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Guest Post: Abandoning Ship - The Eurozone Is Failing At An Accelerating Rate

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Submitted by Alasdair Macleod, PeakProsperity.com contributing editor

Abandoning Ship The Eurozone Is Failing At An Accelerating Rate

It will be no surprise to readers that the news coming out of the Eurozone just gets worse and worse. The reality is that Ireland, Portugal, Spain, Italy, Belgium, Greece, and France (in no particular order) are all in debt traps from which there is no escape. A debt trap is sprung when bankruptcy becomes the only outcome. With corporations, this usually becomes readily apparent and directors are forced by law to stop trading, but countries conceal this reality by printing money. Otherwise there is no difference in the two cases, despite what politicians and neoclassical economists would have us believe. This is why we are painfully aware that the Eurozone is in trouble, since nation states are unable to cover and conceal their obligations by printing money, having surrendered this role to the European Central Bank (ECB).

The ECB is meant to be independent of politics and political pressures. But the reality facing any central banker is that s/he cannot stand by and let politicians drown in their own mess. The politicians know this, and it's what is behind current attempts to move away from austerity towards Keynesian growth. The plea is exactly the same as that of the spendthrift who tells his bank manager that the only chance he has of getting his money back is to increase the overdraft to allow him to trade his way out of difficulty.

So the ECB knows, in its role as bank manager, that the argument is flawed. But unlike spendthrift individuals, politicians have real power, and the ECB has an ultimate responsibility not to upset the apple cart. And that is why the election of a new socialist French president is important. President Hollande is leading the charge away from austerity in Europe, and he has powerful allies, including President Obama in his own election year.

Unfortunately, the ECB and the politicians lack a proper understanding of their economic condition because they continue to operate within the neoclassical framework that has led them into this mess. The lack of understanding of the relationship between the elements of hard-to-predict future consumer preferences, as well as the entrepreneurial function and the role of time in their calculations, has led to a reliance on sterile economic models. These leave no room for the dynamic and unpredictable creativity of human nature that gives us real economic progress. It is the difference between a proper understanding of the role of free markets, and thinking they can be manipulated to achieve an outcome preferred by the state without adverse consequences. An important consequence has been the creation of credit-induced business cycles leading to escalating levels of debt in both private and public sectors, which is why so many countries have become ensnared in debt traps. This statement of the obvious is not recognised by Keynesians and monetarists who continue to argue that the solution is yet more debt, more stimuli, and the avoidance of deflation at all costs. And it is neoclassical Keynesians and monetarists that populate the central banks and advise politicians.

This brings us to an important consideration: Despite what her officials say publicly, austerity has limited support within the ECB itself, because it is run at the top by neoclassical economists. Instead, the real constraint is Germany, whose citizens’ savings are on the line and which faces the prospect of its third currency collapse in a century. So this is where the lines are drawn up: spendthrifts desperate for more money, a conflicted central bank, and Germany.

Angela Merkel has made considerable progress in pushing the German electorate in a direction that is completely against its instincts by playing the political card marked “there is no alternative.” With her considerable political skills, she may be able to push her people some more, but it is becoming increasingly difficult, because everyone in Germany can see that committing real savings to bailing out the spendthrifts only wipes out the savings. These are not euros simply conjured out of thin air, because the Bundesbank cannot print them and probably wouldn’t do so anyway. But the pressure is mounting on her, and she is being squeezed by governments such as the British and the Americans, who are now panicking over the consequences of failure.

This is why both countries went public last week, with David Cameron even visiting Merkel in person. It is a sure indication that major governments outside the Eurozone are beginning to expect the worst, and that unless Germany gives way, it will happen quickly.

Eurozone bank lending

While there is a stalemate at government and central bank level, this is far from the case in commercial banking. The period of expanding bank credit, which gave rise to unsustainable levels of debt, ended with the banking crisis in 2008, and since then, central banks have been dealing with the aftermath. The Eurozone countries facing problems today were beneficiaries of bank credit expansion, and thus are badly hit by the subsequent contraction.

The chart below illustrates how Eurozone bank lending is collapsing, and represents European cross-border bank lending between European countries, rebased to 100 at 31 December 2007. The total is shown by the heavy black line, along with lending to selected Eurozone countries.

It becomes clear from this chart why the ECB offered its long-term refinancing operation last February, when it injected €530bn in raw cash into the banks. The contraction of cross-border lending was accelerating, having completely absorbed the November injection of €489bn. And it tells us that more LTRO injections will be needed very soon.

The underlying picture is more complex than shown by one chart. The lending shown is to both private and public sectors, and the drop in cross-border lending to governments was partially replaced by increased lending from domestic sources on the back of the ECB’s LTRO, and also by US banks (see below). But given that the Eurozone’s banks are already highly exposed to their individual governments, this increase in loan concentration has undermined their creditworthiness; hence the continuing ratings agency downgrading of the banks involved.

A further concern is that government borrowing is crowding out the private sector.  Private sector borrowers are being badly squeezed, not only for capital investment funding but also for their working capital requirements. The consequence is that governments with large budget deficits are not going to get the future tax revenues assumed in economic forecasts.

This is why the only solution to the Eurozone’s problems is a round of massive and immediate cuts in public spending. Without these cuts, the destruction of real savings, vital to the economic wellbeing of society itself, continues. In the past, this destruction was a relatively slow process, but the speed at which it is now happening has accelerated exponentially. The importance of cutting public spending has become more urgent; unfortunately, the election of President Hollande in France has delayed this process.

Help from outsiders only delays the inevitable and increases their exposure to the Eurozone’s problems. Lending to Eurozone countries by US banks has expanded in all the cases shown in the chart below, though lending totals have fluctuated widely. But total lending (the heavy black line) is still up 67% from December 2007. A cynic might say that the Fed has encouraged US banks to increase their lending to the Eurozone, on the basis that no banker in his right mind would have otherwise done so. But if this is true, the Fed has little flexibility to continue with this support, given that commercial bankers will be increasingly reluctant to commit further funds. It explains President Obama’s interest in the current state of the Eurozone, because if it goes down, there will have to be a major capital injection into US banks to keep them solvent. We get used to trillions being thrown around, but that is government spending and money-printing; in the context of the Wall Street banks, the quantities are not small, with the lending total at end-December 2011 being $347bn.

It is hard to conclude anything other than that all of the avenues for resolution have been explored and substantial sums of money thrown at the problem, much of it without the public’s knowledge. The ECB has expanded its balance sheet to offset cross-border lending contraction, and other central banks, particularly the Fed, have done their bit. Germany has committed enough of her own citizens’ savings to fill what is obviously a bottomless pit. New investors, except wild speculators, are non-existent. And without more outside help, Eurozone institutions do not have the resources to avoid a financial collapse.

That outside help is not there. The result is that the Eurozone is failing at an accelerating rate. George Soros is on record as giving Euroland three months. It will be lucky to last that long.

Points arising

While it's impossible to foresee the precise order of events in this accelerating collapse, in Part II: The Most Predictable Next Events, we detail the inevitable developments that will almost certainly arise over the course of Europe's struggle.

Remember that most commentators have little understanding of the true position, or are trained in neoclassical economics (if at all), and are generally recycling someone else’s take on things. Also bear in mind that the Eurozone’s politicians are desperate to allow no steps backwards in their cherished project, because they suspect that any regression will kill not only the euro, but the whole EU project. Everything will be done to prevent countries from leaving the Eurozone, including ignoring problems in the hope they will go away.  And the bigger the country, the more resolute everyone will be to stop them from leaving.

Click here to access Part II of this report (free executive summary; paid enrollment required for full access).

 

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Wed, 06/20/2012 - 17:38 | 2545193 battle axe
battle axe's picture

Bankers and Politicians to the lifeboats......

Wed, 06/20/2012 - 17:44 | 2545212 Almost Solvent
Almost Solvent's picture

In a perfect world, the lifeboats they sit in are wired to blow as soon as they hit the water. 

 

 

Karma, it's a bitch.

Wed, 06/20/2012 - 18:05 | 2545272 SilverTree
SilverTree's picture

Stick around while we "rearrange the deck-chairs".

Wed, 06/20/2012 - 18:51 | 2545371 American34
American34's picture

Agreed, I have been describing the Eurozone problem as "Rearranging the deck chairs on the Titanic" for over a year now. It is a great way of describing things since 2008 worldwide.

Wed, 06/20/2012 - 19:23 | 2545448 Sir Edge
Sir Edge's picture

Yes... Most excellant image... along with asking taxpayers to JOIN the Band on the Titanic... while the lifeboats are being filled up with Bankers, Politicians and Wall Street Executives...

Wed, 06/20/2012 - 20:01 | 2545546 salvadordaly
salvadordaly's picture

They announced Karaoke and the sheep ran to the stage is more like it!

Wed, 06/20/2012 - 21:01 | 2545681 The Monkey
The Monkey's picture

Europe has no easy way out of this mess, but other risks are piling up. The market will ignore them until it can't. Don't get caught short until every ounce of bullishness has been extracted.

Wed, 06/20/2012 - 19:30 | 2545471 theTribster
theTribster's picture

Yep, you couldn't be more right. Karma will be a bitch, I'm a hopin'

Wed, 06/20/2012 - 18:30 | 2545320 eclectic syncretist
eclectic syncretist's picture

Bankers will be taken down by the beast they unleashed (Infinite money creation for governments)

Wed, 06/20/2012 - 18:49 | 2545365 mjk0259
mjk0259's picture

Bankers don't care. They already got the mansions, Porshe's, women and probably bunch of gold and silver at home.

Wed, 06/20/2012 - 22:59 | 2545914 The trend is yo...
The trend is your friend's picture

i'm sure someone has compiled a list of addresses.  They won't be safe anywhere.  All hail FB and GOOG for sharing what everyone looks like

Wed, 06/20/2012 - 20:10 | 2545564 bdc63
bdc63's picture

How many times do I have to say it ... DEAD AS A FEAK'IN DOORNAIL

Wed, 06/20/2012 - 20:14 | 2545571 HungrySeagull
HungrySeagull's picture

We're sorry, the nail you are looking for has been changed. Please try glue.

Wed, 06/20/2012 - 21:21 | 2545727 Buck Johnson
Buck Johnson's picture

They have been going to the lifeboats, they just don't want anybody else to follow.  When this whole game comes crashing down, it will be horrendous and no amount of printing is going to save it.

Wed, 06/20/2012 - 17:38 | 2545194 Snakeeyes
Snakeeyes's picture

Love the cross country lending chart! That is spooky!

Wed, 06/20/2012 - 18:50 | 2545370 mjk0259
mjk0259's picture

Isn't it good that cross country lending is going down? If stable countries were lending more money to unstable ones, that would indicate a pretty high level of stupidity.

Thu, 06/21/2012 - 07:11 | 2546281 andrewp111
andrewp111's picture

The more cross border entanglements are unwound, the easier it will be to dissolve the Euro back to 17 currencies.

Wed, 06/20/2012 - 17:46 | 2545215 Jason T
Jason T's picture

OT: Dent Vs Rickards  .. dent lets loose and curses and everything  http://www.youtube.com/watch?v=pSOGwthC_JQ  

Wed, 06/20/2012 - 17:47 | 2545220 El Oregonian
El Oregonian's picture

Hey, you only live once, right? Unless, of course your the one who makes the rules...

Wed, 06/20/2012 - 17:54 | 2545239 Beevreetr
Beevreetr's picture

...and you are a transhuman.

Wed, 06/20/2012 - 17:48 | 2545223 Yellowhoard
Wed, 06/20/2012 - 18:08 | 2545280 12ToothAssassin
12ToothAssassin's picture

Only if its like this: http://www.youtube.com/watch?v=ddp70SjsiNw (Gunther and the Sunshine Girls: Sun Trip)

Wed, 06/20/2012 - 17:48 | 2545224 paperlessforms
paperlessforms's picture

If someone takes out a large loan then they are making an increase in money supply as a reserve -M3 (it doesn't exist as M0 until its paid back).

But if they renage on the entire loan then its only a reserve that was never filled, so it can be bought by the reserve bank without increasing M0.

Back to school some of you........

Wed, 06/20/2012 - 22:38 | 2545879 flacon
flacon's picture

But what happens to the asset they bought with that loan? To whom does it belong and what is it's value? Mark to market, or mark to fantasy? If we are talking about home prices, then even though the money is gone, the value of the home as a foreclosed house stays as mark-to-maturity, hence the money never went back to where it came from because of the PROMISE that it will be paid off in full at some point in the future.

 

Skool is for beginners, and fantasy is for the experts and academics with letters after their name!

Wed, 06/20/2012 - 17:49 | 2545229 falak pema
falak pema's picture

it shows that the countries and banks are now in closed loop and ECB backing allows this to stabilise. Debts of each nation are being stabilised by decreasing cross border holdings. What we don't know is the extent the ECB balance sheet as ultimate lender and buyer have been diluted. Liquidity outside Euro zone is provided by FED swap lines. 

As government guaranteed borrowing by national central banks prime the pump of EFSF and ESM, the ECB stays out of that loop, its liquidity pump sterilised by collateral of doubtfull value provided by the banks. A lot of opaque areas with banks assets marked to model being the most fragile. A national oriented banking setup is fine as long as the ECB guarantees keep each bank solvency and liquidity. 

ECB Black box even if the separate drawers have been more and more segregated. I like my ratiionale. 

Wed, 06/20/2012 - 17:51 | 2545234 Marty Rothbard
Marty Rothbard's picture

So, what you are telling me, is that Merkel is using her great political skills, to convince the Germans, that if they do not flush their money down the toilet, they will lose their money.  I must admit, it would take some convincing, to get me to screw myself, rather than stop someone else from screwing me.  What has happened to the German people?  Have the Keyneseans been putting stupid drugs, in the beer?

 

Wed, 06/20/2012 - 18:03 | 2545266 Caviar Emptor
Caviar Emptor's picture

Germany is the third most indebted country in the world behind USA and Japan. On a per capita basis, their debt is higher than the US. And as far as debt/GDP they are tied with France. (Figures for 2010). 

http://en.wikipedia.org/wiki/Government_debt

Wed, 06/20/2012 - 18:55 | 2545382 mjk0259
mjk0259's picture

That table is not ordered by per capita debt. They are only number 8 out of about 20. It's also 2010. US is much higher now as we have trillion dollar yearly deficits. Germany doesn't have a huge ongoing deficit. Germany debt is owned mostly by Germans. US debt owned significantly by China and Japan.

Wed, 06/20/2012 - 19:15 | 2545428 Tirpitz
Tirpitz's picture

Got to add all the issued guarantees and backstops hidden off the books.

Wed, 06/20/2012 - 19:15 | 2545427 rete
rete's picture

It's in Wikipedia so it must be true.

Wed, 06/20/2012 - 17:53 | 2545236 Marty Rothbard
Marty Rothbard's picture

The British, and Americans telling Germans how to handle their money.  That's rich.

 

Wed, 06/20/2012 - 18:57 | 2545392 mjk0259
mjk0259's picture

Yeah, the advice would be stop making things that other countries want - it's causing problems. Instead outsource all your manufacturing, get 20 million unskilled immigrants that don't speak your language or want to learn it, invest in occupying Afghanistan, stop giving people health care. Make your economy based on selling pieces of paper to each other.

Wed, 06/20/2012 - 17:53 | 2545237 slewie the pi-rat
slewie the pi-rat's picture

weak

abandon ship!  how novel!

Wed, 06/20/2012 - 17:56 | 2545242 disabledvet
disabledvet's picture

If I were France I would bring all that gold back from Switzerland and use it to recapitalize a new Bank of France and start issuing francs. RIGHT NOW.

Wed, 06/20/2012 - 18:53 | 2545378 Temporalist
Temporalist's picture

The French tried to get their gold back from the US once...once.

http://www.youtube.com/watch?v=jxdPr58coTE

Wed, 06/20/2012 - 17:57 | 2545244 FartInTheWind
FartInTheWind's picture

Some good news for a change, according to the latest news headlines a new pro-Euro Greek goverment has been created at record pace. Even the Greeks themselves have gained trust: the people that recently took their money from the banks are now putting it back on deposit again at the same banks. Meaning that their economy can survvive at least a little longer.

So it seems that the can can be kicked down the road a little further.

Wed, 06/20/2012 - 17:57 | 2545247 midgetrannyporn
midgetrannyporn's picture

This piece should be rewritten under the title: The Flawed Appplication of Neo-Classical Economics to an Unmitigated Kleptocratic Environment.

Wed, 06/20/2012 - 17:58 | 2545248 Joebloinvestor
Joebloinvestor's picture

The flaw in your thinking is that you neglect the other thing politicians control (and it is in their "hidden" models) and that is WAR.

Another "condition" that justifies printing.

Wed, 06/20/2012 - 17:59 | 2545254 bagehot99
bagehot99's picture

You could be forgiven, as a German, for considering invasion rather than lending hard-earned money to idle, nannied Southern European wastrels. That would certainly stabilize things. If I had any money in Euros, at this point, I'd be agreesively switching it into Gold or CHF.

Wed, 06/20/2012 - 18:02 | 2545259 PulpCutter
PulpCutter's picture

Quick! Investigate Eric Holder and Roger Clemens!

Wed, 06/20/2012 - 18:19 | 2545301 Tsar Pointless
Tsar Pointless's picture

Yes!

And stop those fags from ruining the sanctity of marriage - you know, that thing that ends up in divorce nearly half of the time?

And stop women from having abortions! As we all know, along with disallowing the entrance of a female virgin into the bonds of holy matrimony - which, BTW, was punishable by death - God doesn't like them.

Distractions. There are SO MANY from which to choose.

Wed, 06/20/2012 - 18:36 | 2545338 Spastica Rex
Spastica Rex's picture

Screw economics, I'm just trying to figure out what the proper course of action is to address the mildew in my rental house, lest I be consumed in a pillar of flame.

Wed, 06/20/2012 - 18:54 | 2545381 kito
kito's picture

lots of vinegar......

Wed, 06/20/2012 - 19:11 | 2545418 Tirpitz
Tirpitz's picture

No vinegar, but rather 60 ... 70% ethyl alcohol.

Wed, 06/20/2012 - 20:15 | 2545573 Pejorative Requiem
Pejorative Requiem's picture

I'll drink to that.

Wed, 06/20/2012 - 23:11 | 2545927 TBT or not TBT
TBT or not TBT's picture

Did you know you can use old motor oil to prevent mold re-infestation?   Slather it on!

Wed, 06/20/2012 - 20:38 | 2545633 stant
stant's picture

bleach and water 50/50 pump up sprayer on fine mist

Wed, 06/20/2012 - 18:05 | 2545274 bullmkt
bullmkt's picture

I ask,why is the EURUSD at 1.27 not 1.17 then?

Repatriaton flows or what other excuse ZH has?

Wed, 06/20/2012 - 18:10 | 2545282 A Lunatic
A Lunatic's picture

This carefully scripted drama will take decades to unfold at the cost of countless lives, fortunes, and liberties. I am having great difficulty understanding why many here believe the world leaders to be bungling idiots who are groping blindly in the dark for answers to an impromptu dilemma. Collapse IS the plan..............

Wed, 06/20/2012 - 18:24 | 2545307 Not Too Important
Not Too Important's picture

That is the plan, but Fukushima screwed up who the survivors are going to be. They all breathed it in, just like the rest of us.

Won't take decades for the West to suffer the effects. We're next, right after Japan. The Southern Hemisphere folks will be the ones turning out the lights.

Wed, 06/20/2012 - 18:53 | 2545377 Milestones
Milestones's picture

Well if you ignore Nevil Shute's book "On the Beach which is exactly where mankind is still standing--ready to complete the cycle.

Man evolved from the ocean and the last men died there.            Milestones

Wed, 06/20/2012 - 19:00 | 2545398 Dapper Dan
Dapper Dan's picture

And 90% of the worlds population lives in the northern hemisphere

Radical cartographer and Harvard grad student Bill Rankin devised these fascinating maps, which show the sum of all population living at each degree of latitude or longitude circa 2000. As you can see above, there’s quite a northerly bias: According to Rankin, roughly 88 percent of the world’s population lives in the Northern Hemisphere, with about half north of 27 degrees north.

http://www.geekosystem.com/world-population-latitude-longitude/

Wed, 06/20/2012 - 19:27 | 2545462 FeralSerf
FeralSerf's picture

Most of the dry land is in the northern hemisphere or Antarctica.

Wed, 06/20/2012 - 18:32 | 2545326 Poor Grogman
Poor Grogman's picture

Yes but was it last weeks or this weeks plan?

Wed, 06/20/2012 - 18:45 | 2545358 cougar_w
cougar_w's picture

will take decades to unfold

Hardly decades. Maybe a single decade. Maybe much less.

Wed, 06/20/2012 - 18:34 | 2545333 pmm009
pmm009's picture

Who is buying spanish sovereign debt today?  The ESM-ESFS-ECB?   The germans are caught either way.  The Target 2 goes up, etc., etc.  This is a simple game now.  Force the Sovereign to support their banks - the irish model - and use the leverage to pull the soverign government into the tighter fiscal orbit.  France, Italy & Spain do not want to play this game...so again, who is buying the Spanish soverign debt in the secondary markets?  As the countries get bigger, Germany's leverage is reduced.  Germany could try to leave but then would take the loses in one hit.  Clearly, Germany is behind closed doors with the IMF and Americans in a furious negotiation mode.  The less we see Tim and Legarde on TV, the greater the clarity that they are providing financial support behind the scenes as the Germans are turning their lack of leverage with the Spanish into leverage with them.  THE BIG question is can they drag this out for years without a sovereign calling it quits?  Will the US economy rebound and help take pressure off?  Don't know, but given all the uncertainty in the market it is clearly holding up as if things will get better next year.  Just doesn't seem to make sense.

Wed, 06/20/2012 - 18:46 | 2545360 skepticCarl
skepticCarl's picture

Author Macleod, no one is abandoning ship. The Euro economic system has uncovered several problems, which require a proper diagnosis, and then a suitable plan and its implementation.  That will be done, since it is in the bankers best interest.  Europe has shown that it can survive devastating wars, depressions, fascism, and imperialism.  Today's problems may seem to us as some sort of end game, but in the sweep of history, it is but another incident.

Wed, 06/20/2012 - 19:21 | 2545439 cougar_w
cougar_w's picture

This would be true if not for the following:

The sad and woeful end of the Second World War settled nothing. All the violent dislocations brought on by the end of Western-style Imperialism (which was just a continuation of Roman global domination) remained after 1945. The growth engine that had been stoked up to then by 200 years of systematic rape and pillage was not fired anew after WW2 except by the vast and unparalleled extraction of fossil energy. It was this "free growth hormone" of cheap and abundant energy that kept everyone happy to now.

That free energy bonanza is on the way out. For a number of reasons, none of which are important to the point. The point being that the edges and corners of the world are still packed full, we still cannot survive within our national borders by conventional means, and we still have not learned how to resolve internal frictions without crossing borders to rape and pillage a smaller or less militaristic people.

I don't really know how to say this in a nice way, but Europe will burn.

It will burn because it was already aflame when humanity looked into the face of oblivion, blinked, and took a step away from global conflagration. It was a smart move and the world has used the purchased time to try and solve some of the issues left after the collapse of Imperialism. But the industrialized world did not do enough while it could still do something, and now the flames are set to rekindle.

I don't know who to blame for this. Certainly not Europeans, who knew better. I think however that we can blame greed and stop there.

We have been greedy monkeys playing with fire. Now a lot of monkeys will burn. It will start in Europe because hatred born of desperation will find fewer obstacles to spreading itself. But it will not end there.

We are all desperate men now. I am not hopeful and cannot say what the dawn will bring.

Wed, 06/20/2012 - 19:59 | 2545542 Pejorative Requiem
Pejorative Requiem's picture

Survived? Your argument is a bit like saying the earth has survived ice ages, asteroid strikes and super volcano eruptions. It leaves quite a lot to the imagination regarding the horrors that may have to be endured through the "survival".

Wed, 06/20/2012 - 23:15 | 2545933 TBT or not TBT
TBT or not TBT's picture

Exactly, people live in Pompeii still don't they?   On Santorini too!    Plus they...whoever is there in 100 years, will still have the same numbers and types and distribution of orifices, roughly, even if 85% will be of north african stock.    The continent will be just fine too.   Not going anywhere fast.

Wed, 06/20/2012 - 18:53 | 2545380 Dapper Dan
Dapper Dan's picture

The following quote is the bomb!

"Instead, the real constraint is Germany, whose citizens’ savings are on the line and which faces the prospect of its third currency collapse in a century".

None of the other countries have savings on the line, they have debt on the line.

They signed on the bottom line in a world where the law serves the masters well and true.

The fed said today they would not buy European sovereign debt, for what that is worth.

 

 

 

 

 

Wed, 06/20/2012 - 18:57 | 2545387 Temporalist
Temporalist's picture

Why would the Fed buy their debt?  They "swap" money with them for free.  "Press Enter"

Wed, 06/20/2012 - 19:05 | 2545403 Tirpitz
Tirpitz's picture

"None of the other countries have savings on the line, they have debt on the line."

I may be misunderstanding the author here, but the average Italian has far more savings than the average German has. Just probably an astute Italian won't be ready to empty his accounts for the benefits of reckless Northern banks, while the German taypayer is forced by the police state he has to live in to hand over his dough to the money masters.

Wed, 06/20/2012 - 23:19 | 2545937 TBT or not TBT
TBT or not TBT's picture

You must mean "assets" not "savings", and you must be including some non-liquid assets like real estate, furniture, and physical stuff in the mix.    Stuff that needs a market.

Wed, 06/20/2012 - 19:03 | 2545386 Winston Smith 2009
Winston Smith 2009's picture

"led to a reliance on sterile economic models"

"Sterile" economic models?  That's being far too polite.  Try overly simplistic economic models used by those who pretend to be able to use them to predict the performance of an extremely complex system with an insufficient number of data points and data which is manipulated in the first place for political reasons.  Economic models which have very obviously proven themselves to have been completely unable to predict in advance what we are now experiencing which should then lead anyone with an IQ over 50 to ask how those same models and those who worship them can subsequently lead us out of this mess.  Answer: they can't!

In an interview, Prof. Steven Keen said that while you usually expect that following "expert" advice will be to your advantage, when those "experts" are using highly flawed theories, you are much better off not listening to them at all.  Any so-called economics "expert" who did not see this mess coming a mile away should not be listened to now.  And that is the problem. The same idiots, I mean "experts", who didn't see this coming are the ones still in charge now!

Wed, 06/20/2012 - 18:59 | 2545396 Tirpitz
Tirpitz's picture

"This is why the only solution to the Eurozone’s problems is a round of massive and immediate cuts in public spending."

As long as those cuts are concentrated in reduced bank bailouts and avoided warfare around the globe, they may indeed be beneficial. However if they are targeted to break the backbone of society, major rounds of expropriations will be needed to balance them properly.

For once, let all enterprises which pushed too much money onto unworthy creditors try to stand on their own, and let the chips fall as they may. And get widespread prosecutions started for balance sheet fraud, misleading of investors, and contempt of sane law.

Wed, 06/20/2012 - 19:01 | 2545399 FartInTheWind
FartInTheWind's picture

Actually it is not so difficult to predict the next steps in the scenario.

The next steps will be what is most profitable to the banksters.

Currently the banks borrow at zero interest from the ECB and lend this money at high interest rate to governments (bonds). A very profitable carry trade scheme for them, a giant wealth transfer (=theft) at the expense of the tax payers. Once all the money has been sucked out of the individual countries (dept+interest beyond the level of repayment) the dept will be 'socialized' to a higher European level: Eurobonds. The same scheme repeats and the money is being sucked out of the countries who previsously had a healthy status, their taxpayers now hold the bag. This scheme can continue for another number of years. In the mean time money can and will also be sucked out of the savers (money holders) via inflation due to money creation (so called 'stimulus').

So I don't expect a collapse in the near future. Ofcourse to make the minds of the sheeple ready for the next step in the scheme, a number ofartificial crises need to be created, so the sheeple will choose freely to accept the 'necessary measures' . 

Wed, 06/20/2012 - 21:57 | 2545802 Ned Zeppelin
Ned Zeppelin's picture

Agree that the ultimate goal is to raise all of this debt to the sovereign level, where the collection problem for otherwise uncollectible private (bad bank debt) debts fades as goverments have the power of taxation and confiscation.  Win, win if you are holding the debt and have a quiescent populace.

Wed, 06/20/2012 - 19:49 | 2545514 sablya
sablya's picture

The markets don't care about this at all.  Europe collapsing.....<yawn>.....VIX is PLUNGING.  Mommy is there to support if you bruise your knee, little market, there, there, don't cry....shhhh, it'll all be ok.

Wed, 06/20/2012 - 19:55 | 2545533 AUD
AUD's picture

Just another Brit willfully ignoring the insolvent UK.

Wed, 06/20/2012 - 19:59 | 2545543 Youri Carma
Youri Carma's picture
I am afraid that simply "cutting public spending" won't cut it!   After the banksters produced trillions in debt, after their fraudulent toxics, mostly falsly tripple-A stamped MBS's which blew up Europe's face because they bought 70% of these empty boxes. A debt which can't be repayed won't be repayed, simpel as that.   This hologram of derivative debt's induced by fraud never can be a good reason to cut public spending unless you arrange the default and wipe out those fake derivative debts.
Wed, 06/20/2012 - 23:01 | 2545915 web bot
web bot's picture

R. What is the end game? When? Are we looking at months or a decade? Are we looking at a default of the USD? Is holding PMs for the long term sensible?

Thu, 06/21/2012 - 01:07 | 2546054 OneTinSoldier66
OneTinSoldier66's picture

"What is the end game? When? Are we looking at months or a decade? Are we looking at a default of the USD?"

 

I would say those are Trillion Euro and Dollar questions. As a US Citizen, from where I sit I worry about a default in the USD, heavily.

 

"Is holding PMs for the long term sensible?"

 

Speaking for myself and no one else, I would say... Yes

Thu, 06/21/2012 - 01:10 | 2546042 OneTinSoldier66
OneTinSoldier66's picture

I hear you Youri. +1

 

"This is why the only solution to the Eurozone’s problems is a round of massive and immediate cuts in public spending."

 

Although I believe that Crony Keynesian Governments have gotten completely out of hand and lost nearly all touch with reality, that's not the only solution.

 

1) Why wasn't defaulting on and liquidating the debt that cannot ever be repaid mentioned?

 

2) Why wasn't remonetizing Gold and/or having a "Free Competition in Currency" mentioned? Which would hold Governments to being able to only spend what they take in, as opposed to being able to spend beyond their means.

 

3) Has the author ever heard of a country called "Iceland"?

 

There is no such thing as Too Big Too Fail. Just ask Bernie Madoff. I wonder if he ever thinks about his son? I wonder why his son committed suicide not too long after Bernie went to jail.

Wed, 06/20/2012 - 20:29 | 2545616 Wood
Wood's picture

Everyone says "Unless ECB prints Euro will die!". This is wrong. What has saved the Euro and what will save the Euro is that the ECB won't print. If they print then they die.

Wed, 06/20/2012 - 23:24 | 2545945 TBT or not TBT
TBT or not TBT's picture

Unless ECB prints PIIGS countries will have to default, taking down lots of giant banks, insurance companies, pension funds, and the economy in non-PIIGS countries.    If ECB does print (to lend to PIIGS) that just increases PIIGS debt, making it more severely unservicable than before, causing them to default, taking down lots of giant banks, insurance companies, pension funds, and the economy in non-PIIGS countries.    Populist, demagogic politicians will take advantage in all countries to exit not only from the euro but also the stifling statist EU.

Wed, 06/20/2012 - 21:54 | 2545796 Ned Zeppelin
Ned Zeppelin's picture

The difference between synthetic and organic systems comes to mind - synthetic growth is confined to designated market segments and is unsustainable, organic growth finds many niches and fills them all, and the weak niches fade while the strong ones prosper in a constant turnover of birth-death activity.   Economic Darwinism needs tremendous diversity of market activity - more species and subspecies - to succeed. Free markets are the necessary condition to organic markets, lack of free markets the condition for synthetic markets. 

Wed, 06/20/2012 - 22:13 | 2545837 q99x2
q99x2's picture

How bout move all the jobs and manufacturing back to the US, close the borders except for tourism, lock the banksters out of the monetary system and prosecute fraud.

Elite's deal mostly through corporatism which includes the ability to manipulate Nations so they don't have the solution above available to them until they lose the ability to control Nations. They are losing control and to regain it the stakes must go up.

Pressure cooker's on.

Wed, 06/20/2012 - 22:32 | 2545869 celticgold
celticgold's picture

the main thing we learn from history .....is that we learn nothing from history...

Thu, 06/21/2012 - 00:29 | 2546005 Mike Cowan
Mike Cowan's picture

No it is not failing.

Thu, 06/21/2012 - 01:54 | 2546093 ak_khanna
ak_khanna's picture

A single currency for an economy as strong as Germany on one hand and relatively weaker economies like Greece or Ireland on the other is not sustainable in the long run. The idea of the stronger countries in the Euro zone to keep on bailing out the weaker ones repeatedly will be a difficult one to sell to the citizens of the economically stronger countries. Their is no practical way to save the Euro, the only thing that the politicians can do is to lavishly spend tax payers money towards bailouts which creates a much bigger crises a few months down the line but does not solve anything

 

http://www.marketoracle.co.uk/Article32741.html

Thu, 06/21/2012 - 02:43 | 2546126 AurorusBorealus
AurorusBorealus's picture

The southern European faction of easy money will prevail, and Germany will not leave, knowing that she is sinking herself with her kin (there is an overwhelming sense of fatalism still inherent in Germanic culture).  They will print, and when this fails and the currency fails, the Europeans will hang the bankers (and probably a lot of pensioners as well).  The real concern is the return of totalitarianism.

In America, totalitarianism (with a substantial rural resistance) is a near-certain outcome.

Thu, 06/21/2012 - 06:05 | 2546226 Jack Sheet
Jack Sheet's picture

Yes, Alistair, we know all this ad nauseam and you are another one of the UK and US analysts sitting in a greenhouse. .

Thu, 06/21/2012 - 08:10 | 2546407 TWSceptic
TWSceptic's picture

There is more truth in this one article than all MS media globally combined.

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