Christine Lagarde, President of the European Central Bank (ECB), said in her remarks highlighting the flaws of the legal tender system that even if the institution suffered trillions of dollars in losses, it would not go bankrupt. Lagarde believes that normal bankruptcy rules do not apply to the European Central Bank, mainly because it is the sole issuer of central bank currency denominated in euros. The euro system will always be able to generate additional liquidity as needed.
Bankruptcy rules do not apply to the European Central Bank
The President of the European Central Bank made a speech in response to a question from an Italian member of the European Parliament. According to a report by Reuters, Lagarde unambiguously believes that central banks, especially the European Central Bank, are not bound by established guidelines. she says:
Even if the European Central Bank suffers losses in the tens of trillions of euros in bonds purchased under its stimulus plan, it will not go bankrupt or run out of money.
In response to the global pandemic, the Covid-19 pandemic, the European Central Bank, like other central banks, has injected trillions of euros into the Eurozone financial system. The money is intended to help economies hit hard by lock-in restrictions and to increase demand for goods and services. However, because some people believe that the European Central Bank has exceeded its capabilities, unprecedented currency creation and borrowing have aroused people’s vigilance.
However, in a clear response to these concerns, the European Central Bank President not only defended large-scale borrowing, but also asserted that financial losses cannot cause the central bank to fail. Lagarde said:
“So, by definition, it will neither go bankrupt nor run out of money. In addition, if any financial loss occurs, it will not impair our ability to seek and maintain price stability.”
In addition, Lagarde added: “The European Central Bank has no legal basis to cancel the government debt it owns.”
The fallacy of unscrupulous Money’s currency creation monopoly
Lagarde’s claim that the European Central Bank (ECB) lacks the power to create money has long been a cause of concern for opponents of the legal tender system. One such opponent, the famous Austrian economist Fredrich Hayek, wrote a book entitled “Denationalization of Currency” in which he attacked legal tender.
In this book published five years after the world abandoned the gold standard, Hayek advocated the establishment of a free market even in the field of money creation. According to an excerpt from the preface of the book, Hayek pointed out:
“Currency is no different from other commodities. Compared with the competition of private monopoly issuers, a government monopoly provides a better supply of money.”
Hayek is the winner of the Nobel Prize in Economics. He argued: “Money is not an exception, that is, self-interest is better than benevolence to produce good results is the rule.”
At the same time, advocates of Hayek’s school of thought, including Bitcoin, have always used the views of economists when defending privately issued cryptocurrencies. They pointed to the current competition in the cryptocurrency space and how certain coins are faltering, while others are becoming more popular.
Lagarde’s latest remarks and recent reports claim that global debt will reach unprecedented levels by the end of 2020, which will only help support the argument that the private sector is involved in currency creation.
What do you think of Lagarde’s comments? Share your thoughts in the comments section below.
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