We know about the game of chicken. Teenage boys in hot rods drive toward each other to see who will swerve first: “Chicken!” It is happening in Europe.
There is going to be a crash. That crash will lead to an explosion, which will be felt in the USA. The credit markets are intertwined.
This is becoming obvious to at least a few financial columnists in the mainstream media. Consider this warning:
We appear to be heading for a re-run of the fateful times nearly 20 years ago — at the height of the September 1992 exchange rate mechanism crisis — when President François Mitterrand browbeat Chancellor Helmut Kohl into urging the Bundesbank, after much tergiversation, to defend the French franc. If the Bundesbank had its way in remaining on the sidelines while the markets sold down the franc, Mitterrand told Kohl, the Bundesbank would be “the last one standing on a field of ruins.”
It could really become a field of ruins. But Europe’s economic fate is interlinked with ours.
The European Central Bank refuses to bail out the bonds of Europe, or so we are told. Behind the scenes, it may be ready, but not yet. The central bankers are waiting for the politicians to act. They refuse to act.
Expect, therefore, at some stage in the dramatic days ahead, another confrontation between these two latter-day standard-bearers of Franco-German cooperation, President Nicolas Sarkozy and Chancellor Angela Merkel. There will be talk of final sacrifices, of fateful overtures to protect the monetary union as the totemic instrument of European brotherhood. All this will divert attention from the real battle that is going on, at the heart of the ECB itself.
The governments cannot force the ECB to inflate. It is legally independent. The ECB does not want to take the blame for the looming crisis.
The ECB, meanwhile, like a thin red line of 19th century British soldiers under attack from Zulu hordes, is standing firm — yet remains ready to counter-attack when and if the going gets better. No one who has visited the ECB in recent days, however, can be unaware of the central bank’s immense irritation at the incapacity of European politicians to assemble sufficient firepower to defend monetary union at an earlier stage. In an ever-more-bitter blame game in the political parlors and dealing rooms of Europe, the ECB is determined to avoid responsibility for the potential breakdown — or even demise — of Europe’s emblematic integration project.
It turns out that the ECB warned politicians a year ago that they, not the ECB, had to bite the bullet and bail out the faltering PIIGS. But the politicians ignored the warning.
The ECB has a few small-caliber responses up its sleeve, but nothing significant short of mass inflation.
But no one should expect a panacea. As the most likely alternative to massive selective purchases of trouble-hit members’ bonds, the ECB has discussed broadly based U.S.- and U.K.-style quantitative easing in recent months. In this case, the ECB would purchase government bonds across monetary union in proportion to member countries’ gross domestic product — meaning that German and French buying would prevail over Italian. That might bring some respite to monetary union’s weeks of turmoil — but any tranquility would probably not last long. Market participants may have to recognize a dire reality: this crisis is insoluble.
Got that? “The crisis is insoluble.” This appears in a major media outlet, one that is owned by CBS. This indicates that the Establishment is beginning to recognize that we are coming close to the endgame.