As is well known, the PIIGS countries (Portugal, Ireland, Italy, Greece, Spain) are currently experiencing serious problems with sovereign debt, and there is talk of default regarding Greece. Now the EU is trying to solve these problems through political and “economic” means, but for us the crucial fact is that the ECB, in violation of the no-bailout rule, resorted to monetary emission. Why did this happen?
Let’s look at the chart and return to our thesis that state policies are a system of interconnected levers, counterweights, and communicating vessels.
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Moreover—and this is extremely important—modern fiat money is also a variable quantity for the state (precisely why such currencies exist), a lever that can be “pulled.” When we deal with a nation-state, all its levers are interconnected in some way. Macroeconomics, which is the religion of states, asserts that it is possible to skillfully regulate the state’s “economic parameters” and bring the economy to equilibrium. We will not dwell on whether such equilibrium is truly necessary. Let us only note that in practice, of course, there has never been equilibrium anywhere or at any time, and in principle there cannot be—regulation in one place always creates problems in another and necessitates new regulation, and so on to infinity. There is no “tuning of the economy,” only a constant expansion of regulation as a whole. But nevertheless, all these “policies,” levers, and small valves, in the case of a nation-state, are at least controlled from a single center and can be somewhat coordinated in the short term for the situation of a specific country. Roughly speaking, the set of parameters regulated by the state in each country requires its own unique configuration of all levers, including the “money” lever. In the case of the EU, however, the position of the “money” lever is the same for everyone, but at the same time, each country has completely different budgetary, fiscal, social, and other policies.
Of course, this cannot continue for long. Everyone knows that modern finance is based not on reality but on trust—essentially a lottery, a speculative wager, or simply legalized swindling. Any serious trouble in one part of the system inevitably affects the system as a whole; people immediately begin to wonder if it’s time to flee the pyramid and consider how to withdraw their money from the bank—in general, people behave exactly opposite to what the “leading economists” recommend. At this moment, creditors remember that Greece is Greece and Germany is Germany. Creditors were willing to lend to Greece at 2% when everything was calm because the euros were the same as Germany’s. But in turbulent times, creditors prefer to play it safe. They are told: “We have the no-bailout rule in effect! No one will give money to the Greeks, so buy their bonds at 2%!” “Of course, of course, you have your rules, sure,” say the creditors—and buy at 15%. And they do the right thing, because ultimately the “no bailout” rule gets thrown out the window, the ECB yields to “political expediency,” and money is printed.
This chart also shows why the euro is not gold. One often hears that since the gold standard is equivalent to a single currency, what, they ask, is wrong with a single currency called the euro compared to the gold standard? Well, in the case of the gold standard (for simplicity, let’s assume a gold standard without the complicating factor of “national” currencies and central banks) ceteris paribus, from 1999 (let’s assume that instead of the euro a gold standard was introduced that year) to 2008, the yield curves of different countries’ bonds would never have coincided in such pleasant harmony. Germany and France would have had low rates all this time, Greece, Ireland, and the rest—high rates. And there would have been no need for any ECB or “no-bailout” rules. Creditors would already know perfectly well that money won’t appear out of thin air, since the laws of nature are such that the supply physically cannot be increased quickly. Therefore, creditors in a system with commodity money like gold would simply never have lent to a profligate state like Greece at low interest rates, and consequently there would have been no debt crisis. However, when the money supply is determined not by the laws of nature but by the laws of politics, creditors will lend to Greece because they understand that political laws, however strict and inviolable they may seem, can be abolished or circumvented. I will not even mention that creditors have observed how the Maastricht agreements are being fulfilled. Poorly fulfilled. And therefore, in case of trouble, they immediately stop buying Greek bonds at 2 and buy them at 15, because they know that a bailout will happen in any case, despite all the rules. Actually, the chart shows that another experiment—testing whether political laws or the laws of nature are stronger—can be considered finished in favor of the laws of nature.