printing presses don't last forever: pysics demonstrates the natural law of diminishing...
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8/4/2019 Printing Presses Don't Last Forever: Pysics demonstrates the natural Law of Diminishing Returns
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Shanghai DailyTuesday 27 September 2011
A6 OPINION www.shanghaidaily.com/opinion
Illustration by Zhou Tao/Shanghai Daily
George Soros: Save the euro with a new treaty
Shawn A. Mesaros
AS Greece reels into the abyss, we are
reminded that debt matters.As Ireland teeters at the edge of the abyss,
we are reminded that debt matters.The problem isn’t external debt, or internal
debt. In a world of free trade, global capitalmarkets correctly price many assets unless
they are being artificially supported.Where the sellers of such assets don’t have
the ability to support asset prices artificially,such as in the eurozone, assets repr ice to wherethe market sees capacity to pay vs ability tomanipulate.
We respectfully disagree with Robert Shiller’sassessment (“World overreacts to debt-to-GDPratios,” Shanghai Daily, August 26.)
“This (negative) feedback has nothing to do
with the debt-to-annual-GDP ratio crossing somethreshold, unless the people who contribute tothe feedback believe in the ratio.”
Are we as nations operating on “beliefs-
based cash” or cash in the bank?Since when did Americans buy groceries
with beliefs? Overextended is just what it is.Reality, not belief.
Pure stupidity?“Economists who adhere to rational-
expectations models of the world will
never admit it, but a lot of what happens in
markets is driven by pure stupidity — or,
rather, inattention, misinformation about
fundamentals, and an exaggerated focus oncurrently circulating stories.”
If the world is stupid, then America shouldretire its debt and tax its citizens less, andgrow more. This is what all countries shoulddo? What form of misinformation begins withowing too much?
“We should worry less about debt ratios andthresholds, and more about our inability to seethese indicators for the artificial — and oftenirrelevant — constructs that they are,” wroteprofessor Schiller.
If debt is so artificial, then what, exactly,are these “ir relevant” items that the USA owes
to China? What caused the UK to pull outof Panama after World War II despite their national interests? Debt to the USA.
History serves as our witness. Money 2 isnow going through the roof as the authoritiescontinue to crank rates lower in the UnitedStates.
Europe’s “inability to print its own money”has unwittingly created a surreal level of demand for US Treasuries, and Americanpoliticians see this as a vote of confidence?
Quite the opposite. It is simply the last resor tin the great scheme of least-bad alternatives.
In an election year, the USA will use this“least bad argument” to expand spending again
and again, flooding the system with cash,buying votes with the taxpayer’s own money.
Deficit spendingMr Shiller might be right, so long as everyone
agrees that this is a sustainable policy.The United State is unique in its financial
power to print money well in excess of what ittakes in for tax revenue. This is called “deficit”spending.
What it doesn’t collect must be financed.
The United States has long held a policy of issuing debt vs outright “printing of money”in order to “fund the deficit” that the taxpayer would somehow later become responsible for paying.
Policy makers in the USA have never in
their lifetime seen a smaller total budget thanthe year before.
Our trade partners know full well that theywill not be paid back in currency which isworth as much as what was borrowed.
The question trade partners ask in thisscenario is “what is our relationship with theUnited States worth” in terms of opportunitycost when investing in our debt?
The long-term question becomes how muchinflation “they” (our trade partners) are willingto suffer with for the opportunity to continueas a partner of the United States of America.
Our trade partners are willing to accept fun-damentally flawed, debased paper in repaymentof debt, but only because relative to the current
❛ As countries “print and print and print”despite a lack of actual GDP growth, they serveonly to devalue their own capital stock.
Shanghai Daily welcomes the ideas of oth-
ers. Please send your idea to
state of affairs in Europe — they know the USAis committed to pr inting the money.
Perhaps Mr Shiller is correct that debt doesn’t
matter, so long as this is seen as a sustainablepolicy. He is cor rect in his assessment, but only
if an unlimited pri nting press is a sustainablepolicy.
Natural lawsWe bring attention to the “corporate model”
of country governance.
One cannot “borrow their way” to prosperity(law of diminishing returns) any more than
governments can tax their citizens to greater
heights of productivity (in which case citizenshave no money for productive investment).
These are natural laws, not just financial
laws. We would opine that just as every
company has shares of “stock” that every
country has units of “currency.”As countries “print and print and print”
despite a lack of actual GDP growth, they serveonly to devalue their own capital stock.
As a famous athlete once joked: “I am real ly
hungry, please cut that pizza into 50 slices.”Politicians love the printing press because
it is free money to buy votes, but in the longrun, currency loses its purchasing power. Theillusion of wealth being larger piles of paper.
The author is managing director of Pacific Asset Management,
Pamria, LLC. The views are his own.
Debt really does matter as
presses cannot print forever
George Soros
TO resolve a crisis in which the im-possible has become possible, it isnecessary to think the unthinkable.So, to resolve Europe’s sovereign-debtcrisis, it is now imperative to preparefor the possibility of default and de-fection from the eurozone by Greece,Portugal, and perhaps Ireland.
In such a scenario, measureswill have to be taken to prevent afinancial meltdown in the eurozoneas a whole.
First, bank deposits must be pro-tected. If a euro deposited in a Greekbank would be lost through defaultand defection, a euro deposited in
an Italian bank would immediatelybe worth less than one in a Germanor Dutch bank, resulting in a run onthe deficit countries’ banks.
Moreover, some banks in the de-faulting countries would have to bekept functioning in order to preventeconomic collapse. At the same time,the European bank ing system wouldhave to be recapitalized and put under European, as distinct from national,supervision. Finally, government
bonds issued by the eurozone’s other deficit countries would have to be
protected from contagion. (The last
two requirements would apply evenif no country defaulted.)
All of th is would cost money, but,
under the existing arrangements
agreed by the eurozone’s national
leaders, no more money is to be
found.
Missing componentSo there is no alternative but to
create the missing component: a
European treasury with the power
to tax and, therefore, to borrow.
This would require a new treaty,
transforming the European FinancialStability Facility (EFSF) into a full-fledged treasury.
But this presupposes a radical
change of heart, particularly in
Germany. The German public still
thinks that it has a choice about
whether to support the euro. That isa grave mistake.
The euro exists, and the global fi-nancial system’s assets and liabilities
are so intermingled on the basis of the
common currency that its collapse
would cause a meltdown beyond thecapacity of the German authorities
— or any other— to contain. The
longer it takes for the German publicto realize this cold fact, the higher
the price that they, and the rest of theworld, will have to pay.
The question is whether the Ger-man public can be convinced of
this argument. Chancellor Angela
Merkel may not be able to persuadeher entire coalition of its merits, butshe could rely on the opposition tobuild a new majority in support of
doing what is necessary to preservethe euro. Having resolved the euro
crisis, she would have less to fear
from the next election.Preparing for the possible default
or defection of three small countriesfrom the euro does not mean that
those countries would necessarily
be abandoned. On the contrary, thepossibility of an orderly default
— financed by the other eurozone
countries and the International Mon-etary Fund — would offer Greece
and Portugal policy choices.
Moreover, it would end the vi-
cious cycle — now threatening all
of the eurozone’s deficit countries
— whereby austerity weakens their growth prospects, leading investorsto demand prohibitively high interest
rates and thus forcing their govern-ments to cut spending further.
SacrificesLeaving the eurozone would make
it easier for the most distressed coun-tries to regain competitiveness. But,
if they are willing to make the nec-essary sacrifices, they could also
remain: the EFSF would protect
their domestic bank deposits, and the
IMF would help to recapitalize their banking systems, which would helpthese countries escape from their
current trap.
Either way, it is not in the Euro-pean Union’s interest to allow thesecountries to collapse and drag down
the entire global banking system
with them.The EU’s member countries, and
not only those in the eurozone, must
accept that a new treaty is needed to
save the euro. That logic is clear. Sothe discussions about what to includein such a new treaty ought to beginimmediately, because, even with
European leaders under extremepressure to agree quickly, negotia-
tions will necessarily be a prolongedaffair. Once the principle is agreed,however, the European Councilcould authorize the European Cen-tral Bank to step into the breach,indemnifying it from solvency risksin advance.
Having in sight a solution to theeurozone’s sovereign-debt crisiswould be a source of relief for finan-cial markets. Even so, because anynew treaty’s terms will inevitably
be dictated by Germany, a severeeconomic slowdown would be al-
most certain. That might induce afurther change of attitude in Ger-
many, in turn allowing the adoptionof counter-cyclical policies. At thatpoint, growth in much of the euro-zone could resume.
George Soros is chairman of Soros Fund
Management. Copyright: Proje ct Syndicate, 2011.
www.project-syndicate.org.