Götterdämmerung – Germany is finished

First published at Paper Money Collapse on Friday:

What disturbing and nauseating image greeted us this morning from the covers of the morning papers: a smiling and moved Angela Merkel surrounded by a bunch of suited, self-satisfied, sycophantically grinning parliamentarians happily signing their country’s economic future away, burdening their fellow countrymen and women with financial obligations the grotesque size of which have long ago surpassed the average German’s grasp of large numbers – all in the name of Germany’s “responsibility for Europe”, and for personal political ambition, a commitment to party unity, the impulse to follow orders, that sort of thing.

Glueckwunsch, gut gemacht.

The whole thing is surreal beyond belief.

What lie did I tell yesterday?

The “rule of law” is not an accurate translation for the German phrase “Rechtsstaat”. The difference is more than semantic and reveals very distinct legal traditions. In any case, it doesn’t matter anymore. Neither concept still applies to Germany. The political class is lying and breaking laws and contracts at will. Political expediency rules.

As the German professor Stefan Homburg pointed out in this interview with the German daily Sueddeutsche Zeitung, EVERY rule that was designed to guarantee the financial stability of the eurozone has now been broken: the Maastricht limits to public debt, the ban on government-funding via the ECB, the no-bail-out provision.

Frank Schaeffler, one of the few dissidents, reminded his fellow parliamentarians in his speech in the Bundestag yesterday, that Chancellor Merkel had told them as recently as October 27, 2010, that the bailout facility would definitely be terminated in 2013, and that this would be the end of it. That was obviously not true. And the statement yesterday that the German public will not be asked for more money was equally a blatant lie.

For just as Merkel’s spineless supporters smilingly threw another €250 billion ($330 billion) – or roughly 10 percent of Germany’s GDP – on the country’s ever-growing debt-pile, the international commentariat and the global bureaucratic elite had already moved on, openly suggesting and discussing their desire for a MUCH BIGGER bailout fund. The FT’s resident statist and inflationist Martin Wolf, who I quote here, is the perfect example. “Europe needs a much bigger bazooka.” Probably several trillion Euros.

Surreal. Surreal.

It is, of course, only a matter of time until Germany will lose its AAA-rating. Its obligations to the euro- project will undoubtedly finish it off fiscally. What’s the endgame?

Currency collapse, of course. Logically, in a system in which certain politically favoured entities are never supposed to default, the printing press is the last line of defence against the sustained onslaught of the laws of accounting and arithmetic. The pressure on the ECB – which has broken all of its own rules of good central banking already – will intensify. By leveraging the EFSF it will ultimately accommodate, via the printing press, the bailout of sovereign states – or, more precisely, the bailout of the careless lenders to states, the banks, which are the real beneficiaries of this bailout frenzy. This is Weimar Republic all over.

Professor Homburg is brutally honest. Government finances have never before been this bizarrely stretched at times of peace. So the best guide for what is in store for us is what happened at the height of war efforts. The state simply takes what it thinks it needs. We will see massive market intervention (several countries extended their bans on short-selling of certain stocks last week), capital controls (the financial transaction tax is a splendid starting point), aggressive taxation and outright confiscation.

In the final chapter of my book Paper Money Collapse – The Folly of Elastic Money and the Coming Monetary Breakdown I identify one of the final stages of a fiat money crisis as the nationalization of money and credit. We have entered that phase.

The short of the century?

Maybe there is a bit of (paper) money to be made from Germany’s demise by shorting German government bonds, Bunds, via the futures market, at least for as long as we are allowed to do so. I don’t have the trade on yet but I am getting closer. I think this will soon be the short of the century, combined with shorting U.S. Treasuries. Hedge funds and banks are getting sucked into extreme long positions right now via free money from the central banks and promises of zero rates forever, and the persistence of the cretinous notion that these government bond markets constitute safe havens. When the extent of Germany’s fiscal destruction is fully apparent, the market will turn.

At present prices, I consider gold to be ridiculously cheap.

And one final word to my English friends. No gloating please about the clever decision to stay out of the euro-mess. You have the same thing coming your way without the euro. The coalition’s consolidation course is apparently so ruthless that every month the state has to borrow MORE, not less. Even official inflation is already 5% but pressure is growing on the Bank of England to print more money. See the comical Vince Cable yesterday, or Martin Wolf, the man with the bazooka, in the FT today. Since 1971 the paper money system has been global. Its endgame will be global, too.

Back to Germany’s professor Homburg. Is there a way out for the common man?, the professor was asked by the interviewer. No, he said. Best to adopt a Buddhist attitude and learn how to be happy when poor.

On that note, have a great weekend!

6 Comments

  • Dan Mosley says:

    Trying to short US treasuries and bunds would be a good way to lose a lot of money in my opinion. There were many who believed in 2008-2009 that increases in government debt and money printing in the US would lead to inflation and consequent higher interest rates on US government debt.

    This view has been proved spectacularly wrong; and any investor who believed in this view and acted upon it would have lost a lot of money.

  • On the subject of the rule of law, this one minute speech by a British MEP is good:

    http://blog.xanthippas.com/2011/10/01/dan-hannan-illegitimate-europe/

  • waramess says:

    It is hard to believe that we are all calmly watching this slow motion crash. It is actually the most worrying crash that I have ever seen or read about.

    This is no Weimar Republic where people were able to escape the ravages of inflation by buying overseas currencies; there is no escape this time.

    You say “At present prices, I consider gold to be ridiculously cheap.” but I would say that, at current prices food is ridiculously cheap.

    This is not a case of some banks having substandard assets on their books or of some banks having conjured up credit from nowhere, it is not a case that some banks might be technically insolvent it is that there is a huge possibility that they all are.

    Where do we go when governments can borrow no more because the institutions are no longer able or willing to sustain them and when the available credit pool shrinks because the pool of players has reduced to levels that no longer allow such largess to continue; when governments can no longer pay Civil Servants for their services or to continue to maintain essential services?

    Fanciful? You may well think but in the UK one of our biggest banking groups went bust and suprised the entire financial regulatory system. Now that’s fanciful.

    “At present prices, I consider gold to be ridiculously cheap.” When the crash comes you will be unable to eat your Gold and you may well end up swopping a few ounces for a stale crust of bread.

    Fanciful? The collapse of the Euro as a result of the failure of the Greek economy. That’s fanciful

    • mrg says:

      I confess that I’ve been tempted to bulk buy some beans, but it’s hard to imagine people actually going hungry in Britain, even if things do go very wrong.

      For one thing, we’re much better off than most Germans were in pre-crash Weimar days. We have more food than we can possibly eat. Any currency crash is not going to destroy the technological advances that have brought us cheap food.

      For another, if things really do start to look that bad, I suspect we’ll quickly descend into a WW2-style police state, with government control of the food supply, rationing, who knows what. It seems unlikely they’d let us keep our gold, but they might not even let us keep our hoards of food.

      Alternatively, if society completely collapses (highly unlikely, IMO), you’ll need more than food. You’ll need guns and ammo, and the will to use them. Ordinary people will be up against gangs much more ruthless than they.

      Incidentally, when do you expect the apocalypse to hit?

  • Buy gold and silver coins. 1/2 and full sovereigns each month. When 20+% 70’s style money printing inflation starts you will be very glad you did. Dont worry about the volatility in gold and silver at the moment but take an average cost and the mid and long term view that those holding pound stirling will lose 50% of their wealth whilst those holding old gold coins will preserve that portion they put into metals.

    Remember it is not Left vs Right, thats just a charade to divert your attention and garner your vote. It is Them vs us, the taxpayer and wealth creators.

    Just because a slaver loosens your bindings does not make him less of a slaver.

  • I must hope that German politics are playing the “bailout game” just not to be blamed of having let UME crash; I must hope they know this will not save anyone, and they think they can resist ’till half UME carsh down, so they will take control of whole Europe and take it back on more an austere management of public finances.

    I must hope this lest I am hopeless.

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