Monday, September 26, 2011

The Central Problem for the Euro Currency

The entire article from which the following quote is taken is well-worth reading, complete with all its choice quotes, from the web pages of Acting Man, linked here. I choose to quote here just this small section, rich in ultimate common sense, the essence of which this blog hads been trying to put across for years, but far less adequately:

This monetary system is the cause of the boom-bust cycle that has now brought forth the crisis. There is simply no way to avoid future crises as long as this monetary system remains in place. It does not matter how many new regulations are foisted on the banks, or how big the EFSF bailout fund's resources become. All these measures are mere band-aids that fail to address the central problem. Mr. Venizelos thus is correct that 'Greece is not the euro area's central problem', but he fails to say out loud what exactly the central problem is, something he has in common with his fellow euro-area politicians and eurocrats.

Why nobody stops to ask how exactly it comes that the euro area's banks are short of capital and teetering on the brink of insolvency remains a mystery. If we were to guess, we would say that the faith in the idea that central planning of money in a fractionally reserved fiat money system is possible in principle has not yet been sufficiently shaken. However, the fact is that it is not possible, regardless of the good intentions of the planners. The very same basic problem that besets central planning in socialist command economies – the calculation problem – in a wider sense also besets central banks. Socialist economies fail because there are no market prices for capital goods, which makes it impossible to sensibly allocate scarce resources and plan production. Central banks fail because they can not 'know' what the social rate of time preference is. They try to create a 'fixed point' (their target interest rate) in a highly dynamic system on the basis of an assessment by a handful of bureaucrats who are allegedly able to judge 'what interest rate the economy needs'. Moreover, as the central bank-led fiat money system enables the fractionally reserved banks to expand credit and deposit money to the fullest extent possible due to minuscule reserve requirements and the central bank's willingness to replace their funding whenever a run on deposits occurs, the economic distortions produced by the expansion of fiduciary media can grow to unprecedented proportions. Let us not forget that every cent of 'money from thin air' leads to exchanges of nothing for something, thereby weakening the economy's pool of real savings. It also creates a misleading picture of how big a pool of savings is actually available, with the inevitable result that capital is malinvested and ultimately consumed. This is therefore the 'central problem', but judging from the debates among the monetary and political elites, it remains completely ignored.



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