What is a Bank-sovereign doom loop?

514 views

What is a Bank-sovereign doom loop?

In: Economics

Governments in the EU are giving banks very low interest rate loans to stimulate spending in the EU. Except these EU governments are getting the money to make these loans by borrowing it back from those banks at interest rates above what the governments are the charging banks.

Imagine I loan you a 10 dollar bill, and you promise to pay me back $11. Except after I make the loan I realize that I couldn’t really afford to loan you that money. So I borrow the $10 bill back from you, except that I promise to pay you $12. All we have accomplished by doing these transactions it to create a world in which I owe you $1 for no reason.

Because neither you nor I has actually spent the $10 bill, we can keep doing this over and over again until there is billions of dollars in debt, with me owing you *substantially* more money than you owe me back. This is whats going on in the EU right now.

This is creating a cycle in which absolutely nothing productive is being accomplished at the same time that EU governments are heavily indebting themselves to banks in a manner that appears to be unsustainable.