Europe’s bluff

It is the dawn of a new week as we begin to find out what the latest machinations of governments over the week end will bring us.

Predictably, our leaders now tell us they have reached agreement and they have a solution that is as much fiscal as it is political. Predictably too, the verbiage used by our politicians as they emerge from the week-end pep rally, is eerily similar to the language that was used at the height of the crisis in the USA.

BRUSSELS – The European Union and the International Monetary Fund pledged a massive nearly $1 trillion defense package for the embattled euro Monday, hoping to finally turn back relentless attacks on the eurozone’s weakest members and allow the continent to resume its hesitant economic recovery.

Under the three-year aid plan, the EU Commission will make euro60 billion ($75 billion) available while countries from the 16-nation eurozone would promise bilateral backing for euro440 billion ($570 billion). The IMF would contribute an additional sum of at least half of the EU’s total contribution, or euro250 billion, Spanish Finance Minister Elena Salgado said.”

Of course, it terms of size, this package looks the business. As defense strategies go, it was unrealistic to discuss anything in the range of a few hundred Billions because as I evidenced in recent blog entries, single banks are bogged down in this mess for dozen of Billions each so that anything less than one Trillion would not have represented anything remotely credible. After all, this being exactly the same crisis as what we have already witnessed happen to the USA, to large banks and corporations and to sovereign states like Iceland and Dubai, our leaders have learned their lesson. So one Trillion does make for credible posturing… at least for now.

But of course if, like me, you know this is a problem brought about by excessive debt, then you must wonder how this Trillion Euro fund will be funded. And here yet again we enter into a world of Kafkian logic. Part of the answer to this question is that the USA will once again re-open a US$ financing mechanism known as “swap lines”. What is worthy of note here is that the US Federal Reserve had in fact already opened swap lines in 2008/2009. At the time this was done in secret and only a handful of people were sufficiently aware to be able to ask appropriate questions. One of these people was Congresmann Alan Grayson for example. Nonetheless, Grayson’s concerns never came to anything as the authorities successfully swept the whole thing under the carpet. But already then, the actions of the Fed and the European authorities showed  that the “floating exchange rates” character of our global monetary system was showing clear signs of instability leading to breakdown. That is, the crisis was showing the interdependency of the global currencies and, by extension, the limits of the modern US$ based monetary system.

So today the Fed once again opens the swap lines so the USA are going to contribute to part of this Trillion Euro fund. The rest of the fund must therefore come from the Europeans one presumes. But here is the thing. How can countries that are already struggling with excessive debt going to contribute to a fund to fight everyone else’s funding crisis? Ireland, Portugal, Spain and the UK will presumably take on more debt to fund an account that they may very well need to use themselves in coming weeks. Ergo, our leaders are planning to fight the results of excessive debt by pushing all debtors deeper in debt.

Had he been alive today, Kafka would have gone to town on the reality of our world.

““EU finance ministers have rushed to ‘shock and awe’ the markets,” Mitul Kotecha, head of global currency strategy at Credit Agricole CIB, wrote in a note to clients. “”

Sniker, sniker!! This from the guy who works for one of the banks that is mired the deepest in Greek debt for example.

But just to give credit where credit is due, there are, to be sure, some voices of reasons in this aberrant wilderness. Notably, from the first press article above: ““I’m against putting all the blame on speculation,” said Austrian Finance Minister Josef Proell. “Speculation is only successful against countries that have mismanaged their finances for years.”

Indeed. Speculators have nothing to do with this mess. If anyone is a speculator here, our leaders are. Investors only take positions they feel will reward them financially. If an investor sees the imbalances in the finances of a company or a country, they will take positions to protect and advance their investments accordingly. If I know the Euro is going to the toilet, why should I keep holding Euros? If I know Greece is going to the dogs, why should I hold investments in their companies and banks? Blaming speculators for the troubles of a company or a country is facile and childish unless by “speculator” you mean our politicians and leaders.


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6 Responses to “Europe’s bluff”

  1. Groan… mmmmphhh « Guido's temple of the absurd Says:

    […] […]

  2. ducati998 Says:


    Indeed, Germany can remain an EU member without utilizing the euro currency. They can simply return to the DM. Which for them would reduce their national debt, contracted in eoro’s, assuming the euro continues to fall – which it likely will.

    As to the sheep, unfortunately true. What is of great concern however is that they’ll take us with them, it’s going to be difficult to offset this disaster.

    jog on

  3. guidoamm Says:

    By the way, you mean “Britain move to an EU membership, like Germany, but jettison the euro for the DM” right?

  4. guidoamm Says:

    QE has started. Bank of France just announced they have begun purchasing sovereign debt.

    All currencies are toast. It is only a question of which goes first and which last but this is the end of the road. The “floating exchange rate” dynamic as contemplated by our modern monetary system is ensuring we all go down albeit at different speeds.

    The real problem here is that the masses do not understand what is happening. The masses lead by the unions still feel government owes them something. Little do they know government owns them. The masses will be fighting tooth and nail to get MORE government intervention (i.e. assistance) and when they won’t get it, they’ll throw a fit.

    In turn, when enough people start throwing fits, government will have to occupy them with something… likely a war against some sorry ass foreign evil that is threatening our way of life….

    Of course, the only people threatening our way of life are our politicians and our bankers.

  5. ducati998 Says:


    Europe will have to move to an overt QE. The difference here being that two members of the EU, Britain [not a euro member] and Germany, are still in the midst of elections- bailouts are very unpopular in Germany and the change in political parties, might see a re-evaluation of the current policy. This fact could see Germany move to an EU membership, like Britain, but jettison the euro for the DM. That is then essentially the end of the euro.

    jog on

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