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Not “Adults in the Room” but “Children in Charge” Resolution of the Amsterdam European Council on the stability and growth pact “The Member States undertake to abide by the medium-term budgetary objective of positions close to balance or in surplus…” Consider another monetary union: TomDickHaria Each of Tom, Dick & Harry starts with €100: total money supply €300 Each starts with spending €200/Year on the other two Expenditure & Income Tom Dick Harry -200 100 Savings Aggregate expenditure €600 Aggregate income €600 Expenditure is income: GDP is €600/Year

Not “Adults in the Room” but “Children in Charge” Kingdom of Tom decides to aim for budget surplus of 5% of GDP/Year (€10 in 1st year) Expenditure & Income Tom Dick Harry -190 95 100 -200 Savings +10 -5 Tom’s surplus €10 Aggregate GDP €590 €10 fall in GDP Tom’s savings causes equal fall in GDP Aggregate savings €0 Kingdoms of Dick & Harry aim to restore balanced budget Cut spending by €5/Year Aggregate GDP €580 €10 fall in GDP Dick & Harry’s savings cause equal fall in GDP All 3 fail to meet savings targets Aggregate savings €0 Expenditure & Income Tom Dick Harry -190 95 97.5 -195 Savings +5 -2.5

Not “Adults in the Room” but “Children in Charge” Tom decides to aim to overshoot: spend €10 less again Dick & Harry only reach halfway to balance: repeat €5 reduction in spending Expenditure & Income Tom Dick Harry -180 90 95 -190 Savings +10 -5 Tom’s surplus restored €10 Aggregate GDP €560 €20 fall in GDP Savings by all three causes equal fall in GDP Aggregate savings €0 Kingdoms of Dick & Harry decide to overshoot: Cut spending by €10/Year Expenditure & Income Tom Dick Harry -180 90 Savings Tom’s surplus eliminated Aggregate GDP €540 €20 fall in GDP Savings by Dick & Harry cause equal fall in GDP Aggregate savings €0

Not “Adults in the Room” but “Children in Charge” If Tom tries to restore his surplus target… End result of this process is a GDP of ZERO Individuals save: economies (and Unions of economies) cannot Collective increase in money requires more money to be produced Who produces money? Countries, by exporting more than they import Trade surplus converted into domestic currency by Central Bank Only sustainable basis for EU objective of surpluses is Mercantilism Banks, by creating more debt than is repaid Bank-originated Money and Debt (BOMD) creates money & debt at same time Bank money comes with identical debt liability for recipient Governments, by spending more than they tax Government deficit creates liability-free money for recipient “Stability & Growth Pact” objective makes this negative, thus destroying money rather than creating it

Not “Adults in the Room” but “Children in Charge” Pact ignored private debt on basis of childish Loanable Funds model Banks as Intermediaries: the Ashley-Madisons of Money Real world: Banks Originate Money and Debt Bank of England: “Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.” Bundesbank: “banks can create book money just by making an accounting entry: according to the Bundesbank's economists, "this refutes a popular misconception that banks act simply as intermediaries at the time of lending” Bank of Norway: “The bank does not transfer the money from someone else’s bank account or from a vault full of money. The money lent to you by the bank has been created by the bank itself – out of nothing” Macroeconomic consequence of this: Bank credit (annual change in bank debt) adds to aggregate demand…

Not “Adults in the Room” but “Children in Charge” Tom takes out a loan of €10 (not shown in this table) from the Bank & pays 10% interest on the loan to the Bank Total expenditure is total income equals €612/Year Turnover of existing money as before (€600/Year) Credit (€10 in first year) Gross financial expenditure (€1/Year interest) Finance sector expenditure (€1/Year) … Expenditure & Income Tom Dick Harry Bank -(200+10+1) 100 100+10 +1 -200 +0.5 -1

Not “Adults in the Room” but “Children in Charge” Pact allowed huge credit bubble in countries that followed Pact policies: like Spain Government could cut its debt because of huge stimulus from private credit Reached almost 40% of GDP equivalent in 2007 Crash when credit collapsed to -20% of GDP Rising government debt after crisis a symptom, not a cause

Not “Adults in the Room” but “Children in Charge” Credit-Unemployment dynamic obvious for Spain: Same dynamic in all “Walking Dead of Debt” countries that had crisis in 2008 (& Japan in 1990) Data available at http://www.profstevekeen.com/d ata-on-credit-employment-and- house-prices/

Not “Adults in the Room” but “Children in Charge” Same processes apply in Greece. Pact let private debt bubble build…

Not “Adults in the Room” but “Children in Charge” Credit drove economy up as it rose, down as it fell As in TomDickHaria voluntary austerity, EU-imposed austerity is destroying GDP as much as it reduces government debt Recipe for permanent collapse Keeps private sector in permanent deleveraging mode Only reason for slight recovery since 2012 is decrease in rate of deleveraging

Not “Adults in the Room” but “Children in Charge” “Stability & Growth Pact” actually a pact to destroy money Answer to “How can Greeks save more money?” is “Only if government creates it!” Pact prevents this & destroys money in Greece equivalent to surplus target Greek response is falling GDP, continued deleveraging… “If a country or region has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to Emigration as the only alternative to poverty or starvation.” Wynne Godley 1992 Greek Austerity is the Irish Potato Famine of the 21st Century The “Stability & Growth Pact” is the Potato Blight of the 21st Century

Not “Adults in the Room” but “Children in Charge” Politicians can’t be entirely blamed for destructively childish policies when these are the product of mainstream economic theory We need realistic, adult, monetary macroeconomics to avoid catastrophes like Greece

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