Paymaster Germany and the Endgame
by Gary North: Debt
and Debt Maintenance: Why American Households Are Not in Big Trouble
I did a Google
search for "paymaster Germany." I
got over 34,000 hits. They refer mostly to the Eurozone crisis
over Greek government debt, and the German government's willingness
to tax Germans in order to keep bailing out the Greek government.
I got the phrase
from a pro-gold standard German economist, Paul C. Martin. He wrote
a book with this title in 1991. Its subtitle is as relevant today
as it was two decades ago: "Thus they dissipate our money." When
he wrote "they," he meant "German politicians." The phrase has stuck.
It is correctly being applied to the on-going program of the Merkel
government to provide fresh injections of government money
taxpayers' money into the Greek government, so that the government
can pay 70% per annum to investors.
We are told
that German voters oppose these bailouts. But the voters have no
clout. The big German and French banks that loaded up on Greek government
bonds are at risk of huge losses, and the bankers have the upper
hand with Angela Merkel. When publicly speaking about further Greek
bailouts, "her lips say 'no, no' but her eyes say 'yes, yes.'"
a similar capitulation of Congress to the big banks in the fall
of 2008. The big banks wanted a $700 billion bailout from the government.
It was called TARP: Troubled Asset Relief Plan. The bankers enlisted
Treasury Secretary Hank "Goldman Sachs" Paulson to make their case
a master salesman. He told the leaders in Congress that a banking
collapse was just around the corner. Congress just had to pass TARP.
Leader John Boehner bought it: hook, line, and sinker. He delivered
his deservedly famous "mud sandwich" speech to the House of Representatives
on September 29. This was an eloquent call by a senior politician
to vote against the express wishes of the voters. Emails against
the TARP bailout were running ten-to-one against the bill, but Boehner
pleaded with his fellow House members to vote for TARP.
the votes . . . these are the votes . . . that your constituents
sent you here to decide on their behalf."
The words "on
their behalf," really meant "against their express wishes." The
words meant this: "Congress knows what's good for the voters: a
$700 billion line of credit for the big banks."
I have posted
the video of his speech, along with a marvelous music video, "I
Want Some TARP," here.
OVER FOR ENDLESS ROLLOVERS
bank run is not like the runs of the early 1930s, where depositors
lined up in front of a bank to withdraw their money in cash. It
is much more subtle. Big depositors refuse to roll over their short-term
deposits. There is no long line. There is simply a memo: "We do
not intend to roll over our existing account. Please wire our funds
to our home bank." No, muss, no fuss except inside the meeting
room of the bank that receives the memo.
There is a
major problem. The home bank of the investment fund that sent the
memo may have received a similar memo from another investment fund.
There is an international daisy chain of debt among the big banks.
No one knows which banks will be left standing. Think "Wachovia."
facing the European Union (EU), the European Central Bank (ECB),
and the European Monetary Union (EMU) is the European Daisy Chain
(EDC). Greece is the weakest link in this daisy chain of debt. When
Greece defaults it is not "if" the daisy chain will
be broken. Big banks will find that their Greek bonds are dead instruments.
There will be no more interest payments. There will be no market
to unload these now-worthless IOUs onto some other even more stupid
fund managers will take note of the dilemma of specific big banks.
They will send the memos.
will begin to fall. Think "Credit Anstalt Bank, 1931."
is the refusal to roll over the debt. This means a refusal to inject
could decide to do nothing. The voters want her to do nothing "on
their behalf." But Mrs. Merkel by now has grown used to eating mud
sandwiches. She has to eat them ever-more regularly.
One group of
critics of the on-going bailouts says that the money would be better
spent by bailing out specific banks that get in trouble after Greece
defaults. Why roll over Greek debt, which only postpones the day
of reckoning, when the money would get more bang for the buck by
being supplied to specific banks?
is politics. When Greece defaults, the government will get away
with it, the same way that the government of Iceland got away with
government will get the message. So will the government of Italy.
(By the way, the ultimate rollover in Western Europe over the last
65 years has been the government of Italy.)
in PIIGS countries will finally grasp economic reality, namely,
that the EU is a toothless tiger. The bureaucrats in Brussels have
no meaningful sanctions that they can impose, other than expulsion
from the EU. But expulsion would trigger a loss of faith in the
Grand Experiment of treaty-based political unification. This has
been the dream of the New World Order ever since at least 1919:
the Versailles Peace Conference and the League of Nations.
defaults, the EU will then face this problem. How can membership
in the EMU be maintained if no negative sanctions are imposed for
pulling out of the EMU? The only meaningful negative sanction is
expulsion from the EU. But what threat is that? Only one negative
sanction would have any impact: blocked access to the markets of
the EU nations. In short, the only meaningful negative sanction
is an economic trade war in Western Europe.
would be, as John Mauldin titled his book, the endgame. If a trade
war begins among major nations anywhere on earth, the entire post-World
War II experiment in free trade could come crashing down. That would
create a nightmare scenario. There would be a major worldwide recession.
It would last for as long as the trade barriers did. Government
budget deficits would not go to the moon. They already have done
that. They would go to Mars.
Merkel is standing at the edge of the abyss. It is both a political
abyss and a financial abyss. She has only limited funds. She has
only limited time. Her coalition government has the look of a 1958
DeSoto in Cuba. She does not know what will happen if she steadfastly
refuses to supply any more government funds to the sinkhole that
is the Greek government. Her options are limited: go/no go. This
means roll over or refuse to roll over. She keeps rolling over.
Her lips say
"no, no," but her eyes say "yes, yes."
LONG CAN THIS GO ON?
In recent weeks,
the mainstream financial media have posted stories about the looming
Greek default and its negative effects. There are major economic
analysts who say that the break-up of the European Monetary Union
could come within weeks. This is serious language. It reminds me
of Hank Paulson in September 2008. "Oh, woe! Oh, woe! So, sign on
the dotted line."
Lest we forget,
let me review the
key text of the original proposal, which Congress refused to
by the Secretary pursuant to the authority of this Act are non-reviewable
and committed to agency discretion, and may not be reviewed by
any court of law or any administrative agency.
had passed that version, it would indeed have been "Section
Merkel meets with Sarkozy in one of their "no, no, yes, yes" liaisons,
European stock markets rise. There is some vague language about
another round of bailouts. Investors rush in to buy, buy, buy. Yet
there is no one, other than Greek politicians, who says exactly
how the latest debt rollover can lead to a permanent solution of
the Greek debt crisis. Fund managers have to know that these German
bailouts cannot go on forever, yet their lust to avoid missing quarterly
financial profit targets leads them to buy shares.
The fund managers
are not rewarded to produce long-term capital gains. Warren Buffett
is; no one else is. So, they cannot resist buying whenever Merkel
and Sarkozy emerge from their tryst to tell the world that they
are willing to let Germany bail out the Greek bond market one more
This is great
political theater. The French banks are regarded as the most vulnerable
to a Greek default. At the same time, France does not have the reserves,
either political or financial, to bear the burden of the rollovers.
Sarkozy is like some aging gigolo who is getting paid to show up.
14, Moody's Investors Services downgraded two large French banks
and placed a third bank on review. This is why Sarkozy
keeps after Merkel to fork over the money for Greece.
memos to major banks regarding the funds' refusal to roll over their
short-term loans can go out at any time. No one wants to be the
first fund to trigger a banking panic. But no one wants to be left
holding the bag. This is why predictions regarding the day of reckoning
are highly speculative. The major decisions will not be made by
banks. They will be made by fund managers with large deposits at
banks. The bankers are just sitting there, hoping for the best.
can get hit from two sides: (1) the Greek government, (2) the large
depositors. They have no control over either. Their only hope is
that Merkel will pony up more money, and the ECB's German representatives
will not get enough votes on the board to keep the ECB from buying
more Greek bonds directly or accepting bank IOUs with Greek bonds
shown that she will eat mud sandwiches for as long as she is in
office. She is willing to sacrifice the next election for the sake
of the Greek bond market. She is nervous about thumbing her nose
at the voters, but she and her party's members in the national government
are willing to defy the voters for the sake of the EU, the ECB,
and the big banks.
remain paymaster for the entire European banking system until the
German voters finally rise up and throw out the Christian Democrats.
But will those parties that replace them be any less subservient
to the EU? The leftist parties in Germany are officially more internationalist
than the Christian Democrats.
My guess is
that Greek voters will force the Greek government to default before
Germany's politicians cease subsidizing the Greek government. I
think the voters in Germany will eat their share of fiscal mud sandwiches
until the voters of Europe's basket case nation finally decide that
Iceland is the prudent model, not Ireland.
AWARENESS IS INCREASING
When Paul C.
Martin wrote Paymaster Germany two decades ago, there was
far less awareness of the nature of the influence of the big banks
in German politics than there is today. Throughout Europe, voters
are becoming aware of the enormous stupidity of the senior managers
of the largest banks. The bankers' aura of expertise has worn off.
A quarter century
ago, there was a recurring character in the British sitcom, Yes,
Minister: Sir Desmond. He was a banker, and he was a dolt.
He was funny then. He is scary now. Here
is a delightful segment with Sir Desmond.
The Sir Desmonds
of the world are members of the most influential special-interest
group in European politics. Growing numbers of voters are beginning
to recognize this in Western Europe. In Germany, the power of the
bankers is evident every time Merkel meets with Sarkozy.
not alone in this increased awareness. There is far more awareness
in the United States today because of Ron Paul's run for the nomination
in 2007. The big banks are under far more scrutiny. So are central
This is good
for politics, but it is nowhere near enough to reverse the long-term
control over politics by the interests of the largest banks. We
hear a few disparaging words about the Federal Reserve System from
Rick Perry and Michelle Bachmann, but none from Obama, and none
from the senior political leaders in Washington.
ate his mud sandwich in full public view. He became a shill for
Paulson. While I do not think he will do this again, the fact remains
that Congress still refuses to place the General Accountability
Office in charge of accounting over the Federal Reserve. The mainstream
media dismiss criticism of the FED as the work of fringe candidates
and fringe groups. This is not likely to change between now and
the elections of 2012.
I think it
will change by 2016.
cartel is under attack from the grass roots. Its enforcing agent,
the Federal Reserve System, is under attack as never before. The
FED is on the defensive. Bernanke is the most rhetorically inept
FED chairman since G. William Miller. He is an academic. He does
not respond well to criticism. He honed his verbal skills in the
one-way communications world of the university classroom. His speeches
are term papers, footnotes and all.
In my experience,
the most boring economist of my era was Paul McCracken. He was Nixon's
chairman of the Council on Economic Advisors, 1969-71. The Wall
Street Journal had him write a column in the early 1970s. I
have never read anything as boring as those columns. I use him as
the standard: 100 on the McCracken Index of Boredom. Bernanke consistently
comes in at 86 to 88.
His lack of
charisma puts him at a disadvantage. The spotlight is a threat to
him. It wasn't for Greenspan and Volcker.
the paymaster of Western Europe. The German government bails out
Greece in order to hold together an international political partial
union that supposedly helps German exporters. No doubt it does help
German exporters, but at the expense of German voters. It takes
Keynesian fiscal interventions to hold together Europe's free trade
zone today. It is a mixed free trade zone, just as all modern economies
are mixed economies.
threat today is that the subsidies from Germany will not save the
Eurozone from a Greek default. The system then could disintegrate,
leading to trade wars.
is a great idea, from across the street to across the ocean. But
when it is achieved through central banking and political subsidies
to trade deficit nations, it will come to an untimely end. Then
the latent political forces favoring import-cutting mercantilism
close the borders may come into power once again,
as they did in the 1930s.
That is the
endgame. It ends badly.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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