There is a lot of chatter about the eurozone, Greece,
Spain, Germany, and the European Central Bank (ECB). And rightly so since we
appear to be reaching a critical stage there. Some have raised the point that
there is nothing the ECB can do to solve their problems. That is correct in the
long run. But in the short run, never underestimate a desperate central bank’s
willingness to print.
This morning I was referred to an article from Phoenix Capital Research that posited that “THERE IS NO ENTITY
ON EARTH THAT CAN BAILOUT EUROPE.” I suggest you read it; it’s not long. It
shows the complexity of the situation for a system that was born to fail.
Phoenix has another article today on this topic on their web
site.
Their first point was:
The ECB is tapped out. Having provided over €1 trillion in funding via LTRO 1 and LTRO 2, taking on over €700 billion in PIIGS debt putting its own solvency at risk, it simply cannot launch another LTRO scheme for the following reasons:
Those banks accepting LTRO funding are being punished by the market, thereby indicating that ECB funding is not financially toxic to a firm’s reputation in the market place.
The positive effects of LTRO 2 lasted only one month compared to several months for LTRO 1. Thus, we find that with each additional intervention the benefits are shorter lasting.
I agree with their conclusion that no one can bail Europe out. But … you can never underestimate the power of a central bank to print money when panic prevails. When this thing implodes, the ECB will open the spigots.
As Phoenix points out, there is no real solution other
than the “Austrian one”: depression (liquidation of malinvestment). The
eurozone was flawed from inception and no amount of financing tricks or
printing will save it. But … assume that events will not be
orderly in any way. If Grexit happens (I think it will), Spain’s Tesoros will
sink like a rock, their banks will freeze up because no one will believe
their assets (many Tesoros) are worth more than their liabilities. And it may spillover to
Italy and …
There will be pressure on the ECB from politicians
everywhere in the eurozone, except Germany, to “do something.” Printing is
the only thing they know. I think Merkel will get weak-kneed and bless
whatever the ECB will do in an “emergency.” Remember the EU and
eurozone are political constructs, not economic. She’ll sacrifice German
thrift for German guilt. It would be a rare situation where
collapsing EU economies wouldn’t bring about political change which would
favor printing over austerity. France and Greece have already proven
that.
Greece has nothing to lose by leaving, other than
their credit, since they are already in a depression. They’ll print new
drachmas and face high inflation. They will be the European Argentina.
Riots may bring a military coup, price and wage controls, and … ?
The country with the most to lose is Germany. They
already are owed billions in balance of payments adjustments made through the
ECB to countries like Greece who run big deficits. Plus their banks are very
exposed to Greek, Spanish, and Italian debt. It’s a lose-lose for Deutschland.
History is a funny thing. Huge events can happen so
quickly that it is often the case that participants don’t even know what
is the significance of what is occurring and what they are doing. When
Lehman went down, panic prevailed. I think some of the things the Fed did
were actually illegal, but no one cared at the time. Now the revisionists
say they saved the economy!
Just remember that historically, the way governments
like to deal with debts and panics is to print money.
My strategy is to gird my loins and prepare for the
worst.
No comments:
Post a Comment