Germany's Institutional Memory

We have often argued that Germany was a likely stumbling block for inflationary initiatives by the ECB in order to rescue wobbly sovereign debtors, a view that was confirmed by the serial resignations of Axel Weber (who stepped down as chief of the Bundesbank) and Jürgen Stark (who resigned from the ECB). Both men, it should be recalled, stepped down over disagreements with the ECB's bond buying program, in spite of the fact that this program has been fully sterilized.

What is at work here is the German post-war monetary policy tradition that has only one major guiding principle: Weimar, never again.

Reichsbank president Rudolf von Havenstein was partial to Georg Friedrich Knapp's theory of chartalism. Knapp published 'The State Theory of Money'  in 1895, a screed that put forward a statist view of money, arguing in favor of fiat money, not least because it allegedly made a default by the government 'impossible' (interested readers can download the English translation of the book in pdf form here). The crude inflationism of the chartalist theory can be seen as a logical extension to the German 'historical school' of economic thought. This school held that since every phase of history is unique, there are no fixed economic laws, and hence there could be no universally valid economic theory. Instead, every historical period needed to be studied empirically, and the economic laws governing a certain period had to be discovered in this manner. If this vaguely reminds you of Hegel and Marx, it should. Although Marx hated the Prussian establishment from whence the historical school sprang, he also believed in historical determinism, in the Hegelian idea that every new period of history would by necessity be 'better' than the ones preceding it.

Knapp's chartalism was the idea that the 'modern world' no longer needed a market-chosen commodity money, but could be better planned with state-issued tokens that derived their value purely by force of law, i.e., fiat money. Today, the whole world is living Knapp's dream, or perhaps we should rather say, Knapp's nightmare. Chartalism has been revived, using the somewhat more spiffy sounding moniker 'modern monetary theory', but it is still the same crude inflationism. Not surprisingly, Knapp was also a major influence on J.M. Keynes.

Under the influence of Knapp's theory and that of advisors who were likewise partial to it, von Havenstein embarked on one of the biggest debt monetization efforts ever. He set off a vicious spiral, and eventually became unable to extricate the Reichsbank from its course. The flaw of the chartalist tenet regarding the impossibility of government default soon became apparent. The German Mark descended into utter worthlessness, destroying the lives of all those depending on fixed incomes, from pensioners to widows and orphans, while enriching a select few, such as Germany's 'inflation king' Hugo Stinnes.

The economic and political upheaval that followed in the wake of the hyper-inflationary collapse has left a deep scar in the German psyche. It has rendered the post WW2 establishment deeply inimical to inflationary policy. As a result of this, it has become increasingly likely that Germany will rather see the euro fall apart than to embark on a 'rescue by means of inflation'. The point was brought home again yesterday by Axel Weber's successor at the helm of the Bundesbank, Jens Weidmann.

As Reuters reports:


ECB Governing Council member Jens Weidmann, an opponent of the bank's bond-buying programme, told Germany's Spiegel magazine the ECB had burdened itself with considerable risk and it was wrong to abandon established principles of monetary policy.

The usual divisions between fiscal and monetary policy had become blurred, and some measures carried particular dangers, he said in an interview made available on Saturday.

"Once monetary policy starts to be used, there will always appear to be reasons to suggest it should continue to be used," he told Spiegel. [Bernanke and his merry pranksters are busy falling into this trap, ed.]

"Of course in such an unusual crisis it would be wrong to stubbornly dwell on principles. But it would be just as wrong to throw out all established rules of monetary policy by citing a general emergency," said Weidmann, who heads Germany's Bundesbank.

Weidmann, like former ECB policy maker Juergen Stark, opposed the ECB's decision in August to reactivate the bond plan following a 19-week pause. The bank decided to buy the bonds of Italy and Spain after they came closer to succumbing to the debt crisis.  "It is indisputable that buying bonds on the secondary market does not ease underlying problems," he said.

Weidmann added that in taking risk upon itself the euro zone reallocated risk among the tax payers of individual countries.  "We must reduce these risks, as at present German tax payers bear 27 percent."

He added it was unhelpful to speculate about what might happen should Greece not stick to the aid conditions.  Separately, Weidmann said after a meeting of European finance ministers in Poland that the euro zone should not take up Washington's suggestion of leveraging its bailout fund to fight the bloc's debt crisis. It was not clear how the European Financial Stability Facility (EFSF) could be leveraged without impeding the ECB's independence, he said.

 

(emphasis added)

We are of course of the opinion that a central bank-led system of banks operating with fractional reserves is doomed to fail no matter what policy principles guide it  due to the calculation problem.  As J.H. de Soto has shown, the socialist calculation problem not only makes a command economy impossible, but the principle extends to the decision-making processes of a central economic planning agency like a central bank as well. As we have previously noted in this context, the so-called 'stability policy' of targeting a certain 'average price level' in the economy harbors its own dangers (see 'The Errors and Dangers of the Price Stability Policy'). Not only is it impossible to actually determine this mythical 'average price level', but by ignoring an inflationary credit expansion during times of strong productivity growth, it is no effective brake on the inflation of money and credit and the trade cycle this sets into motion. To wit, the euro area's money supply measure TMS has grown be nearly 130% over the past decade.

Nevertheless, we can certainly 'grade' various central bankers by what they do and say. On the whole, it is certainly better to have a conservative central banker than one who is advocating  loose monetary policy. Weidmann in fact only harkens back to the principles that were agreed upon when the ECB was founded. It was specifically decided that monetary policy would be conducted at arm's length from fiscal policy. In order not to create an inventive for blurring the two, the Maastricht treaty established upper boundaries for annual budget deficits and the cumulative public debt of member nations, by means of the admittedly somewhat arbitrary 'debt to GDP' ratio concept.

Weidmann is correct in criticizing the fact that this blurring of monetary and fiscal policy has now occurred in spite of all the rules that were put in place to keep it at bay. We think it is especially worth emphasizing that an alleged 'emergency' should not be misused to throw one's principles and rules overboard. Let us not forget here that the usual sequence of events is that once the State arrogates new powers to itself on account of a real or imagined emergency, they become the 'new normal' (a good recent example would be all the terrorism inspired abridgments of traditional legal principles that have been put in place in the US during the Bush era. The Obama era has not seen one iota of 'change' in these provisions).

Moreover, Weidmann has an excellent point when he argues that once one goes down the path of using monetary policy to 'temporarily' combat an emergency, new reasons to use it will continue to crop up.  This view is supported by the historical record of many past monetary experiments that went wrong, such as e.g. the post revolutionary period of fiat money inflation in France. Reading the debates that took place before the French assembly decided to embark on the road to hell is quite illuminating in this regard. These were not stupid people. In spite of the fact that France had already experienced a disastrous experiment with fiat money under the regency of Philippe II, the Duc d'Orleans and his economic advisor John Law, they thought initially that they had a better plan. For one thing, their money would be 'backed' by confiscated church property. More importantly though, they held that the money supply inflation would be a 'once off' affair,  just to provide short term relief to the economy, or as today's Keynesians would say, to 'jump-start' it. It soon turned out that this didn't work as advertised by the supporters of the inflation policy. Once the effects of the initial issue of assignats had fully percolated through the economy, the status quo ante returned, only slightly worse. Industry found itself back in depression – in a worse depression in fact than that pertaining prior to the first wave of inflation. Alas, it was not this ultimate outcome that informed the subsequent debate, but the initial, seemingly positive effect. Like drug addicts, the assemblymen argued for 'one more fix'. In other words, 'reasons to use monetary policy' inexorably kept cropping up – a situation that is very much akin to the one the Federal Reserve finds itself in after the first two iterations of 'QE'.

Note here that the French revolutionary assembly not only managed to destroy the currency and deliver a deadly blow to the economy. The policy also meant that it had to become increasingly tyrannical to keep people from attempting to protect themselves against the debasement.  Germany's experience of the Weimar Republic's inflationary disaster was in many ways very similar – it not only led to economic deprivation, it paved the way for tyranny. Hence the conservative attitude of modern-day German central bankers. Note in this context also a recent editorial by ex-Fed chairman Paul Volcker, entitled 'A Little Inflation Can Be A Dangerous Thing'. While Volcker also holds fast to the opinion that 'planning for stability' is in principle possible for the central bank (it isn't), he is evidently well aware of the dangers that an explicitly inflationary policy can bring. Notably he mentions that 'mathematical models' can not be used to disprove his contentions, that the siren song of using inflationary policy to support economic activity is strong, but that it should be clear that the stimulative effects of the policy are all too fleeting. These are all points we strongly agree with.

With regards to Germany, we should also point out that the recent string of electoral defeats by the German ruling coalition in regional elections will likely make resistance to the 'bailout policy' in its many forms an even bigger feature of the political debate inside Germany. As the German magazine 'Der Spiegel' reports, the decline of the FDP makes it all the more important for the party to differentiate itself from its bigger partners in the coalition. Resistance to the euro rescue efforts is the most likely path it will choose to achieve said differentiation in its effort to remain politically relevant.


“Europe is pinning its hopes for a euro rescue on German Chancellor Angela Merkel. But her power to take decisive action has been seriously curtailed by a series of regional election defeats for her party, the latest having come in Berlin on Sunday, and by growing euro-skepticism from her junior coalition partner, the Free Democrat Party, which is in electoral meltdown.

The pro-business FDP was humiliated in Berlin where its support slumped to just 1.8 percent, well below the 5 percent threshold needed to remain in the city-state parliament. The party has now crashed out of parliament in five of the seven state elections held this year — a disastrous record that has sparked predictions of its demise and stems in part from its failure to deliver on its election pledges, especially tax cuts, since it re-entered government in 2009.

Its leader, Economy Minister Philipp Rösler, who is also Merkel's vice chancellor, has responded with a desperate campaign to regain votes by challenging Merkel's euro policy. The move comes just as the crisis is at risk of heating up once again with financial markets increasingly nervous about contagion, Greece falling short of its austerity pledges and Merkel facing a crucial euro vote in parliament later this month.

Rösler upset European markets last Monday by saying Greece may need an "orderly bankruptcy" to stabilize the euro. He was the first German cabinet minister to talk openly about that possibility, which contradicted Merkel's pledge that Greece should be kept afloat.”


We would note to all of this that the often criticized imposition of austerity in over-indebted euro-area nations is in fact properly reflecting the misallocation of capital that has led them to the current juncture. To illustrate what we mean by that it is worth quoting a few paragraphs from a recent note by Andy Lees from UBS (note that this is his personal view and does not reflect the official stance of UBS):


Economists and politicians tell us that if we try to cut the level of debt the economy will slow and it will become self-defeating; debt will rise relative to GDP. Whilst this is sounds fair enough, how does this fit in with the truism that if debt is rising relative to GDP then by definition we are allocating capital unproductively and therefore unsustainably?

The answer is simple definitions. Clearly over the last few years vast amounts of capital have been written off and yet we have not revised previous estimates of GDP. We have effectively ignored that some element of the economic activity was unproductive and unsustainable. If debt rises by 10% relative to GDP, then only 90% of the stated GDP is actually sustainable. The 10% balance is made up of non-jobs that are dependent on debt accumulation. They are either consuming down our productive balance sheet, and thereby borrowing from our future level of economic activity, or alternatively borrowing from another country’s either present consumption level or their productive balance sheet. Either way, unless we are going to default, we are again borrowing from our future level of economic activity. We are putting the balance sheet through the P&L account and accounting for that as profit or GDP but without an offsetting liability.

Realistically therefore we should not look at debt-to-stated GDP, but rather debt-to-“sustainable” GDP. Taking the example where debt-to-stated GDP has risen over the course the last year from 190% to 200%, then we know that 10% of the factors of production are misallocated and unsustainable, and therefore sustainable GDP is just 90% of the stated level. This means that debt-to-sustainable GDP is not 200% but rather 222.2% (ie. 200/90). Imposing austerity simply recognises that fact, slowing the economy to the sustainable level of output and thereby recognising the level of debt against this truer measure of GDP. Take Greece for example; clearly the country has been living way beyond its means, and its sustainable level of GDP is significantly lower than the stated level. Recognising and accepting this reality is extremely difficult, but we cannot clear Greece’s debt without at the same time “clearing” the level of economic output to a true level.

If we allocate resources correctly, then debt-to-sustainable GDP will start to fall immediately. The confusion and the pain comes from having to recognise what that sustainable level is, ie to own up to what is our true economic worth. Taking the above example, we know that debt-to-sustainable GDP is not 200% as recorded but actually 222.2%, so if we allocate resources efficiently, all other things being equal, GDP will fall back to the sustainable 90% level and debt-to-sustainable GDP will remain at 222.2%. Given the painful acceptance that is necessary, if we make the adjustment over time, then the total debt will continue to rise in both absolute and relative terms, but by incrementally less each year relative to sustainable GDP.

Japan is a great example of this. A lot of people question whether the US will suffer a lost decade like Japan? When the Japanese bubble burst, net government debt was less than 20% stated GDP and would not have been much higher as a percentage of sustainable GDP. It is only that Japan has since misallocated capital that has driven debt to higher and higher levels, reaching 225% as of end of 2010.”

 

(emphasis added)

In short, there is no way to 'avert the pain' that rectifying the capital misallocation, or better malinvestment, of the past entails. Once an economy has been subject to a boom built on the quicksand of an expansion of fiduciary media ('unbacked' money from thin air, or in other words, money claims that are not preceded by production) and the production structure has been extended beyond its actual 'production possibilities frontier' to use a term coined by Roger Garrison, it becomes necessary to shorten the capital structure back to a sustainable configuration. Malinvested capital that is too specific to be transferred to new uses must be liquidated, resources need to be reallocated from higher order production stages to lower order ones, and the neglect of capital maintenance that is invariably a feature of the boom must be rectified by directing new savings to maintaining those portions of the existing durable capital that it makes economic sense to support. The end result will be an economy that has regressed relative to what was thought possible during the boom, but it will also sport a sustainable configuration of the productive structure. Once this is achieved, the vistas for renewed economic growth are open again. The problem with government intervention in the form of deficit spending and inflation is that it aims to keep the unsustainable configuration of the capital structure intact, while adding even new unsustainable activities. A great example of the former are Japan's 'zombie' construction companies, which have been kept on artificial life support by the government's infamous spending on 'bridges to nowhere'. The latter has recently been exemplified by the failed attempt of the US administration to subsidize 'green energy' companies, one of which – Solyndra –  just went down the tubes in a glaring example of a spectacular waste of scarce resources.

As we noted on Friday, the error of the pro-interventionist camp is to believe that government exists outside of the market economy's ambit, that it commands a hidden and sheer inexhaustible reservoir of resources that can be conjured into being by waving a kind of magic wand. In reality, the economy's production possibilities are precisely circumscribed by the available pool of real funding and the existing stock of capital. Government can add nothing to this, but its interventions will invariably make the economy's attempt to adjust to reality far more difficult, if not impossible.

 

Downbeat Italians And Oddly Cheerful Greeks

Last night Italy's debt was downgraded one more notch by S&P, while the 'negative outlook' was retained. As CNBC reports:


“Standard and Poor's downgraded its unsolicited ratings on Italy by one notch to A/A-1 and kept its outlook on negative, a major surprise [not really, ed.] that threatens to add to concerns of contagion in the debt-stressed euro zone. The single currency skidded over half a cent to $1.3606 after S&P said the cut reflected its view of Italy's weakening economic growth prospects.

Italy's fragile governing coalition and policy differences within parliament will likely limit the government's ability to respond decisively to the challenging domestic and external macroeconomic environment, the agency said.

"In our opinion, the measures included in and the implementation time line of Italy's National Reform Plan will likely do little to boost Italy's economic performance, particularly against the backdrop of tightening financial conditions and the government's fiscal austerity program," said S&P.

The move from S&P came as a surprise as the market had thought Moody's was more likely to downgrade Italy first. Moody's last week said it would take another month to decide on its action [oh, so the surprise wasn't the downgrade, but who did it. OK, ed.]


As a reminder, below is the schedule of Italy's debt rollovers for the next several years. As can be seen, the downgrade couldn't come at a worse time, as the the great bulk of Italy's government debt is maturing over the next two years.

 


 

Italy's government debt maturity schedule is heavily front-loaded, with enormous amounts coming due over the next few years – click for higher resolution.

 


 

However, the world's stock markets have chosen this morning to focus on another event. Worries about Italy have been set aside for now in favor of another strong dose of 'Greek hopes' and presumably, 'Bernanke hopes' (the latter are set to be disappointed on Wednesday).

The hopes regarding Greece have been re-kindled by what the WSJ called 'oddly cheery Greek pronouncements' in the wake of yesterday's telephone conference call between the Greek government and representatives of the so-called 'troika' of EU, IMF and ECB.


“All sorts of cheer at the end of the Conference Call to Save the World!

Michael Casey has already written about the oddly buoyant email from the Greek finance ministry about the call ending. I think they were just giddy they didn’t have to be talking on the phone into the wee hours of the morning.

But to add to the degree of enthusiasm, somebody in the Greek finance ministry is also saying Greece’s next rescue package is all but wrapped up. Reuters reports:

Greece is near an agreement with its international lenders to continue receiving bailout funds, a Greek finance ministry official said on Monday after a conference call between Finance Minister Evangelos Venizelos and inspectors from the EU, IMF and ECB, known as the “troika.”

“Some work still needs to be done. We are close to an agreement,” the official said on condition of anonymity. “Some measures (for 2011 and 2012) need to be quantified.” The official would not elaborate.


Adding to this odd cheerfulness over Greece is the fact that the 'troika'  has decided to continue with the conference call today. According to Reuters:


“As it happens regularly, the mission chiefs of the Commission, the IMF and the ECB held a conference call with the Greek Minister of Finance and senior officials of his ministry on Monday 19 September," Commission spokesman Amadeu Altafaj said in a statement.

"Another conference call will take place tomorrow evening. In the meantime, technical discussions are ongoing in Athens," he said.”


In addition, the Greek government has denied reports that were circulating yesterday regarding a planned referendum on whether Greece should remain in the euro-area.  Given that a possible Greek withdrawal from the euro-zone has been more often and more vehemently officially denied than we can count, it is a good bet that it actually remains very much on the agenda. The government must deny all such rumors of course, as otherwise an even bigger run on Greek banks would immediately ensue (thus far it has been a 'slow motion' bank run), as desperate savers would try to rescue their funds. Reuters reports:


“Kathimerini daily wrote on Tuesday, citing unnamed sources, that Prime Minister George Papandreou was considering calling for a referendum on whether Greece should continue to tackle its debt crisis within the euro zone or by exiting the single currency.

The government has long said it was planning a referendum on political reforms but has repeatedly denied that it would concern the country's euro membership.

Asked if the referendum would be about staying in the euro zone, deputy government spokesman Angelos Tolkas said: "No. We haven't discussed such an issue, definitely not." He said the government had put to parliament on Monday a bill aimed at allowing the country to hold referenda but without specifying any issue.

"Yesterday we tabled a bill about referenda … but we have not discussed anything more than holding a referendum."


When a government spokesman utters the phrase 'definitely not' the correct translation usually is 'definitely yes'.

 


 

The maturity schedule of Greece's government debt. The biggest bulk of government debt rollovers looms in 2017 – click for higher resolution.

 


 

Germany's DAX index as a proxy for European stock markets – it is bouncing again in spite of the downgrade of Italy's debt by S&P. It is a good bet that the markets weren't really surprised by this downgrade – instead the focus has shifted back to the likelihood that the Greek debt can may be kicked down the road one more time, while the FOMC presumably stands ready to announce fresh inflationary measures on Wednesday – click for higher resolution.

 


 

Euro Area Credit Market Charts

Below is our usual collection of charts of CDS spreads, bond yields,  euro basis swaps and a few other charts. Prices in basis points, with both prices and price scales color-coded where applicable. On Monday, CDS spreads on European sovereign debt resumed blowing out , in some cases to new highs for the move or fairly close to the highs attained previously. Prior to the news that Greece  may after all be subject to one more stay of execution, markets were clearly losing their nerve again. The failure of the euro area finance minister conference in Poland to announce a firm commitment to the Greek bailout over the weekend was seen as a big red flag. In particular, CDS on Greek debt increased to a new high of nearly 6,000 basis points on Monday, a jump of 600 basis points on the day.

Our proprietary index of CDS on euro-land banks also attained a new high, adding nearly 40 basis points on Monday.

 


 

5 year CDS on Portugal, Italy, Greece and Spain – Friday's pullback didn't last – click for higher resolution.

 


 

5 year CDS on Ireland, France, Belgium and Japan – click for higher resolution.

 


 

5 year CDS on Bulgaria, Croatia, Hungary and Austria – all of them are nearly at new highs – click for higher resolution.

 


 

5 year CDS on Latvia, Lithuania, Slovenia and Slovakia – still within the boundaries of what are bullish looking triangles – click for higher resolution.

 


 

5 year CDS on Romania, Poland, Slovakia and Estonia – same story – click for higher resolution.

 


 

5 year CDS on Saudi Arabia, Bahrain, Morocco and Turkey – click for higher resolution.

 


 

10 year government bond yields of Ireland, Greece, Portugal and Spain – yields were rising again on Monday – click for higher resolution.


 


 

10 year government bond yields of Italy and Austria, UK Gilts and the Greek 2 year note. The flight into 'safe havens' resumed. Note that Italy's bond yields remain above the technical 'breakout level'. The danger that they will blow out again to their recent highs is great – click for higher resolution.


 


 

Three month, one year and five year euro basis swaps – once again moving in the wrong direction – click for higher resolution.


 


 


Our proprietary index of euro-area bank CDS (an unweighted index of 5 year CDS  on the senior debt of BBVA, Deutsche Bank, Societe Generale, BNP Paribas, Intesa Sanpaolo, Unicredito, and Monte dei Paaschi di Siena) has added almost 40 basis points on Monday.

 


 

A log chart of our euro-land bank CDS index shows that the recent technical breakout over resistance has now been confirmed after a brief retest – click for higher resolution.


 



 

Inflation adjusted yields were declining again on Monday – click for higher resolution.


 


 

The SPX vs. the AUD-JPY cross rate – a bearish divergence is now evident – click for higher resolution.


 


 


Finally, here is an idea how UBS could make good on its recent € 2.3 billion trading loss through the unauthorized trades of one of its London based proprietary desk traders. It's quite simple: all they need to do is sell 230 million of  t-shirts like the one depicted below at € 10.- each:


 


 

Our idea to effect a clawback of UBS' trading losses. Sell 230 million of these shirts at € 10.- each (hat tip to our friend CdT).

(Photo source unknown)


 


 

 


Charts by:  Bloomberg, StockCharts.com


 

 

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4 Responses to “Remembering Weimar and Oddly Cheerful Greeks”

  • amun1:

    Call me an empiricist, but the Germans have been debasing their currency for a long time. They may not call it that, but a welfare state based on deficit spending is exactly that, because in the long run debt used for consumption in a democratic welfare state won’t be repaid with sound money. Germany’s debt looks a little more manageable than some, but that’s because Germany runs a positive trade balance; on a per capita basis they run a bigger surplus with the US than China, by a good margin. That can change in a hurry if Germany really decides in favor of sound money. Strong words from a central banker are one thing; finding politicians to stand firm against the global currency tide while the export sector gets annihilated is something totally different.

    If Germany wanted to step up and defend their currency, they should have already done so. The peripheral European economies are sunk, and they’d already be well on their way to default if not for Euro printing. I can’t see the logic of proceeding with this incremental bailout policy unless you intend to follow through. The old saying is in for a penny, in for a pound and the Germans are definitely in for a penny. The German people may not realize it yet, but they’ve already been launched down that slippery slope

    • I’m just noting that there is still a strong constitutency in Germany that is very strongly opposed to ‘unconventional’ monetary policy. It is of course very much possible that this constituency will find itself marginalized again when the next major decisions are coming up.
      Also noteworthy in this context is that the political left has lately been winning all regional elections in Germany. It is no big stretch to foresee them winning the next national election too. And while many of the votes are simply protest votes against the ruling coalition, the Left is clearly prepared to ‘do more’ to save the euro project. The whole European socialist super-state idea is essentially a leftist one after all (and quite in contrast to the far more libertarian and subsidiarity focused vision of the EU’s founders).

      • amun1:

        Forgive me if I seem overly argumentative; you know a lot more about the European situation than I do. My opinions are based on two decades of closely watching the US economy and markets and waiting for somebody, anybody, to make a slight gesture toward sound money. I watched in amazement as Alan Greenspan uttered his irrational exuberance comments and then proceeded to pour gasoline on the fire for several more years. Of course, what we’re doing now is an order of magnitude worse.

        When it comes to rhetoric about responsible monetary and fiscal policy, I’ve finally decided that there’s no way back from here. We’ve waited so long that it has almost become politically undoable. There’s incredible pressure to maintain the incremental but obviously accelerating debasement of fiat money, to the point that politicians would rather face an “unexpected” currency crash than a self-induced deflationary credit contraction. I could be completely wrong about that, but that’s my outlook.

        • No problem, I enjoy robust debate. The fact of the matter is that the euro is a fiat currency as well, with all the warts that come with such, so your skepticism is well founded. If there is a slight advantage the citizens of the euro-area enjoy vs. Americans, it is the fact that the ECB is bound by only a single mandate, namely to ensure ‘price stability’. Of course, as I have often pointed out, this does not mean that there is no inflation – in fact, during the credit boom of the past decade, money supply inflation in the euro area has been just as extreme as in the US (in fact, it was even slightly faster during the boom phase) – after all, ‘CPI’ didn’t warn that anything might be amiss, and our modern-day central bankers don’t care much about money supply growth (even though the ECB quotes its official money supply growth data during press conferences).
          It is clear to me though that Germany’s central bank bureaucracy, and to a lesser extent that of France and Italy, is well aware of the dangers to the currency that willy-nilly government bond monetization will bring into play. At present, it is still theoretically possible for the inflationary effects of past credit expansion to ‘work itself out of the system’ in terms of its economic effects. This is to say, if the inflation stops, then once all the effects of the money supply inflation have percolated through the economy, the dangers will be minimized.
          However, I suspect that it actually can not be stopped, since the systemic rot has already gone too far. We see it at the moment, with the banking crisis once again flaring up after just one year of de minimis money supply inflation in the euro area (money TMS grew only by 1% year-on-year as of July). So I am far from saying that the German inflation-phobia is likely to result in anything resembling sound money – but it may become a stumbling block with regards to a more adventurous deployment of the ECB’s virtual printing press in the context of rescuing profligate member nations (at least as long as it’s not Germany that needs to be so rescued).
          Alas, my suspicions are not really allayed by this either – it is only a potential factor to be considered with regards to the current specific crisis circumstances.

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  • What President Trump and the West Can Learn from China
      Expensive Politics Instead of a demonstration of its overwhelming military might intended to intimidate tiny North Korea and pressure China to lean on its defiant communist neighbor, President Trump and the West should try to learn a few things from China.   President Trump meets President Xi. The POTUS reportedly had a very good time in China. [PT] Photo credit: AP   The President’s trip to the Far East came on the heels of the completion of China’s...
  • Business Cycles and Inflation, Part II
      Early Warning Signals in a Fragile System [ed note: here is Part 1; if you have missed it, best go there and start reading from the beginning] We recently received the following charts via email with a query whether they should worry stock market investors. They show two short term interest rates, namely the 2-year t-note yield and 3 month t-bill discount rate. Evidently the moves in short term rates over the past ~18 - 24 months were quite large, even if their absolute levels remain...
  • Is Fed Chair Nominee Jay Powell, Count Dracula?
      A Date with Dracula The gray hue of dawn quickly slipped to a bright clear sky as we set out last Saturday morning.  The season’s autumn tinge abounded around us as the distant mountain peaks, and their mighty rifts, grew closer.  The nighttime chill stubbornly lingered in the crisp air.   “Who lives in yonder castle?” Harker asked. “Pardon, Sire?” Up front in the driver's seat it was evidently hard to understand what was said over the racket made by the team of...
  • A Different Powelling - Precious Metals Supply and Demand Report
      New Chief Monetary Bureaucrat Goes from Good to Bad for Silver The prices of the metals ended all but unchanged last week, though they hit spike highs on Thursday. Particularly silver his $17.24 before falling back 43 cents, to close at $16.82.   Never drop silver carelessly, since it might land on your toes. If you are at loggerheads with gravity for some reason, only try to handle smaller-sized bars than the ones depicted above. The snapshot to the right shows the governor...
  • Heat Death of the Economic Universe
      Big Crunch or Big Chill Physicists say that the universe is expanding. However, they hotly debate (OK, pun intended as a foreshadowing device) if the rate of expansion is sufficient to overcome gravity—called escape velocity. It may seem like an arcane topic, but the consequences are dire either way.   OT – a little cosmology excursion from your editor: Observations so far suggest that the expansion of the universe is indeed accelerating – the “big crunch”, in...
  • Claudio Grass Interviews Mark Thornton
      Introduction Mark Thornton of the Mises Institute and our good friend Claudio Grass recently discussed a number of key issues, sharing their perspectives on important economic and geopolitical developments that are currently on the minds of many US and European citizens. A video of the interview can be found at the end of this post. Claudio provided us with a written summary of the interview which we present below – we have added a few remarks in brackets (we strongly recommend...
  • Inflation and Gold - Precious Metals Supply and Demand
      Reasons to Buy Gold The price of gold went up $19, and the price of silver 42 cents. The price action occurred on Monday, Wednesday and Friday though so far, only the first two price jumps reversed. We promise to take a look at the intraday action on Friday.   File under “reasons to buy gold”: A famous photograph by Henri Cartier-Bresson of a rather unruly queue in front of a bank in Shanghai in 1949 in the final days of Kuomintang rule. When it dawned on people that the...
  • Precious Metals Supply and Demand
      A Different Vantage Point The prices of the metals were up slightly this week. But in between, there was some exciting price action. Monday morning (as reckoned in Arizona), the prices of the metals spiked up, taking silver from under $16.90 to over $17.25. Then, in a series of waves, the price came back down to within pennies of last Friday’s close. The biggest occurred on Friday.   Silver ended slightly up on the week after a somewhat bigger rally was rudely interrupted...

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THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

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