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Europe's Debt Crisis, The Free Market vs. the Total State

Stock-Markets / Eurozone Debt Crisis Nov 30, 2011 - 06:49 AM GMT

By: Gary_North


Best Financial Markets Analysis ArticleOn November 22, the New York Times published an interactive chart on which governments owe how much money to which foreign nation's banks. The chart reveals the fault lines in Europe's economy. The debts are owed above all to French banks. The biggest debtor is Italy. If Italy defaults, France's largest banks go down. Overnight.

On Monday, November 28, there was a Financial Times article speculating that the Eurozone has less than two weeks to survive. The headline: "The Eurozone really has only days to avoid a collapse." It was written by an associate editor of the publication.

There have been lots of these articles over the last few weeks. They all offer the same formula: "The end is near, unless. . . ." Unless what? Unless Western Europe's largest governments unilaterally abolish the treaties that created the European Union in the 1990s. This will involve the following: (1) the consolidation of the Eurozone into an unconstitutional super-state, and (2) the European Central Bank buys bonds issued by this new entity, which is also unconstitutional, according to the existing treaties.

The first solution is consistent with over 90 years of behind-the-scenes planning to centralize Europe politically, thereby destroying individual national sovereignty. I have written about this many times. The mastermind of this was Jean Monnet. Monnet started working for political unification when he and Raymond Fosdick, John D. Rockefeller, Jr.'s agent, sat together at the Versailles Peace Conference in 1919.

In July 1919, Fosdick sent a letter to his wife. He told her that he and Monnet were working daily to lay the foundations of "the framework of international government." [July 31, 1919; in Fosdick, ed., Letters on the League of Nations (Princeton, New Jersey: Princeton University Press, 1966), p. 18.] Fosdick returned to New York City in 1920, where he took over running the Rockefeller Foundation for the next 30 years.

Monnet was the #1 front man for the New World Order for the next five decades. He promoted political unification by wrapping it in the swaddling clothes of economic unification. The first institutional manifestation of this plan was in 1951: the creation of the European Economic Coal and Steel Community. It was extended in 1957 with the creation of the Common Market.

The second aspect of this unification process was the creation of a unified currency and a single central bank. The NWO did not get all of this, but they got most of it in 2000: the Eurozone and the euro.

We are now facing the clash of these two endgames: (1) Monnet's political endgame, which could easily become a reality in the next few weeks vs. (2) the monetary endgame, in which Monnet's original vision is not consummated, because the Eurozone collapses in a wave of big bank failures. The world then goes into a recession . . . or worse.


Also on November 28, European stock markets had an enormous rally, between 3% to 5.5%, depending on the market. I see three possible explanations:

1. The article was dead wrong: no Eurozone crisis.
2. Monnet's political endgame in about to happen.
3. Investors grab at straws.

There was a rumor over the weekend that the IMF was going to lend Italy's government €600 billion. Here is how one news outlet reported it.

Rome – The IMF could bail out Italy with up to €600bn ($794bn), an Italian newspaper reported on Sunday, as Prime Minister Mario Monti came under pressure to speed up anti-crisis measures.

The money would give Monti a window of 12 to 18 months to implement urgent budget cuts and growth-boosting reforms "by removing the necessity of having to refinance the debt", La Stampa reported, citing IMF officials in Washington.

The IMF would guarantee rates of 4.0% or 5.0% on the loan - far better than the borrowing costs on commercial debt markets, where the rate on two-year and five-year Italian government bonds has risen above 7.0%.

Either the article was wrong, or else the author's alternatives – fiscal union and European Central Bank inflation on a massive scale – are a slam dunk, to use an American phrase.

Early Monday morning, the IMF had denied that any such plan existed. The markets paid no attention to the denial. The rumor had to be true. It was only right that it be true. It was too good not to be true. All day, they soared upward.

Investors want to believe that Santa Claus will come early this year.

For weeks, the volatility of Europe's stocks has been enormous. Wild waves of pessimism are followed by equally wild waves of optimism. The pessimism is driven by free market forces: the relentless upward move of interest rates for PIIGS government bonds. Greece is paying well over 100% on its two-year bonds. Italy and Spain are facing 7%, which is regarded as some sort of tipping-point figure – why, we are not told. It just is. Greece pays almost 20 times this, but we are reassured that Greece will not default. However, Spain and Italy may default as a result of 7%.

I do not buy either story. Greece will surely default, contrary to all assurances to the contrary, but Italy and Spain may not, if they cut government spending fast enough and deep enough. But they won't.

So, are the investors wiser than the columnists? Is the IMF going to come through, even though (1) Europe is not yet consolidated politically, and (2) the ECB will continue to refuse to inflate? Is the IMF Santa Claus? Or will it turn out that the ECB is going to play Santa this year?

The investors don't care. One of these scenarios has to be true, because the alternative is a crash. France will have its credit rating downgraded. Sarkozy's government will fall.

The Eurozone needs a lot more than €600 billion. It needs something in the range of €2 trillion in a TARP-like bailout. And this doesn't include however much the ECB must inflate to keep the banks solvent. This is the opinion of the other Sarkozy: Nicholas' half brother, who is a senior manager of the Carlyle Group, the third largest private hedge fund on earth. Among its investors are George H. W. Bush and the rich bin Ladens.

How soon is this enormous infusion of capital needed? A lot sooner than most people think, he says.

Stock market investors on November 28 were saying, "No problem!" The money will be forthcoming. From whom? No one knows. From bonds issued by a unified government that does not exist and which most voters oppose? Bonds purchased by whom? By the ECB, which has held out against major increases? By nearly insolvent large banks? By private investors?

Who is the Santa who will come in the night with toys for good politicians? Who are these good politicians? Politicians who say that the two European Union treaties need not be honored, since they do not authorize fiscal union or central bank purchases of bonds issued by such a political entity.

This will not be decided by voters. It will be decided by elected leaders, who will be taking orders from the real powers in Europe, which are closely allied to the large banks. The large banks will not be allowed to go under. No pieces of paper (treaties) are going to be allowed to interfere with a European big bank bailout.

Investors sense this. They know that the game will go on. They know that the leaders will work out something, and that the tight-fisted ECB will capitulate in the face of a domino collapse of commercial banks.

The problem is, the leaders may not work it out in time. Merkel has verbally stonewalled, although she has not demonstrated any serious resistance. She will surrender. But she is playing a game of chicken. She is playing the hard-nosed bluffer, trying to get some kind of deal favorable to Germany. Sarkozy looks ready to surrender to get any deal that will keep French government debt from being downgraded.


The rumor about the IMF carried weight, because the IMF does not need to consider voters. It lends other people's money, namely, money ponied up by member governments. The IMF can do whatever it wants. It will want to save Europe's largest banks.

If banker Sarkozy is correct, the IMF alone will not be able to keep this ship afloat. Europe's northern (non-Irish) taxpayers must consent to having their future income pledged by politicians as collateral for the extra debt. If his estimate is anywhere near correct, it will take an enormous pulling together to enable the governments in a "new, improved" Eurozone to borrow over €2 trillion. Unless . . . the ECB comes up with the money.

Nevertheless, all it takes are hints to send investors into a buying mania. They are ready to believe rumors. They are willing to believe rumors that are officially denied. They are ready to believe that credit is always available by the trillions on a moment's notice, and at low interest rates.

They do not believe that there are limits to debt. They believe that the ratchet of government debt can be cranked higher and higher, despite the obvious fact that no one denies: European government debts will never be re-paid. They will be rolled over forever, growing exponentially, without causing either (1) rising rates, (2) delays in interest payments, or (3) price inflation.

Hints of a solution are all it takes to get investors to buy shares. The actual entries on balance sheets have no effect on their thinking. They are following Napoleon Hill: "think and grow rich."

Merkel is going to deliver a speech to the German Parliament on December 2. This is in preparation for the next scheduled summit on the weekend of December 8-9. Investors are convinced that there will be a resolution to the crisis then.

There have been other summits. Each time, there has been enormous optimism regarding a forthcoming solution. Then the summit issues a soothing press release, but without specifics. The magnitude of the looming crisis is still not perceived by investors.

Or is it? Are they correct? Will a summit meeting provide all the political capital needed for a non-existent new government to borrow enough money from visibly insolvent, undercapitalized banks?

I do not see how the investors can have hope in anything other than the willingness of the ECB to provide whatever digital funds are necessary to provide borrowers to buy government debt issued by the PIIGS's politicians at rates low enough to calm the equities markets. In other words, investors are counting on Federal Reserve-like increases in the ECB's monetary base.

This tidbit supposedly was instrumental in the rapid rise of the markets.

Germany and France stepped up a drive on Monday for powers to reject euro zone members' budgets that breach EU rules. Finance ministers of the 17-nation currency area meeting on Tuesday are due to approve detailed arrangements for scaling up the European Financial Stability Facility rescue fund to help prevent contagion in bond markets.

I see. They will scale up the EFSF rescue fund. What rescue fund is that? The last time I read about the fund, the EFSF was using its funds to buy its own bonds.

"No," you may think. "That would be Alice-in-Wonderland finance." You would be correct. That is where we all live today: in Wonderland. This appeared in the London Telegraph (Nov. 12).

The European Financial Stability Facility (EFSF) last week announced it had successfully sold a €3bn 10-year bond in support of Ireland.

However, The Sunday Telegraph can reveal that target was only met after the EFSF resorted to buying up several hundred million euros worth of the bonds.

Sources said the EFSF had spent more than € 100m buying up its own bonds to help it achieve its funding target after the banks leading the deal were only able to find about €2.7bn of outside demand for the debt.


I thought this was illuminating. On November 18, the Telegraph ran this:

Meanwhile, a leaked document seen by The Daily Telegraph yesterday showed Berlin has drawn up radical plans for an intrusive new European body which will be able to intervene directly in beleaguered countries.

So, Germany wants to exercise more control over the PIIGS. How? Does Germany plan to invade? What sanctions can the EU impose? Cut off more bailout money? You mean the way the EU has cut off Greece? Oh, it hasn't cut off Greece? I see.

Sir John Major, the former prime minister, warned last night that the growing integration of the eurozone nations threatens democracy in those countries. He told Al Jazeera television that richer euro members led by Germany and France will "insist on moving towards what we call fiscal union. By that I mean common control over budgets and fiscal deficits".

So, here is John Major, 21 years after he replaced Margaret Thatcher, because she opposed entry into the EU, and he didn't, going on Al-Jazeera to warn about the loss of democracy. The Monnet plan in Europe has been just that ever since 1951.

The end of democracy in European nations is Monnet's endgame. The bankruptcy of over-leveraged French banks is the free market's endgame. The political mouthpieces of the bankers are promoting the acceptance of Monnet's endgame, all in the name of avoiding the free market's endgame in the financial markets.

I'm rooting for the free market.

Gary North [send him mail ] is the author of Mises on Money . Visit . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .

© 2011 Copyright Gary North / - 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.

© 2005-2022 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Luis de Agustin
04 Dec 11, 09:00
Europe's debt crisis

It is essentially the long and winding road to capital ownership of the state (as if the status quo were insufficient). All talk of “contagion” is just another cover story to portray European and US policymakers as innocent victims of market forces.

Unfortunately, Europe’s continued rejection of market principles is scaring away much of the private capital without which their economies will be unable to grow. The European economy is failing because its collective public sector is intentionally indebting itself in the effort to suppress the perceived threat from markets. That’s the reason why a recession is highly likely in Europe.

But there is a silver lining to this story. Capital that’s driven out of Europe by unwise and unfriendly economic policies will go to work in the rest of the world, and that will largely maintain the global growth rate. Even the crony capitalist US economy and stock market might receive a boost from Europe’s pain.

Luis de Agustin

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