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26/04/12
Keith Weiner
Dear
Professor Keen,
I am a
monetary scientist and a fan of some of your work. I admire the courage
it took for you to call the Australian housing crisis as early as you did,
and to make a bet that you would be right. But I came across this video
(http://www.youtube.com/watch?feature=player_embedded&v=aqY_DYtp60s#),
wherein
you say:
"...when
a crisis hits, European governments will be forced into imposing austerity on
countries that desperately need a stimulus."
With
all due respect, Dr. Keen, isn't this the same thing as saying that,
"when the delirium tremens hits, the medic will be forced into imposing
sobriety on a patient who desperately needs a fifth of vodka?"
My
analogy is imperfect in that the European Union is hardly a medic.
They
are the source of both the free vodka and the motivation to drink it to
excess.
There
are many problems with the European Union. From a fiscal perspective,
one can simply look at the tragedy of the common greens.
Every
country's politicians have a perverse incentive to outspend the other
countries (with which spending they buy the votes of their electorates).
From a monetary perspective, they have the same flaw that the Federal
Reserve has in the USA.
The
central bank holds assets to balance its liabilities. The assets are the
bonds of the government, and the liabilities are the currency. But
unlike in the USA, the euro is not backed by a single government's bonds but
by the bonds of diverse and numerous member countries. It was a
mechanism to (temporarily) prop up the lower credits of countries like Greece
with the higher perceived credit of Germany, but ultimately to undermine the
credit of Germany by forcing Germany to take on the liabilities of Greece.
We shall see how it plays out, but there are no good outcomes that this
economist can see.
The
only true solution to the increasing frequency and magnitude of financial crises
is to go to the root. In a system based on irredeemable paper money, there is
no mechanism to extinguish debt. So debt is merely pushed around until the
inevitable crisis. In addition, irredeemable paper money systems have
two other intractable problems: unstable interest rates and unstable foreign
exchange rates.
In
their desperate attempts to "hedge" these un-hedgable
risks, the banking system creates endless derivatives, and derivatives of
derivatives. And this leads to the other problem. Markets
increasingly become the casinos for speculators. Speculators push
interest rates and foreign exchange rates to even greater extremes.
And
with every fluctuation, real damage is done to the real businesses that
produce the goods and services necessary to feed us and keep our economy
alive.
We need
a gold-based monetary system.
Sincerely,
Keith
Weiner,
President
of the Gold Standard Institute USA
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