Saturday, January 7, 2012

Synopsis: "The Tragedy of the Euro"

"The Tragedy of the Euro" deals with the recent monetary history, from the banking crisis to the credit crunch in 2007/8 to the current euro and sovereign debt crises in 2011.

Philipp Bagus is a young economist and Professor at the University Rey Juan Carlos in Madrid. The Mises Institute has kindly released the booklet on PDF (download). It's assigned reading for all students of the (post)modern monetary system. The tome is concise, easy digestible, never boring and doesn't get overly technical. "The Tragedy of the Euro" reads like a who-done-it from cover to cover.

Two rival world views
The history of the EU is the battle ground of two rival, mutually exclusive views on Europe: the Classic Liberal, rooted in individualism is about economic freedom in a voluntary, economic confederation of nation states. The socialist vision is the opposite, and will eventually lead to full integration and central governance from Brussels. That view is laid out in the usual statist-collectivist shibboleths as 'solidarity' and 'social-economic policy'. It pushes for a political union which will inexorably lead to an end of the nation state, without as much as one European citizen ever having cast a vote for it.

The covert statist agenda
The political foundation of the European Monetary Union (EMU) is an economic disaster. An economic argument has been used to conceal the true agenda of the statists. Not for a moment have the proponents been able to convince the citizens of the advantages of the single currency (dispensing with money exchange on trips, or else World War Three will ensue). The euro is a facilitator of central planners, and of the French Empire, to curb the economic power of Germany.

Independence of the ECB?
It was the duty of the Bundesbank to ensure price stability, but the only stability the ECB is ensuring is increased inflation. It's independence has proved to have been a myth. The ECB is an auxiliary for the Commission's social economic policies.
Governments, banks, central banks and the ECB are caught in a revolving door. It's an organic entity. While shortsighted, democratic politicians and their makebility ideals have created the crises, they are demonizing capitalism, markets, neo liberalism, speculators, lazy Greeks, banks and lack of regulation. The crises have the statist fingerprint of deficit spending, confiscatory taxation, stranglehold regulations, control and inflation all over them.

Inflationary policies
The ECB has discretionary power to 'print' money, the virtual creation (QE) of fiat money. The ECB has recently lend banks 500 billion euros in 'new' money. That is after they covertly created hundreds of billions of new money in the 6 months prior. Originally this had to be done through the banks, but now the ECB has begun buying bonds with new money out right.

How does it work?
Banks create new money by buying government bonds and use that to finance the ECB. Governments finance sovereign debt with new money that has been created by banks and banks receive new money using bonds as collateral.

Bailouts of banks are nothing but the guarantee, that governments are good for their sovereign debts. Bailouts of countries are nothing but the guarantee that EZ governments are good for the debts of other EZ governments. Bailouts aren't corporate or transnational welfare, but the propping up of the currency with new money (and tax payers money).
Alternative solutions for the bank bailouts would have been available, but governments preferred throwing tax payer's money at the banks, covering corporate risks taken by the banking system; it set a self perpetuating, vicious debt machine in motion.

Unintended consequences
Governments do not even take the trouble of redeeming sovereign debts anymore. Bonds are simply rolled over and covered by new government debt paper.
Debt is used as collateral for financing new debt. A vicious debt spiral ensues.
Bailing out banks and governments encourage making more debt by a mechanism called 'the tragedy of the commons': no one feels responsible for public property. After exploitation it's simply written off.
As a result of inflation the interest on loans is going up, which deteriorates the situation even further.
The bailouts of banks as well as countries are a double moral hazard: as irresponsible banks and governments are aware of the financial safety net, they are taking risks they otherwise would not have taken.

Against the citizens
The fundamental human right to property is violated by purposefully inflationary policies. First and second users of new money benefit, everyone else pays the price as properties lose value.

Monetary policy is used as political leverage to remake Europe into the collectivist, statist vision.
The project isn't faltering by the lack of integration (although it is used for that purpose); it's because governments do not want the discipline of a standard value. They want unlimited deficit spending to buy elections. The policy is aiming at redistribution in favor of countries whose banking system inflate faster than others. It rewards bad behavior.
For the time being the political will exists to extend the route to self-destruction to its unavoidable end.

- Chart of Gold reserves
- Pomoland: "Book: The Tragedy of the Euro"
- Vrijspreker: "Recensie: De Tragedie van de Euro" (Dutch)
- Zerohedge: "Inflation: An Expansion of Counterfeit Credit"

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