Monday, October 17, 2016

England’s Difficulty and Ireland’s Opportunity


As the saying attributed to the Emancipator Daniel O’Connell goes, “England’s difficulty is Ireland’s opportunity.”  In this case, however, England’s difficulty is also England’s opportunity . . . as well as everyone else’s.
Daniel O'Connell, The Emancipator
Specifically, the “Brexit” has caused widespread concern in both England and Ireland that there will be serious and long-lasting consequences.  That is absolutely correct.
What is not correct is that the consequences are necessarily negative.  The Brexit can turn out to be a very good thing for everyone.  It depends on what is done with it.
As things are going, of course, it looks pretty grim.  The falling Pound is making Irish exports to Great Britain more expensive for the British — and Great Britain accounts for 40% of all of Ireland’s exports.  Even a relatively small drop in the value of the Pound against the Euro gets magnified all out of proportion when the percentage is that large.
For example (assuming a general demand curve with a slope of 1, that is, a direct one-to-one relationship in the supply and demand curve, and everything being equal), a 10% drop in the value of the Pound against the Euro would mean a 10% drop in exports . . . which translates into a drop in exports from 40% to 36%, or 4%, which is definitely something to worry about.
In contrast, a 10% drop in the value of a currency when the country with the falling currency only imports 1% of the other country’s exports would mean a decrease under the same assumptions from 1% to 0.9%, or 0.1%, which while a matter for concern, as is any drop in exports, is not as worrisome as 4%.
Keynes: government debt is good.
The situation is exacerbated by the fact that Ireland is doing what it should have done decades ago: decrease debt.  Its target is 45% of economic output, where the European Union’s upper limit is 60%.  Of course, under standard Keynesian assumptions, this means that Ireland will have to increase its reliance on infusions of foreign capital as domestic capital is decreased by the paying down of debt.
And there’s the rub.  Under standard Keynesian assumptions, fiscal responsibility translates into financial irresponsibility.  How, after all, can Ireland maintain its rate of growth when it cannot guarantee that there will be sufficient infusions of foreign capital?
It can’t, and that is why the experts are worried about Brexit and are predicting slower rates of growth.  Yet the obvious answer is right in front of them.
First, what is capital, specifically in this instance, financial capital?
Money.  (And credit we might add, but as Henry Dunning MacLeod pointed out over a century ago, money and credit are essentially the same thing, money being the most general form of credit.)
And what is money?  Anything that can be accepted in settlement of a debt.
Jean-Baptiste Say
To explain, we go back to the first principle of economics, stated by Adam Smith in The Wealth of Nations: “Consumption is the sole end and purpose of all production.”
This leads us to “Say’s Law of Markets,” which is, everything else being equal, the only way to consume something is to have produced something with your labor, land, and technology, either for your own consumption, or to trade to others for what they have produced so you can consume what others produce.
Thus, the only way to consume is either produce it yourself for yourself, or to trade to others for they have produced that you want to consume.  This gives us the usual brief summary of Say’s Law: everything else being equal, demand generates its own supply, and supply its own demand.
The medium through which you exchange what you produce for what others produce is called “money.”  Money is therefore a contract; all money is a contract, just as (in a sense) all contracts are money.
The bottom line here is that if you (or your country) can produce, financing should be no problem.  As long as you have a customer (whether yourself or someone else), you can enter into a contract to exchange productions.  All a commercial or central bank does, in fact, is make it easier for people to carry out exchanges of their respective productions.
That’s why it’s such a bad idea to back money with government debt.  Government debt is a contract that promises to deliver what somebody else produces.  The assumption is that the government will be able to tax people and take part of what they produce to redeem its promise.
It would be so much easier and more efficient just to have banks or businesses “create money” backed by contracts drawn on existing and future marketable goods and services instead of government debt.  That way there would always be exactly enough money in the economy to carry out all transactions, including investment in economic growth, but without one penny of government debt.
If every country in the world created money this way, all money would have a stable value and be backed with private sector assets instead of government debt.  One proposal to do exactly that can be found in the final chapter of Easter Witness: From Broken Dream to a New Vision for Ireland (2016).
Given stable and asset-backed currencies, there would be no need to worry about one currency falling against another and conferring advantages or disadvantages on either trading partner.  People could also stop worrying about globalization, job movement, labor redundancy in the face of advancing technology, and so on.
It’s at least something to think about.
#30#

No comments: