Erroneous Eurozone euphoria

J. Keith Johnson Senior Writer, The Gold Informant
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In desperate situations, any perceived victory, no matter how big or small, can bring about euphoric responses. Enter the euro discussions.

Italy and Spain are against the ropes. Spain’s taken the spotlight recently, but both of these countries have reached the point of no return.

Of course, we know Greece is in so deep they’ll never see daylight again, short of a sovereign default. Spain is in trouble, but still only in debt up to about 75% of their GDP. Italy, however, is over 120% of their GDP in debt.

In examining the deficit, it quickly becomes apparent that only one of the 17 Eurozone countries has a balanced budget, Estonia. Of the remaining 16, only four have honored the Maastricht Treaty’s deficit limit, Luxembourg, Finland, Austria and Malta.

Let’s try to bring this into perspective a little more. Only one country has a positive cash flow, Estonia. This little country also has the second to smallest economy on the EZ, at just under 16 billion euro (2011). The only country that’s smaller is Malta, one of the only four who’ve managed to honor the treaty, with an economy of almost 6.4 billion euro. The largest of these four who are running small deficits is Austria (7th in EZ), with an economy just over 301 billion euro, followed by Finland (9th) at 191 billion and Luxembourg (13th) at almost 43 billion euro (statistics courtesy of eurostat).

These five countries have a combined GDP of almost 560 billion euro. But only Estonia is in the black, by a whopping 164 million euro. With Spain running a deficit of over 91 million euro and France over 103 million, you can see where this is going.

The current effort toward austerity is a typical Keynesian math problem. In traditional economics, supply and demand ruled the economy. There were exceptions based on mood, sentiment, mob mentality and manipulations, but generally things got back to normal. This is because a person that owes 10 bucks needs to come up with 10 bucks to pay off that ten bucks.

Not so with Keynesianism. This is a paradigm in which we can always pay off our debt with new, improved, debt, because our ability to pay isn’t based on what we have. Instead, it’s based on printing presses and our perception that eventually we’ll catch up and get it all paid off. In other words, a country owes 90 million euro so it borrows 100 million euro. Never mind that it couldn’t pay the 90, it’ll figure out how to pay the 100 eventually.

Of course, it doesn’t help that the one loaning the euros is running a deficit as well. However, since their deficit isn’t as bad, they can certainly afford to loan to those who don’t owe as much, right?

This is, in essence, what’s happening with the Eurozone fiasco. It’s a terrible mathematics problem that they’re attempting to solve by defying simple laws, such as 2 plus 2 equaling 4. Yet markets celebrated that European leaders came to an agreement that will kick the can down the road, again, and drive sovereign debt even higher.

Again we see a reason for an asset-based monetary system. Gold and silver have long served as a stable money supply. There have been times of oversupply that drove prices down, but they always equilibrate naturally, based on supply and demand. Without the mechanisms of the central bankers in place, the populace couldn’t be robbed blind by irresponsible printing.

We expect the current market movements to continue into elections this fall. We might get a dip, but QE3 or some other measure will help prop it up so Obama can be re-elected. Historically, no president has been re-elected when the market was down. But, rest assured, eventually the laws of supply and demand will win out. The dollar will eventually resort to its intrinsic value. And gold will once again be recognized as what it is; the world’s only persevering true money.

J. Keith Johnson’s Austrian and libertarian perspectives on current socioeconomic and geopolitical affairs are fueled by his insatiable desire to both discover and share the truth. A Goldco Direct affiliate, you’ll find his commentary on The Gold Informant website, as well as various Internet financial and news sites.