Economics: Synopsis of Euro Crisis; Growth in US Money and Banking Reserves…Interesting Reading

The most expressive market is the one the one that the Fed isn’t overtly manipulating. Though Treasury yields might as well be frozen, the gold price is soaring. Why has it taken flight–not on account of an inflation problem. Gold is appreciating in terms of all paper currencies–or, alternatively paper currencies are depreciating in terms of gold–because the world is losing faith in the tenets of modern central banking. …..Gold is hard to find and costly to produce. You can materialize dollars with the tap of a computer key.–James Grant (Wall Street Journal, Dec. 5, 2009)

Monetary Policy seems extremely accommodating

Check here for the latest Federal Reserve monetary statistics:

Fed reserves are rising across the board, excess reserves, required reserves, non-borrowed reserves, total reserves and the monetary base are increasing. Last month required reserves are up 5%–an annualized rate of 60%.

Watch what Mr. Bernanke does. This data indicates that the rising prices in the commodities market and in the U.S. stock market are going to continue. The manipulated (nominal prices) economy will be strong as well.

The developing price-inflation is going to surprise everyone traditional economists and Wall Street pundits but not YOU.


A good synopsis of the cause and effects of the Euro Crisis.

The problems of the eurozone are ultimately malinvestments. In Greece these days the struggle continues about who will ultimately foot the bill for these investments. During the early 2000s an expansionary monetary policy lowered interest rates artificially. Entrepreneurs financed investment projects that only looked profitable due to the low interest rates but were not sustained by real savings. Housing bubbles and consumption booms developed in the periphery.

In 2007 the bubbles began to burst. Housing prices started to stagnate and even to fall. Homeowners and builders started to default on their loans. As banks had financed and invested into these malinvestments, they suffered losses. After the collapse of the investment bank Lehman Brothers interbank lending collapsed and governments intervened. They bailed out banks and, thereby, assumed the losses of the banking system resulting from the malinvestments.

As malinvestments were socialized, public debts soared in the eurozone. Furthermore, tax revenues collapsed due to the crisis. At the same time, governments started to subsidize industrial sectors and unemployment.

Moreover, even before the crisis, governments had accumulated malinvestments due to their excessive welfare spending. Two causes had incentivized social spending in the periphery. The first cause is low interest rates. These low interest rates were caused by an expansionary monetary policy by the European Central Bank (ECB) and the single currency in itself. The euro came with an implicit bailout guarantee. Market participants expected stronger governments to bail out weaker ones in order to save the political project of the euro if worse came to worst. The interest rates that the Italian, Spanish, Portuguese, and Greek governments had to pay came down drastically when these countries were admitted into the euro. The low interest rates gave these countries leeway for deficit spending.

The second cause is that the euro is a tragedy of the commons, as I explain in my (Philipp Bagus) book The Tragedy of the Euro.

Of Interest

A fair bet?

Jeremy Grantham pontificates:

Postscript: I will work on answering readers’ questions this weekend. Thanks for your infinite patience.

2 responses to “Economics: Synopsis of Euro Crisis; Growth in US Money and Banking Reserves…Interesting Reading

  1. Is there a typo from James Grant’s statement from the WSJ ?

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