Jump to content
House Price Crash Forum
Sign in to follow this  
interestrateripoff

Stress-Testing Europe's Banks Won't Stave Off A Deflationary Vortex

Recommended Posts

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7897304/Stress-testing-Europes-banks-wont-stave-off-a-deflationary-vortex.html

Euroland's authorities are inflicting a triple shock of fiscal, monetary, and currency tightening on a broken economy. They are doing so in a region where industrial output is still 14pc below its peak, where growth barely scraped above zero over the winter "recovery", and where youth unemployment is at 40pc in Spain, 35pc in Slovakia, 29pc in Italy, and 26pc in Ireland.

They seem unaware that China is slowing and the US is tipping into a second leg of the Long Slump. Last week's collapse in America's ECRI leading indicator to -9.8 marks the end of the V-shaped rebound. If this means what it normally means - recession within three months - Europe must take immediate action to prevent being drawn into a deflationary vortex. Spiralling public debt precludes further Keynesian spending, so this must come from central bank stimulus. Tight fiscal policy offset by ultra-loose money is the only option for Europe, the US, and Japan.

No student of Milton Friedman is surprised by the US relapse. The Fed has allowed M3 money to contract at a 10pc pace for much of this year - the Great Depression rate. The economy has hit the wall with the usual lag. Textbook stuff. Never ignore the quantity theory of money.

The US Conference Board's indicator is not yet flashing a red alert, but that is because it gives weight to "yield curve inversion", where long rates fall below short rates. This indicator is meaningless in a Japan-style bust where policy rates are zero.

I suspect that Fed chair Ben Bernanke knows the economy buckled around the Ides of June, but is stymied by hawks at the regional Feds. All he can do for now is to talk down credit costs through hints of more quantitative easing, or QE2. In this he has succeeded. The yield on two-year Treasuries fell to an all-time low of 0.5765pc on Friday. It's Weimar, all right: circa 1931, not 1923.

So what is the European Central Bank doing to prevent southern Europe asphyxiating from debt-deflation, and knowing that M3 contracted in February (-0.3pc), March (-0.1pc), April (-0.2pc) and May (-0.2pc)? It is tightening, as it did in mid-2008 when the eurozone was already tanking.

Far from taking steps to offset Club Med austerity, it is winding down its €60bn (£50bn) purchase of government bonds - "sterilized" in any case to prevent net stimulus. It is draining liquidity fast. The ECB's loans to credit institutions fell from €870bn to €635bn in the two weeks to July 9.

"This is the equivalent in central banking of the Charge of the Light Brigade," said Tim Congdon from International Monetary Research. Cash reserves in the interbank market have fallen by a third in days. No wonder three-month Euribor (the stress gauge) has risen to an 11-month high of 0.86pc. The funding squeeze has turbo-charged the euro rally, pushing the currency to 8.67 Chinese yuan. German exporters can take the pain. It is the strappado for Spain and Latin Europe. They are smiling in Guangdong.

Perhaps the stress tests for Europe's banks will clear the air and unblock the credit system. But such tests worked in the US only because that was a banking crisis. Few questioned whether the US Treasury could stand behind the system, or whether the US would hold together as a political entity. In Europe, sovereign states are themselves the risk, and a dysfunctional EMU is the Achilles heel.

A memo from Germany's regulator BaFin earlier this year said the worry is contagion from "collective difficulties" in Club O'Med, not an isolated default. Once under way, the crisis might turn into a conflagration. Investors know this. It is why the simulation test by RBS adjusts for €400bn of losses in Spain and €1.3 trillion for the eurozone, and called for "overwhelming policy intervention" by the ECB to stop this happening. Will the EU carry out such tests? Of course not.

All now hangs on the credibility of the EU's €440bn rescue fund or Stability Facility (EFSF), itself subject to challenges in Germany's constitutional court. Will the EU stress test the "non-negligible" risk that the court will block it? No.

The EFSF is a bluff that Italy could provide its rescue share for Portugal, Spain, and Ireland, on top of Greece, in the context of a serious crisis without suffering its own debt run. Is this credible? Should any rating agency give this body a AAA grade given that 10 of the 16 states are rated lower, and knowing that Germany has refused to allow pre-funding so that it cannot raise money until matters are already out of hand?

Some interesting points although AEP still appears to want to try and print there way out of this mess.

It is quite a novel idea to get the indebted to borrow more money to save an indebted nation.

Still I'm sure these experts know what they are doing...

Share this post


Link to post
Share on other sites

"Tight fiscal policyplus printing will not prevent an inflationary spiral."

I agree. ;)

Jobs will be lost in the millions and demand for goods will fall accordingly. Price will have nowhere to go but down.

The economic cycle cannot be beaten. Brown thought he had beaten it but he was wrong. Inflation leads to deflation leads to inflation leads to deflation....... As the song goes: "You can't have one without the other."

Share this post


Link to post
Share on other sites

cant get credit?

then get NEW AND IMPROVED Caaaaash.

Looks like a promise, feels like a promise, but its not a promise. It costs nothing and yet you can sell it for 25% or more.

terms and conditions apply, your country may be at risk if you fail to pay off your debts.bankers only need apply.no security needed.bonus guaranteed

Share this post


Link to post
Share on other sites

AEP has become like me.. obsessed with printing and fiscal spending to get out. Once you realize that the private sector is never going to increase borrowing.. then the only option is to increase it through the public debt.

The only western country which I'm currently not in favour printing and spending is the UK. And that is because inflation is already over 3%. Although it looks to be trending down, and likely to drop well under the 2% target once we get yoy comparisons with the fall of 2009.

And that is a lot to do with the massive QE the UK has already done. We grew the M0 base money supply by 169%, a powerful response to the crisis.

Share this post


Link to post
Share on other sites

AEP has become like me.. obsessed with printing and fiscal spending to get out. Once you realize that the private sector is never going to increase borrowing.. then the only option is to increase it through the public debt.

The only western country which I'm currently not in favour printing and spending is the UK. And that is because inflation is already over 3%. Although it looks to be trending down, and likely to drop well under the 2% target once we get yoy comparisons with the fall of 2009.

And that is a lot to do with the massive QE the UK has already done. We grew the M0 base money supply by 169%, a powerful response to the crisis.

forget the money figures....they are meaningless. you need to concentrate on wealth creation. debt cant be paid off without it.

Share this post


Link to post
Share on other sites

forget the money figures....they are meaningless. you need to concentrate on wealth creation. debt cant be paid off without it.

Wealth creation is nonsense. At least in Europe we have all the wealth we need (and some more), if anything it needs to be redistributed more fairly.

Share this post


Link to post
Share on other sites

forget the money figures....they are meaningless. you need to concentrate on wealth creation. debt cant be paid off without it.

We need both. Without money you can't buy capital to make any significant amounts of wealth. And without money people cannot buy your services so you can create wealth.

The UK is ok we're running over target inflation.. so we have to concentrate on the wealth side and the redistribution side. While other areas have a clear lack of money in their systems.

Share this post


Link to post
Share on other sites

We need both. Without money you can't buy capital to make any significant amounts of wealth. And without money people cannot buy your services so you can create wealth.

The UK is ok we're running over target inflation.. so we have to concentrate on the wealth side and the redistribution side. While other areas have a clear lack of money in their systems.

Im not saying we dont need money.

what im saying, whatching and maintaining figures on money doesnt solve the problem...debt...and as we know, debt is expected wealth.

It either defaults or is paid down.

without wealth creation, it cant be paid down....as you rightly say.

Share this post


Link to post
Share on other sites

Im not saying we dont need money.

what im saying, whatching and maintaining figures on money doesnt solve the problem...debt...and as we know, debt is expected wealth.

It either defaults or is paid down.

without wealth creation, it cant be paid down....as you rightly say.

Good points. I am reminded when a great development is stopped.. or a factory ran out of town for not being green enough. You can't fill that gap with money all that would happen is inflation.

Share this post


Link to post
Share on other sites

Oh noes not 0.86% :o

Less than half the gold standard historical risk free return.

Doesn't this all remind you of a terminally ill patient who's innards are likely to burst open at the slightest attempt to sit them up?

Share this post


Link to post
Share on other sites

It is quite a novel idea to get the indebted to borrow more money to save an indebted nation.

actually the point of it is to get those maintainign a financial surplus position to start spending it, not to get those with a deficit position to take on even more debt.

Do you see the distinction.

Also, don't forget there is a price stability mandate. If they just let deflation have its way they'd be in breach of that.

Share this post


Link to post
Share on other sites

As predicted:-

Update: Comments from Spain's Salgado taken out of context according to a Spanish official. Appears a caja or two will be sacrificially thrown to the lions after all. The Farce must go on!

All Spanish banks pass stress tests

All French banks pass stress tests

Pretty much all Greek banks pass stress test

HA HA HA

The farce will continue until ******** flows freely

http://www.zerohedge.com/article/stress-test-leak-update

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 144 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.