Britain had to withdraw from the mechanism. Germany thereafter acquiesced in the lies and deceit by which the weaker states from the ERM were enabled to join the euro, once the UK was safely excluded. The Germans hoped that the rules of the EU and the operation of the eurozone would impose sufficient discipline on the member states to ensure that the zone became more integrated and stable. Now Germany is in dispute with France and most of the other still-viable eurozone countries about the next steps that are needed to 'save' the euro. The majority of eurozone members want Germany to guarantee the debts of all the others: the Germans refuse to contemplate any such policy, that would threaten their hard-won recovery from the devastation of 1945. The Germans are right to resist; but they do not really understand why they should resist. That is because their universities long ago ceased to teach sound Political Economy, which rests on just two Laws and one Principle. The Law of Diminishing Returns and Malthus' Principle of Population can be the subject of other blogs: the Iron Law of Wages has several times been mentioned previously and is again the central fact in this discussion. The Law says that no economy may consume more than it produces [net] over a series of years without catastrophic consequences. In controlling its economy every state must seek to limit the total that its people consume plus what is invested by individuals and by firms and by the state to what that economy produces. It need not limit consumption to goods and services that are provided within the economy: it can swap items in international trade, and thereby its exports can pay for imports both for consumers' and for firms' use. It is even permissible in some years to have a trade deficit, provided that is offset by balancing surpluses in other years.The founders of the euro refused absolutely to test whether candidates for membership were in breach of the Law: and thus the failure of the system was inevitable.
The US, British, Irish, Greek and other economies have systematically devoured more than their real national product for several decades: the Germans and a very few other European countries have not been profligate in that way. The present German government appears to be convinced that the recalcitrant states within the eurozone can be commanded to live within their means, and repay debts, over a long enough period to solve the crisis without Germany having to bale-out anybody else to its own detriment. This would require strict discipline to be applied by the indigenous governments over public and private spending, and rigorous tax collection. The prescription would have to be imposed for two or three entire decades without remission. Meanwhile the ridiculously self-important President of the EU Commission has demanded that his unaudited, corrupt bureaucracy should be empowered to oversee the budgets of the member states to ensure that this demand is met: a pretension that Germany treated with the contempt that it deserved.
The eurozone is in crisis: and it will break up.Germany may bounce out of the top, with a select group of viable satellites including Austria, Slovakia, Finland, France [if they recognise the necessity of taking the only good offer in town] and maybe post-Berlusconi Italy: this group could create a new super-euro. Alternatively the weakest euro economies could fall through the bottom of any safety net and be left to work out their own salvation. Either way the fragments of the eurozone will find their own level in the global money system and within the European Union. Meanwhile both France and Germany are telling Britain's Prime Minister to shut up interfering in their business as the UK opted not to participate in the euro. Cameron is sufficiently vain and silly to persist in telling others what to do, while he has had negligible impact on Britain's vast propensity to break the Iron Law [to which he remains oblivious]. By being outside the euro Britain has escaped one manifestation of the crisis, but along with the USA it will have to face up to a catharsis comparable with that to which the majority of eurozone countries are now just beginning to accept. Whether democratic institutions, which cradled the crisis, can survive the catharsis only time will tell.
I recognise that this has been a rather obscure presentation leading to a plain and simple conclusion. It aims to illustrate the mental confusion that prevents machine politicians form a clear understanding of the conditions in which they are attempting to capture and control.
Thursday, 10 November 2011
Markets and Memories
Twenty years ago Britain was struggling to retain membership of the European Exchange Rate Mechanism [ERM]. Ministers railed against pessimistic forecasts from market analysts, whom they stigmatised as 'teenage scribblers' - people whose exposition of the current market situation was uninformed by memories of previous difficult periods for the value of the British pound. The struggle was lost: Britain had to withdraw from the ERM and George Soros came away from his speculative involvement as a much richer man.
Italy stayed within the ERM: as a very specially privileged member. Under the rules of the System the other member countries had to take action to ensure that the market 'value'of their currencies remained within 2.5% of the median value of all the members' currencies: except the Italian Lira which was allowed to deviate from the median by 7.5% [and was informally allowed to get worse than that]. So the strongest currency - often the German Mark - could be 2.5% above the line, while Italy was [officially] 7.5% below: that was a 10% gap in Italy's favour.
It was therefore to be expected that when the Euro was created the other members of the old ERM club were habituated to turning a blind eye to detailed deviation by Italy from the strict entry criteria that were notionally imposed. Given that Italy was allowed to do this, the Greeks considered themselves licensed to take the trickery further. The manipulators of 'The European Project' carried with them huge optimism bias. They convinced themselves that all would be best in the best of all possible Europes if an all-inclusive Euro drove forward continental prosperity.
The teenage scribblers of 2011 have no significant historical awareness and no relevant understanding; consequently they have advised their clients to make the Eurozone situation much worse. When the dust has settled on the slowly developing crisis of 2007 to 2014 the memory will fade; and the next panic will collapse .
Germany needs an explanation for Hitler. One of the strongest is the idea that the hyperinflation of the early nineteen twenties caused the economic and social chaos that made even Nazism seem preferable. So millions of Germans are well primed to vote against any policy that could lead to excessive inflation, including 'quantitative easing' by the European Central Bank. Hence Chancellor Merkel has stood out against the ECB following the line taken by the US Federal Reserve and the Bank of England. So in this context selective historical recollection is of very dubious value; but it is very powerful. Whether or not it is more powerful than 'the markets' we will son see.
Italy stayed within the ERM: as a very specially privileged member. Under the rules of the System the other member countries had to take action to ensure that the market 'value'of their currencies remained within 2.5% of the median value of all the members' currencies: except the Italian Lira which was allowed to deviate from the median by 7.5% [and was informally allowed to get worse than that]. So the strongest currency - often the German Mark - could be 2.5% above the line, while Italy was [officially] 7.5% below: that was a 10% gap in Italy's favour.
It was therefore to be expected that when the Euro was created the other members of the old ERM club were habituated to turning a blind eye to detailed deviation by Italy from the strict entry criteria that were notionally imposed. Given that Italy was allowed to do this, the Greeks considered themselves licensed to take the trickery further. The manipulators of 'The European Project' carried with them huge optimism bias. They convinced themselves that all would be best in the best of all possible Europes if an all-inclusive Euro drove forward continental prosperity.
The teenage scribblers of 2011 have no significant historical awareness and no relevant understanding; consequently they have advised their clients to make the Eurozone situation much worse. When the dust has settled on the slowly developing crisis of 2007 to 2014 the memory will fade; and the next panic will collapse .
Germany needs an explanation for Hitler. One of the strongest is the idea that the hyperinflation of the early nineteen twenties caused the economic and social chaos that made even Nazism seem preferable. So millions of Germans are well primed to vote against any policy that could lead to excessive inflation, including 'quantitative easing' by the European Central Bank. Hence Chancellor Merkel has stood out against the ECB following the line taken by the US Federal Reserve and the Bank of England. So in this context selective historical recollection is of very dubious value; but it is very powerful. Whether or not it is more powerful than 'the markets' we will son see.
Friday, 23 September 2011
Crisis and Perspective
Without moving from my desk in 114 Batovce I can look down the village green past the baker's shop and the news kiosk to the church, surrounded by red tiled roofs; and beyond to the hills that mark the northern limit of the Danube Plain. In a short walk I can see the manifold evidence of an improved standard of life in the EU, NATO and [latterly] the eurozone: we have improved roads, restored buildings, an up-to-date supermarket and a useful general store that occupies the old Co-op premises. The veg man still sets up his stall three times a week, good local wine is between two and three euros a bottle and a half-litre of excellent beer in the pub costs less than one euro. We have an excellent local administration, led by a sensitive and intelligent Mayor. Economic growth is strong; and while unemployment is rising jobs are still being created in modern factories in the major cities.
Slovakia was emerging from the mire of communism - and still outside the European Union - when lying became institutionalised among the EU insiders; most obviously in the late 'eighties in the matter of the ERM [exchange rate mechanism], the scheme under which the currencies of member states were meant to 'converge' as a first step towards creating a common currency. If the exchange rate of any member currency moved to more than 2.5% above or below the average value of all the member currencies, the central bank and the government of that country had to take the necessary measures to bring the exchange rate back into conformity with the rules. There was a huge amount of fudging of figures: so although the range between the most divergent country above the average and the most divergent below the average was supposed to be a maximum of 5%, much higher diversion was tacitly tolerated. Not even that fudge could accommodate Italy, so the Italians were allowed a special range up to 7.5%: making the 'official' maximum divergeance between the lira and the currency furthest from it in strength 10%. Britain was a Johnny-come-lately into the system, tried to keep the rules with gold-plated rigidity, almost bankrupted the Bank of England in the process, and withdrew in ignomony in 1992.
The core EU countries then proceeded to create the common currency, the euro, on the understanding that the 'weaker bretheren' might not always be efficient in action or honest in their reporting of it. Member governments retained their power over taxation and spending policy, which they were supposed to exercise in accordance with the 'Growth and Stability Pact' so that the economic policies of the eurozone might converge and make the currency viable. Among the first to breach the Pact were France and Germany; and thereafter hypocrisy was institutionalised alongside making false returns and empty promises.
New members continued to join the euro, presumably hoping that there was enough validity in what was said in support of the system by the leaders of the major EU member states; and Slovakia was admitted on January 1, 2009.
Now the Slovaks have become pretty well aware of the rotten state of the EU. They presented the lowest turnout of any member state in the latest European Parliament election, and their parliament has hesitated to agree to any bail-out for profligate medacious south Europeans: they may still decide to stop any drain of their resources into the black hole created by the debts of the 'pigs' [Portugal, Ireland, Greece and Spain]. They are probably prepared to surrender more economic sovereignty to a strong and honestly-run eurozone [one national magasine a couple of weeks ago had a front cover asking 'IS THIS THE END OF SLOVAKIA?' as a sovereign state]; but that is a far cry from continuing to accept the pack of lies on which the currency was originally floated.
David Cameron is free to demand 'action' from the euro-states: but following the news from a village in one of the healthier member economies one becames aware of the seriousness of the issues that have to be resolved before the longer term future of the euro can be defined. On the same day [22/9/11], Cameron told the United Nations that they had a duty to oppose oppressive regimes that attacked their own people; and failed to mention Zimbabwe. That is the same sort of selective blindness as that which enabled European politicians and Brussels eurorats to con seventeen nations into accepting the euro: so, as usual, we have the pot describing the kettle as smoke-tarmished.
Slovakia was emerging from the mire of communism - and still outside the European Union - when lying became institutionalised among the EU insiders; most obviously in the late 'eighties in the matter of the ERM [exchange rate mechanism], the scheme under which the currencies of member states were meant to 'converge' as a first step towards creating a common currency. If the exchange rate of any member currency moved to more than 2.5% above or below the average value of all the member currencies, the central bank and the government of that country had to take the necessary measures to bring the exchange rate back into conformity with the rules. There was a huge amount of fudging of figures: so although the range between the most divergent country above the average and the most divergent below the average was supposed to be a maximum of 5%, much higher diversion was tacitly tolerated. Not even that fudge could accommodate Italy, so the Italians were allowed a special range up to 7.5%: making the 'official' maximum divergeance between the lira and the currency furthest from it in strength 10%. Britain was a Johnny-come-lately into the system, tried to keep the rules with gold-plated rigidity, almost bankrupted the Bank of England in the process, and withdrew in ignomony in 1992.
The core EU countries then proceeded to create the common currency, the euro, on the understanding that the 'weaker bretheren' might not always be efficient in action or honest in their reporting of it. Member governments retained their power over taxation and spending policy, which they were supposed to exercise in accordance with the 'Growth and Stability Pact' so that the economic policies of the eurozone might converge and make the currency viable. Among the first to breach the Pact were France and Germany; and thereafter hypocrisy was institutionalised alongside making false returns and empty promises.
New members continued to join the euro, presumably hoping that there was enough validity in what was said in support of the system by the leaders of the major EU member states; and Slovakia was admitted on January 1, 2009.
Now the Slovaks have become pretty well aware of the rotten state of the EU. They presented the lowest turnout of any member state in the latest European Parliament election, and their parliament has hesitated to agree to any bail-out for profligate medacious south Europeans: they may still decide to stop any drain of their resources into the black hole created by the debts of the 'pigs' [Portugal, Ireland, Greece and Spain]. They are probably prepared to surrender more economic sovereignty to a strong and honestly-run eurozone [one national magasine a couple of weeks ago had a front cover asking 'IS THIS THE END OF SLOVAKIA?' as a sovereign state]; but that is a far cry from continuing to accept the pack of lies on which the currency was originally floated.
David Cameron is free to demand 'action' from the euro-states: but following the news from a village in one of the healthier member economies one becames aware of the seriousness of the issues that have to be resolved before the longer term future of the euro can be defined. On the same day [22/9/11], Cameron told the United Nations that they had a duty to oppose oppressive regimes that attacked their own people; and failed to mention Zimbabwe. That is the same sort of selective blindness as that which enabled European politicians and Brussels eurorats to con seventeen nations into accepting the euro: so, as usual, we have the pot describing the kettle as smoke-tarmished.
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