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Archive for August, 2011

I don’t know enough about the European Union to comment much. I rely on more knowledgeable people to explain what is going in Europe and in international banking.

I do know that Europe formerly had strong divided nation-states, that allied, warred, each with independent governments, tax and fiscal policies, currencies (and defined on very different bases).

Now, Europe has a single market, no customs restrictions, no immigration restrictions, functioning with a single currency. Some countries continue to use two currencies (England), but the Euro is legal tender in all of the European Union.

It is more confederated than the United States was before the US Constitution was drafted and ratified. But, each state’s role in the European Union is more independent and significant than states’ roles are in the US.

There are US states that have larger budgets than some even major European countries, and a default on a state’s debt would be devastating. Many states are stressed financially, and a default on some state’s debt is a strong possibility, especially in a localized or generalized double-dip to the current recession.

The combination of unified currency but independent governments is regarded as the cause of the current global banking crisis (that resulted in 14% drop in the global stock market valuation in 3 weeks, and that was without an actual default). European countries are known to have a strong social welfare orientation. There is some racial and regional division though, as the northern countries are regarded as fiscally confident siting the combination of “strong work ethic” with social welfare state, in contrast to the accusation of Greece, Italy, Spain, Portugal, Ireland, as not having a strong work ethic, but only the social welfare expectation.

I don’t know if it is true or not, or how anyone could assess even.

The accusation is that the south borrows without hope of repayment, without hope of working their way out of debt, while the north borrows with the hope of working their way out of debt.

Europe is in a state of tension now though. There are times when it looks like the whole European Union could devolve or even dissolve.

If each country reestablished their own national currencies, in addition to a strongly backed Euro that can be exchanged back and forth, that might be a good thing, even if the Euro is valued at a premium. (ie statutory 2 -3% exchange premium favoring the Euro over national currencies).

While the integration of Europe is a jewel (international travel is easy, work permission is easy, cosmopolitanism reigns), there are severe problems with the dominance of continental scale economy over an ecology of market scales that includes continental but also regional and local.

The United States is the teacher. When the US Constitution included the “commerce clause” permitting non-tariffed inter-state commerce, the scale of the US economy became continental (after completion of “manifest destiny”). The rationale of economic management determined the scale of market served by different organizations. When the costs of communication and transportation reduced significantly, all limitations to continental commerce disappeared.

There was a natural tendency towards economies of scale, which came to include all facets, not just siting and manufacturing economies of scale. With the implementation of continental media and advertising, economies of scale came to apply to manufacturing, logistics, marketing, ownership.

Now, the supply chains and markets are global. But, it took a long time to even extend continentally, and only culminated at the end of the 20th century, with the presence of ubiquitous global retail. Before then, regional retail was the largest scale.

The consequence was the demise of regional enterprise, regional retail, regional manufacturing. The social consequence of the demise of regional enterprise, is a dangerous economic fragility resulting from reliance on single or very few alternative paths. If there is a bankruptcy, a natural disaster, a war, that affects a fundamental commodity or supply chain, billions of people will go without.

In the finance world, so much is interdependent, multiplied by the valuation process of modern finance (a million dollars profit doesn’t add or subtract a million dollars to a company’s valuation, but ten million), and still reliant enormous leveraging (speculating using borrowed funds). So, the threat of default of one thousandth of the world’s debt, sends the valuation of all financial entities’ stock value down 10%, one tenth.

In contrast, a setting of ecology of currencies, currencies functioning at multiple social scales, encourages the development of intra-regional trade that gets very thick in value-addition and potentially universally.

In the states, that would work by the presence of the national currency – dollar, combined with say a New England currency, combined with a micro-regional currency (Pioneer Valley), combined with local currencies.

Banks would exchange currencies at a premium for the larger scale. For example, although the New England currency would be stated as NE$ and required to be accepted by retailers at the same valuation, it might be redeemed at .96/dollar. Similarly, the Pioneer Valley currency might be redeemable at .96/NE$ or .92/$. And, the Greenfield MA currency might be redeemable at .96/V$ or .88/$.

Banks could then profit on the issuance of local currency, but the local economy would be enhanced far beyond the loss in currency premium, by individuals exchanging very thickly locally and regionally, particularly on value-adding labor-intensive economy that results in enhanced employment.

Just a thought.

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We have a mediocre, but very expensive, government.

We have neither good socialist governance, nor good libertarian.

We have neither a confident safety net, accompanied by full employment, nor an open entrepreneurial playing field with confident volunteer or peer constructed safety net.

And, neither is proposed Actually, BOTH are proposed by rational democratic policy makers.

From the libertarian perspective, our tax rate is too high. The government has and continues to pay for things that are social in nature, not mandated by the constitution. It is too high due to prior commitments and expenditures over a long long extended period, (amped up by powers of ten under the Bush administration).

The natural tax rate for an “originators” constitutional obligation would be in the 14% range, if that. But, that would entail renouncing the US role in world affairs, thereby decreasing the defense budget and establishment, and also renouncing defense of critical US supply chain for oil, minerals, labor. We would have to be self-reliant, which we are nowhere near close to.

Further, the US would become a banana republic, in which private militaries overwhelm public and lawful. Mexico would be our model.

Free enterprise. Hard to know if universal regulation and disclosure would prevail, or only contracted or subscribed regulation and disclosures would.

In a libertarian society, there are still options for voluntary social welfare associations, permanent ones, that could resemble, or even improve on the ones provided by the federal government.

In a socialist society, the government and/or voluntary associations, would provide for full employment, primary personal and infrastructural needs (water, food, housing, energy), cradle to grave. The worst that anyone could experience is boredom.

The natural balanced tax rate in a socialist setting is in the range of 40%. There would still be affluent and somewhat stressed, but not the absurdly affluent acquiring primarily power, and the desparate poor.

The Clinton middle ground, with average tax rates of 30% is a balanced middle way.

Not a lot of “we” feeling going around among leadership. The insistence on government not paying one’s way and simultaneously demanding reduction of deficits, is just wierd.

Its been a long time of overspending, of not paying our way. Fighting two simultaneous unfunded wars at $100 billion/year for ten. Stealing (borrowing) from the social security trust fund as if they were simply government revunues.

The federal government is attempting to go corporate, cynical corporate. The one’s that declare bankruptcy to void pension obligations.

All, in the name of being a “promise keeper”.

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