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The ECB Blasts Governmental Fear-Based Racketeering, Questions Keynesianism, Believes The Fed's Powers Are Overestimated

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Sat, 05/29/2010 - 17:08 | 381388 lynnybee
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this article is exactly why i love this website ........ i learn so much & really appreciate Tyler's efforts.    sincerely .....

Sat, 05/29/2010 - 17:28 | 381412 hound dog vigilante
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Ditto.

ZH is a template that will multiply... smart, nimble SMEs driving web-based journalism (and dialogue).

If broadsheet press is dying, then ZH is both executioner and mid-wife to the next generation...  long live ZH.

 

Sat, 05/29/2010 - 19:01 | 381516 Postal
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Hail Tyler! Long live ZH! *raises goblet of wine in toast*

Sat, 05/29/2010 - 23:45 | 381823 ThreeTrees
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Agreed.  Crowdsourced media:  The Market at Work.

Sat, 05/29/2010 - 23:53 | 381827 trav7777
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TOD was really among the first of this breed

Sun, 05/30/2010 - 04:56 | 381980 AnAnonymous
AnAnonymous's picture

What did you learn? That the Euro has not the same properties as the USD, that the missing properties matter, that the Euro doesnt allow to do what you can do with the USD and that the Europeans resent?

 

It is hoped this is not this. Because it is not news.

Sun, 05/30/2010 - 08:04 | 382032 Trichy
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No, what you learn from this great article is that however close europe is getting to the Ben way, applauded by the Frogs and the Meds, there are still some responsible Europeans left. The Germans are going to resist Keynes, which supports my view that it will be them walking out of the Euro disaster. It will take more clout than Sarkozy, Berlusconi and Mr. Bean of Spain have to bully the German population into bailing out the trash.

The only reason the Germans have gone along, so far, has been their weak banks overlevered with the periferis junk bonds. They will soon recognize that it is cheaper to redirect these bail outs directly to their own banks instead doing the detour through the corrupt states.

My bet is that the next time Sarkozy punches his fist into the table on behalf of his Keynsian gang, both the ECB and Merkel will call his bluff. That could well start the fun.

(Reflection: Ever wonder why there were so many zeros on Mediteranean bills

1 Merkel= 100 Drachma= 100 Mr Bean Pesetas 1= 1000 Lira = Keynes)

 

Thx Tyler, great piece.

Sun, 05/30/2010 - 09:06 | 382064 AnAnonymous
AnAnonymous's picture

Where does your appreciation of who is a Keynsian and who is not come from?

Europe is trying to mimick the US. But they work with the Euro, not with the USD.

That is why they will never achieve the same results as the US.

Sun, 05/30/2010 - 09:21 | 382070 Trichy
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Agree, they will never achieve the same result as the US, thank god, and that is just because Gemany won't let them. If it was up to the French, Spanish etc. they would already have US like deficits, bailouts et al in all of Europe. The current bailout has back doors as previously reported here at ZH, and was only partially agreed to by Merkel after Sarkozy bluffed by threatening to leave the Euro, lol.

Sun, 05/30/2010 - 09:27 | 382074 AnAnonymous
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Clearly, the results achieved by the US are ugly. That is why the EU is trying to mimick the US by the way.

Sun, 05/30/2010 - 14:44 | 382412 Trichy
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Sorry for insisting, but I interpreted your first post to imply, "move on no news here", which I disagree with. For the Euromarket as well as international it is extremely important to follow the mood of the ECB and the EU sovereigns and this was a big move from ECB. When you say EU is trying to mimick the US I again disagree cus you imply EU is reigned by the frogs. They had a win in getting the bail out through but the French have never won a war. (If you need to verify the later fact google "french war victories" and go for the I'm feeling lucky button.)

Sun, 05/30/2010 - 15:46 | 382471 AnAnonymous
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That is that. Move on, no news. The Euro has not the same properties as the USD. Therefore the ECB cannot accomplish what the FED can accomplish.

Sun, 05/30/2010 - 13:31 | 382326 sgt_doom
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"..they will never achieve the same result as the US.."

I believe the reason for that is because JPMorgan Chase, Goldman Sachs & Morgan Stanley have control of the single largest concentration of credit derivatives (mark-to-myth, of course).

 

Sun, 05/30/2010 - 15:35 | 382463 Ropingdown
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Agree, Trichy: Merkel's quick independent implementation of various short-sale restrictions seemed to me the stage-setting for a move to rescue German banks directly, as the leadership saw the French trying to lock-in an absurd concept of "no restructuring, no defaults, no withdrawals."  Smaghi is desparate. The French "gang of three" have gone delusional. What will happen is still obscure.  The heart of industrial and engineering Europe is still either not in the Euro zone or willing to follow Germany, one would guess.

Sun, 05/30/2010 - 15:06 | 382432 Kayman
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Ahhh AnAnon y mouse

Squeak louder, I cannot hear you.  Must be my racist ears.

Since you already know everything, why not move to China, set up your own site and wait for the knock on the door.

Sun, 05/30/2010 - 15:49 | 382473 AnAnonymous
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You have a strange definition of knowing everything.

Sun, 05/30/2010 - 10:44 | 382138 ISEEIT
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I adore this site. Shit on the fucking liars and I'll help do it. I need a hand though: Would love to have someone explain to me what "Liberty 33" is?

Tyler makes reference to that entity and my stupidness is unfamiliar with it.

Like the Angel said "Pleeese heeelp".

Sun, 05/30/2010 - 11:15 | 382173 mikla
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Liberty 33 is a reference to the Federal Reserve Bank of New York, (at 33 Liberty Street, downtown Manhatton, New York City, New York, USA) through which "the Fed" handles most of its market operations.

http://en.wikipedia.org/wiki/33_Liberty_Street

Sun, 05/30/2010 - 15:19 | 382446 Kayman
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ISEEIT

I don't know who junked you and why, but you have asked a fair question and you have been given the answer.

I think most ZH'rs are happy to provide answers where they can, and I am certain most ZH'rs will confess they do not have the answers to every question.

That is, except for AnAnon y mouse, who while he/she/it already knows everything and disdains this site, still has the temerity to come on to this site and bother us with his tedious bleatings.

Mon, 05/31/2010 - 10:23 | 383485 ISEEIT
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Thank you all. I am now somewhat less stupid. Honestly, I appreciate it.

Mon, 05/31/2010 - 05:07 | 383276 Fíréan
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@ ISEEIT. ".... and my stupidness is unfamiliar with it."

Don't be hard on yourself.You are in good company here and probably know more than the majority,yet  not all, who post replies. I wonder how many have read the 120 page analysis refered to in the leading article here ? ! ? Maybe Zero Hedge  are conducting their own experiment of  multiples of typewriter-armed monkeys ?

 

 

 

 

Mon, 05/31/2010 - 05:07 | 383277 Fíréan
Fíréan's picture

@ ISEEIT. ".... and my stupidness is unfamiliar with it."

Don't be hard on yourself.You are in good company here and probably know more than the majority,yet  not all, who post replies. I wonder how many have read the 120 page analysis refered to in the leading article here ? ! ? Maybe Zero Hedge  are conducting their own experiment of  multiples of typewriter-armed monkeys ?

 

 

 

 

Sat, 05/29/2010 - 17:11 | 381391 exportbank
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I've asked this question on ZH previously but never received an answer:

Why is there a target inflation rate and why is it never 0%?

Why do governments target a 3% deficit and think they're doing well - why don't they target a 0% deficit or even better a 5% surplus to pay down debt?

Sat, 05/29/2010 - 17:17 | 381397 akak
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I have been asking that very same question since I was a kid --- with never a logical or honest answer to it yet.

Sat, 05/29/2010 - 18:45 | 381493 mikla
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I've asked this question on ZH previously but never received an answer:

 

Why do governments target a 3% deficit and think they're doing well - why don't they target a 0% deficit or even better a 5% surplus to pay down debt?

 

Why is there a target inflation rate and why is it never 0%?

There are (at least) three good answers:

  1. Inflation is a tax.  By forcing inflation, governments get to spend "new" money that they did not have before (because it did not exist).  Governments don't need to explicitly tax its citizens for this money -- they simply print it (so it is politically advantageous).  With a target rate of 0%, governments would not get "new free money".  Further, society doesn't "feel" the inflated effects of the new money (currency devaluation) until later, so governments get to spend "stronger" money before the citizens play with it (at which point it becomes "weaker" money).
  2. Inflation devalues current debt.  Since nearly all governments are in debt, it is advantageous to governments to "de-value" what they owe by debasing the currency.  Deflation kills debtors, including governments.  Hello Iceland, Greece, etc.
  3. Inflation forces transactions.  Since you are "punished" for holding currency (you are punished at the rate of inflation), more transactions occur because people are accustomed to "getting rid" of a devaluing currency.  This increases the velocity of money, encourages excise taxes, and otherwise promotes economic activity (which benefits the government through increased property valuations and a HOST of other taxes).
In theory, economists are so afraid of "deflation" (where economic activity is punished) that they don't want to go anywhere near 0% inflation.  This is the famous "deflation spiral".  To encourage a "safe" margin from deflation, they shoot for 3%.  If you go too high, then it's similarly possible to destabilize economic activity (e.g., capital access becomes risky at greater interest rates, which similarly punishes economic activity).
I have been asking that very same question since I was a kid --- with never a logical or honest answer to it yet.
IMHO the central planners would rather you not understand such things (they benefit most with a compliant citizenry). There are more "nuanced" answers regarding positive-and-negative inflation rates, but then we start to touch into the "business cycle", which the central planners absolutely do NOT want you to discuss.
Sat, 05/29/2010 - 18:52 | 381506 mikla
mikla's picture

...sorry, I missed the other half of your question:  Governments never want budget surpluses.  They want to spend everything they can (the budget), plus more (the deficit).  It's fun spending other people's money, so they always run deficits.

Politically, spending money yields fame, power, influence, wealth, etc.  Since there is almost no "pressure" to combat fiscal irresponsibility (all interest groups want their cut, and they are the ones with the pressure), deficits are always-big-and-getting-bigger.

But, I bet you already knew that.  ;-)

 

Sat, 05/29/2010 - 19:09 | 381527 DosZap
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mikla,

Plus,if you have a surplus, the following year is difficult to INCREASE..................

Local & State Gvt's do this religiously..........you lose your cut of the pie.............IF it's not ALL USED.

Sat, 05/29/2010 - 20:31 | 381629 ArsoN
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Thank you, Professor Mikla.  But isn't it also good to run a deficit as long as you grow faster than you borrow?  So if your GDP grew at 5% you could have a deficit of 4% of GDP.  This implies that you generated a positive rate of return on your investment (providing the financing/debt servicing costs don't ruin it).

Sat, 05/29/2010 - 21:10 | 381667 mikla
mikla's picture

But isn't it also good to run a deficit as long as you grow faster than you borrow?  So if your GDP grew at 5% you could have a deficit of 4% of GDP.  This implies that you generated a positive rate of return on your investment (providing the financing/debt servicing costs don't ruin it).

Yes, that's true.  However, this brings in two things:

  1. Increasing roll-risk.  You borrowed more, so you have to keep rolling more debt (issue new bonds as your old ones expire).  This means you increasingly *require* stable capital markets, and you're increasingly at-risk to a favorable interest rate (if the bond market demands higher rates from you, that will really hurt).  The FALSE assumption is that the bond market will grow in capacity as your borrowing needs grow (e.g., tied to GDP):  NO.  At some point, the bond market must correlate to the "real" economy, which never grows as fast as the "financial leverage" economy.  However, as you mentioned, it's possible to walk this thin line (of "leverage") while things are "nice".  Of course, governments don't save for a rainy day, and rainy days come ...
  2. Liar statistics.  GDP is mis-calculated, and mis-reported on purpose (it doesn't reflect productivity).  Rather, changes in GDP for the last couple decades are merely changes in debt.  When we say a country has "only" 90% debt-to-GDP, it's a little silly because the government doesn't *own* that GDP (the private sector produced and owns that, the government merely takes a cut).  Further, that "90%" isn't real -- the government's liabilities are FAR higher than what's reported, and the "real" GDP is FAR LOWER than what's reported.

You are correct that leverage can give you net positive return -- but that assumes we spent money on something worthwhile.  In the real world, we set fire to piles of money (for no gained value) and call it GDP.  We build "bridges to nowhere" and call it GDP.  We account for future expected profits that aren't real, and call it GDP.

So, if you take out leverage for *real* productivity -- fine.  But that's not what we do, and that's not what will happen.  Give Greece a zillion billion dollars -- their "real" GDP won't move an inch.  They won't export any more olive oil than they do today (and quite possibly, they will export less).  That's "diseconomies of scale" and "increasing overhead".  Almost the entire $1 Trillion US stimulus is that (almost no productivity), and the $1 Trillion EU pledged bailout is the same thing (nobody will be more productive as a result).

Sat, 05/29/2010 - 23:36 | 381815 bc0203
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+10

Sun, 05/30/2010 - 08:28 | 382041 Trichy
Trichy's picture

+1

And would add the Feb is investing in GDP growth as if it was an asset. They have seriously learnt the lesson of the French, who used to employ people to dig holes in the ground, just to be able to fill them again.

Sun, 05/30/2010 - 10:06 | 382097 Lux Fiat
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GDP is mis-calculated, and mis-reported on purpose (it doesn't reflect productivity).  Rather, changes in GDP for the last couple decades are merely changes in debt.

Very thought-provoking take on things.  Goes back to that old saying that you get what you measure.  In spades.

Can we send Bernanke to the ECB in exchange for Smaghi?

To the person who junked mikla's comment - at least have the decency to explain why you thought that this deserved junking.  That would serve to further discourse and understanding, instead of sowing confusion.

Great job ZH - it is articles such as this one that keep me coming back.

 

Sun, 05/30/2010 - 15:35 | 382464 Votewithabullet
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That "junking" feature is fucking useless. I will not donate to ZH as long as it exists.

 

~sarcasm~ on

Sun, 05/30/2010 - 11:00 | 382155 ISEEIT
ISEEIT's picture

Thanks Mikla:

If I weren't previously indoctrinated, educated to know better, I might begin to suspect that modern society is basically a crop being harvested by a bunch of elitist.

Could you PLEASE define Liberty 33 for me????

Sun, 05/30/2010 - 11:11 | 382171 mikla
mikla's picture

Liberty 33 is a reference to the Federal Reserve Bank of New York, (at 33 Liberty Street, downtown Manhatton, New York City, New York, USA) through which "the Fed" handles most of its market operations.

http://en.wikipedia.org/wiki/33_Liberty_Street

Sun, 05/30/2010 - 11:15 | 382175 juangrande
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address of the fed? liberty 33?

Sun, 05/30/2010 - 13:33 | 382327 sgt_doom
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Wall Street, Broad Street, Park Avenue, Main Street and Liberty 33.....

Sun, 05/30/2010 - 17:51 | 382601 Rusty_Shackleford
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Also, please consider for a moment that GDP is not the Federal Government's "profits" or "income".

 

People tend to think of GDP as it applies to the Federal Government like they think of their own salary as it applies to them.  This is an inappropriate analogy.

 

This would be akin to the owner of a company including the incomes of all of his employees as his own when he applies for a higher credit limit on his credit card.  The GDP does not "belong" to the state.  It is the sum total of all economic activity in the country INCLUDING government borrowing and spending.

The only reason it is used when talking about a country's debt, is because THAT's the number THEY want to use.  It makes it look better for them.  3% of GDP doesn't sound so bad.

 

Again, would the owner of a factory be able to borrow against the sum total of all the incomes of all of his employees?  Of course not.

 

It's all BS.

 

If anyone else is interested in a basic lesson in inflation and why the government likes it, consider checking out Irwin Schiff's "The Kingdom of Moltz".

http://www.constitution.org/tax/us-ic/schiff/moltz.pdf

Sat, 05/29/2010 - 22:29 | 381744 New_Meat
New_Meat's picture

+2

Sun, 05/30/2010 - 07:43 | 382026 exportbank
exportbank's picture

As I thought.. Inflation and deficits are political instruments that have nothing to do with the long-term betterment of society.

It's like one of my other theory's - "Pension Plans don't exist to provide pensions".

Sun, 05/30/2010 - 08:58 | 382060 mikla
mikla's picture

+1 ... I completely agree with what you're saying.  I will now say something else, and I don't want it to undermine the fact that I believe BOTH your statements are true.

It's possible that a targeted inflation rate (like 2%-3%) does actually benefit society.  It *does* result in increased activity.  Yes, it's not "free" -- the savers are punished (it is a mere hidden tax extracted by government from the poor).  I don't like the central planning aspect (I don't trust their intentions nor competence), and it inevitably amplifies "booms" and "busts" (it's hard to quantify its impact on the natural business cycle).  However, there are a lot of moving parts, and this "priming of the pump" quite possibly has net positive effect.

So, I don't complain specifically about "targeted" inflation rates (they are fraudulently reported anyway).  Rather, I complain that the central planners violate the social contract by fiddling with the value of money in MASSIVE ways (don't trust and plan your life such that a goal of 2% targeted inflation will be achieved; we will see double-digit inflation again at a most inopportune time).

Mon, 05/31/2010 - 06:57 | 383307 WaterWings
WaterWings's picture

Great posts.

The central planners also use their alchemy to promote the ultimate racket: WAR

Sat, 05/29/2010 - 19:01 | 381515 Wynn
Wynn's picture

Thanks mikla

Sat, 05/29/2010 - 19:27 | 381557 RabidLemming
RabidLemming's picture

great answer

Sat, 05/29/2010 - 22:28 | 381741 New_Meat
New_Meat's picture

+1

Sat, 05/29/2010 - 22:47 | 381756 KTV Escort
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I wish my university professors could have been as crisp and laser accurate in their explanations as you.

Sun, 05/30/2010 - 11:04 | 382162 ISEEIT
ISEEIT's picture

I wish that every woman were as lovely as you (ass-uming) that is a actual pic of you.

Sorry for real if offended. I said it, but 100% I'm not the only one to think it.

Sun, 05/30/2010 - 00:00 | 381832 GNH
GNH's picture

Excellent post.  Inflation is arguably the biggest enemy of the investor.  So, if there was no inflation, one could take their cash and shove it in a coffee can in the backyard as a means of saving -- and not have to keep pace with inflation.  But, what would then happen to the financial services industry if we didn't have to put dollars "at risk" in order to keep pace? The industry would be decimated and the casino would not have all the forced players at the table.  

 

One more reason why they need inflation > 0%.

Sun, 05/30/2010 - 07:41 | 382025 pan-the-ist
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Thanks~

Sun, 05/30/2010 - 10:38 | 382129 philgramm
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It never ceases to amaze me when I read examples like your mikla's explanation as to the vast financial and historical knowledge possessed by ZH'ers.   I am not at all versed in this field but I am learning so much from the articles but just as much from the comments section.  Kudos!!

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