Wednesday, July 15, 2015

Solving the Greek Debt Crisis, VIII: Specific Monetary Reforms

If we believe the reaction on the U.S. stock market, the financial powers-that-be are jubilant about the alleged solution to the Greek debt crisis.  Of course, once people realize that there hasn’t actually been a solution implemented, only talk about one (and it might not even work . . . make that, we know it won’t work), we can expect yet another wild plunge in the market.

Greece must produce marketable goods and services.
A real solution, as we have discovered in this series, is one that will make it possible for every child, woman, and man in Greece, regardless of current condition or abilities, to become a net producer instead of consumer of marketable goods and services (meaning they produce more than they consume so they can start paying down debt, instead of consuming more than they produce, which runs up debt).  This, as we have seen, is non-negotiable, if only because nobody can keep on consuming if no one is producing, and to take what others produce for your own consumption without giving them anything but promises you have no intention of keeping is called "theft."

We’re speaking of specific monetary reforms, however.  The chief reform must be to implement and maintain an asset-backed, “elastic” currency that has a stable and uniform value.

Currently backed by debt, not assets.
The one plus in Greece’s favor right now is that the currency, the Euro, although it is backed by government debt, isn’t backed completely with Greece’s government’s debt, but by the debt of the somewhat more reliable governments of Germany and friends.  That’s still somewhat marginal, as government debt is still government debt, but it’s enough to keep things together — in the short term.

In the mid- to long-term, however, maintaining a currency backed by government debt virtually guarantees that no viable solution will ever be found.  Face it: the main problem is debt, living beyond Greece’s ability to produce.

If, however, people believe that you must have government debt to back the currency, you’ve already admitted defeat.  The question becomes not, How do we eliminate debt? but, How do we manage debt so we don’t have too little or too much?

Never enough booze for an alcoholic, or money for a politician.
That, of course, is a mug’s game.  As the aphorism for alcoholics has it, a hundred drinks are not enough, and one is too many.  Telling politicians they may go into debt as long as they do so responsibly is like giving an alcoholic a free lifetime supply of liquor on condition that he drink with restraint . . . and letting the alcoholic define “restraint.”

There are, however, ways to shift from a debt-backed currency to an asset-backed currency.  The most drastic is simply to demonetize the debt-backed currency and replace it with an asset-backed currency.  This is how Hjalmar Schacht stopped the hyperinflation in Germany in the 1920s.

Briefly, Schacht instituted an inelastic, non-legal tender, asset-backed reserve currency, the Rentenmark, backed with value of state-owned land and railroads — the things the Allied Reparations Commission couldn’t take.  He pegged the Rentenmark to the U.S. dollar at the pre-war (that’s World War I) exchange rate of 4.2 Rentenmarks to the dollar.  He then “froze” the official exchange rate for the old Reichsmark at 4.2 trillion to the U.S. dollar, although the unofficial and black market rate was upwards of 16 to 24 trillion to the U.S. dollar.

Hjalmar Schacht, "the Old Wizard."
Schacht made the new Reichsmark convertible at par into the Rentenmark, and allowed people to exchange their old, inflated Reichsmarks into new Reichsmarks or Rentenmarks at the rate of a trillion to one.  There were few takers.  The labor of hauling trillions of inflated and yet grossly undervalued (by a factor of 400-600%, the differential between the official and the black market rate) Reichsmarks down to an exchange point simply wasn’t worth it — the currency was more valuable as waste paper or fuel for the fire.  Most people simply started all over again at zero.  Within a few years, however, Germany’s prosperity was completely restored, and the Nazis, when they took over the government in 1933, were able to assemble a war machine and finance an effort that almost conquered the world.

That’s one way of instituting an asset-backed currency.  We’ll look at something a bit less drastic and more practical tomorrow.


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