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Europe is Falling Apart, ECB to the Rescue?

Politics / Eurozone Debt Crisis Nov 26, 2011 - 12:05 PM GMT

By: Bill_Bonner

Politics

Markets closed today. And not much from us either. We’ve got family chores to attend to.

As expected, Europe is falling apart. Yields are rising. France’s debt no longer looks safe. And Germany can’t sell its bonds.


The failure of the German bond auction earlier this week was the latest shock. It tells us that pressure on the ECB is mounting.

It’s one thing when Greece and even Italy can’t finance their debt. Who cares? But it must surely get German bankers’ attention when nobody wants to buy their bonds.

And why should they? Guess how much growth the Eurozone has had over the last 4 years? Zero. Less than zero. The euro economy has shrunk. Not as much as Japan’s 5% decline, but it’s still down.

And guess which bank is safer – a solid German bank such as Deutsche Bank…or one of Wall Street’s finest, J.P. Morgan? Grant’s Interest Rate Observer compares the two and finds the American bank ahead by almost every measure. In terms of leverage – measured by assets-to-equity – Deutsche Bank has more than 3 times as much.

And Germany has almost as much debt, compared to GDP, as the US. Practically all the rest of Europe has even more. No wonder people don’t want to buy their bonds.

So what gives? Our guess is that the ECB – Europe’s answer to the Fed – gives. Here’s the report from The Daily Crux:

Statist billionaire George Soros calls for massive euro inflation

The European Central Bank (ECB) must pump liquidity into the 17-member financial system to stop a run on bonds and even slap a ceiling on yields to avoid a breakup of the currency zone, says billionaire financier George Soros.

Soros writes in a Financial Times column that policymakers should use the European Financial Stability Facility – an emergency assistance fund – to help the European Central Bank flood the economy with liquidity, a move that would aim to curb skyrocketing yields on sovereign bonds issued by indebted southern European nations. “The financial markets are testing the ECB and want to find out what it is allowed to do. It is imperative that the ECB should not fail that test.”

Will the ECB fail to inflate? Will its printing presses remain silent…deaf to the cries of so many bankers and rich people? How could it be so hard-hearted? So insensitive?

No, dear reader, the best bet is that the ECB will come to the rescue – whether it is legal or not…whether it is sensible or not – and buy the bonds itself. This is classic “monetization” of debt…because the ECB would have to create the money out of thin air to do so. It’s not authorized to counterfeit money like that, but you know what happens in a crisis. People forget the rules.

Just this… You know how we always take the part of the underdog…we always champion the lost cause…and stand up for the die hard. Well, we’re beginning to feel a responsibility to defend the “1%”…the poor people who, through no fault of their own, got rich!

More on this…when we pick up our labors…on Friday.

Bill Bonner
The Daily Reckoning

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis and the co-author with Lila Rajiva of Mobs, Messiahs and Markets (Wiley, 2007).

http://www.lewrockwell.com

    © 2011 Copyright The Daily Reckoning, Bill Bonner - 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.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

gAnton
26 Nov 11, 18:38
ECB--zero degrees of freedom

In order to do anything in this situation, all 17 EURO member countries must agree. For example, if the EURO has a dire emergency that requires emergency EURO legislation to be passed and just one of the member country legislatures is not in session because of elections, the legislation must wait until the elections are over and the new legislator is in session. If things get much worse than they are today, the result is much more likely to be some kind of break-up of the EURO than some kind of "kick the can down the road" interm solution to their problems.


Shelby Moore
27 Nov 11, 05:27
ECB logic

gAnton,

From your "degrees of freedom" statement, thank you I surmise you read my recent article:

http://www.marketoracle.co.uk/Article31717.html

Well I said I wasn't going to comment again, or violate the free will of others by constantly correcting them:

http://www.marketoracle.co.uk/Article23786.html#comment129195

However, since I see that you are using the terminology from my article, but you may have missed the key point, I will clarify one final time.

In my article, I provided a link to an idea for a method by which the ECB can achieve a "socialization of defaults" (i.e. money printing) without 100% acceptance of treaty change. There are probably other mechanisms. The overwhelming political demand by the masses of Europe is to not implode into poverty and thus to steal from those who have networth (via the hidden tax of monetary inflation), so as to stretch out the defaults over a period of years. This is defaults by redistribution of wealth. In many cases, those who still have their networth in bonds and houses, are some of the ones who are gradually losing their networth to this redistribution scam.

The ECB has already overweighted their portfolio of sovereign bonds (via secondary market purchases) towards the PIIGS. Thus they can simply threaten to unwind this (selling the bonds of those that don't ratify and buy the bonds of those that do) in order to force economic implosion on those countries that won't ratify a treaty change. Perhaps they will make an "scorched earth" (extreme implosion into poverty) example out of Greece, in order to scare all the rest of the countries into voting for a treaty change. That might not be necessary. Goldman has installed its people at the heads of the govts probably to facilitate this process. Germany and France have sufficient voting rights (weighted by GDP) at the ECB to control ECB policy in this regard.

My understanding is that the ECB can dump the bonds of those who don't vote for the treaty change, while buying the bonds of those that do, and can do this during the time period in which it takes to get the treaty ratification completed. So we are likely to see incredible volatility in the markets during this process, but the overall trend of the rollercoaster ride will be inflation.

Disclaimer: The above expressed opinions and citations are my own and not necessarily endorsed by this site. My opinions and citations are shared as alternative perspective for your entertainment only. I cannot prevent you from deeming that my writings are educational. I am not a professional advisor, thus I claim safe harbor and I am not responsible for any outcomes, mental state, decisions or actions you experience or make after reading this or cited sources.


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