respond to every debt crisis as if they were all created equal. As such, they
are willing to pile debt and promises upon debt and promises.
In cyclical recessions the strategy eventually "works" using the
In reality, such kick-the-can strategies will eventually blow sky
high, which is precisely where we are today, with Bernanke is scratching his
ass, wondering why his policies are not working.
Any thinking person will realize this is not the typical cyclical recession,
but rather a once-in-a-multi-generation debt deflation structural problem.
However, the Fed-fools led by Ben Bernanke are trapped in academic wonderland
and simply cannot grasp the blatantly obvious.
Welcome back to the crisis!
Wolfgang Münchau on Der Spiegel says Welcome back to the crisis!
About one trillion
euros, the ECB has pumped into banks to stabilize the situation. But the idea
is to buy time so that proves to be illusory. In Spain the situation worse,
there is nervousness in financial markets. We are now back
to the point where we were before Christmas.
Welcome back to the crisis! It is not long ago, when Germany in Brussels
refused to further increase the reserve fund on the grounds that the markets
have finally calmed down. Surprisingly this is not. Two weeks ago, Europe was
in the all-round optimism. In recent days, the markets collapsed again. What
has changed in recent weeks?
There have been two convictions enforced. The first relates to Spain, the
second is the European Central Bank . The markets
are now expected to Spain later this year needs a bailout. If that happens,
just the increased bailout will prove to be too small. In a few months, we
are again faced with the choice either to increase the screen again, or risk
a rupture of the euro area.
Spain is now where Greece was two years ago
The markets no longer believe in a stabilization of Spain's debt. It is no
coincidence that the last panic attack just in the markets a week passes in
which the Spanish Prime Minister Mariano Rajoy saving
measures announced by ten billion euros in 2012, by "efficiency" in
the health sector and in schools. Spain is now where Greece was two years
The second reason for pessimism in the markets is changing perceptions about
the policy of the European Central Bank (ECB). In December and February, the
ECB pushed good one billion euros of liquidity into the banking sector. The
markets reacted initially with euphoria. The idea was that the banks borrow
cheap money with a repayment period of three years from the ECB. So it would
buy short-term bonds to their governments and thus stabilize the bond market.
The ECB was allowed for legal reasons, the bonds do
not buy themselves. So they chose to go through the banks.
The ECB policy was like a drug
This theory has a number of hooks, which have now become apparent. The first
is that the action proceeds indirectly and therefore expensive. Only a
fraction of the money actually flows into the bond purchase.
The ECB's policy has thus apparently solved the banking crisis. In reality,
the situation of European banks is as bad as ever. And as in Japan during the
nineties, governments have no strategy to solve this problem effectively.
The greatest nonsense was the argument that the liquidity policy of the ECB
would give the government time to resolve the crisis. There was a time
illusion. It allowed the leaders to deny the reality of another three months
and push the issue on the backburner.
One of the recent experiences of this crisis is that banks are less long. We
are now back after Easter at the point where we were
Illusion of Time
So here we are. Greece is in default. Portugal and Spain are sure to follow.
The only action by the ECB is kick the can down the
However, every can-kicking exercise adds debt and it is repayment of debt
that is impossible in debt deflation cycles.
The current path does not work, and cannot possibly ever work, yet the only
strategy of the ECB and the Fed is to do more of the same with greater and
I wrote about this long ago, on April 03, 2008 to be precise, in Fed Uncertainty Principle.
What I said about the Fed applies to the ECB as well,
and central bankers in general.
Corollary Number Two:
The government/quasi-government body most responsible for creating this mess
(the Fed), will attempt a big power grab, purportedly to fix whatever
problems it creates. The bigger the mess it creates,
the more power it will attempt to grab. Over time this leads to dangerously
concentrated power into the hands of those who have already proven they do
not know what they are doing.
Corollary Number Three:
Don't expect the Fed to learn from past mistakes. Instead, expect the Fed to
repeat them with bigger and bigger doses of exactly what created the initial