Having a Central Bank that issues what is known as a reserve currency has its advantages. It also has its disadvantages when the federal government attached to that bank refuses to enact austerity policies that are designed to maintain fiscal stability in a national economy.
There are some fascinating events unfolding in the European Union and the United States right now regarding austerity measures (spending constraints) and Central Bank policy. In short, the EU nations, knowing full well that they cannot print money with impunity, are looking for spending discipline. U S Treasury Secretary Tim Geithner wants the EU to encourage consumer demand (re: stimulus spending).
June 6 (Bloomberg) — European Central Bank President Jean- Claude Trichet and Treasury Secretary Timothy F. Geithner diverged on prescriptions to sustain growth, with Europe set to tighten budgets and the U.S. seeking stronger domestic demand.
The remarks underline determination within the 16-nation euro area to shrink budget deficits in the wake of a sovereign debt crisis that has led to a 750 billion-euro ($913 billion) rescue fund for the region’s weakest members. The emphasis contrasts with the message delivered to the G-20 by the U.S., which wants countries with trade surpluses, including China and Germany, to stoke demand to help sustain the global recovery.
“Stronger domestic demand growth in Japan and in the European surplus countries” is needed, Geithner said at a separate press briefing in Busan. Spending in both areas is “relatively weak,” he said.
Here is the gist of the debate between Treasury Secretary Geithner and EU Central Bank President Trichet: the United States can print money longer (and sustain deficits for a longer period) than the EU, but the end result is the same. The EU knows it is experiencing a currency crisis right now and may be choosing to face the music by reducing spending. The United States, on the other hand, is still in denial about this looming problem. As the Europeans take on the gut wrenching job of forcing spending cuts on their citizens because they are left with no other choices, our administration is encouraging more Keynesian non sense. Fortunately, the EU is saying “enough” to the Keynesian insanity. Why? Because they have history on their side and know in a very personal way how a currency becomes worthless and what happens as a result. Americans (with the exceptions of Southerners (and their creditors) left holding Confederate dollars 150 years ago) have no experience with the harsh reality that accompanies currency debasement. J P Morgan may have saved the country one hundred years ago but the size and scope of the problem today is several orders of magnitude greater.
This is not a complicated matter. The U S can begin adopting austerity policies now or it can continue to “tickle the dragon’s tail” (print dollars they hope some country will buy) and wager that it can prevent a financial nuclear meltdown when the problem reaches critical mass. This is one time when the Americans should be following the example of the Europeans.
Karl Denninger has another take on this that is worth reading.