Philipp Bagus and Alasdair Macleod on Europe, inflation, and gold

From GoldMoney.com:

In this video Philipp Bagus, Assistant professor of Economics at Madrid’s Universidad Rey Juan Carlos and author of The Tragedy of the Euro and Alasdair Macleod of the GoldMoney Foundation talk about the eurozone facing the problem that is characterised in the “tragedy of the commons” analogy. Bagus explains this phenomenon by way of an example of overfished and over-exploited oceans due to a lack of property rights on oceans. In Europe, governments run larger deficits than their “competitors” in order to externalise the costs to all users of the currency. Knowing these incentives, the Stability and Growth Pact was put in place as per the early 1990s Maastricht Treaty, capping budget deficits at 3% of GDP and the debt to GDP level at 60%. However there was no enforcement of these rules which is why there have already been more than 80 infringements to this stability pact without any repercussions.

They talk about possible solutions to the euro crisis. Bagus points out that there are basically three different ways to go about it. Firstly, governments could make drastic cuts in public spending and privatise public assets in order to balance their budgets. However, there will be – and is – strong political resistance to such proposals. Secondly, the eurozone could disintegrate, driven by a reluctance of German citizens to pay for other countries’ expenditures. And lastly, central banks and governments could decide to print their way out of the crisis, leading to high inflation.

Bagus says that as long as the incentive for running deficits exists there won’t be an increase in countries’ savings rates. Macleod points out that there is great institutional resistance to breaking up the euro. Bagus explains that the official opinion towards the euro is positive in Germany; however the sentiment on the streets looks quiet different. But as long as there is no political party devoted to this issue this mood is not likely to gain traction at least as long as inflation remains moderate.

Amid the ongoing expansion of the money supply and persistent deficits, Bagus can’t see the dollar gaining in value over the medium to long term. He also says that ECB policies are a lot more pragmatic than the ones undertaken by the US Federal Reserve. Talking about sound money, Bagus explains different ways to go about its introduction. One way would be to back all the money in existence by gold, adjusting the price of gold accordingly. Another would be to take away legal tender laws and have competing currencies. However this would require the governments to impose dramatic reforms, which is partly why they will oppose such measures.

This interview was recorded on November 15 2011 in Madrid.

4 Comments

  • Carax says:

    I’m having trouble following Bagus’ line of argument because he’s leaving so much out. Is he saying the only way out of the euro crisis is to let the common people pay for the mistakes of the bankers, with severe austerity measures, that the good times are over for us little people but will get even better for the rich elite? Maybe that’s what he means by the tragedy of the commons.

  • Paul Marks says:

    “Pay for the misakes of the bankers”.

    I am no fan of the credit bubble bankers (to put things mildly – I detest them and their antics).

    However, the Welfare States of Europe (and the Welfare State of the United States – oh yes it has one, the “entitlement programs” and so on) were NOT the creation of the bankers.

    Let us have no Max Keiser nonsense here – Greece (and Italy and ….) are not in trouble because of “the bankers”, they are in trouble because their governments (over many years) set up Welfare State schemes that have vastly expanded (as such schemes always do) and now CAN NOT BE PAID FOR.

    Borrowing from bankers did not create the crises – indeed it put off the day of reckening.

    Indeed such Prime Ministers and (for example) David Brown also supported the banks to expand as much as possible (to “make mistakes” as Carax would put it) – why did he do that?

    He did it, not because he loved the “rich elite” – but because he wanted the TAX REVENUE from the expanded financial services sector, he wanted this tax money to PAY FOR HIS EXPANDED GOVERNMENT SPENDING.

    At the heart of all (but one) of countries that are in crises is GOVERNMENT SPENDING.

    The “austerity measures” (i.e. limiting the Welfare State) would have to be taken even if no banker had ever been born – indeed they would have come SOONER without bankers.

    Only in one country, in crises, in the E.U. is the above NOT true.

    That country is the Republic of Ireland.

    There as recently as 2007 there was not a big government deficit and government spending was actually not as high (as a percentage of the economy) than most countries in the European Union.

    There one can talk about the “mistakes of bankers” leading to a crises.

    It is quite true that the government of the Republic of Ireland should have rejected pressure from the Germans (and so on) and ALLOWED THE ANGLO IRISH BANK TO CLOSE ITS DOORS.

    This would not have been a painless option – the closure (the true bankruptcy) of Anglo Irish bank (and so on), would have caused great economic harm.

    But not as much harm as the choice to bankrupt all of Ireland by standing behind the banks.

    However, for every other E.U. country this is NOT the cause of their problems.

  • Carax says:

    The “welfare states” are not the cause of the “sovereign debt” crisis.

    This is a systemic problem, it is deeper and firmly located in money, credit, debt and banking, political policies and financial architecture, of banks that lent too much for decades. A real free market system uses commodity money outside of political control and this is especially not the case for Europe or America, and other countries. Commodity money in a true free market cannot be used to manipulate the economy. So far, the current system, and the cause of the crisis, has benefited the state, the banks, the financial industry.

    It is they who are receiving entitlements, welfare on the backs of ordinary people who, without their support, the entire pyramid would fall. This has been socialism for the rich and it is no longer sustainable, so the lords of finance have decided to fleece the masses to hold out a little longer.

    Using the welfare term as a cover for the entire euro zone is a straw-man, basic right-wing ideology. Newsflash: there is no unique European social model, some work better than others and aren’t near a debt crisis, e.g., the Nordic model has performed best. Social models, well, the U.S. with about 17% social expenditures has higher poverty rates, and bigger financial troubles than Europe with 26% and lower poverty levels and a higher educated workforce as a result of entitlements to a good education.

    “entitlement programs”

    The most important examples of entitlement programs at the federal level in the United States would include Social Security, Medicare, and Medicaid, most Veterans’ Administration programs, federal employee and military retirement plans, unemployment compensation, food stamps, and agricultural price support programs. Apparently, this falls in line with Ayn Rand’s philosophy (a warped Social Darwinism – a survival of the fittest), they are no fans of these programs.

    Of course, I wonder if Marks realizes that business corporations also take advantage of entitlement programs. In today’s highly interdependent world, individuals and nations can no longer resolve many of their problems by themselves – we all need each other – of course for some, the idea of developing a universal sense of responsibility, a collective and individual responsibility to protect and nurture the global family, to support its weaker members, and to preserve and tend to the environment in which we all live, is abhorrent to them.

  • Paul Marks says:

    The Welfare States ARE the cause of the fiscal crises in all but one of the crises hit countries in the E.U. (the one where this is NOT true is the Republic of Ireland – and I duely mentioned that).

    You are simply wrong Carax – to be blunt you do not know what you are talking about. ACCEPT that I believe you really do (once one has got underneath your mist of words) – see the end of this comment.

    “People need each other” – quite so and we always have done, but to confuse civil society with the STATE is the trick of the totalitarian.

    As for your support for various unconstitutional American Federal government programs…..

    Your problem is not with Ayn Rand (or with Charles Darwin) – your problem is with the Founders of the United States, especially with the writers of the Constitution and Bill of Rights.

    By the way these programs (from farm subsidies, which mostly go to the very “big business corporations” you claim to despise, to the health, education and welfare programs that have undermined both civil society and local autonomy) are totally UNSUSTAINABLE.

    They are going to go BANKRUPT Carex.

    Your kind have told people (for decades) that they need neither make provision for themselves or for others (that the old Fraternities and Friendly Societies are silly – and that the traditional family is “outdated”).

    Now your schemes are collapsing – and tens of millions of people (who have been taxed, and tricked, into becomming dependent upon them) will suffer – the suffering of the population will be horrific.

    This is not “compassion” this is SADISM – as I am certain that you understood perfectly well that these schemes would collapse into bankruptcy. This is (in an American context) the “Cloward and Piven” tactic – first spend everything into collapse and then blame “capitalism” (the Marxist Dr Cloward and his wife Francis Fox Piven were unwise enough to put the idea in writing – but, of course, they did not invent it).

    Your reference to the “global family” (i.e. your hated for real families and for civil society in general) shows what you truely are – and the sickening evil you represent.

    You tell yourself that your aim is noble – that you wish to create a wonderful collectivist utopia out of the ashes of the old world, create a “global family”.

    However, deep down, you know as well as I do that this is nonsense.

    Your true aim is just destruction (just to burn everything to ashes), destruction FOR ITS OWN SAKE.

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