I set off a bit of a firestorm on Twitter this afternoon when I said Greek Prime Minister Papandreou should not shrug off his duties to understand the EMU’s monetary system and his country’s economy onto his people via this referendum.  Steve Randy Waldman, Edward Harrison and several others took issue with the comment saying that Democracy should decide.  I actually agree.   But let me explain.

The role of elected officials within a Democracy or a Representative Republic is to understand complex issues and act on them at times when the country is in need of decisive leadership.   Papandreou has failed in this regard.  He has failed to understand what is ailing his country and he has allowed the northern nations to impose austerity on his country with the false belief that this would fix their problems.  This all leads back to a fairly basic misunderstanding of the EMU and its flawed construction.

The EMU is incomplete in that none of its members have the ability to create their own currency, but are interlocked in a single currency system whereby they are essentially currency users without a floating exchange rate.  This has resulted in inherent imbalances between trade deficit and trade surplus nations.  How can you rectify this imbalance?  It is my opinion, that there are only two reasonable options.  They must complete the union via the formation of a full fiscal union (as the USA did in 1790).  Or they must revert back to the system of old where each nation has its own currency and can utilize that currency in the manner that best benefits that particular nation.   My personal belief is that the USA has provided a fairly stellar model for this system and if implemented in Europe, could be quite beneficial to all involved.  Of course, there are the hurdles of history here and this is all easier said than done.

What’s clear from the last few years is that the leadership in Europe has continually misunderstood this system and its operational aspects.  Papandreou has had a fair amount of ammunition at times during this crisis, but his misunderstandings have led him astray.  He holds the fate of the EMU in his hands to a large degree.  This system has failed the Greek people and their leaders should understand exactly why it has failed them.   Their decision should never have been: “do we accept austerity or not”.  It should have been: “Dear Angela Merkel, we demand a full fiscal union or we are leaving.  The ball is in your court”.   In this regard, there has been a massive failure in Greek leadership.  And I believe Papandreou has displayed consistent ignorance and now cowardice in putting this decision in the hands of a public who cannot be expected to fully understand the complexity of the issues Greece confronts.  In other words, Papandreou has failed to execute the role that he was elected to perform.

Some have called me “elitist” for implying that the Greek public cannot be relied upon to understand these matters and formulate rational decisions.  This is, in my opinion, our unfortunate reality.  The monetary system is complex.  I have literally spent years of my life trying to understand all of this.  At many times, 24 hours a day 7 days a week.  It has been a full-time job.   And I still don’t understand it all.  And I think it is unreasonable to expect your average citizen to understand the breadth and scope of all of these issues.  After all, the average American thinks the USA is bankrupt despite the fact that this is categorically false (there’s no such thing as a sovereign currency issuer “running out” of money it can freely print and becoming insolvent in the same manner as Greece or a household).  Can we really expect the public to always make rational decisions about such complex issues?  Or should we demand that our elected officials understand these issues well enough to make competent decisions on our behalf?   I think it is absurd to believe that our leaders (elected or not) should not command a better understanding of these issues than your average citizen.  There’s nothing “elitist” in expecting that.  It should be common sense.   I expect Ben Bernanke to have a better understanding of banking than your average citizen.  I expect Tim Geithner to understand the impact of government spending.  I expect Barack Obama to understand the modern monetary system (or at the very least, have advisers who  can keep him well informed).  Is that too much to ask?

This is not your average political issue.  It is about the construction of the system that is going to influence every European citizen’s life for the rest of their life.  And while it might be idealistic to sit around and think that the average Greek citizen can understand these complex issues and formulate rational and logical decisions, I think that is a bit naive.  Instead, I believe that the average Greek citizen should elect officials with the understanding and expectation that they will understand these issues and act on them when needed.  This does not absolve the public of their responsibility.  In fact, it is the very essence of Democracy.  And if that leader should fail the people then he/she should be thrown out and replaced with someone that the public feels can better perform those duties.   This is how Democracy works.  We should have very high expectations of our elected officials (and those who are appointed by elected officials).  We should expect that they understand highly complex issues better than your average citizen so that they can be prepared to act in the best interest of those who elected them.

Greece’s leaders have failed the people.  But that does not justify Papandreou’s decision to absolve himself of his responsibilities and place such complex issues in the hands of the public.  Papandreou should have better understood these issues long ago and his failure to do so has directly led to the unrest in Greece.  He is unfit to serve his people.  But that does not justify his recent actions.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. No one in Europe understands what’s going on. This whole thing is going to blow up in their faces.

  2. Or they must revert back to the system of old where each nation has its own currency and can utilize that currency in the manner that best benefits that particular nation. Cullen Roche [bold added]

    Why should a nation have a single one-size-fits-all currency?

    But yes, I’d like to see Europe go back to individual currencies since that is a big step in the right direction of one national currency plus multiple private currencies.

  3. I read artice in the Daily Telegraph that more people drive the luxury car Porsche than people who earn more than 50K Euro per year. The Greeks made a deal to enter the EU just like someone joing the Mafia. There is no way out and the PM wants more concessions so he can pass the blame on someone else. You a typical politician…

  4. I think its a big mistake to centralize currency issuance. I also belie the US would do better if each state could issue its own currency!
    Centralization is never a good thing, its never a democratic process!

  5. I think Papandreou knows exactly what he has gotten into. His people want something that is impossible: They do not want the austerity, they want to default on the debts, BUT THEY WANT TO STAY WITH THE EURO!

    They wanna have their cake and eat it too. They don’t want no cheapo Drakma. You go figure:-)

    I think he is playing it brilliantly: let his crazy people clash with the EU will get him the best outcome it the end

  6. Interesting stuff. What i think influences this, though is the fact that previous referendums failed and the european project has in a sense been imposed on the people through the lisbon treaty. Politics have moved too far ahead of popular sentiment. While i agree that representatives are in a sense a buffer between the (at times) irrational desires of the people and rational action, the will of the people must nevertheless be factored into major decisions, once the representatives have tried their best to explain the issues involved to the people. My concern is that if the oligarchs in brussels keep ignoring the will of the people, you end up with an undemocratic system. Rationally, europe is already there.
    Shockingly, though – 72% of greeks want to remqin a part of the EU. I understand that the subsidized consumption fell good all these years, but i would have thought people are likely more reactive to the immediate circumstance. Regardless, the people should choose their future here. This is also the only way greece can carry out further austerity without being crippled by the protests.

  7. I read this somewhere else. 72% of the population wants to remain in the Euro, but 65% of them don’t want the austerity measures to pass. In other words, they have no idea what being in the EMU entails. This pretty much proves Cullen’s point. The citizens are unfit to decide where this all goes. Too bad the leaders are as well.

  8. The European leaders don’t want to turn their countries into Provinces – the euro is going to fail and likely in a disorderly fashion. It’s a political decision…that’s the worrisome part.

  9. I just extrapolated Cullen’s statement. How can a single currency fit an entire nation? It can’t.

  10. What a ridiculous argument. What you are saying re Greece is “Option A is austerity for us and Option B is you give us money forever”.

    Greece is insolvent. As are most of the eurozone countries. As, bluntly, is most of the industrialized world (and yes a currency issuer is bankrupt if they are issuing debt in a currency that will inevitably debase rather than be paid back). Fiscal union does not “solve” that problem. It merely encourages dishonesty about the problem so that those who aren’t insolvent will eventually get dragged down with those who are insolvent. Kick the can. Kick the can. Kick the can. Until all the lemmings go over the cliff together in a Thelma and Louise moment.

    And yes you are elitist. You are assuming that the people currently running the system actually know what they are doing. They DON’T. Pretty transparently to everyone but them. They are incompetent fools. Without a single exception. Including you (and me – if I were interested in running anyone’s life but mine).

    And that is precisely what Hayek said a long long time ago. You can’t run a centralized system. Because the knowledge/information to run it DOES NOT EXIST IN ONE PLACE. It NEVER will either. So in the end, those who are running the system always prattle on about lumpenstupidity in order to aggrandize power to themselves and cover up their own stupidity. And when that doesn’t work, then scare the snot out of them. Or hell start a war to divert attention and kill some of the lumpens.

  11. Now play that one through in your head. Papandreou demands full fiscal unification. The other governments agree. Now who decides on taxes and spending? I wouldn’t think the 11m Greek will get as many votes as the over 150m Citizens of the northern states. So just by that act he has ceded a lot of power to the rest of the Eurozone, while right now he’s holding all the cards:

    Greece can just default on all debts, violate the Maastricht agreement, get fined by the EU, and then not pay the fine. There is nothing in the contracts that allows the others to throw Greece out. He can also threaten to open the floodgates to all immigrants from Northern Africa. He only needs to figure out where else to get new money other than printing… It just might not be desirable to keep the Euro, but without debt they should be able to balance the budget and might even have room for stimulus.

  12. Wow. I am speechless. There should be an award for that. And I simply could not agree more because this gets right to the heart of all our issues. Globally, THIS is the problem. To expect that our leaders be — well, leaders — seems to be too much to ask for. And citizens are left to the task of taking the LEAST damaging path, in the event they can sort through all the crap. All the while working paycheck to paycheck (in the event they even have one), raise families, and in their SPARE time have to micro-manage our elected officials on complex monetary and fiscal policies.

    I can’t even sort through all my thoughts right now, but your words brought a tear to my eye. You know, it’s not nice to make girls cry.

  13. There’s an actual argument in all that, right? Tell me your solution rather than come here and sling a bunch of ad hominems.

    Do you think Greece should just default, remain in the Euro and continue along their merry way? Should they default and defect? What is your actual solution?

    Btw, the USA has been “debasing” our currency since the beginning of the currency union. We have always run deficits and always print more money one year than the next. You Austrians claim that this debasement is ruining our lives. But America has been the greatest economic engine in the history of man kind. Yes, in its entire history. You claim that the Fed and the printing has ruined this country. But where is the wealth destruction since 1913 or since 1790? Where is it? We are fabulously rich despite the last 10 years of hardship. But people like you want us all to believe that more money = reduced standard of living. There’s an obvious flaw in your thinking as your political rhetoric doesn’t match up with the facts.

  14. There are obvious trade (and hence productivity) benefits to having a shared unit of account, so citizens have the right to make the use of such currency the law of the land.

    Also, your suggestion that currency depreciation is “default” makes little sense – what is currency areciation then, a free lunch?

    Value is ever changing and dynamic, currencies simply mirror that reality. The gold standard Euro failed, and the example of Greece will make this abundantly clear.

  15. @yibberyat

    “a currency issuer is bankrupt if they are issuing debt in a currency that will inevitably debase rather than be paid back”

    You are terribly confused about the dynamics of money creation and it’s relationship to value.

  16. There are obvious trade (and hence productivity) benefits to having a shared unit of account, so citizens have the right to make the use of such currency the law of the land. anon [bold added]

    I smell a rat. If a single unit of account is beneficial then why do people have to be forced to use it?

  17. From the individual Greek point of view walking away from all that debt is like defaulting on your mortgage and still keeping the house. The Greek people will not be significantly worse off than continuing with austerity. Their export trade has dried up and all the unrest is destroying tourism. They will trade one type of unrest for another. The real loser will be the rest of the European Community. My guess is that the EU will find some way to buy Greece off and kick the can father down the road. Japan is done for years.

  18. Cullen, I am amazed to find myself, for the first time, absolutely, completely and utterly disagreeing with you.

    I have no difficulty with your analysis of the problem. The Euro is a flawed construct which can only be rectified by fiscal union. But I’m dumbstruck by your follow-up argument.

    You seem to be suggesting that a democratic government, elected on a specific manifesto to raise tax and spend money according to the promises it has made should, given a crisis, be permitted to then hand those powers over to another supra-national body – without a referendum of the people?!

    If I’ve not misread your argument and you are seriously suggesting this, I can guarantee that not only would very few European voters (aside from a few eurocrats) back you up, but any attempt to transfer sovereign powers away to Brussels without a specific democratic mandate would be met by massive public resistance – far, far beyond anything yet seen.

    It would be regarded as an attempt to steal democracy from under the noses of peoples who have been sovereign for hundreds or even thousands of years. Some, perhaps many, would view such an attempt as a declaration of war.

    This is why, as someone living in Europe, your oft-repeated comment that the Germans ‘wouldn’t allow’ a break up of the euro is so completely baffling. It may make perfect economic sense for Germany to resist such a break up, but beyond a certain point it is not in their hands. If some countries want out, they will out. Would the Germans go to war to defend the euro? Hardly likely.

    The truth sounds like hyperbole but I’m afraid it’s true: Europe’s citizens will ultimately decide whether or not to embrace fiscal union, or there will be tanks on the streets. I can only think that in your passion for promoting an economically logical solution, you’ve completely underestimated the importance of European national psychology.

  19. But people like you want us all to believe that more money = reduced standard of living. Cullen Roche

    In terms an Austrian gold-bug can understand:

    “Being against deficit spending is akin to being against gold mining under a gold standard.”

  20. Currently there is no limit on the creation of private currencies, only the degree to which they are accepted by others, no?

    My guess would be that the justification for a single-nation currency is its subsequent capacity to enact interregional fiscal transfers. It seems to me to be a question of whether Europeans feel enough of a sense of responsibility to each other to accept the burden of collective taxation in order to promote general welfare.

    On a slight tangent, I find MMT’s concern against a one-world-currency to be slightly inaccurate in this regard. If you had a global currency managed by a truly democratically global representative parliament with the power to tax and utilize fiscal transfers (perhaps a model like the one Wendell Gordon proposed) then there is nothing wrong with it, any more than there is with a national currency. Of course, there are a myriad of other issues that would need to be dealt with in such a model, and i’m not advocating that singler currency’ers either mean that or would be on board with it, but it would be nice if prominent MMTers could at least mention that alternative before wholeheartedly dismissing a single currency from an operational perspective.

  21. People have to be forced to do, or not do a lot of things. It’s part and parcel of being in a civil society.

  22. These nations ceded their monetary sovereignty when they entered the EMU. I am not sure their leaders or citizens fully understood this at the time, but when they did this they became part of a supra national entity and in order for this to work they need to make decisions in accordance with the goals of the entire union. Now, the union is incomplete and its disastrous results are clear. This HAS to be fixed so that the union can be workable and beneficial for all involved.

    If the Europeans are unhappy with their current predicament, they must accept what they’ve gotten themselves into and either defect or vie for a fiscal union. The Greeks and everyone else for that matter are acting as though they are still sovereign. They think they are still Germans and Greeks and Italians when the reality of their monetary union is that they are Europeans. If they want their nationality back then they need to realize they made a mistake. I personally don’t have a vested interested in which direction they go. They should decide what they feel is in the best interest of their people. But they are a little late to the party here by acting as though Greece is not already part of some supra national entity.

    The Germans have been imposing their will over the Greeks via this inherent imbalance for years. Whether the Greeks knew it or not. It was occurring. The time for the vote on sovereignty is long gone. What Greece needs to decide now is not whether they will allow the other members to impose austerity on them, but whether they will fix the flaw in the union. This will require Germany working to fix the imbalance and making some concessions. If the other members will not work with them in this supra national entity then they should do what is in the best interest of Greece and tell the other members to rot in hell.

  23. Currently there is no limit on the creation of private currencies, only the degree to which they are accepted by others, no? Ro

    FRNs have numerous government privileges such as a lender of last, government deposit insurance and legal tender laws. A big one is the capital gains tax because capital gains are measured in FRNs.

  24. I’m glad Cullen wrote a post on this topic. Some subjects need more than 140 characters at a time. Unfortunately I think G-Pap knows he can’t push through more austerity and he’s trying to find political cover.

  25. I sm sctuslly wondering , in this greek tragicomedy don’t americans see themselves?
    I think people everywhere are the same.

    People have leaders who dont’ understand how economy/ money work – check
    People want something (a lot) for nothing – check
    People want to borrow as much as we can while the times are good but don’t want to pay – check
    People want to blame somebody else for the problems – check

    The crucial difference is that US got to the end of the rope and nobody wanted to be responsible – bailouts were done, some open and some hidden by executive power despite people not wanting them.
    In Greece – people get to decide which one of two bad options they get to choose.

    Which one is more democratic , I ask?

  26. Although if you’re advocating local and state governments should have the power to issue complementary currencies, that seems fine to me, since individuals would still have federal tax burdens to ensure demand for national currency, although it might get a bit messy.

  27. True to a large degree. America is suffering a crisis in accountability. A lot of people made mistakes in the last 20 years. And no one wants to admit it. So we blame other people and write checks to cover up mistakes. It’s a shame.

  28. What concerns me is the same politicians and investment bankers who created this game are now trying to assure us that they can fix it. Debt with more debt with decreasing cash flow and no room for investment into rodutive assets. This is the death spiral of deflation. To much debt destroys productivity, confidence, cash flow and ultimately assets. You can rid the nalance sheet of debt quickly as this nations businesses use to do or you can die a death by a thousand cuts which seems the preferred method. I do not believe that spending a lifetime thinking about finance and markets allows you to avoid the axiom of deflation.

  29. F Beard,

    I’m lender of last resort and government deposit insurance are reflections of the Govt being able to manipulate things whose value is denominated in their own currency, no?

    As for legal tender…that’s its right as the federal government. I can envisage a system of complementary currencies where the UN demands tax payments only in it’s own currency, federal requiring it in either $UN or $US, state requiring in $UN/$US/$Florida, etc.

    Is there a reason that wouldn’t work?

    FRNs have numerous government privileges such as a lender of last, government deposit insurance and legal tender laws. A big one is the capital gains tax because capital gains are measured in FRNs.

  30. A lot of people made mistakes in the last 20 years. Cullen Roche

    No, they acted rationally given the money system, which is government enforced counterfeiting cartel. Those who did not borrow from the cartel were priced out of the market by those who did.

  31. Must be quite fun to watch from outside the EU, as long as you are not a buy and hold “investor”. I’m a bit scared of what comes next given that we are governed by idiots.

  32. possibly for the same reason that traffic laws “force” people to drive in an orderly fashion

  33. That’s pretty good frank, I can get that msg. I wish TPC would create a section just for fiscal analogies, or a Top 10 list.

  34. Cullen,

    I agree that Euro only has two options in the long run: Dissolve or fiscal union, but I think democracy is more important here. The situation in Greece is urgent, but not as urgent as in the wartime.

    Since I believe in freedom, then I have to respect freedom of other people, including freedom to make mistakes and those mistakes can affect me. I can only try my best to persuade other people to see a bigger picture.

    Mr. Papandreou can choose to pass it in the parliament, but he chooses referendum. Assuming he is not playing political games, which I think he is, referendum is still better because it will be a long term policy like 10 or 15 years commitment, 15 years of deflation or a complete default with no credit for 15 years or a fiscal union. Ordinary elections do not have that long term influence. He may be chicken or a coward, but it is also time for the Greek to have the ability to choose, be more responsible for the decisions, rather than just complain, complain and complain.

  35. “These nations ceded their monetary sovereignty when they entered the EMU. I am not sure their leaders or citizens fully understood this at the time, but when they did this they became part of a supra national entity ..”

    But nobody asked the people of Europe if they wanted to join the EMU. Those few countries that did ask their citizens to vote on the matter chose not to join.

    This is the crux of the whole crisis; the EU project is fundamentally undemocratic. That is why when a crisis came the public are not willing to support a full fiscal and monetary union.

    There is a huge disconnect between what the European elites want and try to implement; a supranational state, and what the people of Europe want, which is to be German, Greek, French, Italian etc.

    That is why this referendum is a good thing; it hastens the breakup of the undemocratic construct that is the EU. If referenda were held across all European nations, all of the ancient European nation states would exit. Pappandreou has the integrity to ask his citizens whether they want to stay in or not.

  36. I thought the euro was a Floating Currency, why does Cullen keep implying that it is not?

  37. The EuroZone’s founders (like Jacques Delours) knew perfectly well that it would require a “beneficial crisis” to complete the Union, and they planned this from the beginning. They just didn’t count on someone like Angela Merkel, who is not willing to fulfill that role.

  38. @ Cowpoke: Don’t be intentionally obtuse. Cullen’s obvious point is that the Euro, while it floats internationally, does not float among the various European nations, hence their loss of sovereignty and their loss of control over the bond markets.

  39. ‘The time for the vote on sovereignty is long gone. What Greece needs to decide now is not whether they will allow the other members to impose austerity on them, but whether they will fix the flaw in the union.’

    True – and through this proposed vote the Greeks can play their part in fixing it. Why? Because the fastest way to fix the euro-flaw is for the Greeks to vote NO.

    An immense crisis would quickly follow. In the fallout, political parties throughout the eurozone promising a euro-exit or a tough renegotiation would swiftly gain in popularity, leaving die-hard European political elites to start calling for the only remaining alternative: full fiscal integration.

    The path ahead would then become clear – at least in the sense that the ultimate battle lines would be drawn between integrationists and nationalists. New treaties could be drawn up, the ratification process via national referendum could begin, and we’d then be in some kind of endgame.

    A YES vote by the Greeks would simply delay this inevitable outcome, leading to further attempts at euro-fudge. The high probability of low growth or quite possibly recessionary or even depressionary conditions, must inexorably lead to the eurozone confronting its inherent flaws sooner or later.

    Will the Greek people have the steel cojones to make it sooner?

  40. There are huge problems with a one-world currency from the perspective of the United States. I mean, do you want to have to answer to the Bangladeshis, the Chinese, or the Indians? The USA is ony 5% of the world’s pupulation, and in a unified world government, the majority will rule.

    And plenty of them will want revenge for past grievances as well.

  41. The best answer is the one that the USA’s founders implemented. A House that represents population, and a Senate that represents the States equally, with all legislation having to pass both houses.

  42. I agree with Cullen. It’s not elitist to expect elected officials to know more than ordinary citizens and for the citizens to expect leadership and action that the public may not understand. Let the politicians do thier jobs and if they fail vote them out. Bad leadership, unfortunatly, has become the rule. People fail democracy when they lack adequate knowledge of the problems they face, the principle of the informed vote; they then lack the means for selecting effective leadership. It’s my experience that most people’s knowledge is limited to the last few soundbites they liked well enough to memorize. It has been said that eventually people get the government they deserve. We don’t know enough to choose wisely so we elect buffoons whose only expertise lies in winning elections.

  43. I am not so certain. The USA had the same basic debate in 1790. Calling it undemocratic and or a mistake would be a real long shot. Granted, this is a different situation, but the Europeans can make it work if they’re able to overcome their national pride and become Europeans.

  44. Cullen – I don’t need to come up with “the solution” for Greece and the eurozone. I’m not writing posts (merely commenting on others) – and if I were I’d probably just post a link to Hayek’s Denationalization of Money – which he wrote in direct response to bad eurozone ideas v.1 from 40 years ago. And at any rate, “the solution” for the eurozone probably rests deep within the bowels of the unicorn that is guarding the Holy Grail so I’ll let others dig in.

    But your commentary about “wealth creation” being caused by merely printing money is pure silliness. If it is true that “homeownership” is one of the larger “wealth” components, then there should be SOME evidence of its growth over the last – say – 100 years. And sure enough, the govt provides statistics to say that it has —

    Of course, the government doesn’t explain:
    1. that it has changed the definition of homeownership in that time to include those who merely own a mortgage debt
    2. that such “homeownership” now requires eternally spending 30% of gross income whereas in the past that was called “renting”.
    3. that the money created to finance those purchases also requires eternally spending x% of gross income to pay taxes to pay the interest on public debt.
    4. that “homeownership” can now actually include in-the-hole equity whereas in the past that was called “homeless” (or perhaps “living in a ditch”).

    So that is one wealth component that we can’t even debate because it ain’t apples to apples anymore. But hey at least we have made major progress re “retirement wealth”. Where we now depend on someone’s else kid to pay higher taxes at some point in the future so we can play golf. We, shudder, used to have to depend on our own kids to pay for any “retirement”. Much more solid now. hahaha.

  45. Yes, that’s what we need. Denationalization of money so the banks can create their own currencies and run the whole friggin show on their own. Hayek’s work is hugely influential in developing the same free market economics that led to the deregulation of our banking system in the first place. The idea that we need a free market in money which would become dominated by the banking system is purely hilarious. I was hoping you had a real solution in mind as opposed to just an insult filled rant or regurgitation from your favorite hyperinflationist. I don’t pretend to have all the answers, but at least I am not running around on the internet calling people names and offering nothing useful to conversations. This is a serious debate. If you have nothing to add then maybe you shouldn’t get involved?

    I never said wealth creation involved printing money. In fact, if you were even remotely familiar with my work you’d know that money is not wealth. But you’re clearly not familiar. You’re just here to throw stones and call people names. That’s fine on a playground, but it’s not appreciated here. Maybe you should run over to Business Insider or another site where they allow the children to draw on one another? If you actually have something to contribute to a thoughtful and important discussion then let’s hear it. But be forewarned – I’ve heard all these Austrian rants before…..

  46. Don’t you think that the one to blame is the one who gives the cake, not the one who eats it?

  47. I have a hard time believing that you can, with a straight face, say that life was better in 1911 than it is now. Cherry picking a singular stat to back up the claim that growth hasn’t occurred is disingenuous and logically suspect.

    Cullen didn’t ask you to solve the problem, but rather engage in a civil discourse with the owner of and commentators on this site, rather than simply planting the standard of Hayek, flinging insults, and expecting everyone to accept your logic because you’re saying it with venom.

  48. RIP Euro –

    A full fiscal union, and further eroding sovereignty, maybe completely… I don’t know just how hard to laugh. We’re talking Europe, dozens of languages and cultures, all distinct, all fiercely proud. I’ll be very surprised if the euro exists in its current form in a five years time. Try again in a century…

  49. Jon, no intent to be “Obtuse” I am just a common man trying to grasp what 99% of economist and Elected officials do not. I need baby steps and analogies. If that seems Obtuse, then I apologize but it is what it is.
    But just as this small point alone can get confusing, surly you can understand how the much larger issues do as well.

  50. Brilliant move by Papandreou……….you must never forget about the human component, which is what the summit completely forgot. They were looking after themselves and never stopped for one second to think “if we do this, what will the Greeks do”.

    People are not chess pieces and this issue is not being played on a chess board.

    Nobody has any idea what is going to happen next!

  51. I think its just one of those quirks in Nature Cullen. In 1790 a whole lot of disparate States (people) called themselves a Nation. Merging a whole lot of disparate Nations (people) against their will is what you call the EMU (In Oz we call that a googly eyed bird that shoves his head down a hole to avoid reality)!!

    Cheers …


  52. The ECB bought Italian bonds today. The ECB’s balance sheet comes to the rescue each time Italian and/or Spanish debt exceeds 6%. That is going to continue for as long as it takes no matter what the Maastricht Treaty says.

    The Greek referendum is democracy in action; good for them. The Greeks are not fools. First, they will do the math and decide whether their standard of living will be higher or lower if they default and reinstate the Drachma versus try to pay off the mountain of Euro debt left after the 50% haircut. Second, they will think about their place in the world and national security. Third, they will try to squeeze the last Euro out of the Germans.

    Many of the Greek demonstrators throwing rocks now will vote to stay in the EU once they start absorbing the economic and geopolitical implications of stiffing Europe and the West and going it alone. The Greeks might fear the Turks and the price of imported food and fuel in Drachmas more than they fear Euro-austerity; Europeans have long memories, and with good reason.

    Fiscal union in Europe is impossible. Different languages, cultures and heritages evolving over two thousand years are much different than the youthful frontier culture, common language and common WASP ethnicity of the late 1700s USA that led to fiscal union. The “melting pot” multi-ethnic USA is mostly a post Civil War phenomenon. Irish Catholics were the most numerous “exotic” immigrants in the USA until the 1870s, and the doors to the USA were closed to immigration almost completely from 1918 until 1964. The USA had a dominant Anglo Saxon culture and language until the Immigration Reform Act of 1964 and the political revolution of the 1960s changed the nation. Fiscal union is an artifact of a much earlier time in the USA; history seems to be moving in the opposite direction.

  53. The U.S. also had a common language and short, shared, history. The same can’t be said for the EU, for what it’s worth.

  54. This already looks like backdoor fiscal union to me, insofar as other countries have been willing to finance the failed fiscal policies of another state. Having one gigantic EU budget would be nearly infinite it complexity alone. Likely the bureaucrats would require two years to produce each annual budget. That’s not workable. The situation is now wholly untenable and has been since Greek cooked its books to enter the EU. This problem is as old as the day the country joined the Eurozone. Since the people of Greece couldn’t completely evaluate their Euro prospects considering their leaders lied to them, it now seems fair for them to decide whether they want to accept a brutal regime of austerity (how much longer? 10 years?) or currency revaluation and the ability to once again manage their own finances.

  55. The experiences of Iceland and Argentina show that there is life after default. Breaking out of the EMU would be painful for Greece, but so would staying in. Arguments can be made either way. So it seems appropriate to ask the Greeks which course they prefer.

    It also seems questionable for a ruling coalition with a very slender majority to be making such far reaching decisions. Greece really needs a national unity government now.

    Exiting the EMU would not necessarily be permanent. After a couple of decades of good behavior, Greece could probably reapply for admission and be accepted back in.

  56. Cullen – Why is it so difficult to say that Greece is insolvent? The choices are to be honest about that or to be dishonest about it. Fiscal union does not solve the problem of “Greece is insolvent”. It merely eliminates “Greece” and transfers the mathematical insolvency to someone else.

    Europe will choose to be dishonest about the problem until it all blows up so I really don’t see why I should spend time talking about alternatives. But hey you want a solution. They should dust off their old drachmas, convert all public employees/pensioners/etc to drachmas (use the same rate they converted to euros it doesn’t matter), and then they can print print print their way to prosperity.

    And within a month, they will default on their euro debts and be forced to nationalize all their local banks. And they can then choose whether to default in bad faith with the eurozone (and risk whatever credit/trade cutoff (or war) creditors counteroffer) or default into a dual-currency limbo where Greece can actually deliver “austerity” (in euro terms) and “growth” (in drachma terms).

    And I wouldathunk that that might appeal to MMT’ers. A real opportunity to see if Greece turns into capital-flight Zimbabwe or taxpaying drachma-demanding fiat paradise.

    Do I like this solution? Of course not. I want to denationalize money and eliminate government’s involvement in it. But since government always insists on screwing everything up, this solution is PRECISELY what Hayek argued in his book. Let Greece accept both the euro and the drachma as internal currencies. And let the competitive exchange rate between the two determine where spending goes, where savings goes, etc. If the Greek government can’t handle this (floating exchange rates), they sure can’t handle fiscal union (where their sole function would become the armed tax-collector for Brussels)

    Pierce – I never said life was better in 1911. That is your strawman. Presumably trying to imply that technology and currency debasement are the same thing. What I did was “cherry pick” the largest component of wealth for the overwhelming majority of Americans (how big can something be before it isn’t “cherry picking” anymore) and raise questions about whether that has changed. In the last 100 years. But why bother. It’s always the same. Raise a problem with long-term currency debasement and the answer is always “Well golly we have washing machines and ipads now”.

  57. I think that Papandreou is finally a realist, not necessarily a coward. He sees his majority in Parliament eroding, almost to the vanishing point. He probably would prefer a referendum to civil war, which is just what is likely to happen if the thinly constituted government keeps imposing EU austerity mandates on the people without their consent.

    I am NOT saying that the Greek government, or people, or the EU, are entirely blameless here. But continued austerity measures will stifle economic growth in Greece, impair the country’s ability to pay off its debt, and prolong the agony of the nation. In the face of increasing interest rates, that means that hopes of Greece’s avoiding default are doomed. The Greek government and people, as well as the EU financiers, governments, and central banks have been studiously avoiding recognition of that increasingly likely outcome. Nobody wants to take the hit, but the longer they delay it, the worse the hit will be. This last negotiated solution from the EU powers that be lasted what, three days?

    The EU might be able to absorb the losses from a Greek default, but the Greek default will accelerate a financial crisis involving the inadequately capitalized and overly exposed finance and banking systems of Portugal, Ireland, Italy, Spain, Belgium, and France, in approximately that order. Wonder why people are buying gold and dollars lately?

  58. It is called “representative democracy” for a reason. Cullen is 1,000% spot-on in this post.

  59. Also it’s a population of under 5 million residents (1790 Census) vs. a population of over 300m. You would need a large stadium just to fit all the houses of parliament. It’s just not a reasonable comparison. Maybe look at the Soviet Union?

  60. Hi Yibberat,

    EMU is nothing more than a slacker version of gold standard and the world progressed much during the era of gold standard (where currency is currency, not just tax credits).

    I suppose once a fiscal union is formed, it will become, like say, if American 51 states will bail out the 1 errant but bankrupt state. In such situation, I am sure that American Federal tax payers will demand austerity to be imposed on that state as opposed to let them carry on as before.

    To Greece, the referendum is like asking them whether they want their left hand cut off or the right hand cut off. It is going to be painful to watch and NO, they cannot MMT to prosperity.

  61. one interesting development arising from the referendum call is whether the troika will actually disburse the current tranche of funds to greece this month. while greece has never truly met the austerity budget targets, at least the greek parliament has approved them, and the troika could disburse funds to a debtor country which is on the program, even if they are having trouble meeting the objectives of the program.

    the call for the referendum seems to be for a date well after the date scheduled for the latest troika disbursement. typically the imf doesnt disburse to a country that has not approved the program. one assumes that the imf will hold its nose this month and hit the send button.

    just another instance where this eu crisis management condcuted by the eu is a fly by the seat of the pants operation.

  62. “irrational desires of the people”

    are you kidding me?
    even if the desire would be irrtional. Who is to blame for that?
    the system that is brainwashing everyone, thus no one has a clue why things are like they are.
    Noone has a clue of the money system, noone has a clue why we are in war with the middle east…
    Its because we are not taught serious things, the political system has taught us to be sheeple.

    and now you come and blame the sheeple to have irrational desire.
    You must be kidding if you see it that way.
    enough is enough!

  63. Hi Cullen. I really enjoy your thoughts on everything financial. You obviously have a super grasp on the problems facing Europe, the US etc. But I think your solution to Europe is unworkable. A single fiscal union between all Euro member states is a pipe dream well beyond that achieved by the US back in the 18th century. It may be a political ideal here in Europe, but at citizen level no one cares about being European. Most of Europe has fought for centuries to preserve and regain sovereignty from oppressive states. What makes you think they will suddenly relinquish this for the sake of a few euros from Germany and the handiness of having the same currency when you go on your holidays (to most countries). And I havent even mentioned the cultural, language, public sector, health, educational, taxation, legal differences throughout the region. My own personal feeling is sooner or later the ECB will buckle and crank up the presses and this will force Germany to exit, maybe taking a few stronger economies with it. We will have 2 ‘Euros’ for a while before sooner or later we all revert to our own. It will be painful, volatile, political landscapes will change. I’m not sure people should be throwing the war argument out as a threat. It seems a little scaremongery to me. Lots of political gesturing sure and lots of incriminations but i think thats about as far as it goes. We have a big recession/depression (already in peripheral countries for what its worth) followed by a new dawn and a period of prosperity and hopefully we all learn some lessons the main one being you need autonomy to look after your people. Tying yourself to a strong ship only makes you a toothless jester.

  64. Papandreou’s move is brilliant, IMHO. He is essentially telling the malcontents to put up or shut up. If the Greeks vote yes, with full knowledge that doing so means years of struggle and reduced pensions and government goodies, then obviously they must see some real benefit in remaining in Europe, and the costs of staying will have been agreed to and accepted (in large measure). If, on the other hand, they vote to go back to the drachma, no one can say they weren’t asked.

    A step of this magnitude requires a (perhaps grudging) acceptance by the Greek population that they have made their choice, and there will be a resolution–at least for a time. Will they make the “right” decision? There is no “right” decision–but there does need to be a decision.

  65. So much to agree with in that article,but I’ll condense it down to this special part…

    “Dear Angela Merkel, we demand a full fiscal union or we are leaving. The ball is in your court”.

    Basically ,they are going to ALL have to sign up to long term transfers linked to structural reform ,or at some point this thing they call the Eurozone is going to fragment. Only a shared process of absorbing all the prio years of misallocation can hold this thing together. German austerity as it stands is simply a ‘big brother’ approach to loading the ‘pain’ in one direction…away from them.

  66. “different languages”
    They could all simply accept the common language of business and make it mandatory in their education system.That language is of course English and tngue firmly in cheek I really like the irony of a Europe with a commmon language of English whilst the Uk stays out of the Euro ;) come on Sarkho let’s hear you say “by Ilkley Moor by tat”

  67. I’m reminded that the founders of the USA agreed w/you Cullen – the “people” cannot be trusted w/making the right decisions, that’s why only property owners (and male) could vote. They feared the mob having such power, being uneducated generally.

    However, this same group that one would expect doesn’t understand many important issues, is responsible for voting in those who do. No wonder those voted in don’t know.

  68. “irrational desires of the people” was meant purely in a theoretical sense. Popular decisions are rational decisions aren’t always co-terminus. For example, everyone might want the state to provide them with a vehicle, but it may be impractical. Representative democracy isn’t structured to merely transmit the will of the people into law. Needless to say, if the state represses the will of the people long enough, it may be brought down by the people in favor of a new form of government.

    As for the middle-east, etc. I am personally of the opinion that those wars are self-defeating – that the unintended consequences outweigh any benefits that military intervention may bring. I’m also of the view that it’s a violation of the principles of democracy applied on the international stage for any nation to interfere with the internal affairs of another. I’m completely opposed to alliances and nation building. However, I wouldn’t suggest that my representatives don’t have a legitimate right to disagree and press ahead. The onus is then on me and people who share my belief to convince enough people that these wars are unjust, to demonstrate and bring about a change in policy through whatever means I consider legitimate. But, in a democracy, my representative doesn’t HAVE to echo the sentiment of the majority of his constituents. And in my view, rightly so.

  69. I often think the welfare state v austrian school society debate boils down to basic questions on what people believe happiness is. People that are committed to individual freedom as the path to human happiness tend to have great regard for the Austrian school. People that believe in a collectivist notion of society tend to believe in the welfare state.
    I think the current state is legitimately a farcial combination of the two notions that is just a corporatist, crony state which does little to protect liberty and often undermines welfare. 400 people possessing 52% of the wealth of a nation isn’t the end product of either free-market capitalism, nor socialism!
    I am intrigued by the terminology, though. I’m still at a loss when I hear of “MMTer” viewpoints. The way I read MMT – it’s descriptive and useful, but it hardly tells you what society SHOULD (normatively) look like. MMT simply doesn’t apply to what the Austrian school wants.

  70. Cullen, is there a simple explanation on how the US dollar floats between US states that is different than the way the Euro floats between the Euro nations?

  71. Can any comparison to Iceland defaulting be drawn here if Greek does or are they so different that the outcome will be unpredictable? Other than the people in Iceland voting default I suppose.

  72. refering to your example:
    So you dont think in a direct democracy people would not be able to figure out that state gifts are nonsense/ unsustainable?

    In fact representative democracy under current money system is incompatible/ unsustainable, cause they decide that state gifts to some beneficiaries is a good thing, that have to be paid by all.

    You dont think that the people will figure out that in the end everyone got to pay his own vehicle even though it was a state gift?

    Sure they will do, but repr. democracy wont, they do what they want that benefits a minority “under current money system”

    To end corruption/ usury, we either need a new money system, that would work with representative democracy, or we need direct democracy if we choose to stay with current money system, to better control corruption and usury caused by the money system.
    Cause represntative democracy wont do it! Representative democracy is not designed to do it, to do what benefits the people, it is designed to benefit the corporations, thus it supports/ is part of a fashistic system.

  73. The Euro doesn’t float between Euro nations, just like the U.S. dollar doesn’t float between states. The Euro floats on the international exchange versus other national currencies, just like the USD. There is no float within a country.

  74. I would just add that the seeds for fiscal union certainly were sown by the Hamiltonians post-Revolutionary War, but it took over 75 years to implement a stable fiscal union.

    Europe is in a fast track to deal with the political issues arising from a flawed monetary design. I think the referendum is a symptom of failed leadership – why would you cut a deal (to the extent that Greece had any real say in the matter) if you didn’t have the authority to do so?

    But the larger issue is that Greece’s specific problems are of no concern to the EU, they are trying to avoid contagion, banking meltdown, and the embarrasment of a semi-sovereign default. So, perhaps the latest “solution” was just rammed down Greece’s throat, and Papandreou decided to assert what political power he has left.

  75. Cowpoke:

    Iceland government decided to let their BANKS default (rather than bail them out ala US, Germany France, Japan). Owners of Iceland bank debt (bond holders) got a pretty serious haircut for their folly, and foreign depositors were stiffed as well. Many foreign depositors were from the UK (about $4B, spread over 300K depositors).

    Not sure that their government borrowed to the extent that Greek government did. Iceland was not and is not a member of EU, and has it’s own floating currency.

    This article was quite helpful. Makes you wonder if we had a more effective democracy if we would not have chosen the same solution.

    On a side note, I remember getting paid investment advice (but not acting on) a tip to put my savings into Iceland’s banks (paying about 14% at the time), based on the assurance that they would be backstopped by the EU. HAH!

    I could be wrong, happy to hear from more knowledgable folks

  76. Haha. Touche, and so very true.

    And THEN? When I was 8 years old…and OMG, PEEPS, you will NEVER believe what just happened…Also, can someone open this jar for me?…and DON’T make me have to come over there!…Everyone just SHUT UP.

  77. Papandreou’s move is nothing to do with democracy. I am continually aghast at the way people on this blog analyze issues. It is pure self preservation on his part. He is trying to prevent himself from being lynched, either metaphorically or physically. I very much suspect it has got to the point in Greece where he knows the people are not going to follow him…………

  78. I think I understand what you’re saying and I agree, that is what he’s doing.

    But he shouldn’t be. His job (as an elected representative) is to act on behalf of the populace that elected him by democratic vote. To simply turn back to them and say ‘Uh… hmmm… so… uh… what do you guys think?” Shows not only how weak a leader he is but that (as Cullen aptly put) he is acting cowardly. He is in a difficult position, but so are the people who put their trust in him to lead.

  79. This isn’t about democracy, it is all about politics. It is about saving Papa’s job. Unless Papa can keep certain members of his coalition from bolting, he is in danger of losing an upcoming confidence vote. The referendum idea is designed to keep those politicians from bolting, so that Papa can keep is job, pure and simple.

  80. Cullen,

    For me dereliction of duty is not a point of view that carries any weight in this situation. Are you thinking along the lines that Papa should end up in some court somewhere and be tried….?

    As for Papa doing it to negotiate better terms with the other members, I do not think that is reason either. It is simply getting too hot for him in his own country and he needs to find a way to survive. He could have of course just bolt and hide somewhere.

    Took your survey by the way.

  81. “moving towards an ever interconnected economy…These nations are all inextricably linked via trade. The single currency system makes this a more efficient economy in many ways…[Fiscal union is] the logical progression as time goes on and these economies evolve and become increasingly intertwined.”

    This is a hypothetical question, since in addition to huge political obstacles, other constraints (finite resources, climate change) may take precedence – but wouldn’t the same arguments apply to the world as a whole?

    (Thoughtful comments by JWG below and others suggest history may be moving in the opposite direction. Could having it both ways – evolving in both directions – be possible?)

  82. We’re not there on a global basis yet, but we’ve certainly made huge strides in the last 100 years. A lot of this is still about technology and the geography. Germany can hate the Greeks as much as they want, but the truth is that the Greeks need to buyer new BMWs to get them to and from the beach (pardon the gross stereotyping)…..You get my point hopefully. Geography makes these countries interconnected. There is no denying it and as we evolve they will become even closer linked.

  83. now things may get verrrry interesting. this is a quote from imf offial today:

    “The board would not want to give money to Greece and then wonder what will happen [...] The board will want comfort that Greece will fulfil its commitments and right now Papandreou is unable to give that.

    The sooner Greece holds the referendum, the sooner the sixth tranche will be paid. But right now, it isn’t going to be paid.”

    now, didn’t greece say they will run out of money mid-november, and haven’t i read that the referendum is likely to take place late december-early january?

  84. Do not be amazed. The stated position just once again that, MMT or not, people reason not to attain conclusions from assumed postulates, but to justify a priori taken options.

  85. ” They must complete the union via the formation of a full fiscal union (as the USA did in 1790). Or they must revert back to the system of old where each nation has its own currency and can utilize that currency in the manner that best benefits that particular nation. ”

    From what I have seen to date of the current account surplus nations in the Euro region their only real option is revert back to the old system. Being in bed with a bunch of conservatives (Germany etc ) will not be helpful as they believe now more than ever that the pan European budget would have to be balanced. That is a step backward not just for Europe but everyone in the West.

  86. I don’t disagree with anything, there. Direct democracy would be great. But, the current system is representative democracy and in a representative democracy, the representative is paid to use his brain and not just opinion polls. I have no particular opinion on direct democracy. Some reps make bad choices, some people do. I am a fan of minimizing political power and thus the power to buy influence, but I have reservations about the basic desirability of direct democracy. Leadership isn’t without merit in society. The influence of money produces poor leaders – so lets attack money in politics, not the virtue behind having leadership in the first place.

  87. Re: local currencies:

    “I was a speaker at an “alternative” conference in Sydney on Saturday. I see these functions also in terms of my role as an educator. In this case, the participants were broadly well intentioned with solid democratic values and a penchant to redress societal ills and advance equity and inclusion.

    But a strong shared sentiment among this group (which I detect among the Occupy movements around the world) is that they are demanding governments to balance budgets, the banks to be prevented from issuing credit and the economy to be returned to a gold standard with fixed exchange rates. That would be the more moderate “progressive” desire.

    The more vocal “progressives” want local currencies to spring up and run parallel with national currencies and to “share the unemployment” by cutting the wages and hours of work of those currently employed and introducing income guarantees.

    My talk on Saturday was that if they pursued these policy agendas they would deny the economy the capacity to deliver progress towards their aspirations and goals and would be playing right into the hands of the power elites.”

  88. The way I see it Greece has two choices

    1) remain in the euro and impose a lower standard of living on their citizens by making it harder to get the currency they need

    2) leave the euro and impose a lower standard of living by making available a greatly devalued currency which they control

    I think 2 is preferable because while it doesnt immedialtely improve their standard of living it does give them freedom to increase at THEIR discretion down the road.

    Id rather be able to work harder to get something of moderate value than be denied the opportunity to work for something of high value. Why should I care how valuable a currency is if I cant get any?

  89. Barroso – a civil servent has threatened famine and pestilence on Greek women & children if they vote no.
    I am sorry Cullen but further transfers of power to a Caligula’s Rome will just not do I am afraid.
    We don’t want any further integration.
    We just use the currency – the ECB is more like a currency board that sets interest rates and prints non govermental euros anyhow.
    Most of the Euro debt is internal – they can cancel the debt easily without financing any goverment and the continents wealth will not vanish.
    They can just bid up the price of Gold to the M1 and beyond.
    Job done, at least the Italian job done anyhow.
    Not very good for the Dollar though.

  90. «My point is that Europe is moving towards an ever interconnected economy. I know that many like to think that the EMU is a grand plan of a group of evil elitists, but the truth is that a unified Europe actually makes a great deal of sense. These nations are all inextricably linked via trade.»
    Don’t you think that the fact Europe is moving towards an ever interconnected economy is because of the political effort (‘harmonising legislation, CAP, Common Fisheries Policy, etc.) put into that rather than the natural succession of things?

    Other countries, such as UK, Portugal and Spain have better natural trade partners. The UK in the Commonwealth, Portugal in South America and Africa and Spain in South America. They already share language, legal systems and culture, in a much more deep way than they do with the rest of the European continent.
    More so, couldn’t those natural partners actually be more advantageous?

  91. I feel that it is high time Papandreou involved the citizenry. I don’t think the highbrow
    attitude that “they can’t understand the complex issues” is applicable here.

    Actually from what I’ve learned it is really quite simple.

    Greece and the other members of the PIIGS are in a position similar to the individual states of the United States.

    They use a fiat currency issued by another party.

    They have been a captive market for goods produced in Germany and France. This has been implemented through various laws which made production of local foodstuffs, textiles, and other goods impractical.

    To finance these purchases they have run deficits financed by borrowing in a currency they must buy through sales of goods and services.

    Their current government inherited this mess.

    There are two choices, as follows:

    a. The currency issuer supports Greek deficit spending by purchasing Greek bonds indefinitely at a level sufficient to restore full employment to Greece and the rest of the EU.

    b. Greece issues it’s own currency “the drachma” on a par with the EURO, Legislatively converts all foreign debts to the drachma, then makes the drachma unconvertible, or lets the drachma float where it will, while issuing sufficient currency to return the country to full employment, including of course, jobs for everyone.

    Greece could also stop supporting Nabucco, and play ball with Russia on South Stream, earning millions in transit fees, which it desperately needs. Greece could also stop playing ball with Israel, and side with Iran and Hezbollah, which could supply her with petroleum on the cheap.

    I don’t see any of this as being too complicated for citizens to understand.


    Dr. George W. Oprisko
    Executive Director

    Public Research Institute

  92. I want to denationalize money and eliminate government’s involvement in it. yibberat

    That is completely unreasonable. Who else should issue government money but government? Should government (and by extension the taxpayer) have to rent a private money supply if it wishes to deficit spend?

    But it is also unreasonable that government money be legal tender for private debts and that the banking system has ANY government privileges.

  93. I’m lender of last resort and government deposit insurance are reflections of the Govt being able to manipulate things whose value is denominated in their own currency, no? Ro

    Government should not lend money since it will inevitably show favouritism if only to the so-called “credit-worthy”. As for government deposit insurance, that is an indirect subsidy of the banking system that probably could not survive without it.

    As for legal tender…that’s its right as the federal government. Ro

    Certainly, but ONLY for government debts not private ones (at least morally).

    I can envisage a system of complementary currencies where the UN demands tax payments only in it’s own currency, federal requiring it in either $UN or $US, state requiring in $UN/$US/$Florida, etc. Ro

    Well, I am opposed to world government but otherwise that sounds workable FOR GOVERNMENT DEBTS.

    Is there a reason that wouldn’t work? Ro

    We also need to allow private currencies good only for private debts.

  94. Your point is excellently made. Cullen’s argument rests on the assumption that Europeans should (and eventually will) get over themselves and choose fiscal union, as it is so clearly in their own best economic interests.

    “…the Europeans can make it work if they’re able to overcome their national pride and become Europeans.”

    As a European this strikes me as woefully naïve. Europe is not a social analog of post-revolutionary war America, a continent with little modern history, overwhelming ethnic and religious homogeneity, a powerful work ethic and gathering sense of common purpose.

    The eurozone consists of ancient nations whose independence has too often been hard-won, fierce rivalries and factions, dozens of languages and radically different ethnic and religious cultures.

    With the euro, these nations’ citizens were sold a pup. They were told by their governments they didn’t NEED to give up their fiscal sovereignty. That’s the only reason they voted for it.

    And now that the bolshy Greeks have revealed this dream to be a crock, Germany and France are making a last-ditch attempt to scare them back into line. This may backfire. Greek national pride is not some light construct that, in Cullen’s phrase, can simply be ‘overcome’. It is absolutely intrinsic to their sense of who they are. It is non-negotiable.

    If you consider yourself a patriotic American, this is dead easy to understand. Ask yourself if you would voluntarily abandon to a foreign power your democratic right to decide how your hard-earned money is taxed and spent? The idea is absurd, right? Your ancestors fought that war already.

    Your sense of what it means to be a proud and independent nation was forged in that fight and just 200 years of modern history. Greece has 4000. They’ve defaulted many times before. Don’t underestimate them.

  95. I am not naive of this hurdle. I just think they’re going there one way or another so they’re better off swallowing their pride and getting on with it. I know it’s not easy. But that’s the direction Europe is headed. It might take 1 year, it might take 100 years. But it’s going to happen.

  96. Dr.,

    Thanks for the excellent comment. Perhaps I am being a bit “highbrow”, but I think you’ve actually explained quite a complex issue that most people do not understand. The average American does not even know what a current account or non-convertible currency is. International trade is extremely confusing. I don’t think it’s fair to expect the common man to understand the issues in Europe. But we should expect Greek leaders to understand it by now. It should be their duty as representatives of the democracy to understand this. But they have failed in this regard and they have shrugged their responsibility off on their people in what I believe is an act of ignorance. Papandreou has continually misinterpreted what is in the best interest of his people. And now, instead of shooting them in the foot, he is handing the gun to them so they can do it themselves. He should know better.



  97. Look at Germany’s primary trade partners. They’re France (10%), USA (7%), Netherlands (7%), UK (6%), Italy, (6%), and Austria (6%). Until international trade barriers improve the EMU is going to be interconnected by mere geography and proximity. Ultimately, I don’t think you can ever really break this. It’s like expecting California to stop trading with the rest of the US states. It’s not going to happen.

  98. But can we really expect our elected officials to be more knowledgeable in every field? I think mostly what they are good at is getting elected at least that’s what I hope when looking at the Republican debates right now. Either half of them are imbeciles or they just play stupid to score with a certain demographic.

    I wouldn’t hire an accountant to fix my boiler. Why can I only pick between 2-5 lawyers to decide on everything from Agriculture over Defense, Education, Economics, Foreign Relations, Taxes and Transportation? Especially since in my country it’s usually a few folks in the party who decide all politics, there is strong disincentive to vote against the party line because it threatens the possibility to get reelected. So naturally not those who are the most competent at the topic at hand but those who are most competent at playing inner-party politics get what they thing is right.

    I’d rather have different representatives for at least the major areas. I am very conservative on some issues but pretty liberal on others (using the terms as prescribed by Fox News/MSNBC). So who do you vote for if you are only given two choices? The person you agree with 51%?

    Disclaimer: I don’t vote anymore.

  99. “They have been a captive market for goods produced in Germany and France. This has been implemented through various laws which made production of local foodstuffs, textiles, and other goods impractical.”

    This is pretty interesting. Can you elaborate on that point? While Greece receives more from the EU than it pays in (to the tune of 9B EUR I believe) the EU naturally gets to decide what the money is used on. I could imagine them building infrastructure in Greece to better move the agricultural and industrial output from the northern states instead of building the local industry like it’s supposed to work. At the same time the EU doesn’t permit countries to subsidize areas of the industry they choose. The Euro then eliminated the only way to correct those imbalances (other than starvation). Am I on to something?

    The Irish were a bit smarter about it of course, instead of turning their country into a handout welfare state they lowered taxes to attract investment, which wasn’t really popular with the other members.

    This seems a pretty short sighted policy to say the least, it’s clear that this has to blow up some time. Who would sign up for that?

  100. No worries, the German austerity is bi-directional. First it kills of growth in the EU countries, which causes German exports to drop. This causes job loss in Germany which increases the cost of Welfare/Unemployment benefits (already over a quarter of the budget). The result will be for Germany to cut spending, or more likely raise taxes so they too can enjoy the fruits of austerity. It’s even part of the German (version of a) Constitution.

    So the Euro ship is sinking and everyone tries to get a seat as far away from the leak as possible so as to be the last to drown. I just hope I can leave the EU before the worst hits.

  101. The point MMT makes is macro economics is not “high brow”. It is the application of
    double entry bookkeeping to the national accounts.

    Basically MMT says that the domestic sector plus the govt sector equals the current account sector. All must balance.

    If the domestic sector must save, as it must do at the moment, the govt sector must run deficits, which are exacerbated if the current account is in deficit.

    In the case of Greece, the current account has always been in deficit since accession to the euro. Therefore, given the necessity for Greeks repairing their balance sheets, the govt of Greece must run deficits, or the economy will spiral into oblivion.

    The ordinary Greeks understand this, their PM who is a socialist should intuitively understand this.

    Lacking, is the moxie to tell Merkel and Sarkozy to their faces that it is time to “shit or get off the pot” as my father would say.

    So, the Greek crisis can be resolved simply and quickly. As I mentioned above, either
    the ECB underwrites deficits as needed to get the economies going again, or it’s the drachma.

    Going back to the basics:

    GDP = C + G + I + (X – M) ; Y = C + S + T ; GDP = Y

    (S – I) + (M – X) = (G – T).

    where Savings minus Investment plus Imports minus Exports equals Govt Expenditures minus Taxes.

    So if the domestic sector must save as currently and if Exports exceed Imports as currently, Govt must run a deficit.


    The domestic sector sheds jobs, which causes a decline in demand, which feeds back into more job losses, which again causes a further decline in demand until everyone is at a subsistence level.

    Using the US as an example:

    It is possible to subsist on about $500 / month. This buys food, cooking gas, clothes at Goodwill, and not much else.

    150 million households X $ 6000 / Yr = 9 X 10^11 = $ 900 billion

    I believe this to be the bottom asymptote of the US economy, given no govt support of the economy. Note: this is smaller than the DOD budget.

    Dr. G

    Dr. G

  102. I love your faith Dr. G, but I don’t think the general public understands double entry bookkeeping. Trust me, I am trying to make it more prevalent, but this is by no means widely known in my opinion.



  103. Cullen,

    you just give too much credit to politicians. Politicians are not “problem-solvers”. Problem-solving skills do not get you a public office.

    It’s extremely optimistic to think that the usual selection process for a political leader weeds out those who can — in times of needs such as now — apply reason and intelligence to sort through a highly complex issue such as this one in the short amount of time that is available. You have conceded yourself that it took you years to get to grips with the workings of the system.

    Also, there is cognitive dissonance and decades-long misinformation at work here. Very smart people who are NOT impeded by holding a public office are at a loss here.

    Do not expect office holders to make any meaningful contribution.

  104. I don’t expect them to be great problem solvers. I expect them to understand things better than the avg citizen though. I don’t demand perfection from politicians. But I expect more than mediocrity.

  105. The Pound Sterling is free floating after George Soros and others busted it out of the ERM.

    The first ERM let currencies float within certain ranges. This prevented single governments from using their Central Banks to get a trade advantage by manipulating their currency, but it also wasn’t a very free market way of determining exchange rates (keep in mind that there are a lot of *actual* socialists in Europe who don’t like the free market).

    If we were to revert to a free floating system we would probably see drastic changes in currency valuations, look for example at Switzerland and how their currency kept on appreciating until they basically pegged to the Euro. This is especially dangerous for trade deficit nations who import a lot of agricultural products who might see their import costs rise heavily. You can do without a Porsche or BMW, but not without food… The issue with agricultural markets is of course that they are heavily influenced by subsidies so they are also not a free market. But that’s a rant for another day.

  106. Well, by expecting them to “understand” things, you expect them to be problem solvers. I do not.

    Politicians are *way* better with words than the average citizen. They are way better with “being popular” than the average citizen.

    That’s what got them into their respective positions.

    If it comes down to deciding if a certain, dangerous technology is going to be employed or not, those decisions end up being made by the outcomes of lobbyism and if it can be “marketed” to the voters — decidedly NOT by the pros and cons of the technology.

    The same applies to high finance: it’s JUST TOO HARD for 99%, and that includes 99% of congresspeople. It’s IMPOSSIBLE to make a 60-minute TV show where you can even begin to explain the PROBLEM to people, let alone discuss good solutions. That already disqualifies the issue to politicians who are doing there job (which is “looking good on TV”).

    “Peak Oil” is another instance.

  107. Yes, even if voters knew what they should we would still have the problem of only two real choises. But if the politicians really understood the economy, how much of a difference could there be? One might be slightly more in favor of capital or maybe consumption be there shouldn’t be much difference in views if we all understand what we’re talking about. I’d personally be happy if all they understood the economy- everything takes money. Nils you’re absolutly correct about republicans dumbing it down for a demographic. Despite the trashing of lower income groups and overt republican support of the monied, there is an inverse relationship between education and likelihood to vote republican, it is very common for poor, uneducated, rural Americans to vote republican. It makes sense for them to do this, the wealthy don’t have enough votes. Educated people are more likely to vote democrat.

  108. I don’t expect people to be perfect problem solvers. I am far from a believer in the idea that humans are rational creatures. I do expect politicians to grasp important concepts better than your avg Joe. If for no other reason than the fact that they have access to better info and sources than your avg joe. This doesn’t mean they will always produce optimal policies, but I expect them to at least be better informed. I don’t think that’s an unreasonable or naive position.

  109. The reality is that while we can expect all we want we are stuck with those who are in charge right now.

  110. Now, something very interesting is happening. Greece is supposed to run out of money (literally) by mid November and won’t get a dime before the referendum is passed in early December.

  111. Interesting comment Delta.

    Money is how we express what makes us happy. If you buy it you want it, if you want it it is fulfilling some sort of need, if all your needs are fulfilled you are usually happy. This isnt to say that having money alone can make you happy but it is easy to see what someone values by what they spend money on.

    I happen to think Austrians are mostly delusional because freedom is a myth. Especially the way its viewed by many as some sort of individual right, or as something an individual can achieve alone. “Leave me alone so I can be free” is an oxymoron of sorts. Asking for isolation is not freedom. True human freedom can only be achieved when we work together. Separating and working in isolation is the last way one can really achieve our full potential as a human. If you are leaving your full potential locked up, you’re not free.


    “the current state is legitimately a farcial combination of the two notions that is just a corporatist, crony state which does little to protect liberty and often undermines welfare. 400 people possessing 52% of the wealth of a nation isn’t the end product of either free-market capitalism, nor socialism!”

    Very true.

    ” The way I read MMT – it’s descriptive and useful, but it hardly tells you what society SHOULD (normatively) look like. MMT simply doesn’t apply to what the Austrian school wants.”

    Well MMT is not supposed to tell anyone what society should look like, it only describes the nature of money. We get to decide what our society should look like. We get to make and buy what we want. MMT tells us how to interpret the accounting we’ve devised.

  112. MMT says that inflation is the true constraint on money creation by the sovereign currency issuer that is indebted in its own currency (solvency is not an issue), and that the productive economic capacity of the sovereign nation is the baseline for measuring the value of the sovereign’s currency and thus the potential for inflation.

    Given that Greece’s current productive capacity is low, and further given that Greece will have little or no access to credit markets if it defaults and readopts the Drachma, and further given the ingrained sense of entitlement in contemporary Western populations including Greece, a new Drachma will likely collapse in short order as the Greek government issues fiat money and transmits it to favored constituencies with little or no restraint and without regard to the productive capacity of the nation. The economy will then become informally dollarized and/or Euro-ized, and new Drachmas will be like Soviet rubles were in the USSR; useful for tax payments and limited daily exchange, but eagerly traded at brutal exchange rates for hard currencies (i.e., “real money”).

    Papandreou is expecting to win the referendum and thus be able to crack down (with military support if necessary) and get the country back to business. If he loses the referendum, the Greek population will have made its soft currency and inflationary choice and cannot really complain about life under the new Drachma. Inflation rather than austerity will reduce the Greek standard of living closer to par with the nation’s productive capacity, but either way it will be reduced.

    What could change this outcome? The ECB purchasing sovereign debt of the periphery to target interest rates, which is de facto fiscal union in the sense that Greece can then continue to tag along on the productive capacity of the entire EU while Greece enjoys the benefits of the Euro and its credit markets. The foregoing may explain why polling shows an overwhelming majority of Greeks favor the Euro but oppose austerity; that is the win-win position for Greece. It also explains why the Germans are warning the ECB against full scale QE; they know that full scale QE by the ECB to bail out the periphery is de facto fiscal union, and that is NOT what they agreed to in the Maastricht Treaty.

    The Greeks are much smarter than TPC realizes. The Greeks have gone all in on the biggest poker hand in world history and believe that the French and German banks will make Germany and France (and the ECB) blink, thus allowing the Greeks to blunt austerity while keeping the Euro and its benefits. The Italians are playing the same game as the Greeks.

    I think that the Germans were the dumb money at the Euro table; the Greeks and the Italians were the smart money. This is what makes the situation so volatile. Beware of angry Germans who think that they have been swindled and betrayed.

  113. The way this is developing is interesting and may mean the Greek pm is playing a smart game.Up to this point he’s had to deal with many Greeks striking and showing their dislike for austerity to the point where his govt clearly won’t be able to sustain such a policy ongoing.However ,because of his proposal ,and the expected response from Europe on further loans the Greek people are now being offered a stark choice.It becomes a vote either for acceptance of austerity which means less for them ,or some of them not getting paid very soon. It’s surprising how less can suddenly look appealing when the alternative is nothing.

  114. My argument is that the trade is the consequence and not the cause of the union. If suddenly Portugal left the Union and started a Free Trade Agreement with Portuguese Speaking African Countries, it would expectable to see them ‘bound’ by trade.

    Another thing I remembered earlier – Greece, Portugal and Spain have been receiving millions upon millions of euros for the last two decades (Cohesion Funds), yet there is deficit and debt in these countries. What does this make of Fiscal transferences?

  115. I have no confidence in Greece increasing it’s productive economic capacity, they didn’t do so in the past when they were handed money by idiot creditors. Of course the EU also ties your hands a little, you can’t subsidize industries directly for example. I think we also have the issue of moral hazard here…

  116. During my many travels, I met a man from Macedonia.

    Before accession to the EU Macedonia made it’s own cheeses, sausages, and other manufactured items. Most of these were made by small establishments, who had been in business for decades.

    Upon accession these outfits found to their horror, that their products no longer met EU standards, only German products did. They went out of business, or were put out of business.

    Same thing happened to the Greeks.

    The country was flooded with German and French products, local products were deemed not up to standard, and local production was curtailed, putting many out of work.

    I hear many claim that the only thing the Greeks are good at is tourism. This is tantamount to saying they make good servants, and little else.

    I hear some say that Ireland’s reducing their corporate tax to attract businesses, was good policy. I think that guaranteeing the offshore deposits in full of one’s private banks is foolish.

    Ireland should have put the banks into receivership, and in receivership gone after the personal assets of all their employees, including the ones living elsewhere, and paid the depositors the proceeds, likely returning only a fraction of their deposits. They should have created a central bank, insisted it have a window at the ECB, or else, and made the ICB lender of last resort for a full reserve banking system, newly created. Yep, only the ICB could print money, sent it from the ECB.

    If the ECB or Merkel, Sarkozy etal wouldn’t play ball then stuff the depositors.

    This is called hardball politics.

    It works.

    Dr. G

    PS: Similarly, each and every EC country should have it’s own Central Bank, with a window to the ECB. The ECB should be limited to providing funds to member Central Banks, and no other firms. The member CBs should be lenders of last resort to banks within their system, and no other firms. The member CBs should have an account for the treasury of their host govt. The Treasury of their host govt should be able to credit funds into that account up to the limit necessary to produce full employment. It should be the job of the ECB to counsel each member state regarding this.

    Also, members should be able to impose their VATs in such manner as to protect local industries from predatory attacks of industries beyond their borders.

    Dr. G

  117. Thoughtful post, Greg.

    >> Asking for isolation is not freedom. True human freedom can only be achieved when we work together. Separating and working in isolation is the last way one can really achieve our full potential as a human. If you are leaving your full potential locked up, you’re not free.

    I think that’s really the key issue that people should be debating. I’m not of the view that individual liberty can be equated with isolationism. In some ways, “freedom” itself is defined as freedom from government. But, the Austrian school is all for voluntary associations of people. In fact, I find most well-versed Austrians would argue in favor of trade unions, even. But, identifying liberty as being individual and from our creator is essential in two ways for the Austrians. First, it’s the basis behind equality of law among all individuals, irrespective of race, etc. Second, its essential to countering the argument of any sort of “social contract”.

    So, I imagine a libertarian would say freedom is what you make of it. If you choose to sit in your basement all day yelling “free at last, free at last thank god almighty I’m free at last” – well, good luck. But, most libertarians would want to see the freedom to make that or any other choice maintained. At times it does get a bit silly and I’m not sure that the “either you respect freedom or you don’t” argument is the optimal way to go – but, I think there is a causative link between freedom and happiness and free societies tend to evolve a lot faster than “government run” societies.

    The issue of currency is deeply connected with the issue of freedom. The current form, which I believe is what MMT describes does turn the state into a power monopoly. Much of what the constitution intended to do in spirit was washed away once we established FIAT money without the old gold peg.

    I certainly have a lot of sympathy for the Austrian argument, though, I’m not sold on the gold standard argument and I don’t see the present condition as a legitimate starting point for a truly libertarian society.

    Thoughts on this?

    ps: Cullen – I wonder if this general topic might make for an interesting post in the future?

  118. Europe is not the US: the genius of the US system works because of the homogeneity of American culture, and its ability to integrate different nationalities into one American ethos. Notice how quickly the different ethnicities gave up their languages to speak English. Europe cannot coalesce in the same way: there is no “Europe” in the same sense as there is “America” (or North America –i.e. the US)– with due deference to our Latin neighbors). The most unity Europe ever had was a cultural unity as “Christendom” prior to the Renaissance and the Protestant Reformation. I believe Europe will continue to remain fragmented, unless a spurious and necessarily fragile unity is imposed by military and/or financial force.

    As for the idea that “I don’t see any of this as being too complicated for citizens to understand,” I believe this is wrong. By definition a collectivity is mediocre or average. In any group, the majority will instinctively look to leadership, for good or ill. Democracy does not mean that one looks to a quantitative majority for wisdom and guidance, but that a responsible representative government has the best interests of the whole in view. This may mean going against the wishes of a majority, because of greater expertise, certain information, etc. The point is that the representatives of the people, ideally, should be guided by the interests of the whole and not by self-interest or the interests of a particular faction. Therefore, I think Cullen’s point is actually more in accordance with the spirit of a real and concretely possible democratic orientation.

  119. Wall Street vs. Greece: G20 Opens as Greek PM Pushes for Referendum on Bailout and Austerity Measures

    The Greeks understand very well, as does the Wall St. Occupation, that they are being pushed unjustly into austerity measures. Papandreou, who is acting as a traitor-wolf–but in sheep’s clothing–is failing in his job as the overseer of his country’s well-being, by demagogically calling for a referendum but at the same time failing to explain to his people what is really going on in this clever reframing of the issue, and in his failure to exercise real leadership and decisiveness. The bankers are increasing their stranglehold on all government, and no one has the guts or the lucidity to cut their heads off.

  120. Cullen,

    I think your republicanism is laudable but overly idealistic and unrealistic here. First, as many others have pointed out, the “elite” representatives elected by Zorba/Josef/Joe Sixpack may be smarter than the average voter, but they are only smart enough to be more dangerous. When push comes to shove, they’re dilettantes in the face of the complexities in the system you yourself claim to not fully understand after often studying it 24/7.

    You fail to understand that societies work more like art than science, as much as we may wish otherwise. No politician can be trusted to “explain/understand” the deep meanings of some great work of art, nor will Zorba Sixpack, nor will even many of those great artists who produced that work themselves. They just “feel” it resonate through all the complexities of being human and our shared perceptions. If there is something rotten in Denmark, I think the populace as a whole will smell it before they know how it’s rotting. I say trust the wisdom of crowds. It could fail like a mob, but it’s better than relying on a few outliers elected by those same “stupid” people.

  121. Re:They just “feel” it resonate through all the complexities of being human and our shared perceptions. If there is something rotten in Denmark, I think the populace as a whole will smell it before they know how it’s rotting.

    Yes, they do smell it, but then it is often too late. Recall that the same “gut feeling” public elected the crooks that got them into trouble in the first place. No government will work if the system has been allowed to legalize criminality. Americans have this mystical belief in quantity. It is absurd. The collectivity by definition is always, always passive: it reacts in relation to either positive or negative stimuli. This is what advertisers and politicians understand very well–again, for good or ill. Obviously a group of scoundrels without principles can be counted on to game the system. A few year ago, Bill Black and company were able to put over a thousand crooks into jail. This time, since criminality became legal, it is quite different.

    Take a look at the Youtube with that master demagogue Newt Gingrich working the crowd in Iowa, then take a look at the rapt imbecility of the average face there, applauding like trained seals each time he hits a knee-jerk reaction phrase. It is remarkable. These are the faces and reactions of a TV-besotted population, which spendss its time working, shopping and so forth, but certainly not studying complex issues in depth, in relation to first principles and in view of possible consequences. We have a perfectly nefarious media controlled by the same corporate forces that are currently strangling government. Our media are there to entertain in an often very decadent and vulgar manner a very dumbed-down population. An active minority initiated a reaction and is gathering followers. They more or less get the big picture: 99%-1%; but don’t push it. They will need intelligent and alert leadership that truly has their best interests at heart.

  122. “It is the minorities who have made the history of this world. It is the few who have had the courage to take their places at the front; who have been true enough to themselves to speak the truth that was in them; who have dared oppose the established order of things; who have espoused the cause of the suffering, struggling poor; who have upheld without regard to personal consequences the cause of freedom and righteousness. It is they, the heroic, self-sacrificing few who have made the history of the race and who have paved the way from barbarism to civilization. The many prefer to remain upon the popular side.
    Eugene Debs

  123. The short and simple is that currecies float against other currencies. It doesn’t float among U.S. states because we all use the same one.

  124. “They will need intelligent and alert leadership that truly has their best interests at heart.”

    Yep. Like Bill Black, for instance. Bill Black for President!