I got my hands on it this weekend an interview to the Harvard economist, Carmen Reinhart, published by Spiegel International. In it, as always, Reinhart hits the nail on the head every time she speaks. She explains that central banks are easing credit conditions with near-zero interest rates as a form of orderly and subtle default.
That’s right, inflation – though still non-existent or in its early stages –, will eventually lead to a devaluation the unpayable debt burden faced by developed nations. At the same time, it transfers money from savers to creditors very efficiently. It discourages saving; the ECB’s open-ended funding scheme encourages banks to channel huge flows of money into national sovereign debt. And that, in addition to separate the eggs for the omelette, keeps interest rates at relatively low levels, even though certain risk premiums may arise from time to time due to the extreme circumstances.
Taxes do the rest. Despite the economic recession, filling up with petrol continues to drain people’s pockets, whilst filling the state’s coffers and driving up the CPI. It is obvious that there is one part of the equation here that is having a rough time of it and will continue to do so (to put it mildly): the public. They, unfortunately, will become poorer and poorer. But everything seems to have been decided, in secret meetings at the highest level, in favour of devaluing an unpayable public debt, whilst at the same time providing life support to governments to prevent their immediate collapse. Woe, therefore, to the holders of developed-world public debt and corporate debt that is heavily dependent on the credit market, because at best they will see their holdings subtly but steadily devalued.
All in all, all these measures appear to form part of a plan. A Machiavellian one, it is true. But one that might have worked to prevent global banking collapses (in Europe and the USA). But Cyprus changed everything, let’s see why:
Just four days ago, the octogenarian (at that age, people tend to say exactly what they think) Mario Soares didn’t seem to want to play that Machiavellian game, and was calling for a default the Argentine way for Portugal. It amounted to saying that if the debt is objectively unpayable, creditors must be told that they will not be repaid – at least not in full – for their little pieces of paper or sovereign bonds. And that when this is publicly acknowledged, ‘bread today and hunger tomorrow’ are reversed in their temporal order. Logically, a default, bankruptcy or debt write-off does not guarantee that the country’s economy will recover in the medium term, as that will depend on each country’s sound judgement, competitiveness and capacity to get its economy back on track. But Going hungry today because of this choice is a lesser evil when we’re already running out of bread for today because of the other one.
The Portuguese, therefore, are now giving very serious consideration to leaving the euro. The fact is that Cyprus’s ‘corralito’ has caused the rest of the periphery to begin shedding their naivety and innocence. Before, everyone believed in European bailouts. Faced with an extreme situation, if we promised to behave ourselves and heed the Troika, Daddy EU would come to the rescue with his EFSF – now his ESM – or even with his LTROs and other forms of virtual money resulting from the combination of financial engineering and political Euro-bureaucracy, and would bail us out endlessly and indefinitely. Faced with that scenario, All the governments on the periphery preferred internal economic adjustments in exchange for external bailouts, amongst other reasons because this at least allowed them to serve out their respective terms in office. That was where the tug-of-war began – the cunning manoeuvring to try and outwit the MiB (Men in Black), who acted as the Eurozone’s financial police. In short A sickening cycle in which some of us faked whatever we could, whilst others absent-mindedly put in money that didn’t exist. But that cycle has come to an end now that the demand for real money has outstripped the ability to keep pretending to leverage more and more virtual money.
With the Cyprus bailout, the masks came off. What had always been promised as an external bailout will now have to be an internal bailout (bail-out or bail-in). And from that point on, the periphery has begun to react and to assess whether or not it is still worth it. Portugal is the first on the list of peripheral countries to be asking whether it is worth continuing to make sacrifices for the sake of a bailout that the Portuguese people themselves will now have to pay for. It no longer makes sense for us, those on the periphery, to continue brutally sacrificing the middle class to pay off a debt that only inflation, internal devaluation, a vast wasteland stretching back many years, and the hope that the Virgin Mary will keep us as we are, can wash away.
If the Eurozone as a whole continues to tremble at the prospect of uncontrolled defaults in the periphery, it will have to offer much more than a bail-in in return (although I do not believe it is even in a position to choose). Because the economic situation in the periphery is already so dire that simply remaining in the euro no longer justifies the ordeal of continuing to try to pay off our debts. That’s the thing about being poor: we have little left to lose. And it was probably never worth the effort of trying to stay in a Eurozone which, when push comes to shove, neither wants nor is able to save us from bankruptcy. Let us not lose sight of the fact that in the event of a default (or an ‘orderly debt restructuring’, as politicians would call it), the periphery would have nothing left to lose that would be worse than the penitent ordeal of the bail-ins. A word of warning.
P.S. At the moment, precious metals such as silver are plummeting by 11% this morning, and that signals a change in the situation – a turning point to which we must adapt as soon as possible.