Economist Marshall Auerback at Italian MMT Summit 2012

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Lebanon by conjure1 flickrMEDIA ROOTS At Media Roots, we’ve been following and featuring the recent radical, or grassroots, economics summit in Rimini, Italy produced by journalist Paolo Barnard, the first annual grassroots Modern Monetary Theory (MMT) Summit.  Bonnie Faulkner, of Guns and Butter, travelled to Rimini, Italy and documented the event over its course of several days to broadcast the radical discussions challenging ruling-class dogma, which Italy’s corporate media has virtually censored and U.S. corporate media must similarly marginalise. 

Media Roots has previously featured the first and second Guns and Butter broadcasts covering the MMT Summit and have archived those broadcasts and transcripts as well.  And here we present the most recent coverage of this important and inspiring international and grassroots summit in Italy.  Whether you often follow economic trends or not, this is one discussion of political economy which carries such implications for everyone; you won’t want to miss.



GUNS AND BUTTER — “And it is ironic, in many respects, that the very policies the Allies imposed on Germany after World War I are now being introduced to some degree by the Germans in countries like Greece, Italy, Portugal, and Spain.” —Marshall Auerback

Bonnie Faulkner“I’m Bonnie Faulkner.  Today on Guns and Butter:  Marshall Auerback.  Today’s show:  European Integration: The ECB Laid Bare. 

“Marshall Auerback has over 28 years of experience in investment management.  He is currently a portfolio strategist with Madison Street Partners, a Denver-based investment management group.  He is a fellow with the Economists for Peace and Security and a research associate for the Levy Institute.  He is a frequent contributor to New Economic Perspectives. 

“Today’s show features introductory remarks by Marshall Auerback at the first Italian grassroots economic Summit on Modern Money Theory in Rimini, Italy, February 2012, produced by Italian journalist Paolo Barnard.  The five speakers were Stephanie Kelton, William Black, Marshall Auerback, Alain Parguez, and Michael Hudson.”

Marshall Auerback (c. 1:46)“I’m going to give you a small history lesson today just to explain that what you are experiencing today is nothing new.  Arguably, this has been a problem that has affected Europe for the last 150 years.  And the only difference is now it’s in the context of something we call the European Monetary Union

“Before I start let me explain that I have worked in the financial markets.  But when I started in the financial markets, we were trained to believe, in fact, finance was something that was the hand-maiden of industry and not the other way around

“So, I have never played any role in creating these financial Frankenstein products like credit default swaps.  I want to make that clear.  There is an expression called Gresham’s Law, which states that bad money drives out goodSome of us, who stay in finance, are trying to bring back the good money and drive out the bad.

“Okay, so this is the problem that you face today in the European Monetary Union:  When you joined the euro, you gave up your sovereign currency in favour of a new currency called the euro.  So, in a sense, national central banks obtain reserves from the European Central Bank for clearing purposes.  And the European Central Bank, in turn, is prevented from buying the public debt of the governments directly.  So, in a sense, you have surrendered your national sovereignty.  Your relationship to the European Central Bank is similar, in many respects, in all respects, in fact, to an American state or American provinces to the central bank.  You are a user of a currency, but you no longer create your currency.  And you have, therefore, lost your sovereignty.   

(c. 4:31) “Now, the reason why this was done—there may have been noble, historical reasons behind it—there was a desire to avoid the horrors of what we experienced from two World Wars.  And there was an ideal of creating a broader, United States of Europe.  But, ultimately, the house, these United States of Europe that we are trying to create is built on very faulty foundations.  And this faulty architecture is at the root cause of today’s problem.  This is not a fault of Italy as a lazy Mediterranean profligate, as say, the Germans like to indicate.  That is a myth being propagated by today’s financial elites, but it has no bearing in reality.

(c. 5:32) Okay, so, here’s the history lesson.  One could argue that the last 150 years has been a history of trying to deal with the so-called ‘German Problem’.  Now, when I say that there’s a ‘German Problem,’ I’m not trying to suggest that there is a problem with the German people.  And I’m not trying to reduce this to crude caricatures, like we’ve seen recently with some of the papers, where, for example, Angela Merkel has been appearing in Nazi uniforms.  I’m not trying to say that there’s a problem in those terms.

“What I’m trying to suggest is that we’ve had a problem of a country, that has been historically much more dominant economically and politically than its neighbours.  And we are attempting to resolve that problem in various different forms.

“Now, in the period of 1865 to 1870 it was very, very similar, in many respects, to the period we had in the aftermath of the fall of the Berlin Wall.  We had a severely divided continent.  And even Germany, itself, was a series of smaller principalities, which were gradually unified into one larger country during that period. 

(c. 7:10) “Now, the creation of that nation-state did not originally cause any problems.  And it didn’t because of the skillful diplomacy of Bismarck, who managed to keep her German aspirations in line and control the imperialist impulses of the Kaiser.  Unfortunately, Bismarck, ultimately, retired.  And the rest was history.  Ultimately, the expansionist impulse of the Kaiser led to the disaster of World War I.

(c. 7:56) “And in the aftermath of that, we had the first way of dealing with the so-called German Problem.  It’s what I call the Carthaginian solution.  We tried to destroy Germany, punish them.  We implemented very harsh reparations.  And we occupied large parts of their country.  And it is ironic, in many respects, that the very policies the Allies imposed on Germany after World War I are now being introduced to some degree by the Germans in countries like Greece, Italy, Portugal, and Spain.  And we all know what happened.  I’m not suggesting we are about to experience the rise of another Hitler, but certainly it is creating dangerous populist movements, which risks turning Europe into a much less civilised place, in which to live.  And it leaves us with a much more difficult future. 

(c. 9:20) “Now, obviously, the Carthaginian solution created a huge backlash.  We had the rise of Nazism.  And we had the Second World War.  And after the Second World War, we tried a different approach.  We divided Germany.  In the West, we had the French and American inluence.  And then East Germany became part of the Soviet bloc.  And I think this, obviously, could work for a short time until the force of history caused Germany to be reunified. 

(c. 10:03) “But I think it’s important to realise that the foundation of the modern German state came during that period.  We had a ‘Western’ government, that was fully committed to the freedom of the market, the freeplay of supply and demand, and the importance of where the state had to intervene to insure that competition was not unduly hindered by cartels and monopolies.  It was Germany’s social market economy. 

(c. 10:39) “And this worked very, very successfully.  It created the foundation of the modern Germany.  And I think it’s worth pointing out at that time it was aided largely by American generosity in the aftermath of World War II.  After the intense destruction of World War II, you didn’t have American politicians lecturing the Europeans about how they were lazy, profligate, and had to pull themselves up by their own bootstraps.  The Americans responded with massive fiscal transfers equivalent to about 2½% each year for several years in the late 1940s.  And this created the foundations for Europe’s greatest period of growth.  So, it’s important to realise we had fiscal surpluses recycled to create growth, not to repay debts and, certainly, not to aid in the imposition of financial reunification. 

(c. 12:00) “Now, obviously, once Germany was reunified, the whole issue of the German Problem arose again.  There were some, such as Prime Minister Margaret Thatcher in Great Britain who worried that we were going to create a new Fourth Reich.  But her concerns were, ultimately, overridden by the actions of what I would call the Europeanist wing in the German government.  The theory was that if Germany bound itself into Europe fully, into a United States of Europe, that somehow the rest of Europe wouldn’t have to worry about the so-called German problem.  So, we created the Treaty of Maastricht, which was negotiated in December 1991 and signed the following February where Germany’s sovereign powers were further reduced, in spite of the country’s tremendous post-war economic success, as an individual country.

(c. 13:18) “Now, that meant that Germany, like other countries, ultimately, would surrender the deutschmark.  Europe, in theory, was to have a common foreign and defence policy and the frontiers of the European Union were going to be open.  But there was a problem that came in the aftermath of the creation of the euro.  In spite of the many benefits offered by a single-market economy, there was a question as to how many countries should actually join this new union.  There were some who argued that the union should be small; it should be linked by a few countries that had common cultural, social, and economic policies.  This so-called small is beautiful school, of which the Bundesbank was a core member, argued that pooled national soveriegnty, greater monetary and fiscal coordination were all more feasible where the countries involved had common comparable social, political, and economic structures and similar social outlooks.  They argued that a large expansion of the Eurozone amongst a larger group of more heterogenous nations with substantially different ideological and historical traditions would complicate the desire and drive to converge.”

Bonnie Faulkner (c. 15:05):  “You’re listening to economist and portfolio strategist Marshall Auerback at the Summit on Modern Money Theory in Rimini, Italy.  Today’s show:  European Integration: The ECB Laid Bare.  I’m Bonnie Faulkner.  This is Guns and Butter.

Marshall AuerbacK:  “By contrast, you had the advocates of what I call a big and broad Eurozone.  And they argued that the bigger the Eurozone the more likely the currency could compete with the decaying dollar standard as a viable reserve currency.  Now, I think that’s questionable, but the gamble was that the euro was launched in the face of substantial regional economic disparities amongst the twelve founding members, both, in terms of unemployment rates and per capita income levels.  And there was no corresponding fiscal authority to help alleviate these problems.

(c. 16:10) “The belief was that the longer these countries stayed under a common currency the more they would converge.  And that’s been the gamble.  And, clearly, it has not been successful.  If anything, as we can see now, the disparities amongst the various countries has got worse, not better.  So, you have to ask, Why did Germany, ultimately, agree to this larger structure, in spite of the problems it’s now created?  And I think this is important because when you understand why Germany agreed to the bigger and broader union, it will help you to understand that they have been huge beneficiaries of this system, as it stands today.  And that they are totally unjustified in criticising countries like Italy and Greece, Spain or Portugal for what has happened in its aftermath.

(c. 17:19) “Let me go into that in a bit more detail because I think when we speak of Germany there are actually three Germanies that we have to talk aboutGermany number one is the Germany of the Bundesbank.  This is the finance capitol, the segment of the country, which to this day retains huge phobias about the recurrence of Weimar-style of inflation and they have an almost theological belief in hard money and a corresponding hatred of inflation.  In their heart of hearts, this Germany would probably rather be on a gold standard and, as much as possible, they have tried to recreate a Eurozone with a model of gold standard in mind.

(c. 18:10) Germany number two is what I would call the internationalist wing of the country.  And they were led for a long time by Helmut Kohl.  This group is probably the foremost exponent of the idea that Europe can rid itself of the so-called German Problem, once and for all, if Germany binds itself to a United States of Europe structure and continues to help institutions that move the EU broadly in this direction.  I think it is questionable whether this vision has survived significantly beyond the tenure of Helmut Khol, himself, but this is certainly a part of the German political spectrum, which still exists.

“Now, you could see the inherent tension between the two views.  Bundesbank Germany would never allow vague internationalist aspirations to dilute the goal of sound money, low inflation, and fiscal discipline.  You can almost imagine many of them looking askance at the Treaty of Maastricht and the corresponding threat to their ideals of sound money, which brings us to the key variable in German politics.

 Germany number three—and that’s industrial Germany.  This is the Germany of Siemens, Daimler-Benz, Volkswagen, and the great steel and chemical companies, the capital goods manufacturers.  These companies have clearly benefitted substantially from the economic stewardship provided by institutions such as the Bundesbank.  But they also recognised that there were huge benefits entailed by a completely open and integrated European market, which was still the largest component of their sales.  In their eyes, a currency union—even if it meant the admission of so-called fiscal profligates, such as Italy and Spain—minimised the threat of competitive currency devaluations.  So, the idea really was: lock in countries like Italy and Spain into uncompetitive exchange rates, insure that they could never use their currency to bear the burden of economic adjustment, and, thereby, entrench Germany’s dominant export position in global trade.

(c. 20:51) “And this is why Germany, today, continues to run large current account surpluses.  Yet, still has the audacity to blame other countries, such as Italy and Greece for running large deficits when they use those deficits, in fact, to buy German-manufactured products.  And I think that when the Germans contend that they are doing nothing, but bailing out profligates and they have derived no benefit from the union.  They crucially forget this component of the European Economic Union.

(c. 21:39) “So, I think, what we have today is a dysfunctional marriage.  The partners haven’t grown together.  Countries such as Greece, Portugal, Spain, Ireland have benefitted from the illusion of economic convergence through lower interest rates and a stable currency.  And when the European economy was growing these markets indulged the fantasy that there was little to choose between, say, Greek bonds and German debt.  And that’s all now changed.  All these countries now are struggling to compete with a much more productive German economy.  But because of fiscal austerity and the rules of the Stability and Growth Pact, they are given no means of competing and they are consigned to a form of indentured servitude.  There is a feeling that, somehow, all of these countries have to get their labour costs down, they have to undergo as what’s known as an internal devaluation.  So, that wages are crushed in order, [so] they can export and compete with the Germans.

(c. 23:00) “The problem is this runs into what we, economists, call the fallacy of composition, which is to say that; if we all deflate at the same time, there is no possibility of any of us growing.  So, there are two or three possible solutions.  One is to admit the whole thing is a failure and to go back to letting 17 individual currencies bloom.  This would have the virtue of restoring full fiscal sovereignty to all of the euro member states and getting them away from the insane fiscal austerity policies, that are now being advocated by the European Central Bank, the IMF, and a whole host of core countries, such as Germany.  

“Now, obviously the economic dislocations, to the banking system, the payment system, both, within Europe and globally, would be, potentially, catastrophic.  It could make the Lehman bankruptcy seem like a leisurely jog in the park by comparison.  Now, what some people in Germany have suggested is solution number two, therefore, is that you have a two-speed euro.  Some have even argued that Germany should withdraw from the euro, reestablish the deutschmark, and the euro, itself, can become a so-called soft currency.  

(c. 24:36) “Well, first of all, there’s the same problem in place.  You have no mechanism to do this in an orderly way.  And the question becomes:  Which countries join the hard-currency bloc?  And which join the soft-currency bloc?  One country, which I think is particularly vulnerable in this context, is France, even though the French like to think of themselves as a disciplined Teutonic-style country.  Its economic and industrial profile is more like that of Italy.  So, it could face huge competitive threats from Italian industry, were Italy to remain in a so-called soft currency bloc.  

(c. 25:25) “It’s also questionable, whether the French populace, as a whole, could withstand the kinds of restraints to living standards, which the Greeks and the Spanish and the Portuguese are now accepting in order to stay in the Eurozone.  This is, after all, the country that invented the guillotine.

“So, the third possibility, which, I think, is the most sensible for a longer term solution, is the United States of Europe.  Now, when I use the term United States of Europe, I don’t mean to conjure up an image that it has to be exactly like the United States [of America].  I’ll use the example of my own country, Canada, because it sounds like a lot less threatening example to many people.  

“So, let’s take my country, Canada, for example.  I come from Toronto.  I’m from the largest province, Ontario.  So, imagine for a moment that the two largest Canadian provinces—Ontario and Quebec—were independent countries.  If this were the case, their debt burdens would consist of their existing debts plus their respecting shares of the current federal government debt.  Their capacity to repay those debts would be determined by their respective tax bases, which is to say each province’s nominal GDP.  

(c. 27:03) “So, how will these debt burdens look?  Well, if you look at the numbers today, Ontario and Quebec would each have debts, that are higher than Spain and about the same as Portugal.  This reflects the growing significant social spending responsibilities of the Canadian provinces in areas, such as healthcare and education, which are the two largest sources of government expenditures in Canada.  Now, these spending commitments today are funded by fiscal deficits and dead issuance.  Quebec and Ontario are also similar to Spain and Portugal in the new environment, that I’ve described, in that they would not control the currency, in which they issue debt.  That would be the Canadian dollar, which would be issued by the Bank of Canada, which in turn is a central bank that is now controlled by the federal government.  So, given the poor fiscal fundamentals and its inability now to print money, these bonds would surely be skyrocketing in terms of the yields, if they were independent countries.  

(c. 28:14) “Well, clearly, that’s not the case.  Yields on 10-year Ontario/Quebec government bonds are substantially lower than almost any European Monetary Union country right now.  Why is that the case?  Because of fiscal federalism and the pooling of risk within the Canadian monetary union.  There is an implicit understanding that the federal government will rescue any Canadian province that runs into trouble in the bond market.

“So, that provides an indication that a monetary union, when it’s complemented by a credible fiscal union, can actually work.”

Bonnie Faulkner (c. 28:55):  “You’re listening to economist and portfolio strategist Marshall Auerback at the Summit on Modern Money Theory in Rimini, Italy.  Today’s show:  European Integration: The ECB Laid Bare.  I’m Bonnie Faulkner.  This is Guns and Butter.

Marshall Auerback (c. 29:15):  “Now, if Europe, ultimately, opted for this solution, then you would never have a situation where people worried about the creditworthiness of each individual country because it would all be aggregated into the broader Eurozone.  Nobody would be worrying about so-called balance of payments deficits.  Nobody would be talking about ‘profligate countries, tax cheats, etcetera.

“If you look at the United States today, nobody knows and nobody cares if, say, a country like Texas runs a huge current account surplus with the other 49 States.  Nobody cares if West Virginia is a constant recipient of federal fiscal transfers because West Virginia is seen as a broader part of the United States.  It’s not a relevant consideration.  That’s, ultimately, what we have to do.  

(c. 30:24) “But I think, obviously, to get from here to there will take several more years.  And the markets are not giving that time.  So, I would like to suggest that there is an interim proposal, which can be used to solve the immediate problems at hand.  

“Unfortunately, as I’ve said before, we do not have a United States of Europe treasury in Europe.  There is only one entity, which creates euros.  And that is the European Central Bank.  And the European Central Bank, unfortunately, has to play a quasi-fiscal role even though it [resists this] because it is the only entity that actually can solve the underlying solvency problem, which the European Union faces today.  

(c. 31:17) “What some of us have suggested, therefore, is for the European Central Bank to distribute trillions of euros, annually, to the national governments on a per capita basis.  The per capita criteria means that it is, neither, a targeted bailout nor a reward for so-called bad behaviour.  The idea is the distribution would immediately adjust national public debt ratios downward, whilst simultaneously easing credit fears, and not necessarily triggering additional government spending.

(c. 32:05) “Once markets perceive that the countries are no longer heading for insolvency they are more likely to demand less in terms of interest rate.  They are more likely to extend credit and to help the countries’ growth again.  I liken this to a company, which has a debt problem, which has a large rights issue in the capital markets.  If that company is able to successfully conclude a rights issue and is no longer perceived to be facing looming bankruptcy, it’s much easier for it to secure additional funding, so that it can begin to grow again.

“Now, I would emphasise that what I am suggesting is not a means of dealing with the problem of aggregate demand deficiency in the Eurozone.  But it is a means of providing a credible way of restoring perceptions of national solvency, so as to open up the capital markets again to countries like Italy, so that they can engage in fiscal expenditures to support growth.  Debt without growth is a non-starter, as the Greeks are finding out.

(c. 33:24) “The reason why Greece, for example, can’t grow today is because it is completely shut out of the capital markets for reasons of perceived insolvency.  If you eliminate that problem and you create a situation where countries like Italy, Spain, Ireland, Portugal, are viewed more like Ontario than a bankrupt state, then you’re no longer under the strictures of the ECB’s harsh enforced austerity programmes.  I will elaborate on these proposals later on this afternoon.  But I think it’s important to start to think in these terms.

(c. 34:08) “The crisis is, certainly, forcing a much more radical approach on policymakers than they may have originally felt comfortable about.  And I think that it’s important to point out that if this idea I propose seems radical, it’s worth recalling that a few years ago the idea of the European Central Bank buying sovereign debts in the secondary market, as they do today, was considered to be heretical.  We were told that this was going to create massive inflation; Zimbabwe was around the corner; and this was gonna be a real problem.  And, of course, it hasn’t been the case at all.

“So, we can actually see that the European Central Bank’s balance sheet has expanded massively over the last several months.  Weimar hasn’t come.  So, it’s time, I think, to dismiss these old economic shibboleths and make people realise that there is an alternative and we’ll try to sketch that out later.  But I thought it was important, first, to place this in a historic context.  This is a multi-year project.  But we can start now.  Thank you very much.

(c. 35:23) “I want to make a clarification on something that’s already been discussed a few times today regarding the difference between a user and an issuer of the currency.  Countries, such as the United States, Canada, Australia, Japan, and the United Kingdom, all issue their own currency.  They have sovereignty in the fullest sense of the word.  They can spend with no financing constraints.  There may be inflationary constraints, real resource constraints, but there is no inability to pay in a financial sense.  That used to be the case for Italy when you had the lira.  But now you are a user of a currency.  You use other people’s money, so to speak.  

“So, that means you are dependent on, either, tax revenues or funding from the capital markets, the bond markets, in order to sustain your growth.  So, if the bond markets decide that you are bankrupt or insolvent, they can, effectively, shut you down.  They can charge you such a high interest rate that the country can no longer function.  That, for example, is the situation in which Greece is in today.  And Portugal is coming into that situation as well.

(c. 36:58) “So, we in America we have control of the steering wheel.  We don’t often act like we do, but we have total control over the steering wheel.  And, unfortunately, you in Italy are passengers in the car.  And the bond markets have the steering wheel.  And it doesn’t matter what kind of car it is; it could be a dumpy little Ford or it could be a fancy Ferrari.  But if you don’t have control of the steering wheel, you can’t drive the car.  So, I think it’s very important to clarify that point.  

(c. 37:34) “The other thing I’d like to discuss this afternoon is this disturbing trend I see amongst my Italian friends who continue to blame themselves for the current crisis in which they find themselves.  There is this sense that somehow you have become lazy profligates and that you’ve been the brats of the European Union and that, therefore, you deserve to be punished.  Well, I’m here to absolve you of your sins, even though I’m not a priest. [Applause]

(c. 38:07) “I’m going to discuss a variation on an old Greek fable about the industrious ant and the profligate grasshopper.  You probably know the traditional story.  Over the past two years, in particular, the Greeks have earned an international reputation, as Europe’s grasshoppers.  And the Germans have become the ants.  Unfortunately, the Greek’s reputation has now spread westward to Portugal, Italy, Spain, and even northwards toward Ireland, as all sorts of non-Greeks are painted with the same brush, as being lazy grasshoppersThe bailout packages for Greece have been accompanied by this propaganda that the Eurozone has been divided into two regions full of industrious northern ants in Germany, the Netherlands, etcetera, and lazy southern grasshoppers.  

“So, now with the warmth of the euro’s summer days behind us, now that the easy money of Wall Street has gone, a winter of discontent has descended upon us, allegedly due to the lazy grasshopper’s idleness.  That’s the dominant story you hear in Europe today, that you lazy grasshoppers are knocking on the northern ants’ doors, cap in hand, seeking one bailout after another.  And the ants, understandably, are coy and they say, ‘Yeah, we’ll give you more money, if you promise to change your ways.’  So, what they are saying is that the stocks that the ants accumulated for the heavy winter are being endangered by these hungry, careless, lazy grasshoppers who resist changing their profligate ways.  I’m sure you’ve all heard this story over the last year.  

(c. 40:04) “Now, the problem with attractive stories like this is that they can distort as much as they can help.  This afternoon I’d like to argue that Aesop’s fable, as attractive as it might be contributes more to Europe’s problem, than it does the solution.  And my reason for this is simple.  The ants and grasshoppers are found in all areas, in Greece and Italy there are hard-working industrious people, just as there are lazy, profligate grasshoppers in Germany and in the Netherlands and in Austria.  But we have tended to assume that all the ants are in the north and all the grasshoppers are in the south.  And, therefore, we are introducing toxic remedies to rectify the problem.  

(c. 40:52)  “It is true that the crisis has placed a disproportionate share of burden on the back of Europe’s ants.  But the ants are not exclusively German, Dutch, or Austrian, nor are the grasshoppers exclusively Greek, Italian, or Spanish.  Some ants are German and some are Italian.  What unites all of Europe’s ants, north and south, east and west, is that they have worked very hard, struggling to make ends meet during the good times and are struggling even more during the bad times.  Meanwhile, the grasshoppers, otherwise known as bankers or technocrats, both, in the north and the south of Europe, have lived the good life before the ‘crisis’ and are still doing well today.  They are keen as always to privatise any gains they have and socialise the losses.  And they socialise the losses by distributing on the hard-working ants. [Applause]

(c. 41:54)  “As I’ve said, you’ve been told that you are a bunch of lazy grasshoppers.  You’ve been told that you are a nation of tax cheats, profligates, living beyond your means.  Those have been the charges.  We hear them all the time.  That’s the narrative, that has taken hold over the last couple of years.  And that’s what the Germans, in particular, continue to propagate.  And they have been so successful that even in this great proud nation many people believe it.  You have this very weird idea that you’ve been bad and you deserve to be punished.  It’s like a form of Stockholm syndrome, or I guess we could call it Berlin syndrome in this case.  

(c. 42:36)  “Well, it’s not true!  And the sooner we understand this fact, the quicker will be the possibility of a proper set of reforms, which will help ants everywhere and where we can stop bailing out the interests of corrupt bankers and EU technocrats, who are totally insulated from the realities of day to day life in Italy and other parts of the European Union.”

Bonnie Faulkner:  “You’re listening to economist and portfolio strategist Marshall Auerback at the Summit on Modern Money Theory in Rimini, Italy.  Today’s show:  European Integration: The ECB Laid Bare.  I’m Bonnie Faulkner.  This is Guns and Butter.”

Marshall Auerback (c. 43:17):  “In Italy, just as in Germany, you have many hard-working people.  In many instances, as Alain [Parquez] was saying earlier, they hold two jobs, but have traditionally found it very hard to make ends meet due to low wages, exploitative working conditions, and the rate of inflation for their lowly basket of goods, which is much above the official average, especially after the euro’s introduction boosted food and basic goods prices.  Because of this, they took on more debt.  They faced massive pressure from the banks to take out loans in order to provide for their children those things that the TV tells them no child should be without and which those with a meagre income cannot really afford.  

(c. 44:05)  “Now, comes the crisis.  A number of members of these families lost their jobs.  Many of you lost part of your earnings, bank loans were called in, taxes rose, and, in some instances, people have had to contemplate living without electricity because the state is trying to squeeze more tax out of them and they can’t afford it.  So, these families’ prospects have collapsed.  Yet, somehow, they are being painted as the villains of the peace and the source of the problems of the euro.

“Now, in Germany we also have ants, as I’ve said before.  We have hard-working people who make products, that many people enjoy.  But they have workers who have had stagnant wages.  They, also, have struggled to make ends meet before and after the Eurozone CrisisTheir increasingly productive labour and stagnant wages has meant that there has been a huge transfer of capital from workers to the manufacturers.  Profits in Germany have skyrocketed over the last few years; and these have been converted into surpluses whose size grew, largely, due to the redistribution of income away from the German ants, towards their employers.  And partly because of the countries greater net exports, which accelerated the cheap German labour, that Germany was becoming.

(c. 45:28)  “So, once created these surpluses, these trade surpluses, began to seek higher returns elsewhere due to the low interest rates they produced in Germany.  At this point, the German grasshoppers, these bankers, whose aim it was to maximise gain out of the short run out of zero effort, looked south for a good deal.  They turned their attention to Greece.  They turned their attention to Italy.  They turned their attention to Portugal and Ireland.  

(c. 46:00)  “Now, we were all at this point in this common currency area, but there was still the prospect for an interest rate arbitrage, especially in the areas of personal credit and credit card loans.  So, you had German capital produced by the manufacturers’ hard, cheap labour and directed by the irresponsible German grasshoppers flowed south in search of higher returns.  

So, what happens when money floods in unexpectedly?  Well, you get bubbles.  It’s that simple.  In Spain, this took the form of a real estate bubble.  In Greece, the bubble manifested itself in the form of public debt, as the Greek grasshoppers, otherwise known as Greek property developers, found it easier to grab the German capital flows by the accounts of the state and whose administrators were only keen to shower the Greek grasshoppers with procurement contracts.

“So, the precise form of the southern bubbles does not matter.  They would burst anyway, once the larger bubbles created by our über-grasshoppers on Wall Street popped.  What does matter is that the German ants could see that their hard work was not translating into a better life, but into more drudgery and less purchasing power.  Now, come the crisis:  The German ants, in particular, were told that they must tighten their belt again, at a time when they were falling deeper into a poverty trap.  They were told that their government was sending millions, trillions to the so-called P.I.I.G.S.Portugal, Italy, Ireland, Greece, and Spain, who these Germans assumed were the lazy grasshoppers, since they were never told that the Greek or Spanish or Italian governments are not allowed to use this money to revive growth, but simply to bail out the banks.  In fact, the loans were given on the condition that the blow against the ants would be maximised, so as to minimise the pain of the grasshoppers.  They were very puzzled.  ‘Why,’ they asked, ‘are we working harder than ever and taking home less money? Why does our government keep sending money to these so-called lazy profligates and not to us?

(c. 48:21)  “Meanwhile, here in Italy and in Greece and in Portugal, hard-working people like yourselves remain, both, desperate and, also, angry.  The grasshoppers of these countries, these would include, as I said, the bankers and the so-called technocrats, such as Signor Monti and Draghi, pointed the finger at them and called them all sorts of names.  They joined in the narrative.  In fact, just in yesterday’s American Wall Street Journal Mr. Draghi launched an extraordinary attack on the welfare state.  He suggested that it was and remains the source of today’s problems in the Eurozone.

(c. 49:09)  “So, we’ve had a complete change in the narrative.  No longer, as was the case after 2008, was it the reckless lending practices of the banks, their creation of crazy, nuclear style products like credit default swaps, which caused the crisis.  Thanks to people like Mr. Draghi, Mrs. Merkel, and Signor Monti, virtually all the so-called leading experts in the West now claim that the crisis was a product of public profligacy and that your failure to address this so-called problem would bring down civilisation as we know it.  

“Now, you’re probably all scratching your heads thinking, Well, there must be a mistake, because you’ve never really enjoyed any of the good times the way your bankers friends have.  You have struggled before.  And you are struggling now, admittedly, far more desperately.  

(c. 50:10)  “As for the bailouts, you and your neighbours across the Adriatic in Greece can’t see them.  Nobody tells you that the trillions end up in Europe’s insolvent banks where they fall into a bottomless black pit.  And then you have the added insult to injury where you have the Germans calling you thieves, corrupts, spendthrifts, over-reachers.  It’s hard not to reach into the collective memory for moments in history, that make it so easy to become anti-German.

“Now, when the euro was established, there was a very interesting experiment that took place simultaneously in, both, Greece and the periphery.  In Germany, governments, employers, and trade unions all tried to restore German competitiveness, they claimed, employment, and growth by reducing German wages and just squeezing German inflation below the European average.  

(c. 51:10)  “Meanwhile, in countries like Greece, Italy, Spain, and Ireland the governments of that time struggled to prepare the country for accession to the Eurozone by also squeezing real wages and taking advantage of the influx of immigrants into the county to drive them down even further.

“Now, here in Italy there was another interesting wrinkle.  And there’s been a very good paper written about this by one of your compatriots, Professor Gustavo Piga.  Your public accounts were doctored; they were understated for the use of a number of Wall Street derivatives, which masked the true size of Italy’s public debt.  I hasten to add that the use of these products was approved by, both, Eurostat and by Italy’s Treasury at the time.  And guess who was the senior official in charge of debt management at the Treasury at this time.  I’m sure you already know, but I’ll eliminate the mystery.  That’s right; it was Mario Draghi, who subsequently moved to Goldman Sachs where he helped earn fees for the bank by helping to privatise Italy’s national assets.  Nice work, if you can get it.

(c. 52:23)  “Now, in Germany, the experiment to reduce workers’ benefits by the so-called Hartz Reform, named after the former head of Volkswagen, worked extremely well and kept working after the euro was created.  Real wages for workers fell and fell and fell.  Unemployment was slashed.  But workers earned less; and they couldn’t buy their own output from the gleaning factories, that produced more and more for less and less.  German goods flooded the other European markets.  And, at the same time, Germany’s success caused money to become even cheaper, flooding the so-called surrounding Eurozone countries, including Greece, Italy, Spain, Ireland.  And you used that cheap money to buy more German goods.  In other words, your so-called profligacy helped to sustain Germany’s massive trade surplus, which allowed them to run smaller fiscal deficits.  But Germany’s ants worked harder for less, while Germany’s own grasshoppers laughed all the way to their bank.

(c. 53:32)  “And, for a time, this appeared to work well.  Once, the flood of cheap money from outside, from Germany and from Wall Street, allowed the Italians, the Spanish, and the Greeks, and the Portuguese, and their political allies in government to borrow from the Germans, they did so as if there was no tomorrow.  Who could blame them?  If you’re offered incredibly cheap credit, the temptation becomes overwhelming. The only problem was that every time the Italian or the Greek or the Portuguese ants asked for some of the benefits of being in the euro, they were either paid off with more cheap-skate public sector jobs, paid with borrowed money, or they were told to go to the banks and borrow directly to sustain their lifestyles.  

(c. 54:16)  “This was done on the back of European structural funds and tied to borrowed money.  The Italian grasshoppers, in alliance with some of the German ones, got fatter and fatter, while hard-working ants, such as yourselves, continued to struggle to make ends meet.  And then, of course, Wall Street collapsed in 2008.  When the collapse occurred across the Atlantic, it hit the banks first and then the Eurozone’s public finances later.  I think it’s important to recognise that the banks were hit first.  This ‘crisis’ was not caused by excessive government spending.  So, of course, when the funding dried up, the bond markets began to question the solvency of the various states who use the euro.
(c. 55:03)  “In the first instance, it was Greece.  We were told that this is a one-off, that they have been savedBut the reality is that the speculative forces of capital are now heading towards Lisbon.  And, after they take care of Lisbon, they will soon go to Spain and Italy.

“The euro was not supposed to work like this.  But someone had to be blamed because you can’t own up to a colossal failure like this.  Too many people like Signor Monti and Signor Draghi are invested with the success of the euro.  They couldn’t possibly admit that they were wrong.”

“So, they all found it convenient to fall back on the scoundrel’s last refuge, nationalism.  Suddenly, we have a war of words between Greeks and Germans, northerners and the southerners.  We’re now told that nobody was ever bailed out, except for some lazy, grasping people and the deeds of the banks are completely ignored.

“Now, as you know, all of Aesop’s fables have a moral.  Many like to think of Aesop’s parable as a morality tale, whose purpose was simply to warn against sloth, laziness, and an unhealthy disregard for the future.  But it was more than that; Aesop was also sounding the alarm against, both, the grasshopper spendthrift ways and the ant’s extreme parsimony

(c. 56:22) “Today, there is another wrinkle that needs to be added to his moral.  And that is that when the ants and the grasshoppers are distributed across the division, separating surplus from deficit nations within a badly designed monetary system, the stage is set for a depression, that sets all against each other in a vicious spiral, from which only losers can emerge.  So, our only option is that we have to start to subvert this dominant narrative.  We have to recognise that coexistence of neglected ants in, both, Italy and Germany, and also recognise that there are over-pampered grasshoppers in, both, Germany and Italy.  If we start recognising that, that is a good beginning.  Then we can start working towards a system that promotes growth and employment, not perpetual bailouts for banks.  And I will leave it at that.  Thank you very much.”

Bonnie Faulkner (c. 57:30):  “You’ve been listening to economist and investment manager Marshall Auerback.  Today’s show has been European Integration: The ECB Laid Bare.  I’m Bonnie Faulkner.  This is Guns and Butter.

“Marshall Auerback has over 28 years of experience in investment management.  He is currently a portfolio strategist with Madison Street Partners, a Denver-based investment management group.  He is a fellow with the Economists for Peace and Security and a research associate for the Levy Institute.  He is a frequent contributor to New Economic Perspectives.  Visit  Or search online for Marshall Auerback.  Visit the website for the first Italian Summit on Modern Money Theory at”

Transcript by Felipe Messina for Media Roots and Guns and Butter

fm: Updated 24 MAR 2013 09:29 CST


Guns and Butter – March 21, 2012 at 1:00pm

Click to listen (or download)


Photo by Flickr users Conjure 1 (feature) and Christina Kekka (synopsis)

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