Germany Accepts Inflation to Save the Eurozone

Thu, May 17, 2012 - 12:56pm

I have been closely watching the economics of these markets since 1970, and I have never dreamed that Germans would tolerate inflation anywhere near 4 percent. They are doing no less than reversing a policy that has governed German central banking for almost a century — since the terrifying German Weimar inflation of 1921 - 1924, which impoverished millions and led to a collapse of the German currency...and social fabric.

In related news, the International Monetary Fund (IMF) is recommending specifically that Germany tolerate higher prices, higher wages, and higher asset prices. The IMF's goal is to generate economic growth. It wants to pump up the German economy, as well as that of other European economies, along with the prices of real estate, stocks, and commodities, as it will help stimulate economic growth. The IMF knows it is the only way to decrease the burden of indebtedness.

Why is the fear of a collapse of the Eurozone so great that it has supplanted the fear of a catastrophic inflation in German hearts and minds? Because Germany now fears a major depression caused by the collapse of the European banking system more than it fears higher inflation.

Our view is that while Germany may deeply fear depression, it should also fear the return of big inflation. While inflation may not be evident now, monetary debasements will undoubtedly drive long-term prices higher. As the famous physicist Richard Feynman said, 'We must not fool ourselves, and we are the easiest to fool'.

Germany may be fooling itself that an inflation rate of 4 percent will not become 6, 8, 10, or even 12 percent. History argues that inflation in Germany, and all of Europe, is heading much higher.

European Officials Change Their Attitude & Give Greece Free Reign to Leave the Euro

Economies such as Germany's — that took the bitter medicine of intensely unpopular labor market reforms in 2003 and are now reaping the benefits — show what structural reform can achieve. Should they choose to leave the Eurozone, the Greeks would not be choosing a path that will devastate Europe, in our opinion. They would be choosing a path that will devastate their own standard of living, at least until a devalued new drachma makes Greek goods and services competitive in the world market. The lessons are unavoidable. The intransigence of Greece's political elite and entitled citizens is just determining how the lessons will be delivered. While this harder fall is proving to be Greece's unfortunate decision, we are happy to hear the European leaders speak more realistically about Europe's capacity to handle Greece's exit.

FDIC Exhibits Wisdom in its Approach to Handling the Next Big Bank Bailouts Taxpayers Could Be Off the Hook

Today, the FDIC will outline a new strategy speech in Chicago. It will introduce a new plan called the "dismantlement" plan for banks, a plan which pleases us.

According to the Wall Street Journal, the plan would work as follows. If the U.S. Treasury Department and other departments decide to seize a firm that is deemed insolvent, "the FDIC will unwind the parent bank holding company of the faltering firm, placing it in receivership and revoking its charter. The firm's subsidiaries around the world would continue to operate, supported with liquidity. The FDIC-held parent company can borrow from the government under the Dodd-Frank financial overhaul. Next, the FDIC would transfer most of the firm's assets and some of its liabilities into a new company called a bridge company." Their equity shareholders would be wiped out and lose all of their equity, just like in a similar corporate bankruptcy. Creditors would receive equity as happens in corporate bankruptcies, and the bank's debt to creditors would be wiped out. Creditors would receive equity in return, as happens in corporate bankrup tcies.

The taxpayer would not be responsible to bail out more banks who have over-speculated, and this would give shareholders the losses they would experience in any bankruptcy. Their stakes would be wiped out.

We support this idea for many reasons. Here are the main ones:
1) It does more to halt taxpayer responsibility for banks' speculation
2) It reduces the moral hazard that bankers will speculate and then hide behind a corporate parent
3) It punishes bankers who fail by having them lose their jobs and seeing their personal equity in the stock of their bank employer disappears.

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Source: Guild Investment

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