Bad Euro Monetary Policy Continues

The prevailing wisdom in some economics circles, primarily those adherent to orthodox Austrian and monetarist theory, is that an expansion of the money supply automatically causes inflation. The last few years have proven the hardline monetarist view wrong, with massive money supply expansion in the United States and accelerating money printing in the euro zone. That does, however, not mean that there is no connection whatsoever between money supply and inflation. There is, but the money needs a transmission mechanism from the banks – literally – to the real sector where prices are set.

In South America government entitlements serve that role as a transmission mechanism. In Argentina, e.g., there is a job guarantee effectively making government everyone’s employer of last resort. Together with other entitlements this has caused government spending to rise to unsustainable levels while eroding (my means of sloth and indolence) the tax base supposed to pay for those entitlements. Instead of reforming away its entitlement state, the government led by socialist president Cristina Kirchner pumps newly printed money into the government budget.

With consumer demand kept up by entitlements and productive activity kept down by the same entitlements (among other business-stifling measures) imports have increased. The massive money printing weakens the currency, causing imported inflation to compound a problem caused by domestic excess demand. Tradingeconomics.com reports the Argentinian CPI-based inflation rate at just above ten percent, though at least one other source put it above 13 percent. It is worth, though, to take any number coming out of Argentina with a  grain of salt, as president Kirchner has been accused of trying to tamper with the country’s national accounts data.

Regardless of the fine print of Argentina’s inflation numbers, their economy exemplifies how excessive money printing can indeed cause inflation. One person who should definitely keep the Argentinian lesson in mind is Mario Draghi, president of the European Central Bank. Despite the restrictions put in place on the ECB when the bank was created, Draghi is pushing hard for a very expansive monetary policy. His money printing ambitions take many different forms, big and small. On Thursday August 7, e.g., in an official ECB statement, Draghi explained the ECB Governing Council’s latest policy decision:

Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. The available information remains consistent with our assessment of a continued moderate and uneven recovery of the euro area economy, with low rates of inflation and subdued monetary and credit dynamics.

In a brief press release the same day, the ECB announced that:

the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.15%, 0.40% and -0.10% respectively.

The latest M1 money supply data from the ECB shows an annual growth rate of 5.4 percent. This is actually a reduction from a bit over a year ago when they were pumping massive amounts of euros into saving Spain and Greece from collapse. However, back then the M1 growth rate relative real GDP growth was approximately four to one, meaning money supply expanded four times faster than transactions money demand. The U.S. economy has seen similar excess growth rates for a while, though with GDP growth picking up and the Federal Reserve tapering off its Quantitative Easing policy, the U.S. rate is declining.

The exact opposite is happening in Europe. With GDP growth at best reaching one percent per year, the euro-zone excess growth rate in M1 is now at 5:1. Of every five new euros printed, one is absorbed by the economy to serve as liquidity for spending, investment, labor compensation and tax-payment purposes. The remaining four dollars go into the financial system as excess liquidity. With the ECB’s overnight lending rate for banks at -0.1 percent, that means a dangerous rise in excess liquidity in the banking system.

It could also lead to an Argentine-style monetary inflation rally. For now, though, the ECB hopes that consumers and businesses will absorb all the money slushing around in the financial system. Back to Draghi:

The targeted longer-term refinancing operations (TLTROs) that are to take place over the coming months will enhance our accommodative monetary policy stance. These operations will provide long-term funding at attractive terms and conditions over a period of up to four years for all banks that meet certain benchmarks applicable to their lending to the real economy. … Looking ahead, we will maintain a high degree of monetary accommodation. Concerning our forward guidance, the key ECB interest rates will remain at present levels for an extended period of time in view of the current outlook for inflation.

Where would the demand for these loans come from? Other than random blips on the national accounts radar, there is no real movement in either business investments or consumer spending in Europe. The only way Draghi and the European banks can push new loans on entrepreneurs and households is to lower credit qualification requirements. That, in turn, exposes banks to significantly higher default risks, without stimulating private-sector activity more than on the margin.

Thus, in order to put their relentlessly expanding liquidity supply to work, the ECB has to go for other measures. And this is where Argentina comes back into the picture. Draghi again:

[The ECB] Governing Council is unanimous in its commitment to also using unconventional instruments within its mandate, should it become necessary to further address risks of too prolonged a period of low inflation. We are strongly determined to safeguard the firm anchoring of inflation expectations over the medium to long term. … the annual rate of change of MFI loans to the private sector remained negative in June and the necessary balance sheet adjustments in the public and private sectors are likely to continue to dampen the pace of the economic recovery.

Let us translate this into plain English. The point about “unconventional instruments” means that the ECB will do whatever it takes to drive up inflation to two percent. This includes using U.S.-style QE measures to prop up deficit-struggling member states. Which opens the door to Argentina. Unlike the United States, the European economy does not have the resiliency to get out from underneath bad fiscal policy and onerous governments. Furthermore, despite our overly generous welfare systems we do not have Europe’s massive income security structure which flood households with work-free cash.

Compared to the U.S. situation, Europe is at significantly higher the risk of monetary inflation. I would not want to keep my investments in Europe when the ECB starts pumping money directly into government budgets.

The last part of Draghi’s speech reinforces my concerns:

To restore sound public finances, euro area countries should proceed in line with the Stability and Growth Pact and should not unravel the progress made with fiscal consolidation. Fiscal consolidation should be designed in a growth-friendly way. A full and consistent implementation of the euro area’s existing fiscal and macroeconomic surveillance framework is key to bringing down high public debt ratios, to raising potential growth and to increasing the euro area’s resilience to shocks.

It is precisely the pursuit of welfare-state saving austerity that has brought the European economy to its knees. So long as the short-term budget balance is more important than GDP growth, consumer spending or reduced unemployment, policy makers at the ECB as well as in the EU leadership and member-state governments will continue to keep the European economy in its increasingly perennial state of stagnation. If they push hard enough on fiscal consolidation, in other words if they add QE to their current policy mix, stagnation will become stagflation.

Fiscal Panic in Argentina

Of all the countries around the world that have tried to embrace the European welfare state, Argentina is perhaps the most tragic example. From the 1920s through the 1950s the Argentine economy was one of the strongest in the world, and there were years when Argentina attracted more immigrants from Europe than the United States did. But what could have become a formidable economic powerhouse caved in to the ideas of the welfare state. As the economy began declining, social and economic stability evaporated and Argentina suffered decades of political turmoil.

The long-term suffering of the Argentine people, and of many other South American countries, is a stark warning to today’s Europeans: their continent could become the same tragedy in the 21st century that South America was in the last century. Unfortunately, the Europeans refuse to hear the warning bells from recent history, so we might just as well pile on yet another story, on top of the ones already published about the crumbling Argentine economy and what brought it down. This one is from Bloomberg.com:

Argentina reduced government subsidies on natural gas and water by an average 20 percent in a bid to narrow the largest fiscal deficit in more than a decade. The government could save as much as 13 billion pesos ($1.6 billion) and will use proceeds to cover utility company costs and finance social spending, Economy Minister Axel Kicillof and Planning Minister Julio De Vido said today at a press conference in Buenos Aires. The cuts won’t apply to industrial users.

And the reason for the big deficit?

President Cristina Fernandez de Kirchner has boosted social spending since taking office in 2007 and left utility rates largely unchanged amid average annual inflation of about 25 percent, straining the finances of power distribution companies and leading to periodic blackouts.

If you live in California (which, thank my tax God, I don’t) you recognize this behavior. Back in the ’90s the state of California wanted to compassionately make sure that everyone could always pay their utility bills. So they regulated the price that utility companies could sell power for to households, but imposed no price regulations on the market where utility companies buy power from power producers. As a fourth-grader could have figured out, if the regulated price in the retail end was too low, on average utility companies would be buying power at a market price that exceeded the retail price they could charge.

The result? Rolling black-outs, no investments to improve either power production or power delivery, and in the end mounting costs for everyone in the back end when the entire power infrastructure needed massive upgrades anyway. (It did not help that California at the time was falling for the global warming delusion and chasing low-cost, fossil-based fuel out of the state.)

Now, Argentina finds itself in the exact same situation. But even more importantly, the Argentine government’s focus on entitlement spending is a stark parallel to Europe. Utility price regulation, which varies from country to country in Europe, is just another form of welfare-state intervention into the private sector. When coupled with the general plethora of entitlement programs that normally comes with welfare states, the subsidy becomes just another entitlement.

As Argentina demonstrates, this has consequences when government runs into fiscal trouble. Just like every welfare state the Argentine version combines spending determined by political preferences with revenues determined by a private sector, i.e., struggling entrepreneurs and tax-burdened consumers. Entitlement spending has a strong tendency to outgrow its revenues – in fact, I am working on an article for an academic journal defining a law that shows that welfare-state entitlement programs inevitably outspend their revenue – but politicians favoring the welfare state never realize that this is actually happening. Inevitably, therefore, they run into deficit problems, but since the politicians do not see this coming they are caught by surprise and react with fiscal panic.

There are three ways that fiscally panicking politicians can respond:

1. Buy time. This means, borrowing as much as they can. When they cannot borrow any more money by flooding the world with their Treasury bonds, they print money and have the central bank buy the Treasury bonds instead. If this happens in an economy with a stable financial system and a limited system of cash entitlements, the money printing will not cause high inflation. If on the other hand cash entitlements are comparatively important for daily consumer spending, then printing money to fund them opens a dangerous transmission mechanism for the money supply to cause high inflation.

2. Raise taxes. No longer a viable option, other than marginally. There is a fair amount of research that shows that voters in both Europe and North America grew tired of constantly rising taxes already back in the 1970s. Since then, an increasing share of the growth in government spending has been deficit-funded. The same is true in Argentina.

3. Cut spending. Since most politicians in our modern welfare states want to preserve the welfare state one way or the other, they do not want to eliminate entitlement programs. But when tax revenues do not grow as fast as they would want it to they are forced to downsize the welfare state to fit within a tighter revenue framework. This means chipping away at entitlements that people have gotten used to and based on which they plan their family finances.

For common-sense minded economists and politicians this means a good opportunity to prudently reform away the welfare state. “Just cutting spending, damn it” is not the way forward, but a structurally sound phase-out model can do wonders.

Leftists, on the other hand, go even deeper into panic. Bloomberg.com again:

Argentina, which has subsidized utilities since 2003, wants to cut aid from about 5 percent of gross domestic product to 2 percent of GDP and make higher income earners pay more for their utilities, Cabinet Chief Jorge Capitanich said March 12. “In 2003 the need for subsidies was clear,” Kicillof said in reference to the period after the nation’s $95 billion default and economic crisis. “Argentina isn’t ending subsidies, just redistributing them.” For Argentine households, the increase in their gas bill may rise as much as 161 percent for the biggest consumers and 306 percent for water bills, according to a presentation distributed by the Planning Ministry.

“The Planning Ministry”… Why not just adopt the Soviet acronym GOSPLAN and get it over with? Humor aside, though, it is worth noting that the families who are now hit with enormous price increases still have to pay the same amount of taxes as before.

The way out, again, is not to restore the subsidies. The way out is to end the entitlement programs and return purchasing power to the private sector so that those who have grown dependent on government can actually support themselves. This, of course, won’t happen in Argentina. What will happen there instead is that consumers now will respond by cutting spending elsewhere, thus reducing economic activity in general. This has repercussions for the tax base, which again will take government by surprise. And the entire process is repeated, with the difference that it starts from an already lower level of economic activity.

Europe is not in as bad a shape as Argentina is. But if they continue down the current path of using spending cuts and tax increases to save the welfare state in tough times, they will perpetuate their own crisis – and thereby perpetuate the need for spending cuts and tax increases.

The end station? An economic wasteland where children grow up to be poorer than their parents. That is, in effect, where Argentina is today, and has been for a long time. Sweden has been there for a good two decades and other European countries are beginning to see that same economic wasteland on the horizon.

Inflation Crushing Argentine Currency

Europe is bogged down in what looks more and more like a permanent state of industrial poverty. I have likened their future to what South America became during the 20th century: a cluster of countries with their good days of prosperity behind them.

This is not entirely a fair comparison, since both Brazil and Chile have made great strides toward rising above the industrial poverty that otherwise holds the continent in a tight grip. But as a general rule, it is entirely reasonable. Just like South America lost its course in the mid-20th century, Europe is going down in the early 21st century.

Europe’s only chance is to totally dismantle their welfare states and start over on free-market terms. I do not see that happening, just as it has not happened in countries like Venezuela and Argentina. (Chile is a different story.) Especially the Argentine example is useful as a general forecast reference for Europe: they have done everything they can to keep their welfare state in place, with the inevitable result that there is not enough tax revenues to pay for all the entitlements.

As a desperate measure to continue the welfare state despite inadequate tax revenues, the Argentine government has turned to money printing. As I reported in September last year, this is causing runaway inflation. For 2012 the inflation rate reached 30 percent, a downright destructive level.

The Argentine government has had plenty of time to see the writing on the wall – the country’s credit rating was downgraded in November last year – but chose not to. Instead, inflation is now destroying their currency and people are hoarding dollars as a last-resort measure to survive. Bloomberg Business reports:

A lot of U.S. dollars are tucked away somewhere in Argentina, most likely in stacks of $100 bills. Seven years ago, the U.S. Treasury, working with the Federal Reserve and the Secret Service, estimated that in the early 1990s Argentines held $20 billion in cash, a number that by 2006 had grown to “perhaps $50 billion or more.” That year there was a total of about $768 billion worth of dollar-denominated cash in the world, which means that someone in Argentina held at least one out of every 15 cash dollars.

This is an interesting number. Anecdotes out of Europe from the first few years of the euro alleged that assorted mafia organizations were dumping the dollar and going for the euro instead. Its highest denomination is 500 compared to the 100 maximum denomination of the dollar. Since the two currencies are largely equally valued, it made a lot more sense for those in more illicit businesses to carry euros. This would have released lost of high-denomination dollar cash, which could then be unloaded in perennially dollarized Argentina.

Back to Bloomberg:

Demand for large dollar cash transfers to Argentina since 2006 … has outstripped demand for dollar cash overall in the world. So it seems safe to say that today Argentines hold probably well more than $50 billion, and well more than one in every 15 dollars. (This is why the government of Cristina Kirchner is so furiously digging at the country’s undeclared wealth. Not to bring home what Argentines hold abroad, but to uncover some of those dollars Argentines have—literally—at home.)

She has two reasons for doing this. First, the dollar holdings are likely the result of financial activities not reported to the tax collectors. With a deficit equal to $14 billion, the Argentine president’s mouth is watered by the prospect of taxing undeclared dollar holdings:  if the government could seize 28 percent of those holdings, it would be enough to eliminate the budget deficit

In one year. The following year, of course, the deficit would be back again. And since you can only confiscate the same dollar once, this would be a stupid solution to a stupid problem.

The second reason for President Kirchner to want to seize dollar holdings from Argentine families is that the country’s own currency is plunging almost as fast as Obama’s presidential credibility. By confiscating people’s dollar holdings she could try to force them into increasing demand for the Argentine dollar. Zerohedge has an interesting illustration of how the Argentine currency has lost value vs. the U.S. dollar on the informal currency market: a year ago the formal and the informal exchange rates were within striking distance of one another; today the informal market pays twice as much for a U.S. dollar than the official exchange rate does.

This is a scathing free-market verdict over the Argentine currency, but indirectly also an acknowledgement by rational economic men that their government is on a fast track to destroying their economy. By hoarding dollars they stand a fighting chance to survive when their domestic currency collapses.

It is worth noting that currency collapses tend to happen in countries with big, entitlement-loaded welfare states. We need not look farther than what is happening in Europe, where the European Central Bank has made a promise to print an unlimited amount of euros to pay for the debts of the euro zone’s welfare states. As a result of this, the general opinion among financial investors and analysts has now shifted away from assessing the strength of the euro to forecasting its demise.

There is really only one reason for a central bank to run amok with its printing presses, and that is to finance a government deficit. That deficit, in turn, is almost always the result of a runaway welfare state. Therefore, the safest way to a sound currency and restraint in money supply is to eliminate the welfare state.

Europe needs to learn this. They have already started on the reckless path to excessive money printing. Thus far it has not come to the point where it causes inflation – the extra cash has not yet reached the transmission mechanisms between the monetary and real sectors of the economy. But when it does, Europe will rapidly ratchet down the South American slope.

Argentina Hit By 30 Percent Inflation

Sadly, the world is full of failing welfare states. One of them is Argentina, where the out-of-control welfare state is causing runaway inflation. This, together with bad GDP growth numbers, has led to a credit downgrade that expels Argentina’s treasury bonds from the reliable end of the market, confining it to shady backstreets together with other C- and CC-rated bonds.

As if this was not bad enough, the government of Argentina is engaging in a macroeconomic form of accounting fraud byt trying to conceal its 30-percent annual price increases in manipulated data. This has rightfully caused a confrontation between Argentina and the IMF, whose credit line is in part dependent on the debtor country complying with certain statistical standards.

Aside some real yelling and screaming from Buenos Aires, the IMF demands seem to have a little bit of an impact on the Argentine government. It is not all for the better, but at least the Fund has caught president PMS Kirchner’s attention. From MyFoxNY:

Argentina announced a two-month price freeze on supermarket products Monday in an effort to break spiraling inflation. The price freeze applies to every product in all of the nation’s largest supermarkets — a group including Walmart, Carrefour, Coto, Jumbo, Disco and other large chains. The companies’ trade group, representing 70 percent of the Argentine market, reached the accord with Commerce Secretary Guillermo Moreno, the government’s news agency Telam reported.

This is pure cosmetics. You don’t do away with inflation by banning the last agent in the chain from compensating himself for price increases further back in the process. Wal-Mart and the other supermarket chains are still going to have to compensate their suppliers for higher costs of production and transportation.

There are only two possible results from this: empty shelves in the stores or product reconfiguration. The former is the Soviet solution, the latter the Venezuelan version. After Hugo Chavez caused 30-percent inflation in Venezuela he went after the retailers and food producers when they reconfigured their products. His aggressive policies actually escalated the crisis to the Soviet level, causing food shortage in Venezuela.

It remains to be seen what the outcome will be in Argentina. But one thing is clear: you cannot escape the devastating consequences of inflation by banning people from raising prices.

MyFoxNY again:

Polls show Argentines worry most about inflation, which private economists estimate could reach 30 percent this year. The government says it’s trying to hold the next union wage hikes to 20 percent, a figure that suggests how little anyone believes the official index that pegs annual inflation at just 10 percent.

The underlying problem is that the government has been flooding the economy with borrowed funds and printed money, paying for all sorts of work-free entitlements. When more and more spending in the economy is based on work-free income, you open up an imbalance between production and consumption.

This is one of three transmission mechanisms from reckless monetary and fiscal policies to consumer prices spiraling out of control. The second has to do with banks being flooded with cheap liquidity. This can encourage banks to start lending without due attention to the credit strength of their borrowers, simply because they are faced with tempting interest margins, ultimately created by a reckless government.

A third transmission mechanism involves the exchange rate, where a surge in domestic money supply causes a depreciation of the currency.

Which one of these transmission mechanisms has had the strongest influence thus far is yet to be determined. Preliminarily, it looks as though the first one is a major culprit, simply because of the perpetually bad government finances and the lavish nature of Argentina’s entitlement systems.

Argentina offers yet another example of how a runaway welfare state can bring devastation and destitution to a country. It is about time that policy makers in Europe and America pay attention – and start working on Ending the Welfare State.


Another Welfare State Downgraded

Two months ago I explained how Argentina’s president, Cristina Kirchner, was pushing her country deeper and deeper into a spiral of inflation and government debt. I noted that Argentina’s economy…

is spinning out of control, and it is all driven by the same old leftist agenda to use government spending to eradicate “income inequality”. This statist agenda has led to endless problems with government debt. For almost 15 years now these problems have been chronic. In 2005-2006 the IMF basically made a fire-and-rescue emergency run to Buenos Aires to initiate a debt restructuring process and prevent a complete meltdown of the Argentine economy. That restructuring process was basically complete in 2010 and you would have assumed that the country’s political leaders had learned their lesson.

They have not. President Kirchner has spent months fending off mounting accusations that her government is simply manipulating macroeconomic data to conceal an embarrassing growth record and, even worse, accelerating inflation. Part of the reason why she has been so desperate to prevent the economic truth from getting out is that her country has been on the brink of a credit downgrade. That did not work. According to the Daily Telegraph, Argentina is now sinking into the Greek hole:

Fitch cut its long-term rating for Argentina to “CC” from “B,” a downgrade of five notches, and cut its short-term rating to “C” from “B”. A rating of “C” is one step above default, AP reported.

And the situation is pretty bad indeed:

US judge Thomas Griesa of Manhattan federal court last week ordered Argentina to set aside $1.3bn for certain investors in its bonds by December 15, even as Argentina pursues appeals. Those investors don’t want to go along with a debt restructuring that followed an Argentine default in 2002. If Argentina is forced to pay in full, other holders of debt totaling more than $11bn are expected to demand immediate payment as well.

Political leaders in Argentina don’t like this one bit, saying that the ruling puts the 2002 debt deal in jeopardy. However, the real threat to that debt deal does not come from some judge trying to protect investors’ rights – it comes from endless government spending. Government has tried to pay for that spending with taxes, and when they could not jack up taxes anymore they took to borrowing. When they had borrowed so excessively that they effectively defaulted in 2002 (that was when the country went through so called debt restructuring, i.e., partial loan default) they took to a good old Latin American classic: printing moeney.

They have now exhausted all their means to fund irresponsible spending. But instead of behaving like grown-ups and taking responsibility, the Argentine president and her administration double down and, again, try to manipulate economic data. One of the inevitable results is a credit downgrade.

The Daily Telegraph has more details:

Argentina is in a deepening recession and is grappling with social unrest. Besides the court case, Fitch cited a “tense and polarized political climate” and public dissatisfaction with high inflation, weak infrastructure and currency. Fitch also said that Argentina’s economy has slowed sharply this year. Of the two other major rating agencies, Standard & Poor’s has a rating of “B-” for Argentina, five steps above default, and Moody’s rates it “B3 negative”, also five steps above default.

In other words, we can now add Argentina to the pile of already fiscally dinosauric welfare states. That pile is getting uncomfortably high, and what we have seen so far is only the beginning.

It’s time to repent, folks. It’s time to absolve of past entitlement sins and seek forgiveness for years spent behind the blindfolding veil of socialist ignorance.

It is time to let economic freedom ring.

Europe: The South America of the 21st Century

In ten years time, Europe will have become the South America of the 21st century. I am not saying this as a punch line, but as a serious, analytically backed prediction.

In the 1920s South America was a prosperous region, with Argentina being a bigger magnet for migrants from Europe than the United States. The prosperity period lasted for a few decades; in the ’60s there had been a shift away from free-market economics and limited government toward an increasingly elaborate welfare state. During the ’70s the continent suffered from ill-designed economic policies that were put in place to save the welfare states, but the end result was hyperinflation, increased social instability and withering prosperity.

The “solution” was military intervention. Military dictatorships took over in, e.g., Chile, with the explicit intent to stabilize the country and put the economy back on track again. But oppression can never compete with freedom, and the end result was a double loss for the people: what the welfare state took away in economic freedom, reprehensible dictatorships took away in individual freedom.

Nevertheless, it is important to remember that the decline of South America began long before Chilean president Salvador Allende was executed in Santiago in 1973. By the same token, Europe’s problems today have not materialized out of thin air. They are the result of a long series of bad policy choices. This is not an excuse for what the military did in South America, but it is part of an important explanation.

The same pattern that brought juntas to power in,e.g., Argentina, Brazil and Chile is now emerging in parts of Europe. Right before our very eyes, Greece is leading the way with the growing, hard-line Golden Dawn Nazi party.

As part of the process where democracies in Europe decline into totalitarianism, more and more relevant aspects of nation-state independence are being lost. In the case of South America, the loss of independence came in the form of destroyed currencies that led to IMF and World Bank intervention – or, as in the Chilean case, the intervention of an uninvited military power (the Soviet Union were deploying military personnel on Chilean ground through their Cuban proxies). In the case of Europe, the loss of national independence is driven by an ever more powerful, ever more authoritarian European Union.

There are already signs that the EU is becoming an intolerable burden on nation states. Not only do we see nationalist parties gaining ground all around the EU, but there is also an emerging threat to nation-state survival in the form of provincial separatism. This separatism is in direct response to the loss of democratic sovereignty at the nation-state level. As the EU Observe reports, this provincial revolt is a bit more serious than mainstream European media is willing to recognize:

Four Catalan MEPs have asked the European Commission to tell Spain it cannot use military force to stop Catalonia from splitting away. The deputies – centre-left MEP Maria Badia, Greens Ana Miranda and Raul Romeva i Rueda and Liberal Ramon Tremosa – wrote to EU justice commissioner Vivianne Reding on 22 October. The letter says: “We are writing to you to convey our deep concern over a series of threats of the use of military force against the Catalan population … In these circumstances, the European Union should intervene preventatively to guarantee that the resolution of the Catalan conflict be resolved in a peaceful, democratic manner.”

This conflict between the provincial government in Catalonia and the central Spanish government does not come as a surprise. I have discussed this situation earlier, with reference to the austerity policies that the Spanish government is imposing on its people, upon direct dictates from the EU.

It notes that politicians from the centre-right People’s Party of Prime Minister Mariano Rajoy have spoken of article 8 of Spain’s constitution, which says the army can be used to protect Spanish sovereignty. It adds the commission should: “Make a public statement insisting on the withdrawal from the public debate of any military threat or use of force as a way of resolving this political conflict.”

I have been following European politics ever since I was a candidate for the European Parliament in 1995. I have never heard of a similar request from a provincial government for help from Brussels. This is indeed a tense situation, and the reaction from the national Spanish government only adds to this image:

The letter met with ridicule in Madrid.  Rosa Diez from the centrist Union, Progress and Democracy Party called it an “insult” to Spanish democracy. Opposition Socialist Party leader Alfredo Perez Rubalcaba said it “does not bear any relation to reality.” But for his part, Spanish centre-right MEP Alejo Vidal-Quadras told Spanish TV just two weeks ago: “They [the government] should be briefing a general of the Civil Guard … the government should think of intervening in the rebellious region if they persist.”

Guardia Civil is a paramilitary national police force, with equipment and training somewhere between the police and a regular army. It was used frequently against ETA, the Basque separatists who terrorized Spain in the ’80s with the goal of creating an independent Basque republic (presumably run as a dictatorship). Fortunately, the Basque conflict was resolved peacefully and both the Basque and the Catalan provinces enjoy more independence than other Spanish provinces.

This, however, is not enough when their government budgets are taking beating after beating to comply with EU austerity requests. It is increasingly likely that the Catalan people will get to vote on independence in 2014.

That year the Scottish will also vote on the same issue. This raises the stakes in the separatist issue, and it gives EU-skeptical parties and nationalist movements across Europe more reasons to question – and politically resist – further concentration of powers to the Eurocracy. At the same time, attempts from Brussels to suppress this reactionary force could easily raise tensions even further: the advancement of nationalism in Greece and separatism in Spain are examples of how regular Europeans respond not to the democratic deficit in the EU – that has been around for two decades now without stirring conflicts – but to the ever tougher austerity policies that Europe’s leaders are shoving down the throats of more and more member states.

Austerity bites harder than lack of representation. This does not mean that the democratic deficit is of no consequence. It is – in fact, the lack of working parliamentary democracy is precisely what has brought about Europe’s current crisis. But people have a tendency of not caring about how to influence, or not influence, government until government makes their lives miserable. That is happening with austerity.

When people want to respond to austerity, they discover the democratic deficit that is built in to the EU structure. Rather than banging their heads against the Eurocratic brick wall, they respond by supporting nationalist and separatist political movements.

It remains to be seen how far this reaction will go. We can hope that the Eurocrats will take notice and stop pushing for themselves to have more undemocratic power. But a more realistic assumption is that the opposite will happen: the EU leadership will push ahead with its new budgetary superpowers and euro-zone parallel budgeting mechanisms.

That will only raise tensions across the continent. And so long as tensions keep rising, Europe will be torn apart, not brought together. At some point, the tearing-apart will lead to conflicts of a kind that will remind us eerily of South America in the mid-20th century.

Argentina: Entitlement Spending Causes Runaway Inflation

Another welfare state is in trouble. Argentina, a notorious Latin American hotbed for reckless government spending and out-of-control inflation, is at it again. From France24.com:

Argentina’s President Cristina Kirchner hit back at the IMF on Tuesday for warning her country about bad data, saying her nation would not be subjected to threats of any kind. International Monetary Fund chief Christine Lagarde warned Monday that Argentina faces a “red card” if it does not produce acceptable data on growth and inflation by December. An animated Kirchner, speaking to the UN General Assembly, said: “My country is not a football pitch. It is a sovereign nation which makes sovereign decisions. “As such it is not going to be submitted to any pressure, and much less to any threat,” she said to cheers.

Aside the fact that the United Nations has been reduced to little more than a playground for third-world dictators and truncated intellects with white guilt, the Argentine president’s outburst is a clear sign of political desperation. Her country’s economy is spinning out of control, and it is all driven by the same old leftist agenda to use government spending to eradicate “income inequality”. This statist agenda has led to endless problems with government debt.

For almost 15 years now these problems have been chronic. In 2005-2006 the IMF basically made a fire-and-rescue emergency run to Buenos Aires to initiate a debt restructuring process and prevent a complete meltdown of the Argentine economy. That restructuring process was basically complete in 2010 and you would have assumed that the country’s political leaders had learned their lesson.

Not so. As the Wall Street Journal explained back in 2008:

After seven straight years of driving up government spending and hammering every capitalist in sight, the Argentine government, which went bust in 2001, is running out of money — again. No surprise there. For more than a few years, analysts have warned that inflation, trade protectionism, disregard for contracts and confiscatory tax rates were having a deleterious effect on capital flows. Suboptimal investment rates, the same analysts warned, would mean economic trouble when global growth began to slow and the commodity boom came to an end. But former President Nestór Kirchner (2003-2007) and his wife, current President Cristina Kirchner, had promised to bring change to Argentina and didn’t want to hear it. They thought they saw better returns to their own bottom lines by stoking class warfare while increasing government spending.

Later that year, the Argentine government seized all 401(k)-style private pension plans and thus dealt yet another serious blow to private property rights and contract enforcement. No wonder Argentina ranks 158th in the world in terms of economic freedom.

So what does inflation have to do with this? Well, when government has run out of taxpayers’ money, and seized as much of private property as it possibly could get its hands on without returning Argentina to a full-blown dictatorship, then the only thing left to keep government spending going is the printing press at the central bank.

It takes a while before money printing causes inflation. The money has to find its way into the real sector of the economy, which it does when government uses it to pay people not to work. That practice is also known as entitlements. The more money people can spend without working, the less they will work to make money. As people reduce their workforce participation, less is being produced and more is being consumed. Add to this the stiff regulatory labyrinth that the Argentine government has put in place for its private enterprises to navigate through, and you have a recipe for consumer product shortages – and inflation.

Work-free, government-provided income – entitlements – actually consume a third of GDP in Argentina. The following analysis from MercoPress, a South Atlantic news agency, is a serious reminder of what happens when a government puts enough of its population on work-free, taxpayer-provided income:

Argentina currently consumes more than it produces and only with strong growth can it avoid another default situation since liabilities continue to increase, warns economist Diana Mondino. “Argentina has already consumed its assets in energy, agriculture, pension funds, central bank and expenditure continues to expand” points out Mondino adding that government spending has ballooned in the last decade but particularly in the last two years, “well above the production and growth capacity of the economy”. Social Security, Anses, already consumes almost a third of GDP, leaving aside law and order, education, health, which means the fiscal load must be particularly burdensome to meet those expenditures, 40% tax pressure, one of the highest in the world, except for Scandinavian countries.

And the Anses, of course, is an entitlement system that provides work-free income to people.

MercoPress again:

“And in spite of the taxing pressure the government had to appeal to some of the ‘jewels of the crown’, such as energy, agriculture, pension funds, Central bank reserves, and yes what we managed was a consumers’ boom”. Mondino added that Argentina no longer enjoys a genuine fiscal surplus since the budget includes such cosmetics as the Central bank and other government companies’ profits. “Stats are very limited; we know the outlays but not the level of debts, delayed payments, subsidies, or how much government enterprises owe. What we know is that there is an effort to rearrange expenditure even with non discretional items. During the last quarter of 2011, social security expenditure was up 40%; government salaries, 26%, but only 2% in capital expenditure and 1.3% in transfers to the provinces”.

Since Argentina has a history of “solving” its government revenue problems with freshly minted money, it is perhaps understandable that the IMF keeps a close eye on what president Kirchner is doing. But that only makes it even more stupid of her and her government to try to conceal inflation by manipulating its data.

The situation with inflation data reporting in Argentina has gone so bad, in fact, that in February The Economist explained:

Since 2007 Argentina’s government has published inflation figures that almost nobody believes. These show prices as having risen by between 5% and 11% a year. Independent economists, provincial statistical offices and surveys of inflation expectations have all put the rate at more than double the official number … . What seems to have started as a desire to avoid bad headlines in a country with a history of hyperinflation has led to the debasement of INDEC, once one of Latin America’s best statistical offices. Its premises are now plastered with posters supporting the president, Cristina Fernández de Kirchner. Independent-minded staff were replaced by self-described “Cristinistas”. In an extraordinary abuse of power by a democratic government, independent economists have been forced to stop publishing their own estimates of inflation by fines and threats of prosecution. Misreported prices have cheated holders of inflation-linked bonds out of billions of dollars.

This is nothing short of economic Orwellianism, obviously with devastating consequences for anyone who needs to spend money, make a living and invest for his and his family’s future. The Economist concurs, though in a more polished way:

In 2010 we added a precautionary footnote to our statistical tables. From this week, we have decided to drop INDEC’s figures entirely. We are tired of being an unwilling party to what appears to be a deliberate attempt to deceive voters and swindle investors. For Argentine consumer-price data we will look instead to PriceStats, an inflation specialist, which produces figures for 19 countries that are published by State Street, a financial services firm. Had we switched to one of the provincial statistical offices still generating reliable figures, we fear it would have come under government pressure.

Academic research provides yet more evidence of the inflation deception. In a recent research paper on Latin American inflation, Alberto Cavallo, assistant professor of applied economics at MIT, explains:

This paper uses online prices to evaluate the widespread claim that the Argentine government has been manipulating official inflation indexes since 2007. Online indexes are first shown to be able to approximate both the level and dynamic behavior in inflation trends in four Latin American countries: Brazil, Chile, Colombia, and Venezuela. In Argentina, by contrast, there are huge differences in the level of online and official inflation rates that have persisted for over 3.5 years. A series of robustness tests show that there is no simple data or methodological explanation that can account for this large discrepancy between online and official data.

Since Cavallo’s paper is academic, it does not speculate as to the policy motives of the Argentine government, let alone accuses them of deliberate manipulation. But within the realms of what is common in academic research, Cavallo does provide strong evidence that the Argentine government is cooking the inflation books.

All, of course, for the purpose of hiding the inevitable consequence of a runaway welfare state. Rather than acknowledging that government spending is destroying the economy, Argentina’s political leaders continue to enforce “income equality” by means of idiotic taxes and by vilifying entrepreneurs and other productive, financially successful citizens.

A lesson to learn, and not just for Europeans…

Getting the Freedom Priorities Right

Sometimes, the daily flow of politics and public policy tends to remind us of what really matters in this world. Last week’s Supreme Court ruling that upheld the individual mandate in Obamacare as a tax is a good example. By defining the mandate as a tax, the Supreme Court dealt a serious blow to the economic freedom of the American people: the Court effectively opened for the federal government to remove what remains of our economic freedom by creating new entitlements – and tax us to pay for them.

The road is now open for the remaining parts of the European welfare state to come rolling ashore. If we allow that to happen, then the largest bastion of economic freedom in the world will be gone for the foreseeable future. It is absolutely imperative that all hands are on deck to protect our economic freedom – the fight for almost every other freedom issue must stand back. (Accountable government and freedom of speech excepted.) This means that those among the ranks of libertarians who prioritize social issues over economic issues better think again.

Yes: gay marriage is less important than economic freedom. Not in principle, but in priority.

In principle – in a truly free society – everyone is at liberty to follow his or her own path in life, so long as his or her actions do not inflict harm on others. Government is confined to protecting, not intruding on, people’s lives, liberty and property. By logical consequence, in a free society, built on libertarian principles, people can define themselves as whoever they want to be, whatever they want to be, without having to ask the government for permission to do so. There are no government rules to stipulate how you can and cannot live your life – if you want to drop out of school, you have the right to do so; if you want to never buy health insurance, you have the right to do so. Consenting adults can get married in whatever constellations they want to, and who is a man and who is a woman.

The personal freedoms associated with the most private aspects of our lives are crucial in a free society. Some libertarians join forces with liberals in advancing these issues, the best known being gay marriage. All other things equal I would suggest that this is a worthy cause to fight for,  but as economists put it, ceteris is not always paribus. All other things are not equal. Most of us live in the part of the world where government taxes away one third or more of our income and redistributes it among us private citizens. Most of us are stifled in our economic ambitions by highly progressive taxes (especially those here in America who live in a state with a progressive income tax). And if such laws as the Affordable Care Act survive the 2012 election results, our economic freedom will be infringed on even further. Worse still: if Obama wins a second term, he will advance the welfare state even further, thus removing even more of the economic freedom we still enjoy.

With a government that is increasingly intrusive on our liberty and property, it is a waste of valuable political capital – manpower and money – to fight for gay marriage or the rights of transgender persons to define themselves as whatever gender they want to be.

Every liberal from Sea to Shining Sea will cry foul at this statement, and frankly so will a fair amount of libertarians. In support of my priorities, consider Argentina, where they just used up valuable legislative resources to liberate a small group of citizens from the shackles of having to be either a man or a woman. The Associated Press reports:

Argentina’s president personally delivered the nation’s first identity cards on Monday to people who legally switched their genders under a law that sets a global precedent. President Cristina Fernandez said she’s proud of setting a new global standard with the gender identity law, which overwhelmingly passed congress, enabling anyone to change their gender without first having to win approval from judges or doctors. Argentina is showing the world that equality is just as important as liberty, she said. “What sets us apart is that we care not only about ourselves and our immediate circle, but about others as well,” she said. “Today we’re setting a new standard for equality and legality.” Fernandez handed out the new identity cards to a half-dozen people who were born one sex but now identify as another. She also gave new cards to several children of lesbian parents who couldn’t be properly identified before.

This is the same country that ranks 158th in the Heritage Foundation’s annual Index of Economic Freedom:

Argentina’s economic freedom score is 48, making its economy the 158th freest in the 2012 Index. Its overall score has decreased by 3.7 points, the third worst decline in this year’s Index. With lower scores on six of the 10 economic freedoms, Argentina now ranks only 27th out of 29 countries in the South and Central America/Caribbean region, and its overall score is far below the regional and world averages. Argentina’s foundations of economic freedom have weakened in light of extensive government intrusion into free markets. Aggravated by corruption and political interference, the lack of judicial independence has severely eroded limits on government. Public spending by all levels of government now exceeds one-third of total domestic output. Regulatory encroachment on private businesses has continued to increase, undermining previous years’ structural reforms. Populist spending measures and price controls distort markets and undermine productivity growth, and the financial sector remains hobbled by government interference. Fading confidence in the government’s determination to promote or even sustain open markets has discouraged entrepreneurship and dynamic investment within the private sector.

Again, in a libertarian society all are equally free. But in order to attain such high levels of freedom we have to get our priorities right. Fundamentals such as an accountable government, freedom of speech and economic freedom must all be in place in order to provide an infrastructure of liberty, before we can advance to liberate other areas of society.

The freedom to marry five people of various genders is reduced to eclectic flea-killing if you cannot provide for yourself without asking government for a handout. The freedom of a lesbian couple to adopt is worth nothing if that lesbian couple are forced to rely on government-provided food, health care, education, clothes and housing. (For regular families, that is what the complete absence of economic freedom boils down to.) The freedom of Jack to become Jill, with or without gender surgery, is reduced to mere symbolism if Jill is just as unable to find a job and pay her own bills as Jack was.