ECB Prescription: €1 Trillion

October 4th, 2011
in Op Ed

by Andrew Butter

GeitnerAuthor’s original title: “Leider Mein Liebste; Its Spelt TALF Not TARP: Next ECB Will Print A Trillion Euros”

Here’s an idea, if the Euro doesn’t exist anymore then the Greeks can pay back their Euro-denominated debts in imaginary money and everyone can live happily ever after?

Follow up:

Meanwhile, trust the Eurocrats to come up with a mind-baffling plan to kick the can down the road. It’s written in Deutchlitz, which is what you get when you use a computer to translate a document originally written in German into French and from there you use another computer to translate that into an approximation of English. The words all spell on an English spell-checker but in aggregate anyone who speaks English hasn’t got a clue what they mean. For example, from the ECB Data Warehouse we are provided with:

Dataset name: Balance Sheet Items; Frequency: Quarterly; Reference area: Euro area (changing composition); Adjustment indicator: Neither seasonally nor working day adjusted; BS reference sector breakdown: Credit institutions; Balance sheet item: Loans; Original maturity: Total; Data type: Outstanding amounts at the end of the period (stocks); Counterpart area: Euro area (changing composition); BS counterpart sector: Unspecified counterpart sector; Currency of transaction: All currencies combined; Balance sheet suffix: Euro

I think that’s a timeline of total outstanding loans made by European banks, which are sometimes called “assets” when there is a remote chance they will get paid back, but I’m not completely sure, whatever it is, IT’S NOT ENGLISH!

So how about:

Euro area (changing composition), Outstanding amounts at the end of the period (stocks), Credit institutions reporting sector - Securities other than shares, Total maturity, All currencies combined - Euro area (changing composition) counterpart, Unspecified counterpart sector, denominated in Euro, data Neither seasonally nor working day adjusted.

The way I read that the Euro-zone banks are currently declaring assets of 17.8 Trillion Euros in loans they wrote, plus 4.2 Trillion of securities, like PIGGY bonds, total a cool 22.00 Trillion… I’m just wondering, is there anything else? And I’m also wondering what “BS” stands for, that wouldn’t have anything to do with Bull Manure would it?

Come to think of it, that data is public domain but the economic and financial media didn’t do the math; neither did the LSD Lap-Dancer Appreciation Society who doesn’t want anyone to stress them out - not that they are particularly good at math. And evidently the Eurocrats were too busy stuffing down five-course luncheons with wine on First-Class to notice that anything was brewing.

Remember this one, eighteen months ago:

On Friday (5th February 2010), European monetary affairs commissioner Joaquin Almunia declared; “There is no bailout and no "plan-B" for the Greek economy because there is no risk it will default on its debt”.

My daddy always told me, “Never trust anyone who doesn’t have a Plan-B”. Right now, the way I’m counting, the Eurocrats are on about Plan-F. I’m not sure if that’s “F” for “Failure” or whether that proves that the European monetary affairs commissioner (a) is not very smart (b) got confused by the Deutchlitz (c) knew what was happening but he thought it best not to tell anyone until his index-linked pension got straightened out?

Not that what was going on was a secret, although in the true Bastiat principles of the blessed-bureaucrats there are things that “sometimes are better not seen” - which is probably why if you put “How much are the morons into a hole for” on a Google Search you won’t get to see this chart:


Big picture, US private sector outstanding debt went down by 4% in their “crunch” - i.e. by about $1.4 trillion, which is co-incidentally about how much TALF sanitized - but the Euro-zone debt hasn’t gone down since 2008. If in reality it had a similar problem, then it needs to go down by about $1 trillion from where it is now if the same amount of “healing” is going to happen.

Looking at that another way, in 2008 the nominal GDP of America was $14.37 trillion and the private sector banks had “assets” of $13.847 Trillion on their books, which included $1.299 Trillion of Mortgaged Backed Securities. Plus there were $24 Trillion of bonds excluding US Treasuries and Municipal bonds (that’s part of government in my book). Add that up and be careful not to double-count the MBS and you get to $36.5 Trillion excluding the “assets” of the shadow-banks, which so long as they are worth the same or more than their liabilities, are “counted” in the $36.5 Trillion.

So that says in America that portion of private-sector “assets” was 260% of nominal GDP, plus or minus.

By that measure the Euro-zone looks pretty similar, their GDP was about $12 trillion (taking out the non-Euro-zone countries - and I’m talking round numbers here), so their private sector banks hold “assets” worth 260% or so of nominal GDP…SNAP!!

Although quite a lot of that is owed to them by governments, so it’s not apples for apples. Plus Europe as a whole owes minimal amounts to what the Americans fondly call “aliens”, which is another-story.

But the question remains, about how much money “someone” is going to have to print to resolve the current banking crisis in Europe?

What “solved” America’s banking crisis was TALF. That involved printing $1.6 trillion or so (which equated to 4% of the total privately held debt), buying up toxic assets to get them out of the system, and posting those as collateral with the Federal Reserve Agent (a government employee) who presumably turned a blind-eye to their valuations.

So the Euro-zone has about $31 trillion of private sector debt. Multiply that by 4% and you need about $1.24 trillion to play the same trick - that’s about a trillion Euros.

What’s the difference between TARP and TALF?

I always think of “treating” a fiat-banking crisis is a bit like treating diarrhoea, which is a common “unexpected” consequence after you over-indulge at Ravi’s, as in you know there is a “risk”, but you figured it was manageable, and you can’t resist.

You got two choices, you can drink a lot of ISOSTAR and flush the problem away, which is how nature designed the physiological response, and in the analogy, that’s how the “natural” free-market would deal with the problem.

There are three potential problems there. The first is that it’s embarrassing, particularly when you get caught short - interesting that in the analogy you get the “runs” and in finance you get a “run”. Plus it’s often quite painful - here’s a tip, keeping the toilet paper in the freezer can help with that phase. The other potential problem is if the dose is so bad that you can’t drink down ISOSTAR fast enough and you end up more or less locked in the lavatory. Worst-case you get seriously dehydrated and then you need to go on a drip.

The second option is to pop a couple of IMMODIUM, which basically forms a solid dam of partially digested “manure” in your colon, and you hope you get better. You normally do, except that the sickness is extended because you are keeping the poisons inside. Plus the next thing that happens is chronic constipation with the risk of getting (or exacerbating) piles, which long-term can be extremely painful - colonic irrigation can help you get over that phase.

The first reaction to fiat-inspired fiscal diarrhoea is normally to pump in liquids (drink ISOSTAR). If that fails, what you do is get the central bank to print $1.6 Trillion or so and buy up the toxic debt and put it in cold-storage, and wait for things to “heal”.

The downside of that policy is that the “toxins” weren’t allowed to flush through, and you get economic constipation, which is what is happening in USA. So now the next delight to look forward to is the colonic irrigation part, when toxic assest are released back onto the market. Once that’s all cleared away, hopefully the piles will subside, and Ben Bernanke will be able to sit on a chair and not look so uncomfortable.

Europe is behind the curve. Intriguingly, the reason for that  is probably because a much smaller proportion of the private-sector “assets” were re-packaged into structured debt (10% in Europe compared to 70% in USA). And the reason that was important is that there are “triggers” in structured debt that have to be pulled by law. Whereas with ordinary debt you can work with your auditors and friendly regulators to extend and pretend (kickbacks help “smooth” that road), which is what is happening in Europe.

The Bastiat consensus in 2008 and 2009 was that the European model was “safer” than the American model, but there is a growing realization that European banks which are even less well-capitalized than American banks (if that’s possible), are just as susceptible to getting blind-sided by “Liar-Loans” and greed-driven denial.

What if European bankers are stupider than American bankers?

That estimate of one-trillion Euros is a pretty crude number, but I’m not sure anyone else has even got a number or a line of logic to arrive at one. Either way, in this game, you need a number.

And you know that the ratings agencies are worthless - that they haven’t got a clue how to value toxic debt. Their auditors are worse than worthless (whether either of those professions are run by crooks with massive conflicts of interest is, let’s say: “debatable”) and in any case accountants also haven’t got a clue about valuations. The CDS “market” is rigged, and the Basel idea of “risk-weighting” is simply childish and takes no account of the valuations of the assets. So how else do you come up with a “number” to save your pretty little fiat currency - if you decide it’s worth saving?

Anyone got a better suggestion?

The core assumption in my calculation is that IQ and the ethics of European Bankers is similar to that of American bankers. If it turns out that’s not correct, or if the Eurocrats let the disease progress too far without “treatment”, then perhaps when they get around to administering the IMMODIUM “cure” they will need all of the Two-Trillion Euros they are muttering about; if their “latest version” fiat currency is not going to end up as the shortest surviving fiat currency in history.

The issue in Europe is that the ECB can’t easily print and buy “toxic assests” like the Federal Reserve did; and also that in Europe things move rather slow. Yet history teaches us that when your pretty fiat currency gets sick you need to move quickly, or the disease just festers.

I’m pretty sure that quite soon there will be a Euro-TALF and that at least one-trillion Euros will be needed to create the “necessary” level of economic constipation.

Related Articles

Opinion Articles by Andrew Butter

About the Author

Andrew Butter started off in construction in UAE and Saudi Arabia; after the invasion of Kuwait opened Dryland Consultants in partnership with an economist doing primary and secondary research and building econometric models, clients included Bechtel, Unilever, BP, Honda, Emirates Airlines, and Dubai Government.
Split up with partner in 1995 and re-started the firm as ABMC mainly doing strategy, business plans, and valuations of businesses and commercial real estate, initially as a subcontractor for Cushman & Wakefield and later for Moore Stephens. Set up a capability to manage real estate development in Dubai and Abu Dhabi in 2000, typically advised / directed from bare-land to tendering the main construction contract.
Put the unit on ice in 2007 in anticipation of the popping of the Dubai bubble,defensive investment strategies relating to the credit crunch; spent most of 2008 trying to figure out how bubbles work, writing a book called BubbleOmics. Andrew has an MA Cambridge University (Natural Science), and Diploma (Fine Art) Leeds Art College.

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