It seems unusual that our global capital system has such a recent, well-documented and accurate example of our current quagmire and also, absolutely ignores it. I’m referring to the period of 1929 through 1935. If we aren’t hell bent on exactly repeating it, we surly are trying to come close.
First, the DJI chart from 1928 to 1935 is looking surprisingly like our own crash, from two years ago. So much so, that even the talking heads on CNBC have been pointing it out. And then there is the EU and the horrible dilemma surrounding the PIGSTY. The very same bailouts were attempted in 1931, to attempt to stem the cascading of national bank failures which began in Austria then Germany and France, then England and finally to the US. This process of credit runs and liquidity draining happened to one sovereign country after another, forcing Europe and then the US off the gold standard.
In many ways the world of 29/34 was financially linked, just as today. The Bank of England held development bonds of German cities; German banks held bonds of Austria and the US banks held bonds of European cities and country’s. These countries debt instruments, created a hidden interlocking financial structure, where a bank in France fearing that Germany could not collateralize it’s bonds with gold, could and did, call the bonds, creating a run on the national bank and it’s gold reserves.
Just as now the CNBC crew spouts off about how Greece’s default could not hurt the US, Hoover, in 1930/31 was being told that the US was protected by the distance of an ocean from the sovereign debt crisis festering in Europe. But by Inauguration day, 1932 this clearly was not the case as all banks in Indiana, Maryland and Michigan had been closed and many other states were on the verge of closing all banks with many cities already printing their own currency as we entered a period of barter while currency imploded.
What is pathetic about our current situation is that we are collectively repeating this same tale. The financial disaster of the 20’s and 30’s, lead to disastrous social consequences. The first thing to happen was trade barriers and the rise of political tensions between old rivals. A modern day Chinese example: In of trade barrier lingo is, ‘Indigenous Enterprise’. Along with protectionism came right-wing populist Nazism, the demonizing of the Jews and then war.
I guess, if we are to repeat history, we might as well do it over and over making it possible for large corporate banking cartels to drain liquidity from the middle class every 70 years or so.
Is there another way out for the EU? Debt restructuring, which has not been chosen yet, and Sovereign loans seem the only two alternatives. And these two alternatives may be the only alternatives at this point. Remember, in the last cyclical equity contraction all sovereign countries were driven off the gold standard in an attempt to re-liquidify, (print money) the world financial system.
One potential solution was created in Greece, by Greeks, to deal with a monetary crisis in 1922. It is unique and bears consideration as a tool to redistribute sovereign debt risk.
This is from an essay by Martin Armstrong, of Princeton Economics fame:
“In Greece, between 1914 and 1928, the price index rose 868%. Greece had a budget surplus at the start of the war. They moved into a deficit by 1922. When they could not raise taxes and any hope of barrowing from foreign lenders vanished, Greece came up with a startling plan. On March 25th. 1922, the government ordered its citizens to cut their currency in half. They could retain one-half, and the other was to be redeemed for government bonds for 20 years at 6 ½%.”
“The Greek solution was again used on January 23rd. 1926. This time, however, the government took only 25% of the circulating currency and swapped it for debt. This was a very interesting solution that eliminated Hyperinflation in Greece.”
An economic mechanism, such as this, has the potential to convert the Greek citizen into an investor/bond holder of its own country’s debt and opening up options to perform a staged austerity program over a realistic time frame. As risk is transferred onto each citizen, bond spreads should revert to more normal ranges. This type of solution also has positive political implications. Each European country steps up to assume responsibility for its unique culture without over involving other European countries.
The problem, of course is that Greece no longer has a country currency, it trades in Euros. So, Greece would have to drop out of the Common market on a structured debt timetable, exchange Drachmas for Euros at 50% of face value and issue bonds to the public for the other 50% over an appropriate timeframe. At the end of this conversation period, Greece could again join the EU and convert back into Euros. Each PIG could be taken through this process in a structured program. Maybe, the percentage conversion rate of each debtor country could reflect the relative debit to GDP ratio of that country.
There seem to be potential solutions, which, if implemented could calm European credit disparity. Unfortunately, time is running out to create a solution orientated stand, as each week more debt must be issued to re-pay old debt and the business of the state grinds ever onward.