FedUpUSA

Europe

We’ll see whether this gets any positive mentions — anywhere. (Hint: It won’t)

Europe’s economy contracted in the fourth quarter for the first time in 2 1/2 years as the region’s debt crisis undermined confidence and forced governments fromSpain to Greece to toughen budget cuts.

Gross domestic product in the 17-nation euro area fell 0.3 percent from the prior three months, the first drop since the second quarter of 2009, the European Union’s statistics office in Luxembourg said today. Economists forecast a drop of 0.4 percent, the median of 42 estimates in a Bloomberg News survey shows. In the year, the economy grew 0.7 percent.

Europe is facing its second recession in less than three years and Moody’s Investors Service cut the ratings of six of the region’s countries on Feb. 13, saying policy makers haven’t done enough to restore investor confidence. Euro-area finance ministers today will hold a teleconference to prod Greece to do more to clinch an aid package needed for a March bond payment.

Note carefully that nice embedded sentence.

This is elmementary mathematics, but nobody wants to deal with it.

GDP = C + I + G + (x – i)

That is, Consumption (by consumers) + Investment + Government Spending + Net Exports

Well, guess what — when you deficit spend you create false demand that does not really exist in the economy, and that makes GDP larger than it really is.

When you stop deficit spending then GDP must, mathematically, contract.

This is not bad, it’s good.  It forces out the malinvestment, the excess production, the companies that survive on the basis of producing goods and services for which there is no actual demand.

The common mantra that “growth is always good” is in fact false.  Growth is only good if it is actual growth in organic demand — that is, if there is both ability and desire to buy what is produced by real consumers using their economic output.

Government, in turn, has two means (and only two!) by which it can spend — it can either tax people in the here and now or it can dishonestly steal the funds to spend by borrowing.

The latter is dishonest because deficit spending inherently causes the monetary supply (money and credit) to increase.  And since the value of a unit of currency (in terms of goods and services) is determined by the simple relationship of the number of units of production divided by the units of currency and credit in the economy all such borrowing inherently causes the value of every unit of credit and currency in the economy to fall.

It thus has the exact same effect as if everyone using that currency were taxed in the exact amount that is “printed” through that borrowing!

It does not matter if your unit of currency is pieces of eight, scraps of linen-laced paper with dead Presidential visages upon them, stones of peculiar dimension and shape or sticks of wood.  All that matters is the number of them and those markers used to represent them, which is what credit is, compared to the number of units of goods and services produced.

Recession, once one understands this, is good, not bad.  It clears the excess production from the system and by doing so takes the weakest borrowers and lenders out to the woodshed and bankrupts them both.

We, and the rest of the world, must accept the fundamental truth of mathematics.  It’s not complicated; we’re talking about arithmetic and algebra here, not calculus.  Simply put, compound growth of anything is unsustainable over the longer term, and that which relies on it is therefore impossible.

This does not mean that for some period of time growth cannot happen.  It most-certainly can, and in many cases should.  But all such projections and expectations must have a “use by” date at which the presumption ends, and those political and social policies that follow must also take into account that “use by date.”

It is the refusal to do this that has led us to where we are in Europe with budget deficits and unsustainable fiscal policies.  The same refusal is what plagues us here in the United States, and what will result in financial, social and political ruin right here at home unless we choose instead to face reality.

The Market-Ticker

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