Alan's Finance Blog

European Union Agreement: Good or Bad for the Dow Industrials?

By Elliott Wave International

Did European Union leaders make the sovereign debt crisis “go away” last week?

Not even close. What they did agree on is tougher budget rules:

“…17 countries of the euro zone…agreed to run only minimal budget deficits in the future and allowed the European Court of Justice the right to strike down national laws that don’t enforce such discipline properly…”
Wall Street Journal, (12/9)

Will the EU agreement prove bullish or bearish for world stock markets, including the Dow Industrials?

Let’s put it this way: The evidence suggests that government intervention in the economy does not alter the dominant trend of financial markets.

For example: Look at the DJIA chart and try to identify when the U.S. government bailed out Fannie Mae, Freddie Mac, and other financial institutions.

“[The chart below] shows that in fact these actions took place in the early portion of the biggest stock market decline in 76 years. These actions did not push stock prices back up. The market finally bottomed months later, at a time when nothing along these lines happened.

“It is no good to claim that these actions had results eventually. By that reasoning, any future turn in the stock market would prove the contention.”
Elliott Wave Theorist, March 2010

If anything, the face value of this chart argues that economic government intervention makes stocks go down.

There is simply no “cause and effect” relationship between government actions and stock market trends.

The stock market’s price pattern is governed by the Wave Principle:

“Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own. It is not propelled by the external causality to which one becomes accustomed in the everyday experiences of life.

“….The market’s progression unfolds in waves. Waves are patterns of directional movement.”
Elliott Wave Principle, (p. 21)

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Ron Paul – Beware the Coming Bailouts of Europe

The economic establishment in this country has come to the conclusion that it is not a matter of “if” the United States must intervene in the bailout of the euro, but simply a question of “when” and “how”. Newspaper articles and editorials are full of assertions that the breakup of the euro would result in a worldwide depression, and that economic assistance to Europe is the only way to stave off this calamity. These assertions are yet again more scare-mongering, just as we witnessed during the depths of the 2008 financial crisis. After just a decade of the euro, people have forgotten that Europe functioned for centuries without a common currency.

The real cause of economic depression is loose monetary policy: the creation of money and credit out of thin air and the monetization of government debt by a central bank. This inflationary monetary policy is the cause of every boom and bust, yet it is precisely what political and economic elites both in Europe and the United States are prescribing as a resolution for the present crisis. The drastic next step being discussed is a multi-trillion dollar bailout of Europe by the European Central Bank, aided by the IMF and the Federal Reserve.

The euro was built on an unstable foundation. Its creators attempted to establish a dollar-like currency for Europe, while forgetting that it took nearly two centuries for the dollar to devolve from a defined unit of silver to a completely unbacked fiat currency note. The euro had no such history and from the outset was a purely fiat system, thus it is not surprising to followers of Austrian economics that it barely survived a decade and is now completely collapsing. Europe’s economic depression is the result of the euro’s very structure, a fiat money system that allowed member governments to spend themselves into oblivion and expect that someone else would pick up the tab.

A bailout of European banks by the European Central Bank and the Federal Reserve will exacerbate the crisis rather than alleviate it. What is needed is for bad debts to be liquidated. Banks that invested in sovereign debt need to take their losses rather than socializing those losses and prolonging the process of adjusting their balance sheets to reflect reality. If this was done, the correction would be painful, but quick, like tearing off a large band-aid, but this is necessary to get back on solid economic footing.  Until the correction takes place there can be no recovery. Bailing out profligate European governments will only ensure that no correction will take place.

A multi-trillion dollar European aid package cannot be undertaken by Europe alone, and will require IMF and Federal Reserve involvement. The Federal Reserve already has pumped trillions of dollars into the US economy with nothing to show for it. Just considering Fed involvement in Europe is ludicrous. The US economy is in horrible shape precisely because of too much government debt and too much money creation and the European economy is destined to flounder for the same reasons. We have an unsustainable amount of debt here at home; it is hardly fair to US taxpayers to take on Europe’s debt as well. That will only ensure an accelerated erosion of the dollar and a lower standard of living for all Americans.

Ron Paul – US Congressman

What Is Backing Your Deposits in the Bank?

By Elliott Wave International

Is the bank really the safest place to keep your money? Robert Prechter joins the Mind of Money host Douglass Lodmell to discuss what backs bank deposits and how you can keep your hard-earned money safe.

We invite you to watch the interview below. Then read Robert Prechter’s free report, Discover the Top 100 Safest U.S. Banks.

What is the best course of action to safeguard your money? Read our free 10-page report, Discover the Top 100 Safest U.S. Banks, to learn: The 5 major conditions at many banks that pose a danger to your money. The top two safest banks in your state. Bob Prechter’s recommendations for finding a safe bank. And more! Download your free report, Discover the Top 100 Safest U.S. Banks, now.

The Light Bulb Moment for the Eurozone

EWI’s free EU debt report sheds some light on what’s in store

By Elliott Wave International

How many European bankers does it take to change a light bulb? That’s a joke in search of an answer, but EWI’s European analyst Brian Whitmer explained five months ago that the “light bulb moment” was coming — that’s the time when most people would clearly recognize the severity of the European debt crisis. He offered this spot-on analysis back in July 2011, before the larger world came to know recently how bad things really are in the eurozone.

This chart shows how markets in Greece, Ireland and Portugal have behaved over the past five years, including the bailouts. Whitmer says that the turmoil in Greece is due mostly to both social mood and Greek markets having plummeted for more than a year and a half, while the larger EU stock markets have levitated. Once they turn down, he forecasts that what you saw in Greece will be replayed in the eurozone.

To help his subscribers see the light and get the full picture, he compared EU member nations under financial scrutiny to those that are usually viewed as being safe — and showed that they weren’t as safe as most people thought.

Specifically, Whitmer warned that the debt per person in Greece looked eerily similar to the debt per person in highly regarded countries, such as Germany and France — and even to non-eurozone countries, such as the United Kingdom.

In 2010, Britain proposed a five-year, 25% budget reduction that affects nearly every area of the government. While it sounds like a drastic measure, it has played out differently during the past year. According to member of European Parliament Daniel Hannan, statistics show that not only is government spending and borrowing significantly higher than this time last year, but taxes, too, are way up. Whitmer notes that the budget cuts rely heavily on the future and lack near-term bite.

Why has the worst of Europe’s violence taken place on the streets of Athens rather than London? Athenians did not suddenly grow more violent in 2011. What has changed since 2007 is their stock market. Whitmer’s words of advice: “…should your country’s stock market begin to look like Greece’s, watch out. Trouble will be on the way.”

*****

European Financial Forecast Editor Brian Whitmer has covered Europe’s debt crisis since March 2010 — and his forecasts kept subscribers ahead of the downward spiral every step of the way. Read more of his analysis in our free report, “The European Debt Crisis and Your Investments.”

View your free report.

Free Report The European Debt Crisis and Your Investments Continue reading more articles like this one by Brian Whitmer in our European Debt Crisis report. This free report offers commentary from February 2010 through November 2011 that will help you to better understand what could be in store in the coming months and years. Download your free report now.

He Chose Well

By: Paul Tustain

David Cameron was today forced in Brussels to choose between the free market and the vanities of overreaching politicians…

TODAY is a very sad day. We believe that the markets are telling us that there is a horrible abscess in Europe, and that the Euro is the pus. We believe that fuelled by injustice, the infection of nationalism will now tear Europe apart – making outright enemies of Germany and Greece, France and Italy, the Netherlands and Spain.

Our European friends are today irritated by Britain’s refusal to come to their drunken party. Not for the first time we are the odd man out, and being pointed at by the shallowest politician in Europe. It’s OK. We can live with a little name-calling for the moment, and we look forward to quietly rebuilding our friendships with every one of you in the future. We hope it will be soon.

You are right. Our financial system contributed – in part – to the mess we are in. But you are wrong as to the reason and the solution. What happened is that over a period of years the political classes in London, New York and the smaller financial centres of Europe worked together to hold down the cost of credit. Ever since 2001 they suppressed the will of the market for higher interest rates. They did this to foster the ‘feel-good factor’ and to get themselves re-elected. It was the irresponsible and self-serving policy of elected representatives all over the western world, and it is without any doubt the root cause of the explosion of credit which we now have to pay for.

The result of the explosion of credit was an enormous pile of cash accumulated at the banks of the world. It represented the savings of an older generation, and there was far too much of it. It was lent very unwisely. That happens. It’s life. And usually it means the creditors lose their money and gain some wisdom.

Only this time some of the creditors – particularly Germany and France – don’t want to lose their money. They want to force two or three generations of Greeks, Irish, Portuguese, Italians, Spanish and Belgians to pay, pay, pay. Germany and France lent to your father, yet you become the indentured slave.

That should never be how bad money-lending is resolved. The lender should take the hit when the borrower cannot repay; it helps to focus his mind before he lends. In Britain we got rid of inter-generational debt servitude 200 years ago, and it is not progress to return to it.

As it happens in Britain we have the same deep insolvency problem to resolve, but it is going to be resolved in a different way. Our government is going to have to print to eliminate the debt – just watch. There is going to be a storm and Sterling will be murdered. Interest rates are going to climb sharply as world markets demand the return of their rightful position as the setters of the cost of money. Those rate hikes and concomitant inflation are going to eliminate twenty five years of savings, and twenty five years of a silly, credit-fuelled house price bubble. By the time it ends the creditors will have paid in full. Houses will be again affordable by anyone with a half decent job. Retirement at 55 will have been consigned to the dustbin. Student loans will have inflated to irrelevance, and Britain will again be a great deal fairer than it currently is.

In Europe you will doubtless laugh quietly as this storm hits us. But you will have no reason to make war on us, and you won’t want to, because your strength will be all used up making war on each other. We do not believe that 1,000 years of carefully constructed and often hard fought mutual independence should be sacrificed on the altar of a bad monetary union. We do not believe the people of Europe will want it when nationalist tensions materialise. We think that Europe’s political class is making a monumental error in order to hold on to something which carries their political credibility. We think they will fail and that Europe will suffer dreadfully for it.

It is a black day, because contrary to your belief we love Europe. We also love our free market and the way it exposes the vanities of overreaching politicians. Today you forced David Cameron to choose between the two, and he chose well.

Paul Tustain

Director

Settlement-systems specialist Paul Tustain launched BullionVault in 2005 to make the security and cost-efficiencies of the professional wholesale gold market available to private investors. Designed specifically to meet his own gold ownership needs as a risk-averse investor, BullionVault now cares for some $1.5 billion of client gold property, all of it privately owned in the client’s choice of low-cost, market-accredited facilities in London, New York or Zurich.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

The Catfish, Your Savings & Japan’s Gold Coin Giveaway

Don’t be greedy, or a giant catfish might force you to spew out your savings…

UNLIKE us – who are so smart today – ancient folk in ancient times used to believe the oddest things about how the world worked.

The Japanese, for instance, long thought that earthquakes were caused by a giant catfish, shuffling and shifting whenever the great god of Kashima forgot to keep his foot on a heavy stone which held the beast down, deep beneath the coast of Honshu. Honoring the Kashima shrine, some 80 miles north-east of what was then Edo (modern-day Tokyo) was therefore a good idea. Because tectonic upheaval, causing death and destruction, was a sign that the god was neglecting his duty.

November 1855 saw Kashima skip town, or so legend soon had it, leaving the god of fishing in charge of the stone and the catfish. What a mistake! The Great Ansei Earthquake killed 7,000 people at a stroke, and many more in the days and weeks after.

But it wasn’t all bad…

“Don’t be greedy!” one of the laborers urges his mates in this popular print, Mr.Moneybags launches forth his ship of treasure. “You’ll regret it if you save this money and an earthquake comes.

“Better go and spend it at the brothels and keep it circulating.”

The Kashima shrine itself was damaged in March 2011′s catastrophe. But the poor idiots of old-time Japan would still find a silver lining. Although some of the hundreds of namazu-e (catfish pictures) from 19th-century Japan show the beast captured and beaten – or even committing hare-kiri to say sorry – he also became a folk hero to laborers and shopkeepers, because he forced the wealthy to spend money on repairs and rebuilding.

Think of it as a divine take on Bastiat’s “broken windows” parable. Knocking things down is good for society (or so society says), since the glazier is paid and then spends that money in turn. Earthquakes are great for production, because they force cash out of locked chests into the pockets of carpenters, plasterers, bricklayers and masons – just the right type to keep it circulating again.

“For Edo residents,” one scholar explains, “the earthquake of 1855 was an act of yonaoshi, or ‘world rectification’.” In print after print, catfish shake or squeeze wealthy old hoarders who vomit or shit out gold coins, quickly scooped up by dancing laborers eager to spend it on booze, noodles and trips to what’s now known as Soap Land.

“Like typhoon-season floods and dry-season fires,” notes another 2011 look back, “earthquakes and tsunamis were understood as corrections of temporary imbalances in the vital force perpetually flowing through the world (known in Japanese as ki and in Chinese as qi). Periodic eruptions of natural violence released pent-up force and kept both nature and human society healthy by renewing them…Confucian philosophers as well as ordinary people believed that the economy followed the same principles. Just as ki flowed continuously in nature, money should be kept moving in the economy too, not allowed to stagnate and foster greed. For this reason, many people viewed capital accumulation distrustfully. Nature, they believed, censured it.”

Could anyone hold such a medieval view of economics today? Not outside a central bank or university, you might think. But greed is central to our depression’s mythology. From there, the attack on capital accumulation can’t be far off. And it’s ironic that to help keep money moving after the terrible earthquake and tsunami which hit Honshu this spring, Tokyo is now offering gold coins to investors buying its reconstruction financing bonds. On the minimum ¥10 million investment ($150,000) needed to qualify, however, Japan’s reconstruction bonds pay 0.05% per year without the coin, and a barely less miserly 0.3% with it if gold stays at today’s prices by the end of 2014. So the net effect is still to shake down Mr.Moneybags – otherwise known as Japan’s diligent household savers today.

Anyone calling this special half-ounce commemorative gold coin an “incentive” might sound like they need to raise money themselves to buy a calculator. But it’s not the first promotional effort tied to Japanese government bonds. Word reaches us here at BullionVault that special flyers – posted by door-drop in Tokyo – have recently been advertising government debt straight through the mailbox. As for coupons and premia, the Nomura brokerage is already offering its retail clients free shopping vouchers if they buy JGBs and lend to the government, too.

“The wealth of the realm belongs to the realm,” wrote Confucian scholar and advisor Yamaga Soko – who also developed the Samurai code of chivalry, bushido – in the mid-17th century. “It is not the wealth of a single person. Well should it circulate.”

Now compare and contrast French politician and essayist Claude Frédéric Bastiat writing 200 years later. “What would become of the glaziers, if nobody ever broke windows?” he asked in his famous parable of 1850, paraphrasing the “vulgar” mob who applaud the shards of glass on the street. Yet it is the shopkeeper needing to get his window fixed, “the shoemaker (or some other tradesman), whose labour suffers proportionably by the same cause…who is always kept in the shade…who shows us how absurd it is to think we see a profit in an act of destruction.” It is also the tradesman who stands for the capitalist, the diligent drudge minding his business. Shaken down like old Tokyo’s Moneybags, he can only watch in horror as his money – his treasure – is launched forth to common approval.

Here in the early 21st century, Occupy Wall Street think they know just who to choke with a catfish. “Hey, Paulson, you can’t hide, we can see your greedy side!” chanted the self-declared 99% at the hedge-fund manager in October, little caring that his fund has halved in value in 2011-to-date. The echo-chamber of TV news and financial blogs reckons the entire system is run by greedy bastards anyway. No doubt they’re right, but even before the crisis blew up, Fed chairman Ben Bernanke long ago blamed Asia’s savings glut for building imbalances in the global economy.

So how to shake cash from the hoarders? A Tobin tax on financial transactions looks a good start, even though retirement savers will end up paying, of course, as their pension-fund managers pass on the cost. Capping bank dividends only hurts savers again, because their income depends on such yields. Setting interest rates at zero aims to scare (or at least hurt) them for not spending money today. So too does printing more money, as Japan’s modern-day Moneybags know only too well.

“Your key financial asset, your medium of exchange – money – is also a savings vehicle (a store of value) and a safe asset (a unit of account),” explains Berkeley professor Brad DeLong. So “if an excess demand for financial assets is seen to cause a collapse in production and employment” – especially money hoarded in money, rather than being spent on new windows and brothels – “then it would seem immediate and obvious that generating an excess supply of financial assets would cause a revival.”

Immediate and obvious like a giant catfish making the rich puke gold coins, perhaps. Forcing a revival of spending by flooding the market with cash still hasn’t worked in Japan, but it has led to door-drops and vouchers to try and find new loans for the State. And further to DeLong’s proposal, our key financial asset and means of exchange is now something else, too: money is first and foremost a credit, held on deposit rather than hoarded in sock drawers at home. And being a credit, rather than tangible property, the vast bulk of money today is already out of the savers’ control.

Today’s Mr.Moneybags is by definition a lender. Indeed, his money’s already been lent out with gusto. The old miser has no choice; cash on deposit is owed to him, he does not own anything inside the bank’s vaults. On the bank’s balance-sheet, his savings are deemed “liabilities”, while on the other side of the ledger sit the banks’ “assets” – the loans it has made, using Moneybags’ cash. If the old miser (aka retiree or saver) withdraws all his cash, some debtor somewhere must repay their loan. And debt forgiveness is already being talked up – whether for governments in Europe or over-spent US consumers.

So blame greedy hoarders if you like. Just watch for the mob gathered round your broken windows, ready to choke you with a metaphorical catfish.

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Prechter: “The Trend Is Exhausted”

Robert Prechter explains what’s the real problem with today’s market

By Elliott Wave International

What is the real problem with today’s market? Watch this excerpt from Robert Prechter’s special, video issue of the August 2011 Elliott Wave Theorist. Prechter shows you how the buildup of dollar-denominated debt has brought us to what he calls a critical market juncture.

Get even more information about current market trends and how to prepare for what’s ahead with our new 14-page investing report. See details below.

The Most Important Investment Report You’ll Read for 2012 Every year or two Elliott Wave International (EWI) publishes analysis with a message so critical that they decide to share it, FREE. They have just released The Most Important Investment Report You’ll Read for 2012, a free report to help you navigate the markets and prepare for what’s ahead. You’ll get hard facts, 25 eye-opening charts and 14 pages of straightforward commentary that will put the volatile market action of the past months into perspective within the “big picture” to help you position for the years to come. Download your free report now.

Get Your Free Report: The European Debt Crisis and Your Investments

Dear Investor,

In 1999, 11 European countries surrendered their currencies for the euro and a shared monetary authority. But as the world applauded, Elliott Wave International (EWI) forecast that those countries had also sealed a shared fate: to eventually collapse together in a liquidity-driven deflationary spiral.

Barely a decade later, the once-celebrated EU and its currency are facing collapse. In November 2011, EWI observed that its “pageant of concession and agreement focuses (now) on rescue and preservation rather than expansion.”

EWI’s analysts have been anticipating and tracking the credit contagion across the European nations for the past two years. Back in December 2009, EWI analyst Brian Whitmer warned that a set of troubling events across Europe were signaling that the entire continent was on edge.

In April 2011, Whitmer wrote:

Back in February 2010, we stated, “Greece’s woes aren’t over and neither are its neighbors.” Four months later, as nearly every country in Europe said they would avoid a “Greek-like fate,” the June 2010 issue added, “The only thing separating these countries from Greece is the fragile confidence that they are, indeed, distinct.”

Will the Central Bank coordination bolster confidence enough to turn around the economies of the world? Or is this just another hopeful attempt that will provide nothing more than a short-term fix?

You owe it to yourself and your investments to find out. Remember, even if you believe you’re not directly invested in Europe, there’s a very good chance that some of the companies in your portfolio are — possibly even your money market funds.

Gain a valuable perspective on the European debt crisis and get ahead of what is yet to come in this free report from Elliott Wave International.

Read Your Free Report Now: The European Debt Crisis and Your Investments.

About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private around the world.

Gift Wrapped Liquidity

Is the ECB about to give Europe’s governments and banks the biggest Christmas present of their lives…?

WITH CHRISTMAS a little over three weeks away, the European Central Bank may be about to hand indebted European governments – not to mention its banking sector – the biggest gift they ever received: an unlimited credit backstop.

It is now being widely reported that there ‘only ten days left to save the Euro’. Even Metro – the free newspaper found discarded by commuters on British trains and buses each morning – made it their front page splash today.

The FT’s Wolfgang Munchau was pushing this meme earlier in the week – but it was European commissioner for economic and monetary affairs Olli Rehn that really got it going with these comments yesterday:

“We are now entering the critical period of ten days to complete and conclude the crisis response of the European Union…There is no one single silver bullet that will get us out of this crisis.”

The ten day dead deadline refers to the European leaders’ summit at the end of next week. Is such a deadline justifiable? Will the Eurozone begin to disintegrate if no convincing solution comes out of that summit?

Quite possibly. Predictions of Eurozone demise within the fortnight could turn out to be self-fulfilling. An ultimatum has been laid down – if politicians appear to have ignored it, it could be fatal for what little confidence investors have left in Europe.

All of which could go some way towards explaining yesterday’s coordinated central bank action. The headline move was the lowering by 50 basis points (half a percentage point) of the cost of borrowing US Dollars. This makes sense given the speed at which international capital is fleeing Europe, as investors head for the perceived safety of the world’s sole reserve currency.

The coordinated central bank statements, though, seem to be preparing the ground for something else too. The following paragraph was common to all six of the central banks involved in the action (The Federal Reserve, the ECB, the Bank of England, the Bank of Japan, the Bank of Canada and the Swiss National Bank):

‘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 US 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. The swap lines are available until 1 February 2013.’

In other words, central banks are preparing to step up their provision of currencies other than the Dollar. This could be a sign that the ECB is about to take a more active role in the Eurozone crisis.

Indeed, each central bank’s statement had a version of the following, taken from the ECB, dealing with its own particular currency:

‘The Governing Council of the European Central Bank (ECB) decided in co-operation with other central banks the establishment of a temporary network of reciprocal swap lines.  This action will enable the Eurosystem to provide Euro to those central banks when required, as well as enabling the Eurosystem to provide liquidity operations, should they be needed, in Japanese Yen, Sterling, Swiss Francs and Canadian Dollars (in addition to the existing operations in US Dollars).’

Here’s a rough outline of where we stand in this crisis:

• Investors are wary of Eurozone government bonds. This reluctance to lend to governments has pushed borrowing costs to unsustainable levels in Italy and Spain. France may be next.

• It is hoped that the Eurozone’s rescue fund, the European Financial Stability Facility, will be able to solve this problem by ensuring there is sufficient demand at government bond auctions to bring yields back to sustainable levels – for example by offering partial guarantees on losses. However, the EFSF lacks the necessary funds to do this for larger countries, and is having trouble raising cash itself.

• French finance minister Francois Baroin has called repeatedly for the EFSF to be given a banking license so it can borrow from the ECB (Germany is dead against this). And here’s what Bank of France governor and ECB Governing Council member Christian Noyer said yesterday: “In a period of intense market disruption, it is essential to ensure that the monetary policy transmission mechanism actually works. This may involve temporary and exceptional interventions on those market segments where dysfunctions are most apparent.”

• European leaders now have a de facto ultimatum: sort this out by the end of next week, or else.

There is an ongoing push, led by Germany, for a ‘fiscal union’ – involving greater oversight of national budgets and the like. But fiscal integration is preventative measure – not a solution to a crisis that has already erupted.

Markets are looking for a solution this side of Christmas. The only agent in a position to act that quickly is the ECB.

ECB president Mario Draghi spoke to the European Parliament this morning. While he gave his support to what he called “a new fiscal compact”, he did make some comments that may hint at further ECB action over and above its ongoing bond purchase program (which clearly isn’t working, as Italian and Spanish bond yields attest).

“As you know, the ECB’s monetary policy is constantly guided by the goal of maintaining price stability in the Euro area over the medium term,” said Draghi.

“And when I say this, I mean price stability in either direction. This applies to both the setting of official interest rates and the implementation of non-standard measures.” (emphasis ours).

There was also this potential hint:

“I am confident the new surveillance framework will restore confidence over time. I am also quite sure that countries overall are on the right track. But a credible signal is needed to give ultimate assurance over the short term.” (emphasis again ours)

Might that “credible signal” be an offer to provide whatever liquidity is needed to assuage fears in key markets?

There are several mechanisms, for example, by which the ECB might seek to prop up government bond prices (and thus keep yields down). It could find a way, as touched on above, to get more Euros into the hands of the EFSF. It could buy the bonds directly at auction (unlikely, and currently forbidden by several European treaties, but at this stage of the crisis little can be ruled out…). Or perhaps some other method would be found.

The net aim is the same whatever the mechanism: to get Euros to governments who need to roll over their Euro-denominated debt. If there are insufficient investors willing to hand over their Euros, logic suggests that one solution is to turn to the ECB, from whence Euros originate. The ECB, after all, has access to an unlimited number of Euros.

There are also fears over the banking sector, which yesterday suffered a swathe of downgrades from Standard & Poor’s (which in turn may have precipitated the central banks’ announcement). Lower ratings could seriously impair some banks’ ability to borrow in the money markets – which is also a reason we see the world’s lenders of last resort priming their pumps.

In short, get ready for a world of uncapped credit availability, as the authorities step up their fight against deleveraging – like the cavalry in a Western, riding over the hill when all hope seems lost. Saddle up, Draghi!

Long term, a liquidity boost would tend towards a higher gold price, other things equal. However, there could be significant downside risk for gold, with or without a solution being announced at next week’s summit.  If markets are unconvinced, we could see the sort of mass liquidation that has been common in recent weeks – and that has hit gold and silver along with stock markets.

If, on the other hand, the markets buy whatever the Euro leaders are cooking, then we could see some weakening of safe haven demand for gold, at least in the immediate term.

Either way, though, Europe will still be in a mess. Growth is sluggish (today’s Eurozone purchasing manager’s index shows a manufacturing sector shrinking at an accelerating rate).

Outstanding debts, therefore, will either be dealt with via default, or they will have their real value diminished – which means reducing the value of money itself. Default or devalue remain the watchwords for creditors.

So while the ECB may be convinced that it has ‘ten days to save the Euro’, if it ramps up its liquidity provision it could end up doing the exact opposite.

Ben Traynor

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Where Would We Be Without Rules?

“Where would be if we didn’t have rules?”

“FRANCE!”

“And where would we be if we had too many rules?”

“GERMANY!”

– UK comedian Al Murray, the (very British) Pub Landlord

“The GREAT DEPRESSION was caused by the Gold Standard,” reckons NYU professor and professional media star, Nouriel Roubini.

Like pretty much everyone else, Roubini thinks the Gold Standard’s tiresome rules brought about that cataclysm. Those manacles meant having to swap paper for bullion every time investors and savers got jumpy about the size of your deficit, your debt or your money-printing.

Really, what an idea! So 80 years later, the Gold Standard is deader than punk. Yet here we are in another depression again.

What’s caused this catastrophe if gold was to blame before?

“First, it is Europe itself that is in crisis. Not finance. Not the economy. Europe. Its culture. Its genius. Its unconscious conscience. Its immemorial and its memory. All that makes up its bases and its origins. Its heart, that beats more and more faintly. Its soul. Its common and hidden grammar. The distinction, that it invented, between law and right. Or between man and citizen. The articulation, that is its own, of multiple forms of the Multiple and of the unique name of the One…”

There’s more of this – much, much more – from French “superman and prophet” (© Vanity Fair) Bernard Henri Lévy. A “vain, pontificating dandy” according to the professional pie-thrower who’s been attacking Lévy’s enormous hair since the mid-80s, the nouveau philosophe “[has] no equivalent in the United States,” according to his biog’ on the Huffington Post. Which is lucky for the US. Because in France, Lévy “is accorded the kind of adulation that most countries reserve for their rock stars,” says the UK’s Guardian.

Scarier still, he’s best-friends-forever with French president Nicholas Sarkozy. Most scary of all, Lévy would in fact make a clear and sensible point, if only he swapped the word “Europe” for “money” above. Deflation is a “deterioration of the monetary standard” just as much as inflation, as sometime Reagan advisor and WSJ editor Jude Wanniski noted in 1982. No less disastrous for everything built on the grammar, culture and genius of money than its apparent opposite, deflation is “characterized by falling prices”. And as money rises in value, “it affects more and more debtors in global Dollar contracts” – the Dollar still being money today, and the only cash that counts in a panic.

Research shared with BullionVault today shows that, in 8 out of 10 of the best weeks for equities since 2007, the Dollar fell on the currency market. It rose in each of the worst 10 weeks for stocks. You might have noticed this mechanism gutting your portfolio again this month, as well. But what of the Dollar’s sometime challenger for reserve currency status?

“The Euro represents the mutual confidence at the heart of our community,” declared Wim Duisenberg, then-president of the European Central Bank, when accepting the Charlemagne Prize on behalf of, well, on behalf of the Euro currency itself, in 2002.

“It is the first currency that has not only severed its link to gold, but also its link to the nation-state. It is not backed by the durability of the metal or by the authority of the state.”

Lacking those two legal attributes – attributes held by pretty much all money ever until the mid-20th century – the Euro did have rules, however. “In order for [monetary union] to function smoothly,” as the European Council still says today (just above a warning that “this page is under revision”), “member states must avoid excessive budgetary deficits. Under the provisions of the Stability and Growth Pact, they agree to respect two criteria:

“A deficit-to-GDP ratio of 3% and a debt-to-GDP ratio of 60%.”

Now, if everyone had stuck to those rules, perhaps the Euro would have avoided this crisis. (Not adding the debt of your entire banking sector to the deficit, as Ireland did in 2008, would have helped too.) But nobody kept to 3-and-60, because those rules were just rules, and they were there to be broken.

“If a Member State exceeds the deficit ceiling, the excessive deficit procedure (EDP) is triggered at EU level. This entails several steps – including the possibility of sanctions – to encourage the Member State concerned to take measures to rectify the situation.”

Tough talk! The “possibility” of sanctions would “encourage” miscreants to “take measures”, or so the Growth & Stability Pact pretended. Yet as we wrote a year ago, nearly 12 months to the day, the “ghost of the Mark” (as Nobel-winning economist and ‘father of the Euro’ himself Robert Mundell called it) saw the Euro’s strict rules – learnt and applied during 50 years of Teutonic discipline – over-run at every turn.

• The European Central Bank’s own target for money-supply growth first became merely a “reference value”, and then it was ignored outright. Set at 4.5% per year to start, it hit well over 12% at the height of the banking bubble in 2006-7;
• Luxembourg aside, all member states have long since breached the Eurozone’s government deficit and debt ceilings – Germany included;
• Barred by its founding treaty from financing government deficits directly, the ECB first bailed-out commercial banks by lending to them against government bonds put up as collateral, and then threw the whole thing over by agreeing to buy and hold government bonds outright – the weaker, the better, of course.

There has been resistance, of course. But it was awful late in coming. German ECB member Axel Weber stood down in February 2011, proclaiming discomfort at the majority of his central-bank colleagues voting to buy government bonds to shore up Athens, Dublin and Lisbon. Yet this was over nine months after the first Greek deficit crisis, and a mere eight years after Germany and France breached the 3-and-60 rules themselves. Where were his principles when breaking the rules didn’t matter?

Six months after Weber, the ECB’s chief economist Jürgen Stark also made a principled stand, announcing that he would leave his post, two years early, in December. Why? Because “If the central bank starts to finance governments, it decreases the incentive for governments to address the root causes of the crisis,” as Starck told an interviewer last week.

“It is not so much that bond purchases will lead to inflation at this particular moment. The ECB regularly draws down the liquidity again; it later soaks up the money spent. What is important and problematic is that the interest rate on government bonds is affected by the purchase of bonds and thus has a fiscal effect.”

Buying bonds, in short, means that the independent ECB policy wonks “influence the conditions under which governments can borrow,” says Stark. “This is absolutely not our job.” Given that everyone knows the rules are being broken, of course, “There is an open discussion about extending our mission,” says the ECB man. “This not only affects our independence, it threatens it.

“Principles apply…Rules are there to give direction, especially in times of crisis.”

How brave, insightful and utterly naïve! Tilting at windmills, Stark misses the one true lesson of the Great Depression’s Gold Standard just as badly as Nouriel Roubini does. Hasn’t anyone got a library card these days?

“The advantage of gold, in theory, is that it affords a safeguard against the dishonesty of Governments,” writes British philosopher Bertrand Russell in a dusty tome from 1935. “This would be all very well if there were any way of forcing Governments to adhere to gold in a crisis, but in fact they abandon gold whenever it suits them to do so.”

Replace the word “gold” with the words “Europe’s Growth & Stability Pact”, and you’d think it was the end of November 2011. And just like the Euro’s would-be saviors today – or at least, just like those world-improvers who don’t believe rules should get in the way – Russell thought the only solution to mankind’s economic problems was “an international Government”. That way, tiresome democracy would be made irrelevant as expert technicians did the best for all in all possible ways.

Now voters in Greece, Ireland, Portugal, Spain and most plainly Italy have shown they can’t handle democracy – not in a rules-based currency system. Time and again they have voted for people and policies which now make the rules aimed at defending the State’s independence impossible. Little wonder their sovereignty’s now vanishing, along with the rules.

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.