At the root of the current crisis in Europe are the actions of the European Central Bank. As Philipp Bagus explains in his new book, only a realization of the true costs the euro has imposed on the continent in the past can shed light on the path to future recovery. FULL ARTICLE by David Howden
Source link: http://archive.mises.org/15322/europes-tragic-crisis/
{ 16 comments }
Very good article. I really liked the part about “contagion”: it’s the byproduct of the propaganda served to us each day.
One thing though: it seems Europe is already seeking outside help. Asia’s Central Banks have already pledged to buy billions worth of “Eurobonds”. While China and India are no surprises, Japan is. With a monster debt and an horrifically unbalanced budget, Japan has pledged to buy up to 20% of the total. What’s going on here?
Some analysts say they may want to “swap” part of their US bonds, yet Japan is still not only the second holder of US treasure securities after China, their central bank actually stepped up purchases in 2010, going from 742 billions to a whooping 877 billions, not very far from China.
Any opinion? Thanks.
@Kakuga,
I also fail to see the reasoning of China and Japan buying Eurobonds. Their banking systems are built upon the same fiat money foundation as Europe and the USA and like all fiat moneys suffer the same eventual fate. They are trying to sustain the unsustainable in my opinion.
I like the term “contagion”…. they are trying to conjur up an image of some sort of fiscal disease sweeping through Europe. Of course in the central bankers world the only cure for the “contagion” is another dose of debt.
Thanks Kakugo,
IMHO the question you raise can be answered by the article itself (that is, by David Howden).
Instead of having the European countries come to the “aid” of their own member states, in your question, world nations are coming to the “aid” of Europe.
Following the logic in the article, it is now the world that is supporting an unsupportable scenario.
In other words, David Howden points out how the “problem nations” in Europe are slowly undermining ALL of Europe — and bringing closer the day when the Euro-Experiment (using Paper Fiat Money in a Fractional Banking System operated by one Central Bank) finally collapses and is thereby terminated.
You are simply pointing out that it is the EXACT same analogous process that is being now undertaken by the entire world — and the results cannot be expected to be any different than they will be for Europe.
I also agree with you about Anna Schwartz — she really is one amazing (and REAL) economist — and her take on so-called “Contagion” stingingly exposes the empty rhetoric of the so-called “Economists” who are really just spinmeisters and shills for their own broken-down economic philosophies.
It seems pretty obvious to anyone with 1/2 a brain cell that the real avenue to be followed is to allow the banks to go bankrupt like Iceland did.
I believe the EU parlament recently banned referendums specificaly to prevent the Iceland solution as it was feared that Irish voters would refuse a bailout, and rightfully so.
Excellent review of a very important book. But let me comment on this line:
“Instead of continuing to fuel an unsustainable situation, the Icelanders tightened their belts and turned fiscal deficits into surpluses.”
We often read that a nation’s citizens must “tighten their belts”. But when government reduces its spending, it reduces its parasitical impact on the wealth generating sectors of the economy. The wealth destroying sectors are the one who must “tighten their belts”. This is a point often made by Frank Shostak.
Phillip.
The baffling thing about Ireland is that Ireland ran up debts, while having a massive trade surplus.
Simply put the Irish just borrowed like crazy.
Italy’s trade deficit was not a serious as the other Club Med countries. Italy has massive gold reserves, and Italian citizens own a lot of wealth all over the world. In my dealings with Italians, I have found them to be amongst the shrewdest capitalists anywhere. The Italian state might be loaded with freeloaders, wasters, corrupt officials, and loafers. The Italians know this and like to avoid paying tax.
Spain is a more honest country. But the Bank of Spain is lying about the state of the banking system. The government are on a continual PR effort. Spain built far too many houses, on the premise that Northern Europeans wanted holiday homes. But Northern Europeans cannot afford holiday homes, and the trend has ended. People are going back to using hotels again.
Spain is a disaster that will explode. The evidence is in the minimalist coverage that is provided by the pro-EU media organs in several EU countries.
And then there is Belgium. Czechoslovakia achieved an amicable divorce. But Belgium will be a gruelling affair, with a big row over who gets stuck with what percentage of the debt. Belgium is being held together at the behest of pleasing all of Belgium’s neighbours.
The baffling thing about Ireland is that Ireland ran up debts, while having a massive trade surplus.
You shouldn’t be baffled. A trade surplus cannot prevent a government from spending more than it takes in. There is no connection between fiscal deficits and trade deficits.
The US, as we all know, runs a huge trade deficit and we might have an interesting discussion on the monetary policy which encourages it. But that trade imbalance, in no way, excuses Washington for its terrible fiscal policy.
Japan, on the other hand, continues to run tremendous trade surpluses, yet we all know that Japanese government debt is approaching potentially catastrophic levels, too.
Long-term trade deficits (or surpluses) are the result of monetary policy, it’s true. But they are neither beneficial nor are they harmful to running a responsible government.
A nice counterpoint to this article can be found on the Mises Canada website.
http://www.lvmises.ca/posts/blog/portugal-the-euro-and-canada/
Thank you for that link, Redmond. I wasn’t aware that there was a Mises Canada website. It looks quite good.
There are sites for roughly a dozen countries…check the “outside links” section in the right side column.
Just a simple question regarding central banks in general. Does anybody know, do they automatically own whatever money they print? You cannot really loan something to somebody unless you own it. It would be a massive, unimaginable financial advantage to be able to spend 2 weeks to print 2 trillion dollars and then automatically own that money. Then you loan it to some government and receive around $100 Billion a year in interest alone – for 10, 20 or 30 years! That’s a lot of money for 2 week’s worth of work. So do they own the money? If not, who does? And when the government pays it back, who gets to keep it and spend it for their own well-being? Thanks, Dave
Welcome to the wonderful world of central banking (aka cartelized money creation, fraud, and theft). The short answer to your question is yes, the central bank owns the money it creates out of thin air.
Here are some resources to get into further detail:
Articles:
Is Our Money Based on Debt?
The Fed as Giant Counterfeiter
Do Non-Banks Create Money?
Books:
What Has Government Done to Our Money?
The Mystery of Banking
The Creature from Jekyll Island
Videos:
A Second Look at the Federal Reserve
Fiat Empire – Why the Federal Reserve Violates the Constitution
Money, Banking and the Federal Reserve (HQ) (download here)
Dave Murrow, excellent question !!!
Please refer to
Fed’s Crisis Investments Are Showing Big Returns
As to your question about The FED or any other Central Bank “owning” the money that they print, I think that it is self-evident that the creation of this money (whether it is done electronically, or by physical printing) is SUPPOSED TO BE done IN TRUST FOR The People whom the Central Bank and its Government supposedly serve.
Now there will be those conspiracy theorists who will disagree with me, and say that The FED is a private institution, and that only a few large banks actually own The FED, and that all of this is being done for the “profit” of these private entities.
But as scurrilous as the activities of The FED (and of the other Central Banks) are, and no matter how much offense you and I might take from those activities, the actions of Central Banks are MEANT to be well-intentioned and to be “theoretically” helpful to the nations’ economies which those Central Banks are supposed to “serve”.
Of course, Austrian Economists disagree with the theory that supposedly underpins, and justifies, the Existence of, and the Operations of, Central Banks —— especially because these Central Banks operate what are referred to as “Broken Fiat Paper Money Systems” using the very harmful adjunct system known as The Fractional Reserve Banking System.
You are quite right to note that Central Banks can just print money willy-nilly and they do so with the rationale that they are stimulating The Economy, or saving the GSE-s, or “saving The Economy from another Great Depression” or whatever.
So as an example, The FED prints money and buys “assets” like Mortgage bonds issued by the GSE-s like Fannie and Freddie. The FED also buys government bonds, but it does this through other banks acting as dealers and agents —— this allows The FED to maintain that it is not buying Treasury Bonds from The Treasury —— The FED can say that it is keeping these activities “at arm’s length” and is not directly buying from the Government which is issuing such horrendous amounts of debt. This “arm’s length” distinction is silly because the effect of the money flow is the same either way —— the only difference that results by “going through the marketplace” is that The FED can say that is is acting “independently” of the Government’s Treasury Department —— which is really stupid, because Geithner and Bernanke talk to each other all the time.
The other bad effect is that these banks who act as dealers get shiploads of money for doing virtually nothing, because they have the right to take a “cut” for their “hard work”. This is money that The FED pays out on behalf of The People —— of course, The People have no say as to how the unelected Head of The FED spends The People’s money —— The People just have to hope for the best.
The other rationale is that The FED can say that it is not conspiring with The Treasury to “make the market” and is therefore allowing the market to affect prevailing interest rates —— I will let you decide for yourself as to how stupidly hollow this last rationale is.
(Today, IMO, The FED is the Market-Maker for marginal interest rates, both long and short —— the trick is, how long can it continue to successfully do this? Austrians know that these actions by The FED are all harmful, because they take The Market further and further away from the corrective action that The Market has been trying to make.)
Of course, IMHO, ALL of what The FED does is a harmful sham, but because its worldview currently prevails, and because we are not likely to see a serious re-examination of the Fractional Reserve Banking System any time soon, there is not much that you or I or the Austrians can do to change the situation.
The article by Dave Howden illustrates that what The FED does in America, the ECB has now begun to do in Europe. The SHAM is the same. The European Central Bank is now monetizing debt the same way that The FED is. This is a whole lot different than what the old German Bundesbank would have done, on that we can all agree.
Mind you, all of these central banks will DENY vociferously that they are engaged in Debt Monetization.
But if Greece receives money for its sovereign bonds directly, or indirectly, from the ECB (which guarantees loans made by banks to Greece and allows Greek bonds to be used as reserves by those commercial banks) and if Greece then defaults on such bonds, what else could this be called but Debt Monetization?
So, IMO, Dave Murrow, your point is very germane. The FED prints this net-new money (some 2 TRILLION!!! in the last 2 years), buys bonds from the market, earns interest, and then sends the “profits” to the American Treasury!!! It’s smoke and mirrors.
This allows The FED Chairman, Ben Bernanke, to boast (or joke) as in the article from the New York Times (“Fed’s Crisis Investments Are Showing Big Returns”):
Dave Howden’s article has a very germane observation within it:
Dave Morrow, just ask yourself what a country like Spain is doing to itself, when it allows a million empty houses to be constructed, at say, $100,000 each? This is a very conservative number IMO —— which means that more than $100 Billion has been wasted to no good end. A lot of this money came from Spanish banks to the detriment of where the corresponding resources (money) could have better been spent. That is typical of what Central Bank control of interest rates leads to. Namely artificially low interest rates and economic bubbles.
Oh yeah, some day those houses might be occupied —— but that is not the way to run an Economy successfully —— talk about Malinvestments!?
Once a person sees how the Fractional Reserve Banking System operates, they understand how bad the effects over time really are. This is the key, along with understanding how Central Banks operate, to seeing why we are where we are, and why it took so long to get here —— as well as to understanding how intractable the problem of a huge worldwide Credit Bubble really is. I would recommend reading Doug Noland’s weekly article as one place to start (in addition to all the articles on this site).
The way money is supposed to flow between savers and borrowers is that if a saver does not have current use for her money, she uses an intermediary (a bank) to lend her money out so as to earn her some return, and for some return to go to the intermediary bank for providing the service of prudently managing her hard-earned money. The bank has to carefully select a creditworthy borrower in order to safely “put her money to work”.
The problem in a Fractional Reserve Banking System (aided, abetted, managed by the nation’s central bank) is the so-called Multiplier Effect which allows for one person’s saving to be multiplied many times into more and more credit (Debt). The money is more and more “encumbered”.
In other words, our Broken Money System causes the growth in Real Debt to far outpace the growth in Real Saving. To the neo-Keynesian believers, who see all money as “fungible” and who do not subscribe to the necessity of matching growth in debt to growth in saving, the Austrian economists are just a bunch of nutcases spitting into the wind.
But for Austrians, at some point this Debt simply cannot grow any larger at the same rate that it has for decades. There is a point where Debt is Too Big NOT to Fail. There is a point of systemic failure.
The putative ‘solution’ of The FED and the Government? More debt and more money-printing.
Solutions? Sure the authorities have ‘solutions” —— they can monetize the debt, inflating its worth away.
But this hurts all savers and all pension funds and many ‘stores’ of value. Our future standard of living will take a hit —— this is the eventual and inevitable multi-decadally-realized grievous cost of the Fiat Money and Fractional Reserve Banking Systems. It does not undergird a stable and sustainably growing system —— any accountant who understands a Balance Sheet could tell you this —— but The FED seemingly cannot.
The so-called ‘solutions’ to our current problems can be as bad as accepting a depression to allow for slow saving and repayment of debts —— at least those debts that are still serviceable. Along with this process typically is the writedown of many assets from formerly higher valuations to lower ones, as asset owners begin to realize that those 1 million homes may no longer be worth what they were once worth, or even what they cost to build. (The alternative, so as to artificially maintain that price, say $100,000, is to have the Central Bank debase the currency sufficiently so that the “asset” reflects the original real price in its new nominal price.)
So this other ‘solution’ involves the Central Banks making money more and more worthless and essentially allowing repudiation of all loans, via repayment with money of less and less purchasing power. As alluded to above though, many of us depend on future pensions and returns from our investments and perhaps even life insurance policies that are grounded on the value of credit. If the credit becomes worthless (or in the best scenario, just “worth a little less”) then most of us will still suffer a loss in our prospective standard of living —— that is, a lower standard than what we were counting on in “our golden years”.
The Money System is an Information System above all else. And The FED and other Central Banks do not subcribe to the limitations that this view would place on them —— that is, viewing and operating our Money System as a real and honest Information System would handicap them in their eyes in ways that are simply unacceptable to them.
Dave Morrow, please also refer to another article (“The Faults of Fractional-Reserve Banking”) and its associate blog trail at:
http://mises.org/daily/4880
IMHO, there is no magic solution to a problem that was made by the system we operated and lived in for so many “Glorious-To-Be-Rich” decades. Wasn’t it great while it lasted though? I can understand what led so many to argue in favor of a system that seemingly operated for so long with so few apparent problems.
I have discussed the flaws of this article, more specifically those involving Iceland here
Viirlaid
I appreciate your very lengthy and insightful response to my question, “Do the Fed owners actually own the money that is printed (or data-entered)”. Also, I’ll check out the links you suggested.
A couple of comments regarding your response:
First, I was referring primarily to the fiat money (printed or computer entered) that ends in the monetizing of the debt. Clearly this causes inflation and, therefore can be very damaging over time. The last to receive the new money are the one’s who get hurt the most, because by then it’s lost a lot of value. However, it’s not the inflation that bothers me most of all. What really bothers me is that, if the Government printed money on its own, without the Fed, then, even though we’d still suffer the inflation, we would not suffer the ungodly crushing debt.
Also, when this much money is so easy for these guys to obtain, it increases the odds that the massive amounts of money they stick in their grubby little pockets will be used for nefarious, not-so-legal, and not-so-moral ends – like the conspiracy theorists believe. The Rothchilds are supposedly worth $500 trillion.
Regarding whether the individual Fed owners get to own and spend the 2 trillion dollars in fiat money:
If we got real productive, and real responsible, and we decided to pay off our debt to the Fed – all of it – the principle and the interest (which is possible only if the Government prints its own money to pay the interest), then, indeed the Fed owners would have all of the 2 trillion dollars (plus interest) in their grubby little pockets to spend for their own private pleasure. This begs the question that the liberals are famous for: “Isn’t it time for the central bankers to pay their fair share?” But alas, they pay no taxes on this massive profit. The word “fair” was not written into the Federal Reserve Act.
Since you elaborated some on Fractional Banking, I’ve included my thoughts on that matter:
If I deposit $10,000 in a checking account, then
(1) I should pay some kind of reasonable fee for the bank to provide me with a checking account service.
(2) If the bank wants to loan out my $10,000, they should offer me a small interest, like, say 1%, and ask me if I’d like to loan out the money. If I say no thank you, then they should not loan out my money. I would then use the checking account service and pay my fee, and that would be the end of it.
3) If I say yes, let’s do it, then we become partners in the loan and I get my 1%. If they want to loan out my money a second time, they should first ask me, and, if I agree, they should pay me another 1%. If they want to loan out my money 10 times, they should ask me each time, and if I agree, they should pay me a total of 10%. YES! But actually, it would be far better for the country to loan the money only once.
4) If I do agree to their loaning my money even one time, then I should not be able to withdraw it or write checks on it, on account of the fact that it’s not there! Duh! When the borrower makes a payment, I should receive in my account the principle and interest for that payment. After at least some of the money has been paid back (plus interest), then I could withdraw whatever amount of money is actually there. If the money was loaned out twice, then I would have no available money to withdraw until at least one of the loans was completely paid and the other loan was partially paid. If the money was loaned out ten times, then I’d have to wait until nine of the loans were completely paid and the tenth loan was partially paid. Bottom line: I should be allowed to spend only the money that is actually there! And the bank should not be allowed to loan out my money even once without my permission.
5) The only problem with this policy is that the bank would have to charge much higher fees for their checking account service. But my money and everybody else’s money would be a lot safer.
Once again, thanks for the response.
Dave
I think it is very important to first remember there are a few certain people that meet regularly to plan the events happening in the world especially the what is happening to the economies of countries, to see who these people are go here.
http://republicbroadcasting.org/?p=8795
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