Borrowing from Petra to Pay Paolo

This past weekend, the Keynesian meddlers were all pleased with themselves.  They were quite excited by the package of loan guarantees they’d put together in order to ‘save’ the PIGS [Portugal, Ireland or Italy, Greece, and Spain] from their unbelievable careen toward fiscal disaster.  Not to be left out, crypto-socialist American president was reported to have helped strong-arm the fiscally sane in Europe to help out the fiscally insane.  They took our money and good credit, or at least what’s left of it, and opened up an emergency line of credit for the PIGS.  However, as the week wore on, it suddenly dawned on the ‘best and brightest’ that this package would do nothing to change the overall long-term debt problems and economic stagnation.  The markets reacted with initial exuberance, but then realized their mistake.

Our so-called economics leaders today do not really understand markets.  In fact, they seek to completely isolate themselves from the principles the undergird the ideas we come to understand about markets.  They are eternal principles that have driven economies as long as we have had economies, but ‘new’ economic models pretend they can manipulate, to the good, market forces and cause ‘change’ that will ‘help’ people.  Since these principles always confound their efforts, it is much easier for them to ignore them.  They ignore them at our peril.

Our political leaders are looking at money as if it were a means to an end.  They are not viewing dollars, for example, as units of production but rather as something that has innate value.  Money does not innate value.  It is simply a chit or representation of productive value.  As we produce an excess of something, we seek to sell it in the market.  Those who have an excess of something we want and don’t have, can trade their excess for our excess.  That is the fundamental principle of a market. 

Such a principle works on microeconomic and macroeconomic levels.  What gets confusing is that societal ruling bodies, governments, get into the process and since government produces nothing, it must rationalize its existence by portraying its value as something.  We may believe that government does good things, but basically, it is nothing more than drain on an economy.  That drain must outweigh the balance of good being done.  When that goes out of whack, fiscal insanity prevails.

Marxist/socialist models, like World Systems Theory, believe that money has inherent worth and that making money and letting it flow from ‘rich’ to ‘poor’ creates wealth.  They reject the idea that money is not actually a unit of productivity and is only worth that which it can buy.  Money is something tangible and the economy will catch up with the supply.  It is the ‘tail chasing the dog’ ideal.

That gives them the courage to just create money out of thin air and as long as people believe it is worth something, it is.  However, as soon as people realize there is a lot of paper floating around without having to do much to get it, the worth begins to sink.  Dollars are realized for just what they are, so much script. 

When the politicians cobbled together this line of credit, they did so on the premise it would stablize the euro.  The principle they followed was that faith in the worth of the euro would give people confidence.  But, it didn’t do a thing for the economies of the debtors.  It only puffed up the free spending by these governments.  Sure, they may have to trim and style the haircut in their budgets, but it will not allow growth.  Their budgets are still sucking all the air out of the economic room.  The dependant government sector has Robert Gibb’s metaphorically boot on the throat of the productive sector.  It cannot get up.

So, the market realized these politicians are still not getting it.  The only place any growth will go is into the dependant sector slowly starving the productive sector of potential growth.  In other words, Greece may be able to borrow, but it will never be able to pay it back.

Regular people understand these fundamental principles because we confront them every day.  If I owe more than I can pay back, borrowing more will not make my economic situation better.  We call this ‘borrowing from Peter to pay Paul.’  You are not retiring debt,  you are simply piling on more while appeasing the lenders.  We are not making more, we are just borrowing more chits. 

The only relief we will get from this economic morasse is to live within our means and create more in the productive sector.  That’s it.  That is the magic formula that will end this world-wide economic bust.  But, our political scientist leaders cannot fathom that idea.  They are wedded to a fantastical notion of monetary and fiscal liquidity without any conformity to basic economic principles. 

Such fundamental choices must be made.  But, they are not.  Instead, we are just burying ourselves in more imaginary worth and pretending the credit card bill will never come in the mail.  We are relying on politicians who promise the world for free to make difficult decisions.  It is an ever expanding bubble that is going to soon burst.  When it does, we are all going to be in for a rude, harsh awakening.