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Draghi Needs Greece Out to Succeed

Bruce Krasting's picture




 

 

Merkel said that Greece was going to stay in the Euro on Friday:

 

.

 

Hollande said the same thing on Sunday:

 

 

Merkel added that all of the folks who have a seat at the table just shut up about Greece (This was a weird one to me):

 

 

I don’t get it.

 

To “fix” Greece, Greece must decouple from the Euro. There is no other option. It is only a question of when, how much it will cost and whom will pay. The EU deciders know that this is true; they just don't admit to reality in public. An important question to ask:

 

What are the implications to Mario Draghi/the ECB of “Merkande’s” public support for Greece staying with the Euro (and dying) for a few more years?

 

Draghi changed the game on 8/2 when he put the issue of “convertibility” (the risk of a return to legacy currencies) on the table. Markets have been reacting ever since he drew a line in the sand with these carefully chosen words:

 

Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible.

 

Draghi shouts out:

 

“Don’t worry! No current member of the EU will leave! There will be no Euro breakup!

 

How can Mr. Draghi eliminate the risk of convertibility in the EU when the weakest sister in the EU has to be kicked out for its own good? “He can’t”, is the answer. Not when everyone (including the IMF) agrees that sustaining the Greek Euro link is impossible (and harmful to all).

 

As long as Merkel and Hollande talk nice about Greece, the convertibility issue will hang in the air. The market will continue to fret:

 

“What happens when Greece goes?”

or

“When Greece goes, does that mean Spain will too?”

 

The issue of Greece’s status must be resolved before the question of convertibility for the rest of the EU members can be laid to rest. Draghi can’t eliminate the risk until Greece is out, and the resulting fallout is contained.

 

Draghi is a market savvy guy. He knows he can’t stand in front of the capital markets and succeed unless he has a credible position that can be defended. Greece is the broken wheel of his cart. It has to be jettisoned before the other wheels have a chance to prove they can roll on their own. He says he wants to reverse the market psychology on convertibility risk, that can’t happen until Greece is gone.

 

The EU political leaders are screaming, “It’s all, or nothing!” That stance takes the cards out of Draghi’s hands.

.

 

Note: My long held position is that the best course of action is for a Grexit. I do not believe that Grexit necessarily means Spaxit (or Itaxit). Too many years have passed in this story for a “crisis” to happen when the final chapter for Greece is written. It’s in the ‘print’ already.

.

 

 

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Mon, 08/27/2012 - 16:01 | 2741783 q99x2
q99x2's picture

Behind the scenes financially the central banks can do whatever they want because there are no sovereign nations financially. Everyone's money is in the same control. Nations are a tool to be used as the central bankers see fit. If they don't want Greece to leave the EURO then Greece remains.

The central banksters will steal private investor money slowly and continuously all the way through the collapse.

Mon, 08/27/2012 - 15:05 | 2741557 steve from virginia
steve from virginia's picture

 

BK is right, there is no eurozone with Greece in it. It's a rathole into which good solid German euros are endlessly shoveled. Better to shove Greece into the air lock and jettison it into deep space ... right?

 

Greeks like euros because nobody will accept drachmas. Why would they? Wait long enough and Greece dollarizes. Without euros or dollars the PIIGS cannot buy fuel for their wonderful, wonderful cars ...

 

... which got the Europeans into the current mess if the first place. Nobody earns money by driving a car except for a handful of taxi drives and deliverymen. The entire business is a multi-trillion euro dead loss x 100 years. Both cars and fuel must be subsidized with non-stop debt or else!

 

'X'-number of hundred-trillions later and it all costs too much. Gee, how could that have possibly been missed?  Now what?

 

What's happening in Greece is also happening in Spain and Italy and France and ... Germany, Japan, China and the US. Socialism has nuttin' to do with it, more like 'automobilism'. The process is called 'entropy'. It's science, thermodynamics, kinda like, 'E=mc2' except it only works in one direction.

 

Entropy is a Terminator, It can't be bargained with. It can't be reasoned with. It doesn't feel pity, or remorse, or fear. It is coming to beat you so hard you'll wish you were dead, eventually you will be.

 

If you don't think so, ask a Greek. Nobody is getting out of this one ..

 

Mon, 08/27/2012 - 17:25 | 2741986 John_Coltrane
John_Coltrane's picture

Non-scientists don't seem to recognize that entropy is a measure of the number of possible states in a system (i.e. the more random or chaotic the higher the entropy, the more organized the less  so)  So, building a car reduces the entropy of the world (and thus requires work and energy).  While its true that the entropy of a closed system always increases (second law), life is dedicated to reduction of entropy.  Life is highly organized and thus has fewer possible states than a lifeless earth.

Heat death, and indeed death is the future of the universe.  However, until then, keep on organizing.  Until we run out of mass (see your E=mc^2, and nuclear fission) we have plenty of energy to reduce the entropy of the earth as much as we desire though a lot of heat might be generated in the process.

Mon, 08/27/2012 - 15:41 | 2741715 JeffB
JeffB's picture

"What's happening in Greece is also happening in Spain and Italy and France and ... Germany, Japan, China and the US. Socialism has nuttin' to do with it, more like 'automobilism'."

---

I beg to differ, Steve. I think the rising cost of extracting fuels does exacerbate the problem, but that socialism and the central banksters, along with their fiat money & partial reserve banking are the ultimate and root cause of the world's financial crisis.

Half of the families in the U.S. are now on government assistance of one kind or another (or multiple kinds) and less than half of the people pay any sort of federal income taxes. That's a recipe for disaster.

It's also a problem when, as the Wall Street Journal notes,:

 "More Americans work for the government than in manufacturing, farming, fishing, forestry, mining and utilities combined."

The bottom line is that it is our government bloat, and the central banking systems they've implemented to facilitate that ever growing cancerous bloat, IS THE PROBLEM. I personally believe in the peak oil theory, but don't think it has caused anywhere near the problems our governments have so far. I also think that it's quite possible, that we can eventually find answers to overcome peak oil issues, as we've overcome so many other obstacles we've faced before. Time will tell, of course, but that's in the future, whether in the very near future or the distant future, and the government problems are slamming us face first into the pavement RIGHT NOW.

Mon, 08/27/2012 - 16:53 | 2741924 negative rates
negative rates's picture

The answers have been found, and jumbled into a corrupt politicial system. One that became so inefficient, it bankrupt the country into a monetary inflationary one, where theories are thrown around and rinse and repete is the norm, but eventually it runs out of time, and never gets around to doing the right thing.

Mon, 08/27/2012 - 15:34 | 2741679 FeralSerf
FeralSerf's picture

While entropy can't be bargained with, one can look for and sometimes find another reservoir to do business with.  And there's also always death too.  Dieoffs/cullings leave a pie that's not divided into so many pieces.  Protests are to be expected.

Mon, 08/27/2012 - 16:01 | 2741784 Eireann go Brach
Eireann go Brach's picture

Bruce the question of the day is, "can the German banks that hold a lot of toxic Greek debt withstand a Greek exit?" isn't this Merkels biggest dilemma? I would love to hear your take on this matter?

Your reporting continues to be excellent!

Mon, 08/27/2012 - 14:57 | 2741529 kegman
kegman's picture

They extensively intermingle the terms EU, Euro Zone, and Euro, seemingly to confuse the recipients of the meaning of their various statements. Is it possible for Greece to transition to the Drachma and still remain in the EU?

Mon, 08/27/2012 - 16:42 | 2741903 Ghordius
Ghordius's picture

Yes. But they want to keep the EUR. They would prefer to default straight.

Mon, 08/27/2012 - 14:53 | 2741511 negative rates
negative rates's picture

The last time a guy said all or nothing to me, he didn't wake up the next day.

Mon, 08/27/2012 - 14:36 | 2741462 Jack Sheet
Jack Sheet's picture

Greece will not leave the Euro because the banks must maintain Greek debt denominated in EUR at any cost, until the last national asset (including oil and gas in the Aegean) has been collateralized and the last future generation has been indentured.

Mon, 08/27/2012 - 14:19 | 2741414 JeffB
JeffB's picture

"I don’t get it.

 To “fix” Greece, Greece must decouple from the Euro. There is no other option. It is only a question of when, how much it will cost and whom will pay."

---

I don't get it. Why is there no other option? It seems to me that Greece could default on its bonds and let the creditors sort out how much it will cost and who will pay.

They will obviously have to downsize the government, but that will need to happen one way or another. The churches, & other charities can help families, friends and neighbors help out the disabled, widows and orphans, and the able bodied will need to find the best jobs available at any given wage. Wages would obviously need to fall to a market clearing price, but why not let the free market handle that, rather than exiting the Euro, instituting the drachma or some similar fiat money that would promptly be devalued to bring about the same result... a lowering of real wages to the point that they are competitive in the international markets again.

There are at least two ways to skin a cat, it would seem to me, and I don't see why exiting the Euro is deemed not only the preferrable way, but THE ONLY WAY.

Mon, 08/27/2012 - 16:18 | 2741834 Steaming_Wookie_Doo
Steaming_Wookie_Doo's picture

Right. Webster Tarpley has made your point as well. Basically, being bankrupt doesn't mean you cease to exist, or that a federation would have to be broken up. Case in point, some US states have gone bankrupt in the past yet were not required to be disbarred from the union.

The real issue is that bond holders don't want to take the hit, and want to crank down on the avg Greek (or whoever else, certainly not just Greece). And all of the derivatives based on all that crappy debt would expose a lot of financial institutions to be...full of crap.

Tue, 08/28/2012 - 05:03 | 2742916 Element
Element's picture

That's right.

This is totally about the PIIGS becoming the next "Iceleand's" which elect to discard fractional-reserve based 'debts', regardless, and move on minus it.  And the ECB is just going in to bat for the banksters to maintain the debt-load con-game, to feign a pretext to asset-strip them further.  So the ECB and Brussels stupidly and impossibly tries to deny that mass defaults will occur and kill their fucking criminal-infested banks anyway ... leading to the neo-Iceland paradigm, of appropriate mass deleveraging, of the inappropriately supplied impossible load of mere fractional-reserve 'credit'.

Default is the driver and process here, not whether some country stays or goes from the euro sewer-system.

Never forget that all that fucking alleged 'debt', that the EU twerps and ECB ponces are so desperate to preserve, is just fractional-reserve baseless inflation and taxation inducing utter bullshit from the very beginning!  There is nothing real about any of it!  And should always be, first and foremost, be treated as such, and all governments, TBTFs and Central Banksters likewise.

It's all been a giant con on the rest of us.

They're all based on this single grand lie, a rigorous deception of the wage-slave taxpayer dupes.

To hell with their fucking yoke and their con games - default on the fuckers and put them to the blade if they dare bitch about it - the fucking scum don't deserve to live another day!

Tue, 08/28/2012 - 06:31 | 2742990 Ghordius
Ghordius's picture

Please don't confuse the cases. Iceland refused to bail out it's banks. Iceland refused to do "an Ireland".

Iceland continues to service it's sovereign debt.

To the other points, pls see here in the same thread 2742981

Mon, 08/27/2012 - 18:04 | 2742069 Lednbrass
Lednbrass's picture

They won't be disbarred but the union may well disintegrate, at this point the other states will most certainly let them take it right in the teeth. California and friends do not have the power to award themselves more stimulus money, additional shadow bailouts will not be tolerated and are politically impossible.

Mon, 08/27/2012 - 14:15 | 2741403 Panafrican Funk...
Panafrican Funktron Robot's picture

Bruce,

You may want to brush up on Reggie Middleton's analyses regarding the contagion of sovereign defaults, there is a strong, strong case for keeping Greece in the Eurozone indefinitely, even if it ultimately costs in the order of several trillions in euros.  The alternative is total collapse of the euro currency.  Greece is the "first domino".  

Mon, 08/27/2012 - 13:29 | 2741270 Rayfp65
Rayfp65's picture

From what I've read, they can't kick Greece out because than the ECB would need to be recapitalized!!! They're in deep with Greek Bonds! And who would Recap the ECB??

Mon, 08/27/2012 - 12:57 | 2741192 rufusbird
Mon, 08/27/2012 - 12:39 | 2741141 rufusbird
rufusbird's picture

I said it before and I will say it again. Can Greek default on the bonds and stay in the Euro?

 

Mon, 08/27/2012 - 12:28 | 2741105 dugorama
dugorama's picture

there is another, uglier possibility.  continue to drive the economies of the club med countries into the toilet and either violence takes over or the extreme right parties win power.  or both.  do not for a moment imagine that youth unemployment > 50% in Spain will be tolerated much longer.

 

Mon, 08/27/2012 - 17:12 | 2741964 John_Coltrane
John_Coltrane's picture

The official unemployment rate has little to do with the real employment in either Greece or Spain and little to do with that in the US for that matter.  The underground, cash only economy is huge in Greece and Spain (and thus the huge revenue deficits) and because its cash no one honestly knows how large.  Anyone who traveled in Europe in the 70s knows that Spain, Italy and Greece were all exceptionally poor relative to say, Germany, but quite stable and ideal vacation destinations for those from weathly highly productive nations like Germany, Japan, US.  The problem is entitlement and perceived standard of living.  Those expectations have to come down.  Most countries have been living beyond their means, borrowing from an illusive future productivity and income stream.  However, No real work, no entropy reduction, no wealth.  Its as valid as conservation of momentum or energy.  No free lunch.

Mon, 08/27/2012 - 12:28 | 2741103 Joebloinvestor
Joebloinvestor's picture

Greece is a charity case and should be treated as one.

Would be better propoganda for the EU.

Mon, 08/27/2012 - 12:25 | 2741092 FeralSerf
FeralSerf's picture

The Euro Zone and the Dollar Zone are competitors.  The Fed is "printing" a trillion or so USDs per year.  There is no way the EZ can compete with the Fed printing unless it "prints" a roughly equal amount of euros as well.  But the EZ savers must not know that printing is taking place.  That is the bottom line.  All the noise about the PIIGS is just that, a smokescreen to get the Northern Europeans to continue believing that their governments are protecting their savings and they will have no worries about their retirement.  The alternative is a stampede to gold by the proles and the death of the banks.  It's not much different from Americans believing they went to the moon.

The same scenario exists on the other side of the Atlantic.  If California (or Rhode Island) doesn't get its fiscal house in order, will there be a Calexit from the Dollar Zone?   Not by the hair of your chinny-chin-chin.

It's all a diversion to keep the music going as long as possible when TPTB know there really aren't enough chairs anymore.  (They should know, since they're the ones that stole them.)  The longer TPTB can keep this charade up, the longer the price of gold will remain suppressed.   When they can't anymore, there's no run like a bank run.  How much longer?  Who knows?  They've been remarkably resilient so far.  How many tons of Yamashita's gold do they have left to throw at the problem?   When they run out, they can always throw some of their plutonium at the problem as well and odds are they will.

Mon, 08/27/2012 - 12:29 | 2741109 Freddie
Freddie's picture

+1

Mon, 08/27/2012 - 14:57 | 2741530 jomama
jomama's picture

there are arrows for that.

Mon, 08/27/2012 - 15:58 | 2741763 Almost Solvent
Almost Solvent's picture

Freddie is special and thinks, among other fleeting thoughts, that Tyler places the ads on these pages himself, also can't bring himself to use words such as Fuck, or Shit or Asshole, preferring Fu*k, Sh*t or A**hole.

Mon, 08/27/2012 - 10:56 | 2740873 AbbeBrel
AbbeBrel's picture

Sounds to me like Greece is getting the dreaded Vote Of Confidence from TPTB, which usually occurs just before the knives come out.   We come to bury Greeks, not to praise them.   "Et tu, Draghe"?

Mon, 08/27/2012 - 10:36 | 2740823 etresoi
etresoi's picture

One needs to think as a politician to see what is happening.  No politician wants to have his/her name attached to failure.  They will stall and lie until they can all hide behind the upcoming "troika" report and then say, "too bad, so sad."

Mon, 08/27/2012 - 10:30 | 2740805 HoofHearted
HoofHearted's picture

There is going to be pain no matter what happens. Nobody wants to face the pain. The best idea is for the strong countries to just leave and make the weaker countries have to figure it out. This endless bailout nonsense prolongs the problem and probably makes it many times worse. If I'm in Germany's place, I'm already gone. If I'm in Greece's place, I'm going to keep sucking at Merkel's teat as long as she allows it. Sure, the EZ will go to hell, but I've kept myself alive longer than I should have been able to.

Mon, 08/27/2012 - 11:53 | 2741001 NWO1776
NWO1776's picture

Germany cannot exit.  Their currency will appreciate and they will no longer be able to export effectively.  Exports are what has saved them thus far, they will not give up their greatest strength on a whim.

Mon, 08/27/2012 - 17:59 | 2742051 Lednbrass
Lednbrass's picture

It does little good when your trade profits get soaked up by having to hand the money back to southern Europe.

Mon, 08/27/2012 - 10:26 | 2740791 harrod
harrod's picture

Greece is going nowhere without a fight. http://ronharrod.com/2012/05/politics/for-such-a-time-as-this/

Mon, 08/27/2012 - 08:57 | 2740584 Bruce Krasting
Bruce Krasting's picture

Do you and Tchir really think Greece can stay in, and be viable? I don't. I don't think there are any serious voices who believe that. It is only a question of when, not if.

If you agree that it is only a matter of time, then you also have to agree that Draghi can't eliminate the risks of convertibility until Greece is resolved.

This is a cart and horse problem. The horse is Greece, it has to go first or the cart doesn't work.

 

Mon, 08/27/2012 - 15:15 | 2741610 Azannoth
Azannoth's picture

This is not about Greece and not about viability Greece must stay otherwise the whole european glass house will crumble into dust, somebody said something about throwing bricks in a glass house well this is all that this is about Greece is a brick(no not BRICs) and it does not matter how big 1 brick is enough and it's all over

Mon, 08/27/2012 - 12:47 | 2741160 vast-dom
vast-dom's picture

The question isn't if Greece stays in or not. The question is how bad a Euro crash when Greece finally exits.

Mon, 08/27/2012 - 11:46 | 2740978 Freddie
Freddie's picture

Well the Greeks want to stay in.  Who else is gonna pay the 50+% of "citizens" who are unionized govt workers?   Where are they gonna find other "fish" besides the Germans who will pay for them?

The Greeks are like Obama voters in Detroit - especially Detroit school teachers and administrators.   Show me the mo-fo money homie!  Ditto the cops and teachers in Suffolk County making $200 K a year.  All Hopey and Changey.

The Euro and EU-SSR have to go.  The problem is in Brussels and the central banks owned by the european banking families.

Mon, 08/27/2012 - 12:14 | 2741050 Freegolder
Freegolder's picture

Actaully the problem is nothing to do with central banks.

It's the socialist way the world has gone these past 40+ years.

Greece is now adjusting to reality, precisely because there is an independent ECB. There is no bail out, no free money.

How can you not see how different Greece is from the America you describe? Tell me, please, how you see the two are the same?

Think, read, think some more!

Mon, 08/27/2012 - 12:28 | 2741102 Freddie
Freddie's picture

How can you not see how different Greece is from the America you describe? Tell me, please, how you see the two are the same?

How is Greece any different from California, Detroit, and a lot of other unionized socialist kleptocracies in the USA?  The Greek unionized govt workers are no different than California unionized govt workers.  There is just more stuff still available to loot in CA.  The cupboard is bare now in Greece.

The TARP money was used by Obama to help liberal cities from cutting costs and living within budgets.  CA, Detroit, Chicago, NY, NYC, IL and other places got "bailed out."   Are you totally oblivious to what is happening to pension plans in these states and cities?    A lot of these cities will probably default on their munis.

The U.S. national debt got downgraded from AAA by S&P.  What did Obama do?  Slow spending?   No he sicked the FBI on S&P.   Meanwhile Moodys aka Buffett & Co plus S&P and others keep downgrading European sovereign debt. 

Mon, 08/27/2012 - 12:36 | 2741132 Freegolder
Freegolder's picture

'There is just more stuff still available to loot in CA.  The cupboard is bare now in Greece.'

Actually the cupboard is bare in America too, as some states are finding. But Uncle Sam will print up another few trillion soon to keep the good times rollling.

And that's the difference by the way.

Mon, 08/27/2012 - 17:56 | 2742040 Lednbrass
Lednbrass's picture

Which would last for a short period of time...then it all blows up.  There is absolutely no political possibility of more money going to the bankrupt states in another "stimulus" package, they are too deeply hated in the rest of the country and do not have enough political power to keep awarding themselves cash forever. The wheels will be coming off of the gravy train soon, most of the rest of the country would cheer if California sank into the ocean tomorrow.

Mon, 08/27/2012 - 12:26 | 2741093 Ghordius
Ghordius's picture

+1 and if they had a gold standard, this adjustment to reality would be even faster, harsher and more painful

Mon, 08/27/2012 - 12:38 | 2741139 Freegolder
Freegolder's picture

Hello fellow ECB apologist.

Re a gold standard, suggest you read about freegold, the ECB are leading the way in this monetary evolution.

Fofoa's site is best place to start.

Cheers.

Mon, 08/27/2012 - 16:02 | 2741790 taraxias
taraxias's picture

Between you two idiots today have posted more garbage than I normally take a whole week to come across ZH and it's only Monday.

Wake up stupid europhiles, internal devaluation hasn't worked anywhere on the planet before and it's not going to work in Greece either. Default and devaluation has worked though time and again. Those who are bankrupt only have one good choice and that's to admit they are.

It's a matter of when not if and it's not the corrupt Greek politicians or Merkolande who will decide the timing, the Greek people will. Hunger has a tendency to push people to a moment of clarity.

The new drachma is coming book your vacations now.

Mon, 08/27/2012 - 16:37 | 2741891 Ghordius
Ghordius's picture

Tsk, tsk, two ad homs. 1. "internal devaluation" is quite normal in a gold standard environment. 2. Who said no restrucurings were possible? Say next year?

So, when are your vacations?

Mon, 08/27/2012 - 11:20 | 2740922 Freegolder
Freegolder's picture

Bruce, whilst I enjoy 90% of what you write, you don't understand the Eurozone much. As you tyoed yourself:

 

'I don’t get it.'

 

You then wrote:

 

'To “fix” Greece, Greece must decouple from the Euro. There is no other option.'

That's plain wrong. Greece needs to default on a further chunk of its debt for sure, but plenty of studies have shown that an internal devaluation is the better option for Greece, when compared to a devaluation via a Euro exit.

Greeks recently were hoarding Euros, and they voted in an election to stay in the Eurozone. They know which is the better option.

As do other Euro politicians and the ECB.

So, frankly, they all seem to get it, but you (and the mainstream media) keep harping on about Grexit.

It is not going to happen, the Euro itself is irreversible, and so is joining.

Greece will become viable once it has devalued sufficiently within the Euro, at that point it will have a balanced budget, and a cheap labour force. And it can start to stabilise and grow again. It will take time, it will be painful.

However (as Americans and the British seem unable to comprehend) there are no easy fixes, which includes a Grexit. the pain must be endured.

Draghi is spot on, and eventually writers like you will see that Euro exits will not happen. And maybe you'll realise why the ECB's marking of real physical gold to market every quarter is the nail in the coffin of the dollar too?

 

Regards.

 

 

Tue, 08/28/2012 - 03:05 | 2742870 Element
Element's picture

 

 

freegolder - Draghi is spot on, and eventually writers like you will see that Euro exits will not happen. And maybe you'll realise why the ECB's marking of real physical gold to market every quarter is the nail in the coffin of the dollar too?

 

Unfortunately this is the fundamental problem you mistakenly down-play and discount,

People are getting involuntarily destroyed, sacrificed by a ruthless cadre of bankster priests, to their One True God ... fiat muney!

Guys like you are thinking in 2-D, the public response is profound and runs deep and it will run its course in the end. It is a tide coming in, and there is not a government, a political union, a bank on Earth, that will survive what's coming from citizen taxpayers.  They are not going to pay.

And that's just the way it's going to unfold, my blind theoretician friend. 

It's quite incredible that 5-years after subprime popped and the continuing political and social degeneration that political theorists still fail to grasp that overt and insurmountable profound trend.

Tue, 08/28/2012 - 03:17 | 2742886 Ghordius
Ghordius's picture

Element, you are not addressing the key point that freegolder is making, i.e. that the Greeks seems to want to go the deflationary road instead of the inflationary one. It's a bold point, worth of many criticism, but you are just ignoring it in favour of your worldview. Why? Get another coffee and think about it. What if it's true?

Accepting deflationary depressions is the key element needed for a gold standard, btw.

Tue, 08/28/2012 - 04:20 | 2742901 Element
Element's picture

Default is debt-deflation.

They have already done it, and they will do quite a lot more soon-ish too, in every sector of the economy.  That is ultimately not subject to policy prescripts or political edifice and artifice -- it will happen however the EU Commission as bank-puppet and the ECB and its goldmanite boss squirms on their fiat hook.

Do enough of that and pretty soon you've effectively become the new "Iceland" ... ready to grow again, minus the former suffocating weight of debt, and its servicing (which is what the ECB would like to avoid ... the actual fix ... it's the CBs and their TBTF owners who don't want this fix to happen ... as all their efforts are geared towards preventing the iceland option ... but it's happening anyway).

Think the rest of the piigs won't notice this fact?

Is that fact not clear enough yet to move on and take it as given that this is a feature, not a bug, of the current and near-term economic and geopolitical dynamic?

In a CB fiat system inflation is secular, from the outset.

It's also implied to ramp via printing ... as a failed palliative measure ... which is really a variable hidden tax anyway.

And inflation is implied if exiting the euro also.

So then;

Default-based deflation is the very means being used in Greece to destroy the core problem, the unrepayable debt load, because inflation is present in any system, whether gold-backed or not, whenever insufficient resources and sources of trade revenues exist.

And the converse is likewise true, look around, Japan has serious trade revenue still, and the US has massive trade and resource ownership and access, so the inflationary effects of massive printing are being staunched by it, hence the tendency to hyper-inflation that might be theorised, is being nullified ... for now.

I fail to see how a gold-standard helps in practice here, within the time-scales wherein the pain is going to be most acute.

The gold-standard is a more long-term issue to avoid the next deflation ... which given hystery is rather doubtful.

 

So how am I, "not addressing the key point that freegolder is making"?  How is this just appealing to some preferred, "world-view"?

 

(already had a fresh coffee)

Tue, 08/28/2012 - 06:28 | 2742981 Ghordius
Ghordius's picture

are you considering the fact that the Greek debt is in a long-winded "reconstruction phase"? at the end, there is an implicit, unspoken assumption by all sovereigns that nobody can pay more than 20% of it's tax income.

Of course it would be much, much better if half of the Greek sovereign debt would be just defaulted. But in the current banking and political environment this is a no-no.

Nevertheless, even in a fiat environment there is a difference in quantity and quality. You don't have to QE in the pedal-to-the-metal way if you are willing to undergo deflationary depressions coupled with defaults - which are the norm in a gold backed environment.

This is where I always shake my head: the "risk" component of lending rates is exactly this: the part meant to cover the defaults. And if you don't let default happen, then of course all debt is "unpayable because of the fiat system" and then you have eventually the inflationary pressure building up. Because someone pockets the risk component.

Again: Lending Rates = "Risk Component meant to cover defaults" + "Real growth".

If you don't let defaults and deflationary depressions happen -> unpayable debt that has to be financed by printing. Fiat works, if you drive the system in the correct way - i.e. in the same way as you would do with a gold backed system. Which of course is not that easy, politically.

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