Milton Friedman Wants a Word With You

The EU: Combination Clowns and Police State

Milton Friedman has long been considered the Dean of the Chicago School of Economics, which in turn was largely assumed to be descended from Austrian Economics.  Therefore, Milton Friedman was an Austrian School guy, QED,

Except, as it turns out, not.

Friedman was one of the leading advocates of using monetary policy to deal with short term problems in the economy.  He was aghast when Nixon put in wage and price controls to deal with inflation during the first oil crisis.  Inflation should be dealt with via central bank, not central planning.  By restricting the money supply, you squeeze the economy, temporarily kill growth but kill inflation, too.

This, in effect, is what Volcker did in the late 1970s and early 1980s.  The result was to kill inflation, which has never really been an issue since.

But Friedman apparently did NOT believe the sort of Hayek-style "Hey, recessions and depressions are good things" philosophy.  In other words, you should use monetary policy during a downturn as well as during inflation.

This is effectively what the Federal Reserve has been doing, dropping interest rates into the cellar and now buying US debt back in "quantitative easing".

Which brings us to Europe and the Euro.

Germany is doing great these days.  Their economy is growing, unemployment is relatively low, even in the former East Germany.  And Germany controls the European Central Bank.

The problem is that certain parts of the EU are in real trouble.  Greece, Ireland, Portugal and Spain are the European equivalent to South Florida, Nevada, Georgia and California.  They got rich off cheap loans made to banksters who invested in American real estate.  When the bubble collapsed, they then scrambled to protect the banks, but in really stupid ways (at least in Ireland's case).

So now the Irish government has to cover private bankster's losses.

Capitalism!

Ireland is broke.  Usually, a country could devalue its currency in a time like this, when everyone is freaking out over the weakness of Irish debt.  That's what Uncle Milton would have done.

But Ireland can't devalue its currency, since its currency is the Euro.  Across the Irish Sea, the British - who never adopted the Euro - are faring somewhat better, in that they can devalue their currency more to deal with debt.

The end result of this, ironically, has been the wealthier, more stable EU nations forcing IMF-style austerity not on "global South" nations like Argentina, Bolivia or Nigeria, but on countries like Ireland, Portugal and eventually Spain.

And those austerity measure really, really suck.  They always sucked for the people of Thailand or Argentina or Kenya.  But now they suck for people who aren't used to things sucking.  There's a certain fatalism in the developing world about the fact that being poor is just part of life.  You're less likely to be that accepting of that in Europe.  We've already seen rioting in London over hikes in student fees.

When it comes down to it, the broader issue is this, whether in the US or Europe.  The financial sector screwed EVERYONE over, but after a few token scalps were claimed, they went back to making fortunes and earning billions in bonuses, as if nothing ever happened.

And everyone else is expected to suck on it.  Everyone else gets THEIR budgets cut: schools, social welfare services, college scholarships, health care, infrastructure repair.  As long as we don't tax the banksters!  It's important they we don't stifle their "creativity".

At some point, we're going to see anger erupt into violence.  Americans tend to be a remarkably docile people politically, at least on the Left (the '60s were an exception).  European leftists are a lot more radical.

If Europe continues to try and create solvency on the backs of the working class to pay off the disaster created by the financial markets, there will be blood on the streets at some point.  We've already seen some in Greece.

On the other hand, it's nice to see that America isn't the only part of the world with one set of rules for the rich and another set for everyone else.

Europe trapped itself in a system where you can't use monetary policy to get out of a slump.  We'll see if Bernanke can help engineer our retreat from the brink using QE.  But the Euro - and the needs of the European Central Bank - are currently killing the fringes of Europe.

We'll see where this all leads...