Submitted by David Stockman via Contra Corner blog [15],
At the moment, Europe is struggling to pass an inflamed financial gallstone. The sooner that Greece is permitted to escape the debt clogged financial ducts fashioned by its Brussels paymasters, the sooner the entirety of Europe can begin the cure of debt liquidation and return to honest finance.
In their wooden-headed insistence that Greece remains obligated to 100% of its crushing $350 billion debt load, the Germans are, ironically, doing the work of the financial gods. By making it literally impossible for the new Greek government to abide by its voter mandate, Berlin is paving the way for “grexit” and is thereby setting-up the catalyst for the Euro’s demise. And with it, of course, the obliteration of the EU’s rotten regime of bank bailouts, central bank money printing and fiscal policy anesthesia.
Hallelujah! Europe and the world desperately need a big, bloody sovereign default, and there is no more worthy case than Greece. As Finance Minister Varoufakis so inconveniently stated last week, Greece is a “bankrupt state” and has been since the crisis first erupted back in 2010.
Accordingly, the Brussels bailout transfer of that impaired debt from the banks and investors, which had so richly earned the right to experience deep losses owing to their lack of prudence, to EU taxpayers was a stupendous act of economic and political folly. It paved the way for the very evil that the fiscally resolute Germans profess to fear the most. Namely, central bank financing of state deficits and the unleashing of politicians to thereby ultimately bankrupt it.
Stated differently, everywhere and always modern politicians and fiscal authorities need to face the naked wrath of an honest bond market—the bond vigilantes of yore—- when they seek to finance voter subventions today by obligating the taxpayers of tomorrow. Especially when government finances start heading south, nothing can be permitted to stand in the way of honest price discovery. Indeed, the instantaneous shock therapy afforded to authorities that comes with soaring interest rates on currently issued debt, and the associated risk that all existing debt will have to be rolled over at prohibitively high rates in the future, is the only thing that can preclude the disease of kick-the-can fiscal drift and profligacy that prevails the world over at present.
As a practical matter, only the bracing tonic of unfiltered bond price feedback and the threat of uncontained sovereign debt yields can concentrate minds and screw up courage in the finance ministries and parliamentary fiscal committees before it is too late. That is, while there is still time to avoid the debt trap of borrowing to pay the interest.
So modern welfare state democracies desperately need rough and tumble free markets in public debt and not infrequent sovereign bankruptcies. The latter will keep the bond and bank managers alert and focused on the job of risk analysis for which they presumably are paid their fees; and the former will keep politicians alert to the danger that chronic deficit finance and pie-in-the-sky fiscal projections—–i.e. Rosy Scenario—-will put them on the slippery slope from which there is no return short of politically fatal resort to sweeping tax increases and spending cuts.
Preventive health is thus the sine qua non of fiscal stability, but the EU’s Keynesian regime of bank bailouts and central bank financial repression is equivalent to binging on empty calories. In fact, there is nothing more insidious than the Draghi orchestrated orgy of hedge fund front-running that is going on in the European debt markets cheek-by-jowl with the Greek exit ordeal. In the face of that generic risk, it is flat out absurd that the French 10-year is trading at 60 bps or that the debt-besotted Italian and Spanish state issues are bid at 160 bps.
The fact is, the purported threat of “deflation” is an entirely bogus reason for the ECB’s pending lurch into $1.3 trillion of QE. Apart from the short-term impact of the global oil and commodity collapse, there is no evidence of systematic price decline in Europe, and the current transient gale of commodity deflation is actually a boon.
Likewise, it is plainly evident that the ECB’s embrace of ZIRP and QE cannot possibly help the macro-economy or trigger an escape from Europe’s state-instigated lapse into economic stagnation. That is because Europe’s private sector is already saturated with borrowings and has run smack into the limits of peak debt. Therefore, zero interest rates do not stimulate incremental borrowing, and do not goose the GDP with a one-time ratchet of credit fueled spending.
As shown below, the credit channel of monetary policy transmission is as clogged and impeded in Europe as it is in the US. During the first seven years of the “euro” boom, private debt footings in Europe soared at a 12% compound annual rate. In short order, the available balance sheet headroom on European household and business balance sheets was used up. The single currency miracle was then over because it was rooted in an artificial and unsustainable credit boom, not organic improvements in capitalist productivity and efficiency across the continent.
Since the financial crisis, however, private sector loans in the euro area have plateaued, and for an obvious reason that only Keynesian economists and central bank money printers cannot comprehend. Namely, that private incomes are stagnant and leverage ratios are at their maximums.
Even then, the 14-year CAGR for private loan growth in the euro area is a robust 6.0%. Needless to say, that is not evidence that central bankers have been too stingy. Instead, its the historical proof that the European private sector has used up its available balance sheet, and that it is now struggling to expand on its own two feet in the face of the insuperable barriers posed by governmental addiction to high taxes, welfare state largesse and statist dirigisme.
That Brussels and Frankfurt remain committed to financial repression and bond market bailouts, therefore, has only one logical explanation. They have stumbled into an unstable, destructive regime that is attempting to finance state deficits throughout the continent in a hothouse bond market that is an artificial creature of the EU superstate—-a make believe financial market where all prices are dishonest and are formed by the flood of false credit from the ECB printing press and the false price floors decreed by the bailout authorities.
In short, the sooner the EMU is busted, the sooner the fiscal free riders like Italy, France and Spain will be required to get back out into the global financial markets with their own currencies. And there is not a chance under those circumstances they could print there way to 1% ten-year money or borrow it from at risk lenders.
In the article attached, London’s most astute advocate of the monetary printing press, Ambrose Pritchard-Evans, flacks for the Obama White House, [16] insisting that the EMU authorities let Greece off the hook. As our clueless President observed,
“You cannot keep on squeezing countries that are in the midst of depression. At some point there has to be a growth strategy in order for them to pay off their debts…”
No, paying off their debts is exactly the wrong medicine. You do not kick the can and extend and pretend that Greece can service its crushing debt. Instead, you permit it to default, and then to rebuild it’s economy and credit the old fashioned way. That is, by allowing its workers and entrepreneurs to function in an environment of honest money—– where success is rewarded with gain and where mistakes, errors and excessive greed bear their own consequences.
In any event, its a problem for the Europeans and the Greeks to resolve. Obama should stop sending Keynesian witch doctors like Secretary Lew and the national security deputy quoted below, Caroline Atkinson, to spread more policy poison around Europe.
Having pushed the national debt above $18 trillion and appointed a Federal Reserve board that has gone off the monetary deep end, Obama has already done enough damage at home. He could do everyone a favor elsewhere and just butt out.
