European Monetary Union Members Cannot Print Money to Inflate Way Out of Crisis

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Rumble rumble rumble. Do you hear that? It’s the sound of over-leveraged financial organisations beginning to crumble. Of course, by crumble, we actually mean “forcibly confront fiscal reality.” It is not the end of the world. But it is, as Bill says in his article, the end of the world as we know it.

Ratings agency Fitch began the rumbling when it downgraded Portugal’s sovereign credit rating to AA and changes its outlook on the Iberian nation to negative. Analyst Douglas Renwick wrote, “A sizeable fiscal shock against a backdrop of relative macro-economic and structural weaknesses has reduced Portugal’s creditworthiness… Although Portugal has not been disproportionately affected by the global downturn, prospects for economic recovery are weaker than 15 European Union peers, which will put pressure on its public finances over the medium term.”

Europe’s monetary failure is bringing about a fiscal crisis, and probably a social crisis too. The Euro not only made 10-month lows against the dollar. But the viability of the common currency (one interest rate, many fiscal policies) is now being openly questioned. And in Greece, rising interest rates are already consuming the savings made by emergency budget cuts.

It’s a real pickle. Actual monetary contraction may be politically impossible. What elected official is going to slash and burn the public budget? But continued fiscal expansion is equally impossible if you can print the money you borrow in. No one in the European Monetary union can print money to effectively inflate their way out of the crisis. So the crisis persists.

By the way, one quick point. We get lots of letters telling us we’re an idiot. And many of them point out that a country that prints the money it also borrows in (like the United States for example) cannot default on its bonds. It can always pay back bond holders with new money.

Yes. That’s true. But money-printing is a de-facto devaluation of the currency against real goods. It’s inflationary. And ultimately, rampant money-printing destroys purchasing power. An outright default is also the end of the fiscal road. But in terms of outcomes, there is not much difference between default and inflation.

Or is there? Perhaps a default would be a quick and painful realignment…whereas an inflation would be far more weatlh destructive. We’ll find out soon enough. Greece isn’t going away. And Portugal won’t be the last to be re-rated by the agencies.

“Isn’t it great that 30 million people in America now have health insurance?” we were asked by a mate at the pub last night. “Yeah. But who’s going to pay for it?” we asked (it was a genuine question).

“I don’t know,” he conceded. “But it’s nice to see America joining the civilised family of nations. You should be proud of your government. It finally did something nice for the little guy.”

“That it did. The whole progressive project is finally capped off. But I still have no idea who’s going to pay for it. You can have an idealistic vision of what kind of country you want to live in. And you can make people pay for it with higher taxes. But it doesn’t mean it’s going to stand up to economic reality. Just seems like weird timing to me…the whole welfare state system is proving that its financial model is defunct…and America’s politicians expand it. Only in America!”

By the way, new home sales in the U.S. hit their lowest monthly level since the figures began being kept in 1963, according to the Commerce Department. New home sales fell 2.2% last month and the inventory climbed again. It’s yet proved more that America’s over-investment in housing is going to take years to recover from – both at the household level and the bank level.

But what about Australia’s over-investment in housing? Did you hear Don Argus in today’s Age say that Australia’s banks are becoming “giant building societies?” He was making – but far more succinctly – the same point we made yesterday: the banks have over-invested in residential housing. Commonwealth Bank has 60% of its loan-book tied up in housing and Westpac’s is over 50%.

The additional trouble with that is that it deprives the rest of Australia’s capital-intensive resource businesses of the capital they need to increase production and exploration. Hence, smaller Australian companies like Moly Mines selling off equity to Chinese funding partners. Molybdenum is not, apparently, as safe as houses.

And that’s fair enough. Banks are in business to make money loaning money. They are not compelled to loan money to the mining industry because it’s in the national interest that the benefits of the resource industry go to Australian shareholders. The banks have their own shareholders to look out for.

But those shareholders should ask around and start thinking about whether the banks are over-exposed to Aussie houses. It seems obvious to us that they are. But as many readers tell us, we’re an idiot. So maybe it’s not so obvious…

Speaking of Chinese investment in resource projects, a previously announced $60 billion LNG deal in Queensland was confirmed yesterday. China National Offshore Oil Corporation signed a 20-year contract to buy LNG from Britain’s BG Group. Technically, it’s coal-seam-gas from Queensland’s Surat Basin.

These are the kind of deals you can probably make money on. But as we’ve said before, you have to be early. Once the projects are “de risked” and final investment decisions are made, the smaller stocks tend to be fully valued. At that point, you’re essentially buying producers. And producers are valued differently than explorers, developers, or prospect generators.

Finally, have a look at this if you get a chance. It shows that the average annual return on a super fund was 3.6% in the five years ended in June of 2009. Over the past three years – and this excludes most of the big recovery since March of last year – the return is 2.3%. And can you guess what the best performing in house corporate super fund was over the last five years? Go on….have a guess.

It was the in-house staff superfund of GoldmanSachs JB Were. That fund delivered annualised returns of 9.6% in the survey period. Not bad huh?

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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38 Comments on "European Monetary Union Members Cannot Print Money to Inflate Way Out of Crisis"

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Ross
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St George economist this week said majors pre GFC were funded over 50% by foreign bonds but last year it was down to 20%. Govt guarantee off soon, “no rush to fund before deadline” sic they say “proves it is all ok” sic …. bs

Then the Now what else can we sell

Justin
Guest

Are you sure the govt guarantee is off soon Ross? Methinks that might be good old fashioned central bank jawboning.

Ross
Guest

31 Mar Justin

Biker Pete
Guest

DD: “It shows that the average annual return on a super fund was 3.6% in the five years ended in June of 2009.”

Plus the 27% saving on tax: 42 – 15… . And if you transferred your Super between ASX and cash in a timely fashion, you made a helluva lot more than 30.6% on your money Dan… . :)

Sambo
Guest

Great article DD.
The readers that say you are an idiot should go work the for banks, if they don’t already. I’m sure the banks could do with some more ‘Yes men’.

Stillgotshoeson
Guest
@Comment by Biker Pete on 25 March 2010: DD: “It shows that the average annual return on a super fund was 3.6% in the five years ended in June of 2009.” Plus the 27% saving on tax: 42 – 15… . And if you transferred your Super between ASX and cash in a timely fashion, you made a helluva lot more than 30.6% on your money Dan… . :) Trouble is many don’t salary sacrifice because they either a) don’t earn enough to make it worthwhile or b) they are so over commited financially they need every dollar they get… Read more »
Biker Pete
Guest

Have to ask yourself why my comment was so quickly ‘disappeared’ from Recent Comments on the home page, Shoes? Reflect on that awhile. In really good years we made 48%… .

“sort of like the property spruikers today.. it will be ok, nothing to fear… ;)”

Enlightening. Indicates your understanding of superannuation.

Stillgotshoeson
Guest
My understanding of superannuation is FAR FAR better than yours.. again you only look at the ME, ME, ME aspect of superannuation.. Most people do not like super.. would rather have the 9% in wages to do with as they please, less contribute extra than do.. those that understand it, realise it is a tax effective way to save for your retirement.. again most people think in the now not the future… salary sacrifice from a 42% tax base and only pay 15% and get it tax free after 60 what a deal.. trouble is if you only pay 24%… Read more »
Biker Pete
Guest

Should I let it pass… or shall we read the entire description: “Shoes, This is Your Life”, a full recount of the financial, marital and medical history of the Man Who Can Afford Shoes?

Biker Pete
Guest

“Me, Me , Me”(?) Out of kindness, I’ll spare you that indignity, son.
I was amused by your little manifesto about education and medicine yesterday. I let that one go by, too.

Stillgotshoeon
Guest
The confusion you have over my comments and yours is.. that I am willing to speak of my own position but also acknowledge that others are not in the same position as me.. Your me, me, me posts are all, I did this, and I did that so everyone else can… everyone else should salary sacrifice like I did, everyone else should have bought property on river and beach front in WA like I did.. I did it everyone else should have/could have done it too.. the reality is most can’t and that is where your egotistical rants on the… Read more »
Biker Pete
Guest

Shoes, can we learn anything from the two posts between Ross and SV, do you think? DRA is a good newsletter… and it must reduce interest level when the “You said / I said” merde flies backward and forward. Despite opposing views, R and SV conducted that exchange respectfully, without put-downs, shouting or recrimination. Willing to try, if you are…. .

Stillgotshoeon
Guest

I don’t htink you are capable of said Biker Pete… privious 18 months of posts I have been reading through casts doubt upon my mind.. I can.. not too sure about you. ;)

I have 2 comments awaiting moderation yet…..

As I have stated earlier… Disrespectful exchanges here ALL have a common denomiator and that is you…

Firebug
Guest

Must say that most what Shoe said about super, or more precisely, average Australians’ financial habits on retirement saving makes sense.

We don’t save enough as a nation and will pay for it.

In an age when speculation seems to be the way, there is little incentive for peple to save for 30 years down the track. Also, a lot of people think that they can get onto the government pension.

Biker Pete
Guest
Firebug: “We don’t save enough as a nation and will pay for it.” There’s currently little incentive to save. Savings are highly taxed. Australians, like many others, seek the quick payback… the fast turnover. DRA editorials, as recently as last week, argue that cash isn’t all that good a place to be. Frankly, it pays to fully understand the financial system… and I think we’d all accept that Shoes is making it work his way. Being an uneducated old soakwell digger, I’ve gone a different direction… . I’ve allowed the spruikers to influence my plans… and, as Pete suggested, I’m… Read more »
annie
Guest
Thing that bothers me about super, is that they can change the rules whenever they like. A small stroke of a legilative pen is all. Just like retirement age. It’s like a juicy carrot sitting out there but you may never be able to eat the darn thing. Get another financial crisis, super goes down and then heaven forbid, hyperinflation, then super looks pretty dicey. Give me land, a little house, some animals and a huge vege garden now and I won’t need much in 20 years. No debt and self reliant. If my super is there then well good,… Read more »
Biker Pete
Guest
Valid points, Annie. “Get another financial crisis, super goes down…” One of the reasons I’m here. As you age, it pays to play a very defensive position. DRA assists us to keep that edge. I checked our Super figures after reading DD’s comment re returns last night. Even if we’d left it all in _cash_ for the last five years, the return was 5.58%. Then add the tax saving of 27%. But during many of those years we scored better than 5.58%, getting 21 – 24%. The danger is that if you play set-and-forget with Super, you could make _as… Read more »
Biker Pete
Guest

Shoes: I don’t htink (sic) you are capable of said Biker Pete… privious (sic) 18 months of posts I have been reading through casts doubt upon my mind. Disrespectful exchanges here ALL have a common denomiator (sic) and that is you…”

A property bull should _expect_ to wear a high degree of abuse, here, Shoes.

Here’s some advice, mate. Let the morphine wear off, get well and we’ll debate again some time. In your current state, I’m not prepared to continue the bickering… . Cheers!~ :)

annie
Guest

Yes biker, this site and the opinions here offer a diverse range of ideas that help in many respects.

Even people with defined benefit super have no guarantees of a suitable return. In this day and age with so much uncertainty, if I could get my hands on my super I would. I’m sure I would look after it a lot better than the so called experts.

I suppose I don’t trust government with our money. They can find all manner of ways of frittering it away. I worry about that future fund..

Biker Pete
Guest
Annie, at some point (if they don’t withdraw that concession) you’ll be able to access it through the Transition-to-Retirement scheme. Currently, that’s 55, but, as you say, they may well shift the goalposts. The great advantage of TTRs, paid as monthly cheques, is that your own money works in a tax-free environment… and is paid to you tax-free, on top of any/all other income. Matched with a carefully-balanced salpack plan, it’s literally as good as gold. Your end plan, a small property owned outright, is a great goal. Our last two decades in that situation have been the most rewarding… Read more »
annie
Guest
Thanks for that Biker. I do need to look into it further. I can’t access my super until I’m 57. Old age at 67. I really think that the KHTR or some other thing with marry the preservation age with the age you can get the pension. Then I would have to wait another 20 years. Yippee. Well they can’t afford to pay the pension and so many get their super, spend it, and then go on the pension. Well by that time, I don’t think the country can afford a pension, hence wack up the retirenment age and make… Read more »
Biker Pete
Guest
Annie: “I also heard that the henry review was advocating a inheritance tax. I wish they would release the bl**dy thing.” Same here, Annie. It has put my next project totally on hold. What if every other property investor is thinking the same way? That would align with very recent data showing a fall in construction. It must be completion of the FHB grants, too… but a close friend who was about to build has shelved his plans. I think Ned has, too… . We’re all waiting… . Death duties would be interesting. Our kids don’t need a cent from… Read more »
Pete
Guest
BP: “Despite opposing views, R and SV conducted that exchange respectfully, without put-downs, shouting or recrimination. Willing to try, if you are…. . ” What does that remind me of something a politician would say at election time? “A property bull should _expect_ to wear a high degree of abuse, here, Shoes.” You still don’t understand. It is not your position as a property bull that is offensive. It is not your name either. It is not the fact that you post night and day and flood this website. It IS the fact that you are an obnoxious braggart who… Read more »
Biker Pete
Guest

Limp Pete: “If lack of respect was karmic, in your next life you’d be a dung-beetles crotch louse.”

Pretty typical of your responses since Day One, son… .

Pete
Guest

Typically missing the point again. I did mention you brought the worst out of people, myself certainly included. The common denominator is you. It is always you. And unless you can change your ways, it will continue to always be you.

But if you can play nice, you won’t hear from me anymore. That’d be win/win I think.

Biker Pete
Guest
Limp Pete: “I did mention you brought the worst out of people, myself certainly included.” I think that probably happened when you lost bigtime on property in the UK, LP. Your most amusing accusation is that of ‘bitterness’. If you reread your posts, they’re indicative of extreme rage, envy and hatred of numerous groups. Not just directed at me, but at good, honest folk like Ned. I’m not concerned if I hear from you again, or not… . :) I’ve no reason at all to be bitter. My life plan, achieved through property and Super, has been achieved. Karma has… Read more »
Pete
Guest

Wow, riveting.

You could hardly be more wrong about everything you just said. But that has never stopped you in the past.

I wonder if one day you will say something to me that upsets me? I doubt it. Although I do get upset when you mistreat others here.

So…good time to buy up some property, right now huh? I’ve heard the Melbourne market is red hot. Get in, grab yourself a bargain before they’re all gooone. You’d pretty much have to wouldn’t you? After all the things you’ve said…

Biker Pete
Guest

Limp Pete: “So…good time to buy up some property, right now huh?”

We have enough, thanks, LP. You’d be advised to wait, patiently. Your long-distance guru counsels that the Great Property Crash will save you 40%.
All you need do it wait… . Karma rewards believers… . :)

prozak
Guest

slanging matches still going on… no surprise really…

Pete – are you / were you in the UK?

Biker Pete
Guest

More Limp Pete: “You could hardly be more wrong about everything you just said.” Yes, my sincere apologies for the crack about realty falling 40%.
It was inaccurate and misleading. What you _really_ said, in defense of Keen, 15th June 2009, was: “A HUGE real estate bubble. Massively inflated prices. It is not realistic to expect prices inflated at 10% to drop by 50%. It is however realistic to expect prices inflated at up to 50% to drop by 50%.” Fifty percent.

The fun starts in April, LP. ;)

Pete
Guest

Hi Prozak. No, that old fool thinks I am you. You know the whole “only one person could possibly disagree with me, all of those names must be the same person” deal again. He has accused many people of being you or me for a while now. I think it is probably just some defensive form of vanity?

If it helps I have relatives in the UK…

prozak
Guest

Pete,

Likely he is also then adding another person into the mix as well.

I do sort of remember someone saying they lost money on property in the UK… was it in the last fall in the 90’s? I can’t recall who it was though.

Pete
Guest
No idea where it all started actually. Anyone’s guess? The sheer amount of assumptions that old fool makes adds nothing to any shred of credibility he might once have had. Glad to see you are back on here though – many good commenters leave and then this place is left with old fools using this place to chat about their adventures in the garden. I’d given up commenting for quite a while actually, wasn’t bad. Just got a bit arc’ed up when this sad excuse of a man (I bet I ride more motorbikes than he does) was at his… Read more »
Biker Pete
Guest

Policeman Prozak (“Ullo, Ullo, what’s goin’ on ‘ere then?”) and Limp Peter (“I’ll have a ‘alf …. of Melbourne”) here to entertain us… .
Plodzak: “…slanging matches still going on… erm, no surprise really.
I bet I ride more motorbikes than he does.” Classic!~

And Limp Pete conveniently forgets his past confused comments, including bleating “I only voted for Rudd because I hate Costello and Howard more!” That’s Karma for ya!!~

Gerry
Guest
This site is an interesting one for opinion pieces,essays,comments etc,and is a worthwhile read, and best wishes to all for that. However…The standard of the feedback and childish comments posted from the “regulars” continues to take the site downhill and with few exceptions adds little to the subjects highlighted. Take a good look at the rubbish that is being posted in the comments section and lift your game.Not clever not funny, not at all constructive…just evidence of a lack of constructive thought and probably wastage of real productivity (maybe in the bosses time) in your primary jobs.I’m well over it… Read more »
Pete
Guest

Noted Gerry. I won’t be posting at all if you-know-who can keep it friendly.

Biker Pete
Guest

Gotta agree, Gerry. S’awful, innit?

My missus: ” You’re blathering on with the Toxic Twins… again?!~”

Good luck, Prozak. Good luck, Pete. May it all come good for you both… .

BP

baal
Guest
what’s so weird and funny about the -[Beijing-Forbidden City]- routine ? do you get a box of guns with every trunk full of pills ? just like it use to be in the old days. man! talk about a bummer, you had to go out and buy the ammo first before you could open up a black market pharmacy. butter up the boys guys,did you catch two Fridays ago NY POST article about the new collection agency in NYC ? and them darn euro notes trade at a 20% discount in the USA off the spot rate plus $7 for… Read more »
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