Why We Must Leave The Euro!

December 6, 2010

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The Debt-Deflation Theory of Great Depressions By Irving Fisher

http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf

In spite of his most unfortunate dalliance with eugenics, Irving Fisher, one of the most outstanding economists produced by the US, in the 1930’s, produced startling insights we can apply in understanding Ireland’s great depression of today, 2010.

In a great depression, Fisher wrote:

“The big bad actors are over-indebtedness and deflation following soon:

Then we may deduce the following chain of consequences in nine links:

(1) Debt liquidation leads to distress selling

(2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down in velocity of circulation, precipitated by distress selling. This contraction of deposits and of their velocity, precipitated by distress selling, causes

(3) A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated,that this fall in prices is not interfered with by relation or otherwise, there must be

(4) A still greater fall in the net worth of business, prciptiating bankruptcies and

(5) A like fall in profits, which in a “capitalistic”, that is, a private- profit society, leads the concerns which are running at a loss to make

(6) A reduction in output, in trade and in employment of labor. These losses, bankruptcies, and unemployment, lead to

(7) Pessimism and loss of confidence, which in turn lead to

(8) Hoarding and slowing down still more of the velocity of circulation.

The above changes cause

(9) Complicated disturbances in the rate of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.

Evidently debt and deflation go far toward explaining a great mass of phenomena in a very simple logical way.

(30) Likewise, when a deflation occurs from other than debt causes and without any great volume of debt, the resulting evils are much less. It is the combination of both-the debt disease coming first, then precipitating the dollar disease-which works the greatest havoc.

(32) deflation caused by the debt reacts on the debt. Each dollar of debt unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation of debts cannot keep up with the fall in prices which it causes. In that case, the liquidation defeats itself. While it diminishes the number of dollars owed, it may not do so as fast as it increases the value of each dollar owed. Then, the very effort of individuals to lessen their burden of debts increases it, becuase of the mass effect of the stampede to liquidate in swelling each dollar owed. Then we have the great paradox which, I submit, is the chief secret of most, if not all, great depressions: The more the debtors pay, the more they owe.

The more the economic boat tips, the more it tends to tip. Itis not tending to right itself, but is capsizing,

(37)…Ultimately, of course, but only after universal bankruptcy, the indebtedness must cease to grow greater and begin to grow less. Then comes recovery and a tendency for a new boom-depression sequence….

I would like to draw your attention to the following prescient words written in 2008 by Hermann Kelly 06.07.2008 by Hermann Kelly

http://www.wiseupjournal.com/?p=395

“Sweden signed up to the euro with the Maastricht Treaty in 1993 but still hasn’t introduced it. It hasn’t been penalised.

And what could the rest of the EU do anyway if we quit the euro – invade Ireland? Withdrawal from the euro would entail preparation and a time of transition to make contractual changes. It is difficult but possible. […] but it would not mean EU grants would stop or the common market would be shut to Irish goods. There has been a lot of talk, post-Lisbon referendum, about a two tier-EU. But there is already a multi-tier EU as it is. Some countries in the EU are not in the euro; some members are not in the Schengen area, which allows for free international movement without passports. I would be very happy to be on tier two – but with lower interest rates and an economy that actually works.

Put simply, euro interest rates have damaged our competitiveness at a time of growing global competition. If we introduce our own currency, we can devalue our currency to make our exports attractive again.

If we gradually move out of the euro, we also bypass the eurozone’s Growth and Stability Pact, meaning the Government will no longer be restrained by unnecessarily tight limits on borrowing.

Huge powers were forfeited the day we signed up for the euro, a decision exerted not by economic logic but by political pressure. The czars of European integration saw the euro as a stepping stone to political union.

It is now time for Ireland to reweigh the costs and benefits of the euro. Yes, it is handy when traveling and increases price transparency. However, it has many more downsides.”

Its worthwhile to compare Sweden and Finland’s response to its Boom and Bust Cycle in the early 1990’s to our current situation and crisis:

http://ec.europa.eu/economy_finance/publications/publication13551_en.pdf

“…The defence of the pegged exchange rate was initially strong and stubborn. The broadpolitical consensus of defending the peg was a reaction to the devaluation policies of the1970s and 1980s. The goal of the hard currency policy was to avoid a new devaluation cycle with high inflation rates. Eventually, both countries had to give in and let their currencies float. The recovery was then driven by falling interest rates and a strong rise in exports due to the depreciation caused by the floating. Unemployment remained high for many years after the crisis.”

We have left ourselves in the hands of the IMF/ECB to sort our difficult problems. Their solution is a failed solution that will lead to our inevitable default and the breakup of the euro.

Rather than spend our current resources in the penal extraction of further deflationary pain due to insurmountable debt, it surely must be a better option to organise a structured withdrawal from the EMU. Our exports will benefit and floating our new Punt will avoid a more painful extraction down the line.

Its far better to suffer a cold, than get  potentially fatal pneumonia!

End

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