Ideal Taxes Association

Raymond Richman       -       Jesse Richman       -       Howard Richman

 Richmans' Trade and Taxes Blog

"Le Tarpe" will not work any better than did TARP
Howard Richman, 5/16/2010

A foolish decision is haunting both North America and Europe. I refer to the decision by the American and European elites to bail-out their big banks without addressing the underlying cause of the financial crisis, the trade deficits. The fact is that trade-deficit countries accumulate debt in return for mercantilist-produced baubles. The result of the bail-outs was an immense transfer of bad debts from banking sectors to governments. The result of the continuing trade deficits is that the underlying debt problem will continue to grow.

In America, the transfer of bad debts from banks to governments was first realized with the $700 billion TARP bill, and was followed up with the Federal Reserve buying $1 trillion of soon-to-be-worthless mortgage-backed securities and the U.S. government subsidizing purchases of used residences.

In Europe, the decision to transfer bad debts from banks to governments is playing out now with the $1 trillion rescue plan known as "Le Tarpe," for the banks that have loaned money to Europe's three most heavily indebted trade-deficit governments. It will continue with the upcoming purchases by the European Central Bank of junk-bonds issued by Greece.

As a result of ignoring Asian and German mercantilism, trade-deficit countries on both continents will be mired in the perpetual depression which, Keynes predicted, comes to countries that permit trade deficits. Specifically, in his magnum opus (The General Theory of Employment Interest and Money) Keynes pointed out:

A favorable [trade] balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression. (p. 338)

Just as the Great Depression did not alleviate until policy makers figured out that governments need to maintain a growing money supply, the current stagnation in Europe and North America will not end until American and European policy makers figure out that governments need to maintain relatively balanced trade. Unfortunately, most American economists, including President Obama's advisors, are such free-trade ideologues that they are still impervious to this reality.

But not all American economists are free-trade ideologues. Peter Navarro is one of the first of our premier economists to see where all of this is going. In an excellent May 15 commentary, he laid out a realistic case that the euro may be dead and that gold is probably the best investment at the moment because we are heading toward a "de facto" gold standard. He succinctly explained why the euro bail out will fail:

The euro will continue to decline because “Le Tarpe” will either lead to a massive boost in the euro money supply OR a collapse of the euro if countries that want to borrow “Le Tarpe” funds refuse to agree to the conditions of accepting the money. There is NO third option so the euro must fall!

He explained that this will not only affect U.S. exports to Europe, but also China's currency policy. He wrote:

China won’t revalue the yuan at this time because as the dollar is rising, so, too, is the yuan. This hurts Chinese exports to Europe – its largest market. Ergo, there is no way China would allow further strengthening of the yuan to the euro by strengthening the yuan relative to the dollar!!! (If you don’t understand this one, please re-read until you do. It is the single most important dynamic right now in the global recovery besides the euro collapse itself.)

He predicts a possible return to a "de facto" gold standard, not because of the theoretical advantages of a gold standard over flexible exchange rates, but because the two alternatives, the euro and the dollar, are both in trouble:

The decline in the euro boosts gold and silver prices by raising the probability that gold and silver will be de facto “reserve currencies” in a world where high sovereign debt levels in both the U.S. and Europe make the dollar and euro less attractive as reserve currencies over time.

Although he does not endorse a bearish scenario as being more likely than a bullish scenario, he does see it as a distinct possibility. He summarizes it thus:

The bearish scenario is this: Europe stagnates as “Le Tarpe” fails because of political pressures that were not present in the U.S., i.e., while the U.S. could make demands on Citi and AIG et al, the Eurozone bigwigs can’t bend Greece and Portugal and Spain to their will. China implodes on a combination of collapsing real estate and stock market bubbles coupled with a fall in exports to the Europe. The U.S. continues to be leached by Chinese mercantilism while it loses its export growth in Europe while internally states like California and Illinois undertake contractionary measures that ripple across the nation.

Unlike Navarro, I can't see any alternative to the bearish scenario, unless either (1) Asia, led by China, were to suddenly change its successful strategy of stealing industry from both Europe and the United States, and or (2) American and European elites were to switch from their unilateral free trade policies to balanced trade policies. Neither solution is likely at the moment.

Your Name:

Post a Comment:

Comment by Sputte, 5/20/2010:

Greece reduced its budget deficit by 41.8 percent during the first four months, "said Greek Finance Minister in a speech today.

EU Commissioner Olli Rehn announced last week a package of measures to strengthen coordination of economic policies, mainly in the euro group. The package aims to broaden and deepen the control of countries' fiscal policies, but also to address differences in growth, inflation and competitiveness between euro countries (structural).

The Commission proposal contains three parts:
* Restoring respect for the so-called Stability Pact, which prescribes a balance or surplus in public finances.
* Enhancement of monitoring of economic poltiken, in particular structural reforms that are open to more growth and jobs.
* Create an emergency mechanism to deal with future debt crises.
The Stability Pact can be divided into two parts: one part prevention and part of the correction and punishment. Ollie Rehn would provide both better teeth.


In the preventive side, the Commission would put more focus on long-term approach to finances. The Stability Pact can be supplemented with rules that bind governments to build up buffers in good times. Governments should also in their national budget laws to enter the EU's long-term budgetary objectives, such surplus and spending in the financial perspectives.

In part to redress and remedies, the Commission would be "criminal procedure" will start earlier than now for a sin that country to deal with problems before they grew so large as in Greece, for example. Penalties are to be imposed even against a country that does not reduce farmers taking public debt below 60 per cent of GDP. Contributions from the EU budget should be frozen as soon as a country begins to depart, not as today when the crisis became acute.

The enhanced surveillance of structural policies are necessary if the euro countries will become more like each other. Today there are major differences in competitiveness, wages and costs. The result has been that some countries are building up surpluses in their foreign affairs, while others may be growing deficit in its foreign trade.

This undermines the currency union. The new reform strategy "Europe 2020", the Commission would therefore create a kind of scoreboard of indicators to show when the reforms must be implemented. Early warnings will be issued to avoid such a property bubble in Spain.

Yesterday's cautiously positive response from the finance ministers were provisional. The package will return more formally to the summit on 17 June. Commission's ambition is that the new rules will start functioning in 2011.


  • Richmans' Blog    RSS
  • Our New Book - Balanced Trade
  • Buy Trading Away Our Future
  • Read Trading Away Our Future
  • Richmans' Commentaries
  • ITA Working Papers
  • ITA on Facebook
  • Contact Us

    Sep 2021
    May 2021
    Apr 2021
    Feb 2021
    Jan 2021
    Dec 2020
    Nov 2020
    Oct 2020
    Jul 2020
    Jun 2020
    May 2020
    Apr 2020
    Mar 2020
    Dec 2019
    Nov 2019
    Oct 2019
    Sep 2019
    Aug 2019
    Jun 2019
    May 2019
    Apr 2019
    Mar 2019
    Feb 2019
    Jan 2019
    Dec 2018
    Nov 2018
    Aug 2018
    Jul 2018
    Jun 2018
    May 2018
    Apr 2018
    Mar 2018
    Feb 2018
    Dec 2017
    Nov 2017
    Oct 2017
    Sep 2017
    Aug 2017
    Jul 2017
    Jun 2017
    May 2017
    Apr 2017
    Mar 2017
    Feb 2017
    Jan 2017
    Dec 2016
    Nov 2016
    Oct 2016
    Sep 2016
    Aug 2016
    Jul 2016
    Jun 2016
    May 2016
    Apr 2016
    Mar 2016
    Feb 2016
    Jan 2016
    Dec 2015
    Nov 2015
    Oct 2015
    Sep 2015
    Aug 2015
    Jul 2015
    Jun 2015
    May 2015
    Apr 2015
    Mar 2015
    Feb 2015
    Jan 2015
    Dec 2014
    Nov 2014
    Oct 2014
    Sep 2014
    Aug 2014
    Jul 2014
    Jun 2014
    May 2014
    Apr 2014
    Mar 2014
    Feb 2014
    Jan 2014
    Dec 2013
    Nov 2013
    Oct 2013
    Sep 2013
    Aug 2013
    Jul 2013
    Jun 2013
    May 2013
    Apr 2013
    Mar 2013
    Feb 2013
    Jan 2013
    Dec 2012
    Nov 2012
    Oct 2012
    Sep 2012
    Aug 2012
    Jul 2012
    Jun 2012
    May 2012
    Apr 2012
    Mar 2012
    Feb 2012
    Jan 2012
    Dec 2011
    November 2011
    October 2011
    September 2011
    August 2011
    July 2011
    June 2011
    May 2011
    April 2011
    March 2011
    February 2011
    January 2011
    December 2010
    November 2010
    October 2010
    September 2010
    August 2010
    July 2010
    June 2010
    May 2010

    April 2010
    March 2010
    February 2010
    January 2010

    Book Reviews
    Capital Gains Taxation
    Corporate Income Tax
    Consumption Taxes
    Economy - Long Term
    Economy - Short Term

    Environmental Regulation
    Last 100 Years
    Real Estate Taxation

    Outside Links:

  • American Economic Alert
  • American Jobs Alliance
  • Angry Bear Blog
  • Economy in Crisis
  • Econbrowser
  • Emmanuel Goldstein's Blog
  • Levy Economics Institute
  • McKeever Institute
  • Michael Pettis Blog
  • Naked Capitalism
  • Natural Born Conservative
  • Science & Public Policy Inst.
  • Votersway Blog
  • Watt's Up With That


  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]