Old Hatreds Flare Up…

It looks like I’m not the only political commentator to evoke the spirits of the past on Europe’s current breakdown (or breakdowns).

From the Daily Mail:

Greeks angry at the fate of the euro are comparing the German government with the Nazis who occupied the country in the Second World War.

Newspaper cartoons have presented modern-day German officials dressed in Nazi uniform, and a street poster depicts Chancellor Angela Merkel dressed as an officer in Hitler’s regime accompanied with the words: ‘Public nuisance.’

She wears a swastika armband bearing the EU stars logo on the outside.

Attack: A street poster in Greece has depicted Angela Merkel in a Nazi uniform with a swastika surrounded by the EU stars. The accompanying words describe her as a 'public nuisance'
The backlash has been provoked by Germany’s role in driving through painful measures to stop Greece’s debt crisis from spiralling out of control.

From a Greek perspective, it seems shatteringly obvious. For them, the Euro has become a battering ram for a kind of fiscal austerity that is set to benefit Germans (price stability) and penalise Greeks (austerity).

As advantageous as the Euro once seemed, it is becoming ever clearer that the union is suffering from deep political fracture. It is a union built without a common language (other than perhaps the belief in bureaucracy — and an unwillingness to give bankers haircuts), without a political head (or even a coherent political structure) without a common culture of work, and without an integrated economy.

That’s why decisive action is proving impossible, in spite of all the rhetoric.

Worse (because it shows contagion at work), it looks like Portugal is about to sink into the mud.

From Ambrose Evans-Pritchard at the Telegraph:

Cashflow problems (making it much, much harder to pay down debt) — that’s what you get when spend-as-much-as-we-want-and-then-print-money mediterranean nations entrust their nation’s monetary to stern-looking austerity-minded German central bankers.

Most startlingly, it looks like Paul Krugman finally got something right:

European leaders reach an agreement; markets are enthusiastic. Then reality sets in. The agreement is at best inadequate, and possibly makes no sense at allSpreads stay high, and maybe even start widening again.

Another day in the life.

Of course, his solution — much, much deeper integration, with a good dose of money printing — is politically impossible, so whether or not it would work (clue: it won’t) is irrelevant.

Meanwhile Americans smoke their hopium (“GDP is up! Stocks are up! The recovery is here!“) hoping that the whirling Euro conflagration will just go away.

It won’t just go away. The global financial systems is an interconnected house of cards — a full Euro breakdown will bring down American banks with European exposure, like Morgan StanleyHank Paulson was telling the truth — either the thing is bailed out (again and again and again) or it will collapse under its own weight.

Creditors — starting with China (who are acquiring gold and Western industrials at a rapid rate) — will be hoping that the system can hold on for a few more years while they try to cash out with their pound of flesh.

Debt-ridden Americans and European would be forgiven for accelerating its collapse…

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How to Avoid the Inevitable (Clue: You Can’t)

Have Angela Markel and Nicholas Sarkozy saved the world from contagion? (Clue: they haven’t)

From the NYT:

PARIS — European leaders struggled Wednesday to reassure the world they were making progress in overcoming the two-year-old euro-zone debt crisis, with German lawmakers approving a proposal to strengthen an emergency bailout fund ahead of an emergency summit meeting later in the day promoted as the moment for a comprehensive solution.

The vote to expand the bailout fund, which passed by a strong margin in Germany’s lower house, came after Chancellor Angela Merkel, in a plea for domestic support, implored lawmakers to overcome their aversion to risk and put the might of Germany, Europe’s strongest economy, firmly behind efforts to get control of the crisis, which has caused economic anxiety and unnerved financial markets far beyond Europe’s borders.

Wow! German lawmakers decided to do the “right thing” and sacrifice a huge chunk of their GDP to appease institutional investors who hate the idea of losing their money due to their poor and failing business practices.

From Zero Hedge:

The only real question remains, is whether Merkel and Sarkozy will hold hands to add emphasis to their “we saved the world” announcement.

Key problem: creating a (sorely under-capitalised) bailout fund does not solve the problem of fiscal mismatch. The mediterraneans will keep spending money they don’t have (and never had), bankers will get their payoffs, and the German taxpayer will pick up the cost.

Great system, right?

Yes — if you love the idea of offering your hard earned capital as a sacrificial lamb to appease the bloodthirsty animal spirits of Wall Street and the bond vigilantes.

Fortunately (or unfortunately) the mediterranean predicament is so insolvent that the EFSF just won’t be able to give creditors a haircut-free future. And the ravenous CDS-hounds smell blood (CDS, by the way, is a completely preposterous innovation, effectively allowing investors to take out insurance against other people’s property — as the insurance industry knows all too well this leads to a lot of fires).

Just as with Wall Street in 2008, when investment banks and hedge funds naked-shorted each other to hell, a significant segment stands to gain a lot from a huge crash and depression.

In 2008 (before I started writing this blog) I called it cannibal capitalism. I still can’t think of a better term.

Germany Pours Cold Water Over Europe

Just as I predicted Germany is getting restless at the idea of bailing out the bulk of Europe.

From the Telegraph:

Andreas Vosskuhle, head of the German constitutional court, said politicians do not have the legal authority to sign away the birthright of the German people without their explicit consent.”The sovereignty of the German state is inviolate and anchored in perpetuity by basic law. It may not be abandoned by the legislature (even with its powers to amend the constitution),” he said.”There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit – which might be politically legitimate and desirable – then Germany must give itself a new constitution. A referendum would be necessary. This cannot be done without the people,” he told newspaper Frankfurter Allgemeine.

Turns out that listening to Germans in the German government, and on the German street might have more bearing on reality than listening to globe-trotting, world-saving, hopium-pedling, six-pac-abs, tax-evading Timothy Geithner. For example, German finance minister Wolfgang Schauble. He might be in a position to comment (or a better one than Geithner, in any case).

From Zero Hedge:

*SCHAEUBLE SAYS `WILL NOT SPEND OUR WAY’ OUT OF CRISIS

*SCHAEUBLE SAYS `SOLIDARITY HAS LIMITS,’ REQUIRES RETURN EFFORTS

*SCHAEUBLE SAYS `IMMEDIATE FISCAL REFORMS ARE OF THE ESSENCE’

So if Germany won’t bail out Europe (until things get much worse) and China and the BRICS won’t (until things get much, much worse) then who will?

America, apparently.

From Bloomberg:

China and the U.S. finally found something to agree on: Europe is doomed and might take the world’s two biggest economies down with it.

Neither officials in Beijing nor Washington are actually using the “D word.” They don’t need to, not with Zhou Xiaochuan, China’s central bank governor, talking matter-of- factly about emerging nations bailing out the euro region and U.S. Treasury Secretary Timothy Geithner warning of “cascading default, bank runs and catastrophic risk” there.

The price tag for keeping the Greek-led turmoil from killing the euro is rising fast. Asians are so anxious about it that they’re querying Americans — like me. In my travels around the region this month, I’ve faced a harrowing question: Would U.S. President Barack Obama chip in for a giant European bailout?

It’s hard to decide what’s more disturbing: the obvious answer — over Republicans’ dead bodies — or the fact it’s being asked at all, and by whom. Among those posing it were the finance minister of one Asia’s biggest economies, the central bank governor of another and a number of major executives.

After all, the closest thing to concerted action on Europe so far has come from Bernanke.

It’s the same absurd predicament — Americans pay for global stability, everyone else benefits.

Will the Fed Trigger Big Inflation?

What now after the Italian downgrade?

From Forbes:

Standard & Poor’s pulled another late move on Monday, downgrading Italy’s sovereign credit rating by one notch to A/A-1.  The credit rating agency cited weakening economic growth prospects as public and private borrowing costs rise, and a fragile political coalition failing to adequately respond to a challenging economic environment.

While the downgrade doesn’t come as a shock, as S&P had Italy under a negative outlook since May, it will rattle markets.  Europe’s sovereign debt woes have grappled nervous markets the last couple of weeks, with every word coming from Greece, Germany, or the ECB sparking massive moves on both sides of the Atlantic.

This has sent certain (risk-addled) European banks spiralling downward, leading the European Systemic Risk Board to warn policy-makers that the time may soon come to make a massive liquidity injection into European markets (i.e., throwing money at saving bad banks)

BNP Paribas:



SocGen:

In America, traders today were in a more bullish mood.

From Zero Hedge:

Shrugging off Italy’s rating downgrade (somewhat expected but continued negative outlook), funding stress in Europe (Libor levitating and Swiss/French banks divergent), cuts in global growth expectations (IMF and World Bank), concerns over systemic risk contagion (ESRB and World Bank), and escalating rhetoric in Sino-US trade wars, US equities have managed to reach up to Friday’s highs as rumors of AAPL being added to the Dow seemed enough for hapless traders.

More significant than excitement over Apple — and the main reason that markets today are levitating, in spite of all the turmoil — is the hope that Bernanke will throw more policy tools at the American economy.

Will he?

Although I have been specific about the idea that QE3 is definitely coming I don’t foresee QE3 being initiated this week. Why?

Firstly, because I think Joe Biden promised Wen Jiabao that America would hold off QE3 in the short-term to preserve the value of Chinese holdings.

Bernanke will probably initiate a program to roll the Fed’s holdings onto the long-end of the spectrum of bonds: as 2-year bonds in the Fed’s portfolio reach maturity, the Fed will replace those with 10-year bonds, to reduce net interest rates.

More significantly, I expect Bernanke to announce that the Federal Reserve will announce that it will no longer pay interest on excess reserves. Banks have accumulated massive excess reserves since the 2008 crisis, when the Fed determined to pay interest on reserves not lent — ostensibly to increase flexibility in the banking system in case of further collapse:


In theory, unleashing these excess reserves into the economy would get capital to productive ventures without infuriating bondholders and retirees any further with more quantitative easing. But in practice a surge in lending might do the precise opposite — unleashing a tidal wave of inflation, further diminishing the purchasing power of dollars.

The potential loans possible on these reserves could be up to $16 trillion. GDP is currently $14.99 trillion. Unless the GDP keeps pace with the money supply, these new loans would create the potential for substantial amounts of inflation.

Could this be the spark that triggers a runaway inflationary spiral? It could be. It’s not in the interest of either debtors, nor creditors — but that doesn’t remove the risk.

Europe to Geithner: “Go Away”

And what might put Europe and the global financial system to the sword? Recrimination. It’s not my fault it’s everyone else’s fault. Now former ECB policy-maker and Euro-hawk Jurgen Stark has weighed in to tell Euro-hopping U.S. Treasury Secretary Geithner (in less direct language) to shut up and go home.

From Zero Hedge:

Finger-pointing in the direction of Europe shouldn’t prevent others from putting their budgets in order and doing their homework before handing out advice to Europeans.

Of course, Stark has a point. Europe is a complete mess, European policy makers are stumbling and slumbering forward to the gates of Hades. But America? The American economy is a jaundiced sham; where Europe has maintained a sliver of its former industrial might (i.e. supply chains, heavy & light industry, consumer manufacturing) in Germany, Scandinavia and the Netherlands, America prefers to ship a significant majority of its consumption (and even a lot of its infrastructure) from China (and subsidise the shipping costs through massive military deployment).

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Will China Bail Out the World?

With fear running high on global markets, particularly regarding sovereign debt in the Eurozone, many commentators are asking: will developing nations flush with cash (i.e. China) ride into town and save the day?

From Reuters:

Italian Economy Minister Giulio Tremonti said on Thursday that Asian investors are reluctant to buy Italian bonds because it sees they are not being bought by the European Central Bank.

Speaking at a news conference, Tremonti also said it would be desirable for the central bank to follow the lead of the Japanese and Swiss central banks in taking expansionary steps to tackly the euro zone’s crisis.

“I note that the Bank of Japan today launched quantitative easing and the Swiss cen bank cut rates to zero, we are waiting for decisions if possible, but desirable (from the ECB),” Tremonti said.

When you talk to Asia they say: “We don’t understand what Europe is,” he continued. “The second point is that they say ‘if your central bank doesn’t buy your bonds, why should we buy them”?

That is a fairly unqualified no. And why should they? As Amschel Mayer de Rothschild famously put it:

Buy when there is blood on the streets

And China are entitled to hang onto their money and let asset prices depreciate further to get more bang for their buck. But some signs suggest they will act. The more Europe and America deteriorate, the weaker the demand for Chinese goods.  And China’s massive FX holdings’ value is dependent on the system of international trade and the economies of various Western nations retaining functionality. Most importantly, the only remedies that Western governments have are money-printing, and (China’s worst nightmare) debt-forgiveness, neither of which the Chinese would like to see.

Of course, China stepping in to buy shoddy debt isn’t going to offer any  solutions to underlying problems. At best it will kick the can do the road awhile, as Europe muddles around and continues to fail to come to any kind of meaningful or coherent agreement on its future. So as as Europeans clutch furiously at (Chinese manufactured) straws, there is still only one bailout party in town: