Dear Sir and Madam,My name is Jurre Hermans. I am 10 years old and live in the Netherlands. I am quite worried about the eurocrisis and look at the TV news daily. The eurocrisis is a big problem. I think about solutions. Since I read in the newspaper about your price, I thought that I would like to submit my idea. The idea might fit. So here it is:
I made a picture of my solution and I will explain it to you.
The situation in Europe has reached the point of embarrassment, when a 10-year old boy has as good a strategy for dealing with Eurofailure as the professionals. Says Jurre:
The Bank gives all these euro’s to the Greek Government (see topleft on my picture). All these euros together form a pancake or a pizza(see on top in the picture). Now the Greek government can start to pay back all their debts, everyone who has a debt gets a slice of the pizza …
We can call this the ‘Pizza Policy’. The Greek’s creditors get the (theoretical) pizza, the Greeks get ‘unhappiness’, worthless drachmas and a kick in the pants.
Youngest entrant
An eleven year old boy from the Netherlands has received a special mention from the judging panel of the Wolfson Economics Prize for his application to the prize.
Jurre Hermans, a school boy from Breedenbroek in Gelderland Achterhoek, was the youngest entrant to the Wolfson Economics Prize. He decided to enter the prize after watching Jeugdjournaal, and because of his concern about the Eurozone crisis. Jurre’s paper, complete with diagram, proposes that Greece should leave the euro. Greek citizens would exchange their euros for drachmas and anyone caught moving euros abroad would be penalised financially.
He will receive an €100 gift voucher for his efforts.
€100 gift voucher, good at any McDonald’s. Jurre’s platform is shockingly similar to German Finance Minister Wolfgang Schäuble’s: knock those Greeks down then beat them with clubs with nails sticking out. Jurre certainly has a job waiting for him at Goldman-Sachs or at the US Treasury as the euro will certainly be long gone by the time he comes of-age.
The only hole in the Jurre-Schäuble argument is the Greeks lack the euros to repay anything in meaningful amounts. This shortage of euros IS the credit crisis not the outcome of it. The absence of euros feeds on itself: the shortage multiplies demand for available euros and their cost in credit markets. Euros are hoarded or removed from the marketplace which pushes credit costs higher still. This isn’t debt-deflation so much as it is a deliberate policy of credit strangulation.
Keep in mind, the ECB with its LTRO- and the discount window operations cannot create new credit only recycle or re-allocate what already exists. Its balance sheet expands because private-sector balance sheets shrink by equal amounts elsewhere. What economists ignore is central banks are collateral constrained: they can accept zero-quality collateral but cannot lend against zero collateral, otherwise there is no central bank.
What would end the rationing scheme and the credit crisis would be the addition of more euros or any other form of liquidity. Since credit isn’t a natural resource and can be created in virtually unlimited quantities, shortages of credit are matters of policy or corruption. In the Eurozone, the absence of liquidity is the small matter of an absent fiscal structure. There is no European ‘federal government’ to provide euros. Only the national governments and the private sector can create credit: the private sector refuses and precious rules inhibit the nations themselves from doing so themselves.
In credit economies, access to credit rations access to resources as well as other goods. Shortages that take place are blamed upon ‘deadbeats’ who ‘purposefully choose’ not to meet their obligations. As credit vanishes, demand for it increases to infinity. Credit demand becomes impossible to satisfy, this leaves demand for the goods to be exported to the creditors who gain the ‘moral claim’ to consume in the borrowers’ place.
The borrowers fail to make good because of the denial of credit on the part of private creditors with interests to promote. Out of this failure the creditors’ claim against the borrower becomes perpetual. The only means by which the borrower can make good is now possessed by the creditor who refuses to release it. Because funds are borrowed in order to waste resources, debts cannot be satisfied unless the borrower is able to waste more which requires more borrowing.
Here is where the edifice of so-called capitalist economics collapses under its own weight: waste as the center of industrial activity is presumed to be ‘productive’ even as the wasting- borrowing process bankrupts the entire enterprise. The leverage regime acts against itself as agents borrow themselves into ever-deeper holes that they can only pray to be allowed to borrow their way out of … which of course, they cannot do.
From this particular vantage point, the euro becomes the instrument of bait-and-switch credit fraud like a sub-prime mortgage. Policy failure on the part of the European Union is to not have a lender of last resort: the fact of such an absence after ten years of euro speaks for itself.
The cost of credit scales inversely to the amount of debt an enterprise can take on. Inversely scaled credit cost is the competitive advantage the ‘too bigs’ possess over the ‘not quite so bigs’ who must pay more to borrow. Sovereign debtors are expected to outlive (or to execute) their creditors even as economic ‘growth’ (inflation) reduces the real amounts debtors must retire or service. Because sovereigns are the largest debtors they claim extraordinary privilege … of not having to repay debts but to infinitely roll over and monetize them. Because sovereigns are the ultimate consumers of credit, national debts are too great for any economy to repay even when it has gone far down the road to Ponzi financing. At some distant point in time both the borrower and the lender have been migrated to the (sovereign) balance sheet which allows the loan to be extinguished. Alternatively, debts are repudiated.
The sovereign is vulnerable: the borrower must take on debt denominated in the country’s native currency. Otherwise, all of his debts are external, at the pleasure of repayment on the lenders’ terms in the lenders’ currency! Here is the set trap at the center of the eurozone: no country within the Eurozone who carefully follows its rules has the use of its own currency. The euro is no-nation’s currency and all debts denominated in euros are external debts. Each Eurozone country is held hostage to private lenders: in a practical sense every European country is a colony of the finance industry.
It is that industry that sets money rates at any given time because there is no public competition, no alternative bid. Governments lack the structural means to control their own destinies. If ‘investors’ collude so as to refuse to lend for any reason at all … there is no agency to lend in their place and compel a bid.
Because there is a bid, the Japanese can borrow at low rates with debt/GDP ratio of 204%. Because there is no European bid, the political economists Reinhart and Rogoff can effectively pronounce a death sentence on Greece’s debt to GDP ratio of 130% even though such a thing is irrelevant to a sovereign. Nevertheless, the Greeks are are cut off from private credit. Had Europe a real lender of last resort rather than the current fake, there would always be a bid for the national debts and there would be no debt crisis to speak of.
What the foregoing insists is that European nations cannot survive their human or corporate creditors … which is astonishing and suggestive. The demand is exercised that Greece in a multi-year recession must repay finance-level debts that are beyond the ability of any economy to retire and to do so at once without any support. This indicates that Greece is expected to expire: there is no other possible explanation.
At the same time, private lenders are in extremis because of habitual poor credit underwriting both within Eurozone and elsewhere. Add the strains of unrequited repayment demands made upon Greece and the others credit spreads have deteriorated and risk has increased making all lending unprofitable.
The financiers and core states of the Eurozone have changed the rules in the middle of the game, from allowing Greece and the other peripherals to roll over maturing debts at reasonable rates of interest to cutting off credit and calling outstanding loans. Here is Greek default, imposed upon it by the rest of the Eurozone.
Greece has been a nation for thousands of years, certainly a ‘modern’ Greece would be expected to survive long enough to manage its debts. It could do so if it could access credit at Germany’s rates of interest.
If Greece had a government worthy of the name, the Greek treasury would issue fiat euros and use them to put citizens back to work. A government worthy of the name would dare the financiers in Frankfurt, London and Wall Street to do anything about it as there is nothing that they could do.
About the Wolfson Economics Prize
The Wolfson Economics Prize will be awarded to the person who is able to articulate how best to manage the orderly exit of one of more member states from the European Monetary Union.
There is now a real possibility that political or economic pressure may force one or more states to leave the Euro. If the process is managed badly it would threaten European savings, employment and the stability of the international banking system. The Wolfson Economics Prize aims to ensure that high quality economic thought is given to how the Euro might be restructured into more stable currencies.
The Wolfson Economics Prize, worth £250,000 (€286,000), is the second biggest cash prize to be awarded to an academic after the Nobel Prize. Deadline for submissions will be January 31st 2012.
Who is Wolfson?
Simon Wolfson, Baron Wolfson of Aspley Guise (born 27 October 1967) is a British businessman and currently chief executive of the clothing retailer Next and a Conservative life peer …
As if there is any other kind of life peer … Here is a sampling of entries:
Roger Boodle, A Practical Guide To Leaving The Euro:
Secrecy versus openness
In theory, keeping a country‘s planned exit secret for as long as possible would help that country to minimise – or at least delay – the disruptive effects likely to be caused by the disclosure of its plans to leave.
Such effects might include: large capital outflows from the country as international investors and domestic residents withdrew their funds; associated falls in asset prices and increases in bond yields; runs (i.e. large and rapid deposit withdrawals) on banks in the country, perhaps causing a banking crisis; and negative effects on consumer and business confidence.
Thousands of words from Mr. Boodle but not one mention of energy in his entire proposal.
If we assume the costs caused by the additional legal uncertainties are equivalent to just 10% of annual external trade in goods and services, a typical euro-zone country might face an additional hit of 4% of GDP. But the disruption in the immediate aftermath of an unanticipated exit from the euro could be much greater.
There is as much or more secrecy to propositions as there is to nuclear power … and for the same reason. The truth would have persons running for their lives. It is far better, as our 11-year old economist suggests, to force or mislead people into serving the interests of moneylenders. This will not work if people discover their ‘destiny’ as economic fodder ahead of time. Here is another secrecy pimp, Not Really Niel Record:
If member states leave the Economic and Monetary Union, what is the
best way for the economic process to be managed to provide the soundest foundation for the future growth and prosperity of the current membership?[Author’s Name withheld]
I make six practical recommendations in the essay:
Recommendation 1: Germany (possibly together with France) establishes a secret Task Force, with a Charter to design proposals for planning and managing possible Eurozone Exit. Ideally France would join to give legitimacy – but secrecy and speed is essential, so only a token joint operation may be possible.
Recommendation 2: Whatever the results of the Task Force’s deliberations, firm plans and proposals should be in place by 30 April 2012, or as soon thereafter as is practicable using all means at the Task Force’s disposal.
Recommendation 3: The Task Force would propose to the Council of Ministers that the Euro should cease to exist on the day of the Exit announcement, to be replaced by new National Currencies.
Recommendation 4: The ECB would be closed and its functions terminated with immediate effect. All its functions to be transferred to the relevant National Central Banks (NCBs). Its balance sheet to be shared out pro-rata to NCBs by reference to the ECB shareholding proportions and (for banknotes), NCB banknote issue …
Notice how utopia arrives tomorrow … as soon as the monarchy has, “managed to provide the soundest foundation for the future growth and prosperity of the current membership.” What must come first is the tonic: robbery. As long as the boarded up nuclear reactors don’t melt down, all is good … until tomorrow!
Adjusting finance so that failure is not self-induced is necessary. Doing so now will buy valuable time: Europe and the rest of the world are gripped in an energy crisis. By not coming to terms, the economics profession marginalizes itself. This is understandable to some degree: the greatest of all human enterprises, the culmination of millions of years of evolution is to take good capital and throw it into the fire. The few managing the fire reward themselves for their cunning. The economists’ job is to rationalize this monstrosity: to convince the public that two-plus-two equals twenty-two. That they succeed is unsurprising, the world seeks to be deceived. After all, success and prosperity are sure to come … tomorrow.
Figure 1: EU auto registrations for the past year (from ACEA). It is possible that registrations might recover, but hardly likely when consuming countries such as Spain and Italy are now on the euro credit stringency chopping block. The demand for fuel in peripheral countries is removed. This is done by creditors cutting off peripheral access to euro-denominated credit. Those remaining with credit have the means to then ‘import’ Spanish- and Italian domestic fuel demand for themselves without any monetary or credit penalties.
It’s cars versus jobs and people. Car is winning today but will ultimately lose.
Purposeful deflation is energy conservation by other means.
This is not completely arbitrary as the conservation impulse is not optional. It will be enforced by events or otherwise. There is nothing that can be done to stop or slow conservation. It is driven by entropy which is a physical law.
Instead of jettisoning car industry and keeping the EU, the union jettisons Greece to keep the car industry. The EU stupidly thinks the crisis is ‘fixed’. At some point Germany exits the EU which is then destroyed: at the end of the day there is no EU and no car industry, either.
Greece failed rapidly, the other EU states will collapse even faster, so will the UK which must import fuel. This is the crisis, Europe must import almost all of its fuel and has borrowed heavily to do so. There is no return on the burning of the fuel, the outcome of this dynamic is bankruptcy and national economic collapse.
Once countries start failing there will be full-on finance crisis. There will be fuel shortages as are appearing now.
Fuel shortages will be permanent. The cost of fuel will be greater than the return on wasting it or the cost of borrowing to waste it.
European economic reforms:
– Energy conservation shall be the centerpiece of policy aims everywhere on the European continent,
– Shared sacrifice: industries will bear accrued costs of waste instead of countries and citizens. The ongoing strategy sacrifices countries for the temporary benefit of banking and motor vehicle-related industries. This shall be reversed: to save the people, jettison the machines.
– Any and all monetary tactics that come to hand shall maintain necessary services: food, clothing, shelter, useful — not wasteful — activities. This includes but is not limited to forensic analysis of the outstanding debts followed by restructuring, finance transaction taxes, punitive tariffs and exclusion of Chinese and petroleum imports, consumption taxes, common bonds, demurrage money, fiat national currencies with the euro as a continent-wide reserve currency and more.
– Break the waste-debt cycle: debts are to be taken on only to promote conservation. To discourage waste, all legacy dead-money debts shall be written off and creditors bankrupted without exception. Those who lend to promote and enable waste must be made example of. Otherwise, new forms of credit subsidies for similar enterprises will emerge as tomorrow’s waste will be justified by the debt-residue from yesterday’s waste.
For those who might think the third and fourth propositions are at odds, the vital services would reflect payments to those who do not waste: payments made to those who don’t have automobiles, who do not make use of health ‘services’, who do not have children, who do not consume. These payments are investments that provide real returns: petroleum that is not burned today is made available for higher-value use in the future.
The weakness in the markets started late last night when Australia posted a surprising second consecutive deficit of $480 million on expectations of a $1.1 billion surplus (with the previous deficit revised even higher). This is obviously quite troubling because as we pointed out 3 weeks ago when recounting the biggest Chinese trade deficit since 1989 we asked readers to “observe the following sequence of very recent headlines: “Japan trade deficit hits record”, “Australia Records First Trade Deficit in 11 Months on 8% Plunge in Exports”, “Brazil Posts First Monthly Trade Deficit in 12 Months,” then of course this: “[US] Trade deficit hits 3-year record imbalance”, and finally, as of late last night, we get the following stunning headline: “China Has Biggest Trade Shortfall Since 1989 on Europe Turmoil.” So who is exporting? Nobody knows …
How about Saudi Arabia, analytical dudes?
Europe’s problem is a waste-based economy not currency imbalance. No amount of tinkering adjustments will fix Europe without stringent energy conservation. The cost of borrowing to buy fuel thence burned up for nothing has destroyed Europe. What is left is the post-mortem.