MERKEL: WE WILL NOT BE BULLIED BY THE MARKETS

Angela Merkel is sending a pretty clear message this weekend – EMU leaders will not be bullied into action just because the markets are throwing a fit about the speed of their actions.  Bloomberg provides some highlights of her recent comments:

“At this time — we’re in a dramatic crisis — euro bonds are precisely the wrong answer,”

“They lead us into a debt union, not a stability union. Each country has to take its own steps to reduce its debt.”

“Politicians can’t and won’t simply run after the markets,”

“The markets want to force us to do certain things. That we won’t do. Politicians have to make sure that we’re unassailable, that we can make policy for the people.”

These are pretty staggering comments.  If you’re a market speculator you can basically read her comments as such:

“We are in no rush whatsoever to solve the crisis in Europe.  We will not be swayed by market crashes or panics.”

In other words, they are 100% behind the curve.  The markets are sending them a very clear message.  There is a very serious risk of a banking crisis in Europe.   And it all stems from the fact that the Euro is inherently flawed.  As Merkel and her friends fail to provide markets with a solution, they will continue to push the envelope.  Let’s see who blinks first.  Rich politicians have a tendency to pay attention when their personal wealth starts sinking into a blackhole that they could have closed….

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. I’m inclined to agree with Merkel, as untenable as the situation is, there must be a line in the sand, the last thing anyone needs is a closer union, and more devolution of political power. Default if that is whats needed, in a few years the pain will begin to pass, but the EU will still be comprised of sovereign states.
    I want the EU to survive, but I don’t want to be bounced into a fiscal union on the back of a crisis.

    • Default if that is whats needed, in a few years the pain will begin to pass, but the EU will still be comprised of sovereign states.

      Basically, Euro nations ceded the most important element of sovereignty when they created the Eurozone. They can raise “revenue” and pass traffic laws, but economically they’re as sovereign as Wyoming, without enjoying the benefits of a fiscal union as Wyoming does.

      The choices are fiscal union or a bunch of super Argentinas – complete with bank runs – across Europe, including France. And enormous bank bailouts across the board, including the rump Eurozone that will remain – Germany, Austria, the Netherlands. All parties will get to enjoy strikingly lower national incomes, which they will foolishly subordinate to the reparation of what’s basically an accounting problem.

      • “Basically, Euro nations ceded the most important element of sovereignty when they created the Eurozone.”

        EXACTLY.

        Why is it that my dumb-@ss can understand this but people in power of there can’t?

        • It’s so weird. In our system, national party control is really loose, so all sorts of people can get elected to office – when you hear something crazy, there’s no compelling reason to think the person doesn’t actually believe it. But it’s not plausible that Merkel, et al are stupid or crazy (I think), or else they couldn’t have risen through the CDU/CSU (I think).

          They could still soothe an angry electorate by saying that they don’t want to take the measures being discussed, but could frankly explain to the people why and how things are screwed up, and why and how they have to be fixed. Instead, they offer nonsensical bluster about not bending to “the markets”, reinforcing dangerous and self-destructive conceptions about the Eurozone among its citizens.

          • I’m a little excited and sufficiently scared because I’m starting to think you can read my mind.

            “They could still soothe an angry electorate by saying that they don’t want to take the measures being discussed, but could frankly explain to the people why and how things are screwed up, and why and how they have to be fixed”

            Couldn’t agree more- and from a political standpoint they have all the ability in the world to ‘pass the buck’ while doing so (not that I agree with the idea, but it makes it easier for a politican to do something). They weren’t in power when the Euro was developed and adopted, they can look like the heros swooping in to fix the broken system that the people didn’t even understand was broken until they pointed it out.

            And even more so, when the can finally hits a wall and they have to pay the piper, if they’ve sufficient fixed the euro by then (setting up a functioning unified treasury by then: unlikely, but they could at least say they tried) they would be able to say that without their actions there would be no way to shore up the banking system. They could take the responsibility, directly, for slapping one of those monster band aids on the entire european banking system and thereby preventing the shockwaves of a collapse from affecting the world economy.

            Instead? Merkel wants to look like she won’t bow to evil stock brokers and their nasty markets.

            #Id-e-uts

            (Of course, this diatribe is written in my standard idealistic tone and logic. It would be a huge step if they just admitted there’s a flaw in the euro)

            • Exactly – succinctly, blame it on the socialists! How is that not, like, on page one of their playbook?

                  • Yeah but you didn’t provide 6 links to its etymology….. you’re losing your edge beowulf :)

                • But how will she incorporate that into the butterfly, tribal pattern and poorly transliterated Chinese maxim that I like to think she already has?

  2. Leigh Harkness, would you mind thinking about a Trading Bank e.g. Bancor system? It seems to me that separate currency loops for the internal economies, verses a bancor loop for external trade makes the equations much simpler. It also puts the trade balances front and center for political authorities to see and act upon. Mercantile countries that acquire excessive bancors due to inflows from all their trading partners can be punished through agreed upon legal mechanisms.

    In other words, I struggle with the need for floating exchange rates, when a conceptually simpler and fairer system has been conceived.

    • I struggle with the need for floating exchange rates, when a conceptually simpler and fairer system has been conceived. REN

      Why not just abolish the private money monopoly and let international currencies develop as they will? Then, instead of a single balance of trade account, there might be dozens, each capable of separate adjustment by private monetary action.

      Single national currencies are too blunt a tool to be used effectively. A monetary policy that might help one sector of the economy could easily harm another sector.

  3. Dear Cullen,
    I leave the above learned scholars to their economic theories. I am just simple trader. You know from my previous comments that I live in Heidelberg,Germany, but I am an Australian. And I am an observer of what I see around me, and I have made my living for the last 6 years trading the DAX Index futures exclusively. From where I stand, I don’t think it matters what Angela Merkel will or won’t do with regard to the markets. The DAX index passed through its 1000 day EMA two weeks ago, and is making no headway back, and has lost more than 2100 points since 2 May when it topped at 7602 points, and when it sinks past its March 2009 low sometime in the next 6 months, as it will surely do, Ms Merkel will lose the upcoming election, and we will have a coalition of the Greens, the Links and the SPD, probably with the Greens dominating! Wait til you see what kind of politics that will bring to the EU. Ms Merkel will seem like the consumate diplomat by comparison! Ms Merkel likes to keep her head when those around her are losing their’s, but keeping her head together is not what will put an end to this crisis. And it is a huge crisis. It needs the kind of leadership that she is not capable of providing. And there is no one on the horizon to take it over. Sooner or later, something too big to handle is going to happen, and the EU will implode with a mighty roar. If you keep the risk alive for long enough, sooner more likely than later………!!! And Ms Merkel likes to think she has time on her side in abundance. I hope she’s right, but I fear she will be proven wrong.

  4. Politically, in Germany, fiscal union or eurobonds are definitely not the path of least resistance. Merkel’s latest comments back that up as do the comments about what might happen in Germany after the next election.

    I just don’t see either of the above scenarios happening so at some point it has to come to a head when the Germans will say enough is enough. We are no longer backing everyone elses debt. That will signal the end of the Euro. I can’t see a Euro without Germany.

    Within a couple of years I reckon Germany will be regretting the decision as demand for their exports plummet.

    Thats my guess for what its worth.

  5. FB, a bancor system has a trading bank account for each country. In this way each country has its own fiat money system, and is insulated from machinations of foreign powers. If Germany’s account is in surplus, but Norway’s is in defict, then no big deal, you can transfer surplus bancors to the deficit account. But if all of your trading bank accounts go into deficit, then you have to make adjustments to devalue your currency.

    In biological terms, the blood circulatory system is kept separate from the spinal cord system. In this way they cannot mix and infect each other. IMHO, we need a similar system for the world money systems. Individual country currencies should be encouraged as they provide the fast feedback an economy needs, yet trade can be encouraged as well with a properly constructed bancor trading bank system. Floating exchange rates don’t do the trick to my mind.

    An example: WW2 was caused by intergovernmental debt left over from ww1 and high U.S. trade barriers. Debtor countries like Germany couldn’t export across tariff walls to pay their U.S. debts, so they turned inward to Nationalism. Germany, for example borrowed from U.S. Commercial banks, to send dollars to pay off debt at the Government level. Effectively, they transfereed debts in America from the government to commercial banks. When Germany’s currency became weak, more credit money was borrowed to bear raid the economy, further driving them into hyperinflation desperation. Politically, fascism arose as the trading system broke down and the people had their assets wiped out. War broke out to acquire the resources that couldn’t be gained through trade.

    There are parallels to today with the PIIGs borrowing from commercial banks to fund their government operations. Individual national currencies with bancor systems in Europe would have prevented today’s situation.

    Surveying monetary history, I don’t see much to recommend floating exchange rates. A trading bank system provides a level of insulation and also exposes trade weaknesses so they can be dealt with.

    As an aside, the private money power you advocate always attempts to usurp political control for itself. It has to be restrained with checks and balances. The bank of england takeover in 1694, the First and Second U.S. banks, the FED, among others are good examples of private money power attempts at usurping political control.

    Political authority can also overcome private money power, witness Jews being kicked out of Europe approx 200 times, and the Templar’s forced to flee by the King of France.

    Only a legal framework with checks and balances will control money power, as money itself is a legal construct.

    • As an aside, the private money power you advocate always attempts to usurp political control for itself. It has to be restrained with checks and balances. REN

      Private money needs to be totally ignored by government. Once government recognizes private money in any way then yes it will eventually take over as you say. But there is absolutely no need for government to recognize private money since government can easily create, spend and tax back (some of) its fiat.

      Thanks for the info on the bancor system.

  6. “Private money needs to be totally ignored by government”

    The private sector will have to create its own framework to handle their money power. They will also have to deal with the impossible contract problem, because interest is built into the system. In effect, a private economy will have to create its own shadow government. Said shadow government will then have to come under control of the people, and you are back to the primary questions. Who holds the money power and how are you going to restrain it?

    Yes, governments cannot be trusted when they are fascist, or have built in statism. But, a Federal Republic can restrain the money power. It is the only form of government that can.

    Bancors are an extension of the idea that legers should be single entry and not double entry. Assets should not swap back and forth with liabilities. Also, money supplies should not mix, which is your position and mine.

    We tried the private money public money system with the tally sticks in England. That system was usurped by the Gold Men.

    • They will also have to deal with the impossible contract problem, because interest is built into the system. REN

      My bet is that large scale usury requires government support and that without that support that usury-free money forms such as common stock would prevail.

      We tried the private money public money system with the tally sticks in England. That system was usurped by the Gold Men. REN

      After 726 years!

      I might agree with an all public money system if only we had a class of throughly righteous men to run it. However, those won’t appear till the Second Coming. Till then, I reckon competition (plus strict enforcement of fraud and insolvency laws) to be our best hope for high performance and honesty.