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Wednesday, December 1, 2010

The Birth Of QEuro (Quantitative Euro) And The Death Of The Euro Proper.

Not that there is a lack of material to write about these days from speculating on the impact of the next WikiLeaks dump regarding a big bank or the Koreas, but the big one that is on everyone’s radar screen is Euroland. For all the blistering talk about how the Euro Zone was not going to act like it is cousin across the pond and just print money it sure looks like they will have to eat a giant helping of crow.

Just today comes an article entitled “US Ready to Back Bigger EU Stability Fund: Official” which details how the US is ready to support an extension of the EFSF (European Financial Stability Facility) via a commitment from the IMF (International Monetary Fund). The EFSF currently stands at about 750 Billion Euros or roughly $980 Billion. Dear reader I know at this point you are saying to yourself…who cares this is a Euro problem..so what if they want to go to the IMF…what has that got to do with the price of Starbucks in New York?  In the world of today we are more interconnected than ever so almost everything affects us in some way shape or form.

To start with the leaders of EuroLand have tried to project the notion that Europe is holding firm on so called austerity measures; just like the US the problems in Europe are so large that they cannot be solved by such simple measures. The Euro zone also chastised the US for it’s spendthrift policies of QE where as they were taking what they considered to be the prudent approach. That was then and this is now and today the Europeans find themselves in the position of a debt default contagion that is spreading. This latest gambit to have the US bolster the IMF to fund the EFSF is just a harbinger. The powers that be in Europe, the IMF and the FED must know that “the big one” is on its way and its crash would overwhelm the EFSF. I would hazard a guess that Spain is closer to melting down than is commonly thought otherwise why take dramatic steps to bolster the EFSF if the funds there are currently adequate to handle the meltdowns and bailouts in progress?

In my “Law of Entomology” I posited a speculation regarding who would bailout the Irish; would it be the EU or “the BenBernank” (aka B52 Ben) that would step forward to help Ireland with its financial woes. I guess I was too early in the cycle as only now after the Irish debacle seems to have quieted but before the assumed next problem children come to the fore the US is looking to boost the IMF.

The US which means you and me dear reader is the largest share holder in the IMF and as a result we have the largest funding stake. We have already allowed our government to borrow from our kids and grandkids to toss $250 Billion in the EFSF kitty and now it is revealed that we are set to throw some unspecified billions in new bones in to the mix. It makes you wonder where the Dollars are coming from at a time when there is much talk about freezing federal pay and other schemes which will save a few billion dollars.

We won’t actually know where the money is coming from until the government closes its books on September 30th 2011; at this time one could take the stated budget numbers and subtract them from the increase in the national debt from last year to deduce how much off balance sheet spending actually transpired. If I had to guess the FED will have produced these dollars from thin air to give to the IMF, so in essence much to their pontification the EU is participating in Quantitative Easing via the back door.

As I had stated earlier the European’s stance has been not to do what the FED has and print its way out of the debts and bailouts, but there are rumors swirling that Jean Claude Trichet, who has been one of Europe’s the most vocal opponents of QE may now be looking to soften his stance. Speculation is growing that Trichet will not seek to quickly remove the ultra cheap liquidity from the markets for fear that it could result in market chaos. It appears that the Euro zone is falling in to the same quandary as the US with regards to the ability to siphon off the cheap liquidity without further hurting the system before it may cause a problem.  Apparently Trichet was out on the media stump making statements warning the markets not to underestimate the ECB’s determination to resolve the crisis indicating that there would be some sort of revelation perhaps as soon as tomorrow (Thursday).

The debt markets in Europe are not functioning smoothly as many investors are too nervous to take on government or private debt for fear that they will not be able to exit. In the meantime those that want to or have to exit are doing so in a manner that is causing the credit spreads to dramatically widen as they dump out of the debt instruments.

Looking at this situation it appears to me that the only true option the Europeans have is to join “B52 Ben” and print because they have demonstrated that they do not have the fortitude to allow countries to go belly up. Instead the Europeans will not call it QE and will give all kinds of excuses but it will all boil down to the Europeans are going to print money just like us. The Europeans may call it something else or they may do it via the back door of the IMF but they will debase the currency too. The thing that is of most concern is that the FED has their finger prints on this whole mess and I just don’t see how we can afford to bail out Europe when we can’t bail ourselves out. I guess “B52 Ben” was right in one of his more famous speeches he said, “we have a technology called a printing press”. I am sure that the “press” will be running day and night to monetize the world’s problems…It is for reasons like this that I remain invested in tangibles and precious metals to be ready and protected…are you protected?

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