Divided We Stand United We Fall

By the time the Vandals sacked Rome in A.D. 455 the empire of the Caesars had already receded from Western Europe.  Over several decades the vast territories of Britannia, Hispania, Gallia, and Italia gave way, piecemeal, to barbarians until imperial Rome ultimately fell in 476.

After the ignominious collapse of the Roman Empire, a decentralized feudal system of lords, vassals, and fiefs arose across Medieval Europe.  Learning and the arts were lost to simple survival and 1,000 years of darkness.

Following Medieval Europe’s emergence and Renaissance, a collection of independent nation states were established.  Over the following centuries they coexisted in symbiotic disharmony.  Then, at the dawn of the third millennium, something last seen in Roman times came to pass.  A United Europe once again ruled the continent.

Even so, it was not a real union of the sort that comes about by love or war…it was a contrived monetary union hammered out over several generations by the fists of politicians and central planners.  In other words, it was doomed from the beginning.

The euro entered circulation on January 1, 2002, to the self-satisfied praise of Europe’s uppermost elitists.  By uniting Europe under a common currency, not only would it rival the United States in economic power and wealth, Europe would finally put the catastrophic bygones of the 20th Century to bed and move onward and upward together.  The dream of political unification, as first conceived by Jean Monnet at the Versailles Peace Conference in 1919, would finally be realized. Peace and prosperity would triumph across the land.

Cheap Credit and a Mirage of Wealth

At first the union appeared to be working. Economies boomed throughout Europe.  An abundance of opportunities not seen in over 40-years, if ever, prevailed.  Optimisms and imaginations swelled.  Nothing could stand in Europe’s way.

But for the reflective types, those who paused to consider what was going on around them, things didn’t seem quite right.  Interest rates had dropped and credit spreads across Europe narrowed to near parity with German bunds.  Soon it was obvious that some countries couldn’t handle the flood of cheap money.

The Irish, for example, defaced the Emerald Isle with a housing mania of American style suburban track homes.  The Spanish bid up property prices nearly 300 percent between 2000 and 2008…taking out 50 year mortgages to finance the inflated values.  The Greeks promised early retirement to 55 year olds and borrowed massive amounts of money to pay for it.

The Germans, on the other hand, put their nose to the grind stone manufacturing goods to sell to the rest of Europe.  To pay for Germany’s products, the rest of Europe borrowed money from French bankers.

Regrettably, it was not real economic growth taking place at all…it was a boom puffed up with seemingly unlimited amounts of cheap credit.  With it, a mirage of wealth floated up from the fresh pixie dust sprinkled in with all the cheap money.

Everything worked out just fine, of course, until one day in 2008 when it didn’t.  Now, similar to the United States, Europe has more debt than its economy can support.  But unlike the United States their central bank’s been handcuffed politically by Germany from printing up the trillions of euros needed to bail out their financial system.  That is about to change…

Last week 35 percent of German bunds went no bid at its government debt auction.  This week central bankers decided to destroy their currencies in unison.

Divided We Stand United We Fall

On Wednesday, the major central banks of the world joined hands and vowed to help Europe crank up the printing press.  The first two paragraph of Wednesday’s official announcement begin innocently enough…

“The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system.  The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.

“These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points.  This pricing will be applied to all operations conducted from December 5, 2011.  The authorization of these swap arrangements has been extended to February 1, 2013.  In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.”

The third paragraph is a bit more interesting…

“As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant.  At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise.  These swap lines are authorized through February 1, 2013.”

Skipping to the last paragraph is the kicker…

“U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets.  However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.”

Where will all this lead?

We suppose, when the time comes, the Fed will make a notation in its ledger and – out of thin air – create money to save Europe.  The Fed will then swap those dollars with a French Bank to provide “liquidity support” for the European financial system.

But, alas, this doesn’t make the bad debts go away.  It just papers them over with counterfeit money…for a time.  In other words, once the money printing via international swap arrangements begins, it will have to continue, in greater quantities and frequencies, until the ultimate crackup.

That’s when not only does a United Europe fall, but a divided collection of nations, united under a financial pact with the devil, bites the dust too.

Surely the gods of antiquity are laughing at us.

Sincerely,

MN Gordon
for Economic Prism

Return from Divided We Stand United We Fall to Economic Prism