Explaining The European €2.5 Trillion Liquidity Catch 22 Closed Loop

Tyler Durden's picture

If anyone is confused about what the real issue in Europe is, the following two charts should explain it all.

Because stripping all the recent rhetoric and bluster about this insolvent nation or that, the real explanation for Europe's troubles, and the real reason why virtually every country except for Germany, is essentially insolvent (something that has absolutely nothing to do with how much liquidity the ECB can provide, and in fact by making liquidity free to fill transitory needs, the ECB enables even more destructive behavior that does nothing to fix the cause), has to do with the flow of cash. And specifically the transfer of cash within the mercantilist union.

The first chart below summarizes the various individual current account deficits (accumulated over the past decade) within the Eurozone, and how it is clearly in Germany's best interest to perpetuate a common currency, which prevents its legacy currency, the DEM from soaring, and thus crippling intraunion current account flows that benefit Germany. As for external trade flows: the weaker the Euro, the better so Europe can export its stuff to China and the US (hence the need for a perpetual threat of a PIIGS Implosion, which prevent the EUR from rising on endless concerns foa default).

Source: Diapason

Now this plan worked for many years, until about 5 years, the debt capacity of the Periphery started getting filled, and instead, via the Eurosystem Banks hub and spoke system, of which the ECB is at the hub, those countries with current accounts had to start funding indirectly, via TARGET2, the capital deficiency of the big CA deficit countries. The second chart below shows just how far this divergence has gotten.

Source: Goldman

The problem, as we noted last year, is that the system may have crossed a threshold where Germany's explicit funding of the CA deficit transgressors is now far too large for it to be sustainable (as Jens Weidmann has now confirmed).

Alternatively, should the status quo continue, and it very well may with just bailout after bailout in store - in other words the same defection-encouraging game theory stance - the only way it can work is if Germany continues to recycle the CA surplus right back into the European periphery. There is, however, no ceiling to this activity, and in several years, the German TARGET2 "receivable" will be in the trillions, or well greater than its entire GDP.

And that, in a nutshell, is what is happening in Europe.

Everything else is merely noise masking the expansion of the relationship whereby Germany pretends its increasing losses, in the form of recycled sunk Current Account "costs" as a victory.

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treemagnet's picture

Its okay, we're "uncoupled"....

flacon's picture

Can we get gold and silver to decouple from the EUR? 

treemagnet's picture

guess we're gonna sell the real deal to cover for the fake deal.

kaiserhoff's picture

Comrade father/general Ben can fix this is in 15 minutes.

resurger's picture

Of course, he can raise interest rates in 15 minutes if he has to ... the world money markets is solely dependent on this fidgeting lier.

mean while ...

ISDA:Fuck .... you will make us go bankrupt Jon!


Jon Corzine: No, you dont declare a credit event and i dont exercise those nukes, lets do the catch 22 and get the real thing gold and silver from those fucking greek goys!

ISDA: What a true fucking kyke you are!!!

Jon Corzine: ^ ^


Xkwisetly Paneful's picture

Damn evil german zionista kyke banksters bankrupting all of Europe so they can live high off the bogus hog!

LawsofPhysics's picture

we have a winner.  Same as it ever was.  now about your "prize"...

Freegolder's picture

Yeah, actually gold is already decoupled from the Euro (just check the ECB's accounts every quarter).

Freegold will solve all of these problems, and it is inevitable.

Just google is if you want to know more.

GenX Investor's picture

Coupling is a great UK tv show, or as the German's call it Pärchenabend.  A must watch...

battle axe's picture

Of course we are "uncoupled" everything will be fine in the old USA, because the geniuses that were in charge back in 08 have all been replaced. Wait a minute!

TruthInSunshine's picture

I couldn't believe it as I just discovered it.

Funniest wiki page ever by a mile.

Al Huxley's picture

Wow, reading that explains an awful lot about what's going on in the world today.  Or at least it explains why so many people seem willing to check common sense at the door when it comes to deficits, monetary policy, etc.  Amazing that people actually can convince themselves to believe such complete and utter bullshit.

r00t61's picture

Modern Monetary Theory - a school of economic theory so whack that even Paul "I never met I stimulus I didn't like" Krugman disagrees with its core premise: that deficits don't matter so long as you can print.

I personally despise MMT because it's just another gigantic statist utopia: it requires the presence of monolithic government, it requires that government to impose a legal tender law (making only government fiat usable for paying debts), creating its closed-loop system, and it assumes, a priori, that government has the RIGHT to tax people in order to fund itself.

In MMT, people are just vessels to be taxed for their productivity, all to enable the perpetuation of the state that imposes its MMT-system upon those people in the first place.

TruthInSunshine's picture

I gave you a compulsory +1 on the basis of your 1st paragraph, alone.

"A system so whack that even Paul Krugman says...hey....wait a minute there....that's crazy talk," as he endorses his 227 trillion USD Hostile Extraterrestrial Invasion From Uranus Earth Defense Stimulus Plan (aka A Proton Phaser in Every Backyard).

hamurobby's picture

Aw be nice to Paulie, he said we needed only 7 trillion or so to start.

Chupacabra-322's picture

@ r00tl1, And why are they able to print to infinity?  Because everyone is a slave used as collateral. 

Exactly how all this was orchestrated is too lengthy to be addressed here, but this much can be told. The original birth or naturalization record for every U.S. Citizen is on file in the official records in Washington, D.C. (you get to keep a copy!) and the property and assets of every living U.S. Citizen is pledged as collateral for the National Debt!

Within two weeks and three days each Certificate of Live Birth is to be filed in Washington D.C. Evidence reveals that there is even a Federal Children Department established by the Shepherd/Townsend Act of 1922 under the Department of Commerce that appears to be involved in this process in some way. Every citizen is given a number (the red number on the Birth Certificate) and each live birth is valued at from 650,000 to 750,000 Federal Reserve dollars in collateral from the Fed.


francis_sawyer's picture

from the link...

"It seems that back in 1913 the United States was short of cash. World War I had depleted the treasury and there were several really bad financial panics..."

Really?... World War I (which started in 1914), had "depleted the treasury" in 1913?

Some war, huh?

Matt's picture

It accurately describes why we pay taxes if the government just prints the money:

Because the government can issue its own currency at will, MMT maintains that the level of taxation relative to government spending (the government's deficit spending or budget surplus) is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government's activities per se.

So if we didn't have to pay taxes in dollars, people wouldn't work for dollars, so the dollars would have no value. You must pay taxes, otherwise the dollars don't exist.

RSloane's picture

I thought it said Charlitanism - my bad.

TruthInSunshine's picture

No one will believe me - this is absolutely not a joke - but I have dyslexic bouts sometimes when I read very quickly, and genuinely  thought that's what it said, too, hence my posting it.

Then again, can anyone who understands the system honestly blame me?

Again, I really did think the wiki link read 'Charlatism,' and that someone had hijacked the page to describe MMT there.

andyupnorth's picture


I had the same confusion.

Thank you so much TruthInSunshine.  When scrolling down the comments section, I always stop and read what you say (and give you a green thumbs up).

You bring valuable information to those of us who are  seeking the truth.

Al Gorerhythm's picture

Can Chartalism be linked to Americanism Citizenisms?

Al Gorerhythm's picture


(Edit: re chartalism)

A lie, told often enough, becomes the truth.

Ghordius's picture

Anyone using the words "mercantilist union" in describing the eurozone just gives away he's bias and propagandistic intent. Tsk, tsk...

Hooter Shaker's picture



Edit:  Damn, someone beat to the punch!

Cognitive Dissonance's picture

THAT doesn't look good. Time to buy some PM's......which just so happen to be on sale today.

disabledvet's picture

Couldn't disagree more. In euro terms...fine. But this is as predictable an end to a currency union as can be humanly made. The "end" will be the same as well: law and order has already completely collapsed, a Novus Ordo Seclorum is what comes next.

LawsofPhysics's picture

You are getting ahead of yourself.  I worked for them too you know.  Profits need to be generated in order to fund the transition you refer to.  That means only one thing, more war.

Cognitive Dissonance's picture

You disagree that it doesn't look good, that I shouldn't buy PMs or that PMs aren't on sale? :>)

resurger's picture

I just love it when it goes on sale ... the elites think they are smart hahahaha!

like a cocksucker called Soros who called that the gold bubble has "POPPED"

the Angel of death will pop his ass when he dies ....

"I dont wish death for no body except for those crooks"



DavidPierre's picture

"... that, in a nutshell, is what is happening in the World.

Everything else is merely noise..."



What a week it will be! Don't worry, it's coming! For Gold watchers... Watch Wednesday.

Dennis Gartman chimed in about last weeks massacre ... saying something nefarious could have taken place in one pompous breath, and of course poking fun at by talking down to and basically trashing Gold bugs as usual.

Can't argue with someone who doesn't understand the argument.

Hard money advocates, Gold bugs whom Mr. Gartman constantly makes fun of, have been correct for at least the last 40+ years. They have been right, and right for all the right reasons.

This past Wednesday, finally and very publicly put an end to conspiracy theorists being considered nuts.

As it turns out, anyone who towed the mainstream lines of investment logic since at least 1971 have been wrong. It has taken many decades for the proof to arrive. It finally has. No one can deny now that too much debt is the problem and has been the problem building for 40 years or more.

More debt cannot be the solution. Without unfairly pounding his royal pompousness with no chance to defend himself... Dennis feels easily threatened. Mr. Gartman needs to question whether or not Gold and Silver have been manipulated in price. He can no longer say "it doesn't matter, or I don't care" like Jeff Christian does.

It does matter.

You should care because it has, is, and will affect you, your children, your children's children and everyone else on the planet! So there it is. Treat Gold bugs with the respect that they deserve and have earned... despite his and other's constant ridicule.

Debate publicly... here on ZH would be a good start... or just STFU and go away!

Back to this week. China has become an aggressive seller of U.S. Treasuries. The ECB created another $700 Billion out of thin air while Greek one year paper traded near 1,000%. At the same time ISDA said that no default has occurred and now anyone who purchased CDS for protection is butt naked and sitting on unrecoverable losses. Make the mental leap forward ... backward... this insurance isn't and never was, insurance. It could not and cannot be paid out.

The money... the reserves, whatever the fuck they call it has never and can never exist.

What idiot would go to JP Morgan, Credit Suisse, AIG or whoever to insure their U.S. Treasury bonds? What paper financial entity on the planet will still be alive if the U.S. Treasury fails? Are we only talking about Greece right now? The European sovereign's and thus Germany and the ECB itself are coming soon, and then ultimately the U.S. Treasury.

Inside the system, the Rotting House, there is no place to hide.

There is no magical product or insurance or CB policy that has the ability to protect you. The only protection is to go outside... out of the paper system. The only insurance is in Gold and it's little sister Silver. The fact that global physical demand is much greater than actual supply ... has been for 40+ years. Volume and open interests on the paper markets are dropping as investors say 'no mas' and are leaving the rigged and rotten casino. Even though The Fed and ECB are flooding the markets with more and more liquidity, the tide is continuing to recede and naked insolvency’s everywhere are continuing to be exposed.

This week is important. We will get intuitive action. We will get some answers!

Now for sure central banks will provide liquidity to and beyond infinity. We now know that the rule of law is no longer.

The ISDA ruled that default isn't default.

If you own CDS... well... that's just too damn bad.

MF Global was thrown under the bus. A bus filled with Mafia thieves will land on 'free parking'.

No one will be prosecuted. This was the greatest Rot of all. The end of the road for fiat.

The rule of law is lost... exactly what is happening.


jimmyjames's picture

The fact that global physical demand is much greater than actual supply ... has been for 40+ years.


There are no supply problems-there is always enough gold in the world to meet demand-

The problem lies in the price of gold-

When gold holders/hoarders believe the current price is too low and that it will increase in the future-they will continue to hold/hoard it until their price expectations are met-

All gold is for sale at the right price-obviously-we're just not there yet-

Al Gorerhythm's picture

I'm not holding it for price discovery. I'm holding it for value discovery. Everything is valued in gold, especially credit. Gold is undervalued by Modern Money Theorists. The true expanding-credit-believers and players with a book to sell may ridicule it. Me? I'll go with its 5000+ year track record over that ofDennis Gartman, Jeff Christian or the track record of paper IOUs. Credit default swap for insurance, anyone?

jimmyjames's picture

I'm not holding it for price discovery. I'm holding it for value discovery


Yes-that's another way of looking at it-but gold is so far not a medium of exchange so-currency price/oz. vs whatever you care to exchange it for- is still an important measurement-

dontgoforit's picture

yeah; and ya' can't eat it

TruthInSunshine's picture

I just want to mention a point of order; gold, in fact, is edible. It can be found on all manner of edible leaf and trim on valuable pastry and bon-bons. Anyone who has done window shopping in Geneva knows about the O-face women get there when doing so.

You know what I'm talking about.

Show her my O face! - YouTube

Federal Reserve Notes & Euros, on the other hand - full of toxins.

Carry on.


A 'fiat event' would be followed by all the hoopleheads panicking.  Followed by confusion that turns into a weird instinctual like survival mode.  Which wont help most people because they've been dumbed down with sodium flouride, processed food, and a strong injection of daily propaganda.  So many will be unprepared for a sudden, monstrous paradigm shift.

DavidPierre's picture

The Cocksuckers are just laughing into their hats as they herd the world into WWIII... which has already started.

The last word on Gold...




Calmyourself's picture

"No rule of law" exactly that is all that matters and until hunger overrules that fact nothing changes because it cannot.

Kayman's picture

"It could not and cannot be paid out."

It shall not and will not be paid out.  Our claims adjuster is Ms. Helen Waite.  So go to Helen Waite.

Or, the english translation.  "Thank you for the premium, now that you have taken a loss, why don't you go fuck yourself."

dontgoforit's picture

Kayman - you're a hoot, man!  Hootman!

The Navigator's picture

Can I buy a CDS on my credit card debt and have ISDA rule that my default isn't a default to keep my high FICO?

dontgoforit's picture

...and don't forget, Don't argue with an idiot.  He will bring you down to his level and beat you with experience!

newengland's picture

Dear 'DavidPierre',

You have written an excellent companion piece to one of ZHs best pieces of analysis to date, this article. My children and I fall into the category of 'widows and orphans'. When the banks went bust, I was hearing nonsense from Coutts and other financial advisers. I didn't know why, so I turned to internet to do my own research. I came across the story of gold and silver. Soon, I came across the writings of James Sinclair. His no-nonsense relentlessly rational yet empathetic explanation of the unregulated otc derivatives, QE to infinity etc has been my guiding light, particularly at times of violent market turbulence.

Most of my savings are in gold and silver. The money I needed to keep safe for my children's future is doubled, tripled; it retains purchasing power; it is our insurance policy and protection against the evils of deceitful men who would bankrupt any child or mother simply for their own greed.

Ben Bernanke and the Trilateral Commission: I am talking about you, and your cohorts in the globalist central bank cartel who manipulate every market for your psychotic aim of a 'New World Order', aided by your political pets, technocrats and corrupt bureaucracies. Your favoured agents like Goldman Sachs and JP Morgue are increasingly exposed on the internet. Jon Corzine ought to live in fear of his life, for his theft has angered some ruthless people who will most certainly get their revenge, sooner or later, imo.

Amish Hacker's picture

No one should be surprised that the chart shows both Italy and Spain have worse current account balances than Greece.

Hugo Chavez's picture


Greece was first to run out of OPM to buy imported stuff.