Spain’s deflationary quagmire now lies well beyond remedy, dooming Europe’s bold but ill-conceived attempt to forge a political and economic union under a single currency. That Spain’s collapse is imminent should be obvious to all by now, as the country attempts to borrow its way back to prosperity amidst 25% unemployment, savage budget cuts and a flight of capital to banks in England, Germany and elsewhere. Recall that it was just two weeks ago that the world’s bourses wildly celebrated a German constitutional court’s decision to uphold the latest bailout facility, the European Stability Mechanism (ESM). Stocks and bullion rallied sharply on the news, acting as though yet more monetary pump-priming would somehow surmount the irresistible deflationary drag of the world’s imploding, quadrillion dollar derivatives edifice. In fact, the supposedly all-knowing, all-seeing stock markets showed themselves to be deaf, dumb and blind to fact and reality, since the court’s decision actually raised more obstacles to a bailout than it eliminated. (Traders have since repented, having given up nearly all of their earlier price gains.)
Concerning the legal ruling, “the establishment of the ESM is about the only thing that the German court did say yes to,” our Australian colleague Bill Buckler noted in the mid-September edition of The Privateer. “The rest of its ruling is a litany of the word NO!” We quote the Privateer at length here, since Buckler appears to have been alone in describing what actually went down: “In the first place, the court insisted that the German parliament must have a veto over any increase in Berlin’s Euro 190 Billion contribution to the ESM. Any increase in that amount would require the prior approval of both houses of the German parliament.
Oh, That EU Treaty…
“Much more important,” continued Buckler, “the court effectively vetoed any move to give the ESM a banking license by saying that any borrowing by the ESM from the ECB would be incompatible with the prohibition of monetary financing contained in the current EU treaty. The court also stated that: ‘An acquisition of government bonds on the secondary market by the ECB aiming at financing the Members’ budgets independently of the capital markets is prohibited.’ This clearly bans Eurobonds, although it seemingly does not ban the ECB’s purchase of existing government bonds on the secondary market – which is in effect the capital market.
“The German constitutional court clearly does not want the kind of open ended QE that the US Fed announced on September 13. Nor does it want ANY more German participation in potential European bailouts without the PRIOR consent of the German government. Finally, it says in effect that if Europe wants to go whole hog into money printing, they are going to have to change their treaty once again. And any treaty change requires unanimous consent from the EU. The German court – and the Bundesbank – still cling to the idea that a central banking system and sound money are not incompatible.”
Europe’s Day-to-Day Bills
Just so. Anyone who thinks Germany is “on board” for open-ended loans to Spain – and also, by implication, to Italy, Greece and Portugal – needs to re-read the analysis above. The same goes for those who believe an outbreak of inflation is imminent merely because Europe appears ready to try hairy-knuckled, US-style monetization. As bankers, politicians, economists and news editors should have learned by now, to attempt to inflate is not necessarily to succeed at it. At this point it is all dead money velocity-wise, and more and more trillions of it have become necessary to induce even the faintest blip of inflation, let alone a sustainable improvement in employment and housing. For sure, a hyperinflationary thunderclap must eventually result from printing so much valueless money backed only be debt. In the meantime, however, we should expect debt deflation to continue to asphyxiate Spain et al. as the dying welfare state that is Europe struggles to pay its routine bills.
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rick,
you asked me if I could write an article under 650 words…
&&&&&
mega: You’ll need to furnish a proper e-mail address if you want to communicate about such things.
RA