But while, as in the lynch mob, the majority can become actively tyrannical and aggressive, the normal and continuing condition of the State is oligarchic rule: rule by a coercive elite which has managed to gain control of the State machinery. There are two basic reasons for this: one is the inequality and division of labor inherent in the nature of man, which gives rise to an "Iron Law of Oligarchy" in all of man's activities; and second is the parasitic nature of the State enterprise itself. Murray N. Rothbard For a New Liberty: The Libertarian Manifesto
Some have suggested that the ongoing crisis in Greece could epitomize the counterpart to the Lehman episode, which triggered global meltdown contagion in 2008.
As Olli Rehn, European Union Economic and Monetary Affairs Commissioner said in a recent Bloomberg interview[1]
“We have always been concerned of contagion,” Rehn said. “One of the achievements over the past one-and-a-half years has been that we have been able to prevent a financial meltdown in Europe. We have been able to avoid a Lehman Brothers kind of catastrophe on the European soil. And moreover, we have been able to contain the crisis to the three countries now under the program,” he said.
This rabid fear of fractional reserve banking induced debt deflation represents as only one of the major influences guiding the current path of policymaking. It’s partly ideological.
But most importantly this signifies as the implicit desire to keep the current unholy central bank-government-banking system cartel or patronage system intact.
Proof of this is that the exigency to conduct bailouts has almost been representative of the creditor nation’s banking system exposure to crisis affected economies[2]
Any signs that would risk the survival of this tripartite global political arrangement would translate to urgent or contingent collaborative actions, despite political differences.
Faced with the risks of a Greek default, the ECB and Germany have been working on a compromise[3]. China’s recent declaration to help shore up Eurozone bonds or the bailout of Greece[4] has also demonstrated such tight kinship on a global scale.
The current framework of socio-political institutions has been built around such symbiosis. It’s a relationship based on financial repression.
And unknown to most, the political elites will fight to maintain this status quo despite the unpopularity on the constituency.
Politicians essentially know that they can manipulate voters.
Voters have mostly elected leaders for what they stand for. But once in power, people cannot or will not be able influence the politicians’ actions, which usually depart from their pre-election promises.
And this is what most experts don’t get.
So political elites will come up with usual hobgoblins as the “Lehman Moment” to ensure that accompanying policies would translate to the preservation of their political privileges.
Misdiagnosing Greeces’ Problems
It would be misplaced to argue that the survival of the Euro depends on “political and fiscal union” as celebrity guru Nouriel Roubini writes[5].
Had this been true, then the Soviet Union would have still existed. The USSR had a centralized monetary system, political and fiscal union but got dissolved.
The current problems of the Euro have not been because of the lack of centralization but because of it.
Political spending has reached levels whereby the productive sectors of the society can’t afford to pay.
As exhibited in the above charts, government spending growth[6] and a nation’s ability to pay[7] has been tightly correlated.
Thus, the political economy of institutional centralized redistribution (or free lunch policies) backfires once economic imbalances has reached the “tipping point”.
Essentially the Bismark-Keynesian concepts of welfare economics have reached a point of having to boomerang. We are at this turning point.
Thus the key to restoring competitiveness is to REVERSE the fundamental cause of such imbalance—government spending or dismantle or reduce welfarism.
The unfolding Greece crisis should be a reminder of the unviability of false promises and serves as preview of what we should expect once a major bubble bust emerges—but this time at a much larger scale.
Deflation Charade
I read of some comments that suggests of a deflation risk from Greece’s insistence to keep up with the “fiscal austerity” and that Greece would greatly benefit from exiting the Eurozone where she can devalue at will.
And that by devaluing this risk “flooding the Eurozone with ‘cheap’ goods”.
Despite the current crisis, Greece has NOT been suffering from deflation but from stagflation as shown in the charts from tradingeconomics.com[8]
Yet devaluation would not solve Greece’s economic predicament because her debt are mostly denominated in Euros.
An exodus from the Euro coupled with devaluation would only mean Greece would need more drachmas to pay for Euro based obligations unless she can convert these to drachmas ahead of devaluation.
In addition, it is such a nonsense to believe that cheap currency equals export greatness. If this snakeoil economics is to believed then Zimbabwe would have been an export titan, the Philippines would have also been one of the most prosperous.
Besides, if the riots in Greece has been about maintaining political entitlements, then this won’t lead to increased investments and expansion in productive ventures, but rather, this increases the risks of a European version of Dr. Gono's Zimbabwean policy, once Greece does exit from the Euro.
To believe that banking or fiscal austerity based deflation would cause the Euro’s demise is loopy.
Throughout history, currencies usually die from hyperinflation or from wars[9]. Reducing the prospect of war has been one of the main pillars why the Eurozone Union was put to existence[10]. This leaves hyperinflation as the biggest threat.
The Mises moment is when a critical choice will have to be made between policies that could lead to hyperinflation or mass deflation.
I don’t think that today’s condition would warrant such decisions yet as central banks still have some leeway to move about.
[1] Bloomberg.com Rehn Sees Markets Misreading of EU Leaders’ Intentions on Greece, June 16, 2011
[2] Economist.com Piggybacking, Daily Chart, April 15, 2011
[3] Wall Street Journal Schaeuble Calls For ECB Compromise On Greece, Boosting EFSF-Spiegel, June 19, 2011
[4] See China to Assist in the Bailout of Greece, June 18, 2011
[5] Roubini Nouriel, Could the Eurozone Break Up? June 18, 2011
[6] Buttonwood’s Notebook Spending too much or taxing too little? Economist.com April 4, 2011
[7] CreditWritedowns.com Five Misconceptions Squashed, June 2011
[8] Tradingeconomics.com Greece Indicators
[9] Dollardaze.org, Demonetized Currencies
[10] See Buy The Peso And The Phisix On Prospects Of A Euro Rally, June 14, 2010
