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
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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.