How the European Endgame Will Be the Death Knell For Modern Economics

How the European Endgame Will Be the Death Knell For Modern Economics

by Gregor Macdonald, contributing editor

Monday, December 5, 2011

Executive Summary

• Central banks are running out of options, leaving only increasingly desperate choices
• Why Europe is most likely to begrudgingly print a whole lot more money soon
• The harsh judgment day is approaching for mainstream economists
• Why 2012 heralds the dawn of a new era of economic understanding

Part I: It’s Time To Give Up On Mainstream Economics

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: How the European Endgame Will Be the Death Knell For Modern Central Banking

Central Banks Becoming Increasingly Desperate

Has Europe decided to print its way out of the crisis? The big-bang announcement last week among global central banks suggests as much. Unfortunately, the global US dollar swap solution only patches up the liquidity portion of Europe’s present dilemma and does nothing to address the solvency issue.

As readers know, I take the mildly heretical view that “money-printing” in our present debt deflation actually functions as a status-quo maintainer. It does not risk hyperinflation, but instead keeps social confidence intact — at low levels, of course — as the familiar institutions of Western economies are maintained. Hard defaults, on the other hand, especially hard defaults that appear out of the hands of either fiscal or monetary policy makers, risk a confidence collapse on a large scale.

In my view, hyperinflation typically begins with a broad rejection of a country’s sovereign debt. This is the initial threshold that is crossed on the path to currency rejection, as foreign holders exit first. Domestic institutions are more restricted, slower to react, often bound by investment mandates, and thus left “holding the bag,” as it were, on a country’s bonds. Eventually, domestic confidence in the currency itself is lost, as the public, having watched its institutions fail, rejects the currency.

In my view, Europe is still at very high risk for such a catastrophic outcome.