Wednesday, December 21, 2011

Too little, too late

One of the most important jobs of a central bank in possession of a printing press is to act as a lender of last resort when there is a run on the other banks in the nation. I.e., it is literally physically impossible for a central bank to run out of money, so if a bank with typical reserve ratio of 20% suddenly has 40% of its customers show up wanting their money, it's the central bank's job to trade freshly printed cash for the long-term loans on the member bank's books, then soak the cash back up as the long-term loan gets repaid.

The Federal Reserve, to its credit, did that in the 2007 credit crisis here in the United States. The Fed accepted trash for cash to the tune of over $1.5B, or roughly 6% of the outstanding loans in the USA. But the European Central Bank did not. The Fed did an indirect bailout of some of the most important European banks by trading cash for trash, but nowhere near what would be necessary to re-float those banks -- only enough to keep U.S. insurers of those banks solvent, because the Federal Reserve's charter is to serve the USA, not Europe.

The end result in Europe is deflation, and as I've mentioned here before, deflation is the same thing as debt inflation -- that is, your debts are rising and rising and rising in value until they finally reach the point at which they cannot be repaid, a point which has arrived for far too many Europeans and even entire European countries. There's a term for what happens after that: circling the drain, as debtors default, banks collapse, cause further deflation, causing *more* debtors to default, wash, rinse, repeat, swirling down down down with less and less currency in circulation (it's disappearing under mattresses) until entire economies are reduced to barter, probably the most inefficient method of conducting business, like, evah.

So it's good that the ECB *finally* is stepping forward to do their own trash for cash to keep European banks from collapsing. On the other hand, the ECB is run by Germans, and a good percentage of the banks owed money by the countries on the verge of default are German banks, so it may be that they finally simply didn't have a choice but to do the minimum needed to keep the whole Eurozone from circling the drain into the Barterzone.

But note the *size* of this loan program: less than half the size of the Fed's loan program in 2007, despite the fact that the Eurozone's combined economies are approximately the same size as the USA's economy. Too little. And four years too late.

My suggestion to Europeans (other than the British, who avoided the Euro madness): Turnips. Seriously. When the Soviet ruble collapsed with the nation that created it, turnips were the currency of choice for much of Russia because they're durable, useful (if you have too many turnips you can ferment them to make vodka, even!), and not dependent upon a central bank to make the decision to create them. What, you say this is daft? Well, no more daft than those silly people who collect shiny-colored metal in hopes that it will have value after the Euro collapses. You can eat turnips. You can't eat gold.

-- Badtux the Snarky Economics Penguin


  1. Well well well, I do read your blog because I learn stuff here. I thought certain alcoholic beverage had to be made with certain vegetables or grains, I didn't realize that the generic names describe a process. I thought vodka was made from potatoes, whiskey from corn, gin from juniper berries. Thanks BT, :)

  2. Uh, I'll take the gold, 'Tux, if you don't mind. With the gold I'll buy my own farm, grow my own turnips and other good things to eat, and maybe raise a few goats, chickens and rabbits.

    Try that with turnips. If someone approached a farmer with the offer of turnips in exchange for the farm, said farmer would probably tell Turnip Dude, "Take a hike, Jack! Why would I want your turnips when I can grow my own and still keep the farm?"

    Gold is safe because damned near everybody will accept gold in exchange for whatever. Greed prevails.

  3. So, Phil, where do you find farmers who will sell you their land in exchange for shiny metal? Every farmer I've ever encountered wants dollars, not shiny metal. Just like I can't go into a grocery store and buy groceries in exchange for a little bag of gold dust. They'd just look at me like, "You *GOT* to be kiddin'!" and tell me give them dollars, not some shiny *DIRT*.

    So what will replace dollars as currency if we go into a deflationary spiral that reduces us to a barter economy or the opposite, an inflationary spiral that renders money basically worthless? Well, we have recent history on that one. Hint: It ain't gold. In Zimbabwe it's cattle. In Russia, it was turnips. Hint: If you're hungry, something to eat appeals a *whole* lot more than some shiny *dirt*.

    - Badtux the Observant Penguin

  4. Trust me, 'Tux, if you put enough shiny metal in front of rats (or people who lust after gold), reason will abandon them. Greed prevails.

    "In Russia, it was turnips."

    In Russia, I'm pretty sure it was vodka.

    Regardless of what passes for currency in the future, the 21st-century economy will in no way resemble the economy of the 20th; those days are gone forever. With fossil fuels in decline--and no cheap and abundant energy resources on tap to replace them--it's essentially game over for the economy (as we've known it) and for much of the global human population.

  5. Well, turnips can be turned into vodka, of course :).

    Hungry rats don't go for shiny objects if there's food to be had. Just sayin'.

  6. Or as they say in Finland,

    A worm-infested turnip is sweet, but bitter the one that a mouse has bitten


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