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« The Beef Industry’s Deadly Secret: “Blading” and “Needling” | Main | Sweden’s Euro Hostility Hits A Record »

Germany’s Favorite Rabble-Rouser Economist Lashes Out

Hans-Werner Sinn, President of the German Ifo Institute that issues the closely watched Business Climate Index, is a thorn in the side of bailout politicians and eurocrats. When asked in an interview, published today in the Handelsblatt, if the Eurozone crisis hadn’t calmed down thanks to the promise by ECB President Mario Draghi to buy the debt of Spain, Italy, and other crisis countries, he sneered: all Draghi had done was explain to investors—from banks to hedge funds—that taxpayers in “sound countries” would make good on that debt. “That reassurance worries me,” he said.

In early July, he’d already irked the euro bailout establishment when he and over 170 economists warned in an open letter about a Eurozone banking union. It would collectivize bank debts that were “three times as large as sovereign debts.” Creditors should take the losses, not taxpayers, retirees, and savers of “still solid countries.” Banks should be allowed to fail. A banking union would “save neither the euro nor the idea of Europe” but would only benefit “Wall Street, the City of London, even some investors in Germany, and ramshackle domestic and foreign banks” that would continue doing business “at the expense of citizens in other countries,” all “under the mantel of solidarity.”

Rabble-rouser was the collective response from the red-faced German government.

And for a couple of years, he’d been raising a stink about the mushrooming Target-2 balances at the Bundesbank. These claims against the European System of Central Banks, he argued, now in the hundreds of billions of euros, could cost the German taxpayer dearly if the Eurozone fell apart.

He was accused of exaggerating and making gross mistakes in his analysis. The government tried to ignore him. The Bundesbank brushed him off; these balances were, despite their magnitude, “irrelevant,” it said. But plot twist: late February, Bundesbank President Jens Weidmann himself wrote Draghi a letter, warning him of the risks that these Target-2 balances posed.

Sinn has carried out his battle in the media. On TV even. Which irks the government even more. So, in the interview today, he didn’t mince words either. He was worried most about Spain, with its external debt that was “greater than that of all other crisis countries combined,” and with its unemployment problem that was as bad as Greece’s. A “dreadful combination,” he said.

And Italy? Let’s wait and see if Prime Minister Mario Monti runs in the elections, he said. “That would be a blessing.” But he pointed out that Monti’s reforms had gotten bogged down the moment Draghi uttered his bond-buying promise, which “suggested another solution.” The printing press. With the pressure off, unions blocked the reforms, he said. But the lack of competitiveness cannot be solved “with Draghi’s promise of protection.”

He painted a harsh reality. Since these crisis countries cannot devalue their currency to become competitive again, they have to go through the “painful process” of internal devaluation to produce goods at lower prices relative to other countries in the Eurozone. “With the exception of Ireland, this has not yet happened,” he said; and it’s not going to happen as long as the bailout money keeps flowing. But in the end, he said, “those countries that don’t want to become cheaper will have to exit the euro.”

He’d help the exiting countries with debt forgiveness and new money for their banks. But “the longer you delay the radical measures, the more private investors are able to sell their toxic paper without haircut to governmental bailout funds, and then hightail.” Taxpayers and retirees in sound countries would pay the price.

“Investors gain time, taxpayers and retirees lose time,” he said. The fact that the German government talks about implementing measures “to gain time” allows for only one conclusion, he said: “it has taken the side of the investors.”

How was this even possible? “The firepower of the financial industry” has been highly successful in influencing public opinion, he lamented. “That’s why politics has come to consider it a solution when creditors of southern countries are reassured with money from taxpayers in northern countries.”

He predicted that 2013 would remain calm up through the federal election because the ECB would continue its low-interest-rate-policies. Chancellor Angela Merkel’s government is counting on “this general calm” to get reelected. “Afterwards there will be new decisions,” he said. But he didn’t venture into details; too difficult. “Because the government, to take the wind out of the opposition’s sails, usually does the opposite of what it announces.”

As the Eurozone flails about to keep its chin above the debt crisis that is drowning periphery countries, and as the European Union struggles to duct-tape itself together with more governance by unelected transnational eurocrats, Sweden is having second thoughts: never before has there been such hostility toward the euro. Read....  Sweden’s Euro Hostility Hits A Record.

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Reader Comments (4)

1. What Draghi took care of is that the guillotine is replaced by the death by 1000 cuts.
Speculators will not take on the ECB at the moment at least, but normal investors will keep selling till all the toxic rubbish ends up on the BS of the ECB. Either directly via one of the buying programms or indirectly as repo from banks that are nearly all effectively bust. Bank is bust, means economic risk of the gov bond moves to the one that has it as collateral (often as well at inflated prices).
If countries like Spain and Italy do not make so much structural reforms that they become credible debtors for the market this process will continue. All bonds are now as far as longer tem investors are concerned by local banks that are bust. Which means the problem has partly moved to these banks but is not solved only moved.

2. Rates for longer term PIIGS CS debt will remain rather high imho. ECB will only support shorter term and investors will assume for a limited period of time.
So long term bonds will still be around when there is (supposed to be) an unsupported marketaccess. That will take place at 6-7% for 10 Y (plus no great risk it will rise strongly). But at 6-7% is the key. After all this when it goes well (another risk) you have bonds at 6-7%. Maturity will have become shorter and subsequently yields somewhat lower. But 6-7% will beasically determined the value of the bonds. Long term ones at least.

3. Target2 will imho increase further. PIIGS CS have a current account deficit that has to be filled up. Last month we saw Northern Target2 receivables going down, but looks to be caused by some investors getting back to mainly Spain to get a bit more yield. Simply doesnot look like a structural thing.

4. Doubt if 2013 will be calm. Likely we see:
-Greek 4.0 necessary, they simply never comply. Why waist a perfect record.
-Cyprus, black money, Russian oligarch and mob money.
-Cyprus look a perfect candidate to challenge Greece as the main nion-complier.
-Spain has rubbish coming later to the surface written all over it.
-Italy might mess up (Berlusconi plus 5 star movement).
-Greek government might fall and be replaced by populists.
Not all will happen but much of it. Merkel will not like it but most things she can not play, it just happens or not.

Devaluation is not the only thing. Nearly all of these countries need structural reforms. And new investments which even if competitiveness is restored will take a few years to result in jobs and in a zero growth enviroment and competition on the worldmarkets from nearly everyone (Eastern Euro, Turkey, Asia, Latin America etc).
December 14, 2012 | Unregistered CommenterRik
So what - there's a couple of "Rick Santelli" -like characters here and there in the world. That is great. But it does not make hardly a hair of difference.

Politicians - the cart-riders - en masse will do what they want. And what they want to do, is to make bigger and more government, and more and more fiat money - another way of saying enslavement. So that's exactly what will happen.

People are sheep so the situation will continue unchanged.

A handful of Rick Santelli or Hans-Werner Sinn -types, means basically nothing, unfortunately. People are sheep.
December 14, 2012 | Unregistered Commenterfatster
"they have to go through the “painful process” of internal devaluation to produce goods at lower prices"

They also have to fund 'another' new UN organization called the 'World Tourist Organization' (WTO) Along with a new World Tourist Organization (WTO)? UNESCO, ICLEI, it doesn’t end.

Where’s all this money coming from? These expensive agencies produce NOTHING and generate NO REVENUE.

Of course Europe is going broke!

Consider the cost to you, the individual taxpayers, to pay these unelected ‘world’ foreign technocrat’s salaries, pensions, fancy buildings & office complexes, information/documentations systems, supplies, vehicles, energy/maintenance costs, etc, limo/air transportation, meals and accommodations. WE ARE BEING FORCED TO FUND THESE increasingly authoritative bureaucracies THAT ARE GROWING A MALEVOLENT INTERNATIONAL POLICE STATE!

The UN intends to steer all nation’s regulatory agencies to regulate and control ‘you’, your activities, private property and your children’s >educations<.

In the USA one 'federal' dollar spent costs 10 times more than a similarly spent 'state' dollar, now imagine what a 'WORLD' dollar costs you. Also the more complex the bureaucracy the easier it is to siphon off or redirect money for ideological or corrupt purposes, this money must be replaced..

Through uninformed politicians, the UN is increasingly allowed to insert itself nationally and locally in every country. These expensive agencies produce NOTHING and generate NO REVENUE. NOW WE HAVE 'INTERNATIONAL'' or 'WORLD' bureaucracies to fund? What does THAT cost taxpayers (higher taxes-absolutely) to fund the 'world' appointed UN-ELECTED technocrats that are increasingly involved in making your country's laws.

Stop UN funding and stop this lunacy

Watch Agenda 21 in action, is the same happening in your country ? (AND WHAT YOU HEAR IS ONLY THE BEGINING OF THEIR PLAN, reminder at bottom)

Sheriff Dean Wilson – Defend Rural America:

A must watch (and share):
“more education increases the threat to sustainability” – you can’t make this up.

Youtube: Agenda 21 For Dummies
December 14, 2012 | Unregistered CommenterDADDY WARBUCKS
Monti was increasing the Italian debt a LOT. Double of what was doing the idiot Berlusconi. He was cutting primary needs of the population, but he was not touching the real deep problem: the foolish expensive of the government AND bureaucracy. Corruption is grown up with Monti. Quite a lot.
The tax system become more oppressive AND foolish. The country is collapsing.
So why everybody is praising him? It's strange...
December 16, 2012 | Unregistered Commenterniki

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