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Debt And The Decline Of Money

Interest-Rates / Global Debt Crisis 2014 Sep 12, 2014 - 04:44 PM GMT

By: Andrew_McKillop

Interest-Rates

Let it erode, Dump it or Deny it?
For some members of the loosely defined school of Kierkegaard, itself loosely descended from Nietzsche's nihilist school of philosophy,  money is a trick invented by human beings to deny their cosmic responsibilities. They use money to create fake value in this world and depreciate the real value of celestial thought and the purpose of cosmic being. Even in this world however, devaluing or repudiating a national money is a time-worn trick for evading responsibilities – like paying debt.


The national moneys of the now-18 Eurozone countries were nearly instantly de-monetized and excluded from any use in the economy from 1999. Depending on which Eurozone country it concerned, private persons could take along their now-useless national money to any private bank and swap it, at the official “exchange value”, for the new international and stateless euro for periods as long as 3 to 6 months. After that, their “old money” was strictly worthless.

During Germany's Great Inflation or hyperinflation of 1922-23, the national money became almost entirely valueless. It was a common sight to see people carrying sacks of paper money with them, to buy a few groceries. The old money was often used in home furnaces and fireplaces, as fuel. From the end of 1923, the old “Kaiser” marks of Germany were repudiated and replaced by new money.

The major difference between these two events was that the introduction of the euro and the elimination of previous national moneys was planned and organized. Also, the new euro was more valuable than the old national moneys it replaced – especially so in the “Club Med” countries such as Spain and Italy. Even in France 6.55 old francs were needed to buy 1 new euro.

The national or sovereign debts of the Eurozone countries therefore decreased by a large amount, when denominated in euros. With a more valuable currency, and this was certainly an intended and published objective of introducing the euro, interest rates also fell making credit easier to obtain.

For a large number of economists the consensus verdict is that, concerning the euro, this either caused or facilitated the growth of both public and private debt to excessive levels – while other mechanisms were more important in the cases of the USA, Japan, the UK and elsewhere. The result was however the same. There was a run-up of debt, now threatening the national moneys (or international for the euro), in all cases. 

How does this End?
We could comfort ourselves by saying that “fides” or trust and confidence in the money must be restored, and to do that national debts must be reduced. We need a return to confidence and trust. The instant solutions are austerity to cut government spending and everyone must save more. There will be a national crusade to pay down debt. For companies, they must “clean up” their balance sheets.

The problem with this is simple. Spending and investment decline and this results in a depressed economy, no growth, and falling inflation which can become deflation or falling prices, as in the Eurozone and Japan in 2014. On a semi-automatic basis, the ratio of debt to national income will rise, rather than fall. This is called “perverse growth of debt”.

In the 1930s, Keynes talked about  the “paradox of thrift”, Saving more and trying to pay down more debt turns individual virtue into collective vice. What happens is that perhaps private debt will decline or cease to grow, but public debt will grow, and possibly rather fast as the state has to bail out failed companies and handle the growing unemployment.. .

In the end, in all previous historical cases, debt becomes too big to pay down and there is an effective default on a large part of the debt, one way or another. One of these is to devalue the national money against all other moneys. Another well known “default strategy” is to permit or cause a period of initially moderate inflation that reduces the real burden of debt. The problem is this can “run amok” as hyperinflation. This is always the background fear.

The Scotland-England Microcosm

We have a money-and-debt microcosm, today, with Scotland and England within a world macrocosm  of national, corporate and private “real debt” that is so vast it probably exceeds 10 or 15 years of world GNP, set by the World Bank and IMF, using their own “purchasing power parity” corrections, at about $80 trillion per year in 2013..To be sure the “real debt” estimates are called controversial or pessimistic, because they assume there is another global financial market crisis like 2008-2009. This event rapidly converted private bank assets into liabilities they could not honor. Governments stepped in to “bail out the banks”. In the Scottish cases of RBS and HBOS these liabilities were extreme.

Supposedly reassuring bank “stress tests” make the real debt estimates even more controversial, that is able to be brushed aside and ignored. It can't happen a second time.

The basic and inescapable conclusion is however that a large amount of debt will have to be repudiated, one way or another. If or when Scotland and England separated, a major part of their national debts would need to be repudiated, one way or another, and possibly rather fast. Their separation into two different nations would merely accelerate the inevitable process “and bring it into the open”. This would of course be a crisis. It could itself trigger a financial market crisis, making the problem of “real debt”, that is private bank liabilities, even worse.

We are asked to believe that there are unforseen and unexpected events that can prevent or delay national debt repudiation – and this is often presented as the right way to interpret World War II.

This event “cured the depression” of the 1930s. During the war, there were massive and repeated bank and corporate defaults on the repayment of debt. The State took direct control of many sectors of the economy in an accelerated version of “civil peacetime” debt default, which is normally gradual and only individually painful, but has the same net result of reducing overall debt.

What can be predicted as almost 100% certain in the case of Scotland and England “going their own ways” is that one or both nations, or rather their central banks will set out to repudiate debt by increasing inflation inside the nation, by devaluing its national money – although we could also argue that Scotland could possibly play the “revaluation card”, based on North Sea oil and whisky, to introduce a high-value national money, for a short while only. Only for a while.

When a country begins to explicitly default on its debts by lowering the value of its currency, the rational response for people within that money system will be to borrow as much as possible at current low interest rates with the goal of paying back the loans later on, with much-cheaper money. There can be a short “growth binge” with inflation. The net result will however be  a surge in new borrowing - and almost certainly an even bigger debt problem when the economy inevitably slumps back into slow growth or recession.

These are the real processes and options. Pretending that others exist is a mendacious illusion.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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