EUROBLOWN: Inflationary, stationary and vacationary.

Desperate times call for desperate measures…after the holidays

The Eurozone has now reached that stage you get to in the last half-hour of most sci-fi disaster epics.  That’s where the asteroid is still headed straight for Washington, and so it’s time for Bruce Willis to strap a 2000 megaton bomb to his scalp, and get up there to nut the damn thing onto another course. It’s suicidal, but by Jiminy it’s bold. Suicidal nuclear options are now on tables from Frankfurt to Athens via Paris in a final attempt to stop a gigantic defaultoid from wiping Brussels off the map. But in the meantime, we’re all going on a Summer Holiday.

Slog sources in Paris are suggesting this evening BST that French President Francois Hollande is renewing the pressure (begun two years ago by Nicolas Sarkozy) to give the ESM – that’s the bailout fund thought by many Germans to be illegal – banking status. That would mean it could begin 24/7 debt-swapping and loans with and from the ezone’s Central Bank (the ECB). This is not very well hidden code for “provide wobbly French banks with tons of taxpayer cash before Greece finally defaults some time around late August”.

Unsurprisingly, this idea is not playing well to Berlin audiences, and has been poo-poohed by Mario Draghi – who would, of course, be on the receiving end of all those infinite rescue-requests. However, the ECB’s Austrian Council member Ewald Nowotny says the plan only needs a Bruce Willis kamikaze superhero to make it viable. So far, he is in a minority of one, and there is still no sign of a pilot from the banzai school of asteroid redirection. For me, it’s just standard-issue French self-interest: it would be like giving a skid-row meths drinker the keys to the brewery.

Meanwhile, my usual Brussels source has been on the line to say that there is a growing body of opinion at the heart of the Unholy Belgian Empire in favour of letting the euro drop like a stone….and thus allow the ClubMeds to export more easily. That this would make Germany’s exports even cheaper (and thus continue to exacerbate the bond spread problem) seems not to have occurred to this tendency; but like I say, these are the nuclear options we’re into now. Draghi is even less keen on this idea than the French ‘free money’ strategy. A sovereign credit source in Frankfurt tells me he is “pouring ice-cold water on it like a frantic Alaskan fireman”.

Bizarrely, the original US strategy of Greek amputation is yet another approach being dragged out of retirement. The hypothesis on this one runs as follows: Greece is the real problem, so if we nudge Athens into default (which everyone is expecting anyway) and the sky doesn’t fall in, confidence in our ability to solve the Spanish problem will rise.

It’s twisted logic Jim, but very much as we know it from the Eurocrats. There is also ample evidence suggesting the Troika knows perfectly well that Athens’ money runs out on August 20th, but the next bailout (still to be agreed) won’t materialise until mid September. Equally, Berlin signalled yesterday that it was offering Spain a €300bn bailout, no strings attached. But when the MSM caught onto it, Angela Merkel did her usual “No, you misunderstood what I was saying” shtick. A German finance ministry spokesman refuted the idea that Spain was seeking a new bailout at all, saying: “This is wrong, it is not on the agenda.” Here we go again, on another amble down Denial Lane.

Denial of general reality is in fact becoming indistinguishable from denial of specific actuality. Spain sparked anger yesterday by issuing a statement on behalf of Madrid, Paris and Rome expressing impatience at a delay in major Eurozone financial reforms. But once the journos started ringing them, France and Italy immediately denied they had joined in the call, which was a thinly disguised challenge to Germany. What did the Nixon White House call it – credible deniability? Welcome to the wacky world of incredible Eurozone deniability.

Anyway, here’s the bottom line: truth in the Eurozone is now more inaccessible than Mitt Romney’s tax returns. But in the light of that pesky defaultoid heading straight for the unelected Brussels Commission, The Plan is to create a bank that can plunder the ECB at will, get the euro down to par with the Yuan, and push Greece back towards the Drachma. All those who think this won’t be inflationary, say “Aye!” now.


Inflationary is yet to come. For the time being, Europe’s economy is stationary. And in six days time, the entire continent will be vacationary.

Related: Outside the eurozone, Great Britain has entered a recession of olympic proportions.







31 thoughts on “EUROBLOWN: Inflationary, stationary and vacationary.

  1. Germany says no.

    Therefore none of it will come to pass.

    On a scale of 1-10, 10 being utterly, purposely mad, the current range of “solutions” are about an 8.

    Maybe a little time on holiday, a couple of drinks, a hooker or two and a few jazz cigarettes or disco biscuits will help the great and good of euro politics to reach out and grab that 10/10 we all know they are capable of.

    Unfortunately by the time they get back from their little vacations it’ll all be over bar the shouting anyway.

    Maybe that’s the trick, if they aren’t on duty, they won’t get the blame.


  2. Don’t get excited yet, like I said before, there ain’t no Fat Lady waiting in the wings…There is far too much political capital invested, it’s far from over…..Stay tuned….


  3. Yup… with this bunch they will just come back from vacation and declare September… July, and then find the EU actually has trillions and trillions of Euro’s it had not noticed before, then we’ll all jump a titanic magic flying carpet and go to the moon for chips and blue cheese dips… la la la


  4. I, Ioannis, being one of a diminishing few people of semi-sound mind and body do hereby decree written permission for the use of one piece of wise-assery as may be seen fit… cheers!


  5. at least we herein deutschland don’t the north korean flag get mixed up… what nexts? iranian and israel flag mix-up? ya, how to start world-war by olympics – intellectual property of the dimboy cameron.


  6. You are right.Not the fat lady.
    Its the f****ing Mormon Tabernacle choir warming up in the wings.
    The bond vigilantes are not going to stop.Spain then Italy,
    then France.The UK by October methinks.The slow motion train wreck
    is starting to accelerate.
    Be prepared.


  7. ”….intellectual property of the dimboy cameron…..”

    is this a major faux pas – when compared to the minor slip up of the great economist merkel with certain vision of the european super bunderstag in fiscal long trousers?


  8. ESM as a bank that borrows from the ECB?

    Can’t work not even debatable, would cause the panic it is intended to quell.

    Reserve- or central banks cannot leverage or make unsecured loans. Should they do so they are perceived to be identical to their insolvent clients which are ‘banks’ that have made unsecured loans … and are bankrupt for it.

    Once this perception emerges (it has) there is no effective lender of last resort. The perception manifests itself as bank runs as depositors are desperate to ‘cash out’ if at all possible.

    Central banks are collateral constrained, they cannot offer leverage or unsecured loans and remain central banks, they have no capital structure in fact no capital. They are like pawnshops, they are balance sheets, nothing more.

    This is the predictable outcome of fractional lending and nothing more.


  9. Pingback: John Ward – Euroblown : Inflationary, Stationary And Vacationary – 26 July 2012 | Lucas 2012 Infos

  10. @Chris. If they aren’t on duty, they won’t get the blame.” Agree with you there. I also think one of the causes of the SNAFU that is the EU is that there’s always been an element of not going down in history as the one who sank the Euro.
    As communists they have a mindset of collective responsibility rather than individual initiative. It’s too fanciful to remember the fate awaiting anyone who messed up in Stalinist / KGB regimes but those times are part of their background culture.
    My mind is turning to Orwell’s “Animal Farm”. Now how did that end again?


  11. Almost certainly a flight of fancy. I’ve been reading about the pre-war Comitern and its successor organisations – which had the aim of destabilising western democracy. It seems to me that these leftist clowns in the EUSSR couldn’t do a better job of destabilisation if they tried. But key figures (eg Merkel, Barroso) may well have been on the unofficial Red payroll way back when – and Putin may still have leverage.

    Perhaps not a serious post on my part but the level of incompetence and disinformation on display got me wondering if there was method behind the madness.


  12. ECB printing press is also likely a no go. The Buba was allowed to (partially) transfer its powers to the ECB under the conditions that:
    a) the ECB was independent (aka not act because the French president demand it).
    b) main task would be pricestability (aka not print as much as you can).
    Consequence of acting otherwise would likely be withdrawal by the Buba (aka double kill (ECB and Euro), well effectively kill a few more but I didnot count small fry like Italy or minor collateral damage like Spain).

    The legal problem being that when this will start to play probably a 100 or so cases with the German Constitutional Court will be started. Like with the ESM. You know nice in the open so that all market participants can fully enjoy the spectacle.

    See the interview with former German President Herzog last week (all over the Gertman press, main one if I am correct in Handellsblatt).

    Anyway 12/9 we only have a ruling on the speedy case. Another one normal procedure might follow (very likely even, assuming that a no go on that will get the German government starting one and a go will most likley only mean that it is not that serious that it should remained on ice until a final ruling. You cannot start banking anyway when it is not there.
    Now under Lux law if I recall it correctly. But in case of a banking union likley under ECB, which might have a problem with the riskprofile of the ESM in that case (and you donot have to be a CBer to see that that sucks big time, nearly perfectly correlated risk, spread de facto over just 5-10 parties of which the largest one takes about 50% and the second largest 25%, so no spreading effectively possible).
    Nice Catch 22 effects in this.
    No banking union, severe other problems.
    No ECB and regulation will be a) uncredible and b) never in place even in 2013 (as there is simply nothing yet (a few AngloSaxons in London but apparently when you have a diet with a lot of olive oil and garlic you get red spots and a strange rash even only hearing that word).

    Likely only realistically a possible way to force Germany out. Although when under pressure it likely takes too much time to set up. And having a realistic possibility playing over the markets that Germany/Buba might leave the building will do the ECB/Euro as much good as a .45 in the head would do to an average human being. And likely as quickly as well.


  13. It is astonishing to me that the Spanish haven’t said to themselves “Hold on, our position is much better than that of the UK, but we have 25% unemployment, rioting on the streets and huge strikes and they are just plodding slowly along. What are they doing differently to us?”

    Fact is that the BofE is printing money and injecting it into the economy at the same pace as debt in the economy is contracting. This avoids a balance sheet recession. Spain is contracting very fast because old loans are being either written off or paid off and new loans can’t be made because the banks are in a mess. The traditional remedy in the Anglo-Saxon sphere is to print money to replace the debt so that the level of broad money supply stays the same or slightly bigger even though debt is collapsing. Spain can’t do that because the ECB won’t let them. How long can it be before they realise the mistake they are making? How long before Spain, Portugal, Ireland and Italy decide they won’t deride the Greeks anymore and instead decide to make a little club of their own? How long before they demand that the ECB does what Britain and the US are doing and start printing money to counteract the balance sheet recession? Could it be that the PIIGS will simply ignore the ECB and print their own Euros? How will Germany and the other non-PIIGS react to this?

    It seems to me that the PIIGS are still holding most of the cards, but don’t realise it yet. There are more countries in trouble than not – they can easily take control of the situation and print more money. Germany will be faced with either having to leave the EU in disgust or go along with Latin hegemony within the EU with a weakened Euro that will never replace the $ as an international reserve currency. If this doesn’t happen then in 10 years time EU living standards will be half of what they are today whilst Britain will more or less have flatlined through the next decade.

    If you want to know more about “balance sheet recessions” you will find a description here:-

    You will also see an explanation of the “paradox of thrift” which relates to the same problem on that page.


  14. May be huge depreciation of euro across the board is ot little help to Spain, Italy…France. What Spain needs is depreciation of Spain money to German money. A better part of Spain export is to EZ. It is hard to compete with Germany having the same currency. Even outside EZ.

    The only way to depreciate is a great reduction of wages. Recently Madrid resembels very much Athens..people do not like it.


  15. merkel and strangelove on hols so Draghi comes out with a bunch of bullshit and suddenly everything is fine ….
    Euro back to 1.2214 … markets “welcomed mr draghis`s comments”

    you couldn`t make it up if you tried ….


  16. @JS: Thanks for those interesting comments…

    The Wiki piece appears to say, essentially, that the recession in the US/UK will last as long at it takes corps and private debtors to pay down their debts built up over (say) the last 15 years. IOW debt deflation is going on. Only then will GDP show signs of recovering. How long that is will depend on the magnitude of the debts to be paid down. The Japanese experience suggests they had big debts to neutralise.

    I’m not sure why it took the great Keynesian mouthpiece Mr Krugman to confirm all this …I’d worked it out 4-5 years ago. It’s simple economics.


  17. @JS: Another comment…
    That Wiki balance sheet recession issue also says that during a period of debt deflation, interest rates play a little part in boosting demand because nobody wants to borrow because they’re all busy paying down debt. I have long believed this myself. This raises the obvious question of why we have Zirp in the UK. If interest rates were normalised and savers were paid a fair return for risking their deposits in banks, they would have more money to spend and would therefore provide a boost to GDP. The main reason I can see for Zirp is to keep mortgage rates down to help homeowners who have overleveraged themselves by failing to do proper due diligence at the time of borrowing. But should this be a duty of savers to finance? I don’t think so. I am increasingly of the view that we need to see a ‘taxpayer revolt’ and refuse to pay income taxes when our return on savings has already been slashed by government by ~60%.


  18. How can you “normalise” interest rates in the way you have described? Interest rates being high suggest you will get more wealth out than you put in just by allowing the bank to make your money work for you. If you want, say 10% return on your savings, the bank must lend out money at 13% minimum to cover its cut. But very few want to borrow money right now, and certainly not at high interest rates. The only thing putting interest rates up will do at this juncture is choke off all remaining lending. This is something Thatcher/Reagan did back in the 80s to purge the system of excessive debt – we had a huge recession afterwards of course.

    If the economy isn’t growing then you cannot get more wealth out of the economy than you put in. Therefore if you invest your savings in the economy the interest you get back must be close to zero. The fact that interest rates are close to zero merely reflects this fact. Why does the retired saver convince himself that his savings should make him richer? In principle you would not expect that to be the case. The average person can only get richer if the economy becomes more productive.


  19. I suspect the ECB is buying bonds via the back door, thus pushing up bond prices. I think bond prices going up has cheered the markets. Remember that bond prices going up means someone is putting money in the markets and all the players have reason to smile about that! I doubt that it will last, unless Draghi has something up his sleeve to back up his comments today. Since so far he has only given words and no hint of what he has to back up those words, I’m guessing he has nothing. The markets will soon say “show us the money” and Draghi’s poker game will be up. He won’t get the chance to play the same game again. Let’s watch the bond yields. If Spanish bond yields don’t fall well below 6.5% over the next few working days then Draghi has got nothing new and Spain will be screwed by the end of the Summer.


  20. Yes. Essentially the UK and US approach will lead to a “lost decade”, where the economy flatlines while we pay down debts. But this is probably the realistic best case, since the debts do need to be redcued in scale before we can start to move forward again. We could try halving the debts by printing the money and handing it out to debtors to get debt down (this would be in essence admitting that house prices in the UK are double what they should be due to the debt explosion, and effectively resetting this problem on the balance sheet) – but this might have serious problems because the public are generally economically illiterate and might react strangely to this apparently free cash.

    The UK/US approach is far better than the EZ approach because it is reacting to the decline in the money supply caused by paying down/writing off debt. This prevents the dramatic recessionary forces experienced in Greece and Spain, keeping banking and government problems from contaminating private sector and consumer economics. Meanwhile it seems that the private sector/consumer is deleveraging at about 10% per year, so even if the government will still me neck deep in debt, the rest of the country will not! (I don’t think the public are necessarily focussed on paying down debt – just paying off mortgages and credit cards naturally whilst turning dow opportunities to get into new debts. The corporate sector probably are finding that new debt comes with too high a price tag and too many strings attached anyway, so are keeping cash back to finance operations)


  21. @Just Sayin’:
    I don’t agree with much of that … Here’s a few other considerations:

    – Reagan/Thatcher raised IRs primarily to squeeze high inflation out of their economies. It may also have squeezed excessive debt out of the economies which itself was caused by previous excessively low IRs.

    – IR’s are a major tool to put downward pressure on inflation. Zirp (deliberate manipulation of natural IRs) has ignored this and as a result we have suffered excessive inflation for 5+ years. The BoE is failing in its PRIME duty.

    – I’m not aware that savers expect to be *richer* by their savings, holding the deposit’s value would be nice and would encourage spending.

    – A person who saves is entitled to a fair return for his deposits. After all, he is lending his money to the banks (a small fact that banks and others choose to ignore). The banks use his money to make a profit.
    My guess right now is that base rates should be about 4-5% to provide the necessary pressure on the fake CPI inflation. But in this day and age, he ought to demand a *risk premium* from the bank to reflect the fact that no bank is safe and may not be able to return his deposit on demand. So 1 year savers IRs should be about 6% right now, not the miserly 2% most banks are offering.

    – Despite Zirp, lending rates to many borrowers have not been reduced proportionately. The majority of people gaining from lower mortgage rates are those on tracker mortgages. IOW, the banks are using Zirp to widen their gross margin spreads, not to offer cheaper loans.

    Personally, I am getting close to pulling my cash out of the banks …and telling them why.


  22. Pingback: EUROBLOWN: Inflationary, stationary and vacationary. [The Slog] « Mktgeist blog

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