Monday, September 15, 2014

Europe decides to eat its capital

Re: The Death Spiral of Capitalism, by Martin Hutchinson

We now see why the profligate countries of the European Monetary Union allowed the European Central Bank to institute a negative interest rate against reserves AND now have allowed it to buy both private and public debt in violation of its charter. These profligate countries are the beneficiaries of the financial repression against savings. They now can sell their worthless sovereign debt (worthless in the sense that it cannot be repaid in money of the same purchasing power as borrowed) at a PREMIUM! The banks would rather take a smaller loss from buying sovereign debt at a premium than a larger one from holding reserves. The European Union's rules against national deficits have been shown to have no enforcement mechanism, so a small negative interest rate can become a large one, just as a small national budget deficit can become a large one. Not only is there now no institutional restraint on money creation, there now is no institutional restraint on government spending. The two go hand-in-glove. Since government spends its budget primarily on welfare and warfare--neither of which activity generates a profit--its spending destroys the capital base of the country. The fact that there are few sectors of society that do NOT partake of the government's largess means that there is no organized opposition to this process. All Europeans partake of what economist Thorsten Polleit calls "collective corruption". Europeans are enticed to consume capital and are punished if they do not do so.

Thursday, September 11, 2014

The insane consequences of majority vote at the ECB

From today's Open Europe news summary:

The FT reports that the ECB will press ahead with its plans to purchase Asset Backed Securities (ABS) despite both the French and German government rejecting the bank’s calls for them to provide public guarantees to the riskier tranches of ABS. Separately, speaking in Frankfurt yesterday, ECB Executive Board Member Yves Mersch said that, “The purchase of government bonds would raise substantial institutional, instrumental and legal questions.”

The European Monetary Union's two biggest members are opposed to action by their central bank, yet the central bank will forge ahead with its asset buying plans anyway. This illustrates the insanity of majority vote at the board level of the European Central Bank and further illustrates the wisdom of Dr. Philipp Bagus's revelation of the structural failures of the EMU in his 2011 book, The Tragedy of the Euro.

Scotland's goal: Out of the frying pan and into the fire!

Re: Alex Salmond says Scotland could join the EU in 18 months

Why in the world would Scotland want to jump from one socialist union to an even bigger socialist union? Independence from the UK is Scotland's chance to become the Singapore of Europe.  At one time it looked like Ireland would be the Singapore of Europe, but its socialists made sure that the Irish kept voting until they got it right and joined the EU and adopted the euro.  The result?  Loss of competitiveness and a huge debt that the Irish are still struggling to pay off. Isn't the EU wonderful? If you are an EU bureaucrat, it is!

Tuesday, September 9, 2014

Jurgen Stark exposes ECB lawlessness

From today's Open Europe news summary:

J├╝rgen Stark, former Chief Economist of the ECB warns in an essay in Handelsblatt that “the ECB is on its way to becoming a bad bank” citing the “enormous risks” of its recent monetary policy. He adds that the bank is undergoing a strategic reorganisation which is irreconcilable with the Maastricht Treaty and for which there is “no democratic legitimacy”.

Jurgen Stark was a member of the board of the European Central Bank until he resign in disgust over its policies.  You see, the ECB's board is composed of one member from each member country, making Luxembourg's vote the same as Germany's.  All decisions are by majority vote, so Germany is always outvoted. Here is what Wikipedia says about his resignation:

On 9 September 2011, it was reported that Stark would leave the ECB due to disagreement with the bank's controversial bond-buying programme, according to Reuters,[3] while the ECB officially announced his resignation as being for "personal reasons". Stark's term had been set to expire in May 2014.

Here is a direct quote from the Maastricht Treaty that created the ECB:

ARTICLE 104 
1. Overdraft facilities or any other type of credit facility with the ECB or with the 
central banks of the Member States (hereinafter referred to as ‘national central banks’) 
in favour of Community institutions or bodies, central governments, regional, local or 
other public authorities, other bodies governed by public law, or public undertakings of 
Member States shall be prohibited, as shall the purchase directly from them by the ECB
or national central banks of debt instruments.
The real question is why more German politicians, bankers, and economists tolerate this violation of the ECB's mandate. The ECB has no authority to monetize any debt issued by any agency. Germany has no legal obligation to belong to an organization that violates its mandate. It should leave the eurozone forthwith and reinstate the Deutsche Mark.

Friday, September 5, 2014

Who Will Defend the Rule of Law in Europe?

From Open Europe news summary of September 5, 2014:
ECB surprises markets with rate cut and purchases of private assets;
Ruparel: Pressure rises on eurozone governments as ECB nears end of its policy tools
The ECB yesterday surprised markets by cutting interest rates and announcing a programme to purchase private sector assets, in the form of asset-backed securities and covered bonds. In his press conference, ECB President Mario Draghi said that the decision was not unanimous, with reports suggesting Bundesbank President Jens Weidmann was opposed. Draghi reiterated his call for flexibility in fiscal policy across the eurozone, but warned that structural reforms must come first. In response to the move, the euro hit its lowest level for 14 months and equity markets across Europe hit their highest point for six years.

Here is a direct quote from the Maastricht Treaty:
ARTICLE 104
1. Overdraft facilities or any other type of credit facility with the ECB or with the

central banks of the Member States (hereinafter referred to as ‘national central banks’)

in favour of Community institutions or bodies, central governments, regional, local or

other public authorities, other bodies governed by public law, or public undertakings of

Member States shall be prohibited, as shall the purchase directly from them by the ECB

or national central banks of debt instruments.



It is clear that the Maastricht Treaty, which created the European Central Bank, has been abrogated.  It appears that Herr Weidmann, as president of the Bundesbank, opposes the ECB's action, but what will he and the German government do? Will the Germans accept as legitimate what can only be described as an illegal action? The fate of the rule of law in Europe now rests in German hands.

Monday, August 18, 2014

Oh, No! Not lower prices!

From today's Open Europe news summary:

Italian Finance Minister Pier Carlo Padoan has said in an interview that the ECB “has to be consistent and bring [eurozone] inflation close to 2%...which is very far from current levels.” Separately, Handelsblatt reports that the Deflation Risk-Indicator (DRI), an early deflation warning system for the eurozone, currently stands on 0.47 with a score of 0.5 marking the point at which risk of deflation becomes acute.

It is hard for someone like me--who lived through the terrible stagflation (high unemployment plus high inflation) years of the 1970's--to understand that anyone could wish for higher inflation.  Inflation devastated American manufacturing by effectively taxing capital: i.e., highly capitalized industries like autos and steel could deduct only historically low capital costs from their tax bills and did not have the funds to replace them at higher prices.  The very fact that there is a "Deflation Risk-Indicator (DRI)" is itself astoundingly dangerous and indicates the total triumph of the radical Keynesians in the halls of governments and central banks.

Germany cannot carry Europe any longer

From today's Open Europe news summary:

Persson: Eurozone still an awfully long way from becoming a healthy and vibrant economic bloc
In the Sunday Telegraph, Mats Persson argued that while the risk of a euro breakup has subsided, “the currency zone is still an awfully long way from becoming a healthy and vibrant economic bloc.” He notes that Germany is unlikely to be able to carry the Eurozone in the long-term: “Bear in mind that at the moment, Berlin seems to be doing its utmost to lose its competitive edge: the current coalition has introduced a high minimum wage, lowered the retirement age and is sticking to a commitment to eliminate nuclear power in favour of renewables, raising costs for everyone.”

When the German economy fails, the EU and the euro fail. Germany has subsidized Europe for years without beneficial effect, and now its own economy is ailing.  Furthermore, its own politicians seem determined to weaken it even more.  Philipp Bagus' prescient analysis of the inherent flaws in the euro are coming true.