Printing money won't solve a global depression

Last week produced nothing but more disappointment. At the center of it was the Europeans’ inability to make their debt disappear. They had hoped that they could just announce a plan to take care of it…and that would be enough.

But then, the Greeks said they wanted to vote on it…and then, they didn’t. ‘Papandenomium,’ the papers called it. If the voters were allowed to give their opinions everybody knew what would happen; the whole fix would be unfixed quix. So, they all got together and twisted Papandreou’s arms…and his arms gave way.

And then, investors started getting nosey. They wanted details. They wanted to know how the French and the Germans could cover so many potential losses — from Spain, Portugal, Ireland, Greece, and Italy.

Italy is in the worst position. It has scarcely any more debt than the US, but it has an immediate problem. It has to turn over its debt…it has to borrow heavily just to keep the wheels turning. And it lacks America’s key advantage…it doesn’t have a printing press. It gave up the power to print money when it joined the EU. Only the European Central Bank can print money…and it’s controlled by the Germans!

What’s the matter with the Germans, anyway? Why don’t they get on-board with the Fed? Why don’t they want to print money? If they would just give the signal — ‘don’t worry, we’ll print the money’ — the whole crisis would be over. In Europe, as in America, bond investors would be reassured. They would know that they’d get their money. The ECB would buy Italy’s bonds, and Greece’s bonds, and Spain’s bonds… Heck, it would buy everyone’s bonds. Bond investors would get their money. They would stop hiking interest rates. Italy could cover its losses.

Everyone would be better off, no? Just like they are in the USA. Right?

It all seems so simple. Why don’t the Germans get it?

While US policy makers, official economists and jackdaw kibitzers are terrified of another Great Depression, Germany’s officialdom is afraid of hyperinflation. Hardly any Germans are still alive who remember it, but the experience of hyperinflation of the early ’20s is painted on the German character like graffiti on a national monument. They can’t ignore it. They can’t forget it. It will take generations for it to wear off. After the bitter experience of WWI, hyperinflation wiped out the German’s residual faith in their institutions. Working hard, saving your money, being a good citizen — none of it seemed to pay off. The ex-soldiers were bitterly disappointed. The ruling classes had let them down. The banks had betrayed them. The politicians had stabbed them in the back.

Even their money was worthless!

“How could 2,000 years of accumulated civilization have led to this…” (Or words to that effect) says the hero of Remarque’s famous All Quiet on the Western Front. Having no good answer, the Germans turned away from accumulated civilization, towards armed, mechanized zombieism.

In just a few years, Germany’s factories were working again — producing tanks and planes. It was a solution to the post-WWI unemployment and depression. Unfortunately, the solution was worse than the problem. The trains ran on time. But they were headed for disaster!

But that’s a long story.

Meanwhile, in the US, we have our race memories too. Few people alive today recall the Great Depression. But it still haunts economists’ sleep and troubles their vacations.

“Not on my watch,” says Ben Bernanke, or words to that effect.

And so, the Americans fight depression. The Europeans fight hyperinflation.

And what will they get? Depression AND hyperinflation!

Yes, dear reader, that was our forecast as few years ago. We stick with it. The world is entering a depression. Growth has stalled. Even the emerging markets are slowing down…suffering the consumer depression exported from Europe and America and trying to fight the inflation exported, by QE2, from the US.

This depression isn’t going away anytime soon. It will take years to work through, write off, default and foreclose on the mountain of household, business, and financial debt built up over the last 60 years. At first, we thought it would take 7-10 years. We’re in year 5 already…and, at the present rate, it looks like it might take another 15 years!

But the authorities aren’t going to take a depression sitting down. Even the Germans will probably decide that a little bit of printing press money is better than the defaults and bankruptcies that accompany a depression. They’ll all guarantee each other’s credits. The banks guarantee the debts of their big customers. The government guarantees the debt of its big banks. The central banks guarantee the debts of the governments…and all print money to cover them. What a great system.

Yes, that’s our prediction. Depression will lead to money-printing…which will eventually lead to hyperinflation.

But heck…the whole thing will take years to play out. By the time it finally comes to pass we’ll all probably have forgotten this forecast. We’ll be lucky if we can remember our names.

What does a modern depression look like? Take a peek. The Wall Street Journal:

Generation Jobless: Young Men Suffer Worst as Economy Staggers

The unemployment rate for males between 25 and 34 years old with high-school diplomas is 14.4% — up from 6.1% before the downturn four years ago and far above today’s 9% national rate. The picture is even more bleak for slightly younger men: 22.4% for high-school graduates 20 to 24 years old. That’s up from 10.4% four years ago.

For such men, high unemployment is eroding their sense of economic independence. Their predicament reflects that of a generation of Americans facing one of the weakest job markets in modern history.

“We’re at risk of having a generation of young males who aren’t well-connected to the labor market and who don’t feel strong ownership of community or society because they haven’t benefited from it,” says Ralph Catalano, a professor of public health at the University of California, Berkeley.

The share of men age 25-34 living with their parents jumped to 18.6% this year, up from 14.2% four year ago and the highest level since at least 1960, according to the Census Bureau.

The WSJ article tells the story of young men who have been disappointed. In the boom years it was easy to make money — too easy. One made $14 an hour installing granite countertops. With plenty of overtime. Now, he’s making $11 an hour, when he can get work. And his marriage has broken up.

Capitalism, as he understands it, has been a failure for him. The Republicans have failed him. The Democrats have failed him. Education has failed him. Marriage has failed. It all must look like such a fraud…the American Dream…the hopes for a better life…the consumer society…the housing boom…the suburbs, the Hummer, the happy family. All of the promises of 2,000 years of accumulated civilization have disappointed him.

Since we, here at The Daily Reckoning, are making guesses…forecasts…and predictions…

…well, here’s one: These disappointed young men are on the cutting edge, so to speak…where politics and economics come together. Like the disappointed veterans of WWI, they are ready for a change…ready for revolution. For the present, they bide their time, playing video games such as Call of Duty. They are not sure whether the world has failed them…or whether they have failed. Surely someone will come along to straighten them out…explaining how it was not their fault…and telling them what to do about it.

What rough beast, his hour come round at last, slouches towards the Potomac…?

Regards,

Bill Bonner
 for The Daily Reckoning