A Solution to the Debt Crisis – Amour

A Solution to the Debt Crisis – Amour

Who were we to doubt the ability of an American President to solve debt woes? Who were we to question the dedication of a Democrat to manage liabilities responsibly?

The Times Online UK reports that Bill Clinton, who managed to get the US federal budget to balance during his term as President, has once again stepped in to solve the State’s financial woes. Only this time it’s the Secretary of State, not the state itself, that’s getting his budgetary attention:

“This is the second time in a year that Mr Clinton has offered himself as a lottery prize to whittle down his wife’s debt, something that makes some of their supporters cringe. As Secretary of State she is barred from raising money herself to pay it off. “

Going on a date to pay down your wife’s election debt. Ahh, that’s amour. I believe you can bid for the date here.

Perhaps American homeowners should take a page from Clinton’s book and auction themselves off to avoid becoming one of “a record 92,432 bank repossessions [that] were reported in April, up 45 percent from a year earlier and 1 percent from March… Foreclosure filings, including default and auction notices, were 333,837. One out of every 387 U.S. households got a filing.”

This is one hell of a “recovery”. Lucky the governments of the world stepped in with stimulus to save us all, or things would be ever so much worse right now. But wait, what’s this?

“California Governor Arnold Schwarzenegger will seek “terrible cuts” to eliminate an $18.6 billion budget deficit facing the most-populous U.S. state through June 2011, his spokesman said.”

And all across Europe, countries are cutting their deficits in crippling austerity measures. The Spanish and the Brits hold the headlines this week, stealing the Greek’s limelight, but not for long. The Greeks have rescheduled major protests to the 20th of May to avoid disruption to University entrance exams. How considerate. Hopefully the protesters won’t go on a murderous rampage again.

Preferably things will be civil, like in Iceland where “more than a year and a half after Iceland’s major banks failed, all but sinking the country’s economy, police have begun rounding up a number of top bankers.” Not to worry though, most are already living comfortably overseas.

But sadly, things don’t look terribly calm in Greece. Protesters are getting hot headed. Not at the politicians who brought on the debt, not at the panicking bond holders, but at the people doing the bailing out.

“The IMF will not stop thirsting for workers’ blood,” said Yannis Panagopoulos, chairman of Greece’s main private sector labour union GSEE. “Its recipes are a disaster and the government must turn them down.”

Readers know we aren’t a fan of the IMF, but “thirsting for workers’ blood” should be something left for the really bloodthirsty – the Maos and Stalins of this world. And yet, Bill Bonner found himself agreeing with some of their biggest fans on Friday of last week.

“Greek communists are usually a reliable bastion of error and darkness. Their ideas are appalling. Their proposals are absurd. The only thing they are not wrong about is their opinion of the ruling classes – whom they regard as morons.”

But while Europe’s leaders are being moronic, their “subjects” – sorry, citizens – are proving they have the leaders they deserve. Even the media has a warped sense of reality. See if you can spot the various issues one might have with this excerpt from an article titled “Tensions simmer as Greece readies pensions reform”:

“I feel angry that my right to dream has been denied and it’s mainly the government’s fault,” said Penny, a 19-year-old student demonstrating on a square in front of the parliament building — the scene of riots last week.”

At least Penny has some foresight…

And so it Begins

“The 16 national central banks of the euro region are acting under the umbrella of the ECB. [They are] resorting to what some economists have called the “nuclear option.”

“By deciding to “go in and buy sovereign and corporate debt, they crossed a line,” said David Kotok, chairman and chief investment officer at Cumberland Advisors Inc.”

“The line between fiscal and monetary policy gets blurred.”

Fiscal policy has been exhausted in Europe and so now monetary policy has to maintain the status quo to maintain a false stability. It has turned into an extension of the state’s stimulus effort.

So much for the intellectual battle at the ECB. The Germans didn’t hold the inflation hawk fort for long.

The printing presses in Europe are up and running. To paraphrase the most enlightening piece of economics literature around, “Yo, Freddie – party at the ECB”.

Who’s Freddie? Well, he is the guy who tells you all you need to know about the state of the global economy – and he doesn’t even need to be alive to do it. His work is timeless and it tells you why central banks shouldn’t meddle with other people’s money and what happens when they do. He also happens to be Dan Denning’s favourite Austrian economist.

ECB despot Trichet, who now features on our office dart board alongside his co-conspirator Ben Bernanke, informed everyone in his usual double speak that some of the European monetary policy cranks weren’t happy with the decision to begin quantitative easing (QE):

“On some of the decisions there was unanimity, I won’t give details, and on some there was an overwhelming majority.

“On bond purchases we had an overwhelming majority.”

Things are moving pretty quickly in the central bank world. Just last week, Trichet informed us that “at this stage, we have absolutely no decision on the purchase of government bonds.”

So this is what “absolutely no decision” can turn into.

But why the lack of unanimity in the ECB boardroom? It’s because even central bankers can’t ignore the great inflations of history – and how they start.

The really exasperating thing is that the legality of the bailout is quite clearly that it just isn’t legal.

The UK’s MoneyWeek reports that “the Central Bank’s Charter expressly forbids quantitative easing because it would violate the no bail-out provision.”

Hey look, “forbids QE” and “no bail-out provision”. What kind of plonkers drafted this silly treaty? What sort of Keynesian free future did they have in mind for Europe? This just has to be rectified…

But “rectifying” the inevitable truths of economics is difficult:

“Sovereign risk hasn’t gone away in the slightest,” said Jim Reid, head of fundamental strategy in London for Deutsche Bank AG, Germany’s biggest bank. “What this package has done is massively reduced the tail risk in European markets without necessarily changing the medium- to long-term dynamics of financial markets.”

So Europe remains on the road to ruin.

Smell a Rat?

And it turns out Bernanke couldn’t keep his finger out of the pie. When it comes to money printing, who you gonna call?

“The Federal Reserve late Sunday opened a program to ship U.S. dollars to Europe in a move to head off a broader financial crisis on the continent.

“Other central banks, including the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank, are also involved in the effort.”

Ok, so maybe they won’t literally be “shipping” dollars across the Atlantic. And they won’t be dropping money from helicopters either. You don’t see counterfeiters doing that anywhere in the world. They are far sneakier and keep their operations much more secretive:

“The European Central Bank has no plans to publish a regular tally of its new government bond buying program…”

They operate in the dead of night:

“The European Central Bank, which announced the unprecedented initiative at 3:15 a.m. this morning, declined to comment.”

And they have to be more targeted in their spending, so as not to arouse suspicion:

“The central bank said it will intervene in “those market segments which are dysfunctional,” signalling it views the recent surge in some of the region’s bond yields as unjustified.”

(For the economics buffs among you, consider the above three aspects in relation to rational expectations.)

In other words, hyperinflation could begin tomorrow and the Europeans wouldn’t know till it’s too late.

Hey, wait a minute! “…market segments which are dysfunctional”! Dysfunctional? That would imply intervening in the political process, not the bond market…

A similar line from the Financial Times puts it even better:

“No limits were set on the level of purchases but the ECB said the objective was to “address the malfunctioning of securities” – rather than to help governments.”

“Malfunctioning” as well now. In other words, demand and supply is no longer functional. Selling risky assets lands you in the dysfunctional malfunctioning category of the bond market. All those PhDs at banks and they have turned out to be nothing but a bunch of malfunctioning dysfunctional loonies. Unless the bond holders (or former bond holders) are in fact right and the bonds are worth less than the politically correct price.

But even the politically correct price suits the bond trading bankers just fine if they get it guaranteed for the near future. Marc Faber, who seems to be having an awfully good time on TV lately, pointed out the following on Bloomberg TV.

“It would be a mistake to think that the bailout is actually a bailout of Greece… Greece is a write off… The bailout is actually a bailout of the ECB itself … and a bailout of the banks in Europe.”

Just like your editor pointed out in a past Markets and Money Week in Review, bailing someone out means you are really bailing out their creditors. The creditors of PIIGS include the institutions listed above by Dr Faber, noting in particular the ECB.

Textbook Execution

Bloomberg provided a textbook example of the state that macroeconomics is in today. First it reported that “the euro strengthened 2 percent” on the back of bailout news. The next day it was surprised to note the “the euro lost all of yesterday’s gains…” But not to look dumb, it added a semi plausible reason: “… on concern the almost $1 trillion lending plan to bail out indebted nations in Europe will fail to avert a slowdown in the region.”

Slowdown… what? The central bank is signalling the printing of hundreds of billions of Euros and Bloomberg thinks a slowdown is at the heart of the depreciation! Do you think they might be missing the point?

Try increasing the supply of anything by hundreds of billions without ruining its value… You can only do that with fiat money, which is why stable monetary systems are based on precious metals.

Speaking of which, remember that gold and silver market fraud from a couple of weeks ago? Well, the time is ripe for some more bank bashing by politicians and so the regulators are in with a vengeance.

Gold is staging its own rampage, setting all time highs this week. And it’s worth noting that this can’t just be due to Bill Clinton’s comment that the crisis wouldn’t have happened if the world had remained on the Gold Standard.

More intriguing, but less surprising than Clinton’s comment, is that the Germans are taking matters into their own hands on a personal level now that their government has gone back to the printing machine again.

“Michael Kramer, president of Manfra, Tordella & Brookes, a large New York-based coin dealership, said: “The demand [for gold coins] has been huge overseas. Most of it is ending up in Germany.”

And the premium being paid on some of these coins (from their metallic value) is remarkable.

Stuck in the Middle of Europe

Germany continues to take centre stage in the development of the European crisis.

Rumours are that Deutsche Bank took a container delivery of Deutschmarks (the German currency before the Euro) in preparation for… well, you can guess.

And the German media isn’t playing along with the “we need to stabilise Europe” story. Instead, they are reporting on just how smug the Greeks are about the situation and their windfalls of the past years’ extravagance. “Once again, we are the Shmucks of Europe” is the best headline so far.

Another Couple of Billion on the Side

Oh and by the way, Fannie Mae is requesting an $8.4 billion bailout after losing $13.1 billion in the first quarter of this year. And the official ObamaCare cost estimates have jumped by a couple of hundred billion as well. Oh well.

Have a great weekend.

Nickolai Hubble.
Markets and Money Week in Review

Nick Hubble
Nick Hubble is a feature editor of Markets and Money and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about Markets and Money, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails.

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