EU Fighting Tsunami with more Water

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

May 2010

‘Water’ in this instance is a metaphor, and in the Chinese (Cantonese) context, it means money. And the Europeans are printing lots of it, 750B Euros in all to save the PIIGS, not least Greece, from being butchered.

Some commentators are now screaming the eventual demise of the EU (European Union), the uselessness of having a common currency given no punitive tooth exists to rein in the less than disciplined countries, and the possible delisting of Greece from the Euro. The last point was raised by prominent economist Paul Krugman.

Irrespective of the final outcome, your humble author thinks, as and like a layman, this would further flood the global economy with more money than it could chew. This in turn means there is plenty of excess dough which, if history is any guide, would somehow be destroyed or utilized one way or another:

A)      Inflation = is one way to render the excess dough extinct and while such inflationary pressures may not be applied equally worldwide or in all things, they destroy the excess money by lowering their purchasing power. When the world has $100, a pencil may cost $1. When it has $300, the same pencil would have a $3 price tag. Naturally this is a much too simple (and sometimes naïve) way to put it yet it illustrates the general point.

B)      Asset Price Bubbling and Bursting = is another way to make such excess dough disappear. Before the print, there is $100 and 10 assets with each costing $10. After the print, there is $300 and still 10 assets and thus each now costs $30.  

However, the extra $200 is NOT dished out as a gift without strings attached. Instead, it is usually distributed in the form of financing (call it a loan, bond, mortgage etc as one likes) which needs to be repaid plus interest and with many strings attached.

Unless the assets are way under-priced to begin with, and usually they are not, they would generally become overpriced assets which in turn means an unsustainable market condition.

Bubbles burst to kill off the excess dough eventually. Now, at this point, governments and central bankers may again print another round of money to cover the losses, just like some idiots paying credit card A with credit card B which in turn is paid off by credit card C…well, you know, this is not going to solve the problem.

Naturally, the above is also a too simple and sometimes naïve example but it shows the point.

C)     War = is the least desirable way, for most at least, but then again was employed throughout history when the world had excess dough, or where transformed, excess productive capacity, excess goods and services, excess gadgets, or simply excess human aspiration and energy. Wars have the double effect of using (sometimes wasting) the excess stuff, whatever these may be, while disrupting the normal money creation process IF played out on a big, and your humble author means really big, scale.

Btw, has anyone noticed the coincidence? When the economy is flooded with money, we describe it as being very liquid and liquidity is also one measure of economic (well) being. And ‘water’ is a liquid and is also one without which we could not have lived. In short, there is a good reason to call money ‘water’.

Yes, the Americans fought (off? Had they?) their tsunami, literally a problematic water event, with more water in 2008 and now it is the turn of Europeans in 2010.

Wonder who would be next? And when…and where?

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