We now live
in a phony economic world where central bankers rule without check. Any hint
of weakening data, which is actually a sign of reality and healing returning
to the economy, is quickly met with the promise of more disastrous money
printing. Last week we saw U.S. factory orders down and initial jobless
claims rise. In Europe, we saw the Spanish bank bailout fall flat on its face
and interest rates spike in Spain and Italy. Therefore, in predictable
fashion, financial markets soared on the premise that the ECB and Fed must
imminently ride to the rescue once again.
Meanwhile,
most Main Stream Economists are auditioning for a role with the Weather
Channel by blaming the persistently weak economic data on a warmer than
typical winter. However, in truth the faltering global economy is resulting
from a massive accumulation of debt that has led to a recession/depression in
Europe. The same situation will inevitably cause a recession in the U.S.,
which will continue to cause a reduction in the growth rate of GDP in
emerging markets.
But an
endless increase in central banks' balance sheets can never be the answer to
the malaise we find ourselves in, nor will there be any bailout coming for
Europe other than the viability that can eventually arrive out of a cathartic
depression.
Don't look
for Germany to bailout Europe either. The country will never abdicate its
sovereignty to profligate nations and assume the average borrowing costs of
southern Europe on their debt. The U.S. shouldn't advise Germany to adopt
fiscal unity in Europe unless Treasury Secretary Geithner also thinks it's a
good idea to allow Greece the authority to issue T-Bills. Unless they are
given complete control of the PIIGS spending and taxing authority, the
Germans will most likely abandon their parenting role in Europe in due
course.
The only real
solution for insolvent Europe is to explicitly default on the debt to a level
that brings PIIGS countries to a debt to GDP ratio below 60%. Then to pass
balanced budget amendments and adopt tax and regulation reforms that makes
them competitive with the rest of the world. Also, they need to adhere to the
other strictures of the Maastricht treaty and not fall into the temptation of
abandoning the Euro. Their economies will suffer a short depression, but this
plan is the least painful option.
Having Greece
return to the Drachma and defaulting on their debt through devaluation and
money printing is a much worse option. Many are proposing that Greece now
leave the Euro and inflate their way out of debt; just like Argentina did
during 2002. However, this ignores the fact that the Argentines first
defaulted on $100 billion of their external debt before removing their
currency's peg to the U.S. dollar. Even though the Peso lost about 75% of its
value and caused a brief bout with high inflation, the Argentine central bank
did not have to monetize its debt. Therefore, the amount of new money printed
was greatly reduced and resulted in a quick rebound in the economy.
In sharp
contrast, the Europeans, Japanese and Americans still cling to the idea that
inflation is the answer. PIIGS countries are pursuing an inflationary default
that will increase borrowing costs and lead to a depression that will be far
worse than if they simply admitted their insolvency and defaulted outright.
Devaluing your currency to pay foreign creditors leads to hyperinflation and
complete economic chaos. Paying off your debt by printing money was tried in
Hungary during 1946 and Germany in 1923, but it resulted in complete
devastation and hyperinflation.
If the
Eurozone economies persist in the belief that the ECB can restore solvency to
bankrupt nations, the Euro could fall back to parity with the dollar within
the next 16 months. And if such central bank arrogance persists, the Euro
could eventually go the way of the Hungarian Pengo.
Mr. Draghi should acknowledge that money printing hasn't
fixed Europe's interest rates or economy.
Our central
bank suffers from the same hubris as its European counterpart. Bernanke
believes a deflationary recession must be avoided at all costs and that
prosperity can be found in a printing press. The U.S. already has a higher
debt to GDP ratio than EU (17) and is growing that debt at an unsustainable
8% of GDP per annum. Therefore, if America doesn't remove her addictions to
borrowing and printing money, our own sovereign debt and currency crisis
can't be more than a few years away.
|