Notes From Underground: Europe To Be Crucified On a EUR/YEN Cross

Tonight’s BLOG headline is attributable to my friend KM after a long conversation about the IMF and G-20 meetings that took place in Washington during the past four days. It appears that Japanese monetary policy was not the subject of derision but rather applauded as a strong measure to lift Japan’s domestic economy out of two decades of malaise. Let me be as clear as possible: There is a full frontal assault being waged on the German model of GROWTH THROUGH AUSTERITY. The first shot fired was several months ago when IMF economist Olivier Blanchard delivered a paper stating that the previous belief that the negative impact on GDP from austerity was not a multiplier effect of 0.5% but rather a greater measure of 0.9-1.5% in its impact so a decease in fiscal spending would create a much greater slowdown than previously thought. The battle was waged in the efforts to limit the sequestration in the U.S. even as IMF Managing Director Lagarde cautioned that U.S. tightening is “too much, too fast and it’s in the wrong place. It’s not right for the U.S. economy and it’s not right for the world.”

The recent academic attack questioning the reliability of the Rogoff/Reinhart work is another sword unsheathed against those promoting fiscal austerity during the time of slow global growth. The IMF has become the phalanx for pushing back against the “austerians” and thus easing the restrictions on EU budgets (or just say no to austerity and yes to any and all fiscal and monetary efforts to sustain growth). The Japanese were not the G-20 goat and even if the YEN depreciates the greatest impact will be on the Germans as they are direct competitors. If the Germans do not desire global growth then the end result will be Japanese corporations merely taking market share from German business. Without increased global growth it will merely be a game of profit transference. The amount of money spent on luxury autos will be stagnant but the money will flow to the most price competitive–Lexus versus Mercedes. The higher the EURO/YEN moves, the more the German economy suffers and the more content Christine Lagarde and her IMF cronies become.

The rest of Europe will suffer under a stronger EURO but the short-term pain will be nothing if it breaks the back of the German model of growth through austerity. The battle lines have definitely been drawn and the more the global economy muddles along the more the effort will be to curtail fiscal austerity. The efforts of the U.S. and the U.K. to achieve solid economic growth through aggressive monetary policy have achieved minimal success. ‘Monetary policy needs fiscal stimulus’ seems to be the path to increased GDP. If Germany wants to remain on the growth through austerity path there will be a price to be paid.

***The case of Germany being the target of G-20 and IMF “slings and arrows” can be found in various places:

In Monday’s Financial Times, Wolfgang Munchau has an op-ed piece: “Perils of Placing Faith In A Thin Theory,” which attacks all of those who have given so much credence to the Rogoff/Reinhart thesis of too much public debt acting as a drag on GDP. Many politicians wishing to curtail fiscal spending have cited this work as the qualitative source for the proposing of austerity. They pay tribute to the theory of Rogoff/Reinhart 90% threshold as being the tipping point of an economy reaching the a point of fiscal debt being a drag on growth, but the recent academic work has shown the argument to be full of faulty data. The Rogoff/Reinhart theory has been waylaid but what is interesting is that Chairman Bernanke and all the QE proponents who are operating monetary policy on theoretical basis have not had their policies questioned even as economic growth has not behaved according to theoretical projections.

Rogoff is on life support while the theoretical basis of Bernanke’s policies is not even getting a full exam. At a meeting of high level G-20 economists and policymakers, FED historian Professor Allan  Meltzer asked, “Why  has there been such a weak response to such extraordinary stimulus?” There was no good answer from the central bankers. But yet Bernanke and the QE theory of banking, which may in fact cause much greater systemic damage than Rogoff/Rinehart, remains the centerpiece of central banking and global policy response.

***Mario Draghi may have the biggest stake in the current austerity battle for the whole outright monetary transaction (OMT) was premised on a pledge of conditionality of increased budget austerity. No European sovereign borrower could get the needed funding unless conditions of fiscal severity were agreed to for the Germans would not approve funding without strict rules of financial engagement. If there is an emergency banking crisis in Spain, how will President Draghi be able to deliver in the face of a recalcitrant German guarantor of financing? Mario Draghi has claimed OMT an unmitigated success. It is not because it has yet to be tested.

***In another sign of IMF displeasure, the FT had an article on Thursday, “Osborne Girds for Battle With IMF.” It is more of the case being made against austerity. The British Chancellor of the Exchequer has promoted budget austerity as a key to British economic resurgence (and as Osborne maintains, this policy was previously supported and applauded by the IMF). The British economy has remained lackluster, even with a very aggressive quantitative easing policy in place. Therefore it is time to back off austerity. While the U.K. is being criticized the bigger target is elsewhere. If the academic basis of the budgetary policy is questionable, so is the policy. Germany is in the crosshairs.

***There’s an article in Monday’s FT by Giles and Harding, “Five Lessons From The IMF Spring Meetings.” The reporters sum it up: “The U.S. is asking Germany to create more demand at home to help the eurozone grow. Germany is unimpressed–suggesting that research is more often used to justify economic policy than to make it–but may be willing to allow slower austerity elsewhere in Europe.” This will be the key to the success of the full frontal assault on the German model. There is a new TROIKA: The U.S., Japan and the IMF. The target is German intransigence. I am not making a qualitative judgment on budgetary austerity for there is a time and place for various policies to be effective, but I am alerting all the readers of NOTES FROM UNDERGROUND that the lines of battle are in place.



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9 Responses to “Notes From Underground: Europe To Be Crucified On a EUR/YEN Cross”

  1. Mark Says:

    Helllo Yra,

    Thanks for this particularly interesting article.

    One of the issues I find most perplexing is that of alliances/competitors vs unipolar financial world coordination. Your article presents a series of practically unassailable observations that battle lines are being drawn. Yet, why do so many other issues appear jointly coordinated, at least in the western world?

    For example, as the Cyprus situation unfolded, news suddenly appeared about similar thinking coming from Canada and New Zealand (let alone bail-ins for the rest of Europe). More recently, ZH reported on similar bail-in planning language from the US Fed. Bail-ins, it seems, are on the global table..Was this just a coincidence of global thinking evolving, or the result of global planning to a) slow monetary inflation as derivatives are resolved, and b) avoid money stagnation (hoarding) in banks? (or other reasons)

    The IMF seemed to be very much in the lead with respect to Cyprus. Now, that country appears to be devastated and ruined. Is Germany the real moving force behind the bail-in bomb? Was the Cyprus affair driven by greedy bankers? Was it staunch adherence to anti-inflation principles? Or was it deliberate destruction of a country?

    Now we hear that Bernanke will not attend Jackson Hole due to a “scheduling conflict”. It is hard to believe that the conflict is anything other than that he simply does not want to attend. My best guess for an explanation behind all this is that internecine wars within the western banking system are breaking out and are superimposed on larger organizing forces (e.g. BIS, world governance planners).

    But something still does not add up. Draghi is part of the GS gang and LaGuarde is a US banking insider. Could Germany really have prevailed against the massive forces of the big banks in pushing austerity to the point of death of countries like Cyprus? I doubt it. Perhaps what you are seeing is simply the latest message telegraphing via the captured media: the PTB have dialed in austerity a bit too far and are now worried about premature system collapse before the replacement system is ready. So now further easing returns as fad of the day for a while. Same bread crumbs – just speculating about the hand that placed them rather than where they are intended to lead us hungry mice.

    Machiavelli anyone?

  2. johann Says:

    IMO the Germans don’t want to waste a bullet, they will need it after the election in September. They know that something messy will come in Europe at the end of the year.

  3. GreenAB Says:

    thanks Yra,

    i am a big fan of your 2+2=5 thinking.

    i get a possible motivation of the (south) Europeans to weaken Germany.
    but certainly China and the US have nothing to gain from a weakening yen, it puts additional pressure on their economies, especially the US auto makers.

    while it´s possible that a weakening German economy might lead to looser policies, it´s all but certain.
    dragging Germany on purpose into a slump poses all kind of risk (how deep of a slump, impact on world trade, will a possible stimulus be succesful…?).

    and what if a German recession puts downward pressure on German wages, thus preventing the productivity gap to southern Europe from narrowing?
    (i still think that low productivity (wages rose to fast during the 2000s) and not the lack of stimulus is THE biggest problem in PIIGS)

    so couldn´t be the real reason for G20 silence on the Japanese experiment be, that they all know that they might be forced to enact similar policies to in a not to distant future?

  4. yra harris Says:

    Green and mark; Nice postings and they deserve a real answer.On the quick,Germany is the bastion of fiscal rectitude in the world as of right now and its “intransigence” is deemed to be a problem for those believing that it will take the lifting of fiscal policy to get the global economy moving—see the work of Christine Romer to see the impact of fiscal spending versus monetary policy.Germany is the only possible player to be the bacstop of Europe but it makes demands that keep pushing the debt plagued economies deeper into debt—Yes ,Adverse feedback loops do have an impact,which by the way is the end result of the Rogoff/Reinhart work–do slowing economies beget bigger gdp/debt ratios or the inverse.but make no mistake about it –the Germans are the target of the anti–austerity crowd—the alternative to pressure on Germany is a massive sovereign debt default in the european peripherals if Germany pulls its agreement to backstop the entire European experiment.The effort to move to bail-ins is the moral payoff to German issues of moral hazard in a haphazard financial system.

  5. Dan Says:


    Would greatly appreciate your diagramming the flow of how “QE” works in the USA. Been explained to me that:
    a) QE is ALL about buying worthless (failed) OTCD’s (think subprime insurance, etc) from the banks’ to continue to keep them liquified, operating (I didn’t say “solvent”), and to be buyer’s of US Treasury debt.
    b) bankers keep getting their bonuses and fat salaries, etc., and keep in control of the K street lobbyist firms that buy and control the politicians in elected office, and seeking office…
    c) net transferrance of dead beat (uncollectible) debt from banking system back to federal govt from where it in reality ultimately spawned (fmac, etc., with unsupervised and criminal lending practices which allowed subprime to begin in the first place).
    d) QE not intended to focus help on main street, its intended to keep both banking and government in operation.
    e) taken to ultimate extremes, will kill main street, and take us to a place akin to cuba or north korea.

    SUMMARY: confused, of course, but hope you can of course correct all my mistakes, so I can finally get a handle on what’s going on.


  6. yra harris Says:

    Dan–I will try to explain this as to the best of my abilities–be patient

  7. yra Says:

    Dan–upon further review –you got the rudiments with a heavy dose of frustration–for more see simon johnson,”The Silent Coup”

  8. Chicken Says:

    Bernanke has apparently elected to skip out on the Jackson Hole conference, is his QE program about to negotiate parallel alternatives?

    My view is we’re witnessing both selective austerity and selective QE, the beneficiaries of which are one in the same, those guys who habitually make bad bets without repercussion. Those same guys are now making loans to corporate America at (above market) lucrative rates, positioning themselves to vacuum up a lion’s share of future wealth created. They’ve moved on and have found new trees to shake with their loan-shark approach, more of the same says they have nothing to lose if these new bets go against them.

  9. Austerity is The Culprit; Not Bernanke | Points and Figures Says:

    […] Yra Harris has a nice discussion on the EU situation. […]

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