Boreout

I guess I have to apologize for the lack of posts lately.

The main reason being that things are boring, especially in all things economic. We’re still talking about the same-old same-old that we have been talking about for more than three years (or perhaps the last three hundred) without any sign of understanding. So don’t get me wrong here. It is not boring in and of itself. It is rather boring as in the old saying that war is filled mostly with boredom interspersed with short moments of terror.

Paul Krugman put this quite nicely in his recent posts about the British Debt History, Irving Fisher and German Current Account Suplus.

And those of you not reading my comments on the Economist will have missed this one:

There are ways in which the Euro could be rescued without the dreaded “transfer union” (even though I don’t think it is avoidable in some large degree, as this is what European solidarity demands and has in fact always been). The most important point is simple: *LET* the indebted countries pay off their debt, meaning that you must first create the necessary conditions for this to happen.

Debt can only be paid off through economic activity. Services and goods must be *exported* from the periphery to the core countries with which they are indebted. The money thus earned can be used to pay off debt. Which is intuitively clear. Periphery countries got goods and services from the core, so now they should deliver some themselves in order for the economic equilibrium to be restored. THAT is the fundamental reason why things went haywire. The core countries turned the European economic unit into one large exercise on how potlatch can turn foul.

If you continually move goods from A to B that are paid for with credits given from A to B, then this stream of goods is *not* made good by the payments, because the debt remains. The equilibrium is only achieved once goods (and services etc.) are also moved back, making good for goods and services rendered. That is why economics isn’t bullocks – it makes barter practical, but that doesn’t mean it does away with the principle of reciprocity that barter is based on.

The core countries still insist that exports are *their* privilege and that their debts must be repaid. They can only have one of the two. Keep the export privilege and kiss good-bye to the debt-obligations (and expect the same to happen to further debt handed out under your export privilege). Or forget about your privilege, come to terms with the fact that raising wages makes you “less competitive” but strengthens both your domestic economy and the people living in it – while giving debtor countries the opportunity to sell your people goods and services, enabling them to repay their debt.

The reason why German bonds are no longer selling is the simple fact that all of Germany depends on exports to countries that Germany (to large part) has driven to ruin. And markets realized that this cannot help but ruin the German economy itself rather sooner than later.

I must admit that this is not an original thought. The problem of debts having to be paid back but facing limitations in the way how to pay them back without ruining the economy of the country by which it is being paid or to which it is being paid was very well described by John Maynard Keynes in his 1919 book “The Economic Consequences of the Peace”.

One would think that we have learned from our past mistakes. But things have gone bad in a way that I think was unpredictable and is, in any case, ridiculous. If there was a point when you would expect economics to go haywire, it was certainly during the high-pitched ideological clash of the Cold War. But if anything, this was the time when some of the most reasonable developments began. The social market economies of Europe, the middle class society in the USA and the idea of a humane communism (although it was crushed by the Soviet Union). Only China was in fact caught in the extremes of the Communist ideologie.

Ever since the 1980ies, things changed. The Chinese, horrified the by excesses of cultural revolution and the “great leap forward”, developed a pragmatic approach based on observation, foreign experience and experiments in implementation. It was about getting things to work not ideology.

At the same time, having become overconfident by the economic success of the past, the west has become overconfident. At the end of the cold war, they sparked the worst economic crisis the world has ever seen. And I’m not talking about our current quibbles, but the demand of immediate privatization and a free-for-all capitalism in the former Soviet Union. It killed milions. Life expectancy in Russia dropped by six years when the economic system collapsed.

The economy was centrally planned (in lots of different such “centers”) to take advantage of economies of scale and local factors (as well as political ones) – not to make money. In a way, it is organically grown, although in a very different pattern than you would see in a market economy. It’s like breaking up a large corporation (itself a centrally planned economic entity) and that henceforth declaring each part of it must be a profitable business or go bust. But it should be obvious, that each part is needed for the corporation to function. It goes without saying that centrally planned economic entities alone have a very hard time to satisfy the needs of the consuming population (just ask Americans what they think about AT&T), but they were still better than the smoldering ruins left behind after the imposition of free markets.

The less said about what happened since the 1980ies in Europe and the USA the better, it would only be another boring repetition.

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One thought on “Boreout

  1. It certainly seems to be an odd kind of government planning, in Western Economies, a kind of herd group think akin to economic suicide, for all of them to cut spending and increase taxes thereby reducing the net spenders of last resort, particularly for the Monetarily Sovereign Governments; namely the UK, US and Japan (I note plans cuts in spending for the first time in six years, again, despite the economic downturns caused by their previous VAT raising ‘experiments’) that create money by spending it and destroy it by taxes, without any need to ‘borrow’ it’s own money back, unless they don’t want a Naturally Zero Interest Rate Policy!

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