Report on the Euro for December 5, 2011
1) … Introduction
The proposed EU Leaders’ Fiscal Compact is designed to assure the survival of the Euro as a currency and establish the EU as a stability union. It is said to enshrine a budget balancing rule in national constitutions. Fate is inexorably moving the Eurozone towards a political union where seigniorage, that is moneyness, will come via diktat.
2) … Merkel and Sarkozy will reveal their Eurozone economic governance plans on Wednesday.
Catherine Bremer of Reuters reports The leaders of France and Germany agreed a master plan on Monday for imposing budget discipline across the euro zone, saying the EU treaty will need to be changed in the search for a sweeping solution to its debt crisis. President Nicolas Sarkozy and Chancellor Angela Merkel said their proposal included automatic penalties for governments which fail to keep their deficits under control, and an early launch of a permanent bailout fund for euro states in distress.
"What we want with the chancellor is to tell the world that in Europe the rule is that we pay back our debts, reduce our deficits, restore growth," Sarkozy told a joint news conference after about two hours of talks in Paris. "This package shows that we are absolutely determined to keep the euro as a stable currency and as an important contributor to European stability," said Merkel.
Confidence that European leaders will come up with a credible plan to lead the region out of its debt crisis at this week's summit lifted world stocks on Monday, with European shares hitting a five-week high. Investors and policymakers hope a summit deal on closer euro zone integration combined with strict deficit reduction measures by heavily indebted states will induce the European Central Bank to act decisively to stop contagion on bond markets.
Sarkozy and Merkel said they would send off their plan on Wednesday, in time for a make or break European Union summit on Friday.
If countries such as euro outsider Britain blocked a treaty change at 27, the euro zone would proceed with an agreement among its 17 members open to all who wanted to join, they said.The revised treaty would permit automatic sanctions against states that breach an existing deficit limit of no more than 3 percent of total economic output, unless a super majority of states voted against the penalty. It would also enshrine a budget-balancing rule in national constitutions across the euro zone, although they gave no detail of the proposed wording. In deference to French concerns about sovereignty, they agreed the European Court of Justice could rule on whether euro zone states had implemented the fiscal rule properly in national law, but would not be able to reject national budgets.
Markets reacted enthusiastically, with the yield on Italian two-year bonds plunging 85 basis points to 5.78 percent. This was far below the yields of over 7 percent last month, levels at which Greece, Ireland and Portugal had to take international bailouts. But unions immediately called a strike to protest against the "Save Italy" package, while Monti urged the ECB to play its part in the wider drive to restore investors' faith in euro countries' ability to repay their debts. Ireland imposed further spending cuts in an austere budget on Monday, accounting for nearly 60 percent of next year's 3.8 billion euros fiscal adjustment. ECB chief Mario Draghi has signaled that a "fiscal compact" produced by the euro zone governments could nudge the bank to act more decisively on the crisis.
3) … The Eurozone is inexorably moving towards a political union.
3A) … Mike Mish Shedlock quotes leading European Federalists as he writes Germany Needs to Exit EMU.
Romano Prodi, EU Commission President in Interview in the Financial Times, April 1999 said "[My] real goal [is to draw on] the consequences of the single currency and create a political Europe."
Romano Prodi, EU Commission President, speech to European Parliament, 13th October 1999: "We must now face the difficult task of moving forward towards a single economy, a single political entity... For the first time since the fall of the Roman Empire we have the opportunity to unite Europe."
Romano Prodi, EU Commission President. Financial Times, 4 December 2001: "I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created."
Wim Duisenburg, President of the European Central Bank. Date uncertain. Note the choice of words "was always meant to be", which communicates a false inevitability: "The process of monetary union goes hand in hand, must go hand in hand, with political integration and ultimately political union. EMU is, and always was meant to be, a stepping stone on the way to a united Europe.
Mr Shedlock writes, Germany must at last decide. It is a horrible choice. My sympathies go to the German people who were never given a vote on this ensnarement and infeudation of their peaceful country, and who were egregiously deceived by their own leaders, and who cannot now begin to understand why they suddenly are target of such furious and venomous global criticism. The Germans too are victims of this ruinous project, the greatest victims of all. Their elites have led them into a diplomatic and economic Stalingrad.
Germany cannot unwind the clock. It did take the fateful step of joining monetary union, and from that awful error follows a string of strategic imperatives.
As the wise professors warned at the time, EMU would lead ineluctably to full fiscal union because an orphan currency would not endure without an EU Treasury and government to back it up, but it would a fiscal union accountable to nobody, because no European democracy exists, or can exist. It would lead to debt pooling and shared budgets. It would lead. fatally, to loss of the Bundestag’s sovereign powers to tax and spend. The core functions of parliament would slip away to EU mandarins. It would lead to the emasculation of Germany’s exemplary post War democracy. It would lead in essence to the abolition of Germany as a nation state, even if the window flowers remained in place.
Otmar Issuing, Chief Economist of the German Bundesbank Council, 1991: "There is no example in history of a lasting monetary union that was not linked to one State." John Major, British Conservative politician, Prime Minister 1991-1997, widely viewed as a failure and famous mainly for calling Eurosceptics bastards and shagging Edwina Currie. November 1996: "A single currency is about the politics of Europe. It is about a Federal Europe by the back door."
It must either immolate itself and dismantle the Bismarckian state for the cause of EMU, or prepare to finance an orderly withdrawal from monetary union (with the Finns, Dutch, and Austrians) so that the South can breathe again and hope to recover. That is the choice. All else is can-kicking, denial, obfuscation, muddle, and self-delusion. As is now becoming obvious, the failure to resolve the matter one way or the other is becoming a danger to the global financial system. It threatens to uncork a global depression. Germany must at last decide. However, the Deutschmark would be a credible currency right off the bat. That makes it less disruptive for Germany to leave rather than Greece, Portugal, and Spain to leave. Those countries have no credible currencies to go back to.
3B) ... Fate is effecting a coup d etat in the Eurozone for regional economic government
In respectful comment to Mr. Shedlock, I relate that Germany’s choice was has already been made. Out of sovereign armageddon, a credit bust and banking system breakdown, fate will direct that a New Europe will emerge, and that it will be based upon intergovernmental compacts where EU Leaders meet in summits and announce regional framework agreements, that waive national sovereignty and establish regional economic government.
A number of EU nation states lost their debt sovereignty when their interest rates soared above six percent. And the European Financial Institutions, EUFN, are insolvent, as is seen in the coordinated move by world central banks to provide dollar swaps. Given that both the EU nations and their banks are insolvent, the seigniorage of fiat money has ended, and the seigniorage of diktat has commenced as is seen in technocratic government being established in Greece and Italy.
Not by any human action, but rather, at the appointed time, fate will open the curtain, and the Sovereign, Europe’s Leader, and the Seignior, Europe’s Banker, will step onto the world’s stage to rule the Beast regime of Neoauthoritarianism, as it rises from the profligate Mediterranean Sea countries. This behemoth of regional global governance and statism has seven heads, symbolic of mankind’s seven institutions, and ten horns, symbolic of its governance in the world’s ten regions.
A collapse of sovereign debt and the world’s banking system is imminent. And out of this crisis, a New Europe, whose sovereign authority comes from the 1974 Clarion Call of the Club of Rome for regional economic government, will provide a degree of economic security for corporations and governments; and the people will be amazed, and place their confidence, faith and trust in the seigniorage of diktat.
4) … Today’s financial market report
World stocks, VT, ACWI, VSS, EWX, EEM, BIK, rose today; but Reuters reports the day's rally was dampened by news that Germany and other top rated European nations could see their credit ratings cut. The soon coming downgrade of the top rated core EU Nations is long overdue as they are involved in a debt union with their periphery peers. The interest rate on sovereign debt paid by the PIIIGS suggests that they are insolvent sovereigns and this definitely justifies a down grade of the top rated European nations. The periphery nations do not have the ability to pay the interest and principal on their loans; they have lost their debt sovereignty. And have to look to the seigniorage of the core nations, for seigniorage, that is moneyness. The periphery dependency is the reason for the drive for the New Europe.
James Wood writes in Seeking Alpha A European Banking Disaster Is Inevitable. Commercial bank issues can and will explode independently of the sovereign issues. It is the commercial banks that will probably be the real tipping point into the explosive consequences. Generally speaking the press has not picked up much of this. MF Global seems to be treated as an isolated case, but it is merely first of many liquidity and solvency bank problems to come, probably very soon. Four interrelated issues make the commercial bank and other private financial companies’ problems what is so immediate and explosive: 1) customer withdrawals of their deposits in their national banks; 2) lenders’ unwillingness to make loans to other banks perceived to have problems; 3) bank’s inability to raise significant new amounts of capital; and 4) the unwillingness of the citizens of the country with problems to accept the sacrifice that is required to put country accounts into order. The problems with European unions will be a particularly critical factor in preventing viable solutions to the sovereign debt imbalances, which in turns leads to the crisis for the commercial banks.In summary, there are four powerful reasons why there will be no ECB bonds or guarantees to solve the current European bank problems. The problem will progress from the Southern European banks to the Northern European banks.
Commerzbank is Germany’s second largest lender. It was part of the European Wall Street that financialized and securitized all kinds of toxic financial instruments. Today, the Telegraph reports Commerzbank In €600m Buy Back To Avoid Nationalization
The attractiveness of EFSF bonds as an investment will be jeopardized by the forthcoming downgrade. The soon coming death of the EFSF means EU leaders can no longer pin their hopes on using the monetary authority as a resource to keep the European sovereign debt crisis from spreading. Shaun Richards writes Greece’s Fiscal Numbers Decline Further Whilst Standard And Poors Threats Further Handicap The EFSF.
Small cap value, RZV, rose on on rising stockbrokers and dealers, IAI, small cap materials, PSCM, and on small cap revenue, RWJ.
Sector leaders today included CHIM, COPX, ALUM, URA, KOL, REMX, MXI, EMMT, WOOD, SLX, OIH, IEZ, XES, XOP, PSCE, ITB, XHB, IYM, EMMT, IHI, FAA, SMH, XSD, IWM.
Regional and country leaders, today included, EZU, VGK, EPP, EWI, EWP, EIRL, EWZ, EWA, EWD, EZA, TUR, EWN, EPOL, EWY, RSX, ARGT, EWW, FXI, EIS, THD, VTI, EWO, EWJ, EWN, CEE.
Financials EUFN, XLF, IXG, KBE, IAI, KCE, CHIX, RWW, RWJ, QABA, EMFN, FGEM, KRE,rose. Nicholas Financial, NICK, and Advance America, ACA, led most of the credit industry stocks, seen in this Finviz Screener, higher. Most of the banks seen in this Finviz Screener rose.
Risk was on, drawing Junk bonds, JNK, and Leveraged Buyouts, PSP, Higher.
Transportation, IYT, Industrials, IYJ, XLI, Shipping, SEA, Airlines, FAA, and Railroads seen in this Finviz Screener, rose ….. Automobile Stocks, VROM, CARZ, Vehicle Parts Manufacturers, seen in this Finviz Screener, rose strongly as did Automobile Retailers seen in this Finviz Screener ….. Construction, Enviornmental, and Industrial Stocks seen in this Finviz Screener rose. Industrial Electrical Equipment Manufacturers, seen in this Finviz Screener rose.
Commodities, DBC, and USCI, as seen in this Finviz Screener, turned lower, on lower base metals, DBB, and Natural Gas, UNG, plummeted.
Dislocation out of the Milton Friedman Free To Choose floating currency regime has caused the greatest disinvestment out of these country stocks EZA, EPU, RSX, EWI, INP, EWZ, ARGT, ECH, EPOL, EIS, TUR, EWO, … as well as out of these basic material stocks FCX, VALE, BHP, CLF, AA, SCCO, POT, CF, RIO, BVN, SQM, ACH, MXI, MCP … as well as out of these basic material ETFs EMMT, MXI, CHIM, COPX, ALUM, IYM, XLB, URA, KOL, SIL, XME, REMX, WOOD, SLX.
Israel has paid a price for its money printing and for being a country experiencing hot money inflows. It is experiencing debt deflation, that is currency debasement of the value of its stocks, which are traded by the ETF EIS. And Robert Wenzel in post Central Banking and Israel communicates that people in Israel are protesting about the cost of disruption caused by the fiat money system.
Gary of Between The Hedges reports of extreme credit stress as well as bank insolvency. “The TED spread continues to trend higher and is at the highest since June 2009. The 2Y Euro Swap Spread is near the highest since Nov. 2008. The 3M Euribor-OIS spread is very near the highest since March 2009. The 3M EUR/USD Cross-Currency Basis Swap is still near the worst since November 2008. The Libor-OIS spread is the widest since June 2009, which is also noteworthy considering the equity surge off the recent lows.” These metrics suggest that banks are facing a financing freeze.
Gary of Between The Hedges relate that Economic Daily News reports China Steel, Baoshan Ask Iron-Ore Firms to Cut Prices, Edn Says. China Steel Corp. and Baoshan Iron & Steel Co. have asked iron ore producers, including Vale SA, BHP Billiton Ltd. and Rio Tinto Group, to cut iron ore prices by 23% to lower costs. The steelmakers also asked iron ore supplies to cut deliveries by 20%. Today,
VALE, rose 3%, BHP, rose 2% and RIO rose1%.
Upper Michigan Source reports Six Hundred Employees At Cliffs Natural Resources To Be Laid Off The news came early on Monday, after one of the company's five customers announced a shut down of a blast furnace for maintenance in 2012. As a result, the company projects 2.7 million tons of ore for 2012, just over half of the 4.6 million tons produced in 2011. According to Cliffs, employees at the Empire Mine will be affected during the maintenance period, which could take several months. The company employs a total of 1,800 workers."They're actually taking one of the blast furnaces down and doing some maintenance on it and from time to time, that has to be done just live every other facility," said Dale Hemmila of Cliffs Public Affairs. "Generally the blast furnaces can last quite a long time without the maintenance, but eventually it has to be done." CLF rose 4% today.
Bloomberg reports Euro Erases Gain Against Dollar on Reports of S&P Moves on Credit Ratings. The euro erased gains against the dollar after a report that Standard & Poor’s plans to put Germany, France and other European nations on “creditwatch negative.” The 17-nation currency rose earlier after France and Germany said they want a rewrite of the European Union’s governing treaties to tighten economic cooperation in the region. FT reported the credit ratings company would release a statement later today. “The S&P warning is having an impact,” said Boris Schlossberg, director of research at online currency trader GFT Forex in New York. “This all speaks to the ultimate truth that the European policy makers are unwilling to recognize that the only way to solve this crisis is federal euro-bonds.”
Bloomberg reports Commodities Signaling Economic 'Trouble Ahead': Chart of the Day. Diverging commodity indexes may signal "more trouble ahead" for the world economy as they repeat a pattern seen in the slump of 2008, Commerzbank AG said. The Commodity Research Bureau/Reuters U.S. Spot Raw Materials index fell 1.5% in the past two months, as the S&P GSCI index of 24 exchange traded items rose 11%. The CRB index covers 13 goods from steel scrap to burlap and wool that aren't exchange traded and so less likely to be affected by financial investors.
Bloomberg reports India Fertilizer Demand May Drop on High Prices, Cutting Imports. Fertilizer consumption in India, the world's third-largest potash importer, may tumble for a second year as rising prices of the soil nutrients deter farmers, cutting overseas purchases. Consumption of di-ammonium phosphate and potash may drop as much as 35% in the year starting April 1, compared with normal use of about 15 million metric tons, said U.S. Awasthi, managing director of the Indian Farmers Fertiliser Cooperative Ltd., which represents 55 million farmers. Demand this year is seen falling as much as 25%, he said.
Business Insider reports India's Economic Decline Is One Of The Most Under-Reported Stories This Year.
Ireland is the poster nation for imposition of austerity measures. Agence Franc Presse reports Ireland Braces For Fresh 2% VAT.
The NYT reports The Secrets of the Bailout, Now Told. And Elliott Spitzer writes in Salon A Secret Scandal. The government and the big banks deceived the public about their $7 trillion secret loan program.
My Budget 360 reports on The 1 Trillion Dollar Student Lending Moral Hazard. In 2000, student debt was roughly $200 billion.; today it is above $960 billion. And reports Student Enrollment Soared 225% In The Last Decade.
Business Insider reports Central Banks Dollar Liquidity Only Prolongs The Euro Debt Crisis. And risk adviser Christopher Whalen is not impressed that the Fed is taking euros as collateral as he communicates in the American Public Media article Borrowing Europe's Debt Troubles. The world's biggest central banks have agreed to make it easier, that is, cheaper, for European banks to get dollars. They've done so in the hopes that that will unstick the gummed up credit markets over there. What if there's no euro a year from now? You just had the U.K. tell its banks yesterday to prepare for the end of the euro. So the Fed could be holding worthless currency, and the Europeans may just default as they have before. Not only that, should the euro tank, the Fed might not even be able to sell its euros. So says Frederick Sheehan, the author of several books on the Fed. He's suspicious of the Fed's reassurances that we'll hold euros for whatever dollars we swap with the European Central Bank. The real impact on consumers is higher inflation. And the cost is going hit you right in the pocketbook, in terms of what your dollar can buy.
5) … The seigniorage, that is moneyness, of the fiat money system is failing … The seigniorage of diktat is commencing.
Stoneleigh of The Automatic Earth writes Inflationism Turns Into Destructionism ... The Failure of Moneyness Commences Deflation The extension of credit through the shadow banking system removes the semblance of central bank control over monetary expansion. Securitization and financial innovation also create putative wealth from thin air, using underlying collateral to derive layers of additional illusory value. In this way, excess claims to underlying real wealth are created. The connection between the rapidly expanding virtual worth of the derivative instruments and the real value of the underlying collateral becomes ever more tenuous.
This is - the proper definition of - inflation : an increase in the supply of money plus credit relative to available goods and services. In times of speculative mania, when people no longer care what they pay for something on the grounds that someone else will always pay more, and money is being created with abandon in order to satisfy the acquisitive impulse, credit hyper-expansion constitutes inflation on a massive scale.
Expansion is the only reality many of us have known, hence it is no wonder we imagine it can be a permanent condition.
As John Rubino wrote, credit gains 'moneyness' as during periods of ponzi finance, creating excess claims to underlying real wealth:
As the global economy expanded without a hic-up, more and more instruments came to be used as a store of value or medium of exchange or even a standard against which to value other things—in other words, as money.
Thus mortgage-backed bonds and even more exotic things came to be seen as nearly risk-free and infinitely liquid....credit gained "moneyness," which sent the effective global money supply through the roof.
This in turn allowed the U.S. and its trading partners to keep adding jobs and appearing to grow, despite debt levels that were rising into the stratosphere. For a while there, borrowing actually made the world richer, because both the cash received and the debt created functioned as money.
In the process of credit expansion, we borrow from the future through the creation of debt. Our focus on virtual wealth has very significant real world effects, as it distorts our decision-making in ways that guarantee bust will follow boom. We bring forward tomorrow's demand to over-consume today, frantically building out productive capacity in order to satisfy that seemingly insatiable demand.
As money supply increase leads the development of productive capacity during this manic phase, increasing purchasing power chases limited supply and consumer prices rise. Increasing virtual wealth also drives up asset prices across the board, strengthening speculative feedback loops that inevitably strain the fabric of our societies, all too easily to the breaking point.
However, concern about the inflationary trend continuing into the future is misplaced. That is where we have come from, but it is not where we are going. Simply extrapolating past trends forward is tempting, but does not constitute meaningful analysis and has no genuine predictive value. It is far more important to be able to identify coming trend changes and to understand where these will lead.
Decades of inflation lie behind us. It is deflation - the contraction of the supply of money plus credit relative to available goods and services - that lies ahead. The threat we are facing is the rapid and chaotic extinguishing of the myriad excess claims to underlying real wealth created during our thirty years of credit hyper-expansion. The greater the scale of the credit expansion, the greater the effect of bringing demand forward during the boom years, and the greater the crash thereafter. With little demand, there is no price support at anything like previous levels, so prices also fall and remain low, potentially for years, as we saw in the depression of the 1930s.
When a credit expansion reaches the point where the debt created can no longer be serviced by a hollowed-out real economy, and the marginal productivity of debt becomes negative, continued growth is no longer possible. The Debt Saturation Phase commences and Money Contracts.
The process of monetary contraction following a ponzi expansion is implosive because it involves the destruction of virtual value - the fairly abrupt realization that the emperor has no clothes. A pertinent analogy is that of a giant game of musical chairs where there is only one chair for every hundred people playing the game. Imagine what happens when the music stops. A few will be lucky and secure a chair. The rest represent excess claims, and those claims are then extinguished.
Credit only functions as a money equivalent during times when the suspension of disbelief can be maintained. Once confidence is lost and a toxic combination of fear and suspicion takes hold, a pile of human promises that obviously cannot be kept ceases to hold the illusion of substance. At that point one can expect is significant contraction in the scope of what constitutes money.
No market moves only in one direction. The tug of war between greed and fear, and consequent ebb and flow of confidence, mean that the scope of what constitutes money can demonstrate periods of reflation as suspension of disbelief temporarily reasserts itself. The two year sucker rally from March 2009 saw the monetary contraction process reverse temporarily, and a number of factors resumed trajectories characteristic of the expansion years.
As we have said many times, rallies are kind to central authorities, because the supportive psychology of a rally, complete with suspension of disbelief, allows their actions to appear effective, temporarily. Stimulus packages seemed to achieve the desired ends, at least in terms of elevating the markets, suggesting that we were facing a relatively simple problem with a straightforward solution.
A dangerous perception has developed that central bankers are so much wiser and better informed than their predecessors in other times and places, that the lessons of the past have been learned and the pitfalls of the past avoided. This is of course the height of hubris. If a predicament such as this could be so easily resolved, then there would be no similar crises in the historical record. We cannot simply assume that previous central authorities were blind, ignorant, unimaginative or disinterested in self-preservation.
Now that the downtrend has reasserted itself with a vengeance, the supportive psychology of a rally no longer exists. Confidence is ebbing again, and fear is sharply in the ascendancy. We can already see how ineffectual the actions of central authorities are under such circumstances. Everything they do is too little, too late, and every failed attempt to stem staunch the financial hemorrhage only makes them look more desperate, which undermines confidence further in a vicious circle.
Europe is leading the contraction this time, providing a telling example of the powerlessness of central authorities in the face of a collapsing credit ponzi. The stability fund (EFSF) was originally to be €220 billion, but it was obvious long before that was agreed that €220 billion would be grossly insufficient.
Agreement , at the expense of the Slovakian government, was obtained to increase the fund to €440 billion, but by this time there were already public discussions of the need to leverage the fund by a factor of five.
A further agreement to extend the facility to a trillion euros was already behind the curve, as it was common knowledge that at least €2 trillion would be needed, and that would cover only Greece. Clearly, several other members of the eurozone would require the same treatment, and there is no provision for their difficulties.
At the heart of the problem lies the loss of money equivalence of credit instruments previously seen as risk free. As 'moneyness' is lost, the effective money supply contracts, and does so very rapidly. This is deflation by definition.
CNBC's John Carney explains It’s easy to miss the contraction of the money supply because it involves a destruction of financial assets that we do not usually think of as "money" but that, in fact, operate as money — or did until relatively recently. The fundamental characteristic of modern fiat money — as opposed to commodity-based money under a gold standard — is that it serves as a medium of exchange. This means dollars or euros, for example. Basically, the local currency.
Within the banking system, however, other financial assets also serve as money. These assets can be used to meet margin calls, collateralize obligations, and make payments. U.S. Treasury bonds are the most obvious example of this kind of money-equivalent financial asset. The U.S. government recognizes the equivalence of Treasury bonds and dollars within the banking system by not requiring banks to hold any reserves against the bonds. They are counted as "cash or cash equivalents" on balance sheets of U.S. public companies.
Over in Europe, sovereign debt issued by euro zone nations also served as a money-equivalent inside the banking system. Banks were not required to hold reserves against sovereign debt. They used them as collateral for obligations, and made inter-bank payments with sovereign bonds. The bonds were, in short, as good as euros.
When the markets turned against nations like Greece and Italy, the cash-equivalency of their bonds came into doubt. It was obvious that they could lose value, and quite rapidly. The debt could no longer be used as collateral, except at extreme discounts.
The discounting of sovereign debt, then, meant that there was less money in the European banking system. If a one million euro bond previously held as a money-equivalent is now worth just 600,000 euros, the holder has lost 400,000 euros. Multiply that across the banking system, and you have millions of euros of money-equivalents simply vanishing.
It is exactly as if some paper-eating plague just started rotting physical euros. The money supply of Europe is vanishing.
Over the next year and beyond, we will discover what credit crunch really means. It is an economic seizure, and its effect is devastating. Credit in its myriad forms represents the vast majority of the money supply, and it is about to lose its money equivalency. This will leave only cash, and that cash will be extremely scarce.
Aggravating the effect of crashing the money supply will be a substantial fall in the velocity of money, meaning that money will largely cease to circulate in the economy as people hang on to every penny they can get their hands on.
Money is the lubricant in the engine of the economy in the way that motor oil is the lubricant in a vehicle engine. Attempting to run any kind of engine with insufficient lubricant will result in that engine seizing up.
Without the monetary exchange that we have built into our system at every level, it will not be possible to connect buyers and sellers, producers and consumers.
Nothing moves in an economic depression. This is the polar opposite of the frenetic activity of the inflationary boom years. Instead of the orgy of consumption to which we have become accustomed, we will experience austerity on a scale we cannot yet imagine.
Demand will evaporate, not because people do not have wants, but because they will lack the purchasing power to turn those wants and needs into consumption. Demand is not what we want, but what we can pay for.
We will be looking at falling prices as lack of demand undercuts price support, but because purchasing power will be falling much more quickly than prices, everything will become far less affordable, even as prices fall. As a much larger percentage of the much smaller money supply begins to chase essentials, those will receive relative price support, and will be the least affordable of all.
We must prepare right now for the onset of a long period of deflation and depression. Many people are reluctant to make preparations until they see the roof on fire, but by then it will be too late to take action.
To reiterate the advice TAE has been offering since its inception - hold no debt, hold liquidity in order to maintain freedom of action, gain some control over the essentials of your own existence, and build social capital in your own communities.
There is no time to waste in securing what you have, under your own control to the greatest extent you can manage. The future is at our doorstep, and it does not look like the past as we have known it.
Stoneleigh of The Automatic Earth uses the word moneyness which is the same as seigniorage, which has a number of definitions. Seigniorage is defined as moneyness; The ability to create money, or increase value of a stock, bond or currency; The ability of sovereign authority to create currency; The difference between the face value of money and its cost of production; The right of the lord to coin money; A stamp upon, mark, or etching in, that declares value and purchasing power or economic exchange.
Synonyms for seigniorage include value, monetary worth, desirability, price, utility.
Four examples of the use of the word seigniorage follow.
Insolvent sovereigns cannot govern. Greece and Italy having lost their debt sovereignty, now lack seigniorage, the ability to create money. And Spain has lost its debt sovereignty and lacks debt seigniorage as well as the interest rate on its 10 year bond has risen above 6%. The periphery nations cannot spend what they do not have. They are without fiscal spending resources, and have to depend on the sovereign authority of a Euracracy, that is the EU ECB Troika. The seigniorage of freedom is fiat money is history, and the seigniorage of diktat has commenced. And it is mandating expansionary fiscal contraction as we seen in reports of the presentation of the Greek and Italian budgets.
In a world of credit evaporation, credit will come via regional stakeholder bodies, that lend to companies deemed essential to the well being of the region. Structural reforms, such as austerity measures, pension overhauls, reworked national wage contracts, as well as bank nationalizations, and debt servitude will be de rigueur. In as much as the EU is characterized by failed nation states, moneyness will come by diktat. The seigniorage of diktat may provide dole for the fiscal spending of former nation states, as all will be vassal states existing in a totalitarian collective. Totalitarian collectivism will be the way of life for all in the Euro zone.
The euro has been undermined by the region’s sovereign debt crisis, while the Swiss franc and yen have fallen as their governments buy billions of dollars to weaken them. Yes, the seigniorage of the Euro, FXE, has fallen as fears of sovereign insolvency and bank insolvency have increased. A flight to perceived safety in US Government Debt has given seigniorage to ETFs such as EDV and TLT. An inquiring mind asks, is the rise in M2, nothing more than a flight to safety in US Treasuries held at the Federal Reserve? Is the rise in M2 inflationary? or is the rise in M2, simply a rise in the notational value of US Government debt, trade by ETFs, such as ZROZ, EDV, TLT, IEF, and SHY? Is it not reasonable that the rise in M2 money is reaching a peak?
A collapse of sovereign debt and the world’s banking system is imminent. And out of this crisis, a New Europe, whose sovereign authority comes from the 1974 Clarion Call of the Club of Rome for regional economic government, will provide degree of economic security for corporations and governments; and the people will be amazed, and place their confidence, faith and trust in the seigniorage of diktat.