Thursday, May 28, 2015

Pray For Graccident—–It Will Trigger The Demise Of The ECB And The World’s Toxic Regime Of Keynesian Central Banking

by David Stockman
It is not surprising that in a few short months Yanis Varoufakis has proven himself to be a thoroughgoing Keynesian statist. After all, what would you expect from an economics PhD who co-authored books with Jamie Galbraith? The latter never saw an economic malady that could not be cured with bigger deficits, prodigious printing press “stimulus” and ever more intrusive state intervention and redistribution.
In what is apparently a last desperate game theory ploy, however, Varoufakis has done his countrymen, Europe and the world a favor. By informing his Brussels paymasters that they must continue to subsidize his bankrupt Greek state because its the only way to preserve the European Project and vouchsafe the Euro, the Greek Finance minister blurted out the truth of the matter, albeit perhaps not intentionally:
“It would be a disaster for everyone involved, it would be a disaster primarily for the Greek social economy, but it would also be the beginning of the end for the common currency project in Europe,” he said.
Whatever some analysts are saying about firewalls, these firewalls won’t last long once you put and infuse into people’s minds, into investors’ minds, that the eurozone is not indivisible,” he added.
He sure got that right. People who believe in democracy and economic liberty anywhere in the world should pray for a Graccident. During the next several weeks, when $1.8 billion in IMF loans come due that Greece cannot possibly pay, there will occur a glorious moment of irony for Syriza.
If it holds firm to its leftwing statist agenda and takes Greek democracy back from the clutches of the EU/IMF apparatchiks, Syriza will strike a blow for democracy and capitalism in one great historic event. That is to say, defiance of the Germans and the troika would amount to a modern monetary Marathon; it would trigger a thundering collapse of the ECB and the cancerous superstate regime built upon it in Frankfurt and Brussels—–and the worldwide Keynesian central banking regime, too.
The hour comes none to soon. In a few short years under Draghi and in the context of Europe’s fiscal and economic enfeeblement, the ECB has been transformed into a hideous reverse Robin Hood machine. So doing, it has transferred hundreds of billions of ill-gotten gains to the financial gamblers and front-runners of the euro debt markets.
In the days shortly before Draghi issued his “whatever it takes” ukase, for example, the Italian 10-year bond was trading at 7.1%. So speculators who bought it then have made a cool 350% gain if they were old-fashioned enough to actually buy the bonds with cash. And they are laughing all the way to their estates in the South of France if their friendly prime broker had arranged to hock them in the repo market even before payment was due. In that case, they’re in the 1000% club and just plain giddy.
While it is extremely difficult to think of a reason that would justify such wanton redistribution to financial gamblers, the ECB rationale is so astoundingly threadbare as to be laughable. In a word, Draghi and his minions claims that Europe’s economic torpor stems from too little inflation and too little borrowing by private households and businesses. Hence, they have no choice except to drastically falsify prices in Europe’s entire $20 trillion bond market in order to rekindle 2% inflation and get economic growth off the flat line.
Oh, puleeze. The Eurozone economies have had no problem whatsoever in generating an ample quotient of inflation ever since the inception of the single currency. In fact, the CPI has gained an average of 2.1% per annum during the last decade and one-half. Self-evidently, the temporary flattening of the inflation curve in the last year is a consequence of the plunge of oil and other commodity prices, not anything that could possibly account for Europe’s languishing growth rate.
Historical Data Chart In fact, the euro area core CPI is up by nearly 1% during the last year, and has gained about 1.5% per annum during the past eight years during which time the global oil prices have soared and collapsed twice.
Historical Data Chart
So there is really nothing behind the low-flation mantra except the spurious argument that consumers will defer purchase if they are not assured that prices will not continue to rise and eat away at their paychecks. No, Mario, European consumers are not spending because their incomes are not growing, their take home pay is eviscerated by taxes and their balance sheets are already saturated with more debt than they can sustain.
Indeed, private sector borrowing nearly tripled during the decade before the financial crisis. That it has flattened out since then only means that the supply of credit worthy borrowers has been exhausted, not that their exists some mysterious economic malady that can be cured by the ECB’s printing press.
Stated differently, private sector loan growth since 1997 still amounts to 6.0% per annum compared to 3.3% average growth of nominal GDP. At some point, every debt addicted economy runs out of balance sheet runway——a condition that Europe attained long ago.
Historical Data Chart
The good thing is that this whole misbegotten euro project cannot survive the impending Greek default. The ECB is now on the hook for $138 billion of Greek liabilities—–an amount that is equal to the remaining deposits in its entire banking system. Needless to say, when the impending “Graccident” explodes onto the front pages, there will be pandemonium at the ECB and in Brussels and capitals throughout the 19-nation Eurozone.
Did the German politicians and voters really understand that their Bundesbank representatives in Frankfurt were not the watchdogs of monetary rectitude after all, and in crab-like fashion backed their national central bank into $35 trillion of liabilities——–debts that are owed by a Greek banking system and central bank that is hopelessly insolvent.
No, its actually such a complete financial zombie as to make the US savings and loan industry of the late 1980s look like a paragon of financial health in comparison. Yet week-by-week the clueless apparatchiks in Frankfurt have been metering out a couple of billions of ELA funding to keep the Greek banking zombie alive. When the scam finally blows, there witch-hunt in the halls of the ECB grand new palace like Europe hasn’t seen in generations.
Source: @FGoria 
The fact is, the ECB can’t survive the coming Graccident. It will not only be insolvent, but also stripped of every vestige of  credibility.

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