In our modern economic age of fractional reserve banking, bank bailouts are occurring at a global level, albeit with predominant frequency in Europe and the Unites States. The ideology that a bank can be bailed out and suffer little to no consequences is a fallacy which only undermines the general economy as a whole.
There is no such thing as a free lunch, but when banks are bailed out, money is indeed created through “out of thin air,” and then deposited into the recipient banks’ accounts in order to increase their liquidity reserves. Subsequently, banks can lend more money out to businesses and individuals.
The irony is that even though this may seem justifiable on the surface, bailouts have an adverse effect on ‘savers’: the value of their savings decreases–and using the same logic, the value of the debt of ‘debtors’ diminishes. In other words, savers get their purchasing power wiped out and debtors get their debt wiped out through inflation. While this allows governments to continue their deficit spending and to reduce the burden of their obligations, the end result is an eventual financial collapse. Perpetual debt is mathematically unsustainable. As the chief of our modern economic system, John Maynard Keynes, once said “The long run is a misleading guide to current affairs. In the long run we are all dead.”
If, on the other hand, our economy were backed by a gold standard, bailouts would not be possible, as governments would be unlikely to possess the sufficient funds necessary for the bailout. A gold standard enforces a much needed discipline into the markets and requires a balanced budget.
This system is clearly not politically favorable as it would restrain politicians from making endless promises, especially regarding entitlement programs. Nevertheless, under a gold standard, any division or company that provides unsustainable programs will be forced into liquidate their losses, or serve eventual bankruptcy. Today, we have – “too big to fail”, and perpetual debt is required to stay afloat . Under a gold standard, politicians would also be chastised for any malinvestments made under their auspices. This would potentially lead to more personal responsibility and ownership of one’s actions.
In reality, we live in a fiat-based monetary system which creates a political and economic environment favorable to sophist politicians who have the power to promise and create with impunity, even if the fruits of their creations will be detrimental for the people they are meant to serve.
In the end, bailouts will breed even more bailouts as politicians and investors continue to create ever more malinvestments, thus creating more and more inflation, perhaps even setting the stage for a hyper-inflation.
