From RISK ON To REALITY ON
From Mark Grant, author of Out of the Box
Hope Springs Eternal - Then Reality Shows Up
"We need more Europe. We don't only need monetary union, we also need a so-called fiscal union," she said. "And most of all we need a political union -- which means we need to gradually cede powers to Europe and give Europe control."
-Chancellor Angela Merkel; June 7, 2012
This comment seems innocuous enough on its face, more political rhetoric; but maybe not. No one is kidding anybody. Europe is controlled by the country with the largest and most stable economy and that is Germany. As money has fled from the sovereigns in Europe; it has poured into Germany as being “best of class” so as everyone else falters on the Continent and has slipped into recession there is but one man standing and that is the Berliner Bear. If there is someone serious that thinks that Germany does not presently control Europe; I have yet to find him. So what is Germany really saying here; let me give you my translation:
We need more Germany. We don't only need monetary union, we also need a so-called fiscal union," she said. "And most of all we need a political union -- which means we need to gradually cede powers to Germany and give Germany control.
You may ascribe what motives you like from the benign to the most worrisome but, to me, the implication is obvious and the case being made by Berlin is quite clear and requires no Wizard of Oz to look behind the curtain and see who pulling the levers. As I reflect back historically here is the manifestation of destiny; the “third time is the charm” in action. It was quite impolite prior to World War II to discuss what was going on in Germany as hadn’t they assured everyone of what they were not going to do, hadn’t they signed any number of treaties promising a world of peace and prosperity and why would anyone think anything else as that is what they told us and yet, as our forefathers so painfully learned, what was said was not exactly what then took place.
There are many, today, who will get riled and raise their backs that I even deign to bring up this issue but it must be brought up, it must be considered if, for no other reason, out of consideration for those that gave their lives to stand in defense and while a final conclusion does not need to be found it would be very wrong not to honestly look at what is going on and wonder and so I wonder.
“For what we regard as reality is conditioned by the theory to which we subscribe.”
Lately I have listened to many that seem somewhat confused about what Europe can and cannot do presently and so I thought I would take a moment this morning to set the table straight. First and foremost there is no ESM, it does not yet exist and so cannot be used to do anything. It may well come into existence somewhere between July-September but it is not yet in existence. The present stabilization fund, the EFSF, has depleted assets after the bailout of Greece, Ireland and Portugal and has nowhere near the capital that would be required to provide any real financial assistance to Spain. The EFSF also can only give money to sovereign nations and has no authority to give money to banks and while this could be changed it would have to go back to the national parliaments to get changed and it would take months to revise its charter which is something that has not even been started so the conjecture about using the EFSF to give money directly to the Spanish banks is just hopes and prayers based upon misinformation.
In fact, there is only one European institution that is already authorized to give money directly to banks and that is the European Central Bank but this is also a construct that is full of with difficulties. Yesterday Spain was downgraded three full notches by Fitch with a negative outlook which complicated matters. What is the ECB to do just hand some of the Spanish banks $125 billion which is more likely $350-400 billion in my estimation and to which banks; just some of the Spanish banks or all of the Spanish banks and who is to supervise the re-capitalization as the banks are supervised by the Spanish Central Bank and not the ECB and so the banking system in Spain would have to be totally re-organized and power ceded which would likely take months, if politically possible, and what would the other nations in Europe say if the ECB is to help the banks of just one country when they did nothing for Dexia (Belgium, France and Luxembourg) or the Irish banks and one could reasonably imagine screams all across the Continent.
Perhaps some novel solution is found but this is not the muddling along kind of thing at all. This is the changing of charters kind of thing, the changing of national banking regulations kind of thing; the ceding of power to Europe kind of thing and anyone who thinks that this can all be accomplished in a matter of days is out having tea with Cinderella’ fairy godmother. Yet equities have rallied and bond spreads stopped widening on just this kind of hope but I predict that this will all be short-lived because, on its face, it is irrational. There is nothing wrong with having hopes and prayers but to base investment decisions on irrational interventions of some Divine power where there is not even a door for the Divinity to enter is just poor judgment by this name or any other you may concoct. It is no longer a case of “Risk on/Risk off” but of “Reality on/Reality off” and I advise you to keep pressing the “Reality on” button!
“Reason is a choice. Wishes and whims are not facts, nor are they a means to discovering them. Reason is our only way of grasping reality; it is our basic tool of survival. We are free to evade the effort of thinking, to reject reason, but we are not free to avoid the penalty of the abyss we refuse to see.”
-Terry Goodkind, Faith of the Fallen
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