"The euro is irreversible."

[txlaw]

http://www.nytimes.com/2012/09/07/business/global/european-central-bank-leaves-interest-rates-unchanged-at-0-75-percent.html

[beerbaron]

Can someone explain how it can purchase bonds of troubled countries but at the same retire money? Does it mean countries will need to put funds into the ECB?

 

BeerBaron

[Eric50]

This is what they call sterilization: for every euro worth of bonds that they buy, they sell an offsetting amount of an asset that they already own. Hence the ECB balance sheet does not grow. That's the theory. But it does not work in practice as there is a lot more problem debt to buy as they will be able to sell... So that sterilization can't really happen...

 

It's just a game of pretend so that the Germans think that they are not printing. In reality the ECB is becoming like the Fed and is about to start a massive monetization of the debt.

[moore_capital54]

Where are parsed and all the posters who exclaimed with such confidence the end of the euro... Look through my post history and you will see clear and concise predictions of today's ecb decision. You either get how a fiat money system works or you don't..

[giofranchi]

moore_capital54,

I have read your posts on gold and have found them extremely interesting and informative. I really have great respect for your work. Anyway, could you elaborate a little more on your view of the Euro?

Even though the ECB is going to “start a massive monetization of the debt”, like Eric50 wrote, I remain very skeptical. Take, for instance, Italy: my country has been mired in public debt for as long as I remember (actually, for as long as my father remembers!). And we had always solved the problem printing new liras, again and again. We have never showed the world that we are able to reduce our debt through austerity, and then to keep it reasonably low. So, why on earth should anyone want to lend money to the Italian government?! I don’t understand. Ok, we will buy two or three years thanks to “massive monetization of the debt”… then what? What is more likely: that all Italians become Germans and show unprecedented fiscal rectitude? Or that the ECB every few years must begin a new bond purchase program to save southern Europe? If the latter, is it really sustainable? It certainly will mean higher and higher inflation in Germany, and higher inflation equates to higher taxation: “Inflation is taxation without legislation.” Milton Friedman. So, will the German tax-payer go on subsidizing southern Europe? While even northern Italy is completely fed up with subsidizing southern Italy?! Even if the German tax-payer would do so, can he really afford it? Mighty Germany balance sheet is reasonably sound, but it is far from pristine! I know that Germany is very mindful about exports and that a weak Euro could boost exports to the US and China, but, once more, is it sustainable? Any country with a trade surplus should have a strong currency, and Germany’s currency should be much stronger than the Euro presently is. Otherwise, unbalances are created: for instance, I don’t see how Italy could close the competitiveness gap with Germany, unless you presume that we will able to cut workers compensation by at least 30% (then, it means you are not aware of the strength of labor unions in Italy!).

Maybe, there is something very important that I am missing, so I really would like to read your opinion on this topic!

Thank you very much,

 

giofranchi

[twacowfca]

moore_capital54,

I have read your posts on gold and have found them extremely interesting and informative. I really have great respect for your work. Anyway, could you elaborate a little more on your view of the Euro?

Even though the ECB is going to “start a massive monetization of the debt”, like Eric50 wrote, I remain very skeptical. Take, for instance, Italy: my country has been mired in public debt for as long as I remember (actually, for as long as my father remembers!). And we had always solved the problem printing new liras, again and again. We have never showed the world that we are able to reduce our debt through austerity, and then to keep it reasonably low. So, why on earth should anyone want to lend money to the Italian government?! I don’t understand. Ok, we will buy two or three years thanks to “massive monetization of the debt”… then what? What is more likely: that all Italians become Germans and show unprecedented fiscal rectitude? Or that the ECB every few years must begin a new bond purchase program to save southern Europe? If the latter, is it really sustainable? It certainly will mean higher and higher inflation in Germany, and higher inflation equates to higher taxation: “Inflation is taxation without legislation.” Milton Friedman. So, will the German tax-payer go on subsidizing southern Europe? While even northern Italy is completely fed up with subsidizing southern Italy?! Even if the German tax-payer would do so, can he really afford it? Mighty Germany balance sheet is reasonably sound, but it is far from pristine! I know that Germany is very mindful about exports and that a weak Euro could boost exports to the US and China, but, once more, is it sustainable? Any country with a trade surplus should have a strong currency, and Germany’s currency should be much stronger than the Euro presently is. Otherwise, unbalances are created: for instance, I don’t see how Italy could close the competitiveness gap with Germany, unless you presume that we will able to cut workers compensation by at least 30% (then, it means you are not aware of the strength of labor unions in Italy!).

Maybe, there is something very important that I am missing, so I really would like to read your opinion on this topic!

Thank you very much,

 

giofranchi

 

You make good points, giofranchi.  If a monetary authority subsidizes a behavior, improvidence, that reward should stimulate more of that behavior.

 

The federal system in the USA has discouraged bailouts of individual states.  California actually paid some of its bills with IOUs a few years ago until it tightened its belt.  That wasn't traumatic, just necessary medicine for the patient to get back on the road to health.

[giofranchi]

California actually paid some of its bills with IOUs a few years ago until it tightened its belt.  That wasn't traumatic, just necessary medicine for the patient to get back on the road to health.

 

twacowcfa,

if you were a German tax-payer, would you bet on the fact that Italy will behave itself like California did? Northern Italy is making the bet that southern Italy will behave itself ever since 1861… Until now it has always been a losing bet… I don’t think Italy is California. California has an entrepreneurship culture that Italy completely lacks: California exports technology all over the world, Italy exports pasta and garments… I believe that northern Italy has great strengths, but, southern Italy has always been and will most probably continue to be a serious drag. Even the fittest of the swimmers runs the risk of drowning, if an heavy stone is tied to his feet…

I really hope that everything could end up well. But I am not betting on hope: for now, my firm’s investments stay in America.

 

giofranchi

 

[beerbaron]

Please tell me if my logic is OK:

 

If a trade imbalance happens for a long period and the currency cannot fluctuate. Then money must find it's way back or else at one point the spending country will end up with 0 dollars. Now there is only one way that I see the equilibrium between the two nations happening.

-The thrifting country must give money away to the spending country.

 

When we are talking about a single country it makes sense, Canada sends Billions from Alberta to poorer provinces. USA probably does something very similar. This is how the system maintains. For Europe I don't see why on earth someone would accept such a deal.

 

If there is no redistribution happening, then two things will happen in the spending country that will delay the day of reckoning:

-Collective debt is increased

-Debt is transferred from one sector to the other (moving the pain)

 

Now from what I read from ECB statement is that it's moving the pain, maybe Moore is right and that it's just another step in front of full flegde printing, but at this point buying securities of a troubled country to sell other securities.

 

It also sounds like a great way to make money, being long the spending country's debt and short the thrifting country. So how does ECB avoid hedge funds from making a ton of money on this?

 

BeerBaron

[Liberty]

What a mess. If I had to guess, I'd say that they will eventually monetize the debt one way or another.

 

There's no way that the german voters are more resolved to avoid bailouts than southern voters are resolved to avoid the pain of austerity and pro-growth reform, especially since the germans are in a kind of lose-lose situation; if they say no to bailouts forever, they can still get hit by an Europe-wide crisis, while the southern countries can win if they just get the germans to pay for them (through monetary inflation, most probably).

 

The real question is 'what then?'. Once that's done, will they try to federalize Europe more, or will they leave it as is and periodically subsidize the south with newly printed money?

 

Or maybe I'm missing something important... In any case, I don't feel confident enough about any of this to base an investment on it.

[giofranchi]

Please tell me if my logic is OK:

 

If a trade imbalance happens for a long period and the currency cannot fluctuate. Then money must find it's way back or else at one point the spending country will end up with 0 dollars. Now there is only one way that I see the equilibrium between the two nations happening.

-The thrifting country must give money away to the spending country.

 

When we are talking about a single country it makes sense, Canada sends Billions from Alberta to poorer provinces. USA probably does something very similar. This is how the system maintains. For Europe I don't see why on earth someone would accept such a deal.

 

If there is no redistribution happening, then two things will happen in the spending country that will delay the day of reckoning:

-Collective debt is increased

-Debt is transferred from one sector to the other (moving the pain)

 

Now from what I read from ECB statement is that it's moving the pain, maybe Moore is right and that it's just another step in front of full flegde printing, but at this point buying securities of a troubled country to sell other securities.

 

It also sounds like a great way to make money, being long the spending country's debt and short the thrifting country. So how does ECB avoid hedge funds from making a ton of money on this?

 

BeerBaron

 

 

Beerbaron,

I think your logic is perfect.

Imho, delaying the day of reckoning might be useful, only if in the meantime the trade imbalance disappears and the threat of redistribution subsides. To achieve that with a currency that cannot fluctuate, the spending country must increase its revenues (taxes), cut its expenditures, hope that higher taxes and less spending don’t prolong the unfolding recession, and slash its labor cost.

Now, the question is: will the turnaround of the spending country be successful? I think nobody knows the answer for sure…

 

giofranchi