08.13.2012 0

Europe’s circular bailout

European BailoutBy Bill Wilson — On Aug. 20 Greece must make a bond payment of €3 billion that it owes to the European Central Bank, but it does not have the money. So, it will be getting its loan from none other than the European Central Bank (ECB), reports Der Speigel.

Would you lend somebody money to pay you back money they already owed you, with interest? Does that make sense to you?

Welcome to modern finance — where no matter how broke a government is, it can always borrow more from banks to refinance its existing debts and make interest payments.

For individuals to consider such a practice is mind-boggling, but for governments that never contemplate repayment of their debts, it is just the normal course of doing business.

There’s no other way to keep the Ponzi scheme going. In short, there is not enough capital in the private sector to finance ever-expanding government borrowing, and certainly not in Europe.

So, the only way for governments to continue borrowing and deficit-spending — they’ve even convinced themselves that doing so is the only way the economy can grow — is for central banks to continue expanding the credit pie.

While the ECB is prohibited by the Lisbon Treaty from directly financing government debts, this time it is funneling the money into the Greek central bank, to then lend it to Greek banks to purchase short-term government bonds — providing the Greek government with the money to pay back the ECB.

This is not central banking at all. It’s circular banking.

But like a game of musical chairs, continued play is entirely dependent on not being left without a chair when the music stops.

With 23 percent unemployment — including over 54 percent youth joblessness — Greece’s continued viability is therefore dependent entirely on the good graces of those who operate the printing press. But will it last?

Common sense suggests that eventually the music will indeed stop as political appetites for bailing out a bankrupt nation wane in core nations like Germany and the Netherlands.

At that point, Greece would be forced to default on its obligations and likely exit the Eurozone of its own accord. This would mean tremendous losses for European financial institutions, including the ECB. But does history suggest such a result?

In the U.S., the national debt has been allowed to explode unabated every single year since 1957 all the way to $15.9 trillion — larger than the entire economy. The only way this has been accommodated is through continued expansions of the money supply by the Federal Reserve.

Minus that credit expansion, the U.S. would have already defaulted. The only difference between us and the Eurozone, then, is a continued political willingness to expand the central bank’s balance sheet by imposing inflation, crushing savers and working families.

The eggheads in Washington, D.C. plead that there is no other way. There is no way to balance the budget, let alone ever engage in debt repayment, they say. The only solution they offer is to just keep digging.

Conveniently, many of the important decisions have been outsourced to an unelected, faceless bureaucracy at the Fed. So, even if the central bank’s ever-expanding balance sheet — or continued credit expansion by financial institutions at large — wreck havoc on the U.S. economy, voters are left without any recourse or alternative.

Besides, nobody expects a financial institution like the Fed to ever cut off financing for the federal government, imposing losses on itself. For similar reasons, it may be unthinkable for the Eurocrats to contemplate cutting Greece off.

In that sense, the ECB is not bailing out Greece at all. It is bailing itself out. That makes the ongoing bailout of Greece — and practically every debtor nation in the world — a lot like the wheel of fortune in The Original Amateur Hour with host, Ted Mack.

When it was spun, Mack intoned the words: “Round and round she goes, and where she stops nobody knows.” Similarly, where the ongoing sovereign debt bailouts end, and how badly, is anyone’s guess.

Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.

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