This was the most popular post on the zerohedge.com blog in 2011:
It was posted on September 26.
This was the most popular post on the zerohedge.com blog in 2011:
It was posted on September 26.
Papandreou (waking up): Great gods! Will these nights never end? Will daylight never come? I heard the cock crow hours ago, but my indolent and totally corrupt people are still snoring away! Curses on this debt crisis! Curses on Pasok! I can’t even sack my own public servants.
The spotlight switches to the top floor of Papandreou’s home and reveals the Troika of Creditors, who are armed with iPads and studying a pile of dusty Greek ledgers.
First Creditor: It really is quite remarkable. Until last month more than 1,000 dead pensioners were receiving payments from Greece’s biggest pension fund.
Second Creditor: And what about this? The Greek state considers 637 types of job to be so arduous that the people doing them get early retirement.
First Creditor: What sort of people?
Second Creditor: Steam bath attendants. Radio technicians. Hairdressers.
First Creditor (thoughtfully): One could look at things another way. International civil servants such as us get generous pensions and early retirement, too.
Second Creditor (stiffly): We’re not in Athens to look at things another way.
Third Creditor: Absolutely right. We’re here to look into the questions that really matter. For example, the difference between who owns swimming pools and who declares ownership of swimming pools in their tax returns. (He displays a Google Map.) The two categories do not exactly overlap – at least, not in the suburb of Ekali.
Second Creditor: Let me guess. Ten thousand swimming pools and only 1,000 owners.
Third Creditor: You underestimate the addiction to fiction of the pool-loving Greek. Ekali has 16,974 pools. But according to the tax returns there are only 324 owners.
The spotlight switches to Papandreou.
Papandreou (despairingly): Who do we owe all this money to? How much do we owe? Let me add up the interest … It’s a nightmare, these debts are deeper than the Bay of Salamis! Sometimes I wish I were back at Amherst, playing Bob Dylan songs on my guitar. But I mustn’t give up! It was Andreas, that father of mine, who got my country into this mess. I’m not like him. I’m not really a socialist at all. But it’s my duty to save Greece. I know! I’ll call a referendum!
The spotlight switches back to the Troika of Creditors.
First Creditor: Did someone say the word “referendum”?
Second Creditor: No, we’re not in Ireland.
Leader of the Chorus: Oh, mortal central bankers, you who wish to instruct yourselves in our great wisdom, take heed that you must know how to hold your own, how to withstand extreme market pressures, and how to press on without admitting to fatigue. Then you will enjoy the greatest of blessings, to live and think more clearly than the common herd and to shine in the contests of words.
Trichet (briskly, to Draghi): So, we’re clear about the first rule of central banking.
Draghi: Buy Greek bonds and call it the removal of impediments to the transition mechanism of a price stability-oriented monetary policy.
Trichet (stares at Draghi): All right, then, the second rule. It is, mon cher Mario, that one should never speak ill of one’s colleagues, especially at the European Central Bank. Here in Frankfurt we have done more than any institution in Europe, or in the entire world, to keep the euro alive. Every single one of us deserves credit.
Draghi: With that sentiment I am in complete, utter and total agreement.
Trichet: All the same, I have my doubts about old Axel.
Draghi: Me, too. What on earth is he playing at?
Trichet: I don’t mind him opposing the bond purchase programme. You expect nothing less from a Bundesbank president.
Draghi: It’s natural.
Trichet: But he shouldn’t express his opposition in public.
Draghi: It’s unnatural.
Trichet: He’s having a terrible effect on German opinion. He’s making our job twice as difficult.
Enter a slave bearing a tray.
Slave: A letter from Axel Weber, master.
Trichet (opens letter and reads): Well, he has solved our problem. He’s resigning.
Draghi: Not before time.
Trichet: He’ll be lecturing in America before you can say Schuldenbremse. (Thinks.) Of course, this will clear the way for someone else to step into my shoes here.
Draghi (innocently): What’s your size?
Leader of the Chorus (to Draghi): Tell us boldly what you want of us. Then you cannot fail to succeed. When we have finished teaching you, your glory among mortals will reach even to the skies.
Draghi: Well, there is a rather delicate business in Rome …
Slave: The nurses’ uniforms are ready, master.
Berlusconi: Grazie. Here, Vlada, you’re good with figures. Answer me a question.
Vlada the Heart-Stealer: What is it, Papi?
Berlusconi: Why is the number eight so significant in my life?
Vlada the Heart-Stealer: Well, you once said you did eight of us in one night.
Berlusconi: Brava! But tonight that’s not what I have in mind. The reason is that there were eight traitors in my party who deserted me in parliament. My enemies are like bedbugs, advancing on me from all corners. They are biting me, they are gnawing at my sides, they are drinking my blood, they are yanking at my coglioni, they are digging into my backside! Now I must make the supreme sacrifice for the good of my nation. Now I must fulfil my destiny as the Jesus Christ of politics. Now the curtain will fall on the greatest premiership that Italy has known.
Vlada the Heart-Stealer: Come, come, Papi, no giving up! The thing to do is to find an ingenious way through.
Berlusconi: A way through? I only wish one would come to me.
Vlada the Heart-Stealer: Are you holding something?
Berlusconi: No, nothing whatever.
Vlada the Heart-Stealer: Nothing at all?
Berlusconi: Nothing except … The Italian people know what I have done for my country. The restaurants, the beauty salons and the private jets are all full. I’m not finished yet. Mark my words, if my enemies think they can destroy my entire career, they will be sorely disappointed. I am the most persecuted man in the history of the world, but they will never get me.
Enter the Chorus of the Clouds.
Leader of the Chorus: Old man, we counsel you, if you have a successor, send him to us to learn in your stead.
Berlusconi: He’s called Mario Monti.
Leader of the Chorus: Can you make him obey you?
Berlusconi: If he refuses, I’ll turn him out. I’ve got the numbers in the Senate.
Vlada the Heart-Stealer: Eight?
Berlusconi (wearily): Not tonight, Vlada.
Merkel: What delicious cheese!
Sarkozy (to himself): That’s her second helping.
Merkel: You really should try some, David, it will calm you down.
Cameron: I tell you, I will not hold a referendum, I will not agree to a new treaty, I will not support a financial transactions tax, and I will not listen to lectures from that ventriloquist’s dummy of yours!
Merkel (producing dummy from her handbag): Oh, I think Herman’s rather sweet. (To dummy). Give us one of your haiku.
Herman Van Rompuy (speaking through Merkel):
The fiscal compact
Is agreed. But Belgium still
Lacks a government.
Merkel (puts dummy back in bag): We’ve been practising all week.
Sarkozy (fawningly): He has a most accommodating nature, Angela.
Merkel (pleased): Even when he was quite little, he amused himself at home with making horses, carving boats and constructing small chariots of leather. He had a wonderful understanding of how to make frogs out of pomegranate rinds.
Cameron: I tell you, I will not hold a referendum, I will not join the eurozone and I will not give money to the European rescue fund! (Sighs.) It was a lot more fun with Boris in the Bullingdon Club. Killing foxes with chilled bottles of Taittinger Brut …
Merkel (to Sarkozy): You and I need to get down to business. So tell me the truth, Nicolas, was DSK set up?
Sarkozy (sweetly): As you have put it so eloquently, Angela, there is no Europe without the euro. (To himself.) Merde, she must have been gossiping with Carla.
Merkel: Well, that’s that, then, I’m glad to say we have an agreement. Europe will have a fiscal union in 250 years’ time, and I’ll have a bit more cheese.
Cameron: I tell you, I will not hold a referendum, I will not …
Merkel (turning to Cameron): What, are you still here?
Sarkozy (pausing before he deals): What about your ante, Mario?
Draghi: Oh, sorry.
Draghi places a €10 note on the table. Sarkozy inspects it.
Sarkozy: The serial number begins with a Y.
Merkel: Mein Gott, it’s Greek!
Sarkozy: Throw it away.
Draghi: How can I? They’re still in the eurozone, you know.
Merkel: Tell me about it.
Leader of the Chorus: What a thing it is to love making mistakes! For this old Europe, having loved its mistakes, now wishes to withhold the money that it borrowed.
Sarkozy continues dealing.
Merkel (to the Leader of the Chorus): Why didn’t you warn us earlier?
Leader of the Chorus: We always do this to those whom we perceive to be lovers of mistakes. We precipitate them into misfortune, so that they may learn to fear the gods.
Draghi (folds hand): I’m out.
Merkel (aghast): You can’t be!
Sarkozy: It’s you and me alone, Angela. What’s it to be? Eurobonds or the end of the euro?
Merkel (to Draghi): I sometimes think he’s worse than Chirac.
Enter Cameron, running wildly.
Cameron: Oh, Europeans, do not be angry with me! Do not destroy me! Pardon me, I’ve gone crazy through babbling. Bring me a torch, someone!
Sarkozy and Merkel: In the name of the gods, what are you doing?
Cameron: What am I doing? What does it look like? (Cameron sets the house on fire.)
Merkel: You’ll destroy us!
Sarkozy: He’ll never destroy us. I’m raising you a million euros, Angela.
Merkel (slowly folding her hand): You’ve won this round, Nicolas. But I’ll win the war.
The House of Thoughts is ablaze.
Leader of the Chorus: Lead the way out, for we have sufficiently acted as Chorus for today.
Any number of people — including yours truly — have compared the eurozone’s current trials and tribulations to those of the Great Depression. The FT’s Wolfgang Münchau goes much further back in time: all the way back to the Thirty Years War of 1618 to 1648.
The comparison makes for thought-provoking reading:
Both the eurozone crisis and that terrible war occurred amid sudden power shifts; they were triggered by seemly trivial events; and they became incredibly complicated. They are also marked by sudden regional power shifts . . .
The eurozone, too, has been subject to an internal power shift in the past five years, with the relative rise of German economic power. The eurozone crisis also had a comparatively trivial trigger, a fiscal meltdown of a small country at its outer perimeter . . . When the eurozone’s modern rulers assembled in Brussels this month to sign the modern equivalent of a peace treaty, they were interrupted by the cross-current of a much older conflict – a UK-versus-the-rest dispute. So instead of one peace treaty, they ended up with two overlapping and interacting conflicts. Europe is once again getting absurdly complicated.
I do not wish go overboard with the parallels. The German regions lost between 20 and 45 per cent of the population between 1618 and 1648, as a direct and indirect consequence of the war. What is happening in the eurozone today is not war, nor likely to lead to one. And, no, I am not predicting that the crisis will last 30 years. It might, however, end in an economic devastation of a similar scale, especially if the German-imposed austerity policies are implemented everywhere and in full.
But what remains unchanged from those times are the underlying cultural conflicts between Protestants and Catholics, north and south, Britain versus the Continent. The many decades of European integration have not ended this fundamental mistrust. This is also one the reasons why the Europeans have created such an irrationally unbalanced monetary union. Its rules were not the result of a rational economic argument, but designed to allay very old German suspicions.
I see the most disturbing parallels between the way the 30 years war has ended and the way Europe’s political leaders are setting about to resolve the current crisis . . . The war brought about the fragmentation of continental Europe, followed by 300 years of utter carnage.
The crisis management in the eurozone may also end in fragmentation. I see the three following scenarios as the most plausible outcomes: a political union with a joint debt instrument; the status quo enforced by eternal austerity; or a break-up.
No matter which is chosen, it may also lead to an unstable equilibrium. A political union would solve the narrow crisis, for sure, but may weaken democratic legitimacy, and may thus become unstable. German-imposed austerity is the solution most likely to trigger political extremism and violence. It is also inherently unstable because it imposes the economic doctrine of one country on another. A break-up of the eurozone will, at worst, destroy the European Union itself or, at best, return us to the situation of the early 1970s.
The treaty of Westphalia ended the 30 years war in 1648. It was the early modern period equivalent of what Herman Van Rompuy, the president of the European Council, would nowadays call a comprehensive resolution. Neither addresses the underlying conflicts. The 30 years war shows that we Europeans have been delaying making the necessary hard decisions for a long time.
Plus ça change, plus la même chose.
“Without the euro, the ECB ceases to exist. That is true of no other eurozone institution. It gives it the incentive to act. It is also acting on a large scale.”
– Martin Wolf, December 28, 2011
Regular readers of this blog are well-acquainted with the thoughts of Martin Wolf, the Financial Times’ chief economics commentator. Wolf has long been among the most vocal critics of the European Central Bank, charging that its refusal to act as the eurozone’s lender of last resort has worsened the currency union’s crisis and made it impossible to resolve that crisis.
It is therefore with considerable interest that, as suggested by the above quote, he seems to have changed his mind regarding the intentions and efficacy of the ECB’s policies and actions. Simply stated, without the euro, the ECB has no raison d’être. Like any and all institutions, it will do whatever is necessary to ensure its survival.
Wolf seems to have been greatly influenced by Mario Draghi (the ECB’s new president) who, in his interview with the FT on December 18, argued that the ECB had taken important actions during the previous week:
“We cut the main interest rate by 25 basis points. We announced two long-term refinancing operations, which for the first time will last three years. We halved the minimum reserve ratio from 2 per cent to 1 per cent. We broadened collateral eligibility rules. Finally, the ECB governing council agreed that the ECB would act as an agent for the European Financial Stability Facility (EFSF).”
Wolf’s interpretation is as follows:
Thus the ECB is determined to fund banks freely, at low rates of interest, thereby subsidising them directly and the governments they lend to, indirectly.
Why lending to banks that use the money they borrow to lend to governments is good, while lending to governments directly is bad, is hard to understand. The only obvious difference is that in the case of lending via banks, the intermediaries may themselves go broke. That makes them unavoidably unreliable conduits. Yet if this complex procedure gets round theological objections to direct financing of governments, those who believe some financing of governments is now needed should be content.
In short, the recent decisions of the ECB look like a clever way of relieving the funding constraints suffered by banks and vulnerable sovereigns. This does not redress solvency concerns directly, though the subsidy may be large enough to make a difference even here, particularly for the banks. But it should mitigate – if not eliminate –liquidity constraints, which have proved of rising importance over the last year and half.
In an 108-page report, management consulting firm McKinsey projects a massive change in the geographical ownership of financial assets by 2020. The implications are profoundly disturbing.
From the Executive Summary:
Several forces are converging to reshape global capital markets in the coming decade. The rapid accumulation of wealth and financial assets in emerging market economies is the most important of these. Simultaneously, in developed economies, aging populations, growing interest in alternative investments, the move to defined-contribution pension schemes, and new financial regulations arechanging how money is invested. These forces point to a pronounced rebalancing of global financial assets in the coming decade, with a smaller share in publiclylisted equities.
- Today, investors in developed economies hold nearly 80 percent of the world’sfinancial assets—or $157 trillion—but these pools of wealth are growing slowly relative to those in emerging markets.
- The financial assets of investors in emerging economies will rise to as much as 36 percent of the global total by 2020, from about 21 percent today. But unlike in developed countries, the financial assets of private investors in these nations currently are concentrated in bank deposits, and keep little in equities.
- Several factors are reducing investor appetite for equities in developed countries: aging populations; shifts to defined-contribution retirement plans; growth of alternative investments such as private equity; regulatory changes for financial institutions; and a possible retreat from stocks in reaction to low returns and high volatility.
- Based on these trends, we project the share of global financial assets in publicly traded equities could fall from 28 percent today to 22 percent by 2020. That will create a growing “equity gap” over the next decade between the amount of equities that investors will desire and what companies will need to fund growth. This gap will amount to approximately $12.3 trillion in the 18 countries we model, and will appear almost entirely in emerging markets,although Europe will also face a gap.
- As a result, companies could see the cost of equity rise over the next decade and may respond by using more debt to finance growth. Only a tripling of equity allocations by emerging market investors could head off this drop in demand for equities—which will be difficult to accomplish in this time frame, given the remaining institutional barriers. The probable outcome is a world in which the balance between debt and equity has shifted.
The implications of this shift are potentially wide ranging for investors, businesses, and the economy. Companies that need to raise equity, particularly banks that must meet new capital requirements, may find equity is more costly and less available. Reaching financial goals may be more difficult for investors who choose lower allocations of equities in their portfolios. And, with more leverage in the economy, volatility may increase as recessions bring larger waves of financial distress and bankruptcy. At a time when the global economy needs to deleverage in a controlled and safe way, declining investor appetite for equities is an unwelcome development.
The Telegraph reports on the British Treasury’s “contingency plans” in case the euro disintegrates:
The preparations are being made only for a worst-case scenario and would run alongside similar limited capital controls across Europe, imposed to reduce the economic fall-out of a break-up and to ease the transition to new currencies.
Officials fear that if one member state left the euro, investors in both that country and other vulnerable eurozone nations would transfer their funds to safe havens abroad. Capital flight from weak euro nations to countries such as the UK would drive up sterling, dealing a devastating blow to the Government’s plans to rebalance the economy towards exports.
Britain’s top four banks have about £170bn of exposure to the troubled periphery of Greece, Ireland, Italy, Portugal and Spain through loans to companies, households, rival banks and holdings of sovereign debt. For Barclays and Royal Bank of Scotland, the loans equate to more than their entire equity capital buffer.
The plans include more than just capital controls:
Borders are expected to be closed and the Foreign Office is preparing to evacuate thousands of British expatriates and holidaymakers from stricken countries.
The Ministry of Defence has been consulted about organising a mass evacuation if Britons are trapped in countries which close their borders, prevent bank withdrawals and ground flights.
From marketobservation.com, a great graph showing how easy money, deregulation, reckless leveraging and market failure led t0 crisis, collapse and bailouts.
President Hoover on Treasury Secretary Andrew Mellon’s advice for ending the depression:
Mr. Mellon had only one formula: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people”
Mark Sitznagel, who, as the founder and chief investment officer of the hedge fund Universa Investments, could be expected to survive in some comfort (albeit less so than did Mellon) during a lengthy period of liquidation, reiterates Mellon’s advice. In his op-ed (“Christmas Trees and the Logic of Growth“) in today’s Wall Street Journal, Sitznagel draws an analogy between “the coned evergreen trees that form vast forests across the Northern Hemisphere” and “the financial forests of our own making.” At a time when most observers agree that a necessary if not sufficient condition for restoring the eurozone’s economic and financial well-being is for the European Central Bank to become a lender of last resort, Sitznagel says that central banks “are creating a tinderbox by keeping alive many very bad investments.” It’s survival of the fittest — for trees and for investments. Never mind that liquidated investments have human consequences rather larger than do liquidated evergreen trees.
In case the link to Sitznagel’s op-ed doesn’t work, here’s the full text:
The ubiquitous greenery of the season has me thinking conifers and stock market crashes. There is much to be learned from the coned evergreen trees that form vast forests across the Northern Hemisphere. As the oldest trees on the planet, the mighty conifers have survived threats of catastrophic extinction since the time of the hungry herbivorous dinosaurs.
The conifer’s secret to longevity lies in a paradox: Their conquest has been largely the result of episodes of massive forest destruction. When virtually all else is gone, conifers show their strength and prowess as nature’s opportunists. How? They have adapted to evade competitors by out-surviving them and then occupying their real estate after catastrophic fires.
First, the conifer takes root where no one else will go (think cold, short growing seasons and rocky, nutrient-poor soil). Here, they find the time, space and much-needed sunlight to thrive early on and build their defenses (such as height, canopy and thick bark). When fire hits, those hardy few conifers that survive can throw their seeds onto newly cleared, sunlit and nutrient-released space. For them, fire is not foe but friend. In fact, the seed-loaded cones of many conifers open only in extreme heat.
This is nature’s model: overgrowth, followed by destruction of the overgrowth, and then the subsequent new growth of the healthiest and most robust, which ultimately leaves the forest and the entire ecosystem better off than they were before.
Pondering these trees, it is not too much of a stretch to consider the financial forests of our own making, where excess credit and malinvestment thrive for a time, only to be destroyed—and then the releasing of capital into markets where competition has been wiped out. The Austrian school economists understood this well, basing a whole theory around this investment cycle.
After the purge, great investment opportunities are created, from which prolific periods of growth emanate—provided that sufficient capital remains to reinvest into the fertile and now-open landscape.
Suppressing fire, creating the illusion of fire protection, leads to the wrong kind of growth, which then invites greater destruction. About 100 years ago, the U.S. Forest Service took a zero-tolerance approach to forest fires, stamping them out at the first blaze. Fast forward to 1988 when a massive wildfire at Yellowstone National Park wiped out more than 30 times the acreage of any previously recorded fire.
What obviously occurred was that the most fire-susceptible plants had been given repeated reprieves (bailouts, in a sense), and they naturally accumulated, along with the old, deadwood of the forests. This made for a highly flammable fuel load because when fires are suppressed the density of foliage is raised, particularly the most fire-prone foliage. The way this foliage connects the grid of the forest, as it were, has come to be known as the “Yellowstone Effect.”
Strangely parallel to the Yellowstone catastrophe was the start of the federal government’s other fire-suppression policy with the 1984 Continental Illinois “too big to fail” bank bailout. This was followed by Alan Greenspan’s pronouncement immediately after the 1987 stock market crash that the Federal Reserve stood by with “readiness to serve as a source of liquidity to support the economy and financial system,” which heralded the birth of the “Greenspan put.” The Fed would no longer tolerate fires of any size.
From a forestry point of view, the lessons were learned. In 1995, the Federal Wildland Fire Management Policy stated, “Science has changed the way we think about wildland fire and the way we manage it. Wildland fire, as a critical natural process, must be reintroduced into the ecosystem.”
Herein are pearls of great wisdom for central bankers today. Central banks are creating a tinderbox by keeping alive many very bad investments, fertilizing them with everything from artificially low interest rates to preferential liquidity to outright securities purchases. As these institutions and instruments overrun the financial landscape, they hamper the economic ecosystem and perpetuate the environment of low growth and high unemployment in which we currently find ourselves.
Seeing periodic, naturally occurring catastrophes as part of the growth cycle requires thinking more than one step ahead, not only longer term but, more specifically, intertemporally. This is perhaps an insurmountable cognitive challenge, both to investors and central bankers in today’s news-flash world. When contemplating the forest, we may intuitively understand nature’s logic of growth. Yet when we look at the seeds of destruction we have sown through current monetary policy, it is clear we are lost in the trees.
This list will be updated periodically. In the future, it will be included in the “Pages” section of the blog.
For your pre-holiday reading enjoyment.