Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Euro-Zone: Up the Creek without a Helicopter and Paralyzed By Hyper-Inflation Phobia

Interest-Rates / Euro-Zone Nov 13, 2011 - 05:27 AM GMT

By: Andrew_Butter


Best Financial Markets Analysis ArticleI don’t know why but when I watch the drama of the Euro crisis unfold my mind wanders to a scene in “Nashville” about a “country girl” who got a gig to jump out of a cake at a function, and didn’t quite understand what was supposed to happen next. I can’t help thinking that at some point in this whole sad scenario someone will have to stand naked.

Almost everybody agrees that the only way to resolve the Euro-Zone debt crisis in an orderly fashion is for the central bank to print somewhere between One and Two trillion Euros so as to allow Italy and probably France, plus any little piggy’s who promise to be good, to roll over their sovereign debt, plus perhaps to spoon-feed out ten billion here and twenty billion there as an occasional treat for all the little Miss Piggy’s who can’t collect enough taxes to keep their show on the road, but are “trying their best”.

That could be done by sleight of hand, just getting the ECB to run the presses, or by selling AAA rated Euro-Bonds just like the US Treasury sells recently downgraded US Treasuries (mainly to the Fed).

And that would at least buy the time to sort out the combination of fraud, creative accounting, and delusional incompetence that caused the panic in the first place. The option is that the Euro is no more.

The problem is the European Central Bank can’t just run the presses, Germany made sure of that at the Treaty of Lisbon.

Leaving aside the insanity of designing a central bank for a new-fangled fiat currency, without a helicopter, even if the politicians decided that it was in the best interests of the Euro-Zone and the Euro to authorize a helicopter-drop, they can’t, because that decision would need to be made in the German equivalent of the Supreme Court. Plus they would need to get around a system of checks and balances in Germany that was set up to make absolutely sure a lunatic like that excitable little chap with the moustache, could never corrupt the system and grab power again.

Meanwhile the hyper-inflation crowd is streaming out of the woodwork complete with selective amnesia of their silly warnings in 2009 about the how the $2 Trillion that Ben Bernanke dropped out of the sky was going to cause the end of the world, except it didn’t. There we go again, Einstein said the definition of lunacy is to expect a different result when you do the same thing, that works the other way around too, they did QE in USA and also in UK, and it worked more or less and there was no hyper-inflation because the money just sat, in the event it was nothing more than a state-sponsored accounting ruse.

Remember when Nassim Taleb said that the whole world should short US Treasuries? Back then the 10-Year was 3.7%, it looks like the pesky black swan got the last laugh on that one, of course the amnesia brigade say “just you wait”; but they are beginning to sound as insane as  Nouriel Roubini and his carpet-bag full of stopped clocks.

The interesting thing about what Ben did is that he just did it; he didn’t even really explain to anyone what he was doing. Sure every now and then he rolled up in front of some committee or other to take questions from a cross section of the fools that pass for government “experts” in USA, which he answered in riddles, and then he went back to his office and kept on printing. You can say what you like about Ben Bernanke, but you have to admit he got style.

The problem in Europe right now is also the structure of the debt. All of the sort-of wannabe “sovereigns” in Europe hiding under the skirt of the Euro, are akin to municipalities in USA, except in USA the municipalities typically offer debt secured by something, whether it’s a sewage treatment plant, or a public transport system, that has assets, which can theoretically be re-possessed, plus cash flows.

In the heady days of Europe’s most recent debt-fuelled Renaissance, they skipped that step and a lot of that sort of “peripheral” debt was underwritten by promises from corrupt and/or incompetent politicians buying election-candy, and we all know how “bankable” those are once everyone wakes up from the LSD trip.

The ironic thing is that on the face of it Europe’s debt problem looks not much worse than America’s, the problem is really that they don’t have an “irresponsible” chap like Ben Bernanke who slips out the back door and prints a couple of trillion, without asking anyone’s permission, meanwhile President Obama can’t even get permission to go to the toilet…so who runs America?

Here is a chart of Europe’s debt compared to America’s, using an exchange rate of $1.4 to a Euro for comparison. It isn’t exactly apples for apples, because the nominal $30 Trillion of “Euro-zone Bank Loans + Securities held” includes quite a lot of EU Government Debt (a lot of which is Piggy debt).

It’s quite difficult to understand Euro-Zone debt because the way the data is presented by the ECB and EUROSTAT is bizarre, and there is double counting.

The US data on the other hand is very clean; you can produce those lines in five minutes, all you need is SIFMA report of the value at face of securities outstanding, then the FDIC Quarterly reports (remember to subtract the securities FDIC-insured banks hold so not to double count), then you to pull out the timeline on how much the Federal Government owes in “Intra-governmental debt” which you can get from Wikipedia and Bingo! Of course those lines don’t show the situation in the “Shadow Banks”, because that’s in the “shadows”, but most people look at that as double counting anyway.

So Big Picture the Euro-zone nominal GDP in 2010 was $12.2 trillion (that’s excluding UK and other EU members that don’t use the Euro), their private sector debt is a tad over $30 trillion so that’s about 250% of nominal GDP, in USA that number is 240%. That’s the real story, public debt is a red-herring, and which is why I think the whole hyper-ventilation about Italy is overblown because their private sector debt is low; and the clever Italian bankers got the French and the Germans to finance their  government, as in they knew the score!

The important thing is that eyeballing that chart, as predicted, eighteen months ago, the private sector is deleveraging, in both Europe and USA, and the public sector is reluctantly filling in the gap to make sure the wheels don’t fall off.
Net-net total debt as a percentage of GDP is not going up much, which is probably why there was not any sign of serious inflation, let alone hyper-inflation.

The most obvious message you get from looking at that chart is in four years (2004 through 2007), both USA and the Euro-Zone piled on $10 trillion of extra debt, each, that’s an average of $2.5 trillion a year, that’s when the damage happened, that was when complete utter lunatics were in charge, and that WAS hyper-inflationary, then.

What’s happening now is damage control, sometimes when you been on a bender and you drank a whole bottle of vodka in an evening, the best thing to get you through the next day, is a couple shots.

Sure you can promise yourself “Never-Again”, and you mean it, from the bottom of your heart. Be that as it may, you still have to get through the day to carry you through the time the damage of the night of debauchery slowly heals and the toxins slowly get washed out of your system.

Come on Angela, what you waiting for?

 It’s “Hair of the Dog Time”.

Don’t let your Protestant inhibitions stand in the way of taking the medicine, see how healthy and contented Ben Bernanke looks, and notice that bulge in his pocket, that’s a hip-flask, just in case he gets an attack of the trembles. Sometimes that’s all you can do, AA (Alcoholic’s Anonymous) can wait until next week.

Meanwhile, I can’t believe that the politicians will be so incompetent that they blow up the Euro just because they had a bad-trip, I think a solution will be found, all I’m interested in at this juncture, is who has to stand naked?

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2011 Copyright Andrew Butter- All Rights Reserved
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 losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules