Cobden Centre’s Gordon Kerr on Bloomberg on the Euro and European banks

The Cobden Centre’s Gordon Kerr can be seen on Bloomberg discussing the Euro and the state of Europe’s banks, which are now in a considerably worse state than they were in 2008.


Europe’s Move In The Direction Of More Monetary Mischief

The European Central Bank has announced its intention to create out of thin air over one trillion new Euros from March 2015 to September 2016. The rationale, the monetary central planners say, is to prevent price deflation and “stimulate” the European economy into prosperity.

The only problem with their plan is that their concern about “deflation” is a misguided fear, and printing money can never serve as a long-term solution to bring about sustainable economic growth and prosperity.

Europe’s High Unemployment and Economic Stagnation

The European Union (of which the Euro currency zone is a subset) is experiencing staggering levels of unemployment. The EU as a whole has 10 percent of the work force unemployed, and 11.5 percent in the Euro Zone.

But breaking these numbers down to the national levels show just how bad the unemployment levels are in the different member countries. In Greece it is nearly 26 percent of the work force. In Spain, it is 24 percent; Italy and Portugal are both over 13 percent. France has over 10 percent unemployment, with Sweden at 8 percent. Only Germany and Austria have unemployment of 5 percent or less out of the 28-member countries of the European Union.

Youth unemployment (defined as those between 16 and 25 years of age unable to find desired work) is even more catastrophic. For the European Union as a whole it is an average of over 22 percent, and more than 23 percent in the Euro Zone.

In Greece, its almost 60 percent of those under 25; in Spain, it is nearly 55 percent, with Italy at 43 percent, and over 22 percent in both France and Sweden. Only in Norway and Germany is youth unemployment less than 8 percent. Almost all the other EU countries are in the double-digit range.

At the same time, growth in Gross Domestic Product for the European Union as a whole in 2014 was well below one percent. Only in the Czech Republic, Norway, and Poland was it above 2 percent among the EU members.

Consumer prices for the EU averaged 0.4 percent in 2014, with most of the member countries experiencing average consumer price increases between 0.2 and 2 percent for the year. Only in Greece was the average level of prices calculated as having absolutely declined by a minus 1.3 percent. Hardly a measured sign of dramatically suffered price deflation in the EU or the Euro Zone!

Fears of Price Deflation are Misplaced

The monetary central planners who manage the European Central Bank are fearful that the Euro Zone may be plagued by a prolonged period of generally falling prices if they do not act to push measured price inflation towards their desired target of around two percent a year.

(It is worth pointing out that if the Euro Zone monetary central planners were to succeed with their goal and maintain two percent average annual price inflation, this would mean that over a twenty-year period the purchasing power of a Euro would decline by around 50 percent.)

Many commentators inside and outside of the European Union and the Euro Zone have insisted that price deflation needs to be prevented or reversed at all costs. The implicit premise behind their arguments is that deflation equals economic depression or recession, and therefore any such decline in prices in general must not be allowed.

In all these discussions it is often ignored or forgotten that annual falling prices can well be an indication of economic prosperity and rising standards of living. For instance, between 1865 and 1900, prices in general in the United States declined by around 50 percent, with overall standards of living in general estimated to have increased by 100 percent over these 35 years. This period is usually recognized as America’s time of rapid industrialization in the post-Civil War era that set the United States on the path to becoming the world’s economic giant through most of the 20thcentury.

Falling Prices and Improved Standards of Living

A hallmark of an innovative and competitive free market economy is precisely the never-ending attempt by entrepreneurs and enterprisers to devise ways to make new, better and less expensive goods to sell to the consuming public. The stereotypes in modern times have been pocket calculators, mobile phones, DVD players, and flat-screen TVs.

When pocket calculators first came on the market in the 1980s, they were too big to fit in your shirt pocket, basically performed only the most elementary arithmetic functions, and cost hundreds of dollars. Within a few years they fit in your shirt pocket with space to spare, performed increasingly complex mathematical functions, and became so inexpensive that many companies would give them away as advertising gimmicks.

The companies that made them did not proclaim their distress due to the lower and lower prices at which they sold the devices. Cost efficiencies were developed and introduced in their manufacture so they could be sold for less to consumers to expand demand and capture a larger share of a growing market.

In a dynamic, innovative and growing free market economy there normally would be a tendency for one product after another being improved in its quality and offered at lower prices as productivity gains and decreased costs made them less expensive to market and still make a profit.

Looking over a period of time, a statistical averaging of prices in general in the economy would no doubt show a falling price level, or “price deflation,” as one price after another experienced such a decline. This would be an indication of rising standards of living as the real cost of buying desired goods with our money incomes was decreasing.

Draghi as Superman with Paper Money

Europe’s Problems are Due to Anti-Market Burdens

Relatively stagnant economies with high rates of unemployment like in the European Union and the Euro Zone are not signs of deflationary forces preventing growth and job creation. Indeed, since 2008, the European Central Bank has increased its balance sheet through monetary expansion by well over one trillion Euros, and prices in the Euro Zone, in general, have been rising on average between 0.5 and 2 percent throughout this period. Hardly an indication of “deflationary” forces at work.

The European Union’s problems are not caused by a lack of “aggregate demand” in the form of money spending. Its problems are on the “supply-side.” The EU is notorious for rigid labor markets in which trade unions limit worker flexibility and workplace adaptiveness to global market change.

Above market-determined wages and benefits price many who could be gainfully employed out of a possible job, because government policies and union power price these potential employees out of the market. Plus, the difficulty of firing someone once a worker is hired undermines the incentives of European companies to want to expand their work forces.

Even a number of international organizations, usually culprits in fostering anti-free market policies, have pointed out the need for European governments to introduce workplace reforms to free up labor markets in their countries, along with general reductions in regulations on business than hamper entrepreneurial incentives and prevent greater profit-oriented competitiveness.

Creating a Trillion Euros will only Imbalance Europe More

Creating a trillion more Euros cannot overcome or get around anti-competitive regulations, cost-price mismatches and imbalances due to government interventions and union restrictions, or the burdensomeness of taxes that reduce the willingness and ability of businessmen to undertake the enterprising activities that could lift Europe out of its economic malaise.

Furthermore, to the extent to which the European Central Bank succeeds in injecting this trillion Euros into the European economy it will only set in motion the danger of another future economic downturn. Not only may it feed an unsustainable financial and stock market run-up. The very manner in which the new money is introduced into the European-wide economy will inevitably distort the structure of relative prices and wages; wrongly twist the patterns of resource and labor uses; and induce forms of mal-invested capital.

Thus, the attempt to overcome Europe’s stagnant economy through monetary expansion will be the cause of a misdirection of labor, capital and production that will inescapably require readjustments and rebalances of supplies and demands, and price relationships that will mean people living through another recession at some point in the future.

Forced European Bank Lending cartoon

A Market-Based Agenda for Growth and Jobs

What, then might be a “positive” pro-market agenda for economic recovery and job creation in the European Union, and in the United States, as well, for that matter? Among such policies should be:

  • Significantly reduce marginal personal tax rates and corporate taxes, and eliminate inheritance taxes; this would create greater incentives and the financial means for private investment, capital formation and job creation;
  • Cut government spending across the board by at a minimum of 10 percent more than taxes have been cut so to move the government in the direction of a balanced budget without any tax increases; this would take pressure off financial markets to fund government deficits, and end the growth in accumulated government debt, until finally government budgets would have surpluses to start paying down that debt;
  • Reduce and repeal government regulations over the business sector and financial institutions to allow competitive forces to operate and bring about necessary adjustments and corrections for restoring economic balance;
  • Institute real free trade through elimination and radical reduction of remaining financial and regulatory barriers to the competitive free flow of goods among countries;
  • End central bank monetary expansions and manipulation of interest rates; interest rates need to tell the truth about savings availability and investment profitability for long-run growth that is market-based and sustainable. Monetary expansion merely sends out false signals that distort the normal functioning of the market economy.

A market-based set of policies such as these would serve as the foundation for a sound and sustainable real “stimulus” for the European and American economies. It also would be consistent with the limited government and free enterprise principles at the foundation of a free society.


Swiss National Bank Throws Banks, Self Under Bus

In 1985, Arnold Schwarzenegger played John Matrix in the action movie, Commando. One line stands out. While dangling a bad guy over the edge of a cliff Matrix said, “Remember, Sully, when I promised to kill you last?” The frantic man replied, and Matrix added, “I lied.” He let Sully go.

Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank (SNB), must be channeling John Matrix. On December 18, 2014 Jordan said, “The SNB remains committed to purchasing unlimited quantities of foreign currency to enforce the minimum exchange rate with the utmost determination.” Last Thursday, not even a month later—he said, “The Swiss National Bank (SNB) has decided to discontinue the minimum exchange rate…”

Schwarzenegger said it better. Besides, Commando was just a work of fiction. Central bankers toy with people’s livelihoods. Several currency brokers have already failed, only one day after this reversal.

When a central bank attempts to peg its currency, it’s usually trying to stave off collapse. The bank must sell its foreign reserves—typically dollars—to buy its own currency. Recently, the Central Bank of Russia tried this with the ruble. It never lasts long. The market can see the dwindling dollar reserves, and pounces when the bank is vulnerable.

The SNB attempted the opposite, selling its own currency to buy euros. It faced no particular limit on how many francs it could sell. Despite that, the market kept testing its willpower. Here is a graph showing the price of the euro in Switzerland. The SNB’s former line in the sand, is drawn in red, a euro price of 1.2 francs.

Euro Priced in Swiss Francs


The price of the euro was falling the whole year. Jordan’s promise caused but a blip. The pressure must have been intense. So he tried one last trick, familiar to any gambler.

Thomas Jordan bluffed.

He said the SNB is committed and tossed around words like unlimited. The market saw his bet, and raised. That forced him to fold.

I wrote about why the SNB pegged the franc. It wasn’t about exporters, but commercial banks. They borrow francs from their depositors, but lend many euros outside Switzerland. This means they have franc liabilities mismatched with euro assets. When the euro falls, they take losses.

The SNB inflicted this same problem on itself with its intervention. It borrowed in francs, creating a franc liability. This borrowing funded its purchase of euros, which are its asset.

As of November, its balance sheet showed 462 billion francs worth of foreign currencies, and it has disclosed that euros represent just under 50% of that. This puts their euro assets around 230B francs (which probably increased after that). The euro has fallen from 1.2 francs to just under 1.0, or 17%.

On Thursday, the SNB lost at least 38B francs, or 6 percent of Swiss GDP.

Why on earth did it choose to take this loss? It threw the commercial banks under the bus, and got tire tracks on its own back too. Without being privy to its internal discussions, we can make an educated guess.

The SNB hit its stop loss.

As traders kept buying francs, the SNB was obliged to keep increasing its bet. Its exposure to euro losses was growing. To continue meant more euro exposure on the same capital base—rising leverage. It chose to realize a big loss now, rather than continue marching towards insolvency.

The market is much bigger than the Swiss National Bank. If the citizens of insolvent states like Greece want to sell their euros for francs to deposit in Swiss banks, and if hedge funds and currency traders want to bet on the franc then the SNB can’t stop that freight train.

Everyone who holds francs is happy, because the franc went up. However, the fallout has just begun. Franc holders will discover that they are creditors. They can’t rejoice for long at their debtors’ pain. Pain will one day morph into defaults. Soon enough the franc will abruptly reverse. Who will bid on a defaulted bond, or a currency backed by it?

The game of floating paper currencies is not zero-sum, but negative-sum. Every move destroys someone’s capital. On Thursday, the SNB admitted it lost 38B francs. How much did commercial banks, pension funds, and other debtors in Switzerland lose in addition?


As Germany loses battle for ECB, QE goes global

What is Super Mario up to?

First, he gave an unexpectedly dovish speech at the Jackson Hole conference, rather ungallantly upstaging the host, Ms Yellen, who was widely anticipated to be the most noteworthy speaker at the gathering (talking about the labor market, her favorite subject). Having thus single-handedly and without apparent provocation raised expectations for more “stimulus” at last week’s ECB meeting, he then even exceeded those expectations with another round of rate-cuts and confirmation of QE in form of central bank purchases of asset-backed securities.

These events are significant not because they are going to finally kick-start the Eurozone economy (they won’t) but because 1) they look rushed, and panicky, and 2) they must clearly alienate the Germans. The ideological rift that runs through the European Union is wide and deep, and increasingly rips the central bank apart. And the Germans are losing that battle.

As to 1), it was just three months ago that the ECB cut rates and made headlines by being the first major central bank to take a policy rate below zero. Whatever your view is on the unfolding new Eurozone recession and the apparent need for more action (more about this in a minute), the additional 0.1 percent rate reduction will hardly make a massive difference. Yet, implementing such minor rate cuts in fairly short succession looks nervous and anxious, or even headless. This hardly instils confidence.

And regarding the “unconventional” measures so vehemently requested by the economic commentariat, well, the “targeted liquidity injections” that are supposed to direct freshly printed ECB-money to cash-starved corporations, and that were announced in June as well, have not even been implemented yet. Apparently, and not entirely unreasonably, the ECB wanted to wait for the outcome of their “bank asset quality review”. So now, before these measures are even started, let alone their impact could even be assessed, additional measures are being announced. The asset purchases do not come as a complete surprise either. It was known that asset management giant BlackRock had already been hired to help the ECB prepare such a program. Maybe the process has now been accelerated.

This is Eurozone QE

This is, of course, quantitative easing (QE). Many commentators stated that the ECB shied away from full-fledged QE. This view implies that only buying sovereign debt can properly be called QE. This does not make sense. The Fed, as part of its first round of QE in 2008, also bought mortgage-backed securities only. There were no sovereign bonds in its first QE program, and everybody still called it QE. Mortgage-backed securities are, of course, a form of asset-backed security, and the ECB announced purchases of asset-backed securities at the meeting. This is QE, period. The simple fact is that the ECB expands its balance sheet by purchasing selected assets and creating additional bank reserves (for which banks will now pay the ECB a 0.2 percent p.a. “fee”).

As to 2), not only will the ECB decisions have upset the Germans (the Bundesbank’s Mr. Weidmann duly objected but was outvoted) but so will have Mr. Draghi’s new rhetoric. In Jackson Hole he used the F-word, as in “flexibility”, meaning fiscal flexibility, or more fiscal leeway for the big deficit countries. By doing so he adopted the language of the Italian and French governments, whenever they demand to be given more time for structural reform and fiscal consolidation. The German government does not like to hear this (apparently, Merkel and Schäuble both phoned Draghi after Jackson Hole and complained.)

The German strategy has been to keep the pressure on reform-resistant deficit-countries, and on France and Italy in particular, and to not allow them to shift the burden of adjustment to the ECB. Draghi has now undermined the German strategy.

The Germans fear, not quite unjustifiably, that some countries always want more time and will never implement reform. In contrast to those countries that had their backs to the wall in the crisis and had little choice but to change course in some respect, such as Greece, Ireland, and Spain, France and Italy have so far done zilch on the structural reform front. France’s competitiveness has declined ever since it adopted the 35-hour workweek in 2000 but the policy remains pretty much untouchable. In Italy, Renzi wants to loosen the country’s notoriously strict labour regulations but faces stiff opposition from the trade unions and the Left, not least in his own party. He now wants to give his government three years to implement reform, as he announced last week.

Draghi turns away from the Germans

German influence on the ECB is waning. It was this influence that kept alive the prospect of a somewhat different approach to economic challenges than the one adopted in the US, the UK and, interestingly, Japan. Of course, the differences should not be overstated. In the Eurozone, like elsewhere, we observed interest rate suppression, asset price manipulations, and massive liquidity-injections, and worse, even capital controls and arbitrary bans on short-selling. But we also saw a greater willingness to rely on restructuring, belt-tightening, liquidation, and, yes, even default, to rid the system of the deformations and imbalances that are the ultimate root causes of recessions and the impediments to healthy, sustainable growth. In the Eurozone it was not all about “stimulus” and “boosting aggregate demand”. But increasingly, the ECB looks like any other major central bank with a mandate to keep asset prices up, government borrowing costs down, and a generous stream of liquidity flowing to cover the cracks in the system, to sustain a mirage of solvency and sustainability, and to generate some artificial and short-lived headline growth. QE will not only come to the Eurozone, it will become a conventional tool, just like elsewhere.

I believe it is these two points, Draghi’s sudden hyperactivity (1) and his clear rift with the Germans and his departure from the German strategy (2) that may explain why the euro is finally weakening, and why the minor announcements of last Thursday had a more meaningful impact on markets than the similarly minor announcements in June. With German influence on the ECB waning, trashing your currency becomes official strategy more easily, and this is already official policy in Japan and in the US.

Is Draghi scared by the weak growth numbers and the prospect of deflation?

Maybe, but things should be put in perspective.

Europe has a structural growth problem as mentioned above. If the structural impediments to growth are not removed, Europe won’t grow, and no amount of central bank pump priming can fix it.

Nobody should be surprised if parts of Europe fall into technical recessions every now and then. If “no growth” is your default mode then experiencing “negative growth” occasionally, or even regularly, should not surprise anyone. Excited talk about Italy’s shocking “triple-dip” recession is hyperbole. It is simply what one should expect. Having said this, I do suspect that we are already in another broader cyclical downturn, not only in Europe but also in Asia (China, Japan) and the UK.

The deflation debate in the newspapers is bordering on the ridiculous. Here, the impression is conveyed that a drop in official inflation readings from 0.5 to 0.3 has substantial information content, and that if we drop below zero we would suddenly be caught in some dreadful deflation-death-trap, from which we may not escape for many years. This is complete hogwash. There is nothing in economic theory or in economic history that would support this. And, no, this is not what happened in Japan.

The margin of error around these numbers is substantial. For all we know, we may already have a -1 percent inflation rate in the Eurozone. Or still plus 1 percent. Either way, for any real-life economy this is broadly price-stability. To assume that modest reductions in any given price average suddenly mean economic disaster is simply a fairy tale. Many economies have experienced extended periods of deflation (moderately rising purchasing power of money on trend) in excess of what Japan has experienced over the past 20 years and have grown nicely, thank you very much.

As former Bank of Japan governor Masaaki Shirakawa has explained recently, Japan’s deflation has been “very mild” indeed, and may have had many positive effects as well. In a rapidly aging society with many savers and with slow headline growth it helped maintain consumer purchasing power and thus living standards. Japan has an official unemployment rate of below 4 percent. Japan has many problems but deflation may not be one of them.

Furthermore, the absence of inflation in the Eurozone is no surprise either. There has been no money and credit growth in aggregate in recent years as banks are still repairing their balance sheets, as the “asset quality review” is pending, and as other regulations kick in. Banks are reluctant to lend, and the private sector is careful to borrow, and neither are acting unreasonably.

Expecting Eurozone inflation to clock in at the arbitrarily chosen 2 percent is simply unrealistic.


Draghi’s new activism moves the ECB more in the direction of the US Fed and the Bank of Japan. This alienates the Germans and marginally strengthens the position of the Eurozone’s Southern periphery. This monetary policy will not reinvigorate European growth. Only proper structural reform can do this but much of Europe appears unable to reform, at least without another major crisis. Fiscal deficits will grow.

Monetary policy is not about “stimulus” but about maintaining the status quo. Super-low interest rates are meant to sustain structures that would otherwise be revealed to be obsolete, and that would, in a proper free market, be replaced. The European establishment is interested in maintaining the status quo at all cost, and ultra-easy monetary policy and QE are essentially doing just that.

Under the new scheme of buying asset-backed securities, the ECB’s balance sheet will become a dumping ground for unwanted bank assets (the Eurozone’s new “bad” bank). Like almost everything about the Euro-project, this is about shifting responsibility, obscuring accountability, and socializing the costs of bad decisions. Monetary socialism is coming. The market gets corrupted further.

Book Reviews

‘The system has spun out of control’

Book Review: The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

The_Death_of_Money_Cover_ArtThe title will no doubt give Cobden Centre readers a feeling of déjà vu, but James Rickards’ new book (The Death of Money: The Coming Collapse of the International Monetary System) deals with more than just the fate of paper money – and in particular, the US dollar. Terrorism, financial warfare and world government are discussed, as is the future of the European Union.

Though he quotes F.A. Hayek a few times, the Austrian School gets only one mildly disparaging mention in the entire book. This seems odd for an author who devotes a whole chapter to the benefits of the gold standard. His first bestselling book, Currency Wars, argues that currency wars are not just an economic or monetary concern, but a national security concern for the USA.

Rickards relies on emerging Chaos theories of economics and markets (1) to buttress his arguments in favour of sound money and prudent – limited – government. He uses the same insights, twinned with years of Wall Street experience, to explain why the “coming collapse of the dollar and the international monetary system is entirely foreseeable.”

One of Rickards’ key arguments is that exponential increases in the total size of credit markets mean exponential increases in risk. The gross size of derivative markets is the problem, irrespective of false assurances about netting, he claims. Politicians and central bankers have by and large learnt nothing from recent crises, and are still “in thrall to bank political contributions.”

He makes the case for the US federal government to reinstate Depression-era restrictions on banking activities and for most derivatives to be banned. As a former Federal Reserve Chairman, Paul Volcker, said in 2009, “the only useful thing banks have invented in 20 years is the ATM” – a sentiment Rickards would probably be sympathetic to.

The chapter dealing with the Fed’s hubris and what investment writer James Grant calls our “PhD Standard” of macroeconomic management will be familiar territory for readers of this site. The Fed is trapped between the rock of natural deflationary forces of excessive debt, an ageing population and cheap imports frustrating its efforts to generate a self-sustaining economic recovery and the hard place of annualised inflation of 2%. Rickards quotes extensively from eminent economist and Ben Bernanke mentor Frederic Mishkin, who noted in a 2013 paper titled Crunch Time: Fiscal Crises and the Role of Monetary Policy that “ultimately, the central bank is without power to avoid the consequences of an unsustainable fiscal policy.”

More interesting is the author’s attempt to map out what-happens-next scenarios. The chapter about the on-going transformation of the International Monetary Fund into the world’s central bank, and Special Drawing Rights (SDRs) into a global currency, is particularly insightful. Though Rickards doesn’t say it, Barack Obama’s former chief of staff (and current Mayor of Chicago) Rahm Emanuel’s dictum about never letting a crisis go to waste seems to apply here: hostile acts of financial warfare would lead to calls for more international regulation, and to more government intervention and monitoring of markets. Observers of the EU’s crab-like advance over the last half century will be familiar with the process.

Indeed, my only quibble with this book is Rickards’ starry-eyed take on the EU – soon to be “the world’s economic superpower” in his view. Though he makes a good argument – similar to Jesús Huerta de Soto’s – that relatively-tight European Central Bank monetary policy is forcing effective structural adjustments in the eurozone periphery, as well as in eastern states that wish to join the euro, his endorsement of other aspects of the EU seem too sweeping.

The author talks of the benefits of “efficiencies for the greater good” in supranational government, and how subsidiarity makes allowances for “local custom and practice”. But, as the regulatory débacle surrounding the Somerset floods has shown recently, EU rule frequently licenses bureaucratic idiocies that destroy effective, established national laws. Regulatory central planning for an entire continent is, I’d say, just as suspect as monetary central planning for one country.

The continent’s demographic problems are probably containable in the short-term, as Rickards says. But mass immigration is driving increasing numbers of white Europeans to far-right parties. And while there is consistently strong public support for the euro in the PIIGS (Portugal, Ireland, Italy, Greece and Spain), he’s silent on the broader question of the EU’s democratic legitimacy. No mention of those pesky ‘No’ votes in European Constitution, Maastricht and Lisbon Treaty referendums – or of the Commission’s own Eurobarometer polls, which show more and more Europeans losing faith in “the project”.

No matter I suppose: the eurocrats will rumble on regardless. But what was that quote about democracy being the worst form of government apart from all the others?

All in all though, this is a great book – even for someone like me who’s not exactly new to the economic doom ‘n’ gloom genre. As Rickards says at the end of his intro: “The system has spun out of control.”

(1) For example Juárez, Fernando (2011). “Applying the theory of chaos and a complex model of health to establish relations among financial indicators”. Procedia Computer Science 3: 982–986.


Currency war means currency suicide

What the media calls a “currency war,” whereby nations engage in competitive currency devaluations in order to increase exports, is really “currency suicide.” National governments persist in the fallacious belief that weakening one’s own currency will improve domestically-produced products’ competitiveness in world markets and lead to an export driven recovery. As it intervenes to give more of its own currency in exchange for the currency of foreign buyers, a country expects that its export industries will benefit with increased sales, which will stimulate the rest of the economy. So we often read that a country is trying to “export its way to prosperity.”

Mainstream economists everywhere believe that this tactic also exports unemployment to its trading partners by showering them with cheap goods and destroying domestic production and jobs. Therefore, they call for their own countries to engage in reciprocal measures. Recently Martin Wolf in the Financial Times of London and Paul Krugman of the New York Times both accuse their countries’ trading partners of engaging in this “beggar-thy-neighbour” policy and recommend that England and the US respectively enter this so-called “currency war” with full monetary ammunition to further weaken the pound and the dollar.

I am struck by the similarity of this currency-war argument in favour of monetary inflation to that of the need for reciprocal trade agreements. This argument supposes that trade barriers against foreign goods are a boon to a country’s domestic manufacturers at the expense of foreign manufacturers. Therefore, reciprocal trade barrier reductions need to be negotiated, otherwise the country that refuses to lower them will benefit. It will increase exports to countries that do lower their trade barriers without accepting an increase in imports that could threaten domestic industries and jobs. This fallacious mercantilist theory never dies because there are always industries and workers who seek special favours from government at the expense of the rest of society. Economists call this “rent seeking.”

A Transfer of Wealth and a Subsidy to Foreigners

As I explained in Value in Devaluation?, inflating one’s currency simply transfers wealth within the country from non-export related sectors to export related sectors and gives subsidies to foreign purchasers.

It is impossible to make foreigners pay against their will for the economic recovery of another nation. On the contrary, devaluing one’s currency gives a windfall to foreigners who buy goods cheaper. Foreigners will get more of their trading partner’s money in exchange for their own currency, making previously expensive goods a real bargain, at least until prices rise.

Over time the nation which weakens its own currency will find that it has “imported inflation” rather than exported unemployment, the beggar-thy-neighbour claim of Wolf and Krugman. At the inception of monetary debasement the export sector will be able to purchase factors of production at existing prices, so expect its members to favour cheapening the currency. Eventually the increase in currency will work its way through the economy and cause prices to rise. At that point the export sector will be forced to raise its prices. Expect it to call for another round of monetary intervention in foreign currency markets to drive money to another new low against that of its trading partners.

Of course, if one country can intervene to lower its currency’s value, other countries can do the same. So the European Central Bank wants to drive the euro’s value lower against the dollar, since the US Fed has engaged in multiple programs of quantitative easing. The self-reliant Swiss succumbed to the monetary debasement Kool-Aid last summer when its sound currency was in great demand, driving its value higher and making exports more expensive. Lately the head of the Australian central bank hinted that the country’s mining sector needs a cheaper Aussie dollar to boost exports. Welcome to the modern version of currency wars, AKA currency suicide.

There is one country that is speaking out against this madness: Germany. But Germany does not have control of its own currency. It gave up its beloved Deutsche Mark for the euro, supposedly a condition demanded by the French to gain their approval for German reunification after the fall of the Berlin Wall. German concerns over the consequences of inflation are well justified. Germany’s great hyperinflation in the early 1920’s destroyed the middle class and is seen as a major contributor to the rise of fascism.

As a sovereign country Germany has every right to leave the European Monetary Union and reinstate the Deutsche Mark. I would prefer that it go one step further and tie the new DM to its very substantial gold reserves. Should it do so, the monetary world would change very rapidly for the better. Other EMU countries would likely adopt the Deutsche Mark as legal tender, rather than reinstating their own currencies, thus increasing the DM’s appeal as a reserve currency.

As demand for the Deutsche Mark increased, demand for the dollar and the euro as reserve currencies would decrease. The US Fed and the ECB would be forced to abandon their inflationist policies in order to prevent massive repatriation of the dollar and the euro, which would cause unacceptable price increases.

In other words, a sound Deutsche Mark would start a cascade of virtuous actions by all currency producers. This Golden Opportunity should not be squandered. It may be the only non-coercive means to prevent the total collapse of the world’s major currencies through competitive debasements called a currency war, but which is better and more accurately named currency suicide.

This article was previously published at


In Defense of the Euro (An Austrian Perspective)

Professor Jesus Huerta De Soto sent me a copy of his new film called “In Defense of the Euro (An Austrian Perspective)”. You can watch it here.

For those truly interested in the Gold Standard as a potential solution to our monetary crises, whilst the Euro is a very weak imitation of it, it does force governments in the euro area, in the absence of any ability to mint up money out of nowhere, to confront their profligate over-expenditure and move towards being honest with their citizens over it.

We who sit in nations that can mint up new money from nowhere – the UK, USA, and Japan – can seemingly avoid the pain of confronting our profligacy, but we wither on the vine; the pain is required to and grow and prosper again. The eurozone area will be on a stronger footing, with governments living within their means, much quicker than in the nations where monetary nationalism rules the day.

To all those who trash the Euro and Euro-style solutions, you should listen to what the Professor has to say, reflect on this contrary view, and challenge your perspective. You may find that, surprisingly, the Euro could lead to smaller governments and more honest money.


France’s cul-de-sac

Over a year ago, in the midst of an ongoing economic crisis, François Hollande celebrated his victory over Nicolas Sarkozy in France’s presidential elections. Hollande became the leader of a country in economic turmoil. In the past year, he has had relatively free rein to carry out his economic agenda, since the Socialist Party he leads has a majority in the French Parliament.

France has a history of grandiose government spending, even among European countries. Public spending accounts for 57 percent of national output, and public debt accounts for over 90 percent of GDP. While austerity has been the buzzword in the rest of Europe since 2009, resulting in a modest decline in government spending as a percentage of GDP, France is not part of that trend.

The public sector now accounts for almost two-thirds of all direct economic activity, and more if indirect activity is counted. This large and growing dependence on government is disastrous because it is funded by ever higher taxes. These high taxes drain the private sector (while simultaneously giving the public sector an aura of impotence) and deficit spending obliges future generations of French citizens to pay off the largesse of today’s government.

Deep within the French psyche is the idea that cuts to the gargantuan public sector would cause undue harm to everyone. This inability to envision a French economy where the private sector picks up the slack when fewer public services are provided has reinforced the reluctance of politicians, and in particular, François Hollande, to use austerity measures to overcome the crisis. Instead, the current solution is to increase government spending and create more jobs in the public sector. For this reason, Hollande’s administration has pledged to increase the minimum wage for all employees, public and private, and create 60,000 new public teaching jobs.

In addition to the present increases in public expenditures, Hollande has committed to future increases in public spending. His decision to roll back Sarkozy’s initiative to raise the retirement age from 60 to 62 obliges taxpayers not only to support the burgeoning ranks of public employees “working” today, but the growing number of public retirees supported by generous social security payments.

In a bid to combat rising interest rates on its bonds, the French government has recently commenced a campaign to raise taxes to fund the country’s ballooning expenditures. Indeed, one of Hollande’s primary electoral promises was a top tax rate of 75 percent on the so-called riche (income earners above 1 million euros).

France has one of the highest corporate tax rates in the European Union, exceeding even the famous high rates of Sweden. While the European Union’s average tax rate has been decreasing (from about 50 percent in 2005 to about 44 percent in 2012), France’s tax rate has remained constantly high (over 65 percent from 2005 to 2012).

In addition to high tax rates, French businesses are faced with the highest social charges in the European Union, as well as oppressive government regulation. These factors make for an unattractive business environment. Recently several large companies closed their doors rather than deal with the difficult business conditions, resulting in thousands losing their jobs. New companies are slow to appear in such a climate.

In response to the threat of higher French taxes, British Prime Minister David Cameron, offered to “roll out the red carpet” for any high-income earning Frenchmen who wanted to avoid paying French taxes. Of course, we would be remiss to think that Cameron was motivated by anything other than to attract tax dollars into his own strained coffers. The result, however, was tax competition between states.

Before the advent of the European Monetary Union, highly indebted countries sought to cure their fiscal woes through inflationary policies. France removed this option from the table when it adopted the euro. Indeed, as Philipp Bagus demonstrates in his book The Tragedy of the Euro, it was the French who aggressively pushed for monetary integration within Europe. They must now adhere to the results of this decision.

The monetary union functions somewhat as a modern gold standard. Just as gold once kept states from running prolonged deficits, today the loss of an independent monetary policy constrains European member states in a similar way.

With no recourse to an inflationary monetary policy, the French government is at the mercy of the bond market. As lenders worry about the French government’s ability to repay their debts, now and in the future, interest rates will rise (as they have already). The French government will have to rein in its deficit spending either through spending cuts or tax increases as the cost of borrowing goes up. The private sector is already a heavily burdened minority, and given the current exodus of French companies and entrepreneurs to other countries, any further taxes would be coming from an already shrinking tax-paying base.

Like many of his counterparts, François Hollande realizes that the beleaguered French economy needs change. What he must do is focus on the areas that he can change. He must decrease public spending and lower taxes in order to increase employment. In addition, the private sector must be allowed to heal and recover, instead of treating it as a goose to be plucked. This is the only way the French government can continue to function, and more importantly, the only way to get France out of its economic cul-de-sac.

This article was co-authored with  and previously published at


The rise of the money cranks

It’s official: global economic policy is now firmly in the hands of money cranks.

The lesson from the events of 2007-2008 should have been clear: boosting GDP with loose money – as the Greenspan Fed did repeatedly between 1987 and 2005 and most damagingly between 2001 and 2005 when in order to shorten a minor recession it inflated a massive housing bubble – can only lead to short term booms followed by severe busts. A policy of artificially cheapened credit cannot but cause mispricing of risk, misallocation of capital and a deeply dislocated financial infrastructure, all of which will ultimately conspire to bring the fake boom to a screeching halt. The ‘good times’ of the cheap money expansion, largely characterized by windfall profits for the financial industry and the faux prosperity of propped-up financial assets and real estate (largely to be enjoyed by the ‘1 percent’), necessarily end in an almighty hangover.

The crisis that commenced in 2007 was therefore a massive opportunity: an opportunity to allow the market to liquidate the accumulated dislocations and to bring the economy back into balance; an opportunity to reflect on the inherent instability that central bank activism and manipulation of interest rates must generate; an opportunity to cut off a bloated financial industry from the subsidy of cheap money; and an opportunity to return to sound money and, well, to capitalism. Because for all the thoughtless talk of this being a ‘crisis of capitalism’, a nonsense concocted on the facile assumption that anything that is noisily supported by bankers must be representative of free market ideology, the modern system of ‘bubble finance’, cheap fiat money and excessive debt has precious little to do with true free-market capitalism.

That opportunity was not taken and is now lost – maybe until the next crisis comes along, which won’t be long. It has become clear in recent years – and even more so in recent months and weeks – that we are moving with increasing speed in the opposite direction: ever more money, cheaper credit, and manipulated markets (there is one notable exception to which I come later). Policy makers have learned nothing. The same mistakes are being repeated and the consequences are going to make 2007/8 look like a picnic.

From ‘saving the world’ to blowing new bubbles

Of course, I was never very optimistic that the route back to the free market and sound money would be taken. At the time I left my job in finance in 2009 and began to write Paper Money Collapse, the authorities had already decided that to deal with the consequences of easy-money-induced bubbles we needed more easy money. ‘Quantitative easing’, massive bank bailouts, deficit spending and ultra-low policy rates had become the policy of choice globally. But at least the pretence was upheld for a while that these were temporary measures – ugly and unprincipled but required under the dreadful conditions of 2008 to save ‘the system’. The first round of debt monetization after the Lehman collapse – the exchange of $1 trillion of mortgage-backed securities on bloated bank balance sheets for freshly minted bank reserves from Bernanke’s printing press under ‘quantitative easing 1.0’ (QE1) – was presented as an emergency measure to avoid bank collapses and a systemic crisis.

I never thought that this was a convincing rationale as it was clear to me that whatever the accumulated dislocations were, there was ultimately no alternative to allowing the market to identify and liquidate them. Aborting, delaying and sabotaging this essential process of economic cleansing and rebalancing would only cause new problems. Even on the assumption that these were measures to deal with extreme ‘tail events’, I could not then and cannot now support them. But it is becoming abundantly clear that these measures are neither temporary nor restricted to avoiding bank runs or systemic chaos but that now, after the public has become sufficiently accustomed to them and a cheap-money-addicted financial industry has begun to incorporate them into their business models, they constitute the ‘new normal’, that they are now the accepted ‘modern’ tool kit of central bankers. Zero interest rates, trillion-dollar open-market operations to manipulate asset prices and to ‘manage’ the yield curve are now just another day in the modern fiat money economy. Nobody talks of restraining central bank activism. Rather, the temptation is growing to use these tools to kick-start another artificial boom.

In his excellent new book The Great Deformation – The Corruption of Capitalism in America, David Stockman provides a fascinating account of how the principles of sound money, balanced budgets and small government have progressively been weakened, betrayed, undermined and ultimately completely abandoned in American politics (often by Republican politicians and even some of the alleged ‘free market heroes’ of Republican folklore), and how today’s cocktail of bubble finance and trillion-dollar deficits represents the delayed but inevitable blossoming of destructive seeds that were sown with Roosevelt’s New Deal and Nixon’s default on the Bretton Woods gold exchange standard. In a chapter on the recent crisis, Stockman argues convincingly that the shameful bailout of Wall Street in 2008, in particular of Goldman Sachs, Morgan Stanley, and a few other highly leveraged entities via the bailout of ‘insurance’ giant AIG, were sold to Congress and the wider public with exaggerated claims that the nation’s real economy was at imminent risk of collapse. From my position as an economist and a market participant at the time of these events, Stockman’s analysis and interpretation strike me as entirely consistent and correct. But even if we were willing to give more credit to the claims of the ‘bailsters’ and interventionists that the fallout for Main Street would have been substantial, that would only further underline how far the Fed’s preceding easy money policies had destabilized the economy, and the question would still remain whether it could ever be a reasonable objective of policy to sustain these large-scale dislocations against market forces.

Be that as it may, the dislocations were largely sustained and plenty of new ones added. Talk of ‘exit strategies’ – that is, of a ‘normalization’ of interest rates and shrinking of central bank balance sheets – has now pretty much died down. Super-low interest rates are now a permanent tonic for the financial industry. In fact, the nature of the debate has shifted markedly over the past 15 months as the idea is progressively gaining adherents that the new hyper-interventionist tool-kit of the central bankers that was slipped in under the cloak of avoiding financial Armageddon in 2008 should now be used pro-actively to start a new easy-money-induced credit boom, that aggressive money printing and debt monetization should be employed to generate a new growth cycle. Many economists are de facto demanding a new bubble.

In America, QE2 was already targeted at boosting the prices of government debt and thereby lowering interest rates and encouraging more lending – which naturally means more borrowing and more debt, the opposite of deleveraging and rebalancing. And QE3 – which is an open-ended $85-billion-a-month price-fixing exercise for selected mortgage- and government- securities – is even targeted officially at lowering the unemployment rate, meaning Fed officials seriously claim that they can create (profitable and lasting?) jobs by cleverly manipulating asset prices.

The resurgence of the money cranks

Rising real wealth is always and everywhere the result of the accumulation of productive capital, which means real resources saved through the non-consumption of real income, and its employment by entrepreneurs in competitive markets under the guidance of uninhibited price formation. This process requires apolitical, hard and international money. Monetary debasement always hinders real wealth creation; it does not aid it. Easy money leads to boom and bust, never to lasting prosperity. Easy money is not a positive-sum game and not even a zero-sum game. It is always and everywhere a negative-sum game.

To claim, instead, that an economy’s performance and society’s wealth is lastingly enhanced by pumping more fiat money through its financial system requires a considerable degree of economic illiteracy and, in the wake of the recent crisis, selective amnesia. Not too long ago, such assertions as to the benefit of inflation and money printing would have clearly marked its proponent as a money crank. But the cranks are now manning the monetary policy ships everywhere, and the international commentariat is either willingly complicit in spreading economic nonsense or intellectually challenged when it comes to exposing the naivete and recklessness of these policies.

Nothing confirms the renewed dominance of money crankism more than the present sad spectacle of Japan, a country that became a post-WWII economic powerhouse in no small measure thanks to the old capitalist virtues of hard work, high savings rates, strong capital accumulation, and innovative and international-minded entrepreneurship, now taking a leaf out of the policy book of Argentina and embarking on a mission of aggressive money printing, currency debasement, asset price manipulation and inflationism. Japanese savers are already losing international purchasing power by the bucket load as the Yen keeps plummeting in international markets.

The idea that currency debasement will result in lasting, self-sustained growth and rising prosperity is positively laughable. I do not doubt that Japan’s new initiative of aggressive monetization has the potential to improve the headline numbers on a number of corporate earning reports and to even give a near-term boost to GDP. Like most drugs, easy money tempts its users with the promise of an immediate but short-lived high. What is, however, absolutely certain is that whatever ‘stimulus’ is generated in the short term is bought at the price of more imbalances (most certainly higher indebtedness) that will weigh down severely on the Japanese population in the future. What is even more worrying is that Japan’s gigantic pool of government debt – held to a large extent by an aging population as a ‘pension nest egg’ and by domestic banks on highly levered balance sheets – is a veritable powder keg, and the Bank of Japan’s new inflation strategy is tantamount to playing with fire.

The deflation myth

It has become commonplace to justify Japan’s monetary ‘experimentation’ with reference to the country’s long suffering under supposedly ‘crippling’ deflation. Even otherwise respectable financial newspapers and journals lazily repeat this standard refrain. It is complete and utter nonsense. Whatever Japan’s problems are, and I am sure they are numerous and sizable, deflation is not one of them.

Firstly, there is no economic rationale for assuming that the type of moderate and ongoing deflation (secular deflation) that analysts suspect in Japan and that is the result of stable money and marginal improvements in productivity could constitute a problem for the economy’s performance. Why such deflation is harmless (and even preferable to moderate inflation) I explain in detail in chapter 5 ofPaper Money Collapse. I make no claim to originality here, as this insight was widely accepted among most serious mainstream economists up to and including the first third of the twentieth century when it became sadly ‘forgotten’ rather than refuted. But if you don’t want to take my word for it or go through the argument in my book, or if you want to have ‘empirical evidence’, then you might want to listen to Milton Friedman, hardly an advocate of the gold standard, who (together with Anna Schwartz) analyzed the late 19th century economy of the United States which had both stronger growth and much more deflation (in particular after the fiat money episode of the Civil War had ended) than Japan had over the past 20-odd years, and who concluded that U.S. data “casts serious doubts on the validity of the now (1963) widely held view that secular price deflation and rapid economic growth are incompatible.”

Secondly, there is not even any deflation in Japan that deserves the name. The data (which is here) does not support it. I am sure the economists at the Bank of Japan employ massive magnifying glasses to detect deflation in their data series. What Japan has is, by any rational standard, price stability.

In February 2013, the consumer price index (CPI) stood at 99.3. Ten years earlier, in February 2003, it stood at 100.3, and ten years before that, in February 1993, at 99.6. Apart from the fact that, as with any price-index data, the methodology, accuracy and relevance of these statistics is always highly debatable, it is clear that if we do take the data at face value we see an economy that has roughly enjoyed stable prices for two decades. In fact, prices rose marginally in the late 1990s, remained stable for a few years, and have recently declined marginally.

In February of this year, the inflation rate was -0.6 percent year over year. Would any of the commentators who lament Japan’s ‘crippling deflation’ claim that an inflation rate of +0.6 percent year over year would constitute worrying inflation, or even deserve the label ‘inflation’ at all? Would it not simply be called a rounding error? – By comparison, official UK inflation stood at +2.8 percent year over year in February 2013 and has fluctuated between +1.1 percent and +5 percent over the past 4 years alone. What monetary system is more conducive to rational economic calculation and planning – Japan’s or Britain’s? (It should be worth noting that over those 4 years the British economy has NOT outperformed Japan, despite its ‘wonderful’ inflation.)

Those commentators who tell us that this ‘crippling deflation’ is hurting the economy because people postpone spending decisions in anticipation of lower prices, want us to believe that Mr. and Mrs. Watanabe don’t buy a new popup toaster for ¥3,930 this year because – at a 0.6 percent p.a. deflation rate – they can reasonably assume that it will only cost ¥3,906 to buy the same toaster next year. And they won’t even buy it next year at ¥3,906 because the year after that it will only cost ¥3,883. The Watanabes would thus be able to save ¥47 over two years by not eating any toast (and it goes without saying that they may save considerably more by never eating toast!). This is a saving of – wait for it! – $0.47 or £0.31 (at present exchange rates) for postponing the purchase of a standard consumption item for two years – 730 mornings without toast! The notion that this ‘crippling’ deflation is holding back Japanese growth is simply beyond ridiculous, yet you can hardly open a newspaper these days without seeing such nonsense presented as economic analysis. (I would recommend that these experts on consumer psychology call the people at Apple, Samsung and other providers of tablets, smartphones and various consumer technology items and tell them that they are missing a trick: it is evidently rising prices that get people buying, not falling prices!)

Funding the state

The deflation argument is so flimsy that one can only assume it is a convenient scapegoat for a different agenda: securing printing-press funding for the state. Under Japan’s new monetary debasement plan, the Bank of Japan will practically buy the entire annual issuance of new government debt and thus fund excessive public sector spending directly via the printing press. Japan is famously the world’s most highly indebted state at 230% of GDP and runs an annual budget deficit of around 10% of GDP. Even the most troubled members of EMU enjoy better funding stats.

The often-heard argument that such profligacy has evidently not been punished by markets for years and decades, so why should the day of reckoning be any nearer now, is unconvincing. For years, the Japanese public has in fact saved and has faithfully handed its private savings over to the state, which immediately wasted them on Keynesian ‘stimulus’ projects that will never bring a meaningful return (bridges and roads to nowhere, public pools, agricultural subsidies). For a long time it was to a considerable degree private frugality that funded public excess. But now the savings rate has collapsed to 2 percent and given the shrinking workforce and aging population is unlikely to ever recover. Private savings are thus no longer sufficient to fund the state’s recklessness, so now it is up to the Bank of Japan to keep the state in business and maintain a mirage of solvency. The inflationary implications of funding massive government waste through money-printing rather than voluntary savings are, of course, considerable.

The risk here is not that the policy of monetary debasement will again amount to ‘pushing on a string’ and fail to raise inflation and inflation expectations. The much riskier and likelier outcome is that this policy will ultimately ‘succeed’. The aging Japanese population sits on a massive pile of government debt that is not backed by productive capital but that the population still considers its ‘pension assets’. Debasing the purchasing power of fixed income streams that Japanese pensioners draw from this pool will ultimately dampen domestic consumption – the very component of GDP that the inflationists claim to boost with their monetary debasement. If inflation only rises from -0.6 percent to +1 percent, the entire Japanese yield curve is ‘under water’. Only very long maturity bonds will still provide a positive real yield. This will also hurt the banks which are massive (leveraged) owners of government debt. And of course, a meaningful sell-off in the bond market would quickly wipe out bank capital.

Such a sell-off may still not occur anytime soon. At the present UK inflation-rate of +2.8 percent, most of the UK’s government bonds are also trading at negative real yields. In fact, in recent months many bond investors around the world have exhibited a remarkable willingness to hold bonds at negative real returns. It appears as if many of these securities have become, in the eyes of their holders, ‘cash equivalents’, i.e. instruments that are held for reasons of safety and liquidity, not for reasons of income generation. How far the central banks can exploit this phenomenon is uncertain. Central banks cannot turn water into wine but almost any asset into (fiat) money by ‘monetizing’ them. The only limit to this operation is the willingness of the public to hold these new ‘monetized’ assets, and frankly I doubt that there is money demand in Japan to the tune of 230 percent of GDP. – We shall find out.

Money crankism will spread

‘Abenomics’ will not solve Japan’s problems; it will make the Japanese worse off and it has the potential to trigger a mighty financial crisis. Yet, what is surely inevitable might not be imminent. During the early honeymoon between ‘Abenomics’ and financial reality, the idea of printing yourself to prosperity is likely to have imitators, with the UK being a prime candidate. In terms of total indebtedness, the UK is the one industrialized country that can compete with Japan, meaning it is in the same supersized debt-pickle. Even the timid attempts by Chancellor Osborne to lower the speed at which Her Majesty’s government goes further into debt are being attacked as savage ‘austerity’ by the opposition and large parts of the media. In his latest budget he put the remaining taxpayer-chips on another housing bubble and gave the Bank of England more room to ignore inflation. Over at Thredneedle Street, the Deputy Governor of the Bank of England, Paul Tucker, openly fantasized about negative interest rates recently, outgoing Governor Mervyn King voted for more QE (overruled), and Governor-elect Mark Carney promises to be, well, – flexible. Bottom line: desperation is spreading. Watch this place! Chances are the Old Lady is the next to throw any remaining caution and remaining vestiges of monetary sanity to the wind and – go ‘all in’.

This will end badly.

P.S.: As to ‘the exception’, the only place where money crankism is not the order of the day yet is – the Euro Zone!– Yes, I am serious. – I know, I know. This is an amalgamation of semi-socialist, semi-bankrupt welfare states that share the same politicized paper currency issued by a central bank that has already bailed out too many banks, has manipulated various government bond markets and whose balance sheet as a percent of GDP is larger than the Fed’s. However: in a global sea of monetary madness there are at least a few remaining signs of sanity and orthodox monetary discipline on display in the much derided EMU. Greece was allowed or encouraged to default on part of its debt, which meant that bond-holders had to eat losses. Cyprus’ biggest bank is being wound down, which means depositors are going to eat losses, too. There is a persistent push towards ‘austerity’. On the fiscal front, the Euro Zone easily outperforms the US, the UK and, of course, Japan. While the Fed has increased its balance sheet girth by almost $300 billion in the first three months of 2013 alone, the ECB has reduced its own by almost €400 billion over the same time. My rule is this: the more Professor Krugman is foaming at the mouth and the more apoplectic the commentary from the strategists, analysts and economists in the bailout-addicted financial industry get, the more it seems that Mrs Merkel & Co are getting a few things right.

This article was previously published at


‘Brexit’ talk with Nigel Farage

Episode 87: GoldMoney’s Andy Duncan talks to Nigel Farage MEP, leader of the United Kingdom Independence Party, and co-chair of the Europe of Freedom and Democracy Group within the European Parliament.

They talk about the ongoing euro currency situation and the recent speeches from Mr Barroso, the President of the European Commission. They also discuss the recent news of the German Bundesbank’s decision to repatriate some of its physical gold reserves from the USA and France, and what the chances are of the UK leaving the EU – “Brexit” – in the next few years, and the likely fate of the euro and the EU itself.

This podcast was recorded on 15 January 2013 and previously published at