Europe's democracies must not subcontract their destiny to the Bundebank

Telegraph (UK) ^ | 4:55PM BST 10 Jun 2012 | Ambrose Evans-Pritchard

[DeaconBenjamin]

Europe has lit the fuse on an economic and financial bomb. The rescue package for Spain cannot plausibly be contained to €100bn once it begins, given the subordination of private creditors and collapse of global confidence in the governing structure of monetary union.

Italy must guarantee 22pc of the bail-out funds, even though it cannot raise money itself at a sustainable rate. You could hardly design a surer way to pull Italy into the fire.

Citigroup warned Italy’s economy will shrink by 2.5pc this year and another 2pc next year as the fiscal squeeze starts in earnest, with grim implications for debt dynamics. Public debt will jump from 121pc of GDP to 137pc by 2014.

The world is uncomfortably close to a 1931 moment. Italy’s public debt is the world’s third largest after the US and Japan at €1.9 trillion. There is no margin for political error.

The EU machinery (EFSF/ESM) exists largely on paper, a €500bn declaration of intent. It struggled raising trivial sums last year to fund Irish and Portuguese loan tranches -- understandably so, since the fund is a transparent attempt to evade the imperative of Eurobonds and EMU debt pooling.

China’s sovereign wealth fund is withdrawing from Europe’s debt markets, fearing a collapse of the euro. Investors will pay zero rates for German sovereign debt, or near zero for French debt, sure that these nations will emerge from the rubble. They patently do not want mangled guarantees from an EMU club at risk of disintegration. Sovereignty is all that counts now.

All key measures of the money supply in Spain and Italy went into violent contraction in the second half of 2011, with predictable consequences a few months later. The shock was so severe that money contraction had spread to the core by the early winter.

[Lysandru]

I am no expert on international finance. But I do fundamentally understand that you can't spend more than you earn/create indefinitely.

Only pseudo-intellectual, over-educated elitist fools can't realize this.

[Puckster]

Isn’t the use of “democracy” past tense?

Is it just me, or is democracy just window dressing for the masses when “socialist ideology” becomes entrenched in a society with it’s entitlement mentality?

[eyeamok]

They know exactly what is going on, the goal is to saddle the people with ALL the Losses from their Complicit Fraud. There are only 2 possible outcomes:

1. We the people stand up and say NO, and let the Banks and Financial institution ALL GO BANKRUPT, whereby the Financial Guru’s lose everything and are imprisoned for life.

or

2. We continue to ALLOW FRAUD,LIES, and DECEIT on a MASSIVE SCALE and permit the Bankers and the Money Changers to pass the bill to us.

The option of doing nothing is Much,Much Worse, unfortunately that is where we are heading.

You Decide, ichoose option # 1 JUST SAY NO

[BfloGuy]

The Bundesbank is all that apparently remains between Europe and ruin.

[Pining_4_TX]

So, when do the bank runs start? Will it happen here, too, and should we pull our money out of banks and stocks and hide it in a safe or under the mattress or something for a while?

Personally, I’m taking the poor man’s route to prepare - stocking up on peanut butter, canned tuna, soap, and dog food. Have to fee the defenders of the homestead, you know! :-)

[USFRIENDINVICTORIA]

IMHO, the ersatz Keynesianism, practiced by tax-and-spend governments since WWII, appeared to work (or at least didn’t dramatically fail), because of a couple of trends that are now reversing.

First, as Europe (in particular) recovered from WWII, there was a greater than normal increase in productivity, for at least a couple of decades. This economic growth partially offset deficit spending.

Then, a couple of decades after WWII, the baby boomers started to enter the workforce. The pig was now in the middle of the python. This led to more productivity.

Now, baby boomers are starting to leave the workforce, and become dependent on pensions. A source of economic growth has become a source of economic contraction. We know where the pig is now.

Things will get worse and worse, as “contingent liabilities” for entitlements become converted into actual debts. And economic growth won’t be sufficient to keep up.

[DeaconBenjamin]

So, when do the bank runs start?

Several months ago. Money has been running from the PIIGS banks to German and other core banks.

[BfloGuy]

So, when do the bank runs start? Will it happen here, too, and should we pull our money out of banks and stocks and hide it in a safe or under the mattress or something for a while?

Good question. It's hard to imagine its happening here -- the bank runs, that is. The Fed will stop banks from failing. And once inflation takes hold for good, assets like stocks typically keep up their value. Stocking up on food's a great idea, though.