I'm starting to think along the lines of Mike Ruppert that the stage has passed for following the perturbations of the global economy – the direction is set and the time for discussion is over.
Europe Is Now Sinking Fast
Alasdair
Macleod
20
November, 2012
With
the Eurozone having being displaced from the financial headlines by
the American presidential election, you
might have briefly thought that its problems had gone away. They
haven’t.
It’s
just that the public is expected to absorb one major story at a time.
And now that the presidential election is done and dusted, Europe
is rapidly returning to the headlines.
This is not desired by the powers-that-be, who desperately need us to
believe things will get better with a little patience.
Behind
the scenes, in order to prevent a systemic crisis, the authorities
(through the European Central Bank) have been hard
at work keeping a lid on interest rates for Spain and Italy,
which act as everyone’s market bellweather. Their strategy focuses
on the hope that high bond yields are just a lack of 'animal spirits'
– and if only they can be reignited!
Time
is working against all countries in the Eurozone because the good are
being dragged down by the bad.
You
don’t have to be an economic genius to understand that the
perpetual uncertainty over the Eurozone’s future has led to a
widespread freeze on industrial investment and
development. Industrial
production is collapsing at an accelerating rate,
falling 7% year-on-year in Spain and Greece, 4.8% in Italy, and 2.1%
in France. The downtrends for industrial production are readily
apparent in the chart below:
The businesses
that are doing well (and
there are some) are those businesses with strong balance sheets and
solid export order books for non-Eurozone markets; unfortunately,
they are concentrated
in countries like Germany, Holland, Finland, and Austria.
They are not located where they can contribute to economic progress
in Spain, Italy, Greece, or France, and so they are not adding to the
tax revenue desperately sought by those governments.
Despite
the recent deal worked out with Greece, the old cliché about kicking
the can down the road is close to becoming no longer
possible. Deferring
the inevitable is only a political option so long as there is no
immediate damage from doing so.
But this is no longer true in the Eurozone, where political
procrastination is now identifiably responsible for social unrest.
It’s not just the trade unionists in revolt; now it is the middle
classes as well. Doctors and teachers in Greece do not get paid
anymore, and it is going that way in Spain, with regional governments
surviving by simply not paying their bills. Government is destroying
society, proving the falsity of the heretofore accepted belief (in
Europe, anyway) that government makes society better. But
then, anyone
who has bothered to read Hayek’s The
Road to Serfdom will
not be surprised.
What
was not anticipated in Hayek’s masterpiece is the divided state
that is emerging. Greece
is part of a larger EU and
Eurozone bureaucracy and cannot achieve statist ends by turning her
citizens into serfs. The government
itself is subservient to higher authorities and
is now having that medicine applied to it by its peers. Every visit
by the Troika (collectively the European Central Bank (ECB),
International Monetary Fund (IMF), and the European Commission)
screws the Greek government further towards its own serfdom.
Keep
in mind just one thing: Greece
is utterly broke and cannot escape that fact.
All of the posturing by the three Troika members is designed to avoid
facing this reality. The political elite drive this party line and
rigidly conform to it. However, there is increasing unease among
powerful elements in the background, and in particular, sound money
advocates in the Bundesbank are deliberately pushing for different
solutions than those pursued to date.
Jens
Weidmann, who is the Bundesbank’s chief and its representative on
the ECB’s Governing Council, is remarkably outspoken on this issue.
In a recent interview with the Rheinishe
Post, Weidmann
pointed out that the ECB and other national central banks in the
Eurozone are now Greece’s largest creditors and cannot take a
haircut on Greek debt. Furthermore,
they cannot write off this debt, since that would amount to monetary
financing, which is forbidden under Eurozone rules. So, he concludes,
the ECB
is trapped.
This
intervention is important, because – unusual among the world’s
central banks – the Bundesbank is viewed by the German public as
the protector of the currency against the politicians. The German
economy is traditionally driven by small savers, who are secure in
the knowledge that the Bundesbank won’t let them down by printing
money. While this is perhaps a stereotypical view, a hangover from
the days of the deutschemark, it is still true with respect to public
attitudes. And this is important because there
is greater public trust in the head of the Bundesbank, Jens Weidmann,
than in any politician, including Chancellor Merkel.
We must listen to Weidmann, not Merkel.
Returning
to Greece, forward-looking markets have already written it off, but
getting there is not easy.
On 11 November, by a slender majority, the Greek Parliament agreed to
the latest austerity demands from the Troika, in the belief that the
Troika will come up with urgently needed cash. This is cash for an
economy that is tanking with its industrial production collapsing.
Deposits have flown from the banks, which, without the ECB’s
recycling of funds both through the TARGET2 settlement system and by
taking in yet more worthless Greek debt as collateral, would
themselves default. Tax
revenues, insofar as they can be collected, are simply vaporizing.
In the words of the classic Monty Python sketch, this
parrot is dead, expired, and everyone knows it.
Despite this, the Troika caved in (to ironic laughter from the press)
on 13 November by giving Greece a further two years to get its
government debt to GDP under 120%.
The
concern, obviously, is that Greece is a dry run for Spain and
Italy. It
is also, as I argue below, a dry run for France, which is in terrible
shape and deteriorating rapidly. This is why the protector of German
savers, Herr Weidmann, is worried. He is signalling that the
precedents set in dealing with Greece will ultimately destroy
Germany.
In
my last
article for
PeakProsperity.com, I
argued that Germany,
not Greece, should and will leave the Eurozone, perhaps taking
Holland, Finland, Luxembourg, and Austria with her.
It has always been clear that this is the last thing the political
elite would consider, but unless Mrs Merkel reconsiders her position,
she will be overruled by the Bundesbank, and perhaps also her own
finance minister, Wolfgang Schäuble, who is known to be extremely
concerned.
Anyway,
let me throw in a little ray of sunlight for Germany (or is this the
light an oncoming train in the tunnel?) For
some reason that's not entirely clear, the outstanding TARGET2 claims
by the Bundesbank on the other Eurozone national banks actually fell
in October.
The updated chart is below:
That's
the good news. The
bad news is that the previous down-tick (in December 2011) was in the
wake of a drop in Spanish bond yields from over 7% in mid-2011 to a
low of under 5% last January. This time, Spanish yields fell from
7.5% three and a half months ago to 5.4% a month ago. Italian
government bonds have followed a similar pattern, as shown in the
chart below:
It
is perhaps
logical to link changes in TARGET2 balances with changes in sentiment
in Spanish and Italian bonds.
These bond yields show signs of bottoming out, which is clearly
visible on the chart. The only reason these bond yields have fallen
to these low levels is because the ECB forced them there. But
when these yields rise, which they probably will because there is
little doubt the ECB’s manipulation cannot succeed for very long,
the accumulation of TARGET2 imbalances on the Bundesbank’s book
will quickly exceed €1 trillion.
And
there is a further problem.
One of the reasons French ten-year government bond yields are only
2.1%, and have even been briefly negative for her six-month bills, is
that some of the capital flight out of Spain and Italy has been
deposited in French banks, only to be then lent on to the French
government.
But
France, as I argue later in Part
II of this article,
is itself a basket case,
only not yet widely recognised as such because it has benefited from
this capital flight from Spain and Italy.
At
some stage, probably in the next six months, these accumulated
deposits in the French banks will, in turn, seek a safer home
elsewhere – and where else but in the German banks? And
so the Bundesbank faces the prospect of a second wave of capital
flight and escalating TARGET2 imbalances.
Of
course, this would not matter if it was certain that no one was
leaving the Eurozone, and the TARGET2 system was constructed on the
assumption that no one ever would. One could argue that Greece
leaving would not be too much of a problem, other than the precedent
it would create. This is why
it is so important to keep Spain and Italy in the system.
In Part
II: Europe's Mexican Standoff we
explain why the answer to the question of Who
will ultimately pick up the tab? when
a Eurozone member leaves is not at all clear.
In fact, the "stability" of Europe right now hinges
completely on no one leaving (or defaulting).
After
all, TARGET2
is a settlement system with offsetting cash creation and destruction
carried out by the national central banks on delegation from the ECB.
But nonetheless, it is understandable that the sound-money guardians
at the Bundesbank are increasingly alarmed at the progression of
events.
To
borrow from Dirty Harry, it leaves those tied to Europe's future
pondering a seminal question: "Do
I feel lucky?" Well, do ya?
The Myth Is Over: Europe Fails To Agree On Greece
20
November, 2012
Given our
earlier comments,
it is hardly surprising but the Eurogroup meeting just ended and
there is no agreement; headlines via Bloomberg:
- *FRIEDEN SAYS NO DECISIONS REACHED TODAY ON GREECE BY EUROGROUP
- *FRIEDEN SAYS EURO FINANCE CHIEFS TO CONTINUE TALKS ON MONDAY
- *SCHAEUBLE SAYS EUROGROUP UNABLE TO REACH CONCLUSIVE AGREEMENT
- *LAGARDE SAYS MORE WORK NEEDED FOR GREEK SOLUTION
EURUSD
is tumbling (as are S&P 500 futures in their oh-so-correlated
manner)
Of
course, Juncker has his own spin:
- *JUNCKER IDENTIFIED 'CREDIBLE' IDEAS TO BRING DOWN GREEK DEBT
- *JUNCKER SAYS GREECE HAS MET PRIOR ACTIONS SATISFACTORILY
- *JUNCKER SAYS GREECE HAS MADE 'CONSIDERABLE EFFORTS'
- *JUNCKER SAYS NO MAJOR POLITICAL DISAGREEMENTS IN GREECE TALKS
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