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Germany, Greece, the Euro, and the Gold Standard
Raymond Richman, 2/26/2010

Many commentators believe that dysfunctional Greece is the cause of Greece’s pending bankruptcy and many believe that dysfunctional USA is the cause of the USA’s pending bankruptcy. Time has run out for Greece and is running out for the USA. But the U.S. is more fortunate than Greece; its bonds are payable in U.S. dollars, issued as needed by its central bank, the Federal Reserve System. Poor Greece, its debt is payable in euros which are printed by the European central bank whose policies require Germany’s approval. And Germany does not approve profligacy.

The cause of Greece’s problems is alleged to be financial profligacy but its immediate cause is really its chronic trade deficit with Germany and the European community which causes it to run out of euros. The cause of the USA’s problem is alleged to be financial profligacy but its immediate cause is its chronic trade deficits with China, Japan, Germany, and OPEC  which flood the world with dollars which the world hoards as reserves or sends to the U.S. in return for U.S. Treasury bonds and other U.S. financial assets. Unfortunately, this is not sustainable .

The Asian Tigers got into trouble like Greece when the bubble caused by inflows of foreign capital burst in the late 1990s and their debts unfortunately were  denominated in U.S. dollars which they did not have and could not get. They are no longer in trouble because they all have trade surpluses with the U.S. This gives them plenty of dollar reserves to pay any debts they may have payable in dollars.

Greece could get out of trouble, too. All it needs to do is have a favorable balance of trade with the members of the European Union. Its profligacy unfortunately makes it difficult if not impossible to prevent an imbalance of trade. Indeed, it would not have gotten into trouble if its trade had been in balance. Every country’s slogan has to be “Balanced Trade” or it will inevitably bite the dust. Growth and stability, not profligacy is the answer.

That is the way the gold standard used to work. Countries got into trouble when they ran out of gold to pay their foreign debts when due. And why did they run out of gold? Because their profligacy caused them to run continual trade deficits that had to be paid for in gold. A number of years ago, Prof. Milton Friedman, one of my mentors, predicted that the euro could not be sustained any more than the gold standard could be maintained. He recognized that a condition of its longevity was that each member had to earn as many euros or as much foreign exchange that could be converted into euros as it spent. Not necessarily every year but the deficit could not go on indefinitely.

After WWII, the U.S. was generous in helping its former enemies recover. The world was on a gold exchange standard basically in the 1970s when the U.S. faced the possibility that a continued outflow of gold would empty Fort Knox. So the world was forced to adopt a system of flexible exchange rates, in which as it happened, the dollar became the world’s standard. It worked fine as long as the U.S. maintained its economic growth and stability.

The creation of the euro imitated the gold standard, or perhaps, the gold-exchange standard with the German mark imitating gold. The problem was that Germany until overtaken by China during the last decade was the country with the world’s largest chronic trade surpluses. For all practical purposes it was inevitable that member countries would run out of marks – excuse me, I mean euros. Greece is the first to teeter on the brink of bankruptcy but Spain, Portugal, Ireland, and Italy are having difficulties and are not far behind. Germany employs commercial policies at home that are mercantilistic. That is good if it wants to subjugate Europe – it is genuine lebensraum. But it is more likely to cause a break-up of the European Union than made Europe a satellite of Germany.

For the euro to survive, Germany must bring its European trade into balance. For the U.S. to survive it likewise must balance its trade with its trade partners with whom it has been experiencing chronic trade deficits for decades. Printing dollars while the dollar is the world’s exchange standard can enable it to survive but it is not sustainable. China, Germany, Japan, and the OPEC cartel are going to have to bring their trade into reasonable balance with the U.S. or, what comes to the same thing, the U.S. has to end its profligacy, restore growth and stability, and has to bring its trade into balance with these countries. It may have to use barriers to imports which are authorized by the rules of the World Trade Organization to countries experiencing chronic trade deficits.

Perhaps, Greece should put a tariff on its imports from Germany! Poor Greece!

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Comment by real_econ, 2/28/2010:

You are making this situation much more complicated than it needs to be. You see the US manipulates Gold to keep its price low. Using the COMEX and LBME markets. This is fact.

If Gold ever rises too much in price the world will dump the dollar and buy Gold. So for the dollar to stay strong Gold always has to be cheap. Understand. Now, the architects of the Euro currency knew that the dollar would collapse one day in the future. (Really, did anyone think that the US could forever keep Gold cheap?) This is why the architects built a 15 percent gold reserve into the Euro currency. Because one day soon the dollar is going to die, Gold is going to shoot to the moon, and all the debt that the Euro Zone has is going to be wiped away by the increase in the value of the Euro.

All this talk about the Euro falling apart is just noise, and many people are going to lose their shirts betting against it. Got Gold? Got Euros?

Response to this comment by Raymond L. Richman, 2/28/2010:
The notion that the US manipulates gold to keep its price low --at $1100 an ounce! -- is not borne out by the facts. As the value of the dollar deteriorates [and the European Union experiences slow growth and other problems  like the one described above], the price of gold rises as investors take flight from the dollar. The  euro will fall apart if Germany continues to follow what Keynes called a "beggar-ones- neighbor policy" of deindustrializing its neighbors and the U.S. This is not sustainable.  
Response to this comment by real_econ, 3/8/2010:
Gold is not expensive at $1,100 today. Gold would not be expensive at $5,000 today. You must understand that the dollar can only exsist if it can purchase physical gold. What if you woke up tomorrow to read in the paper that it was impossible to buy gold anywhere at any price? No pawn shops are selling, no coin dealers are selling. It is all gone. This is the scenerio that we are facing very soon. When something as precious as gold goes extinct I beleive the value today would make even $5,000 an oz cheap. You must understand that the COMEX and LBMA markets have allowed 2 or 3 major banks to go masivily short on gold and silver contracts. THIS IS A FACT. These banks dont have the physical metal to cover these masive short contracts. When these soverign nation debt defaults really get into full swing, the big money is going to rush the COMEX and LBMA and the mother of all ponzi scemes is going to be exposed. It is possible that the big money is already in the process of taking delivery of what ever amount of metal the COMEX and LBMA have. Its unknown how silver and the other precious metals will perform in this situation because they are comodity metals, but  physical gold (not being good for much of anything except as the ultimate store of value and wealth) will revalue to a price that no one can imagine, and will no longer be available to buy with paper fiat dollars. All of this said, the Euro planners knew this day was comming. They knew history, that every fiat paper money experiment in the past always ended badly. So they structured %15 gold reserves into the Euro currency, as gold rises to $10,000 or $20,000 an oz, the Euro will rise accordingly. The dollar will collapse or hyperinflate next to a gold price so high. Again this being said, physical gold is the best place to have your money. Even the Euro is just paper currency and will experience some pain along the way to the New World Economy. By the way, the 1,100 an oz price you talk about is set by the COMEX market. They will never let the price go to $2000 or even $1500. The price that the fraudulaent COMEX market sets is likely to start falling as more and more people wake up to this scam and buy physical. Keep your eye on physical gold prices on to see how the price of physical gold is about to go to the moon, and the price of paper COMEX gold is about to start dropping. We live in facinating times, the amount of fraud, lies, deception, and propaganda are unparalleled in the history of the world.   Stay alert, stay alive!    PR: wait...  I: wait...  L: wait...  LD: wait...  I: wait... wait...  Rank: wait...  Traffic: wait...  Price: wait...  C: wait...
Response to this comment by real_econ, 3/8/2010:  PR: wait...  I: wait...  L: wait...  LD: wait...  I: wait... wait...  Rank: wait...  Traffic: wait...  Price: wait...  C: wait...

Comment by Zbigniew Mazurak, 2/28/2010:

Greece is not allowed to impose any tariffs on any imported products from any EU countries. The EU rules do not allow EU member states to do so. If they were allowed to do so, the EU single market would disappear.

Response to this comment by Raymond L. Richman, 2/28/2010:
That is why I wrote: "Poor Greece!" in my last sentence. Greece, Spain, Ireland, Italy, and Portugal  have to allow Germany to make their domestic economic policies or retire from the European Union. The U.S., when it wakes up, can force a trade balance" on Germany.

Comment by Sputte, 4/10/2010:

But... there is only a certain amount of gold in the world in contrast to the Euro which you can print again and again and ....

Response to this comment by Sputte, 4/10/2010:
What I did mean was that the European Commission or a overstate government has to be able to invest or push money in to the countries that have a negative flow of money. This would not be possible with the gold standard because there only exists a certain amount of gold. But as the Euro is printable, it's possible for, lets say the ECB, to buy state bonds, or the European commission to invest in infrastructure in those areas. This could lead to inflation in the Euro area but, better inflation than default!

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]