The Euro is breaking down

The Euro situation is rapidly getting out of control, and for the first time I am beginning to imagine a real break up possibility for the Euro.  The in trouble countries appear unable to take sufficiently strong reforms to calm the markets, and the European Unions is very limited in how much financial support it can provide, due to restraints placed by the Maastricht Treaty, the German High Court and Germany itself towards endless money transfers.

The markets are rapidly getting spooked, and the players appear to be unable to take effective action to calm the markets.  The whole thing could blow up very soon.  At first I thought that I would just be a mainly Greek problem but contagion has set in.  This from Mish Shedlock who is a great commentator.

Official Denial Signals Spanish Bailout Imminent; Dreadful Result in Spanish Bond Auction, 6.975% Yield on 10-Year Debt; Merkel says “ECB Cannot Solve Euro Crisis”

The ECB stepped into the fray once again today but the the results of the Spanish debt auction today speak for themselves. The rate on 10-year bonds is close to touching the 7% mark.

The BBC reports on the “Dreadful Result

The Spanish government sold 3.56bn euros (£3.04bn; $4.79bn) worth of bonds out of a maximum target of 4bn euros.

The auction attracted bids worth 1.5 times the securities offered. The so-called bid-to-cover ratio was down from 1.8 in October.

“The result was dreadful. They didn’t manage to raise the full amount and the bid-to-cover is really poor,” said Achilleas Georgolopoulos, rates strategist at Lloyds in London.

“The fiscal profiles of Spain and Italy are different but their yields seem to be aligning now.”Volatility on Spanish Bonds Soars

Bloomberg reports “Volatility on Spanish sovereign debt was the highest among developed-country markets today, according to measures of 10- year bonds, two-10-year spreads and credit-default swaps. The cumulative change was 5.1 times the 90-day average, the Bloomberg gauge showed

Official Denial Signals Spanish Bailout Imminent

An official denial from a ranking Spanish government official suggests a bailout of Spain is now imminent.

Spain is “absolutely not at risk of a bailout,” Salgado said on Cadena Ser radio, after rates for the government to borrow money rose to dangerous levels.

“The sustainability of our debt is beyond all doubt.”For a discussion of the “official denial” concept, please see Eurozone Breakup Logistics (Never Believe Anything Until It’s Officially Denied)

Systemic Nonsense

In “Debt Crisis Live” The Telegraph reports Spain’s finance minister Elena Salgado says there is a “systemic attack” on European sovereign debt going on, and that the ECB must keep on supporting government bonds by buying them until some other instrument is put in place.

Clearly Salgado is talking systemic nonsense. Yields in Spain are approaching 7% for a simple reason: Spain cannot possibly pay back what is owed.

The Telegraph also reports on huge protests in Italy and Greece:”We will throw all of them out,” promised a banner held aloft by students, while another carried by anarchists read: “In the face of tyranny, one must choose between chains and arms.”

Here is a picture of a protest turned violent in Italy.

Merkel Rules Out Everything

Here is a nice quote at the 10:45 mark from Debt Crisis Live.

10.45 Mrs Merkel has been speaking in Berlin this morning, and she seems to be ruling out everything. She said neither joint euro-area bonds nor using the European Central Bank will solve the debt crisis.

Apparently a “snappy debt cut” is also out of the question. She said:

Quote I’m convinced that none of these approaches, if applied right now, would bring about a solution of this crisis.

Which is all very well – but what the markets want to know is, what IS the solution?

Euro Experiment is Over

Pritchard concludes with a couple of paragraphs that I whole-heartedly endorse…

David Heathcoat-Amory, Britain’s former Europe minister, said Berlin will do whatever it takes to try to save EMU.

“The Germans will pay up, accept eurobonds, and mobilise enormous firepower. But this won’t save monetary union in the end because it is not a debt crisis. It is a currency crisis. The weaker states are uncompetitive and you cannot force them to deflate their way back to competitiveness by cutting wages 30pc. The EU elites won’t admit it, but the euro experiment is over,” he said.

Merkel is willing to destroy Germany (and Europe) to save something that is doomed anyway.

Top Orwellian Comments Of All Times

  • An American major after the destruction of the Vietnamese Village Ben Tre: “It became necessary to destroy the village in order to save it.”
  • Vice President Joe Biden: “We Have to Go Spend Money to Keep From Going Bankrupt.
  • President George W. Bush: “I’ve abandoned free-market principles to save the free-market system.”(For a discussion please see The Most Redeeming Feature of Capitalism is Failure)
  • Nancy Pelosi said “We have to pass the health care bill to see what’s in it.” (YouTube Video)
  • Larry Summers says “The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending.” (Reuters)

We can safely add “To Save the Euro we Must Cede Sovereignty” to that list.

Unlimited Supply of Hare-Brained Ideas

There have been more hare-brained ideas in the last 6 months on how to save the Euro and the global economy than in the prior three years combined.

Ceding sovereignty to save the unsavable is one of them. A leveraged EFSF is another hare-brained idea. It has already blown sky high.

Here are some more examples.

  • Alan Beattie proposes the ECB lend money to the IMF so that the IMF can take on Eurozone credit risk, in order to get around ECB statues regarding bailing out insolvent nations. Allegedly that needs to happen or it will be another Great Depression. (Financial Times)
  • In one of the looniest ideas in history, economist Brad DeLong proposes “The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash before the increase in eurorisk leads American finance to tighten credit again and send us down into the double dip. The Federal Reserve Needs to do so now.” (DeLong Typepad)
  • In an absurd idea since abandoned, EU officials actually proposed that rating agencies be barred from rating countries with “excessive volatility”

Quack Ideas

In regards to Beattie’s proposal EuroIntelligence writes

In the never-ending search for quack solutions to the eurozone crisis, European leaders come up with ever desperate attempts. After the silly idea of leveraging the EFSF, the G20 summit discussed – and failed to agree on – the notion of leveraging the EFSF through the IMF’s special drawing rights (SDRs).

Alan Beattie writes in the FT it is illusory to think that one could bolster the EFSF to €1 trillion through SDRs as such a decision would require approval by the US Congress, with a success chance of between low and zero, he writes. He concludes that the only thing that currently prevents a crisis resolution is ideology. The ECB could lend money to the IMF, which in turn could set up a fund to buy Italian debt.

Interventionists Man the Barricades

In response to DeLong’s proposal, my friend Pater Tenebrarum comments in Interventionists Are Manning The Barricades

Another quite funny missive reaches us via the always amusing Keynesian statist Brad DeLong, who argues that given the euro area crisis escalation, the US Federal Reserve should immediately proceed to crank up its printing press. In terms of sheer lunacy his proposal is hard to beat.

DeLong approvingly quotes an article by Paul Krugman, who bemoans the possibility of the eurocratic moloch falling apart:

I believe that the ECB rate hike earlier this year will go down in history as a classic example of policy idiocy. We would probably still be in this mess even if the ECB hadn’t raised rates, but the sheer stupidity of obsessing over inflation when the euro was obviously at risk boggles the mind.

First of all, who’s to say that the euro is worth saving? If saving the euro depends on the central bank rewarding the fiscal profligacy of member nations by monetizing their debt, then obviously we’d be better off without the euro. These nations could then attempt to inflate themselves to prosperity on their own.

Regarding the ECB rate hike earlier this year, it is really hard to argue that it makes any difference whatsoever if the administered interest rate sits at a minuscule 1.25% or a minuscule 1.5%. How can that have any bearing on the insolvency of peripheral governments? Moreover, whether the rate is at 1.25% (where it now is again after the recent rate cut) or 1.5% – in both cases it is well below the official inflation rate of 3%, in other words it represents a negative real interest rate. The ECB is definitely not pursuing a tight monetary policy either way.

The euro system has proven a badly constructed self-destructive system, just as its opponents have claimed from day one. In fact, they have pointed this out well before the euro was introduced. Alas, it does not logically follow from this that it is worth attempting to ‘save’ it by means of inflation, which is what all the above quoted people evidently want.

Currency Expiration Looniness

For sake of completeness, I need to point out once again Gregory Mankiw’s inane proposal to save the economy by expiring 10% of Money supply every year (see Time For Mankiw To Resign)

GDP Targeting Looniness

I also need to point out the preposterous idea by Christina Romer who proposes the Fed institute GDP targeting in which she says Dear Ben: It’s Time for Your Volcker Moment.

For starters the Fed cannot spend money, it can only lend it. Thus the Fed has at best an indirect affect on GDP.

Interest rates are at 0% and money is stacking up at the Fed as excess reserves. In such conditions, the Fed has no affect on GDP. However, the price of crude is back over $100.  Food prices are up as well. The Fed has destroyed those on fixed income.

The Fed already has a dual mandate. A dual mandate is stupid enough in and of itself. The reason is the Fed can control at most one variable at a time. For example, the Fed can defend an interest rate target but it then loses complete control over money supply. It can target money supply but lose control over interest rates.

The Fed cannot do a damn thing about jobs other than indirectly. Now Romer appears to seek a triple mandate that is quite frankly economically impossible.
How Economic Incompetents Rise to Fame and Power

Inquiring minds may be asking “How the hell did such a blazingly incompetent economist ever get picked to Chair Obama’s Council of Economic Advisers and why is she on Obama’s Economic Recovery Advisory Board?”

Those are excellent questions. The snide answer would be to place the blame on Obama. However, President Bush also had incompetent economic advisors.

The answer is more fundamental. Romer was picked precisely because she was incompetent, not in spite of her incompetence. She says the things government wants to hear.

  1. We need to print more money
  2. We need to spend more money
  3. We do not need to worry about debt
  4. The “Free Lunch” exists
  5. Government is the savior

In short, Romer preaches exactly what presidents want to hear.

I added to my list above one of the biggest Orwellian statements in history: Nancy Pelosi said “We have to pass the health care bill to see what’s in it.” (YouTube Video)


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