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E.U. $1 Trillion Bailout, Detonates Nuclear Option of Printing Money to Monetize PIGS Debt

Interest-Rates / Credit Crisis Bailouts May 11, 2010 - 01:37 AM GMT

By: Nadeem_Walayat

Interest-Rates

Best Financial Markets Analysis ArticleWhilst most in the mainstream press are occupied by the big numbers behind the Euro 720 billion / $1 trillion of bailout loans, and guarantees of the Eurozone PIGS, however the most important change announced was the European Central Banks intentions to buy the debt of Eurozone countries in effect adopting an open ended policy of Quantitative Easing or money printing to monetize the debt of bankrupting Eurozone countries much as the other central banks have been doing of the US, UK and Japan. Which means that the debt burden of the PIGS has been dumped onto mainly German tax payers therefore it's not surprising that European banks holding bankrupting PIGS debt have soared in price as the PIGS government debt they hold is now effectively being insured by the ECB.


For the past 6 months Claude Trichet the head of the European Central Bank (ECB) has repeatedly stated that it is against the Eurozone rules for the ECB to buy Eurozone members debt. This iron clad rule at the core of the European Monetary Union has long since been factored into economic models that converged towards a deflationary outlook for imploding PIGS that could not compete against the highly competitive German economy that was boosted as a consequence of having weak economies as part of the Euro-zone which kept the Euro currency relatively weak thus allowing Germany an huge advantage in terms of exports which I covered in length in an article earlier this month (05 May 2010 - Greece Economic Depression Resulting in INFLATION NOT DEFLATION Surge ).

Whilst the announcement has taken the mainstream press by surprise that the ECB would now print money to buy sovereign debt, against this consensus view I have repeatedly voiced these past 6 months that investors should NOT pay any attention to the denials emanating out of Claude Trichet's mouth and other ECB officials as the ECB as is the case for ALL central banks has NO choice but to print money and monetize debt in ever escalating mounts as illustrated below -

05 May 2010 - Greece Economic Depression Resulting in INFLATION NOT DEFLATION Surge

Whilst my inflation mega-trend ebook (FREE DOWNLOAD NOW) focuses primarily on the UK economy, however as stated, many of the primary drivers of inflationary mega-trend impact on ALL of the western debt ridden economies that have NO CHOICE but to deploy INFLATIONARY mechanisms which in Greece's case comes down to a defacto debt default the bill for which is being picked up by predominantly Germany and France which signals surging inflationary consequences across the Eurozone that will continue to manifest itself in a weaker Euro currency as the European Central Bank is forced to ramp up the printing presses towards the monetization of bankrupting Euro-zone nations debts.

ALL Central Banks are only good at One Thing and that is PRINTING MONEY ! - The ECB IS PRINTING MONEY for Greece, and soon will PRINT hundreds of billions of more Euros as the other PIIGS line up one by one each with their own Euro's begging bowls.

People have to understand that the inflation mega-trend is a GLOBAL PHENOMENA, not just a Greek problem, Euro Problem, UK problem, for ALL of the countries central banks are printing money as they are engaged in continuous competitive devaluations of their fiat currencies that continue to feed the fires of the inflationary mega-trend that will eventually reach ALL shores of ALL budget deficit running, money printing, debt accumulating economies and even those that have well managed economies and national accounts are engaged in highly inflationary pegs against bankrupting currencies that ensures inflation will be imported whilst such pegs exist.

Will the $1 Trillion Bailout Solve Greece / Europe's Debt Crisis ?

NO, all the E.U. has done is to buy some time. Many bells and whistles were announced to accompany the $1 trillion extension of liabilities as the ECB will effectively transfer PIGS debt onto its own balance sheet. The package includes severe austerity measures for the PIGS involving deep spending cuts and tax rises. However these measures are of little value in the face of a potential default of one of the PIGS which would immediately trigger ECB debt financing of that country with little regard as to where the government stands in terms of the austerity plan.

Financing albeit shrinking annual PIGS deficits over the next few years will still mean that ALL of these countries debt burdens will be HIGHER in 3 years time, i.e. Greece's debt burden is expected to rise from 120% of GDP to as high as 150% of GDP. How is that a solution for the debt crisis? How will that prevent eventual debt default ? Answer - It won't!

The ONLY solution is for the Eurozone economies to GET their economic houses in order which means cut the deficits and total debt as a % of GDP which can only be achieved through economic growth which means public sector spending cuts and reform of economies to generate economic growth that means LESS E.U. and national regulation as touched up on in the article Solving Britain's Economic Crisis Through Micro Business Capital Investments and Credit (31st Mar 2010). However when a country has a debt burden of 120%+ of GDP at interest rates of 5% or higher the inevitable result is still debt default.

There IS NO SOLUTION TO GREECE'S DEBT CRISIS OTHER THAN A DEBT DEFAULT!

In the meantime, the E.U. has sent the wrong signal to the bankrupting PIGS in that they can continue growing their respective debt mountains without little consequences in terms of paying the market rate of interest for the risk that their debt actually presents, that will continue to put pressure on the Euro currency as at some point down the road this $1 trillion bailout will be followed by another, then another each contributing towards sinking the Euro a few notches lower and inflation a few notches higher.

ECB Gives Escape Route For PIGS Bond Holders

Holders of Greece and other bankrupting PIGS debt have been given a chance to exit PIGS debt at far less loss than where the debt had been trading at prior to the announcement which was probably the primary purpose of the bailout as most of the Greek and PIGS debt is held by German and French banks.

EURO II ?

This, first of a series of money printing debt monetization bailouts puts the Euro firmly on a trend towards high inflation as are all fiat currencies, i.e. the fundamentals of the Euro block composed of many small weak economies that cannot devalue internally against highly competitive strong economies will still remain. The only possible solution is for a Euro II, i.e. split the Euro into two currency blocks one for the weak that suffer higher inflation and interest rates and the more competitive countries as part of the Euro II block (could just be Germany on its own?) which would act as a safety valve in times of economic crisis that demands internal currency devaluations.

Debt Deleveraging Deflation Flawed Argument

Greece in economic depression carrying a huge debt burden that continues to deleverage, that cannot devalue its currency OR print money because they they gave up those sovereign powers to the ECB. All of this suggests that Greece should be experiencing deep price deflation as many workers are being forced to suffer 30% pay cuts as a consequence of being forced to cut the governments budget deficit to back under 3% of GDP, Instead Inflation in Greece has soared from 0.5% in June 2009 to 3.9% for March 2010, as a consequence of ever escalating money printing and competitive currency devaluations that stoke the fire of the Inflation Mega-trend that continues to gather pace.

This is 2010 not 1930 - Living in a Global Media Soup

The problem with the deflation argument for 2010 and beyond is that those the espouse it repeatedly refer to the 1930's just as they have been repeatedly referring to the stock price chart of the 1930's to imply a similar stocks bear market that is continuously busted each time the Dow makes a new high, only to be trundled out again in a few months time on the next correction.

However this is NOT the 1930's. This is 2010!, the world is swimming in an instant global media soup where a small riot in Greece that someone living in a nearby street does not even notice, is magnified by the global media soup to imply the whole of Greece is burning and unlimited, imminent INFlATIONARY actions need to be taken before civilisation collapses.

The politicians answer (in Democracies) is always to take the easy route rather than face the consequences from the global media soup's spotlight on difficult decisions that could result in an avalanche of adverse exposure, the easy route is always to seek to inflate ones way out of crisis by whatever means that results in money printing.

Repeating my warning of November 2009 18 Nov 2009 - Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend )

The warning of November 2008 of the worst case scenario of Hyperinflation has not only NOT diminished over the past 12 months, but it has been greatly reinforced, where 2010 looks set to the year of INFLATION NOT DEFLATION and 2011 may be Far worse as the Deflationists lose every penny they own and hold in Government Bonds that they so vocally now profess to pile into!

After the deflationary correction of 2008 we are about to witness the INFLATIONARY MEGA-TREND of the NEXT DECADE! the consequences of which are many.

Little has changed, instead of recognising the flaws in the deflationary argument, deflationists are delusionally playing around with what actually constitutes Inflation, no not the Inflation Data such as CPI that 99.99% of the people on the planet recognise as a measure of inflation of general prices in an economy but obscure credit statistics that supports the theory of deflation whilst in the real world inflation rages, destroying the value of hard earned wealth.

Many governments have already abandoned inflation targeting in all but name, Look at the UK, CPI is at 3.4%, RPI is at 4.4%, the Bank of England comes out with its regular monthly nonsense that the inflationary surge is temporary, despite the fact that inflation continues to rise the following month. Its not the Bank of England's fault, for it is not in the MPC's nature to admit that they are incompetent at targeting UK Inflation at ANY level let alone at 2%. If anything the UK and many other economies are heading for an inflation shock THIS YEAR that will make today's 3.4% CPI rate look LOW.

Protect your wealth from the inflationary mega-trend that has boosted asset and commodity prices in most cases by more than 50% during the past 12 months whilst most still question the existence of the inflationary mega-trend and ramble on about NON Existant Deflation (CPI is at +3.4% NOT -3.4%). My FREE EBOOK contains 50 PAGES of of how to protect and grow your wealth as ever higher fiat currency supply seeks a home in scarce limited supply resources and asset classes as private sector and sovereign debt mountains EXPLODE into Much Higher inflation as we are witnessing with Greece today, especially as government's induced asset price inflation to prevent economic depression is increasingly spilling over into consumer price inflation the only response to which is rising market interests and rising risk of eventual sovereign debt default.

Source: http://www.marketoracle.co.uk/Article19379.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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