So how does this end?
I don’t mean the current Spanish debt crisis or even the euro debt crisis. I think we know what the “solution” will be to that.
And I don’t even mean the U.S. debt crisis or the Chinese debt crisis. I think we know what the “solutions” for those will be as well.
But what about the meta crisis? The one that’s been created by the current round of “solutions?” How does that end?
I’d suggest that we all brush up on Gresham’s Law, the 16th-century description of what happens to strong currencies when they meet up with bad money. In a nutshell Gresham’s Law says that the bad currencies win. Figuring out what to do about that is important as investors head into an era of bad money as far as the eye can see.
I think it’s clear by this point in the aftermath of the global financial crisis that all the various local crises have been “solved” to date by the creation of vast sums of money essentially out of thin air on the official balance sheets of central banks such as the Federal Reserve and the European Central Bank and on the unofficial balance sheets of, say, China’s banking system. And I think it’s equally clear that, for all the talk about economic reforms creating growth or austerity creating growth or financial market confidence creating growth, the most likely “solution” going forward is the creation of vast sums of money essentially out of thin air.
It’s still an open question if the “solution” will work. In the case of Spain, for example, the European Central Bank fixed the crisis for a while by giving banks access to 1 trillion euros in 3-year loans in December and February, but by late March the crisis was back and the yields on Spanish and Italian government bonds have started to rise again. And now we’re looking at another program of bond buying by the central bank to lower yields or another program of 3-year loans to banks to give them the money to buy more bonds in order to lower yields.
To condense what I wrote in my Friday, April 13 post on the current state-of-the-art in the Spanish crisis http://jubakpicks.com/2012/04/13/the-spanish-debt-crisis-combines-the-worst-of-the-greek-and-irish-crises-in-a-too-big-to-fail-package/ Spain and the EuroZone are likely to fall back on a series of increasingly desperate kludges by the European Central Bank, other global central banks, and finally the International Monetary Fund. Each of those fixes would require somebody to print money—either the European Central Bank, or the International Monetary Fund, or some combination of the Federal Reserve, the Bank of Japan, and the People’s Bank of China. Print enough and the immediate Spanish crisis goes away again as bond yields sink and governments get another breathing space to propose economic reforms and budget cuts.
At some point, though, the bill for these solutions comes due. Read more