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posted on 31 January 2015

Epoch of Belief, Epoch of Incredulity (3) - "Enabling Acts"

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The Eurozone continues to live on borrowed time. Last week in a scene reminiscent of the deck on the Titanic, whilst speculators were enabled by Mario Draghi and his expected QE operation to buy Eurozone equities, the Eurozone banks were busily stress testing the "Grexit" scenario - [i].

The equity speculators seem to think that Germany is sailing towards the iceberg erected in the form of Mario Draghi; and from a German perspective the actual situation is the exact reverse. The European Constitutional Court's opining last week - [ii], that in essence Draghi can legally deploy any version of QE he deems to be appropriate, further enabled the cognitive dissonance. The EU court ruling however does not specifically identify any form of QE; it simply implies its vague, nebulous, generic legality for the credulous observer.

The devil is always in the legal detail; and this devil is in the form of German constitutional law. Draghi then applied all his Jesuitical casuistry to the credulous observers; when he linked the court ruling directly to the American version of QE by saying that:

"All members of the Governing Council of the ECB are determined to fulfill our mandate," and "Naturally, there are of course differences over how that should be done, but there aren't endless possibilities."

Benoit Coeure then followed up with the absurd statement - [iii] that the ECB is studying how the Fed and the Bank of England (BOE) "successfully" executed QE; adding to the impression that Fed style QE is now a formality. Tellingly, neither Coeure nor Draghi mentioned anything about having an exit plan, once the QE has been deployed; rather like the Fed and the Bank of England whom they have allegedly been studying.

As the Fed and the Bank of England are now finding, it is neither possible nor desirable to exit QE; because this would create another Great Depression. America and Britain are therefore facing the inevitability of permanent money supply creation, through the abandoning of the exit from QE. At this point, they have no idea whether the inflation created will cause an immediate Depression or an asset bubble first and then the Depression when it bursts.

An unintended consequence of the QE has been a bubble in oil prices and capital investment in this sector; which is now bursting. The bursting of this bubble is promoted by QE advocates as the deflation which will cause the Great Depression. The intention and capability, of the QE advocates, is therefore to create a permanent economic bubble and misallocation of capital investment which they call economic growth.

Germany already has experience of permanent QE, from the Weimar Republic period, hence it has a constitution that expressly forbids this from happening again.

America has experience of the Great Depression, which has given the Fed a mandate to expressly forbid this from happening again. Both economic schools view the same economic problem from a totally different and mutually exclusive perspective. This clash of views is now about to be violently played out. In the past this has literally come to blows, so this should not be ruled out again some time in the future.

Nowadays however the great economic powers fight each other by proxy, through what Lenin termed as "useful idiots"; whom today seem to be mainly Slavs and Muslims, based on the fallout of the original major global confrontations and their settlements at Versailles and Yalta.

What Draghi and Coeure have actually done is to inflame the Bundesbank, by putting false words about QE into its mouth. The German reaction will be swift and decisive. Sabine Lautenschlager set the record straight on Germany's behalf, but nobody was listening to her when she said that there is still no case to justify QE - [iv]. The EU court and Draghi have therefore accelerated the coming confrontation between Germany and the ECB; and hence the magnitude of the collision.

The speculators should in fact be stress testing the "Gerexit" scenario under which Germany, with its budget surplus, exits the bankrupt Eurozone of its own volition; because its neighbours refuse to apply the economic reforms demanded as the quid pro quo for German acquiescence to some form of rigorously legally controlled QE.

                                                   "One of these countries is not like the others...."

With prescience and alacrity, Germany two weeks ago announced that it had achieved a budget surplus one year ahead of its predictions, for the first time in half a century - [v]. The German GDP data released on the next day, which showed that the economy grew at its strongest pace in four years, should have left no doubt in anyone's mind that Germany should not in fact be in the Eurozone.

The probability of a "Gerexit" became significant with the release of this data. These announcements are no accident; and demonstrate that Germany has prepared for the battle over QE. Speculators who think that Germany has walked into Draghi's trap, should consider if the situation is not in fact the obverse. Germany will thus have a budget surplus and AAA credit rating, in whatever currency it decides to use after the "Gerexit" and/or Eurozone breakup.

Angela Merkel already moved closer to the "Gerexit", when she appeared to suggest that Greece could leave the Eurozone at any time. Since then she has been silent on the Eurozone, which has therefore been deafening. What she was in fact suggesting is that Germany is prepared to leave, if it doesn't get its way on economic reforms within the Eurozone.

Pundits should remember that the German Constitutional Court has already ruled on the Maastricht Treaty of 1992. Under this ruling, Germany has the right to exit from the Eurozone if the conditions of the Stability Pact are broken. These conditions, of sovereign debt at 60% of GDP and a fiscal deficit of 3% of GDP, have been totally and consistently broken by many of its neighbours, including France. Greece should not have been allowed into the Eurozone in the first place; and its current membership is therefore fraudulent. Ireland and Portugal should already have been ejected; and now Spain, Italy and France are on the exit list.

The Eurozone's continued existence is a notional political concept, rather than one based on economic reality. Eurozone membership was originally sold to the German people as the vehicle for ensuring fiscal stability in its neighbours; which would then avoid the need for any future bailouts by German taxpayers. The experience has been that Eurozone membership has led to fiscal profligacy and bailouts; the antithesis of what Germans exchanged their Deutschemark for when they signed up. Germans now understand that they were fooled by their own politicians, as much as by the cunning financial reporting of their neighbours.

Only their faith in Merkel's ability to deliver economic reforms in their neighbours has subdued German political reaction thus far. The fact that she was not the Chancellor, who signed them up for Eurozone membership, is perhaps the one thing that has saved her so far. Merkel is trusted to deliver economic reforms in the Eurozone. If she fails, then both she and the Euro will be gone.

If and when Mario Draghi tries to monetise sovereign deficits, which have broken the Stability Pact rules without any economic reforms, Merkel will be unable to prevent the democratic principles of the German Constitution from kicking in by legal default. At this point, the German Constitutional Court will have to opine that QE is unconstitutional; and Germany will then have to vote either to change its Constitution to allow QE or to leave the Eurozone altogether.

Leaving the Eurozone would actually be easier than holding a referendum to change the German Constitution; since the Constitutional Court ruling on the Maastricht Treaty of 1992 has already set up this default exit option. Economic observers have forgotten that Germany is a constitutional democracy, founded to stand against the very kind of undemocratic dictatorship that the EU and the ECB are now seeking to impose with their own version of Germany's Enabling Act of 1933. The "European Enabling Act of 2015" seeks to grant absolute political power to the EU (and ECB) to "do whatever it takes", at whatever cost, over whatever time is deemed necessary to save the Euro currency.

Elected German politicians are given specific political mandates for specified terms in office by comparison. The German Constitution will not accept what is being engineered in Brussels and Frankfurt. Germany clearly understands the undemocratic nature of this situation, because it went through something similar in 1933. What is most absurd, about the current scenario, is that the people of Europe no longer believe that the cost of saving the Euro is worth paying any more. The constitutional democratic nature of Germany however, ensures that the German people will ultimately be allowed to have their say.

In the meantime, Draghi makes a show of threatening to cut off funding to Greece; partly to force the Greeks into submission, but mainly to demonstrate to the Germans that he sincerely wants economic reforms before he QE's - [vi]. Nobody should be fooled by this phoney war however. Germany is in a position to strike whilst all its partners are fiscally weak and it is fiscally strong.

President Napolitano's resignation last week, signalled that Italy is ready to roll over - [vii]. Even Finland announced that its budget surplus reserves, built up over the last three years, are exhausted - [viii]; signalling that it will now have to borrow in order to fund public spending. Spanish Prime Minister Rajoy's parachuting into Greece behind enemy lines, to support the encircled Samaras, suggests that in fact a "Grexit" will trigger another crisis as contagion swiftly spreads from Greece - [ix]. Rajoy's mission certainly seemed to be successful; as immediately after he visited, the anti-Austerity Syriza party sold out to the European elite political classes and U-turned on the "Grexit" and various other populist nationalist promises it had made before the elections - [x].

The situation is being framed by the EU, as though another classic Eurozone political deal has just been done behind closed doors. Greeks should be forgiven for feeling sold out as Olli Rehn, the architect of the previous Greek compromise, signalled that Greece's debts will be rolled out further over time rather than written down or reduced in size - [xi]. Greece is therefore still in the debt hole; and presumably its people will feel even more antipathetic towards their own politicians as well as to the EU in consequence. Evidence of this antipathy and the coming economic problems can be seen in the Greeks voting with their economic feet, in what is turning out to be a classic run on their banks. The Greek banks are now drawing on emergency credit lines from their central bank - [xii]; and the Greek Central Bank is drawing on emergency credit lines from the ECB.

The Germans have now noted that the ECB's own liquidity and capital position are at risk. What happens at the ballot box and in the Greek parliament is therefore of no importance. Greece is rapidly becoming insolvent again; which means that Olli Rehn and his colleagues have been played again. Greeks now understand that their debts won't be cut; and will in fact be transferred from generation to generation in perpetuity. It therefore doesn't matter who they vote for in the presidential elections. Neither does it matter if the Syriza anti-Austerity party do a U-turn and stay in the Eurozone if they are elected. Greek sovereign debt has a theoretical value on paper, but in practice it will never be paid back by the Greeks themselves.

The real object of the exercise therefore seems to be to preserve the value of the ECB's Greek debt holdings; and hence implicitly the value of all the ECB's sovereign debt holdings. If Greece and/or Germany were to exit the Eurozone, after which it blew up, the ECB would become insolvent and require a bailout and recapitalization itself. This would effectively spell the end of Draghi, the ECB and the Eurozone political classes. When Mario Draghi advocates QE and "doing whatever it takes", he is therefore bailing himself out, rather than stimulating economic growth in the Eurozone.

The object of the exercise is to preserve the Euro as a currency, by creating more Euros to honour all of the outstanding Eurozone national sovereign debt obligations. After all, this is what the Fed did. Perhaps this is what the real kerfuffle with Germany is all about; because saving the Euro by printing more Euros is actually illegal under German Constitutional Law. Ultimately however, Draghi must do what Germany demands or face the consequences of insolvency.

After Draghi went through the motions of signalling that QE was coming, Jens Weidmann immediately responded - [xiii] by saying that he was in total opposition on both economic and legal grounds. For Weidmann, the fall in the oil price should have stimulated the Eurozone economy enough already, so that QE is not required. What Weidmann therefore just signalled is that there is "another reason" for QE; that he knows and is not saying anything about at this point in time. This "other reason" can only be the fact that ECB and national Eurozone central banks will become insolvent if the ECB is not allowed to print the money to redeem the national sovereign bond holdings of the national central banks.

In theory the Bundesbank would also be insolvent, because of all the claims it holds on the other Eurozone central banks which are its debtors. In practice however, as the legal creditor of the Eurozone central banking system, the Bundesbank would own the ECB in the event of ECB insolvency. The bank, on this occasion the Bundesbank, wins and the Eurozone has to exchange its equity for a German bailout. This equity should be understood as Germany taking legal and political ownership of the Eurozone's assets and people.

At this point, one should start to think about real military conflicts on European soil much more seriously. It is doubtful that Germany wishes to have another conflict; however there can be no doubt that it wishes to have a legal conflict in order to make Europe more German in its economic behaviour.

Germany intends to play hard ball, using its constitution as the basis of its opposition. It is unlikely that any German citizen would take the ECB over its own constitution, so Weidmann understands the politics that override the economics of the situation.

To his credit, Weidmann left just a little wiggle-room to avoid an immediate disaster, by saying that he was disappointed about how much flexibility had been given on budget deficits. Clearly there is still room for the grand bargain of QE for economic reform left, in his opinion.

The devil is however in the legal detail; and Germany is now disinclined to keep kicking the can down the road, because it has found that its Eurozone partners have no sincere intention to reform their economies. Draghi's monetary policy also gives them an incentive to keep procrastinating and kicking the can down the road. Germany is calling an end to this situation, at a point when it is strong and the rest of the Eurozone and the global economy are weak.

Unfortunately for Germany, America is in reasonable enough economic shape to mount a serious challenge to German ambitions, using all means at its disposal. Military victory is accepted as occurring when an actor makes his opponent do something, that it does not wish to do, at a time set by the actor. Germany is therefore at the point of a tactical victory, which is prevented from becoming a strategic one by America's relative strength.

A closer look at American strength however will reveal that it is an illusion of liquidity and capital misallocation, thanks to the Fed. There are therefore limits on just how aggressive America can be, especially since it will soon become too distracted by its own presidential elections. Germany therefore has a real window of opportunity to get some things done, which it shows every signs of capitalizing upon.

Age of Wisdom, Age of Foolishness (59) "Patience Is A Virtue" - [xiv] observed Abe's attempts to gain control of economic policy by default, through the agency of his allegedly enabled political mandate, by nature of his snap election victory. In practice, his mandate is somewhat more tenuous than the spin that he put on his election victory. The tenuous nature of his grip was exposed last week by the farmers, when Abe's candidate for the agricultural prefecture of Saga was soundly beaten - [xv]. Abe's intended reform of the agricultural sector has just been delivered a severe blow, as has his overall prestige and the credibility of his political mandate.

Signals on the masts of the carrier fleet of the Yen Carry Trade, suggest that a reversal of fortune is now under steam. Analysts are factoring in the weak oil price to the dynamics of the Yen. Consensus is building that the weak oil price is bad for the US economy, which has become a petroleum economy of late thanks to Shale and QE from the Fed, whilst at the same time boosting the Japanese trade surplus - [xvi].

The BOJ has itself responded to the oil price drop, with a dramatic turnaround of the super-tanker that carried its QE cargo, by revising up its growth forecasts and giving up on all hope of achieving its 2% inflation target - [xvii]. Technical analysts, who care more about what is happening rather than why it is happening, have similarly reversed their targets for the Yen - [xviii]. Japan Inc., with its own reputation for groupthink, has provided the greatest signal yet that Yen weakness is over. Last week, UBS reported that Japan Inc. was increasing the ratio of domestic to international capex - [xix].

The corollary of this signal was provided by the smart foreign money, in the form of Axa Real Estate moving to liquidate its Japanese commercial real estate portfolio, after a four-year cycle holding period - [xx]. Axa is selling into the liquidity, provided by those who believe that economic growth and domestic inflation will support commercial real estate prices. Axa is happier to trust the liquidity provided by the BOJ during QE, rather than the alleged liquidity that an economic upswing and domestic inflation will provide.

The Euro is now taking the place of the Yen as the world's funding currency; so Yen strength is being created by the Eurozone also - [xxi]. European equities now are a function of the value of the Euro; and the correlation of Japanese equities with the Yen is breaking down. As a consequence of the Euro becoming the world's carry trade currency,

Abenomics itself is threatened by Yen strength putting downward pressure on inflation; in addition to the deflationary pressure being exerted by the falling oil price. The jury is now out on the weak Yen. The one thing, still supporting the weak Yen scenario, is the view that the Fed will hike rates in 2015. The only meaningful strengthening in the Yen will come once a consensus develops that the Fed will hold off on tightening and then actually consider easing.

The phenomenon of "Hispanic Spring" in South America, first identified in Age of Wisdom, Age of Foolishness (59) "Patience Is A Virtue" - [xxii], was further enabled in Venezuela last week. The military has now taken control of the food supply - [xxiii] chain, as economic chaos and civil unrest explode. The opposition is also coalescing into an entity that is credible enough to engineer regime change - [xxiv].

Argentina is now also in play; as the Government tries to prevent the farmers from holding their produce off the markets in order to support prices - [xxv].

The Brazilian extension of "Hispanic Spring", to become "Latin America Spring", is now seeing the contagion spreading from the abuse of the cash-cow known as Petrobras. The contagion from Petrobras' unstable financial position, after the fall in oil prices and the systemic embezzlement, is now spreading into the Brazilian banking sector - [xxvi]. As is customary with all contemporary Brazilian scandals, involving money laundering and capital flight, the name of Alberto Yousseff - [xxvii] has finally emerged. The figure off Yousseff and his capital flight schemes now circles directly back to Rousseff's newly elected government.

Jeb Bush was also observed making his move in Age of Wisdom, Age of Foolishness (59) "Patience Is A Virtue" - [xxviii]. Last week he enabled his intentions and capabilities, by releasing a further eight years of his tax filings; which effectively undermines the threats from Romney and Clinton, who have so far been very economical in relation to transparency over their shady financial affairs. In an economic recovery, which has favoured the elite, Bush has taken the initiative; by showing how his fortune has been affected during and since the Credit Crunch - [xxix]. The elite have also hidden behind convoluted tax structures, which are beyond the reach of the average American. Should it be found that Clinton and Romney have availed themselves, of such fiscal structures, they will have a lot of explaining to do. Through this stroke of genius, Jeb Bush has been able to ditch the baggage of his brother and get out ahead of his rivals. Last week, Romney gave the strongest signal yet that he intends to run - [xxx]; but his challenge has already been neutralised by Bush.

In the wake of the shifting global headwinds, it fell to the World Bank to be the catalyst that enables the coming coordinated global policy response, which may or may not include Germany. Last week, it opined that the US economy was the only bright spot in the global economy, which looked set to be dimmed by the headwinds blowing in from abroad - [xxxi]. In addition, it argued very strongly for QE from the ECB as one critically necessary policy response.

Macro calls from the World Bank are usually occasions which bring forth hoots of derision from the smart money, which traditionally looks upon this institution as notoriously too slow to change its forecasts. The World Bank revised up its US growth projections and cut those for Japan, China and Europe. This time around, the World Bank's call actually moved the capital markets for once, as a commodity slide in the Asian time zone was viewed as vindicating the call.

The World Bank is suddenly a player in the great game of Emotional Finance. The events which followed the World Bank's call, then cemented its position as the "great enabler". Presumably it was chosen, not only because it is based in Washington but also, because it is the institution which links the Developed and Developing World by the thread of economic policy. It is also the place which gets countries into debt, before the wolves at the IMF come calling; but that is another story that can await enablement in a later report.

Seemingly, further global economic policy coordination will next be achieved at Davos; where the sublime themes this year are how the US Dollar has returned to become the World's Reserve Currency and how the US economy has become the global driver once again. Readers may wish to read Age of Wisdom Age of Foolishness (38) "Rosebud" - [xxxii] again, for some perspective and background on the Davos playbook.

In this report, the subject of Cuba and the appearance of a Russian surveillance post on its soil were introduced - [xxxiii]. Readers with a suspicious mind will therefore have the required perspective and context in which to put the recent sudden thawing of American relations with Cuba; and hence the context in which to put the "Hispanic Spring" call in Age of Wisdom, Age of Foolishness (59) "Patience Is A Virtue" - [xxxiv]. More eagle-eyed readers will have noted the presence of Netanyahu, Hollande and Putin in one of the heretical cartoons (entitled "The Plot Thickens") that also appeared in the report. There is no smoke without a fire, as they say.

Hence the jostling of Netanyahu for a front-row position - [xxxv] at the Charlie Hebdo solidarity march, alongside the diffident Hollande, has further context; as does Foreign Minister Lavrov's call for Russia and the West to pool resources against Islamic terrorism after the march - [xxxvi].

Putin's photogenic context is that his economy has been thoroughly trounced by the resurgent US economy and his new surveillance operation in Cuba has just been evicted after the thaw in relations with America which kicked off "Hispanic Spring"; in addition to his hands being on the trigger of the smoking surface to air missile launcher that took 193 Dutch lives on a Malaysian plane over Ukraine.

Eagle eyed readers may also have noted the third Rupert Bear cartoon, depicting the travails of the Eurozone and the connection to Janet Yellen's Helicopter Money. This confluence of cartoon characters and events would seem to be appropriate currently also. As the Fed now pushes the intended date for tightening further out into summer, it will reach a point at which the annual Jackson Hole gathering will intercede. Such a gathering eclipses Davos, as the place to coordinate a global policy response, because today's Davos theme of American global leadership is the fanfare and precursor to the action to be taken at Jackson Hole 2015.

Age of Wisdom Age of Foolishness (38) "Rosebud" - [xxxvii] also reported how Rupert Murdoch was busy trying to shut down the threat to his empire from free digital content of the likes of Google; and to simultaneously buy himself a monopoly position in paid content through the acquisition of Time Warner. Nothing is free on the Net, it is just paid for with advertising revenue which is much lower than that which Murdoch can extort from his own customers. Murdoch is therefore simply trying to regain pricing power and market share, by having his digital competitors gagged by lawmakers.

It is therefore no surprise to see David Cameron nudging President Obama, to enable the control of the organs of the internet which disseminate free content, in the name of national security - [xxxviii]. The resulting potential loss of individual freedom and liberty to communicate ideas, in favour of their control by an aligned media oligarchy and government intelligence services, using the cover of an act of terror which ostensibly threatens freedom of speech itself, is an irony that should arouse equal suspicion and consternation in the minds of all true democrats. It is perhaps the real riddle, inside the mystery, wrapped in the enigma of the recent tragic events in Paris.

Age of Wisdom Age of Foolishness (38) "Rosebud" - [xxxix] also identified the phenomenon of "Rupert's Bear Markets", which seem to link Murdoch's historic overpaying for control of free speech with major equity market tops. Thus far, "Rupert's Bear Market" is in place; as is another potential loss of free speech through the benevolent digital dictatorship of Cameron and Obama. This time however, people will think that their political leaders and media oligarchs are actually preserving the right of free speech; whilst in fact they are creating an even greater monopoly over who is allowed to speak and what they are allowed to say. This bear market however, will not last very long because it is engineered to be the catalyst for some coordinated global monetary and fiscal "Shock and Awe". A violent equity market sell-off is therefore needed to mobilize the monetary and fiscal "Shock and Awe" on which the next big rally depends.

The real signal, of the Davos sublime themes of the resurgent US economy and US Dollar, is that America now is in a position to get back to its favourite pastime of monetary and fiscal stimuli; which will ultimately start to erode the value of the US Dollar again. Just as President Clinton left the US economy and US Dollar in great shape for "W" to decimate, so Obama is leaving a healthy financial position for the next administration to totally destroy. The rest of the global economy is in such bad shape that America will feel obliged to step up and start acting like a drunken sailor again soon. The one-way bet on a stronger US Dollar has therefore just lost its fundamental attraction; and it will indeed be time to start going the other way once the Fed shows its true colours and starts reversing course on the exit from QE. What should really be noted is that a fundamental bid for Gold just came back.

The Swiss National Bank (SNB) certainly seems to have embraced the Davos spirit; although not in the collegiate manner that the World Bank advised. Faced with a European compromise that yields QE, or a Eurozone breakup because Germany won't play ball, the process of preserving the peg between the Swiss Franc and the Euro is a futile waste of time. The SNB therefore rationally gave up on this pointless exercise and watched the Franc strengthen in a quantum leap - [xl]. What in actual fact happened was that the Euro devalued against the Swiss Franc, US Dollar, Sterling and the Yen. Perhaps more importantly, the US Dollar also devalued against the Swiss Franc and the Yen simultaneously. With all this currency debasement going on, even before the Fed starts the printing presses again or the Eurozone breaks apart, the fundamental bid for Gold just got even stronger.

Next up for the global enabling team, after the SNB played at being party poopers, was Christine Lagarde. On this occasion, she was addressing the Council on Foreign Relations (CFR).

Readers may wish to go back and read Age of Wisdom, Age of Foolishness (17) " 'Putin' the 'F' Back in the CFR" - [xli] at this point; since it sets out the roadmap and the worldview and the Trans-Atlantic global agenda of which Lagarde is a leading practitioner.

Before reading on, readers should also familiarise themselves with Age of Wisdom, Age of Foolishness (49) "Wondrous Stories" - [xlii]. In that report Lagarde's support for a global solution, akin to the money printing and spurious investment of the Weimar Republic, was observed. Readers should only need to refer to the recent debacle in the US Shale Oil sector to find the precedent of how the Fed's flirtation with Weimar economics played out recently, in terms of spurious investment and capital misallocation. On this occasion, Lagarde was again basically singing from the same old Kurt Weill songbook that she used previously. In this most recent appearance - [xliii], her criticism of the SNB was withering; however more importantly she only berated it for not being a global team player, by acting unilaterally and not allowing the ECB to move first and do QE.

The SNB's rejection of both QE by the ECB and also by itself, in order to shadow the Euro and hence vindicate the ECB, is a major global signal of the intentions and capabilities of a handful of central banks that still believe in sound money. By acting unilaterally, ahead of the ECB, the SNB gave the strongest possible signal of opposition. In effect, the SNB also gave an insight into what the Bundesbank should be rationally expected to do going forward.

Jens Weidmann owes Thomas Jordan a beer. Perhaps he will even buy him champagne to celebrate a return to a monetary system based on sound money. If he does buy him a drink, he will probably pay for it in Deutschemarks; which has come back as Germany's currency and retained its historic parity against the strong Swiss Franc. Technical analysts should be looking at their old Deutsche Mark charts and then making the conversion into today's exchange rates. There is now a significant probability that the SNB has opened the door to a return of the foreign exchange market status quo that existed pre-Euro.

The Euro can therefore exist as a new currency and fall like a stone, however it is unlikely that the Germans will find it attractive to use any more. Adopting the Euro saved their industrial base, but only because the Euro was accepted as a reserve currency. If it is no longer similarly accepted, then pricing one's exports in it is of no use; since nobody will hold it in order to make purchases.

A Euro without Germany as a member is of no value.

This is the inherent problem of fiat currencies created from debt, when the size of the debt dwarfs the size of the real economy and hence the ability to service it. When an economy deploys sleights of hand, such as extending the debt maturity and also printing the currency with which to service the debt, it suddenly loses its reserve status. America did pull the stunt of QE, but during the Credit Crunch it paid 100 cents on the Dollar of all its debt obligations. The Fed even bailed out non-American banks, by injecting them with the liquidity to remain solvent in US Dollars at the ultimate expense of the US Taxpayer.

The US Dollar's reserve status was thus guaranteed by the Fed's transfer of the burden of honouring to "pay the bearer on demand" onto the US Taxpayer. The US taxpayer did not revolt, as the Europeans are starting to do; but rather the US Taxpayer blindly shouldered this burden in its ignorance because Congress had been outsmarted by Bernanke, Hank Paulson and Tim Geithner. The fact that the Fed is now "paying" alleged profits on QE back to the taxpayer via the US Treasury, is supposed to fool the US Taxpayer into thinking that he/she has come out unscathed.

In practice he and she have just had the value of the US Dollar debased and also signed up to slavery in order to honour the increased obligations of the new Dollars created by the Fed and the Treasury. The US Dollar thus deserves its reserve currency status, because American citizens have bound themselves as slaves to honouring its debts.

The Euro does not deserve reserve status, because some nations have welched on their debts in Euros; and paid their creditors less than 100 cents on the Euro, in addition to rolling out the payment dates of these smaller payments. Currently, some nations (including Germany) are considering walking away from honouring any of the Euro bills that Mario Draghi is in haste to print. If everyone wants to own the Swissie and Deutschemarks, then making and selling things in both of these currencies will save their respective economies and their growth prospects. The Germans and Swiss can always cut the price of the things that they make and sell; and this would also make their workforces and industries globally competitive. Since the rest of the world is now cutting its prices and wages, this precedent will have to be followed by Germany and Switzerland in any case.

A swift look at the Ruble's recent problems will illustrate what happens to a currency that nobody wants.

Long before the above plays out however, Draghi will probably have been replaced with someone who defends the Euro by hiking interest rates and supporting economic reforms, rather than someone who thinks that saving it involves printing more of it.

In relation to the global economy, Lagarde then opined that a stronger US economy and lower oil prices do not outweigh the weakness in Europe, Asia and China. Whilst applauding Britain and Japan for doing their bit for QE, she advised America not to ease off the monetary gas just yet; and ordered the ECB to step on the monetary gas. She also reserved her invective for a special attack on Jens Weidmann, by giving her esteemed legal opinion that QE from the ECB is in fact legal. Lagarde is clearly irritated with Germany.

What the venal Anglo-Saxon press coverage failed to say is that Germany is equally as irritated with Lagarde; and all those who seek to print the currencies to pay the central banks the principal and interest on all the sovereign bonds that they own.

Angela Merkel's current silence, on this issue, clearly shows that a huge clash is coming; and that in her classic leadership style she will, remain aloof from the real dirty fighting. When it is over she will then finally emerge, looking as pristine as ever, to declare the outcome that maintains her place at the head of the Germanic tribes. On the next occasion of her appearance however, the Germanic tribes may have already decided that their place is outside the Eurozone because their Constitutional Court has said so. Merkel, despite all the trappings of Presidential dictatorial power, remains bound by the rulings of this court also. For her to try and play the "Enabling Act" card used by Hitler and advised by Lagarde, something more threatening than the murder of profane cartoonists and Jewish delicatessen shoppers will be needed!

History is replete with ironies. It would therefore be ironic if hyperinflation, launched by the ECB's QE, led to the triumph of the Far Right in Europe. Currently, the Eurozone political class equates QE with preventing the rise of the European Far Right. Germany can however demonstrate that in fact the Eurozone political class have it wrong again; just as they did at Versailles when they forced the Weimar Republic to start the money printing presses which enabled Hitler.

It's classic "chicken and egg" stuff. Did the Nazis enable the hyperinflation, or did the hyperinflation enable the Nazis?

In the mix, that serves as reality, Europe experienced both at the same time; and a central bank enabled this experience. Today the same kind of eggs are getting smashed and beaten again.

- [xli]

- [xliii]

- [xliii]

- [xl]

- xxxix]

- [xxxviii]

- [xxxvii]

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