If you read the financial media in the last days you must come to the conclusion: Damn, the sky is falling. A hysterical media is producing an avalanche of bad news: A debt crisis in Europe, Japan and USA. Deficits are totally out of control. Hyperinflation is imminent. 2.5 trillion US$ just vanished (Translation: The financial ruling class lost nominal wealth. Which is truly bad.) So the stories go. But here’s the good news. I will walk through one of this articles so you must not and afterwards we can hopefully put our worries to rest. The article was written by some Patrick Bernau — a neo-liberal minion — in the FAZ. It is titled “Börsenchaos: Die Welt vor der Rezession” (German) [Stock Market Chaos: The world on the brink of recession] So what worries our author?
The world economy is on the brink … The crisis currency gold soars … The share prices tumble … 2.5 trillion US$ lost … S&P downgraded the US … So who’s to blame? According the DB chief economist Thomas Mayer: The European sovereign debt crisis. The US sovereign debt crisis. And the prospect of weaker growth. (I won’t translate the whole article but will try to summarize the arguments.)
Is the world economy on the brink? Maybe. But if so we can put most of the blame for this calamity to economists, politicians and know-nothings like Bernau. In other words if the world economy tanks this crisis is self-inflicted. For a start gold isn’t a currency. It is a commodity. The gold market is very small. If some people move into the gold market prices will soar exceptionally because the market is so narrow. The gold price isn’t a good indicator for what is going on. US treasury yields are.
Share prices tumble and 2.5 trillion US$ of nominal wealth are lost? Who cares? We must differentiate between primary and secondary stock market transactions. In the secondary market financial assets are just shuffled around between private sector agents. Someone gains and someone loses nominal wealth. No big deal for the real economy. Corporations used their exceptional profits to buy back shares and shore up income for the captains of industry. And now they lost big? I’m so sorry.
S&P downgraded the US? So what? Moody’s did this with Japan several times. Let us remember: In November 1998, the day after the Japanese Government announced a large-scale fiscal stimulus to its ailing economy, Moody’s made the first of a series of downgradings of the Japanese Government’s yen-denominated bonds, by taking the Aaa (triple A) rating away. By December 2001, they further downgraded Japanese sovereign debt to Aa3 from Aa2. Then on May 31, 2002, they cut Japan’s long-term credit rating by a further two grades to A2, or below that given to Botswana. And what happened to bonds? Nothing. Zero. The bond market ignored Moody’s idiots.
Which brings us to the main culprits. All these sovereign debt sinners. Let me be clear: There is no such thing as a sovereign debt crisis in the US and the Eurozone. The US debt crisis? A hoax. The US government is fully sovereign in its FIAT currency and can always pay back interest and principal of its debt. You don’t believe me? Maybe you believe this guy Warren Buffet: “Think about it. The U.S., to my knowledge owes no money in currency other than the U.S. dollar, which it can print at will. Now if you’re talking about inflation, that’s a different question.” Question answered? I will revert to the different question of inflation shortly.
What about the Eurozone? It is clear that members of the Eurozone aren’t sovereign in their currency. Thus they face a solvency risk. This is not good. But nevertheless I wouldn’t term this a sovereign debt crisis. The fundamentals of Europe speak a very different language: GDP and aggregate debt/deficits. And in principal we have the equivalent of the FED which is the ECB. I would term it a constitutional crisis in the Eurozone. We’ve put the cart before the horse. By introducing a common currency without spending one second what this means in constitutional terms. And now the shit hits the fan. Thus we must come back to the original question and address the constitutional shortcomings of the Eurozone one way or another. Sorry guys. No way out. We must bite the bullet and discuss the European project.
Back to the question of inflation. Bernau is of course also worried about inflation. Every serious neo-liberal pundit worth his blood money is. But the question never addressed by them is: who will eventually suffer from inflation say 4-5%. It is the rentiers. Now people like Bernau will of course counter such an argument by waxing lyrically about the little saver and his eroded savings. As a matter of fact there are not many little savers left due to 40 years of neo-liberal policy. And the few who are left can be easily compensated by the government for their eroded savings. Granted. Germany is a particular neurotic patient in regard to inflation. The Weimar episode seems to be part of the German genetic code meanwhile.
The article continues with the next straw man. What would a good article be without any reference to Carmen Reinhart and Kenneth Rogoff and “This time is different” plus its derivatives. An epidemic in the German and international media. The pernicious worldwide marketing of Rogoff made this book somehow to the modern bible of conservative and neo-liberal anti-social “experts”. What would you say if I publish a book about child mortality in Europe over the last 700-800 years and come to the conclusion: this time isn’t different. You would call me an idiot. Anybody who argues that human affairs haven’t changed over the course of 700 years is plain simple crazy. “This time is different” is an interesting historical account but offers ZERO insights for the world and our monetary arrangements after Bretton Woods collapsed in 1971. For a thorough debunking of the story Bernau might want to visit this piece of Robert Shiller.
Finally Bernau claims that debt simply does not vanish. Which is true for private sector debt. Your liabilities are someone elses assets. But once the debt is moved from the private sector balance sheet to the government sector balance sheet things look very different. Then the claim that debt does not vanish is bullshit. Sovereign debt is actually never paid back. With proper policies it simply goes away. Again you don’t believe me? Fine. Let us consult the mainstream
socialist economist Willem Buiter:
The last time the US sovereign radically lowered the ratio of public debt to GDP was between 1946 (the all-time high for the Federal debt burden at 121.20 percent) and 1974 (its post-World War II low at 31.67 percent). Arithmetically, of the 89.53 percentage points reduction in the Federal debt burden, inflation accounted for 52.63pp and real GDP growth accounted for 55.86 pp. Federal surpluses accounted for minus 20.51pp.
Summary: Say it loud with me: There is no sovereign debt crisis. This is an artificial problem made up by the rentiers and their willing servants. And yes — Patrick Bernau is one of them. But there are many real problems. Food in Somalia. Immigrants dying on the coast of Europe. Unemployment in the West. And on and on. So if you want to worry please start to worry about the real problems. Money is not scarce. Real things are. Money is an artifact we can produce for nothing by clicking on keyboards and marking up/down some digital numbers on a balance sheet.