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Print or Die

Europe has come to understand that what is at stake right now is not just the economies of a few member nations, but the future of European Union itself.  The cornerstone of that union is the Euro, the single currency that has made close cooperation even tighter.  But in order to save that currency, there is little that can be done short of the member nations drawing much closer together.  That, and risk killing off the Euro in order to save it.

The growing realization is that they will have to print a lot more Euros to get out of this.

As discussed earlier, the European Central Bank (ECB)  does not really have the power to simply print money, which is more or less what our Federal Reserve did with two rounds of Quantitative Easing.  They were set up to make a single, strong currency that the world can rely on.  They did that well and are loathe to destroy the faith built up by simply printing cash to cover the pending default of sovereign (national) debt.

But once you accept that default is inevitable, there is little choice.  The problem comes in the reserves held by banks who were investing in the European economy.  Under the rules, leverage of up to 450:1 (!!) was allowed when the reserves were sovereign debt.  This was done because default on national debt was unthinkable – it simply could not happen.  So those assets were deemed completely secure.

Here in the USofA, we’ve been dealing with “Too big to fail” and, at times “Too big to understand”.  In Europe the entire system was set up on “Failure is impossible”.

The deal with Greece supposedly allows 50% of their debt to be defaulted on, although that does not include the debt with the ECB and other institutions, meaning it’s closer to 30% overall.  At least one independent analyst (Sean Egan) has said that he believes the default will have to be closer to 90% in the end.  The problem is that in order to cover debt payments you have to tax the people of Greece at a level that will almost certainly wreck the economy and plunge them into a Depression by any measure.  That makes covering the debt even harder, meaning more default.

As tempting as it is to make the banks pay for all of this, many do not have the reserves outside of sovereign debt to keep operating.  Asking banks to take the hit will almost certainly result in bank failures across the Eurozone.

As we all know, the problem is much bigger than Greece.  There is an estimated €3 Trillion in default looming out there right now, and that will have to be made up somehow in order to keep the Eurozone from falling into Depression.  If you estimate at least half of this can be raised by simply printing it, you’re looking at a situation very similar to the Quantitative Easing done by the Fed.

Why are they so slow to do this?  The ECB is chartered to prevent inflation and preserve the value of the Euro, and printing more of it would render the existing money supply of around €10 Trillion much less valuable.  However, inflation would spread the pain around very evenly through the whole system – essentially a tax on everyone for the benefits of maintaining one currency.

This has the additional benefit of lowering the value of the Euro around the world, making exports cheaper and likely providing jobs in the distressed economies.  But this could deepen the Currency War which is always on the verge of becoming more of a Trade War.

No matter what, the motto for the Euro is going to become “Print or Die”.  Exactly how much is an open question, as is how it will be authorized.  We do know that the result will have implications for international trade and will hurt our own efforts to boost manufacturing and create jobs here in the USofA.  But it is still much more desirable than chaos throughout Europe and a general Depression that could well bring the whole world under.

21 thoughts on “Print or Die

  1. Good blog, but you didn’t say why we should care until the very end. I think you also said in the past that US banks are on the hook for about half of any default meaning this could be a big problem for us as well. I think the alarm bells for the US should be ringing like crazy.

    • An excellent point! I was so wrapped up in this one that I neglected the “Why we should care” at the start. I hope it’s pretty obvious by the time you get to the end, at least. Yes, the alarm bells should be pretty loud – I’m doing my part.

  2. As the MF Global story plays out we will be hearing a lot more about this I think. They were not the only ones betting on Europe and there will be big investment houses in a lot of trouble if there is a default. So I agree that they have to increase liquidity (how we say print it) but they are so slow to get to it we can not say how or when it will happen.

    • I think you’re also making the case for “Why we should care” here. Yes, MF Global is the tip of the ol’ iceberg. Why other financial institutions are so quick to go after them remains a bit of a mystery, but it’s clear that at least part of it has to deal with Corzine’s political connections and appearance of special favors (such as being a primary on T-Bills). I suspect, however, that they are all trying to distance themselves and their practices from the obvious poster child for more regulation, ie, “Methinks thou doth protest too much”.
      But this does very much tie into the Euro problem and probably gives everyone a reason to care how MF Global unwinds from their insane position.

  3. Way out of my minimal financial range of understanding to comment coherently, save for: The EU is in a heap O’Hurt with few options.

  4. Nice analysis. Interestingly I was working in Europe when they “made the great switch.”

    Another note, I’ve been trying to come up with business to start that actually produces something vs. the knowledge work that I presently do.

    • Thanks. I always enjoyed making things more than just walking around telling people what to do. It’s why I got my degree in engineering. Rubber products may not seem like much, but coming out of the lab dead tired with holes in my clothes and a kilo or two of experimental polymer is actually quite a lot of fun. Making music boxes was pretty fun, too, but far less lucrative. It’s good to have something to show at the end of the day and say, “This is what I do”.
      Sadly, there’s not much work like that around.

  5. in other words more bailouts for banks are coming one way or the other – will we just bend over and give it to them this time like last?

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