Bleeding Edge

Let’s start with the good news.

The European Union has shifted economic policy greatly.

And it has shifted to the good.

Finally.

This shift is manifest in seemingly small random acts and bureaucratic changes at the leadership level. Retiring the old financial hierarchy and retiring the old school of thought that goes hand in hand with retiring the leadership of the central bank and the transition that just happened at the helm of the bank — is but one of these much welcomed changes. Yet the most important changes we are not even aware of them except when they constitute a signal change.

And this following shift is certainly one of them, because the European Central Bank unexpectedly dropped Stark and replaced him with Peter Praet, a friend and noted Belgian economist as its de facto chief last Tuesday…

Economic Policy Chief that is.

Great big beans you might scoff, but…

This is a major shift for Europe, because it is breaking a tradition in which the absolute German hard-liners occupied that crucial policy-making post in Frankfurt and defined Europe’s economic future fully with what can and cannot be done. ad now this Mr. Praet, whose fiscal renewal policy will succeed none other than the infamous Jurgen Stark realpolitik era. Because Mr Praet as head of the bank’s economic policy and strategy department signals a significant shift that could lead to a creative and non hard-line approach by the institution with the most direct control over the fate of the euro. So that constitutes the good news from the central bank world and from the highest European thought and action leadership.

And this shift only happens now because of the looming clouds of devastating storms and disasters coming up in the horizon.

And now brace for the Bad News:

Right now, the crisis has hit a new high, because there’s an unresolved government crisis in Greece and in Italy and slightly less luster in the French economy. There is also a general worsening of the financial crisis, because all the efforts to leverage the EFSF have run into political, legal or technical difficulties. And here am referring to the European Financial Stability Facility, the bailout fund for the euro zone that can’t decide if it’s a firefighter, a health worker, or an innocent and unconcerned bystander…

That means that currently Europe still has no adequate walls against a possible flare up and no firewall to prevent a disorderly Greek default. And that is what is pushing the financial markets into a renewed panic. I expect the market to fall into despair and panic and I expect that to get worse this year. But the positive end is not unattainable either. We just have to survive another year unmolested in the midst of the freaking masses, the headless and leaderless politicians and the roaming hungry wolves of war and their kin the nasty doom merchants…

And now please feel free to despair…

Because despair may indeed be the right emotion, if you accept your fate and do nothing to avert it.  Since all the predictions of what will happen if European leaders don’t get ahead of the markets are dire, you know the score: Stay docile and do as you are told or else… all hell will break loose is what the message is from all comers. And this is why they want to lead us all hogtied into a war to get our noses out of the depression and the economic malaise we are experiencing.

Because this crisis is truly far bigger than the crash of 2008, and because we have survived the crash of 2008 and we have not yet survived this one, the powers to be have decided to bring in the clouds of war.  Yet in the looming storm there is a danger that even if they get it right, we will all suffer and if they get it wrong then you have a financial meltdown on top of the devastation and ravages of regional and possibly major global conflicts that could erupt. But we won’t go there now and leave this discussion for later…

Because on the strictly economic front; if there is a disorderly default in Greece, and the rest of the euro zone has not been insulated from contagion via a Central Reserve Bank to guarantee the financial and fiscal transactions of the plain vanilla high street depositor banks, then you could have a meltdown not only of the Greek financial system, but of the whole European one and in fact the global financial system because we are all so well interconnected in this global village of ours…

So far, so dire.

And then war might truly be the only option left to us. After all some of you uncanny students of economic and political history might remember that we never really got out of the Great Depression until the end of the Second World War…

War is the father of us all still it seems…

How Daft

But here come some more Good News:

And here are a couple of ideas not just by me but also espoused by some great practitioners of practical enterprise, finance and banking. Here comes the ideas for those of us investors and economic thinkers and high practitioners of finance, who dare to think different. And these two natural ideas are part of the Good News regime that we supply here and those news should perk you up.

One is about the economic bazooka, not the other kind.

And the second one is about Germany’s European leadership and how to use her might in order to avert a real war.

First, the financial bazooka is the strongest financial weapon Europe has to offer. And it seemingly has created this in order to defend all the ailing European economies from the opportunistic and the scardy traders who are betting against them. To end the crisis, Europe needs this bazooka to be big enough, well aimed and fired regularly to punish skirmishers and to convince the market players and the markets that making a war against Frankfurt will be deadly, useless and punitively expensive. In short to randomly punish evil doing profiteers to convince them that going up against the Euro is not the stuff of legend for childish day traders of FX and video game players playing monopoly. Certainly not the morning pill, for the smart wise responsible investors to wager against the Euro either. And all of them will shape up, if they start seeing the carnage littering the Wall streets with their brethren FX traders leaping off high buildings and flying off their windows — having blown their last wad to oppose the European might of the central bank whose economist aims the big bad bazooka’s crosshairs squarely at their forehead and pulls the trigger furiously fast and often.

And this is what our friend Mr Praet shall do. Or at least this is what we expect him to want to do, because he is a thinker and a fighter. And because until now, the story of this financial crisis is one of the European leaders consistently being one step behind the markets. First by bringing their just words to the rukus and failing to defend against the fistfights. Then by getting a sandbag to a fire fight. Then forgetting to bring a gun in the war of the trenches. And finally in this last fight with traders using howitzers, they are forgetting to bring out their own really big and mean bazooka. But that should change in a hurry now…

Because this fight keeps getting more and more bizarre when even in this new year, the verdict of the markets is that the European Financial Stability Facility war chest of €440 billion, or $600 billion isn’t enough. They reason that if you are not gonna use it, this war chest is a continuation of this pattern of insufficiency and weakness. And we say that although the Eurocrats are weak in the knees, this bazooka actually rests in their lap and it has ample ammunition, provided they aim carefully, pull the trigger and fire it the right way and at regular intervals to train the markets and the traders, on what’s what.

But to do just that it takes Balls, Imagination and a bit of a Crazy mean mofo attitude…

Good qualities for a fight, yet all of them in short supply or non existent  in the Eurozone head centres. No such leadership to be found and none such leaders reside in Brussels, Berlin, Paris or beyond, because this broken system does not cultivate independent thinkers as leaders.

Sadly, old Europe first acknowledges defeat and then studies to see what its bazooka can and cannot do. Is it too small to achieve the rescue of Europe’s faltering members directly? Yes and No…

To explain: The bailout fund itself, was designed as a way of providing guarantees on government bonds, but for that purpose it’s clearly inadequate. It cannot be stretched to cover Italy, Spain, Hungary and maybe others.

And here comes the crazy leadership idea and the method of how to apply this to solve the current sovereign borrowing cost crisis: Use the bailout fund by aiming it in a different direction, because the bailout fund not big enough to save the national economies is plenty big enough to save Europe in a different and far smarter way: We should use it creatively and only in order to guarantee the depositor banking system. Thus the banks can become highly re-liquiditized. And then in good shape, they would be able to buy the high-yielding government debt of the European countries that are currently struggling to find lenders and thus shore up the national economies in turn. The member banks would be “strongly encouraged” to hold all their liquidity in their country’s Treasury bills, which they could then sell to the European Central Bank at any moment the need arises. So this method magnifies the bang of the European armaments and it is the equivalent of cash without spending it. And this way, it would yield far more than cash, therefore the banks would naturally hold it. That simple roundabout method of economic leadership, would allow profligate countries like Greece, Italy and Spain during this crisis period to borrow at negligibly higher costs than those that Germany, France or England can borrow at…

All that takes is a good bazooka volley of shots and will clear the field of battle from any FX and Debt instrument trading funds and vulture contenders and then the new cleansed battlefield will become a greenfield. A greenfield opportunity to create a lender of last resort for Europe in one stroke and with the capital to match our aspirations for the European project. With this method, Europe which is currently lacking a lender of last resort, will be trained in the arts of war and also will be battle hardened and battle ready and further able to arm the Central Bank with the star credentials too. And its because the bailout fund would then take the solvency risk, which is beyond the legal right of the European Central Bank, the field of battle will remain clear for many years to come and no new upstart challengers will appear to shake the Eurozone down for their wages of sin.  And getting rid of highway men brings a renewed comfort and security of trade and economic growth and development. And to accomplish all that — all it takes are some well aimed shots of the battle bazooka. And there is plenty of money to do just that. But someone has to be willing to be in the line of fire… and that takes BALLS and crazy MOFO attitude.

In short it takes real leadership.

This plan, would all of a sudden make Greece’s and Italy’s debt “sustainable” because the ECB with it’s new economic leadership will have any amount of money available for the purpose of providing liquidity. At the same time, this method would not violate the law against the ECB directly financing the member governments. This plan is essentially a way to get around Europe’s fundamental economic flaw: A single currency, without the benefit of national monetary policy levers, but also without a lender of last resort… Two birds with one bazooka shot.

It’s a nifty trick, but a trick that would work.

Yet we must do this right now Mr Praet, because the European crisis has metastasized now. And it has moved to many others, mainly because Germany’s intransigence, which has been adamant about blocking precisely this sort of tricks.

The second reason for relative optimism is our conviction that Germany and its leader, Angela Merkel have recently had a crucial change of heart now that they are aware that it is entirely in the hands of Germany to break or save the Eurozone. And here Angela Merkel’s attitude has changed drastically willing to take the hard steps like a new Maggie. She finally recognizes that the euro is in mortal danger and she is willing to risk her political future to save it. And I think she recognizes that Germany historically has caused European crisis and now again is ultimately responsible for this crisis to get out of control. It appears that she is now determined to correct that imbalance and thus avoid further conflagration that might lead to proxy wars and a real fighting deadly war on all fronts. And I don’t mean the financial or economic wars here but the blood gore and human sinew fodder for cannons variety of war.

Yours,

Pano

PS:

Please, Madame Merkel, Read the writing on the wall.

These are good steps yet far more is needed. Great economic imbalances always are the presage to war.

Same as Energy imbalances lead inevitably and inexorably to war.

After all, the economy is just a form of energy management within our “ecos”  within our home, our habitat. It is the Eco- system disharmony and it’s continued grave imbalances that always lead to war.

Dear Angela please remember this. Grave economic imbalances always lead to war. Always…

Yet since it is not too late to save Europe, the Eurozone, and save the Euro and even prevent a catastrophic war — we must act swiftly and act without fear. Act forcefully, in the hope that we might actually avoid the incoming war. To do this we must fight this economic war, with all our might. Let us devote all of our strength and resources in putting out these fires and prosecuting this war fully, in order to avoid the physical one which surely follows – if we fail to correct these imbalances.

But be warned that time is running out and that Europe’s leaders must fundamentally change their strategy to succeed.

Otherwise a global or regional war of attrition has already started…

Lest You forget…

To avert war it takes more energy than to just engage in one.

Building Peace is a hard job but one we are surely fitted to undertake.

And ultimately it’s up to us.

Me and You