Printing money won't solve a global depression
Last week produced nothing but more disappointment. At the center of it was the Europeans鈥� inability to make their debt disappear. They had hoped that they could just announce a plan to take care of it鈥nd that would be enough.
But then, the Greeks said they wanted to vote on it鈥nd then, they didn鈥檛. 鈥楶apandenomium,鈥� the papers called it. If the voters were allowed to give their opinions everybody knew what would happen; the whole fix would be unfixed quix. So, they all got together and twisted Papandreou鈥檚 arms鈥nd his arms gave way.
And then, investors started getting nosey. They wanted details. They wanted to know how the French and the Germans could cover so many potential losses 鈥� from Spain, Portugal, Ireland, Greece, and Italy.
Italy is in the worst position. It has scarcely any more debt than the US, but it has an immediate problem. It has to turn over its debt鈥t has to borrow heavily just to keep the wheels turning. And it lacks America鈥檚 key advantage鈥t doesn鈥檛 have a printing press. It gave up the power to print money when it joined the EU. Only the European Central Bank can print money鈥nd it鈥檚 controlled by the Germans!
What鈥檚 the matter with the Germans, anyway? Why don鈥檛 they get on-board with the Fed? Why don鈥檛 they want to print money? If they would just give the signal 鈥� 鈥榙on鈥檛 worry, we鈥檒l print the money鈥� 鈥� the whole crisis would be over. In Europe, as in America, bond investors would be reassured. They would know that they鈥檇 get their money. The ECB would buy Italy鈥檚 bonds, and Greece鈥檚 bonds, and Spain鈥檚 bonds鈥� Heck, it would buy everyone鈥檚 bonds. Bond investors would get their money. They would stop hiking interest rates. Italy could cover its losses.
Everyone would be better off, no? Just like they are in the USA. Right?
It all seems so simple. Why don鈥檛 the Germans get it?
While US policy makers, official economists and jackdaw kibitzers are terrified of another Great Depression, Germany鈥檚 officialdom is afraid of hyperinflation. Hardly any Germans are still alive who remember it, but the experience of hyperinflation of the early 鈥�20s is painted on the German character like graffiti on a national monument. They can鈥檛 ignore it. They can鈥檛 forget it. It will take generations for it to wear off. After the bitter experience of WWI, hyperinflation wiped out the German鈥檚 residual faith in their institutions. Working hard, saving your money, being a good citizen 鈥� none of it seemed to pay off. The ex-soldiers were bitterly disappointed. The ruling classes had let them down. The banks had betrayed them. The politicians had stabbed them in the back.
Even their money was worthless!
鈥淗ow could 2,000 years of accumulated civilization have led to this鈥︹�� (Or words to that effect) says the hero of Remarque鈥檚 famous All Quiet on the Western Front. Having no good answer, the Germans turned away from accumulated civilization, towards armed, mechanized zombieism.
In just a few years, Germany鈥檚 factories were working again 鈥� producing tanks and planes. It was a solution to the post-WWI unemployment and depression. Unfortunately, the solution was worse than the problem. The trains ran on time. But they were headed for disaster!
But that鈥檚 a long story.
Meanwhile, in the US, we have our race memories too. Few people alive today recall the Great Depression. But it still haunts economists鈥� sleep and troubles their vacations.
鈥淣ot on my watch,鈥� says Ben Bernanke, or words to that effect.
And so, the Americans fight depression. The Europeans fight hyperinflation.
And what will they get? Depression AND hyperinflation!
Yes, dear reader, that was our forecast as few years ago. We stick with it. The world is entering a depression. Growth has stalled. Even the emerging markets are slowing down鈥uffering the consumer depression exported from Europe and America and trying to fight the inflation exported, by QE2, from the US.
This depression isn鈥檛 going away anytime soon. It will take years to work through, write off, default and foreclose on the mountain of household, business, and financial debt built up over the last 60 years. At first, we thought it would take 7-10 years. We鈥檙e in year 5 already鈥nd, at the present rate, it looks like it might take another 15 years!
But the authorities aren鈥檛 going to take a depression sitting down. Even the Germans will probably decide that a little bit of printing press money is better than the defaults and bankruptcies that accompany a depression. They鈥檒l all guarantee each other鈥檚 credits. The banks guarantee the debts of their big customers. The government guarantees the debt of its big banks. The central banks guarantee the debts of the governments鈥nd all print money to cover them. What a great system.
Yes, that鈥檚 our prediction. Depression will lead to money-printing鈥hich will eventually lead to hyperinflation.
But heck鈥he whole thing will take years to play out. By the time it finally comes to pass we鈥檒l all probably have forgotten this forecast. We鈥檒l be lucky if we can remember our names.
What does a modern depression look like? Take a peek. The Wall Street Journal:
听
Generation Jobless: Young Men Suffer Worst as Economy Staggers
The unemployment rate for males between 25 and 34 years old with high-school diplomas is 14.4% 鈥� up from 6.1% before the downturn four years ago and far above today鈥檚 9% national rate. The picture is even more bleak for slightly younger men: 22.4% for high-school graduates 20 to 24 years old. That鈥檚 up from 10.4% four years ago.
For such men, high unemployment is eroding their sense of economic independence. Their predicament reflects that of a generation of Americans facing one of the weakest job markets in modern history.
鈥淲e鈥檙e at risk of having a generation of young males who aren鈥檛 well-connected to the labor market and who don鈥檛 feel strong ownership of community or society because they haven鈥檛 benefited from it,鈥� says Ralph Catalano, a professor of public health at the University of California, Berkeley.
The share of men age 25-34 living with their parents jumped to 18.6% this year, up from 14.2% four year ago and the highest level since at least 1960, according to the Census Bureau.
The WSJ article tells the story of young men who have been disappointed. In the boom years it was easy to make money 鈥� too easy. One made $14 an hour installing granite countertops. With plenty of overtime. Now, he鈥檚 making $11 an hour, when he can get work. And his marriage has broken up.
Capitalism, as he understands it, has been a failure for him. The Republicans have failed him. The Democrats have failed him. Education has failed him. Marriage has failed. It all must look like such a fraud鈥he American Dream鈥he hopes for a better life鈥he consumer society鈥he housing boom鈥he suburbs, the Hummer, the happy family. All of the promises of 2,000 years of accumulated civilization have disappointed him.
Since we, here at The Daily Reckoning, are making guesses鈥orecasts鈥nd predictions鈥�
鈥ell, here鈥檚 one: These disappointed young men are on the cutting edge, so to speak鈥here politics and economics come together. Like the disappointed veterans of WWI, they are ready for a change鈥eady for revolution. For the present, they bide their time, playing video games such as Call of Duty. They are not sure whether the world has failed them鈥r whether they have failed. Surely someone will come along to straighten them out鈥xplaining how it was not their fault鈥nd telling them what to do about it.
What rough beast, his hour come round at last, slouches towards the Potomac鈥�?
Regards,
Bill Bonner
听for The Daily Reckoning
