Gonzalo Lira on the eurozone crisis, hyperinflation and why countries should default

GoldMoney’s Alasdair Macleod talks to Gonzalo Lira, an economist from Chile who blogs at gonzalolira.blogspot.com. They discuss the current state of the eurozone crisis, the prospects for hyperinflation and which assets one should own in such an environment.

Speaking from Flensburg, Germany, Lira talks about the discontent of the German public towards the recent decision from their constitutional court to allow Germany’s participation in the ESM bailout fund. They explain how with the introduction of the euro, borrowing rates among member states converged, allowing the periphery states to consume much more than they were used to. Many German banks are now stuck with bad loans (i.e., money they lent to the PIIGS).

Alasdair and Gonzalo talk about the bond-buying announcement from the European Central Bank and question how strictly Mario Draghi will be insisting on the implementation of reforms that are supposedly the condition for those purchases. Lira thinks this will lead to a game of chicken with a lot of moral hazard issues. Spain, Italy and even France have to deal with labour market rigidities which make it hard to hire people and generate growth. While labour market reforms are tough to implement, Germany is a good example of how such reforms can pay off.

Lira’s long-term solution to the problem is for countries to default on unpayable debt and start over again. He point to the example of Iceland which shows that taking the hit now and not delaying the inevitable is the better strategy.

Lira talks about the Chilean hyperinflation in the 1970s. The institution of price caps coupled with wage increases lead to a consumption spree and a very quick devaluation of the currency. Looking at the US he sees the potential for hyperinflation if there is a run on US bonds. Until now the Fed’s QE programmes have prevented this from happening — with the side effect that the central bank now owns 60% of all US Treasury bonds with a maturity of between 20 and 30 years.

Lira also runs a preparation platform called Strategic Planning Group (http://www.liraspg.com/).

This podcast was recorded on 13 September 2012.

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Alasdair started his career as a stockbroker in 1970 on the London Stock Exchange. In those days, trainees learned everything: from making the tea, to corporate finance, to evaluating and dealing in equities and bonds. They learned rapidly through experience about things as diverse as mining shares and general economics. It was excellent training, and within nine years Alasdair had risen to become senior partner of his firm. Subsequently, Alasdair held positions at director level in investment management, and worked as a mutual fund manager. He also worked at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, Alasdair has been de-mystifying macro-economic events for his investing clients. The accumulation of this experience has convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. Accordingly, his mission is to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.

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