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Thoughts from the Frontline

Waving the White Flag

May 12, 2012

Choose your language

A common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools.

- Douglas Adams, The Hitchhiker's Guide to the Galaxy

For quite some time in this letter I have been making the case that for the eurozone to survive, the European Central Bank would have to print more money than any of us can now imagine. That the sentiment among European leaders was that they were prepared for such a move was clear – except for Germany, which is haunted by fears of a return to the days of the Weimar Republic and hyperinflation.

When Germany agreed to a fixed monetary union and a European Central Bank, it was with the clear understanding that it would be run along the lines of the German central bank, the Bundesbank. The members of the Bundesbank and the German members of the ECB were most outspoken about the need for a conservative monetary policy that would keep a clamp on inflation.

However, as I have previously noted, the Bundesbank was a toothless tiger. Germany has two votes out of 23 on the ECB, and the loud drumbeat from most of Europe, which is experiencing the difficulty of austerity accompanied by too much debt, is for a far more accommodating ECB.

The simple fact is that Mario Draghi, the Italian president of the ECB, created €1 trillion euros to help fund European banks, which promptly turned around and bought their respective countrys' sovereign debt. Germany's Angela Merkel forced the Bundesbank to "play nice" and go along with what was seen as the only way to solve a growing banking crisis in Europe. Everyone breathed a sigh of relief, thinking that this at least bought a year during which things could be sorted out. But it turns out that a trillion euros just doesn't go as far as it used to. The "relief" lasted about a month. The last few weeks have presented yet another budding crisis, as least as large as the last one. Where to get the next trillion?

This week the German Bundesbank waved the white flag. The die is cast. For good or ill, Europe has embarked on a program that will require multiple trillions of euros of freshly minted money in order to maintain the eurozone. But the alternative, European leaders agree, is even worse. Today we will look at the recent German shift in policy, why it was so predictable, and what it means. This is a Ponzi scheme that makes Madoff look like a small-time street hustler. There is a lot to cover.

At the end of the letter I will mention a few upcoming speaking engagements, in Atlanta, Philadelphia, and a webinar I will be doing next week. Now let's jump over to Europe.

Waving the White Flag

It is the world's worst-kept secret: Germany does not want inflation but wants to abandon the European Union even less. And as we will see, the eurozone simply does not have enough money to keep itself together without massive ECB intervention.

"Cry havoc," wrote Shakespeare in Julius Caesar, "and let slip the dogs of war." The military order "Havoc!" was a signal given to the English military forces…

Discuss This


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Jari Searns

May 15, 2012, 9 a.m.

Jari Searns

Dear John,

Your article as usual was thoughtful and thought provoking…watching the “soap opera” that is the EU makes one wonder about the ultimate viability of our own country as we move faster and faster toward a socialistic form of government, an increasingly uninformed population and a society interested more in “what’s in it for me” rather than “what can I do to make my life better and my fortunes more successful”.  Are we destined to follow in the footfalls of the European community?  I certainly hope not…it would be a tragic legacy for our children and grandchildren…

Eloise Burke

May 14, 2012, 12:02 p.m.

Why is Mrs. Merkel thought to be so determined to remain in the club?  Are all Germans of the same mind?

Alberto Covin

May 14, 2012, 3:38 a.m.

The sentence “Spain has â?¬332 bln liabilities to the ECB” is not correct, since there is a pledge (i.e. bonds) as a collateral; in other words you cannot use it as banks’ debt vs ECB and at the same time as a debt of the country. Of course this does not change the general awful picture.

Alan Harris

May 13, 2012, 8:32 a.m.

Several commentators seem to ask…Who will pay for this? It’s the people dummy. They are each country’s shareholders so they’ll have to take the hit. It will come by way of inflation rendering cash savings and pensions devalued to near non existence.
Then someone asked John to turn his focus from Europe to the effects elsewhere (USA I assume). If Europe devalues to encourage more exports and gain growth, others are bound to contract, their industry will shrink, stock will lay in the warehouses, jobs will be lost, so other countries will also have to experience inflation/devaluation (or trade barriers). Their people will pay too. Its a spiral that will search for an eventual bottom.
So how to protect your savings…..invest in essentials. But with so much spare production worldwide and everyone cutting costs to the bone looking for a bigger slice of the limited cake, what will be essential? Answers below please.

Richard Sackler

May 13, 2012, 7:07 a.m.

Until now, you seemed to hold the view that the â?¬ would spin apart in some way more drastic than Greece departing.  This week, you say the Germans have given up on moand that they will allow the ECB to print â?¬ by the trillions. The macro impact is huge.  What will the earliest first order impacts be felt and seen?  Would you please soon comment on the implications of this view.