I don’t know why but when I watch the drama of the euro crisis unfold my mind wanders to a scene in “Nashville” about a “country girl” who got a gig to jump out of a cake at a function, and didn’t quite understand what was supposed to happen next. I can’t help thinking that at some point in this whole sad scenario someone will have to stand naked.
Almost everybody agrees that the only way to resolve the eurozone debt crisis in an orderly fashion is for the central bank to print somewhere between one and two trillion euros so as to allow Italy and probably France, plus any little piggies who promise to be good, to roll over their sovereign debt, plus perhaps to spoon-feed out ten billion here and twenty billion there as an occasional treat for all the little Miss Piggies who can’t collect enough taxes to keep their show on the road, but are “trying their best.”
That could be done by sleight of hand, just getting the ECB to run the presses, or by selling AAA rated euro bonds just like the U.S. Treasury sells recently downgraded U.S. Treasuries (mainly to the Fed).
And that would at least buy the time to sort out the combination of fraud, creative accounting, and delusional incompetence that caused the panic in the first place. The option is that the euro is no more.
The problem is the European Central Bank can’t just run the presses, Germany made sure of that at the Treaty of Lisbon.
Leaving aside the insanity of designing a central bank for a new-fangled fiat currency, without a helicopter, even if the politicians decided that it was in the best interests of the eurozone and the euro to authorize a helicopter-drop, they can’t, because that decision would need to be made in the German equivalent of the Supreme Court. Plus they would need to get around a system of checks and balances in Germany that was set up to make absolutely sure a lunatic like that excitable little chap with the moustache, could never corrupt the system and grab power again.
Meanwhile the hyper-inflation crowd is streaming out of the woodwork complete with selective amnesia of their silly warnings in 2009 about the how the $2 trillion that Ben Bernanke dropped out of the sky was going to cause the end of the world, except it didn’t. There we go again, Einstein said the definition of lunacy is to expect a different result when you do the same thing, that works the other way around too, they did QE in USA and also in U.K., and it worked more or less and there was no hyper-inflation because the money just sat, in the event it was nothing more than a state-sponsored accounting ruse.
Remember when Nassim Taleb said that the whole world should short U.S. Treasuries? Back then the 10-Year was 3.7%, it looks like the pesky black swan got the last laugh on that one, of course the amnesia brigade say “just you wait;” but they are beginning to sound as insane as Nouriel Roubini and his carpet-bag full of stopped clocks.
The interesting thing about what Ben did is that he just did it; he didn’t even really explain to anyone what he was doing. Sure, every now and then, he rolled up in front of some committee or other to take questions from a cross section of the fools that pass for government “experts” in USA, which he answered in riddles, and then he went back to his office and kept on printing. You can say what you like about Ben Bernanke, but you have to admit he's got style.
The problem in Europe right now is also the structure of the debt. All of the sort-of wannabe “sovereigns” in Europe hiding under the skirt of the euro, are akin to municipalities in USA, except in USA the municipalities typically offer debt secured by something, whether it’s a sewage treatment plant, or a public transport system, that has assets, which can theoretically be re-possessed, plus cash flows.
In the heady days of Europe’s most recent debt-fueled Renaissance, they skipped that step and a lot of that sort of “peripheral” debt was underwritten by promises from corrupt and/or incompetent politicians buying election-candy, and we all know how “bankable” those are once everyone wakes up from the LSD trip.
The ironic thing is that on the face of it Europe’s debt problem looks not much worse than America’s, the problem is really that they don’t have an “irresponsible” chap like Ben Bernanke who slips out the back door and prints a couple of trillion, without asking anyone’s permission, meanwhile President Obama can’t even get permission to go to the toilet ... so who runs America?
Here is a chart of Europe’s debt compared to America’s, using an exchange rate of $1.4 to a euro for comparison. It isn’t exactly apples for apples, because the nominal $30 trillion of “eurozone Bank Loans + Securities held” includes quite a lot of EU Government Debt (a lot of which is Piggy debt).
It’s quite difficult to understand eurozone debt because the way the data is presented by the ECB and euros TAT is bizarre, and there is double counting.
The U.S. data on the other hand is very clean; you can produce those lines in five minutes, all you need is SIFMA report of the value at face of securities outstanding, then the FDIC Quarterly reports (remember to subtract the securities FDIC-insured banks hold so not to double count), then you to pull out the timeline on how much the Federal Government owes in “Intra-governmental debt” which you can get from Wikipedia and Bingo! Of course those lines don’t show the situation in the “Shadow Banks,” because that’s in the “shadows,” but most people look at that as double counting anyway.
So big picture, the eurozone nominal GDP in 2010 was $12.2 trillion (that’s excluding U.K. and other EU members that don’t use the euro), their private sector debt is a tad over $30 trillion so that’s about 250% of nominal GDP, in USA that number is 240%. That’s the real story, public debt is a red-herring, and which is why I think the whole hyper-ventilation about Italy is overblown because their private sector debt is low; and the clever Italian bankers got the French and the Germans to finance their government, as in they knew the score!
The important thing is that eyeballing that chart, as predicted, eighteen months ago, the private sector is deleveraging, in both Europe and USA, and the public sector is reluctantly filling in the gap to make sure the wheels don’t fall off.
Net-net total debt as a percentage of GDP is not going up much, which is probably why there was not any sign of serious inflation, let alone hyper-inflation.
The most obvious message you get from looking at that chart is in four years (2004 through 2007), both USA and the eurozone piled on $10 trillion of extra debt, each, that’s an average of $2.5 trillion a year, that’s when the damage happened, that was when complete utter lunatics were in charge, and that WAS hyper-inflationary, then.
What’s happening now is damage control, sometimes when you been on a bender and you drank a whole bottle of vodka in an evening, the best thing to get you through the next day is a couple of shots.
Sure you can promise yourself “Never-Again”, and you mean it, from the bottom of your heart. Be that as it may, you still have to get through the day to carry you through the time the damage of the night of debauchery slowly heals and the toxins slowly get washed out of your system.
Come on Angela, what you waiting for? It’s “Hair of the Dog Time.” Don’t let your Protestant inhibitions stand in the way of taking the medicine, see how healthy and contented Ben Bernanke looks, and notice that bulge in his pocket, that’s a hip-flask, just in case he gets an attack of the trembles. Sometimes that’s all you can do, AA (Alcoholic’s Anonymous) can wait until next week.
Meanwhile, I can’t believe that the politicians will be so incompetent that they blow up the euro just because they had a bad-trip, I think a solution will be found, all I’m interested in at this juncture, is who has to stand naked?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.