There is a myth circulating, and I am not sure whether it has its origin in sloppy thinking or devious manipulation. It is this: sovereign default in the euro-area is the biggest threat to the euro’s survival.
The euro is a form of paper money, just as the dollar, the pound and the yen is paper money. Paper money is backed by – nothing. It is an irredeemable piece of paper. It is not as if you could take your paper money to the central bank and demand to get something material in exchange for it –such as gold.
The solvency of the states that print paper money and make it legal tender is completely irrelevant for paper money’s use as a medium of exchange. The risk to a paper currency’s continuous acceptance in trade is over-issuance of the paper money, not sovereign insolvency.
Historically, paper monies have died – and sooner or later they have all died – not because the government went bust but because the government went bust and did not want to acknowledge that it was bust. It wanted to keep on operating. It wanted to keep on spending. It wanted to keep on bestowing privileges on those whose services or support it needed. So it kept on printing money. That has always been the reason for paper money’s ultimate demise. And it will be the reason for the demise of the euro.
And the dollar.
And the pound.
An honest government that declares itself insolvent when it is insolvent, and that declares its banks insolvent when they are insolvent, is no threat to the survival of its money. A government that does ‘whatever it takes’ to save its banks and bond investors, and keep on spending, is a massive threat to its paper money.
The biggest risk to the euro is not insolvency of states and banks. Keeping states and banks going by printing euros is the risk to the euro. Whether the ECB hikes on Thursday or not is irrelevant. The ECB will not be allowed under any circumstances to meaningfully tighten monetary policy, to drain liquidity from the system and – to shrink its balance sheet. Its balance sheet has to keep growing. And those of other central banks as well.
Why? Here is why. The ECB keeps rates low and keeps on printing euros to keep the banks in business. The ECB also keeps rates low and keeps on printing euros to keep various states in business. And the states are kept in business so that the banks – which are fractional-reserve banks and lend money by creating money, of which they lend a lot to the state – are kept in business so that they –- keep on lending money to the state.
This will continue until the euro is worthless. Ditto for the dollar, ditto for the pound. When the public fully wakes up to it things can unravel quickly.
Not convinced? I recommend Ludwig von Mises’ Causes of the Economic Crisis and Other Essays Before and After the Great Depression…
As a student of the Austrian School, I find myself surveying unfolding events with a sense of weary inevitability. I happened today on a collection of quotes I posted in 2008: they are just as relevant today as the tight nexus of states and their institutionally inflationary, centrally-planned, monopoly money systems continues its decay.
Thankfully, the Governor of the Bank of England has now said (PDF),
Of all the many ways of organising banking, the worst is the one we have today.
And since I arrived in Parliament, Douglas Carswell MP has begun advocating the cause of money reform. I see that Michael Meacher MP is aware of the fundamental issues and has today advocated the end of socialism for the banks.