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Alasdair
Macleod, publisher of Finance and
economics.org, sees little
room for a happy ending to the worsening
European credit crisis.
In this
interview, he builds on his
excellent synopsis from earlier
in the week that detailed how the crisis originated, essentially embedding a fundamental
structural shortcoming into
the entire Eurozone construct starting back in 1997. This flawed monetary model was exploited for temporal gain and it
worked very well as long as the pie was expanding and nobody was looking too
carefully at the mounting imbalances created as it chugged along beautifully. Everybody was getting rich
on their Mediterranean
villas going up in price almost daily.
This whole
thing was bound to work until, mathematically, it couldn’t work.
The process
of growing sovereign debt at a
much higher rate than national income year over year over year was bound
to encounter a mathematical
limit at some point. That time has arrived.
How did we go wrong? How should we repair
this? These are good
questions that the European
leaders are *not* asking at
this stage. Instead, they're choosing to do all they can to perpetuate
the status quo
- focusing on keeping things together just through the next quarter, through the next election cycle. And it clear that
their best efforts are meeting with
less and less as the
situation worsens.
In this
interview, Alasdair provides
a very detailed update on
where things stand in
Europe and what to expect
next. Most notably, he paints a
picture of a lot of very well-meaning, very anxious people who -- tragically -- are diligently applying the wrong solutions to
the incorrect diagnosis.
There
is one big element of this, which nobody had addressed because they don’t understand it. If you’re an Austrian economist you will understand
it. If you not, you won’t. And because governments are populated by economists who are not Austrian, then they don’t
understand it and they won’t understand it.
That
is this: if you try and measure
an economy by GDP, all you
are measuring at the end
of the day is the amount of money in the economy.
It is not a measure of economic progress. This is a very, very
important point. And, the reason it is relevant is that so
long as you say we need GDP to not fall -- which is roughly what
we’re talking about
as far as the problem that
the officials see; they don’t want the economy to fall because it threatens taxes and all the rest of it -- if they’re measuring it by GDP, then they are using the wrong metric to come up with any solution.
Now, we’re
in the real world and we’re trying to seek a solution to
the problem. You don’t
do that by concentrating
on an accounting identity.
This is the point that nobody in the system seems to understand. So far as I am aware, nobody is yet discussing
it, but this is why I think
virtually anything they do is almost
certain to fail.
Now, if we take a step
back, the one thing that is wrong with
the European Union -- and most
of the other advanced
nations by the way -- is
the size of government. There is
a myth that government can intervene and improve things. It can’t.
As
you rightly point out,
one side that isn’t looked at is that
government spends money
on subsiding industry, paying out welfare and so on and so forth -- but that money’s got to come from somewhere. Is it being taking
away from the productive economy and being injected into something less productive or
not productive at all. They’re
destroying savings and therefore the ability of an economy to actually progress itself.
So,
at the accounting identity level, governments can and actually do push up GDP because
GDP incorporates government
spending at cost in the provision of services and all the rest of it. That is part of GDP. So, if government
increases it’s spending, GDP goes up. You rightly say, it excludes the other side, so
where does the money actually come from?
So,
we actually do have a huge problem in understanding what the problem is and therefore how to resolve it. I think that
the consequence of that is that the crisis is likely
to drag out a lot longer than it
would otherwise because they are bound to resist the obvious and that is to cut government
spending. You really
need to slash it the whole way across
the board. So they will resist that
because the economists will tell them that if you cut
spending across the board, then you’re
going to cut GDP which means that
your tax take is going
to go down and you’re just
going to make the problem worse. That unless you print
money to offset it, you’re
going to create a huge great deflation.
But
actually, what they need to do is to cut the government spending and remove the distortions from the economy so that the economy
can actually recover itself. Now, you mentioned
Iceland earlier. I think you know that what the currency did is a slightly separate thing from what happened
in Iceland itself. The government hadn’t resorted to do anything. It couldn’t interfere. It stood back and everybody understood they had a problem, a huge great problem.
They knew they couldn't expect the government to solve the situation and that they had to look after themselves..
They’ve done that and the result is the economy has turned around. That is what we need
to happen in Europe. But, they
are going to resist that process till the politician’s dying days, and that is really the problem. They are now getting in the way of the solution.
Click the play
button below to listen to Part I of Chris' interview with
Alasdair Macleod (38m:48s):
iTunes: Play/Download/Subscribe to the Podcast
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