Posts Tagged ‘ECB’

More AEP

August 9, 2011

AEP ‘s opinions now coming thick and fast…


It [the ECB] needs to launch quantitative easing on a massive scale to head off a eurozone debacle, if necessary purchasing half the entire stock of Italian and Spanish debt, they argue.

Stephen King, HSBC’s chief economist, said the ECB should drop its ideological opposition to QE and embrace easy money in “exactly the same” way as the US Federal Reserve.

“At the heart of the problem is the ECB’s unwillingness to be seen ‘monetizing’ government debt. Yet if the alternative to QE is the collapse of the euro or a descent into depression, then massive expansion of the ECB’s balance sheet seems a small price to pay,” he said.

The ECB should not ‘sterilize’ purchases of Italian and Spanish bonds to offset stimulus but instead allow the liquidity to course through the system. Dr King said the eurozone will have to embrace fiscal union in the end or face the same sort of “fiscal anarchy leading to financial implosion” that destroyed post-Soviet rouble area.”

I am not sure whether the first phrase is AEP’s or whether it is the continuation of the caption of “a chorus of economists”. Be that as it may my question is this. Economists have clearly failed to identify the potential crisis in advance. Once we were clearly engulfed by a crisis that bore striking resemblance to 1929 and 1970 economists have obviously failed to propose any solutions that have any impact on the developing crisis. That being the case, why should anyone think that going nuclear with solutions that have already been tried and are obviously discredited should now be a viable the solution? Incidentally, AEP is already on record saying that our monetary system is already hitting the buffer due to “suffocating debt”.

Also, with regards to Mervin King’s comments and his proposal for not sterilizing intervention. Sterilization is a technique that should result in a central bank intervening in the markets with no effect on inflation. Mr King is now suggesting that this massive intervention should not be sterilized presumably because he wishes to boost inflation thus a devaluation of the currency thus a rise in the general price index. The idea is to boost the economy presumably… via debasement of the currency…

BUT I HAVE A BETTER SOLUTION FOR MR. KING… why not take this money and give a government salary to every man woman and child? Can you imagine the economic boost we’d get out of that? My tongue may be firmly planted in my cheek but in the same universe where monetization of debt is deemed a viable policy, a government salary for every citizen of the realm would be a far more efficient way to achieve the same result.

David Marsh, co-chairman of OMFIF, said the statement was “half-hearted” and suggested that dissenting German hawks were imposing limits. “The ECB is clearly not going in with all guns blazing,” he said.”

As if Hank Paulson by going in with all guns blazing in 2008 with a then astounding budget of US$750 Billion (which morphed in a now astounding US$13Trillion and counting) has accomplished anything.

Investors have not forgotten that the ECB failed to stop Greek, Irish, and Portuguese yields from spiralling out of control before each needed a rescue, even though it purchased almost a fifth of their combined debts.

Gary Jenkins from Evolution Securities said Greek yields fell from 12.43pc to 7.35pc in the week following the ECB’s first bond purchases, only to creep back up over the next six weeks.

Jacques Cailloux, Europe economist at RBS, said the ECB’s intervention had stopped a collapse of South European bond markets for now, but ultimately the ECB will have to act as buyer-of-last-resort on a huge scale.

Investors will take advantage of bond rallies to cut exposure to Italy and Spain, shifting the risk onto the ECB and the taxpayer. The crisis will flare up again if the ECB stops buying.

Here AEP hides behind comments of other pundits and market participants. Nonetheless, sentence after sentence confirms that what is being suggested has already been tried and has already mathematically and spectacularly failed for if it hadn’t we would not be in this predicament at present.  But, it seems leaders and experts take comfort in the fact that “intervention has stopped a collapse for now”… but why has none of them noticed that whatever issue caused the problem then is now an even bigger issue? Why can none of them see the diminishing marginal utility of debt?

Barely a month ago the consensus thought recovery was at hand. “We were looking at the end of QE, and exit strategies, and we could see an oasis across the desert.”

There was never any such consensus. Not arithmetically, not intellectually and not even in any given parallel universe. This is pure propaganda

Breaking up the Euro

June 27, 2011

As I speculated some two years ago, it seems to me that if anyone should leave the Euro it is Germany. The rationale is that weak members need the union more than the union needs them. Conversely, the union needs strong members more than strong members need it.

Even assuming Greece should leave the union, I don’t see how other weak members could stay on.  If Greece goes, borrowing costs will sky rocket for all other weak members thereby hastening their demise. This in turn brings about two dilemmas. First, if all weak members start falling off the wagon then how many members other than Germany might be left? Second, even assuming Greece should go, this will bring about the marking to market of Greece’s debt held by the ECB… which I think should bring about the marking to market of all other sovereign debt held there… in other words this would be the “poof!” moment for the ECB thus the dissolution of the EU…

In my view, the path of least complication is if Germany quits the Euro and the EU


About that state sovereignty thing… (Karl Denninger)

June 3, 2011

Karl Denninger is one of the more astute observers in the blogosphere and recently he was musing on the European situation decrying the fact that Trichet implied he would like individual states in Europe to cede sovereignty to the ECB

I can’t post on Mr. Denninger’s forum because the procedure is much too complicated for someone that would only post very occasionally so I decided to make a post of my own.

The reality is that through the Lisbon Treaty, a whole chunk of sovereignty has already been ceded to an unelected EU executive body. For the ECB and the rest of the governing elite to now complete the legislative and juridical take over of Euroland,  is only a formality.

The economic incompetence of the political class (Charles W. Kadlec)

December 9, 2010

It is human nature. We never give something much thought till something goes horribly wrong.

I often drive across Europe. I recently returned from just such trip and as I drove through the St Bernard’s tunnel I was discussing the inevitability of disaster in human endeavor with my passenger. By means of example, I told him, take these tunnels. Till the Mont Blanc tunnel did not suffer a devastating fire and killed scores, tunnel safety wasn’t really an issue. Then the fire happened and now going through the Mont Blanc is an experience akin to driving into the Starship Enterprise – there are sensors, multi-colored lights, markers, signs, cameras, there is a blanket radio signal that takes over your car radio and at the toll booth you are only allowed to enter the tunnel at some distance from other vehicles. But then, a few years later, the Gottard tunnel too suffered a devastating fire and, once again, scores were killed. Similarly, and despite the Mont Blanc precedent, Gottard’s tunnel security wasn’t really and issue till then.

As we were discussing these unique human traits of waiting for something to happen before we do something, not two days later the Frejus tunnel skirted disaster two weeks ago as a fire developed. Maybe because this is the oldest and least practical of all the trans alpine tunnels and is therefore not used by many or because of sheer luck, the fire was contained and no lives lost.

And through the soul searching, the hand wringing and the finger pointing during the aftermath of disaster, we are singularly incapable (or are we unwilling) to take preventive measures for situations that inherently breed disaster.

The opinion expressed by Mr. Kadlec in Forbes can be generally agreed with; “generally”. But of course, as is the case with Mr. Kadlec, we must ask where was the press and the punditry when all this was developing and when, by the year 2000, the trend was clear and unmistakable.

Here is the Forbes’ opinion piece with my comments interspersed:

The sovereign debt crisis now threatening Europe, as well as major American states and cities, discloses the sheer incompetence of a political class that has over-promised, under-delivered and squandered vast amounts of their citizens’ wealth.

Guido here: Right there from the get go I have to take exception. Politics, and electoral politics in particular, can only be manipulative thus expedient and self serving. It cannot be otherwise. The simple political dynamic requires that a politician must either convince or deceive people in order to acquire a base larger than his/her opponents. But in the particular case of the interaction of politics and the economy, no politician could  viably propose spending cuts or the termination of programs. Thus electoral politics will always and everywhere be devoted to increased spending because a case can always be made that change can be brought about without cutting any programs.

Greece, Ireland, Spain, Portugal, California, Illinois, Los Angeles and Chicago are simply the poster children for what happens when elected officials engage in reckless and irresponsible management of their economies, their banking system or their respective government’s public finances.

Guido here: if Mr. Kadlec were familiar with the variety of monetary system we currently employ in the West, he would realize that “mismanagement” of the system is built into the system as a necessity for the life of the system.

Greece’s debt stands at 144% of its gross domestic product, the highest in Europe. Ireland’s debt is 70% of GDP, due in large measure to the liabilities it assumed when it bailed out the Irish banking system. The just-announced European loan of 50 billion euros to Ireland is equal to nearly 50% of its GDP. Within the next year, Italy will have to borrow 20% of its GDP just to refinance its maturing debt.

California’s budget deficit has soared to $25 billion, or more than 25% of total spending. And, according to a recent study, the City of Chicago’s unfunded pension liabilities total $45 billion, or more than $40,000 per household.

Politicians may not be solely responsible for this fiscal mess. But they are responsible for using borrowed money to pay for current expenses until they had borrowed more than they now seem able to pay back. Furthermore, they agreed to generous pension plans without properly funding those future obligations. As a result, massive tax increases–or a renegotiation of those commitments–now seem unavoidable. Neither alternative is going to be very pleasant economically or politically.

Guido here: Politicians are absolutely and solely responsible for this crisis. It is the politicians that have allowed the banks to propose and impose this particular variety of monetary system. It is the politicians that then and now continually fail to inform themselves on the characteristics and ramifications of the use of one system over another. It is the politicians that have imposed this particular variety of monetary system on society unilaterally and arbitrarily. Finally, for the same reasons I outlined just above, it is the politicians that insist on curing any political or economic crisis with excess spending and excess debt.

Prior to the euro, the political class in Europe could cover up its incompetence through a devaluation of the country currency in question. The ensuing inflation reduced the real value of the debt, providing elected officials and their economic advisors a face-saving way to force lenders to take a “haircut” on the value of their government bonds.

But with the euro, devaluation is off the table, and capital markets are beginning to bring the political class–and the supporters of big government–to account. In fact, capital markets were further empowered to check government excess by an agreement among European leaders that after 2013, bondholders will face a loss of principal in the event of a financial rescue of a European state. Lenders, as well as taxpayers, will be at risk from wasteful government spending.

Guido here: devaluation of the Euro is alive and well. Mr. Kadlec is either not familiar with the concept of Floating Exchange Rates or he does not understand it. But the Euro has been grossly and steadily devalued against a bunch of other things. What Mr. Kadlec intends to say here, is that being members of the Euro monetary system, European countries cannot devalue “against each other”. For a graphic representation of devaluation, check my charts (link at right) on page 4, 5 and 6.

In the meantime, however, the European strategy of enabling more borrowing while imposing austerity plans, including higher tax rates, on overly leveraged countries may prove counterproductive. Increasing tax rates slows growth, reducing GDP, employment and the tax base necessary to service the debt.

A shrinking economy and rising unemployment also increase the demand for higher government spending to support failing businesses and the unemployed. Moreover, lenders are already demanding higher interest rates, increasing the cost of refinancing past debts, which are now coming due.

At some point, there is a risk that one or more European countries may be unable to avoid a de facto, if not de jure default on their debt, requiring a complete restructuring. And that creates the risk that the European Central Bank will be forced to bail out the political class by buying that country’s sovereign debt and devaluing the euro–hence the current weakness of the European currency.

Guido here: Correction. Corrections aplenty. Higher government spending is the de-facto natural inclination of government whether the economy is doing well or not. Why else would anyone choose to adopt a Debt Based Fiat Monetary System? Hence the reason that, for example, since 1980 in the USA, Federal debt increased well over 1000% but GDP barely doubled. Besides; we are already bailing out the political class as we are bailing out the banks quite successfully too for now I might add.

In the U.S. at least, the looming debt crisis among states and municipalities also reflects a lack of diligence on the part of the citizenry. This can be attributed in part to a naïve assumption by the electorate that those in government, freed from the profit motive, could be trusted to do what was “right” for the community as a whole.

Guido here: ooooohhh so wrong. The debt crisis is the result of government deliberately debasing the currency. When interest rates move inexhorably from the top left to the bottom right, individuals are put in a position whereby if they do not spend they stand to loose all their savings. When government constantly and repeatedly lowers interest rates and regularly spends in excess of what the economy could sustain, the individual cannot do otherwise but spend because saving makes no sense.

Instead, what we now can see is that elected officials, following a power motive, can be as greedy and irresponsible as anyone in the private sector. In many cases, officials from both parties have been captured by powerful interests, including public sector unions and recipients of transfer payments. As a consequence, they have willfully committed current and future taxpayer money to benefit those with political power at the expense of the community as a whole.

Guido here: yeah. That’s the political dynamic in an electoral context. In an ideal world, it is the degree of fiduciary duty the higher echelons of government are willing to extend to society that could make the difference. But, again. The electoral politics dynamic pretty much precludes that.

One lesson is that to live in liberty requires an elevated level of diligence, oversight and skepticism of our elected officials. Taxpayers and financial market regulators need to insist on more honest accounting and disclosure of the true costs of the government programs in general, and government employee pensions and benefits in particular.

Guido here: Indeed. Liberty does require diligence and, I might add, sacrifice. That and pundits that can inform themselves.

The sovereign debt crisis now encircling Europe may well prove to be a preview of what lies ahead for the political class in the U.S. Like their European counterparts, they may be participants in an end-game in which capital markets force a reassessment of debt-financed government spending, especially on transfer payments, government pensions and wealth-destroying investments in bridges to nowhere, green energy and other government boondoggles with negative rates of return.

Charles W. Kadlec is an author and the founder of the Community of Liberty. He can be reached at

Who do the IMF or the ECB really want to bailout?

November 17, 2010

As the mainstream press appears to steadily if hesitantly move towards a more objective role, the Wall Steet Journal today reports who the real beneficiaries of the bailouts really are.

Not news to us of course.

All told, European banks were sitting on more than $650 billion of exposure to Ireland as of March 31, according to the Bank for International Settlements.”

And there you have it.
Banks are once again trying to skirt their primary legal and fiduciary responsibilities. Banks are businesses. Businesses make strategic decisions in an attempt to earn a profit. When decisions turn out to have been wrong, a business takes the loss or goes bankrupt. It is how it is supposed to work in open free economies.
But in our bank imposed, debt based, fiat monetary system, not only are banks perceived as indispensable to the normal functioning of the system but they have also placed themselves above the law. This would not be such a bad thing if it weren’t for the fact that banks have successfully maneuvered into this position with the ongoing connivance of the political, legislative, judicial and executive framework of presumably sovereign democratic countries.
Hence the reason banks can disregard entire swathes of accounting rules that apply to everyone else. Hence the reason banks enjoy selective legal treatment. Hence the reason banks get fined token amounts in cases where they have clearly and deliberately committed fraud, if not been criminally negligent, as is the case with the ongoing foreclosure debacle that incidentally is in the process of getting “settled” for yet more token amounts and where nobody will go to jail… yet again.
Mathematically, we’ve reached the limits of this monetary system. The upshot of this situation is that debt based fiat money conforms to the law of diminishing marginal utility so that as you reach the mathematical limits of the system, the progression accelerates till it implodes. We are literally 3 to 5 years away from total implosion.
You know my position. This implosion will bring global conflict just because neither our politicians nor, indeed, our electoral political systems are geared towards doing what needs to be done or taking responsibility for a crisis years in the making. Politicians and electoral politics are inherently expedient and short-termist in inspiration and in deed thus guaranteeing immunity from responsibility. A fall-guy will be found, a sacrificial lamb will be slaughtered and a war precipitated.
Ireland like Iceland before it, should tell the banks to go pack fudge. Bank bondholders should be forced to assume their roles as prescribed by law and take the loss. Public funds must no longer be used to safeguard bank’s deliberately reckless behavior. Bondholders must no longer be saved from the scheming ways of their own creation.
Someone has suggested recently that each citizen should buy a silver coin or a silver ingot. You needn’t spend much; less than US$50 will do. But each and every person in the world should buy a small quantity of physical silver either in coin form or in ingot form. Buy it and put it in your pocket; i.e. do not buy a certificate. Buy the real physical item. Whilst you are at it, you can do the same with gold. If every sentient and reasonable person in the world did so, the monetary authorities would be quickly brought under control. Help reason and decency prevail. Buy a little bullion.

Something is not confirmed till government officially denies it (re-post)

November 15, 2010

I re-post because I can… :))… and because had anyone actually put money down on the bet, I’d be a rich man by now… by the way, other than the re-post below, notice that the Irish government is bending over backwards to deny they are in talks with the ECB/IMF.

Begin re-post:

My favorite theme. Check out any of these prior posts…

Obviously having learned nothing from Almunia and his histrionics, today we have none other than the Prime Minister of Spain declaring:

Euro Debt Crisis is Over

Now, I can understand how politicians can never learn from their and other politicians’ mistakes past and present. Politics is inherently and by necessity expedient and manipulative in nature so politicians do and say what they do and say.

What I have a harder time understanding is how presumably “informed” media agents, media companies, professionals and, indeed, members of the public can so regularly not see political statements for what they are.

Once again. As I did with Almunia whom, incidentally, has disappeared from the public scene, I will gladly take the other side of this bet. Sovereign credit spreads as well as fiscal revenue trends say this is easy money. So easy in fact, it could qualify as hustling.

ECB attacks G20 plan to boost IMF drawing rights to pump cash into global economy

April 8, 2009

… well, not quite the ECB but certainly someone within the ECB. Namely, Mr. Jürgen Stark, the ECB’s chief economist and Germany’s member on the bank’s executive board.

As outlined in previous comments like this one for example, a world currency is a dangerous thing. It is dangerous to individual liberty it is dangerous economically and it is dangerous socially and politically.

What is regrettable across the global political spectrum is the total lack of rationality and the egregious abandonment of fiduciary duty in favor of expedient political actions aimed at keeping the real criminals in place as they loot and plunder whatever wealth may be left.

It is comforting that though a minority, people like Mr. Jurgen Stark and Mr. Vaclav Klaus still do exist and still put up resistance where and when possible. These are the leaders that deserve to be supported by the public.