On July 2, 2017, the Belgian De Tijd published an interview with Lex Hoogduin, professor of Monetary Economics, entitled “ECB plants the seeds of the next financial crisis”. If you are interested you can read it here: www.tijd.be
As a Thailand blog reader, you may wonder why you should know about this? Well, if you receive a pension from Europe, if you own securities in Europe, especially bonds, and if you own real estate in Europe, then the actions of the ECB will make another crisis likely and these incomes and assets will be lost. will be affected.
Before I explain Lex Hoogduin's concerns to you, I would like to briefly introduce you to economic theory. Everyone knows the name of John Maynard Keynes and knows that his theory is that in times of economic downturn the government should take the lead and stimulate the economy through monetary policy and government spending and investment. But are you also familiar with the Austrian school of economists such as Ludwig van Misis and Friedrich Hayek? This movement argues that major economic crises are the result of artificially large lending. This certainly applies to the great depression of the 30s and to the credit crisis of 2008. The Austrian school further argues that lowered interest rates lead to overconsumption and marginally profitable investments financed with debt. At some point the economy will return to normal and marginal investment projects will fall through the cracks and the debt bubble will burst.
If you read the interview with Hoogduin, you will notice that the Austrian school influences his thinking. The ECB has bought € 2015 billion in bonds since 1.900, the vast majority of which is government bonds. So Dijsselbloem and his European colleagues issue government bonds that are then bought by the ECB. In the Maastricht Treaty, the Euro countries agreed to keep the government deficit below three percent of GDP and, if it is higher, to solve the problem themselves. So without help from other EU countries and without monetary financing (turning on the money press). But the ECB makes monetary financing possible for Dijsselbloem et al. and he and his colleagues keep their mouths shut. And for the time being, the ECB's purchase program will continue happily this year.
The ECB's policy of virtually free money with an interest rate of almost zero is also having a disastrous effect on almost all sectors. The governments are able to borrow money at almost 0% and the companion of a working capital market is nothing more than thin cotton thread. The European finance ministers are proud of themselves and say that they have put public finances in order. The need to put things in order has disappeared and borrowing at almost zero percent is so good for the European governments that no one mentions the abnormal situation and states that a return to a normal money market is really necessary.
The ECB's loose money policy has led to the money at the banks sloshing against the ceiling and companies can use borrowed money to increase returns on equity. You have probably also recently read that the labor ratio in the Netherlands is lower than ever and that the reciprocal, the capital ratio is higher than ever. I am a simple business economist and have been through many programs in my working life to reduce money in inventories and accounts receivable, but in the present day that is unnecessary. The low interest rate leads to the acceptance of marginal investments, keeps marginal companies alive and makes innovation less urgent. The ECB's loose money policy also leads to lower Euro exchange rates and, together with the above, the policy affects the innovation and competitiveness of European businesses.
My son bought an apartment in Amsterdam a few years ago and financed it with a 110% mortgage. After being “under water” for a number of years, he has now landed on a substantial profit. There is a real estate bubble throughout the Netherlands and in many European countries because putting money in the bank does not pay off and because securities are now becoming very expensive. But you know how it is with bubbles: at some point they burst and everything goes on sale. After all, after five or ten years, the mortgage must be extended and with normal market interest rates, the necessary families will run into problems. And then the Austrian school was right once again.
Does Hoogduin see anything positive for the future? Yes, In 2018 and 2019, four of the six Executive Board members of the ECB will be replaced. Those who remain (one German and one Luxembourger) are closest to the ECB's original mandate. Fortunately, Mr. Dragi will also leave and then it will be time for a Northern European again. I therefore continue to hope for a return to a normal interest rate market, which on the one hand enables normal funding ratios and returns in pension funds and perhaps also a more realistic Euro exchange rate.
Submitted by Rembrandt van Duijvenbode
The design of the ECB is nothing more than financial support for the southern states.
The southern states can borrow money cheaply because the northern states act as guarantors.
If they don't pay back, the northern states get to cough up the money.
Stimulating the economy, with that free money, is a fairy tale.
What happens if the ECB wants to reduce that stock of bonds?
Then interest rates shoot up because countries have to borrow money elsewhere.
And the economy collapses just as quickly.
If the lenders no longer have confidence in the ECB (now a very large Bad Bank), confidence in the Euro will be undermined.
Waiting then for the first attack on the Euro by the speculators. (in the good old days, speculators against the value of currency were punished by death, but alas)
Fortunately, there is now a new plan from Europe.
We are going to set up a European bad bank, where we can also store all bad loans from the banks.
I share the opinion that one day a bubble will burst, the ECB will one day have to write off the purchased "securities", so write off at the expense of the EU citizens?
The low interest that citizens and, for example, pension funds receive also costs citizens money.
Is there only downside?
No, during this period with very low interest rates, the various countries have already earned a lot because of the low interest rates on the bonds they issued, which means for EU citizens that their government received a significant interest reduction precisely because of that low interest rate.
But there is a price for that.
Nico B
Will this lower the value of the Euro again? I ask this question because the Euro has risen slightly against the Baht in recent months to THB 38,5 at the moment, so unfortunately we will no longer meet the earlier forecasts of THB 40. We are flying to Thailand for a long period next week, so I am wondering if it is best to exchange our savings in full for Baht and deposit it into our Thai bank account, or if I should only exchange a small part (holiday money) and will there be more favorable times for the Euro next year?
A farmer never puts all his eggs in 1 basket.
So does not mean exchanging all the savings in bath.
Thai politics is not really stable, possibly elections in some time.
Exchanging part in Thai baht and part in dollars is an option.
Gambling on a fall in the exchange rate of the euro is also an option.
Now exchange all euros for Thai baht and when the euro collapses, exchange it back for euros.
Gambling on the collapse of the Euro by buying Bahts hardly seems like a good idea to me.
Then it's better to just buy dollars.
If the Baht collapses, you've lost your money and the dollar is still intact.
If the dollar collapses, the Baht collapses too and you lose your money.
By the way, if the dollar collapses, chances are we'll all end up at the food bank.
Then people all over the world will probably be queuing up for their daily ration for many years to come with their ration cards.
Kind of like the hunger winter in 1944.
Nice article with good insights. However, a number of nuances are possible:
- There is indeed an extremely low interest rate, also due to the ECB policy, perhaps that has an effect of 0,6%. The article says nothing that the structural low interest rates are the result of prolonged low population growth and hardly any productivity growth outside of ECB policy. This structurally low interest rate can have negative effects on your pension.
- An accusing finger is pointed at the rising house prices in the Netherlands at the ECB policy with the risk of a bubble. However, the structural causes of low interest rates and the fact that construction production in the Netherlands has been lagging behind housing demand for 20 years, certainly in the Randstad, is not addressed.
Instead of looking for a scapegoat in the ECB, advice should be that retirees in Thailand diversify their risks under all circumstances, but also accept that their emigration is a financial risk for which they are responsible.
Interesting and fascinating article…thanks for that. How do you see a more realistic Euro rate?
In itself you can have an interesting discussion about this, but I do not immediately see the practical application of the above considerations to the Thailandblog readers. The purpose of the message precisely here eludes me completely.
If such a professor predicts something, you can certainly expect the opposite. Opinions are like butts…everyone has one.
My idea is that it is best to change your money now…..the Euro will occasionally recover some rights, but the future lies in Asia, that much is now gradually clear….The baht is now a fantastic currency…the economy is here more robust by the day……the population is young and submissive…In Europe it is already news if another apartment building is built….in SE Asia they build an entire city every month…SE Asia is the Europe of the sixties.
Excellent analysis.
However, I am afraid that Brussels will not be bothered by this and will continue its destructive actions. I therefore see an exit from the EU as the only solution for the Netherlands and perhaps also for the Euro.
In 2011, the interest rate on Italian government bonds had risen to more than 7%. This was because the interest also includes a risk remuneration, and in Italy there was a risk of a state bankruptcy because the debt had risen to 130% of GDP. However, Italy has not used the recent years of artificially low interest rates to reduce that debt; on the contrary, the debt has even increased somewhat further. And if the ECB stops buying, it seems logical that interest rates will go back to that high level and possibly even higher. And partly due to the increased interest payments, Italy is again at risk of bankruptcy. I don't know how that will end, of course, but a pleasant solution does not seem to be available. People in the Netherlands and also the farang in Thailand will undoubtedly suffer from this. It might be wise to buy bahts. Maybe we will eventually get a strong neuro. Don't know. My advice: buy some gold or shares in gold mines because gold will undoubtedly become more expensive in such a case. But don't think of gold so much as an investment but more as an insurance policy.
Thailand-related insofar as the (central) Bank of Thailand must be accountable to the same shadowy party as the ECB, namely the BIS. I can recommend to anyone who does not know what this central bank of central banks, which is completely above all laws and rules (both democratic and e.g. army command), reads the following article which discusses its objectives and history in more detail: http://www.zerohedge.com/news/2015-04-11/meet-secretive-group-runs-world
It is high time for a world without money. We are also working hard on that, but of course that does not reach the mass media.
Bram, you yourself already indicated why the euro is not loved by many people: the differences are immense and that will eventually mean the “irrevocable” end of the euro. And that end will be accompanied by a lot of pain. A single currency with a few like-minded countries would have been much better. It was just a matter of megalomania. Politicians think big.