If the ECB under the new leadership of Mario Draghi buys so-called PIG bonds or attempts to print money, Germany will feel it has a central bank that has no "rules" and which simply serves as a blank check to the other member states. This means permanent price instability. If the ECB refuses to monetize the debt and no other white knight can be found (the IMF cannot fill the hole, Germany and China won't fill the hole, Tim Geithner would love to but the American public won't permit it, and the idea that the G20 can do it provokes howls of laughter from G20 government officials), then multiple sovereign defaults will occur well beyond Greece. The Greek default will continue with new haircuts leaving investors lucky to get 20 cents on the Euro. That would mean a substantial fall in the Euro and no possibility of recovery until the last element of default was done. That will feel like permanent price instability to the Germans.Keep in mind that Malmgren is no flunky. She was Special Assistant to the President for Economic Policy on the National Economic Council (President Bush). She was also a member of the President's Working Group on Financial Markets, aka, the Plunge Protection Team. Her client list includes every elite corporate firm in the world (The list is here.).
Either way, Germany will find itself hostage just as a skilled and prepared mountain climber might find himself fully locked onto the mountainside but his colleagues are dangling in the wind. National interest will demand self preservation no matter how much Germany might like to keep the climbing team together. They don't want to cut the rope but they may be forced to.
It's true that Germany is against ECB printing. Draghi replaces Jean-Claude Trichet as head of the ECB on November 1. Draghi has already said that the ECB will continue to buy EZ government paper. It remains to be seen if he sterilizes the purchases by selling other ECB securities, or monetizes the EZ paper by printing new money. If it's the latter, this sets up Malmgren's scenario where Germany leaves the EZ.
I don't see as much of a threat of Germany leaving the EZ as Malmgren, if the ECB does not print. Although this would create economic problems for the PIIGS, simple supply and demand economics would likely strengthen the euro.
The real problem comes if Draghi starts printing money, which he might do. If he does, the EZ becomes very price inflationary and the Germans will likely have had it with the entire EZ concept by then.
What is Germans objection to printing money? Money is wealth. Just print more.
ReplyDeletePrinting money for paying debts leads to hiperinflation and ultimately to the collapse of the economy. I think the solution is to stop printing ignorance.
DeleteYou would think they would have remember the good ole days of hyperinflation during the Weimar Republic?
DeleteIt doesn't look like Angie can steal more from her German slaves...Damn uppity slaves are a real kill-joy, eh?
ReplyDeleteI'll believe it when I see it. Contingency plans are all well and good, but until there is ANY other source within Germany willing to corroborate this bombshell . . . it is merely rumor.
ReplyDelete@Silver
ReplyDeleteExactly. More yammering and unsubstantiated text. Everyone keeps calling for the fall of Europe. You read it on all the blogs how nothing they're doing is going to work. Yet, work it has. Each and every time. This is likely because all these bloggers continue to think about how the economy will respond inside a box of established preconceptions and rules.
The reality, however, is that the governments are merely changing the rules to make it work. How sustainable it is remains to be seen. But the rumor of the EU's demise has obviously been greatly exaggerated.
@Ivanovic71
ReplyDeleteYou state:
"You read it on all the blogs how nothing they're doing is going to work. Yet, work it has. Each and every time."
If it worked, then there wouldn't be an "each and every time", unless you define "working" as "putting off the day of reckoning for another month or two by making the endgame even more expensive for the German taxpayer.
"What is Germans objection to printing money? Money is wealth. Just print more."
ReplyDeleteMoney is NOT wealth when it is counterfeited out of thin air. Money is only wealth when it is true, sound, honest money, which cannot be created out of thin air, i.e gold and silver dollars.
Yes, it has "worked" to forestall the final reckoning, but each "fix" just brings more distortion. The ISDA decision that a 50% "haircut" does not constitute "default" and therefore trigger CDS contracts means that the sovereign CDS market is dead- no one will buy them, thus the only solution becomes selling SovDebt when uncertainty prevails. This will raise bond yields, making credit more expensive.
ReplyDeleteEach "solution" just introduces 10 new and worse problems, and makes the final reckoning that much more painful and catastrophic.
It doesn't matter. By "worked" I DO mean forestall the day of reckoning. But if they can just change the rules all the time, then there eventually won't BE a day of reckoning. At least not in our lifetime.
ReplyDeleteAnyone betting against these yahoos is going to go broke doing it. The best solution is just to stay out of the market completely - knowing that it is rigged.
exactly, like the 2008 US subprime meltdown, even those (austrians) who said it would happen didn't know exactly when. And probably it won't come with a bang but with a long drawn out whimper.
DeleteIf you have assetts or cash, it´s not possible to stay out of the market. Everything, including cash is affected, and by holding cash you are betting on the currency it is held in
ReplyDeleteThere is no way out of this Euro mess. Greece needs a clean default, take the hit, recapitalize the banks, and move on. The current strategy is a drip-drip water torture. What did the last summit achieve - 5 days of peace before the next )Greek) shoe dropped?!
ReplyDelete