Tuesday, May 29, 2012

First Reaction to Huerta de Soto

Below I have printed Jesús Huerta de Soto's In Defence of the Euro: An Austrian Perspective, while I consider the piece important in bringing out discussion of flexible exchange rates versus fixed exchange rates versus gold, I can not agree with de Soto's conclusion on the value of the euro.

He writes:
the euro has ended monetary nationalism
This is true, but it has replaced monetary nationalism, with a super central planning for 17 countries.

DeSoto then takes the brave step and says:
for the states in the monetary union, it is acting, even if only timidly, as a “proxy” for the gold standard
Given the propping up the ECB is conducting of the debt of such countries as Spain and Greece, this is a bit hard to swallow.  The distortions are massive, even if the money printing has been sterilized by drains elsewhere.  These distortions simply could't go on under a gold standard. But aside from this propping up activity, de Soto seems to think that there is some type of inherent restraint on money printing because of the euro's very structure. In fact, the limited money printing to date may be the result of the historical accident  of  Merekel-Sarkozy influence over the ECB that may now change with the election of France of Francios Hollande.

Indeed, one must ask, who is in a better position right now relative to the future health of their economies, the  northern eurozone countries, who may in the not too distant future suffer serious price inflation as Hollande leads the ECB into a massive printing scheme or Switzerland, which has remained outside the eurozone?

The obvious answer is Switzerland. No one is fleeing the Swiss franc, many are fleeing the euro.

The more centralized any sector of an economy gets, the more difficult it is to keep stability in such a sector, even the money sector. Political pressures will simply pull the sector in different directions leading to all sorts of distortions that would never occur in a free market. It appears we are about to witness this in the EZ. If the entire experiment doesn't fall apart, massive money printing appears the next step now that power appears to have moved to the southern EZ countries. This is as far from the gold standard as you can get.


  1. I like Huerta de Soto very much, and consider him the greatest living economist. But in this matter Sir, he is wrong and you are 100% right.

    1. Just goes to show that he maybe the greatest living economist, but he's still human. How long will it take for him to realize the error of his thinking?

  2. The best Austrian exposition of the Euro and the broader Eurpean Union can be found by Phillip Baggus http://mises.org/books/bagus_tragedy_of_euro.pdf

  3. Sound Money will not be imposed from the top down or reached by any kind of consensus.

    One country will lead the way and slowly but surely the others will have to emulate.

    If the Euro breaks up into 20 currencies, the chances of one of them doing the right thing will be much higher.

  4. a "gold standard" is exactly what gold was revalued from $20.67/oz to $35/oz under.

    all these national currencies could themselves operate under a gold standard, since they too could be priced against gold, with that price fixed by the government. in that light the euro is a proxy in that they are not using gold, but the euro. i would happily describe this as "timid," since the authorities behave almost entirely different under this system as they would if fixing the currency price in gold.

    perhaps there is more of what he wrote worth quoting?

    were you thinking of the 100% gold dollar? this is an idea that is not as ambiguous.

  5. I would have to say he is right and wrong. Basically, the EURO is one shit can replacing 15 or so other shit cans. So, the amount of shit one has is still the same, but at least, as he pointed out, they can't print more money. This is true. He also points out that having one currency can take away the political influence of the nations on their respective currencies. Fine, but at the same time the EU is the new political influence, and is above and beyond the independent nations. I'll take nationalism over globalism any day.

  6. Having grown up in venezuela and educated here, I would have to agree with de Soto 99% of it. I wish we had the same discipline the Germans have or more. I have seen whatever stupidity politicians can come up with, and people are happy with them.

    An ideal scenario, in my view, would be that those countries have to impose extreme cuts, get rid of unions, no bailout, eliminate tariffs, and entitlement systems once and for all. Somalia looks a real free market economy compared to Europe and California.

    As RP said, until the public opinion changes, we will keep electing the same politicians on both sides.

  7. Huerta de Soto is saying that the euro is preventing a lot of governments from inflating their way out of debt because they don't control their own currencies. While it is possible for the ECB to inflate, regardless of any legal restrictions as they have routinely ignored them; it is difficult for that to happen because it requires a political consensus. While Merkel might be able to hold out against Hollande, we can't be sure; and Merkel must face re-election soon herself. This makes the euro a very imperfect device for restraining inflation.

    Mr. Wenzel's criticism would be more solid, however, if it could be shown that the gold standard was an effective device. History shows, however, that politicians can, and do, fiddle with the money supply even without the existence of a central bank. We did so frequently in the 19th Century. We printed dollars. We coined additional silver. State banks accepted state-chartered bank notes in payment of taxes making them virtually as good as legal tender. Devaluation is always an option.

    DeSoto's remarks, I think, need to be seen in the context of a discussion of imperfect systems, not as a contrast with an unattainable ideal.