Mish's Global Economic Trend Analysis

EFSF "Grand Leverage Plan" All But Dead
Only True Role of Central Banks is to Print Money – Why Else Have It?
Run on the Eurozone has Started; Horrendous Idea that Will Not Die; Hitler Enters the Equation; Merkel Reiterates the Obvious; No Hope or Future for Eurobonds

Posted: 24 Nov 2011 09:45 PM PST

All the schemes and maneuverings by eurocrat clowns and misguided economists hoping to get 4-1 or even 8-1 leverage on the EFSF bailout fund while keeping the fund's AAA rating intact have officially died on the vine. Even the EFSF committee admits as such.

The Financial Times reports Euro rescue fund's impact in doubt

European leaders hailed a scheme to offer insurance on losses for investors buying troubled eurozone bonds as a means of leveraging the €250bn spare capacity of the rescue fund four or five fold, to more than €1,000bn.

But the dramatic spike in borrowing costs for Italy since the summit is likely to force the European Financial Stability Facility to sweeten the deal offered to investors, which will limit the number of bonds the insurance would cover.

Klaus Regling, head of the EFSF, earlier this month said that overcoming investor concerns with improved guarantees would mean the fund was likely to have only three to four times the firepower – an admission that underlined the challenge European leaders face in steadying sovereign debt markets.

But three senior eurozone officials said even this lower target may be difficult to reach, and expect the eventual firepower to be between two and three times the remaining buying capacity of the fund. "It is falling well short of its billing," said one. Concerns over leverage will be a key item on the agenda of eurozone finance ministers meeting on Tuesday.

Please recall the huge number of economic illiterates who protested that 4-1 leverage was "not enough". Also note, the market has emphatically stated that any leverage may be too much.

Ironically, the "grand plan" for the EFSF hatched by German Chancellor Angela Merkel and French President Nicolas Sarkozy last month may die before terms are even set for its use.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Only True Role of Central Banks is to Print Money – Why Else Have It?

Posted: 24 Nov 2011 12:24 PM PST

Steen Jakobsen, chief economist at Saxo Bank in Denmark has a few thoughts via email I would like to share.

Steen writes ...

The German "near miss" failed auction yesterday has set off several new developments and pressures – This is a major thing clearly, and some media even speculate it could change the mighty Bundesbanks' perception of reality.

Close to home, Germany now trades ABOVE Denmark on 10 year government debt by 10 basis points! However, there is reason to believe this more a function of the illiquid markets than an endorsement of the Danish economy, where the fiscal imbalances continues to expand negatively (Unlike Sweden!)

Spread difference 10 year Denmark minus 10 year Germany

It has also increased the pressure from France to get the ECB more involved – I fail to see link between the German auction and this, but never the less the French political machine is always firmly behind the concept of "Dirigism" and in today's meeting between Merkel, Sarkozy and Monti the topic surely will be touched again.

It's important in historic context to remember that the only true role a central has is to … print money – why else have it?

I remain committed to my Chapter 11 concept as one of the few ways to break this deadlock.

Safe travels,

Steen

For a discussion of the "Chapter 11" concept, please see Perfect Storm the Most Likely Scenario; Is Europe Set to Declare a Chapter 11 in Early 2012?

Steen is correct regarding the only true role of central banks. It is precisely why they they should be eliminated. Far from being "inflation fighters" they are the very source of inflation.

More correctly: Fractional Reserve Lending and Central Bank Printing do not "cause" inflation, they "are" inflation.

Deflation is the destruction of credit and debt from the preceding boom.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Run on the Eurozone has Started; Horrendous Idea that Will Not Die; Hitler Enters the Equation; Merkel Reiterates the Obvious; No Hope or Future for Eurobonds

Posted: 24 Nov 2011 09:22 AM PST

I remain in "awe" of the amazing arrogance of politicians and news writers who simply cannot take "no" for answer no matter how many times it is spelled out. The horrendous "eurobond" idea simply will not go away, even though Merkel and the German supreme court buried it long ago.

Even if Merkel was willing to give in on the idea, Finland and Austria wouldn't, and more importantly neither would the German supreme court.

Yet people keep wasting time debating the merits of it. It's like debating the merits of perpetual motion. No matter what the merits might be, perpetual motion is not going to happen, so there is no point in debating it.

Run on the Eurozone has Started

Eurointelligence proclaims Run on the Eurozone has Started

Jose Manuel Barroso warned yesterday the euro would be "difficult or impossible" to sustain without further economic integration. German newspapers this morning produced a whole string of poisonous comments about the European Commission's proposals for Eurobonds. The eurozone is now in a position where crisis resolution requires a much firmer political commitment than member states had expected to provide.

German could accept Eurobonds under certain conditions

Taken at face value the German opposition against Eurobonds seems to be as strong as ever and most German papers such as Süddeutsche Zeitung and Handelsblatt report on the topic in these terms. Nevertheless, the resistance against the Commission is less categorical than it appears, Financial Times Deutschland writes. Angela Merkel did not rule out Eurobonds but rather said the timing of José Manuel Barroso's proposal was "inappropriate". Among the condition she enumerated were changes of the EU treaties and a much stronger commitment of member states to condolidate. Norbert Barthle, the budgetary spokesperson of Merkel's CDU/CSU parliamentary group, told FTD: "We never say never. All we say is: no Eurobonds under current conditions". As a result there is scope for a deal at the EU summit December 9.

The idea is preposterous. There is no scope for a deal and no time for a deal even if there was scope. Moreover, and even if there was scope and time, it would require a German referendum and treaty changes by all 17 Eurozone countries.

Facts do not stop politicians or writers.

Hitler Enters the Equation

Writer Mark Schieritz in Nazi Adolf, inflation and the euro crisis blames the rise of Hitler on the gold standard and deflation.

The hyperinflation of the twenties led to so that the Weimar Republic was entirely prescribed a hard currency strategy - regardless of losses. Others were wiser because:

After leaving the gold standard, the UK saw its unemployment rate decline by about a third from 1931 to 1933, while Germany's rose over the same period Significantly. If Germany had been willing to follow the UK in inflating, and its unemployment rate had followed a similar trajectory, it would have stood at 17% rather than 33%.

In other words, perhaps the greatest catastrophe in human history could have been prevented if the Germans had allowed a little more inflation.

The euro in its present form is in many ways comparable to the gold standard.

The cause of the great depression was the runup in credit that preceded it. Blaming gold for the rise of Hitler or for the great depression is preposterous. Begging for inflation is equally preposterous.

Economies go through these massive boom-bust cycles because of inflation, fractional reserve lending, and rampant credit expansion. The cure cannot be the same as the disease no matter how one tries to distort the facts with untenable correlations.

Central banks, governments, fiat currencies, and fractional reserve lending are responsible for every major economic bust in history and fools come back begging for more.

Enough! Eurobonds are not going to happen (nor should they happen).

For a detailed discussion of why Eurobonds and ECB printing are piss poor ideas, please see Understanding the Problem, Understanding the Solution, and Understanding Who is to Blame are Three Different Things.

I wrote that last evening but failed to post it. At the time US futures were up over 1%. Now I see they were flat. The reason? I presume this:

Merkel Reiterates the Obvious

Bloomberg reports European Stocks, Euro Fall on Merkel Comments

The euro weakened, Italian bonds declined and the cost of insuring European government against default rose to a record after German Chancellor Angela Merkel ruled out joint euro-area borrowing. European stocks fluctuated.

Euro bonds are "not needed and not appropriate," Merkel said at a press conference with Italian Prime Minister Mario Monti and French President Nicolas Sarkozy in Strasbourg, France.

"The market sees a 'no' and reacts to it," said Martin Huefner, chief economist at Assenagon GmbH in Munich, which manages more than $4.7 billion of client assets. "We're going to see a deterioration of equity markets in the coming months to the point where something will have to be done. The market would be euphoric to get euro bonds. Apparently the pressure is not big enough yet."

No Hope or Future for Eurobonds

Huefner has it backwards. The market hears "yes" and reacts to it, even when it is damn obvious the answer is no.

There is no hope or future for Eurobonds and there never was.

No matter how many times this is explained or reiterated, some eurocratic fool or some fool writer finds some lame excuse to attempt to revive the dead. The latest (yesterday) was preposterous analysis by the Financial Times suggesting Merkel did not "really" mean no. This was followed up with the ludicrous idea by Mark Schieritz who blamed gold and lack of inflation for the rise of Hitler.

Sheeesh.

Now that Eurobonds are finally dead (hopefully), can we please start a rational discussion as to how best to break up the Eurozone?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Home Refinance Calculator

Thursday, November 24, 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

No comments:

Post a Comment