Notes From Underground: 2+2=5 raises the Question, “If we ran the world what would we suggest?”

The end of April is here and there is not much in the way of market-moving news. The European debt markets quieted today in the anticipation of a market support package being approved by the German Bundestag. Our new favorite barometer, Italian Bond Futures/German BUNDs, reversed and the Italian finished up 75 ticks while the BUND was down 30. This reversal led to a modest rally in the EURO as many short positions were unwound. The pundits were suggesting that the EURO strength was due to the robust jobs report out of Germany but that is utter nonsense. Improved labor data in Germany does nothing to resolve the Greek debt situation. In fact, we believe it makes it worse. As the EURO weakens, the German economy becomes even more globally competitive. But because the PIIGS do not weaken relative to Germany, the Deustchland Locomotive becomes even more of a competitive dynamo both inside and outside Europe. The pressure on the PIIGS to deflate becomes even more significant as their current account deficits continue to erode and their financing problems become acute. German growth that is not accompanied by increased domestic demand will exacerabate the European crisis, not ameliorate it.

After we wrote about all the central bank activity yesterday, we  found another central bank that entered the fray. The Russian Central Bank cut their lending rate yesterday to 8%. This was somewhat of a surprise, but the Russians feel their budget situation is healing as high energy prices are providing increased revenues into state coffers. Russia is so flush with money that we want to offer their increased wealth to solve the European debt crisis. Being that the Russians are awash in cash and the European Union is its largest energy client, we propose that they offer the debt stressed nations of Europe a type of vendor financing similar to what China provides to the U.S. The Muscovites have been buyers of the EURO currency for the last three years as they moved to rebalance their foreign reserves away from DOLLARS. This implies that Russia has a major self-interest to see a positive resolution to the PIIGS debt fiasco.

Russia OUGHT to buy all of the IMF bonds that will go to refinance GREEK and other distressed DEBT.They could buy these BONDS for a low interest rate allowing the IMF to fund the PIIGS at a level that would curb the budgetary  stress caused by the fear of default.

Why would the Russians do this? First, it would aid the economic growth of their largest customers and second, THE IMF WOULD GUARANTEE THE BONDS BY SECURING THEM WITH THE IMF GOLD HOLDINGS! Think about that: A real use of IMF GOLD and an economic bailout at a low cost. We at NOTES FROM UNDERGROUND are always thinking in unbalnaced ways for as Sundance said to Butch, “You keep thinking Butch. That’s what you are good at.” To make 2+2=5 is never an easy task.

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4 Responses to “Notes From Underground: 2+2=5 raises the Question, “If we ran the world what would we suggest?””

  1. arko Says:

    great thinking

  2. Fred E. Says:

    This interesting suggestion of Russian purchase of IMF bonds to prop up the PIIGS needs one other calculation to make it a real option. What is comrad Putin’s thoughts on this, as he has been on the road to restore his mother country to the Stalinist power of decades gone by.

  3. yra Says:

    thank you for the compliment—-just trying to solve the problems one crisis at a time.Hope it can help stir the pot a little bit

  4. scott h Says:


    Great idea on Russia/IMF /PIIGS . It is definitely the sort of thing the Russians would like to be seen doing. Though I think it would be very hard for the EU to accept Russia playing such a important funding role on their turf at this stage.

    Love the blog Yra, always a great read. There are not a lot of great macro thinkers around. Happy trading

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