A call to arms for central banks

The rate at which the majority of the eurozone is descending into insolvency is accelerating. The rescue package for Spanish banks, which appears to have been provisionally set at a figure designed to impress the markets, hardly even produced a dead-cat bounce. All it has achieved is to draw attention yet again to the helplessness of the authorities in dealing with multiple debt-traps. So what is the answer?

It depends on the purpose behind the question. If it is to seek a genuine solution, then the answer is to cut public spending rigorously in all countries that depend on markets to fund budget deficits or to roll over existing debts. Only a convincing budget surplus is going to lead to falling borrowing costs. The objection to this solution is partly political and partly on the grounds of neoclassical economic prejudice. The former persists in placing social objectives above economic objectives, while the latter has been convincingly proved to be wrong. Otherwise, please talk us through how a government actually knows best to kick-start an economy into recovery, without ignoring the accumulation of past evidence. Explain why it is that those countries, driven by the consumption so loved by Keynesians and monetarists alike, have turned into basket-cases, while economies driven by a savings culture persistently confound all neoclassical theory by making their citizens better off, in every case.

The answer is that government intervention is destructive. Taxation and regulation are the tools by which government disrupts the primary social function of humans exchanging their labour for mutual benefit. Government is no substitute: its desire, consciously or unconsciously, is to control people’s lives for its own social objectives. This is the motivation behind the destruction of savings and their replacement by an accumulation of debt; and for the government itself, there are mounting future liabilities. Reversing an accumulation of past interventions, which is necessary if a country’s fortunes are to be improved sufficiently to escape complete bankruptcy, goes counter to every reason a modern politician enters his trade.

So it is more likely that the purpose behind the question posed is to find a solution without cutting public spending, and if possible allowing it even to increase. For this reason, Keynesians and monetarists continue to be employed despite their abysmal record. So an alternative to facing up to reality will be found, and the clue, as Sherlock Holmes observed, is in the dog that did not bark in the night.

Despite signs from everywhere that major economies are stalling, it has been odd that the major central banks have not indulged in more quantitative easing. One could argue with some conviction that this is because it has not had the desired effect, and that for one country to do so would risk undermining its currency. But there is possibly an alternative reason: that the major central banks are watching the European crisis with the growing realisation that the eurozone is about to crash with horrible consequences for all. The only, final, solution will be a co-ordinated round of multiple quantitative easings, joined in by the European Central Bank, when the outcome without it would obviously be so dire that not even Germany can object.

This article was previously published at GoldMoney.com.


  • Paul Marks says:

    The Economist magazine (house journal of the international “liberal” elite) demanded a Spanish bailout of some 100 billion Euros (a bigger figure than others were demanding at the time).

    Yet as soon as the bailout was announced the Economist magazine denounced it as “not enough”. It is impossible to please the international “liberal” elite – they will always want more corporate welfare.

    Bankrupt banks must be allowed to GO BANKRUPT.

    And the same is true of bankrupt GOVERNMENTS – for example the government of Greece has made impossible Welfare State promises to its population. No matter how many bailouts Greece gets (or on what terms) those promises remain impossible – and, sooner or later, that must be faced.

    “But the consequences of letting bankrupt banks and (gulp!) bankrupt governments GO BANKRUPT will be terrible”.

    Of course the consequences will be terrible – but bailouts (financed by the European Central Bank creating money FROM NOTHING) will not prevent these consequences – and by putting them off (briefly) it just makes the consequences even worse.

    Nor can calling upon the German taxpayers to pay for the Welfare State of all other European Union members work (it can not work at all). German politicians have not “failed to prepare the German people” for this (Economist magazine again), there is no “failure to prepare the people” because they whole idea (of the German taxpayers, hard hit as it is, paying for the Welfare State of other countries) is INSANE.

    The denial of objective reality and the demands for insane “solutions” (the ECB will engage in “monetary stimulus”, the German taxpayers will engage in “fiscal transfers”), as if objective reality can be beaten by some political “act of will”, is perhaps the worst feature of the international “liberal” elite.

  • Robert Sadler says:

    I am not convinced that the prospect of banks and governments going bankrupct will have terrible consequences. For a start it will shut down a major source of funding to the government (bonds sold to banks) thus rapidly reducing the size and power of the government.

    In the short term who will be hurt? People who hold cash balances and people who depend on the State for their livelihood. But in the long term, were governments unable issue debt, all other things being equal we would all be better off.

    Unfortunately though, even if the government did default, they would soon figure out a way to keep on robbing us.

    • Paul Marks says:

      There are two de facto bankruptices comming.

      A montetary bankruptcy the (long delayed) collapse of the “financial system” (which has been rotting for many years – and is now a putrid mess).

      And a fiscal bankruptucy – the collapse of the Welfare States in various countries (they have grown like cancers and are now far too big to sustain).

      The two de facto bankruptcies are (of course) linked – as one of the reasons that govenrments have pushed (and continue to push) the credit bubble “financial syetem” is to get tax revenue from the enterprises (banks and other such) in it, and to get “cheap money” (low interest rate loans). Both to finance the Welfare States with.

      None of it will work much longer. So they will not be in a condition to rob us – and sadly most of us (including me) will have nothing worth robbing.

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