Guest Post: The Nightmare After Christmas

Tyler Durden's picture

By Detlev Schlichter of The Cobden Center

The Nightmare After Christmas

The pathetic state of the global financial system was again on display this week. Stocks around the world go up when a major central bank pumps money into the financial system. They go down when the flow of money slows and when the intoxicating influence of the latest money injection wears off. Can anybody really take this seriously?

On Tuesday, the prospect of another gigantic cash infusion from the ECB’s printing press into Europe’s banking sector, which is in large part terminally ill but institutionally protected from dying, was enough to trigger the established Pavlovian reflexes among portfolio managers and traders.

None of this has anything to do with capitalism properly understood. None of this has anything to do with efficient capital allocation, with channelling savings into productive capital, or with evaluating entrepreneurship and rewarding innovation. This is the make-believe, get-rich-quick (or, increasingly, pretend-you-are-still-rich) world of state-managed fiat-money-socialism. The free market is dead. We just pretend it is still alive.

There are, of course those who are still under the illusion that this can go on forever. Or even that what we need is some shock-and-awe Über-money injection that will finally put an end to all that unhelpful worrying about excessive debt levels and overstretched balance sheets. Let’s print ourselves a merry little recovery.

How did Mr. Bernanke, the United States’ money-printer-in-chief put it in 2002? “Under a paper-money system, a determined government can always generate higher spending…” (Italics mine.)

Well, I think governments and central banks will get even more determined in 2012. And it is going to end in a proper disaster.

Lender of all resorts

Last week in one of their articles on the euro-mess, the Wall Street Journal Europe repeated a widely shared myth about the ECB: “With Germany’s backing, the ECB has so far refused to become a lender of last resort, …” This is, of course, nonsense. Even the laziest of 2011 year-end reviews will show that the ECB is precisely that: A committed funder of states and banks. Like all other central banks, the ECB has one overriding objective: to create a constant flow of new fiat money and thus cheap credit to an overstretched banking sector and an out-of-control welfare state that can no longer be funded by the private sector. That is what the ECB’s role is. The ECB is lender of last resort, first resort, and soon every resort.

Let’s look at the facts. The ECB started 2011 with record low policy rates. In the spring it thought it appropriate to consider an exit strategy. The ECB conducted a number of moderate rate hikes that have by now all been reversed. By the beginning of 2012 the ECB’s policy rates are again where they were at the beginning of 2011, at record low levels.

So why was the springtime attempt at “rate normalization” aborted? Because of deflationary risks? Hardly. Inflation is at 3 percent and thus not only higher than at the start of the year but also above the ECB’s official target.

The reason was simply this: states and banks needed a lender of last resort. The private market had lost confidence in the ability (willingness?) of certain euro-zone governments to ever repay their massive and constantly growing debt load. Certain states were thus cut off from cheap funding. The resulting re-pricing of sovereign bonds hit the banks and made it more challenging for them to finance their excessive balance sheets with money from their usual sources, not least U.S. money market funds.

So, in true lender-of-last resort fashion, the ECB had to conduct a U-turn and put those printing presses into high gear to fund states and banks at more convenient rates. While in a free market, lending rates are the result of the bargaining between lenders and borrowers, in the state-managed fiat money system, politicians and bureaucrats define what constitutes “sustainable” and “appropriate” interest rates for states and banks. The central bank has to deliver.

The ECB has not only helped with lower rates. Its balance sheet has expanded over the year by at least €490 billion, and is thus 24% larger than at the start of the year. This does not even include this week’s cash binge. The ECB is funding ever more European banks and is accepting weaker collateral against its loans. Many of these banks would be bust by now were it not for the constant subsidy of cheap and unlimited ECB credit. If that does not define a lender of last resort, what does?

And as I pointed out recently, the ECB’s self-imposed limit of €20 billion in weekly government bond purchases (an exercise in market manipulation and subsidization of spendthrift governments but shamelessly masked as an operation to allow for smooth transmission of monetary policy) is hardly a severe restriction. It would allow the ECB to expand its balance sheet by another €1 trillion a year. (The ECB is presently keeping its bond purchases well below €20 billion per week.)

Deflation? What deflation?

It is noteworthy that there still seems to be a widespread belief that all this money-printing will not lead to higher inflation because of the offsetting deflationary forces emanating from private bank deleveraging and fiscal austerity.

This is an argument I came across a lot when I had the chance in recent weeks to present the ideas behind my book to investors and hedge fund managers in London, Edinburgh and Milan. Indeed, even some of the people who share my outlook about the endgame of the fiat money system do believe that we could go through a period of falling prices first, at least for certain financial assets and real estate, before central bankers open the flood-gates completely and implement the type of no holds barred policy I mentioned above. Then, and only then will we see a dramatic rise in inflation expectations, a rise in money velocity and a sharp rise in official inflation readings.

Maybe. But I don’t think so. I consider it more likely that we go straight to higher inflation.

The deleveraging in the banking sector is the equivalent of austerity in the public sector: it is an idea. A promise. The reflationary policy of the central bank is a fact. And that policy actively works against private bank deleveraging and public sector debt reduction.

Consider this: The present credit crisis started in 2007. Yet, none of the major economies registered deflation. All are experiencing inflation, often above target levels and often rising. In the euro-area, over the past twelve months, the official inflation rate increased from 2 percent to 3 percent.

From the start of 2011 to the beginning of this month, the U.S. Federal Reserve boosted the monetary base by USD 560 billion, or 27 percent. So far this year, M1 increased by 17.5 percent and M2 by 9.5 percent.

Below is the so-called “true money supply” for the U.S. calculated by the Mises Institute.

As the Mises-Institute’s Doug French pointed out, total assets held by the six biggest banks in the U.S. increased by 39% over the past 5 years. Maybe this is not surprising given that in our brave new world of limitless fiat money, credit contraction is strictly verboten.

In the UK the official inflation reading is at around 5 percent, but nevertheless in October the Bank of England embarked on another round of “quantitative easing”. It has so far expanded its balance sheet by another £50 billion in not even three months, which constitutes balance sheet growth of about 20 percent.

What we have experienced in the UK in 2011 provides a good forecast in my view for the entire Western world for 2012: rising unemployment, weak or no growth, failure of the government to rein in spending, growing public debt, further expansion of the central bank’s balance sheet, rising inflation.

Death of a safe haven

And what about Switzerland? Here the central bank expanded its balance sheet by 40 percent over just the first three quarters of the year, and almost tripled the monetary base over the same period of time. Most of this even occurred before the 6th of September, the day on which Mr. Hildebrand, the President of the Swiss National Bank, told the world and his fellow Swiss countrymen and women that the whole safe-haven idea was rubbish and that Switzerland was now joining the global fiat money race to the bottom.

Deflation has become the bogeyman of the policy establishment. It must be avoided at all cost! Of course for most of us regular folks deflation would simply mean a tendency toward lower prices. It would mean that the capacity of the capitalist economy to increase the productivity of labour through the accumulation of capital and to thus make things more affordable over time (a true measure of rising general wealth) would accurately be reflected in falling nominal prices. The purchasing power of money would increase over time. This, however, would require a form of hard and apolitical money. Instead we are constantly told that our economy needs never-ending monetary debasement in order to function properly. We are constantly told to fear nothing more than deflation, which can only be averted by a determined government and a determined central bank. And the never-ending supply of new fiat money.

Appropriately, there is no talk of exit strategies any longer.

Given the size of the already accumulated imbalances I think a stop to this madness of fiat money creation would be painful at first but hugely beneficial in the long run. I am the last to say that no risk of a very painful deflationary correction exists. But a correction is now unavoidable in any case, and every other policy option will make the endgame only worse. Even if I am wrong on the near-term outlook on inflation and even if all this money-printing does not lead to higher inflation readings imminently, it will still be a hugely disruptive policy. Money injections obstruct the dissolution of imbalances and invariably add new imbalances to the economy, including new debt and capital misallocations, that will make even more aggressive money printing necessary in the future.

The nationalization of money and credit

Herein lies a fundamental contradiction in our present system: The desire for constant inflation and constant credit expansion requires that the banks be shielded from the effects of their own business errors. Allowing capitalism’s most efficient regulators, profit and loss, to do the regulating, would mean that banks could face the risk of bankruptcy – this is, of course, the ultimate disciplinary force in capitalism. This could then lead to balance sheet correction and thus periods of deflation. Ergo, banks cannot be capitalist enterprises at full risk of bankruptcy as long as constant credit growth and inflation are the overriding policy goals. The constant growth of the banking sector must be guaranteed by the state through the unlimited provision of bank reserves from a lender-of-last resort central bank.

That banks get ever bigger, that they routinely hand out multi-million dollar bonuses, and that they frequently get bailed out, is not a result of the greed of the bankers – a stupid explanation anyway, only satisfactory to the intellectually challenged and perennially envious – but is integral to the fiat money system.

Banking under state protection ultimately means banking under state control. In the end it means state banking. And this is where we are going.

Last week the Federal Reserve and the Bank of England announced plans to tighten the control over the balance sheet management and the risk-taking of private banks. This is just the beginning, believe me. The nationalization of money and credit will intensify in 2012 and beyond. More regulation, more restriction, more control. Not only in defence of the bankrupt banks but also the bankrupt state. We will see curbs on trading, short-selling restrictions and various forms of capital controls.

A system of state fiat money is incompatible with capitalism. As the end of the present fiat money system is fast approaching the political class and the policy bureaucracy will try and defend it with everything at their disposal. For the foreseeable future, capitalism will, sadly, be the loser.

The conclusion from everything we have seen in 2011 is unquestionably that the global monetary system is on thin ice. Whether the house of cards will come tumbling down in 2012 nobody can say. When concerns about the fundability of the state and the soundness of fiat money, fully justified albeit still strangely subdued, finally lead to demands for higher risk premiums, upward pressure on interest rates will build. This will threaten the overextended credit edifice and will probably be countered with more aggressive central bank intervention. That is when it will get really interesting.

We live in dangerous times. Stay safe and enjoy the holidays.

In the meantime, the debasement of paper money continues.

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Oh regional Indian's picture

Thin ice is so true. 

One possible shock is the rug being pulled from under the developing world's feet, if the dollars need to rush home. They can RUIN India/China/Thailand/Malaysia just like that. Reverse the liquidity pump.

Interesting visual. the BRICS were built as flat bottom boats, to float on thinly spread liquidity. When it's gone, they'll just sit there and rot. It's already happening here. 

ori

/the-plan/

EhKnowKneeMass's picture

But, but, but, the Sensex went up by close to a 1000 pts in the last 5 days. So, all must be well in India, a place where people are more fertile than the land.

Oh regional Indian's picture

What a weird last line in your comment. Un-less, seeing your carefully crafted handle, that you were trying to be funny?

Weird...

But anyways, the Sensex is susceptible to as much manipulation as the DOW.

ori

ratso's picture

Mr. Schlichter makes some interesting points, however, he fails to prove that fiat monetary systems are incompatible with capitalism.  He asserts his conclusion in the end without have demonstated its validity. SImply talking about banks getting bigger and giving out bigger bonuses etc proves nothing except that shareholders have little to say about how large corporations are managed - this pertains to all large corporations not just banks as well as big elected governments. 

When the values of accountability to shareholders and citizens have vanished this does say anything about capitalism except to say that capitalism is an inherently amoral system that easily spawns self destructing off spring that threaten its own mechanisms of operation. 

Disproportionate bonuses and salaries are an insult and injury to the citizens and shareholders of every country and corporation where they are inflicted, as is tax evasion and neglect of the poor and less fortunate.

Happy New Year

sof_hannibal's picture

There are several good points (in the article), but I would add this also: greed of banks vs. State/central planners and bank control becomes somethong like a what came first the chicken or the egg argumemt; as I see deregulation policies as leading corporate monies to put political pressure on the system to keep the illusion going not necessarily the other way around.

I am not saying that I am 100 percent right here either; however, the original article above says that bank CEOs get million dollar bonsues because of central bank panning. Well, the stupidity and greed of many CEOs, regardless of it being a bank [CEO] or not is -- that many CEOs or corporate leaders who rountinely bankrupt their companies are given multi-million dollar bonsues; not just bank CEOs. MF global walking away with 1.2 billion dollars of investor money is another example of this no rules, cronyism, and "good ol' boys system," which seems to be the direct result of a no regulations/ no rules policy -- both of our current system and the fiat currency isssue(s).

Should countries be allow to carry sham debt balances?, no. Should central planning be allowed to (currently) bail out banks at wim?, no. However, shawdow banking and gambling with trillions one or a corporate entity at (100:1) does not have should also be illegal, as well as things such as shawdow banking (should be outlawed). It would seem to me that these 2 concepts, for instance, are related to regulation, not de-regulation policies ; but also tied to less intervetion of the state in business. Meaning that we still need strong regulations, or cronyism/ robber barron capitalism will continue. And clearly, people in general are vastly losing all confidence in the financial markets... Bullish on shotgun shells... haha

Dr Hackenbush's picture

any monetary reformist knows that currency today is private and debt is nationalized to pay for it.  

AnAnonymous's picture

he fails to prove that fiat monetary systems are incompatible with capitalism.

////////////////////////////////////////

Made me laugh?

Prove? US citizens need no proof for capitalism.

US citizenism postulate: capitalism is success, capitalism is good.

When something bad happens, when something fails, it can not be capitalism (by previous US citizenish postulate)

No proof needed. Only US citizenism.

TheGardener's picture

Sure no cynicism in your "citizenism"? Citizenship has become a much eroded concept lately, but why add an "ism"
which almost always indicates something really dirty or
outright repugnant.

Cathartes Aura's picture

perhaps he's referring to the "citizenism" imposed upon birth, with the assigned socially secured #. . .

repugnant indeed.

vamsy's picture

what are you saying? Manipulation is 'mandated' in order for the 'free markets' to continue <sarcasm>. Look at this outrageous article:

 http://www.moneycontrol.com/news/rupee/patchy-rupee-defence-to-slow-not-...

so only the banks are authorized to print money by short selling the Rupee (just like the holy man of India Dr Manmohan Singh said two years ago that it is not good that speculators make money in  a bear market, market movement should be completely random); so we see 10% spike in stocks if the profit of a large software firm falls by 30-40% and stocks free fall after they report a 100% increase in profits. Death to all the banks! Let the system restart which it desparately trying to do...

Oh regional Indian's picture

True Vamsy.

And look at the current depression of the rupee. IT firms not so firm bottom lines get help, indian connedsumer gets hammered on essentials and smothered with cheap, toxic crap!

ori

johnu78's picture

Everything is still going to sh*t despite what CNBC is telling us!!!

 

-John
http://www.youtube.com/watch?v=5bfMrvswSLo

DaveyJones's picture

in order to call out shit, you must first be something else

Esculent 69's picture

Oh boy! I wonder what new war we will get for the new year. I'm so excited I think its time for a not very sexy party!!! www.youtube.com/watch?v=vqj22l2djEs

pineyard's picture

I have ONE OBJECTION to the CONTENT of this Article ..and that is:

EUROPE COMBINED has had a POSITIVE TRADING AND CURRENT ACCOUNT BALANCE for the Time of The European Unions Existance .

This means that EUROPE has financed what it spent and what it invested  ..ITSELF.. in an overall  ( and Austrian School ) Calculation .. because it EARNED the Money spent by its own LABOUR and EFFORT .. in the first place  .. It is true ..this  surpluss has been UNEVENLY distributed ..INSIDE the EU .. nevertheless ..it was and is .. a SURPLUSS ..

That is a FACT .. which should be taken in consideration .. when PROGNOSTICATING ... but is so conveniently OMITTED .. by the TSUNAMI of PUBLICATIONS emanating from the ANGLOSAXON WORLD .. which for as long as I can remember NEVER produced MORE then they spent ... but on a constant basis ..was forced to BORROW ..from the external  world .. in order to make ends meet means

CPL's picture

Europe hasn't gotten around to paying for the crusades you dumb fuck, the US just made it's last payment on WW1.  When does this bullshit stop?  Never.  For longer than a millenia europe has been the piss pot of the planet and it will REMAIN the pisspot of the planet.

 

Africa has less debt incurred over time, there are small pacific islands where pigs are used as capital than have more equity invested in themselves and they don't even use fiat.  Just pigs.

 

This is why we can't have nice things, people sweep truth under the rug constantly to make the universe line up with their belief structure.  Fucking makes me sick.

CPL's picture

Canuck actually.   You would be surprised how many of us refer to her majesty as the old cunt and the soon to be king her crotch fruit.  Canadian taxes remain high to make sure some tart across the pond on a golden throne is entitled to keep fucking and spending her own people's money with nothing but a vague promise she's connected to God by some ancient Papal sanction decreed 1500 years ago.

 

Fuck Europe.  It's not an investment strategy unless you are the king or queen of a country.  That's Europe, 2000 year old mentality of sea piracy and theft by decree of a political force only driven by whos cunt you drop from.  Nothing more.  It's dump and it wasn't turned into a dump by foreigners, last time I've been through London and the area the white people were doing a fine enough job of shitting in their sandbox.  France isn't much different, nor is Germany. 

 

Worker Bee's picture

Hey CPL,remember that time you were running around screaming like a little girl about your insider info on an imminent nuke attack?

CPL's picture

Sure.

It's still going to happen whether you want to believe it will or won't.  Here's a job position for you.

 

http://www.goarmy.com/careers-and-jobs/browse-career-and-job-categories/...

 

You can either leave the compound at night or you can stay.  Your perspective depends on who you are working for once someone is dumb enough to pull the trigger.  There certainly is no shortage of stupid.  Unending universal well to draw from.

 

Did you think they were not going to use the nukes?  Russia is doing something they haven't done in 15 years.  They are testing the sea to surface missiles.  Without all that ice in the way of the north pole, nothing is stopping the military juntas from turning each other into ashtrays and their populations into shadows on pavement.

 

http://www.reuters.com/article/2011/12/23/us-russia-missile-test-idUSTRE...

All this hedges on the US and Israel behaving themselves regarding Iran.  Iran currently couldn't give a rats ass about Europe.  in fact NOBODY cares about Europe except the people running Europe and the chattel that live under their kings and queens.

http://www.upi.com/Business_News/Energy-Resources/2011/12/23/Iran-rehear...

http://www.bloomberg.com/news/2011-12-25/saudi-aramco-s-fuel-halt-will-a...

Iran is already making plans to cut the nuts off of Europe.  Japan is sneaking out the back door from the US Hegemony.  European reaction is to have "die-ins" as a protest to their mouths running against the oil producer in the area running at capacity next to the house of Saud.

http://www.wdm.org.uk/climate-change/fuel-poverty-action-%E2%80%98die-in...

Funny thing is the dying currently is voluntary.  Just wait a year, then the option goes from voluntary to compulsory.

 

So what news have you got to the contrary that the world is improving and international relationships are strengthening in this dismal time? 

 

None but you got a new iPad/android appliance so the world is okay.

 

I would suggest that you take all your money out of your savings and spend it today.  It's boxing day, so take the next step and become what I expect you to be and consume...then borrow some money...then buy some more stuff.

 

 

 

 

Green Leader's picture

CPL

I am reading this agronomical book "More Food From Soil Science, The Natural Chemistry of Lime in Agriculture".

http://www.growersmineral.com/about/tiedjens

The Russians had figured it out by 1850, the rest is just fertilizer company sales propaganda.

I will be able to defeat chemtrails and grow beautiful, vibrant, healthy plantains once again. Purple and yellow taro, too!

CPL's picture

It's basically what every grave digger since time began knows; calcium, protein and lime make healthy lawns in graveyards.

 

Name a graveyard where they use fertilizers?  They don't, unending supply of fertilizer shows up daily in various sizes and shapes daily.

 

If you want to pick a fertilizer, breakfast cereal and cat food.  It has everything people need and plants to.  Government figured out  a while ago people eat both food in great quantities then started regulating the minerals and vitamins that go into human chow so their respective population wouldn't die of rickettes and scurvy.

Green Leader's picture

In order to boost production you actually need to reach a specific base saturation threshold in the soil particles and the realationship between lime applied and bushels of corn produced is NOT linear.

It's not as simple as you wish to portray.

Mariposa de Oro's picture

Tell me about the pigs, CPL.  I live in the Republic of the Marshall Islands.  I've never heard the islanders here using pigs as capital.  This is a serious question.  There are plenty of pigs on the outer islands.  I'm on Kwajalein so none here (usually).  Those that do show up are very short term visitors if you know what I mean. thx

TheGardener's picture

Don`t mind the swine. Those leftists are immune to hard facts. Marshall Islands ? Must be ruled by some U-Boot
survivors , if they dare to counter my stories...

Mariposa de Oro's picture

Leftists=swine, lol indeed. no U-boat survivors here, just Americans and the locals.

Sean7k's picture

You seem to be ignorant of the debt obligations created by derivatives by european banks on malinvestment and sovereign debt for excessive social spending and the bailing out of those same private banks. Your current account balance deals only with foreign trade. 

Europe has NOT financed what it has spent. It has borrowed sums beyond comprehension.

Marco's picture

He's not ignorant, he is simply saying it's an internal issue. The EU as a whole pays for what it consumes.

Lets say the entirety of the EU would default but find some way to keep it's factories and service industries providing it's exports running ... would they be able to import the same amount of goods they are importing now? Yes, because it has trade balance ... the EU exports products to pay for its consumption, internal distributions of debts and credit are irrelevant to that fact.

Lets say the US would do the same, would it be able to import the same amount of goods they are importing now? No, because it isn't in trade balance ... the US exports debt (and military protection) for it's consumption, not product.

Sean7k's picture

If the EU paid for what it consumed, it would have no sovereign debt. What part of that is hard to understand? If the EU paid for what it consumed, it wouldn't have a 3.5 trillion debt on the balance sheet. 

You cannot take a part of the economy and separate it from all the other parts and scream, "We're solvent". You have to look at the WHOLE balance sheet. You cannot separate out the costs of socialism that you are unable to pay, not able to tax for  and have people believe you are solvent. If that was the case, your bond rates in the PIIGS would not be hitting 7%.

It is not an internal issue when your banks continue to feed at the FED swap lines. Trade balances are meaningless without a consideration of the national wealth. Nations have negative and positive trade balances all the time and for periods of history, it means nothing until they are exposed and people refuse to accept their currency at the rates the nation wants to trade at.

This is a reflection of sovereign debt and the ability to pay on that debt. Thus, Greece, Ireland, Spain and Italy. Soon to be France, Britain and Germany. I am not saying the US is any better- see my comment below.

francis_sawyer's picture

Not really arguing with you here, but when you say something like this...

You cannot take a part of the economy and separate it from all the other parts and scream, "We're solvent". You have to look at the WHOLE balance sheet.

Isn't that what they do with LABOR numbers & CPI numbers all the time? Keep fudging out elements until it kinda sorts looks palatable...

Half the time I think they do all the somersaults for nothing... A report of a bad number of anything quickly bets buried on page 4... Even if it stayed on page 1, people would be like, "HUH"... They have no capacity to aggregate these things... Especially when DWTS is on the other channel...

LawsofPhysics's picture

I think you all are missing the point. "the E.U. pays for what it consumes" - really? With what? Gold? Oil? Or simply more bullishit paper? The answer is the latter morons. Let's see how ANY sovereign country does when the oil, coal, and natural gas stops flowing. I'll be impressed with the E.U. when they start "paying" for what they consume with real hard assets. Until then, they are simply more paper-pushing fucknuts.

Socratic Dog's picture

Yeah.  I was thinking yesterday about how much corn I can buy for an ounce of gold.  It's well over 5,000 pounds at retail prices (50 pound bags).  Thats over 5,000 man-calorie-days (my own units, I think it makes sense) of nutrition, or 14 man-calorie-years.  14 years of food for an ounce?  Something wrong with this picture.

What's wrong, it seems to me, is that the price of gold reflects the worthlessness of fiat; the price of corn doesn't.  Yet.  When it does, it's game over.

LongBallsShortBrains's picture

Dog,
You will find it much easier to replace that corn through your hard work than trying to replace one ounce of gold with your own work. The amount of corn in the world is constantly changing. It gets eaten, burned, lost, popped, or planted and harvested. The gold is mined and very little is consumed. However, as said here before..... You can't eat it...

Disclosure: long gold krugs til the boating accident(s), still hoping to find them.

Marco's picture

Financial paper isn't counted into trade balance calculations, financial services are ... but that's mostly the UK. The Euro zone pays it's dues with real services and products.

Marco's picture

The EU is not just it's governments or it's banks ... it's it citizens and corporations as well. Which one of us is looking only at part of the economy? If you net the internal credit and debt within the EU then you end up with the EU being a net creditor to the world ... that's what it means to run a cumulative current account surplus.

The EU is in trouble because it allowed internal imbalances to be created and it refuses to solve them itself at the national and fiscal levels. The US is allowing EU banks to feed at FED swap lines because they know that in the end if trade deficit countries in the EU start to default people will start really considering the national wealth of the greatest debtor of all.

In a sane world productive capacity, education levels and infrastructure are national wealth ... and in that respect the EU is quite wealthy as a whole. The US as well, but not nearly wealthy enough for it's current standard of living ... it's enjoying that standard of living because reserve currency ownership and military might has become wealth in this insane world.

Sean7k's picture

Well, why don't you produce those numbers with a citation, cause I call bullshit. The EU is not a net creditor- not even close.

gjp's picture

Precisely. People just don't seem to understand the current account, what it represents and how important it is. It is the most damning of the metrics for many of the PIIGS (Italy excepted) and the US is the worst of all in this department. Yet everyone focuses narrowly on federal government budgets. Frustrating, but just the usual in our Orwellian world where nothing is at it is presented.

JOYFUL's picture

The "fact" of surplus is value neutral once you engage your full faculties.

"Trade" in the sense that you have used the word, is a euphemism for the serial extraction of resources from the peripheries of empires to the core. As lately as the 70s* that process of exporting disease and trinkets and importing valuable resources was still in full swing. Europe is in the terminal phase of it's imperialist cycle - the resources available increasingly must be paid for on terms other than of it's own making. There is quite simply a period of abeyance right now - an interlude between total command and total collapse - that will soon enough come to an end. 

It's illogical and to pose the discussion in terms of USA vs. European interest.  Amerika has been in the forefront of helping the combined powers of the European imperialist residue to try and stage one last grand theft...Libya, Syria, Tunisia, Egypt, Iraq, and soon Iran, are graveyards of Italian, French, English ambition. Watching the pathetic efforts of these hasbeen powers to raid the tomb one more time has been both shocking and enlightening.  There is, indeed, no honour amongst thieves.

The reserve currency status has given Amerika a few more rounds to stand upon it's own legs before it too goes down.  That empires are retracting and going through death throes is normal and unstoppable, no matter what military might is employed to stave off the inevitable.

Lest this observation be misunderstood as an anti-colonial diatribe, the simple fact is that all nations nurture ambitions to prey upon weaker neighbours...we are not so far removed from our beginnings, by a long shot. Neither India nor China nor any other so called developing nation have any moral high ground to stand upon. That Germany and other northern European nations stand relatively free of colonial payback is an interesting articulation of the perils of empire and the advantages of 'defeat.' They, and they alone, did learn to live off of their own labor; but this is Europe we speak of-the grand experiment in post colonial consumer fetishism...did they really believe it would work out?

*arguably a decade either way, depending upon one's stance

TheSilverJournal's picture

While the Euro is in a world of hurt, the USD is in much worse shape and has a bigger debt problem. The difference is political in the sense that the Euro could be the one to bust the world fiat ponzi if they decide not to save one of the big countries such as Italy or Spain, whereas in the US, the states aren't seceeding any time soon. However, if the the Euro is held together, the Euro countries have much more road to kick the can down than the US. No matter what is done in the US, there isn't much time left.

TheSilverJournal.com

Miles Kendig's picture

Balance sheet considerations should not seriously constrain central bank operations

- Ben Bernanke May 31, 2003

http://www.federalreserve.gov/boarddocs/speeches/2003/20030531/default.h...


innsbrooklad's picture

The world financial system is broken. The present mess remonds me of a golf club I used to belong to. They would have a capital assessment every year. We all thought it was for new machines and mowers. Unfortunately it was used to pay operating expenses and the club went broke and the Directors were all sued and they lost in court.

We borrow long term to pay national operating expenses. It is terminal. Only when the markets do not buy our debt anymore will the mess come to a head, but I imagine it will be far too late. The solvent nations like Canada and Switzerland will see a rush into their currencies, but that has bad omens also. Remember when the Swiss devalued at 1.40 SF?????

bozzy's picture

Solvent? Switzerland? The numbers do not say this - Switzerland has a debt shaping up to look like Iceland

duo's picture

I want to see that TMS graph on a log scale.

duo's picture

found it.  M2 up by 15x since 1971

http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=M2NS&log_scales=Left

 

Almost Solvent's picture

Canada eh?

 

Other than their ballet  - eh.