Europe is in a sticky mess and Europe’s leaders are about to make yet another mistake.
The recent big story that dominated this week, was the threat of a downgrade of the credit ratings of 15 eurozone countries, including Germany and France. So what is going to be Europe’s response?
Read between the text of what some of the papers are saying and you will see what is about to happen:
“ECB President, Mario Draghi, is facing increasing pressure to stabilise the euro zone…” says the Irish Times. The New York Times Reports that The hope among many European officials is that the European Central Bank (ECB) will intervene to “ease the crisis”.
Translation?
The ECB is going to get out those heavy print cartridges and start printing money. In other words, quantitative easing. At least, that is the way I read it.
So far all the ECB has been doing is giving tough talk that they have no plans to do any quantitative easing. But I suspect that that is a mere smokescreen so that eventually when they do decide to print, it will make it appear as though they had no other choice.
We have already seen the fallacy of printing fiat currency to get us out of this mess. The Feds did that in 2009 and where has that got us? All we are doing is printing money to dig us out of a hole. It is a temporary band aid on a wound that has got gangrene.
No doubt this will buy Europe and the Euro some time. The markets have rallied since the end of November. Hedge funds are putting on risk (buying stocks) on probable expectations of the ECB’s quantitative easing.
How much time will it buy Europe? We will see. I doubt anything spectacular in the markets will happen in December, considering we are only a few weeks away from the festive holidays. I expect January 2012 is a safer bet as to when this financial mess finally unravels.
How do YOU see this crisis unfolding? Do you agree with my views? Leave me a comment below even if you disagree.
one word: hyperinflation
OK, and your suggested course of action for Europe is…
Totally agree with you but the bigger question here is, What will happen in the long run? For me its load up the landrover and head of to Wales. There is more than just a TOTAL economic collapse around the corner!! Think 28 days Later meets, 2012 meets Die Hard….basically all the worst bits of John Revelation and The Hour in the Qur’an…. Happy Day 😉
S&P has been very clear: their purpose is to force the ECB to print money.
http://www.lemonde.fr/economie/article/2011/12/07/standard-poor-s-nous-ne-sommes-pas-des-commentateurs-mondains_1614194_3234.html
Germany is trying to resist, but of course are the European leaders who are to be blamed.
Discredited rating agency should not suggest monetary policy. That’s a good topic for a blog:
http://www.huffingtonpost.com/2009/09/30/credit-rating-agency-anal_n_305587.html
How are the dollar and pound in a toilet after their QE? Pretty fancy toilet.
@tim : why have you not run to the hills of Wales long ago, when the English bank started its quantitative easing? Why would Euro QE be any worse?
Apart from that: how is the ECB is to do QE without a market of Eurobonds? It must buy up a basket of Euro sovereign debt from different countries. So in stead of only buying a fixed basket, they have the freedom to also modify the mix in the basket. Until now they’ve already, slowly, bought selected sovereign bonds with very low prices. So now might also start buying bonds of more countries, to keep some balance in this basket? What would that change? Which disasters can it cause? Nothing serious seems to have happened in the US and the UK..?
Hyperinflation will be a serious problem. The ECB is expected to cut rates today sending the Euro to another test of 1.3360. quantitative easing will devalue the currency. It gets more interesting though, Germany’s Bundesbank had a meetingto discuss the reintroduction of the German Mark. This goes well with yesterdays negative headlines from a German official stating the summit will be a disappointment and the European problem is going deeper. CNBC made a bold prediction that the Euro will be at par with USD.
USD is a safe haven, and will be for all those holding Euros
Germany will leave Eurozone. Severe recession for everyone including Germany. QE likely. Hyperinflation?
I’m argentinean and I’m a music film composer then:
I have lisent to this song ten years ago, I remember very well the end of it…. and sorry it’s not don’t cry for me dear Queen Mary.
I do not fully agree with Alessio. We are in this mess because Europe refused to let the banks failed. Capitalism is the survival of the fittest not the weakest. Why is Europe printing money? to solve the crisis not at all but because banks need money to invest in the commodity bubble.
Sooner or later, we are going to have some sort of gold standard back. Investors want to get their hands on the European gold reserves, they are going to use gold as collateral against European debts.
It is nonsense for the fxxking heavy debtors not to print money to repay their debts while they actually have no way to and have never planned to repay SINCE DAY ONE…
Almost western governments are robbers of the eastern – sell you an IOU but have never planned to give you back.
I have to say that Alessio has right… but the problem here will be much greater than printing money. In order to get out of a big recession is war. ECB will buy some time by printing money. But at the end the only way getting out from recession is a big war. This war probably will be in the name of God and i am talking about the war that is going to start between Christians and Muslims.
I agree John that has been in the works for a while now.
Second world war gave us the European Union, NATO and the United Nations (IMF,world bank,the ICC).
World war 3 is new world order (one world religion/ united religions, one world government, one financial system). In short global slavery.
I think that the global influence of quantitative easing (aka printing money which devalues the currency being printed) guarantees that the pain of the inevitable recession will be felt globally. There is no alternative. We are in a global economy whose financial regulations are decided by the interests not of a voting population anywhere, but by those financiers who stand to make the most money by the regulations they lobby for and agree to. The very narrow focus of self interest for the powerful that this promotes cannot possibly help most people, let alone most nations, to live peaceful or prosperous lives, or be free. We are already living on ‘borrowed money’ because of quantitative easing. So what’s next? Widespread currency devaluations with the economic collapse that accompanies it, as productivity slows, and a suggestion by central banks that people are given a credit ‘ration’ to ‘tide them over the worst, when in fact this will be the new method of people paying for their goods and services. It has been predicted already in the Bible that this is how the final stages of global economy will operate – before Jesus returns as the physical, not just spiritual, ruler. We can’t guarantee how to stay affluent or look after ourselves. Hunkering down will buy some time, but much better to turn to God in prayer and ask for His way.
As long as we continue to pay interest on our debt, and as long as hyperinflation is curbed by unemployment and an under-heated economy, things could conceivably remain somewhat stable, no? The bulwark of the US monetary system surely can handle a wide scale reshuffling of asset values precipitated by euro dissolution, no?
I am no expert, but I wonder if the perennial clarion calls of imminent disaster can be calmed by the new “realities” that the Fed and other central banks are manufacturing. Not that the charade of money supply manipulation is ethically defensible, but I wonder if the masters actually kind of know what they’re doing in some sense, despite the obvious fact that they are essentially shuffling numbers around and not real concrete THINGS.
Not that I don’t agree with your main points, Alessio. You’re a rock star in my book!
Hi David – Really awesome of you to call me a “rock star”. 🙂 Much appreciated. I enjoyed reading your comments on the European Crisis – they are certainly interesting and I agree with some of your points. Alessio
Alessio, as you like teaching, here is a simple story I imagined, that if you think is accurate could help you explain why europe is in a ressesion:
Imagine a isolated village some time in the past, where people trades with gold coins. One guy, the one with the safer house one day tells the others: give me the gold coins that are difficult to carry and hide and i will put them in my safe, I will give you a receipt for each coin and you can trade with my receipts.
For simplicity, let’s imagine villagers gave him 100 gold coins wich where exchanged for $100 in receipts. After a while this “banker” learned that at any given day nobody asked more than 10% of the total 100 coins deposited. Knowing that, he realised that he could lend safely up to 10 times the coins he phisically had, without the risk to run out of coins any given day.(This is called fractional reserve)
9 people asked him $100 each one day. He asked everyone a collateral and issued a receipt for $100 to each one. But they should pay $10 of interest each month. The banker was safe as 10% of $1000 was 100, and he had that amount on gold.
The next day, in the village, there where $1000 in circulation.
The first month the 9 debtors had to pay $10 of interest each, and they did, leaving $910 in circulation.
The second month the debtors manage to pay $10 each on interest, leaving $820 in circulation.
But the principal of the 9 loans where $900, so it was mathematically impossible for everyone to pay the principal. That means someone was going to bankrupt and the collaterall was going to be collected by the banker.
At that point the banker thought: If lend more money, the rate of bankrupcy is going to be lower than if I dont lend money for several months until almost everyone is broken and all the collateral is mine.
Can you guess what he did?
A recession is not a cyclic event that occurs because of fears from investors, it is an intentional contraction in the money supply by intentionally avoiding lending the money necesary to be able to at least pay the interest of loans.
Since the money introduced by this banker into the economy was enought only to pay the principal of the loans and no the interest, it is guaranteed that with the pass of time some of the debtors are going to bankrupt and the most efficient way for that to happen is to stop lending money for enought time, but before the system crashes resuming the lending and starting over again.
That is basically the way wealth is transfered from the ordinary people to bankers and how Goldamsachs rules the world.
Add some details to this fiction story and you will have real life.