How to save the Euro by printing money

Friday 30 Sep 2011

The Financial Times has an article today by Martin Wolf called "Time to think the unthinkable and start printing money". He says:

It is the policy that dare not speak its name: the printing press. The time has come to employ this nuclear option on a grand scale. The alternative is likely to be a lost decade. The waste is more than unnecessary; it is cruel. Sadists seem to revel in that cruelty. Sane people should reject it. It is wrong, intellectually and morally.

If there is one constant psychological theme that has run through all Martin Wolf's articles over the last few years, it is the idea that the government should avoid inflicting pain. He argued against the UK Austerity program on purely Keynesian grounds, he backed backed quantitative easing and zero interest rates, he backed the EBC's bond purchases and the Greek bailout, he describes the Greek austerity program as vicious, he even opposes Italian austerity, and he campaigns for orderly Greek default. Although Martin Wolf is an Anglo-Saxon neo-liberal economist, he certainly doesn't believe in Thatcherite style toughness.

In this opening paragraph Wolf describes people like Thatcher as "sadists", but in reality of course he is just talking, the real difference between the modern liberal and the old fashioned conservative is a difference of morality. In Wolf's articles you often find him advancing two self contradictory line of reasoning, if you say the Greeks need to be punished he will reply that "economics is not a morality play", if you say pain is good for the soul he will say "pain is immoral". In reality he is justifying his own subjective moral intuitions, he has no objective moral or objective pragmatic foundations for arguing whether or not the evolutionary 'sort it out yourself', or the nurturing 'let's help' solution is the correct judgement call.

Analysing and objectively answering such dilemmas is what Socrates and Plato taught. In this article I won't list the two moral and two intellectual ways of analysing the problem, but I will quickly point out the psychological defects underlying Wolf's liberal analysis. Firstly, it should be obvious that Wolf's analysis reflects his own moral psychological preference for not experiencing pain in the now himself, it's cowardly and weak. His generosity with other peoples money has an air of Anglo-Saxon hypocrisy about it, the Americans and the UK want the Germans to make sacrifices for the Greeks, but we know they wouldn't do the same if they were in Germany's position. Secondly, it should be obvious that he is blind to the intellectual problems of evolution. If Wolf was focused on the future 100 years from now he would be much less concerned with transitory suffering and much more concerned with the long term risks to reform, moral hazard, leadership and harmony that such a radical policy entails. He is unable to detach from himself, he lacks self control and judgement.

What I am saying here is most obviously expressed by saying Wolf lacks objective idealism. Thatcher inflicted pain during the 1970s because she looked past material utility, she measured society by something that transcends the physical, a religious person would call it moral goodness, a philosopher wisdom. For example, Thatcher saw herself on a moral crusade to restore puritan values to a lazy society, she was working at a much deeper level than utilitarianism. For someone focused on the transcendent form of goodness bodily pain is invisible because they see beyond the physical into the human heart or mind. Because a profligate person becomes a better person when they are forced to conquer their self inflicted problems, every idealist from the Catholic to the Puritan to the Samurai to the Sage embraces the challenges of life as self developing. The modern liberal is the atheistic relativist who denies both a spiritual dimension beyond the physical and the existence of psychological virtue. He measures life by the subjective instinctive pain or pleasure of physical experience alone, like a spoilt child he calls the world's idealists sadists.

Wolf goes on to mention the two types of money printing: you can hand every man woman and child a cheque to spend as they wish, or you can hand the government a cheque to use for the betterment of the people at large. Despite the crisis of capitalism Wolf remains wedded to laissez-faire ideology, so he unsurprisingly chooses the former option:

Personally, I would favour the “helicopter money”, recommended by that radical economist, Milton Friedman. In this case the central bank money passes money to the public at large.

This is an absurd suggestion because the German ants would simply horde the money, and the Greek grasshoppers would go on a spending binge. Such a policy would only exacerbate the imbalances which so threaten our geopolitical stability. Handing the money directly to the people would also be economically inefficient, only a die hard believer in rational expectations could possibly suppose individuals would manage such a windfall optimally, and only a die hard believer in invisible hand could possibly suppose the communal utility of such a windfall is insensitive to each individual's monetary marginal utility. Handing money to people instead of the government would also be more likely to be inflationary. Finally, is it obviously absurd to distribute the money to the people instead of the government in the midst of a life threatening sovereign debt crisis.

Although he does not explain himself, I think in his heart of hearts Wolf knows that handing money to individuals is absurd, and the rest of the article continues by discussing only second option of government benefiting from the windfall.

What Wolf does not discuss is the reaction of foreign powers to this action, he simply assumes it is a sovereign right to print ones own currency. I think this is both morally and intellectually doubtful, even for a country such as the UK.

If you think about the nature of this crisis, what we have is a bifurcation in the world between competitive countries, such as China & Germany, and uncompetitive countries such as the US and Italy. This mismatch has combined with globally traded currencies such as the Dollar and Euro, creating a situation in which the uncompetitive countries are indebted to the competitive countries. So the issue of the day is that one group of counties owes the other group a large amount of money, and the weak outlook of the uncompetitive countries demand that they make profound reforms in order to honour their burdensome debts.

In one of Plato's dialogues Socrates says the issue of debt is ethically problematic. He says the ideal system, in his opinion, is probably one in which debts are voluntary instead of enforceable or secured, so loans depend on the perceived morality and wisdom of the borrower alone. Nevertheless, this is not the system we use today, and were we to have such a system today there would be very few loans in the world. The sanctity of sovereign debt is part of the rules of the modern geopolitical game, and unilaterally money printing on a humongous scale violates those rules and threatens geopolitical unrest.

So I have my doubts about the righteousness of printing vast quantities of currency without the consent of foreign powers who hold ones debt.  However, if, for the purposes of argument, we leave this issue aside, what could we suggest for the Eurozone?

The Greek government owes its creditors 30,000 Euros for every man woman and child living in Greece. Italy owes approximately the same amount, most other Eurozone states owe less. So let's wipe this out this debt completely with money printing. In order to ensure fellow Eurozone states don't object, we need to print the same amount of money per capita for all Eurozone countries. Multiplying the 330 million people in the Eurozone by 30k gives the nice round sum of 10 trillion euros.

By printing 10 trillion Euros and distributing it to the governments of the Eurozone all sovereign debt could be wiped out (forced repurchase at an imposed discount rate), and many countries would end up with national savings which could be invested into the economy. With the risk of sovereign default neutralised the banking sector would look much healthier, the crisis is basically over. Such a shock and awe policy move could be accompanied by greater federalism, the obvious policy would to be to ban sovereign borrowing for all Eurozone states in the future. Never again would governments in the Eurozone be allowed to issue government bonds, they would have to stay in permanent credit (an exception would have to be made for bank bailouts). That simple rule would create a much more sustainable union and hugely improve the quality of democracy, it's an extremely useful reset button which tides up the politics and solves the crisis at the cost of foreign creditors.

It's impossible to say with any confidence what the effect of such a move might be on inflation and interest rates and the exchange rate, it's very much a giant leap into the unknown. Wolf dismisses the inflation threat, but then he would wouldn't he, his analysis is famously lacking in self doubt. Personally, I couldn't even say with real confidence whether it would benefit the rich or the poor more. I wouldn't opt for a drawn out program or half measures as Wolf does in his article, so much uncertainty would play havoc with financial markets, better to take a quick bold one off leap and then deal with the consequences. The absence of sovereign borrowing would probably have a very negative impact on the long term profitability of banks, which is a good thing. It would change attitudes to the stock market, people would switch a lot of their cash into the stock market asap.

The latest idea doing the rounds is a three trillion Euro program financed by leverage. If I had to choose between that and ten trillion of printing equally distributed I would certainly take the latter. It wouldn't end the austerity programs, but it would end the uncertainty and anger. Countries would have no excuse to resist reforms after a move like this. How much money is ten trillion euros? Look, spectacularly profitable Apple Computers has more of their profits sitting in the bank that any other private counterparty in the world, yet they have only about one two hundredth of this amount. Ten trillion euros is more that the total market capitalization of all the world's stock markets added together, it's an absurd sum of money and a testament to the madness of politicians that they have run up these kind of unsustainable debts even in the midst of a global growth bubble. Even though paying back this money is going to be a nightmare, I prefer my less federalist more reform orientated and less quantum leap like technocratic prison solution, but money printing is an attractive idea.

If I were Angel Merkel and I wanted to go this route I would explore it with the Chinese and see if they would support such a move in return for various political favours, such as market economy status at the WTO, an end to the arms embargo, and basically everything and anything else they want. You couldn't print this kind of money without China's blessings, and in the unlikely event they said "ok" I would call all the prime ministers and finance ministers of the Eurozone into a meeting, that's 34 politicians in total, and present them with two options: money printing or technocratic prison. I would confiscate their mobile phones and keep the doors locked for as long as it takes for them to choose between one of these two options, then I would implement it. End crisis!