Copyright 2012 by John T. Reed

Thank God for the Euro Zone. It has given us a sort of federal fiscal irresponsibility laboratory with 17 separate experiments going on simultaneously.

I have repeatedly said recently that when federal politicians can no longer borrow, they will inflate in order to keep sending out the entitlement checks to voters.

But what about the Euro Zone? There you have 17 countries who cannot inflate because they no longer have a national currency. They traded their national currencies in for the euro in 1999.

They have a European Central Bank that can “print” currency so Euro Zone countries can pay their bills with less-purchasing power money. But the ECB, in contrast to the U.S. Federal Reserve, has only one mission: prevent inflation. And it is refusing to “print” very much money. (The Federal Reserve has two missions: prevent inflation and keep unemployment low. Unfortunately, those are often conflicting missions and it is therefore impossible to achieve both simultaneously.)

So the bad Eruo Zone countries—called the PIIGS—are confronted with a situation where they can neither borrow nor “print” money to pay their bills—mainly entitlement checks to citizens in figurative hammocks.

So what to they do? I figured they had no choice but to cut spending.

Turns out there is another choice. They resign. Politicians want to be popular. It is a psychiatric disorder they share. By inflating, they have a chance to remain popular. When that choice is taken away by no longer having a national currency, and they cannot keep borrowing. Many abandon politics altogether.

In other words, they NEVER do the right thing, even when they have no choice!

Ironically, it conforms to my article on IF laws. In that article, I said liberals do not understand that they are passing lots of IF laws and regulations. Those say

If you do X, you must do it the way we say


If you do X, you must pay this additional tax.

Liberals think such laws force business to do things their way and/or to pay more taxes. But businessmen look at the laws and often say,

Oh, okay, so we’ll stop doing X.

I now see that nature also has IF laws. One group of nature’s laws are the laws of economics. The pertinent one here says,

If you are an elected official, you must either borrow or “print” money to fund entitlement spending or if you cannot do either of those, you must cut spending down to the level of tax revenue.

Many politicians look at that and say,

Oh, okay, so I’ll stop being an elected official.

That is part of what has been happening in the PIIGS countries. Also, in late April, in Holland

So then what?

This puts the ball into the court of the third parties and voters.

What appears to be happening in the PIIGS and Holland is that the mainstream politicians—bad enough to have made the mess to begin with—are replaced by ultra leftist demagogue parties. Their platform is either renounce the national debt or nothing but vague condemnation of austerity (cutting spending down to the level of tax revenue).

Essentially, the voters are debt-causes-cuts-in-entitlements deniers. The nation’s leaders need to deliver the bad news that the party’s over. But politicians never deliver such bad news. A number of elections are going on in April and May 2012 in the Euro Zone. We need to wait a month or two to see what will happen.

What appears most likely is

1. fractured parliaments that cannot govern

2. bond markets that either refuse to buy the debt of the nation in question or who charge interest rates so high that they make the necessary cuts even deeper

3. collapse of the Euro Zone or at least expulsion of one or more of the PIIGS

4. instant hyperinflation in the new (or return to traditional) currencies of the PIIGS

5. mass emigration into nations with stable currencies, possibly the good euro countries

6. total collapse of the new local government currencies in the PIIGS

7. an all-black-market foreign-cash-and-carry or barter economy in each of the PIIGS countries

The black market is also known as the free market. That’s good thing. But the black market lacks the rule of law which is a crucial ingredient of prosperity. If you get cheated or robbed or whatever in the black market, you cannot call the cops, because the transaction you were trying to do was, itself, illegal.

We already have black markets in the U.S.: drugs, cigarettes in high tobacco tax states, illegal immigrants, prostitution outside of the few NV counties where it is legal. Black market prices are also quite high compared to prices in normal countries with stable currencies.

Thomas Hobbes famously described life in a way that applies to an all-black-market economy as:

solitary, poor, nasty, brutish, and short.
Chapter XIII paragraph 9 of Leviathan

8. The ultimate result is what Zimbabwe recently did after five years of hyperinflation: repealed their legal tender laws and capital controls. Legal tender laws, which the U.S. also has, require that all sellers and lenders accept federal government paper money at face value. Capital controls, which the U.S. has had in the past and will have in the future because hyperinflation requires them, prohibit possession of gold or foreign currency.

Essentially, Zimbabwe said,

Alright. Forget about Zimbabwean dollars. Use whatever currency or money you want.

(A reader sent me a ten-trillion dollar Zimbabwean note. It says on it, “I promise to pay the bearer on demand Ten Trillion Dollars” and is signed by the head of the Reserve Bank of Zimbabwe. I have it on my wall.)

In other words, they made the black market legal, giving hope that the rule of law might be restored. Good luck with that after wiping out all respect for law. Zimbabweans, who had been using U.S. dollars, British pounds, euros and so on in the black market then simply began to use them openly.

There is a great danger that the public here in the U.S. might elect a totalitarian party to power once the traditional parties dissolve as a result of resignations and election losses. Hitler, whom some believe won in 1933 because of the hyperinflation ten years earlier, held no more true elections after the one his party won.

Ultimately, the voters and politicians of Germany ended up, literally, with a pile of rubble and millions of dead in 1945.

It was as if Mother Economics was saying,

So will you believe me now!? You cannot spend more than you take in!

It was then and only then that the people of the former hyperinflated countries of Austria and Germany decided to live within their means and maintain stable currencies. They subsequently prospered.


• rule of law
• economic freedom
• property rights
• stable currency
• certainty as to rules governing long-term contracts and investments

The leftist parties say we do not need those five foundation blocks. We can simply take control of everyone and every thing and force them to do what we want. This is the Soviet, North Korean, Communist Chinese before partial capitalism, Cuban model. It is slower acting than hyperinflation and war but eventually produces the same pile of economic rubble.

John T. Reed