In my previous article, I considered the possibility that Germany may finally succumb to the malaise spreading around it, causing German rectitude gave way to a little Keynesian counter-cyclicality, and the ECB to begin unreservedly to emulate the Anglo central banks.
A second, less probable outcome, if one hardly to be excluded, is that things have simply gone too far to be retrieved: that there is either a full or partial break-up of the single-currency, for either financial or political motives. Were this to occur, we might expect the newly-liberated nations to make a swift and vigorous recourse to that printing-press over which they would have thereby regained domestic control, with drachma, peseta, escudo, and lira being offered forthwith in profusion and PSI haircuts go hang!
The corollary might be – just as it was with Germanic Europe in the aftermath of the dissolution of Bretton Woods (and as it has been with the SNB in recent quarters) – that the initial response of the stronger nations would be to try to offset the knee-jerk appreciation of their own currencies – with the aim of sheltering their exporters and subsidising their bankers – to the point that their own rates of money creation were left helplessly hostage to the profligacy of their post-devaluation trading partners.
Though such a programme would not do much to save the population of the Olive Belt from facing the full consequences of the long years of public misgovernment and private malfeasance, even so the realisation of their loss of wealth would certainly not be able to be held up by coteries of creditors abroad and by political obstructionism and unfocused street protest at home.
Though we would still prefer to see these countries price themselves back into the market through successive reductions in costs and prices – and by shedding their insupportable indebtedness through administrative means, not force majeure – one sometimes has to wearily admit the pragmatism of Wilhelm Roepke’s formulation that sometimes a country becomes just so uncompetitive that a devaluation, backed up by credit restraint, is the only route out of the Slough of Despond, as it arguably was for 1992 Britain.
The only problem with this is the explicit proviso – that a fall in the exchange rate must not be accompanied by a new superabundance of credit with which to squander the chances of a more deliberate if protracted round of winning orders and securing investment by being cheap and working harder for lower real wages. Historically speaking that has decidedly been the road less travelled – look at Argentina today, for an off-the-peg (!) example of how easy it is to climb back on the old inflationary treadmill which has kept the nations who have ridden it in penury for centuries.
Thus, the greater risk is that the breaking of the shackles would see an abdication of all self-restraint to match it, adding licence to liberty: that nations already tired of the hair shirt would seek to maximise their short-term relief at the expense of their long-term health. They will certainly not lack for advice that this is exactly the course they should pursue. One can almost see the shrill triumphalism filling the op-ed columns of the NY Times even as one writes.
Before embarking upon this perditious way forward, we would do well instead to heed the words of the man we quoted at the start of this series, William Graham Sumner:-
To go on to further inflation… [by whatever methods]… means simply bankruptcy and repudiation. Each new issue will produce, only for a time, ease and apparent prosperity, to be followed in a few years by a new crisis and new distress, then a new issue, and so on over again. Reform will then be no longer possible, and we must run the course to its end, in which the paper disappears as ignominiously as the Continental notes.
As Sumner went on to write of the Greenback era of paper money, with a pertinent moral for us today:-
If we want [sound money], we here see how we must go to work to get it. It is not possible, save by withdrawing a portion of the paper. When we [left the standard], we overissued. The consequence was a rise of prices, increase of speculation, and export of specie. Large importations of merchandise followed, and exportation was loaded with disadvantages.
The course of resumption is the opposite in every particular. When the paper is withdrawn, prices fall, speculation is restrained, [hard currency] flows in. Importations are discouraged, exportations increase and go to pay for [the currency]. It may be added that, as the former process was smooth and agreeable, so the latter is hard and distressing.
No nation has ever had the courage to pursue this course except England, and she only entered upon it after two or three commercial revulsions had destroyed a large part of the paper, never immoderately redundant… Other nations, like Austria and Russia, have gone on for generations, sinking deeper and deeper, crippled in their military and industrial strength by this inheritance, not knowing how to endure it or how to get rid of it, or, like France and our own colonies, have gone through bankruptcy and repudiation.
These are the alternatives, and it has been well likened to the choice of a man in a house on fire who jumps out of the second story rather than wait to be driven up to the third or fourth or the roof.
We rather suspect that, having set the fire themselves, when those who quit the single currency first smell its smoke, they will take the escalator straight to the penthouse, exulting as they do, and then go littering the stairwell with tinder from on high, the better to feed the flames licking about their feet.
In our modern world, where – as our author rightly said – few realise that neither is credit capital, nor money, wealth, but that the first of each pair can be, in over-supply, the destroyer of the second, we are only likely to be free of our pyromania, of our worship of the inflationary fire, when it has burned itself out completely. Hopefully, when it does, we shall find it has not devoured all that we are and all that we possess in its awful, final, fiat money conflagration.