The Eurozone, France, America and Ron Paul

Moody’s, one of the world’s most important rating agencies, today told France that it is considering whether to put the country’s government debt (i.e., bonds) on a negative watch, which would mean that Moody’s could then decide to reduce the AAA rating of French debt.

At first glance, this seems like a reasonable decision because France has a budget deficit of 5.7% of its gross national product.  This is the same as the budget deficit of Portugal, already “bailed-out” by the Eurozone, the European National Bank and IMF loans. Eurozone countries in the European Union have committed by treaty to keeping their budget deficits below 3% of GNP. However, France is far from being alone in violating this treaty commitment. If honest governmental financial reporting were the rule, we would probably find that no other country in the Eurozone is currently in compliance.

But, the real problem in France is that growth is now at about 1.75% annually and is expected to decline to around 1% next year and unemployment is stubbornly at 9%. So, there is no way that consumer spending can boost France’s GNP enough to solve its debt problem in the near future, rather like America's dilemma.

And, France is a particular problem because, along with Germany, it is the pillar of the Eurozone and together, the two countries support the faltering Eurozone economies. Thus, France and Germany are the backbone of the 440 Billion Euro European Financial Stability Fund that Eurozone countries are trying to put together to bail out other weak Eurozone countries as their government debt ratings make it impossible for them to borrow money at reasonable interest rates. If France’s credit rating is lowered, it will cost the country more to guarantee its required share of the EFSF and would probably make the Fund an impossibility, because Germany, whose taxpayers are not enthusiastic about shouldering the entire Eurozone debt, would need to go it alone as the financial contributor to the EFSF.  

Added to this, France has to find 33 billion Euros to help Belgium bail out a failed Franco-Belgian bank, Dexia, which still holds significant toxic debt left over from the 2008 crisis.

In the middle of this mess, the Euro is magically still very high against the US Dollar. It took about 1.37 dollars to buy 1 Euro today. Don’t ask me to explain this, because it defies logic. And, keep in mind that without the US Federal Reserve printing money to keep the European Central Bank afloat, there would not be enough money in the Eurozone to meet ordinary private and commercial needs.

So, dear readers, the next time you hear that America is in the worst financial condition in the world, you might just want to re-read this blog. It ain’t necessarily so, as Mr. Gershwin wrote.

But, what America does need, as does every European country, is fiscal discipline. Nobody can spend 40% more than it makes every year and borrow the rest. Not you, not me, not the Eurozone countries, and not the United States. We are approaching not a liquidity crisis (where there is not enough money in the system to meet demand) but a solvency crisis (where there is a lot of money in the system but it is worthless because the government that prints it has nothing to back it up - not gold or the financial discipline necessary to keep its budget at a level that can be financed by tax income.

When money becomes worthless, it takes a lot of it simply to buy a loaf of bread. If you don’t believe that, ask Ron Paul to explain what happened in Weimar Germany between the two world wars, or in Zimbabwe today. Because when he talks about federal solvency, Ron Paul is right and we all ought to be paying attention.