About bubbles, bursts, booms and solutions
In the last month more and more voices came up criticizing the monetary policy of the ECB and the austerity measures by the Troika. The last blow came from the BIS in their annual report 2013/2014 (1) proclaiming that the current crisis policy has failed because it's not solving the problems of the real economy. Instead it creates a new financial bubble heading towards a simple end: the later it burst's, the louder it will make boom!
1. Sovereign dept of the industrial countries rose from 44% GDP in 2007 to 73% in 2013 and will rise further in the coming years if the IWF is right. At the same time private dept rises also thus becoming the Tango partner of the sovereign dept heading for the show down.
2. Many European banks are facing lingering balance sheet weaknesses from direct exposure to over indebted borrowers while the weak economic development in many countries creates more bad loans.
3. The cheap money policy of the central banks drove investors towards more risky investments while money with interest going ground zero let the door go wide open for speculation on credit.
4. Most countries are still weak from the last economic crisis with high dept ratios, low economic growth and high unemployment rates. Making things more worse in the next crisis, because many countries can not make more dept to survive the first onslaught of financial melt down (2).
The only sign of economic development was the rally at the stock markets ... and if we believe the experts of the BIS they where significantly overvalued. The stocks in Europe rose last year by 15 percent, while the economy stagnated and the expected profits have declined by 3 percent.
On the contrary, the lack of investment in the industrial countries
continues and the growth of productivity continues to decline. Thus we can assume that the current development at the stock markets is not part of an economic recovery but part of the problem: cheap money creating artificial economic growth (3)!
Truth to tell the austerity policy combined with the design error of
Europe (4) had no other effect than that we are still standing while
bleeding more. The only mechanism that could achieve economic growth within the euro area countries in difficulty, was the so-called internal devaluation, i.e. Reduce costs in the private and public sector through layoffs and wage cuts, while living costs like food and energy where rising fast. Internal devaluation and austerity paved the way for the high levels of unemployment, the decline in the household income and rising poverty - literally created a misery for dozens of millions of people thus bringing hunger and starvation to Europe.
Today a large part of the new debt only serves existing debt to save it from collapse, but does not lead to new demand and certainly not more investment. The attempt to combat a crisis caused by too much debt and cheap money, with even easier money and more debt is thus officially failed. But still the ECB follows it's motto: If it will not work, we do more of it. Maybe the ECB should understand that the large paper money experiment of the West - 43 years is not a long time for a monetary order – is the core of our problem and has failed!
Therefore we of the EOCB advise the burocrats at the EZB to read the study “The Illusion of the Perpetual Money Machine” from the ETH Zurich (5). They come to the following conclusion:
“We argue that the present crisis and stalling economy continuing since 2007 have clear origins, namely in the delusionary belief in the merits of policies based on a “perpetual money machine” type of thinking. Indeed, we document strong evidence that, since the early 1980s, consumption has been increasingly funded by smaller savings, booming financial profits, wealth extracted from house price appreciation and explosive debt. This is in stark contrast with the productivity–fueled growth that was seen in the 1950s and 1960s. This transition, starting in the early 1980s, was further supported by a climate of deregulation and a massive growth in financial derivatives designed to spread and diversify the risks globally. The result has been a succession of bubbles and crashes, including the worldwide stock market bubble and great crash of 19 October 1987, the savings and loans crisis of the 1980s, the burst in 1991 of the enormous Japanese real estate and stock market bubbles and its ensuing “lost decades”, the emerging markets bubbles and crashes in 1994 and 1997, the LTCM crisis of 1998, the dotcom bubble bursting in 2000, the recent house price bubbles, the financial bubble via special investment vehicles, speckled with acronyms like CDO, RMBS and CDS, the stock market bubble, the commodity and oil bubbles and the debt bubbles, all developing jointly and feeding on each other until the climax of 2008, which brought our financial system close to collapse. Rather than still hoping that real wealth will come out of money creation, an illusion also found in the current management of the on - going European sovereign and banking crises, we need fundamentally new ways of thinking. Governing is the art of planning and prediction.”
Heading the last advise the ECB should ponder about the following: In essence the job of the ECB is an Euro currency promoting real economic growth and social development in Europe thus creating wealth and wisdom for the good of all of us. But for this goal the ECB would have to funnel money into the real economy so we the people could develop again and not stagnate like today. We need a new “New Deal” (6). When Roosevelt became president his focus to solve the crisis was real economic growth and not the well being of the financial markets. This solved the crisis of the people created by the crisis in the financial system.
So we ask the following question: a money system that creates new money solemnly through credit creation - be it through the Fractional Reserve Banking System or our current Central Bank System – can be able to solve a crisis created by too much dept? I guess the problem lies not in the answer but in it's meaning … the end of finance driven capitalism through dept and speculation!
If the conclusion of the BIS is right that only real economic growth can solve the dept crisis of Europe the following study should be read: "Why does financial sector growth crowd out real economic growth". Stephen Cecchetti (the chief economist of the BIS) and Enisse Kharroubi come to a clear conclusion: The productivity of the real sector DECREASES when the financial sector of a country takes up a disproportionate amount (7; 8; 9)!
If we want to solve the current crisis in Europe the ECB has to curb the financial sector while promoting real economic growth. Both lies inside the abilities of the ECB. First the ECB would have follow the demand of the FT in their article “Strip private banks of their power to create money” and end the Fractional Reserve Banking System which gives the financial markets an edge through the ability to create money through credit out of thin air. Our sister organization just would have to point out that the only institution allowed by law to create money is the EZB and no other bank like the German Bundesbank just made clear. Secondly the ECB should follow the insight of the IWF in their working paper “The Chicago Plan Revisited” where they come to the conclusion that a monetary system with 100% reserve backing for deposits would be the solution for our biggest problem: private and public dept (10; 11)!
The FT then comes to the conclusion that such a reform would be complex but doable and be worth pursuing. Such a system would be more stable. No pro-cyclical credit booms, no more banks that are too big to go bankrupt. Also, the risk of a credit crunch is not seen. Further the new money creation could be used by the ECB to give it direct to the people and the states of the European Union thus reducing dept creation and promoting individual demand thus leading to real economic and social growth and technological advancement!
1. BIS annual report 2013/2014
2. “Warum die nächste Finanzkrise sicher ist und warum sie schlimmer als
die letzte werden kann”, Joachim Jahnke, Wochenbrief
3. “Die krachende Niederlage der Notenbanker”, Von Daniel Stelter,
beyond the obvious
4. "Elend für Millionen von Menschen" Christoph Stein, Telepolis
5. “The Illusion of the Perpetual Money Machine”, Didier Sornette and
Peter Cauwels, ETH Zurich
6. ”Von Roosevelt lernen: Sein "New Deal" und die große Krise Europas”,
7. ”Why does financial sector growth crowd out real economic growth"
Stephen Cecchetti and Enisse Kharroubi, BIS
8. “Counting the cost of finance”, Buttonwood, The Economist
9. “Wages and Human Capital in the U.S. Finance Industry: 1909–2006”,
Thomas Philippon and Ariell Reshef
10. ”Strip private banks of their power to create money”, Financial Times
11. “The Chicago Plan Revisited”, Jaromir Benes and Michael Kumhof, IWF