The House has Burnt Down

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The house has burnt down. Nothing is left of it but a pile of wet ashes. Pop and Mom and their numerous progeny gaze at the ruins, speechless.

Pop turns to the family and says: “Mom and I will have a summit meeting tomorrow, to find a solution to this problem. Tomorrow we’ll have the definitive solution to this crisis; in the meantime we’ll sleep in a tent that our German neighbors will rent us.”

* * *

The European house has burnt down financially. In 1999 the Euro was installed as the single currency for a central group of European nations. The interest rates of the various nations were to be set by “diktat” of the European Central Bank. No nation was to be allowed to have a Fiscal Deficit of more that 3% of GNP.

Thus was set up the orgy of government and private sector borrowing and spending on the part of the hot-blooded nations of Europe, that is to say those that form the “Club Med” of Europe: Greece, Italy, Spain, Portugal, with the participation of Ireland and even France. Never were seen nor dreamt of in dreams such low interest rates and such easy credit in those nations.

The spending was gigantic. Never was Europe so happy. The governments showered benefits upon the governed. Life was pleasant, free of worries. The good life was assured: modern housing, autos (his and hers), free education for the kids, medical and hospital insurance, generous pensions for early retirement, a monthly check in case of unemployment; in Italy, three months’ vacations. The standard of living in Europe was the wonder of the world.

What nobody saw, was that the Europeans were burning their financial house down while they went on vacations, munched their tasty “hors d’oeuvre” and washed them down with delicious wine. In Spain, costly airports were built that never got any air traffic. Spaniards boasted that they had the finest highways in the world.

Europe burnt down its house when its governments and private sectors took cheap credits in gigantic quantities and spent the funds on current expenditures to please the people with benefits and services, on maintaining a bloated bureaucracy in comfort, and on unprofitable investment projects.

For example, the small Portuguese island of Madeira boasts a fabulous complex of super-highways that cross the mountains of the small island through long and ample tunnels, all spotless and well lit. Many hundreds of millions of Euros were spent in building those highways and a beautiful modern airport was carved out of the mountains. How will the population of 260,000 inhabitants ever pay off the debt that was taken on?

Europe was able to burn down its financial house in 13 years.

These days Papa Hollande (and before him, Papa Sarkozy) and Mama Merkel and their colleagues at the ECB and the presidents and prime ministers of Europe gather in one Summit Meeting after another to contemplate the ruins and talk about the “solution”.

Somebody needs to tell them: “Gentlemen, there is no “solution”. The house has burnt down. When a house burns down, you have a burnt house. There is no solution to a burnt-down house!”

* * *

What caused the fire?

The cause of the fire would be the first thing to investigate. But since it is logical to start there, that is precisely what no one wants to find out. Because while the house was on fire there were important men who were spiriting valuable stuff out of the house and they want to keep their winnings. Those men are important and are indispensable if the Papas and Mamas of Europe want to continue governing.

The “proximate cause” – that is to say, the direct cause – of the fire was fiat money, false money that came into circulation in the form of euro banknotes in the year 2000. This money was created and continues to be created out of nothing, and it led to the unrestricted expansion of credit during the time of the epic combustion of the European house.

The “final cause” of the fire – the purpose of the fire – was that the democratic governments of Europe wished to keep their governed peoples happy and so they set up the burning party, a great party while it lasted.

* * *

The democratic system is based on buying the consent of the governed to be governed by the government elected by the majority of voters.

As soon as a democratic government has to stop buying the consent of the governed, serious popular grievances arise. Austerity and democracy are incompatible.

A democratic government must spend in order to stay in power. There is no way around this fact. All we have to do is watch TV to see what is going to happen to Rajoy with his plan for austerity for Spain. The people are not going to stand for it. Witness the rioting in Madrid.

In order for “democracy” to prevail in Spain – in order to be able to go on purchasing the consent of Spaniards to be governed democratically – Spain will have to leave the Euro system and return to the Peseta, which the Spanish Central Bank can create to suit. Thus an inflationary financial fire would continue to ravage what remains of the capital resources of Spain, but at least this would take place in a democratic peace, however precarious it might be. Perhaps in time the fire might be put in a slow-burning mode once again.

Otherwise, the military will have to impose – not purchase – social order, and this would be, of course, the end of democracy in Spain.

* * *

So now what?

It’s not only the European house that has burnt down. Right here in our own back yard, the US house is on fire and burning brightly; the Americans who live in the US house have still not quite caught on; the people in MSM are doing their best to keep expectations up. But sooner or later the fact will be self-evident. Watch for teepees being set up.

And here in Mexico we have been doing our best to burn down our own house and keep up with the Gringos in our back yard. We seem to love bonfires – we burnt down in ’54, in ’76, in ’82 and lately, in ’95. Looks like we’re fixin’ to have another event. (See graph at the end of this article).

The fascination with fire and the urge to destroy what has been built is ancestral. We think we are modern but the primeval man abides. One upon a time the American Indians had their “Potlatch” parties; today we have our Keynesian “Growth” which turns out to be another name for “House Burning”.

Go figure.

peso us dollar mexican government debt 1988 to 2012


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About Hugo Salinas Price