The European Central Bank taking Steps to make the Eurozone Crisis Worse

Posted by PITHOCRATES - September 22nd, 2012

Week in Review

To increase the money supply central banks can do a few different things.  To stimulate economic activity.  They can lower reserve requirements to stimulate money creation via fractional reserve banking.  They can print money.  And they can buy bonds with money they create that they inject into the economy with their bond purchases.  These actions will put more money into the economy.  In hopes people will use it to generate economic activity.  Of course there is a tradeoff.  Increasing the money supply can also create inflation.  And often does.  Unless the economy is so far into the toilet that no one spends any money even with all of this new money in the economy (see ECB in ‘panic’, say former chief economist Juergen Stark posted 9/22/2002 on The Telegraph).

“The break came in 2010. Until then everything went well,” Juergen Stark, the German who resigned from the ECB in late 2011 after criticising its earlier round of buying up of sovereign debt, told Austrian daily Die Presse in an interview.

“Then the ECB began to take on a new role, to fall into panic. It gave in to outside pressure … pressure from outside Europe.”

Mr Stark said the ECB’s new plan to buy up unlimited amounts of eurozone states’ bonds, announced on September 6, on the secondary market to bring down their borrowing rates was misguided.

“Together with other central banks, the ECB is flooding the market, posing the question not only about how the ECB will get its money back, but also how the excess liquidity created can be absorbed globally,” Mr Stark said.

“It can’t be solved by pressing a button. If the global economy stabilises, the potential for inflation has grown enormously.”

The European Central Bank (ECB) wasn’t trying to stimulate economic activity with these bond purchases.  What they were trying to do was throw a lifeline to those nations in the Eurozone about to go belly up because no one will buy their bonds.  Because the chances of them ever repaying their enormous debts are slim to none.  Because of this these indebted countries have to offer very high interest rates to entice anyone to take a chance buying their risky bonds.  These high interest rates, though, were hurting these countries.  Increasing their financial woes.  And pushing them ever closer to bankruptcy.  So the ECB caved.  And bought their worthless bonds.  By doing something only a central bank can do.  Create money out of thin air.

These additional Euros thrown into the money supply could very well end up depreciating the Euro.  And sparking off inflation.  Which monetary expansion ultimately does.  Unless an economy is so far into the toilet that no one will spend this additional money.  And it just sits in the bank.  But if the economy does turn around there will be a lot more money available to borrow.  At exceptionally low interest rates.  So low that some will borrow it because of those low interest rates.  Which could spark off inflation.  Helping the Eurozone to settle back into recession.

This is not going to help anyone in the Eurozone.  Especially those staring down bankruptcy.  Because this won’t cut spending.  This won’t reduce any deficits.  And this won’t lower any debt.  All of the old problems that caused their problems will still be there.  Along with a new problem.  Inflation.  Guaranteeing that things will get worse in the Eurozone before they get better.

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The European Central Bank Acts to add Liquidity to European Banks

Posted by PITHOCRATES - January 7th, 2012

Week in Review

The European Central Bank (ECB) offers up some cheap loans to add some liquidity to the Eurozone economy.  A liquidity problem caused by the Eurozone debt crisis.  Which was caused by excessive government deficit spending.  So the ECB’s solution to this problem is to throw more cheap money into the economy.  Problem solved (see Europe banks gobble up cheap loans offered by Central Bank by Henry Chu posted 12/21/2011 on The Los Angeles Times).

Faced with the threat of another regional recession, the European Central Bank said Wednesday that it was doling out more than half a trillion dollars in special long-term loans to hundreds of financial institutions in a bid to keep credit flowing…

The money, lent at the low interest rate of 1%, proved attractive to many financial institutions that are highly exposed to government debt and that have therefore found it hard to borrow commercially.

“It provides some stability to the funding of banks which have more or less completely lost market access,” said Sony Kapoor of the think tank Re-Define.

But the record response to the ECB’s offer is a sign of how dire the situation has become, Kapoor said. He warned that the new loans failed to address the heart of the euro crisis: the loss of faith in Europe’s banks and in the heavily indebted governments that stand behind them, especially in peripheral countries of the Eurozone…

Meanwhile, European government bond yields rose on fear that banks might back away from buying more sovereign debt amid pressure to reduce risk on their balance sheets.

Perhaps not.

This is why there is no easy solution to the Eurozone debt crisis.  European banks aren’t buying sovereign debt.  Because their balance sheets are full of risky sovereign debt.  So much that these banks have lost market access.  They can’t borrow because they are now risky, too.  Much like the countries of the Eurozone who are having trouble selling bonds.

All of this bad debt has resulted in a liquidity crisis.  And weakened European banks.  So the European Central Bank stepped in to relieve this liquidity crisis.  By providing low interest loans.  In hopes that these banks will use that cheap money to buy more of that risky sovereign debt.  That has caused the liquidity crisis.  And weakened European banks.

So either the banks will sit on that money to improve their balance sheets.  Or they will further weaken their balance sheets by buying more of that risky sovereign debt.  Neither which will fix the underlying problem.  Too much debt.  These countries with too much debt need more austerity.  To reduce their borrowing needs.  Before the European banks start failing.

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The Eurozone to fail because they will Never have the Fiscal or Political Union Required to make a Currency Union Work

Posted by PITHOCRATES - December 11th, 2011

Week in Review

The Eurozone is doomed.  For the things they say they need to do they just can’t agree to do (see Like it or not, the euro is doomed by Hibah Yousuf posted 12/9/2011 on CNN Money).

European leaders, particularly from France and Germany — the eurozone’s two largest economies — have had very different views on the ultimate role of the fiscal compact, and the latest proposals are just “too little, too late, and miss the structural problem,” said Leach.

Germany has been strongly opposed to sending the ECB down a path of printing money to stabilize Europe’s economy.

“Printing money is associated with hyperinflation, the collapse of the Weimer Republic, and the rise of Hitler,” noted Leach. “From a German perspective the question is that, once the ECB has lost its virginity printing money, just how promiscuous could it become.”

Hyperinflation and the collapse didn’t happen when they started printing money.  These happened after they printed a lot of money.  It was a progression.  For it takes time to make your currency worthless.  Which is something the Germans don’t want to experience again.  Because it didn’t end well for them the first time.

Afseth said the fiscal union needs to focus more on boosting economic growth, rather than just pushing for budgetary discipline and fiscal austerity. And it needs to advocate for pooling the eurozone’s debt together, so the region can issue eurobonds, another highly contentious topic among Europe’s political leaders.

Despite the multitude and extent of the political disagreements that could lead to the eurozone’s crumble in the near-term, more optimistic experts say Europe’s leaders will likely find a middle ground to avoid the severe economic consequences.

“The political arguments are strong, but they come against a hard economic reality,” said Andrew Milligan, head of global strategy at Standard Life Investments in Edinburgh, Scotland, noting that the costs for a single country leaving the eurozone could amount to at least 15% or 25% of its economy, if not more.

There are those who want the European Central Bank (ECB) to assume the debt of the member states.  Like the U.S. did in 1790.  But the Americans already had a currency union.  And a political union.  As well as a common language.  A common heritage.  Common institutions.  A national post office.  And a lot of other common things.  With only about 100 years of history.  And despite all of this the idea of assumption did not go over well.  It took a fight.  And some wheeling and dealing.  Europe, on the other hand, has only a common currency.  And they’ve been around for about 2,000 years of history.  So chances are all they will have is a common currency.  And they may not be able to save that.

The Eurozone was the answer to the United States.  The world’s number one economy.  Because within her borders was the largest free trade zone in the world.  Which exploded her economic growth to the top spot.  The Eurozone was to replicate that in Europe.  A united states of Europe.  And it worked.  But it probably won’t last.  If only one nation drops out of the Eurozone it could reduce the economy of the united states of Europe by 25%.  And if one goes more will probably follow.  This economic powerhouse will be united no longer.  And it will probably plunge Europe into recession.

“A break-up could result in very major recession in Europe, and so it’s hard to imagine how any politicians and governments could possibly make a conscious, voluntary decisions to leave the eurozone,” said Milligan.

So clearly the Euro failing will be too painful to endure.  So painful that the member states will try everything within their power to prevent that.  Including trying to get the ECB to issue Eurobonds.  And print money.  Much like Richard Nixon did when he abandoned the gold standard in 1971.  Saying he was then a Keynesian, too.  And the U.S. spun out of control with double digit inflation rates.  High unemployment.  Stagflation.  And it wasn’t Keynesian economics that finally fixed this mess.  It was the anti-inflation policies of Paul Volcker of the central bank.  He raised interest rates.  And stopped printing money.  This fixed the inflation problem.  Then Ronald Reagan fixed the economic problem.  By cutting taxes.  Something the Europeans may not be physiologically able to do.

So it really doesn’t matter what they do.  For the end will be the same.  It may be sooner or later.  But the Eurozone will most probably dissolve.  Because they will never have the fiscal or political union required to make a currency union work.

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Debt Limit Talks just Theatre, Obama Determined to Emulate Greek Spending and Debt

Posted by PITHOCRATES - July 18th, 2011

The Debt Limit hasn’t Stopped the Debt from Growing

The bond ratings agencies are getting nervous.  About the inevitable default of Greece.  And the possibility that the U.S. won’t be able to accumulate the unsustainable debt like the Greeks have (see Moody’s suggests U.S. eliminate debt ceiling by Walter Brandimarte posted 7/18/2011 on Reuters).

Ratings agency Moody’s on Monday suggested the United States should eliminate its statutory limit on government debt to reduce uncertainty among bond holders…

“We would reduce our assessment of event risk if the government changed its framework for managing government debt to lessen or eliminate that uncertainty,” Moody’s analyst Steven Hess wrote in the report…

In the United States, Moody’s said the debt limit had not effectively curbed the rise in government debt because lawmakers regularly raise it and because that limit is not related to the level of expenditures approved by Congress.

They have a point.  The Economist noted (see Down to the wire posted 7/18/2011 on The Economist) “Congress has acted a total of 91 times since June 1940 to either raise, extend or alter the definition of the debt limit…”  So it would seem that the debt limit is a limit in name only.  It hasn’t stopped the debt from growing.  As their little chart shows.  So why have it?

A Debt Default will be Bad, so will continued Out of Control Spending

Because, apart from World War II, the public debt hasn’t exceeded 100% of the GDP (see The Economist chart referenced above).  George W. Bush took it close to World War II heights to pay for two costly wars (Iraq and Afghanistan) and an expensive Medicare drug plan.  Obama has taken it beyond World War II levels.  At about 140% of GDP.  And Obama wants to borrow more, taking it to 150% of GDP.  Or beyond.  The European Central Bank is forecasting Greek debt to peak at 161% of GDP.  So you can see why having a debt limit is a little more important now.  Which makes the Moody’s recommendation a bit puzzling considering their concerns over Greece (see Senate Throws Obama a Debt Lifeline by Chris Stirewalt posted 7/18/2011 on FOX NEWS).

The bond-rating agencies have spelled out the two scenarios that would result in a downgrading of U.S. creditworthiness: either an unconditional increase to federal borrowing that shows Washington sprinting toward the fiscal abyss or an unbreakable stalemate on the debt ceiling.

A debt default will be bad.  But so will be continued out of control spending.  So it makes little sense solving one problem by making another problem bigger.  Besides, the U.S. has the money to service its debt.  The only question is will Obama service it?

But, here again, Obama is the one in charge of deciding who gets paid in the event of a shortfall. While his administration might send scare letters to senior citizens as a bargaining tactic with Republicans, it’s unlikely that the president would tell pensioners that they can’t have the money they paid into the system during their working lives.

Imagine the president keeping open national parks or green energy stimulus projects while telling America’s oldsters that they aren’t getting checks. Not going to happen.

Yes, if Social Security checks don’t go out to seniors, it will be because Obama chose not to send them.  And speaking of Social Security, this brings up another point.  That it’s a Ponzi scheme. 

The money we paid into the Social Security isn’t sitting in some lockbox collecting interest.  Like those Social Security statements we get imply.  The government spends that money, our money, as soon as they get it.  Which is why they viciously attack any plans to privatize Social Security.  They want your money now.  While you’re living.  And after you die.  For if we privatize Social Security, our heirs would get our unspent retirement money.  Not the government.  As the system is now designed.

This is just another good reason not to give the government more money.  They’re just going to blow irresponsibly.  Like using our retirement money deducted from our paychecks to pay for national parks.  Or green energy.

Obama and the Democrats don’t want Deficit Reduction

Washington can’t curb it’s appetite to spend.  Doesn’t want to.  And they don’t try to hide this fact (see Obama officially threatens to veto ‘Cut, Cap and Balance’ by Sam Youngman posted 7/18/2011 on THE HILL).

The White House on Monday warned President Obama will veto GOP legislation to “Cut, Cap and Balance” spending and the budget…

The administration lambasted the “Cut, Cap and Balance” proposal as setting out “a false and unacceptable choice between the federal government defaulting on its obligations now or, alternatively, passing a Balanced Budget Amendment that, in the years ahead, will likely leave the nation unable to meet its core commitment of ensuring dignity in retirement.”

The White House also blasted some of the cuts Republicans have suggested, saying the proposal would “undercut the federal government’s ability to meet its core commitments to seniors, middle-class families and the most vulnerable, while reducing our ability to invest in our future.

“[The bill] would set unrealistic spending caps that could result in significant cuts to education, research and development and other programs critical to growing our economy and winning the future,” the SAP said. “It could also lead to severe cuts in Medicare and Social Security, which are growing to accommodate the retirement of the baby boomers, and put at risk the retirement security for tens of millions of Americans.”

Business as usual.  Scare the old people.  So they can spend more.  This is an admission that there will be no deficit reduction.  Obama and the Democrats don’t want it.  It’s all just theatre.  To amuse the public.  And buy time.  For they plan to spend, spend and spend.  On programs that are ‘critical’ to winning the future.  Despite the fortune we’ve spent already on these programs that have won jack squat so far.

The American Taxpayer paying for Irresponsible Governments Here and Abroad

So it’s on to Athens.  Push that debt up to 160% of GDP.  I mean, what really can happen that’s so bad (see Gloomy Forecast for Europe’s Banks by Jack Willoughby published 7/16/2011 on BARRON’S)?

Sean Egan, co-founder and president [Egan-Jones Ratings], has a stunning prediction for Barron’s readers: Forget about things getting better in Europe, he says; they will actually get worse. And who might be one of the patsies in all this? The American taxpayer, who could feasibly be stung as the Federal Reserve aids an ailing European Central Bank already depleted by too many bailouts. The big question: Will Europe, worn down by bailout after bailout, finally be forced to bail out the bailer—the ECB?

Oh.  As bad as things are in Europe they’re going to get worse?  And the American taxpayer may ultimately pay for these bailouts?  Lovely.  Just when you thought things couldn’t get any worse.  Not only will the American taxpayer pay for their own irresponsible government.  But Europe’s as well.

Atlas can’t Shoulder the Weight of the World Anymore

That debt limit seems more important than ever.  This out of control spending has to stop.  Before it’s too late.  Because we can’t afford our debt and Europe’s debt.   America can’t be Atlas and shoulder the weight of the world on its shoulders.  At least, not anymore.  Not with the Obama administration running things.

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The Costs of European Socialism Bankrupting the EU?

Posted by PITHOCRATES - December 6th, 2010

European Socialism – Voting yourself the Treasury

The Left loves European Socialism.  They want it here.  They’ve been trying to get here.  All the while the Europeans are trying to move away from it there.

Socialism doesn’t work.  Once people learn they can vote themselves the treasury, they do.  It’s been the death knell of all democracies.  As those state benefits get bigger, they entice more people.  They say, “Work?  But why?”  Because many can live comfortably without working, many do.  And they sign up for those generous state benefits.

The problem is that there is no ‘secret stash’ of government money.  Everything they spend they take from us.  Those who work.  So taxes go up.  Working people get less.  And the government-dependent grows and becomes an important voting demographic.  And they vote.  They vote themselves the treasury.  And why not?  It’s not their money.  Not yet, at least.

The EU, the Euro and the ECB cannot Fix the Fundamental Flaw of Socialism

Eventually, the number of working people decrease.  And the number of those not working increase.  More and more people receive benefits.  And fewer and fewer people pay taxes to fund those benefits.  So they keep raising the taxes on those who work.  To pay those who don’t.  But they can only raise them so far.  Because people simply won’t work for free so their neighbor can live a better life.

And how is that European Socialism working?  Much like the people collecting those generous benefits.  It ain’t working either.  To compete against the economic power of the United States, they’re trying to become like the United States.  They created the European Union (EU).  A European Central Bank (ECB).  And a common currency (the Euro).  Because they thought bigger was better.  Because the United States is a big economic zone.

But the Europeans have a problem.  They’re still social democracies.  And the trends continued after the union and the Euro.  More people collecting benefits.  Fewer people paying taxes.  Some of these countries are going through debt crisis.  And as these countries implode in their financial crises, the affects are felt throughout the European Union (see Euro’s Worst to Come as Trichet Fails to Calm Crisis, Top Forecasters Say by Anchalee Worrachate posted 12/5/2010 on Bloomberg). 

The 16-nation currency’s [the Euro] first weekly gain against the dollar since Nov. 5 may prove short-lived amid mounting concern that more nations will need rescues. European Central Bank President Jean-Claude Trichet delayed the end of emergency stimulus measures last week and stepped up government-debt purchases as “acute” market tensions drove yields on Spanish and Italian bonds to the highest levels relative to German bunds since the euro started in 1999.

“We’re going to get a continuation of the problems that Ireland, Portugal, Spain and others are suffering,” said Callum Henderson, Standard Chartered’s global head of foreign-exchange research in Singapore. “The fundamental issue is these are countries that have relatively large debts, large budget deficits, large current-account deficits, they don’t have their own currency and they can’t cut interest rates. The only way they can get out of this is to have significant recessions.”

Once upon a time Europe was ablaze in war. The growth of nationalism brought nations into conflict with each other over land, food and resources.  They redrew their borders in blood.  Nations did not give up their national sovereignty without a fight.  Which makes the European Union that much remarkable.  What they fought to the death to prevent they now give up voluntarily.  Of course, when your nation is on the brink of bankruptcy, what have you got to lose?  Having someone else bail you out of your financial mess?

Can the Euro and the ECB Survive European Socialism?

A weak currency helps a nation to export goods.  The more they export the more economic activity they have.  And the more jobs.  And the more people to tax.  So a weak currency can be a good thing.

But a weak currency also carries some baggage.  If a nation is ‘printing money’ to pay for excessive state benefits, that will not only make the currency weak, it will also increase prices; it’ll take more of those weak dollars (or Euros, or Pounds, or Yen, etc.) to buy things.  Even government benefits.  This is counterproductive.  People have less purchasing power.  And the government has to tax, borrow or print more because they, too, have less purchasing power.

The United States debased its currency.  Which helped the Euro gain some strength.

Just a month ago the euro reached $1.4282, the strongest level since January, as traders sold the dollar on speculation the Federal Reserve would debase the greenback by printing more cash to purchase $600 billion of Treasuries in so-called quantitative easing.

But the Euro wasn’t getting stronger.  The dollar was just getting weaker.  Both currencies are losing value.  And with more member nations in the EU getting weaker, the stronger ones may bail to save themselves.

Taylor [chairman of FX Concepts LLC, the world’s biggest currency hedge fund] predicted some nations may leave the common currency. Stronger members “have to say ‘enough, you guys, get out of the euro,’” he said. “The risk that Spain and Italy will get into trouble is going to cause the euro to get quite weak.”

Spain and Italy follows Ireland.  Which followed France.  Which followed Greece.  Nations are struggling under the weight of their debts.  Is there a limit to how much the ECB can help?

The ECB will keep offering banks as much cash as they want through the first quarter over periods of as long as three months at a fixed interest rate, Trichet said. That marks a shift from last month, when he said that the ECB could start limiting access to its funds.

Time will tell.  The trends are going the wrong way, though.  And there are more countries that can fail.  And they don’t have their own currencies.  So they need the ECB.  And the ECB needs to save them.  To save European Socialism.  Much like the Soviet Union tried to save Soviet communism.  Which, of course, they didn’t.

The problem with the Soviet Union was Soviet communism.  And the problem with the EC is European Socialism.  Great big governmental bureaucracies fail.  Always have.  And always will.

The Europeans know what they need to do, though.  And they are doing it.  Cutting their spending.  Despite the rioting and the burning of some of their cities.  Even with all of that, they are NOT increasing their spending.  Or trying to reduce their deficits by increasing taxes.

As the euro region’s most-indebted nations cut spending to bring their deficits under control, a weaker euro will be needed to cushion their economies, said Ian Stannard, a senior currency strategist in London at BNP Paribas SA, the fifth most accurate forecaster.

Of course, they want a weaker Euro for their exports.  So the EU can sell their export products cheaper than the domestic products of the import countries.  Which those import countries will not welcome with open arms.  Because they’re trying to grow their economies, too.  But that’s a whole other story (if you’re interested you can read about how international trade wars brought about the Great Depression).

It’s European

Meanwhile, on the other side of the pond, we’re having our own financial problems.  Large debts, large budget deficits, large current-account deficits.  Just like the Europeans.  Only difference is that the Obama administration is trying increase taxes and spending to fix our problems.  The Left calls this economic stimulus.  Rational people just call it stupid.

The political Left likes all things European.  In fact, they want to be European.  So I say let’s be European.  Let’s cut our spending like the Europeans.  I mean, if the Europeans don’t want to be like us (tax and spend), perhaps we should be like them (cut spending).  After all, if it’s European, even the Left should find it the fashionable thing to do.

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