In remarks that highlight flaws of the fiat currency system, the European Central Bank (ECB) president, Christine Lagarde, says the institution cannot go bankrupt even if it incurs losses running into trillions. According to Lagarde, normal bankruptcy rules do not apply to the ECB primarily because it is the sole issuer of euro-denominated central bank money. The Eurosystem will always be able to generate additional liquidity as needed.
Bankruptcy Rules Not Applicable to ECB
The ECB leader made her remarks while responding to a question from an Italian member of the European Parliament. According to a Reuters report, an unequivocal Lagarde argues that central banks and the ECB in particular, are exempt from the established norms. She says:
The European Central Bank can neither go bankrupt nor run out of money even if it were to suffer losses on the multi-trillion-euro pile of bonds bought under its stimulus programmes.
In response to the effects of the global pandemic Covid-19, the ECB, just like other central banks, pumped trillions into the Eurozone financial system. The money was intended to help economies hard hit by lockdown restrictions as well as to boost demand for goods and services. However, the unprecedented money creation and borrowings are raising alarm as some believe the ECB went beyond its capacity.
However, in an apparent response to such concerns, the ECB president not only defends the massive borrowing but asserts that financial losses cannot bring down central banks. Lagarde says:
“So, by the definition, it will neither go bankrupt nor run out of money. In addition to that, any financial losses, should they occur, would not impair our ability to seek and maintain price stability.”
Furthermore, Lagarde adds that “there is no legal basis for the ECB to cancel the government debt it owns.”
The Fallacy of Unbridled Money Creation Monopoly
Lagarde’s claim that the ECB has unhinged money creation powers has long been the source of concern for opponents of the fiat currency system. One such opponent, the famous Austrian economist Fredrich Hayek wrote a book titled “Denationalization of Money” in which he attacks the fiat currency.
In the book, which was published five years after the world abandoned the gold standard currency system, Hayek argues for free markets even in the sphere of money creation. According to an excerpt from the book’s preface, Hayek states:
“Money is no different from other commodities and that it would be better supplied by competition between private issuers than by a monopoly of the government.”
Hayek, a winner of the Nobel Prize in Economics, argues the case that “money is no exception to the rule that self-interest would be a better motive than benevolence in producing good results.”
Meanwhile, adherents to Hayek’s school of thought including bitcoiners, have consistently used the economist’s arguments when making the case for privately issued cryptocurrencies. They point to the competition that currently exists within the crypto space and how some coins are faltering, while others gain traction.
Lagarde’s latest remarks, as well as recent reports that the global debt will reach unprecedented levels by end of 2020, only helps to buttress the argument for private sector participation in the creation of money.
What do you think of Lagarde’s comments? Share your thoughts in the comments section below.
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