Tinker Bell Is Dead?
Tinker Bell Is Dead
Monday, June 25, 2012
by Gary North
If you have seen the stage version of Peter Pan, you know the scene in which the audience is asked to clap if they want Tinker Bell to live. It's time.
Janet Daley wrote a provocative essay in London's Telegraph
on the day before the Greek election (June 16). She did her best to
explain why the eurozone is in crisis. Europe's leaders are living in an
illusion of their own making.
She began with what should be obvious to the financial markets by
now. By entering into the eurozone, the politicians surrendered control
over the money supply.
The problem is not that politicians surrendered control over the
money supply: it is that they surrendered it to the European Central
Bank (ECB). They should have surrendered it to the free market.
The politicians of Europe asserted control over the international
money market in 1914, when they abandoned the international gold
standard. They set the precedent. Everything that has followed has been
one fiat-money crisis after another. But only Austrian School economists
teach this. In Europe, bureaucratic control over money has run the show
ever since 1999.
The economy is now beyond the control of national governments, and
therefore outside the remit of democratic politics. It has become truly
global, and thus a law unto itself; nation states have gone broke in
their attempt to feed its gargantuan appetites for consumption and debt.
It is not the "world economy" that has a gargantuan appetite for
debt. It is each nation's politicians, who want something (increased
spending) for almost nothing (borrowed money at low rates). That was
what northern commercial bankers gave the PIIGS governments at German
rates of interest until the spring of 2010, when the Greek socialist
government announced that its predecessor had cooked the books.
The losses must now be parceled out. The losses are in the past. They
cannot be avoided. They can only be postponed by covering them up. In
short, the eurozone must do what the Greek government did before 2010:
cook the books.
Thus, the bailouts continue.
The remedies for this began in panic and are now ending in delusion:
first the banks went bust and were bailed out by governments; then the
governments went bust and needed to be bailed out by — whom?
International funding agencies which get their cash from — where? From
central banks which will have to print gigantic amounts of money to
replace all the money that simply disappeared in the bad debt that
bankrupted the banks in the first place. And if we all agree to accept
the illusion that this newly printed cash has actual value — if we all
clap really hard and say that we believe in fairies — then the whole
show can get back on the road and we will be rich again.
It was exactly a century ago that Ludwig von Mises's book The Theory of Money and Credit
laid out the case against central-bank wealth fairies, but few listened
then, and fewer listen now. The message is unpleasant to politicians,
who want to spend more than the government takes in through taxes. They
do not want rising interest rates that will result if the government is
to cover its deficit.
The governments of western Europe now face a moment of truth. They
much prefer illusion: free money. Truth is always politically painful
after years of illusion.
But what will be required is a world-wide agreement to participate in
the illusion. It will rely on every country, and every government, and
every electorate, being prepared to say: "Wealth can come from thin air.
It doesn't need any basis in real income or assets to make it viable."
This is the heart of Keynesian economics, Chicago School economics, and Greenbackism.
The threat is a voter reaction inside a nation that is asked to provide free money for a PIIGS nation.
If the population or the political leadership of one country
(Germany) insists that money must be earned before it is spent, then the
game is up and Tinker Bell dies.
This is the one electorate that is at least vaguely aware that wealth
is not the product of monetary inflation. The rest of Europe wants the
Germans to clap loudly and affirm their faith in fairies. They have got
to persuade Angela Merkel to quit playing "let's pretend."
What has been happening for the past year — and will continue to
happen at the G20 summit in Mexico tomorrow, whichever way the Greek
election goes, is the browbeating of Angela Merkel into playing "let's
pretend". We know now that she will not do it. She may make small
concessions — baby steps in the direction of debt-pooling or Eurobonds —
but the conditions and the guarantees will have to be there. Reality
will always be asserted. And her country supports her in this with
overwhelming approval ratings. Indeed, her population would not permit
her to relent, even if she were inclined to do so (which she is clearly
not). The Germans know better than anyone where it ends when you tell
lies about the value of the currency.
The problem with this analysis is that Merkel has always talked a
good line before each concession, but she always conceded. She agrees to
The Eurocrats continue to insist that the bailouts must continue.
They also insist that the eurozone needs an international government
with control over domestic fiscal policy: taxing, spending, and
borrowing. They are pushing for the surrender of national political
sovereignty, which has been the goal of the Eurocrats ever since the
creation by treaty of the European Coal and Steel Community in 1951.
So the only way that the World Economy, which has now become an
apolitical, undemocratic, supra-national force of nature, could be
brought under control is to erase the divisive historical memory of
nations and create an equal and opposite force of World Government.
This, of course, is just what the EU was designed to do on a continental
scale, and that hasn't quite worked out. The official solution —
endlessly reiterated by increasingly desperate European commissars — is
to eradicate more forcibly than ever the messy democratic accountability
of national governments to their people.
There is a way out, and Daley sees it. But this way out is not
acceptable to voters: the dismantling of the welfare state, nation by
A really serious cutback in state spending — not the Osborne nibble
but drastic, meaningful reductions in the size of government — could
reduce the dependence of democracies on global capital. It is government
entitlement programmes which devour wealth and produce nothing in
return. If they were stripped away — and if government got out of the
wealth redistribution business — taxation could be reduced. So instead
of "stimulating" the economy by offering more debt (as Mr Osborne
proposed at the Mansion House), and so getting even deeper into hock to
the Beast, we might get the genuine stimulus that comes from people
spending money that they have earned.
Voters Want a Tinker Bell Economy
The voters do not want major cutbacks in government welfare spending.
They will throw out of office any political party that suggests this as
a permanent remedy.
The voters also do not want to see their treasuries raided by the
Eurocrats and commercial bankers to bail out the PIIGS one more time,
because this will never end.
They also do not want to surrender political sovereignty to the
eurozone. They do not want Germans to have a say as to how large a
deficit to run.
They also do not want to leave the eurozone, because they expect
Germany to foot the bill for the deficits forever, letting locals build
up bank accounts in euros in Germany rather than their own insolvent
All calls to have another round of ECB inflation are calls for the
destruction of the euro. The voters say they don't want that, either.
What do the voters want?
They want to clap and cheer and keep Tinker Bell alive.
No one is more faithful in his belief in and support of Tinker Bell economics than Paul Krugman. He wrote this on the day of Greece's vote:
So Greece, although not without sin, is mainly in trouble thanks to
the arrogance of European officials, mostly from richer countries, who
convinced themselves that they could make a single currency work without
a single government. And these same officials have made the situation
even worse by insisting, in the teeth of the evidence, that all the
currency's troubles were caused by irresponsible behavior on the part of
those Southern Europeans, and that everything would work out if only
people were willing to suffer some more.
Which brings us to Sunday's Greek election, which ended up settling
nothing. The governing coalition may have managed to stay in power,
although even that's not clear (the junior partner in the coalition is
threatening to defect). But the Greeks can't solve this crisis anyway.
The only way the euro might — might — be saved is if the Germans and
the European Central Bank realize that they're the ones who need to
change their behavior, spending more and, yes, accepting higher
inflation. If not — well, Greece will basically go down in history as
the victim of other people's hubris.
Blame Germany! Blame the tightwads at the ECB. Blame Greek
politicians hardly at all. And do not, under any circumstances, blame
the Eurocrats and commercial bankers who oversaw this disaster.
The Germans are going to take the hit. Their bankers have led them
into the trap. They cannot get out. The German central bank cooperated
with the commercial bankers in their foolhardy extension of credit to
Bank Runs Have Begun
Mohamed El-Erian is the CEO of the largest bond fund in the world, PIMCO. He made this statement on CNBC on June 16, the day before the Greek elections:
It is not easy to stop bank runs once they start. Indeed, as a famous
investor once observed, the rational thing to do when you see a line
outside a bank is to join it; and if you do not have your deposits at
that bank, go quickly to where you do and join the line there.
He followed with this:
After all, it is a very asymmetrical payoff for your life savings.
Therefore, in most states of the world it is better to be overcautious
and pull your money out rather than face the risk of confiscation and
He was speaking of the threat called Drachmageddon. The
Greek government may pull out of the eurozone and have its central bank
return to the drachma. If this happens, those Greeks or other investors
who are holding drachmas rather than euros will suffer substantial
losses. In contrast, those Greeks who got their euros into a northern
European bank will be able to buy far more drachmas after the pullout.
As always, the trusting souls who believe politicians and bureaucrats
about the trustworthiness of the national currency in the face of
numbers that do not add up are the victims. The people who understand
economics and who know the politicians are liars can get their money out
of the country. There, less blatant liars rule.
Rich Greeks understand this. For a year, Greek bank depositors with a
lot of money have been withdrawing funds in euros. They have not been
taking out currency. They have been opening accounts in German banks.
This is legal. The eurozone banking system of 17 nations (the UK
excepted) uses a single currency. Their banks are linked digitally. To
open an account in a nation outside your own is a matter of digital
Legally, eurozone banks operate under the laws of their respective
nations. But with a common currency and a common central bank, there is
no way that a commercial bank in northern Europe can insulate itself
from an influx of digits out of Greece, Spain, Portugal, or Italy. If
the northern bank is offered euros from a foreign bank, it must accept
The commercial bank in Greece must sell assets in order to hand over
the digits to a depositor, who has the digits sent by bank wire to a
bank outside the PIIGS. But Greek banks are running out of liquid assets
to sell. This is why Europe is facing the possibility — I would say
inevitability — of Greece's withdrawal from the eurozone. Greek banks
cannot continue to honor their depositors' requests for digital currency
to be transferred to banks outside of Greece.
According to the Wall Street Journal
(May 15), about $900 million worth of euros were pulled out of Greek
banks on Monday, May 14. The Greek banks cannot sustain this.
As of March, privately owned euro deposits in Greek commercial banks
totaled 165.36 billion. To cover these, Greek banks borrowed 73 billion
from the ECB in January, plus an additional 54 billion from the ECB's
emergency lending facility. That is a total of $127 billion. That means
77 percent of the total private deposits in Greece as of March had been
borrowed from the ECB. Put another way, the banks' "total borrowing from
the ECB accounts for more than one-half of Greece's gross domestic
The election on Sunday June 17 did not make clear whether Greek
political parties can put together a coalition government. It is also
not clear that any new government will maintain the socialist
government's pledge to European lenders to cut government spending. This
had been the quid pro quo for getting further loans last January.
Philipp Bagus, an Austrian School economist, saw all of this coming. He wrote a book on this, published in 2010: The Tragedy of the Euro.
It was released just as the Greek crisis began. In a June 15, 2012,
article, "Passing the Bailout Buck," he described what the German
Central Bank has done by issuing credits to the PIIGS. It cooperated
with the TARGET2 system of the eurozone, which clears interbank transfers.
Indeed, TARGET2 debits and credits have been built up since the
beginning of the financial crisis. While peripheral countries
accumulated TARGET2 debits, in April 2012 TARGET2 claims of the
Bundesbank amounted to almost 644 billion. That is almost 8,000 per
If Greece leaves the eurozone, it will still not repay interest on
its debts in euros. It will pay, if at all, in depreciated drachmas. The
ECB will suffer a loss, and the German central bank's share of this is
Can the ECB inflate its way out of this? Of course. The result will be depreciation.
However, creating money does not take away the fact that the wealth
is gone when the periphery defaults. It is like B not paying with real
goods because he dies. A may receive new paper money from his bank, but
this will not feed him through retirement. Unfortunately, as long as the
European periphery remains uncompetitive relative to Germany, nothing
will be produced to settle the German TARGET2 credits. Most likely,
their real value is gone forever. To think that they will represent real
wealth is an illusion that will be ended in one of three possible ways.
The first is the already-mentioned inflation when the ECB just prints
money to keep the system afloat.
The irony here is that the Greeks who got their money into German
banks will suffer losses. They had better get their money into safer
banks, in a safer currency. They must trust a new set of lying
politicians and central bankers.
Tinker Bell has terminal cancer. The audience can clap all it likes.
The audience will find that, after the show is over, their banks have a
stack of IOUs on their books that cannot be collected in stable euros.
This is reality. This is not the fantasy of the bailouts.
It is the underlying reality of every Western nation. They have all
written IOUs that cannot be repaid. The eurozone's politicians found out
sooner because there are 18 nations that have made impossible promises,
and idiot bankers who made loans to these politicians. They all expect
the Germans to bail them out.
Think of Tinker Bell as Angela Merkel with wings. Not too appealing, is it? Not too believable, either.
Gary North is the author of Mises on Money and Honest Money: The Biblical Blueprint for Money and Banking.
He is also the author of a free 20-volume series, An Economic Commentary on the Bible.
Visit his website: GaryNorth.com.
Send him mail. See Gary North's article archives.
This article originally ran on LewRockwell.com, June 20, 2012.Copyright © 2012 by the Ludwig von Mises Institute. Permission to
reprint in whole or in part is hereby granted, provided full credit is
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