In our cover story, James Ferguson quotes Arthur Conan Doyle’s character Sherlock Holmes: “Once you eliminate the impossible, what is left, however improbable, must be the truth”. It is a thought being picked up by European politicians too.
Where does it lead James? You’ll have to read the piece to find out. But after eliminating the impossibles he concludes that the only way out of the debt crisis for the eurozone is to start issuing Eurobonds. But if everyone can issue bonds backed by all nations, how might it be possible to stop the likes of Greece from abusing the system – issuing more bonds than they have a hope of supporting and causing yet another debt crisis along the way? James says it could work if we put in place a “robust set of rules” to keep things under control.
He might be right in the short term (and it is not as if there is another option). But it is still hard to see how Eurobonds could save the currency union in the longer term. I asked When Money Dies author Adam Fergusson (who used to be an MEP back when a common currency seemed the obvious solution to everything) about it this week. He isn’t so sure: he can’t see how any rule can be made so robust that Greece can’t ignore it. That the eurozone leaders will introduce a Eurobond is improbable but possible. That it will work beyond the short term? Impossible.
Beyond the eurozone, Tim Price of the wealth management group PFP and also author of our own The Price Report newsletter has pointed me towards Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das. In it he outlines what has to happen for us to get straight again. “The world has to reduce debt, shrink the financial part of the economy and change the destructive incentive structures in finance. Individuals in developed countries have to save more and spend less. Firms have to go back to real engineering. Governments have to balance their books better. Banks can’t be larger than nations, or be countries in themselves. Countries can’t rely on debt and speculation for prosperity. The world must live within its means.”
Doesn’t seem very likely does it? With that in mind here’s another Holmes quote: “The ideal reasoner would, when he has been shown a single fact in all its bearings, deduce from it… all the results which would follow from it.” The key fact facing us all today is that there will never be enough growth in the West to pay back the sovereign debt on the table. That means that, however much we mutter about austerity and growth, the end game of the current macroeconomic situation has to be more money printing and currency debasement. Eliminate the impossible (default or actually paying back debt in real terms) and in this case you end up with a very probable result: high inflation for years to come.