Goldman's Take On TARGET2 And How The Bundesbank Will Suffer Massive Losses If The Eurozone Fails

Tyler Durden's picture

Two weeks ago in "Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B?" we suggested that according to recent fund flow data, "the Bundesbank wants slowly and quietly out." Out of what? Why the European intertwined monetary mechanism of course, where surplus nations' central bank continue to fund deficit countries' accounts via an ECB intermediary. We speculated that according to the recent ECB proposal, the primary beneficiary of direct ECB intermediation in fund flows, as Draghi has been pushing for past month, would be to disentangle solvent entities like the Bundesbank, allowing it to prepare for D-Day without the shackles of trillions of Euros in deficit capital by virtually all of its counterparties. Today it is the turn of Goldman's Dirk Schumacher to pick up where our argument left off, and to suggest that it is indeed a possibility that the Buba would suffer irreparable consequences as a result of Eurozone implosion, and thus, implicitly, it is Jens Wiedmann's role to accelerate the plan of extracting the Buba from the continent's rapidly unwinding monetary (and fiscal) system.

From Goldman:

"central banks in the core countries face one specific risk that can be traced back to the TARGET2 imbalances, and this refers to the possibility that a country might decide to leave the Euro area. In such a scenario, the net claims the remaining central banks have acquired vis-à-vis that country reflect a genuine risk that would not exist without these imbalances. This could in the extreme case of a total  break-up of the Euro area, and assuming that the peripheral central banks could not repay their liabilities, mean that the  losses would materialise on the Bundesbank’s balance sheet."

Adn the conclusion:

It is only if one or several countries were to decide to leave the Euro area that the imbalances would lead to potentially significant losses beyond the risk already reflected in the current generous liquidity provision through the ECB.

Needless to say, the possibility that a European country can leave at will, as the European Nash Equilibrium finally fails, is something the Bundesbank not only knows all too well, but is actively preparing for: here is what we said on December 6: "we may be experiencing the attempt by the last safe European central bank - Buba - to disintermediate itself from the slow motion trainwreck that is the European shadow banking (first) and then traditional banking collapse (second and last). Because as Lehman showed, it took the lock up of money markets - that stalwart of shadow liabilities - to push the system over the edge, and require a multi-trillion bailout from the true lender of last resort. The same thing is happening now in Europe. And the Bundesbank increasingly appears to want none of it."

After all, Germany has been sending the periphery enough messages to where only the most vacuous is not preparing to exit. The question is just how self-serving is Germany being, and whether once Buba is fully disintermediated, Germany will finally push the domino, letting the chips fall where they may?

In other words forget about printing: Europe will be lucky if it maintains the Bundesbank within the existing framework of the ECB. Which means the only European bailout rescue recourse continues to come from just one palce - that of the subbasement deep under the Marriner Eccles in Washington, DC.

From Goldman Sachs' Dirk Schumacher

TARGET2 balances: A shock absorber for the Euro area, not an amplifier

The so-called TARGET2 balances between Euro area national central banks have, by acting as a safety valve, prevented a disorderly correction of the imbalances in the region. By moderating the adjustment, they have bought policymakers time to address the underlying causes of these imbalances. Thus, the rising net claims of ‘core’ vis-à-vis ‘peripheral’ central banks in the Euro area should be seen as symptoms—rather than a cause— of the crisis.

TARGET2 imbalances reflect peripheral countries’ continuing need for external financing and are therefore complementary to the persistent large current account deficits seen in the periphery. However, these imbalances do not per se represent an additional risk for national central banks beyond that already stemming from the ECB’s very generous liquidity provision. Only if one or several countries were to decide to leave the Euro area would these imbalances reflect a genuine new risk for those central banks that have acquired net claims vis-à-vis other central banks.

Another ECB mandate: Smooth operations of payment systems

The ECB’s main role in the eyes of the general public is to set the interest rate level at which banks can borrow reserves at the ECB. Determining the appropriate stance of monetary policy is indeed the main task of the ECB in order to fulfil its “primary objective”, which the EU treaty defines as “to maintain price stability”.

But the EU treaty also obliges the ECB “to promote the smooth operation of payment systems”, which implies “facilitating the circulation of money in a country or currency area”.1 The ECB plays a crucial role in the Euro-zone’s payments system through the so-called TARGET2 system2, which allows banks to settle payments between each other. Around 866 credit  institutions currently participate directly in TARGET2 and some 3,585 participate indirectly through subsidiaries. The daily average turnover of the system in 2010 was 343,380 payments, representing a total average value of €2.3trn.

Strong increase in imbalances One characteristic of the ECB’s TARGET system is that payments from one bank to another bank in a different Euro-zone country are processed through the respective national central banks. If, for example, money is
transferred from country A to country B, this payment will involve the central bank of country A as well as the central bank of country B.

An important feature of the TARGET2 system is that claims among national central banks resulting from crossborder payments are not necessarily balanced. The payment from country A to country B therefore leaves, all else equal, central bank B with a claim vis-à-vis the central bank of country A. If the payments predominantly flow in one direction—always from A to B, without any offsetting flows—the receiving central banks’ claims will continue to rise, creating ever-growing imbalances in the TARGET2 system.

Chart 2 shows the imbalances that exist among Eurozone central banks, as reflected in the net claims of some central banks against others. As can be seen, these imbalances have increased dramatically since the outbreak of the crisis: the  Bundesbank—and to some extent the Banque de France and the Nederlandsche Bank—have acquired significant net claims against the central banks in the periphery.

But while there are now substantial imbalances in the TARGET2 system at the level of central banks’ accounts, it is less obvious how these imbalances should be interpreted.

The macro view of TARGET2 imbalances

Before we explain in more detail the mechanics of the TARGET2 system, and how cross-border flows between core and periphery are processed in the system, it is worth looking at the macroeconomic story underlying the imbalances. This should make it easier to follow the economics behind the accounting that we present below. Countries in the periphery ran partly very sizable current account deficits, which were financed through borrowing from core countries, mainly through the banking system. These loans were privately funded and, although processed through the TARGET2 system, did not lead to imbalances.

As banks in the core economies were no longer willing to extend credit to peripheral banks, central banks in the periphery stepped in and refinanced peripheral banks. Consequently they financed the current account deficits of peripheral countries. It is this replacement of privately lent money through central bank funding that led to the rise in net claims of central banks in the core against peripheral central banks.

The mechanics of TARGET2

We now explain the mechanics of TARGET2, starting with a simple example showing the money flow of a payment between banks within a single country. If a client of bank A transfers money from her account to another account at bank B to pay a  bill, her account at bank A is debited with that amount in the first step of that transaction. The settlement between bank A and bank B then takes place through the exchange of central bank money. For this, the account of bank A at the central bank is debited with the respective Euro amount, while the account of bank B is credited with that same amount.

Note, that the balance sheet of the central bank has not changed in this transaction, as it simply transferred central bank reserves from one account to another, without any change to the overall liabilities or claims to the commercial bank sector.

We now look at the same transaction but assume that bank A and bank B are located in different countries, with bank A (‘bank periphery’ henceforth) domiciled in the Euro-zone periphery and bank B (‘bank core’) sitting in the core Euro-zone.

Table 1 shows the stylised balance sheets of all four institutions involved in the transaction. We assume that bank periphery and bank core have made loans to corporates in their respective countries worth €100, and that these loans are financed through deposits and the issuance of bank debt; we abstract from any equity capital. Each bank also has deposits at the central bank and liabilities of that same amount. The central banks in turn have claims against the commercial banks and
similar liabilities.

Cross-border transaction

We now assume that a corporate in the periphery wants to buy a machine worth €10 from a producer based in the core. For this, the corporate borrows €10 from bank periphery and asks the bank to transfer the €10 to the account of the producer of the machine at bank core. Again the settlement of the payment takes place via the central bank. But, given that the banks are located in two different countries, the central banks of periphery and core are involved in this transaction.

At the first stage of the transaction, the claims of central bank periphery against bank periphery will increase by €10. The liabilities of central bank periphery will increase by the same amount as the money is passed on to central bank core; implicitly the claims of central bank core against central bank periphery increase by €10. Furthermore, central bank core credits the account of the producer of the machine with €10.

However, the question remains of how bank periphery has funded the loan to the corporate. One possibility is that bank periphery issues debt worth €10 in order to fund this loan. Bank core would be, in our little model economy, the natural buyer. As its deposits have now increased by €10, it may want to invest somewhere. Thus, bank core buys the bond issued by bank periphery by wiring €10 back through the central bank system. As a consequence of the reversal of the payment, the claims of central bank core against central bank periphery are reduced to zero again, as are the liabilities of central bank periphery against central bank core.

Table 2 summarises the balance sheets of all four institutes involved in the settlement of the payment. We would stress a couple of noteworthy points here:

  • When periphery borrows from core, a current account deficit opens up. The periphery has bought the machine from the producer in the core by borrowing €10 from bank periphery, which has been funded ultimately through the savings of the machine producer (the deposits in the machine producer’s bank account have increased by €10). The macroeconomic equivalent of this is that the periphery records a current account deficit against the core.
  • Credit risk of core extends through the banking sector. Although the machine producer in the core is the ultimate bearer of the underlying credit risk, that risk would only materialise if bank periphery and bank core were unable to make their obligations, i.e., bank periphery was unable to repay the bond issued and bank core unable to guarantee the deposit of the machine producer. Note that we have abstracted in our stylised model from any equity on the side of banks that could be used to absorb any losses.
  • Central banks bear no risk in this transaction. The trans-border payments have not led to any change in the exposure of central banks vis-à-vis the private banking sector, as the claims against the banking sector in the periphery and core have  not changed on the back of the transaction. Central banks have simply facilitated the flow of money, and thus the lending from core to periphery.
  • No TARGET2 imbalances. Neither central bank ultimately saw a change in its liability or claim against the other central bank once all payments had been made, and there are consequently no net claims— TARGET2 imbalances—of one central bank against the other, despite a current account deficit of periphery against core.

Core stops lending to bank

We now assume that the funding situation of bank periphery deteriorates and that bank periphery finds it increasingly difficult to finance the loans on its balance sheet. These difficulties could stem from the fact that bank core is unwilling to roll the bond issued from bank periphery, for example.

The sequencing of the flows starts with bank periphery shifting €50 to its account at central bank periphery as bank core is unwilling to re-finance the debt that is maturing, and is demanding that its money be wired back.

Central bank periphery then transfers the money to central bank core, which results in the liabilities of central bank periphery against central bank core increasing by €50. Finally, central bank core credits the account of bank periphery with €50 and bank core credits the account of the depositors from the periphery—who have now opened an account with bank core in order to shift their deposits from periphery to core—with €50.

The crucial question is how bank periphery is financing its loans, as the asset side of bank periphery is now longer than the liability side (€110 in loans plus €10 in central bank reserves against €60 in deposits/debt). Assuming that bank periphery is  not able to issue any new debt or increase its deposits, there are only three possible scenarios at this stage. First, the bank  could try to reduce its asset side as well by pulling credit lines or selling off loans. If this is not possible, bank periphery could try to refinance its loan book at central bank periphery. If this is not possible either, the only option left for bank periphery is a default. The scenario depicted in Table 3 assumes that bank periphery refinances its loans after the withdrawal of deposits by pledging its loan as collateral to central bank periphery.

Another possible scenario leading to funding strains for bank periphery is if deposits are withdrawn and transferred to bank core as depositors question the solvency of bank periphery. The underlying flows in this ‘capital flight’ scenario are identical to what is displayed in Table 3, and central bank core again acquires in that scenario a claim on central bank periphery, i.e., aTARGET2 imbalance opens up.

No change in the current account deficit, but the deficit is funded differently now

There are similarities—but also meaningfully differences—between the balance sheets as displayed in Tables 2 and 3. For one, the current account deficit of the periphery vis-à-vis the core is the same. What is different, though, is how the loans on the balance sheets at bank periphery are funded: central bank core has replaced bank core and/or private depositors from the periphery who have shifted their money to the core. It is this replacement that has led to the rise of TARGET2 imbalances. Because there is no money flowing back from the core private sector to the periphery, central bank core has now a net claim against central bank periphery of €50. But these net claims are not a result of higher lending activity in the periphery or of a bigger current account deficit.

Note in that respect that there is no limit to the claims/liabilities between central banks created through the TARGET2 system. The only real binding limit is the amount of eligible collateral that peripheral commercial banks can pledge to their national central banks.

ECB funding of peripheral banks has increased sharply, while German banks show little interest

The previous section showed that TARGET2 imbalances can arise simply by a tightening of funding conditions for banks that led to a stronger reliance on the central bank as a funding source. We now look at the extent to which the scenario described in Table 3 is consistent with the rise in TARGET2 imbalances. For this, we first look at the funding of banks in peripheral and core countries through the ECB (Chart 2). The dependence on the ECB as a funding source has increased significantly over  the last two years—particularly in the case of Greece, Ireland, and Portugal—and the rising share of banking system assets are re-financed at the ECB.

Note that these numbers under-represent the actual reliance on the ECB as they do not include lending under the so-called Emergency Liquidity Assistance (ELA), which in the case of Ireland, for example, reflects around 15% of outstanding loans of Irish credit institutions.

Chart 3 shows another development that is consistent with the shift of funding from peripheral  countries to the core, and in particular Germany. While German banks represented around of 50% of the ECB’s refinancing operations before the crisis, this share has declined to almost zero. The decline in the share of German banks at the ECB’s refinancing operations also reflects the tendency of German banks to play an intermediary role, which they ceased doing after the crisis led to a mutual loss of confidence among banks. At the same time, deposits as a share of loans to the private  sector have continued to increase over the past couple of years in Germany (see Chart 4).

As far as the drying up of private funding sources for peripheral banks is concerned, there is evidence that German banks have significantly reduced their lending to peripheral banks. Given that it is the Bundesbank that has seen its net claims rising strongly against peripheral central banks, the reduced funding of German banks is simply the counterpart to the TARGET2 imbalances. Finally, we can also observe that deposits in Greece have declined sharply over the last two years, although deposits in the other peripheral countries have remained broadly stable so far (Chart 6).

TARGET2 smoothes the adjustment in current account deficits, but does not prevent it

Some commentators have argued  that the existence of the TARGET2 imbalances would prevent an adjustment of the current account deficit. As Chart 7 shows, this is not necessarily the case as the current account deficits in the periphery are declining. Moreover, private-sector deleveraging also remains strong (Chart 8) and bank lending has generally declined (Chart 9).

A genuine TARGET2 risk only in the event of a Euro area break-up

By increasing its liquidity provision to Euro-zone banks, the European System of Central Banks (ECB plus national central banks) also inevitably increased the credit risk it faces, despite the various haircuts the ESCB applies to the collateral that is pledged. As the ECB has increased its funding to peripheral banks in particular, the risks the ESCB faces is also more concentrated in that region.

The losses the ESCB might face, however, are distributed among the national central banks regardless of where they materialise. This is the case whether there are significant TARGET2 imbalances or not. The rise in TARGET2 imbalances has  increased the risk for core central banks only to the extent that without these imbalances the liquidity provision of peripheral  banks would have been smaller. But it is not clear to what extent the liquidity provision to peripheral banks would have been any smaller without the TARGET2 imbalances. After all, it is the repo operations (whether full allotment or not) and the  collateral regime that decide on the size of the liquidity provision.

Put differently, it was the decision to replace private funding through central bank liquidity that increased the risk the ESCB faces and not the fact that TARGET2 facilitated transfers from peripheral countries to the core. As long as peripheral central banks are able to replace private funding—and the limiting factor here is the amount of collateral that can be pledged—there is no additional risk due to TARGET2 imbalances.

However, central banks in the core countries face one specific risk that can be traced back to the TARGET2 imbalances, and this refers to the possibility that a country might decide to leave the Euro area. In such a scenario, the net claims the remaining central banks have acquired vis-à-vis that country reflect a genuine risk that would not exist without these  imbalances. This could in the extreme case of a total break-up of the Euro area, and assuming that the peripheral central banks could not repay their liabilities, mean that the losses would materialise on the Bundesbank’s balance sheet.

Overall, barring any collapse of the Euro-zone, TARGET2 imbalances do not reflect an additional risk for core central banks. It is only if one or several countries were to decide to leave the Euro area that the imbalances would lead to potentially significant losses beyond the risk already reflected in the current generous liquidity provision through the ECB.

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Cassandra Syndrome's picture

What's caused the sell off in the futures?

Chris Jusset's picture

As Lehman showed, it took the lock up of money markets to push the system over the edge, and require a multi-trillion bailout from the true lender of last resort. The same thing is happening now in Europe. And the Bundesbank increasingly appears to want none of it."


Fasten your seatbelts ... buckle up ... it's COMING ...

Careless Whisper's picture

Whatever Goldman says should be taken at face value. They always tell the truth. Former GoldmanSachs CEO Jon Corzine is an honest businessman.

WestVillageIdiot's picture

You may want to be on the lookout for lightning bolts heading towards your house. 

AssFire's picture

Right, Like Hamey would say: "If you can't trust the Government...who can you trust?"

AssFire's picture

Oh shit! that was a reminder that The Gingrich returns this week as well..ruined my night.

I look forward to catastrophic financial news , but not news of those who caused it..especially when they are running for office to be rewarded for creating it.

Go Ron Paul.

WestVillageIdiot's picture

It looks like his money bomb is currently just under $3,900,000.  

AssFire's picture

I know here is a photo of it:

If you don't want to do it online you can mail it:

If you would like to send a paper check, please send it to:
Ron Paul 2012 Presidential Committee
845 Plantation Drive
Clute, TX 77531

Either way don't put an accurate phone number, you will be pestered to death by others.


I know several people from Sargent TX Dr. Paul delivered for whatever could be afforded by the family rather than take Medicare. Now Dr. Paul asks the people to send what they can for the sickest patient.
WhiteNight123129's picture

Goldman Sachs is a fight with Germany. Germany is in a fight to finally recover its sovereingty. Fuck the bankster Germany!


old naughty's picture


I am confused. GS a bankster is in fight with G; and G is in fight to recover its sov...and G is now a bankster?

Are you coining a new oxmoron, soverign-bankster?

Thanks for sharing, nonetheless.

CPL's picture

Comfy chair...check


///curtains are almost about to open.




topcallingtroll's picture

I have been sitting here so long my popcorn is stale and my butt hurts.

Anybody else getting bailout fatigue?

CPL's picture

This is the Mexican stand off. just watch.  Who out of these countries haven't managed to do anything in 2 millennium except attempt to kill each other, this is the story arc.  It won't last very long, but the effects are going to be spectacular.


This, right here...this is where it starts.

Michael's picture

Karma is a bitch. Fasten your seat belts bitches, it's going to be a bumpy ride. I live the smell of complete and total worldwide economic collapse on Sunday evening.

Dr Paul Krugman's picture

Relax and have a drink.  And when you wake up in the morning, nothing will be different.

Michael's picture

That's what they said before the housing bubble bust, then the bust happened and you got your instant gratification of fulfilled prophecy with the carnage. The problem is so few people can actually analyze the natural progression of events and likely outcomes, you not being one of them who can. 

It works the same way in China. Their epic housing bubble is bursting right now and there's nothing they can do to stop it. We already know how that will turn out, just look at the western world for an example.

The Eurozone, part of the one world government program, is a complete and total failure just as their global carbon tax was. Get over it.




Dr Paul Krugman's picture

Culture is much more sophisticated than what you predict.  Europe has bonded as a continent politically.  Economically they are reliant on each other.  The main problem in Europe is the delusional technocrats that believe austerity is going to improve the bond market.

WestVillageIdiot's picture

From 2005 - 2008 I watched this mess, mainly focusing on the housing component, and could not believe the things I saw.  The stock market rose to its highs in 2007, as housing seemed headed for a major disaster.  The financial system seemed to be a boxer that could take any punch thrown at it.  Then came Sept. 14, 2008.  That punch didn't knock the boxer out, not right away.  But reality finally seemed to set in. 

The Fed then jumped in and bailed out every sociopathic criminal organization it could.  Now almost three years later I sit here wondering how it is still going.  The European mess just seems to get bigger.  The only thing holding up the U.S. economy is massive government deficit spending and The Fed operating in the shadows.  Just like 2008 it seems that something big has to happen soon.  In the meantime, plan and prepare.  I don't know what else to do. 

Absalon's picture

I want to see some perp walks and some long prison sentences.

The politicians on both sides of the ocean have had four years to get the banking system under control but have refused to do so because the banks paid them bribes campaign donations. 

The bankers and their paid lackies need to go to prison before we have any hope of saving the economies of the world.

AssFire's picture

The opening acts are pathetic..I don't think these people will want to be listed in the credits at the end of the show.

Atomizer's picture

Who cares, zero sum game is at play. By 2:15 PM tomorrow, another rumor will kick the can down the road.

ebworthen's picture

I would read this to mean that Germany has the biggest incentive to restore the Deutschmark and leave the Euro-zone (?).

Yes, their exports will be more expensive, but they won't have to bail out Southern Europe and can leave that chore to the apparently quiescent sheeple U.S. Taxpayers via the FED, Treasury, and IMF.

Spitzer's picture


They dont have to bailout anyone to save the Euro currency. Do you think the Euro is just going to dissapear ? The Thai baht, Russian Ruble, Icelandic Krone still exist.


old naughty's picture

Good valid point.

But then you don't need other currencies in a one-world gov.

Duffminster's picture

Like the Chinese they'll probably want a gold backed currency;  the question is how they could possibly achieve that when the Fed has most of their physical gold in theory, if it hasn't been rehypothecated?  In the case of the euro and the dollar, lets call it "ED",  the "ED" is “backed” primarily by government bonds, which are promises to pay EDs. So, the ED is a promise backed by a promise to pay an identical promise.  So what is the substance of this promise????   If the the germane government treasuries will not give you anything tangible for your ED, then the "EDA is a promise to pay nothing.

Despite all the hyperbole, in the end, the winner will be whoever holds the physical gold and silver in my opinion.  Thats the money I would want, rather than infitley debt laden fiat currencies backed only by ever increasing and increasingly not repayable debt.  The rush to take possession of the last real money (the only true store of wealth over time) will become quite evident as the remaining solvent nations rush to become the currency leaders, backing their currencies with the only univerally trusted money through out the ages of failed fiat currencies.


fnord88's picture


It seems to me the Euro could survive given their massive gold holdings. Unlike the US, Euro gold is marked to market, so they could convert savings accounts to being gold backed, print like crazy, stave off disaster, savers are protected by gold, so their new gold backed accounts should rise with inflation.

But it all comes down to who really ownes the Gold.

WestVillageIdiot's picture

Even with gold backing, wouldn't that scenario be hugely inflationary?  That doesn't seem like a great way to go. 

fnord88's picture

If savers money is backed by gold, who gives a shit? Wouldn't inflation become essentially meaningless? If it costs $1 or $100 for a loaf of bread, as long as your savings are backed by gold, what difference does it make if you use one imaginary number or a different one?

WestVillageIdiot's picture

Better hope the people that don't have savings don't have weapons. 

fnord88's picture

Why? The people that dont have savings probably have debt owed to banks. Under a massive inflationary period, all their debt essentially goes away. Pay 1c on the dollar or something. Savers win, debtors win, banks get totally fucked. Or am I missing something? Where is the downside?

WonderDawg's picture

If it were only that simple. We've crossed the event horizon. There is no way out that doesn't involve severe pain for all. There is no free lunch, and the bill is due.

Manthong's picture

" the winner will be whoever holds the physical gold and silver in my opinion"

Rickards seems to imply that the US might want to continue to hold Europes gold whether Europe wants us to or not.


Absalon's picture

It does seem that they could be more creative in their use of gold. 

Suppose Italy offered a Euro (or dollar) denominated 30 year bond which carried with it an option to exchange the principal of the bond  for gold at maturity, at say, 3000 Euros to the ounce secured by physical deposit of the gold in some country outside of Italy (Canada or Germany perhaps).   Such a bond with its inflation protection might attact a lower interest rate than Italy is able to get at the moment and Italy's problem revolves a lot around keeping interest rates down.

old naughty's picture

"Like the Chinese they'll probably want a gold backed currency..."

Didn't the Chinese gov "told" the citizens to buy gold? Why wouldn't they hoard more to strengthen their balance sheet (since it is so important these days)?

Sure they could confiscate the gold from the citizens someday; but perhaps their want is not that solid? Or, perhaps its an insurance policy, in case no-can-do back-to-gold-std?

q99x2's picture
Bundesbank is not in the business of doing God's work.
old naughty's picture

Leave God out of it, please.

Its our mess, our karma.

ISEEIT's picture



Nuff said.

BennyBoy's picture

One or more countires will leave the Euro (hello Iceland!)

KABOOM Buba! To the tune of $500B

Isn't fantasy finance fun?

DormRoom's picture

sort of supports Kyle Bass thesis that Germany will wait for the collpase, then recapitalize its bank.  I highly doubt US banks will get another bailout. If you hold BAC, or MS, you may be out of luck.


My thesis is Germany will exit. EZ collapses.  Germany will bailout its banks with new Deutsche Marks.  With a high Deutsche Mark, the new BundesBank will print, and her flushed, recapitalized banks will buy out prime European assets.  She gets Europe, and can maintain her export base.

economics1996's picture

What happens to PM, commodities when the bust happens?

economics1996's picture

In the past commodities always collapsed.  But the banks closed.  Do you risk a bank holiday to get cheap PMs?

chump666's picture

It will be interesting to watch.  But gold and oil may stay bid silver and other indust commodities sell off.  USD will be bid too on Asia outflows.  Stocks volatility to the major liquidation trade, then the print jobs...maybe 6mths into 2012.

DormRoom's picture

near term, if EZ collapses, commodity collateral trade will collapse, and commodity prices will collapse.  Medium run, if EZ collapses, US will enter another deep recession.  So it will be forced to stimulate.  But that will push debt:tax revenue over 120%.  So US will be headed for downgrades, and the USD as a reserve currency is doomed.


After the flight from USD is manifest, and its reserve status in jeopardy, US will either call for a debt jubilee, and risk war with China.  Or wage war with a big player (Iran/Pakistan) to increase GDP.


But when the USD falters as reserve currency, commodities will likely be a temporary store of value, and unit of exchange.  It's still unclear if USD will be dropped as the reserve currency, since the US will remain the primary military power for a long while.


Military planners have planned a US vs China conflict by 2020 (When China economy becomes bigger than the US)


The US could defeat China.  It would very likely win any war with middle powers to increase GDP.


But there will be a period where the USD reign will be questioned.  So I see a comeback in commodities, if it collapses after a EZ implosion.


NOne of the may come to pass, but it's fun to speculate.

fnord88's picture

Isn't using war to increase GDP a bit like the broken window fallacy? How does using precious resources to build armaments which are then destroyed boost GDP? I can see how people are employed, and thus have money to spend, but the wages the gov is paying is printed money anyways. I guess if they just gave everyone $100K, it would be spent in country and contribute to inflation, whereas blowing shit up in another country does not so much.

Still seems like madness to me. We could colanise mars, which would export inflation, kill less people, and be way cooler, for seeminly the smae economic boost.

chump666's picture

I am betting on China meltdown within the first 6mths of 2012.  So many signs pointing that way FX outflows, property implosion Wenzhou contagion (goggle it). When banking crisis in China hits the wires, stocks will be sold into oblivion.

Also, a cute Chinese girl that works at the local supermarket near me said this. "China really bad...too many properties..."

Say no more.

old naughty's picture


agreed with the "too many properties..." May be they are for Lunar reptiles migration?

And which comes first, Chinese meltdown or Asia outflows, in your 6-monthhorizon?

Thanks for sharing.