The Weiner Component #117A – The United States & the Eurozone: Growing Interdependence: Working For the Common Good

English: A map of the 12 districts of the Unit...

English: A map of the 12 districts of the United States Federal Reserve system. (Photo credit: Wikipedia)

Countries using the Euro de jure Countries and...

Countries using the Euro de jure Countries and territories using the Euro de facto Countries in the EU not using the Euro (Photo credit: Wikipedia)

Toward the end of the year 2008, while George W. Bush was still President of the United States, the Real Estate Bubble exploded in the U.S. causing phenomenal economic misery throughout that nation and, on a slightly lesser level, throughout the Industrial World.  Many of the major European banks and many European citizens had purchased and held onto Hedge Fund Real-Estate bonds that now became worthless or nearly worthless. In essence the entire civilized world took a downward economic fall. This included for both banks and many individuals, particularly in Greece, Spain, Portugal, Iceland and Italy. In fact the three major banking houses in Iceland all went bankrupt. Some nations fared better than others but all were hit to some extent.

The real estate hedge fund sales, dividing up mortgages into microscopic parts, selling them through numerous hedge funds, and continually driving up real estate values,   had been going on for over thirty years. The process had existed through the entire careers of many bankers and investors. It had been a traditional safe hedge or investment which paid reasonable dividends. Suddenly all this ended with trillions of dollars’ worth of bonds being virtually worthless.

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The Federal Reserve tends to supervise the United States and the European Central Bank controls the Eurozone. They can add or subtract money from within their domains. Unfortunately this process can work toward solving economic problems but within a relatively slow period of time.

Economics tends to be a loose science that seemingly becomes better understood as time and situations happen.  Economic recovery is a gradual process and the FED or ECB does not have total control of the tools of recovery.  In the case of the United States the legislators, whether they understand it or not, control fiscal policy and by some of the laws they pass can hinder or aid recovery . In the case of the ECB there are 19 separate nations, with separate histories, languages, and a sense of nationalism, that have agreed to cooperate together with a single currency, for the mutual benefit of all of them.

Some of these 19 nations are currently in a dire economic condition with high unemployment and heavy debts exceeding their GDP and undergoing extreme austerity as they attempt to pay off their killing loans to those members who have supported the bailouts of their economies. Greece, for example currently is the worst off of all the nations in the Eurozone. She has 25% unemployment, has been bailed out at least twice by the ECB and is needing another loan in order to not go bankrupt.

In addition the agencies within each country that control the currency flow, and can increase or decrease it by their actions, are the banks within each nation.  These operate separately and for profit. Under both the Federal Reserve and the ECB the interest they can charge is largely controlled. They, however, until the end of 2008, were the instruments that filled the void where the societies needed freer flowing cash. They did this for three decades and finally continued forcing the process in such a way as to bring about the recessions of 2009 throughout most industrial nations.

In the United States the Federal Reserve, despite the actions of the Republican led House of Representatives whose policies tended from 2011 on to shrink the size of the Federal and State Governments creating even more unemployment, was able by creative Monetary Policy to work toward improving economic conditions within the country

The Federal Reserve largely solved this problem for the United States by both adding money at the rate of 40 billion dollars a month to their economy and by buying up 45 billion dollars a month’s worth of mortgage paper. Without ever announcing what they were doing the Fed forgave the mortgage holders their property debts. This, in turn, added much of this money to the cash flow as it was spent on new productivity rather than retiring debt.

The European Central Bank is currently facing a similar problem; they are currently facing the beginnings of deflation. Their GDP is actually decreasing while their population is increasing. The ECB’s immediate solution for all 19 nations in the Eurozone is to add 60 billion euros to the overall economies every month until September 2016. This is a giant economic stimulus plan that will hopefully boost the sagging economies and fend off deflation bringing about recovery.

Will this help countries like Greece, Spain, Portugal, and Italy who are currently following intense austerity programs in order to pay back their debts to other Eurozone countries?  This is an interesting question?  These nations have been directly aided by the ECB.  At different levels they are undergoing stringent living in order to pay off individual and government debt.  Will the people in these states continually be willing to undergo a lower standard of living than the rest of the Eurozone?

Greece, which is probably in the worst shape of all of these countries, has voted No in its last election. Their new government, with the support of the bulk of their population, is currently attempting to negotiate an easing off or forgiveness of some or all of the debt.  Will they succeed?

If the negotiations break down and nothing is resolved then Greece will be forced to leave the Eurozone and probably, sooner or later, declare bankruptcy and the ECB will collect nothing. If the ECB attempts to force payments from Greece, who currently needs a further bailout of a billion or more euros and attempts to make the repayment even more stringent than its current state, then the Greeks will be forced to withdraw from the Eurozone. If a compromise is reached then, at least, part of the debt will have to be forgiven.

If that happens then the other countries that are in extreme debt to the Eurozone will also want and expect their debts to be modified.  Spain, for example, has an extreme left party that will be running in the next election on a platform of ending stringent living in Spain.

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There are certain factors we should keep in mind.  Up to the 2008 Crash virtually all the banking houses were encouraging all the people and governments to borrow money. Times were good and could only get better was the popular belief. Not all the nations within the Eurozone took this up; some were much more conservative in their borrowing and spending habits than others. Five or six within the Eurozone did take it up and carried the borrowing as far as they could. There was a similar situation within the United States and in some of the other industrial nations.

It should also be remembered that money is no longer gold coins. That ended in the 1930s. Today money is paper which is used as a means of exchange and has nothing behind it except the word of the government that prints it. Also that the amount in circulation is determined by the particular government or the ECB or in the case of the United States by the Federal Reserve.

The amount is arbitrary and can be increased or decreased at any time. The Federal Reserve forgave many of its debtors and the country now seems to be rapidly moving toward recovery. The ECB needs to rethink its position. Many of its members still have the fixation that money is gold or that those who had been living freely through 2008 must pay their debts. It is time for these people to mentally enter the 21st Century and ask themselves what is best for all of its members. After all, Europe is probably one of the major industrial centers of the world and cash or money serves only as a means of exchange. Punishing the people of a country for careless living which was encouraged by the financial institutions does not solve major economic problems. It can, if fact, exacerbate them so that everyone will economically suffer.

In the United States a goodly percentage of the homeowners in 2008 ended up owing more on their properties than they were worth. The Federal Reserve forgave many of them what they owed. It never admitted that it did this. If it had there might have been a hue and cry against this action.   If that had happened the U.S. would probably still be in a deep recession or another Great Depression.

This is a strange issue. Given a choice, what would the American people have chosen? Allowing a large number of people undeservedly to be forgiven their debts and see the country head in the direction of a return to prosperity or fair and equal treatment of everyone and a major depression.

This is actually the problem the Eurozone is facing now. Currently the Greek government is negotiating to either reduce or be forgiven its debts. Germany and France want it to pay its debts.  After all, they have to be punished for overspending prior to 2009.

Is the issue economic justice or a solid return to prosperity for all the nations in the Eurozone? Which is more important to see immediate justice or deal with what is best for all the nations within the Eurozone? An interesting question!

Fortunately the Federal Reserve in the United States was able to act surreptitiously. The European Central Bank does not have that option. The only realistic action it can take is to partially forgive the loan in the present and eventually drop it completely. If it does this, combined with the stimulus the Eurozone will once again reach a high level of prosperity. If the ECB demands the full return of what is currently owed in order to negotiate a further stimulus, that is, equal fairness for every country; then these nineteen countries face a hard economic future.

On Friday, February 20, 2015 at a negotiating meeting of Eurozone finance ministers a compromise was reached giving Greece four more months on its bailout. One result of this temporary compromise sent the Dow Jones industrial average and S&P 500 to new highs. The Euro resounded to $114 and Germany’s DAX index closed at a record high.

Depending upon the actions of ECB in June the situation could be back to where it was a week before the temporary compromise. By then it should be obvious to everyone involved that rigid enforcement of the original agreement would have strong adverse effects upon all the nations involved. What will happen will depend upon the ability of all these people to define the best common goal for all of the Eurozone.

English: The European Central Bank. Notice a s...
English: The European Central Bank. Notice a sculpture of the euro sign. (Photo credit: Wikipedia)

The Weiner Component #117 – Following the Federal Reserve’s Example: the European Central Bank

The 2008 Real Estate Debacle affected not only the banks and economy in the United States but also those in Europe and other parts of the industrial world. And like conditions during the Great Depression each country or region has had to fend for itself, work its way through the economic disaster.

The United States followed a method of creative monetary policy, adding gradually trillions of dollars to its national cash flow in order to bring about a return to the direction of prosperity. In essence it created and added 85 billion dollars a month to its economy for well over two years. The result of this was partial recovery with national unemployment dropping to slightly over 5 percent.

(It should be added that had Congress also applied fiscal policy unemployment would probably be down to 2 1/2 to 3 percent.  But that would today be impossible with a Republican majority in both Houses of Congress.)

The European Central Bank (ECB) is the equivalent of the Federal Reserve, controlling monetary policy for its 19 member Eurozone economy. Mario Draghi, the director of the ECB has begun their version of creative monetary policy to bring about economic recovery within the 19 nations that make up the Eurozone. It should be remembered that this economic union was initially called The Common Market.

The European Central Bank will buy $69 billion or 60 billion euros in bonds each month until September 2016. They do not have the mortgage dilemma that had existed in the United States but they do have a debt crisis in a small number of their member states that they are currently essentially attempting to ignore. The ECB is beginning this process with traditional monetary policy. But even this is a radical step for the ECB because they will be adding 60 billion euros to the cash flow every single month. This will be done by buying back bonds.

In all they will be adding a total of over one trillion euros. Where is all this money going to come from? The ECB will print it and add it over a twenty month period. At the end they will be adding 1.2 trillion euros to the Eurozone cash flow.

Remember, currency has no real value. There is nothing behind it but the word of the agency or country that provides it. This is true for all nations today because there are not enough precious metals in existence to conduct all the business that occurs within and among all the nations. The value of this currency is set in the nations using the money by their governments and by what other countries are willing to trade for it.

There are several major problems the Eurozone is facing. To use a historical example: When the United States was first formed during and immediately after its Revolutionary War in the late 19th Cwntury its government consisted of thirteen separate states and a Continental Congress made up of representatives of these states. In order for Congressional legislation to pass, each of the individual states had to sanction it. Also only the states could tax. Congress had to request money from each of the states which each of the thirteen states could send or not send. What existed was 13 sovereign states with an essentially powerless central government.

This is largely what exists in Europe today, nineteen sovereign nations that largely speak different languages who have bound themselves into an economic union. Some are wealthier and more efficient than others. It is to everyone’s advantage to belong to the union but some of the members are currently in dire straits.

In the period prior to 2009, some of these countries using creative bookkeeping, which was largely created for them and their citizens by large American banking houses like Goldman Sacks, slowly incurred extensive debt. The basic premise, I assume, was similar to that used by the banking houses in the United States that their increasing prosperity would grow the debt out of existence. At the end of 2008 the Housing Industry collapsed in the U.S. shrinking economic growth throughout the world and leaving these nations and many of their citizens hopelessly in debt.

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The Eurozone is a monetary union of nineteen European states that have adopted the euro as their official currency. They are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Other European states are getting ready to join and some have adopted the euro unilaterally.

The current major problem facing the ECB is deflation. Their Gross National Product (GDP) has been slowly shrinking; it is currently down .02%. This means, particularly with their population slowly increasing, that the average standard of living for most of the people is slowly dropping.  In order to avoid this and to begin growing the GDP again the ECB will, using monetary policy, increase the cash flow throughout the Eurozone by 60 million euros per month for about twenty months. Obviously they believe that this will reverse the current pattern. Hopefully in this they are right.

The euro tends to be a far better currency than most of the 19 nations had before the Common Market. It has been between 1.2 to 1.5 percent above the U.S. dollar. The only currency that has been higher has been the British pound which has been between 1.5 and 1.7 cents above the U.S. dollar.

All the nations involved have benefited from this economic union, but all these countries are not economically equal, and all of them have otherwise remained independent sovereign nations with strong feelings of nationalism. Currently Greece, which had a youth unemployment level of 53.5% in November of 2014, had its government for a number of years borrowing off the books billions of euros. In November of 2010 Eurostat revised the debt of Greece putting the deficit at 15.4% of GDP and public debt at 126.8% of the GDP. This was the greatest deficit among all the EU member nations. The European Central Bank (ECB) bailed Greece out with money and an austerity package.

Despite the austerity measures, possibly because of a continuing recession, the deficit continued to grow and in the beginning of July 2014 there was a second bailout of one billion euros that was due to be paid back in late July. Greece ended its six year recession in the second quarter of 2014 but was still facing, economic and political instability and heavy debt

There has been spontaneous protests strikes, heavy unemployment, and large scale discontent ever since the bailout loans were first made. In the January 25, 2015 Election the Left Wing Syriza Party won the majority position with 149 out of 300 seats, 36% of the popular vote. The second, out of the 20 functioning political parties in Greece, was the (NO) New Democracy with 27.81% of the vote.

Syriza campaigned as the anti-austerity party. They are a radical left-wing political party whose platform was to end Greece’s austerity measures. In a manner of speaking by the way they voted the Greeks held out their middle finger to the European Central Bank (ECB).

It’s understandable in a country which, for whatever reason, has been in an ever increasing recession for the last seven years, has seen its GDP decrease about 25% and unemployment rise above 25%, with the ECB now asking for further austerity.

The new Prime Minister, Alexis Tsipras, has promised to renegotiate the country’s 270 billion bailouts. He is also seeking forgiveness for most of Greece’s 270 billion euro debt. He has pledged to reverse many of the austerity reforms, such as cuts in pensions and the minimum wage and public sector layoffs.

Germany and France want the ECB to adhere to the original austerity agreements; in a sense they want to continue to punish Greece and the other nations who overspent and received bailouts from the ECB. Some of the other countries are Spain, Portugal, Ireland, and Italy.  In Spain a radical left party is presently organizing protest marches in the country. They may well emulate Greece in their next popular election.

As of now nothing has been done. The European Central Bank has put off any possible settlement for several months. What will happen then is anyone’s guess.

The ECB needs agreement from all its members in order to act. If it demands that the austerity continue then Greece will be forced to leave the Eurozone and go back to its old currency, the Drachma, and eventually be forced to declare bankruptcy since at the present it is at the point of needing another bailout for which its new prime minister swears he will never ask. If, at that time, the ECB accepts a compromise it will be establishing a precedent that will apply to the other nations that have overspent in the past and need or will need bailout funds.

All this is an interesting dilemma! This is particularly true since the euro has no intrinsic value. Additional funds can be printed and issued as needed. In fact this is the Monetary Policy plan that the ECB is about to start that will hopefully reverse the current deflation cycle the Eurozone is presently undergoing.

This problem is another result of the U.S. Real Estate Bubble bursting in late 2008 and causing a world-wide recessions. Both the Eurozone and U.S. property dilemmas were caused by the major banking houses.

In the United States the Federal Reserve, with the approval of President Barak Obama, by its monthly purchase of 45 billion dollars’ worth of mortgage paper, essentially forgave a large percentage of the multitude of homeowners who found themselves over their heads in debt on their homes. The result of this has been to solve the multi bundling of mortgages and return the housing industry to sanity and to move the country largely in the direction of economic recovery. Hopefully the dual actions will eventually occur.

Ultimately the ECB will have to take a similar type of action, largely forgiving the debt of the few nation’s that are currently in dire straits and add over a trillion euros to their overall economy or see the Eurozone largely fall apart. And if this happens and the Eurozone is largely broken up then Europe could see a return to the conditions of 1929 when each individual nation had to fend for itself during the time of the Great Depression.

(Footnote: Many of my readers have asked me questions in their comments. I carelessly did not number the original publication of “The Weiner Component #114.” However all the questions are answered in that blog: “Responding to Your Enquiries.”)

English: Clockwise from top-left: Federal Rese...

English: Clockwise from top-left: Federal Reserve, Bank of England, European Central Bank, Bank of Canada (Note: Uploaded for use on Wikinews) (Photo credit: Wikipedia)

English: Various Euro bills.
English: Various Euro bills. (Photo credit: Wikipedia)