Only Unlimited Money Printing Will 'Help' the EU Now
By Staff News & Analysis - October 27, 2011

Thank you Germany … Alone among EU leaders, Chancellor Angela Merkel goes to tonight's summit in Brussels with an iron-clad mandate. It is a remarkable moment. Never before – to my knowledge – has a national parliament demanded and held a prior vote on an EU summit accord. Had this principle been established a long time ago, we might have avoided much of the relentless Treaty creep and EU aggrandizement advanced by secret deals at the Bâtiment Justus Lipsius. Thank you Germany. Thank you too, judges of the Verfassungsgericht, for giving the Bundestag a veto on EU encroachments on fiscal sovereignty. – UK Telegraph/Ambrose Evans-Pritchard

Dominant Social Theme: Finally, Europe has a bailout that is necessary to combat the problem. Why couldn't they just get it done earlier? Politicians are always dragging their feet until the last minute …

Free-Market Analysis: Of course, by now you know the EU has announced another "miraculous" bailout. But this article, written by one of our favorite mainstream journos, Ambrose Evans-Pritchard, shows why it won't work, can't work and NEVER WILL work. Hats off to Ambrose. Such clarity is not usually the bailiwick of the mainstream press, not even the Telegraph.

In fact, the "miracles" that are announced regularly by the Eurocrat brain trust are nothing more than an elite dominant social theme. Crises are SUPPOSED to be solved by the most brilliant among us … and top governmental officials have the goods. That's why they are there, to tackle problems too complex for the rest of us.

The realty is otherwise, of course. Governments CAUSE the problems that later demand attention and are in some cases unsolvable. The Euro-crisis, as this article shows us, may be one of the unsolvable ones. A malevolent mixture of monetary rigidity, uncontrollable debt and banking insolvency seems to doom any potential solution to irrelevance.

The article doesn't start propitiously. In fact, it's one of Evans-Pritchard's more confused articles in our view, given the murkiness of exactly what one is supposed to be "thanking" Germany for. But the reason to analyze the article is not to probe Pritchard's gratitude (ironic or not) but to comment on the article's conclusion. Here he justifies all the rest:

The unpleasant truth is that [Merkel/EU's] leverage proposals are idiotic, the worst sort of financial engineering, legerdemain, and trickery. As countless economists have pointed out, it concentrates risk. Germany's €211bn commitment to the fund is not technically breached but the risk of suffering large and perhaps total loss is vastly increased. Creditor states switch from protected senior status on Greek, Portuguese, or Italian debt to the bottom rung on new slabs of sub-prime structured credit.

The bluff might well be called. The consequence will be to bring forward the downgrade of France and other states. It will accelerate contagion to the core, not stop it. Why is Germany pushing for such a destructive policy? Because it dares not cross the €211bn red-line that has become totemic in the Bundestag, and because it has for ideological and cultural reasons excluded the one option that can plausibly halt the eurozone crisis – which is mobilizing the full fire-power of the European Central Bank.

It should be obvious by now that euroland needs an authentic lender-of-last-resort. Yes, there is a risk that ECB bond purchases could degenerate into chronic monetisation of deficits. But it is an even greater risk that the EFSF – as proposed – will set off a calamitous chain of events.

In three paragraphs, Evans-Pritchard takes us to the heart-and-root of the problem. The EU's central bank cannot print the money necessary to defuse the rolling debt crisis. In the US, the Federal Reserve issued something like US$16 trillion in short-term loans when the markets were seizing up in early 2008. Most recently the Fed basically guaranteed something like US$75 trillion of Bank of America's bad derivatives debt. (Thanks, Merrill Lynch!)

These are admittedly huge sums. We defy anyone to visualize how much US$75 trillion is. It's like imagining infinity in our view. That's why we often write that the dollar-reserve system is dead and that it died in 2008. One cannot issue out – or even intend to issue out – such vast sums of money. Their very incomprehensibility tells the tale.

But in a sense, for the moment, such aggressive actions seem to have worked. The system, in all its chaos and ruin, staggers on. The incomprehensible amounts of money issued by central banks to stabilize it seem to have worked for the moment.

They won't for the long-term in our view but for those politicos and bankers looking for a short-term fix, throwing impossible amounts of currency at the underlying problem of over-leverage is a satisfactory answer.

This is what Evans-Pritchard is pointing out in his article. Contrast sums of US$16 trillion and US$75 trillion to the piddling euro amount of 400-plus BILLION (with a "b") that the EU has wrenched out of its member-nations after considerable wrangling. It is nothing but a penny in a pot!

Evans-Pritchard has illuminated the basic problem of these EU bailouts. In the US, the Fed can issue unlimited amounts of money; the EU Central Bank is constrained. Thus, arguments will continue over fixed amounts of bailout change when unlimited amounts are needed. "Enough" will never be enough.

That's what happens during a fiat-money collapse. Central banks must print and print until the currency is either inflated away to nothingness or a depression commences that salvages at least some of the banks within the context of the current economic structure. The EU hopes for the latter, but it doesn't currently have the power to pull it off. Only the Fed has that sort of unconstrained artillery.

Of course, we would like to see this rotten system collapse entirely. It might have a terrible impact on many – but salvaging the system via monetary inflation and war will be just as horrible. At least if the system collapses, the horror will mean something.

After Thoughts

In any event, Evans Pritchard explains to us the source of the problem. Without unconstrained money printing, no "bailout" is ever going to be enough. Only fiat-money printing by the ECB can salvage the EU. So here's the real question(s) for all you EU believers and investors (or non-investors): Is the ECB apt to get the power to print unlimited amounts of money any time soon? Think so? Will that really happen? And if it doesn't, what then …