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Why doesn't Europe print its way out of the crisis?



November 30, 2010 – Comments (14)

The conventional wisdom is that Germans are too afraid of cranking up printing presses, having been burnt by hyperinflation in the 1920s, so they want stable money supply, while the PIIGS can only pay their debt by printing or defaulting. But if you forget the myth about stable Germany and look at the actual debt-to-gdp ratio, all of a sudden German debt doesn't look sustainable either. If the bond market decides to demand a higher yield, Germany too will be bankrupt. So I think that what we are seeing now is just a short-term beggar-thy-colony policy where the imperial heartland is trying to win some advantages for itself at the expense of the periphery, but in the longer term, EU will be printing money as fast as America.

If PIIGS call the Germans' bluff, reject austerity and threaten sovereign default, that day may come even sooner. It's better to start QE a few years earlier than to own tons of Irish and Spanish bonds with no coupon payments forthcoming.  

14 Comments – Post Your Own

#1) On November 30, 2010 at 9:50 PM, JakilaTheHun (99.92) wrote:

They can't "print" their way out of the crisis. Printing more money wouldn't really fix the problem, either, since the problem is price convergence. 

Moreover, there's sort of a myth out there that central banks have unlimited power to "print away," when in actuality, they don't have that power at all.  Rather, they can loosen monetary policy and the banks can make more loans, creating more money, but that will only happen if the banks themselves think they can earn a decent return on their capital, which is far from a foregone conclusion in this sort of environment.

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#2) On November 30, 2010 at 10:19 PM, starbucks4ever (93.20) wrote:

Huh? Governments can't finance deficits by the credit from the Central bank? What is then our QE2?

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#3) On November 30, 2010 at 10:28 PM, Harold71 (< 20) wrote:

Moreover, there's sort of a myth out there that central banks have unlimited power to "print away," when in actuality, they don't have that power at all.

Of course that is impossible.  Unlimited would be infinity.  Typing "∞" into the bond-buying program at the Fed, at this time, would indeed crash the computer.  That is why Bernanke selected $600 billion....for this round.

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#4) On November 30, 2010 at 10:57 PM, ChrisGraley (28.68) wrote:

The problem is that the European Union gives them less bang for their buck.

It would be one thing to steal prosperity from your children if it had a big trade advantage and made your exports cheaper.

It's a different story when your biggest trade partners are paying with the same funny money. 

Could they print their way out? Yes. They do have exports to non-European countries. The thing is that the strongest countries would have to print twice as much funny money as a country that controls it's own currency to have the same effect.

That's a hard option for them to pick to bail out people that aren't voting for them because they are in a different country.

Yes, Germany has it's own debt problem, but as long as it's lower than the rest of the "spend now and figure out how to pay for it later" European countries, they'll be the cutest dance partner in the leaper colony. 

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#5) On November 30, 2010 at 11:01 PM, JakilaTheHun (99.92) wrote:


Unless banks decide that marginally lower interest rates on Federal debt make lending more profitable, then where will the money be created?

To be sure, lowering the risk-free rate might make some banks slightly alter their calculus, but the reality is that there's simply not enough demand for loans at current interest rates for the banks to make significant returns on capital. 


As I said, it's not as if the Federal Reserve magically prints out money.  It merely buys US government issued securities in order to lower market interest rates.  But market interest rates are already absurdly low, so it's not clear that some marginal hypothetical drop in these rates will result in a significant increase in lending activity.  If there's no increase in lending activity, then money supply is not increasing any faster.  


If it helps, think of it like a company buying back its own stock.  If the company is profitable, the stock buyback will boost EPS and could make the stock more attractive.  

On the other hand, if the company is long-term unprofitable, a stock buy back would merely make EPS lower and would not make the company any more attractive to investors. 

This is the dilemma the Federal Reserve faces. Lowering rates in a normal economic environment (or especially, during a boom) could result in banks lending a lot more, which would then rapidly increase the money supply.  In an environment where interest rates are already rock-bottom, it's not clear that make them marginally "more rock-bottom" is going to change much. 

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#6) On November 30, 2010 at 11:35 PM, starbucks4ever (93.20) wrote:


Yes, Germany can hold on longer than Italy and others. But QE is still in the cards.


QE2 was not so much about interest rates, it was about increasing M2 money supply by brute force. Banks don't even have to lend. The point is, government collects less money in taxes than it spends. The difference comes directly from Bernanke's computer. Of course, Bernanke's banking friends act as intermediaries between him and the government, but that's beside the point. The bottom line is, you and I have more nominal dollars as a result. That's why it's called quantitative easing. Manipulation with interest rates only affects "quality" - by encouraging more leverage on the same physical money base. Printing just increases that physical base, that's why it's "quantitative".

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#7) On November 30, 2010 at 11:44 PM, Harold71 (< 20) wrote:

If there's no increase in lending activity, then money supply is not increasing any faster.  

Newsflash.  The "lending activity" isn't just going on in the private sector.  The private sector debt has been contracting, and the government debt has taken up the slack.


As I said, it's not as if the Federal Reserve magically prints out money.  

No kidding?  It "merely" buys US government issued securities with money that previously did not exist.  The fact that paper bills are not actually printed -- does that make it somehow less inflationary?  

As an aside, let's just stop calling it "money."  Bernanke Bucks has an excellent ring to it.  I got $600 billion Bernanke Bucks...I'm gonna go get a cup a coffee...

You are quite pro-Fed and banking system.   Might I recommend a daily dose of Marc Faber or Jim Rogers as squeegee for your eyes.


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#8) On November 30, 2010 at 11:49 PM, Harold71 (< 20) wrote:

zloj you beat me to it, hopefully I added something to the education of young Jakila.

The US gov't could borrow and "print" $5 trillion tomorrow morning.    The banks didn't have to lend a dime.  And oil now costs 243 Bernanke Bucks per barrel.

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#9) On December 01, 2010 at 3:01 AM, RockOYates (57.01) wrote:

I would like to add to zloj's excellent description of Quantitative Easing:

 Most of us know the Federal Reserve is private bank held by private shareholders, many of them foreigners with no allegiance to our country. Member banks of the Federal Reserve are part of the banking cartel which the Federal Reserve heads up in the USA.

As zloj so beautifully explains, the banks are the "middle men" in the transaction between the Fed and our Treasury. As that our Treasury does not have the power to print our currency (look at our dollar bill, it is not called a Federal Reserve Note for nothing) it is the Fed which controls Federal Reserve notes printed and put into circulation.

However the problem with quantitative easing is this: in this case banks are using their middleman profits to back up their shaky reserves. Quantitative Easing has nothing to do with cranking up printing presses and dropping dollars from helicopters on the populace. Quantitatve Easing is more accounting legerdemain, just electrons shooting from one entity's books to another, with a few of those electrons scraped out of the pipe as digital 0s and 1s as the banks "fee" for processing the sale of bonds and Treasuries.  

As banks use "fractional reserve" lending, i.e. for every dollar they have in reserve, they can lend out 10 more, the problem they all face, esepcially our four biggest banks, is they overextended themselves during flush times making unwise bets on housing, CDOs, MSBs, and the like. Profits were booked on false profits, or profits which were not marked to market.

Hence, money that banks are now taking in from QE2 trading fees AND as bonds (which they sell back to the Fed) is going into their coffers to back up the mark to fantasy bad bets hidden on their books and off books.

(Meredith Whitney, T. Zakoli, and many other avid bank analysts claim that all our big banks . . . at this time . . . would be declared insolvent if FASB accounting rules were changed back to the rule pre-Obama, where assets were listed at mark to market.)

As zloj mentions, banks are not lending like they used to. They are opting to sit on their new found cash (thanks to the Fed which has taken away any say taxpayer's should have in this bargain) and hold it in reserve to cover their defaults and loan portfolios.

When it comes to declining M3, it's not only banks are not making the money available to wholesale predatory lenders as they once used to, nor is it they have decided to cut back in their own direct loans due to stricter regulation, but there's a third, bigger, variable which most banking analysts will tell you is alarming: the demand for loans from consumers is way, way down. (I'll get to this lack of demand in a minute.)

When banks fractional reserve money is not lent out, money velocity slows down. Money velocity (M3) is no longer followed officially by the Fed, hence M3 is no longer a figure given out by the Fed at it's monthly meetings. However, M3 is accounted for by many analysts, one of whom, Professor Menzie Chinn, just printed this handy chart showing M1, M2 and M3:

(By the way, the shaded vertical bars denote Recessions) 


 M1 = includes currency held by the public, plus traveler's checks, demand deposits, other checkable deposits (including negotiable order of withdrawal (NOW) accounts, Automatic Transfer Service (ATS) accounts, and credit union share draft accounts). 

M2 =  includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money market funds.

M3 = includes M2 as well as all large time deposits, institutional money market funds, short-term repurchase agreements, along with other larger liquid assets. M3, in short, measures the "velocity" at which money circulates throughout an economy. 

Now if you know the truth about American consumers you know this talk about them becoming "savers" again is nonsense.

Here I am from a post on Motley Fool's METAR board using information gleaned from a WSJ piece about the ruse Americans are becoming big savers again: 

Americans are NOT paying down their debt as we have been led to believe, but they are paring it down? How is this so? 

It's like this: indebted Americans are defaulting on their loans (and refinancing old debts.) The former writes off debt. (The latter reasigns debt at a smaller interest.)

When you open the link to this article, you will see that defaults are the biggest wipe offs for American's personal debt, not repayment or refinancing.

So all those hopeful stories on Bubble TV about Americans retracting from spending so they can pay down their debts? It isn't so. The American consumers is not only tapped out, he/she is running in place with their race to pay off debt.

Debt repayment by Americans is so infinitesimally small that one must wonder how the NBER can say the Recession ended back in 2009. 

Here's the annual rate Americans are paying down their debts (minus defaults) . . . 0.08% . . . or not even 1/10th of one percent. 

Now if you open that link to my post, you will see a link to the WSJ article which more than adequately explains why money velocity is contracting: values of homes are contracting so fast that consumers are being foreclosed upon, or they are walking away from their nightmare upside down loans, and the money these homes once lent to GDP (Real estate transactions, construction, appraisers, etc.) all evaporated and went up to Money Heaven.

And here's the truth about Sub-prime loans which started this whole destruction of $7 to $8 Trillion of our nation's wealth:

In the last year Ameriquest (the bankrupt lender which is spotlighted in the new book "The Monster") was in business, one-fifth of one percent (or .25 cents of every hundred dollars they lent out) was for refinancing of fraudulent loans. Most of these refinancing by loan sharks were to cover fraudulent loans which loan sharks, many times from the same firm, had made earlier to collect exorbiant upfront fees, early payment fees, and hellatious APRs which worked out to 15 to 20% once all the hidden charges were figured in.

And when it came to Jumbo refinancings for people considered "good" risks, that money, most of the time, went to buy toys such as jet skis, boats, new cars and motorcycles, and sometimes, upgrades to middle class homes.

When you look at the refinancings for good credit risks, you soon understand where the Housing ATM money went: it disappeared into Money Heaven after underlying assets lost their fast appreciating values and everybody who got caught with the fast receding tide simply walked away from their obligations or were foreclosed upon.

All that money labeled "commissions" in the FIRE Economy which fell into loan sharks' hands has disappeared to Money Heaven too.

Banks are not lending because banks are now the bagholders of hundreds of billions of dollars of worthless loans and they are also the underwriters of junk MSBs which many entities are now suing to have banks take back.

Hence, Quantitative Easing is a nice way of hiding a transfer of our nation's wealth to the banks, so that the banks will, hopefully, not be declared insolvent. To be sure, Quantitative Easing II (just started a few weeks ago) is adding money to M2 money supply; however, it doesn't follow that this money (really debt obligations) will be lent out to increase M3 money velocity.

There's not a burned bank out there willing to lend money to wholesale lenders who were using the money for fraudulent schemes which preyed on the poorest people in our society. There's not a burned bank out there doing NINJA loans, or requiring no money down, or refinancing homes at 105 to 110% LTV. Those days are long over.

Consequently, there are millions of Americans out there, former homeowners, who have destroyed their credit and who do not qualify for loans. Hence, the pool of possible buyers for house continues to shrink, while housing inventory incresases, and prices continue to fall on homes and condos if you figure that all MLS's across the US are being gamed now not to show all their actual REO sales prices . . . so as not to bring down the artificially propped up median.

As the chart above shows, the first Quantitative Easing did not create a spike in Money Velocity. Quantitative Easing is simply a transfer of digital 0s and 1s from the Fed to the Treasury, and vice versa, with the banks picking up their "vig" in between to help keep them in business as their bad loans hidden on and off books continue to lose value in the real world. 

And as the linked to WSJ article in my post shows, Americans are not saving more, its just they are walking away from debts which are being written off by banks, hedge funds, and others further down the line.

Quantitative Easing is just a ruse to keep the Too Big To Fail banks in business. It is doing nothing in the short term to help fund jobs or pay off our deficits. Quantitative Easing is a simple IOU from US taxpayers where banks are borrowing our future money so as to have reserves against their overblown debts which are coming due every day now. And banks make a profit being the middlemen from the shuffle of these IOUs from the Treasury to the Fed. 

 It's a royal scam, and it's why our nation would do well to audit the Fed, then disband it, and then take over currency manufacturing by our government, instead of allowing a banking cartel to control our money. 

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#10) On December 01, 2010 at 12:38 PM, whereaminow (< 20) wrote:

Um.... about a million frickin rec's for FreethinkerKW's comment.

David in Qatar 

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#11) On December 01, 2010 at 1:34 PM, Jbay76 (< 20) wrote:



I'm with David, awesome write up! Thanks!

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#12) On December 01, 2010 at 7:19 PM, dbjella (< 20) wrote:

Taken from  FreethinkerKW

As zloj so beautifully explains, the banks are the "middle men" in the transaction between the Fed and our Treasury. As that our Treasury does not have the power to print our currency (look at our dollar bill, it is not called a Federal Reserve Note for nothing) it is the Fed which controls Federal Reserve notes printed and put into circulation.  

Taken from Wikipedia 

The Treasury prints and mints all paper currency and coins in circulation through the Bureau of Engraving and Printing and the United States Mint. The Department also collects all federal taxes through the Internal Revenue Service, and manages U.S. government debt instruments. 

Can someone explain the difference between these statements regarding printing? 

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#13) On December 01, 2010 at 7:27 PM, starbucks4ever (93.20) wrote:

Treasury mints and prints cash. Federal Reserve "prints" the electronic cash. That's the only distinction.

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#14) On December 01, 2010 at 7:51 PM, neamakri (< 20) wrote:

I live 15 miles from the treasury printing press in Fort Worth. The last time I hit the ATM, all the money was new; five twenties were in serial number sequence. You better believe they are printing money!

By the way, who authorized Bernanke to spend $600B of my grandchildrens money?

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