Monday, August 1, 2011

A Traumatic August Crisis in Italy and Spain and a Future Potential Great Explosion?

Ambrose Evans-Pritchard is out with an important piece in The Telegraph. I have been harping away in the EPJ Daily Alert that in recent weeks the U.S. money supply has been exploding. Pritchard makes the same point: 
We have a glimmer of hope. The key indicators of the US money supply are at last firing on all cylinders, a dramatic turn for the better that would normally signal recovery or even a mini-boom within the next six to 12 months... data from the St Louis Fed show that America’s M2 money supply grew at a 6.4pc annual rate in the second quarter, accelerating to 12.2pc in June. 
What Pritchard fails to point out,  however, is that the coming manipulated-boom is a Trojan horse that will contain within it major accelerating price inflation.

On Europe, Pritchard warns of a possible 1931 scenario:

My recurring nightmare ever since the Western debt edifice began to crumble four years ago is that the denouement would track the events of mid-1931, when leaders failed to reform a destructive fixed exchange system (Gold Standard) and the fuse finally detonated on Europe’s banking system. It was when political blunders turned recession into the Great Depression, and ideology intruded with a vengeance.

The narrative of 1931 is already well-known to readers. France sabotaged a rescue of Vienna’s Credit Anstalt because of strategic disputes with Germany. This set off a financial chain reaction. Frightened markets tested the weak links of the Gold Standard. They withdrew funds from Britain after naval ratings “mutinied” over pay cuts. Contagion spread back to New York. By October 1931 the international system had collapsed, though the full horror did not become evident until the next year. A string of countries retreated into variants of autarky, or fascism, or both. Communists and Nazis together won more than half the seats in the Reichstag election of July 1932.

It is far from clear that the international order is more secure today than it was in the seemingly calm days of May 1931...
I can not disagree. While Bernanke is printing dollar upon dollar at the Fed, the European Central Bank has stopped printing money. A stable, non-growth monetary policy is something that should not be criticized. It is a sane policy. However, Europe does not appear ready for stability or sanity. Accompanied with a stable non-growth monetary policy should be full defaults by EMU members in over their heads financially. This means all of the PIIGS. However, given the view of the populace in these countries that even a broke nanny should be supporting the populace (and bankster desire to be protected), sanity, in the form of full defaults aren't likely. Instead, we get games and limited hang out defaults. This does not mean that the PIIGS will escape full defaults, just that reality will down the road force upon the PIIGS a much harsher form of crises and defaults.  And that "down the road" may not be that far away.

Pritchard continues:

The EU has brought about the first sovereign default in Western Europe since the Second World War and set a fateful precedent without actually resolving the Greek problem. This is the worst of all worlds.

Moody’s cited the summit terms as a key reason why it put Spain on negative watch last week. “Pressures are likely to increase still further following the official package for Greece, which has signaled a clear shift in risk for bondholders of countries with high debt burdens or large budget deficits,” it said.

EU ineptitude - or rather, German, Dutch and Finnish unwillingness to face up to the implications of EMU - have raised the risk of a traumatic August crisis in Italy and Spain. EU leaders are bringing about exactly what they pledged to avoid.
As long as the grown-up members of the EMU, the Germans, the Dutch and Finnish, throw the PIIGS life lines made of string, the crises will continue and get worse. The only real solution, that would end the madness, is for the EMU to disband and let the PIIGS fend for themselves. It's a lot better solution than a replay of 1931. It would at least protect the adults G,D and F, and offer a role model for the PIIGS. However, if G,D and F are dragged deeper into the PIIGS problems, then ultimately a Great Explosion will take place with completely unknown consequences. Nineteen thirty-one might then prove a guide to what might occur, or it might be much worse.

(Thanks 2 Lew Rockwell)


  1. Yes that past will be repeated over and over.Get ready to find out where the rubber meets the road.Debts that cannot be repaid,won't.

    Buy hard assets and you will fair better than most.It will be hard to figure out how ugly this is going to end up.The bottom if this mess is sure to shock even the person thinking of the worst case scenario .
    Michael Olsen Rye,NY

  2. "Debts that cannot be repaid, won't."

    Not so, all debts are repaid. The question is who will pay.

    I do wonder how much longer the German people will stand for all this nonsense.

  3. Here is what I expect to happen. I think Gold will be placed on a limited sell order basis world wide by all the governments involved(Europe and the USA). The governments will close the marketplace. Which means a collapse of the Gold market. I predict the same governments will confiscate all gold from any private citizen holding gold. The possible exception being jewelry. These governments including the USA will make it illegal to hold gold as a commodity. The only ones holding gold will be governments. They will preset the price of gold for international banking exchange. I suggest they will pay 2,000 dollars an ounce and set the price at 3,500 to 4,000 dollars an ounce. Read you history. Franklyn D. Roosevelt did this after taking office in the 30s. I think it was 2 days after taking office. He then set up the biggest socialist confidence game in the history of the world. Those that do not learn from history are doomed to repeat it. All I did was add some zeros.

  4. Well done sir.

    Incisive, informative and instinctive.

    Thank you.

  5. The entire Human race is broke, save that no one has the guts to say so aloud.

  6. it is funny that may people equate the gold standard to this line "a destructive fixed exchange system" which when viewed from the libertarian perspective is just another government controlled monetary system. When gold is left to float and be a truly free market5 for the commodity problems rarely arise yet even with something as good as gold when government controls are applied the system will fail.

    Great article the EU should break up and let the piigs return to printing their own currency.

  7. The 'boom' has happened, in commodities and emerging/2nd tier(Korea, Brazil, etc) economies
    and markets, and is now ending.
    The Fed printed, using the existing methodologies of the times, steadily in 1930-33
    and it simply didn't matter-monet(and credit) was vaporized.