THE 2010-2015 GREEK LAWGIVERS' CRISIS, THE EURO AND CURRENCY AREAS. SHOULD THE EURO ZONE BREAK APART?

So today, editors at Forbes published yet another train-wreck of flawed thinking by Tim Worstall. In The Cause of the Eurozone Crisis Was the Euro: The Solution Is Abolition of the Euro, Worstall tries hard to call for an end to the Euro by blaming its existence for the cause of a what he calls the Eurozone Crisis, which likely he means the the Euro Banking Crisis of 2008 the Greek Lawgivers' Debt Crisis of 2010-2015.




Seriously, I don't understand why Worstall doesn't find another line of work besides trying to write about economies and economics (see more on Tim Worstall right here on Bizarro Theater),

"Even a cursory glance at the economics of this field, optimal currency areas (founded by Robert Mundell) tells us that over such disparate economies a single currency just isn’t going to work." ~ Tim Worstall

Worstall seems not to understand Mundell's Optimum Currency Area Theory at all. Mundell included his theory in a textbook titled International Economics, (1968, pp. 177-186).

Mundell's Optimum Currency Area Theory is one where an authority can stabilize employment and prices over a well-defined region. According to Mundell himself:

• "If the case for flexible exchange rates is a strong one, it is, in logic, a case for flexible exchange rates based on regional currencies, not on national currencies. The optimum currency area is the region."
• "If the world can be divided into regions within each of which there is factor mobility and between which there is factor immobility, then each of these regions should have a separate currency which fluctuates relative to all other currencies."
• "The argument works best if each nation (and currency) has internal factor mobility and external factor immobility."
• "But if regions cut across national boundaries or if countries are multiregional, then the argument for flexible exchange rates is only valid if currencies are reorganized on a regional basis."

In the work, Mundell cites two who he believes has captured the essence for defining the optimum currency area — Meade and Scitovsky.

• "In both cases [Meade's; Scitovsky's ] it is implied that an essential ingredient of a common currency, or a single currency area, is a high degree of factor mobility;"
• "...neither writer disputes that the optimum currency area is the region-defined in terms of internal factor mobility and external factor immobility-but there is an implicit difference in views on the precise degree of factor mobility required to delineate a region."

According to László Andor, European Commissioner for Employment, Social Affairs and Inclusion, in his speech titled Labour Mobility in the EU: Challenges and Perspectives for a Genuine European Labour Market, Europeans have the necessary ingredient of labor mobility.

Free movement of workers began in 1968. Today, it encompasses the labor markets of 28 Member States of the EU and every Eurozone country.

EU nationals have the right to look for work and take up employment in another Member State and to receive assistance from the employment services in the host country when looking for a job.

Countries experiencing the highest increase in labor outflows to other EU countries in 2011-12 were Greece, Spain, Ireland, Hungary and Latvia. Labor outflows went mostly to Germany, Austria and the UK.

So according to Mundell and his theory, the European Central Bank (ECB) ought to make more credit available in Germany, thus pushing up prices in Germany to remove the demand of Greeks from buying German products.  With Greek demand for German goods cut by being priced out, Greeks would then produce the alike, substitute goods on lower prices (lower wages), thus taking up unemployment slack in Greece.

But the problem has been the lawgivers in countries like Greece. As wages are prices, they have kept wages up through massive fake-work, make-work government programs, pensions and welfare. Greeks had been living through a credit bubble, a public sector credit bubble and not a private sector. When that bubble burst — Greek lawgivers couldn't borrow without bailouts — Greeks suffered at the hands of lawgivers rather than commercial bankers.

For those who doubt that Greek lawgivers haven't been the source of the problems for the Greeks, have a look at GREXIT IS NO EXIT. Nigerians export more than three times as much as the Greeks, but only import 1.34 times as much as the Greeks.

So how do the Greeks do it? How do the Greeks pay for those imports? Their lawgivers have borrowed year after year to pay for government agency workers, pensioners and welfare collectees who, in turn, take their Euro borrowings and buy imports from those of other Eurozone countries.

In the countries hit hardest by the Euro Banking Crisis, their problems have been caused by lawgivers borrowing to keep afloat phony economies and thus hampering price discovery. As well, by Mundell's theory, those countries within the Eurozone experiencing trade surpluses need to have their regional central bankers rediscount more and thus pump more credit into those countries, which presumably would jack up prices relative to the Eurozone trade deficit countries. By Mundell's theory, it doesn't matter if Germany and Greece are separate countries as long as the countries operate under the same exchange rate and have factor mobility.

Mundell also said, "Similarly, if factors are mobile across national boundaries, then a flexible exchange system becomes unnecessary, and may even be positively harmful, as I have suggested elsewhere." 

The Euro is a "gold" standard - one rate for an internal common market with factor mobility that requires lawgivers to adjust policy to that standard. The price of that Euro "gold" standard relative to the outside world (other banking systems' cash) fluctuates.

Mundell wrote at a time when countries had fixed exchange rates with bank cash convertible to gold while many called for floating exchange rates with irredeemable cash. Mundell proposed his theory as an attempt to explain international disequilibrium caused by balance-of-payments crises under fixed exchange rates and price fixing by legislators (rigid wage and price levels).

Mundell believed that countries with trade surpluses whose leaders capped bank credit caused unemployment for those living in trade deficit countries because leaders of trade deficit countries had to shrink their economies to restore the imbalance.

Whether one banking system shared among a few countries or countries each with their own banking systems, according to Mundell, the fix for regional disparities is for trade surplus countries to inflate (add bank credits) —

• "In a currency area comprising different countries with national currencies, the pace of employment in deficit countries is set by the willingness of surplus countries to inflate."
• "Unemployment could be avoided in the world economy if central banks agreed that the burden of international adjustment should fall on surplus countries, which would then inflate until unemployment in deficit countries is eliminated"
• "But in a currency area comprising many regions and a single currency, the pace of inflation is set by the willingness of central authorities to allow unemployment in deficit regions."

Under floating rates with irredeemable bank cash, those living in the trade deficit countries would need to pay more for foreign cash of trade surplus countries until BOP equalized. Thus, all inflation would be unneeded as is the fix for disparities between regions under the same banking system.

So, absent the will to inflate by region in the Euro zone, the Euro zone ought to break up and let floating exchange rates do their work — force prices up of foreign goods as expressed in one's own bank cash.

At the end Mundell concludes, "...the optimum currency area is the world, regardless of the number of regions of which it is composed." By that Mundell means there should be one money and balance of payments would adjust regional difference. In short, Mundell means something like gold as money would be the ideal for the world over.

Legally, Europeans have labor mobility. Culturally, whether they move or not is another matter (see: On the Move, The Economist).



Hordes of illegal aliens, many claiming to be refugees, don't seem to have a labor mobility hang up. For more on the horde invading Europe, check out 2015 EUROPEAN REFUGEE CRISIS. FLEEING THE FAILURES OF TOTALITARIANISM, BUT FAILING TO EMBRACE BETTER WAYS.

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WHO NEEDS A CAR AND A 747 WHEN YOU CAN'T BUY A GALLON OF GAS?

So yesterday, a dialogue of sorts opened up between Tim Worstall of Forbes as well as the Adam Smith Institute and myself. Forbes published a piece of work by Worstall in which Worstall makes these claims about gasoline prices in America:

• "Futures speculation doesn't change the price of gasoline one whit"
• Americans do not set the price of gasoline in the USA
• The global balance of supply sets the price of gasoline in the USA 
• Futures trading does not affect the price of physical commodities
• David Ricardo rendered an Iron Law of One Price 

Worstall addressed me and said this bit of foolery,

"[A]t the more general level gasoline prices are set by the international price of crude oil. If this were not true then gas prices would not move in lock step with that price of international crude. Given that they do therefore they must be so influenced...There are significant gasoline exports from the US: so the market is so integrated."

Worstall's beliefs are quite absurd. Worstall believes that crude oil prices set the price of gasoline. Worstall tries to defend the false belief that input prices set output prices. In so doing, Worstall expresses the fallacy that costs set price.

It was Worstall's beloved David Ricardo who is well-known for having started that fallacy. It is Karl Marx who is well-known for perpetuating that fallacy in is his foolish “Labor Theory of Value”.

If it were true that crude set gasoline, that is, if the fallacy of costs set price were true, then why do refiners go out of business? Why do retailers go out of business?  Why wouldn’t businessmen merely charge costs to avoid bankruptcy? Why wouldn’t businessmen merely raise prices at will to cover increasing costs to avoid bankruptcy?

Crude oil prices do not set gasoline prices, ever. Gasoline prices for gasoline bought by retailers are set by futures markets players. To believe anything else is to reveal profound confusion on the matter.

Futures speculation sets prices of refined gasoline purchased by retailers. At the delivery date of a futures contract, someone must take physical delivery of that refined gasoline at the settlement price of the contract.

The entire purpose of futures speculation is to set prices of commodities. In so doing, futures markets players keep the flow of gasoline to retailers both in times of glut and in times of shortage.

Speculation into graded contracts creates a steady, active market for property of all kinds without respect to on-the-spot winning bids for what is on offer at any moment. The purpose of organized futures speculation is to give rise to consistent profit from transmuting property as capital into property as wealth under efficiency.

Gasoline retailers are price takers of the gasoline price set by futures markets players. Oil refined into gasoline is the product they sell at retail. Gasoline retailers are retailers the same as supermarket operators who sell milk, eggs, bread, meat.

All prices adhere to the one and only true law that governs all of commerce — the Law of Prices. The Law of Prices holds the winning bids of purchase and sale in the face of what is on offer sets the price.

It is drivers alone who buy gasoline who set the retail price from their winning bids.  Once futures players set the price of gasoline for retailers, retailers try to make a go of it by accepting prices set by drivers who buy gasoline.

The whole trick of business is producing so that one can adhere to the Axiom of Profit on given prices set by winning bidders. The Axiom of Profit holds the sum of sales on prices set by winning bidders must at least equal the cost of production, otherwise the seller goes to ruin.

If drivers drive less, buying many thousands fewer gallons of gasoline, retailers shall be forced to accept lower winning bids for what they have on offer.  For some, owing to inefficiency, they shall sell at a loss and get forced into bankruptcy. That is the great Axiom of Profit in action.

In 1994, there were 202,800 retail sites for the sales of gasoline. In 2012, that number had fallen to 156,065. The total number of sites has fallen -29.9% falling at a rate of -1.4% a year.

Thus, it can be seen that between 1994 and 2012, many retailers could not make a go of it profitably on extant prices for gasoline set by futures speculators. Therefore, these unprofitable retailers exited the field.

Worstall is quite wrong about all of it, as usual from my experiences reading his work. Perhaps Worstall should find another occupation as he seems to be wrong, consistently on all matters of commerce.

Reality thoroughly contradicts Worstall. As to prices of gasoline, the EIA reports prices in the USA differ by region. As well, Bloomberg reports prices for gasoline differ by country. Thus, it can be seen there is no fictitious global balance of supply and demand that sets the price of gasoline in the USA as Worstall so wrongly believes.

Further, imports of refined gasoline can come into the USA profitably only if outlays to refine elsewhere are low enough such that when combined with transport outlays, foreign producers can at least break even on prices set here in various regions of the USA. As can be seen here by PADD (Petroleum Administrative Defense Districts) region, most foreign exporters of crude to Americans do not also export gasoline likely because it is not profitable to do so.

David Ricardo never wrote about an “iron law of one price.” Germans academicians stuck Ricardo with the phrase, “the Iron Law” and they did so because Ricardo had written something about wages only and not other prices.

Specifically, Ricardo claimed there is a tendency for population to rise as soon as wages would rise above bare necessaries to sustain living thus. This thought became known as the "Iron Law of Wages."

Worstall tries to make an appeal to authority by mentioning Bank of Sweden laureate, Paul Krugman. According to Worstall, Krugman claims futures trading doesn’t affect the price of commodities.

Krugman is an expert in academic economics. However, Krugman appears not to know anything about commerce.  Like Worstall, Krugman is a shop-talker and not a man who deals in profit and loss from selling stuff. Krugman works at think tanks and he teaches.

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ELITES SEEK TO PUNISH WORKERS WITH A CONSUMPTION TAX, OR A TAX ON WORKERS' WEALTH

Tim Worstall is a Fellow at the Adam Smith Institute, which exists as a think tank to promote libertarian and free market ideas. Worstall also writes for Forbes.

Today, Forbes published a work of Worstall's in which Worstall rather stupidly claims a consumption tax is not a tax on wealth. Worstall wrote, "This is rather the point of it in fact: it (consumption tax) entirely exempts wealth from taxation." 

Worstall does not know the first thing about wealth. Wealth is the name given to property put to purchase and sale for cash and credit. 

A consumption tax is a tax on spending on goods, whether chattel or services. Said another way, a consumption tax is a tax on wealth. That is all it ever can be.


The word consumption enters into economics from the Physiocrats. Most economic historians consider the Physiocrats as the first modern economists. The Physiocrats were Frenchmen (Quesney, Turgot, Le Trosne, others) who sought to justify taxation on merchants and financiers while justifying no taxation on farmers. 

In their explanation of a trade, which they called exchange, the word the Physiocrats wrote was consommation, which Englishmen translated as consumption. By consumption, the Physiocrats meant the purchase of something after first gaining the means by selling something else.

Le Trosne said, 

"There is this difference between an Exchange and a Sale, that, in an Exchange, everything is consummated, or completed (consommé) for each party. They possess the thing which they desired to procure, and they have only to enjoy it.

"In the Sale on the contrary, it is only the purchaser who has attained his object, because it is only he who is in position to enjoy. But everything is not ended for the seller.

"Exchange arrives directly at its object, which is consommation (consumption, completion). It has only two terms, and is ended in one contract. But a contract in which money intervenes is not consommé (completed, consumption), but it is necessary for the seller should become a buyer, either himself or by the interposition of the person to whom he transfers the money.

"There are, therefore, in order to arrive at consommation (completion, consumption) which is the ultimate object, at least four terms and three contractants, of whom one intervenes twice."

To the Physiocrats, the trading away of wealth in the form of cash or credit for wealth as products after the cost of production, which they called the produit net, is what they meant by consumption. Thus, the Physiocrats knew at least two kinds of wealth — products of the earth and money. 

Wealth is anything that can be bought or sold. Socrates said so in his dialogue known as the Eryxias. The Romans said so. English jurists of courts since the 1700s have said so. So too have American jurists.

Worstall conflates both capital with wealth as well as production and trade. 

Capital is property put to making stuff.  The name for property put to purchase and sale for cash and credit is wealth. 

Though most think of property as things possessed, property always has meant the right of ownership and never the thing owned. Only when property gets created, can trade arise between two persons.

Production is the use of capital to create property in potential wealth, which all know as stock or inventory when in chattel form, or to create property in actual wealth, which all know as work, in services form. 

Trade is the purchase and sale of property as wealth.

Labor is the poor man's capital. Work sold for wages is wealth. Wages acquired in a purchase and sale of work for wages is wealth. 

So too, is the same for the firm. Machinery and labor are the capital of the firm. Product sold for income is wealth. Income acquired in a purchase and sale of product for income is wealth.

Inventory (stock) is property that has potential wealth and derives from capital. Inventory never sold, though still property, is loss. Inventory does not become wealth until traded. 

Production uses capital. Trade requires wealth.

Until trade happens, nothing is wealth. Though someone has property in a beat-up, used bicycle that goes unsold while on offer at a lawn sale, because the bicycle remains unsold, the used bicycle never becomes wealth. 

However, when bought new in a purchase and sale, the bicycle became wealth of the seller and the cash or credit used to buy the bicycle became wealth of the buyer.

If someone has property in say a house, a banker might consider such property an asset — property that has potential to gain a street price in a purchase and sale. And as such, a banker might consider the asset as collateral, which is property pledged against debt owed on credit borrowed. 

Worstall then goes on to further embarrassment when he writes, "What a progressive consumption tax does do is tax the returns to capital that are then consumed." Brushing aside his horrible grammatical expression, "does do," Worstall reveals that he does not understand commerce and business.

When a capitalist invests, a capitalist uses his wealth to buy a right of action to a share of profit, if any, earned by a firm run by an entrepreneur.  The return to capital is profit. And all profit is income.

Credit capitalists use cash and credit as capital to produce income earned from the shares of profits purchased from entrepreneurs. The credit capitalist lends credit at interest because that is the product the credit capitalist sells.  

In trade, wealth trades for wealth. So credit is the wealth the capitalist sells in a purchase and sale to buy a right of action. The right of action is wealth the entrepreneur sells in a purchase and sale to buy credit.

In his tirade against capitalism, silly-minded Thomas Piketty has said, "...the past devours the future," stealing his famous quip from another Frenchman, philosopher Henri Bergson. Yet, as I show in Thomas Piketty, Revivalist Preacher of Born-Again Socialism. The Second Great Awakening of Socialism has Come to America, wealth in the present that becomes capital creates the future.  In short, the present creates the future! And that is what capitalism and credit is all about. 

Income is the name given to property in cash or credit acquired in a purchase and sale for other wealth. An income tax is a tax on profit and thus the return to capital, but it isn't a tax on capital. It's a tax on wealth. All income taxes are taxes on wealth.

All income is the same, whether gained by the purchase and sale of work for cash and credit or gained by the purchase and sale of rights of action to future profit for cash and credit.

As I say in Interest, Capitalists and Futuristic Time Cops, for a theory to be useful and closer to truth, it must apply equally to many things observed. In agreement, de Fontenay said, "Wherever there is a revenue you perceive capital. The theory of revenue must be the same for all classes of human production." 

Income gained from capital gains is not different at all from income gained by labor. As bad and immoral as income taxation is, as long as income taxation is going to exist, then capital gains should be taxed at the same rate as ordinary wages and salaries precisely because all income is the same.

A tax on capital would be a fee paid to license a dump truck that hauls gravel to pave roads since the dump truck is the capital. A tax on capital would be a fee paid to pollute the air during the blasting of pig iron with pure oxygen while producing steel since the blast furnace is the capital. A tax on capital would be a fee paid for a building permit since the labor put to building is capital. 

A tax on capital would be an impact fee to develop one's property in undeveloped land. Undeveloped land goes into making improved land — land with structure on it — to become wealth when sold in a purchase and sale for cash and credit, often obtained through a mortgage.

If only Worstall had read my work, Why is the Economy So Horrible? Because Academia Economics is Fake, he could have disabused himself of many false beliefs. For a guy working for a free-markets, libertarian think tank, Worstall doesn't understand capitalism at all.

For most, obvious confusion rests in that most fail to see property means right of ownership and not what is owned.

• So anyone has property in chattel, which are things. 
• So anyone has property in work produced from the mind or the body, such as a surgeon who sells his surgery skills in operation and buys income. 
• So anyone has property in libability — right of action — against a debtor to whom he has lent credit in a purchase and sale of a share of profit.

The entirety of trade, or commerce, or real economics ties up with two words — property and profit. Without profit from effort, anyone would lack buying power to buy anything else. Without property, no one can trade. 

A society is association of strangers who have come together because of the desire to trade — to trade property for property, and when we talk about such property, we give it a name, wealth.

To trade, someone needs to produce property — the right of ownership — in chattel, in work or in rights of action — at surplus under efficiency (sales must exceed cost) to gain profit so to buy property in what is wanted (lacking) and sell property in what is not wanted (surplus). 

Bare subsistence manual labor isn't going to produce much property in surplus, if at all. So, producers take to using property in other things, or that which we call capital, to produce property in surplus, or that which we call stock, in hopes of sale, transmutting that stock into wealth; or if they are selling completed work, then transmuting property in labor, which is capital, directly into property in work, which is wealth of the laborer.

For most, their obvious confusion further gets exacerbated because the dynamics of trade — property in various states — is too much for their minds to grasp.

Most get lost in thinking about trade in the same way that most fail to grasp relativity. Thoughts of changing frames of reference are too hard for most to handle.

Capital is one thing and one thing only. The name for property put to making stuff is called capital. Capital is property of production. It doesn’t get much simpler.

So credit lent becomes capital of the entrepreneur used to buy fixed capital (buildings, equipment) or floating capital (electricity, diesel). So wealth used to capitalize a bank becomes the capital of the banker.

All of the names mankind uses for property — capital, wealth, asset, collateral, stock — are names of property in various states — production, trade, estimation, deals of credit, potential sales.

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THE PROPERTY-DESTROYING VIOLENCE OF NET METERING

Today, in Forbes, Tim Worstall typed a piece advocating an end to net metering.

Worstall supports the silly, faux argument that solar consumers "don’t pay to maintain the power grid." Worse, Worstall dresses that silly argument in the fallacy of appeal to emotion by claiming "they’re not paying their fair share of ... fixed costs."

Net metering ought to end, but not for the lame argument that Worstall makes. Net metering ought to end because such arrangement abrogates property of electricity firms and their freedom to contract.

Suppliers of oil, coal and of natural gas to electricity generators don't pay to maintain the power grid. Yet, no one argues that electricity firms ought to have the right and thus oil, coal and natural firms should have the duty to pay for the costs electricity firms incur to transmit electricity from plants to cities.

Instead, electricity firms buy oil, coal and natural gas to fuel their plants. Firm execs decide what fuel sources to buy depending upon market prices and what fuels their plants can burn.

Because of net metering, residential and commercial customers who generate excess electricity from solar installs supply already-generated electricity to electricity firms whose executives are required by law to buy.

Worstall's silly claim that those with solar only contribute to overhead when sucking power off the grid is akin to saying that if you only shop in Kroger's, Safeway or Publix once a month, you are contributing to the overhead of their physical stores, but you don't buy enough for those firms to profit upon you, thus you should be banned from shopping at all at those stores.

In trade, all firms get held to the great Axiom of Profit and the infrangible Law of Prices. The Axiom of Profit holds the sum of sales must at least equal the cost of production otherwise firms go to ruin. The Law of Prices holds the winning bids of purchase and sale for what is on offer set the price.

The sum of sales for electricity sellers comes from rate payers and not from suppliers of fuel used to generate electricity. It is from the sales of electricity to rate payers that electricity-selling firms pay their expenses. If they have planned their businesses right, they might break even.

A better argument to end net metering would be thus:

1. Executives of electricity firms cannot know how much solar install exists at any time, nor can these executive know how much sun shall shine over a futures contract period for oil or natural gas, nor how efficient the production of electricity from solar shall be during this period. 
2. Times of solar abundance pushes higher the true price electricity firms have paid already for oil, coal and natural gas, thus increasing costs and reducing the likelihood of break even.
3. Thus, executives cannot forecast and mitigate risks to insure break even. 
4. Therefore, executives should not be forced to deal with commercial and residential customers who wish to sell their excess electricity to their local utility.

Wal-Mart execs aren't forced by law to buy products from any wholesaler nor any manufacturer. No franchise in the NFL is forced to draft any player nor contract with any player. Forcing any electric utility to do the same violates their freedom of contract, freedom of association and their property in capital and property in wealth.

Worstall makes his silly argument based on the faux science of economics. In WHY IS THE ECONOMY SO HORRIBLE? BECAUSE ACADEMIA ECONOMICS IS FAKE, I show how trade of property for profit is the only basis upon which anyone can discuss trade or commerce or authentic economics.

Americans need to come to understand that there isn't "The Grid." "The Grid" is pure fiction that politicians spin on behalf of electric utilities hoping to get Americans to subsidize the capital of these firms, thus increasing their unearned profit.

There are firms, which sell electricity to residential and commercial customers. There are firms, which own and operate high voltage transmission lines connected by towers. There are firms that own electrical generation power plants, which buy the services of transmission-line operators in the same way that manufacturers hire long-haul truckers to haul goods to wholesalers and wholesalers hiring the same to haul goods to retailers. In the past, firms did all three — generate, transmit and sell.

Americans do not own "the Grid" in the same way that Americans do not own the U.S. Interstate highway system. Congress owns the U.S. Interstate highways.

Congress imposes the duty on you to pay taxes for the Interstates. Congress gives itself the right to collect taxes from you. Congress gives you the right to travel the Interstates. Congress imposes the duty upon itself to let you travel the Interstates.

Firms run transmission lines from more than one power plant, which are the sources, to the same city, which is the sink. This is done to ensure that electricity stays running in case of failure at any power plant.

If you don't know what net metering is, the Energy Policy Act of 2005, a federal law, requires all public electric utilities to facilitate net metering to their customers upon request.  Net metering requires electricity firms to accept electricity generated by commercial and residential customers through renewable methods, such as solar panels, and then reduce bills of these customers by the amount of electricity they have generated.

If you don't know what property means, property means ownership, a bundle of rights — right for possession (Jus Possidendi), right for using (Jus Utendi), right for destroying, alienating (Jus Abutendi), right for recovery when found in the wrongful possession of another (Jus Vindicandi).

Property means the right of ownership and never the thing owned.

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