Euro chicanery as ominous as any other sign

I’m sure everybody has noticed by now certain patterns that European politicians have used to disguise the lack of progress on their issues.

The mainstay approach of having a meeting, resolving nothing, then departing and declaring victory is getting really thin.

The announcement is followed with no specifics and further meetings are announced to work out the details of the non-deal when in fact the extent of the agreement is “we have agreed to solve the problem” but without any mechanics.

The second line of attack is, we’ve had a meeting, and we’ve decided that somebody else will solve our problem.  China will solve our problem.  Private investors will solve our problem.

That is not a plan, it is a hope for “deus ex machina”.

This form of salvation reminds me a lot of the old Aesop fable about mice who are being terrorized by a local cat.  So the mice have a meeting and they decide that the solution to the problem is that they will put a bell on the cat.   The reaction to this is quite favorable, until an old and wise mouse speaks up and says, the plan is fine, but who is to bell the cat?

In other words, a plan that can’t be implemented due to an insurmountable hurdle is as good as no plan at all.

China is predictably not interested and there is little incentive for them to get involved.  The lack of any attempt by Europe to take a serious run at its’ problems on its own makes it foolhardy to fund them.  They’ll just go through any money contributed and then when it is about to run out, start having meetings again to figure out what to do.  Giving money to Europe right now is about as constructive as putting your money in a pile and setting it on fire.

As for the private investors solution, that fizzled for predictable reasons.  There is little interest in European bonds now as it is.  The leverage plan is rather silly, because it insures only 20-30% of the value of bonds.  The statement that makes is in some ways worse than no insurance.  Invest in Europe and we guarantee you will get one fifth of your money back ! Woo hoo, sign me up.

The whole issue is that private investors are losing faith in government debt.  The theory that you will fix the problem by attracting back private investors is strained at best.

Trying to force banks to take on more government debt by increasing tier 1 capital requirements is dirty pool and there is a bit of a conflict of interest in the decision.  The irony is that the whole thrust of the problem is that tier 1 capital is arbitrarily defined and attributes a reliability to government debt that is without foundation.

Other dubious plans have come up.   An utterly bizarre plan from Germany involves putting together currency reserves to increase investor confidence.

So Germany alone would need to save 500 billion Euros under that proposal.

If there isn’t actual currency set aside, it’s just an accounting gimmick.

If currency is raised to set aside with bonds, then you increase the debt.

If you do set physical currency aside as a guarantee, you will decrease the liquidity in the system unless you print more Euros.   That will tend to cause deflation and stagnate markets.  Deflation will increase the value of existing debts.

If the idea is to print money to set aside as a guarantee, so that there isn’t a liquidity crisis, why not just simply print money without turning this into a dog and pony show.

So I am divided as to whether this latest from Germany is supposed to make no sense or whether it is supposed to be counterproductive.

The latest from Europe generally is, the ECB lends money to the IMF and then the IMF lends it out to Italy or Spain as the case may be.

Is John Cleese making European policy?

If Europe and the ECB can’t bail out Italy and Spain now, how does it assist to loan money through the IMF?  If they are providing the funds, how does adding a step with the IMF in the middle change anything?

If the idea is that the IMF is a better credit risk, then you have the ultimate issue that, if the debtor country stiffs the IMF, will it be Europe or the IMF that gets stuck with the tab?

That really is the issue.  If the IMF doesn’t have the money to loan, and the ECB doesn’t have the money to loan, how does this work? If the IMF and the ECB could fix the problem with their resources together, why not have the ECB put in some money and the IMF put in some money separately rather than taking weird roundabout steps?

If the money isn’t there for a bailout, it isn’t there.

There is an old expression about pulling oneself up by one’s bootstraps which would be appropriate, but it is a bit dated.

Here’s a more contemporary allegory: bees lifting a laptop:

http://www.youtube.com/watch?v=3AxIOtSjXyA

Mythbusters proves that bees can’t lift a laptop using basic principles of physics.

The basic myth of bees lifting a laptop has the same structure as supply-side and other right wing economics however.   It is possible with some sleight of hand to create the appearance that it can work but that isn’t enough to deliver.

It’s hard not to wince hearing some of the plans being floated in Europe these days.   When a “plan” is obvious balderdash, it has a prejudicial effect worse than having no plan.  A bunch of confusing bafflegab may reassure slow people but to those of us with IQs over 100 it looks incredibly desperate, like not only is there no plan but you’ve given up and are prepared to say things that are incoherent rather than say nothing at all if you need to stall for time.

Merkel and Sarkozy are the pioneers of the planless plan, where the real plan is to game the media to keep up market and consumer confidence without doing anything.   It’s too bad that Merkel is taking the lead in this, because she leads Germany and Germany has money to spare.   Sarkozy is at least ten times as smart as Merkel and far better at public relations.

Merkel and her bank friends are so awful that they make me feel sorry for Berlusconi.  Italy was in good shape and then there was a massive misleading press blitz about Italy’s finances and then ECB halved it’s support for Italy’s bonds in order to push Berlusconi out of power so that he could be replaced by an ECB/ Goldman Sachs puppet.

It is a supreme irony that with all of Berlusconi’s unethical connections and activities and more legitimate reasons to remove him than you can count on your fingers, that when he was finally removed from office, he was removed by foreign powers and bankers because he was a patriot who refused to sell out his country.

The tactics used against Italy suggest to me that those who would consolidate Europe now do not have the appropriate motives and it must not happen.

Europe has had years to work on the debt problem and they haven’t come up with a single good idea.  Germany vetos any suggestion that would solve the problems (e.g. print money).

The plan for Greece is doomed to failure for a variety of reasons, not least of which is that the yields on Greece’s bonds are over 30%.

If Greece’s full debt was unsustainable at 7% yields, can half of Greece’s debt be sustainable at 30% yields?  Do the math.  No way.  Greece is going to burn out and soon.

Greece should be allowed to default…because they are going to default.  Anything that anybody has to say on the subject is moot.

What needs to be the focus is, when is Greece going to default.

The unpopular answer for the politicians should be, as soon as possible and it should be carefully planned so the logistics can be worked out.

If more bailout funds are given to Greece, they will be spent.

Greece should be allowed to default, but the flip side of that is that the bailout funds would need to be given to Greece’s creditors to keep them afloat.

Wait, and the bailout funds will have been spent and we will be in the same mess but with fewer resources to address it.  Unfortunately politicians are averse to taking any immediate action that is unpopular, even if it is necessary and the cost/benefit is there.

 

 

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