Monday, October 3, 2011

Germany Will NEVER Leave the Eurozone—Because It Can’t

There’s No Upside, Only Downside

Late last week, there was a spike in random speculation that the German government was preparing to exit the eurozone—and that in fact, the Germans had gone so far as to print new Deutsche mark bills and mint new Deutsche mark coins.

Several alternative news sites, including Zero Hedge and others, gave serious credence to this rumor—enough credence that the euro took a hit against the dollar and gold.

But at the end of the day, it was just random speculation from one Dr. Philippa Malmgren, who was interviewed by a Swedish newspaper as saying “My impression is that the German Government sent us a number of signals that, from their perspective there is no other solution [than for them to leave the euro].”

This random speculation—coupled with last year’s random speculation from, a German fringe site that claimed with absolute certainty that on May 12, 2010, the Germans would for sure go back to the Deutsche mark, having already printed and minted the new bills and coins—gave the Malmgren nonsense some legs.

The fact of the rumor is no big deal—there are always rumors.

The fact that the financial community took such nonsense so seriously points to the big deal in this situation—the underlying worry that a lot of market participants are fearing: What if the Germans all of a sudden cry, “Fuckit!”, and let slip the bonds of the eurozone?

Can they leave the eurozone?

Sure they can—anything is possible. But is it likely that the Germans will leave the eurozone?

In a word, no—because they are a creditor nation.

According to Bundesbank figures, Germany’s current account surplus for 2010 was €141 billion, with net capital exports of about €131; 2011 figures seem on track to match those amounts.

Suppose the Germans decided to exit the euro and go into the new Deutsche mark: What would happen to the euro?

Answer: The euro would drop like a rock—against anything and everything. Gold, silver, the dollar, the yen—since Germany is such a key component of the EMU’s overall balance of trade and balance of payments, Germany exiting would be catastrophic.

It would also be catastrophic for the Germans.

If Germany exited the euro and went into the new Deutsche mark, then the new-DM would rise against the euro—so therefore, German euro-denominated assets would take a massive hit.

After all, those German euro-denominated assets would remain in euros: They would not magically be converted into new Deutsche marks. Germany’s creditors—Greece, Spain, Italy, France, etc.—would owe Germany euros, not new Deutsche marks.

So they would pay Germany in euros—which would have fallen against the new Deutsche mark.

Thus Germany would take a massive hit on its capital exports, if it decided to exit the euro. The hit would be greater than a default, because debt default would be selective (Greece, Spain, maybe Italy), whereas euro devaluation against the new Deutsche mark would be across the board: Every loan Germany had made would be devalued by the degree that the new Deutsche mark rose against the euro.

Now if that is the negative of Germany exiting the eurozone, then surely there must be a positive—right?

Actually, there isn’t: Germany would not gain anything, by exiting the eurozone and going to the new Deutsche mark. It might make some local political hay—but the German population would quickly see the tremendous cost they had inflicted upon themselves. And the benefit—aside from German chest-thumping—would be nil.

Germany doesn’t have a problem with the euro—it’s the other countries that are screwed because of it. If Germany exits the European Monetary Union, they would essentially be shooting themselves in the foot.

What We Have To Worry About

Not Germany—they won’t ever leave the eurozone. What we have to worry about is that Germany will not let other nations exit the eurozone.

As a creditor nation, Germany wants to make sure that the countries that owe it money pay it back—and pay it back in the currency (and valuation of that currency) that they lent it out at.

If a country—say Greece—were to exit the eurozone and go back to a local currency, it might find it tempting—not to say politically expedient—to convert all debts from euros into the local currency. This could be easily done, by government diktat.

If this were done by Greece, they could convert all debts denominated in euros into debts denominated in New Drachmas, by a simple government decree—then devalue these New Drachmas, thereby making the euro debts less painful to the country and to the people.

This event would not technically be a default—after all, there would be no haircuts, let alone debt repudiation. But the creditor—Germany—would get screwed.

Nobody likes getting screwed unless its by a supermodel in a grungy club bathroom. Thus Germany has every incentive in the world to not only refuse to renegotiate sovereign debts, but also do everything in its power to keep these debtor nations in the eurozone.

The issue at this point in time is, Will the Germans allow a little debt relief in order to keep the weaker nations inside the eurozone? Or will they rape them so badly via austerity measures and intransigence, that they essentially force the weaker economies—Greece, Portugal, Ireland, Spain, Italy—into exiting the European Monetary Union, going to local currencies, and then devaluing?

This is the crucible the weak European nations find themselves in: Waiting on Germany's decision.
This post originally appeared in The Strategic Planning Group. If you are interested, check out the SPG preview page.


  1. I really don't buy the analysis that says "we can't run our gov't and country properly because it will make our currency too strong"

    That, in the final analysis, is what you are stating. I don't buy it.

    A strong currency, if it results from being a good steward of the country, will be a plus overall for Germany.

    1. if your currency appreciates, your products will be too expensive for the world market. $300.000 bmw's will not sell anywhere!

  2. Au Contraire Mr GL.
    Shall we take a quick look at the US position with debt and debasement.
    One could seriously argue that the US will default on its debt obligations by creating inflation through money printing. At the end it will inflate away its debt and effectively pay 2/5's of 5/8ths. A win for the US and the losers are the countries who are creditor nations. Countries that have leant money to the US.
    In the case of the EUR zone, which has a high degree of probability of following the US game of money printing in very large quantities to stave off the sovereign default, the chances of inflation rearing its fugly head there become very real prospects.
    Germany being the largest creditor nation will suffer the same fate as the creditor nations of the USA. Massive capital losses.
    AND YOU SAY THAT GERMANY WILL WANT TO STAY IN THE EURO...HMMMMMM...more twists and turns than a floor routine performed by the greeks during a summer olympics.

    Liquid Motion

  3. Great write up.... However, given Germany's history with the Wiemar Republic and its resulting Hyper-inflationary collapse, it will be interesting to see if the German people associate the devaluing Euro, Banking failures, and increasing debt burden as reminiscent of the Wiemar. As the Euro continues to loose value and prices for basic items such as gasoline and food increase, Wiemar parallels will be drawn. Those kinds of associations might push Germany out of the Euro. Politics are almost never logical. As this crises escalates and as the Merkel Govt looses popularity and political power, the dynamics could easily shift through a future populist movement. Germany has seen that shift as well. History is indeed repeating itself.

  4. GL,

    I think what you really get down to with this article is that, one way or another, creditor nations are going to take a hit. Either Germany exits the EU and their receivables become nil, or... other countries leave the EU and German receivables again become nil. And if Die starken Deutschen force peripheral countries to stay in the Eurozone to preserve the value of their debts? Then the Germans simply sink with the rest of the EU.

    The way out of this seemingly intractable problem is massive debt relief and a fresh start, which means a new political order since the old order is run by a bunch of ruthless small-minded creditors with God complexes. There's your endgame, now let's just get everyone into that mindset so we can get started.

  5. GL, on Wall St we have the "99%" people who don't have but a few food stamps to rub together. Across the nation we have 50 million people on those food stamps, millions more receiving unemployment and a growing underclass who don't really see a way out of lower middle class. Should Bank of America, Citigroup or Goldman Sachs collapse, the average man on the street is going to think, "Meh. They had it coming anyway. I don't have any money so what do I care?"
    So the ranks of the "99%" at #occupy rallies are growing, calling for... well, something. Even if that something would result in total economic implosion. They are calling for it because they are so disaffected, and probably feel completely disenfranchised.
    Now, the question is: Is there a similar movement in Germany that could care less about "bondholders" taking "haircuts" because "Hey, I'm not holding any bonds so what do I care?" I understand that Germany has low unemployment right now, so likely higher participation in markets and a greater awareness of the actual effects of those "haircuts". But if that employment number slips and Germans suddenly feel like they are losing jobs because lazy Greeks and Italians don't want to work, wouldn't national pride and disaffection start to drive a movement to separate? Sure it might spite their face, but at least they've cut off that nose? I agree that Germany has no reason to pull out now, but any slippage of numbers and I could see a populist uprising screaming for it.
    Again, I'm pretty sure this is all going to end in a global conflagration. Let's play Global Thermal Nuclear War.

  6. GL, love the website. But on this one issue, you have commingled the German govt and German banks. They are not the same. German banks would take a bath if Germany exited the Euro, and you've explained it very well. However, capital would fly to German bond-issuers (not German banks that are exposed to the Euro) at lightning speed in a new German currency. The German govt would have difficulty keeping up with the inflows were they to tell the PIIGS to keep their shitty currency. HOWEVER, the German banks likely control the German govt, so it depends upon how likely it is that German voters will scare the politicians into going back to the Mark.

    Keep in mind, there are still plenty of Germans walking around who had grandparents tell them of Weimar Hyperinflation--and they'll want nothing to do with it. Especially if the hyperinflation is to help lazy Greeks get out of their debt.

  7. Hello Gonzalo, when can we expect an update on your hyperinflation forecast? By your forecast we should now already experience something like 7% annualized CPI and bonds should be selling off heavily. The opposite is happening.

    Any update?

  8. Well don Mr Lira, but what if the Germans all of a sudden cry, “Havoc!”, and let slip the dogs of the eurozone WAR!?

  9. Interestingly, Michael Pettis and Mish argue the exact opposite of Lira's point: according to their analysis, the costs for Germany if it were to leave the euro would ultimately be +lower+ than if it stayed in and other countries would break out.

    Assuming everybody and his grandmother -except for all European policy makers of course- now understands and agrees that it's simply impossible for all current euro countries to stay in AND have the euro NOT blow up, there are only two logical options: Germany (plus whoever) leaves or Greece (plus whoever) leaves.

    The question which of those two options would ultimately be cheaper (considered from the aggregated European level and/or from each country's point of view), would be decided not so much by who would be stepping out, but by what would happen to the denomination of the currently outstanding debt in euro's: would those debts remain in euro's or they would be 'fiated' (i.e. converted by government decree) into whatever the new currency of the stepping-out country will be.

    Short of going to war yet again to collect its pound of flesh, Germany is at the mercy of its debtors for that decision. Lira considers it a foregone conclusion those debts WILL be converted by fiat. But it doesn't make sense that any country would be able to doublecross the Germans like that - and then get away with it without consequences. On the contrary, in that case the exiting country would probably either be thrown out of the EU (not the currency union but the larger political/economic one) and pay a high price for that, or the EU itself would rapidly implode. After all, why would Germany want to stay within a EU in which other countries either lute Germany, or allow other countries to lute it, by unilaterally declaring all Germany's claims 50% or more void through devaluation?

    That countries CAN decree to convert their existing euro-denominated debt into a new currency, doesn't neccessarily mean they WILL.

  10. Central banks aren't buying dollars or euros, or those freshly printed and minted phantom Deutschmarks. They are net buyers of gold. Even university endowment funds are taking physical delivery of the shiny metal.

    Meanwhile, the ability of the humble citizen to purchase precious metals diminishes. Over the counter trading of gold and silver was banned in the US a few months ago. The Austrian government recently ordered restrictions on gold and silver purchases. France recently banned cash sales of gold and silver over a very low limit.

    Many say gold has no use other than to look nice and shiny. They say you can't eat it, it generates no earnings, pays no interest, has no intrinsic value, and has absolutely no utility.

    If gold looks nice and shiny but has no utility, why are central banks and university endowment funds buying it, and why is citizen ability to acquire it diminishing?

    Inquiring minds want to know!

  11. GL, that is a very one-sided view of yours. You do confirm that Germany is afraid it's loans will not get paid back - but you completely ignore the question how the likelihood on that has been moving for the last few years already: lower and lower.
    If Germany wants to stay in the Eurozone, it will have to make more and more loans to deficit members.
    The funny thing most commentators do not see is that the German account surplus is used mainly to prop up the Rentenkasse (general pension system), which in itself is completely unsustainable without outside "support". If now the cashflows out of credited loans dry up, as at some point not even the interest can be paid anymore by the worst deficit countries, it's game over.
    In the alternative scenario, a new Deutsche Mark together with the reinstatement of *real* price stability managed by the Deutsche Bundesbank (German central bank) would likely attract vast inflows to BOBLs (German federal bonds).

  12. Here's where your analysis hits the rocks in overgeneralization "Germany would not gain anything, by exiting the eurozone and going to the new Deutsche mark. It might make some local political hay". Put in a separation between the national politicians' interests and the national interests and you will see how a German exit would happen.

    There is an electoral space for a group of pols in either an existing or a novel party to say "we're the anti-euro party". Right now that electoral space is relatively small but it is significantly larger than it was even two years ago. If the space grows sufficient that a party taking that position would gain real power for a significant time, politicians will move to fill that space and elections will be won on the basis of the politicians anti-euro position. The penalties for being elected to do something and then not doing it will be significant and that's where you will get your anti-euro votes, based on pure domestic political calculation.

    If public sentiment turns against the euro, perhaps by a PIIG default (not just Greece but multiple PIIGS would need to provide uncomfortable haircuts felt by the common voter in Germany) then Germany will leave the euro because if you're going to get raped, might as well restore your dignity going forward instead of becoming the PIIGs prison bitch.

  13. Germany is owes a lot of Euros too, remember. Their external debt of almost $5 trillion would be paid back in the new and rising Mark.

    The most important issue in any country leaving the EU is whether their debt will have a market.

  14. Derivatives created by the German institutions to hedge the improbable German action and then going ahead and doing it. What a blitzkrieg.
    As always, I'm glad to know your thinking despite my own positions.

  15. Drat! I was also on the opinion that Germany won't leave the euro (mostly because it's an exporting nation and leaving the euro would lead to a strengthening of its new local currency, thus hurting the exports). But now that Gonzalo is advocating the same opinion, a feeling of dread is creeping in me... :-(

    I mean, you know Gonzalo's track record as far as predictions go, don't you? The Irish won't pass the budget, leading to a disintegration of Europe, QE2 never ending, that sort of thing... Dammit, I should start preparing for Germany leaving the euro now... :-(

  16. Russia is starting a Eurasian Union with Belarus and Kazakhstan, with Tajikistan and Kyrgyzstan soon to follow, and most likely other former memebers of the USSR. What if this new Union joined the euro group? Would it help the euro's situation? Consider how resource-rich the FSU countries are.

    Second question: assuming the idea is good, can it be implemented quickly enough to be useful (for the EMU)?

  17. Interesting, however it is not Germany the biggest creditor to the EU, but rather the banks. They now want Germany to foot the bill...

    If Germany leaves the Euro, the biggest hit will be for the banks: French banks, English banks, German banks, Goldman -Sachs who obviously want to avoid being paid back in devalued Euros.

    If I were Germany, I would GET OUT NOW...let the EUR devalue and then "generously" offer to pay the Eurozones debts AFTER devaluation ;-)

  18. If Germany leaves the Eurozone, your analysis is dead-on in that the Euro will sink like a stone. However, while the export spigot will be effectively choked off and asset-denominated in Euro will also take a huge hit, there has to be a natural upside to this. The upside is increase appreciation of the DM vs the Euro and increased purchasing power of the Germans in the new currency. So the exports will fall as domestic consumer spending increases either domestically or abroad where Germans can live like kings in the future 3rd world countries in Europe (aka PIIGS).

    However, the conclusion that Germany won't leave will most likely play out. Mainly because it's in the interest of German bankers to keep those debt instruments alive as long as possible at the expense of the German citizens. If the country left the Euro, the banks would be screwed and the people would benefit from a strong currency.

  19. I'm not sure if you or anyone have covered this in detail, but what about the "real" political ramifications across the EU, especially by countries that are going to feel the brunt of this Euro meltdown (some are feeling it right now as events unfold)?

    Are we going to see a new breed of nationalism flare up in the EU or Europe as a whole (i.e. boycotts, embargoes, armed conflict, etc.)? Is it premature to contemplate perhaps some nasty events could unfold in Berlin or Frankfurt in the future?

  20. Hello,

    My understanding is that the government of Greece owes money to banks, mainly French, German, British, etc. Also, I have read that increasingly jackel American banks, expecting bailouts forever, have written an indiscreet amount of CDSes on this debt. Which is why Geithner wants massive money printing and no defaults. If I'm wrong about this, I'm sure someone will let me know....

    What Germany wants depends on who Germany is. If there is no difference between Germany and its bankers, then "Germany" will push Ireland, Greece etc for every last "pfennig" until they riot, crack, and default - on the bank loans. But does that mean they have to leave the euro? Will German bankers kick them out of the euro if they refuse to pay off the loans? What good will that do them?

    Meanwhile German banks and their purchased politicians will try to con their own people, das deutsche Volk, out of as much tax money as possible until even the German people crack. These politicians will incite ethnic hatred against other peoples to divert attention from their banker patrons, put the European Project at risk, trash their social safty systems, schools, health services, even forget their budding love affair with Russia and its natural resources. In short, they'll not care who or what they destroy so long as they think they can squeeze one last euro out of somebody. Loans they should never have made. And before pointing fingers at "lazy" this and that, remember that Greeks and Italians have higher personal savings rates than Germans.

    If what "Lady" Thatcher, the grocer's daughter writ large, said is correct for our times, that there is no such thing as "society", then neither are there "Peoples and Fatherlands". And so there is no such thing as Germany, Europe, or America for that matter. Just bankers, unions, politicians etc all grasping for their own, twisting laws and constitutional structures to enrich themselves, and nothing more. Who would bother caring about them?

    However, if the good "Lady" is wrong, the debt will be repudiated because Europeans will, in the end, refuse to let their peoples and societies be destroyed. And so amidst an immense amount of turmoil the banks will fail, the European Project will remain, and in some way, so will the monetary union.

    The first European politicians to articulate this, whether of the left or the right or both will win power. Germany stays in the euro and the banks fail. That's my bet. Arrangements are made with other countries, it's messy for awhile, and life goes on in a direction that Wall Street and the Americans have never liked.

    Of course, if the euro and the European Project never were anything more than the banks, then both will fail and drag down the banks along with them.

    I'll most likely be proved wrong, and perhaps this is nothing more than foolish sentiment, but then again "Peoples and Fatherlands" are in the end, foolish sentiment. This will be interesting to watch, for sure.



  21. @Unna:

    "If what "Lady" Thatcher, the grocer's daughter writ large, said is correct for our times, that there is no such thing as "society","

    You should take the time to find the whole quote. Lady Thatcher went on to point out that the lazy and feckless are paid for by the hard working - she said "there is no such thing as society" to point out that "society" is not a nebulous abstract concept with the ability to create wealth from nowhere, but is in fact made up of hard working people with problems of their own.

    I am afraid you have been duped by the radical left into believing she said something rather more heartless by the simple device of extracting part of a much longer sentence, itself part of a whole paragraph, and then presenting that part of the sentence out of context. Please google to find the whole quote - you might find it worthwhile.

  22. I think it is far too early to say if Germany were to pull out of the Euro. The fact is at the moment we can see that the total amount of debt that has been reated by fractional reserve banking is now so large that some countries not only don't have enough cash to pay off the capital but they don't have enough cash available to service the interest. Greece finds itself in a similar position to Argentina just before the default (albeit the Argentine Peso was locked 1:1 to the $ by decree rather than by physical use of the same currency as it is in Greece).

    In the current situation Greece and other European countries will be forced one way or another to eventually default on the majority of the debt or print money. If Greece were to simply default on the debt whilst staying in the Euro that would only solve part of the problem - the Euro is too strong for Greece to compete against non-Euro countries like Turkey. It is more-or-less forced to get out of the Euro and introduce a free-floarting currency of its own. The current Greek government won't let this happen, but the electorate will make damn sure the next Greek government will. A number of other European countries are likely to follow the Greek example. This will leave the Eurozone stronger, which sadly will choke off German exports causing a big increase in German unemployment ( it has been persistently high since unification anyway). Debt owed to German institutions won't be paid back. Poverty in Europe will become widespread with demand for BMWs and Mercedes falling. German pension funds will suffer. The average German will look at the EU and will wonder why they are a part of it. It will just crumble around them with only the French and a few small countries left. Euro totally dominated by Germany will be a strong currency like the Mark used to be, so why not go back to the Mark and take control of Germany's destiny?

    The Southern Europeans and the Northern Europeans always made strange bedfellows. The European Union cannot really survive with its two halves pulling in opposite directions. Remember that Maastricht and the creation of the Euro are only a few years old. Basically this strange amalgamation of nations, some modern and sophisticated with others more-or-less medieval, is run by failed unelected politicians from its weakest members. It didn't work and what we are living through now is its failure. The European Union will come apart at the seams and all that remains now is to see if there will be anything left of it worth slavaging. That will determine if Germany is part of the Euro or not.

  23. Germany has two choices: stay and pay, OR leave ad die. That's it. You fools that like to compare nations need to understand this about the Germans: THEY DON'T SPEND MONEY. They EXPORT.....PERIOD. Do you understand that? Wal-mart even failed in Germany. Somehow the Germans managed to avoid a property bubble while the rest of the world (incl. europe) got into one. Gonzo is CORRECT. If the lazy Greeks, Italians, Spaniards, AMERICANS, etc. cannot buy Beemers....guess what happens to their export market??? Inflation is a bitch, but deflation is worse. EIther way, the middle class gets screwed. At least rich folk get protected in inflation. The last time we had deflation, bankers jumped out the window. Ah, the good ol' days.......

  24. The other alternative is for the EU to become much stronger, where Brussels exerts real authority over the fiscal policies of the member nations.

    It is power, after all, that motivated the founders of the EU. A world govt., if you will.

  25. Seems like your view on Germany is that of the minority against the mainstream 'Hollywood' news. However, there are similar writers who hold similar views (i.e. those more familiar with European mindset) such as LEAP 2020. Their recent article states that it is very likely that those Greek and Spanish securities will take a 50% cut..which is why I think we hear all the screaming from the 'vampires of Wall Street' as the losses are most likely to be borne by them.. and of course will force to FED's hand for QE3. I guess we shall soon find out who is correct very soon. My guess're probably right!

  26. @Ryan,

    I had a longer comment but it got lost in cyberspace when I clicked "post".

    Anyway, when I made my comment, I thought I would be excoriated for being a right wing reactionary traditionalist, not for being a "dupe" of the radical left.

    I reread Maggie's statement and it's still the same old Maggie with her pinched and narrow view of life. No society, only individuals. A reduced and atomized population that interacts over the counter next to the cash register. Bartertown.

    The problem with Lady Thatcher is that she is a liberal - circa the 19th Century. Remember the old argument of Society vs Community back then? Both the traditionalist Right and the radical Left saw the same problem with "liberalism", although they had different solutions.

    Fast forward to 1980 up to the present. Liberalism now holds sway in its even more virulent form of "neo liberalism". It's even managed to replace Society with "The Market."

    Markets are good, but they are devices created by society and must be used to facilitate social ends and must remain subordinate to social values and goals. When they're not, we get the likes of "Lord" Blankfein who buys and sells politicians and regulators like so many bunches of celery. And without the social values with which we construct society, who will have the moral stature to stop this market place in politicians?

    Maggie ushered in this new era of neo liberalism a generation ago and the social, political, and economic crash palace you see all over the globe is the result. There's a straight line from her to "Lord" Blankfein, BushBama, Timmy, third world revolutions, political instability due to poverty, unemployment, extreme wealth inequality, "Occupy Wall Street", and who knows what else to come as we go forward.



  27. Germany will not leave the EZ for sure. If Greece default, will Germany get screwed no matter what? No, not over the longer term.

    Germany strategy is to feed just enough bailout to prevent any of the PIIGS default on its debt. Then use that as leverage to pass a new EZ treaty. The new EZ treaty will allow Germany to exercise more control over debtors including acquiring 'national assets'. In short, Germany gets to run the EU more directly. I think they like that idea. No need to build so many tanks.

  28. Generally your work is good. on this one, you missed it. Youve missed that the move out of the Euro is a long term hedge against the deadbeat nations. They know they wont get paid back, in the Euro value lent out, only in continually depreciating Euros. So it would be better for Germany to take a one time hit than to perpetually feed the bailout fund which they will be required to do if they stay in the Euro. You also underestimated Germanys Weimar intransigence against paper printing.
    I suggest that when Merkel is kicked out it will be by an uber nationalist that will be elected by the idea Deutchland-uber-alles redux: why pay for fat Greeks and Italians to sun on the beach for ever? Why not take the hit, the Germans make good products...assuming the world continues to want them, it wont matter if its DMs or Euros, they'll still sell.

    Your analysis is tactical only..misses the strategic picture.

  29. Unna, the full quote is

    "I think we've been through a period where too many people have been given to understand that if they have a problem, it's the government's job to cope with it. 'I have a problem, I'll get a grant.' 'I'm homeless, the government must house me.' They're casting their problem on society. And, you know, there is no such thing as society. There are individual men and women, and there are families. And no government can do anything except through people, and people must look to themselves first. It's our duty to look after ourselves and then, also to look after our neighbour. People have got the entitlements too much in mind, without the obligations. There's no such thing as entitlement, unless someone has first met an obligation."

    Thatcher clearly honors the social values of families, the most basic element of a society.
    And you would do yourself a service if you looked at GB's condition before Thatcher came to power, and compare.

    Somebody else said:
    "Under the rules of the modern state, we give up a portion of the capacity to provide for ourselves and in return are freed from a portion of the obligation to discipline ourselves.
    Increasing economic collectivism enables increasing moral individualism, both of which leave us with less responsibility, and therefore with less grounded and meaningful lives."

    We clearly suffer from too much economic collectivism already, not too much liberalism.

  30. Germany will not leave the Euro unless it implodes for one reason:

    1. They are protecting their economy. With the PIIGS in trouble it is keeping the Euro weak. Europes bright spot is Germany and if they implemented the Deustch Mark it would quickly gain strength which would kill exports, which would slam the German economy.

    As long as Germany has an unfair advantage with a weak currency they will continue.

  31. At this stage it's all a moot point. The central banks are now fighting to stave off a global Great Depression. It's unclear that they will succeed. Potential losses in the highly leveraged financial world are probably in the tens of trillions ($$), well above anything that small injections of money by the banks could cover. There will have to be winners and losers. There will be major bankruptcies - including whole countries. Germany needs to take whatever steps are necessary to save itself. It is now a race for the few solvent organizations and countries to separate themselves from the heap of losers. Will this work ... it's doubtful but who knows?? It's more a question of who endures the most pain, and who does not.


  32. Many people in Euroland believe in the power of printing money. Of course they claim otherwise and swear austerity in the morning. But at the end of the day they declare that there is no alternative and that inflation is a reasonable way to tackle with debt.

    Coincidentally, very few of these people are Germans. In fact, an ordinary German considers the printing of money as a criminal act.

    The PIIGS will never adopt the German mentality. In my opinion there is only one way Germany could accept monetizing sovereign debt: When Germany itself is broke, after having bailed out half of Europe. Isn't it better to head for the exit before? The German people got it. German economists got it. If, at last, politicians get it, the Euro will be history.

  33. My great-grandparents lost everything in Weimar hyperinflation. The memory lives on - my grandfather used to save in stocks, gold and swiss franc, but certainly not €. Even my uncle moved all of his saving to Switzerland around 2008 and sticked to that.
    It's true - as soon as Germans hear the word "inflation", we panic and rush out to buy real estate & gold (precisely what's happening now).

  34. Dear Michael,

    We could all dissect Maggie's statement like so many postmodern literary critics - don't you really enjoy reading those guys (!) - but I would say this: the quote, let's agree the fragment of a quote, "...there is no such thing as society..." has become iconic because, separated from the rest, it seems to capture what people generally believe to be Maggie's true attitude towards others, a governing attitude which would determine what she would do in government.

    How about, "Lady Thatcher, the Kiddie Milk Snatcher"? True? Fair? But that is what she did to British school children. No Finnish socialist she, where they have some of the highest academically achieving children in the world and where every kid is fed free breakfast and lunch regardless of economic status.

    How does Yuval Levin explain those results when Finns' social responsibility towards their children's health and nutrition through public spending should be leading to the kids' spiritual, moral, and intellectual decline?

    When Maggie left office close to 30% of Britian's children were living in poverty. The last time I looked at Britian's social well being rankings, I remember them to be not so good. Perhaps there's something wrong with the system there? The rich are doing fine, however, and I suspect that was always the point.

    The poll tax was her undoing if only because it was so blatant. Government tax intervention to make money flow from the working and middle classes to the wealthy. And I'm sure those "wealthy" were convinced to a moral certainty that their individual initiative and industriousness had led to their increased bank accounts. In the end, everyone knew she had to go.

    Anyway, this thread is about Germany and debt and the euro.

    I brought up the quote to ask this question: will Europeans allow themselves to be thrown under the bankers' bus, or will they default on the bank loans because there's no way they can pay them back. The alternative is leaving the euro which is somewhat of the same thing. But I don't think that's in Germany's long term self interest. That seems to be GL's point.

    If Europeans want to retain intact societes, the bankers greed will break against that reality, including Germany's bankers. But if there are no "societies" left in Europe any longer, they will more easily be ground down. It's another way of trying to predict what will happen. A different political-social way of looking at things. I still think a healthy default - marine haircut - on the bank loans is the only way out.

    Also, remember that Germany has been trying for a full century now to establish a tax and tariff union. It was one of their war aims in 1914 when they deliberately let the so called "July Crisis" spin out of control and into war. Next time you run into your favorite German say "Sublimate, sublimate! Euro good, war bad."

    Finally, thanks very much for sharing the Levin article. I'll be sure to read it carefully.



  35. more talk of Germany leaving the Euro and the creation of a New GM...another FIAT currency.
    What the world needs certainly not more fiat currencies. Fractional banking and fiat currencies are on their death beds. Surely the banksters and bureaucrats know that. They will unfortunately, continue however to suck every last morsel out of the system while it is on life support. In the meantime "real" money will increase in value exponentially.
    There is an unmistakeable diversion that all and sundry are discounting because of the "noise" being made about the seemingly larger player in the Euro zone.
    What is simply required and likely to occur is the managed default of Greece, Portugal and Ireland debt and a mjor recapitalisation of the Euro banks. Rather than being a Lehman type event ...this time around there is enough knowledge and "willingness" to avoid a systemic breakdown. There undoubtedly will be some nationalisation of some Italian / French and other banks.
    This will be achieved before and above all other scenarios.
    Ultimately however, the Euro will disintegrate like all fiat currencies. It will be the first.
    That is the crux of the issues faced by Euro nations (fractional banking and fiat currency)not whether Germany will or wont stay.

    Liquid Motion

  36. Hey Lira!

    What about German debt?
    They would be stupid to change that into new Marks - eh?
    So there would be a large windfall profit for the German state/people, because they actually would have defaulted on their debt to the tune of at least 70% (appreciation of the new Mark in the first year).
    This profit would easily allow them to buy P&I, maybe even S&G...
    O.K. a few financal investors are going to be sc*ewed, but as there is a clusterf**k going on already - maybe the Germans will want to be the ones to give at least once, and not on the receiving end, like the last 20 years...

  37. Everyone and I mean everyone is missing the big picture and the significance of the Euro and its relationship to the collapse of Bretton Woods 2

    This is the proper way to view the Euro system

    The Euor system is a new monetary order, it has noting to do with the current commercial banking sector within Europe.

  38. Well ... once again we are seeing that classic battle between the stock markets and the credit market. The stocks for major indexes are attempting to climb over the 50-day moving average line. It has been a line of upper resistance until now - it seems pretty obvious that someone wants to send a message that the 50-day average will become a line of support. I wonder who that someone could be??

    However, the soaring yields on sovereign debt in Europe send a very different kind of signal. The credit market is not buying into any of the whoopla about bailouts or stability measures for Europe's banks. In fact, the astronomical yields on Greek debt are pointing to the fact that recovery rates on Greek bonds will be abysmal. May as well write them off.

    So who wins in the great struggle between stocks and the credit market? Answer: It's nearly always the credit market that prevails. The reason being common sense. The credit market doesn't care about speculation and obfuscation. It only cares about getting paid back for its bonds. When it's obvious that creditors won't get paid back in full - or at all - the scene is set for weeping and a gnashing of teeth (to borrow an old Biblical phrase).


  39. From Badali of Stansberry and Associates: this seems to support Nicole Foss's view of Deflation rather than your take regarding inflation:

    The copper price fell because of a collapse in credit.

    Smelters and fabricators, who buy the majority of copper, don't use petty cash to make the purchases. A bank lends them money. When the smelter sells the finished products, it pays off the loan.

    Traditionally, European banks provided financing to the base metal industry. But as you may know, European banks are in deep trouble right now. The banks can't lend money they don't have. With no available credit, smelters can't buy copper. The lack of demand for copper sent the price plummeting."

  40. GL,
    Have you taken up residence at the disco?


  41. Hello Gonzalo,

    Are you done as a blogger? Have not heard from you in a while.

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  43. Das Experiment Euro & Europa ist bereits gescheitert! Die DM wird wieder eingeführt werden müssen. Europa entwickelt sich im Gegensatz zu Deutschland einfach zu langsam! Den Wirtschaftskrieg haben wir gewonnen! Deutschland wird es sich nicht leisten können weiter Spitzenprodukte gegen Weichwährung abverkaufen zu können. 80% der Menschen hier sind gegen den Euro, und für die Mark! Wann dürfen wir endlich UNSERE Demokratie wiederhaben? Wann beenden wir die EU-Occupation?

  44. I like what 'White Bear' had to write.

    My first impression was "What if the Euro exits Germany."

    Certainly, Germany is already prepping for the day the U.S.A. offically defaults and perhaps changes their currency.

    This article is the sort of thing MSM would approve of.

    Nice read as usual.

    Kansas out.

  45. I see no end to the debt crisis in europe' jim rogers has commented recently that the only real solution to this problem and the problem of that national debt of the united states is for these countries to just declare their inability to repay their debts' and than just default.


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