Posted by Michael A. Kamperman on September 28, 2010
In yet another return to the 1930′s, a Beggar-Thy-Neighbor style global trade war has broken out. Right now the war is mainly focused on currencies, with the exception of a few trade spats between China and the U.S. Switzerland’s central bank has been intervening in currency markets all year to try and hold down the value of the Swiss Franc, which has come into great demand ala gold from Europeans trying to get out of the Euro. Japan has drawn a line in the sand and has printed money to buy other currencies to hold down the appreciation of the yen. Brazil is now saying it too will defend the Real from unwanted appreciation. The Fed’s plan to print enmasse after the election is driving down the dollar on world markets. Now, the Bank of England says it too is ready to return to quantitative easing. All of this is causing a surge in of all things the soon to break apart Euro, because they refuse to print….so far. The bottom line is every nation in the world is looking to export its way out of the global depression. This of course leaves unanswered the question of where is the nation willing to be the net importer? It used to be the U.S., but the Obama adminstration is wanting to become a net exporter by doubling current U.S. exports within 5 years….fat chance.
The crisis is being driven by a combination of unacceptably high levels of unemployment throughout the globe and bloated deficits throughout most of the globe. Quantitative easing can ease the deficit crisis and help with internal demand, but it cannot solve the thirst to look to others via exports to solve broken domestic economies. Unfortunately the Whitehouse is a leading proponent of wanting to solve the U.S.’s problems on the backs of others. With a chance to bring in outsiders as his new advisors the President is content to promote from within and remain insular. Don’t hold your breath for a change in policy near term. In fact, look for an escalation into an all-out trade war with China sooner rather than later.
The Whitehouse’s failure to promote aggressive policies to create jobs is making the depression worse. At the end of this week 240,000 people will lose their jobs as the part of the stimulus plan that paid employers to hire workers expires. The economy never recovered sufficiently for the companies to afford the extra workers. Where is the Whitehouse plan to extend the program or start a new one? It seems that the professorial-law-review-editor side of President Obama lacks conviction on what method is best to restore America’s economic prosperity. He has tried Keynesean stimulus spending and hasn’t seen the return he expected on his investment. Now he appears ready to try the Austrian School prescription of austerity and time. Clearly he doesn’t realize the time it will take to the end the depression could be decades if he sticks to the Tea-Party call to just stop the spending. Just ask Japan, they are about to embark on the third decade of their debt induced deflationary depression. Lacking a clear idea on how to solve one’s own problems makes it easy to look to others to solve them, but Mr. President there is no big buyer waiting to scoop up U.S. goods. The solution is to return to the consumer demand driven economy of the last 65 years. Yet the President believes this is irresponsible and that we should invest, produce, save, and export.
Posted by Michael A. Kamperman on September 16, 2010
The people of Delaware have spoken and the country listened intently. A candidate once considered a gnat knocked off a 35 year state-wide office holder thought to be a shoo-in for nomination. Christine O’Donnell’s Delaware coup has ended any chance Republicans in the next Congress will agree to another round of significant stimulus, almost no matter how bad the economy gets. It doesn’t matter if a Republican thinks they can win the general election, they’re petrifried they won’t survive their own primary if they compromise on more federal spending. Gridlock in an economic depression is not a good thing, but that’s what we’ve got now. The Obama Administration has done such a poor job of managing the economy, and explaining how federal spending helps fill a lack of demand from the private sector, that the general populous has come to believe that federal spending is hurting the economy. In the Middle Ages people believed in Trial by Drowning. They would throw an accused Witch into a lake with rocks and ropes tied around her. If she sank she was innocent, but if she floated she was guilty. Naturally almost everyone sank and most were not pulled out in time to live once their innocence was ‘verified.’ Just because a majority of people believe something doesn’t make it true. And economically speaking austerity in a depression for a country that can print its own money and owes all its debts in its own currency is economic alchemy.
Fortunatley we still have monetary policy to bail us out. It is not perfect and it cannot do the complete job by itself. But a concerted effort by the Fed to boost employment is not only a possibility, it is a probability. Wall Street is coming around to this reality and several major firms now predict the Fed will move to a second round of signficant quantitative easing within months. The open ended question is will the Fed move aggressively enough to head off what now seems like an almost certain double-dip in the economy.
For those like the Obama Administration, thinking we can lower the value of the dollar and export our way out of our problems, think again. The Bank of Japan has gotten the message and is determined the yen will not fall below 82 to the dollar come hell or high-water. At least some people in Japan understand the global predicament. Not only did they intervene in the currency markets this week, they printed the money they used to do it. Welcome to the world of competitive printing. It’s O.K. because there really is no other way out of this debt-induced depression. Yet the Summers/Geithner led Whitehouse economic team still has the Presidident walking to the podum saying the secret is to double our exports in the next five years. They still haven’t answered the question export to whom? It seems the only person in the country who still has confidence in them is the President. Like it or not this is the hand we are dealt. In 2011 most of the stimulus will end. In 2011 no one is getting a tax cut despite the rhetoric. The battle is over leaving the current tax rates in place rather than sun-setting them. We won’t be getting tax cuts or stimulus spending from Washington to aid the economy in 2011. We will be getting the President’s long-term Austerity Commission suggesting how to make things worse, not better.
Posted by Michael A. Kamperman on August 31, 2010
The minutes from the Fed meeting show that no one on the Fed is worried that deflation is a significant near-term risk. No one. Some see disinflation while others still see inflation as the mostly likely outcome, but no one is forecasting deflation. In fact they are forecasting moderate growth for 2011, despite the fact the stimulus will run off in 2011 and there doesn’t appear to be a replacement stimulus bill on the horizon. The Fed is way way way behind the curve again, ala summer 2007. Deflation has already taken hold in the U.S. Deflation is a function of either over-supply or declining demand. Demand has withered for most items, most notably housing. With the expiration of the homebuyers tax credits sales of homes have plunged. How hard is it to foresee housing will remain a drag on the economy? Wages are falling substantially for those fortunate enough to replace lost jobs. What has held up the incomes of many households up until now are unemployment benefits and 401(k) plan withdrawls. Congress is not likely to extend unemployment benefits for individuals beyond 99 weeks. The large scale shedding of workers began roughly 99 weeks ago right after Lehman Brothers was turned away by the Treasury and forced to file for an unprepared bankruptcy. How hard is it to foresee household personal incomes are in trouble going forward?
The question the Fed should be concerned with is not whether the economy will fall into deflation, the question they should be debating is how soon and how forcefully do they need to act to prevent it. Like cancer, it may be too late to cure it if you wait for it to be obvious to see. Look at how Japan has struggled to shake off deflation despite near zero interest rates. Look at how the U.S. failed to shake off deflation prior to the onset of World War II. Frankly, the Fed simply doesn’t know how soon they should act, nor how forcefully. Shocking considering Bernanke is supposed to be the world’s deflation expert.
The Fed knows its only remaining weopon is printing money, which puts a bad taste in the mouths of most avowed inflation hawks. But as inflation hawk St. Louis Fed President Bullard has said, the data is coming in on the low side for inflation, not the high side. And, while he doesn’t see deflation as a probability he wants an orderly framework for how the Fed will decide when to print and how much to print. Shouldn’t this conversation have occurred under Greenspan or Volcker and shouldn’t the Fed have a manual on just what to do in this situation? The reason they don’t is the concept of deflation has seemed inconceivable to smug modern day economists who grew up in the post World War II era. This is the reason all of our econometric models only contain post World War II data. With fiscal policy frozen in Washington the only operational weopon left is monetary policy. I’m know we have waited too long to pull the trigger. So do all the 99ers. There is no doubt the Fed will print more money. The open question is do they have the guts necessary to print the trillions needed?
Posted by Michael A. Kamperman on August 10, 2010
Well that was quick. The Fed looked for an exit strategy in April and returned to printing money by August. Make no mistake the Fed just adopted St. Louis Fed President James Bullard’s strategy of targeting the balance sheet and rasing or lowering the quantity of quantitative easing based on the forthcoming data. Bullard is an economic hero. He provided a plan. Like a lion willing to lay down with a lamb he walked to the other side of the aisle and and said I am a self-avowed inflation hawk , but I see deflation as the risk and I am willing to do the un-thinkable and monetize the debt. Now, the ball is in the politicians court. How many Democrats are willing to step up and say we should not only not raise taxes, but during a major economic downturn we should lower them. How many Republicans are willing to stand up and say we should not only not cut spending, but during a major economic downturn we should raise spending to create jobs. It is time for President Obama to step forward and lead. We need another stimulus plan and the progressive liberals need to back off letting the Bush tax cuts expire.
The Fed effectively has said the TARP wasn’t enough. The Stimulus Plan wasn’t enough. Our previous quantitative easing program of $1.5 trillion wasn’t enough. The tax credit for homes and clunkers wasn’t enough. The economy remains in the ditch and it will take heavy lifting to get it out. The Fed has signalled they have the will. But the Fed cannot do it alone. We must have permanent fiscal stimulus to create an environment of confidence. The best ideas are to lower the eligibility for Social Security and Medicare to 60 and to have the Federal Government take over all Medicaid spending from the states.
What the Fed has done is they have said don’t worry about the deficit or the debt, because we can monetize it and control it. That is the advantage of owing all of your debt in your own currency. Japan owes its debt in yen. Will the Bank of Japan follow the Fed? Probably not until the policy proves successful. Great Britain owes its debt in pounds. Will the Bank of England follow the Fed. Yes, in a heart beat. The countries in the euro owe all of their debts in euros. Will the ECB follow the Fed. Eventually, once there is a massive mutiny against the austerity crowd and they run Trichet out of town on a rail. We have a global problem and we need a global solution. The Bullard led Fed is showing the way.
Posted by Michael A. Kamperman on July 22, 2010
Federal Reserve Chairman Ben Bernanke gave a speech in 2002 in which he famously said that if it was necessary to prevent a Japanese style deflationary-depression the Federal Reserve could figuratively speaking “drop money from helicopters.” Now, with a Japanese style deflationary-depression staring the U.S. right in the face, the man we placed in charge of the Fed confesses that he doesn’t know how to fly a helicopter. His paper was theoretical after-all, and now he claims he is not sure of what the risks would be if his theory were put into practice. He will place the theory into practice if there is another ‘panic’ and have the Fed resume aggressive quantitative easing. But short of that he is content to watch this “unusually uncertain” economy and dither. There is nothing uncertain about the economy. We are in a deflationary-depression ala Japan. We are repeating the policy mistakes of the 1930′s by focusing more on the deficit than on economic growth. To this day the variables programmed into the Fed’s econometric forecasting model and most other econometric models are based solely on the post World War II inflationary expansion. Hence, what is ”unusual” and causing “uncertainty” is the economy is not responding the way the models predicted. Right now the Fed’s model anticipates unemployment will fall to 7.5% by the end of 2012 without any changes in Fed policy, tax policy, or stimulus policy. To reach that target the economy would need to generate 7.5 million new jobs, which is an average of 250,000 new jobs per month for the next 30 months. I must have missed where Washington D.C. jumped the gun on California to become the first in the nation marijuana tourist destination. At least I hope these guys are smokin something, because it is depressing to think this is actually the best work they can do. Mr. Bernanke, throw away the models and open your eyes.
Short of a ’meltdown’ the Fed is willing to take three steps to vigorously support the job market. First, they are willing to say they will keep interest rates near zero for a really really long-time, rather than for just an extended period of time. Wow, that should open up the job market. Perhaps he should consider how effective this has been for Japan before relying on it as our next line of defense. Second, the Fed might be willing to stop paying the Zombie Banks a quarter of a point interest on the one trillion dollars in reserves they have at the Fed in-order to jump start lending. The WSJ detailed how many many small businesses are being asked to back their loans with cash, in many cases for the full amount of the loan, in addition to the equipment and real estate already pledged to the bank. The Zombie Banks keep insisting that they are ready to make loans to all that qualify, which means if you give them the money to loan back to you you qualify. Small business credit cannot get any tighter than this. Again, hard to imagine the Zombies would open up the credit spigot if they were denied that 1/4% interest payment from the Fed. Third, and this would help at the margins, the Fed is willing to re-invest the mortgage and bond payments it purchased back into the economy. Right now those payments simply lower the Fed’s balance sheet and go back to money heaven. They are neither saved nor spent in the economy. Effectively, the Fed is currently tightening the money supply because all those mortgages payments are not being recirculated back into the economy.
Mr. Bernanke has already presided over an economic slide greater than the slide in 1930 at the start of the Great Depression. Yet despite his reputation he lacks the wisdom and the will to head off either another slide mirroring the one in 1932, or a long drawn out nightmare mirroring the Panic of 1873 and the Two Lost Decades in Japan. He should have told the Congress that the key tool under consideration is the Fed stands ready to support the Treasury market with aggressive purchases to back whatever fiscal stimulus policies Congress deems necessary to spur private sector growth. There is a time and a place for everything, and now is the time to drop concerns about Fed independence and have the Fed and the Congress work together. The housing market is terribly underwater. Why not have a bail-out for the people instead of the Zombies? Congress could offer to refinance and modify any existing mortgage in America for 4% with no credit check. A home would be appraised and if the mortgage is underwater Congress would authorize the balance over and above the value of the home to be paid off by the Treasury. These mortgages started out no higher than appraised value. All Congress would be doing is hitting the housing reset button. Anyone with half a brain is not really worried about the debt or the deficit because they know the U.S. can print what it owes. Democrats want social spending and they want the rich to pay for it. Republicans simply want a strong national defense and to pay less in taxes. Democrats are unwilling to cut out social spending to avoid a deficit. Republicans are unwilling to pay higher taxes to avoid a deficit. Both sides don’t want to pay in some way for the other sides issues. The “tools” the Fed and the Congress need to fix the economy are simple. The wisdom and the will are what seems like a bridge too far.
Posted by Michael A. Kamperman on June 5, 2010
The supposed V-Shaped recovery the U.S. economy had entered has been shown by the recent unemployment report to be non-existent. Just because business is better than it was 12 months ago coming out of the depths of the financial crisis doesn’t mean the economy is on strong footing. We only created 20,000 non-census jobs and once again people are being pushed out of the labor force to keep our unemployment rate at a phony 9.7%. This is the best we can do after we threw a TARP Too-Big-To-Fail life-line to the Zombie Banks, spent 75% of the stimulus money, and juiced the housing market a second time with an $8,000 first time home buyers tax credit combined with an open spigot of FHA mortgage credit. Now the tax credit is over and the states are assembling 2011 budget plans without the stimulus funds used to smooth over the depression of the last couple of years. And the unexpected BP blowout is rapidly shredding the economies of the people of the Gulf. The recent unemployment report does not include any of the aftershocks of these events. The next one will. The seeds of the poorly named double dip recession (what recovery?) that have been sown the last few weeks have sprouted. Europe is in disarray. Geithner’s message to stress test their banks and continue stimulus spending has fallen on deaf ears. The Summer/Volcker/Geithner strategy to have America consume less, save more, produce more, and export more has found no takers. We need a new plan. Yet I fear none is coming.
What I also fear is the Obama Presidency is imploding right before our eyes. Regardless of one’s political persuasion this is very bad news. At the very moment our country desperately needs visionary leadership we are on the verge of going rudderless. The failed BP blowout preventer has apparently blown apart the Obama Presidency. Night after night of images of oil soaked marshes with no sign of the cavalry charging to the rescue have exposed the President to be out of touch with the people and unable to get on top of the situation. For some odd reason the President continues to allow BP to stay in charge of the cleanup efforts of our Gulf rather than turning the effort over to our all-hands-on-deck military. The people get it that BP has to find a way to seal their well one mile under the ocean. The people don’t get why BP is dictating the pace and the effort of the clean-up of our Gulf. Neither do I. The ramifications of this are best explained by liberal talk show host Chris Mathews who stated “if the oil keeps flowing into the Fall the Democrats could lose 100 seats in the House.”
The economy desperately needs a much bigger dose of stimulus than it has received so far. It’s not going to get one. The President is already weakened to the point that he was unable to get the Senate to extend unemployment benefits to the end of this election year. Normally a no brainer for a Democratically controlled Senate. They will try again this week. The deficit hawks have gained control of the debate. After this election cycle many more of them will swarm the Halls of Congress. It was especially disheartening to hear President Obama praise the unemployment report yesterday as good news and continuing signs of progress. He is clinging to hope and a prayer that his economic programs will work eventually. Importantly, he has failed to articulate the case for more stimulus spending. Now it is too late. We’re “Slip slidin’ away-slip slidin’ away-you know the nearer our destination-the more we’re slip slidin’ away.” It’s now all up to Ben Bernanke and the Fed to lead us to the economic promised land. The number of people pleading for quantitative easing from the ECB has grown exponentially in the last few weeks. Soon the chorus of those calling on the Fed to print money will grow exponentially as well. There is no other way out.
Posted by Michael A. Kamperman on May 26, 2010
Unfortunately our Treasury Secretary has misread our recent financial history’s cause and effect. He believes his bank stress test is the reason confidence was restored to the financial markets. Nothing could be further from the truth. Most people now know, and knew at the time, that the assumptions in the stress test were too weak. Yet few care, or cared at the time. For example, the unemployment rate and the decline in home prices have well exceeded the worst case scenario of the tests. The reason confidence returned to financial institutions is that it was made clear that there would not be either the nationalization of a bank or a chaotic ’Lehman’ style shutdown. It was the policy of TOO-BIG-TO-FAIL that restored confidence in conducting business with and investing in large financial institutions. These companies were endowed with a defacto full faith and credit of the U.S. government. The markets fully accepted the capacity of the U.S. government to backstop all of these institutions. It also helped tremendously that the Federal Reserve stepped up to the plate and purchased over $1 trillion of mortgage paper. The European banks are probably in worse shape than the U.S. banks were. The markets will not accept another smoke and mirrors sleight of hand trick. And there is not a person I know on the planet that believes Greece can backstop its banks no matter how high the losses may be. Hence, if a sham stress test is conducted ala the U.S. version the markets will ignore it. If a real stress test is applied the markets will cough up blood over the inability of most European governments to stand behind these institutions. President Obama needs to fire Geithner, and once again for the record he needs to quit listening to Volcker.
In an austerity mania Geithner is also taking a message to European governments (Germany) that their governments need to spend more to bolster economic growth. While he is right on the priciple of the issue, his proposal will be dead on arrival. Apparently he is tone death and lacks the powers of persuasion. There is a solution to the crisis. The European Central Bank needs to expand its balance sheet and conduct massive purchases of Greek, Italian, Irish, Spanish, and Portuguese debt. Importantly, it needs to not sell any assets to offset the purchases. The ECB has the power to drive down the interest rates all of these governments are paying and it needs to get on with it. What Geithner should tell Europe is if the ECB conducts quantitative easing, then the U.S. will correspondingly purchase in the open market as many German and French government bonds as necessary to push the Euro back above 1.25 to the dollar. This will alleveiate misplaced German fears of a collapsing currency leading potentially to hyper-inflation.
Ultimately the buck stops with President Obama. He now owns the double-dip we are entering. He needs to surround himself with advisers who have the vision to lead us out of the crisis. Instead he clings to the same advisers that assured him the unemployment rate would not rise as high as it has. There is no doubt there is an environmental disaster unfolding in the Gulf of Mexico that demands the President’s immediate attention. Ditto the shenanigans of Iran and the crisis unfolding on the Korean Peninsula. Beyond that there is no reason the economic crisis is not job number one for the President. But he continues to treat it as a nuisance. Our states are being forced into the same austerity mania sweeping European governments. Yet the President remains silent. At this rate it is almost a certainty the historians will talk about the economically failed Hoover/Obama Presidencies.
Posted by Michael A. Kamperman on May 19, 2010
Germany befuddled markets yesterday by acting unilaterally to ban naked short selling of all European Government Bonds and in the stocks and bonds of its 10 largest financial institutions. Angela Merkel has been behind the curve and wrong on most of the decisions she has made so far regarding the credit crisis. Finally, she shocked me and a lot of other people and did something right. Many hedge funds are screaming bloody murder this morning claiming banning naked short selling will solve nothing. They are only talking their book and their wallet. Banning naked short selling prevents people betting against something in quantities greater than the underlying asset itself. If their are 200 billion euros of Greek bonds, then the market can still short 200 billion euros of Greek debt. But it cannot short 500 billion euros of Greek debt creating an artificial market that overwhelms the long side of the traded and pressures it to the downside. Hedge funds will claim banning naked short selling hurts liquidity and increases risk. Then perhaps they should practice diversification and fundamental research if they want less risk in an asset. The bottom line is our societies need our governments to be able to access the bond markets on reasonable terms. Allowing speculators to raise champagne glasses in triumph while riots run wild in the streets is insanity. The German ban should become permanent and it should extend to all asset classes. And it should extend to all markets outside of Germany. The Germans acted unilaterally on their own for two reasons; the French refused to go along, and the Germans have the power to act without getting someone elses permission. This message will not be lost on the rest of Europe. Merkel has made the current crisis much worse than it should have been. It is about time she did something right.
Protecting the debts markets is one thing. Coming up with a strategy to repay the debts in a deflationary world is quite another. The April U.S. CPI just printed a negative .1% overall and a core rate of zero. Since the end of April oil prices have collapsed by 20%. The negative CPI was in spite of higher oil prices. Additionally, the mortgage purchase applications fell by 27% last week. The expiration of the first time home buyers tax credit will lead the housing market down once again. In other words, inflation was negative in April before the impact of these two very deflationary trends in May.
The ultimate solution to solving the sovereign solvency crisis and deflation is the same. The central banks of the world need to start printing money and start buying up their own government bonds in very large quantities. The deflationary environment is giving all of these governments a chance to hit the reset button. Yes, monetizing the debt is the solution to our credit problems and our deflation problem. To really defeat deflation we still may have to mail out money allowing the private sector to reduce its debt levels as well. While Germany has been right about naked short selling, they have been wrong that inflation is a near-term threat and that austerity is the solution to the crisis. As events over the last few weeks have shown the Euro is an ungovernable entity. Therefore, it is up to the Fed to step up in the midst of this new credit crisis and resume its quantitative easing program. Everyday they wait allows confidence to whither further away.
Posted by Michael A. Kamperman on May 12, 2010
As predicted the ECB caved and has started to print money to buy up European Government bonds (Greek, etc.). They never really had a choice and should have acted much sooner to the avert the crisis. However, quantitative easing should be pared with a long term glide path to fiscal sanity. Instead, the Europeans in their clear lack of wisdom have embraced a combination of buying just enough government debt to keep the “Wolves” at bay. Meanwhile, they are trying to combine this strategy with demands for fiscal discipline requiring significant short term cuts in budget deficits. On the surface it sounds great to require people to retire later in life and to cut wages and to cut jobs. In reality this will only deepen the debt-induced depression and delay the inevitable. The Fed, the ECB, the Bank of Japan, and the Bank of England need to coordinate an all out monetization of government debts. This will hit the reset button and buy time for nations and economies to adjust holding societies together. By both cutting jobs and requiring people to work longer we are killing job opportunities for people in their 20′s. Is this what we really want? Younger workers without seniority will take the brunt of the axe to be swung. And, they will be out of luck a long time as retirements are delayed keeping existing jobs closed to newcomers for a long time. The austerity religion sweeping the globe is utter madness. The riots in Greece could be a harbinger of all of our futures. Today Spain announced it will cut another 6 billion euro form its current budget to show solidarity with the austerity mania. This in a country with official unemployment rates already over 20%.
The U.S. shares in the austerity mania as exemplified by the Tea Party. These well intentioned but misguided people believe they are saving society. In fact, they are most likely causing the fabric of our society to disintegrate. In my state of Texas the legislature is facing a projected $11 billion budget shortfall. One solution gaining popularity is to raise the student teacher ration in elementary schools. The current cap is 22 pupils per teacher. They want to save money by cutting teachers and forcing more kids into the classroom. They also are considering shortening the school week from 5 days to 4. Young teachers will be cut loose and elementary education graduates will find no room at the inn. Texas is in the best shape of all the large states in the U.S.
What the peddlers of austerity fail to grasp is many innocent hard working individuals will find themselves out in the cold through no fault of their own. Why? So those who were irresponsible will be punished? So those who are afraid of hyper-inflation will be pacified? Inflation occurs when too much money is chasing too few goods. There is no shortage of almost anything in the world. Furthermore, with global unemployment well above 10% it is doubtful demand will overtake supply even if all federal debt is monetized globally. Yes gold will go up in the short term. Probably a few other commodities too. But it will not lead to shortages. It will however push capital further out on the risk curve which could perhaps lead to global unemployment falling back below 10%. What most people miss is a large portion of global government debt is held by banks and hedge funds. The real money, capital, backing these bonds is not nearly as high as the outstanding amount of the bonds. Most banks and hedge funds are allowed to mark government debt at par and are allowed to leverage this debt with little capital. When they move out on the risk curve the leverage will greatly diminish. In the meantime young teachers could teach and young children could learn.
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.
