I think you misunderstand, Ed... Printing press isn't a solution. It's a way to buy yourself time, while the necessary structural adjustments are made. Capital formation/GDP (I think that's a slightly better term than "investment") can only be increased over time, as a result of particular policies, reforms etc. At the moment, the market isn't giving the Eurozone periphery any time to implement anything. That's what the short-term measures like EFSF, ECB bond buying etc, are supposed to give you. The Germans are doing what they're doing, because they want to make sure that, once they buy time for periphs, the necessary adjustments are made. However, it's a dangerous game they're playing and it might all backfire.
The weekly: Greece to default/restructure THIS weekend? thread
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I didn't misunderstand, printing money won't work, it will do more harm than good, it will remove the possibility of real growth...so it could not buy time...and really for what?
There have been very detailed schemes to provide more debt...in order to buy time...but there has been no articulation of what reforms in the PIIGS, or achieve by an amendment of the constitutive treaties, would bring about growth on any time schedule. Markets are prospective and now they only see the prospect of 'austerity' schemes...which I explained above are contraction and recession schemes that are really the result of a failure to grow or to plan to grow, and so they can not provide the means to pay either the new debt used to buy time or the old debt that has accrued.
If the EU is serious about 'buying time.' They have to articulate the growth story that they are buying time to get to. You know that the Mekel's vision for treaty reform at the Dec. 7 meeting has nothing to do with growth. Who has ever articualated a credible plan for a strategy of common area growth? The idea that if you throw more debt at the PIIGS and subsidize their near term debt service that in time growth will magically appear is just not believable. Outside creditors, new money into the EU, will not sign up for magical thinking....maybe you can find some Asians that still belive in the 'cargo cult'...you tell them that airplanes will bring growth only if they lend more money.
The point is that the time needed to implement a policy that promises a return to growth can only be bought with a presently articulated credible plan for growth. This promise that some plan will be worked out by the Technocrats once the new debt is applied is simply not credible. Mario Monti wants tax increases and austerity enforeced by coercion...Papademos sings on to the same. These fellows and the Burgomasters they report to, don't have any idea how to create growth. It is obvious that what they are advocating is more control over a declining economy.
The reason I use 'Investment'/ GDP is because the GDP has always been explained as the total of 'Consumption' + 'Investment' + 'Government Spending' + (Net of Exports, Imports). If you want to reate a new vocabulary, that's fine. To communicate I am using the existing vocabulary and I would use the existing data that the BEA uses to tabulate the investment component of the GDP.
There have been very detailed schemes to provide more debt...in order to buy time...but there has been no articulation of what reforms in the PIIGS, or achieve by an amendment of the constitutive treaties, would bring about growth on any time schedule. Markets are prospective and now they only see the prospect of 'austerity' schemes...which I explained above are contraction and recession schemes that are really the result of a failure to grow or to plan to grow, and so they can not provide the means to pay either the new debt used to buy time or the old debt that has accrued.
If the EU is serious about 'buying time.' They have to articulate the growth story that they are buying time to get to. You know that the Mekel's vision for treaty reform at the Dec. 7 meeting has nothing to do with growth. Who has ever articualated a credible plan for a strategy of common area growth? The idea that if you throw more debt at the PIIGS and subsidize their near term debt service that in time growth will magically appear is just not believable. Outside creditors, new money into the EU, will not sign up for magical thinking....maybe you can find some Asians that still belive in the 'cargo cult'...you tell them that airplanes will bring growth only if they lend more money.
The point is that the time needed to implement a policy that promises a return to growth can only be bought with a presently articulated credible plan for growth. This promise that some plan will be worked out by the Technocrats once the new debt is applied is simply not credible. Mario Monti wants tax increases and austerity enforeced by coercion...Papademos sings on to the same. These fellows and the Burgomasters they report to, don't have any idea how to create growth. It is obvious that what they are advocating is more control over a declining economy.
The reason I use 'Investment'/ GDP is because the GDP has always been explained as the total of 'Consumption' + 'Investment' + 'Government Spending' + (Net of Exports, Imports). If you want to reate a new vocabulary, that's fine. To communicate I am using the existing vocabulary and I would use the existing data that the BEA uses to tabulate the investment component of the GDP.
Well, I beg to differ... The whole point of everything they're doing is to create growth eventually. Specifically, if you look at the measures that Monti is actually proposing, they're only half about austerity. The other half is all about growth. Whether or not it's credible is your subjective judgement, which I can neither agree nor disagree with.
I am not creating a new vocabulary. Capital formation is a well-known term. It's used by the BEA and by the OECD, as part of the SNA93 framework.
I made my point clear Mghoul...you don't agree. OK. I believe I was clear about what I was saying using 'Investment/GDP'. You understand what I am saying but you like other jargon 'Capital Formation/GDP.' Well that's fine, you can communicate your way.
If you think Monti has a credible plan for growth, then I suggest you buy some Italian debt...I don't see any credible plan for growth...I was in Rome last week and it waw not evident even though I was looking for some signs...Monti is part of the problem, not a source of growth, he is part of the culture of 'consuetudo fraudium'. I have been short the PIIGS and Europe in general. I have taken profits. I sitll have a short position. If there is a significan rally on any Monti speach or promise...I will an opportunity to add to my short again.
If you think Monti has a credible plan for growth, then I suggest you buy some Italian debt...I don't see any credible plan for growth...I was in Rome last week and it waw not evident even though I was looking for some signs...Monti is part of the problem, not a source of growth, he is part of the culture of 'consuetudo fraudium'. I have been short the PIIGS and Europe in general. I have taken profits. I sitll have a short position. If there is a significan rally on any Monti speach or promise...I will an opportunity to add to my short again.
Yep, I am happy with either term really and I understand what you mean.
I think Monti does have a credible-sounding plan for growth. However, as always in these things, execution is the hard part. I think at the very least they deserve a chance to try to do whatever they're trying to do. I will not assume they necessarily fail before they try to do anything. I am not outright short Europe and don't intend to be involved either way, until there's some liquidity. We'll see what happens.
So, another month has gone by on the Humpty Dumpty at the Summit project and still the egg is broken. It is tortuous to see so many tragically educated bureaucrats and pundits continue to scheme on how they can solve an insolvent debt problem by applying more debt. The simply obvious truth easily seen through a child's open eyes and grasped by a clear and honest mind, is that you need income to pay debt. Income is growth. Anything else is a hopeless confusion. Austerity with its hardships and taxes is a resignation to contraction and default. Summits don't change this.
On a micro level the EU banks in much worse shape tham most imagine. The MF Global affair reveals how investor collateral can be rehypothicated legally in Europe with no constraints...that means that the Banks and Brokers in EU and U.S. and elsewhere, operating through EU subsidiaires can use thier client collateral deposits as thier own collateral to buy sovereign debt....so that the same collateral can be leveraged sequentially in a daisey chain. The MF Golbal client deposits that disappeared were likely transfered to the London subsidiary and used again as collateral in repos trasactions to leverage the purchase of PIIGS sovereign debt. The big scandle will be that this is legal, specifically allowed by U.K. and the U.S. Fed.
The problem is worse than it appears and the solutions outlined below are all losers....
IMF cannot get enough money to roll over the Italian and Spanish debts. Because they would have first priority over existing and subsequent debt the decison to go to the IMF would be an all or nothing decision. There isn't enough money.
Direct lending by the ECB is illegal under the existing treaty. It is obvious that you can't get all members to agree on a new treaty in time to make any difference.
Lending money from the ECB to the IMF and earmarking it to buy PIIGS and other EU sovereign debt is transparent and still illegal. Putting such funds in the IMF general account without an earmark and then having IMF buy the sovereign debt will never be approved by the non-EU members...and there is not enough money anyway.
Funding an off ECB balance sheet ESM or leveraging the ESFS for the same purpose or both...won't raise enough money and will result in Sovereign downgrades of the Core EU nations that must do the funding.
Austerity strategies do not foster growth and actually reduce revenues available for debt service in the future because they cause contraction, while at the same time creating civil unrest and government instability.
Until you hear someone in Europe talk clearly about a plan for growth you need to sell the ralleys and hold to or add to your shorts.
On a micro level the EU banks in much worse shape tham most imagine. The MF Global affair reveals how investor collateral can be rehypothicated legally in Europe with no constraints...that means that the Banks and Brokers in EU and U.S. and elsewhere, operating through EU subsidiaires can use thier client collateral deposits as thier own collateral to buy sovereign debt....so that the same collateral can be leveraged sequentially in a daisey chain. The MF Golbal client deposits that disappeared were likely transfered to the London subsidiary and used again as collateral in repos trasactions to leverage the purchase of PIIGS sovereign debt. The big scandle will be that this is legal, specifically allowed by U.K. and the U.S. Fed.
The problem is worse than it appears and the solutions outlined below are all losers....
IMF cannot get enough money to roll over the Italian and Spanish debts. Because they would have first priority over existing and subsequent debt the decison to go to the IMF would be an all or nothing decision. There isn't enough money.
Direct lending by the ECB is illegal under the existing treaty. It is obvious that you can't get all members to agree on a new treaty in time to make any difference.
Lending money from the ECB to the IMF and earmarking it to buy PIIGS and other EU sovereign debt is transparent and still illegal. Putting such funds in the IMF general account without an earmark and then having IMF buy the sovereign debt will never be approved by the non-EU members...and there is not enough money anyway.
Funding an off ECB balance sheet ESM or leveraging the ESFS for the same purpose or both...won't raise enough money and will result in Sovereign downgrades of the Core EU nations that must do the funding.
Austerity strategies do not foster growth and actually reduce revenues available for debt service in the future because they cause contraction, while at the same time creating civil unrest and government instability.
Until you hear someone in Europe talk clearly about a plan for growth you need to sell the ralleys and hold to or add to your shorts.
I have said it before and I will say it again... No matter how many multiple orgasms ZH has, "re-hypothecation" isn't an issue and it's not what killed MFG. As to the rest of your point, Ed, let's wait and see, shall we?
ZH got it from Reuters which did a comprehensive analysis of the issue that makes sense. As you say, we will have to wait and see what roll is played by rehypothecation...not too long though. With regard to the strategies floated...I think it is already settled...we are having an austerity contraction in the EU that has already begun.
Credit Crunch and contraction in EU is given; what we have wait for is whether it will get worse quickly or slowly.
Credit Crunch and contraction in EU is given; what we have wait for is whether it will get worse quickly or slowly.