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"Where would be if we didn't have rules?"
"FRANCE!"
"And where would we be if we had too many rules?"
"GERMANY!"
~ UK comedian Al Murray, the (very British) Pub
Landlord
" The Great Depression was caused by the Gold Standard," reckons NYU
professor and professional media star, Nouriel Roubini.
Like pretty much everyone else, Roubini
thinks the Gold Standard's tiresome rules brought about that cataclysm. Those
manacles meant having to swap paper for bullion every time investors and
savers got jumpy about the size of your deficit, your debt or your money-printing.
Really, what an idea! So 80 years later, the Gold
Standard is deader than punk. Yet here we are in another depression again.
What's caused this catastrophe if gold was to blame
before?
"First, it is Europe itself that is in crisis. Not
finance. Not the economy. Europe. Its culture. Its genius. Its unconscious
conscience. Its immemorial and its memory. All that makes up its bases and
its origins. Its heart, that beats more and more faintly. Its soul. Its
common and hidden grammar. The distinction, that it
invented, between law and right. Or between man and citizen. The articulation, that is its own, of multiple forms of the
Multiple and of the unique name of the One..."
There's more of this - much,
much more - from French "superman and prophet" (© Vanity
Fair) Bernard Henri Lévy. A "vain,
pontificating dandy" according to the professional pie-thrower who's been attacking Lévy's enormous hair since
the mid-80s, the nouveau philosophe "[has] no equivalent in
the United States," according to his biog' on
the Huffington Post. Which is lucky for the US.
Because in France, Lévy "is accorded
the kind of adulation that most countries reserve for their rock stars,"
says the UK's Guardian.
Scarier still, he's best-friends-forever with French
president Nicholas Sarkozy. Most scary of all, Lévy
would in fact make a clear and sensible point, if only he swapped the word
"Europe" for "money" above. Deflation is a
"deterioration of the monetary standard" just as much as inflation,
as sometime Reagan advisor and WSJ editor Jude Wanniski
noted in 1982.
No less disastrous for everything built on the grammar, culture and genius of
money than its apparent opposite, deflation is "characterized by falling
prices". And as money rises in value, "it
affects more and more debtors in global Dollar contracts" - the Dollar
still being money today, and the only cash that counts in a panic.
Research shared with BullionVault
today shows that, in 8 out of 10 of the best weeks for equities since 2007,
the Dollar fell on the currency market. It rose in each of the worst 10 weeks
for stocks. You might have noticed this mechanism gutting your portfolio
again this month, as well. But what of the Dollar's sometime challenger for
reserve currency status?
"The Euro represents the mutual confidence at the
heart of our community," declared Wim
Duisenberg, then-president of the European Central Bank, when accepting the Charlemagne
Prize on behalf of, well, on behalf of the Euro currency itself, in 2002.
"It is the first currency that has not only
severed its link to gold, but also its link to the nation-state. It is not
backed by the durability of the metal or by the authority of the state."
Lacking those two legal attributes - attributes held by
pretty much all money ever until the mid-20th century - the Euro did have
rules, however. "In order for [monetary union] to function
smoothly," as the European
Council still says today (just above a warning that "this page is
under revision"), "member states must avoid excessive budgetary
deficits. Under the provisions of the Stability and Growth Pact, they agree
to respect two criteria:
"A deficit-to-GDP ratio of 3% and a debt-to-GDP
ratio of 60%."
Now, if everyone had stuck to those rules, perhaps the
Euro would have avoided this crisis. (Not adding the debt of your entire
banking sector to the deficit, as Ireland did in 2008, would have helped
too.) But nobody kept to 3-and-60, because those rules were just rules, and
they were there to be broken.
"If a Member State exceeds the deficit ceiling,
the excessive deficit procedure (EDP) is triggered at EU level. This entails
several steps - including the possibility of sanctions - to encourage the
Member State concerned to take measures to rectify the situation."
Tough talk! The "possibility" of sanctions
would "encourage" miscreants to "take measures", or so
the Growth & Stability Pact pretended. Yet as we wrote a year ago, nearly
12 months to the day, the "ghost
of the Mark" (as Nobel-winning economist and 'father of the Euro'
himself Robert Mundell called it) saw the Euro's
strict rules - learnt and applied during 50 years of Teutonic discipline -
over-run at every turn.
There has been resistance, of course. But it was awful
late in coming. German ECB member Axel Weber stood down in February 2011,
proclaiming discomfort at the majority of his central-bank colleagues voting
to buy government bonds to shore up Athens, Dublin and Lisbon. Yet this was
over nine months after the first Greek deficit crisis, and a mere eight years
after Germany and France breached the 3-and-60 rules themselves. Where were
his principles when breaking the rules didn't matter?
Six months after Weber, the ECB's chief economist
Jürgen Stark also made a principled stand, announcing that he would
leave his post, two years early, in December. Why? Because "If the
central bank starts to finance governments, it decreases the incentive for
governments to address the root causes of the crisis," as Starck told an interviewer last week.
"It is not so much that bond purchases will lead
to inflation at this particular moment. The ECB regularly draws down the
liquidity again; it later soaks up the money spent. What is important and
problematic is that the interest rate on government bonds is affected by the
purchase of bonds and thus has a fiscal effect."
Buying bonds, in short, means that the independent ECB
policy wonks "influence the conditions under which governments can
borrow," says Stark. "This is absolutely not our job." Given
that everyone knows the rules are being broken, of course, "There is an
open discussion about extending our mission," says the ECB man.
"This not only affects our independence, it threatens it.
"Principles apply...Rules are there to give
direction, especially in times of crisis."
How brave, insightful and utterly naïve! Tilting
at windmills, Stark misses the one true lesson of the Great Depression's Gold
Standard just as badly as Nouriel Roubini does. Hasn't anyone got a library card these
days?
"The advantage of gold, in theory, is that it
affords a safeguard against the dishonesty of Governments," writes
British philosopher Bertrand Russell in a dusty tome from 1935. "This
would be all very well if there were any way of forcing Governments to adhere
to gold in a crisis, but in fact they abandon gold whenever it suits them to
do so."
Replace the word "gold" with the words
"Europe's Growth & Stability Pact", and you'd think it was the
end of November 2011. And just like the Euro's would-be saviors today - or at
least, just like those world-improvers who don't believe rules should get in
the way - Russell thought the only solution to mankind's economic problems
was "an international Government". That way, tiresome democracy
would be made irrelevant as expert technicians did the best for all in all
possible ways.
Now voters in Greece, Ireland, Portugal, Spain and most
plainly Italy have shown they can't handle democracy - not in a rules-based
currency system. Time and again they have voted for people and policies which
now make the rules aimed at defending the State's independence impossible.
Little wonder their sovereignty's now vanishing, along with the rules.
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