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Europe Can’t Inflate the World

By Rick Ackerman Posted on July 6, 2012, 12:01 am EDT Last Updated July 6, 2012, 2:29 am EDT

How much higher might Europe’s latest dog-and-pony show push stocks, bullion and oil? All three soared on news last week that bailout funds can now be plowed directly into sovereign debt without the pretense that the money be used to stimulate “growth.”  It’s tempting to say that the markets got it right, discounting Europe’s apparent lurch toward promiscuous, no-strings-attached, American-style monetization.  That would surely be inflationary, right?  In theory, yes. By threatening to walk if Merkel didn’t roll over, Spain and Italy have indeed set the European Central Bank on course to promote a credit blowout whose magnitude would be unprecedented for Europe. Trouble is, this approach wouldn’t be the brazen, hairy-knuckled sort of monetization that Helicopter Ben has used — not without some success — to inflate U.S. stock prices. Instead, a substantial portion of the eurofunds would come from actual lenders and not be pulled from thin air as is the Fed’s custom. To underscore the formality of the process itself, it was agreed that the eurofunds will not subordinate private creditors. This amounts to pre-emptive riot control, since private lenders will be able to fall back on the provision without fear of being laughed out of court. (Or do we believe that the Powers That Be would sit idly by as Spain and Italy — is it too early to mention France? — go down the tubes before allowing lenders to get stiffed.)

So, does Europe’s decision to put Spanish fly in the punch bowl warrant an inflationary explosion in bullion, stocks and energy prices? We think not, mainly because the region long ago passed the point where it can hope to inflate much of anything, even by pumping a trillion euros into the financial system. Try as they might at this, Europe’s economy has begun to implode with the force of a black hole. One suspects that even though the Mediterranean upstarts have just mugged Merkel in broad daylight, they’d probably rather the Germans continue to keep the books so that Europe doesn’t go so completely to hell that payrolls go unmet. Protestantism may be dead in Europe, but not the Protestant ethic. And although Spain and Italy apparently have no qualms about bullying Merkel into doing the wrong thing, the fact that their respective bankers are bending to a no-subordination clause suggests they are not quite ready to do business the American way – i.e., making up the rules as they go along. If America’s mass delusion is that an all-powerful Fed can save us from financial ruin, Europe’s is that a bunch of bankrupt or nearly-bankrupt nations can all save each other.

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  • Sam July 9, 2012, 6:20 pm

    VLAD, I certainly appreciate your points of view and opinions and I’d like to share some different perspectives of my own which you may have considered long ago before you came to the conclusions that you are now suggesting.

    Bear in mind I’m not a trader; I’ve been following this fascinating financial crisis as an individual investor and as such I’m not into speculation. My decisions have been based on a combination of politics, activism and real-life events. I’m not alone as almost all of the balls are up in the air right now, while the ground is shaking.

    I have often wondered, while the gold bulls confidently proclaimed the return of precious metals as some sort of safe money, shouldn’t they talk a little quieter and keep this knowledge amongst themselves? Surely making this kind of statement openly leaves the flank open to attack. As such, it comes to no surprise to me that gold has suffered repeated abuses and the GATA crowd (rightly outraged by manipulation for decades) has become more widely understood as newcomers enter the PM market. Although I fully appreciate what a twisted game this may be, I am half aware that this is not the case and that this is merely a page in the chapter of monetary history. We can not know what central planners are really upto and if we did, I have a suspicion that we’d all be heartily disappointed.

    In my opinion, the FRN’s that are held by investors and governments around the world are only safe until the US military machine does not work any more. We could well be fast approaching that time. More and more political elements are coming to the fore and this is something that no human being has the ability to foresee. Some exceptionally wise investors have aired their view on the issue and have some cracking suggestions as to how this may play out (your view included) but we cannot overstate the importance politics and wider human society will affect this. The status quo would not dare do as you have suggested – this would not work to their advantage in the final analysis.

    Imagine a society where the people are living in squalor, where disease and slavery is widespread. Where the division of poor and rich is so extreme that whole postcodes and even cities are considered favelas. Starvation and civil war is commonplace. Armed popular uprisings gather momentum and martyrs are added to the cause on a daily basis. This scenario I’m describing is not based in the Middle East, but Europe and North America. This is why what you’re suggesting will probably not come to pass, because no matter how twisted these sociopaths are, they would never do this to the environment they also inhabit.

    Don’t give up hope with gold! Technicals don’t look good but the fundamentals are still strongly in place. Gold will continue to go sideways (up a bit, down a bit, then up again) until a solution is found. The dollar will be safe until mid-2013 and then all hell will break loose. I’m hoping they get it fixed before then so money can be moved out of heavily manipulated PM’s and still-inflated housing and land (which is deeply connected to the currencies and stocks) and placed into a stable store of value but I’m not holding my breath.

    The only thing which validates your scenario IMO is the possibility of world war. I’d like to think of more pleasant realities until the time that this is inevitable!

    P.S. I always wanted to know this, is your surname D’Impaler? 😉

  • Mark Uzick July 9, 2012, 3:46 am

    VLAD: the still “world’s reserve currency” (ussa fiats) short term bonds, must be protected at all costs,

    Treasuries are “protected” via QE, i.e., money “printing”. By bidding up their price, the Fed is giving a huge capital gain to the bond holders that eventually results in the destruction of the buying power of the “money” in which these treasuries are denominated. Insiders will be long out of treasuries before that happens.

    You seem to believe that the state is omnipotent – that it can protect both the safety of its bonds and the value of its “money”, all while spending multiples of its revenues and strangling its revenue base.

    Gold is not “way more” than 3 times overvalued – it’s almost 3 times (~2.7) overvalued, but it’s not overpriced for the extreme current circumstances. Gold will fluctuate in its buying power; and it may or may not drop from here, but I doubt it will fall to anything less than 2 times its normal buying power until normal times return once more.

    • mava July 9, 2012, 6:59 pm

      Yes, I agree with Mark. Such is impossible, because it would break the law of the conservation of energy, as applies to money. Something will give. One or another, doesn’t matter to me, which.

      Mark, you think that gold is overvalued? I think it is extremely undervalued, but not by everyone. The transfer of physical gold (which is the only gold that matters) abroad is accelerating. This year it is 170 tonnes exported so far, as opposed to the same amount imported during the whole of the last year.

      As it is usual with the cases of mass hysteria, the resolution will feature a sharp revaluation (masses coming to a realization that “oh crap, it is only gold that matters!”), and trying to buy some, but to no avail.

      I have personally experienced it once. It is very strange, indeed. Right before the sudden revaluation, practically no one agrees with the valuation of the asset that will be the reality tomorrow.

      So, yes, we will have gold in $1500-$2000 range, then it will become not available for that price, and then it will suddenly be revalued to $55000-65000 range, or more, depending on how many more bailouts we will make until then.

      Don’t be left behind.

    • Mark Uzick July 9, 2012, 10:11 pm

      Mava, I’m valuing gold according to its buying power – not its fiat denominated price. In terms of fiat, gold’s value is infinite as it’s a fraction with a denominator of zero.

    • mava July 10, 2012, 2:38 am

      VLAD,

      I can’t argue with you on that, you’re right, we all will pay for the things we are wrong about.

      One question regarding other stuff you predict: The boats of deflation, where will those come from? You think the banks will start to massively destroy the reserves we just barely finished recapitalizing them with?

      As for the interest being low, it is a function of two factors. First, the rates have been fake for what, 80 years something by now? If you want to see the action of the elite, then the rates are the first place you would look at. They can’t pay the real rates, so, they must use the fake rates and have them low.
      It is my humble opinion that this whole crisis was allowed to happen for the single purpose of lowering the rates that the government pays on debt, through the supposed “need” to feed the banks the low rate loans, which are tunneled directly to the government.
      And second, even if rates were real, there has to be an end to a scheme. Therefore, we can suggest, that since the end is unavoidable, then it would come even if the rates are high, – just sooner.

      Mark Uzick,

      I understand and agree. But, how do you calculate that the gold is overvalued in terms of its value if everyone participating in valuation market tries to value it in terms of fiat?

    • Mark Uzick July 10, 2012, 8:32 am

      Mava: I understand and agree. But, how do you calculate that the gold is overvalued in terms of its value if everyone participating in valuation market tries to value it in terms of fiat?

      You simply translate fiat’s buying power into terms of gold’s buying power per ounce by multiplying the amount of goods and services an FRN will buy by gold’s fiat price. You’ll find that gold can buy much more stuff than the historical average.

  • Rusty July 9, 2012, 1:18 am

    I have no idea how the inflation/deflation scenario will play out. All I know is those holding Series A Versailles Bonds, didn’t come out whole.

    http://www.bbc.co.uk/news/world-europe-11442892

  • Rich July 8, 2012, 5:27 pm

    Also:

    http://www.thegoldstandardnow.org/featured-articles/1357-fight-the-fiat

  • Rich July 8, 2012, 5:04 pm

    A good read:

    http://mises.org/books/caseforgold.pdf

  • Clark Mandrell July 8, 2012, 4:31 pm

    I have never heard of the burning matchoption trades?
    Maybe this is just some new way of saying something ?

    You sold the puts and collected the premium?
    Can I ask on what month and what is you strike to get 70%? I have look at doing this before but in times like these it’s hard to see where price would be even a few days out? Thank you in advance for sharing some of this information.

  • Rich July 8, 2012, 4:20 pm

    Some pretty smart thinking here this weekend.
    Some markets inflate while others deflate, so I follow the big money (1%) in different markets at CFTC COT.
    Big4 insiders are selling the New LT (30 year) Treasuries and 5-2 year Notes, while buying Fed Funds and 10 Year Notes and Old (20 year) Bonds, as the Treasury lengthens maturities to lower mortgage rates to stimulate housing and give the 1% with cash equivalents a present.
    Big4 are selling Alpha, the Dollar, Dow and SP400, while buying most Ags, Meats, Euro, SP500, NDX , RUT and VIX, suggesting a roller coaster ride ahead, ideal environment for Rick’s ABCD AbbraCadabra.
    That does not mean the Dollar cannot hit its 100 Target and the Euro its 116 target at some point.
    With Big4 and TopTen I waited until both Big4 and the Targets jived before taking positions for 4 digit annual percentage returns for three years with demonstration portfolios.
    Nobody believed it, so now I’m just trading my own account, a more challenging proposition to be sure.
    When different markets conflate there is generally a turn coming in the other direction, the pennies on the dollar scenario the 1% play from generation to generation with usury bankrupting borrowers who lose their collateral to foreclosure.
    The Banks may not foreclose en mass until we are closer to the bottom.
    Assets and economies are still deflating with Broad Money Velocity, as they have been since the 1981 Bond bull market began compounding cash to the sky:
    http://research.stlouisfed.org/fred2/series/MZMV?cid=32242
    Ten and Twenty-year Treasuries are still targeting amazing +208% and +56% gains with 0.5% and 1.7% yield targets.
    No wonder Hank The Hammer Paulson put his tax-deferred GS proceeds into Treasuries when he became Treasury Sec.
    At some point Treasuries may default so the 1% can foreclose on America with government privatization sales as they have throughout history.
    And the beat goes on.
    PS: Sold QQQ puts with +70% Friday and now have SPY puts for another quickie on the burning match options trades…

    • Frog July 8, 2012, 9:13 pm

      “Big4 are selling Alpha, the Dollar, Dow and SP400, while buying most Ags, Meats, Euro, SP500, NDX , RUT and VIX.”

      I can’t imagine making sense out of the above pattern as a guide to trading, as they are selling some very similar things to what they are buying– and some of the buys and sells are indexes which historically rise and fall all together, not in opposite directions. BTW, Clark, note that Rich didn’t say whether he sold those puts to open, or to close.

    • Mark Uzick July 9, 2012, 3:59 am

      Rich, I bought SPY puts too. (5 Aug. 136’s) I wanted to buy 10 but decided to by 5 to start and then another 5 only they have a significant drop in price within a few days.

      My intention is to hold them until NYMO drops below -48 and sell them as it passes through -48 on the way back up.

  • John Jay July 8, 2012, 4:56 am

    Vlad,
    “and then, the mega powerful 1%, with their untouchable trillions in treasuries and bonds, will proceed to buy all property, businesses (and serf loyalty), with those fiats, you now so despise. and then, only when, the mega powerful 1%, has swallow up nearly all property on earth, at 10 fiat cents on the fiat dollar.”
    Exactly!
    They do not care what “Currency” their holdings are denominated in, not at all.
    They will own everything worth owning, and the “Government” they bought and paid for over the decades will gladly provide the “Muscle” to insure there will be no “Revolt” against them.
    The Tax Codes, Dynasty Trusts, and the unenforced Sherman Anti Trust Act made it all possible.
    The Housing Fraud/TARP plan is just the final nail in the coffin that they have built for the Middle/Working Class.
    That’s Game, Set, and Match!

  • gary leibowitz July 8, 2012, 4:51 am

    Why the jobs report was not indicative of a slowdown. In fact it actually indicated domestic demand is still steady if not expanding. A good indication that we should see a nice earnings pattern going forward. This quarter the expectation is for an 11 percent decrease from last year. It is already baked into the current expectations. Not much downside in my opinion.

    Excerpt of an article is below:

    The average workweek rose for the first time since February and temporary staffing climbed for a third consecutive month, according to Labor Department figures issued in Washington yesterday. .

    The need to boost hours and add provisional employees is a sign that sales are holding up in the face of a deepening slump in Europe and a slowdown in China and the rest of the world. Nonetheless, businesses may lack conviction that revenue gains will be sustained in light of the threats, making them reluctant to permanently expand payrolls.

    Firms are still seeing an increase in demand, and there is a need for more labor, said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

  • mava July 8, 2012, 4:09 am

    I am not a very smart person, I know that much. I have another disadvantage, – I am mostly self taught. My Russian degree has nothing to do with economics or money, and even the socialist economics classes that I should have had, – I have skipped. This being said, it should be easily understood that I might use a lesson or two in economics. I will honestly thank you, if you could explain to me the deflation argument.

    Inflation: – Increase in quantity of claims on products and services.

    Deflation: – Decrease in quantity of claims on products and services.

    The supply of goods being constant and the demand being constant, the inflation results in increased prices on goods, while the deflation results in decreased prices on goods.

    A mere increase or a decrease in prices of goods may or may not have anything to do with “flations”. For instance, the increased supply of goods against falling or even constant demand results in decrease in prices of goods, while there is absolutely no deflation.

    This is my understanding of these terms. Now, I have zero respect for authority. Therefore, I never care for the explanations given by hand-fed economists and politicians.

    I propose, that there is no deflation going on right now. Debt defaults, according to my understanding results in “INCREASE of quantity of money”, not decrease.

    I can explain if anyone wants to hear.

    I am asking to be shown how does debt default result in decrease in quality of money. Thank you.

    • gary leibowitz July 8, 2012, 4:40 am

      Here is an article that explains these terms in simple language:

      Monatery deflation using Europe as an example:

      If one or more governments defaulted, northern European banks, which were large-scale investors in government debt, would have massive loan and capital losses. The result of these losses would be banks going out of business, calling in outstanding loans, or both, thereby reversing the money multiplier process and causing a decline in the money supply. The falling money supply — deflation — would make the euro more, not less, valuable.

      Monetary Inflation

      But, in lieu of individual governments opting to return to printing their way out of trouble, the ECB itself has decided to take on the job, and it will continue to do so. Why? Because European governments will not allow themselves to face the political consequences of a banking collapse and the subsequent economic problems that a debt deflation would bring about. Instead, they will, as all politicians do, delay the day of reckoning and let future politicians deal with the much larger economic crisis that will face them as a result of merely putting a band-aid on the current problems. Politicians save their current seats by letting taxpayers and future politicians suffer larger problems down the road.

    • gary leibowitz July 8, 2012, 4:58 am

      In my opinion we should first see a year to year and one half deflation spiral when it does hit (most probably first quarter of next year), followed by government re-inflation policy. I can’t see government induced inflation before a wash out of the excess debt. I also can’t see deflation winning out for too long. You would be fighting the efforts of governments to re-inflate. They usually win that game.

    • Mark Uzick July 8, 2012, 8:19 am

      Mava: I am asking to be shown how does debt default result in decrease in quality of money. Thank you.

      Since our “money” is created through the creation of debt in the form of loans, both debt defaults and debt repayments have the effect of wiping this “money” out of existence.

      It’s the policy of preventing debt default via the creation of more debt (throwing good money after bad) to bail out the old debt with ever increasing amounts of new debt that shifts the responsibility of default from the debtors to to the holders of the currency as its perceived value is shown for the delusion that it is through the inflationary process.

    • Mark Uzick July 8, 2012, 2:45 pm

      Mava: I am not a very smart person, I know that much.

      You’re very smart; and you know it, so stop playing foolish games with us.

      While debt defaults decrease the money supply, it’s the intervention by central banks to prevent these defaults that cause inflation. It’s this expectation that causes the perverse expectation of inflation during a debt crisis. Essentially, it’s believed that debts will not be allowed to default; if they were allowed to default, there would be deflation, but that would defeat the whole purpose of going to the trouble of creating a fiat money system in the first place, as its purpose is to ensure that deflation will never occur – that savers will always be made to bail out the profligate spenders.

    • mava July 8, 2012, 7:33 pm

      Still, I am not getting it. I understand as far as the default being a cause for calling back of loans issued previously, and that in some way stops the process of money expansion inherent in fractional reserve banking (FRB). I do not understand how can it “reverse it” as to the resulting money quantity.

      It seems to me, that where loans were issued, the money were created out of thin air, and entered the circulation as any other notes, not specifically marked. If these loans default, the money issued do not stop existing, they continue to circulate.

      Where banks could call loan back and actually receive the money, then the banks would have the opportunity to destroy that money, and even in this case (which is not happening), the previously made round of inflation is stopped and erased. No money issued before this “incomplete” round are destroyed. Thus, at the most, we can expect the latest bout of FRB inflation to not be able to “make it” into the circulation, creating zero inflation, but note too, creating zero deflation. And this is the best case to hope for for a deflationist. To call a stage of inflation, that never had happened (because it was called off), a deflation is the same as to call a fiance that had never married you an estranged wife!

      In most if not all cases, however, we see a default, not return of a loan. In such a case, what we are actually observing, I insist, is an abrupt termination of FRB process, which supposed to end in destruction of credit, had the loans were repayed. If the loans were repayed, and the credit destroyed, then the inflation they actually were, was only temporary. But, because the loans are not repayed, now, the FRB process returned us a pure inflation. Default in FRB equals inflation! (Repayment in practice means the same, but at least in the theory, repayed credit could have been destroyed.)

      As you can see, I did not even bring in the attempts of the governments to (supposedly) restore the falling money supply, which of course, are inflation. I am only questioning the part that we suppose to believe that the default causes a decrease in money supply somehow. I can not see how this might be the case.

      So, Mark Uzick, I am still missing it. Of course I believe I am correct on this argument, until proven otherwise. But, I have been made feel shamefully foolish before, when pointed at some error that I have allowed in my reasoning, so, being human, I do not see why should I be able to make an error again. Smart people do not make errors.

      I am looking at this story of defaults being equated with deflation, being repeated worldwide, by every economist, even those I respect, and I feel that I must say that the way it all seems to me, the king is running around naked.

    • mava July 8, 2012, 7:40 pm

      Should be “…do not see why should I NOT be able to make an error… “.

    • Mark Uzick July 9, 2012, 3:14 am

      Mava: It seems to me, that where loans were issued, the money were created out of thin air, and entered the circulation as any other notes, not specifically marked. If these loans default, the money issued do not stop existing, they continue to circulate.

      Mava, when you borrow money, the bank doesn’t tell the treasury to print you up a stack of paper money. Circulating FRN’s are but a tiny fraction of the money supply. They exist merely to facilitate small retail transactions.

      Fiat money is nothing more than debt on a ledger that exists as 1’s and 0’s in a computer. When that debt is canceled, either by default or by repayment, it ceases to exist.

    • mava July 9, 2012, 5:18 am

      Mark Uzick,

      Let us say you are the banker, I am the borrower and VLAD has a cow. To keep this very simple, let us say that you have 10 and VLAD has 10 bucks each right now. My accounts are zero. And I want VLADs cow, badly. She is a sweety. Total money supply is $20.

      I go to you, and you press the magic button, and viola! Now I have 100 bucks on my account. This is debt. I can’t wait. I run, not walk to VLAD, and buy the cow of my life for $100.

      So, now, I still have zero dollars on our accounts, I have a cow and VLAD has 110 bucks.You have zero on your account, if you were honest FRB banker. Total money supply is $110! Original $10 of your reserve, VLADs $10, and the $90 you have created. These $90 are now patiently waiting to be eraned back from various market participants, repaid back to you, where you will destroy them, of course.

      Now, I default. Why wait? It is as good of a day as any! Debt destruction! My God, the presidents are all around you like flies on butter. May-be you will get your 10 bucks back from a national bailout, may-be not. This is not important. Let us say you didn’t.

      What is important, is that the economy still has 110 bucks in it’s money supply (initial $20, plus the $90 you have “honestly created”), and these $90 aren’t going anywhere. If VLAD spends $90 on hookers, guess what, that $90 still going to be around and available to be exchanged for goods and services, again and again, and again!

      So, at which point do $90 disappear because I have defaulted, in your opinion?

      And, at which point, and exactly how do you foresee the additional money destruction, so that we could say that not only the inflationary $90 is gone, but may-be the original $20 are now gone , too (deflation)? Just because you don’t have them, doesn’t mean hookers don’t, either.

      Do you have any control over VLADs money? I don’t think so. So, how are you going to destroy them?

      I claim, again, that this default resulted in net inflation. And if you get any bail-out, say $10 to cover your original $10 of FRB reserve, then the inflation is going to be $100, not just the original $90. There is no possibility of deflation. I doubt there is any possibility of even removing the inflationary $90!

      Thus, default = inflation, necessarily. Repayment may equal unchanged money supply. Deflation is not even an option.

    • Mark Uzick July 9, 2012, 8:22 am

      Mava, the bank will repossess your cow and auction it off for as much of that $100 as it can get. That $100, or some fraction of it, comes out of the economy, thereby reducing the money supply by that amount. If there’s a missing balance, that amount is deducted from the bank’s reserves and the money supply is reduced by that amount. Since the bank’s reserves are the fractional reserve basis upon which future loans will be made, the effect on the future money supply will be impacted negatively by approximately $1,000 – maybe more, if the bank perceiving that your attitude is pervasive through society, becomes timid about taking on risk.

    • Mark Uzick July 9, 2012, 8:29 am

      Sorry Mava, the $1,ooo that I mentioned would only be in the case that you, upon hearing about the foreclosure, destroyed the cow in a fit of rage; otherwise the amount would be ~ ten times the unrecoverable part of the loan.

    • mava July 9, 2012, 6:43 pm

      Mark Uzick,

      “Mava, the bank will repossess your cow and auction it off for as much of that $100 as it can get. That $100, or some fraction of it, comes out of the economy, thereby reducing the money supply by that amount.”

      Right. If bank can repossess the cow, and if it actually destroys the money, then we have no inflation as a result of the default.

      “If there’s a missing balance, that amount is deducted from the bank’s reserves and the money supply is reduced by that amount.”

      Right. If the banks actually reduces the reserves to account for any missing balance, then we still have no inflation as a result of the default.

      The impact of this default on future credit creation is of no interest to us here, as it will simply preclude the inflation in the future, – but we are looking for an alleged deflation here, remember?

      Thus, we are in agreement, Mark. At the very best, and depending on how much you believe that the bank will actually destroy it’s reserves, there is a chance that there will be no inflation. If the bank doesn’t have enough reserves to destroy to remove the credit it created earlier (as it only has 0ne tenth of the created credit in reserves), and there is no repossession (as it very frequently the case), then there is going to be inflation as a result of the default, precisely, because there was no repayment!

      Inflation or no inflation. Those are the outcomes.

      And, I detect no case in which there is a deflation, or at least, may-be you forgot to show me where and how it happens.

      So, what are they talking about when they say that defaults result in deflation?

  • mava July 7, 2012, 4:03 am

    What Merkel is doing, is theft, covered by simplistic lie designed for the dumb.

    May-be Germans are just too dumb to understand this fact, or may-be they do or going to be able to understand that in the near future?

    May-be Germans are taking the Weimar lessons the wrong way? May-be all that they really learned from Weimar experience was that it is bad to be in debt (tsss: only if you are going to be so dumb as to actually pay it back)? And so, could it be that Germans simply cannot comprehend the wisdom of the Southerners to milk the neighbor’s cow until it runs away?

    Personally, I think they are too far gone, too politically correct, to brainwashed, too stupid to understand that it makes no sense to sell something to people who borrow from you and never intend to repay. Therefore, I think that everything will progress in the same direction as before. Smart southerners will get fatter, and dumb northerners will get thinner. Eventually, everyone will be engulfed by the inflation and may-be hyper-inflation which will erase the debts of the southerners and the wealth of the northerners.

    It is costly to be dumb. It is far cheaper to be smarter even if much more lazy.

    China is a different story. They will sooner or later demand all new debt to be denominated in Yuan, and then, that all new debt in Yuan is only issued on a condition of the old debt being rolled over into Yuan. Then they are going to demand some payments. Then US will print to buy Yuan, only to find out that every new “easing” drops the exchange rates and that even more needs to be printed. Then the west will relive the Weimar experience. Finally, during the spectacular collapse in the west, China announces gold backing for the Yuan.

    So, China loaning to US is a matter of a chess game, entirely different from the checkers they seem to like in Germany.

    • Mark Uzick July 7, 2012, 10:09 am

      There’s a debt deflation in progress and a massive price deflation in terms of real money as reflected in gold being valued at nearly three times its normal buying power, but if you think that, for the first time in history, the value of fiat money will rise (price deflation) or even hold a fraction of its buying power over time, then you simply don’t understand what fiat money, its intended purpose and its ultimate destiny are.

      In case you’re still not getting it: its purpose is to ensure that when the inevitable debt defaults happen, they will be in terms of the currency defaulting on its pretense at having real value so that the banks and national treasuries can pretend not to have defaulted. The world is entering into an inflationary depression, where “inflation” means “price inflation” but only in terms of fiat money.

      Of course Merkel is playing the game – why else would Germany be involved in the euro-swindle in the first place? Corporate interests that have captured political control have been cleaning up by having German’s savings stolen to subsidize the purchase of their products by the deadbeats throughout the EU.

      The Chinese, too, are playing the same corrupt game of stealing the sweat and entrepreneurial drive of their people (In this case, through linkage of the yuan to the US dollar.) to enrich special corporate and Party interests by subsidizing deadbeats in the West.

    • Mark Uzick July 7, 2012, 10:14 am

      Mava, my reply above was intended for VLAD. I tend to favor your take over his on this issue.

    • Mark Uzick July 8, 2012, 8:01 am

      VLAD: don’t you get it? if there was any current true inflation, at all, interest rates in bank deposits would not be at near zero, and for 3 years now!

      This is a manipulated market; if it wasn’t, then you would be correct that interest rates would reflect expectations of price inflation.

      But you couldn’t be more WRONG: In this case, low interest rates indicate just the opposite: that the Fed is monetizing debt by buying treasuries – propping up their price and keeping interest rates artificially low.

      VLAD, if you continue to buy into the central bank propaganda, (That there’s a deflation of the fiat money supply and that there’s little or no fiat price inflation.) then you’ll be sucked dry of everything you have along with the rest of the faithful.

      Don’t become confused by fluctuations in asset prices. In times of economic uncertainty the price of assets like homes and stocks can collapse in spite of price inflation. Resources and finished goods can also go through periods of liquidation of excess inventory and even monetary metals may be dumped by people in financial distress, causing temporary, but dramatic, dips in price. (It’s not so farfetched when you consider that gold is almost 3 times overvalued in its buying power.)

  • Kevin July 6, 2012, 10:16 pm

    You’re right, she is hot….

  • Rich July 6, 2012, 4:13 pm

    Re:
    “How we miss those hotheads!
    JULY 6, 2012 2:58 AM GMT ·
    The markets live up to our expectations yesterday by doing nothing. Le’s hope that hotter heads prevail when w return seriously to work next week. Have a relaxing weekend!”

    Rick’s wish was the market’s command…

  • Rich July 6, 2012, 4:53 am

    Guess I’m the lonely bear here once again:

    QQQ Jul 65 puts anyone?…

    • Mark Uzick July 6, 2012, 5:00 pm

      Rich, are you perhaps looking at the NYMO on the SPX? That’s a hard trade to resist. Too bad for me that I saw it a day later than you, but I don’t think it’s too late to buy some puts today.

    • Rich July 6, 2012, 8:01 pm

      http://stockcharts.com/freecharts/gallery.html?$NYMO

      Plenty of time to go lower and add puts/shorts on pauses or rips…

  • gary leibowitz July 5, 2012, 11:23 pm

    She had no choice. A domino of countires will fall if she doesn’t try to hold the dam together. Spend now, hopefully restructure future policy when economies stabilize. That’s the theory anyway. I am extremely pessimistic they will succeed. I do think this pushes the deadline, or a stay of execution for now.

  • John Jay July 5, 2012, 6:44 pm

    One of the best analogies I have read about the world financial crisis is the following. It is as if you have each nation as a lifeboat in a sea of debt, with more and more holes appearing in the bottom of each lifeboat. There are a limited number of “corks” (real money) to keep the debt from filling each nation’s lifeboat and swamping it. All everyone is doing now is moving their corks from one hole to another, but there are not enough corks for the ever increasing number of holes.
    And everyone keeps drilling more holes in the bottom of their lifeboat (adding more debt) hoping that will work. Which is like that old Three Stooges gag where they are in a rowboat that springs a leak in the bottom.
    Larry says “Hey Moe, the leak is filling the boat with water!” Moe tells Larry, “Well, just drill some more holes and let the water out!”
    It is a madhouse for sure.

  • bc July 5, 2012, 6:42 pm

    The South is learning that nein means nein in German. And so there will be a painful restructuring in their economies. Less govt and less govt services, lower wages, higher taxes, recession, social strife, and so on. Same thing is coming here but without a Germany to ankor our manufacturing and trade able goods sector. The Germans have it right. No doubt they look at us with Bernanke as yet another Latin American banana republic, which I fear we may have become.

  • gary leibowitz July 5, 2012, 3:15 pm

    I don’t see the Euro rising much against the dollar simply becuase the economic indicators have improved on a steady basis domestically, while the EU is still fighting the initial austerity measures they imposed.

    In the short term, as a trade, the EU might jump on the current news.

    Today the ECB cut rates and Chine cut for the second time in a month. Yes it looks like everything is set for a nice rally going forward. The initial indication on job growth here surprised on the upside, while the unemployment numbers keep going down.

    I wonder if my analysis is masked by my long held belief that a final surge will develop. With the EU problem contained, for now, and the following domestic segments showing improvement, such as housing, mortgage rates, unemplyment and employment figures, I just can’t envision a hard drop from here.

    I think we are over extended on the short term and expect one more drop before a surge to new highs. If that drop doesn’t develop, within the next week or so, than I re-enter my long position. If the drop exceeds 1310 on the SP500 on the downside, I stay out of the market and reevaluate my expectation. I can’t see any drop going forward that is a strong one. In fact I believe we will be on a very defined linear move up soon.

    In my mind the perfect storm is developing. I call it a storm even though we should experience beautiful clear skies for the next 6 to 9 months. I believe we will be in the massive eye of the storm.

    Gold and silver should do well as equities go higher. The assumption being we fall into an inflation spiral. That assumption I don’t agree with but for the same length of time as stocks it should be a good investment.

    All this is my musings on the state of affairs. Please don’t get upset with me. It is just my way of venting. I was anticipating these events, and now it looks like it is upon us.

    • Mark Uzick July 5, 2012, 5:01 pm

      Are you saying, as opposed to Rick’s thesis, that the EU will massively inflate the euro to the extent that they will avoid deflation; and do so more easily than in the US? If not, then why wouldn’t the euro rise against the dollar?

    • gary leibowitz July 5, 2012, 6:14 pm

      No, I don’t think the Euro will be able to inflate, just like we weren’t able to these last 4 years.

      It’s just a matter of perception. If the cuts are deemed beneficial to reverse the downward economic trend it should give a boost to the Euro. I think in the long run both the dollar and Euro will move pretty much in step to where we are today, with a slight edge to the dollar.

      I don’t see these currencies as a long or intermediate term tradable bet. This is just a guess on my part. Perhaps the people that trade these currencies see something different.

    • gary leibowitz July 5, 2012, 10:55 pm

      VLAD,
      The notion that the Libor lawsuits will derail the banks is not likely. These lawsuits can be held up for year in litigation, and in the meantime they recover to profitability. TIME is the great equalizer. This Fed is hoping for as much time as possible before the next “event”.

      Now we will have domestic economic news front and center, since I believe the EU debacle is on the sidelines for now.

      Where/how can I bet on the election? I would tie in the markets health with Obamas. I see it as a lock if my equities scenario plays out.

    • Rich July 6, 2012, 4:51 am

      Gary, Intrade has 0 ahead of MR 15 points so far…

      http://www.intrade.com/v4/home/

    • redwilldanaher July 6, 2012, 4:27 pm

      Still refusing to acknowledge the elephant in Rick’s forum Gary?

    • redwilldanaher July 6, 2012, 8:17 pm

      http://www.zerohedge.com/news/four-scariest-charts-hope-filled-de-cuppers – may want to take a look…

    • gary leibowitz July 8, 2012, 6:31 pm

      Red, your scary charts are not very scary. It’s the assumptions that is scary. like all assumptions they can be wrong.

      SP500 3 percent lower than start of year? Not a barn burner. In fact the street already knows this. No impact unless they lower future expectations. The current P/E is already low. Capex topping? Well it is at close to +8 percent and your assumption it will fall hard. Hasn’t happened yet. Same for future orders. it is just below the 50 percent mark, that spells contraction. One month? Nice assumptions. Here is one for you, domestic growth is picking up, worker hours increased for 3 months in a row, lower gas and commodity prices, housing home prices rising, bankruptcies lowest in over 4 years, morgtate rate one of the lowest in a very long time.

      So now, which data point do we use?

    • redwilldanaher July 8, 2012, 9:50 pm

      Keep ignoring the hyper-manipulation that is staring you in the face directly in this forum Gary.

      You are obviously dishonest and cowardly. Deutsche (surprise, surprise) is now being entangled in LIEbor too.

      Just explain it all away. Please tell us all that John and Jane Q. knew about LIEbor the entire time and that this is exactly what your beloved fascist governments and corporations should be doing since they know what is best for us.

      Disgraceful…

    • redwilldanaher July 9, 2012, 3:25 pm

      http://www.zerohedge.com/news/things-make-you-go-hmmm-such-transition-conspiracy-theory-conspiracy-fact

  • Mark Uzick July 5, 2012, 1:32 pm

    This all seems very bullish for the euro versus the dollar; and the EU is in better financial shape than the US by every metric I can think of – yet, the last time you mentioned it, you were extremely bearish on the euro – enough so as to frighten me out of my position on FXE calls. (A good thing, in retrospect, as of this morning.)
    But I’m confused as to why this should be.

    • Rick Ackerman July 5, 2012, 10:51 pm

      My bear market target for the euro is still $1.08, Mark, and I’ve written here extensively on what that might imply. Concerning Europe being in better shape “by every metric,” you seem not to have factored in the perhaps incalculable financial liabilities of an unsustainably bloated welfare state.

      Ironically, with that welfare state already fully in place, Europe is better positioned than the U.S. to hyperinflate simply by spending much more on those things which government already pays for. Trouble is, Europe has relatively few private lenders to take their fair share of the hit, since capital itself has been socialized to a far greater extent than in the U.S. As a practical matter, although hyperinflation might allow a bankrupt Greece, Italy, Spain , France et al. to meet payroll on a given Friday, repeating this magic trick the following Friday might require more cash than even the ECB would be able to muster.

    • Mark Uzick July 5, 2012, 11:32 pm

      Rick, I seem to have misunderstood your thesis as the EU’s inability to inflate away debt. You were actually saying that the EU willinflate?

      This idea that the EU is more of a welfare-warfare state than the USA is, unfortunately, a myth. I doubt their unfunded liabilities, strangling regulations and progressive taxes, bad as they are, are a match for ours.


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