FIGS vs Germany
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The push and pull playing out in the
eurozone between central bankers and governments is interesting to watch. We have chronicled Mario Draghi’s
statement that the ECB "would do whatever it takes to save the euro.” The U.S. Treasury Secretary, Tim Geithner,
visited Germany and the ECB on Monday.
Upon his return to the U.S. Geithner
told Bloomberg the eurozone must take strong action to bring “down interest rates in the countries
that are reforming and making sure those banking systems can provide the credit those economies
Italian Prime Minister Mario Monti
hailed Draghi’s pledge as “bold and appropriate.” He believes European leaders should authorize joint intervention
by the ECB and the EFSF to lower interest rates. Monti wants the ESM to
be granted a banking license so they can lever their balance sheet by borrowing more money from the ECB to buy ever
Monti is visiting other eurozone
capitals to build support for an “activist” ECB. He is not visiting
Germany, as the trip is to encourage other countries to pressure Germany in future decisions. Francois Hollande of France wants the ECB to “do everything” to save the euro (and
keep cheap money coming).
We will call this “lose money”
policy the French, Italian, Greece, Spanish (FIGS) model. On the other side is Germany, the fly in the
ointment. Germany wants to follow the rules. Germany believes the European Central Bank needs to fight inflation
and insure the value of the Euro.
German Vice-Chancellor Philipp
Roesler said “If you take away the interest rate pressure on individual states, you also take away the
pressure on them to reform.” Germany knows that other European
countries would drop hard political reforms immediately without the discipline forced on them by higher interest
rates. We call this the German model.
Mario Draghi met Bundesbank
President Jens Weidmann on Monday to discuss his statements from last week. This morning, the Bundesbank put an interview from June 29 on their
website. In the interview Weidmann said “Politicians overestimate the
central bank’s capacity and place too many demands of it. Whether it’s
about interest rates or any sort of special measures, in the end it always comes down to the same thing: trying to
rope the central bank into meeting fiscal policy objectives.”
The Financial Times has a good article on the relations between the Bundesbank and other eurozone
countries along with the ECB.
Two weeks ago, Ben Bernanke appeared
before the Senate Banking Committee. Forbes wrote that Senator Charles Schumer (D-NY) told Bernanke
'that Congress will not be able to get its act together until it is too late to stave off the impact of the
fiscal cliff looming in January...Schumer urged Bernanke to take whatever action he thinks
necessary.' Schumer told Bernanke, “Get to work Mr. Chairman.”
What is the monetary policy of the
U.S.? Do we follow the German model of sound money or the FIGS model where monetary policy is used to finance
debts that allow politicians to keep spending?
We do not expect the Federal Open
Market Committee (FOMC) to initiate quantitative easing today. Perhaps
they will hint at it and leave the decision until September. We expect
the ECB to lower interest rates tomorrow morning, but little else in concrete action as they need unanimous
approval and will not go against the Bundesbank.
The market is in the top of the
bullish trading channel that has built since the end of May. We expect
the market to visit the bottom of the channel in the next few days to see if support at 1330 to 1345 on the S&P
Bandar's purported death, if true, makes him the only person I've known personally who died
in the War On Terrorism I met him years ago in Washington DC when
he was a major serving as air attaché. Last time I saw him was in his embassy when he was
ambassador. Amazing that, of all those who died since 9/11, he's
the only acquaintance of mine who became a causality. Hope he's the last.---subscriber
reply: Me thinks you are being overly optimistic.
As long as there are men with fanatical beliefs there will be
conflict. Terrorism is a
"soft" way to inflict damage against a superior opponent.
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