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Feb. 26, 2010 - Freedomain Radio - Stefan Molyneux
32:23
1593 True News: PIGs, Banksters and the Death of the Euro

Dr Philipp Bagus discusses the impending failure of Greece and the Euro with Stefan Molyneux of Freedomain Radio.

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Hi, everybody. It's Stefan Molyneux from Free Domain Radio.
I hope you're doing very well. I have on the line Philip Bagus.
I got that wrong again, didn't I? I'm so sorry.
These European names. I'm a guy with four M's and an umlaut and a silent Q, so I'm often getting my name incorrect, so I try to get other people's names right, but sometimes yes and no.
He has completed a bachelor and master's degree in economics at the University of Münster, Germany.
He has moved to Spain to write his PhD because he likes his vitamin D. Under the supervision of Jesus Huerta de Soto, he's earned his PhD in 2007 with a thesis on the theory of deflation.
He is currently an assistant professor at the University of Rio Grande de Carlos in Madrid.
He teaches Introduction to Macroeconomics at the Mostoles campus and Methodology of the Austrian School in Economic Analysis of the European Union in Wichel Varro.
So thank you so much for sitting in on this conversation and for standing with my mangled European pronunciations.
I appreciate your patience. I was really, really struck by your article on Mises.
which were Mises.com, which is a fantastic economics resource for those who are unaware of it, where you talked about some of the technical and historical aspects of the Greek crisis.
And I was particularly struck by your analysis that says the question is not whether the bailout is going to occur, but the fact that the bailout is already occurring through a number of reputation and bond-based means.
And it may be expanded, but to say that it's a question of yes or no is incorrect.
Is that a fair statement of your position?
Yes.
The question is more will they continue to bail out Greece or not?
Right, because they, I mean, I'll just sum it up very briefly and then please go into all the details since you are, of course, the expert.
But it seems to me that there are two major ways that Greece is being subsidized by the EU. The first is, of course, when it joined the EU, it hid a lot of its debt through these currency investments or exchanges, which apparently are off book.
And so it hid its debt to get into the EU, and then it coasts on its reputation as part of the EU. In other words, it inherits the higher credit ratings of more stable countries and less profligate governments.
And furthermore, the European Central Bank is buying up Greek bonds at an artificially low interest rate, which is also subsidizing them because otherwise they would be paying more interest and would have to have done these austerity measures sooner in a less extreme way.
Is that fair? Yes, when Greece entered the European Union, they started to pay lower interest rates, almost as low as Germany, because there was the thought that the euro would never end and they would always be helped by the stronger nations.
So, from then on, they started to pay lower interest rates, but they didn't change their spending behavior.
So, it's like a A guy who always spends more than he has income and suddenly he pays for his debt like a very sober man who saves a lot and has a very different behavior.
So this is like a distortion.
You have a thriftless spending behavior and pay interest rates almost like countries which had another history of spendings like Germany.
Right. It's sort of like sharing your bank account with a drunken sailor.
It's clear that the drunken sailor is going to have an enormously good time.
It's just not so clear that you are going to have a good time as he drains your account to varying degrees of rapidity.
Exactly. And then what is now happening is basically that the ECB is printing money and giving it to Greece to finance their spendings.
Now, this is not... You can imagine it like this.
In practice, it's more complicated because what in practice happens is that the Greek government spends more than it receives in taxes, so it issues Greek bonds.
And these Greek bonds are bought by European banks because these European banks know that with these bonds, they can go to the ECB and the ECB will give them The credits are backed by these bonds.
And as the ECB accepts these bonds as collateral, it's a very safe business.
You receive the money from the EU at 1%, if you are a bank, and you invest in the Greek bonds.
And the Greek bonds are currently floating, at least the threat seems to be that they're floating at around 7%, which seems to me low given the risk of default, but I guess it's low because there's still the possibility of another bailout.
But so if you basically can get a loan at 1% and invest in bonds at 7%, it's really a kind of brain-dead business outfit and would never occur in the free market.
The free market would close those gaps very, very quickly, but it occurs in this statist fiat currency paradigm.
Is that a fair assessment?
Yes, yes. The problem is also that Greek is not the only country who can do that, who can monetize their debt, who can issue bonds and then banks go to the ECB and the money supply is increased and prices increase in all the European Union.
Any country can do that.
So there's an incentive to exploit the printing price, basically to exploit the ECB and therefore the whole Euro The system is very unstable.
Right. So, for instance, citizens in Germany are feeling angry at even the possibility that they may be taxed to pay for Greek overspending, when the reality is that that's already occurring through a devaluation of the euro because of this subsidization that is only being funded by the printing press.
Is that right? That is exactly correct.
They are not aware of it, and I hope now people can become more aware of it.
Yeah, inflation is like a gas that you can't smell and you can't taste but will kill you anyway.
Taxes are a little bit more like getting clubbed over the head but this is like one of those slow deadly gases that you just kind of fall asleep to and that's what's so dangerous to me about fiat currency.
Right, there's less resistance to inflation than to taxes unfortunately.
Yeah, not one person in a thousand really understands the connection and of course the delay Of 12 to 24 months for the inflation to hit means that the causality is very hard for people to see, but they're already being taxed for Greece and for, I guess, the other pigs' countries.
What's that? Portugal, Ireland, Greece, and Spain, where you are, in fact.
So basically, it's you who are causing the Spain problem.
So, do you think this is going to go to a full bailout or do you think that it's going to be this under the table inflation-based bailout?
That's really hard to say.
There are basically three possibilities.
One is that there's a full bailout by other countries, which would mean, of course, in the medium and long run would have fatal consequences for the incentives for For the other countries that may have difficulties like Spain and Italy and Ireland and it's more difficult to help Spain than to help Greece because Greece is not so big, so this would be a problem.
Another option is that Greece really does what it should do, reduce taxes, pay back the debt, reduce the spending, reduce the government sector.
But of course, this might get to political difficulties if there are rights in the street.
So, I don't know to which extent this is possible.
I think that, I mean, my opinion is that the governments love to externalize the blame and say, well, we're helpless in the face of, you know, X, Y, and Z. And so the Greek government may implement austerity measures, but only if they can credibly, at least credibly with their population, credibly blame an external source.
But I don't think that the Greek population will go for that mythology.
That's just my opinion. But hey, we're here to talk about your opinion, so please continue.
Yeah, the last option is, of course, to stop bailing out Greece, to force the ECB not to accept Greek bonds anymore which might actually happen from itself or just if the strong nations just say we will never ever have in anything Greece then the rating of Greek bonds would fall probably right away to a degree that the ECB would not accept these bonds anymore and then probably Greece would be forced to To default and probably then would be also forced to leave the monetary union.
Right. Right.
And so if it were forced to leave the monetary union, it would have to go back to, I guess, to its previous currency.
It would have to go through a currency re-evaluation.
That would be a pretty rough period of transition, but at least the burden of paying the debt would be lifted.
Yeah, it would be paid by Inflation.
But only by Greek citizens and not by the rest of the unions.
Well, sorry. Help me understand that.
But if they default, then they simply will stop paying the debt that they owe.
And so they would revert back to their old currency.
There would be a period of transition, but they would have more money to spend on their domestic programs and policies because they wouldn't be paying the interest or any of the principal, of course, on the debt that they owe outside the country.
True. One point is that they have continually a deficit.
And if they default, it's impossible to have a deficit anymore because no one will lend them money anymore.
Sorry, this is rather technical, but to what degree is the deficit composed of interest payments on the debt?
I know it's a tough question because if they did default and didn't pay the interest on the debt, they may have enough money to cover their operating expenses.
I mean, this is theoretical and it may or may not happen, but it would be a way for them to at least eliminate the interest payments.
Like if you stop paying interest payments on all of your debts just in a household, you may have enough to cover your household expenses.
That's sort of the point of bankruptcy, which is you're out of the interest hole black hole, the interest rate black hole.
But anyway, that sort of remains to be seen.
But do you think this would be a severe blow against the Euro, or do you think the Euro would recover if Greece was kicked out?
Oh, that would be great for the Euro, of course.
If only Germany is in the Euro, then the Euro would be much stronger than it is now.
Right. Well, it could be said that default might be very good for the citizens of Greece in the long run, because it seems to me it's hard, except for those who directly are benefiting from the government money, and of course that is a huge proportion of most of the European population, but particularly in Greece.
If the government is no longer able to borrow as a result of a default, Help me understand the downside for the average citizen.
I mean, again, other than those who are directly receiving money from the state, isn't it sort of a good thing if your government isn't allowed to borrow anymore because it does sort of force them to try to live within their means?
Yeah, it's a marvelous thing.
I totally agree with you.
It's very good. One thing that we have to take in mind is that Greece is not competitive.
Because the wage rates are too high.
Greece entered into the European Monetary Union with a too high exchange rate.
And wages are not allowed to adapt downwards now because of strong labor unions.
So if Greece would go back to their old currency, there would probably be a devaluation of the new Greek currency and therefore they would regain their competitiveness.
But this would be also bad for the normal Greek citizen because import prices would rise so they would pay in the end with inflation for the default and the competitiveness.
Right, okay. You said quite a mouthful there, and I certainly do think I have the smartest listenership on the planet, but I just want to make sure that people follow that.
So, is it the drachma that Greece was on?
I'm trying to remember the name of the Greek currency.
I think so, yeah.
Okay, so let's say they go back to that currency.
There will be a devaluation relative to the euro, because it simply won't have as much credibility, as much history.
I don't think that Greece has a lot of gold reserves left to even give the appearance of backing up a domestically produced fiat currency so it would lower in value relative to the euro which means that the wages, the real wages of the Greek workers would go down Even if their sort of nominal wage rates or the paper wage rates remained the same, which would be a way of lowering the price of Greek labor relative to the rest of Europe, which would make Greek exports more competitive.
But because the Greek currency would be lower in value relative to the euro, the imports would become more expensive and that would have a negative effect on the average Greek citizen's standard of living.
Is that a fair summary?
Perfect, perfect. Oh, look at that.
I'm getting an A. Now, there is a lot of, to me, false moral posturing around these nasty banks and international, the banksters and so on, the Goldman Sachs, who in 2000,
when the Greek monetary situation and debt situation was not that much different than it is 10 years later, but they helped to hide billions of dollars in Greek debt to help Greek get into the I can understand why this makes people quite angry.
Now, the people are outraged because the same banks that help Greece hide all the debt are now shorting the euro and basically betting that Greece is going to fail after helping them to hide all of this debt.
Can you talk a little bit about how that occurred and what the perception of it is in Europe at the moment?
Well, before there was already the incident that Greek falsified the statistics in order to get into, they lied about the statistics in order to get into the euro.
Now the new thing is that with off-balance sheet swap agreements, they managed to get debt from the official balance sheet with the help of They did this with Goldman Sachs and maybe other banks.
So, of course, who is guilty of this is not Goldman Sachs but Greece, the person who lies or falsifies the statistics in order to get into the club.
So, what is the opinion about this?
I guess in Germany...
I'm not in Germany right now, not living in Germany right now.
I read the news and I imagine that people are very angry about this.
Right, right. It is strange the degree to which – I mean, I don't think we can really call these banks private or free market institutions in any real sense of the word.
They are sort of mercantilist.
Semi-fascistic, in my view, corporatist entities that make most of their money enabling governments to prey upon the current and future generations of their citizenry.
However, it seems to me very strange to blame the Goldman Sachs entity and other banks for this falsification, overspending.
And of course, the reason why Greece wanted to get into the EU is because it had this debt problem.
And it really felt that having the collective security, so to speak, of being in this club would help them to continue this particular time frame of overspending and increased deficits.
So they had a huge incentive to lie.
Now, of course, Goldman Sachs reportedly made $300 million out of helping Greece hide its debt.
But I still think that you're right.
The moral force, I think, really lands squarely upon Greece, which seems to be taking no responsibility.
Again, we shouldn't be shocked that governments lie, particularly about economic statistics, and we shouldn't be shocked that governments are taking no responsibility.
But it is amazing to see the Greek politicians blaming the taxpayers, like, oh, the taxpayers are so greedy and they want all this increased spending and they don't want to pay more taxes and, oh my heavens, they're in the grey market and the black market and that's just terrible.
I mean, this is an entity that bribed its way into power and now is blaming people for accepting that bribe money.
It really is amazing.
Is that showing up at all that people are even remotely focused on what the Greek government rather than the banks have been doing?
In Germany or in Spain?
I guess where you are would be the best place to ask about.
People in Spain are more focused on their own problems because There's also a huge deficit, a Spanish deficit, and the Spanish government debt is also rising very fast, and they also started with their first measures, and they were already the first manifestations.
So they are not really focusing on Greece, and because they are not really the people who will be able to bail out Greece, they are not really Interested in this.
I guess they're more interested in if they get problems, if Germany also will pay them out.
Right. I don't know if you've read Atlas Shrugged, but this all strikes me like the last 200 pages of Atlas Shrugged in a horrible kind of slow motion.
At least with Atlas Shrugged, you can read quickly.
This is like a horrible slow motion car wreck, watching sort of the people states of Europe all claw and grab at each other like a bunch of drowning men with one guy who can float, who's just about to go down.
Is there any re-evaluation of the system as a whole?
Because when you see a whole economic system, which really, if you look at sort of the creation of fiat currency, maybe 100, 120 years old for a lot of Europe, is there any fundamental re-evaluation The whole role of the state in finance and fiat currencies and this collectivism of the unified Europe.
Are people really focusing on the details of the everyday or is there any move towards looking at the big picture?
I mean, it seems to me this should be a huge boost to the Austrian school given how Keynesianism has been so thoroughly discredited even since the stagflation of the 70s.
This should be a huge boost and give people a real chance to re-evaluate the fundamental principles that they're using to organize society and the economy.
Is that happening at all?
Or are people just sort of looking in the headlights and freezing?
Well, Austrian economics is booming, but I think mainly because of the financial crisis.
And now this government is Default problem may actually add to this.
This is possible.
Right, right. And I think you've also discussed, or I think you were at the Rothbard conference where this was discussed, that the European bank as a whole, I mean, people seem to think that there's this magic volcano of money somewhere in the world that just throws all of this money and we just catch it and hand it out.
Because when they talk about subsidizing Greece or any of the other countries that may be facing these kinds of financial problems, I don't think there's any money in the European Central Bank.
Is that a fair statement?
Do they have any reserves with which they can do this or is it really going to be a resort to the printing press?
The reserves that the European Central Bank has deteriorated during the crisis considerably.
They still have a lot of gold, but they have also, they have now also many loans to the banking system, to a banking system which is basically insolvent and which are backed by mortgage-backed securities or by Greek government bonds.
So the real backing or the real assets that the ECB has deteriorated considerably.
One funny thing is that the ECB during the crisis reduced the rating they demanded from collateral, from bonds they accepted as collateral.
And they said that at the end of this year they will go back to their old higher ratings that they required for collateral.
And if they go back Greece, with their actual rating now, Greek bonds will not be accepted anymore.
And now I read today that already banks are saying we won't buy Greek debt anymore.
Right. So that's it for, I mean, barring some very strange thing, it would seem to me that Greece must be heading for a default.
Well, probably. Probably.
If there's not a bailout by other governments, this is not sustainable.
Has there been any move to evaluate the other financial statements that other governments put forward in order to join the European Union?
I mean, has this fraud on the part of the Greeks raised red flags on any of the other governments' entry applications, so to speak?
Hmm. I haven't heard about this, but it's possible.
I know that many Germans want the D-Mark back.
I don't know how it's in other countries.
Many other countries had and still have advantages of the Euro, like Spain, for example.
They pay lower interest rates than they would probably pay if they would have the Piazda, Greece, Italy.
I don't think that in these countries there's a huge movement back to their old currencies, but In Germany, I know that there are many people who want back to the DMARC. Right, and I'm sure most of those listening to this know their history and their European history quite well.
But it's impossible, I think, to understand Germany's fear of inflation without remembering, of course, what happened at the end of the Weimar Republic and what that led to.
Of course, the collapse of the currency during the 1920s And the lead into national socialism is still something that is very vivid in the German consciousness and that's one of the reasons why they are very concerned about fiat currency, inflation and the problems of the socialization of international governments.
It's a very scary thing.
Is there any talk in Europe about the 1920s and the 1930s to some degree and where that led?
Do people feel like there's any sense of deja vu or is it considered completely separate from that historical period?
I think it's considered to be separate, but I wanted to add one thing.
There were two hyperinflations even in Germany in the last century.
That is one generation basically lost twice all their savings in the 1920s and then after the Second World War all savings were lost also in a hyperinflation after the Second World War due to the defeat.
And what I wanted to mention is it's nice to see how interventionism causes conflicts.
Bastiat or all the classics would say that free trade It causes harmony and peace.
And interventionism causes conflict.
And we see now this conflict arise, that Germans start to speak bad about Greece, that they are cheaters.
Greece, people start to protest in front of German shops because they have been called cheaters.
So there's a huge conflict involved in the socialist monetary system.
And the European Monetary Union.
Yeah, I think that's exactly right and I can't remember who said it.
It may have been Bastiat or it may have been Smith or Ricardo, but definitely an early economist said where goods stop crossing borders, soldiers eventually start crossing borders, which of course means that if you have protectionism and interventionism and fiat currency inflation, what happens is the governments run into more and more debt.
They have problems paying their citizens And it's really hard to motivate your citizens by appeals to sound fiscal policy.
Citizens get motivated by patriotism, which often turns to anger, which often turns to hatred, which in an extremity turns to war, that governments who hyperinflate very often end up declaring war.
Now, I'm not saying that's about to happen in Europe.
I think that the nuclear powers that are embedded in Europe have made that functionally impossible.
But you're quite right.
It is a zero-sum game when you come to the redistribution of wealth.
Unlike the free market trade, which is a win-win for both sides, it's a zero-sum game.
In fact, it's a negative-sum game because there's always some scraping of the overhead as the money passes from group to group.
And so when it's a zero-sum game, you end up, like two children fighting over one candy bar, you end up with this increased levels of conflict.
And it really is astounding the degree to which these predictions I really hope it gives a huge boost to the Austrian school.
I talked to Peter Schiff and he said it should not be called Austrian economics It should just be called economics, and Keynesianism should just be called voodoo, and I hope that that gives an additional leg to it.
Have you noticed that as you talk about the Austrian theory within your colleagues and your organizations, is it gaining that additional level of respectability now?
Yes. Yes, there's more interest in Austrian business cycle theory And also monetary theory, people listen more to us.
That's great. That's great.
Now, again, I want to be sensitive to your time.
Is there anything that you would like to add?
Any predictions which I can completely absolve you of any responsibility for in the future?
Is there anything that you would like to add or any thoughts that you have as a European who's certainly a lot closer than I am to watching this passage go down?
Well, I think how now it's set up, you know, the monetary, we didn't talk about it, but the Stability and Growth Pact was instituted to limit this perverse incentives of using, of any member country has the incentive to use the European Central Bank to monetize that.
And it does not work.
It does not work because no one Complies.
Not even Germany who pushed for it.
So without it, this construction is not, in the long run, is not viable.
So in the long run, as the construction is now, it will, sooner or later, it will blow up the euro in some form or another.
Yes, I mean, I think that's quite right.
And if I understand what you mean by that, what you mean is that Like most social redistribution welfare schemes, which is fundamentally what the euro is from a monetary standpoint, what happens is the countries that overspend get bailed out, and the countries that are responsible get preyed upon.
Basically, because politics is all about bribing, Special interest groups in exchange for political power.
The countries that bribe the best get the most money, and then the countries that bribe the least, in other words, restrain their spending, get that same amount of money and more hoovered out of their economy and spent on other people's citizens, which doesn't give them any political capital.
So the incentives are completely reversed, even if we accept the status paradigm, which I don't, but even if we accept that, in the European Union, the incentives politically and economically are the entire opposite Exactly.
Well, fantastic. Well, listen, I really do appreciate you taking your time.
I would like you to, if you could, to give your website out, and I'll put it on the video so that people have a chance to read your writing, which is, I think, very good.
You're a very clear and concise and accurate and detailed writer, and I really wanted to compliment you on that.
So if you could give out your website, there's some great material on there to read.
Okay, it's philipbargos.com, but you have to spell it right.
Please do. Please give the spelling and I'll type it out too, but give the spelling, please.
It's philipbargos.com.
Well, thank you.
I really, really do appreciate your time and keep writing what you're writing.
I think that when crises occur, paradigms in human thinking can change, but it takes a lot of effort I thank you very much.
I will do my best. Thank you.
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