The Euro-Crisis and Why the Only Possible Solution, Proposed by the RE-Institute, is Unmentionable

Denver, CO, May 30, 2012 --(PR.com)-- From the perspective of Reformed Economics, the Euro crisis is a result of a faulty monetary system. Dr. J. Moromisato, founder/director of the Reformed Economics Institute has a Ph. D. in High Energy Physics and a M.A. in Economics. He has developed Reformed Economics and written four books about it; he is a member of the American Economic Association. What follows is his contribution to the solution of the Euro crisis.

Latest published proposals to solve the Euro crisis (e.g. The Economist, 5/26/12) are now centered on Eurobonds, which basically means for the financially stronger members of the European Monetary Union (EMU) to borrow hundreds of billion Euros and lend them to the countries in trouble - PIIGS. Those, just as previous proposals, are too costly to be politically feasible.

However, for mysterious reasons, the only economically sound solution, based on 100% reserve or full reserve banking (FRB), is being totally ignored. Economists don’t dare to talk about it; politicians are oblivious to its existence; and the media is strangely silent about it.

The Euro crisis is a rare confluence of bank failures, fiscal deficits, and trade imbalances in a handful of EMU members. Governments in those countries are being slapped with higher and higher interest rates whenever they had to refinance their debts, thus forcing them to get into more debt, which make matters worse. The easy solutions, such as having the European Central Bank (ECB) inject liquidity into the system, have been already tried and found wanting. And the only effective solution, to have the ECB lend directly to the affected governments, is forbidden by the bank’s own charter. Why is this so?

Every monetary system in the world is based on partial reserve banking (PRB). Its greatest virtue—and its fatal flaw—is the capacity to expand tremendously the amount of circulating money. Whenever the central bank issues one billion Euros, for example, the financial system can lend about 10 billion, and after that amount of money returns to the financial system, as deposits, the financial firms could lend another ten times the already expanded amount. Economists call the money issued by the central bank ‘power money’, because every euro thus issued ends up in time justifying 100 Euros in loans (also known as bank-money). The generalized fear of inflation caused by central bank’s money is real, but only because of PRB.

The FRB regime, in contrast, would essentially stop the multiplication of CEB’s money by the private financial firms by obliging them to keep all their depositor’s money in reserve, and to borrow all their lending funds from the ECB, at the customary interest rate. Those interests would be distributed to the different EMU governments. The ‘Bond Vigilantes’ would be the main losers.

As mentioned in previous press releases (J. Moromisato, REIdenver.org), the 100% reserve banking is not a novel idea by any means. It was proposed long after the Great Depression (1930s) by several of the top economists of the 20th century, including Irving Fisher and Milton Friedman (see for instance Milton Friedman, "A Program fro Monetary Stability", 1992).

Could it be that the answer to ‘Why the Only Solution is Unmentionable?’ is itself unmentionable?

And, of course, FRB could also solve the intractable fiscal deficits in Japan and in the US, which only makes its obscurity that much puzzling.

Jorge H. Moromisato, Founder/Director
Reformed Economics Institute, Denver
jhmor@q.com
303 321-0577