The Markets are Holding a Gun on the ECB Demanding Quantitative Easing
Posted by Michael A. Kamperman on May 4, 2010
The Chancellor of Germany has misplayed her hand. In a deference to domestic politics she has allowed Greece to twist in the wind demanding tougher and tougher concessions. The markets have figured out under the microscope of daily careful observation that Greece cannot repay its euro denominated debts if it falls into a deflationary depression. Neither can Portugal. Neither ultimately can Italy, Ireland, or Spain. Neither can most other debtor nations that lack the ability to print money. The grand scheme to bring Greece to its knees begging for mercy has back-fired. At this point the European Central Bank (ECB) either starts a quantitative easing program focused on printing money and purchasing the government debt of all member nations, including Greece, or the euro will implode as an unworkable currency. The risks go far beyond economics. A withdrawal from union will push Europe back to nationalism. That hasn’t worked out so well over the last millennium. It will be highly ironic if the ECB is pushed into quantitative easing when they have resisted kicking and screaming up until now. Hopefully we have all learned never say never.
Make no mistake there is no other way out of the global debt-induced deflationary depression but to print money. Tonight the head of the ECB Trichet is staring at the cold hard facts. But we in America should not be smug. Our states are imploding over the same forced austerity that Greece and the other too deep into debt nations are facing. We need to stop worrying about the deficit and we need to start worrying about our children who are being crammed into classrooms where budgets take precedence over learning.
We have reached the point globally where the rubber meets the road. There is no more opportunity to sweep the dust under the rug. The Maginot Line the Europeans set up to stop the Greek debt crisis from advancing has been breached. The only question is does the ECB have the guts to stand up to the failed policy of austerity? I don’t know the answer. But we will find out on Thursday when the ECB meets. When the Fed stopped quantitative easing it was inevitable the dike would spring a leak from the weakest points. It turns out the weakest point is Greece. But once a dike springs a leak the next weakest point usually pops due to enhanced pressure. That point has been Portugal. Unless the leaks are plugged soon the whole dam could burst causing a Lehman style credit crisis. President Bush was forced to back away from his free market ideology when Lehman imploded. The ECB is now faced with the same Faustian bargain. Hopefully President Obama is paying attention and will back away from his ill conceived and contrived Deficit Commission.
