Er....Are we printing 1929 Deutschmarks?

Inverse to the power of one!

Never really one to pay much heed to armchair investors from abroad.....but an external perspective can be a good thing as well.

What this guy is claiming is pretty extraordinary, but none the less the indicators are very much troubling even if you don't come away with the same conclusion. The money is still flying out the door and it appears that monetary control is not yet a reality.

http://www.businessinsider.com/fianna-filed-ireland-prints-25-of-its-gdp-in-german-euro-2011-1

The Celtic Tiger has been on the economic ropes since the crash of 2008. In the first hours of the crisis, the US Federal Reserve provided emergency funding to Irish banks, pouring 10’s of Billions of US dollars into the Irish Banking system, providing funds as needed. These funding events helped stabilize the banks, during the winter of 08-09.
“The scale of AIB’s borrowing from the scheme is enormous given its relatively small size in the US. Barclays Bank, which bought Lehman’s US operations out of bankruptcy, borrowed $232bn (€174 bn) from the Fed scheme.”
AIB’s biggest single loan — $3.3bn (€2.48bn) — was borrowed from the Fed on July 2, 2009.
The ECB setup a unique Sovereign bond carry with Irish banks, allowing support for their financing needs via deposits of Irish Sovereign bonds held as collateral. This mechanize broke down in the fall of 2010 as liquidity dried up beyond the capacity of the ECB to help out.
The Washington Post has a great graphic that shows Europe’s Financial contagion as cross holdings through both Banking and through Trade . The implications are clear, the cross holdings are significant.
The ECB is reported to have provided up to 130+ Billion Euros in direct support to the Irish banks, by allowing the banks to park Irish Sovereign debt at the ECB for collateral. This has driven up the internal leverage of the ECB enough that it needed to be recapitalized with new funds in December 2010.
The fact that the ECB needed to be recapitalized just as the impact from the Irish bailout of November hit home to the political leaders, though the real context of it was missed by the main stream media. The EU appears to have been caught in a situation that it could not contain the Irish funding needs, while needing to recapitalize the ECB Balance sheet to continue operations.
“The capital increase was deemed appropriate in view of increased volatility in foreign exchange rates, interest rates and gold prices as well as credit risk,” the E.C.B. said in a statement.
Ireland Central Bank was allowed, with or with out permission, to print up up new Euros without new sovereign debt issued behind them. By December of 2010, the EU appears to have been more worried about the appearance of the ECB balance sheet as a whole, than of rogue individual activity by its member states.
Publicly, the EU core nations agreed that the ECB was great candidate for recapitalization due to the support it has been providing the PIIGS. In hindsight, the attention of the market moving to Portugal or Spain was a misdirection of where the real attention needed to be, and that is Ireland still.
The bail out of Ireland, funded currently from their own retirement savings, has not been ratified by their government. The ECB has not started to poured funds from the Stabilization fund into Ireland yet, as they await ratification of the bailout.
The bailout, like a ticking time bomb has not been ratified yet, and if Fianna Fail’s 1 vote coalition collapses before the vote, all bets are off as to it ever being passed.
The current party in power, Fianna Fáil has been in charge of the country for 53 of its 84+ years of official existence. A series of No Confidence votes has been called on its leadership of the nation. The first vote is tomorrow, when an internal vote for leadership of the party is expected to be held.
A second vote of No Confidence has been called in the Parliament meeting that is scheduled for next week. While the coalition is expected to hold together through both votes, it is possible that the Irish bail-out will be held up by a collapse of the current caretaker coalition in Parliament. If this happens, all bets are off concerning ratification or even continuation of the bail out.
The above is all said, to preface what is next.
The Irish Central Bank has crossed the Rubicon in European Union currency terms. They have printed up about 25% of their GDP in electronic credits, and stuffed those credits into their banks. These deposits, if you will, do not have new debt issued behind them.
This is a form of hyperinflation if you will, at least in context that a Central Bank, with no actual printing press, or a functioning bond market, has now electronically printed up new currency units for their banks without issuing debt behind these actions.
While this has happened before in history, it has not happened in the Euro currency project officially before today. This act is going to move the monetary policy of the union, to the individual capitals. The capacity to print electronic credits, with out the creation of cash currency or debt, is a new wrinkle in the economic landscape.
The implications and ramifications will take a while to appear, but “Mark” my words, Germany both as a people, and as a political organization will notice this event. The German people now find themselves captured in a currency where neighbors who are in political and financial stress, have the capacity to print up German Euros on demand. This is Germany’s worse nightmare as both a nation and a people. I dare say, you could not design a more frightening prospect for the “United German States”, than to find their currency diluted on demand by reckless neighbors.
In the coming weeks, and I say that because thing rarely happen quickly in life, Europe is going to have a Sovereign crisis of epic size. They will have to decide what happens next, and do so rather quickly.
Is Ireland going to be punished by the EU for printing on demand?
Can Ireland stay on the Euro, if Germany stays?
Can Ireland escape the bailout clauses?
Can the EU survive Ireland leaving?
Is the EU going to join the US domestic form of economic unity?
Euro Bonds?
European Elected President?
Euro Treasury Minister?
Is Germany willing to be held hostage to foreign printing presses?
How will Germany publicly respond to this?
How will CDS markets respond to the BUND now?
Are all Euros equal?
If Ireland can get away with this printing operation, let’s consider some of the ramifications of their actions when scaled to other economies of larger size. The Irish have printed up the equivalent of 25% of their GDP. If we accept that GDP is equal across economies, their actions are the equivalent of…
Germany with a GDP of $3.3 Trillion printing up $850 Billion dollars worth of new currency units, and shoving them into Landesbanks to recapitalize their loans.
United States with a GDP of $14 Trillion printing up 3.5 Trillion in new currencies and depositing into our To Big To Fails.
EU politicians have known about Ireland’s decision to print currency for weeks now. They have had time to consider their response to Ireland’s dilution of the Euro. I do not expect an initial reaction in the currency markets, as this kind of event takes time to be absorbed by all stakeholders in the Euro.
The Celtic Tiger has made their move and resorted to naked currency printing, to support its banks. The next move belongs to Europe and it’s going to be interesting to see how this plays out in the public arena’s. We know who is first, what CB will be second?


Read more: http://www.businessinsider.com/fianna-filed-ireland-prints-25-of-its-gdp-in-german-euro-2011-1#ixzz1BMxMTln1

Justin Collery

Every crisis has its legacy. In the US it is fear of deflation. In Germany it is fear of inflation.

The legacy of this crisis will be that Europe is utterly changed by the time it is finished, either completely destroyed, or completely unified. To see why you must consider this from the point of view of the German pensioner who has invested his money a German bank. That bank spent the last 10 years lending that money to Ireland, Greece, Spain, Portugal (and sub prime US). What is to happen now? The pensioner wants his money back. Here are the options:

- Do nothing, wait.
Current strategy, didn't work for Greece, isn't working for Ireland, and is likely to fall apart once Belgium, Spain and/or Italy fall, this will lead to either of the below

- Ireland repudiateds the debt
Favoured by many, we say we simply cannot pay the debt. If we do it, chances are others will do the same and there will be large scale debt writedown across Europe. Very bad for our main actor, the German pensioner. He doesn't get his money back, and it's obvious. May also put strain on German banks.

- Irish debt becomes European debt
Sounds so easy, but the implications are massive - a centralised European finance ministry. This is the United States of Europe. It solves all countries problems, but creates a super state, it's politically difficult. It will create a little inflation, but 25% of Irelands GDP is small beer compared to Germany. Such a move, done properly, would resolve the crisis. Our main actor, the German pensioner gets his money. Inflation has eaaten a little of his savings, but thats not so obvious.

The cost of the Euro falling apart is so massive as to be unimaginable. Because of that, and because of inertia, slow though it is, integration is the more likely outcome. Given the outcome is so clear, it is a wonder the political classes have not started laying the groundwork publicly. Given that Ireland is in such a mess, and seen as such a bad boy, it is also a wonder that we have not championed this cause.

So today, as politicians fight to be head county councilor, the main action, and our future, is really being decided in the central banks of Europe and the European political center.

JC

ei.sdraob

Yeh we've been following this money printing here for a while now

As Niall Ferguson mentioned before the only way countries have historically got out of mess like this is by printing and/or defaulting.

Now Ireland creating euros probably would just slightly weaken the euro since we are small part of the euro, and might help us via weaker currency.
The problem is what happens when Greeks, Portuguese, Spanish and Italians start doing them same :eek: thats when things get "funny".

Its interesting that ECB allowed this course of action, shows that they are willing to do anything to keep the show going, lets just hope they manage to keep others from joining in...

Scofflaw

Inverse to the power of one! wrote: »

Never really one to pay much heed to armchair investors from abroad.....but an external perspective can be a good thing as well.

What this guy is claiming is pretty extraordinary, but none the less the indicators are very much troubling even if you don't come away with the same conclusion. The money is still flying out the door and it appears that monetary control is not yet a reality.

http://www.businessinsider.com/fianna-filed-ireland-prints-25-of-its-gdp-in-german-euro-2011-1

What the guy is claiming seems also to be based on a set of inaccuracies and rather weird contradictions - the bailout has been ratified (Dec 16th), one cannot be "allowed...without permission", the ICB is doing it with the full knowledge of the ECB, the abillity to do so is not "a new wrinkle in the economic landscape":

A spokesman for the ECB said the Irish Central Bank is itself creating the money it is lending to banks, not borrowing cash from the ECB to fund the payments. The ECB spokesman said the Irish Central Bank can create its own funds if it deems it appropriate, as long as the ECB is notified.

News that money is being created in Ireland will feed fears already voiced this week by ECB president Jean-Claude Trichet that inflation is a potential concern for the eurozone.

However, a source at the ECB said the European bank is comfortable that the amounts involved are small enough not to be systemically significant. The ECB has been lending money to banks in Ireland at just 1pc, as long as the banks can put up acceptable collateral.

So the whole tone of "OMG Ireland is printing money and inflation will drown us all" is pretty silly - the guy calls it "hyperinflation" in reference to the entire eurozone, while the ECB says the amount isn't systemically important.

Zerohedge is a pretty silly place. It's clear the author of the piece had never heard such a thing was possible before, and has written a "my head's on fire, we're all gonna burn!" piece as a result.

amused,
Scofflaw

ei.sdraob

Scofflaw wrote: »

while the ECB says the amount isn't systemically important.

It probably is not important in the grand scheme of things and is desired
but the problem is now the cat is out of the bag and more countries in trouble might want to go down that route, if Spain does it then the euro be buggered.

Justin Collery

Scofflaw wrote: »

So the whole tone of "OMG Ireland is printing money and inflation will drown us all" is pretty silly - the guy calls it "hyperinflation" in reference to the entire eurozone, while the ECB says the amount isn't systemically important.

Frogs and boiling water. Perhaps you would put more store in the FT:

http://ftalphaville.ft.com/blog/2011/01/18/461666/record-breaking-forecast-busting-uk-inflation/

The real point of the article, and it is not necessarily a bad thing, is that this is QE, and QE leads to inflation. Once you accept QE in one corner of the realm, others will follow. A good dose of inflation would be perfectly acceptable to the PIGS and a couple more I suspect, the Germans being the main opposer's. My point is that the price to be paid for this inflation will be mainly political, not monetary.

JC

Scofflaw

ei.sdraob wrote: »

It probably is not important in the grand scheme of things and is desired
but the problem is now the cat is out of the bag and more countries in trouble might want to go down that route, if Spain does it then the euro be buggered.

Er, yes, it would be, which makes it hard to imagine the ECB nodding along with it on the basis that it's "not systemic". Since the central bank concerned has to notify the ECB, the 'boiling frog' analogy is inaccurate.

Far too many articles are based on extrapolating a small event into a much much huger event without paying any attention to the idea that maybe the reason the small event is allowed to happen is that it is small - and that because someone actually keeps track of all the small events, they don't get to accumulate into a big effect.

cordially,
Scofflaw

ei.sdraob

Scofflaw wrote: »

and that because someone actually keeps track of all the small events, they don't get to accumulate into a big effect.

Just like someone kept track of small Irish banks before their actions accumulated into a big effect .... ... erm yes :P

Scofflaw wrote: »

Er, yes, it would be, which makes it hard to imagine the ECB nodding along with it on the basis that it's "not systemic". Since the central bank concerned has to notify the ECB, the 'boiling frog' analogy is inaccurate.

The problem might arise if a country lets say Spain finds itself backed into a corner and goes ahead and does it without asking, since it might be seen as path of least resistance.
Not like the first time EU states ignored the growth and stability packt and various other things they signed up to.

Scofflaw

ei.sdraob wrote: »

Just like someone kept track of small Irish banks before their actions accumulated into a big effect .... ... erm yes :P

Not even slightly - big Irish banks did enormous things, which were ignored.

ei.sdraob wrote: »

The problem might arise if a country lets say Spain finds itself backed into a corner and goes ahead and does it without asking, since it might be seen as path of least resistance.
Not like the first time EU states ignored the growth and stability packt and various other things they signed up to.

The question is whether that's possible - the author simply assumes it is, and you appear to be following that assumption.

cordially,
Scofflaw

ilovesleep

@Jcollery

what you wrote about the united states of europe. I was just thinking about the same thing at the weekend. What the eu is doing is inhumane. It would be on the same level as the US picking two or three states, raming bailout loans down their throats to save the rest of the US. In the US their problems are shared equally.

I think money and currencies are failing people the world allover. It is the way money is made. It eventually leads to debt slavery. Was watching a documentry about it recently. So much of it rang home. We need a new money and banking system. Debt free money.

Sand

What the eu is doing is inhumane. It would be on the same level as the US picking two or three states, raming bailout loans down their throats to save the rest of the US. In the US their problems are shared equally.

The Irish government elected by the Irish people willing decided to guarantee the *entire* debts of a badly broken and insolvent banking system. The EU didnt do that, the Irish government did. Ireland shoved the problem down its own throat. If anything, the rest of the EU was furious at Ireland for going on a solo run in its guarantee decision.

The EU is just not rescuing us from the stupid, stupid, stupid decision the Irish government made to guarantee the entire debts of a broke and insolvent banking system.

Justin Collery

ilovesleep wrote: »

@Jcollery

what you wrote about the united states of europe. I was just thinking about the same thing at the weekend. What the eu is doing is inhumane. It would be on the same level as the US picking two or three states, raming bailout loans down their throats to save the rest of the US. In the US their problems are shared equally.

I think money and currencies are failing people the world allover. It is the way money is made. It eventually leads to debt slavery. Was watching a documentry about it recently. So much of it rang home. We need a new money and banking system. Debt free money.

My conclusion, for what it's worth, is that money is for buying bread and paying taxes. After that, if you have spare cash, you should buy yourself property, bonds, gold or shares (in reverse order). This is a stylistic view, but you get the idea.

JC