Does it matter what kind of currency you use when you are spending irresponsibly? Wouldn’t there be enormous inflation if Greece had its own fiat currency right now to monetize its debt and pay for deficits? Lastly does it matter to the people what kind of currency (metallic or fiat) government uses? Aren’t people screwed in time of crisis caused by runaway government spending (and it always inevitably comes) either way?
If anything the Euro is saving the Greeks. In a country where every institution is corrupt to the core, the Euro is one thing they can almost count on.
Ok, I’m confused. How exactly does the Euro function in a similar way to Gold? Since when does the euro emulate even remotely the tendencies of gold flows as observed by the likes of Ricardo?
What all of these pro-fiat money advocates like is that it gives politicians flexibility. In other words it allows them to dodge hard decisions on spending other peoples money. So politicians do what they do best which is to spend the money of someone else without the politicians themselves having to get their hands dirty by taxing their citizens.
The only good part of this is that fiat currencies, ALL OF THEM, are at various points on their way to crashing. I am somewhat shocked that the Germans and some other folks haven’t thrown in the towel and adopted their own currencies. The Euro is clearly in bad shape. The design of the democracy in the EU means that the savers pay directly for the spenders. Eventually the Germans will dump it as they tire of paying trillions of $ to bail out these PIGS. The “Big Pig” is still out there and that is the UK. I bet that the EU central bank will team up with the US central bank and really hose their own people to save Jolly Old England from ruin.
We’re not looking at the problem correctly. When the financial bubble started bursting in 2008, states became liable for the deposits of their citizens in foreign banks. For example, the British government had to bail out the Icelandic banks so they could pay back deposits to British citizens. Now the British state wants Iceland to pay them back, but the Icelanders say no way.
In the case of Greece, every big European bank has a large pool of Greek debt on its balance sheet, as well as Spanish, Irish, Italian, UK debt, and so on. Now the UK can bail out its own government by ordering the Bank of England to buy all UK bonds at par. The Greek government cannot tell that to the ECB. Only if all member states agree can the ECB bail out all the banks.
But what will happen if Greece defaults? Then the market for Greek bonds will implode, and all the big European banks will take a huge hit to their balance sheet. Some may not be able to pay back depositors. The entire European banking system will collapse, just as happened in Argentina. Then the ECB will have to decide what to do with the bankrupt banks. Either liquidate them all (to whom?) or save them from bankruptcy by buying all sovereign debt at par.
The same thing could happen to U.S. banks who have PIIGS debt, but the Federal Reserve bailout is already a done deal so why worry?
That’s not even flawed. Neither the drachma nor the euro have ever had any gold backing so why use it as an “argument” against the gold standard is beyond me. Unless you consider the wages and bank accounts of other Europeans a “gold reserve” (and with fuel increasing 3-4 cents a liter each week it looks so).
I don’t know about Ricardo’s gold flows, but I think the reasoning is this:
When an economy is in deep trouble, goes the Keynesian argument, the solution is for the govt to spend spend spend the country into prosperity. But where do they get the money to to spend? Taxes? Ha! That may lead to rioting in the streets.
So the peaceful gentle harmless way is just print more money and spend that. But now look at Greece. The poor buggers are not allowed to print Euros. And they don’t have their old drachmas to print anymore either. They are artificially being prevented to do what it takes to save themselves, mainly print money.
Same thing with the gold standard. If every piece of paper a govt printed was redeemable in gold on demand, that too puts a limitiation to how much they can print; they can only print an amount equal to their gold supply.
Thus any country foolish enough to return to the archaic old fashioned clumsy gold standard would, when the chips are down and the printing press is needed, have the exact same problem Greece is having now.
P. S. I know this is a crock. But that’s what they mean.
And what my mentioning of gold flows is the relationship between gold reserves and the interest rate Rothbard describes in his America’s Greatest Depression; Ricardo observed that when countries bound by gold as a medium of exchange engaged in international trade saw their reserves dwindle as the imported more, and then responded by raising interest rates in order to build them back up. It’s one of the best examples of the ABCT I’m aware of but the fact that I brought it up proves I didn’t understand the Keynesian argument at the time I posted.
If you think Keynesianism is dead, you do not understand the nature of Keynesians. They are a posteriori scientists; first they do something expeditive that they want to do, and then later on they come up with some theory to justify it.
Keynes has been the triumphant a posteriori scientist because his thought is so incoherent that it is almost impossible to refute.