Around the Globe 11.05.2013

BOJ Gov. Kuroda Calls Easing Steps Successful –

BOJ Struggles to Convince on 2% as Abenomics Shine Fades – Bloomberg.

Japan Salaries Extend Fall as Abe Urges Companies to Raise Wages – Bloomberg.

Japanese Incomes  Japanese GDP Performance Through 2Q2013

Japanese Inflation Rate


Printapalooza throughout the world continues, but the Bank of Japan is leading the world in money creation.  Printing inflates asset prices while deflating labor costs, i.e. wages.  In the first chart, note the trend of Japanese wages since the BoJ began printing over a decade ago.  It is not surprising that the Japanese economy is weak, because consumers have been on a slow, inexorable wage reduction for almost 15 years.  The current round has proven ineffective at raising GDP growth, as illustrated in our second chart.  Indeed, Japan witnessed stronger growth in the aftermath of Lehman than it is under Abenomics, which is also the last time Japanese inflation exceeded 2%.  If you examine the third chart, you can see what happened after the last three times the mainstream financial press called an end to Japanese deflation.

In the meantime, the export and stock market gains fueled by the weak yen have probably peaked.  The USDJPY exchange rate is highly correlated to the ratio between BoJ and Fed assets.  As our last chart details, the market has already priced in the more rapid expansion of the BoJ’s balance sheet.  A reduction in Fed purchases, the dreaded taper, will allow the yen to depreciate further.

BoJ to Fed Balance Sheet Ratio vs. JPYUSD


Service Industries in U.S. Grow at Faster Pace Than Forecast – Bloomberg.

Service sector exapnds more than expected in October: ISM.

U.S. service sector growth quickens in October: ISM | Reuters.

ISM NMI 11.2013

The economic data continues to tell a tale of stagnation.  The MFP is breathlessly reporting that the services PMI beat the consensus forecast despite the “shutdown.”  Numbers above 50 signal expansion, but a 55.4 is nothing to write home about.  Expected GDP growth at this level is below 2%, which is far below the 3.5% growth required to stir the labor market.

Pressure mounts on Draghi following eurozone forecasts –

Rehn Confident Greece to Meet Targets as Troika Talks Resume – Bloomberg.

EU Forecasts Sluggish Growth as Austerity Continues –

EU cuts euro zone growth forecasts for 2014.

Uncertainty over ECB caps moves in shares, euro | Reuters.

Euro Fair Value at 1.37


Everyone is trying to predict what the ECB will do on Thursday: will it cut rates or not? Most commentators seem to believe that the ECB will cut its discount rate, because the EU just cut its Eurozone growth forecast for 2014 to 1.1%.  The EU has been relentlessly cutting growth forecasts since 2010, so there is no crisis here.  The only thing you need to know about how the ECB will conduct monetary policy is contained in the chart above.

As long as the euro remains weak enough to promote German exports, there will be no rate cut to lower the euro exchange rate.  If the euro attains and maintains the low $1.40’s for a time, then there will be a rate cut.  At the current rate of $1.35, Germany is benefiting from both low inflation and a weak currency.


Around the Globe 10.23.2013

High-End Spenders Shrug Off Headwind –

Consumer Confidence by Income Group

Around the U.S., the same song plays ad nauseam.   The more money you have, the more money they give you.  Money printing has been very good to the rich raising the prices of their asset portfolios while the majority of the country suffers an unprecedented five year labor market recession.  In yesterday’s post, Around the Globe 10.22.2013 , we examined rampant inflation in the collectibles market.  Today, we learn that the market for high-ticket items is robust buttressing our argument that the “recovery” is exclusive to the rich.

The truth is that QE is not the solution to the problem, it is the problem.  Money printing is a particularly insidious because it helps the rich while crushing the labor market and therefore the working class.   Fortunately for the banksters, their central bank and their government, no one will figure out what is happening until long after they have taken their profits.
Full post with charts, images and links:

Draghi Says ECB Won’t Hesitate to Fail Banks in Stress Tests – Bloomberg.

ECB to Start Review of Bank Balance Sheets –

Net Bank Assets as a Percentage of Host Country GDP


Draghi’s job is too talk tough.  That’s what he was doing in July of 2012 with his pledge to do whatever it takes to save the euro, and that’s what he is doing now by claiming that he won’t hesitate to fail banks next year.  As the chart above illustrates, European banks are overlevered, TBTF disasters waiting for an opportunity to happen.  If ING bank failed, the Netherlands would not be able to bail it out as the institution’s balance sheet is twice Dutch GDP.

These tests will be merely be a continuation of the laughable stress tests that have been conducted so far.  The regulators will arrive, audit and admonish.  The banks will make a few minor changes to their capital structures to enable them to continue the sovereign debt purchases that are keeping the PIIGS afloat, and everyone will be happy.

Meanwhile, bank lending will continue to flag in the periphery, and eventually the disease will spread to the core.  Europe’s economy will stagnate indefinitely, but at least a collapse is not imminent.  As in the U.S., the wealthy’s lot will begin improving at the expense of the worker.

Spain Ends Two-Year Recession Amid Effort to Add Jobs – Bloomberg.

End of Recession in Spain Fuels Hopes for Euro Zone –

Spain emerges from two years of recession –

Spain Retail Sales Performance Spain Employed Persons


The mainstream financial press loves its Spanish recovery narrative and continues to tout it even as Spain remains in a depression.  This is the growth that MFP is getting excited about:

Spain GDP Performance


0.1% could be a rounding error, but instead it is hyped as a win for Spain.  As you can see above, Spain has only grown in 8 of the last 24 quarters and has not put together four consecutive quarters of growth since the GFC.  Moreover, total employment and retail sales are still falling proving that the depression continues.

There is no reason why the facts should get in the way of a good narrative.  This article cherry picks data, combines that with a couple of anecdotes from reliable, go-to permabulls, and declares victory.  If you need to use a quote, at least pick one that’s accurate instead of this:

“We are optimistic on the euro periphery as a whole and Spain in particular,” said Robert Wood, an economist at Berenberg Bank, which forecasts growth of as much as 1.4 percent in 2014. “The country has made big structural changes, it’s been engaged in a lot of deficit reduction, business sentiment is improving and unemployment is probably close to a peak.”

Sell-side economist Wood makes a rosy growth prediction for Spain based on three facts and an additional prediction.  Let’s see if the foundation can support the house.

First, the country has not made big structural changes.  Firing workers is no easier today than it was a few years ago.  A few superficial changes have been implemented, but these are largely ineffectual as illustrated by our second chart showing an ongoing reduction in the labor force.  Second, it has not been engaged in a lot of deficit reduction:

Spain Budget Deficits Last Decade

Last year, the deficit was close to 11% having risen from 9.4% in 2011.  Since the onset of the new normal, the Spanish government has underestimated its budget deficit by at least three full points.  This year, Spain has an EU mandated deficit target of 3.8% for the year.  Through July, it ran a 4.38% deficit.  Extrapolating this number to the full year, we get a 7.5% deficit.  Adding in the traditional Spanish forecasting “error” of three points, we come to a grand total of 10.5% for the year.  There has been no deficit reduction, and total debt levels continue to rise.  Spain will cross the 100% debt-to-GDP level sometime in the first half of 2014.

Third, business sentiment is improving:

Spanish Business Confidence


but note that Spanish businesses remain unconfident as they have since 2008 they are just less unconfident than they had been.

Fourth and last, the shill bases his rosy GDP prediction on a rosy labor market prediction.  Spanish unemployment is probably at the peak as companies have already fired everyone they need to for now, but this is much different from a growing workforce.  Just like in the U.S. falling unemployment numbers belie the true, dismal state of the labor market.

Moreover, GDP growth was driven by export growth.  The euro has appreciated since then and with weak economic conditions prevailing in Spain’s largest trading partners, continued export growth will be elusive.

The bottom line is that Spain remains in a depression, and the data points to continued economic pain despite the hype.


Around the Globe 10.16.2013

Shutdown is having ‘notable impact’ on mortgages.

Home Builders Cite Waning Confidence –

New Purchase Mortgage Apps

Source: MBA/Zerohedge

New mortgage apps are plummeting, which does not bode well for home sales.  Even though the budget “impasse” will end with a deal before too much long-term damage to the nation’s standing is done, the consequences of this political theater will drag on for months.  Home sales will drop through October, but a November rebound will be touted by the mainstream media as a resurgence in the housing “recovery,” not the pent up demand from prior weeks.

Draghi Turns Judge on EU Banks as ECB Studies Accounts – Bloomberg.

Euro zone inflation drops to 3.5-year low in September as expected | Reuters.

Net Bank Assets as a Percentage of Host Country GDP

The ECB is not set to judge Eurozone banks.  This is political theater to satisfy voters that the EU is not throwing away more of their hard-earned money on politically connected bank bailouts.  Bank stress tests have already been conducted by the ECB with kid gloves, and this treatment is expected to continue.  The Eurozone’s banking system is a disaster waiting to happen.  Bad loans in the periphery are being hidden by policies such as slow markdowns of nonperforming debt and playing extend and pretend to prevent loans being categorized as “nonperforming.”

Take a look at our chart and prepared to be surprised by the host countries of the most dangerous banks.  Germany and the rich countries do not wish to be on the hook for periphery banks, not just because they are being selfish but also because they can’t.  They need to keep their powder dry in the case of a systemic collapse, still not out of the question at this juncture in the eurocrisis.

China Intervened Aggressively in Currency Markets in Latest Quarter –

Chinese T-Bill Holdings

The Chinese mainstream media was recently bitching about the amount of US treasuries held by the country.  No matter the country, the mainstream media fails when it refuses to depart from its narrative on a topic.  The narrative for China’s position as the largest foreign holder of US debt is that the virtuous Chinese lend their savings to the stupid, fat spendthrifts across the Pacific to save them.  Actually, the Chinese are saving themselves.

China actively discourages personal consumption by it citizens with an array of methods.  Hence, China sells to but does not buy from the US, so surplus dollars must be invested somewhere, i.e. the US treasury market.  In addition to not buying much from the US, the country purchases dollars on the open market to maintain the yuan’s weakness and its trade surplus.  Like all Nash equilibriums, this system will continue until it cannot.  Then, it will stop.  Good luck guessing when.

Full post with charts, images and links:

Around the Globe 10.02.2013

U.S. Government Shutdown Threatening Housing Recovery – Bloomberg.

New Home Sales

Just a few weeks ago, the so-called housing recovery couldn’t be stopped, but now the shutdown is threatening to stop it in its tracks.  New activity will fall a bit due to the technical factors surrounding the shutdown, and then the economy will make this up in future months.  All in all, housing activity should remain around where it is now, as indicated by the red circle, unless incomes move sharply upwards.

Draghi Says ECB to Act If Needed to Control Money Markets – Bloomberg.

ECB says all options open to temper market rates | Reuters.

ECB Benchmark Rate Through October 2013

Draghi offered nothing new in today’s press conference.  ECB will maintain low rates and will consider cuts as the “recovery” progresses.  A rate cut will do little to assist the peripheral countries as their rates will not change relative to Germany’s, but that won’t stop any post-cut rally.

Gross Says Market Mispricing Eventual Fed Target Rate Increase – Bloomberg.

Pimco’s Gross says low interest rates may persist for decades | Reuters.

Japanese Benchmark Interest Rate From 1981

Japanese GDP Performance From 1981

Bill Gross is correct.  Rates will stay low for years.  If you do not believe that this is possible without stoking inflation, I present Japan.  The BoJ has maintained a near zero rate interest policy for seventeen years without any inflation.  While inflation may be avoided, there are other negative consequences.  To see for yourself, examine the charts above.  Compare Japan’s GDP performance on the left and right sides of the red line and consider what this will mean for the stock market for the next decade.

Berlusconi U-turn secures Italian government’s survival | Reuters.

Berlusconi Backs Down on Threat to Topple Government –


Italian political crisis #1,047 since WWII officially ended with Letta’s successful confidence vote.  You can start buying Italian government bonds again.  Unlike the U.S., Italy had a political broker, Giorgio Napolitano, President of the Republic who was able to move among the various factions to broker a deal.  Acrimony runs so high in Congress that there is no obvious deal maker.  When a group steps forward, things will get moving quickly and Congress will do its job.

Bad-Loan Revival Unburdens Banks –

Fed Holdings of MBS

There is no such thing as a free lunch.  The Fed’s action have inflated real estate prices and bailed out the nation’s banks from many poor lending decisions.  The problem with this policy is apparent from the anecdote within the article.

The bank was able to sell a foreclosed property for $1.1mm rather than the initial estimate of $972k on a $1.2mm loan.  Sure, the banks losses were lowered, but this money came from someone, in this case factory-owner Mr. Hong.  What do you think he would do with that extra $128k? Maybe, he would have hired more workers, invested in a new machine to increase productivity or increased his marketing budget.  Each of these activities would have increased GDP.  Instead, the wealth is being transferred to the banksters where it will line fat cat pockets but will do little to spur GDP growth.

Around the Globe 09.23.2013

Yellen Would Bring Tougher Tone to Fed –

YellenFed watchers have redesignated Janet Yellen as the frontrunner to replace chairman Ben Bernanke.  What no one has discussed is who will replace Jon Hilsenrath as unofficial Fed mouthpiece?

Journalists must straddle a fine line between treating subjects with kid gloves to obtain access and while maintaining the necessary distance to continue objective reporting.  Hilsenrath became too close to Bernanke and the Fed so that he was no longer a reporter, merely a conduit of information from his anonymous source.  This fact bodes well for his retaining his unofficial title as he has proven himself in the role.

Moreover, he is off too a good start to gaining the favorite’s confidence with this puff piece.  Clichés like “hard-charging” and “demanding” are deployed while we learn little about the candidate that we already did not know.  All you really need to know about Janet Yellen is that she is the candidate most willing to crank up the magic money machine to 11, and that is why she is garnering crucial support of the financial industry that will vault her into the role come 2014.

Triumphant Merkel starts tough task of seeking coalition | Reuters.

Merkel Wins Big in German Election –

Merkel’s Victory Is Stunning and Depressing – Bloomberg.

Angela Merkel, courtesy of Armin Kübelbeck

Angela Merkel, courtesy of Armin Kübelbeck

Germany experienced a shift to the right in Bundestag elections. Merkel’s own party drew support not seen since Helmut Kohl unified Germany and the two libertarian parties polled over 9% of the vote.

Much to both parties’ chagrin, the new AfP siphoned critical support away from FDP so that neither earned the 5% necessary to enter the Bundestag.  So while Merkel received a large mandate, in practice it will be difficult to exploit this as she must either enter a grand coalition with the Social Democrats or pick one of the small, leftist parties with which to govern.  This means that Merkel will rule from the center again, which probably indicates a more dovish approach to dealing with the periphery.  Get ready to open your wallets, Germans.

China’s Data Suggest Rebound –

HSBC China Flash PMI 09.2013

Fox News likes to tell us that they report and we decide; not that it works this way in practice, but at least the issue is on their radar.  On the other hand, the affiliated Wall Street Journal does not offer a similar claim.  This is probably why it has reported that China flash PMI has risen to a six month high and decided that the number indicates an economic rebound.

Well, you’re not the boss of me, Wall Street Journal! I am deciding that the six month high in Chinese data represent easy money shenanigans courtesy of your PBOC.  The green arrow indicates the July low in PMI that was cured by record injections of liquidity into the Chinese financial system.  Some of this money is being used to inflate export receipts to create additional funds to invest outside the country, and that is why PMI is rising.  In reality, Chinese manufacturing remains stagnant, not good but not bad either, more like meh.

Euro-Zone Business Activity Rises –

Core v. Periphery PMI Employment Indices

Journalists travel in the circles of banksters, central banksters, government officials and corporate leaders so their views of the economy are very much influenced by these groups.  If you belonged to one of those groups, you could be forgiven for believing that the economy is doing well.  Stock markets are frothy, and now these PMIs are rising indicating a little GDP growth, which is at least better than a contraction.

However, the truth lies in the PMI employment component, which was given short shrift by the mainstream media.  If you take a peek at our chart, you will discover that the Eurozone’s “recovery” just applies to those who own stocks and bonds while employment in the periphery continues to contract. Cheap money may be able to assist corporations financially engineer profits, but it does not seem to promote employment no matter which of the alphabet soup of central banksters you choose: the Fed, BoE, BoJ or ECB.

Draghi Says ECB Will Offer More Long-Term Loans If Needed – Bloomberg.

Draghi Says ECB Willing to Consider More Loans to Banks –

Eurozone Loans to the Private Sector Through 08.2013

There are two reasons for doing something: the real reason and the reason one uses.  The reason Draghi is using to print more money is some wonkish and obscure factors regarding “monetary transmission.” The real reason that Draghi will gladly offer another round of LTROs is that sick European banks cannot easily fund themselves.  Since they are keeping their host countries afloat by continuing to purchase sovereign debt, they cannot be allowed to fail.



Around the Globe 06.07.2013

Fed on Track to Ease Up on Bond Buying Later This Year –

Markets might have gone too far on taper talk: Fed’s Plosser | Reuters.

Greenspan: Taper Now, Even If Economy Isn’t Ready.

Fed Seen Reducing Asset Buying by Smaller Amount – Bloomberg.

Fed QE versus SP500

Everyone is a Fed prognosticator today.  It appears that a change in Fed policy is coming judging from its communications including a Hilsenrath special, but watch how fast the Fed changes its mind when market volatility begins rising.

Germany Cuts Growth Outlook –

Bundesbank dampens optimism over German economy | Reuters.

Eurozone PMI 05.2013

The Bundesbank cut its economic growth forecast for Germany based on weak demand from the Eurozone.  While the ECB sticks to its recovery-right-around-the-corner position, the realistic BuBa realizes that a broad Eurozone recovery is unlikely to occur this year.  With European demand falling, exports are the supposed salvation of the Eurozone.  However, worldwide demand is softening at the worst possible time.  Look for the pace of contraction to accelerate in the third quarter.

Five Takeaways From Jobs Report – Real Time Economics – WSJ.

U.S. Adds 175,000 Jobs, Beating Expectations –

Hiring points to resilience in economy | Reuters.

Payrolls in U.S. Rose 175,000 in May, Unemployment 7.6% – Bloomberg.

US Nonfarm Payrolls

Reading the articles about the jobs report and their headlines, you would believe that the U.S. is in the midst of a booming economic recovery, but it’s not.  The economy needs to create about 400,000 jobs for the next few years just to return to the pre-recession employment situation.  The chart shows just how severe the country’s job loss during the recession was.  Currently, the labor market is not contracting, but it is not growing quickly enough either.  That is what 175,000 new jobs means.

Retailers’ sales rise in May, spending stays moderate | Reuters.

US Retail Sales 06.2013

After the recession ended, people began spending money on purchases that they had delayed due to economic uncertainty.  Since then, retail sales growth has slowed markedly as seen in the chart above.  Real, sustainable increases in consumer spending, which accounts for 70% of the U.S. economy, must be preceded by increases in employment and wages.  As long as the labor market remains tepid, economic growth will continue to disappoint.

Draghi Disappoints as Firepower Becomes Fig Leaf – Bloomberg.

ECB Benchmark Rate 06.07.2013

The problem with the Eurozone is the euro, and no ECB policy can change that.  The alphabet soup of thinly disguised money printing programs will maintain the status quo until it doesn’t, but they will not cure the Continent of its malaise.  A radical freeing of European internal and external markets will stoke growth, but this is a political nonstarter.  Europe will not change until a crisis forces it to.

Mexico Holds Key Rate as Inflation Clashes With Slower Growth – Bloomberg.

Mexico CPI Mexico GDP Performance

The U.S. purchases 80% of Mexico’s exports.  Its slowing economy shows the true state of the American “recovery:” slowing and approaching stall speed.  Mexico’s decreasing GDP growth argues for a rate cut, but persistently high inflation argues against.  The Bank of Mexico is doing the wise thing and maintaining its current interest rate posture to attract foreign capital and maintain the value of the peso.

Euro Stength and the Two Charts That Matter

Mario Draghi Gets the Euro Where He Wants It – The Euro Crisis – WSJ.

Draghi Signals Euro Strength May Hurt ECB’s Recovery Efforts – Bloomberg.

ECB says will monitor impact of euro strength | Reuters.

Financial commentary has become very skewed towards divining what the utterances of the oracles of central banking mean to us mere mortals. All of the mainstream media coverage regarding the strength of the euro and its recent downtick revolves around what Draghi is saying, and no one bothers to check the fundamentals.

Even analysts are deferring more to central banks rather than examining the numbers themselves. I wrote about this trend here, Yen Weakens in Line with Fundamentals | DARECONOMICS. in terms of the recent weakness of the yen. The same analysis applies to the euro.

The euro will continue strengthening. Where it will stop depends on how much the ECB balance sheet shrinks. Outstanding LTRO’s declined €140bn from over €1trn to €873bn since banks were allowed to begin repaying them a few weeks ago. The second tranche of loans will be repaid beginning on February 28. As a show of strength, banks will repay a large sum on the first day of eligibility, shrinking the ECB’s balance sheet further:

Fed to ECB Balance Sheet

From the Wall Street Journal

Furthermore, the Fed’s balance sheet is set to grow €85bn per month for the next year or so. At that rate, the euro may even cross the $1.40 barrier.

The other chart that points to a stronger euro is the balance of trade between the eurozone and the world:

Eurozone Balance of Trade

We are on an upward trajectory here. Declining imports in the austerity racked periphery and a revival in exports among those countries and Germany will increase the trade balance over the coming months. This dynamic will cause an increase in the demand for euros raising the price as the supply decreases due to the ECB’s shrinking balance sheet.

Draghi can flap his gums all he wants, but his words will only cause a temporary respite in the euro’s rise. In order for the ECB to achieve a weaker euro, it must operate on the supply and demand of euros. This entails a monetary expansion of some kind. Currently, the Germans are completely opposed to this, and they’re the ones running the show.

Fundamental Eurozone Problems Covered Up With Cheap Money

Chart courtesy of ZeroHedge

Chart courtesy of ZeroHedge

ECB’s Draghi Says Challenges Remain –

Draghi Hails ‘Positive Contagion’ as Euro Markets Stabilize – Bloomberg.

Mario Draghi believes that the Eurozone will slowly return to health over 2013 as a result of the bond market’s ongoing stabilization. He calls the effects that we are observing a “positive contagion.” The ECB’s intervention has merely hidden the symptoms of the economic malaise rather than curing it, and the Eurozone will continue to stagnate under current monetary policy.

The bond buying pledge via the ECB’s OMT program combined with monetary easing is the cause of the decrease in yields of PIIGS debt. While Draghi also points to significant political progress on a closer economic union among the Eurozone states, this is a fiction. There has been much talk of banking unions and fiscal compacts but no measures have been implemented. The FANG countries will still be required to pay for a banking union, and they have shown no desire to do so.

Draghi boasts of several improvements in the Eurozone financial picture:

  1. Lower bond yields and CDS spreads
  2. Higher stock markets
  3. Low volatility
  4. Low inflation

What is important to remember about these cosmetic improvements is that economic fundamentals underpinning the crisis have barely changed. The PIIGS still have large budget deficits and uncompetitive economies. Unemployment is high, and large internal balances remain within the Eurozone.

The ECB has created trillions of Euros out of thin air, and this money must be deposited somewhere. European banks are purchasing high-yielding PIIGS bonds with cheap ECB loans. Note the steep rise in the ECB’s balance sheet starting in 2011 when it began purchasing PIIGS debt to stabilize the market.

From ZeroHedge

From ZeroHedge

In response to the easing of credit, stock markets have risen. Bears have been driven from the market because no one can fight the printing press. The liquidity provided by the bears has been removed from the system, but the consequences of this event will not be known until there is a panic.

The official rate of inflation remains low because of the recession, not the excellent monetary management techniques of the ECB.

The most significant problem that the Eurozone must solve is its zombie banking sector. The chart at the top of the post illustrates that shoveling money into dying banks may keep them from failing  but it does not spur lending. Loans are what the economy needs to begin growing again.

All of this extra money is either being hoarded at the ECB, or it is being used to purchase higher-yielding PIIGS debt. With the ECB’s OMT guarantee sitting around waiting to be activated, a virtual guarantee on PIIGS debt allows the banks to purchase sovereign bonds yielding 2% or more while paying just 1% to finance the transaction. Since banks are earning riskless profits from this trade, there is very little incentive to originate much riskier loans to the private sector. Large government financing needs are crowding out the private sector.

As long as this monetary policy persists, the periphery should be able to finance itself, particularly since the Swiss National Bank is enabling the ECB’s actions, but this is the topic of another post. Money printing will maintain the stable disequilibrium currently in place in Europe.

The downside to a world where banks and sovereigns are not permitted to fail is economic stagnation. The banks will continue refusing to lend to the private sector, and increased economic activity will not take place.

Draghi Backs Closer Union led by Germany

Draghi Backs Schaeuble Plan for Euro-Region Budget Chief – Bloomberg.

Mario Draghi is in a very unenviable position. He is responsible for the integrity of the euro, but he can only influence monetary policy and affect liquidity. The other problem in the peripheral eurozone economies is that of solvency.

Gobs of cheap money have lessened a liquidity crisis caused by money being withdrawn from periphery because these states do not have the economic power to maintain their budgets. The fact remains that they  are still heading towards insolvency, and there is nothing that Mr. Draghi can do about this. National governments must reform their economies and budgets if they are to back away from the cliff of insolvency.

Under this context, Draghi has little choice but to back whatever the paymasters of Europe want. A national budget portends a great loss of sovereignty, which is a political nonstarter in virtually every member of the eurozone. The only thing worse than a budget tsar to these countries is a budget tsar following German rules.

The truth is the periphery is too poor to protest and will have to march to a Teutonic drumbeat if it wants German money. The question is will the electorate put up with this humiliation.