Randall Wray: EURO CRISIS IS SPREADING FROM PERIPHERY TO CENTER: System Designed to Fail WILL Fail

[girl gone mad]

EURO CRISIS IS SPREADING FROM PERIPHERY TO CENTER: The System Designed to Fail WILL Fail
Author: L. Randall Wray · November 16th, 2011
http://www.economonitor.com/lrwray/2011/11/16/euro-crisis-is-spreading-from-periphery-to-center-the-system-designed-to-fail-will-fail


As I http://www.economonitor.com/lrwray/2011/11/10/is-this-the-end-of-the-faith-based-european-monetary-union">predicted last week, the run out of Euro government debt would spread from the periphery to the supposedly fiscally sound countries of the center and north. Today it happened. The inevitable was inevitable.

The problem was never one of profligate Mediterraneans with lax fiscal policy. No Euro nation should ever have run chronic deficits of any size; none should have run up any significant debt ratio. By design, these are not sovereign countries in the currency sense—they abandoned their own sovereign currencies years ago in favor of a foreign currency. And like any nation that gives up its sovereign currency, every one of them lost the ability to run chronic budget deficits.

It is commonplace to argue that no household can run chronic budget deficits. And it is more-or-less true—or at least more true than false. A day of reckoning will arrive when income cannot service the debt, and then Armageddon arrives when the banker shuts off the line of credit. Without access to new credit to pay the bills, including interest, the household must tighten its belt or default. No need to go through the various caveats that allow some belt loosening–so that households are not strictly constrained by income–as you get the picture.

Governments that use foreign currencies are cut a bit more slack than are households. First, their incomes are often more discretionary than are household incomes—with a stroke of the pen, government can increase tax rates. Unless Laffer Curve dynamics are operative, government revenues (“income”) increase. Hence lenders to government might be willing to believe that while today there is a deficit, tomorrow with sufficient fiscal rectitude government can pay its bills. Second, government spending today can help the economy to grow—raising revenue without a tax hike. In that sense, government is less like a household and a bit more like a firm that “invests” to increase future income that is required to service the debt. Third, lenders might simply rely on faith—the hope that somehow, some way, government will be able to make its unpayable commitments. Maybe a fairy godmother will come along—the IMF, the World Bank, the Fed, or the ECB—to provide lending the highly indebted government can use to pay off private creditors. Fourth, creditors might be fools—unable to understand the difference between a sovereign currency issuer and a government that uses a foreign currency.

http://www.economonitor.com/lrwray/2011/11/16/euro-crisis-is-spreading-from-periphery-to-center-the-system-designed-to-fail-will-fail">more...

[dixiegrrrrl]

1. "In any case Germany is doomed as its market is vanishing down the toilet along with

Spain, Italy, Greece and its other customers."

[abelenkpe]

2. +1000 nt

[dixiegrrrrl]

3. Unfortuantely, that means us, soon, too.

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