Thursday, August 18, 2011

For the moment EU calm - but the storm will come!

Ambrose Evans-Pritchard, frequently the provider of source material and links for this blog on the growing disaster that is the Euro area, today has this to say on the Merkel/Sarkozy comedy turn of last Tuesday:

Readers have asked for a quick verdict on the Merkel-Sarkozy deal.
I have nothing to say. There was no deal. It was a vacuous restatement of clauses that already exist in the Lisbon Treaty, or an attempt to pass off retreads such as the Tobin Tax and harmonization of the corporate tax base as if they were new.

We should therefore turn to other sources to try to discern the turmoil beneath the deceptive calm. Yesterday evening I re-tweeted an FT video on the ECB lending US Dollars, a concept I had trouble getting my mind around, see here.

A more complete description of the disaster now being prepared for us all is available here, written by Pater Tenebrarum on a blog  'Acting Man' it is well worth reading in full, as are other posts on the same site. Some quotes I thought significant, from the posting 'Economically illiterate nincompoops at work' are the following:

Merkel and Sarkozy – they're sitting on a powder keg, but still seem to be blissfully unaware of it.
(Photo via

We would note that both France and Germany are home to extremely leveraged  banks that are potentially prone to suffering a banking crisis that will make the Lehman bankruptcy look like a walk in the park. In our opinion the political leaders of the EU are for the most part economically and financially illiterate and have not the foggiest idea on what a powder-keg the euro area is sitting. How else can one explain the outcome of the Merkel-Sarkozy meeting? What  came out of it was mostly the promise of more and higher taxes and 'more meetings'. They could not possibly have come up with a worse resolution.

The conclusion to the long posting is also worth quoting in full, but read the entire article if you have the time:

As Philipp Bagus has pointed out, the situation is akin to the 'tragedy of the commons' – the profligate member nations thought they had nothing to lose by being profligate. In addition, a currency union works a bit like a peg or a currency board – when economically disparate nations are bound together by such a peg, it seduces investors hunting for yield to invest as much money as possible in the securities that offer a slight yield premium – after all, there is seemingly no currency devaluation risk. At the same time, the credit expansion of the fractionally reserved banking system undermines the pool of real savings and helps with piling up ever more unproductive debt, both in the public and private sectors.

It should be obvious that if the banking system were 100% reserved that there would not be a crisis now. And yet, this subject is completely taboo. We frankly doubt the politicians even understand how the system works, but we are fairly certain that they will eventually badger the ECB into printing money 'Fed style', via unsterilized quantitative easing. This will probably prove to be the 'solution' that is the politically most palatable, as most citizens will be unaware of the horrendous cost until it is way too late.

There will be a rare posting on Teetering Tories later today, regarding Michael Howard on Channel 4 news last evening, his call for extreme revenge by society against the young looters swept up in the London riots, (such as the youth found guilty of stealing a small bottle of mineral water,)

There will be links to this former Tory leader's own MP expense scandal involvements, such as £17,000 of gardening costs on a wood and £44,000 expenses he claimed as his and then passed to the Conservative Party.  All this from the man, now ennobled, who put George Osborne in a position to become Chancellor of the Exchequer and continue the work of Brown and Darling in destroying the nation's economy and binding us ever more firmy to the mess that is the EU.

The Tories, don't you just love them? NOT! (Update 13:15 BST Read the post here)

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