Trade Certificates: Solution to the European Debt Crisis

Trade Certificates: Solution to European Debt Crisis

Here’s a nice discussion of the European debt crisis:

http://streetlightblog.blogspot.com/2011/09/estimating-cost-of-eurozone-crisis.html

It’s the third of three articles on the thing, so click on the blog title to access the rest.

We reduce it to the producer-consumer problem. See:http://anamecon.blogspot.com/2010/05/greek-debt-and-producer-consumer.html

But Kash describes the crisis per se is a result of the sudden cessation of capital flows from the center of the Eurozone to the periphery. These flows had to cease, and probably suddenly, some time, as the debt imbalance inevitably piled up. Kash also notes a fair percentage of those flows were for investment. The periphery countries weren’t exactly squandering the money, but that really doesn't matter, except to make the tragedy more poignant. He suggests shared responsibility for the crisis. Yes, the central countries have to pay. Actually, have already paid, they just have to swallow their losses. Making the peripherals pay is just going to make them less able to consume German surplus production. In fact, the peripherals have to achieve a trade surplus. Germany will have to find other markets for its surplus. Inflicting pain on the periphery, except to the point where they have to live within their means, is graceless. Of course, the entire process of- inflicting surplus production on them has reduced their ability to do this. The same thing has happened to the US with its trade deficit. Its ability to live within its means, actually the means itself, its industry, has been compromised.

Now Greece borrowed a lot of foreign money. That money had to be, eventually, spent on foreign goods. Or else they would still have it, in cash, and be able to give it back. We observe that debt, if you don't have the cash, must be ultimately be payed with goods, services, or assets. Nothing else will do.

So what is to be done? Austerity works for households. For nations? You might think. But the problem is deflating a nation's economy destroys productive components while it is reducing consuming elements. Indeed, the productive elements need the consuming elements to continue consuming unless they have compensating export opportunities. For it is only by exporting that the deficit country can pay back the debt, but will the surplus countries allow this to happen? Or instead is the deficit country is forced to sell assets, which worsens its ability to pay in the future?

In fact, the entire process, in the absence of any debt forgiveness, has a dubious- morality. The surplus country lowers prices, drives businesses in the deficit country out of business. See:

http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html

Runs up the debt in the deficit country, then buys up the deficit country's assets. Moral? Or a form of war?

Greece, for instance, had a significantly deteriorating trade balance since about 1990. It seems to be a self-reinforcing thing. And now its assets are being sold. Germany's trade surplus has been increasing steadily since 1990. Is it buying Greek assets?

We recommend the introduction of import certificates, to force a balance of trade, and pay off reasonable debt. See: http://seekingalpha.com/article/203422-how-import-certificates-could-balance-trade-and-budget

Or for a brief description on import certificates, see: http://en.wikipedia.org/wiki/Import_Certificates

Rather than the targeted certificates, we merely encourage all deficit countries to phase in general certificates, not aimed at any country. Indeed, once the process starts, certificate trading will quickly become the norm, since deficits will be forced and focused on those deficit countries which do not practice it, and trade wars will ensue between surplus countries.

Better than selling the farm. Certificates could be phased in, to prevent economic trauma. The goal would be exporters would be issued 1 euro worth of import certificates for each euro they exported. This certificate would allow the importation of 1 euro worth of goods or services. These certificates could be bought and sold. For the deficit country, these could be phased in, starting near the percentage of deficit. Thus, for a country with a 30% trade deficit, they could be originally issued at 1.25 euro worth of imports allowed, say, for each euro worth of export, and then reduced in periodic increments until one euro of import per euro worth of export, at which point trade would be balanced. In fact, if this were practiced by Greece, eventually their trade and capital flows would each be balanced. Problem solved. To pay back what is already owed, eventually Greece must have a trade surplus, so it would, for a while be issuing certificates allowing say .9 euros of imports for every euro worth of exports. This would force it to have a 10% trade surplus, with which to pay back its debts. It also implies that they willl be consuming at less than their production, which is the point of the austerity process. Of course, the process would take longer than any interest on the loans Greece presently owes to compound to unpayable heights. Do the Germans have any intention of allowing Greece to pay them back, since this would damage their own economy? Or are they instead after Greek assets?

But Greece can be the master of its own fate, if it so chooses. With a little help. And so can the US.

And the peoples of the Germanys and Chinas of the world will have to consume to their ability to produce.

Meanwhile, with each country issuing trading certificates, international trade wold be balanced on a nation by nation basis. No country could be claimed to exploit its surplus to cripple the economy of another, and expand its own economy at the other country's expense. All countries would have to live with in their means. And the benefits of otherwise free trade could be enjoyed at a maximum sustainable amount.

What the income of the top 1% means to the rest of us

The top 1% of the population now get 24% of the personal income of the nation. They used to get, in the 1970’s, 9% or so. Let’s say the difference is 15%.

What is that 15%? Well, that 15% is 15% of all personal income. (All personal income is about $10 Trillion.) So it is $1.5 Trillion. Now if this $1.5 Trillion was distributed to the other 99% of the population, they would be 15% better off. That is, on the average, they would each be 15% better off. That works out to $7500 for somebody earning $50,000. $1500 for someone making $10,000, etc.

Most of the money would be spent, since most of the rest of the people are living closer to the edge. Figure $1 Trillion spent. That makes for 10 million or so jobs. (Well, figure less. The rich do spend some of their excess money.) And figure $50 Billion or so per year to social security.

Millions would be lifted above the poverty line. It would reduce the need for government expenditures on the poor, and other social programs, by $60 billion or so. ($10K x .15 x 40 Mil people.)

Over $300 Billion per year would go to people who owed mortgages. Millions of these would be able to pay their mortgages. Not all would need it. But for millions it would make a difference. It would put a boost to housing prices, and put a big dent in the bubble collapse.

Now let's compare the income of the top 1% to that of the Federal government. 24% of the personal income of the nation works out to about $2.4 Trillion. The income of the Federal government for 2010 is $2.4 Trillion. The income of the top 1% is equal to the income of the entire Federal government. Federal government expenditures are going to be$3.6 Trillion dollars. The deficit is $1.2 Trillion, or half the income of the top 1%.

Of course we already have that the top 1% pay over 40% of all income taxes. Thanks FOX. All income taxes are $1.06 Trillion. So the top 1% pay $410 Billion or so, or just over 1/6th of their income, or 17%. This tells us where FOX is coming from. Since the government’s share of the GDP consumption is 25% or so, we would expect that percent, 25%, of income paid as tax, even under a flat tax. We may conclude that the top 1% pay a smaller share of their income than the rest of society. (Well, to be accurate, the tax end of the government share of GDP is only 17%. But since almost half of the poplulation pays little or no income tax, the tax paying half, minus the top 1%, pay a higher percentage of their incomes.) Now if the wealthy paid 25% of their income, that extra 8% works out to $200 Billion, or 1/6th of the current deficit. If they paid 40% of their income, as they easily can afford to do, (they would still be far better off than they were in the 70's,) the additional amount would pay about 1/2 the deficit.

But, as we have pointed out before, or elsewhere, they are largely the ones the government borrows from. Clearly it pays them not to pay taxes. And since they are largely in control of government....

See:

http://www.philstockworld.com/2010/08/21/who-rules-america/

Now to say they rule America is somewhat of a misstatement. A proper ruler rules for the benefit of all, if only out of enlightened self-interest. The more correct title is: “Who exploits America.” That they act according to unenlightened self-interest is to all our sorrow. For they have made themselves enemies of the rest of us. In fact, they have made themselves enemies to each other, and to themselves.

They wealthy have the power to save the government. But not the..inclination.
Justice Oliver Wendell Holmes Jr. observed that, "taxes are what we pay for civilized society." (See the link.) Evidently, the wealthy do not want a civilized society.

Do the rest of us?

Who do you owe - An answer.

Well, look what we came across:

http://www.oftwominds.com/blogjuly10/con-of-decade07-10.html

Not easy to navigate to Part II: Go to bottom of page, click on 'blog,'
then down that page to the list of entries for July.

Savings and Investment

There is some illusion about people saving, for retirement, for example. People do not save for retirement. They may think they do. But the reality is society invests to support its people, of whom the retired are (will be) a part.

What do we mean? We mean that it is only in the present that society supports its members. It doesn’t ‘save up’ present production to support them in the future. It doesn’t take past production to support them in the present. In terms of what is being produced, it only has what is currently being produced, to support its economy. Yes it has inventories, but usually these are at most a few months. Society doesn’t accumulate (save) a 20 year supply of dishwashers, so it will have them when they are needed ‘down the road.’ Society doesn’t do this with anything.

The closest society does to this is invest in its productive structure. Roads, structures and machinery last a fair length of time. It builds these things in the present, so it will have their productive capacity in the future. It has built these things in the past, so that we have them now. This is physical capital. A society builds capital in the present, so it will have the productive facilities to support its people in the future. In order to do this, it takes away some of its current production from direct consumption, and invests it.

Now the more society builds these things in the present, the more productive capacity we will have in the future. The more productive capacity we will have in the future, the better off, materially, we will be. Assuming, of course, we have the energy to power it. And the labor to direct it.

In particular, the greater comfort we will be able to support our retirees, and the rest of the idle class. And of course, everyone else. And everything else. Because production must also be supported.

Now the way we decide how to divvy up this production is with money. Those who spend the most money get the most goods and services. Those who spend the most, in the long run, are those who have the most. So if you save money in the present, in the future you will have more money to spend.

Now the theory is that the banks will take this money and loan it to someone who will invest it. That is, take current production, and use it to build more productive capacity, so there will be more goods and services to divvy up in the future. This isn’t the only money that does this. Corporations make profits, which they may spend to increase their productive capacity. Some of government spending may go to increase productive capacity, as with some of the ’stimulus.‘

So what happens instead when the banks take your money and squirrel it away?
Well, you’re still saving, but society is not investing in its future. Its capital is not expanding. So the pie is not growing any bigger. So down the road, when you retire and spend your savings, you may have a bigger share of the pie. But since the pie will not be any bigger, everyone else will, on the average, have a smaller share. This includes other retirees, say those on social security, and those who still work, who are supporting you with their labor. It also includes those other things, the productive facilities which must be supported to maintain present production and expand production in the future. So your individual savings, when you spend it in the future, takes away from everything else, including supporting the production on which it depends.

Now, if this were just you, this would not be very significant. But if there is a substantial share of savers, and the banks are not investing the money, (or investing it badly, say in housing or commercial real estate) then all the other people will have a significantly smaller share. And so will production.

What does this mean? Well, under these circumstances, savings is deflationary in the present, and inflationary in the future. In the present, money is being taken out of the economy, and since it is not being invested, (spent on capital) and put back in the economy, there is continually less money, chasing a constant supply of goods. And since the money was not invested, but merely saved, productive capacity is not expanded, so the quantity of goods will not increase.

So when in the future the money is taken out of savings and spent, along with the money that was there before, we will have inflation. Over time, these two effects could be expected to cancel out. What won’t cancel out is a big increase in money supply caused by deficit spending. If this is invested to expand the pie, well and good. If squandered, so the pie still does not expand, much the worse for inflation. What also won’t cancel out is the contraction caused by the deflation, which is that the decreasing amount of money chases a quantity of goods which is also decreasing., though not as fast., which does tend to mitigate the deflation, at the expense of the destruction of productive capacity. The pie actually shrinks.

So this is what is caused by the financial industry doing its retrenchment thing. Now we have already pointed out that the financial ‘industry’ is much too big, so its hoarding of money (rather than investing it in real industry) can be expected to go on for a while. To the detriment of the rest of the economy, since it means that the money supply in the rest of the economy can be expected to decrease, thus robbing productive industries of their nominal profits. Since these industries are losing money, they are not investing, they are cutting back. Still. (Add to this the contraction brought about by the trade imbalance! See: April 2010 The Effects of Unbalanced Trade)

The problem, of course, is that as long as these banks are in business, they’re going to be sucking the money out of the economy, so destroying the economy on which they depend. The government with its stimulus tried to counteract this action. It didn’t, much. It can’t. The banks are sucking too much, too fast.

So. In Economics, savings and investment are equal. At equilibrium. But not in the economy we are experiencing, where savings and investment are not equal.

Just by the way, elementary Keynesian theory predicts a reduction in a nation’s income with an increase in its ‘thrift.’ It assumes savings increases with income, but investment is relatively independent of income, or flat. How to explain the Chinese, though, eh? Next time.