Photo by George Stojkovic
What disturbing and nauseating image greeted us this morning from the covers of the morning papers: a smiling and moved Angela Merkel surrounded by a bunch of suited, self-satisfied, sycophantically grinning parliamentarians happily signing their country’s economic future away, burdening their fellow countrymen and women with financial obligations the grotesque size of which have long ago surpassed the average German’s grasp of large numbers – all in the name of Germany’s “responsibility for Europe”, and for personal political ambition, a commitment to party unity, the impulse to follow orders, that sort of thing.
Glueckwunsch, gut gemacht.
The whole thing is surreal beyond belief.
What lie did I tell yesterday?
The “rule of law” is not an accurate translation for the German phrase “Rechtsstaat”. The difference is more than semantic and reveals very distinct legal traditions. In any case, it doesn’t matter anymore. Neither concept still applies to Germany. The political class is lying and breaking laws and contracts at will. Political expediency rules.
As the German professor Stefan Homburg pointed out in this interview with the German daily Sueddeutsche Zeitung, EVERY rule that was designed to guarantee the financial stability of the eurozone has now been broken: the Maastricht limits to public debt, the ban on government-funding via the ECB, the no-bail-out provision.
Frank Schaeffler, one of the few dissidents, reminded his fellow parliamentarians in his speech in the Bundestag yesterday, that Chancellor Merkel had told them as recently as October 27, 2010, that the bailout facility would definitely be terminated in 2013, and that this would be the end of it. That was obviously not true. And the statement yesterday that the German public will not be asked for more money was equally a blatant lie.
A. Merkel, Photo by World Economic Forum
For just as Merkel’s spineless supporters smilingly threw another EUR250 billion ($330 billion) – or roughly 10 percent of Germany’s GDP – on the country’s ever-growing debt-pile, the international commentariat and the global bureaucratic elite had already moved on, openly suggesting and discussing their desire for a MUCH BIGGER bailout fund. The FT’s resident statist and inflationist Martin Wolf, who I quote here, is the perfect example. “Europe needs a much bigger bazooka.” Probably several trillion Euros.
Surreal. Surreal.
It is, of course, only a matter of time until Germany will lose its AAA-rating. Its obligations to the euro- project will undoubtedly finish it off fiscally. What’s the endgame?
Currency collapse, of course. Logically, in a system in which certain politically favoured entities are never supposed to default, the printing press is the last line of defence against the sustained onslaught of the laws of accounting and arithmetic. The pressure on the ECB – which has broken all of its own rules of good central banking already – will intensify. By leveraging the EFSF it will ultimately accommodate, via the printing press, the bailout of sovereign states – or, more precisely, the bailout of the careless lenders to states, the banks, which are the real beneficiaries of this bailout frenzy. This is Weimar Republic all over.
Professor Homburg is brutally honest. Government finances have never before been this bizarrely stretched at times of peace. So the best guide for what is in store for us is what happened at the height of war efforts. The state simply takes what it thinks it needs. We will see massive market intervention (several countries extended their bans on short-selling of certain stocks last week), capital controls (the financial transaction tax is a splendid starting point), aggressive taxation and outright confiscation.
Out now!
In the final chapter of my book Paper Money Collapse – The Folly of Elastic Money and the Coming Monetary Breakdown I identify one of the final stages of a fiat money crisis as the nationalization of money and credit. We have entered that phase.
The short of the century?
Maybe there is a bit of (paper) money to be made from Germany’s demise by shorting German government bonds, Bunds, via the futures market, at least for as long as we are allowed to do so. I don’t have the trade on yet but I am getting closer. I think this will soon be the short of the century, combined with shorting U.S. Treasuries. Hedge funds and banks are getting sucked into extreme long positions right now via free money from the central banks and promises of zero rates forever, and the persistence of the cretinous notion that these government bond markets constitute safe havens. When the extent of Germany’s fiscal destruction is fully apparent, the market will turn.
At present prices, I consider gold to be ridiculously cheap.
And one final word to my English friends. No gloating please about the clever decision to stay out of the euro-mess. You have the same thing coning your way without the euro. The coalition’s consolidation course is apparently so ruthless that every month the state has to borrow MORE, not less. Even official inflation is already 5% but pressure is growing on the Bank of England to print more money. See Vince Cable yesterday, or Martin Wolf, the man with the bazooka, in the FT today. Since 1971 the paper money system has been global. Its endgame will be global, too.
Back to Germany’s professor Homburg. Is there a way out for the common man?, the professor was asked by the interviewer. No, he said. Best to adopt a Buddhist attitude and learn how to be happy when poor.
On that note, have a great weekend!
15 Responses to Götterdämmerung – Germany is finished.
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{ You raise some very good points that go slightly beyond what I was trying to... } – May 20, 9:47 AM
{ Interesting post. That said, and I don't mean to be disrespectful, I don't think it... } – May 20, 12:49 AM
{ How's that prediction turn out for ya? } – May 17, 4:53 PM
{ It is simple. Everyone should be free to choose as money whatever they want. No... } – May 11, 2:11 PM
Yeah, Germany is a confusing place. On the one hand quite productive with a lot of potential, on the other hand politically so stupid that it distroyed itself twice last century. And it looks like they still haven’t learnt the lessons. It was the right decission for me to leave that country, although Britain is economically in no better shape, maybe even in worst. But there is at least a political culture in this country that allows to debate mistakes and therefore to maybe learn from it.
Detlev,
I have a Euro deposit account with a UK bank. It’s part of my diversification strategy and the account has increased in sterling terms by around 25% in the last three or four years. Have you any thoughts about what might happen if some country (including Germany!) were to leave the Euro? Would UK Euro holders get some kind of currency mixture?
David, there is no definitive answer to your question. None of the agreements and contracts that helped constitute Monetary Union specify anything about a break-up, or about one or more countries leaving the union. Like all grand political designs, this thing is meant to last forever. The idea of anyone leaving wasn’t even contemplated. Here is my guess: No, you would not get a currency-mix. Let’s assume that Germany would leave the euro (not that I expect this anytime soon). Germany would undergo a currency reform, such as in 1923 and 1949, and if your account was with a German bank in Germany, your deposit would get converted into whatever was the new German currency, let’s say DM 2.0, at some official conversion rate. But you hold an account with a UK bank. If the remaining countries in the currency union kept the old euro, your UK bank could justifiably take the position that your euro account still existed, and that the fact that the Germans did not consider this currency legal tender within their own borders anymore was immaterial to the “deposit” contract between you and the UK bank. They would not be wrong in stating that you contracted for euros, and euros still existed. Most certainly you would not get some mix of currencies. The situation would get fuzzier if the euro broke up completely and were replaced by new currencies (again, I do not consider this likely anytime soon). Let us assume that some countries adopted new currencies and others switched to a Euro 2.0. I think that in this case it largely depends on the UK bank or the UK bank regulators (the UK government – which always acts in the interest of its banks – remember Iceland!) what you get for your deposit, if anything. Please remember that your UK bank is a fractional-reserve bank. You, David, do not own euros, you have a claim for euros against a UK bank, which in turn only holds a fraction of those euros as proper reserves. If they can get away with it, they will repay you in whatever is easiest for them to repay in.
Thanks Detlev.
I’ve sold around 35% of my Euros (25% profit), paid off a tax bill, put some sterling into my instant access emergency fund and also increased my deposit with the Airdrie Savings Bank.
Mr. Schlichter, I really dont understand the tone of the article.
In order for the Collapse to happen – and I have no doubts that it will – events just like this one must take place. How can you be critical to Merkel for acting exactly as you describe politicians in your book?
The ideology and the actions of the political class and of the international bureaucracy (not only in Germany but elsewhere, too) do not surprise me. They behave just as I expect them to. We are heading towards disaster, as expected, and it is because of these people that we are heading towards disaster. I analyzed it, I understand it, and I predicted it. That does not mean I have to like it, or that I have to respect these people for it. You may be right that the more disinterested, cooler tone of my book, and the attitude of the scientist and observer to whom nothing comes as a surprise, is more appropriate and more becoming. I take your point. But in some of my blogs I allow myself to vent some of my frustration. Think about the following: What does everybody who has a modicum of wealth, who has some property fear most? What is the biggest threat to their financial security? Theft by common thieves? That “speculators” or the “unfettered market” will destroy their wealth? No. The biggest threat they face is confiscation via taxation or inflation, both entirely the result of state action. That is what most wealth-holders fear today, whether they have a lot of wealth or little wealth. Everybody who values their personal freedom and their property should correctly identify the political class and the bureaucracy as their enemy. How should we write about our enemy? How should we discuss the ideas and strategies of our enemy? I will continue to strive for a cool and scientific tone but the reader will hopefully forgive me if I sometimes fail.
Somehow it all seems so far away on this gorgeous Indian summer’s day. I suspect it will all feel a lot more real in the dark days of winter with inflation nudging towards double figures, rising unemployment and panic amongst the ruling classes and in the financial markets. We most certainly live in interesting times.
This, from the Homburg piece, is wonderful and works even better in google-translate-English:
“Right now, inflation is not high. But the metaphor of ketchup warns inflation: As with a ketchup bottle, the shaking comes, nothing out first, and then a whole flood that can not be stopped”
Dear Mr. Schlichter,
I am new to your writings, but I have thoroughly enjoyed reading them especially this one and I am looking forward to reading your book. I can fully understand your frustration coming out in this article, as it resonates with my own experience. I grew up in Germany but left in 1999; I like to tell people that I left because I fled from socialist rule that started under Schroeder in 1998
For the past couple of years I have been holding onto a glimmer of hope that German politicians would do the right thing. There seemed to be enough opposition to bail-outs for a while to give me that hope, but all that has been pretty much taken away in the last few weeks.
You mention shorting German and US treasuries, which I think is a very good idea, but do you think that people should wait until operation twist comes to an end before shorting US long term treasuries? Also, what is your opinion on large cap German manufacturers with large export revenue from Asia?
Regards,
Christian
The problem with “the short of the century” is indeed the timing. That is the big challenge. When does confidence in the solvency of the state evaporate? I don’t think that “Operation Twist” is a meaningful factor here. First, it is now known to everybody how much the Fed is going to buy. We should expect the market to have worked that into current prices. Second, the central bank has no bearing on the ultimate solvency of the state. Having the central bank print money does not make the state solvent. If budgets are not being brought under control – and presently I see no politically “acceptable” way to achieve this – it only means an ever larger debt pile is funded by money printing. This must undermine confidence in fiat money and lead to higher inflation. And this means you still do not want to hold the government bonds – certainly not at present yields. Printing money only means that nominal solvency is being maintained for a while at the price of constant debasement. At present, the market does not appear to fear inflation, but deflation. In a deflationary environment budget deficits will get rapidly bigger as government receipts collapse. If the central bank remains on the sidelines, which is the precondition for the deflationary outcome, then the state goes bust – you lose again if you hold government bonds. That is why this is the short of the century. You win in the deflationary collapse and the inflationary meltdown. Of course, there are always those who think that politicians will fix this. They will raise revenue and cut spending and the state will always pay. We may disagree on just how likely this is – but you are getting tiny yields for this rather rosy scenario. But back to the timing of the short of the century. My point is this: once the market realizes what the endgames are, it will be ready to take on the central bank. That the central bank might then step up its market interventions (beyond the scope of “Operation Twist”) is, of course, a strong possibility. But it will then engage in a tug-of-war with the market. The central bank’s rapid debt monetization will then just be oil in the fire of growing inflation concerns and further proof of state insolvency. So the key to the timing is loss of faith in the political process. I don’t think we are there yet. But another question is this: at what yield levels do you think that you can happily go short and wait – and even suffer further panic-induced bond-rallies in the interim? I am not sure what the answer is.
I don’t know much about equities, so please take this with a pinch of salt. In the long run I am more bearish on bonds than on equities. There must be good companies out there, stocks that represent solid productive capital which will be needed during and after the crisis. The big risk to these companies is the same that any wealth-holder faces today: confiscation via taxation and inflation. The state goes bankrupt and it will get very unpleasant. I am not sure how important the Asian revenue base is. I believe that Asia has great prospect in the long run but in the short to medium term I am very bearish on China. There is a massive over-investment boom (created, as always, with tons of paper money and cheap credit) in China and when it pops it will affect the entire region.
Thank you very much, very insightful points and lots for me to think about.
I’m with Detlev in his response to Amadeus. Humour in life is not inconsistent with intellectual rigour.
So, Detlev, I say keep up the banter!
Detlev, what would be your outlook on the financial markets if the Schäffler plan gets a majority amongst the free democrats?
Bas, sorry for the late reply. I am no expert on the intricacies of German politics. My first question would be this: Does it really matter what happens within the German Free Democrats? They appear to me to have completely marginalized themselves in German politics by adopting some ‘Social Democracy Lite’ program. The real social democrats, the CDU/CSU, the SPD, the Greens, all agree on the big points, and they will push their agenda through. This is not to say that I have no sympathies with Schaeffler. Let’s assume, for arguments sake, Germany would reject bailouts categorically. What would it mean for markets? Well, one avenue for transferring excessive levels of debt to somebody who still has a bit of free balance sheet, who still has borrowing capacity, and who is only on the way to bankruptcy but not quite there yet – that is, the Germans – would be closed. Banks and sovereign bond markets (Italy) would take a hit. But – there is still one balance sheet left: that of the ECB, which can print money without limit and can buy EVERYTHING. (Hey, the Bank of England just decided to print money and buy government debt to the tune of 5% of GDP – the ECB could do the same). So the next market moves would depend on how quickly the ECB’s arm can be twisted to have them engage in some operation that would restore, er what’s the word, “liquidity and orderly markets”. That, I think, has been the endgame we have been steering towards for some time: trying to bail everybody out via the printing press.
There should be no bailout and there should be no money-printing. Default must be part of the capitalist system. Make no mistake, we will get defaults anyway, but now probably as part of a major monetary crisis.
[...] Pero como no, todas estas cifras se basan en las proyecciones optimistas de los gobiernos sobre el crecimiento económico futuro, e ignoran que los contribuyentes alemanes tal vez tengan que cargar con más rescates para la eurozona. Según argumenta Detlev Schichter, autor de Paper Money Collapse (2011) y que recientemente fue entrevistado por GoldMoney(link to Q&A): ” Claramente, es sólo una cuestión de tiempo de que Alemania pierda su puntuación crediticia AAA. Su compromiso con el proyecto del euro sin duda alguna la matará fiscalmente.¿Dónde iremos a parar?” [...]