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Europe Is Tanking, QE Is Coming

Last year the world kind of forgot about Europe. After ECB head Mario Draghi vowed to “do whatever it takes” to get the Continent growing, the markets calmed down, money got cheap and plentiful and functionally-bankrupt countries like Greece, Italy and Spain stopped making scary headlines. To the casual observer it began to look like the euro project might actually succeed.

Then the mirage evaporated. Five years into a recovery that should, if it followed the normal script, be in danger of overheating, the major eurozone countries are actually slipping back into recession. Germany and Italy clocked in with -0.2% GDP growth in the second quarter, while France was exactly zero. For countries that continue to pile new debt on top of already unsustainable mountains of old debt, zero growth isn’t stasis, it’s death. And the media is starting to catch on. The following headlines appeared in the DollarCollapse.com breaking news links list in just the past two days:

France finance minister “I refuse to raise taxes to close any budget gaps”

End of the Wirtschaftswunder? Germany’s sudden slowdown

UK exports to EU are ‘dead in the water’

Europe’s economy is broken

Broken Europe: economic growth grinds to a standstill

German yield below 1%: 4 takeaways

Washington Post: Europe stuck in ‘greater depression’

Germany is itself a victim of EMU’s austerity fanatics

What happened? The appropriate answer depends on the time frame of the person doing the asking. The immediate problem is that Draghi talked a good game but didn’t actually do very much. While the US Federal Reserve and the Bank of Japan were flooding their economies with newly-created currency, the European Central Bank actually took euros off the market between 2011 and 2013.

Central bank balance sheets for dc 2014

The predictable result of less money in circulation is a stronger currency. Between 2012 and 2014 the euro appreciated against the dollar by about 10%, in effect raising the price of eurozone exports by that amount.

Euro exchange rate 2 years

That’s the immediate problem. The longer-term and more serious issue is that a system based on ever-rising debt will find it increasingly hard to grow because yesterday’s borrowing is a hindrance to tomorrow’s productive investment. Put simply, money that goes to pay interest can’t be used to build factories. So Europe, with its hyper-generous entitlements and ridiculously stringent labor laws was always going to implode. The only question was when.

Why the current slowdown is a shock to both economists and pundits can be summed up in one word: Germany. A lot of experts seem to get that Italy and Greece, with their charmingly child-like but ungovernable people, are natural economic basket cases and that France, with its clueless socialist government, is nearly as bad. But Germany was the country that had managed to combine the nanny state and the state-of-the-art factory into a model for the rest of the world. It was the Atlas that would support the eurozone on its broad shoulders.

The point they’re missing is that Germany was only able to put up the stellar numbers of the recent past because its banks were lending billions of euros to Spain, Greece and Italy, who turned around and bought lots of German goods. In business the lending of money to customers who then buy your stuff is known as vendor financing. It works beautifully as long as the customers can pay their debts but crashes and burns when the customers default.

That’s what is happening to Germany. Now that the peripheral eurozone countries can’t borrow to buy BMWs and pharmaceuticals, Germany’s export-driven growth is slowing down. Meanwhile, a lot of the money German banks have lent to those countries will, one way or another, migrate back to the liabilities side of Germany’s balance sheet, making its debt, deficit and interest cost figures look far worse than the global financial markets were led to believe.

Anyhow, this is all leading to a completely predictable conclusion, which is that Mario Draghi will soon have to put his printing press where his mouth is. “Whatever it takes” will turn out to mean a eurozone quantitative easing program that resembles those of the Fed and BoJ, though on an even bigger scale. The implicit (maybe explicit) goal will be to crater the euro.

This will work, because it usually does — for a while. A year hence the euro will be down by 20% versus the dollar and yen, Europe will have stabilized, sort of, and the US and Japan (with their now-overvalued currencies) will be tipping into recession. And the Fed will be gearing up for a debt monetization binge that will make the ghost of John Maynard Keynes smile with pride.

This will go on until, as Jim Rickards puts it, the world’s governments figure out that competitive devaluation is a zero sum game and that the one thing they can all devalue against is gold. A “monetary reset” will result, with the major currencies once again becoming simply names for given amounts of gold — at $10,000 an ounce.

30 thoughts on "Europe Is Tanking, QE Is Coming"

  1. Auto Correct got me again…..
    “…secret PAPERS hijacked…..”
    “…everything is GOING up, daily….”

    Apologies for the goofs.

  2. Mr. Rubino (John):
    (*Full disclosure, I was lucky enough to interview our host on many occasions, and John is one of the smartest, and nicest of the lot).
    I wanted to give you some “boots on the ground” anecdotes about Europe; in this case, to be precise, Paris.
    We spent a month in the City. It was astounding. It was also disturbing on many levels.
    It used to be, even as little as a few years ago, if you or I wanted to try to buy a 1.3 million Euro broom closet, in certain parts of Paris, you would have to KNOW someone to hear about the listing.
    Not anymore. A Vendre (*FOR SALE) signs have bloomed like mushrooms after a Spring rain. North Paris ( where a Saudi Diplomat was robbed today of a whack of money and had secret pears hijacked) is a NO GO, for a lot of people, not the least of which are Hebrew. Anti Semitism is raising it’s ugly head, and since my wife is Jewish, it was intolerable. The Muslim influx is changing the dynamic of Europe, by the HOUR.

    The only people spending money are Chinese. They have overwhelmed the City. The Paris Police have actually gone so far as to HIRE CHINESE POLICE, to help the hapless Chinese, as they are targeted by desperate bands of Romany, who can clean you out in moments.

    Food prices were INSANE. Everything was gong up, daily.

    HUGE unemployment bubble with Millenials and recent College grads.
    Debt is mushrooming. Stores are closing.

    Talked to one gent, reduced to driving a Cab – who had his own shoe store in Arr. 2, in the City, and he told me he closed, after 39 years. When I commiserated and then asked why he told me flat out that no one had any money and his shop withered.

    Make one wonder what’s coming. It looks ugly, whatever it is.

  3. Nope. Draghi hinted that he will NOT try to “revive” economic growth by employing/implementing QE. In that regard Draghi has more backbone than Kuroda & Bernanke/Yellen.

  4. An alternative to JR’s narrative could be that the traditional rinse and repeat pattern of currency manipulations may not work out so patly this time. In fact, that financial markets are so rigged and manipulated now actually increases the likelihood of contrarian reactions. Financial markets rarely work out the way the vast majority expect it to.

    Besides that, the markets now know more clearly than ever that Draghi’s exclamation was a bluff. The ECB is not set up to “print euros” and the Bundesbank opposes it. I don’t even think the German people want to go there because they seem to understand that that really isn’t a solution. However, Germany leaving the EU and dumping the euro in favor of Duetsche Marks or something new could work out in the long run. Also, ironically, Germany leaving the EU/euro would lower the euro significantly (and without printing a single euro), which supposedly would help the remaining euro countries too. But that may not be what the globalists want. We shall see.

    1. Germany’s already set up their deal for a gold-backed “Nordic Euro.” I’d bet if Scotland votes to secede they might even want to join. Salmond’s “plan B.”

  5. In “The Vision” copyright 1973 (41 years ago) by David Wilkerson, EU’s economic collapse comes just before Japan and then the USA. All will happen soon now.

  6. James Richards says 10s of trillions of credit default swaps are taking place between Europe and US to prop up the Eurozone. Could this be why bank balance sheets in Europe have plummeted? IDK. The sociopaths saw this Eurozone plunge coming which is probably why they fomented the coup in Ukraine. Propaganda is so thick you can cut it with a knife and reeks of desperation. When all else fails they take you to war.

    Russia and China are real economies as is Germany. But Germany has great business ties to Russia. I suspect the Fed is blackmailing Germany and other EU members with financial obliteration if it does not go along with its resource plundering plans and sanctions.

    1. Europe has been blackmailed for decades, simply to the fact that we’ve become “puppetstates” of the U.S after WO II……….What wonders me the most is how the American peoples can’t OR wan’t see what’s happening with their own BANKRUPT country = becoming a police state…….Oh yes, they are taking the West to war with Russia AND China, because the US president is a stooge for the British Empire…..If he doesn’t the B.E. and U.S. will loose their hegemony in favour of Eurasia…….And then you have Agenda 21 of the UN (a sustainable world), read the smal lines, you’ll be shockked…..dépopulation of the world by at least 2/3 th………R.I.P.

      1. We know what is going on in our Country. Our political system is so corrupt right now there is nothing we can do about it.

    2. Yep! They’ve been building their underground cities in China, Russia, USA, etc. for awhile now. Personally, I’d rather be out and about with the zombies than stuck in one of those hell-holes.

  7. …”Fed will be gearing up for a debt monetization binge that will make the ghost of John Maynard Keynes smile with pride.”

    I thought Keynes only said “a little debt is good” to prime the pump. He did not say a “LOT of debt is great!” That’s what the idiot politicians have turned it into and when idiot voters realized they can vote themselves money, a la Ben Franklin’s statement, democracy is over. That was five laps back. NSA all the time!

    1. Yeah, I feel sorry for Keynes because what he actually proposed, as I understand it, was taking surplus out during the good times and giving it to small business / the little guy during the bad times, as the best way of stimulating demand. Giving it to banks was never his idea as this does not stimulate anything except banker bonuses. I think we should use the term “neo-Keynesianism” rather than attributing the current insanity to Keynes himself.

      1. I thought that Keynes advocated running small deficits at the federal level during recessions. Then, during the subsequent expansion, running small surpluses to pay it back. (not that different from what you posted)

  8. “So Europe, with its hyper-generous entitlements and ridiculously stringent labor laws was always going to implode. The only question was when.”

    No, no, no.
    The statist policies that protect corporate profits above all else is the problem. Not the average guy on the street with his so called “entitlements” that he has worked his whole life to achieve under the so call “social contract” supposedly forged by the capitalist and labor.

  9. Most of what is discussed here carries considerable weight.
    The conclusion however, is highly questionable, at least short term.
    The author doesn’t see the other wild cards the Fed Res/IMF/BIS
    have up their sleeves to keep the global ponzi scheme going, by either
    deflating/devaluing or inflating the key global economies.
    A global reset will probably be part of the formula, as per J Rickards.
    Trillion or even quadrillion dollar bonds could be part of the mix.

    ‘Broken Clock Harry’ Dent may finally be proven correct with
    his prediction of gold to $700, at least for the short/ mid term.

    Long Term: The 5000 yr history of Gold, after all the manipulation
    runs its course, will rise above the ash heap of the busted global
    economies and central banks, imo.

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