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Save The Euro By Destroying It
From The Daily Capitalist
A couple of good articles on the euro bailout this morning. This first one is from Barry Ritholz's Big Picture, an article by Lee Quaintance and Paul Brodsky of QB Partners, a private macro-oriented investment fund based in New York. Also, see their excellent article, "We Are All Austrians Now."
The lead in this morning’s paper WSJ provides all necessary guidance for global wealth holders: “The European Union agreed on an audacious €750 billion ($956 billion) bailout plan in an effort to stanch a burgeoning sovereign debt crisis that began in Greece but now threatens the stability of financial markets world-wide.” This weekend’s behavior demonstrates without equivocation the thesis we have been following: naturally occurring credit deflation will be met with an overabundance of monetary inflation that will hyper-inflate the global economy. (Please see the piece we distributed last week for a comprehensive analysis of our thesis and our expected outcome.)
Global policy makers continue to demonstrate that when push comes to shove they will forcefully apply policy that sustains the near term nominal values of financial assets. They continue to choose to use their unique powers to cover all bad bets with paper money and credit that only they can manufacture. In doing so, they claim victory when nominal financial asset prices predictably rise, as they must, and they hide the loss of real wealth denominated in their diluting paper currencies. The stock of real wealth is the same as it was a week ago and at every point between then and now, though there is a trillion more dollars (€750 billion) in the global system.
The EU is effectively proclaiming; “if you pour our brew down the drain we are just going to make more of it.” To defend the Euro, something has to be sold against it. The Fed (the tallest midget) has re-opened the USD swap line to the EU so that newly-digitized dollars can be sold for Euros in the market. Clearly, the bailout is USD bearish – not Euro bullish. If the EU was serious about saving the Euro, then the ECB would have to dump its gold and hike funding rates. They are going “all in” with a six of clubs. In the current backdrop it seems preferable for the Fed to inflate immediately, rather than the ECB, given the relative strength/weakness of the USD/EUR. This is the same playbook global central banks have been following for a while. The mere fact that all major currencies today need to be defended wreaks of fraud. If something is as it seems there is no need to defend it.
Then there is a good one from Bob Wenzel, "Trillion Dollar Madness."
European policy makers have unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases to stop the sovereign-debt crisis. The Federal Reserve will also play a role through currency swaps.
The 16 euro nations agreed in a statement to offer as much as 750 billion euros ($962 billion), including International Monetary Fund backing, to countries facing instability and the European Central Bank said it will buy government and private debt.
There is nothing more to be said other than this is potentially the greatest inflationary plan ever designed. Although statements have been made in the past that the EU has failed to follow through on, the statements issued last night appear to have a sense of seriousness about them, especially the ECB announcement to buy government and private debt, and the Federal Reserve launching of currency swaps. Both these actions suggest spectacular inflation may not be far away. Although the ECB statement says the purchases will be sterilized, meaning they won’t increase the overall money supply in the system, one wonders how long this will go on. A sterilization of the money printing would mean that money would be drained out of other sectors of the EU economy to be given to the governments of the PIIGS, who are proven irresponsibles with money. Draining from the potentially productive sectors of the EU economy to give to the PIIGS is almost as insane as printing the money without sterilization.
That no objection to this madness has come from any finance minister or central banker signals how far down the road we are from any real concern about inflation or the taking away from the productive sectors of the economy. Indeed some of the the statements coming out of the emergency meeting of EU finance ministers are simply absurd.
“The message has gotten through: the euro zone will defend its money,” French Finance Minister Christine Lagarde told reporters in Brussels early today. How opening up the printing presses defends the euro, she did not explain. The last I looked printing money destroyed a currency. It did not help the currency.
As for other parts of the plan that call for EU members to chip in with bailout funds, Venkatraman Anantha- Nageswaran of Bank Julius Baer & Co put it best, “It might temporarily calm nerves but questions will come back later on how they will pay for this package when all of them need fiscal consolidation." ...
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Interesting DOW chart and will upload a new EURO chart shortly:
http://www.zerohedge.com/forum/latest-market-outlook-0
http://stockmarket618.wordpress.com
The Fed and the ECB are fighting a war they can not win - living standards for all but the most wealthy is in decline in the Western world. THere is just too much cheap labor available in the globe and nothing short of a trade or shooting war will prevent the disinflationary impacts - which would not be so bad (mild deflation/not war)if we were not in debt up tour eyeborws
Another Austrian perspective, from the Austrian's Austrian, both ideologically and ethnically:
http://www.acting-man.com/?p=823
Akak....when a value is perceived or apparent, I agree with you that it is not influential in "real" money...but when that value is paid in a transaction...is a printed tick. Ceases to be value and becomes a price.
That "value" became real money changed hand, and part of that value ended in a book of a bank as mortgage for which someone paid with real money.
I am trying to understand a bit better and there is no need to become fundamentalists and cry "Anathema...repent the end is nigh!" if someone tries a line that is not the crowd collective thinking, at least here. I like ZH enough not to see it become an "Economic Talibanistan"...that why I ask.
I can agree that out of all the asset destruction , probably only the fraction that actually came out of the bank's books counts in term of quantity of money supply taken out of the circle, and I saw on my pocket some effects of inflation...but in durable goods and fuel. mainly...not in food , honestly, maybe due to New Zealand being an agricultural economy, and saw the value of my home plunge first and then bounce back some...that I couldn't care less as O have a minimal nominal mortgae for purely fiscal reasons.
The point is debt deflation IS deflation, is negative GDPs and the consequences are dire...although allows to take a good chunk of bad debt out of the books...is not good for society.
Are we ready to bear the full brunt of the consequences of the "right" monetary policy?? Do we really want to go back to gold and rifles as fundamental values of human society?
Not that I approve the money for nothing and checks for free policy, as I am debt free and a saver...so a loser.
I am just thinking if I really want the consequences of a righteous policy...
Usually a country goes to sh*t when they start privatizing public utilities that are monopolistic by nature. Like for example the energy company of a city or a metro service. You got there instant monopolies and gradually the service will get worse but service fees just keep on rising. Privatization as cure all is very dangerous thing to a society and usually leads to very poor results (like in the UK, Argentina and many others).
Another example is the US healthcare, infested with parasitic layers after layers and the costs are unbelievable high to the society and Americans are still getting 3rd world service, especially if you are poor.
Too late at this juncture - Pandora's box is almost completely open. The consequences are coming irrespective of any future policy decisions. The only thing left to question is the timing and the order of magnitude of the implosion........
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In the words of Shep Ramsey, "Sometimes the only way to win is to lose."
But what really makes the difference is how badly you lose and you for sure don't want losing to kill you. I think the ECB may have just -killed the euro.
The article about us all being Austrians now is spot on and is a perfect description of the rationale (forgive me for giving it this much credit) behind the euro rescue package as well as a description of what the Fed is doing. The governments are all devaluing their currencies in nominal values - but not in absolute values as defined by the authors. Unmoored from a gold peg, currency has the value assigned to it that day by TPTB and not much more. The governments are slowly defaulting on all the private debt by taking it on their balance sheets and inflating the debt away by devaluing their currencies.
Until the ploy doesn't work any more.
Hold those exchange rates steady while the S.S. Basket of Currencies slowly sinks below the waves in a sea of under-reported inflation. (Wouldn't want anyone to rock the boat or get an unfair leg up on the 'competition' would we...)
If they keep this up however the effect will be to create One Interlinked TBTF World Currency without having to go through the nastiness of a public referendum... hmmm...
I would have to disagree somewhat with Bob Wenzels statement at least from the Irish and possibly the Spanish experience when he states that
"A sterilization of the money printing would mean that money would be drained out of other sectors of the EU economy to be given to the governments of the PIIGS, who are proven irresponsibles with money"
The Irish Finance ministry during the boom years not only kept below a 3% fiscal deficit but ran budget surpluses to the extent that it effectively had zero public debt when you factor in the money set aside by the exchequer for future public pension liabilities.
It was in monetary affairs that grave errors were made.
The previously conservative Irish central bank indeed fell asleep after the Euro transition and the local oversight of loans became appalling in its willful blindness.
But the ECB was well aware of the volume of excess German and other savings going into the Irish Banking system and was very late in the day in calling stop to this madness.
The southern Irish mentality has respect or perhaps reverence for global international institutions - if the ECB expressed real and active concern early on in this decade the Irish robots would have reacted to orders - this is a monetary failure and not a fiscal failure.
I can assure you we Irish Monkeys are now surviving on peanuts and not bananas now.
The whole private credit creation system has stopped dead - the only money coming into this economy comes via government spending and whatever its flaws it is a far more efficient deliver of goods and services then the private banking establishment.
throughout the boom years our public utilities have been starved of investment to service the private utility fetish.
Our state electricity company was in fact mandated to increase INCREASE the electricity costs to make it attractive for private investment
It has also been starved of new funding for new plants.
The only state company that truly worked in this country has been cannibalised and starved of credit while the banks built their absurd castles in the sky.
This was a state company which brought the modern world into this country - where even investment money was made available during the last great depression.
We once had the cheapest electricity prices in western Europe and now we have the most expensive.
We have seen neoliberalism up close in its most virulent form and it has destroyed us.
Our captured foolish neo liberal government is now in a cage - incapable of forming either intellectual capital or physical capital because of their closed minds and closed capital markets.
Grand Theft Euro.
inflation is running at 9% according to williams shadow statistics
what has been taken out , asset went down in price.. but the original dough is still circling the globe
this idea you take the fiat printed then deduct asset price destruction in my opinion is a bogus way to figure things
h debt was created out of nothing . it has bought supply, bought wood, bought labor nothing has been done to this pile. wentg into the construction. into the economy
military spending ,, they blow up the equipment , but the dough is still spent
the amount of fiat hurled into the air is unprecident in history ,
food , services, health , every thing has gone up in price .
its in the pipe line .. every thing has gone up pricewise .
or you have not paid attention and listened to some faulty thinking
I am starting to have some second thoughts about the way we apply Austrian School principles here....
In the sense that I am trying to see signs of inflation...but in broad terms, if the "value" lopped off assets in U.S. was, counting only home's prices, 12 to 14 trillions ( of which maybe only 5 trillions recognized in Bank's books) and the Feds printed, so far 1.5 trillions...the overall quantity of money taken out of circulation is still much higher of the quantity repumped in....
Therefore, no inflation....yet.
This debt deflation period I think will be longer and more painful than anyone thinks...
so far 1.5 trillions...the overall quantity of money taken out of circulation is still much higher of the quantity repumped in...
I would just point out that you are forgetting the exponential growth potential of that figure once it begins to move from balance sheet to balance sheet levering ten times or more every time it lands. Fiat money, even in its oldest school non-fractional form, is both extremely powerful as an economic tool and extremely dangerous because the state will always, always eventually inflate it to the point of collapse. No system has yet been devised to prevent this from happening. When fiat is married to fractional reserve, as it is now, it has a runaway inflationary potential akin to oh, say, the explosive potential of nanothermite. The cat, in my opinion, is indeed out of the bag. "Sterilization" is a reassuring word to throw around but the concept is pretty far removed from the practice. As far as I know the only way to mop up liquidity is by increasing taxes. Good luck with that.
Sorry, but your facile equation of debt with money is grossly in error, although understandable given the mass Keynesian brainwashing of most people over the last several decades.
The fall in the previously perceived values of houses had, and has, absolutely nothing to do with any supposed contraction in the supply of money. Houses are not money! But rest assured that the real inflation has happened, continues to happen (and accelerate), and will soon be savagely apparent, and undeniable, to everyone.
No fiat currency regime has EVER suffered deflation, and I put no bets on ours being the first. Given a spendthrift and borrow-happy government on an unsustainable financial course, every historical precedent demonstrates that the end result is currency depreciation and/or collapse. I see absolutely no evidence for an unbacked fiat currency unit, issueable in unlimited amounts, with an issuing authority having every motivation to increase the rate of that issueance, to suddenly and unprecedentedly INCREASE in value. Indeed, the very suggestion is intellectually insulting.
Akak,
I agree with your general comment, but I would raise several points.
1. How do you measure inflation? We are clearly deflationary right now because asset values are falling as are wages (a slight decrease maybe offset by slight CPI increase). Housing isn't money, but it is wealth.
2. The CPI does not include housing or real estate, only rental equivalents, so maybe it doesn't show deflation?
3. The fiat money has to find its way into the economy and it really isn't doing that yet. When it does, we'll see inflation unless the Fed's efforts to drain the pond work. (Maybe, maybe not).
4. Zombie banks exist here. Until they clear bad debt (malinvestment) off their books, the cash (Money Base) will sit in reserves. Remember Mises said supply of and demand for money.
5. You could argue that Japan had fiat money since it sat on zero interest rates for years. But, because of No. 4, they stayed in deflation and still are.
6. Many people here confuse money with wealth. Not the case with fiat currency. As Paul Brodsky and Lee Quaintance point out, that fact that you wake up and find an extra 750 billion euros in your pocket doesn't mean there is another 750B in wealth.
"Houses are not money!"
Disagree.
Any tangible asset IS money. One can trade an ounce of gold for an ounce, a house for one of similar value for a house, a dryer for a dryer, etc.
These are money. Currency isn't.
IMO, completely correct. We actually live by exchange of goods and services. Paper money is only an agreed upon exchange contract.
Farm land. Cumbersome but generates something that can be exchanged for other goods.
That would be incorrect. Japan is a modern fiat dumptruck and it's money supply also takes into account asset values. Assets have value, and therefore house value which can be converted to money supply. A car is considered an asset and counted as such when counting up a persons wealth.
Price inflation confuses people becuase in a deflation things of non-utility have a price that goes down. Clothes, derivatives, fancy cars. Things of utility like gold, food and oil go up. Insurance, health and caputured audience commodities will go up becuase they can
Japan!
Wrong!
To say that Japan underwent deflation in the 1990s and 2000s is just more Keynesian propaganda, and bullshit to boot.
Consumer prices in Japan have NEVER fallen year-over-year, and consumer prices have steadily increased, since World War II, as they have in everywhere else under the worldwide fiat currency regime. Keynesians like to throw in every OTHER economic factor but the most obvious one to make their fallacious case for deflation, but as usual, they are wrong, wrong, wrong.
"Consumer prices in Japan have NEVER fallen year-over-year"
http://www.stat.go.jp/english/data/cpi/158c.htm
But isn't the money supply (money circulating in private sector) continuing to fall? I don't see the transmission mechanism for putting new money into the system to generate inflation. If velocity stays pinned to the floor, and incomes slowly contract and debts are slowly repudiated, then what stops the money supply from returning to pre 1980 levels?
i get that the USG is bankrupt and can never make good on its financial obligations, but i see 20 years of bankruptcy, foreclosure, asset price collapse ... not "inflation." how does that money get in circulation to impact prices?
Government monetizing spending - good way for fiat credits to get into circulation.
You are a bank and you are holding a big chunk of bad debt (Greek bonds, MBS, whatever) . You cannot leverage that debt and furthermore in a sane world you would be forced to write it off, come what may. However in Lala world the Fed and the ECB will take those bad assets off your hands, deep six them and hand you brand spanking new hot money. Dollars or Euros to do with what you will. How will that money find its way into the economy? Any damn way it can because it sure as hell isn't going to sit on your books doing nothing. It will find a way into circulation, it will expand 10, 100, 1000 times. It will stimulate economic activity, it will drive up equities and it will fuel inflation because once it's out there, expanding exponentialy, it is damn near impossible to draw back or soak up or sterilize or whatever you want to call it. Once its on the books and in the clear it will get out because it has to. Will it cause a collapse? According to the theory I think has been adopted the only collaspe to worry about is a collapse in confidence. Who knows, maybe they're right. Maybe not. But the dice are rolling, this is high stakes gambling at its most rarified level. Ain't it a gas?
Madcow, fiat money is debt. That is the real confusion people have about inflation vs deflation. Just know what it means and once you understand what it means you will have an epiphany and it will all make sense.
Keynesians are people who only have one pair of underwear. Having more than one would be an underemployment of resources.
Name one country using the "Austrian" economics...there is none. But don't let the facts get into way...
well they had to blow up Iraq to save it ditto afghanistan.
Sounds like Orwell's finest hour:
List of Newspeak wordsI think the key to defending the Euro is not the bailout package but the swap lines from the U.S. Fed. Currency values are all relative. If Helicopter Ben can make the U.S. dollar smell worse than the Euro, the Euro should rise.
Relative to other paper currencies, but not relative to physical assets. That includes gold, silver, your house, clothing, toilet and the prostitute's services on the corner.
Which means this is all just a stupid ass game and that our "world leaders" have completely lost touch with reality and are driven by hubris.
Ah, but they know not what else to do, as evidenced by hours of excruciating blather of EU Olliaberry and the Spanish Finance Ministress aptly displaying their abject lack of even a most basic grasp of the situation.
Bureaucrats all, they assume throwing large numbers and a multitude of platitudes will calm mythical beasts.
Time has passed for further Charades and Kabuki Theater.
Unless defective spending, tax and monetary policies are rectified, the Euro will slowly set into oblivion, providing another superb excuse for the Power Elite to further consolidate control and abrogate Nature's Rights of Man.
+1
Yeah but wouldnt doing that turbo boost Gold even more on a dollar decline.
Patience, young jedi.
I have been seeing and hearing this idiotic meme more and more recently, and am boggled by the self-evident insanity of it. No, currencies have both relative AND absolute values! If the Euro is falling against the dollar, that does NOT imply that the dollar is gaining in absolute value (i.e., purchasing power). ALL fiat currencies --- which is to say, all contemporary currencies --- are in a constant process of falling (devaluing), and relative moves against each other take nothing away from that fundamental fact.
To say otherwise is to say that if two boats are sinking, and one suddently begins taking on water at a faster rate, then the other one will somehow automatically start rising out of the water! The idiocy of this idea is obvious when applied to a practical matter ---- but nobody ever said that Keynesian economic bullshit was practical, nor immune from contradictory babble, which is indeed the essence of such pernicious economic fallacy.
He said that currency values are relative TO EACH OTHER, which is true, not that they're relative to each other AND some absolute benchmark.
Does this remind anyone else of when we printed dollars throughout the 1920s to prop up the pound? That ended pretty well if I remember right.
Wait- let me get this straight. The Europeans need us to print dollars so the euro banks can convert to... Euros?
We are going to print a trillion dollars and swap baseball cards with Europe? What kind of fucking nonsense is that?
And the dollar is uptoday too. Bernanke is an ASS
IMO, dollar is up because Euro hidden troubles are not yet resolved. The dollar can has been kicked further down the road.