11 Apr 2013

Where did the Maastricht Criteria come from?

At 4 o'clock this morning, the penny dropped. Or maybe I should say that the $1 trillion dollar coin dropped.

First, a quick reminder of the criteria on Government budgets imposed by the Maastrict Treaty:
Government budgetary position: Member States are to avoid situations of excessive government deficits, that is their ratio of planned or actual government deficit to gross domestic product should be no more than 3 %, and their ratio of (general) government debt to GDP should be no more than 60 %, unless the excess over the reference value is only exceptional or temporary or the ratios have declined substantially and continuously;
Now, have a look at thes table showing how much different countries within the EU pay in interest charges on government debt as a percentage of GDP.  In particular, have a look at the percentage of GDP paid in interest for the Eurozone countries.

Notice anything interesting?

Do you think that it is just a coincidence that the percentage of GDP used to pay interest on government debt (i.e. 3%)  just happens to match the percentage of GDP that governments are allowed to have as a budget deficit under the Maastrict rules (i.e. 3%)?

Now look at the graph for the Percentage of UK GDP that has been going to pay the interest on the UK national debt since 1955 that I posted yesterday. That also just happens to average about 3% over the 6 decades. Coincidence??

Imagine a meeting of bankers back in the early seventies. The bankers from the UK are showing a graph that shows how they have been succesfully creaming off 3% of GDP from UK taxpayers for decades. And they say to their colleagues from other countries - "You can do this too!".

"Here's what you need to do. First, you have to impose rules that stop governments borrowing from their Central Banks. Make up some story about how this is really important to guarantee the stability of the money supply. If you sound sufficiently knowledgeable, and you speak using incomprehensible  language, you will be able to convince the politicians. They will assume that you know best.

Then, you arrange things so that when the governments borrow money from the commercial banks, they end up paying interest charges that are not so high that people object, but which maximise bank profits.

So, let's see. What would be the amount of government debt and the level of interest charges that would maximise the revenue for the banks?

Well, suppose that the government's debt level was about 60% of GDP, and that we can charge about 5% in interest per year. That would mean that we could extract a maximum of 3% of GDP from the economy every year.

Brilliant! Now, all you have to do is to get the politicians to agree to a pact where they try to keep the debt level at 60% and we will be able to arrange things so that we get 3% of GDP in interest, and you are guaranteed maximum profits for as long as you can keep the scheme going.

Of course, we all know that we don't have the money we lend the governments - we just create it out of thin air. But the public don't know that. And if we can keep our scheme secret, then we are all rich."

Wind forward forty years. And you will see that to keep the interest payments at the optimal level (3% of GDP) when government debt levels exceed the magic 60% level, it may well be necessary to offer to lend governments money at below 5%. Hey, you can even get down to 1.54% (which is the current rate for Germany). But as long as Germany has over €2 trillion in government debt, you will still be able to milk them for 2.5% of their GDP per year. OK, it's not quite 3%, but it's not bad.

Magically, every time that governments go to the markets to borrow yet more money, they almost always get the money they need - at a rate which miraculously allows the banks to extract roughly 3% of GDP in interest. 

Is this scenario fantasy? Maybe. But, seriously, I don't think so.

I believe that the whole Maastrict treaty and in particular the rules that prevent Central Banks lending to governments, and the 60% value for government debt, and the 3% value for permissible budget deficits can be explained if you see them as being designed to allow the commercial banks to cream off the maximum amount of taxpayers money.

The solution? Force the Central banks to take over all government debt and charge 0% interest.

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