When the Vandals stormed Rome in A.D. 455, the once-mighty Roman Empire had long been diminishing across Western Europe. Over the following decades, the sprawling regions of Britannia, Hispania, Gallia, and Italia gradually fell to barbarian invasions, culminating in the empire’s ultimate collapse in 476.
After this catastrophic downfall, Europe entered a dark era characterized by a fragmented feudal system, where lords, vassals, and fiefs struggled for control. This period saw a regression in learning and the arts as survival took precedence, plunging society into a millennium of obscurity.
As the Middle Ages waned and the Renaissance emerged, Europe experienced the formation of independent nation-states. These states coexisted in a state of symbiotic disharmony for centuries. By the turn of the third millennium, history seemed to repeat itself, as a unified Europe began to take shape once more.
However, this unity was far from genuine; it was constructed through a monetary alliance meticulously crafted over generations by politicians and central planners. Unfortunately, this endeavor was flawed from the outset.
On January 1, 2002, the euro was introduced, greeted with self-satisfaction by Europe’s elite. By adopting a common currency, Europe aimed to rival the United States in economic strength and wealth, while finally laying to rest the tumultuous memories of the 20th century. For many, the vision of political unity championed by Jean Monnet at the Versailles Peace Conference in 1919 seemed to be coming to fruition, promising peace and prosperity across the continent.
Cheap Credit and a Mirage of Wealth
Initially, signs of success were evident as economies flourished across Europe. An explosion of opportunities, unprecedented since the previous four decades, gave rise to optimism and imaginative prospects. There seemed to be no limits to Europe’s potential.
Yet, those who observed closely recognized something was amiss. Interest rates dropped, and credit spreads around Europe narrowed, converging near German bunds. It soon became clear that some nations were struggling to cope with the influx of easy money.
For instance, Ireland saw a housing frenzy reminiscent of the American suburbs, while Spain experienced a nearly 300% surge in property prices from 2000 to 2008, with many taking out 50-year mortgages to fund their newfound wealth. Greece, in turn, promised generous retirements at age 55, accruing significant debts to sustain these promises.
Germany, conversely, focused on manufacturing quality goods for the rest of Europe, with other nations borrowing from French banks to finance these products.
Regrettably, this was not true economic growth but rather a superficial boom inflated by vast amounts of cheap credit, creating an illusory wealth that momentarily dazzled many.
Everything seemed fine until the unexpected happened in 2008. Europe, much like the United States, found itself burdened with debt surpassing its economic output. The difference? Germany constrained its central bank from printing the necessary trillions of euros required to rescue the financial system. However, change was imminent…
Recently, 35% of German bunds went unsold at a government debt auction. In response, central bankers globally resolved to devalue their currencies collectively.
Divided We Stand United We Fall
On a pivotal Wednesday, major central banks around the world united, pledging to reignite Europe’s money-printing operations. The initial paragraphs of their official announcement began benignly enough…
“The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.”
The following paragraph offered a more intriguing glimpse into their intentions…
“As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so liquidity can be provided in each jurisdiction in any of their currencies should market conditions warrant. Currently, there is no necessity for non-domestic currency liquidity outside of the U.S. dollar, but the central banks find it prudent to prepare for quick liquidity support if needed. These swap lines are authorized through February 1, 2013.”
However, the final paragraph contained the real implication…
“U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. Nevertheless, should circumstances worsen, the Federal Reserve possesses a range of tools to provide an effective liquidity backstop for these institutions and is prepared to utilize these tools as needed to ensure financial stability and promote credit extension to U.S. households and businesses.”
What does this all portend for the future?
It’s anticipated that when the moment arises, the Fed will record a notation and conjure funds from thin air to support Europe. These dollars will then be swapped with a French bank, providing “liquidity support” for Europe’s financial challenges.
However, this maneuver does not eliminate the underlying bad debts; it merely conceals them beneath layers of counterfeit money—temporarily. Once the international swap arrangements begin, the reliance on this approach will escalate until an inevitable breakdown occurs.
Ultimately, not only will a united Europe falter, but a divided coalition of nations, bound by a pact with financial peril, will face similar demise.
The deities of ancient history must surely be chuckling at our situation.
Sincerely,
MN Gordon
for Economic Prism
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