The Return of the Peseta: Spain Strikes Back

There is only bad news emanating from Spain. The country is ensnared in a debt trap, which may be explained with the aphorism , “the more the debtor pays the more he owes.” In the present situation, Spain has enacted austerity in an attempt to right its fiscal condition.  Considering this term in light of your household budget,  Spain is merely cutting back its spending.

When you budget your expenses against your income every month, you want to maintain at the very least a zero monthly deficit. Outlays for shelter, food, savings, clothing, healthcare and entertainment should not exceed your monthly income.

A monthly budget is a very simple concept that every responsible adult learns from his parents and from his initial experiences after leaving the nest. If your income decreases, you cut back. Maybe you don’t go out to dinner as much, or you keep that old winter coat an extra year. By decreasing your spending, you get by.

Budget cuts do not work like this in the complex system that we call the economy. Economists talk of the multiplier effect, and it is a simple concept. When Spain spends a euro, it becomes someone’s income. That person spends the euro, and it becomes another’s income and so on.

But the system works in reverse, too. If Spain cuts that euro from its budget, all of the spending down the line that would have occurred disappears from the economy. This dynamic is problematic, because Spain is relying on these transactions for tax revenue. The disappearance of that single euro leads to tax revenue decreasing. Therefore, Spain must cut its budget even more in an attempt to balance it, which again leads to additional decreases in tax receipts and so on.

This is not a theoretical proposition. Look to Greece to see what the true effects of an austerity plan are. Over the last two years, we have observed that the more Greece cuts, the more it owes. Spain has been caught in the trap, and there is only one way out, a default.

Before I explain to you default, I must warn you that I am about to use Latin, and it will suck. Anyway, when you exceed your household budget for too long and can no longer afford to pay your credit card bills, you will stop paying them, which is called a de jure default. “De jure” is a Latin term which means “of the law.” You signed a legally-binding contract with the  credit card company where you promised to pay the debt. If you cannot, you have legally defaulted, and the credit card company will pursue a case in the legal system to collect on the debt. A de jure default is the only way that a private entity welches on its debt.

If you are lucky enough to be a sovereign state and not just a guy who lost his job, you have another default option available to you. This is known as a de facto default. In Latin, this means a default in fact. While the country still pays the debt, it pays it in a devalued currency. Legally, the country has not breached the agreement between itself and its bondholder, but because the bondholder is getting back less actual money through a cheaper currency, the situation is still considered a default.

The United States has a long history of maintaining its creditworthiness starting with the assumption of the Revolutionary war debts from the states in the late 18th century.

In 1933 the United States was out of money and in danger of defaulting on the national debt. Once a country legally defaults, it carries that stigma for decades. A de facto default is treated differently.

Rather that writing down the outstanding amount or refusing to pay it outright, the government elected to devalue the dollar by resetting the price of gold from about $20 per troy ounce to $35. With the stroke of a pen, the debt was now 30% less. The next time that someone tells you that the United States has never defaulted on its national debt, you can reply that it just has never legally defaulted.

The United States is not alone among the Western democracies in using a currency devaluation to reduce its indebtedness. Every currency in existence has been and continues to be devalued.

This option is currently not available to Spain because it no longer has its own currency. It shares the euro with 16 other nations. If you are a rich country, you get a weaker currency than you deserve. A poorer country gets a stronger currency that it should,  and there you have the current problems of Spain, Italy, Ireland, Greece, Portugal and Cyprus.

A stronger currency makes these countries’ economic output more expensive to the rest of the world, so they are able to sell less of it making them less well off. Bad news for these countries is good news for Germany, Austria, the Netherlands and Finland. A weaker currency, still the euro, makes their economic output cheaper to the rest of the world, and they sell more of it making them better off.

In a standard currency union like the American dollar or the British pound, fiscal transfers blunt the effect of a strong currency. If oil prices are low, Texas cannot devalue the dollar to make WTI cheaper to sell more on world markets. However, fiscal transfers from the rest of the country soften the economic hardship Texans feel from now having a dollar too strong for their economy. Money from unemployment benefits, welfare, Medicaid and infrastructure projects rushes in to replace some of the money lost from the strong dollar.

We can have a fiscal union in this country, because, despite rivalries between the states, we are still one people. People from the Bible Belt may view us New Yorkers suspiciously, but attack the World Trade Center, and see what happens. Those Bible Belters get pissed and have no problem spending billions of dollars to rebuild downtown Manhattan.

Europe does not have the necessary fiscal union, because there is no such thing as Europe. Germans do not feel the same bond towards Spain as New Yorkers feel towards Mississippians even though the geographic distance in both cases is similar.

To me, Mississippi is part of the United States. To a German, Spain is a nice place to visit in August. You can see with the Eurocrisis that the Germans and the other northern countries talk of a united Europe is just talk. When it comes time to put their money where their mouths are, they do nothing but prevaricate.

Spain deserves better. If the eurozone is not willing to mitigate the effects on Spain and the other crisis countries from using a currency that is too strong for their individual economic situations, then these countries need to leave the eurozone.

I see that my Spanish brothers and sisters are protesting by surrounding their Parliament in Madrid. If the bastards let you people in, ask them why you still belong to an ill-fitting currency union. The reason is the same reason why poor men fight wars that rich men start. The ambitions of the elite ruling class come before those of the people.

Your politicians are members of the cult of the euro. The cult sees the common currency as a path towards an eventual United States of Europe. Another layer of government means more political positions and therefore more jobs for politicians.  With the way things are going right now, they’re going to need them.

Look at all of the pain that remaining within the straitjacket of the euro has caused in your own country. It can get worse; see your future under the euro and austerity in your Greek allies.

The way back to economic growth is clear, but you will need to press your leaders to abandon their own self interest and begin working for the people.

Spain must leave the eurozone and begin using the peseta. Quite conveniently, you already have a king to place on your banknotes and coins. Perhaps, the time he spends sitting for official portraits for the new money will save the lives of a few elephants.

Using the peseta will immediately reduce the country’s debt burden, and it will help the country out of the debt trap. If the country runs up higher debts in the short-term, the peseta will devalue more leaving the debt burden essentially the same in real terms.

There are downsides to reintroducing the peseta.  The people’s own savings and holdings of both public and private domestic debt will decrease in value. Inflation will also increase making foodstuffs and oil more expensive. The proposed plan may be simple, but it is not easy.

In addition to devaluing debts, the cheaper peseta will spur more sales to foreigners and reduce purchases from foreigners because you will not be able to afford as much of them. This cause a trade surplus that will drive economic growth.

In order to fully take advantage of a weak currency, Spain needs to reform its economy. When I write “reform,” I mean remove all of the red tape. Make it easier for businesses to hire and fire workers by reducing job guarantees. Strict labor protections favor those with jobs over those without. When the people without jobs reach a critical mass, protests begin and lead to political instability.  Foreigners do not visit or invest in politically unstable places unless they have a lot of oil. You don’t.

Red tape exists in the other byzantine regulations that Spain has in its economy. If you make it easy to open businesses, people will open businesses. These new enterprises will require additional employees, services and materials. The vicious circle of austerity has now turned into a virtuous circle.

So that’s the plan: devalue and reform, simple in conception but challenging in execution. I believe that the people of Spain are up for the challenge. It is up to you to force your politicians to act.

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8 thoughts on “The Return of the Peseta: Spain Strikes Back

  1. If Spain leaves the Euro, I wonder what the severity of loss percentage will be on its Euro denominated bonds? A default would probably tank the entire Spanish banking system. I guess they would have to nationalize many banks.

    • They would just pay back pesetas instead of euros on a one-to-one basis. The loss percentage would depend the value of the peseta versus the euro.

      The whole financial would need to be recapitalized, but that is not as large a problem when you have a magic money machine that prints all of the pesetas that you want.

  2. Most of the new private financing (in the past three years) carries a nice tidbit saying “If spain should revert to the peseta, this debt will still be paid in Euros”. I hear most lending to local corporations is also happening this way…

    • When large institutions get in trouble, they can and will change the rules. Parliament can pass a law setting an official peseta-euro exchange rate and then allow debts to be paid off at this rate. For entities who cannot afford to pay off a debt in euros, there is also the threat of bankruptcy.

      Anyway, since you’re in the thick of things I have to ask, what do you see happening in Spain over the next few months?

  3. If Spain de facto defaults, then its first task is not to take advantage of its weak currency. Rather, its first and foremost objective must be implementation of a program certain to make the paseta a strong currency. This alone will assure the well being of Spaniards is foremost attended to and, indeed, most widely achieved. As such, Spain would be wise to study the U.S. example you mentioned, when the federal government assumed the Revolutionary war debts of the states in order to capitalize the First National Bank of the United States. What this scheme did was assure that, despite all the disparate interests possessed by each state in the union, collectively they had a vested interest in the success of the Bank. The internal improvements of the American physical economy the Bank was purposed to finance provided the means by which the wealth of the nation (and, therefore, the wealth of its people throughout every state) were assured to increase, this through a policy venturing to raise the productive power of labor engaged in both agriculture, as well as manufacturing. By financing investment in those endeavors necessary to raise the productivity of the American citizenry, the creation of new wealth from the bounty of resources at our disposal positively assured the soundness of finance facilitating this end, and in so doing strengthened the value of the dollar as a currency whose ultimate, true utility is measured in the productive commerce it creates virtually out of thin air. THIS was the practical manifestation of principles for which the American Revolution was fought, brought forward by Alexander Hamilton and his circles for the likes of Spain today to take hold of in their present desperation and one soon day wave in the face of their British imperial captors whose monetarist euro system enslaves all who it touches, much as was intended.

    There is only one way out for those sovereign nations trapped in the euro scam. This is through raising the value of labor, along with the currency used to achieve this end.

    Right thinking Americans see the present distress occurring at the alter of an imperial system of finance as a moment in history destined to occur as a result of the victory achieved during the American Revolution, whose reaffirmation came with every battle since, fought and won in defense of precious American principles, the likes of which are eloquently stated in the simple, single-sentence Preamble to the U.S. Constitution. The hour for the American Revolution to go global has arrived, my friend. First task here in the states is rid ourselves of the filth polluting our political system with its undying obeisance to Her Royal Bankruptcy’s imperial shit house whose new order of the day is fascist austerity in a calling card demanding destruction of social progress promoting Tranquility and the general Welfare, these accomplishments being the fruits of prior generations of Americans who possessed courage to fight the imperial scourge of its day. For all intents and purposes our present day’s imperial enemy ventures to symbolically piss on the graves of every prior generation of Americans whose natural right to a classical humanist form of political representation succeeded in building the institutional foundation upon which the United States has become the formidable force it is today, and this notwithstanding that foundation’s grave compromise by a two-party system sold out to our eternal, imperial enemy. The fight is on, and it is time for Americans to decide whose side to take. The imperial scam plainly is bankrupt, and so, putting forward propositions harmonious with its world view only displays cowardice unbecoming an American mindful of his or her nation’s history as a bastion against tyranny ultimately to be appropriately asserted no matter where in the world tyranny is making its presence a scourge upon humanity. Let the people of Spain embrace the America of our founders.

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  5. I’ve been gone for a while, busy following the protests.
    I’m not sure how much of our gigantic political problem is visible out there. On Septemer 25th, during the protests at congress, a proposal to cap politician’s revenues was barred (again).
    I am hoping for a Peseta scenario, But that’s wishful thinking, within Spain this is viewed as almost an impossibility and I’m convinced that we will follow the path of Greece, led by politicians who perceive they themselves have nothing to lose.
    The Civil War is not so remote an event for Spaniards, and reverting to the Peseta would be forewarned by extreme social unrest, if not violence, and a radical change of government.
    As a side note, Spaniards seem to me far more willing to get rid of the current political class than the economic problems, and most are actually looking foward to a loss of sovereignty in favor of the EU hoping that will wipe out many well-established politician families.

    • That is very interesting. I heard Italy looks to the EU in a similar way believing that European politicians and officials are less corrupt than their own. Thanks for the insight.

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