The Dow Jones Industrial Average fell almost 400 points today, and the Asian markets fell out of bed with a way to go before they hit the ground on the way to closing. As you may already know, the reason for this revolves around the rather obscure fact that the interest rate on Italian bonds has now exceeded 7%.
To someone not versed in the trivia of finance, this is a WTF moment -- so let me explain. According to a report issued by Barclays Bank yesterday, the Italian economy is strong enough to pay for its bonds when interest rates are no more than 5.5%. It's been widely calculated that when interest rates go to 7% for Rome, every bond holder and his brother will realize that Italian debt is now no more trustworthy than Greek debt. In order to pay the vigorish beyond 7%, Italy can sell all of its women into white slavery rings (along with selling and buggering everything else) -- and it still won't be enough to make the bond payments.
God forbid that some trillion euro vulture capital fund should come up short on its cash flow by having less than guaranteed payments on its Italian debt portfolio. Why, some of those bond traders making millions might actually be forced out on the street. People would have to sell their yachts and private planes, and they could never hold their heads high at the country club on Capri ever again.
No, it's far better that nonessential personnel like teachers and firefighters should be put out to pasture. People who want old age pensions should be able to retire only when they're 80. City water systems that have been under government control for a thousand years or more can be sold to the highest overseas bidders. This is the standard formula that the International Monetary Fund has, and unfortunately this bitter medicine is what the European people are being forced to swallow.
One of the problems with the whole shebang is that the train of debt contagion is starting to move out of the station. Greece was the first car to move, and now we hear the clang of Italy. Spain, Portugal, Ireland, France, and even Germany will almost be sure to follow unless something drastic can be done.
Up until a few weeks ago, it looked as if the governments of the US, UK, China, etc. would be willing to lend their unlimited resources to quench the conflagration. But with Italy's 1.4T euro debt on line, and more dominos getting ready to fall all around, sovereign wealth funds from Saudi Arabia to Beijing have suddenly gotten cold feet. Why bother buying useless paper from the Europeans when you don't know how the story is going to end?
The ultimate authorities in this whole mess are the European Central Bank and Germany. The EU is on its own now in solving its problem. And here we get a few peculiarities. Unlike the Federal Reserve Board or the Bank of England, the European Central Bank has only limited powers. When a single country has a debt crisis, an ordinary central bank just starts the presses. The ECB has no such power to do this because of the nature of the European Union.
Germany is the arbitrator of the European Union and the ECB because it is the far superior economic power in the region. And there is a peculiarity about the Germans. They still remember the hyperinflation that the Weimar Republic resorted to in its attempt to get out of paying World War I reparations. You might remember old pictures of people carrying wheelbarrows of cash to grocery stores, or houses that used 1,000,000 mark notes as wall paper. While a dose of inflation is in fact what is needed, you might as well ask a German to hold his hand in the middle of a fire as to ask him to pursue an inflationary monetary policy.
And this is the dilemna that the European Central Bank and Germany are in right now. It is getting very close to the point where only two courses of action will be possible to quench the towering inferno. Either the ECB has to be given immediate, broad powers to act more like the Federal Reserve Board in every respect, or the Germans will be forced to step away from the European Union and the creation of the euro, going back to the Deutschmark.
Death or booga booga.
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Comments
still, there are probably ten men in zurich who could straighten out europe if given license to fire the people who led the world's biggest economy into looming disaster.
I'm surprised vulture capitalists haven't already proposed another solution to this problem of "income redistribution", A Modest Proposal along the lines of Soylent Green. I say let 'em eat bonds and wash 'em down with molten gold. That latter is how Native Americans used to treat Gold Fever.
If this fiscal insanity continues, the entire world will be forced to return to an agrarian economy. Well, at least that will go a long way to solving the obesity problem -- and the overpopulation problem.
Thank god my grave is waiting just around the corner.
While I sympathize with the scorn placed on selling the yachts, I doubt that it’s as painless as that. Pension funds, governments, other banks and god knows what else is entangled, once or twice removed, from Italy’s looming dud paper. Most people, and these days I guess that includes corporations, have some savings and investments dependent on Italy paying its debts. That’s only the direct, or first wave effects.
Germany walking away from the Euro is nightmare fantasyland. Their leaders know that appearing to escape unscathed while all their trading partners around them collapsed would offer only very short term relief. Most extreme scenarios envisage a reduced Euro zone. It still looks like the run on Euro paper can be contained to Greece and Italy, though I wouldn’t want to bet a lot of my own money on it.
It’s also worth noting that Italy, like Greece and Argentina a decade ago brought much of these problems on themselves. Large deficits in good times and bad, a bloated public payroll, corruption, and widespread tax evasion coupled with a large “informal” (i.e. cash only) economy. Combating these failings isn’t a left-right issue, or it shouldn’t be.
A chicken farm in the hills won’t even help. When hordes of hungry city dwellers come raiding they’ll eat all your chickens for dinner and you for dessert.
Enjoy the ride. She’s gonna be a doozy!!!
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If Italy defaults, no one is going to lend to them at anywhere near 7% and schoolteachers aren't going to get paid and people will lose their pensions and have to work until they are 80.
There has been an EU trend over the last 30 years of ever wider membership and ever closer union -- too goals that are fundamentally in conflict. Ultimately, I think they will have to choose one. To judge by the voters, the choice is for wider membership, not closer union.
Germany can't impose rules without the agreement of the other 17 Euro countries and the issue of giving up national independence is not an easy one.
First, there has been a worldwide overconcentration of capital, particularly in America and the financial sector of Europe where banks make up a much higher percentage of GNP than the US. But an awful lot of those tens of trillions of dollars is in the ownership of the uber-wealthy and the banksters. How much money is in the hands of tax cheats and drug lords? If a credit crunch hits, these groups will no doubt be affected. But should we weep tears for them?
The whole problem of this depression is that because of speculation and the overconcentration of capital, the crisis was set up running in the first place. And we have a long time to go before the whole sorry spectacle of CDOs and other exotic debt instruments unwinds. I've also heard it said that it's standard operating practice in the investment world to dump the worst assets into the accounts of public pension funds while the wealthiest clients suck up the gravy. Thus, that extremely small concentration of wealth gets even more concentrated as IMF-style sanctions are imposed on the general populations of the people in order to maintain "credit worthiness."
Clearly, not only is a policy of large scale inflation necessary on a global scale to get out of this debt spiral, but other policies have to be taken to alleviate the debt burdens on th majority of Europeans and Americans who cannot afford to subsidize the lifestyles of those malefactors of great wealth.