Notes From Underground: Rome Is Alive With the Sound of Music

There was singing in Rome when Angela Merkel announced that she is stepping down as the leader of the Christian Democratic Union. The two most recent German regional elections has solidified the unmitigated truth about the weakened condition of the German chancellor. For the last six years, I have been highly critical about Merkel’s policies. The bumbling French President Nicholas Sarkozy out-maneuvered Merkel in 2011 as he prevented then-Bundesbank President Axel Weber from leading the ECB.

The French could not tolerate a hard-money advocate like Weber pushing a Bundesbank agenda as the mighty French state machine needs low interest rates to keep the bureaucracy operating without high debt servicing costs. The French could pay lip service to the German fiscal austerity as long its borrowing costs are low. (Yes, I know that it was ECB President Trichet, a Frenchman, who blundered by raising rates twice in 2011 and set the stage for the financial crisis in the European periphery. But I have maintained that Trichet was more German than any Bundesbanker when he invoked the policy of Le Fort Franc in 1991.)

Chancellor Merkel needed a German at the ECB in order to maintain German popular support for an aggressive ECB liquidity/QE program. Since the onset of negative interest rates and massive ECB asset purchases, it has been the German savers that have been financially repressed.

The full impact was realized this week as German inflation data showed that some regions’ price increases reached an annual rate of 2.5 percent. By what measure of financial responsibility does a country have more than 2% inflation with a TWO-YEAR NOTE yielding -0.62 percent? (Yes, a negative real yield of 3.12 percent if you are purchasing the aforementioned debt instruments.) The popular narrative is that Merkel is suffering due to her stance on immigration but that is so flawed. The rise of the Alternative for Deutschland (AfD) was initiated by a group of economists challenging the policies of the ECB. The issue for the Germans was if fiscal profligacy was going to be the guiding principle of the EU, how was it to be funded and what entity would bear the burden of being the creditor?

The Davos contingent, under the guidance of George Soros and others, were pushing for the Eurocrats in Brussels and Frankfurt to craft a eurobond to CONSOLIDATE all the sovereign debt of the EU nations. However, there was no Alexander Hamilton with the persuasive and political power to initiate such a program. Also, the legacy debt was so vast that the German elite was terrified of asking its voters for the authority to be encumbered by such a great fiscal responsibility. Frau Merkel and her fiscal stalwart Finance Minister Wolfgang Schaeuble opposed all entreaties by European and world politicians for such a program until the individual European states embarked upon policies of fiscal austerity to ensure that the debt level would shrink. The Germans insisted upon cuts in pension programs. Less social programs and even tax increases in order to meet the levels ordained by the Growth and Stability Pact. Greece and others were forced into what economists call INTERNAL DEVALUATIONS where wages are squeezed to levels that make the labor force competitive on a global scale. Export earnings coupled with reduced demand for foreign products will help build a country’s savings.

This German-sponsored program has created a great deal of ill-will toward Germany but much of the blame is to be directed at the ill-conceived structure of the EU itself. The creation of the EUROBOND should have been done with the advent of the EURO but the Germans would never have agreed to it under the conditions that existed in 1999. As I have stressed for years, the Draghi ECB has laid a trap for the northern European states by building up a massive balance sheet through QE.

The useful idiots would argue the counterfactual of what would have occurred if nothing had been done, but a usual the bean counters fail to measure the political fallout. The Italians, Spanish, Greeks and even the French were singing the European anthem, Ode to Joy, as Merkel has fallen from grace.

However in Rome the piazzas were alive with Ding Dong the Witch is Dead. Yes, Merkel is still Chancellor of Germany and is only stepping down as CDU party leader. But in echoing the thoughts of Professor Niall Ferguson, it is the height of arrogance for Merkel to remain chancellor. It is hard to believe the spineless Social Democrats will remain in a coalition with a weakened politician that has caused them to be relegated to a footnote in the current government and resulted in the party suffering humiliating losses in the recent regional elections.

AfD has consistently been out-polling the once proud beacon of German stability. Merkel needs to become less arrogant and give way to new people and new ideas.The current situation is creating the backdrop for severe disruptions to the EU system. The problem is that the entire edifice is held captive to the ECB’s massive balance sheet. Italy is temporarily rejoicing as it will be the recipient of a changing attitude in Europe and maybe the world over. Fiscal austerity will be giving way to fiscal profligacy. China, Brazil,Japan, Russia, Mexico, and yes, the post-election U.S. will all be pushing infrastructure programs in an effort to prevent an economic slowdown. The financial impact from such programs will be what we are concerned with as we go forward, but it seems that a global fiscal stimulus program will be well received by the G-20.

The fall of Merkel is celebrated in Paris as French President Macron seeks to become the focal point of European politics and the darling of the globalists. Remember, although Macron is very young and a political neophyte, Napoleon was 35 when he was named emperor. The tumultuous month of October has ended and yet the volatility has just begun. Europe is now entering the epicenter of instability. Ode To Joy?

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14 Responses to “Notes From Underground: Rome Is Alive With the Sound of Music”

  1. Chicken Says:

    I’m a little confused, isn’t fiscal profligacy a root cause of where Europe (and others, for that matter) is today?

    I have to wonder if Merkle’s loss of popularity stems from an inability to shield Germany from these profligates of Europe thus, those famously gruff Parisions might be celebrating for the wrong reasons?

    • yraharris Says:

      Chicken–the answer is YES–isn’t that what financial repression is all about—somebody has to pay and just like in the U.S. it is the savers who bailed out the profligate–the Parisians have celebrated for all the wrong reasons since 1870 but that is the modern history of Europe

  2. asherz Says:

    Infrastructure programs are expensive and must be paid for. With QE gone or diminishing to the point of zero, how will these programs be financed?

    While Italian sovereign and bank debts are nearing the precipice, some major Eurozone banks are in jeopardy. With AfD and Five Star members buying knockoffs of Melania Trumps “Really Don’t Care, Do U” jackets, markets may take notice.

    Talking about banks, anyone notice the price of DB lately? And this from the counterparty to trillions of derivatives. Does AIG ring a bell?

    Is that a black swan nearing shore? I don’t know but there are some black feathers nearby.

    • yraharris Says:

      Asherz–somebody picked up your DB piece and bought 3%–it is a absolute play on moral hazard

      • Asherz Says:

        Saw that. Hazard, shmazard. Hudson Executive figure that the strategy worked a decade ago with B (BAC) and C (Citi) so why not try letter D.
        I think that’s what the Gypsy fortune teller must have told Braunstein. He hears the Cavalry will be coming soon. He doesn’t know that their CO is Lt. Col. George Armstrong Custer.

    • David Richards Says:

      QE probably not gone, merely suspended. Big gov’t infrastructure spending projects will move up the date of the coming government debt crises and QE. Thus the currencies will be the relief valve and take the hit. I say great. As then the PM sector will go higher, sooner. The tone of the PM sector seems to have changed this autumn. Because lately PM sector dips, like Wednesday’s, are short-lived and reversed with a vengeance as they were Thursday. BTW I’m not a gold bug, but I might become one at least for awhile.

    • David Richards Says:

      Those European bank debt crises, US corporate debt crises, student debt crises and pension fund crises all beckon for more QE eventually too. When the only tool they have is a QE hammer, then every problem looks like a nail.

      • Chicken Says:

        The FED needs to reengineer a crash first, before reinventing QE (aka selective interests welfare).

        Cart always goes before the horse and this time is no different.

      • David Richards Says:

        Yeah and if they raise or “normalize” as they should, it could crash at least one of those bond markets and spread. But maybe not soon, as in the post WW2 era, there has never been a down period for the S&P 500 in the twelve months following the mid-term elections. No matter what the election results, expecting a short term stock rally, and same for select EM, AUD/USD and EUR/USD (for technical reasons, not this mid term election “cycle”).

  3. kevinwaspi Says:

    Custer indeed! Both Merkel and DB are the canaries in the coal mine that everyone still believes are chirping away, healthy and multiplying. With a 3+% negative real yield, no one should be surprised that dead canaries have morphed into very much alive swans of a dark color!

  4. GreenAB Says:

    “The popular narrative is that Merkel is suffering due to her stance on immigration but that is so flawed. ”

    I wish that was true, Yra. 😦

    Unfortunately it´s all about the immigration issue. That´s all people care about here in Germany. They won´t even bother to honor a trong economy, high job security, record low unemployment since the reunification, five consecutive years of a balanced budget, rising pensions and wages and so on… No, it´s all about fear (the refugee as a potential criminal and rival for jobs and appartments).

    CDU/CSU 42%
    SPD 26%
    AfD 3%

    Guess, when this poll was taken…

    …July 12, 2015! Just before the migrant wave rolled over Germany.

    At the moment it´s unpredictable who will win CDU chair. The bookies have Annegret Kramp-Karrenbauer (Merkel ally) in the lead. But that could change. It will be very interesting to see where CDU party will go next – moderate as they used to be under Merkel or much more conservative as in tha past.

  5. Arthur Says:

    The gold is going to Turkey via Iran and Venezuela…

    Financial tools for US policy toward Nicaragua and Venezuela: A conversation with Treasury Assistant Secretary Marshall Billingslea
    https://www.brookings.edu/wp-content/uploads/2018/10/fp_20181024_nicaragua_venezuela_billingslea_transcript.pdf

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