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Thursday, May 23, 2013

Keynesian Europe Will Not Muddle Through, Says German Economist

by Gary North

Europe is the poster child of Keynesianism. The southern countries ran huge government deficits for a decade. There was a boom. But that boom has ended. Mediterranean nations are in depressions. These depressions are getting worse.

Hans-Werner Sinn is a German economist. He is known as one of the most pessimistic economists in Europe. But, compared to what is facing Europe, he is a raging optimist.

He spoke at the Peterson Institute. That organization is closer to economic reality than other Establishment think tanks. It allows some bad news to be discussed. Not statistically inevitable bad news, but some bad news.

Sinn said that Germany’s government is officially solvent. The other nations are not. Germany has 5% unemployment. Spain has 27% unemployment.

There are three ways out, he says. First, the governments can impose more austerity. That means reduced government spending. That is not politically acceptable. He thinks it would hurt growth. That is because he is a Keynesian. The deeply depressed nations will default at some point. They will imitate Greece.

He failed to mention the obvious: the IMF and the ECB have bailed out Greece, thereby protecting stupid bankers in the north. If Spain, Portugal, and Italy default, there is no bailout possible. The banks will take the hit.

Second, Germany must accept inflation. Why, he did not say. More common is this solution: Germany must run deficits and bail out the spendthrifts. That is not popular in Germany.

Third, the busted governments can leave the eurozone and inflate. But that is default.

There is no way out that will be anything like painless. There is no exit strategy.

This is soft core Keynesianism. He did not mention this: the European Central Bank will inflate to the point of hyperinflation. Of course, that is no solution either, because that policy must end, but the debts to retirees will still remain. No exit.

Second, the default must include all of the social insurance welfare state programs for retirees. This policy is inevitable, because the deficits — unfunded liabilities — are astronomical. So, he did not mention it. That policy of default would mean the final visible failure of the Keynesian welfare state. No one dares mention it, yet it is a 100% sure thing, all over the world. The bills cannot be paid. The promises cannot be kept.

The establishment’s experts focus on problems that might possibly be solved, yet they offer no recommendations. They offer only politically unacceptable solutions, which they tell us are all bad solutions. They never recommend anything specific. They refuse to mention the inevitable bankruptcy of the government-guaranteed retirement programs and the subsidized medical care programs. They do not want to sound like complete pessimists. So, they turn their backs on actuarial reality.

The public shrugs it off. Americans refuse to read about Europe. “Not our problem.” But we have the same kinds of problems. “Not our problem,” Americans say. “We will muddle through.” How? “Somehow.”

The present value of the government’s unfunded liabilities is over $222 trillion. “Not our problem.”

Whose problem will it be? “Someone else’s.” When? “Later. Much later. After I’m dead.”

Muddling through is mainstream. Deny that we can muddle through, and you get kicked out of the mainstream. No one in the mainstream wants that. You get cast into the outer darkness of Austrian School economics. “I’d rather die!” But, as someone has said, in the long run, we’re all dead. Beat the rush. But, for Keynesian mainstream economists, there is no exit. They prefer sinking on the mainstream ship.

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