The euro was a glorious fudge. The Latin countries plus Greece could enjoy the benefits of German discipline and virtue while carrying on with traditionally unsustainable public and private sector policies. In the old, pre-euro days, the southern economies had to pay high interest rates on their debt; wary investors knew that inflation and devaluation were likely and so demanded interest rates that would compensate them for the risk. The lira, the drachma: everyone knew they would lose value over time against the Deutsche mark and even the dollar, and interest rates reflected this understanding. But as the southern countries moved into the euro, calculations changed. For the last twenty years, countries like Greece and Italy were able to borrow money at essentially the same rate that Germany could.
Typically, they decided to spend rather than save this windfall. Greece in particular decided that since the costs of servicing its debt were so low, it made sense to run up more debt. Lousy leaders gave greedy civil servants fat raises; promises were cheap and the government scattered them far and wide. In Italy as well, once the national debt was less painful to carry, there was less pressure to reduce the national debt.
Low interest rates led to economic booms as both private and public sector borrowers rushed to take advantage of this once in a lifetime change. Home mortgage rates fell dramatically; construction boomed, unemployment fell and wages rose. It was party time in the Mediterranean.
Central banks exist precisely to puncture this sort of bubble, but the European Central Bank wasn’t focused on the peripheral European economies….
Mead is a liberal’s liberal. To the point he seems like a conservative. He says what is happening, without ideology.
Granted, I find his liberalism a bit cynical. But he seems to get the narrative right.
So, could they have done this if we all didn’t have fiat currency? What if the lira and the drachma were actually made of silver? What if dollars were still made of silver? Could this sort of thing still happen? What if there were open audits of gold & silver repositories and all currency issued against it had to have it’s value based on such tangible assets?
Could inflation rob us all the way it has? Could credit be so easily given to such unworthy credit risks if the money couldn’t be created out of thin air with the backing of the full faith and credit of the issuing country’s government?
Silver I bought in 1995 is worth about 200% in dollars today more than when I bought it. It takes about 20 paper dollars to get one silver dollar now. That means our paper dollars are actually worth about a nickel each. How did that happen? Where is the purchasing power that we earned? Who got rich at our expense?