The Big Do Over
By now I am sure you have all looked over the massive program put in place this weekend by the ECB/IMF/FED to backstop the Eurozone. The details are not really that important, just take away that about 1 Trillion dollars will be at work to support the Euro banking system and serve as aid packages to struggling countries.
This is almost a carbon copy of the US TARP plan, though I do think the European plan is more than 1 page long. I think it is two and a half pages, though one page is a cartoon. Indeed the old world is more refined than the US.
For a great write up on the particulars and some reading of the leaves I would suggest The Baseline Scenario article:
What happened to the global economy and what we can do about it
Eurozone: The Kitchen Sink Goes In – Now It’s All About Solvency
A great read though I would find fault with one of the summary lines:
To ultimately get out of this mess, the euro zone needs to grow fast enough to allow nations to grow out of debt. The global backdrop here is very positive in the short term. The jobs numbers in the US last week and strong numbers out of core northern Europe suggest the world can grow. No doubt the ECB and the Fed will use the eurozone scare to justify longer loose policies.What growth rates are assumed here? How can growth at a high rate come if fiscal cuts are made? How long a time frame are we talking? This could have been fleshed out a bit more, but still a great read.
I will leave the heavy lifting to those with more knowledge than I on these matters. I wanted to talk about some macro issues this all presents instead.
I often get into a debate with the author of Illusion of Prosperity about the whole deflation/inflation duel. Deflation has been the name of the game for a while now, but some think inflation has been non existent for about a decade. Of course this depends on what you are gauging inflation by as well as how you view "inflation" generally.
Here is an example from the real world:
Easy credit and no lending standards ignites a condo frenzy in a South Florida coastal community. Lego like condos that were selling for 200k one year now are flipped for 800k just 2 years later. This is a clear bubble and massive inflation of condo prices.
3 years after the high of the market, the same lego land condo would be selling for 100k if banks were making the mortgage loan and regular loan standards applied. However, the FED has rigged rates at all time lows, the US government makes the mortgage loan, and all the worthless paper from the good old days resides not at the banks but at the FED for safe keeping and hiding of losses. The condos in this market now sell for 400k. This is clear inflation of prices as well.
This brings me to TARP, the Euro-TARP, and all the other circus antics employed by the world up to this point.
I call this The Big Do Over (copyright EconomicDisconnect 2010).
Faced with debt deflation and collapsing asset prices it was the decision on all sides to paper over the losses and replace the lost money with new money. Usually this is both criminal (counterfeiting) and leads to hyperinflation but some cute tricks have coincided with a useful market truth to keep that scenario on hold.
All the money that the FED has made for the banks had been kept under tight wraps. Usually printed cash is deployed by the banks via fractional reserve lending and this expands the money supply. This time banks simply sit on the new cash as it serves as a marker for losses they transferred to the government. Now do not get me wrong, the banks are making out well both by not having losses and they can use this money for some things:
-Buying US government debt and making a huge spread
-Goosing the stock market to the tune of an 80% rally off the lows. The FED likes this because a higher stock market is the only sign anything they have done has worked at all.
Both the US and the Eurozone have or will use the new money to buy their own debt to keep various rates low. Quantitative Easing is easily the most silly thing I have ever been witness too in my life. A government prints cash to buy it's own debt that it issues.....to raise cash and a worldwide market acts like they are some anonymous buyer making a purchase when everyone knows the deal. Some argue against conspiracy by saying there is now way X can happen because how could so many people stay quiet. It's easy, just do it in plain site! QE is a joke and a smack in the face of market players.
The market truth I mentioned above is simply everyone knows everyone is broke but nobody is in any position to do anything about it. While a negative most of the time, fiat currency does have the built in safe guard that if you call out one, you have to call them all out. They are all various degrees of baloney, which is just a big hot dog.
For a sampling of the kind of rhetoric now being used and the commentary that reads more like an Onion article than real life, here is a bunch of views from across the web:
Via The Daily Capitalist (on ZH):
The lead in this morning’s paper WSJ provides all necessary guidance for global wealth holders: “The European Union agreed on an audacious €750 billion ($956 billion) bailout plan in an effort to stanch a burgeoning sovereign debt crisis that began in Greece but now threatens the stability of financial markets world-wide.” This weekend’s behavior demonstrates without equivocation the thesis we have been following: naturally occurring credit deflation will be met with an overabundance of monetary inflation that will hyper-inflate the global economy.Spot on.
Global policy makers continue to demonstrate that when push comes to shove they will forcefully apply policy that sustains the near term nominal values of financial assets. They continue to choose to use their unique powers to cover all bad bets with paper money and credit that only they can manufacture. In doing so, they claim victory when nominal financial asset prices predictably rise, as they must, and they hide the loss of real wealth denominated in their diluting paper currencies. The stock of real wealth is the same as it was a week ago and at every point between then and now, though there is a trillion more dollars (€750 billion) in the global system.
The EU is effectively proclaiming; “if you pour our brew down the drain we are just going to make more of it.” To defend the Euro, something has to be sold against it. The Fed (the tallest midget) has re-opened the USD swap line to the EU so that newly-digitized dollars can be sold for Euros in the market. Clearly, the bailout is USD bearish – not Euro bullish. If the EU was serious about saving the Euro, then the ECB would have to dump its gold and hike funding rates. They are going “all in” with a six of clubs. In the current backdrop it seems preferable for the Fed to inflate immediately, rather than the ECB, given the relative strength/weakness of the USD/EUR. This is the same playbook global central banks have been following for a while. The mere fact that all major currencies today need to be defended wreaks of fraud. If something is as it seems there is no need to defend it.
Looking at the current state of the world economy, the underlying reality remains little changed: there is more debt outstanding than is capable of being properly serviced. It's certainly possible to issue government debt in order to bail out one borrower or another (and prevent their bondholders from taking a loss). However, this means that for every dollar of bad debt that should have been wiped off the books, the world economy is left with two - the initial dollar of debt that has been bailed out and must continue to be serviced, and an additional dollar of government debt that was issued to execute the bailout.
Notice also that the capital that is used to provide the bailout goes from the hands of savers into the hands of bondholders who made bad investments. We are not only allocating global savings to governments. We are further allocating global savings precisely to those who were the worst stewards of the world's capital. From a productivity standpoint, this is a nightmare. New investment capital, properly allocated, is almost invariably more productive than existing investment, and is undoubtedly more productive than past bad investment. By effectively re-capitalizing bad stewards of capital, at the expense of good investments that could otherwise occur, the policy of bailouts does violence to long-term prospects for growth. Looking out to a future population that will increasingly rely on the productivity of a smaller set of younger workers (and foreign labor) in order to provide for an aging demographic, this is not a luxury that our nation or the world can afford.
David Rosenberg (on ZH):
The emergency measures just announced buys some time but should help take some of the fear and illiquidity out of the market over the near-term. However, what were not addressed are the intense structural fiscal problems plaguing much of the Eurozone.
In the final analysis, if the EU lends money to Greece or to any other problem country in the zone, debt ratios (including contingent liabilities) in the region will only rise further. It will be interesting to see how the rating agencies end up handling this. It cannot be lost on them, or the global investment community, that while loans, guarantees and central bank provisioning can deal effectively with liquidity issues, they are ineffective in addressing what’s really at stake here, which are structural fiscal issues.
Everyone knows the issues but nothing can or will be done about it.
I take a bit of heat for being a gold and silver lover and a hater of fiat money. Most of the time I get the old "where's the hyperinflation?" call. What's the difference between Zimbabwe and the US? Size. What's the difference between the Eurozone and Argentina? Size. That's it, that's all. If anyone could do anything about any of this they would. If a viable alternative to US manipulation and reserve currency status was out there, we would be left high and dry in about 10 seconds. I guess that makes us very lucky.
I think two scenarios are possible going forward:
-After about 1 more year of bad debts and deflation the panic button gets hit very hard and we step outside the bounds of make believe and do in fact have a real crisis with our dollar
-After another year of the same the FED allows the banks to flood the markets with the money they never wanted really making it's way to regular people's pockets (no wage increases and no jobs after 2 or 3 Trillion in money? Geez, what a raw deal!) and we indeed get the inflation this kind of thing promises to deliver.
It is absurd to me how far this has all gone. I still believe we would be in a better spot if things just went sour a while back. The end of the world? I think not, just the end of the banking iron grip on the world of finance. Instead we muddle on dodging train wrecks.
Have a good night.