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Another Signpost On The Road To Inflation

by John Rubino on May 15, 2012 · 11 comments

Europe’s leaders — that is to say German Chancellor Angela Merkel and the bureaucrats running the various eurozone agencies from Brussels — have looked into the abyss and don’t like what they see. Specifically, a default and departure by even a relatively insignificant country like Greece might start a contagion that cripples or destroys the whole eurozone.

So despite the posturing now going on about a Greek exit being manageable and that there should be no give in core country demands for peripheral austerity, that’s just for show. The bureaucracy will do just about anything to avoid finding out what’s on the other side of a Greek departure. Today the hints of a softening began:

Greece Gets Hint of Leeway From Euro Officials
European governments hinted at giving Greece extra time to meet budget-cut targets, as long as the financially stricken country’s feuding politicians put together a ruling coalition committed to austerity.

Calling talk of a Greek pullout from the euro “nonsense” and “propaganda,” Luxembourg Prime Minister Jean-Claude Juncker said only a “fully functioning” Greek government would be entitled to tinker with the conditions attached to 240 billion euros ($308 billion) of rescue aid.

“The government would have to stand by the program,” Juncker told reporters after chairing a meeting of euro-area finance ministers in Brussels late yesterday. “If there are dramatic changes in circumstances, we wouldn’t close ourselves off to a debate over extending the deadlines.”

Some thoughts
When eurozone bureaucrats describe a Greek departure as “nonsense” and “propaganda” that’s of course what they have to say to avoid giving up the game immediately. They know a Greek exit is possible and maybe inevitable, but to keep it from becoming a self-fulfilling prophecy they have to pretend that things are under control. Always assume heated denials from government officials are lies because most of the time they are.

Before this is resolved, the eurozone will make some truly breathtaking offers of leniency to Greece, but by then it will be clear that if Greece accepts, the cost of extending the same deal to Spain and Portugal will be ruinous — or highly inflationary.

Looked at another way, if Greece does leave the eurozone, then the headlines will stay the same, but with Spain and Portugal in place of Greece. The crisis can’t end until all the PIIGS countries are made solvent, which is to say until the ECB buys up all their debt.

The probable result: by year-end the currency war will be in full swing, with the ECB, the Fed, and the Bank of Japan operating in helicopter mode. The precious metals markets haven’t begun to anticipate this yet, but they will, once the Greek negotiations get down to specifics.

  • Keith

    Is “helicopter Ben’s” aviation license valid in Euroland?

    • mike

      He’s been flying that thing on an IMF license for several years.. to the tune of $500 billion plus for Euro land…

  • Bruce C.

    I don’t understand why eurozone bureaucrats are even bothering to talk with the Greeks any more about agreeing to austerity. It’s completely unnecessary at this point because the financial markets will force it on them whether they like it or not.

    Before, when French and German banks held most of Greece’s government bonds, they needed those bonds to be serviced and ultimately re-paid – hence the efforts to “refinance” them at manageable interest rates to keep Greece solvent – but now that those bonds have been successfully transferred to the ECB with a unique senior loss-free status the European banking system has nothing to lose. Now, any losses on Greek government bonds will be enjoyed only by private bond holders and Eurozone taxpayers in general.

    Therefore, as far as the craven banking elites are concerned, the Greeks don’t need to be micro-managed like this. If the new Greek “government” overspends or anything else that the global bond market considers reckless and unsustainable then Greece won’t be able to borrow the money it wants or ”needs”, thus “austerity” will automatically result. There should be no need for earnest do-gooders like Jean-Claude Junker to get involved. Furthermore, one could argue that allowing the financial markets to arbitrate Greece’s fiscal behavior, rather than bureaucrats, is the most democratic and “fairest” way to do it.

    I understand that the big fear is that Greece will leave the EU and cause the whole sorry arrangement to fall apart, but I don’t think a Greek default on its debts is the same thing as leaving the EU, or necessitating its exile. If Greece defaults then – well – it defaults, and all those socialist-minded Eurozone citizens can lend a helping hand by paying more taxes.

    Seriously, though, my point is that I’m still not convinced that endless capitulations and ultimately 24-7 money printing all over the world makes any sense. I don’t want to give the idiots in charge too much credit here, but that strategy is suicidal even for “them”. It would be the equivalent of mutual financial nuclear destruction.

    Instead, by forcing austerity on the world – as draconian as that sounds and can be – malinvestments would dissolve naturally and assets worth preserving would attain saner economic values. I admit these are awful choices to contemplate, but if it has to be one or the other I think the “elites” would rather hunker down and let the rest eat cake. There seems to be at least as much evidence to support that scenario as the more popular and conventional belief that massive inflation is the inevitable end-game.

  • http://OldHeritageTaxidermy.com Thomas M.

    Problem is I think…the situation isn’t being dealt with by capitalists, rather socialist leaning politicians. Letting the free market deal with it isn’t an option. Surely hasn’t been lately anyway. Should be an intersesting ride.

  • http://independentstockanalysis.com/ JJ Butler

    Understanding the nuances of politics in foreign nations might be impossible. In short, the path will twist and turn, but the road ends by being buried in paper.

  • BillT

    No matter where the road seems to be going, there are black swans taking off from the ponds nearby to fly into the EU’s path, wait and see. One could be Israel, Iran and the Empire mix it up in the Middle East, dragging the rest of the world down. Another, a heat wave in Europe that takes down electric systems and destroys the best laid plans of the banksters. Nothing like a nice hot summer and 50%+ of the youth with nothing to do but riot. Another, … well, I’m sure you can think of a few also.

  • http://independentstockanalysis.com JJ Butler

    If governments and central bankers choose austerity, then default and deflation will be the rule. Otherwise, expect policymakers create large budget deficits financed by money printing. The event is binary.
    The Greece (pick your Mediterranean country) investment thesis is simple: These problems are going to get papered over. Think precious metals.

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  • Yay Man

    Bruce C., you say “I’m still not convinced that endless capitulations and ultimately 24-7 money printing all over the world makes any sense.”

    I’m just wondering why you would EVER be convinced of that? Stand up like a man, with your AR-15, and wait for it, ok, buddy?

  • http://thebasicsofliving.com/ Robert McCorkle

    Most people do not know the difference between money and debt.


  • Tony D

    Todays G8 pronouncement of “jobs and growth” may well be the starters gun for an inflationary future. They are likely to do what it takes to prevent a deflationary crisis. After all, which politician wants to be blamed for “doing nothing” ?
    Crack up boom, anyone ?

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