Roubini Tells Europe to Stop 'the Savings Madness'

Governments in Europe should lower taxes and increase salaries to boost growth rather than insisting on austerity and continued saving, famous economist Nouriel Roubini told a German newspaper in an interview on Tuesday.

Roubini also said the German government should give its citizens incentives to go on holiday in countries in the south of Europe that were affected by the debt crisis to help those states recover.

Some leaders in major European countries have already shifted their rhetoric from austerity to growth, as tax increases and cuts in government spending have exacerbated the economic downturn, causing deep recessions in some euro zone countries. But Germany still insists on austerity as a way to bring budgets under control.

"The savings madness must be stopped. Governments must lower taxes and increase wages. Europe needs growth," Roubini told popular newspaper Bild.

"The German government should give every German household a 1000 euro ($1,250) travel voucher. However, it should only be used for holidays in crisis countries. That will help boost growth there. In addition, everyone who buys a holiday home in a southern European state should get a tax bonus,” he added.

Pulling the plug on funding Greece, which has already been bailed out twice, would lead to the collapse of the single currency, Roubini

OK, so you just don’t really understand what’s going on in the EU. Germany is not unwilling to “save the euro” as it were, but the rest of the continent has to pay the high price as mentioned by the pro-EU leaders (including Merkel)—that being the surrender of sovereignty, fiscal and political, to the central government. The term “United States of Europe” is being bandied about, but EUSSR is more accurate, since no member state (except for one) will be able to formulate its own budget anymore, never mind many laws that will become essentially void in the face of the EU constitution being officially supreme. It’s centralization on a scale never seen before . . .

What makes you come to that conclusion? No country so deeply indebted has ever sat in said proverbial seat, but rather in a cage—how could it pay for its own defense, never mind produce anything manufactured, i.e. for itself anymore? The USSR did not fall because it was a top producer with a trade surplus after all. Neither did the Roman Empire. Debasement of currency has really, really bad consequences.

This is really sad, when people that purport to be conservative do not even pay heed to the words of the Founding Fathers anymore . . .

Not only the wealth, but the independence and security of a country appear to be materially connected with the prosperity of manufactures. Every nation, with a view to those great objects, ought to endeavor to possess within itself all the essentials of national supply. These comprise the means of subsistence, habitation, clothing, and defense.

— Alexander Hamilton, Report on Manufactures

That hasn’t changed in the 221 years since that report came out.

There’s a difference between government debt, a trade “deficit”, and debasement of the currency. Two out of three are bad. The other is an invention and represents nothing. A trade “deficit” is a nonsense concept.

Every transaction is paid in full at the time of the transaction. Oil, machinery, toys, etc. that are purchased by Americans are paid for in US Dollars. That completes the transaction. They have the US Dollars and we have the product, item, good or service. There is no deficit or debt. The transaction is complete.

Imagine the “deficit” you have with your grocer. You’ve paid him over and over again in US Dollars and received food. He’s never purchased anything from you. You have a “trade deficit”. Can you see how absurd the concept is?

Imagine the “deficit” you have with your grocer. You’ve paid him over and over again in US Dollars and received food. He’s never purchased anything from you. You have a “trade deficit”. Can you see how absurd the concept is?

Wow; I see that I’m working with a real rocket scientist here. Where did the money you used to purchase the goods from the grocer come from, eh? Didn’t come from thin air if you worked for it (because you created real money by doing so), unless of course you subscribe to liberal “economics” that very well do produce dollars out of thin air. Let us say that you worked at a plant that produced farm machinery or fertilizer for the farmer that produced food for the grocer to sell, yes? or fuel for such machinery; or steel to build the machinery in question; or at a mine where the ore to produce the steel to build the machinery comes from, ad libitum. How can that be an eternal trade deficit? It is not. In the case of our relationship to China, it is—we produce far, far less than China produces in relation, so our dollars are worth less and less and soon our economic worth to China will peter out. Which is why they have found a new trade partner in Europe—themselves a manufacturing powerhouse, and an equal insofar as that.

Meanwhile, the rest of the world is working on removing the US dollar as the world's reserve currency.

Your dismissal of Hamilton’s words tells me all I need to know about you.

It is an internal trade deficit as measured within a political boundary - city, state, nation - but an external trade deficit between you (your family or nominal economic unit) and the butcher. The fundamental definition of a trade deficit is a lack of reciprocal trade. The formula would be that you sell bread to the butcher and he sells you meat in equal “value” and hence the trade is in “balance”. If you’re familiar with basic economics barter is a move backwards economically.

Imagine a case where you only want $8.35 in beef and you sell a loaf of bread for $1. The butcher can either:

1. Accept 8 loaves ($8) (a loss of 35 cents in value to the butcher & a gain to you);
2. You can give 9 loaves (the reverse loss above and a 65 cent gain to the butcher; or
3. Or you can cut the bread to best approximate 35% of a loaf (there will be imperfection here and loss of value to one side or the other)

Imagine an alternative case in which an even more primitive society where you are trading a live goat for some bananas. You don’t want that many bananas, but the banana seller does want some oysters. So now you have to design a three way trade to balance out the three different wants. Money is important and one of the great inventions of capitalism and civilization.

You’d likely enjoy the Ascent of Money. http://www.pbs.org/wnet/ascentofmoney/ Take a watch it is excellent and will shore up your understanding of the importance of money and credit to human welfare.

As you can see above the idea that money is bad or that a trade deficit is bad are absurd. All the live long day you’re creating trade deficits as you earn “money” and buy goods. The money is just a financial marker that relates to a basket of goods/services (including savings and investments) that are available to you. You are correct to say that fiat money can be corrupted and devalued and this happens all the time and throughout history. That is a political problem and not one with money per se.

You’re also correct that government deficits, over and above that necessary for commerce to flow freely, is a drag on the economic welfare of society. Recall that economics as a root means household management. We tend to see individuals as the fundamental economic unit, but it is really families that are. Large deficits and large debts can crowd out the productive sector of the economy, lead to malinvestments and harm the economies of individuals and families.

But, a trade deficit is not a debt that must ever be paid. The Chinese, to use your example, are giving us actual goods and services in exchange for US Dollars. What can they do with this money? They can only buy things denominated in US Dollars. That is property, goods, services and treasuries of Americans because we’re the largest source of US Dollar denominated goods. China is trapped. We are exporting our inflation to China and they cannot get off the merry-go-round without inflicting real harm on themselves.

The wasteful spending of American politicians and the people who elect them is a separate issue. It must be addressed, but our trade deficit doesn’t affect it in the way you propose.

that being the surrender of sovereignty, fiscal and political, to the central government

Yes. I really do understand what's going on over there and I agree with the above statement completely. But not everyone in Germany is ready to save the Euro-zone at any cost. The Bundesbank, in particular, is resisting. They understand that the resultant inflation will cause Germany to lose much of its global competitiveness and stifle their exports.

Now, that is not to say that the Bundesbank wants to destroy the Euro -- not at all. They are quite comfortable with it as it was designed with an ECB largely powerless to print.

I'm commenting primarily on the economics of the ongoing and proposed "bailouts." That is not meant to imply that I think the politics are unimportant. And it remains, to our shame in my opinion, that the bad economic strategies being proposed are of Anglo-Saxon origin and currently entrenched in both the U.K. and the U.S..

This entire series of comments started with a joke [Germans forget they're the Saxon part of Anglo-Saxon.] I'm not too sure why it's escalated.

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