The year has started off with a macro-economic bang. The excesses of decades past are beginning to show. The world is languishing in debt and money printing will become an increasing theme. Zimbabwe’s money printing lessons are more applicable now than ever before.
2015: Macro-economic fireworks
The start of the year has been all about Europe: The Swiss ended its currency peg, the European Central Bank announced a massive round of QE (planning to print over €1.1 trillion to pay off government debt*) and the Greeks voted in a radical leftist party. These are three extremely important events in the context of the euro currency and the world economy. Very briefly, here is a bit of background.
In 1999, the European Union introduced the first currency of its kind. Hailed as a major breakthrough for the area, the Euro Project gave the entire region a single currency that allowed people from different countries to trade across borders without the problems that you typically get with multiple currencies. It made imports and exports very simple, transferring money became very easy and generally life improved for all countries in the Euro-zone.
Banks also found it beneficial. With one currency banks found it less risky to loan money across borders. Very quickly, they began to lend heavily to one another and the banking system as a whole became very integrated. Many countries that exported goods to the Eurozone began to save their surpluses in euros – it soon developed into the second largest reserve currency in the world. Money flowed into the region and consumption boomed. Life in Europe was good…
Except for a single problem. The governments in these regions were going into debt far beyond what they had agreed to beforehand when they signed on to the single currency arrangement. Even Germany, the bastion of economic restraint, exceeded its debt commitments. It was so easy to borrow cheaply and governments in the area binged on their credit limits – particularly the nations known as the PIIGS (Portugal, Ireland, Italy, Greece and Spain).
The fattest of them all
Of these, Greece became plump with debt. European banks themselves had been lending heavily to the Greek government by buying Greek bonds. Few investors noticed the country’s burgeoning debts and to add to this, the government was falsifying its loan figures.
By 2009 ratings agencies progressively downgraded Greece’s credit rating. Its government was struggling to repay its debts on time. The various European authorities gave emergency loans to roll over debts that had become due, and in one instance negotiated a debt reduction. But only on condition that Greece reduce its government spending and increase taxes (known as austerity).
The financial crisis and austerity measures led to widespread unemployment and massive demonstrations in Greece. Even with the reduced spending, last year Greece’s government accounted for just over 59% of all trade in the country – it is a pseudo-austerity.
Rest of Europe
The same problem has been revealed in many other countries in Europe: the Emperor has no clothes. These countries can’t, in fact, pay their debts. Given that banks, pension funds and most investment houses are exposed to European government debts, the very solvency of the system is dependent on whether these loans can be repaid.
As the European debt crisis buckled in 2011, money flowed out of the region into Switzerland. To provide support, the Swiss National Bank began to print its own currency on a fantastic scale to buy euros, lending them to European governments.
This year starts with a bang
Fast forward to 2015, on January 15th, the Swiss National Bank announced that it would stop buying euros with newly printed Swiss Francs. New lenders would need to be found elsewhere.
One week later on January 22nd, the European Central Bank announced that it will be printing €1.1 trillion to buy government bonds (i.e. to lend money to them and to repay their debts). Initially Germany had resisted this move, but it has been persuaded to go with it since they are the primary beneficiary of this printed money (some commentators estimate that 25% of this new money will go to buying German bonds). None of this new money will go to finance Greece’s debts – which has prompted outcry and demonstrations in Greece.
January 25th, the radical left-wing party Syriza was voted into power in Greece. As part of its election campaign, this party have openly decried austerity measures. They are looking to consume further in debt and are trying to renegotiate repayment terms. Without support, Greek debt is unpayable. Syriza is also open to exiting the euro and returning to a Greek currency. This would enable Greece to print money in response to debts and expenses. With little opportunity left for Greece to repay its debts in euros, the European banking system is again at risk.
Greek Prime Minister Alexis Tsipras is defiant against austerity measures being imposed, and the government has reportedly been investigating whether it can use bank money for its expenses (which has ultimately come from the European Central Bank). A Greek default would rock the European banks.
Debt and money printing are very closely aligned. Europe’s debts will not easily be repaid without massive money printing schemes going forward – a move that the authorities are embracing with unreservedness. In the past, many governments have repaid their debts with newly printed money and it always leads to destruction in an economy. These events will play out in the coming months and years. Europe’s problems are only beginning.
When Money Destroys Nations news:
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‘til next time
* I refer to money creation as money printing which is, in effect, the same thing – likewise the purchase of government bonds as repayment of government debts.