Divinely comical

“Italy, long a bystander to the euro-zone’s debt woes, was thrust into the eye of the storm on Monday, as investors fled the country’s bonds and Europe’s leaders struggled to keep the crisis from infecting the Continent’s third-largest economy.”

Thus reports the Wall Street Journal Europe this morning. What?, I was thinking. Bystander? Investors fleeing the country? –-  Was anybody still holding Italian bonds?

That Italy was next in line was so obvious, how can anybody truly be surprised? What were you thinking, sitting on a pile of Italian debt while watching Greek bonds slide into the Aegean Sea? This has been talked about for more than a year, for chrissake!

On CNBC yesterday, PIMCO’s Mohamed El Erian said that Italy was not like Greece, Ireland, or Portugal. Better maturity profile, yes, and more debt held by domestic investors. Ah, very clever.

Well, could it be that you are over-analyzing the issue, Mohamed? – I am all for keeping it simple: Italy will not repay its debt, neither will Spain, France or Germany for that matter.

The question is not if Italy is in better shape than Greece but whether it is in good enough shape.

Almost all states are meeting their present obligations by borrowing more. They are servicing their debt by accumulating more debt.

This is not a healthy strategy. It relies crucially on the willingness of your creditors to keep funding an EVER-growing debt pile. Maybe that is asking a bit too much. In any case, lenders are having a re-think right now.

Remember: on a long enough time-line, everywhere is Greece.

Oh, please, you cannot be surprised!

Hey, bond investors, why not be a step ahead of the curve for a change and sell some Bunds? The German government is also heading for fiscal trouble – it is just a question of time. Either Germany has to bail out everybody else in Europe and goes broke that way, or the other European governments finally do the honest and manly thing – don’t count on it!- and default, in which case Germany has to bail out its bankers who for years have been happily handing their funds over to Greek and Italian politicians for a few basis points more in spreads, financial geniuses that they are.

So who is thinking that Bunds are a safe haven? Well, probably the same guys who thought that Italy would be safe. Better maturity profile.

Sorry if I am quoting myself – and Oscar Wilde – but you got to have a heart of stone not to be crying with laughter at the plight of the euro-elite and their grand design built on cheap money and ever more debt.

Two weeks ago, the Financial Times reported that Greek savers were lining up to buy physical gold. I am sure in a few weeks from now we hear the same from Italy. This is still a sensible strategy, in my view – and not just for Greeks and Italians. The governments are bust, the banks are bust – and the major risk is that in their desperation the Eurocrats will use the printing press to buy some time.

Will the ECB be a push-over? – Of course!

Don’t believe the mainstream press when they still unthinkingly describe the ECB as some hard-core anti-inflationist institution still in the pocket of some old Bundesbank hardliners. Rubbish!

Last week the EasyB executed a symbolic rate hike of 0.25 percent while simultaneously guaranteeing the entire Portuguese banking industry by nonchalantly discarding its rules on the ratings-quality of collateral. These rules have been discarded – indefinitely!

Every central bank is at its core an anti-market institution. It is an organ of the state, an extension of government. And since Mises we know that government is essentially the negation of liberty.

The moderate free-market crowd is still under the illusion that an apolitical, independent central bank could be possible that would simply provide – semi-automatically, disinterestedly, and in a rule-bound way – stable fiat money for the market economy. How naïve!

The ECB is already making up its rules as it goes along. The ECB – like all state institutions – knows best. When the rating agencies get it wrong, the ECB disregards their verdicts. When the market gets it wrong and the bond market is irresponsibly “disorderly”, the ECB uses the printing press, buys PIIGS-bonds and establishes “better” prices.

Of course, the same is being done – often more outrageously and enthusiastically – by the U.S. Fed and the Bank of England.

Fiat money is state money – to be provided by the state in order to serve its own political objectives.

Central banking is a form of central planning!

The mask is now coming off. Crises clarify things. It is in the very nature of a central bank that it will ultimately allocate money. Already, the ECB is tightening conditions for some, and easing them for others. Over the weekend, in Aix-en-Provence, Europe’s top central banker already “urged more financial regulation”. France’s not only vertically challenged president already has his pet project going: regulating the evil speculators who cause commodity prices to rise. So if you buy gold, do it soon – and don’t store it in France!

This crisis is not over. Far from it. They won’t put Humpty Dumpty together again.

What to expect? More regulation, more intervention, capital controls – and more money printing.

As I said before, in a paper money system the printing press is the last line of defence against bank runs and sovereign bankruptcy. None of the major central banks will tighten meaningfully or shrink their balance sheets. On trend, the opposite will happy.

What is the weakest link? Your money!

This article was previously published at Paper Money Collapse