Starting September we’re going to see a movie which is also going to break myths and be remembered for years. Myths always need time for being broken, and they’re remembered for years.
4 years ago we saw the Financial Crisis starting with Lehmans Brothers bankruptcy and the biggest Banking bail out of the history. Since then we’ve seen how the world’s economy has lightly improved for a short period and severely deteriorated a few months later.
Once and again we’ve seen how a bailout of a problematic country in Europe (Greece, Portugal, Ireland, Spain), or a Quantitative Easing in US was going to solve the problem and some months later we saw an economic relapse.
After every cycle the economy has always been a little bit weaker than in the previous one. This is a typical example of a Liquidity Trap
Beginning of 2011 we discussed here that this is not a liquidity issue but a solvency one. Simplifying, all those government actions have eased the tensions in the Financial System by injecting liquidity in a system in which the real problem is lack of solvency generated by a huge debt that simply cannot be paid.
By injecting liquidity and easing the financial tensions, governments are buying time. I’m not criticizing this approach; as Mr. Mario Draghi (president of the ECB) said some days ago, “buying time is not a minor achievement”
The question is “Buying time”, for what?
For letting people accepting that solving the crisis will require trade sovereignty for debt reduction, with all the social, economic and political implications that this agreement has.
This is the real myth to be broken, maybe not in nine and half weeks, but sooner than expected.
Reducing the debt to sustainable levels is a requisite for recovering trust and solvency, and giving sovereignty is a requirement for coordination and efficient capital management. The final deal will be painful for both sides, borrowers giving individual freedom and lenders accepting that they will not recover part of the invested Capital.
At the end, if you owe the bank $100, that’s your problem. If you owe the bank $100 million, both parts have a problem.
By the way, a great song
Looking forward to read your opinions.