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No man's life, liberty, or property is safe while the legislature is in session. – Mark Twain (1866)
You see a lot of stupid comments made about the financial crisis and what should be done about it, and one of the most dangerous was made over the weekend by Vince Cable, the UK Business Secretary, when he proposed that the ECB should be given unlimited powers to support the Euro and the region's debt-ridden economies. You can see the full article at Bloomberg here.
My favorite line from Nietzsche's writings is 'when you look into an abyss, the abyss looks back into you'. What did he mean? There's been much discussion. He had syphilis (which attacks the brain in the late stages), and I suspect may have been doing some powerful drugs during his most creative period, but I think what he probably meant was that that if you look into your dark side too much, then your dark side may come to dominate you. Certainly true of some famous Nietzsche enthusiasts, Hitler in particular.
We're looking into a different sort of abyss today, but as I was considering the potential abyss below on EURUSD particularly this morning the quote came to mind, so I thought I'd mention it.
I don't have a PhD in Economics, and perhaps if I did, some of the oddities of modern economic policies, as practised by central bankers nowadays, wouldn't seems as strange.
One of those oddities is the strong superficial similarity between the policies of spendthrift governments printing money to cover deficits, in the manner that led to hyperinflationary meltdowns in Weimar Germany and Zimbabwe, and modern quantitative easing, where governments run large deficits to boost growth, selling bonds to cover the deficit, while for unrelated reasons their central banks create large quantities of money to buy bonds and thereby boost liquidity.
Equally the layman might think that if a policy isn't working, then it might be worth considering alternatives, while the PhD economist's trained mind and keen vision can see that initial failures are due to not pursuing the strategy vigorously enough, and that redoubling the effort will be sure to yield results.
I was talking about the possibility yesterday that we could see a major bearish reversal, and we may be looking at that starting now, though a visit to 1185/90 support on ES doesn't become a likelihood until the ES rising channel support at 1240 is broken, and that's holding on the first test so far.
How serious is this move overnight? Potentially very serious indeed. It has been triggered by Italian bond yields moving over 7% and that has been triggered in part by some vey stupid moves by European leaders. Firstly banks in the Eurozone are being very strongly encouraged to mark their weak sovereign debt to market, which means that a lot of them are just reducing or selling out their holdings altogether. Margins on weak debt have also been raised and all this selling has taken italian debt over the important 7% level. Over 7% the debt becomes harder to roll over and Italy is on a slide towards default that may not be easy to reverse. Greece is a small two bit economy that has been a major struggle to rescue. Italy is much bigger and owes an awful lot of money.
I have a bearish bias that I have to struggle with. The source of my bearish bias is that I've read an awful lot of history and economics, and have always been skeptical about the existence of the Tooth Fairy and Santa Claus. I don't believe that well-meaning folly results in happy endings as a rule, and current world economic policies look like slow fiscal suicide in historical terms.
However I try to put that bias aside as far as possible because history also teaches us that hubris can last quite a while before nemesis arrives to set things back on the proper path, and this collective delusion of the developed world that anaemic growth caused largely by too much debt, can be corrected by amassing more debt to grow our way out of it, might continue for a while longer.
Ultimately this period should end with the bond markets demanding high real interest to lend to governments who have become doubtful credit risks, and a consequent change in policy that corrects the problem through austerity to return government finances in the developed world onto a sustainable long term path, and possibly also default, either by classical or inflationary means.
