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Another Keynesian Debt Boondoggle: How Brussels Plans To Turn $26 Billion Into $390 Billion

Tyler Durden's picture




 

Submitted by David Stockman via Contra Corner blog,

The desperation and fraud of the Keynesian policy apparatus gets more stunning by the day. Apparently, the pettifoggers in Brussels will soon be announcing a new $400 billion bazooka to blast the euro-economy out of its lethargy. This massive new “stimulus” is supposed to spur all manner of infrastructure and private investment that is purportedly bottled-up for want of cheap capital in the private markets.

Are they kidding? Thanks to the Draghi Put (“whatever it takes”) and the hedge fund gamblers who have gone all-in front running the promised ECB bond-buying campaign, this very morning the corrupt and bankrupt government of Spain can borrow all the money it could possibly need for infrastructure at hardly 2.0% for ten years. And any healthy German exporter or machinery maker can borrow at a small spread off the German 10-year bond which is trading at 73 basis points. For all intents and purposes, sovereigns of any stripe and reasonably healthy businesses in most parts of Europe can access capital at central bank repressed rates which are tantamount to free money.

And, yet, these fools want to bring coals to Newcastle. Well, its actually worse than that because not only does Newcastle not need any coal, but the impending “Juncker Plan” doesn’t include any new coal, anyway!

In fact, not a penny of the $400 billion is new EU cash: Its all about leverage and sleight-of-hand. Thus, having apparently failed to notice that most of the sovereigns which comprise the EU are already bankrupt, the Brussels bureaucrats plan to conjure this new “stimulus” money at a 15:1 leverage ratio. That is to say, the actual “capital” under-pinning approximately $375 billion in new EU borrowings amounts to only $26 billion.

But wait. The EU is self-evidently broke—that’s why its dunning Mr. Cameron and even its Greek supplicants for back taxes—so where is it going to get the $26 billion of “capital”? Needless to say, an empty treasury has never stopped Keynesian bureaucrats from dispensing the magic elixir of “stimulus” money.

Thus, it turns out that $20 billion of the Juncker Plan “capital” will consist of member state “guarantees”, not cash in hand. And the remaining $6 billion will consist of already existing European Investment Bank (EIB) funds—–money that is available only because the EIB’s  balance sheet is also “guaranteed” by the same bankrupt member-states which don’t have another nickel to send to Brussels in the first place.

This is called a circle jerk in less polite company. And a pointless one at that.

According to the attached Bloomberg story, the $400 billion pot of stimulus will be used for “seeding investment in infrastructure”  and “to share the risks of new projects with private investors”.

Let’s see.  Can even the duplicitous apparatchiks in Brussels believe that the continent is parched for public infrastructure and that this explains Europe’s stagnation? After all, the peripheral countries are not only buried in debt, but also have been inundated over the past two decades with every manner of highways, public transit and other public facilities that EU funds and their own bloated government budgets could buy.

Spain has world class roads going everywhere on the Peninsula, for example, but its problem is want of loaded trucks to utilize them. The same is true in Italy, which has splendid roads, rails, airports and seaports from the Alps to the tip of the boot, but a private economy that is suffocating in taxes, regulation and corruption. Nor can it be gainsaid that France’s high-speed rail system, Germany’s autobahns or Holland’s canals and dykes have been neglected.

Indeed, to a substantial degree Europe’s sovereign debt crisis is owing to the fact that under the tutelage of its Keynesian policy apparatus, it has been absolutely profligate in building infrastructure owned by the public or subsidized in behalf of crony capitalist “partners”. So why at this late stage of the game does Brussels feel compelled to launch a giant financial shell game designed to generate even more unaffordable infrastructure?

The same question holds for private investment. The very idea that the European economies are “under-invested” in private production capacity is truly laughable. What actually occurred after the mid-1990s, as the single market and single currency went into full swing, was a tsunami of private borrowing and investment.

Between 1996 and 2011, for example, euro bank loans to the private sector nearly tripled, rising at a 7.0% compound rate and leaping from 55% of GDP to 95% during the period.  Nor does that include the additional trillions which were raised in the euro and dollar bond markets by business’ located in the EC.

Historical Data Chart

The plateauing since then is self-evidently not owing to the scarcity of capital or borrowers being rationed out of the market by punitively high interest rates. No, the problem is that there are few credit worthy borrowers left who actually need funds for projects that will generate profitable returns.

Historical Data Chart

In short, the “Juncker Plan” is just another installment of the state-driven financialization that has been 180 degrees off-target, and has actually compounded Europe’s economic malaise. The real problem is statist economics—-that is, welfare state subsidies for inefficiency and non-production, dirigisme and financialization.

Europe has high unemployment, vanishing growth and crushing debts because its all-in labor costs are too high owing to government labor mandates, brutal rates of payroll taxation, coddled unions and subsidized idleness. Likewise, business enterprise, productivity and innovation is thwarted by a triple layer of local, national and EU regulation and nanny-state interference that puts the red capitalists of Beijing to shame.

Stated differently, what is left of European capitalism needs to be liberated from the dead hand of the state. But the crisis of growth, employment and debt that today’s insidious regime of statist Keynesian economics has generated, ironically, is pushing the EC in just the opposite direction. That is, to even more interventionist obstacles to prosperity—- arising from the even more rigid, remote and destructive levels of centralization in the Brussels bureaucracies.

Needless to say, this latest $400 billion shell game is just another monument to the Keynesian paint-by-the numbers affliction that is corroding capitalist prosperity everywhere in the world. When the state tries to micromanage the economy through fiscal maneuvers and central bank intervention it ends up confusing sustainable generation of real wealth with transient headline numbers in the GDP accounts. Indeed, the former can not be generated or targeted by the state at all; it is an unplanable outcome produced by millions of producers, consumers, savers, investors, innovators and entrepreneurs in the real main street economy.

Long ago, Keynes himself pointed out, perhaps inadvertently, the profound difference between GDP and wealth. If we merely want a higher GDP print - which measures spending, not wealth - governments should handout spoons so that millions of citizens can dig holes and millions more refill them. It would appear that the statesmen of Brussels are fixing to try the modern day equivalent of just that.

By Rebecca Christie at Bloomberg News

he European Union is planning a 21 billion-euro ($26 billion) fund to share the risks of new projects with private investors, two EU officials said.

 

The new entity is designed to have an impact of about 15 times its size, making it the anchor of the EU’s 300 billion-euro investment program, according to the officials, who asked not to be named because the plans aren’t final. European Commission President Jean-Claude Juncker is due to announce the three-year initiative this week.

 

The commission will pledge as much as 16 billion euros in guarantees for the vehicle, which will also include 5 billion euros from the European Investment Bank, the officials said. Loans, lending guarantees and stakes in equity and debt will be part of its toolbox, with the goal to jumpstart private risk-taking so that stalled projects can get off the ground.

 

Juncker’s investment plan aims to combine EU resources and regulatory changes “to crowd in more private investment in order to make real investments a reality,” EU Vice President Jyrki Katainen said on Nov. 14 in Bratislava. The plan is one element of the EU’s economic strategy and “not a magic wand with which we will be able to miraculously invest ourselves out of a difficult economic climate,” he said.

 

Europe is struggling to spur economic growth as it emerges only slowly from waves of crisis. The 18-nation euro area is forecast to see growth of just 0.8 percent this year, according to EU forecasts, while the region’s unemployment rate of 11.5 percent masks rates of about 25 percent in Greece and in Spain.

‘What We Must’

The euro is on course for a fifth monthly decline after European Central Bank President Mario Draghi said last week that ECB officials “will do what we must” to spur inflation. The single currency was little changed at $1.2404 against the U.S. dollar at 7:38 a.m. in London after declining 1.2 percent on Nov. 21.

 

While the Juncker proposal involves seeding investment in infrastructure and other fields, the 21 billion-euro sum with a proposed leverage rate of 15 times risks disappointing markets.

 

Even with additional funds of 30 billion euros and a more modest leverage rate of 10 times, “the plan may not be credible as a start,” Royal Bank of Scotland Plc analysts including Alberto Gallo said Nov. 18. All the same, if the European Central Bank became involved in joint action with the EIB, “it could be a game changer for Europe,” they said.

Broad Range

The fund is designed to make use of existing resources and not require any new cash infusions from member nations, the EU officials said. The EIB will house the fund, which will have its own management and be able take on a broad range of roles. It will be able to operate with fewer restrictions than earlier initiatives, like a project-bond program that is only available to cross-border ventures.

 

The EU is preparing a list of projects alongside that could take shape quickly. Because the fund will be able to bear some of the risk of starting projects, it may offer a way around national budget constraints and private-sector reluctance to take on new risk, according to the officials.

 

“We need a step change in efforts to tackle the obstacles hampering private investment and to optimize the use of public investment in Europe,” Emma Marcegaglia, president of the BusinessEurope federation of employer groups, said on Nov. 21.

 

The group released a report on investment in Europe calling for the EU to lower national barriers, improve regulation and lower the costs of doing business inside the 28-nation bloc.

 

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Tue, 11/25/2014 - 15:26 | 5487361 TheAnalOG
TheAnalOG's picture

We see debt people

Tue, 11/25/2014 - 15:30 | 5487379 Bloppy
Bloppy's picture

Can't wait to hear all about this on CNBS. Wait...

The Horror! Boston residents forced to eat at Hooters for Thanksgiving!

http://tinyurl.com/m38t8bl

Tue, 11/25/2014 - 15:35 | 5487395 Greenskeeper_Carl
Greenskeeper_Carl's picture

This will be just like our 'stimulus'. It will get handed out to politically favored companies and people who will waste the money, creating zero jobs (they won't be quite as 'shovel ready' as anticipated). Since they are broke, this money will either be conjured into existence, reducing the currencies purchasing power, or borrowed against their children's future. Foarward!!

Tue, 11/25/2014 - 15:55 | 5487480 new game
new game's picture

CHARLES GALT has relocated all the way across the pond... he is holed up somewhere in the swiss alps.  last sighting was on the ski slopes. 

Tue, 11/25/2014 - 17:52 | 5488125 Stuck on Zero
Stuck on Zero's picture

This type of stimulus is sometimes called the "nail soup" stimulus or the "snowball" stimulus. 

Tue, 11/25/2014 - 17:10 | 5487908 SheepDog-One
SheepDog-One's picture

I'd love to have thanksgiving at Hooters!

Tue, 11/25/2014 - 15:43 | 5487420 doctor10
doctor10's picture

So some central bankerz figured out they need another 400B euros worth of collateral for thei derivative house of cards?

Tue, 11/25/2014 - 15:27 | 5487371 Joebloinvestor
Joebloinvestor's picture

Juncker, from the guy who says sometimes YOU HAVE TO LIE.

 

Tue, 11/25/2014 - 15:32 | 5487381 A Lunatic
A Lunatic's picture

Sometimes being always of course....

Tue, 11/25/2014 - 15:53 | 5487444 TeethVillage88s
TeethVillage88s's picture

USA Adjusted GDP upward for the Summer Months... forget what it was. Like from 3.5% to 3.9% increase.

I should check that.

National Income and Product Accounts
Gross Domestic Product: Third Quarter 2014 (Second Estimate)
Corporate Profits: Third Quarter 2014 (Preliminary Estimate)

Real gross domestic product -- the value of the production of goods and services in the United
States, adjusted for price changes -- increased at an annual rate of 3.9 percent in the third quarter of
2014, according to the "second" estimate released by the Bureau of Economic Analysis. In the second
quarter, real GDP increased 4.6 percent.

Tue, 11/25/2014 - 15:35 | 5487393 ebworthen
ebworthen's picture

Brussels Bandits circle jerk; wonder who gets to clean up the mess?

Oh yeah, the "little people" (citizens).

Tue, 11/25/2014 - 15:42 | 5487408 buzzsaw99
buzzsaw99's picture

labor costs too high? bullshit. executive compensation is way too high. until the maggots at the top are dealt with we will always have a bull-shitty economy.

Tue, 11/25/2014 - 15:47 | 5487435 farmboy
farmboy's picture

It is a setup. We know Draghi wants to buy credits but there are not enough and poeff out of nowhere 400 biljon is created and up for grabs for Draghi. Then start again :)

Tue, 11/25/2014 - 15:47 | 5487436 darteaus
darteaus's picture

Hintt: it's the same way that ziimbabwe turned the Rhodesian $R10 into the $Z100,000,000,000,000!

Tue, 11/25/2014 - 15:57 | 5487504 delivered
delivered's picture

Amazing the level of stupidity and incompetence being displayed. Belgium, hello, just look to China and its success with investing in infrastructure that is not needed, can't be supported (at a debt service level), and has no real demand (e.g., ghost cities). Unlike the movie Field of Dreams where Kevin Cosner is told from a voice above "If you build it, he will come". In this case, the voice from above is the desperation of the CBs and western goverments stating "if you build it, they and growth will come". Further, China now has a massive debt problem to work off as a result of the misallocation of capital. Leave it to the Belgiums to figure out a way to one up the Chinese and even create more leverage, on top of leverage, using even more debt, created out of thin air, to invest in projects that have no demand. As Doctor Evil noted, "Those Belgiums are just so damn evil".

I noted before and will state again, this misallocation of capital is driving deflation and not inflation and growth. The author of the article accurately notes that too much capacity is present in too many industries in too many countries spread around the world, all battling for marketshare at any cost. Just look at OPEC and the recent trends in oil prices. Too much oil is being produced and delivered into a world economy that has almost no real growth. So with excess production and flat to falling demand, prices drop. But for OPEC the question is why would they want to support higher prices in the short-term as this only provides relief for inefficient oil production companies to exist (think a number of fracking companies in the US, heavy tar-sands in Canada, etc.)? If you're competing and have economic advantages related to cost, market access, etc., you need to put your foot on the throat of the competition and bury the inefficient. This is how a market system works. 

This is how sad the situation has become. The parties that should be being rewarded with earnings and returns (i.e., savers with low leverage and efficient operations) are being punished by not receiving any return on excess funds and having to compete against "investments" (and I use this term very cautiously) being made with cheap/easy money managed by incompetent buffons. The parties that are being rewarded (i.e., overly leveraged and grossly indebted parties with inefficient operations) are being rewarded with dirt cheap money to spend on even more worthless projects. When I reference parties in this context I specifically mean the bankrupt governments stretching from Japan through Europe to the US.

The problem these SFBs can't understand is so simple and basic that even a 5th grader could understand it. Simply put, there's just too much debt and not enough income to support this debt. Period! But of course the indebted parties always look for a way out of their problems, to live another day by using three strategies. First is to lenghten the time period to repay the debt (e.g., Spain 50 year bonds). Second is to decrease the cost of debt or interest rate (every western CB is using this tool). And third is to look to secondary repayment sources or another credit card to roll the debt over (CB direct monetization of the debt with another form of debt, FRN's in the case of the US).

Each day I'm amazed at the level of stupidity being displayed and think to myself that it can't get any worse. But the next day comes and to my amazement, it does. But then I remind myself that these decisions are being made by incompetent and corrupt politicians, governments, and bankers that will do anything they possibly can to stay in power and control wealth for another day. So as the old saying goes, the more things change the more things stay the same. Translation, the more debt that's added and mismanaged, the more economic growth will suffer. 

Tue, 11/25/2014 - 17:05 | 5487867 Marco
Marco's picture

There is too much debt to allow a deflationary collapse to happen. If the consumer base collapses efficient producers still won't be rewarded. There would be no creative destruction, there would be physical destruction and fascist revolution.

I'm starting to think Bush has had the best policy to deal with the current state of affairs ... just send out checks to everyone. No discrimination, no favouritism, money for everyone and inflation for free.

Tue, 11/25/2014 - 19:20 | 5488603 TheReplacement
TheReplacement's picture

I think you are right in that the misallocation has driven deflation.  However, if there really isn't much else to left to build then more misallocation might have either effect, depending on how it flows.  We've seen luxury explode and that has keep inflation somewhat tamer than would be expected because the flow is only at the top.  That might start to change.

Tue, 11/25/2014 - 21:03 | 5489063 lotsoffun
lotsoffun's picture

dear delivered,  i think in all my time, this is the best comment/article i have ever read here.  thanks.

 

Tue, 11/25/2014 - 16:00 | 5487515 falak pema
falak pema's picture

When you go from nothing to a Million its an achievement; when you go from 1 million to One trlllion it is inevitable... Barefoot Contessa by Mancky... (adjusted to current conundrum by yours truly)...And the ECB is proving this truism.

As Draghi says : I have latitude up to 1 trlillion in ECB balance sheet to do whatever it takes; all the while the Mutti brigade says : Nein, Nein, Nein; we only under-write 26 billion !

Well lets see how this pans out! 

 

Tue, 11/25/2014 - 16:01 | 5487517 tvdog
tvdog's picture

Infrastructure spending is bound to lift Europe out of the doldrums. It's done wonders for Japan, after all.

Wed, 11/26/2014 - 09:48 | 5490453 AdvancingTime
AdvancingTime's picture

I note your sarcasm and second that. To the many who see government spending on infrastructure as a silver bullet for the economy and as a job creator I would like to raise a word of caution, It may be time for a "truth off'. More "bridges to nowhere" and wasted spending exist then the taxpayer could ever imagine.

Often this spending falls short of creating real wealth for our country. In my book Advancing Time I talk about a bridge that was recently replaced in Fort Wayne, Indiana that even the city's leading newspaper said we did not need. The newspaper had gone on to state the bridge did not "need" to be replaced, but only needed minor repairs. In the end they did not only replace the bridge but built a "super bridge" wasting a huge amount of money doing it. More on this subject in the article below.

http://brucewilds.blogspot.com/2014/02/infrastructure-spending-no-silver-bullet.html

Tue, 11/25/2014 - 16:16 | 5487589 moneybots
moneybots's picture

"How Brussels Plans To Turn $26 Billion Into $390 Billion"

 

Derivatives?

Tue, 11/25/2014 - 16:30 | 5487660 yogibear
yogibear's picture

So the Fed's balance sheet from $850 billion to $4.4 trillion.

What's to stop it from going from $4.4 trillion to $800 trillion?

Just print money and lie. Just that simple.

 

Tue, 11/25/2014 - 17:08 | 5487886 Spectre
Spectre's picture

I think that if the sum total of all central bankers get together and managed their money printing in collusion they can price it to infinity.  Tank of gas for your car $18,000,  loaf of bread $59.00 etc. etc.

Tue, 11/25/2014 - 16:42 | 5487722 oudinot
oudinot's picture

Actually the proper 'spoons' analogy  is more readily metaphored to when Milton Freidman was in Africa when Idi Amin was our boy forty or so years ago. The US, through the IMF, was financing a huge canal in Uganda to aid in the country's infrastructure. Friedman noticed that there were hundreds, thousands of men using shovels to dig the canal.  Friedman asked Amin,"Why not use Caterpillars, SO in 30 days instead of a year a dozen Cats could finish this work?".  Amin replied,"Our country needs jobs".  Friedman countered,"Then why not give the men spoons!!""

Tue, 11/25/2014 - 18:17 | 5488247 unicorn
unicorn's picture

ill dig a grave for all that fiat money with just one dig of a spoon. just one.

Tue, 11/25/2014 - 17:37 | 5488049 shovelhead
shovelhead's picture

The EU could use the money to build a bullet train to Mongolia.

Tue, 11/25/2014 - 21:05 | 5489070 honestann
honestann's picture

The EU should spend as much as it takes to construct a virtual reality stadium where all their politicians can live the rest of their lives thinking they are enslaving all the people of Europe... while in fact they've vanished from the real world.  Well, not counting the electric power and nutrient IVs required to keep them distracted.

Yup, a custom matrix for the masters of the matrix.

How elegant!

Wed, 11/26/2014 - 02:15 | 5489921 zerohedgejjxxzz12
zerohedgejjxxzz12's picture

What we need is another baby boom, to create real need for more goods and services, Ladies and Gentlemen are you ready, We need to F*ck our way out of this!

If we only had another planet full of oil to fuel the new generation of Baby Boomers.

Really with the diminishing cheap oil and the real population of Baby boomer's retiring, ie. not spending.

I really don't think the keynsian fools care, as long as they get to stuff their coffers before the collapse!

So whats Next?

Wed, 11/26/2014 - 03:12 | 5489971 orangegeek
orangegeek's picture

Do like China there Druggie - make empty cities.

 

No one is spending Druggie.

Wed, 11/26/2014 - 04:38 | 5490044 Ghordius
Ghordius's picture

I like this article, all in all is a very good one

a few details, though:

- yes, Spain and other southern european countries have excellent roads, at the moment. it's in Germany and other northern countries that the infrastructure argument is being raised, with emphasis in "do something" in the Keynesian sense

- "The EU is self-evidently broke—that’s why its dunning Mr. Cameron and even its Greek supplicants for back taxes". It's a tad more complicated then that. It's not taxes, it's sovereign contributions tied to a GDP calculation. The UK, specifically, changed it's GDP calculation, and so it has a treaty duty to cough up more EU contributions

- "Stated differently, what is left of European capitalism needs to be liberated from the dead hand of the state. But the crisis of growth, employment and debt that today’s insidious regime of statist Keynesian economics has generated, ironically, is pushing the EC in just the opposite direction. That is, to even more interventionist obstacles to prosperity—- arising from the even more rigid, remote and destructive levels of centralization in the Brussels bureaucracies." Here we have the typical misunderstanding of what the EU is. "The State", in the EU, is not Brussels or the EU. It's the member countries. Which have a big history of rising high levels of centralization and interventionism. Note Marine Le Pen calling the EU and the ECB "libertarian" in their policies. In this european context, Brussels is a compromise solution among sovereigns that results in less centralization and less rigid bureaucracies, by having common regulations instead of 28 different regulatory environments

Example: Florida forbids certain beverage sizes, NY others. In the EU, we let Brussels have one common rule on that. So as a beer brewer, in Florida you have to follow locals state beer can regulations, while in the EU we have common beer can regulations, and a mayor of a major city can't forbid certain beverage sizes as Bloomberg did in NY

There is no need to underpin correct criticism of the EU with this kind of EU myths based on ignorance on the scope of the EU. They give Brussels' denizens only ideas, imho. Like this one mentioned in the article

Wed, 11/26/2014 - 09:40 | 5490410 AdvancingTime
AdvancingTime's picture

Not all economic growth is created equal. If you spend money but afterwards have little to show for it, you have wasted it. Sadly much of the money America "invest it itself" each year through government spending and programs falls into this category.

We need the right kind of economic growth, growth that is sustainable, with a purpose, well directed, and that has long lasting benefits. A great deal of our problems come from the poor quality of what we call growth. More on this subject in the article below.

http://brucewilds.blogspot.com/2013/08/the-wrong-kind-of-growth.html

Do NOT follow this link or you will be banned from the site!