Opportunity instead of crises and End this madness!
by Urs P Gasche and Yanis Varoufakis
Almost no one asks what an economic policy looks like that no longer subordinates everything to economic growth: How to reduce the debt mountain to a reasonable level without GDP growth? How can pensions be secured without GDP growth and how can sufficient gainful employment be guaranteed?
Opportunity instead of crisis.
Will we seize the opportunities presented by the current global crisis?
Here’s how we could emerge from the crises
by Urs P. Gasche
Economic growth dictates policy. But the risks of inflation, higher interest rates and mountains of debt are increasing.
[This article published on 7/29/2022 is translated from the German on the Internet, So könnten wir aus den Krisen herauskommen – infosperber.]
The economies of the Western industrialized nations functioned well for a long time during the reconstruction phase after World War II. Growth was able to satisfy many basic material needs of the population. It was also possible to shorten statutory working hours.
But in the meantime, the growth-driven economy is driving full speed ahead into a dead end. Governments and central banks tried in vain to revive economic growth by deregulating, cutting taxes for businesses, and handing out generous subsidies.
But despite these measures, for more than twenty years now, almost all industrialized countries have achieved real growth in gross domestic product only by incurring similar levels of additional debt: Growth on credit. However, this is a risky recipe.
The hope of reducing the mountain of debt thanks to strong growth has also turned out to be wishful thinking.
Out of sheer helplessness, central banks have been flooding the economy with cheap money for years. They accepted that confidence in the value of money could dwindle.
Those who were rich enough took refuge in material assets such as land, real estate, gold or art in good time. Or they invested in companies with shares.
This is a major reason why the gap between the general population and the super-rich has grown even wider.
Part 1: Central banks expropriate savers and turned the rich into the super-rich
Part 2: Euro worth half as much in only 8 years, CHF in 20 years
Jobs and pensions without GDP growth
Almost no one asks what an economic policy looks like that no longer subordinates everything to economic growth: How to reduce the debt mountain to a reasonable level without GDP growth? How can pensions be secured without GDP growth and how can sufficient gainful employment be guaranteed?
Answers would be expected from science. But few economists have ever dealt with an economy without growing GDP. This is now taking its toll.
For despite all efforts, the GDP of the Western industrialized countries in the OECD has been growing only on credit for more than twenty years. Government debt alone has grown faster than GDP in most OECD countries. Add to this the increased debt of companies and private individuals as well as the increased debt of the financial sector (banks, Blackrock, Vanguard, hedge funds, etc.).
Even growth-believing economists who deny that it would take three planets like the Earth if all the inhabitants of Africa, India and China consumed as many resources as the people in the industrialized countries should take note of this.
When bank deposits are no longer safe
The financial sector is mainly to blame for the increasingly unstable conditions. Instead of serving the real economy as it used to, the financial sector, with the support of central banks, has degenerated into a gigantic betting casino over the past 25 years. The vast majority of financial transactions no longer serve manufacturing companies, but are pure betting transactions worth trillions of euros, which are often settled in fractions of a second.
The high incalculable risks of betting transactions on credit are borne by the real economy and the holders of savings and payment accounts. In Switzerland, 100,000 francs per bank are supposedly guaranteed, but only up to a maximum sum of 6 billion francs – out of a total of around 800 billion francs!
Fearing that one day too many people might withdraw their credit balances from the banks, discussions are already underway as to whether cash withdrawals and payment options with cash should be restricted. There is even talk of abolishing cash. Talk of this alone is a red flag.
Concentration of power and distorted prices
A reversal of policy is made more difficult by billion-dollar mergers and acquisitions, which greatly accelerate concentration and thus a concentration of power in both the manufacturing economy and the financial sector. International megacorporations and their lobbies can put enormous pressure on national governments and parliaments.
National legislators no longer manage to regulate corporations that have become too influential in line with the market, for example
eliminate the “too big to fail” privilege;
to effectively stop the worldwide, extensive tax avoidance practices;
enforce the polluter pays principle for environmental damage and risks incurred;
Instead of efficiency, high socialized costs
It is the climate-relevant aviation, shipping and heavy goods traffic, as well as simply all fossil fuels, that benefit from direct subsidies in the trillions. Transport does not even have to pay for its massive environmental impact. According to calculations by the EESI (Environmental and Energy Study Institute), subsidies for fossil fuels reach 55 billion euros each year in Europe and 20 billion dollars in the U.S. – without taking into account the environmental and health damage.
The consequences of transport prices that are far too low are serious: deregulated world trade has distributed production facilities and gainful employment to locations that are economically wrong. For this reason, the international division of labor does not bring the hoped-for benefits, but instead brings high socialized costs.
The means of transport subsidized with trillions are the main reason why the nonsensical, globalized and fragmented production came about. This is now being felt by many countries because of a comprehensive sanctions policy.
Permanent fear for jobs and pensions
In the richest countries of the world there is a permanent fear for jobs and pensions. Because almost all industrialized countries have made the financing of pensions dependent on economic growth and high investment returns, their long-term financing is at risk. As a way out, they want to reduce pensions and pay them out only at a higher age.
Unemployed and unemployed people, on the other hand, have been put off for years until there is more growth.
At the same time, corporate executives are constantly trying to increase the productivity of their companies. Their goal is to get by with as few workers as possible for a given output. The “IT revolution”, which supposedly makes many jobs superfluous, is supposed to contribute to this.
Business lobbies and government officials stoke the fear of job loss and exploit this fear politically in collective bargaining and in referendums.
The overriding but suppressed problem
But headlines about job losses and pensions in jeopardy, about mega-mergers, quarterly closings, negative interest rates, stock market prices and trade agreements all distract from an overarching problem: Today’s generation in rich countries is living at the expense of future generations like no other before. If everyone lived like this, it would take three or four planets like Earth. In addition, the current generation is leaving its descendants a gigantic mountain of debt, oceans polluted and overfished with plastic waste, the consequences of accelerated global warming, contaminated soils and decimated animal and plant life. And it has consumed a large part of the earth’s raw materials that could be mined or extracted cheaply. Future generations will have to store the abandoned highly radioactive nuclear waste safely for hundreds of thousands of years.
The “politically feasible” is not enough
Obviously, a radical change of course is needed. But the power and influence of corporations bent on short-term profit maximization prevent political majorities for a change of course. Politicians mostly limit themselves to what they consider “politically feasible” – in view of elections and referendums.
The overriding goal is therefore not shaken: The economy – measured in terms of gross domestic product (GDP) – should finally grow as strongly as possible again. Politicians from the right to the left are subordinating almost everything to this goal: Tax, social, labor market and environmental policy. Trade and economic policy in any case.
Voting citizens should please align themselves with what brings more economic growth and gives companies more advantages in international “competition.”
However, a panel of experts could provide better answers to these questions than voting citizens.
The three real goals of economic activity
Orderly debt relief would be a first important step out of the dangerous impasse.
The second step would be for the economy and politicians to free themselves from the compulsion to grow the economy. They should stop trying to boost consumption and growth with a crowbar. If GDP grows anyway, so much the better. If GDP falls, it doesn’t matter, because a future fit for grandchildren and our happiness do not depend on whether or not we have even more money overall to consume, throw away and waste in the years to come. Progress is possible even without GDP growth.
Policymakers can then return to the three real goals of economic activity:
The economy should satisfy people’s material needs, using as few raw materials, energy and gainful employment as possible. If too little gainful employment remains, the remaining necessary working hours are to be better distributed with incentives.
Economic activity should prevent people from falling into material and social hardship. Everyone should receive an income that allows them to live above the subsistence level.
Economic activity should help to improve the general quality of life: Allow participation and co-determination, create good conditions at workplaces, pollute air, water and soil as little as possible; avoid noise and other immissions as much as possible; keep the landscape intact; produce in a way that is suitable for grandchildren, i.e. not at the expense of future generations.
An exit strategy that is not politically feasible
It is the task of politics to define the rules of the market in such a way that private and public economic activity achieve these three goals. This means turning away from supposed growth incentives such as subsidies, tax breaks, and relaxation of social and environmental regulations. It requires structural reforms that a panel of experts can devise.
Here are some concrete measures that various parties have already proposed:
Stop measuring economic performance by GDP growth:
The performance of the economy must be measured by whether material needs were met with less energy, raw materials and environmental pollution – and in rich countries, no longer by whether even more could be consumed and wasted. Paying off the mountain of debt with growth has proven to be an illusion. Orderly debt cuts are needed.
Different valuation in the media
The media no longer consider it bad news when people fly and travel less, or when cruises are canceled, or when meat sales decline. They no longer talk about “bad consumer sentiment” when less is consumed.
News programs could publish the following “incidence” numbers weekly or monthly: Global increase/decrease in CO2 emissions; Decrease in glacier ice in Antarctica; Increase/decrease in heating oil and gasoline consumption nationally; Increase/decrease in waste nationally; Increase in plastic waste in the ocean; Increase/decrease in fish stocks in the oceans; New deforestation of virgin forests; Increase in nuclear waste; Increase/decrease in global public and private debt; Global increase/decrease in malnourished; Global increase/decrease in migrants, etc.
Cost truth and polluter pays principle:
Competition is only fair and useful if companies can, as far as possible, no longer socialize costs, i.e. pass them on to the general public. Downright cost socialism prevails primarily in energy sources such as oil, coal and nuclear power, in transport and in agriculture. Subsidies for fossil fuels must be gradually but consistently reduced. The same applies to subsidies for the sale of meat.
Costs and risks that arise today or in the future during production are to be charged, or liability coverage is to be required, as every car driver must also take out.
Require costs for the use of nonrenewable goods of nature:
Non-renewable goods of nature must be given a price that increases as they become more scarce.
If the needs of the population can be met with less gainful employment, this is to be welcomed. It is wrong to fuel an allegedly “too weak” consumption with financial incentives and with seductive advertising. – Financial incentives are needed to better share the remaining gainful employment. In times of impending unemployment, employers who divide the work among several people willing to work should be relieved financially. Unemployment is the worst form of part-time work. A basic income should also be considered.
Limit the power of large corporations so that the state can regulate independently:
Competition law must be tightened so that monopolies and cartel agreements are prohibited even if they are said to bring social benefits. Mergers must be prohibited if dominant positions are created in submarkets.
Whistleblowers are protected, even if they turn to the media.
Companies and their associations can continue to voice their interests in consultations. However, they may no longer make payments to political parties, elections and votes.
[See: Corporate Power]
No major bank or corporation may be “too big to fail”:
Taxpayers must no longer bear the major risks of bankruptcy. Until the unweighted equity of large banks reaches 25 percent of total assets (including government bonds), they must not pay dividends. For as long as banks can create ten or twenty times more credit than they have money, the banking system will remain unstable and a danger to the real economy. Private deposits of up to CHF 100,000 per bank should be covered by an unlimited government guarantee.
[See: Big banks are more subsidized than agriculture].
Shadow banks such as hedge funds, which are largely unregulated today, must be regulated, among other things, so that banks cannot circumvent capital adequacy rules:
Shadow banks account for about a quarter of all global financial transactions. Shifting risk to shadow banks is “the biggest threat to financial stability,” warned Goldman Sachs Vice Chairman Gary Cohn.
Credit default swaps, or CDSs, are only to be permitted if an existing loan is actually insured:
Pure betting transactions, which account for more than 90 percent of CDS trading, are to be banned.
High-risk investment banking is to be shifted to independent legal entities.
Proprietary trading, i.e. stock market speculation by banks for their own account, should be banned.
[See: CS alone: $50,980,000,000 derivatives].
No promotion of debt creation:
Companies and individuals should no longer be able to deduct debt interest in their taxes, as has been the case in Sweden since the late 1980s.
Radical tax reform:
The gradual introduction of a micro-tax is a simple and effective change of course proposed by asset manager Felix Bolliger (Infosperber, Feb. 18, 2016) and supported by Zurich finance professor Marc Chesney.
A micro tax of up to 2 per mille on all electronic money transactions is envisaged, for example 1 per mille per debit and credit. The revenue could be used to replace the much higher and bureaucratic value-added tax. It would also be easy to finance future gaps in the AHV and the costs of climate policy.
A popular initiative that wanted to introduce a micro tax failed for the time being because it did not get enough signatures in the Corona year 2021, and probably also because it wanted to abolish the federal social tax in addition.
Transparency as a prerequisite for democratic participation:
The Public Information Act should be expanded along the lines of the Freedom of Information Act in the United States.
Most of these and other appropriate measures seem to be “politically unfeasible”. No political majorities can be found for them because the influence of the financial sector and large corporations is too great. This raises the question of whether traditional democratic institutions are still capable of setting the necessary course in time.
History teaches that major course corrections usually emerge from crises. However, far-sighted economists and politicians should start thinking today about how to shape a future without debt crises, without ecological and social exploitation, without an accumulation of power among international corporations and, last but not least, without compulsive growth.
Democracies under stress
The financial and political crises are taking their toll on democracies in the West. The separation of powers is also in trouble.
Will growth lead to happiness or a crash?
Will we run out of work if we don’t consume more and more? Or are pensions at risk?
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Gerhard Gucher, Aeugstertal
on 29.07.2022 at 12:19 pm
All well and good, probably even correct, but it won’t work. I will list a few reasons here, far from complete.
– It would be necessary that all states participate. This will not happen as long as nations attack others because they feel diffusely threatened and third parties finance this because they are afraid to freeze in the next winter.
– The individual (with us) would have to accept a clear decrease in prosperity in the range of 30-50% to contribute a personal contribution of 0.0000001 per mille worldwide. No Way.
– There are always people who are driven by greed or envy and exploit or sabotage the system.
– There are billions of people who want to reach our level first. If we don’t use up the resources they will.
– The global financial system doesn’t let you change step by step fast enough. It will only happen in the event of a global collapse.
Josef Hunkeler, Fribourg
on 29.07.2022 at 14:22 hrs
The currently starting inflation crisis should contribute a lot to the solution of these problems.
That the biggest warmongers are most affected by this inflation reminds of the saying : “Qui sème le vent, récolte la tempête”.
However, the Clinton reforms of the US financial system have probably not yet played out their full destructive potential. Lehman Brothers “2” sends its regards.
Werner René Zwicky, Chur
on 29.07.2022 at 14:42 hrs
Dear Mr. Gasche, thank you very much for this great and stirring contribution. Now I am probably a lot smarter, but my stomach ache has increased greatly. What you write there is the unsparing truth about the miserable conditions in our country and in the whole world and should be spread in ALL media and be delivered to every Federal Council, the parliament in Bern and all people who stand in our country in the responsibility towards the people. Dear Mr. Gasche, I am totally shaken now, but again 1000 thanks for your comments.
Peter Ulrich, Gattikon
on 29.07.2022 at 15:00 h
Thank you, Mr. Gasche, for this very convincing orientation contribution! Far too rarely, especially in this country, these fundamental political-economic issues are discussed.The point is not whether one agrees exactly with every point, but to gain the vision for the essential challenges in the first place.
As a suggestion, I would like to elaborate on point 10: I would replace the merely symptom-fighting postulate of abolishing the tax deductibility of all interest on debt without replacement with a far-reaching reform of the monetary system that would eliminate the root cause of the error in the monetary system that leads to the constant expansion of debt, namely the privilege of banks to simultaneously engage in money creation by granting loans. I outlined the main ideas in this regard in an Infosperber commentary on the occasion of the debate on the full money initiative on April 7, 2018: https://www.infosperber.ch/politik/schweiz/mehr-swissness-fuer-unser-gutes-geld/
Peter Herzog, Waldshut-Tiengen
on 29.07.2022 at 16:37 hrs.
m.E. one would have to smash like Anno Domini with Rockefeller, the power concentration of Black Rock, Vangard, Gates, Soros et al.
It is this concentration of power of the super rich that have taken over power, disempowered nation states and made democracy absurd, you can only elect their lobbyists into government. The result is a redistribution from the bottom to the top, e.g. through the Corona pandemic, the Ukraine / gas war, etc.
Ludwig Pirkl, St.Margrethen
on 30.07.2022 at 15:53 hrs
The enlightenment comes too late,
The power of the financial capital thugs (owners and top administrators) and their opportunistic politicians is overwhelming.
The power no longer emanates from the people, even in democracies, in crucial matters, but from financial capitalists who act almost “free” of national regulations on the global financial markets and offshore.
Central banks produce only cash.
Financial institutions can write “book money” again almost at will.
National banks of banks regulate, but do so insufficiently.
( much more equity capital of the balance sheet total of the banks prescribe )
“Joe Biden and Vladimir Putin must put an end to this madness”.
Yanis Varoufakis on Russia’s war on Ukraine
[This article published on 7/28/2022 is translated from the German on the Internet, «Joe Biden und Vladimir Putin müssen diesen Wahnsinn beenden» – infosperber.].
Negotiations should end the killing and destruction in Ukraine, demands former Greek Finance Minister Varoufakis.
upg. On the Ukrainian side alone, the war is killing up to 100 people and injuring 500 every day. But U.S. President Biden declared that he does not want to negotiate with the aggressor Putin. Yanis Varoufakis criticizes this.
Politicians who push for a negotiated solution are often portrayed as “appeasers” (Tages-Anzeiger), “irritating procrastinators” (NZZ on Emmanuel Macron) or “callers to surrender” (Tages-Anzeiger title) who torpedo a Ukraine victory. Infosperber informed several times complementary to other media about their arguments. Today we adopt the statements of Yanis Varoufakis in the following interview, distributed by the international press agency Pressenza.
“Ukraine cannot win the war against the superpower”.
The conflict in Ukraine escalates every day, we see the battlefields and are affected by the many terrible fates. NATO and Ukraine declare that they can win this war on the battlefield, that they will be victorious. What solution do you see?
Certainly not the way NATO and Washington are pretending. What does it mean to say that Ukraine will win? I am very happy to see that the Ukrainian army is fighting back against Putin’s troops. However, it is one thing to say that a resistance army will succeed in defending its territory. It is another to say that it will win a war against a superpower like Russia.
What exactly are the U.S. and Selensky’s government saying? How could they win this war without an agreement between Washington DC and Moscow? Do they want to take Moscow? Do they want to invade the steppes of Russia? Are they so crazy that they are considering this?
I hope they are not because Ukrainian lives are at stake. As we speak, people in Ukraine are dying, being wounded, the poor in Africa and Asia are suffering from the rise in food prices. A great poverty is breaking over a part of the world.
The only reasonable solution for Ukrainians is to find immediate negotiations between Joe Biden and Vladimir Putin to put an end to this madness and find a way for a neutral Ukraine alongside Europe, perhaps with close ties to the European Union, even becoming a member state but not a member of NATO. That would make sense and give Putin a way out without putting the lives of millions of people in danger.
An Austrian-style solution
What do you say about Russia’s goals? Russia states that it wants a neutral Ukraine that does not become a member of NATO and is demilitarized. President Putin also talked about denazification of Ukraine.
I have never made the mistake of classifying a country and its leaders. Russia is a very heterogeneous country. I have colleagues, friends who are in prison in Russia as we speak, victims of the Putin regime. Vladimir Putin and his people have their own ideas.
It seems very obvious to me that we here in the West should not want NATO to expand to Russia’s borders. Do we really want nuclear missiles of Russia and NATO to be placed a few kilometers apart? That would be total madness.
Nuclear missiles on the border would not serve our interests in the West, it would not serve Russia’s interests and certainly not those of the Ukrainians. Consequently, the idea would be an Austrian-style solution. During the Cold War, Austria was a democratic country, a member of the West, a wonderful, technologically advanced country, a free and liberal country, but not a NATO member. It was a neutral country. What would be the problem with such a solution for Ukraine? In fact, this would be the best solution for all. Why don’t we discuss this instead of offensive weapons for Ukraine? Suppose Ukraine now had these weapons, what would it do with them? Put them to use against a nuclear power like Russia? Has madness reached such an apotheosis?
What do you say to those who declare that Ukraine has the sovereign right to do what it wants, to define its own defense and foreign policy, and to join any alliance it wants?
Yes, Ukraine has these sovereign rights. However, at present, this state lacks a part of the country because the Russian army is located there. Ukrainians will have to make a final decision, but we in the West must support them. President Selensky had spoken in favor of a neutral solution several times after the war began. The only ones not talking about it are the Western powers, especially Joe Biden. [That is why one hardly hears anything more from Selensky in this direction].
Selensky himself cannot conduct such a negotiation with Putin. His country has been invaded. Joe Biden and Washington alone have the ability and the moral duty to sit down with Vladimir Putin, whether they like him or not. In this way, they can give Selensky the opportunity to put a neutrality solution into action.
We should not hide behind sovereignty or the theoretical right to become a member of NATO or any galactic empire while the country is occupied. We in the West must pave the way for Ukraine to concretely remain a sovereign state, and we must give Ukraine sovereign rights that it does not concretely have at the moment.
From the perspective of the West and NATO, will there be regime change in Russia soon? President Biden has said that almost by accident, and the Secretary of Defense has talked about weakening the Russian army.
I hope Joe Biden is not serious when he talks about regime change because every time the U.S. and the Western powers, but especially the U.S., have tried to change a regime, it has not gone very well. Think about Iraq, Afghanistan, Libya. After five, six or ten years, the U.S. and the West were defeated. What they left behind was absolute devastation.
One of the weapons used in this conflict on both sides is sanctions. Do you support the sanctions imposed on Russia and the counter-sanctions implemented by Russia?
There, the answer is nuanced. If someone tells me that they don’t want to trade with a power that invades other countries, I respect that. Do we think this will work? No. We can already see that this is not working. The sanctions are very tough and more effective than most of us expected, especially the exclusion of the Russian Central Bank from the Swift international dollar payment system.
That was a very significant action by the West, and there will be consequences that I can’t go into now. What I can say is this: Exclusion from the dollar payment system will have an extremely negative impact on the Russians. Only I don’t think Vladimir Putin is that concerned about the Russians. These sanctions will have no effect on himself. The value of the ruble has even recovered because Russia has the largest liquidity reserves in its history: $250 billion. If Russia cannot import because of the sanctions, but continues to export energy, Russia will naturally have a trade surplus. Therefore, the regime will not collapse.
What do you say about the fact that the majority of the world’s population does not support the sanctions imposed on Russia? Neither the African continent, nor the whole Middle East, nor all of Latin America, nor the countries with the largest populations in the world, China and India, go along with these sanctions.
This is an interesting phenomenon. We’re looking at a disconnect between the North Atlantic West, the Global North, as it’s also called, and the Global South. And that’s not because the South is supporting Putin’s Russia. In my opinion, they are simply fed up with the mendacity of U.S. governments. Governments that committed crimes against humanity in Iraq, in Afghanistan, in Libya, before that in Vietnam, and organized a coup in Iran.
If you trace US policy back to the 1950s, I can mention in Greece the fascist military regime that came to power through the CIA and was supported by the US.
In addition to this hypocrisy, fear may also play a role that if the West can close Russia’s central bank, it could do so with all central banks. This outsized power that is simply the power of the reserve currency, the dollar, becoming a power that can shut other central banks out of the international payments system, all of that scares the rest of the world. It’s understandable.
If we want a rules-based global governance system, we should create one. But not a system that allows the U.S. to commit crimes against humanity and, if they want to exclude someone like Putin for his crimes against humanity, they can do that.
If you look at the impact of this conflict, you find that many countries in Europe are paying for it. Russia has cut energy exports to several countries; the other day, gas supplies to Bulgaria and Poland were cut off because those countries refused to pay in rubles. The leaders of Poland and Bulgaria, as well as the European Union, accuse Moscow of blackmailing these countries. Yet these countries are among those that have imposed sanctions on Russia. What effect does this have on Europe in general? I think that Europe is paying for this as well.
In fact, Europe will emerge from this conflict as the economic bloc that paid the highest price. Not so much in terms of dead people, although of course Ukrainians are suffering a lot, but I think the European Union will emerge from this conflict more divided and more fragmented, poorer, much poorer, and much more reactionary.
Remember that there were hopes for a real European Union, where we would have a common defense policy, a common international policy. None of that is happening. All we have are European governments forced into submission by Washington, forced to follow Washington when it comes to rearmament and when it comes to NATO expansion. There is no European defense. The EU will emerge from this conflict weakened.
Wouldn’t it be time for Europe to formulate its own foreign policy goals independently of Washington?
It would be a good idea to have our own foreign policy, but it does not exist. In 2010, I was involved in the Greek debt crisis. The EU did not want to acknowledge the consequences of not having common guarantees for the sovereign bonds of the different countries, like U.S. Treasury bonds or Chinese government bonds. We refused to be jointly liable for the debt. We also do not have a European parliament. We have only one body that goes by that name. Example: We decided to buy 1.5 billion euros worth of weapons for Ukraine. That was an extremely important decision that we have to approve. But the purchase of these weapons is not monitored by any national parliament, not even the European Parliament.
Instead of coming closer together, we will be more fragmented, poorer and ultimately more reactionary after this war. I would have wished that this would not be the case, but that a European Union would emerge from this crisis, not only in name, but as a reality. But this will not be the case. It is going in a different direction.
Euro worth half as much in just 8 years, CHF in 20 years.
Inflation is tearing up the value of money
by Urs P. Gasche
The loss of purchasing power would be enormous if inflation remained at today’s level. The people have nothing to say about it.
[This article published on 7/26/2022 is translated from the German on the Internet, Euro in nur 8 Jahren noch halb so viel wert, CHF in 20 Jahren. – infosperber.]
The loss of purchasing power again hits the weakest the hardest. In Switzerland, the consumer price index in June 2022 increased by 3.4 percent year-on-year, in Germany by 7.6 percent and in the USA by 9.1 percent.
If inflation remains at this level, the franc – are pensions – will be worth only half as much in just twenty years as it is today. In Germany, the value of the euro would even halve in just nine years, and in the U.S., the value of the dollar in eight years.
With their money glut and low interest rate policies, central banks have already expropriated savers and pensioners and turned the rich into the super-rich (see Part 1: “Central Banks Expropriate Savers and Turn the Rich into the Super-Rich “).
Industrialized countries and many companies have become massively over-indebted because of the financial crisis, because of the Corona crisis and the consequences of war and sanctions. In addition, most states wanted to stimulate economic growth with additional debt.
To reduce the gigantic debts, high inflation is politically the most convenient way. This is because it requires neither a parliamentary nor a government resolution, let alone a referendum.
Inflation: Those who have debts benefit. Those who live on wages or a pension lose out
If prices for products and services have risen by 5 percent, even a 5 percent wage increase on average only secures the previous purchasing power. If wage increases lag behind inflation, employees suffer a loss of purchasing power.
Pensioners are particularly disadvantaged by inflation. This is because the AHV increases pensions only with a delay. In the case of pension funds, it depends on the individual companies whether they compensate for inflation at least partially or – in most cases – not at all. With a pension that is nominally the same, retirees in Switzerland will only be able to consume half as much in 20 years if inflation remains at 3.4 percent annually.
Inflation also devalues savings in bank accounts. The greater the difference between the interest rate (currently zero or negative) and inflation, the faster savings will melt away. In plain language: A de facto tax is levied on the money saved, without this having been decided democratically. Saving is no longer worthwhile. Those who can, save themselves even more than before in the purchase of tangible assets, i.e. real estate and shares.
The losers are people without assets who own neither real estate nor stocks and have no money to buy them.
Special case Switzerland
Because Switzerland has its own currency in the form of the Swiss franc, the Swiss National Bank can prevent inflation as high as in the EU by revaluing the franc. This makes imports of heating oil, gasoline and all other products from abroad cheaper. But if a crash were to occur in the EU, Switzerland could easily be sucked into the vortex.
Squaring the circle
Today, it would be most elegant for central banks (and governments) if they could induce inflation and still keep interest rates as low as possible.
But if central banks continue to keep interest rates too low, inflation threatens to get out of hand.
But as soon as central banks raise interest rates more sharply to fight inflation, a troubling scenario looms: because of the huge mountains of debt, higher interest rates could lead to a crash. The central banks have brought this problem on themselves by encouraging the gigantic indebtedness of governments, companies and private individuals with their zero interest rate policy.
If the central banks were to raise interest rates by even a few percent to effectively combat inflation as in the past, highly indebted countries such as Greece, Italy and Portugal would quickly become insolvent and the euro would be seriously threatened. Highly indebted companies, financial groups and real estate owners would soon be unable to pay the higher variable interest rates or the higher interest rates on subsequent loans.
Higher interest rates would also sharply reduce the market value of existing zero-interest bonds. Large banks, insurance companies or pension funds holding such bonds would have to adjust their value downward and would quickly find themselves in trouble.
For all these reasons, central banks are trying to raise their key interest rates only in small steps. However, it is doubtful whether this will be enough to bring down high inflation and reduce the risky mountain of debt.
Possible way out of the impasse
A possible way out of the impasse would be orderly and staggered debt cuts and an orderly departure from an economic policy that seeks to solve the problems of the rich industrialized countries with economic growth, i.e. with even more energy, raw materials, gainful employment, consumption and waste – and if this requires even more debt.
The hitherto supreme goal of economic policy, the strongest possible GDP growth, belongs in the mothballs of the last century.