Wednesday, 21 September 2011

09:00 – It’s official. I’m crazy, or so says the IMF. Those of us who think a eurozone breakup is likely are engaging in crazy talk according to the IMF. The eurozone situation is fixable, they say, if only the EU will take certain actions. The article didn’t go into details, but as it happens I have a mole within the IMF. He or she tells me that the IMF’s proposal to fix the euro situation includes the following:

Tell them to make us a cambric shirt,
Without any seams or needlework.

Tell them to wash it in yonder dry well
Where water ne’er sprang, nor drop of rain fell.

Tell them to find us an acre of land,
Between the salt water and the sea strand.

Tell them to reap it with a sickle of leather
And tie up the sheaves with a rope made of heather

If they tell us they can’t, we’ll reply,
Let us know that at least you will try.

EU, when thou hast finished thy task,
Parsley, sage, rosemary and thyme,
Come to us, our loans for to ask,
For then thou art a true love of mine.

The bank runs are spreading. Greek, Portuguese, Spanish, and Italian banks have been under siege for some time. No one–people, companies, or other banks–wants to have money on deposit with a bank that is likely to go bust. And now French banks are coming under siege. It was announced yesterday that Siemens had withdrawn $6 billion–that’s billion with a “b”–from the French banking system and put it on deposit with the ECB, a strong indication that Siemens expects the French banking system to fail. And Siemens is by no means alone. Capital flight has become critical, with Europe being sucked dry by depositors fleeing to the US dollar, UK pound, Japanese yen, and other currencies that are perceived as safe havens.

Modern economies are credit-based. To state the obvious, no one can borrow if no one is willing to lend. In Europe, increasingly, that’s the case. So, on top of a debt crisis, we now have a liquidity crisis. Germany is moving to recapitalize its own banks, allocating available funds to that rather than to more subsidies for Greece and other debtor nations. Although doing that is sensible for many reasons, it’s also the first step Germany would take if it intends to withdraw from the euro and introduce a new DM or thaler. That could happen today, or it could happen six months from now. But one way or another, I think it will happen. Parsley, sage, rosemary, and thyme.