Sink or Swim
Last week Germany received a warning from the bond markets to consider what country it ties its economy to. The common link to the Euro and the Eurozone has made the debt problems of Portugal, Italy, Ireland, Greece, and Spain (known in lingo as the PIIGS or Club Med) a financial crisis for Germany. Bond investors turned their backs on new debt offerings from Deutschland a week ago due in part to the company it keeps.
Germany now faces a dilemma. One course of action is to copy the insanity of the United States by giving the European Central Bank the authority to buy the sovereign debt of European Union members that banks and investors shy away from. The central bank purchases the bonds by printing new money. In essence the central bank institutes price controls on debt yield. Do you really think the free market interest rate on 5 year US Treasuries is less than 1%?
Printing money in order keep a lid on debt yields may work for a brief time. As the Germans learned firsthand after WWI when investors shied from purchasing German bonds, the country’s central bank resorted to money printing that eventually exploded into hyperinflation. Prices rise so rapidly that the value of money totally disintegrates. In such an environment the middle class is wiped out as their savings evaporate into thin air. Store shelves lay bare as distribution cannot keep pace with individuals seeking goods in exchange for a currency becoming more worthless with each passing moment. Rapid increases in prices all but make it impossible for producers to make the necessary revenue and cost calculations. Productions of goods come to a standstill. Knowing the history of money printing to buy debt, Germany has rightfully balked at any agreement to allow the European Bank to engage in monetizing the debt.
The only alternative for Germany to regain the confidence of bond investors is to sever ties with the Eurozone. Without the common thread of the European Union and a singular currency, Germany’s financial structure can be viewed with a microscope instead of a telescope scanning the entire continent.
When the Titanic made its icy plunge toward the ocean floor, passengers in lifeboats had to row far enough to keep from getting sucked down in the vortex of the sinking ship. Germany needs to paddle hard away from the Euro.
The question for people in this country is why anyone should be shackled to another person’s debt. Many, including myself, have handled our personal finances responsibly carrying little or no liabilities. If a neighbor takes on a debt load that will in the future wipe out his assets, then why must I be forced to surrender a portion of my wealth and financial security to keep the neighbor afloat? The same can be said for bad decisions made politicians. Because I am tied to the currency of the federal government and they by law dictate that I must use their money for transactions in this country, their irresponsible behavior directly affects my wealth. The only option left to the public is either let the Federal Reserve continue buying Treasuries by printing money or let the politicians tax every dime we possess. Either choice results in a destroyed economic system.
The only chance to be saved from such catastrophe is no different than choices facing Germany. We must sever ties from the source of the problem.