It is a fundamental requirement of any growing economy that the amount of money available increases at approximately the same rate as its potential output.
The money supply can grow either by creation of money ('printing money') or by private loan creation. However loan creation is always associated with a matching debt. So it does not increase the net financial assets in the economy.
Before the gold standard was abandoned in 1971 money was created when gold was acquired. This was called monetizing gold. However the supply of gold was limited, which meant that the amount of money became a constraint as growth accelerated. The solution was first to devalue currencies and then abandoned the gold standard.
Once the gold standard was abandoned it became possible for currency-issuing governments to create money as their economies grew. They do this by creating money, spending it, and then taking only some of it back in the form of taxes. This is deficit spending. If they balance their budget they do not create net new money. If they run a budget surplus they actually destroy money.
When the Eurozone system was set up all governments within it lost the power to create money. Furthermore the European Central Bank is expressly forbidden from funding governments. The authority to create money was completely separated from any government. This is unprecedented, a bold experiment.
Crucially, this new arrangement meant that there was no mechanism to create money in the Eurozone. Constraints on money creation were are even tighter than they were with the gold standard.
Think about this for a moment. There is no way of increasing the net financial assets within the Eurozone. Whatever they were at day zero they would remain at that level forever more.
Does anyone else see the problem here!?
Consequently Eurozone growth is entirely dependent growth in private debt. Since no increase in net financial assets is possible, the level of leverage has to increase, relentlessly.
That seems like a recipe for disaster. And, lo and behold, disaster has struck.
Because much of this borrowing was concentrated in peripheral Eurozone countries they have been blamed for the crisis. But it really was the inevitable consequence of a fundamentally flawed monetary system.
The money supply can grow either by creation of money ('printing money') or by private loan creation. However loan creation is always associated with a matching debt. So it does not increase the net financial assets in the economy.
Before the gold standard was abandoned in 1971 money was created when gold was acquired. This was called monetizing gold. However the supply of gold was limited, which meant that the amount of money became a constraint as growth accelerated. The solution was first to devalue currencies and then abandoned the gold standard.
Once the gold standard was abandoned it became possible for currency-issuing governments to create money as their economies grew. They do this by creating money, spending it, and then taking only some of it back in the form of taxes. This is deficit spending. If they balance their budget they do not create net new money. If they run a budget surplus they actually destroy money.
When the Eurozone system was set up all governments within it lost the power to create money. Furthermore the European Central Bank is expressly forbidden from funding governments. The authority to create money was completely separated from any government. This is unprecedented, a bold experiment.
Crucially, this new arrangement meant that there was no mechanism to create money in the Eurozone. Constraints on money creation were are even tighter than they were with the gold standard.
Think about this for a moment. There is no way of increasing the net financial assets within the Eurozone. Whatever they were at day zero they would remain at that level forever more.
Does anyone else see the problem here!?
Consequently Eurozone growth is entirely dependent growth in private debt. Since no increase in net financial assets is possible, the level of leverage has to increase, relentlessly.
That seems like a recipe for disaster. And, lo and behold, disaster has struck.
Because much of this borrowing was concentrated in peripheral Eurozone countries they have been blamed for the crisis. But it really was the inevitable consequence of a fundamentally flawed monetary system.
No comments:
Post a Comment