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ECB Bazooka Economics

Politics / Central Banks Aug 04, 2012 - 10:33 AM GMT

By: Stephen_Lendman

Politics

Best Financial Markets Analysis ArticleDid he or didn't he? ECB president Mario Draghi promised "whatever it takes." Great expectations arose. August 2 was D-Day.

Fizzle followed sizzle. Bazooka plans stalled. More on Draghi's pronouncement below and what it means.

Europe's economy is broken. Monetary intervention solved nothing. Core problems fester and grow. Contagion spreads everywhere. Effective solutions are absent.


Bankers are prioritized over sound economics. Western policy makers march to the same drummer. Ordinary people suffer. Poverty, unemployment, and deprivation grow exponentially. Nothing ahead looks promising.

On August 2, Draghi spoke. Markets want instant gratification. Disappointment followed. Der Spiegel headlined "ECB Disappoints Investors with No Euro Action," saying:

Promises became hope and uncertainty. It doesn't matter what Draghi said. He can't deliver. At best he can delay an eventual day of reckoning. Unaddressed systemic rot draws it closer.

Draghi said "(t)he Governing Council....may undertake outright open market operations of a size adequate to reach its objective. We will consider further non-standard....measures....In the coming weeks, we will design the appropriate modalities for such policy measures."

Implementation takes time, he stressed. Markets "only adjust once success becomes clearly visible." Governments must "activate the EFSF/ESM (European Financial Stability Facility/European Stability Mechanism)."

EFSF borrowing authority exists. It's capped well below what's needed. The late Bob Chapman estimated $6 trillion. What's available and likely is a drop in the bucket. Chapman predicted a certain train wreck. Only its timing is unknown.

ESM authority is proposed. It's not in place. It's a permanent bailout fund. Creation depends on Germany's Constitutional Court and parliament. Judges must agree to change German constitutional law.

Doing so requires national referendum approval. Perhaps legal requirements will be twisted to avoid it.

Parliament must then act. Doing so is planned for September. Betting odds suggest surrender. Chancellor Merkel long ago sold out to Brussels.

Draghi wants authority to buy toxic sovereign debt. Doing so reshuffles a sinking ship's deck chairs. ECB's mandate prohibits it. Draghi's back door strategy failed.

He loaned Eurozone banks $1.2 trillion. Hoped for sovereign debt purchases didn't materialize. Plan B calls for Draghi to do what troubled banks won't.

Conservative opposition is vocal. Senior German Finance Committee member Hans Michelbach said:

"The central bank under the leadership of Mario Draghi has pursued increasingly adventuresome contortions to get around the prohibition against state financing."

According to Christian Social Union general secretary Alexander Dobrindt:

"If the ECB buys sovereign bonds, it would be akin to state financing through the back door. The ECB would be leaving the path of monetary stability."

Concern is over triggering an inflationary spiral. Germans know their troubled history. Cooler heads want repeating what preceded the Great Depression, Hitler, and WW II avoided. Anything is possible when policy makers are unrestrained.

Draghi is a predatory banker. Once a Goldman Sachs alum, always one. People needs aren't his concern. Sovereign debt buying has strings. Crushing austerity is mandated.

Nations accepting aid must agree to Memorandum of Understanding terms. Doing so means surrendering fiscal sovereignty. Lower wages, higher unemployment, fewer social benefits, gutted pensions, and perhaps blood in the streets follow.

Key also is that everything tried so far failed. New policies rework old flawed ones. Failure again is certain. Half life successes get shorter.

Germany's Bundesbank opposes Draghi's scheme. So do conservative Bundestag legislators. Free Democrats (FDP) finance spokesman Frank Schaffler called the ECB "a state within a state, beyond any legal and political accountability."

Draghi goes his own way with full money power backing and most politicians willing or cowed to go along.

Reports from Germany say people are spending old D-marks. Retailers obligingly take them. The longer Europe's debt crisis festers, the more likely reinstatement is possible.

On January 1, 2002, euros officially replaced D-marks. They lost their legal tender status. Billions were retained. Germans again use them.

They'd gladly trade euros for D-mark stability. Germany appears more willing. The late Bob Chapman said authorities began printing them months ago. The hand writing's on the wall. Growing numbers think the game is up.

Draghi schemes delay day of reckoning time but can't stop it. He may be gone when it arrives. Germany is Europe's funder of last resort. Draghi depends on its resources.

Throwing good money after bad puts Germany's financial stability in play. Perhaps its solvency if it goes too far. Greece died months ago. Spain's on life support and expiring.

Its needs exceed what deep pockets can provide. Its crisis is threefold - banking, sovereign and regional. Troubled Catalonia is Spain's most indebted region.

It's broke. It suspended social service payments. Hospitals and other medical priorities go begging. Earlier budgets were slashed sharply.

Other Spanish regions have similar problems. Crisis grips the country. Madrid is insolvent. So are major banks. They need hundreds of billions of euros to meet liquidity needs. What's possible under ideal conditions isn't enough.

Massive capital outflows highlight the problem. On July 31, new Spanish central bank figures showed May amounts quadrupled year-over-year.

Since summer 2011, the equivalent of about one-fourth of Spain's GDP sought safer havens elsewhere. It sounds like an obituary - a run on the entire country.

It's bad and worsening. The ECB and Eurozone countries haven't enough firepower to address it. Italy, Greece, and other troubled countries need help. Banks and sovereigns need massive amounts.

EFSF funds are capped. They're far below needs. If ESM is established, Spain and Italy must provide 30% of its funding, Germany another 30%.

How can troubled countries contribute anything? What's ongoing reads like a Shakespearian tragedy. Bad endings are easy to predict. SNAFU defines them: situation normal all f..ked up.

Bazooka economic promises are hollow. Eurozone dissolution is inevitable. Only its timing is unknown. Imagine how much worse things will be when day of reckoning time arrives.

It's not confined to Europe. Troubled America faces its own moment of truth. It'll replicate troubled Eurozone countries when it arrives.

A Final Comment

The late Gore Vidal got it right. He called The New York Times the "Typhoid Mary of American journalism." It proves it daily.

It cheerleads US imperial wars. It ignores mass slaughter and destruction. It's silent on banksters stealing us blind. It's comfortable with money power running America.

It supports wealth, privilege and power. Its August 2 editorial headlined "Manana Bankers" showed it.

It asked "(h)ow bad do conditions have to get before" central bankers intervene. It's mindless of the ocean of easy money they created irresponsibly. It went to bankers, not economic growth.

They used it for speculation and greater consolidation. They stole public funds for their own benefit.

The Times wants more of a bad thing repeated. Failure "means trouble for everyone," it said. What are they waiting for, it asked?

Instead of explaining what's wrong and how to fix things, The Times endorses what helps bankers most. Let ordinary people eat cake....if they can afford it.

A Final Comment

The July US jobs report beat expectations. At the same time, it woefully underwhelmed. The headline U-3 number was 163,000. Report details were soft.

The private payroll diffusion index fell for the second straight month. At 56.4, it's down from 56.8 in June and 61.3 in May. Despite last month's headline number beating June's, breadth was lower in July.

Hours worked were flat. Up 0.1%, average hourly earnings barely budged. Work-based income gained the same meager amount. In real terms, wages contracted.

Hourly earnings year-over-year fell from 2% in June to 1.7% in July. The comparable weekly pace dropped from 2.3% to 2%.

Incomes are declining. Jobs created are poor ones. They're mostly low pay/low benefit part-time or temp ones.

Economic uncertainty prompted greater savings. The opposite effect is less spending. In real terms, it's negative.

U-3 unemployment rose from 8.2% to 8.3%. U-6 stands at 15%. Real unemployment as calculated in the 1980s approaches 23%. It adds uncounted long-term (one year or more) discouraged workers U-6 figures ignores.

Without fictitious birth/death ratio over-counting, U-3 gained 120,000 jobs or less. The broader Household Survey was dreadful. It fell 195,000.

Virtually all jobs lost were full-time. They dropped 228,000. They're down for three of the past four months. The employment rate dropped from 58.6% in June to 58.4%. Labor force participation fell from 63.8% in June to 63.7%.

Small downward revisions showed May and June combined created 12,000 fewer jobs.

The U-3 headline number belies economic decline. Soft data confirm it. Expect continued weakness ahead.

Stephen Lendman lives in Chicago and can be reached at lendmanstephen@sbcglobal.net.

His new book is titled "How Wall Street Fleeces America: Privatized Banking, Government Collusion and Class War"

By Stephen Lendman
http://sjlendman.blogspot.com

His new book is titled "How Wall Street Fleeces America: Privatized Banking, Government Collusion and Class War"

 

http://www.claritypress.com/Lendman.html

Stephen Lendman is a Research Associate of the Centre for Research on Globalization. He lives in Chicago and can be reached in Chicago at lendmanstephen@sbcglobal.net.

Also visit his blog site at sjlendman.blogspot.com and listen to The Global Research News Hour on RepublicBroadcasting.org Monday through Friday at 10AM US Central time for cutting-edge discussions with distinguished guests on world and national topics. All programs are archived for easy listening. © 2012 Copyright Stephen Lendman - 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.


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