October 18, 2018 - Latest: What has happened to markets this year? by Darius McDermott
1st January 1999
“The European Central Bank is insolvent”
Hi Shaun, I fear it is not just the ECB which is insolvent! It is more likely all Western central banks, in reality, except that of Switzerland, and also all Western governments with the exception of Switzerland. The real issue of course is exactly how you define insolvency; in the end it is all a matter of confidence. This is particularly relevant in these times, since almost all entities now function on a basis of permanent insolvency, so as to maximize the use of capital.
That of course has significant danger, since there is no traditional Margin of Safety; thus if confidence turns, as it can do suddenly, there is now lattitude to avoid formal insolvency! Unfortunately I fear we shall soon see examples of this, increasingly in enterprises, but also in some Western governments, unless there is a significant change of policy.
…and particularly confidence that future growth will materialise. Governments have borrowed against this growth and now, with a sizeable contraction, find themselves in a serious mess and having to resort to inflation to write down the real value of borrowings. Ideally governments would not borrow against something that may or may not happen. Brown was a master of that technique – his mantra of no more boom and bust, just steady annual economic growth. Ha!
I read the other day that we are even getting the wrong type of inflation to work off the debt. The argument goes something along the lines of:
1. If you want to inflate away debt, you have general wage inflation. As a result of this, nominal GDP grows, reducing the debt as a percentage of GDP. In addition, the fact of wages going up means that taxes go up, making it easier to pay off this fixed amount of debt.
2. The inflation that we have is something different, namely a commodity-based set of price rises. This has not been accompanied by pay rises, so taxes don’t go up. Even worse, people feel worse off because they are squeezed by, e.g. petrol going up, and so restrain spending, reducing consumption taxes. Even worse, nominal GDP does not rise (although I didn’t follow this part of the argument).
The net result is that this type of inflation makes us feel poorer (and, indeed, we are poorer) without helping on the debt front.
Finland looks solvent to me. Norway and Australia are unlikely to bankrupt any time soon.
When small currency that suffers hyperinflation, local business people flee to the most practical and exchangeable hard currencies. QE is destroying the dollar’s hard currency status. Neither the Norwegian Kroner or Aussie dollar is capable of becoming the world
reserve currency – they are insignificant. Sterling is being devalued. I agree that the EC & ECBs treatment of the euro is dangerous.
What will happen to the world economy if we have no main reserve currency ?
Hi ExpatinBG, I was not attempting to be exhaustive and of course I did refer to “Western” nations.
There are clearly exceptions if you like to list the detail, but I feel
in terms of how I defined “solvency” there are not that many now within
those normally classified as the Western Nations, partly due to so called “currency wars”. I would agree that
Norway and Finland are solvent as far as can be reasonably ascertained.
As I suggested, it all comes down to how solvency is defined. It is actually not as straightforward as many seem to believe.
The world reserve currency is likely to become Gold again!
It’s rather inconvenient to quote West Texas intermediate in ounces of gold. If you start computerized gold settlement – how do you tell if a counterparty is short on gold ?
Nothing here that Ms Lagarde, with her fine record, will not be able to solve when she moves to the IMF!!
I heard that Greek motorway toll collection staff are refusing to collect tolls even when English drivers try to pay them. What sane business person would buy any privatized Greek asset when faced with riots, refusal to pay and civil disobedience ? Maybe someone with political connections will buy up state assets on the cheap.
The ECB are recommending privatization that is unlikely to work.
Nice to see Greece calling the bluff of the Germans. Ultimately Germany (and France) will have to decide whether to fully bail out Greece, Ireland and Portugal or pull the rug and breakup the Euro. Cant see the German public agreeing to the size of bail out needed not whilst the Greeks avoid taxes and retire at 50.
Well, the Germans have “bluffed” many times in the past at the expense of other nations, its about time they get “bluffed” too.. If Greece decides to disobey to that joke of a rescue plan called the IMF and default, the German banks will be the biggest losers
I think how dangerous things get when (not if) Greece defaults depends on the nature of how it happens: a controlled implosion is always less dangerous than an uncontrolled, sudden explosion.
I do not know for other countries, but the information on Spain is of a very low quality (the evidence provided as hard data is that some regional governments found a way to indirectly subsidize football clubs… Give me a break!).
Spain may have some trouble (being the main problem a bunch of incompetent politicians, but that might be in course of being solved) but the terror stories that some foreign media are creating are plainly wrong. The many virtues of this country are been neglected in these analysis (just think Zara, Movistar, Santander, BBVA, Iberdrola… and sectors with growth potential such as tourism, the food industry or cultural exports) while a cover-all baseless fear is spread instead. Look at the last 30 years Spanish record and you will get a more balanced glimpse into what you can expect for the futurre.
Maybe someone is trying to make money out of these fears. Or trying to hide worse sins diverting the attention…
Hi Garciava and welcome to my blog.
The crux of the article is that 26 billion Euros have been hidden in Spain’s regional accounts. This is based on work done by Lorenzo Bernaldo de Quirós of Freemantle and as you can see by his name the accusation of Anglo-Saxon bias founders somewhat.
Actually the Spanish newspaper Expansion believes that the numbers for hidden debt are in fact 55 billion Euros….
The European Banking Authority 2011 stress tests anticipate sovereign debt stress, not default. The results are due mid-June. I would imagine heaven and earth are being moved to avoid a default / restructure / haircut before these results are published, dont you?
So no change of course is required and in the words of Tom Petty and a US Navy admiral
Full speed ahead and damn the torpedoes!
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