The Austerity Fallacy

By Marc Gauvin

Copyright © 05/2015 rev. 7/2015
Reproduction expressly granted provided attribution is given and original link is provided.

 Quae ab initio non valent, ex post facto convalescere non possunt.

(what initially is invalid cannot be made valid subsequently)


With the upcoming threat of Greek default and the panic that will ensue this article is critical.  Understanding the real nature and full scope of money and finance is crucial,  as in doing so,  we see how artificial the crisis is and why there really is no valid criteria or logic in the proposed austerity.

There is a fundamental fallacy regarding so called debt crises, the idea is that agents or countries that are in debt,  cannot be allowed further credit because they will only increase risk in the system, therefore it is assumed (wrongly) that 'austerity' is the only solution.   However, this thesis is predicated on a lack of basic understanding of the mechanics of money that when understood, the fallacy of austerity becomes evident.  Note that this is further to other profound fallacies and logical inconsistencies that underpin the current false notion of money discussed elsewhere on this website see "Money, Measure or Commodity Not Both".

Surprisingly or perhaps not so, we hear nothing of the different permutations of transaction types illustrated below,  but by considering them,  we can see that not only is austerity not required,  but rather it can only exacerbate the crisis.

Transaction Types and System Balance dynamics

There are four permutations of transaction types that affect the aggregate balance of a system made of any number of such transactions that reflect the measure of value of goods and services yet to be reciprocated,  this can be taken as a measure of overall system risk as the greater the absolute value of this balance,  the greater the accumulation of goods and services that are at risk of not being reciprocated.

    1. Positive buys from negative (reduces system balance)
    2. Negative or zero buys from positive or zero (increases system balance)
    3. Negative or zero buys from negative (system balance unaffected)
    4. Positive buys from positive or zero (system balance unaffected)

To understand how this is the case we can contemplate the following example of a community whereby positive and negative balances are generated as a function of transacting goods and services between agents: 

transactiontypes

Fig. 1 Transaction Type Dynamic

Notice that of the four types of transactions,  only type B increases the net system balance or level of unreciprocated wealth i.e. risk. Therefore, by all agents being informed of both the system balance and current individual agent balances,  unreciprocated agents and over extended agents can be provided UNLIMITED credit for all transaction types except type B transactions.  Understanding this, avoids any need to paralyse any agent in the system because as long as overextended agents are capable of generating new wealth, overall system balance can be reduced progressively with any minimum number of type A transactions. 

What this means,  is that the solution to the debt crisis has nothing to do with limiting the credit of overextended agents but rather it has to do with the restraint overly positive agents must exercise,  i.e. by not selling to overextended partners but rather seeking to purchase from them i.e. effect more type A transactions. 

Thus, it would seem that the true solution to the Euro debt crisis, is that Germany stop selling to Greece, Spain, Portugal and Ireland and soon Italy and France,  and instead,  start buying more from these nations, while credit must continue to be extended to these nations as they fortify their economies by increasing trade between themselves via type C transactions.

However, such a solution is only possible if and only if the debt generated in the system is truly proportional to the value attributed to goods and services over time.  That is to say, if the debt is not proportional to the value of goods and services, then it is not caused only by the trade of goods and services,  but rather by other extraneous causes. Since it is well documented in the 2012 Bain Report "A World Awash in Capital" referencing the IMF and the OECD,  that global financial assets ($600 T) exceed the global real asset base of "tangible and non-tangible assets of all sectors" ($210 T) by close to a factor of three, then it is clear that the world's debts plus interest cannot correspond to any balance of trade of real goods and services (i.e. tangible and non-tangible assets). 

Therefore, austerity in terms of access to needed goods and services clearly is not going to solve such a crisis.   Similarly, if the trade of goods and services is not the sole cause of the debt, then this puts into question the very validity of the contracts underlying the so called debt crisis in terms of using these to 'justify' confiscation of real assets.  In which case, the universal criteria for the legal validity of contracts in international law must be invoked:  Quae ab initio non valent, ex post facto convalescere non possunt. (what initially is invalid cannot be made valid subsequently).

Hence and as discussed in Greek Debt Crisis Solved, the only legitimate resolution to any such debt crisis, must begin with an analysis of the historic value of trade balances of goods and services between debtor and creditors and NOT in terms of current fictitious money debt instruments. 

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