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EMU and inflation -
a civil liberty issue

 







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EMU (European Monetary Union) and inflation – a civil liberty issue is one of a series of documents about economics and money at abelard.org.
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contents

 


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Introduction
Analysis in seven sections

§
§
§
§
§
§
§

section 1: politics without brains or ethics
section 2: recent currency debauchery in the uk
section 3: governments love inflation
section 4: innumerate workers
section 5: wealth transfer via emu
section 6: big business
section 7: political venality
Reference section
1
2
3
4
5
6
Political and technical considerations
Private money
Future developments
Backup material
Understanding inflation
What is to be done

End notes

 

introduction

1998
A year or so ago an able poster on uk.politics.misc, A.W.R. Gulliver, suggested to me that the proposed EMU was a pressing and important issue. Until that time, I had not examined the EMU project and was rather complacent about the matter.
However, the more I studied it, the more concerned I became. Hence the following report.

My major concerns are

  1. the social damage inflicted by inflation, which I regard as an unmitigated evil perpetrated by corrupt government, and
  2. the potential for contention between nations if this nonsense is forced through against the wishes of the citizens of the various nation states. Very few are covering that issue adequately, but the early part of Redwood's book, Owen's article and, particularly succinct, Friedman's article are germane - see below. William Hague [1] has recently drawn some attention to this matter in a speech.

Both issues have considerable civil liberty implications.

Being a complex matter, I have divided this summary into sections, with a reference section in the second part which includes several web site sources.
I invite any who may think this review useful to include a link on their own sites.
If they have related material not covered in this report on their sites, I will be interested to consider including links from this site.return to contents


analysis

section 1: politics without brains or ethics

Paddy Ashdown and his old-style socialist defectors would  attempt to drive us into disastrous political ‘union’ via the idiotic political Euro, despite  about 60% of the British having the good sense to eschew it.

Hermut Kohl would drive the Germans in, despite about 70% of them having the sense to object to it.
Even the French only managed to force agreement to the EMU by a whisker, prior to any proper debate. I doubt they could repeat that.

Alan Greenspan, one of the truly great masters of monetary consequences, has been reported by the Wall Street Journal as saying, “The Euro will come but it will not be sustainable”.  He also recently expressed concerns over the EMU’s potential capacity to sow dissension between union member states, a central issue as far as I am concerned.

Ted Truman, international chief of the Fed. (Federal Reserve - central bank of the USA), said that the Euro project could adversely affect the smooth  functioning of the international monetary system.

Volker, an ex-Fed. boss of great experience, said, “I’d rather start the intellectual process now than wait for the crisis and conflict that if not inevitable, are all too possible”.

I even hear whispers that the Labour Party is kite flying in this gale.

John Major has at last come off the fence and stated that the EMU is a risk too far.

By putting party ‘unity’ and power before the best interests of the country, inevitably he has damaged both.This has left the Tory Party in no decent state to fight this insanity.

The apparatchiks, who fail to read history and learn, are attempting to rush and force Europe into their silly dangerous and simplistic vision of european unity.

It is clear that the dogmatic idealists do not recognise the clear and considerable dangers posed by *forced* integration, despite having a recent example to hand in the chaos of breakdown in what was Tito’s Yugoslavia.

Trust the instinct behind the resistance and disquiet in the common citizen as shown by recent polls, for that disquiet is well founded in history.

Note also the number and quality of those questioning the EMU project throughout this report.return to contents

 

section 2: recent currency debauchery in the UK

The UK is, and has recently been, involved in a massive debauching of the currency. The money supply has been expanded by  about 12% p.a. over more than 30 months as John Major tried to cling to power. The process is continuing under Labour, though there is some excuse at the present time, given the difficulty of reversing such a policy.

We will have to pay for that debauchery with about 8% inflation over a similar period and the pound will crash once more. The only reason the pound is high at present is hot money seeking the higher interest charges with, probably, some hedging against the Euro.

Major has left the economy far far worse than when he came to power. It is but  poor consolation that continental government is in an even bigger mess with unemployment.

Our central problem is the long-standing disease of paying ourselves more than we earn.

Major has run our country on tick, increasing the borrowings to the extent of about £4000 for every man, woman and child over his last four years.return to contents

 

section 3: governments love inflation

Make no mistake, the Euro is a political project not  an economic venture. It is an attempt at political centralisation.

It would be quite feasible to keep our national currencies while introducing the Euro.

It would be easy enough to introduce a law allowing citizens to specify invoice settlement and proportions of wages in euros or the local currencies, according to choice.

The problem for governments of countries like the UK with inflationary policies (as has recently been active in the UK) is that those with ability and sense will tend to exchange their savings for any foreign currencies which are less subject to the debauchery.

Naturally, political control freaks do not like the public avoiding their inflationary-based taxation in such a manner. They want the population under one currency which they can inflate at will, without allowing any ability to avoid it. To this end, such options (as currency choice) are made as difficult as possible, especially for the less well-off.return to contents

 


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section 4: innumerate workers

Some economists, for instance James Tobin of Yale University (1972), say that a small amount of inflation, say 2.5 to 3 percent, allows greater job market flexibility. Essentially this is because Joe Six-pack doesn’t realise his wage packet is decreasing if the numbers stay the same. Such slow inflation then, has the potential to ease downward wage flexibility where particular skills are becoming less marketable. Without flexibility, it is argued that there would be more worker unrest and more unemployment.

This view, concerning helpful levels of inflation, I accept as an interim measure until populations are better educated.

Another element of inflation is that it is used in order to let countries and companies off the results of failed investment or borrowing decisions. This is done by using inflation as a tax on the mass of workers and savers. It could be argued that this avoids depressions such as those that have hit world markets at regular 50-60 year intervals under a more rigid ‘morality’ (see also the paper by Greenspan and Parks.)

It is possible to argue that this process is ‘a good thing’, but I have yet to see it thus argued, even though it is widely practised. As an elitist, it is possible to suggest that removing resources from the mass in order to enable their masters to continue to function, thus providing jobs and continuity, is a necessary process.

I would prefer to remove such dishonesty and manipulation from the system by concerted education.return to contents

section 5: wealth transfer via emu

German and French governments do not want their citizens to be able to invest in other countries. Their middle-classes want to maintain their overpaid wages and pensions, bugger the fact that their social cohesion is failing.

They would, however, be happy with a centralisation which ends in the UK paying for their refusal to reform their economies.they are less happy with the inflation that would be imported.

Low tax economies are rich economies. We in the UK had made considerable progress under Thatcher until socialist Major threw it all away.

The higher the tax regime and the greater the government interference, the more we and our children will pay with ever lowering standards.

Hence, if Gordon Brown eases up in his drive to control government spending, he simply degrades our long-term future.

Meanwhile in continental Europe, the taxation situation is generally much worse. This is a great deal of the reason why Europe is falling steadily behind in world living standards.return to contents

section 6: big business

It has been claimed by a few that most of Britain’s leading firms also support EMU and that ‘they’ think that entry into monetary union is probably the only way to maintain the competitiveness of our industry.

I think that is specious and incorrect. Some large company managers have stated that they want EMU, others do not. Many of the same people also wanted the ERM.

Their judgement is general poor and often venal. Japan has managed very well within Europe without any single currency, so have we historically. It is well to realise that the bigger firms are generally run by rather unimaginative managers, rather than by entrepreneurs, and that they are usually dull and self-entred. Their companies will gain a little in transaction costs and in reducing their currency departments.

The vastly more numerous smaller companies will merely bear costs, for they do little international trading and those costs will be very considerable. Naturally this appeals to large companies as it makes it difficult for new market entrants to compete.

The banks will, of course, probably end up losing a lot of business.return to contents

 

section 7: political venality

Politicians hope that, by the time we realise the mess, they have generated they will be long gone and comfortable in some banking or Euro sinecure.

The next lot will blame them, but who cares? They’re all right, Jack! And the next lot will, in turn, be preparing their golden parachutes.

Remember, the politicians are generally not on your side. If you want decent government, you are going to have to become active to ensure it.

Remember, the more currencies are available, the more freedom there is for the individual. The benighted euro project is a civil liberty issue.

Don't be fooled by all the flummery, it is a con trick engendered by corrupt politics.

Just ask where the political control will lie when the soft currency nations clash with the hard currency block? Where will be the accountability? Who will decide the level of the inflation tax?  Who will make up the shortfall?

Understand that the main purpose of the EMU is the centralisation of unaccountable power.

Kohl is clearly and deliberately acting in an unaccountable ‘mother knows best’ manner.

At the present moment, no politician could slip EMU past the British people without chicanery; and, remember, no administration can rule in the long run without the consent of the citizenry.

Even those in France who favour EMU would do very well to reconsider the EMU project while political sentiment is running so strongly against EMU in the UK and Germany. Our political masters are telling us that EMU is ‘unstoppable’. That is a blatant lie.

Many in the political ‘elite’ are telling us that EMU, once instigated, is ‘irreversible’. Again a blatant lie.

If EMU is forced through against the democratic will, it is very probable that it will be reversed by politicians who will be prepared to accept the democratic will, politicians who will certainly, in due course, replace those who attempt to ride rough shod over democracy.

Such a progress inevitably will generate much ill-will, tending to instability rather than growing European co-operation.

For the long-erm peace and prosperity it is essential, therefore, that the EMU project is put on hold until greater political acceptance evolves among the European nations.

Any other course is short-sighted and dangerous. Any who tell you otherwise are mistaken, and any who tell you EMU cannot be delayed or stopped are simply lying.return to contents

reference section

1 First, some political and technical considerations

See the chapter by Congdon (pp76-90) in The Euro
editor: Paul Temperton, (John Wiley 1997, 1st edition, 0-471-97955-4, £25)

Congdon just does not think the Euro will work technically. He lays out the technical reasons for this, reasons with which by and large I agree, though he could be over-egging the pudding. His sentence structure can be a little convoluted.

I have a great deal of regard for Congdon’s economic understanding (I have not much regard for the stuff put out by most who describe themselves as ‘economists’ J ).

This book also has four useful appendices giving the extracts from the legal documents that purport to define the Euro (pp. 269-290).
 

Further to this, John Redwood’s book,
Our Currency, Our Country (Penguin 1997,0-14-026523-6, £8)
is a useful rush-through from a committed anti-European politician. He is inclined to bluff over the mess left by the last administration, which does not help his credibility. However, he gives a very useful summary of the bones of political and some of the technical problems. There are even sections on the legal and logistic issues. This is highly recommended as a first orientation for those who do not wish to get into too much detail. It is wise to read with some scepticism, but that probably applies to any reading matter, even this resource.

Both these references above have an air of being rushed out, but that is of course the nature of the situation as venal politicians and bureaucrats try to bounce Europe into this ill-starred project.

For other semi-technical reasons and a better summary of some of the libertarian issues, a short article by Milton Friedman (The Times, 19 November 1997, p.22) is well worth a look. again, there is some inconsistency in his position.

David Owen has recently written a thoughtful and temperate, if rather diplomatic, article,
Yes to Europe, No to Federalism, (The Economist 24-30 January 1998, pp.35-36).
an extended version is available at
http://www.economist.com/editorial/freeforall/24-1-98/owen.html available to subscribers only]
About 18 pages of A4)

I think it worth reading for those concerned with this issue. The extended net version is more useful than the cut-down print version.

However, I point out a considerable error in the section, The need for convergence,
paragraph 3, where Owen states that the Bundesbank is “totally independent”.
This is not so....

The Bundesbank was over-ruled when it opposed the inflationary conversion of ostmarks to
marks on re-unification. The government also refused advice from the Bundesbank that the mark should be retained rather than subsumed into the Euro.

There is also a minor glitch in the section, The British opt out, paragraph 6, where Owen states that a decision to join is “effectively.... irrevocable”. That is an exaggeration, but he is correct that such action could have (and most likely would have - abelard) “appalling consequences”. However, it would be my strong expectation that such detachments from the Euro will eventually occur, however dire the consequences, should any be foolish enuf to join the circus.

Joining the Euro will inevitably see very large rises in UK direct and indirect taxation through inflation, for it is growing ever more clear that the Euro is likely to be a soft currency. Thus we will end up both settling the huge national debts of countries like Belgium and Italy, and funding the enormous continental government pension commitments, if these countries continue to fail to re-order their present arrangements.

For example, see the over-optimistic article
Consolidating and reshaping public finances in the community,
1997 Annual economic report from the European Commission - Growth, employment and convergence on the road to the EMU:
http://europa.eu.int/en/record/aer97/chap3en.htm [currently unavailable]
(About 23 pages of A4 - note particularly the final table).

Given such a scenario, we will import other countries' structural unemployment rates, which rates will continue to climb.
The only other route would be a typical communist fortress economy.

My concerns, as stated, are not primarily technical. as you will note, I am not always entirely convinced by Friedman, Congdon and Redwood. the section above is supplied as a resource for those wishing to inform themselves on these technical matters and political considerations.return to contents

2 private money

Monographs published by the IEA:
Private Money, Kevin Dowd, IEA Hobart Paper no.112, 1988,  0-255-36216-1
Denationalisation of Money, Frederick A. Hayek,  IEA Hobart Paper no. 70, 1976, 2nd ed. 0255362390
As a libertarian, these express some of my reasons for opposing the EMU with its inherent potential for inflation. By allowing private money or, on a lesser scale, various national currencies, there is competition between currencies. Any nation (or for that matter private money issuer) that attempts to debauch its currency leads directly to money holders getting out of that currency.

With less currency options, there is less ability to avoid a government cheating citizens by using inflation.
 

Regarding James Tobin of Yale University (1972), see short review in
The Economist 26 July1997, p.92.
For empiric data on the subject of competing currencies, see the Cato site article by Kam Hon Chu at
http://www.cato.org/pubs/journal/cj16n1-3.html

See also The mechanics of inflation.


3  future developments

For some implications of future developments, see Catherine England on the Cato site at
http://www.cato.org/pubs/books/money/money18.htmreturn to contents

4  back-up material

1) A recent report stated that over 250 local exchange systems had appeared in France recently, as mainly unemployed individuals struggle to get government off their backs. Such is the real wave of the future however much governments may pursue their grand schemes. (The European 2-8th February 1998, p.32)
2) For a truly chaotic but ‘stimulating’ read on this subject, you could try
The Sovereign Individual
William Rees-Mogg and James Dale Davidson, Macmillan 1997, 0-333-66208-3
(over 400 pages!)
3) See also Forbes 8 September 1997, pp172-179 (J. McHugh), probably available on http://www.forbes.com, for discussion of encryption and cyberspace banking.


understanding inflation and why it is so very undesirable

For a more full development of the inflation issue and the multiple problems it generates, see the Costs of Inflation and Disinflation at
http://www.cato.org/pubs/journal/cjv14n2-8.html
(About 21 pages of A4)

This is an excellent review. I cannot recommend it too highly. (There is one minor issue which I wish to check out- self note!)

For a less technical and more pedagogic approach, see the excellent speech by Greenspan with useful commentary by Lawrence Parks, available on the FAME site:
http://www.fame.org/PDF/MG_ISBN097103804X.pdf
About 19 pages of A4)return to contents

6  so, what is to be done?

Both inflation and deflation are forms of dishonest money. They both result in un-negotiated transfers of wealth.

The idea of ‘stimulating the economy’ by ‘deficit’ is undesirable, as far as I am concerned.
I think it better to think in terms of tax and redistribution.

See the very useful review of ‘Keynsianism’ at http://www.digiweb.com/igeldard/LA/economic/keynes.txt [currently unavailable]
(About 19 pages of A4)

I want to see radical changes in the cultural relationship to ‘money’. At present, the debauchery of ‘money’ via deficit spending is a dangerous moral corrosive. I regard this as far more important than the present blasé, and widely unconscious, approach to fiat money.

In my view, understanding of the widespread and damaging ramifications of inflation is very poor, even among ‘economists’ and ‘politicians’. To quote Keynes loosely, not one person in a million is able to diagnose the manner in which inflation operates: not much changes. Keynes also claims that Lenin recommended inflation as a sure manner in which to destroy a state.

A fundamental means to such radical changes must be to teach the nature of fiat money and the effective handling of money from very early in the educational process.

I want inflation indices that incorporate wage levels, housing prices and stock exchange levels. It is important that the myth that the RPI is greatly related to inflation be debunked.
Without adequate indices, government dishonesty can go unnoted.
A freedom of information act is also vital and clear government statistics must be made widely available.
I want a basic policy of monetary stability.

‘Stimulating the economy’ is often done by using infra-structure projects of the type widely practised by governments and funded by deficit spending. These projects may be useful government initiatives in times of difficulty, but they may not involve clear GDP increases. They may not have, therefore, a simple relationship with monetary stability. It is the test of such links that I would consider germane.

Such projects are political issues and inflation is a rather poor and destructive way of funding them.
I propose that ‘leaders’ are taught to think clearly about redistribution, its desirability, its definitions and effects when considering such projects and to eschew the dishonest manipulation of money.

Money is essentially a communication media. To debauch money is to encourage lies and dis-honesty. That is counter to clear education and social progress. It is counter to good and improving government and society.

A reason for the housing boom, and the still very high prices, is the tendency for housing to be seen and used as a hedge against government inflation in countries with amoral politicians. Inflation drives such false markets, causes confusion and disrupts trade.

In time, reduced taxation relative to GDP may be important, but I wish to see greater expenditure, as a percentage of GDP, on education and with no reduction of defence expenditure.

USA. (self note) dated from 10/2/98

Comments are invited.....return to contents
email abelard@abelard.org

End notes

  1. William Hague is a British member of parliament and was, for a while, leader of the Conservative Party in opposition.

email abelard at abelard.org

© abelard, 1998 (10 February, slightly updated and edited on 3 June, 1998)
v.1.1.2


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