The sovereign debt crisis—centered on Greece for the moment, but bound to spread to other heavily indebted national governments—has taken an ominous turn.
The European Central Bank (ECB), the Federal Reserve, and the International Monetary Fund unveiled a trillion-dollar bailout package for the bankrupt Greek government. The intent was to defend the euro, which has been depreciating rapidly vis-à-vis the dollar.
Indeed, the bailout worked—for all of a few hours. Then the market dismissed it as ineffectual and the euro resumed its downtrend. The reason for this is obvious to anyone who understands Economics 101: If you greatly increase the supply of something, the value of each individual unit generally goes down. Since the ECB’s bailout includes making available “unlimited” amounts of newly created euros to sop up some of the flood of sovereign debt instruments issued by spendthrift governments, it seems reasonable to conclude that the euro will continue to depreciate.
There is, however, another factor that may temporarily offset the effect of this “quantitative easing” (money creation) by the ECB: The Fed is adopting a similar policy. As reported by Bloomberg on May 10, “The U.S. Federal Reserve will restart its emergency currency swap tool byproviding as many dollars as needed to European central banks to keep the continent’s sovereign debt crisis from spreading.” (My emphasis.)
The Fed’s involvement in this ongoing crackup has received far too little attention. Consider the following implications:
First, we live in a world of finite wealth and limits, yet central bankers are flirting with an infinitely elastic money supply when they talk about “unlimited funds” and creating “as many dollars as needed.”
Second, who authorized the Fed to bail out European governments? Our own government is drowning in debt, so how can we afford to provide hundreds of billions of dollars to Europe? Is Congress asleep? Where’s the media? There was an enormous brouhaha in the fall of 2008 about the emergency bailout of Wall Street. Today hardly anyone has questioned the bailout of foreign institutions. Have we become that desensitized to bailouts? Or is it just that the media will give Obama a free pass for his role in pushing for this bailout plan?
Third, does anyone think that the other European governments teetering on the brink of insolvency will be able to convince their voters that they should tighten their belts through a government austerity program when the central bankers have made it clear that they stand ready to supply bailout funds? Moral hazard, anyone? The path of least resistance seems to be the creation of additional monetary units in vast quantities for an indefinite period of time.
The monetary and political systems of the western democracies are broken. Central bankers—unaccountable not only to the voters of these countries, but to their duly constituted governments as well—seem to have carte blanche to do what they want. One of the most startling YouTube videos I have ever seen featured Congressman Alan Grayson (D-FL) questioning the Inspector General of the Federal Reserve about which financial institutions received the trillion dollars that the Fed created ex nihilo (out of thin air) after the 2008 financial crisis, and she had no idea.
The modern democratic welfare state seems doomed to live up to Alexander Tytler’s dictum, “A democracy … can only exist until the voters discover that they can vote themselves largesse from the public treasury … with the result that a democracy always collapses over loose fiscal policy.”
Have we passed the point of no return in the United States? Perhaps. According to the Tax Foundation, some 60 percent of Americans now receive more in benefits from government than what they pay into government. We may think, “Those crazy Greeks,” when we see them protesting proposed reductions in government payments to them, but are we Americans any more willing to bite the bullet of fiscal reality? Let Congress try to cut spending, and we’ll hear howls of protest from Americans who fervently believe that whatever they get from government is social justice and their inalienable right.
The president of the European Council, Herman de Rompuy, has stated, “We can’t finance our social model anymore.”
The system is broken. In democracies, politicians get elected by making unaffordable promises to voters. This culminates in national bankruptcy.
According to the Bank for International Settlements, 11 other countries in addition to Greece—including the United States—are about to “hit a wall of debt.” It now appears that these governments are counting on central bankers to try to print their way out of this fiscal corner into which they have painted themselves.
This is the beginning of the end for fiat dollars and euros. The Fed and the ECB have made an “all-in” bet, risking the viability of their respective currencies in a desperate attempt to save a failed political model. The coming years will be tumultuous indeed.