Sinking Beneath the Waves

Last month, I gave up writing about the European meltdown. After all, it was all so inevitable. Either Europe will take the slow and painful Japanese-American road to zombification (allowing a broken system to continue to be broken) by printing the money to support debt levels or European nations like Greece will default and all hell will break loose.

As I wrote multiple times last year, I believed the latter was far likelier, mainly because I didn’t think Germans wouldn’t stand for printing money, although so far it appears that I have been wrong.

Today Zero Hedge brings some confirmation that stern Teutonic monetarism is here to stay, and there is no Euro-Bernanke:

Today channeling the inscription to the gates of hell from Dante’s inferno is none other than yet another Bundesbank board member, Carl-Ludwig Thiele, who said that “Europe must abandon the idea that printing money, or quantitative easing, can be used to address the euro zone debt crisis. One idea should be brushed aside once and for all — namely the idea of printing the required money. Because that would threaten the most important foundation for a stable currency: the independence of a price stability orientated central bank.”

Fitch meanwhile believe that the Greek default will be here by March:

Greece is insolvent and probably won’t be able to honor a bond payment in March as the country negotiates with creditors to cut its debt burden, Fitch Ratings Managing Director Edward Parker said.

The euro area’s most indebted country is unlikely to be able to honor a March 20 bond payment of 14.5 billion euros ($18 billion), Parker said today in an interview in Stockholm. Efforts to arrange a private sector deal on how to handle Greece’s obligations would constitute a default, he said.

As we learned a long time ago, big defaults on the order of billions don’t just panic markets. They congest the system, because the system is predicated around the idea that everyone owes things to everyone else. The $18 billion that Greece owes to the banks are in turn owed on to other banks and other institutions. Failure to meet that payment doesn’t just mean one default, it could mean many more. The great cyclical wheel of international debt is only as strong as its weakest link.

This kind of breakdown is known as a default cascade. In an international financial system which is ever-more interconnected, we will soon see how far the cascade might travel.

23 thoughts on “Sinking Beneath the Waves

  1. A comment from Zero Hedge. Basically a particular jurisdiction will prevent the past mistakes “IT” Made from its own first hand experience.

    http://www.zerohedge.com/contributed/germany%E2%80%99s-fed-and-getting-ready-walk

    @nolla

    “Nope.

    The Author is an American and most of the comments are made by Americans…you just don’t know the context.

    Would any nation repeat the most dreadful experience they have had during the last 100 years? No, they won’t. This is the difference: in the U.S.A. maybe THE experience is the Great Depression (not i.e. WW2), therefore Fed is doing everything to “not make IT happen again”.

    What’s that in Germany? Yes, hyperinflation which brought in Hitler. There’s a 1tn bill in the Bundesbank lobby…go figure why.

    Germany will not isolate, they will not monetize, they will do everything they can to keep the euro intact. And to keep their C/A surplus… pick your menu.

  2. And Adolf Hitler attributes the Hyperinflation period to the “Soft” aaproach taken in respect of the Ruhr occupation.

    In Mein Kampf, He basically says the bureacrats of the day decided that workers were to be paid wages and encouraged to strike. This resulted in a supply shock, and too much money chased too few goods. Germany borrowed the money from “Internationalists” to pay the wages.

    His preference was for a millitary strike to force France to retreat.

    • Sounds like what Greece would do if they had the chance, and sounds like what other non-Germany European nations would encourage Greece, Spain and Portugal to do if it wasn’t for Germany.

  3. They bet on that Greece finally agree to fire sale the country hard assets at last. The Germans are very patient. They can afford to wait but the Greece can’t anymore.

  4. I certainly could be mistaken, but — in that Goldman Sachs packaged and sold the Greek debt to the European banks — and in that the debt was insured by (AIG wannabes) Merrill Lynch and JP Morgan through their London exchange — and in that Bank of America and Chase moved those divisions under FDIC protection two months ago, hand-carried by Ben Bernanke — does it not seem that the European Banks holding the Greek debt would be made whole by the American Colonists?

    I see no other losers in this credit event — except for the time-bound indebted connections of the northern hemisphere banking systems. However, since the US can manifest money at will and monetize their debts due to their reserve currency status — I don’t see why they would miss a payment obligation.

    I do believe Europe will be just fine, under the circumstances. As long as they are not holding an excess of risky US Treasuries. Just an opinion, of course.

  5. However, since the US can manifest money at will and monetize their debts due to their reserve currency status — I don’t see why they would miss a payment obligation.

    This gradual monetisation process is like a coiled spring. The ultimate outcome is a dollar crisis. This could be much closer at hand than we think.

  6. The ultimate outcome is a dollar crisis.

    Indeed, this is so. And the coiled spring you describe could be completely sprung, globally, in less than 36 hours across the Forex, if there is a sudden loss of confidence due to US political paralysis or blatant currency debasement. Under that scenario, the impacted nations would be those that continue to hold significant US Dollars for international trade. China and Japan would take the greatest hit since they are, by far, the largest US creditors. But it’s a hit I suspect they are anticipating and prepared to handle. (To some extent, I imagine the world might be relieved to see such a geopolitical rebalancing, and may feel their sacrifices at the Altar of Dollar Hegemony could be well worth the economic pain it will cause them.)

    In any event, this fine article is about the woes of Europe — which I really fail to see since their banks are largely indeminifed by their Greek bond insurers — JP Morgan and Merrill Lynch, now via the US FDIC and the American Colonists and their progeny. I’m inclined to regard Europe as merely the trigger or catalyst rather than the sad object of the economic cascade (the fate of the UK excepted, of course). That unfortunate distinction, I believe, belongs largely to the United States — which will go down the drain (or liquidate itself) on a solo journey.

    Such things happen to world powers with monotonus regularity (and, of late, whenever they venture into Afghanistan).

    • I’m inclined to regard Europe as merely the trigger or catalyst.

      Bingo, the default cascade will hit America, and lead to another massive Fed printing operation. Of course, Krugman and co will whine that inflation is impossible in a demand-depressed economy, but that’s not strictly true. Inflation is impossible in an economy with a constant deflationary pump from cheap Chinese consumer goods and superabundant food produced with the help of reasonably priced foreign oil. Take those two factors away and America would hyperinflate very quickly. Unfortunately, both of these things are very fragile.

      See, the real problem here is America’s physical economy in terms of supply chains, components, consumer goods, etc, is dominated by China. China dominates the global market in basic components. Much American “manufacturing” is reassembling Chinese goods.

      So America — by allowing China to accrue huge dollar and treasury reserves — has put a timebomb into the hands of a country it needs to maintain its physical economy.

      When the dollar crisis comes, China will impose huge trade restrictions on exports to America, effectively to starve America into ceding to its demands. American economists are roundly fixated on the idea that China “needs” America to buy its goods. That’s totally wrong. If dollar circulation is the thing they need, they can recycle their dollar hoard on domestic consumption. Or, more likely they can switch their huge domestic manufacturing base to armaments.

      Most likely America will give in very quickly in the name of getting global trade flowing again. Attacking China is completely off the table, but giving into Chinese monetary, political and economic demands would do the trick. Even if there is a sociopathic hawk in the White House like Santorum, the Joint Chiefs will make sure they do the sensible thing and get trade flowing again.

      The dollar will cease to be the world reserve currency, and America might even be forced to pay down her debt to China in yuan, or worse, in gold. Military primacy is useless if you don’t control your military and civilian supply chains.

      • When the dollar crisis comes, China will impose huge trade restrictions on exports to America, effectively to starve America into ceding to its demands.

        I can see that. After reading China’s recent Five and Ten Year Plans (indeed, they do those), it’s clear what they want. They would like the US to stop blocking their purchases of working assets in the US. Part of their Five Year Plan is to have factories open in the US — where the labor will be cheaper (they say) and the location more efficient — to assemble trinkets and components for further distribution. China expects to “return” 5 million jobs to the US by 2017. They would also hope to own other strategic assets in the US. As it stands, they are buying income property throughout America. A few months ago, the US kindly offered US citizenship to any Chinese who invested $500,000 in the US. An acquaintance of mine is ushering a group of Chinese buyers around the Southwest next week. I asked him what kinds of property they are looking for. “Ghetto income property,” he told me. “Units. They want to be landlords of all the folks sinking to the bottom.” I leave that investment opportunity for your Readers to figure out.

        Inflation is impossible in an economy with a constant deflationary pump from cheap Chinese consumer goods and superabundant food produced with the help of reasonably priced foreign oil. Take those two factors away and America would hyperinflate very quickly. Unfortunately, both of these things are very fragile.

        I imagine we’ll see what that looks like before 2012 is over. We have a problematic trend with oil prices. Gas prices are rising during the lowest usage time of the year.

        January 2009 $1.65
        January 2010 $2.57
        January 2011 $3.04
        January 2012 $3.29

        The average price of oil will certainly exceed $100 during 2012 — resulting in the highest average gas price in history for American drivers. No amount of firepower can defend the fiat Dollar against global fundamentals. Read an interesting analysis on that in a newsletter the other day:

        “Even though the U.S. economy has been stagnant for the past year and Europe is back in recession, oil is trading at $102 a barrel (Brent – $113 a barrel). This is a classic Catch-22 for Bernanke and his central banker buddies. The higher the price goes, the more recessionary economies become as energy and food costs rise. This would normally decrease demand and lower prices, but the massive money printing by the Fed … artificially inflates the price of oil. The Canadian oil sands are only viable at $90 a barrel. Saudi Arabia needs $90 oil to balance their budgets. The onset of peak cheap oil, lack of Libyan supply, possible war with Iran, and increased demand from the developing world (China, India) will put a floor of $80 to $90 a barrel under oil. A shooting war with Iran would result in $150 a barrel of oil overnight.”

        There’s really no point in pretending that the US is in charge. The petrodollar is only really reflected in the world’s rear view mirror, it seems to me. ymmv.

        • Yes. Oil-related cost push inflation was a massively underrated factor in 2008. I bet a lot of the subprime loans that were in default might have been in better shape if oil had been $20 a barrel; high oil prices erode salaries. Now we’re in a biflationary slump with inflation from spiking commodity prices, and deflation from depressed demand and cheap Chinese consumer goods.

          Politicians and central bankers are scared to let bad debt and bad companies liquidate. They don’t realise that that just stores up more and bigger problems for the future. Since 2008 we should have been making America energy independent and reinvigorating domestic supply chains and manufacturing. Instead we just let ourselves slide deeper into a highly-financialised “service” economy, with an even bigger derivatives bomb. This is a disaster.

  7. I agree with your thoughts, except you forget one thing.

    When a nation is backed into a corner, war is the result.

    The USA has a huge arsenal. With the right propoganda and the right level of hunger, it could mobilise.

    Could you imagine its prison population being given training and “living space”. It would make the SS look like a bunch of Hugo Boss wearing pansies.

    This is the USA get out of Jail free card. Truman used the Bomb, and I am sure another President will fill his shoes to ensure the USA survives.

    • If Ron Paul does not win the Presidency, I hope it will be Obama.

      Obama is a coward. He is happy to fight wars using predator drones, and he is happy to waste billions building up American force in the Pacific to “contain” China, but once the veil lifts he will very quickly accede to Chinese demands to keep the peace, keep goods and oil flowing, and keep America functioning.

      Mitt Romney meanwhile is very quick to brand China a “currency manipulator”, and very clear that he believes America must be a global hegemon, and he will do whatever it takes to secure that status. Romney is not a coward, but he would very foolishly take America to war with the world in the name of securing American primacy, a venture which would in fact do the opposite, and break America and leave China as the global leader.

      Because I believe America should be a counterbalance to the Chinese, I want a President who will repair America, improve American infrastructure, and secure American energy independence, so she can continue that role. Ron Paul is the best choice, but Mitt Romney’s imperialist nonsense is absolutely the worst choice.

  8. Pingback: The System is the Problem « azizonomics

  9. Pingback: Changing the Rules of the Game « azizonomics

  10. Pingback: Nassim Taleb’s Big Idea: Transforming Debt Into Equity « azizonomics

  11. Pingback: The Fabled Greek Mega-Bailout « azizonomics

  12. Pingback: Guest Post: The Fabled Greek Mega-Bailout » A Taoistmonk's Life

  13. Pingback: The Cantillon Effect « azizonomics

  14. Pingback: The Cantillon Effect » Bullion Insiders

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s