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Tuesday, February 16, 2016

The end of the EU

The abomination appears to be in its death throes.
A new German plan to impose "haircuts" on holders of eurozone sovereign debt risks igniting an unstoppable European bond crisis and could force Italy and Spain to restore their own currencies, a top adviser to the German government has warned.

“It is the fastest way to break up the eurozone,” said Professor Peter Bofinger, one of the five "Wise Men" on the German Council of Economic Advisers.

"A speculative attack could come very fast. If I were a politician in Italy and I was confronted by this sort of insolvency risk I would want to go back to my own currency as fast as possible, because that is the only way to avoid going bankrupt,” he told The Telegraph.

The German Council has called for a “sovereign insolvency mechanism” even though this overturns the financial principles of the post-war order in Europe, deeming such a move necessary to restore the credibility of the "no-bailout" clause in the Maastricht Treaty. Prof Bofinger issued a vehement dissent.

The plan has the backing of the Bundesbank and most recently the German finance minister, Wolfgang Schauble, who usually succeeds in imposing his will in the eurozone. Sensitive talks are under way in key European capitals, causing shudders in Rome, Madrid and Lisbon.
Deflation is killing the bond markets; governments require an ever-growing inflation in order to pay off their debts in cheaper money. That's why interest rates have been driven negative, but it's a fool's game because the problem continues to expand the longer the day of reckoning is delayed.

Although complete collapse is unlikely, between the migrant crisis, the debt crisis, and Brexit, it's possible that 2016 will see the first European nations break free of the Fourth Reich.

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33 Comments:

Blogger intuitivereason February 16, 2016 5:00 AM  

The whole point of the Euro setup was that nations that were insolvent would go broke rather than inflate the errors away. Once they go broke, then they can rebuild on solid foundation.

Just do it already.

Anonymous Brady February 16, 2016 5:33 AM  

Cameron has already hinted at June 23 for the date of the referendum.

Blogger bob k. mando February 16, 2016 5:35 AM  

football is never OT, OT:
http://i.imgur.com/P1v1Se1l.jpg

Blogger Shimshon February 16, 2016 5:40 AM  

I can understand imposing a haircut on holders of bank deposits (as evil as it is), but why this? It doesn't really make sense. Especially since banks hold a lot of sovereign debt, and often seems that the whole purpose of government is to prop up the banks.

There have been multiple articles in recent days that the Bank of Israel is about to join NIRP club. It's insane. They keep chanting deflation because the CPI has been mildly negative for a while. Given the nose dive in oil prices, increased domestic energy production, and the like, is that even a surprise or concern for alarm? Housing was also up 8% in 2015! Obviously, they're hiding something and freaking out.

Blogger James Dixon February 16, 2016 5:51 AM  

> They keep chanting deflation because the CPI has been mildly negative for a while. Given the nose dive in oil prices, increased domestic energy production, and the like, is that even a surprise or concern for alarm?

Of course they never count energy (or food) prices as being part of core inflation when they go up. But let them go down and watch the panic.

> Housing was also up 8% in 2015! Obviously, they're hiding something and freaking out.

Not around here. This is just one current example: http://www.trulia.com/property/3069714299-309-Fairview-St-Mannington-WV-26582

Blogger Shimshon February 16, 2016 5:59 AM  

"Of course they never count energy (or food) prices as being part of core inflation when they go up. But let them go down and watch the panic."

I know they do that in the US. I don't think they do that in Europe or Israel. I never read about "core inflation" ("excluding volatile food and energy prices") except in the context of US CPI.

Blogger James Dixon February 16, 2016 6:18 AM  

> I never read about "core inflation" ("excluding volatile food and energy prices") except in the context of US CPI.

The reason it's important in the US is that changes to entitlements (Social Security, et. al.) are based on the CPI.

Anonymous The Kulak February 16, 2016 6:26 AM  

http://sofrep.com/47483/the-russian-paper-tiger-a-foreign-volunteer-in-the-ukrainian-armys-view-of-russian-troops/#ixzz40HUWUCKO
Guys, looks like a 'limited hangout' of an admission by a NATO member state that at least a few of their active duty servicemen deployed to Ukraine in combat roles. Surprise surprise Putin wasn't lying when he said the Ukrainian army was a 'NATO Foreign Legion' with Uncle Sam's allies filling the role of the French instructors to the legionnaires on the front lines.

Judging by the use of the Soviet Afghan war era term 'bandit' this soldier is Slavic, either Slovak or possibly Polish. If he's Polish, that would go a long way to explaining the 'why now' question a year after the Ukrainian (and the U.S. by proxy) defeat at Debaltsevo: http://voxday.blogspot.ca/2015/02/us-defeat-in-ukraine.html

Someone in Warsaw may be trying to get ahead of the leaks coming from the new PiS government's MoD appointees who're getting pissed off as America's most committed frontline NATO state over criticism coming from the Germans (who want Poles to take in Islamo-migrants), the usual EU(SSR) pukes and McCain himself. In other words, keep pushing us politically and we'll drop the truthbomb that Russia wasn't the only country to send regular 'volunteers' to Donbass and lie about it, and some of our guys (at least a handful, just few enough to hush up) didn't make it back from Donetsk Airport battle unhurt or alive.

If several of this guy's fellow 'volunteers' were trapped at Debaltsevo and were going to get caught and put on TV by the Russians as proof NATO is lying about its participation in the conflict, that would explain the sudden terrible urgency for Merkel and Hollande to fly to Moscow last February.

To QuarterMaster and the Polish lurkers and regular commenters here, what do ya'll think of this theory?

Blogger Mr.MantraMan February 16, 2016 6:33 AM  

Decades of scolding the people of the 2nd and 3rd world for their finances, the condor size chickens are coming home to roost.

FTR I track farmland sales and a lot has come on the market, my guess is that the owners sense they are on the precipice of deflation.

Anonymous grey enlightenment February 16, 2016 7:51 AM  

Deflation is killing the bond markets; governments require an ever-growing inflation in order to pay off their debts in cheaper money. That's why interest rates have been driven negative, but it's a fool's game because the problem continues to expand the longer the day of reckoning is delayed.

I'm pretty sure deflation is good for bonds by lowering interest payments. Yields fall and bonds rise when there is less inflation. You have it backwards.

Anonymous TJK February 16, 2016 8:15 AM  

@8
I think the our current government (in power since October) would not be that keen on releasing information showing that the previous government acted with any particular vigour against Russia. In their view the previous government was just an ineffective appeaser of Moscow; in a way this could partly exonerate them, though you could spin this in different ways. In any case I consider it a somewhat risky bluff.

As to the likelihood of Polish servicemen having been there, I suppose it could be a possibility. Certainly the previous government was even more keen on pleasing Western allies than on appeasing Russia, as the former won out when the two tendencies (I hesitate to call them policies) conflicted over Ukraine.

Anonymous MendoScot February 16, 2016 8:26 AM  

Shoot it in the head", says I.

Anonymous Rolf February 16, 2016 9:28 AM  

"Events, dear boy, events." And events are unfolding rapidly.

@10 - The problem is that deflation kills income and savings faster (or to a larger degree) than it lowers the interest payment, while the principle stays fixed (growing in relative value). A very simplified example: If you borrowed a hundred dollars, and a 50% deflation hit, then it would be like paying back a $200 loan.

Anonymous Satan's Hamster February 16, 2016 10:08 AM  

"The problem is that deflation kills income and savings faster (or to a larger degree) than it lowers the interest payment, while the principle stays fixed (growing in relative value)."

No, the problem with deflation is that banks and governments can't tax it. Your savings become more valuable over time, rather than less valuable, and you no longer have to hand that money to bankers to try to retain its value, while paying tax on the increase in nominal value that really just fights off government-created inflation.

Deflation is the reason my $200 tablet has the same performance as a multi-million dollar supercomputer from the early 80s (back when a million dollars was still considered a lot of money). In a sane world, it would be the norm, as improvements in production technology make everything cheaper.

Blogger Shimshon February 16, 2016 10:12 AM  

@14 Your conflating monetary and price deflation, which are two different beasts.

Blogger James Dixon February 16, 2016 10:36 AM  

> I'm pretty sure deflation is good for bonds by lowering interest payments.

Sigh. Lower interest rates cause *existing* bonds to go up in value. But they make people either less like to buy newer bond issues or to pay less for them.

Blogger praetorian February 16, 2016 11:13 AM  

I'm pretty sure deflation is good for bonds by lowering interest payments. Yields fall and bonds rise when there is less inflation. You have it backwards.

Grey, seriously. Have you not learned yet that you aren't as tall as you think you are? This ride has some pretty tall folks on it.

Like JDix said: it's good for the value of current bonds, but it will collapse borrowing even more since we are already at the lower bound for cash flow-based markup by banks on debt offered to consumers. Consumers will never see negative rates on the debt they take on, only on their savings.

This will further collapse the monetary base, as well as monetary velocity:

https://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D=M2V

And, oh, gee, look at the time...

Blogger praetorian February 16, 2016 11:19 AM  

Your conflating monetary and price deflation, which are two different beasts.

I really hate it when people say this, as if they themselves (or any other fucking economist discussing policy in public) make that distinction. It's trotted out like clockwork when some midwit keynesian wants to claim that "Muh Inflation Gud, Yuh Duflushun Bud" and is provided an obvious counter-example.

Not to say it isn't a useful distinction, Shimshon, but fuck, man.

Anonymous Noah Nehm February 16, 2016 11:26 AM  

Here's a question: What is the correlation between deflation and shrinking population? It seems that the big D is hitting all those countries where adults are refusing to have children. Or, is that merely an illusory observation?

Blogger Badmojo February 16, 2016 11:35 AM  

> “It is the fastest way to break up the eurozone,” said Professor Peter Bofinger, one of the five "Wise Men" on the German Council of Economic Advisers.

Might that be the goal?

If the Eurozone collapses, Germany isn't on the hook for the Greek, Spanish, Italian, etc, etc, debt so they could walk away in better shape than staying. Even if that leaves the house burning for others to clean up.

Anonymous Soga February 16, 2016 11:37 AM  

@19

I would imagine there's a decent correlation. I'm no economist, but it doesn't take a rocket economist to realize that, assuming you're not actively trying to destroy the middle class, population growth incentivizes inflationary policies and zeitgeists. More people means you need a bigger money supply to make society work.

Fewer people means inflation is a huge disaster: the rich gets most of the extra cash being pumped into the economy, the poor sees less of it, and the middle class gets fucked.

Blogger unconventional nazi February 16, 2016 12:47 PM  

So how do I get in on this gig? You get appointed (big banks) to be in charge of an entire nation's money supply. You create the money (debt) out of nowhere by entering numbers into a computer. You then loan said numbers you entered into the computer to the government that put you in charge at interest. At some point when the government can't pay you back and the numbers on the computer don't even out you then claim the moral authority to start seizing national assets (see Greece) in exchange for the debt obligation for the numbers you entered on a computer.

Blogger praetorian February 16, 2016 12:59 PM  

So how do I get in on this gig?

I'm sorry, sir, but this line is for tribe members only...

Money, money, money...

Blogger unconventional nazi February 16, 2016 1:04 PM  

Damn it. I knew I should have put more (( )) around big banks.

Anonymous BGKB February 16, 2016 1:11 PM  

So how do I get in on this gig?

Do you think guys marry jewish women for their looks or personalities? They have trouble getting jewish guys to do so.

Anonymous Kreator February 16, 2016 1:15 PM  

Vox, may I ask when do you think the EU abomination is going to collapse?

Blogger dc.sunsets February 16, 2016 1:19 PM  

A policy of NIRP cannot be inflationary. As I see it, if one buys a bond for $1 and gets back $0.95 at maturity, total wealth in the system just fell $0.05.

Okay, I get that in theory, driving down rates below zero continues to increase the capital value of existing bonds, but other than short-dated government paper, NIRP does not exist. B-rated corporates are getting mauled, so rolling over existing debts is rapidly escalating into catastrophe.

All roads lead to less debt in the system. Since debt=money, less debt means wealth evaporation. This is what economists somehow seem not to see; credit never created more wealth, just the illusion of it.

Blogger dc.sunsets February 16, 2016 1:21 PM  

@22
Social democracy is where income is taxed.
Cannibal democracy is where wealth is taxed.
Zombie democracy is where brains are taxed.

BTW, "taxed" is a euphemism for "eaten."

Anonymous Discard February 16, 2016 3:39 PM  

I had really hoped for more from a Fourth Reich. No goose stepping? Not even jackboots?

How can they hope to stand up the the Third Temple?

Blogger VD February 16, 2016 6:50 PM  

Vox, may I ask when do you think the EU abomination is going to collapse?

I don't due time predictions. Soon, I hope.

Blogger JCclimber February 16, 2016 8:45 PM  

I was thinking that the fires would start in Paris two years ago with all the muslim rioting.
Then last year, in Greece.
This year, I'm thinking parts of Europe, but I keep getting the timing off as the powers and elites manage to find ways to drag things out a little longer.

Already it looks like the spigot of rapefugees is ready to be turned down to a lower level, so the question is whether or not there are already enough in Europe to kick things off in 2016.

I'm leaning now toward a slow simmer rather than a boil. Corrosive, rather than explosive.

Blogger dc.sunsets February 17, 2016 9:26 AM  

VD is right, the first signal will likely be financial, not cars burning in the street.

People can act on their financial fears much more quickly than can a mob coalesce in the street. Once the financial dam bursts, the mob actions will be close behind, I suspect.

Anonymous Geert! February 22, 2016 6:20 PM  

I AM GEERT!!

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