Weimar Republic here we come
People here and elsewhere have been asking where all the money comes from to pay for all the world's governments' rescue plans.
Apparently they haven't read Ben Bernanke's comment in 2002 (back when his then boss Alan Greenspan was inflating his way out of the collapse of the Dot.Com bubble and sowing the seeds for this latest collapse):
The US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost...
Author Peter Schiff points out in this CNN interview that Americans blew through their savings in the Dot.Com crash, too few people want to lend to Americans now, so to pay for all those rescue plans Americans at least "are reaching for the printing press."
And in Europe? Essentially just the same. The "responsibility" of paying for the "rescue plans" rests on the central bank's printing press and the wilting shoulders of taxpayers. But unlike the facile reasoning of Bernanke, the printing press does not come "at essentially no cost." As Honorary Professor at the Frankfurt School of Finance & Management Thorstein Pollett explains,
Under today's fiat-money regime, banks, under governments' auspices, increase the money stock "out of thin air" whenever they extend loans. The money supply is built on credit, which, in turn, hinges on peoples' confidence in banks and banks' confidence in their borrowers' ability and willingness to service their debt.
As confidence leaves the system, banks refrain from extending loans and demand repayment of outstanding loans, and the money stock contracts. Economies that have for decades been fuelled by ever-higher doses of credit and money fall into depression — that is, declining production, employment, and prices...
The "punch bowl" of never-ending credit expansion has been taken away, and while the hangover is now in full swing the response from all the "rescue plans" so far is to keep the punch bowl topped up and spiked with an increasingly toxic mix:
- More credit, by increasing the base money supply in the interbank market,
- Guarantees for financial institutions' liabilities, and
- Nationalising the world's banks.
How is it all paid for?
- By government sponsored credit, and
- Money-supply expansion.
In other words, by more of the same. And the expected result? Thorstein Pollett again:
... it is hard to see how fighting the symptoms of the unfolding monetary fiasco could solve its underlying cause.
True. And ...
Starting the printing presses wouldn't solve the debt crisis either. Hyperinflation would cause economic and political damage to the greatest possible extent.
To qualify as a remedy to present ills, government action needs to be constrained to a far-reaching reform of the monetary systems, which, if implemented properly, would neither cause deflation nor inflation. Markets need to be liberalized to the greatest extent to allow prices to adjust back to equilibrium.
A return to sound money is needed.
You think that's going to happen? You think the house of cards can be repaired from the ground up?
Or is it Weimar Republic here we (all) come?
UPDATE: Businessweek magazine explodes the idea that New Zealand can ride out the world financial crisis. Reports NBR:
Businessweek has named New Zealand as one of the 13 countries likely to be hit hardest by the global credit crunch.
New Zealand, which scrapes in at 13th place, is joined on the list by countries like Pakistan, Argentina, Serbia and Kazakhstan.
Businessweek compares New Zealand to Iceland, saying both countries were favourites of investors playing the yen carry trade...
But it’s not all bad: “Unlike Iceland, though, New Zealand's banks have strong support because most of them are controlled by bigger banks across the Tasman Sea in Australia.
“The New Zealand government also is in a stronger position than Iceland's, having run budget surpluses of around 4% of GDP until recently. Even with the country in recession, the government is likely to continue running a budget surplus..."
Maybe Businessweek hasn't read the "economic plans" of either Cullen or Key, since both plan to plunge the government firmly into deficit...