Monday, May 10, 2010

Trillion Dollar Madness

European policy makers have unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases to stop the sovereign-debt crisis. The Federal Reserve will also play a role through currency swaps.

The 16 euro nations agreed in a statement to offer as much as 750 billion euros ($962 billion), including International Monetary Fund backing, to countries facing instability and the European Central Bank said it will buy government and private debt.

There is nothing more to be said other than this is potentially the greatest inflationary plan ever designed. Although statements have been made in the past that the EU has failed to follow through on, the statements issued last night appear to have a sense of seriousness about them, especially the ECB announcement to buy government and private debt, and the Federal Reserve launching of currency swaps. Both these actions suggest spectacular inflation may not be far away. Although the ECB statement says the purchases will be sterilized, meaning they won’t increase the overall money supply in the  system, one wonders how long this will go on. A sterilization of the money printing would mean that money would be drained out of other sectors of the EU economy to be given to the governments of the PIIGS, who are proven irresponsibles with money. Draining from the potentially productive sectors of the EU economy to give to the PIIGS is almost as insane as printing the money without sterilization.

That no objection to this madness has come from any finance minister or central banker signals how far down the road we are from any real concern about inflation or the taking away from the productive sectors of the economy. Indeed some of the the statements coming out of the emergency meeting of EU finance ministers are simply absurd.

“The message has gotten through: the euro zone will defend its money,” French Finance Minister Christine Lagarde told reporters in Brussels early today. How opening up the printing presses defends the euro, she did not explain. The last I looked printing money destroyed a currency. It did not help the currency.

As for other parts of the plan that call for EU members to chip in with bailout funds, Venkatraman Anantha- Nageswaran of  Bank Julius Baer & Co put it best, “It might temporarily calm nerves but questions will come back later on how they will pay for this package when all of them need fiscal consolidation."

Markets are reacting in knee-jerk ways that do not at all suggest long-term trends.

The euro appreciated 3.7 percent against the yen as of 6:55 a.m. in New York, its biggest gain since November 2008. Spain’s benchmark stock index, the IBEX 35, rose the most on record. Futures on the Standard & Poor’s 500 Index rallied 4.4 percent.

Over time the euro  won't be able maintain gains. Gold is down by double-digits, but with major inflation threatening around the corner, the gold weakness will be very short-term.

The complete EU/ECB statement is in the EPJ vault, here.


  1. A couple months ago one of my favorite financial bloggers was mocking those who were worried about inflation, saying that when the US monetary base fell like a stone these worrywarts would have egg on their faces.

    So that guy was wrong, in your current estimation?

  2. Fiat currency caused the global correction and these guys want to print more and more. It is a good thing they are not members of the fire brigrade - they would be pouring gasoline on a fire to put it out because gasoline is a liquid.

  3. Hi from Germany,

    In general people in Europe don't understand the step and in mass media it is sometimes not even on the front page.

    I can't tell you how angry I am- politicians stole savings overnight, destabilize the currency, give unlimited quantity of money for 1% to banks etc. This will only lead to even more financial instability, speculation and at the end to the destruction of Europe.

    Oh, democracy- remember that? There was, there is and there will not be a democratic element in this process!

    Regards from Berlin

  4. Germany, we feel for you.

    Your prudence, savings and hard work is being stolen and funneled to the dissavers and profligate spenders of other countries.

    The powerful financial elite has through the central banking system robbed your productive capacity from here on to infinity.

    It is time you speak up and defend your liberties before they are all gone.

    Good luck!

    Best regards from Norway.

  5. Lending to a highly irresponsible borrower like the Greek Government from the essentially bankrupt governments that make up the EU may help short term, but long term will generate massive inflation which will lead to the destruction of the euro. In the meantime, the Greek government (and others) will produce a counterfeit budget and continue its accummulation of debt to prop up its bankrupt welfare state. Robert Stewart, Bermuda

  6. This isn't rocket science,economic health in a nation can only be manitained by the occassional harming,or depriving of certain groups of money.
    Politicians are almost incapable of doing that,so they do absolutely anything other than what should b done,including completely destroying the currency.
    So sit back,buckle up and buy some gold.

  7. re: "Gold is down by double-digits, but with major inflation threatening around the corner, the gold weakness will be very short-term."

    Short-term, indeed. Gold is up over $1217 hours later.

  8. The fact that the Federal Reserve is participating in this inflationary scheme through currency swaps is just pouring more gasoline on the inflationary fire. It is now going to be a race. Who can inflate the fastest? The ECB or the Federal Reserve? No matter who wins we all lose.

  9. You watch, the Federal Reserve, and IMF will do this on purpose and then introduce a new "Global" Currency to save the world. This is all a Ponzi Scheme...and as all Ponzi Scheme's, it will fail in utter disaster and some will reap the benefits at others expense. But we the people of these governments have allowed it to happen, we either lay down and do nothing or we stand up and show governments who we really are. We aren't benefactors of government, government is a benefactor to us because it wouldn't exist without us.

  10. Austrian Economics
    You have to love it.
    keep talking and keep educating
    The Ron Paul revolution is still in progress.


  11. People incorrectly think that central banks fully control the money supply. They control the amount of cash and excess reserves, to be sure, but it ends there, and the money supply is leveraged off those two, by the fractional-reserve banking process, up to ten-fold. When the money supply falls it is the de-leveraging that is at work. Central banks then replace the lost leverage with additional cash or excess reserves. In the near-term the impact is little or none, but once the de-leveraging in the economy reverses, fractional-reserve banking multiplies the new money on top of what was there before. That's why there can be deflation in the near-term, but mass-inflation in the long term, stemming from current conditions. And the transition could be quick, when it comes.

  12. "mocking those who were worried about inflation" , "when the US monetary base fell like a stone"

    Exactly how do you imagine the monetary base can be corrected? The fed will have to dump $1 trillion dollars worth of junk bonds onto the market to correct the fed's balance sheet. If there are any buyers of these toxic assets do you think they will choose new sovereign debt or old toxic fed debt? The fed can't unravel its monetary bubble without causing a worldwide depression.

    So how do you sell something you bought as the last customer, something nobody anywhere wants, especially when you have a trillion of it ?

  13. Francisco Almeida - BRAZILMay 11, 2010 at 1:52 PM


    Since the beginning o EU, Germany knew that it was a blank check freely given to the PIIGS - as they would NEVER cut spending until disaster is at the door.

    Now, hard-working German people is paying for that, and worse: NO new clause preventing PIIGS from lavish expenditures will abide them.

    Pity. It was a ice dream. And feasible.

  14. Something very bad is happening,institutional murder in Iraq and Afghanistan called a war on terror and financial fiduciary misconduct called bailouts.

  15. The game that is being played here is essentially spelled out in Chapter 6 of G. Edward Griffin's The Creature from Jekyll Island, titled "Building the New World Order." To summarize, the objective is the redistribution of wealth from the rich countries (Germany, France, the U.S.) to the less prosperous nations (the PIIGS), via loans advanced by a supranational organization (the IMF, World Bank, EU), with the ultimate goal of establishing a world currency under the control of an agency (the IMF?) that is beyond the sovereignty of any single nation.

  16. "with the ultimate goal of establishing a world currency under the control of an agency (the IMF?) that is beyond the sovereignty of any single nation."

    Keynes called that "Bancor"...
    Good analysts like Guido Hülsmann think so too.
    (listen to this, Sept. 2008, but even several years he predicted the developments before:


    But with what purpose? I don't believe in a conspiracy here- is it just greed combined with helplesness?
    And- that only works if you exclude the majority, i.e. they must work for the wealthy nations in the club... Only by military force is that possible.

    Again from Germany

  17. Maybe the electorate will wake up and Vote Ron Paul!

  18. Someone -anyone- needs to leave the EU on fiscal grounds for any positive development to take place. Germany's exit would trump the whole pan-Europe bank slavery scam. Sooner is better than later in 'Federal' schemes, as the American War Between the States demonstrates.

  19. Socialism is sustainable; especially pseudo-democratic socialism. It only lasts until you run out of other people’s money.

    Best regards,
    Chicago, USSA