"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Monday, August 8, 2011

Trichet's Got A Gun



And he just used it.  The gun reference, for those not familiar with it, is from former US Treasury Secretary Hank Paulson (under Bush II).  Paulson, seeing that the stock and bond markets were in full panic mode in 2008, said that he needed a large amount of money to be used to provide liquidity to the markets.  His view that this large and accessible amount of money, that gave him cart blanche, would be a bazooka.  That is, both a defensive and offensive weapon to ward of bond vigilantes and short sellers.  He even said that merely possessing this bazooka could be enough to stem the market carnage that was taking place in 2008.

Well,  ECB President Trichet just fired his own bazooka - he started "cranking up" the printing presses to buy Spanish and Italian bonds that the market started deeming to expensive due to increased risk of sovereign default.

This represents an interesting development for the EU.  The EU is far from a federation, and thus only the larger member countries have control over EU policy - France and Germany.  But even these two countries need to answer to their electorates, so arriving at a sensible (if it even exists anymore) EU monetary and financial policy, is extremely difficult.  Enter Trichet with his bazooka...

From Bloomberg this morning:
The ECB bought Italian and Spanish bonds this morning, according to five people with knowledge of the transactions, driving their 10-year yields down to 5.39 percent and 5.3 percent respectively from above 6 percent on Friday. Both reached euro-era records last week. Italy has 1.8 trillion euros ($2.6 trillion) in outstanding debt. 
European stocks erased losses, led by a rebound in banks, with the benchmark Stoxx Europe 600 Index up 0.5 percent to 240.04 at 8:25 a.m. in London. U.S. futures on the Standard & Poor’s 500 Index slid 0.8 percent after earlier being down as much as 3.1 percent.
Hyperinflationists will see this as excessive money printing, and they are right, to a degree. The reality is, that when central banks engage in such an action, they attempt to "sterilize" or as I like to put it "cancel out" the inflationary affects of such actions.  How do they do this? They increase the amount of term deposits banks have with the Central Bank.  It's a cancelling out of sorts of money in the economy.  It's parked.  It's basically a balance sheet exercise of shifting around numbers on a ledger.

But it also defies the laws of capitalism.  Without negative economic consequences, economies become distorted and malinvestments are not flushed out of the system.  Those that disagree with this point counter that to do nothing could collapse the system.  They are correct.  However, the same political influence that leads to debt monetization - banks that have an undue influence on governments and central banks - also controls the regulation of banks.  The banks that hold this poisonous debt are not tamed.  There is no governmental regulation strong enough to punish the banks, the type of punishment the darwinistic aspect of Capitalism dishes out to bad investors - banks included.

And so, yes, for today, a free lunch has been provided.  Pain has been avoided - today.  But the imbalances of trade between member EU countries still exist, there is no guarantee that the ECB can sterilize everything that may be needed in the future, and the Banks continue business as usual.

Yes, Trichet has successfully impacted Italian and Spanish bond yields - let's call it what it is - he successfuly manipulated the market.  But there is one asset that doesn't buy all this balance sheet/ledger shifting of poisonous debt.  You know what that asset is?

Gold.

I have been saying for years now.  Watch gold, it is the barometer of the world economy and the current debt based fiat monetary system.  As more temporary band aids are applied to this systemic band aid, gold's value will only increase.

Furthermore, as banks are saved with liquidity and sovereigns are starved of liquidity, austerity will collapse economies, and thus collapse tax revenues, leading to very little change in deficit and debt to gdp targets.  The EU's goals for implementing austerity - to lower deficit and debt to gdp numbers will also fail.  It's been failing in Greece every few quarters.  I'm in Greece now, and it is full blown debt deflation.  When the economy shrinks, when salaries fall, tax revenues fall, and the debts?  They remain the same or even grow.  A country can only lower its debt to gdp if its economy grows and its debts get paid off.  None of that is happening under austerity.

There is no solution in my opinion.  As Michael Hudson has put it:  "debts that can't be paid, won't be paid."  Trichet may carry the game on a little longer, but eventually, one of two things will happen.  The currency collapses, or the economy collapses.  Or both.

43 comments:

Jim Slip said...

Of course there are solutions.

Bring back tariffs.

Allow deficits (have the central bank guarantee the interest rate by targeting price and not quantity).

Tax the multinationals that overthrow domestic players.

Have Germany and China increase domestic consumption.

Shift towards fiscal policy rather than monetary policy.

Oh there are solutions. But they wanna have their cake and eat it too. Yeah, sure, there's no solution to that.

And so what if it defies the laws of capitalism anyway? Work for the Greek private sector (where they screw you) and maybe capitalism is not such a great thing.

Misthos said...

As you say Jim, "they wanna have their cake and eat it too."

I am the most negative I have been in years. I see the entire global financial/political/economic system in a state of entropy that will end in war. Not proxy wars that we have now, but actual wars between regions fought in unconventional ways.

As each nation and its influential interest groups pursue their self interest, it will come down to resource wars. Peak conventional oil is playing a large role in this.

As for my comment on capitalism - the special interests, namely the banks, pick and choose the most advantageous elements of both capitalism and socialism (for the wealthy). They will not lose until the system breaks down and takes them down with it.

Those in control are not looking for big picture solutions - but for solutions that impact their own specific goals. Hence, eventual breakdown.

boatman said...

hi mist,

bond puchases to be "transfered" to the FSFCE(or whatever the exact initials are) bailout fund----300bil$ left out of the original 1tri$.

we know what happens when that runs out.go to the german electorate with that question.


jim, fiat money creation since '71 did not cause the econmic collapse of course....inventive bankers derivatives, greedy stupid shortsighted home owners and a mandate of home ownership from government.

fiat money enables the govmint to take on this debt, to the debasment of the currency.

it will not work it does not pencil out.

fiat currency is giving a credit card to a 16 yr. old(99% of them)

in the long run(end of that run is soon) it will not work and never has in the history of the world.

there is a reason they don't just push a button and the debt disappears.....do you think it would stop then?....problem solved huh....--->it would then escalate.

did you vote for obozo thinking he was going to throw the lobbyist out(didn't happen)?

liberals get mixed up on what could happen vs. what can happen.
conservatives have other problems.

Dave Narby said...

The recapitalization of the system with gold draws near!!!

Glad to see you back Misthos!

Misthos said...

What's up Dave!

Good to hear from you and thanks!

OKL said...

hey misthos, talk about a quick turnaround eh? from 1340 to 1119 in 11 days lol... talk about gap fills.

yeah, it aint gonna be pretty.

glad i hold a job now, rather than trading for a living.

like i say to my friends, who seem to turn a dear ear; none of the politicians actually used the 2008 crisis to good use by uniting their countries... it was just band aid after band aid.

Misthos said...

OKL! Good to hear from you again!

Crazy stuff. You're right about the politicians. In that regard, the US is no different than Greece.

The economy, and the country in general is being run for the benefit of the wealthy - particularly the financial oligarchs, and the world is increasingly looking at the US's governance as if it is a third world country captured by an elite, who's own goal is to plunder.

Unfortunately, many people have no idea and are very partisan - just as 1/2 the population thought everything will be OK when Obama gets in, the other 1/2 think everything will be OK when Obama leaves.

There's no difference in governance when both political parties are captured.

I do see a reflation on the horizon, and the price of gold is telling us that. I think QE3 has just been priced in, with room for a correction.

OKL said...

im not sure if it is really the case on the inside; but it sure looks like govts are getting captured by the "elite" from the outside.

i just think there seems to be a hopeless addiction to free markets and that it is the be-all and end-all for these countries.

it seems to me that many people are forgetting that what differentiates a democracy from other forms of govt (whatever they might be) is the rule of law- all are equal in the eyes of law.

the nasty thing that is going on around ever since the financial crisis in 2008 is that it is glaringly obvious, that govts are "ruling in favor" of consequences rather than the act of commission. of course, it doesn't help that law is traditionally the most conservative (read: slow) branch of govts, in terms of execution...

i dont get QE to be honest; i mean, it's done practically nothing for the real economies, but jacked up prices on Wall Street due to credit borrowing. QE3 in the same form would be idiotic, to be honest.

i dont like the idea of austerity in the US either, i just think that the politicians are struggling to make up their mind and that they don't really know what's best to do in order to move forward; but that's just a reflection of what the majority thinks too.

if anything, there should be a targeted efficient stimulus and for [insert your god] sake, someone tighten the screws on the financial industry please... regardless of what ppl want/think, it's getting more and more like the general economy is serving the interests of the financial industry, which does nothing for political unity.

and then at the heart of it in Europe, or any country that has a high number of immigrants, is this question; "What does it mean to be a XXX citizen?"

If an appropriate answer is not reached, then i think that ultimately, the accountants in EU will square the accounts and force it down the Europeans' throats...

i've a lot more to say... anyway, i just don't see how things can possibly be "smooth" for the next 3-5yrs.

boatman said...

'not smooth' will be the understatment.

there is a reset coming, i can taste it.

but knowing humans like i do,i'm not sure if we will learn much from all the pain.

Jim Slip said...

Revisiting this post, I have to say I find it unsatisfactory.

Here are a few thoughts.

Why is it such a big deal if the Central Bank buys bonds and it's not a big deal if regular banks buy bonds?

Mishtos, you know your MMT, so you know that banks are never reserve constrained in order to lend. So where's the inflation? Nowhere, unless conditions in the economy are right for further private credit expansion. But in that case, the banks will get the required reserves anyhow, either from the interbank market, or directly from the central bank.

So what's the big deal? The big deal is about fiscal policy. But as Bill Mitchell has explained, the notion that an increase in the monetary base will lead to inflation is wrong because it assumes that there is full employment, and that the velocity is constant.

His full post can be read here:

http://bilbo.economicoutlook.net/blog/?p=7591

Also you refer to "the same political influence that leads to debt monetization".

Again, we know from MMT that debt monetization cannot occur without interest rates falling to 0%. As long as the central bank pursues a policy about setting the interest rate, then the debt is not monetized. But even if it monetized, so what?

Again, we know from MMT that an economy that functions below full capacity utilization is unlikely to fall prey to hyperinflation. And if the mercantilists (Germany, China) wish to stop accepting our paper (that is stop suppressing domestic demand) they are free to do so. I certainly wish they would.

Misthos said...

Jim:

"Why is it such a big deal if the Central Bank buys bonds and it's not a big deal if regular banks buy bonds?"

It depends on whose bonds are being bought, and what market to market rules exist, and who is guaranteeing those bonds, and who is issuing them.

As for the inflation - it is showing up, in my view, in gold. When I wrote this post gold was trading just above 1200 EUR. Now just a few weeks later, it is trading above 1300 EUR.

But there are other factors at play - reserve currency/safe haven status of the US Dollar. Deflation pressures in Europe in mostly real estate and stock markets.... BUT... have you gone to the supermarket lately? I believe that in a complex, globalized world that we live in, traditional views of inflation being a monetary phenomena are too simplistic. Looking at just the money supply ignores global wage arbitrage, energy prices, misallocation of capital within an economy, etc...

The ECB buying bonds is the only workable alternative. It does not rely on the political acceptance of the member states' populations the way a Eurobond does.

But there will be consequences to ECB buying. The underlying faults of the EURO are not being addressed. Primarily, the lack of a recycling mechanism.

Greece is effectively a country that pegs its Drachma to the Euro, which is really the Deutsche Mark. Greece has a Greek Drachma economy, not a Deutsche Mark Economy. When Argentina pegged its currency to the US Dollar, how did that end?

ECB buying of Greek, and other member states bonds is a temporary "solution" that ignores the underlying issues.

Jim, you and I know that markets are not functioning properly. Additional manipulation by central banks is not a solution, in my opinion.

Full federalization, or nothing. But even then, I think it is too late. Most of the western world has been hit with debt saturation. Credit money is strangling their economies. A massive debt jubilee is necessary, but that too, has grave consequences.

What are the consequences? Think double entry book keeping. My balance sheet's asset is your balance sheet's liability. Destroy your liability, that is, forgive your debt, and my asset disappears.

Jim Slip said...

If inflation does appear in gold, then that's great, because it affects nobody (as opposed to, say, oil or food).

I'm going to the supermarket once a week (mostly LIDL). I swear, no exaggeration, the money I spend have remained unchanged since 2008, and I buy (more or less) the same stuff.

I completely agree about the underlying faults of the euro not being addressed, and about markets not functioning properly.

About a debt jubilee, sure it would remove the creditors' assets, but then again the same would happen if the debts were being repaid. So how about adopting fiscal policy that would be adequate enough to generate income that in turn would be adequate enough to repay the debts?

boatman said...

thats funny jim, every single thing i buy is uppp bigtime....really

boatman said...

dave narby, your blog has blocked me.....what in the world did i say?

Jim Slip said...

@boatman

I don't think so. I think that you exaggerate the whole thing because you're biased towards inflation so that you can then justify your view that all the "money printing" will bring a resurgence of the gold-standard.

Just yesterday I went to the supermarket and again I spent about 70 euros on pretty much the same stuff.

That said, I mostly buy from LIDL, whose business model is deflanationary.

@Misthos

Can we have a discussion about the way the Eurozone system operates?

Since Eurobonds already exist (the bonds that the EFSF issues), the issue is who guarantees these bonds. So far it is the member states that guarantee them, which is pretty much useless seeing as they are currency users and not currency issuers. So the real issue is whether the ECB is going to guarantee them, which is what the Europeans are trying to avoid because (I take it) should the member states fail to guarantee them, then the ECB is going to credit that money (which is the equivalent to money printing).

Apart from the fact that there's an obsessive bias in favour of private credit creation (the ECB has lent enormous money to private banks and nobody cares, but then the ECB buys some government bonds and everybody whines about "debt monetization"!!!!!), I would like to highlight here the differences between the European and the US model.

Wouldn't it be accurate to say that in the US due to the federal government deficit they credit banks accounts first, whereas in Europe they truly have to get funds from a pool of "savings" (which has come from private credit creation of course, or from exports) and only under the hypothetical scenario that the ECB guarantees these bonds they would get to the part of "monetization"?

Misthos said...

Hey Jim,

I had a busy summer, but now will have more free time to devote to the blog.

There are tremendous differences between the US and the EU, as you point out. One other difference is that the US has some sort of "recycling mechanism" among the states. That is, on a net basis, richer states lose money to the Federal government, whereas poorer states gain money. This is done through Federal taxation and spending - which functions as a funds transfer mechanism between states, and thus, there is no real balance of payments issues.

I will cover this and the points you bring up as well.

My opinion is that the Euro is ultimately doomed as the EU is currently structured - it's just a question of time. The EU needs full federalization - otherwise, it will be just another doomed German Reich experiment.

The current inflexible "gold standard" course will guarantee tremendous economic pain and consequent societal upheaval that will rip the EU apart and make Germany, I fear, seem to be the villain once again.

boatman said...

oh, jim, so now i'm either wrong, can't add or write, or a liar.

if your spending euro's i get it now....your a delusional socialist.

Jim Slip said...

@boatman

Never said you're a liar. I said you exaggerate the whole inflation thing. I don't even know where you live. Maybe if you live in the UK there is inflation, who knows. In Greece, the only inflation I see is because of the extra vat taxes the government is imposing. Misthos could confirm this.

Are you denying that people in favour of the gold-standard see it coming through excessive inflation?

Sorry, I don't see excessive inflation anywhere in the West.

boatman said...

i live in florida, and i do not care if you believe me or not, its a fact proven even by the 'rigged' CPI numbers obozo puts out.

i bet u work for the govmint or used to....i have personally fired 30 or 40 people like you in my life....if they were'nt smoking cigarrettes they were drinking coffee....they spent more energy trying to 'get out' of doing work than it would have taken them to just do it in the first place.

cradle to grave welfare and woefully inefficient government condemns your countery to default.

the world has reached the 'debt-point' that no amount of more debt is going to solve...printing money IS more debt by the way.

just keep trying to get blood out of that turnip, its not working why would more of it will work?

this place is called 'fiat collapse'....i guess u are the resident troll that just will never get it until it happens.

i'm up 125% in 3 years on gold..with alot more to come.......whats your score investing in paper?....if you've made any at all, i advise you to sell it now.

'course you could be some 35 yr. old kid living in his parents basement and on their tab.

Jim Slip said...

@boatman

The only things that you display with what you say is that you're yet another ignorant Austrian living in a fantasy-land and repeating stupid stereotypes about "cradle to grave welfare" and "debt saturation".

boatman said...

how's that borrow spend and print workin out for ya in europe, much less the rest of the whole world.

ya, its workin great...everythings fine n everybody's happy.

moron.

Jim Slip said...

Keep it civil, imbecile.

OK, so you're delusional, fantasizing about inflation and inneficient government workers coming after you and your "pool of savings".

Live a little, learn about the world and grow up.

Misthos said...

Jim - I will agree that here in Greece, there is consumer price deflation. But the EU as a whole is still concerned about inflation.

That said, I no longer focus on the inflation/deflation debate. What we are going through right now is a global currency and bond crisis.

We also have an ongoing currency war - just look at what Switzerland has recently done with the Euro/Swiss Franc trade.

Everyone needs to devalue. This is highly destabilizing.

The EU is self imposing a gold standard of sorts on its own economies - and this will prove tragic. Not because a gold standard is faulty - though no system is perfect - but because the rest of the world is not on a gold standard. Thus you can still have a solvency crisis in the EU's banking sector and governments, occasional bailouts, but still have a strong Euro - if that makes sense.

Greece is going through a tragic debt deflation death spiral. It is a net importer, private sector credit growth has collapsed, and the government is cutting back spending - aiming for a surplus no less. This is a dangerous combination for an economy to experience. All three sectors - Foreign Investment, Government, and Private Sector are net losses for the economy. Greece is bleeding from all three, all at the same time.

Jim Slip said...

Yup.

Austerity helps if you already have a strong external sector.

That's why it worked in Germany, and that's why it (seems to) work in Ireland.

If you don't have a strong external sector, you don't need austerity. You need investments.

boatman said...

my brand of beer just went up .50$ a case....AGAIN

2008: 11.79

now 14.29

FACT

but no, there's no inflation.....i'm either imagining it or i don't know how to read....or its 'transatory' or 'temporary'.......

going on 4 yrs. 'transatory'

Jim Slip said...

Misthos, are you posting as K in Yanis Varoufakis' site?

Misthos said...

Good observation! Yes, that's me. I believe I may have also posted under either Misthos or gnk in the past. "K" is my first initial - my Greek name is Konstantin.

I haven't posted here in a while - I will post something this week, the following week I will begin serving in the Greek Army. Been busy lately wrapping things up. I have dual citizenship now, and as a Greek citizen, as you are aware, I need to serve my time in the Greek Army.

Jim Slip said...

Ouch. Good luck with that. Hope you're doing minimum service at least.

Misthos said...

Yes, due to my residency status at time of enlistment, and my age, I qualify for minimum service. I am actually looking forward to it - it should be an interesting experience.

boatman said...

real inflation:

http://www.acting-man.com/blog/media/2011/10/CPI-nsa.png

Dave Narby said...

Misthos, haven't heard from you in some time... Hope everything is OK!

boatman said...

dave, did you close your blog to the public or just to me?

if so, what could a 'tin foil hat wearing' guy like me possibly have said to piss u off?

Misthos said...

Hi Dave,

Everything is fine. Just been busy lately, and as I wrote above, I will be out of pocket until mid-December. I am currently living in Greece (I have dual citizenship now) so I also have to serve for a period of time in the Greek Army.

As for the blog and my views - all I can say is that I have not changed my opinions whatsoever. We're heading down a dangerous global financial path, with all the unintended unpredictable consequences that will follow. Nothing can be changed now. The system will one way or another reset. This reset can be managed or chaotic - but nonetheless it will be extremely painful for most.

BTW, I too, like boatman, can't see your blog anymore. Have you stopped posting and turned off public availability?

Hope all's well.

Jim Slip said...

I reckon, since you advocate a return to the gold standard, it'd be a good idea if you focused on the differences between how the banking system operates under a fiat system (free floating exchange rates), and how under the gold standard (fixed exchange rates).

Misthos said...

Jim,

That's an excellent point that I think many overlook. But first, I don't necessarily think that a gold standard will bring the world back to a new era of prosperity. There is no perfect system, there is no perfect solution.

I will write on that eventually, hopefully in December I'll have time to post more frequently.

Nonetheless, the conclusion I reach between a fiat system and gold standard and how the banking system operates between the two is reliance on large banks by governments.

Under a fiat system, greater imbalances result in world trade which ultimately accumulate in the banking system Extremely large banking systems emerge under fiat systems, with a corresponding financialization of an economy. The financialization of an economy to me means that it takes on more Ponzi/Pyramid characteristics as credit growth increases. In order to keep the financial sector growing to support government spending and the large trade imbalances, financial engineering (derivatives, securitization of debts, etc..) is necessary. The Ponzi, or Pyramid, needs to grow, and so these financial tools expand in use and quantity.

This process ultimately creates extreme risk in the system. Interconnectedness of global banks creates the possibility of contagion. Which is today's reality.

Our collective standard of living in the West, over the past 30 plus years, was illusory, it was artificial. And not just for the debtors (nations and individuals.) After all, the savers got rich because others went into debt. One nations savings is another nations debt.

We're all in this together. We will all be affected.

By the way, I know many will argue that trade and banking imbalances also occurred before the Great Depression, and the gold standard limited how much government could assist the plunging economy. That is true - but what is ignored is the massive credit creation prior to the Great Depression that took place during the Roaring Twenties. The gold standard was essentially ignored by the Federal Reserve.

Unfortunately, the EU is doing the same thing today. The Euro functions as a gold standard of sorts with the Maastricht rules. During the last ten years, this Euro "gold" characteristic was ignored and credit exploded giving everyone a false sense of wealth. Now that the credit bubble has popped, the EU wants to re-introduce, or rather enforce the "gold standard" characteristics of the Euro. This is why I have little faith in the Euro. The EU is creating another Great Depression which will be politically and socially destabilizing.

boatman said...

cessation of overt money printing has returned the price of my beer back .75$ a case.

QE3 is coming of course....so it will go back up then.

all this money created is sitting.....it does not dissappear or melt.....we EVER get any econ traction (after the GIIPS default and that whole toilet is flushed out---probly in 4-5 yrs. about the time population catches up w/houses sitting)....it'll be REALLY off to the races on prices....leaving the retired in the dust....as usual.

mist---i know u are looking at it this way-your national service will be a plus for you. an experience.....an investment.....and appreciation of what u temporarily give up (to do it) when it is over.

i can see your chin 'up' from florida.

Misthos said...

Hey boatman, thanks.

boatman said...

brendon dornan (history squared) email to CNBC:

Email to CNBC on EFSF “Solution”
October 24, 2011

Is it possible that the problem in Europe is a structural sovereign debt and spending problem and not a banking problem?

Is it possible throwing $2 trillion does nothing but contaminates the core?

Is it possible the EFSF solves a short term problem while enabling a bigger, longer term debt problem to grow by allowing governments to continue to borrow and spend an ever larger amount while forgoing the needed reforms that would solve the underlying problems?

Is it possible the Federal Reserve is performing a similar function for the US, blowing a bigger bubble to replace the last – this time of government debt perpetuated by the Federal Reserve’s debt monetization and artificially low teaser rates?


boatman says: HEYYYYY-OOOO!!

boatman said...

hedge fund whiz on currency crisis coming:

http://www.yorkshirepost.co.uk/business/business-news/hedge_fund_guru_warns_of_period_of_very_high_inflation_1_3858133

Jim Slip said...

Misthos, I believe you will find the following link interesting.

http://www.buoyanteconomies.com/TechnicalitiesOfMonetarySystem.htm

boatman said...

beer price up to record high now

added the .75 back n with a .25 kicker.

real inflation rate 9%

f a buncha of deflated from inflated houses.

Misthos said...

Hi Boatman,

I'm almost done my Greek military service, and will be posting again within a couple weeks. I'm on leave right now for a few days. It has been a very good experience serving in the military. I appreciate the Armed Forces even more now, and what they give up while they serve.

I agree with you on inflation - especially on commodities. But real estate isn't looking to good.

I think the biggest inflation push will be within the next 12 months. The ECB will print, China will print, the US will continue to print, and peak oil and the Middle East will only get worse. Watch Syria and Iran.

So even with high unemployment, energy costs will skyrocket, affecting everything else.

Goodbye middle class.

Daniel Milstein said...

That is so true. As an author and business man, I can relate to how you said "There is no governmental regulation strong enough to punish the banks, the type of punishment the darwinistic aspect of Capitalism dishes out to bad investors - banks included". I hope more people discover your blog because you really know what you're talking about. Can't wait to read more from you!