Its summer! After reading this blog – The ECB is a major reason the Euro crisis is deepening – many readers have written to me asking to provide more explanation of the “sterilisation” operations that the ECB is engaged in. It is clear that an increasing number of people are becoming interested in arcane things like central bank operations which can only augur well for creating capacity for better public debate. A lot of readers overnight have reacted one way or another to the announcement by several central banks that the swap lines are open again albeit at a lower “cost” than previously. There was also considerable interest in understanding what the “failed” sterilisation yesterday means. The answer is not much but we had better not tell the Germans that the ECB weekly deposit tender failed.
I noted a proposal overnight from so-called progressive American economist Dean Baker on Al Jazeera (November 28, 2011) – Time for the Fed to take over in Europe – which suggests that the US Federal Reserve Banks should insulate the US economy from the bumbling leadership crisis and “step in if the European Central Bank fails to deal with the debt crisis”. The proposal is that the US central bank should fund EMU nation deficits. This is another one of cases when friendly fire shoots the progressive movement in the foot. You can read the previous editions When you’ve got friends like this to see what the problem is. The simple point that far from protecting the US economy this proposal would likely cause a collapse in the currency and an inflationary surge that would divert attention of the US government away from creating employment, undermine the real standard of living of workers, and provide new ammunition for those who want to implement damaging austerity. For all that, the US government would only put the EMU nations into a holding pattern anyway.
As the economic crisis has dragged on and deepened, it has changed complexion. It clearly started out as a balance sheet crisis which means it originated from the excessive borrowing of the private sector driven by personal greed and an overzealous and often criminal financial sector. Hence the term GFC. It quickly moved into a real crisis (meaning it affected real GDP growth, employment and incomes) because governments around the world reacted too cautiously in terms of their fiscal intervention. However, it was clear that the fiscal responses that were introduced saved the world from another Depression. China’s fiscal intervention helped many nations including Australia. Now the crisis is all down to incompetent government policies – not before the crisis but now. Governments are now following strategies that defy the most basic principles of sound fiscal management – it is irresponsible to cut net public spending at at time when unemployment is rising. Or in other words, you don’t send more workers into the mine when the canaries start dying.
It is Friday and in Newcastle today it feels like Winter is back although I am aware that complaining about 19 degrees centigrade is somewhat disingenuous to the Northern Hemisphere and temperate region dwellers. But still we complain – more than one person today has said “isn’t it freezing”. So I have been bunkered down reading a lot. Which isn’t that much different to any other day real – hail, rain or shine. The European laboratory is dominating the daily news though and providing us with scripts that no professional playwright could conceive. This week we have seen the European Commission release its latest gee-whiz (you-beaut) plan to save Europe from itself and like all the previous announcements lots of speeches and photos were taken but the substance is missing. The only development that these plans seem to be leading to is a suppression of national democracy. That is my assessment of the EC’s latest proposal. From an economic perspective it maintains the rule – austerity begets austerity.
I woke up to the headlines this morning about the apparently failed German bond tender yesterday and all the experts predicting doom. In my E-mail box there was around 30 requests for an explanation from readers who had read the news and concluded that it was a major event in the current crisis but didn’t really understand what the implications were. The implications are fairly simple – the bond markets are working out that no EMU government is free of insolvency risk because they all use a foreign currency (the Euro). Germany is better placed to resist the crisis because of the relative strength of its economy but it is not immune from it. Its economy will also deteriorate as the effects of austerity spread out through trade. While the “experts” waxed lyrical about the crisis being confined to profligate EMU states (the PIIGS), it was always clear that the northern strong-hold states were going to be dragged in as the crisis deepened. That is because the problem is the Euro itself and the way the monetary system is designed. All the other emotional stuff about lazy Greeks is a sideshow. Germany is starting to find that out – yesterday, it received its first strong message. The crisis is going right to the top in Europe now.
Bloomberg News carried the headline today (November 23, 2011) – Germany Sees No ‘Bazooka’ in Resolving Debt Crisis as Spanish Yields Surge – which reiterated various statements in recent days from German political leaders eschewing any role for the ECB in defending the EMU from impending collapse. The Germans seem to have very selective memories. There was a time – much closer to today than their hyperinflation experience – when their citizens were cold and hungry and only a major fiscal intervention saved them from greater austerity. There was a time when they marched in the streets with placard declaring “Wir wollen Brot!”.
I am sitting typing this at the airport and the TV news screen in front of me is providing a profile of the new Italian Prime Minister and claiming he is well-equipped to rescue Italy. I read a similar argument in a Bloomberg Editorial this morning (November 16, 2011) – Technocrats Step In Where Political Leaders Fear to Tread. The rise of the economic technocrats is being hailed as a model to avoid complicating factors like worrying what the voters might think or want or do. We know best so shut up and take the medicine. There are two problems with this. First, it is undemocratic. Second, even if you are not worried about that, the technology these technocrats bring to bear is the same box of tricks that created the problem in the first place. Somehow they think if they just scorch these economies into submission, the market will finally start working again. Quite apart from their flawed technology, the reality is that the private sector will not be in a position for some years to drive growth strongly again on the back of a credit binge. Public deficits will have to persist. The very anathema of these economic technocrats. That is now emerging as the problem, quite apart from whether you think the people should get a say in who they elect.
As they say in the classics – “some of my best friends are” … and in my case I might have added German. The Euro crisis – that is, the crisis that has arisen because the creation of the Euro stripped member nations of their capacity to defend their economies against negative private spending episodes – is being worsened because of the incredible resistance by Germany and the Troika (EU, ECB, IMF). The Brussels-Frankfurt consensus – which claimed the creation of the Eurozone would engender stability and growth is shattered – irretrievably humiliated one might venture to say – yet the cabal that hides behind that “consensus” maintains power and influence. The hypocrisy that the cabal engage in is staggering. Their narrative is almost totally dislocated from the reality. They regularly disregard their own rules to favour the vested interests that keep them in power. And meanwhile, they are overseeing a collapse of all the ideals they claimed their system was designed to achieve.
When a democratic government fails to deliver on its promises it typically gets tossed out of office by the voters at the next election. Sometimes it takes a few elections for the rot to set in once it becomes clear that the strategy for the nation is not working. Yesterday, the European Union put out its – European Economic Forecast – Autumn 2011 – which categorically demonstrates that after 3 years of crisis and one grand plan after another the leadership is failing. Some of the leadership tokens – the Greek and Italian prime ministers have been pushed aside – but not by the people – rather by the cabal that rules Europe. The situation will worsen while this lot hold the power.
I notice that a speech made yesterday (November 8, 2011) in Berlin – Managing macroprudential and monetary policy – a challenge for central banks – by the President of the Deutsche Bundesbank, Jens Weidmann has excited the conservatives and revved them back into hyperinflationary mode. The problem is that the content that excited them the most is the familiar mainstream textbook obsession with budget deficits and inflation (through the even more obsessed German-lens). That means it is buttressed with misinformation about how monetary operations that accompany deficits actually work. It tells me that the European Central Bank which is the only institution in Europe that has the capacity to end the crisis is in fact a major reason the crisis is deepening.