Mosler, Habermann and Bagus: Questions & Answers | Conclusions. The Crossroads Workshop 1 in Zurich

Many thanks to all three speakers for their substantial presentations. I'd like to invite all three to take a seat on the podium. We still have time for some questions. I guess there's a microphone circulating in the room.

Yes, who would like to? Oh yes, please. It's coming right away.

Why would Warren Buffett accept higher tax rates for himself and his friends?

My question is for Philip Bagus. I see a whole lot of evidence running contrary to some of the statements that Philip Bagus did earlier. If the euro worked like this with excess deficits and excess supply of money all around, this would be an area of strong demand and inflation and unemployment, and rather we have a deflated economy and nearly 20 million people unemployed. I also see a lot of evidence contrary to the fact that southern countries were saved by the euro by getting rid of the Bundesbank discipline. As evidence, ever since the convergence to the euro started in the early 90s, the economic performance of the southern European countries has been very dismal. Italy is one good case in point: the income per capita in Italy today is lower than in 1992 when the convergence criteria started with the Maastricht Treaty. But the main point of my question is this mechanism that Professor Bagus described, by which European governments cannot print euros but they can print bonds, and by printing bonds this initiates a mechanism which expands reserves, expands credit, and ultimately is inflationary. I see no practical foundation that I can see of this mechanism. Two things: one, when banks buy the bonds, their reserves get debited, and when they use the bonds as collateral to get reserves, the reserves get credited, so we're back to square one. They haven't gained any reserves. But even if they gain any reserves, banks are not constrained by reserves in making loans. We are in one of the capitals of banking in Europe, so we may ask some bankers around here if when they make a decision about lending to a client, they first check with their Treasury office and check if the bank has enough reserves. It doesn't apply. It just doesn't work like this.

Is it on? Yeah. So many questions. Will the unemployment... Well, there was a huge credit boom as you have seen during the early 2000s. There's been huge malinvestments, for example the housing sector in Spain, but also the public sector in many countries. At some point it became obvious that these were investments caused by easy money, artificially low interest rates. And there's now a readjustment of the structure of production going on. For example, the housing construction sector in Spain has to shrink. It does not make sense to prop up demand for houses so that every year 1 million more houses can be sold in Spain, because there's no need for more houses. So the cause of the crisis is not the lack of demand; the cause of the crisis is the structure of production producing 1 million houses that is not in line with the demand of people, what people want most urgently. So it's not a problem of demand, it's a problem of the structure of supply, the structure of production that is not in line with consumer wants. Then we have unemployment. People get fired in the construction sector. If the labor market is very inflexible, it takes time for them to get new jobs because no one will hire in such a situation with so much high uncertainty, in a situation where all private savings basically go through the banking system to the government to squander it, a situation where relative prices are not allowed to adapt, and where the public sector does not reduce its overexpanded size, then the unemployment will persist as we see in Spain. The second question was on living standards. Italy is an exception in the sense that their living standard from 1992, as you said, did not increase but actually fell. Well, I could say it would have fallen more without the euro. If you look at the other countries, you see that consumption, as we have seen, is the important thing. Consumption rose very much in the south of Europe, except Italy, during these years, while in Germany living standards measured by retail sales were constant. It's clear without the euro, Germany would have had a stronger currency, could have imported more—you said imports are important—and southern Europe would have had a weaker currency, so they would have been poorer. Basically, living standards have not increased at all. The export sector increased, as you also said, but this is not the important thing. You can't send goods for free to the South, which basically has been done as long as you want, but it doesn't give you real wealth. So basically, less Mercedes would have been sold to Spain, more would have been sold in Germany. That would have been the difference. And your last question was that bank reserves are not important. Well, for the system as a whole, they are important. They determine the limit that banks can expand credit, and the ECB actually lowered in January last year minimum reserve requirements from 2 to 1%. If it would have no effect, then why would they have done it?

There was a question here at the back on this side. Yes, please.

Yes, there. I have two small questions for Philip Bagus also. The first one, I think because I was a little bit late, you haven't mentioned the ELA program. ELA is for Emergency Liquidity Assistance, which in my view is probably one of the best symptoms of the tragedy of the commons, where even no collateral is needed for national central banks to print euros. It reminds me of the situation in Yugoslavia just before the hyperinflation episode in the early 90s, where you had the Federal Bank of National Bank of Yugoslavia like the ECB, and then you had national central banks printing dinars at the time. And the second question... actually it's okay, one question. Thank you.

Yeah, that is true. I could have mentioned ELA, for example, when I talked about governments don't have a printing press. But then the crisis has shown that ever more limits have been fallen. For example, the lowering of the collateral requirement from BB- to now junk, and ELA is another incidence of this. The euro is a political project, and it seems that they will do anything to save it. And if they do anything to save it, the tragedy of the commons is in place. And ELA is a very... it's an incredible monetary policy from a German Bundesbanker point of view, which is already not my point of view, but even from theirs, it's just extraordinary that they can, without any collateral, print money to finance their zombie banks.

I'm like one of those European Commission guys in 1999 who had the wrong degrees to be making a comment in this meeting, so I apologize to the audience. I'm a biologist. So just one remark on what Philip Bagus said. I don't think that wages are higher in Italy because the cost of labor is high in Italy. Wages are devastated by direct and indirect taxation, and so this makes a huge difference in the way you approach the problem. And the result of that was powerful lobbies that retain jobs for life, and young people, particularly people below 30 years of age, who have no job whatsoever. And that's where the Grillo phenomenon came from. I have a question for Warren Mosler. You propose two alternatives to the current disaster: one is to lower taxes and the other is to increase government spending. And if I'm right, the two are not independent variables, and the government seems to have the upper hand all the time. So my point is, government spending is not necessarily to support the economy; it is to hire, to buy a government's constituency. So how can a country remain competitive on the world market if you rely on government spending?

Just let me clarify. When I said wages are too high, I'm meaning total labor costs. So you're perfectly right. What for the company is important is of course total labor cost, not what at the end of the day the worker gets in his pockets. So total labor costs are too high. Your statement comes across as very unpopular. I can live with that.

Is it back on? Yes, okay. The question had multiple parts to it and they were contradictory, so it's a little hard for me to get started. But let me back up a touch. Number one, Professor Tery is correct that the process doesn't add reserves to the bank, and number two, that banks are not constrained by reserves with floating exchange rate, which is what the euro is. On a fixed exchange rate like Hong Kong or the gold standard, they are constrained. The European policymakers have that confused. I've met with them directly, I know they have that confused, and there have been papers from the staffers, the staff workers at the ECB, that do understand it, try and clarify it for the policymakers, who then continue at least to now get it wrong. We've got the same problem at the Federal Reserve. We've got senior staff people we talk to know exactly how the process works, and then when they try and get to the political appointees, they don't have so much success. And that's part of the problem with what's going on. I'm going to... can I ask them to restate the question maybe? Because the question was about how is a country where the labor costs are too high supposed to compete internationally. The country is about the effectiveness of... oh, okay. Yeah, assuming that the government is trying to promote growth of its own economy, that's fine, but not the case. For instance, in my country, the government's main purpose is to buy some constituency, right? Right. So they do anything for that. We were talking about people moving stones back and forth, right, and not producing any... well, yeah, that is not my first choice of policy. As I said before, my first choice for the US, for example, was to eliminate the payroll taxes, the FICA taxes, which would add... and so the government would stop taking $600 a month out of the paychecks of families working for a living, so they could make their mortgage payments, make their car payments, and sustain a normal economy. To Professor Bagus's point, capitalism is driven by profits. So back to Professor J's point, you've got to be able to sell your product to make profits. And when you can't do that at the right price, then you're going to not produce and not offer your goods and services. Which circles back to my point: the way capitalism works is businesses compete for consumers' dollars. The government has a monopoly on the currency. When they're restricting supply so it's not enough to cover the tax liability and the savings desires, there aren't consumer dollars available for businesses to compete for. When there aren't consumer dollars, even the best businesses fail. So we had a problem in the car industry in the United States because car sales collapsed because everyone had their credit cards taken away. So car sales went from 17.7 million to 9 million. Even Toyota, the most popular, who had the best cars, lost $4 billion in one quarter. This is a pure lack of consumer dollars available. And the government, because it's a monopolist, cannot rely on the market to do this. A monopoly and markets are completely different ends of the spectrum. If we could have a currency that wasn't a public monopoly, that was somehow some kind of a private exchange system, everything I'm saying wouldn't be true. But the reality is now we do have public monopolies for currencies, and we've got to play the cards we're dealt until we're dealt different cards. Did I get to... okay. So in terms of the public sector, look, it makes a difference whether the government builds the Panama Canal or whether it blows it up. They're both spending, they're both public spending. If you build a Panama Canal, you've lowered your transportation cost, you've increased productivity, your real terms of trade increase, everything pays for itself in terms of real investment resulting in real cost being lowered for shipping and whatnot. If you spend the same amount of funds to blow it up and make sure it never opens again, you've then raised your costs of trade, you've thrown a monkey wrench into the wheels of commerce, your real standard of living is going to fall. However, whether you build it or blow it up, you can still have full employment. So full employment is a different matter. Number one, you always want to have full employment so that whatever you're doing, you can get the most out of your people. Number two, equally important, is what they do. So if you fully employ people to fight a war, that's not nearly as good as fully employing people to rebuild your cities, unless you're being attacked. So I 100% agree that it matters a lot what you do with everyone, but you also want to make sure that everybody who's willing and able to work has a job so that they can contribute to the output.

Some here, please. Basically, the microphone is just coming. Basically, what you're saying here is that the cure would be to inflate more money into the market, actually to government spending, bringing more money to the market so that the unemployment disappears and companies, private companies, benefit from having more money available so that they can... but okay, but yes, the reason the economy needs more government spending is because of the government tax. Understand? Okay, so if you're going to tax so much, you better spend that much. If you don't want to spend more, fine, cut your spending, but then cut your tax, because the tax is creating the need for the government spending. Sure, sure, okay. So it's a self-created thing. But the point here is actually the iniquity in the European market. I think we have Greece, for instance. They have not collected, I would say, they have roughly collected a small amount of available tax. That's one point. Then we have a situation, for instance, with relatively high labor costs in Italy based on a national phenomenon that people like to spend less time at work if they can afford it, to live a good life by having easy access to credits. And in the past, the Italian government has coped with that situation by devaluating the currency, and by that making the labor costs internally cheaper so that they can compete on the global market and sell better products. And this procedure, I cannot see how that procedure...

So here's how. Everyone agrees that Italian labor costs are high because of the taxes. Not only... yes, not only. I would say not only, no, but that's a big part of it. Government spending. Yes, no, no, but what I'm saying is inflexible labor market. The cost of labor, if you eliminated the taxes on labor, that would go a long way. Right? So in Italy, that would be an appropriate tax to eliminate, and that would allow for more consumer dollars that could then compete, and then businesses could open up to compete for them to make profits. So again, you can play it from either side. And in the UK, I would say eliminate the VAT tax. The important thing is to cut government spending, yes, because if you spend something, it means that you have sucked real resources out of the private sector before. Yes, and the government spending... and this is the problem. Okay, I agree that government spending takes resources out of the private sector. The real tax is paid when those resources move from the private sector to the public sector. The rest is the nominal tax. That's the real tax. But when the private sector has 20 or 30% excess capacity, it's not restricting anything. It's at full employment. Now in the neoclassical model, you always have full employment, so government is always taking... there's always a trade-off. But again, the excess capacity, for example in the construction industry, only shows that this industry has to shrink. Oh, we agree, we all agree on that. So if you're in a situation where the structure of the economy is maladjusted, then what you have to do is to ease the restructuring. And of course, if at this moment consumption also drops as a consequence of the former boom, because the construction sector reduces its size and then consumption drops, how can you speed up the recovery? Well, flexibilize labor markets, reduce government spending so that more real resources are actually available for business to restructure. If in this situation you increase government spending, using resources from the private sector, then you're killing them off actually. You're shrinking potential.

And then I want to say, to make it more popular, not all wages are too high, or not all labor costs. For example, in Spain, if I was working in the construction industry in the boom years, I earned 4,000 a month, and I now get unemployment benefits of 3,000, so I don't really look for a new job. This guy probably, in his new business, if he doesn't have a formation, a very good formation, has to offer... some people, an advisor to a regional government who earn incredible amounts of money paid out of taxes from the construction boom. Maybe this person in the private market also would have a lower wage. I'm not saying that all wages are too high, it's just relative. Some of them are too high.

But the question was, is the cure just to increase government spending? That cure in a situation of...

Okay, all I'm saying is it'll make the numbers work. It won't necessarily... you can get back to full employment doing that. You can just have the government offer a job to anybody who wants one at some minimum wage, and then it could act as a transition job, for example, like an employment force. And then as the private sector picks up, it would hire these people away. You could do that. Your checks will not bounce. Does it optimize real standards of living and real terms of trade? That's a different question. Can you do it? Yes. Is it so... these are political choices. I'm trying to stay out of the politics of it by showing the options. But yes, you can certainly do that.

We still have time for two questions. Mr. Metela, yes.

Thank you. I'm always surprised when I hear that there are multiple causes for inflation, because there is really only one. The only valid definition for inflation is that all prices go up at the same time. If that's not the case, like for example when gas prices go up, that means consumers have to make a choice: they have to buy the same quality and quantity of gas and buy less of something else, which will necessarily drive prices down for those goods that are less under demand, or they reduce their demand for gasoline. So this is not inflation. Secondly, I find it absolutely amazing that the one thing we haven't heard about yet is that money is information. When they create inflation through any methods, European Central Bank, Fed, etc., what they really do is that they completely mess up the information that is conveyed by the currency. That means that you have a complete mismatch between, for example, available resources and demand, etc., because suddenly you shift resources to places, to people who produce stuff that might not at all be under demand, or not under such quantity, or not at that price, etc., because suddenly they get all this fresh money and they create new demand which is completely inconsistent with the actual structure of production and the structure of resources and the real demand of the people. So this completely gets lost in all this talk about the technicalities of how central banks create money, etc. It completely destroys the information that actually keeps the economy alive. Which means that no matter how sophisticated they are about controlling the emission of money and how they do it, no matter what, it will destroy the economy and it will create unemployment and poverty, etc. It's inevitable. So I don't even think there is a choice between increasing government spending to maintain supposedly full employment or reducing taxes. It's not an option. It's like Mises said, it's not like drinking. There is an option between drinking milk and drinking potassium cyanide. They don't have the same effect on the body at all. In fact, one is deadly and the other one is keeping the body alive. So I think it's really... I know that you try to remain neutral, but one cannot remain neutral. It's two completely different things. If you keep spending more, you just keep destroying the economy, and we know from the past, 70s stagflation, that more government spending actually destroys more jobs than it creates. So ultimately, the more spending you do, the more unemployment you will have at the same time as you have higher inflation. So it's not an either/or. You get all the bad things. Whereas if you actually lower taxes and you get people back to work and you lower inflation and you stop emitting new money, then you actually get all the positive effects. So I think there is that. Any comments on that?

Yeah, let me just say that that's the story you read in the newspapers every day, and none of the evidence supports it. But people believe it, and that's why as a person in the financial markets, I place my bets on people believing exactly that, and exactly the things we've been hearing. I don't deny that, and that's why I think we're in for very difficult times ahead, and we're in danger of losing the civilization. So I can't blame people for listening and repeating what they're hearing on the news and from the political leaders and from all the mainstream economists, because they're going to do it. In the meantime, I don't know, maybe I'm just crawled up in a hole somewhere thinking, you know, I know how all this stuff works. I've been in central banks, I know how the checks clear, I know that when Warren Buffett and Bill Gross of Pimco say if the US gets downgraded interest rates are going to go higher, I know they're going to go lower. Now, I didn't have a single person on TV agreeing with me, but in my account at this bank, the portfolio I was running, we were up 60% for the year going the opposite way those people went on that particular trade. Other times they're right. The crowd is not always wrong. You cannot make a living being a contrarian all the time; you're going to lose a lot of money. But there are times, now it's been two or three times a year, where the crowd is wrong. Double-dip recession coming into the United States last year and the year before, everybody remembered that the stock markets though, because I'm sitting there telling myself and my clients, 'Look, we have a 9% deficit.' They go, 'Yeah, that's why the economy is going down.' I say, 'No, you will never get an economy go down with a 9% deficit like the United States. It's too much support. You might not like the government spending, I don't like it, but don't bet your money that this economy is going down because it isn't.' And it didn't. And that happened twice. And now we have the opposite, big tax increase, and everybody's going, 'Oh, that's not going to hurt the economy.' It's like, okay, maybe it won't, but I wouldn't bet on that. I wouldn't bet your money that a tax increase and a spending cut, which they did in the UK, which they've done in every European country, isn't going to hurt the economy. And in fact, it has hurt the economy. Now you can call it a one-time event, whatever you want. I have a pretty consistent picture. Simple accounting: here's a debit, here's a credit, they have to add up. And if they don't, something's going to give. So I can't go specifically to everything you said because you said a lot, but if I did, you could see how each step of the way they have given you wrong assumptions that get compounded. The banks get reserves and make loans. Wait a minute, as Professor Tery said, that's not how it works. And of course, everybody knew that once back in the old days, but things get forgotten and have to be relearned again. And then you have to stop and redo the whole thing. So we can do it privately if you want. I'll give up the microphone here.

I agree with you that we haven't talked enough about the effects of inflation, which are very important, especially because it's proposed as a solution for the situation we are in now. As I said, the only solution is to restructure the economy, and therefore printing more money, more inflation, doesn't help at all, because this new money is used to prop up businesses that should be liquidated, that should be reduced in size or disappear totally, and free up resources to build something that is sound. Inflation always produces redistribution, a change in relative prices, distorting the structure of production, leading to malinvestment. And in this case where we are now, it also produces terrible moral hazard. If you bail out banks again and governments again, you will get more of the same as before. Too loose monetary policy brought us into the problem and will not bring us out of it. Thank you very much.

Ladies and gentlemen, I'm afraid that's all we have time for for now. It's been a pleasure chairing this panel, and I'd like to thank again our speakers Warren Mosler, Ulf Habermann, and Philip Bagus. And I'd like now to hand over again to Mr. Larini, the president of Fact Family Office, for some concluding comments. Many thanks again.

To be short, to the point. Thank you again everybody for being here. I think we've been listening to a lot of interesting things. It was a moment for me too to stop from the operation. I think for many of us who could stop and think about what is happening around us, the debate can continue on Crossroads, so in our information portal. And I think we want to bring further and a step ahead the discussion. So this is a first meeting, a first event, and we want to create the opportunity to do other events together and bring our vision of society, maybe in other cities apart from Lugano, as we are doing already as a family office in Hong Kong and with the presence in Moscow. Just to sum up, I want to invite you for a refreshment now here outside. And I thank you again everybody, the speakers, and all of you, and all my people who have been supporting us to create this important event. Thank you very much.