Message To Merkel: Shut-Up Und Setzen Sie Sich!

Angela Merkel may be a hero to some conservatives because she has stood up for fiscal rectitude and resisted the G-7’s relentless importuning to betray Germany’s taxpayers and join the “stimulus” brigade. But that’s as far as it goes.

The truth of the matter is that she is actually a power-hungry statist menace who is an abysmal ignoramus when it comes to the fundamentals of money and finance. That is on display once again as she drives the rickety machinery of the misbegotten eurozone superstate toward “a solution before the markets open on Monday”.

Those eight words are the heart of the statist catastrophe which is now engulfing the world economy.

They harken back through countless weekends of crisis and jerry-rigged bailouts in an unbroken line to Hank Paulson’s bazooka. That’s when the hideous $5 trillion disaster known as Freddie Mac and Fannie Mae—-erected by politicians over decades—- first broke out in July 2008 and prompted those very same clueless politicians to launch an era of financial governance by Gong Show.

So let’s make it loud and clear. Angela Merkel, you are the head of a government that’s supposed to provide autobahns, public schools, state forests and even social insurance, if you must, within the borders of Germany. But it is none of your damn business what happens when “the markets open on Monday”.

Butt out! The whole purpose of financial markets is to price securities—especially government debt—-honestly. Full stop.

The financial market is not a social program nor the handmaiden of political “projects” such as building bigger, bloated edifices of state like the eurozone. Markets don’t need your help or that of the other eurozone politicians, the ECB, the IMF and the rest of the apparatus of state in order to do their job.

In fact, you people are utterly incompetent to do what markets do, and that is to deploy the price mechanism and the auction process of bid and offer to assess and parse through the blizzards of information and competing interests that are relevant to finding the right price and yield on securities and the right allocation of capital at any giving point in time.

But weekend crisis resolution is the very opposite. It involves inner rooms, outer rooms and anterooms full of politicians and bureaucrats stumbling around on matters that are way over their heads. It makes a mockery of democratic deliberation; its is a hotbed of expedients, delusions and half-witted compromises that are made without regard to sustainability or standards. And, at the end of the day, all of this sweaty, fraught commotion is designed to achieve nothing more noble or substantive than to temporarily tranquilize the markets on Monday morning.

In the extant case, you have commanded the finance ministers to reach an agreement by Saturday when anything even resembling an honest and constructive settlement is not remotely possible. Yet on your instruction the EU politicians are going into full Gong Show mode to produce another tissue of temporizing, hair-splitting and lies:

“Work will continue now for 48 hours,” said Luxembourg Finance Minister Pierre Gramegna. “The most recent proposals are being checked.”

Please don’t! There is nothing to check. Greek democracy has spoken and it resolutely does not want to endure any longer the troika’s recipe for permanent depression and debt servitude.

For crying out loud, even if it was your business to run Greek fiscal policy—–which it is not—–anyone who can do third grade budget sums can surely see that after four months of constant “negotiations” there is no room for “compromise”. Greeks are dug in behind a “red line” that is 90/10 in favor of higher taxes and no pension reforms; and your posse, lead by the IMF, is crouched at 80/20 spending cuts versus new revenues and insisting upon sweeping pension reforms.

This gap cannot be bridged and should not be forced unless you really are trying to revive Germanic rule over the continent. So now would be the time to shut-up, sit yourself down—-or if you prefer, setzen sie sich, bitte—-and consider the absolute financial mayhem that six years of your weekend Gong Show governance has already engendered.

Did it ever occur to you that the ECB is destroying both honest state finance and political democracy throughout Europe? To wit, are you really so financially dense that it did not dawn on you that something had gone haywire big time when the yield on the 10-year bund plunged all the way to 5 bps upon the onset of Draghi’s trillion euro bond buying spree a few months ago?

Surely, you cannot believe that the market was merely “pricing-in” your country’s teutonic fiscal virtues. That’s ridiculous—given that the goal of the ECB is 2% inflation come hell or high water. No real investor wants negative real yields even from German bonds. And what honest bond market would reverse course by 100 bps in a mere two months, as it has since April 19, based on absolutely no change in Germany’s fiscal condition?

But that’s not the half of it. Did you think Mario Draghi was reading from the Bundesbank catechism when he decreed that the ECB would “do whatever it takes” three years ago, causing all the peripheral country bonds to soar in unison and to an extent that has never before been recorded in financial history?

How in the world do you think the yield on the Italian 10-year bond went from 7.5% at the time of his ukase to 99 basis points this March when Italy has no functioning government or semblance of a real fiscal reform plan and an economy that has dropped 10% since 2008 and not rebounded at all?

Yes, you were miseducated at a Stalinist grammar school, but surely by now you have heard at least one German economist of orthodox bent explain that a states’ bond cannot rally by 90% when its debt burden has literally exploded into a zone at 130% of GDP where default is an eventual certainty.

Historical Data Chart

And how naïve and willfully ignorant are you when it comes to Greece’s finances? Did you really believe it was all fixed last summer when they informed you that the Greek state had issued 10-year bonds at under 5%, and that the Greek banks—-utterly dependent even then on a $100 billion lifeline of ECB credit—-had raised upwards of a billion dollars of new debt capital?

You are obviously clueless—so let me explain it. The entire appearance of recovery in the peripheral bond market and Greece’s finances was the work of front-runners, speculators and day traders. They correctly judged that owing to your insatiable lust for power and complete financial ignorance that you would emasculate the Bundesbank guardians of sound money, and thereby permit the monetary snake oil salesman running the ECB to launch the most fantastic money printing campaign—-that is, public debt monetization—-in European history.

So the whole Greek/PIIGS recovery was just a momentary ramp and romp in the bond market casino that the ECB and its kindred central banks around the world have confected. There was nothing honest or sustainable about it, and now the herd of speculators is fixing to stampede in just the opposite direction unless they get one more fix of state largesse

Guess who’s the chump in the casino? You are!

That’s why you are fixing to crush democracy in its Greek cradle by Saturday. After one phony fix after another, do you still have the audacity to think that you can tranquilize the markets by Monday morning?

Well, maybe the hapless Greeks will surrender one more time. But let’s hope they don’t and it looks like they might not.

Greece is running a primary budget surplus and doesn’t need to borrow on world markets to get by. Let the Greeks figure out whether 90/10 or 20/80 is the right mix of fiscal measures to keep their budget in the black. But above all, they don’t need your 15 billion euro bribe because every penny would be recycled right back to redeeming the troika’s onerous debt, anyway.

Yes, a Greek default would allegedly mean a “collapse” of the Greek banking system, but the truth is that its already a zombie. Let Syriza nationalize the carcass, and don’t weep for the hedge fund speculators who—– last year at the peak of the bubble fraud—–scooped up the bonds and stocks of the four main Greek banks which have been wards of the state all along. At the time, the Wall Street gamblers called it an “idea that is working”.

n fact, nationalization of a de facto state asset would amount to a complete redundancy, anyway. Besides, someone will need to negotiate with the ECB—or the German army, as the case may be—when it comes to repossess the $125 billion of collateral against the ELA funding and other transfers from the ECB.

And returning to the Drachma wouldn’t be such a bad thing, either. The Greek government would soon learn that printing press money would quickly become worthless in a nation of people that already has $45 billion of euro bills in their wallets and mattresses and tens of billions more in bank accounts outside of Greece.

Even if the people of Greece are foolish enough to keep leftwing statists like Syriza in office, the Greek government would actually have to run an honest central bank and a sound Drachma in order to bring the Euros out of hiding—–or an outright police state if they tried to outlaw them.

Most importantly, a Grexit would blow-up the whole Euro project and put a quick and certain end to the insanity of the ECB’s massive monetization of the public debt of eurozone countries. In the process, the bond speculators and front-runners who have pocketed hundreds of billions from Gong Show weekends would be left to lick their wounds, vowing to never trust politicians promising one-way bets again.

Oh, yes. Every government in the Eurozone would be driven from office by an outraged electorate as the hundreds of billions of due bills for the Greek bailouts came in for payment. Angela Merkel would be the first to go.

None to soon.

By David Stockman
ContraCorner– June 26, 2015