Friday, November 25, 2011

Poker against Mrs. Merkel

I recently bought quite some German shares. Here are my thoughts.

If Italy or Spain can't finance themselves via the bond market and also don't get money from the ECB because Germany doesn't allow it, and if Germany also doesn't agree to give out Eurobonds and also doesn't give them money directly, then many banks will be insolvent overnight. Millions of people won't be able to access 'their' money and we will see riots, a global depression and the individual Eurozone countries issuing new currencies so that they can at least pay the administration costs of their governments.

That's the fearsome split-up. It is the worst-case scenario and the German industry would suffer tremendously. But if it happens you also really, really want to own anything German because the new Deutsche Mark will skyrocket to a place somewhere near Mars.

Unlike the British, however, who already declared the Germans declaring war in their creative newspapers, I really don't think this is going to happen. Not only would Mrs. Merkel join history as the one German leader who single-handedly destroyed the European project, she also wouldn't survive the next elections. But most importantly, that's just not her plan.

Her plan is this:
At every moment the Eurozone can either use the ECB or Eurobonds to solve the crisis overnight. It's really very simple (if we ignore legal hurdles which have already been ignored in the past). If Europe issues Eurobonds it creates a market that rivals the one of the US bonds in size and liquidity. But, unlike the US, we have much lower debt and a much, much lower deficit. And we have governments who actively do something against debt. And the Chinese want to get out of US bonds anyway. Eurobonds are a silver bullet.
The same is true for the ECB declaring itself the lender of last resort. Suddenly it wouldn't make sense anymore to speculate against the Euro and the immediate crisis would be over.

But Mrs. Merkel doesn't like that - and nor do I. Here's why:
A declaration of dependence of the ECB as well as Eurobonds destroy incentives for Greece, Portugal, Spain, Italy and even France and Belgium to reform their economies (and actually tax their rich for a change!). These destroyed incentives would lead to a second crisis in a few years, maybe some decades.
All western countries - including Germany - need to stop spending more than taxes allow. It's not only unsustainable but it's also deeply unfair to tax the middle class to pay interest rates for bond owners. The only way to politically achieve this, however, is a deep crisis.

Mrs. Merkel is using this very crisis to finally create a European Union that has strong and effective controls in place to prevent member states from spending too much. This wasn't possible before. And to make it happen she will just wait. The current German course is not the result of some anti-inflation ideology. Anybody who followed German politics over the last few years knows that Mrs. Merkel is highly unideological (having a doctor of Physics I'd expect no less, of course :).

Only at the very last second - and I mean the very, very last second - will she act. It will be a super-complex mix of ECB and Eurobonds and ESFS. The European institutions will agree because if they disagreed their members could start looking for a new job the next morning. The other countries will agree because, well, spending reasonably and taxing the rich isn't as bad as the alternative, is it?

Shares would skyrocket in this case of course - especially if the ECB declares dependence and pumps money into the markets.

In any case I really don't see how to better place my money right now.


  1. All western countries - including Germany - need to stop spending more than taxes allow. It's not only unsustainable but it's also deeply unfair to tax the middle class to pay interest rates for bond owners. The only way to politically achieve this, however, is a deep crisis.

    Here, here. There are moments in history whereby a competent, firm hand is needed, and the individual in the position of power is blessed with the very ability. Germany must be in a good place now for creating tomorrow's history.

  2. I wouldn't call it a good place, Ahtchu. Germany has about 80% debt/gdp ratio, too. 15% of the taxes I pay aren't invested in streets or schools, but go to people who own bonds. In the 1990ies we passed the moment when more money had been paid in interest rates than had been accumulated in total debt!

    A balanced budget isn't really a strange German idea, I think. Furthermore, the ECB as lender of last resort or Eurobonds effectively introduce taxation without representation. I think it is quite understandable that Mrs. Merkel wants to avoid that as much as possible without crushing the world's economy.

    Of course, I also understand Mr. Obama who wants Mrs. Merkel to get rid of the crisis now and no matter how. She's more dangerous right now than the laughingstocks that are the republican candidates ;)

  3. She's more dangerous right now than the laughingstocks that are the republican candidates ;)
    Woah, let's tread softly here. Too many tangents along this path and you'll need to change your blog URL and title. The 'genius' of a democrat asks to:
    get rid of the crisis now and no matter how
    Surely, you're playing an extremely dangerous game when you use the ends to justify the means.

    As an engineer with a strong desire to work in the Bundesland, perhaps my views are biased. Germany, post WWII, always struck me as a very secure, financially conservative state. Greener grass syndrome, you say?

  4. Surely, you're playing an extremely dangerous game when you use the ends to justify the means.

    Well, the means are 'inaction' and the end is a balanced budged for the Eurozone. Sure, it's a dangerous game, but not because of the means but because of the possible ends.

    Greener grass syndrome, you say?

    Depends on where you're from. If you're from Switzerland or Norway, for example, I'd say yes.

    On US politics, it's just too damn fun to watch :)

  5. On US politics, it's just too damn fun to watch :)

    A train-wreck is always more entertaining to watch when you are not riding said train.

    In any case, I support whatever it is that is going on in Europe that is tanking stocks over here. If they go just a bit lower, I might actually jump into the market.

  6. Nils, I may even agree with you that Dr. Merkel's intentions are the ones you state. However, I beleieve you are wrong about the “silver bullet” of the Eurobonds and how quickly they could be deployed (hint: the only kind of Eurobonds that have the possibility of being credible to the markets and do something about the risks of say Italy or France, are the kind that would create a much bigger joint liability for European countries than much simpler and cheaper solutions that were rejected before).

    Also it should be noticed that by its (in)actions, Germany is accruing much bad will from its partners (for instance, I think it would be unwise for a German national to vacation in Greece for a while) and risking destroying the common bonds that underpins both the Euro and the EU foundations. In a negotiation you can pursue individual interest, and you are even well advised to do so, but once you are perceived as only caring about your own interest, you will see that your counterparts will also change whats in offer.

  7. I agree that I overstate how fast Eurobonds could solve the crisis, Iv. But in combination with the EBC as lender of last resort they would still be very effective and quite fast, I think.

    But where I completely disagree is that Mrs. Merkel pursues individual interests. A 20% unemployment rate in Spain is a European problem. And the Spanish government hasn't been able to introduce effective reforms yet.
    Furthermore a balanced budget for the Eurozone is not only in Germany's interest but very much in the Eurozone's interest.

    If you fear growing bad will, imagine what would happen in case of a serious inflation in Germany in five years because the ECB started to finance southern governments who are politically unable to stop accumulating debt.
    Or imagine what would happen with Greece accumulating some 500% debt/gdp and other countries having to pay the interest rates.

    If you introduce taxation without representation (which Eurobonds and inflation effectively are) you need to make sure that no country takes on more debt than it can sustain. The past has shown that this hasn't been the case.

    It's a sad thing for Germany to play the role it currently plays. For historic reasons we usually want to be liked and loved. But even if Mrs. wanted to: the German/Finnish/Netherland/.. people wouldn't pay Greece debt ad infinitum.

    The Eurozone needs more control of their budgets before the northern nations elect the wrong political parties and reject to pay the debt of other nations the hard way.

  8. Sound analysis concerning the delaying tactics. Back when the whole thing started, I thought Merkel was very foolish for not bailing out Greece immediately and sweeping everything under the carpet; I've since come to understand the longer game.

    I would respectfully offer two minor caveats: the law of unintended consequences and the strength of nationalistic politicians all over Europe, who wouldn't really mind returning to a British-favoured loose commercial union rather than a political one. I have a great deal of respect for Chancellor Merkel, but there are powerful forces in play against her pro-EU stance, as well.

    You are right in that the Mark would skyrocket if the eurozone broke up (same for the euro itself if the eurozone shrunk to France/Germany/Benelux) but that isn't necessarily a good thing at all in an export-centric economy. One thing that's constantly underrepresented in commentary about this crisis is the extent to which Germany itself benefitted economically from the euro and the EU.

    Anyway, back to swinging the old lightsaber. :)

  9. that train wreck in the US is the progressives and Obama. Make book on it but Obama won't win in 2012. There is no way he gets to 270 electoral votes which is the only number that really matters.

  10. Bit off topic, Goodmongo, but then I already commented on the republican candidates. So it's probably only fair if you can take a stab on Obama.

    In my (European) opinion your president is pretty damn good considering the circumstances he finds himself in. In any case I'd be genuinely afraid if anybody but Mr. Romney or him wins the next elections.

    Even though Romney is a perfect opportunist he is at least not, well, .. a moron ?

  11. Being in Europe you don't see how Obama has been extremely bad for the US economy. Do a search on Steve Wynn and his speechs about Obama. Steve wass a million dollar contributor to Obama and voices how he's killed the economy here.

    Yes Obama inherited a mess (started by Nancy Pelosi, Barney Frank and others), but he's made it worse.

    Search Keystone pipeline for how he's killed jobs in the US.

    Bottom line is Newt Gringrich will most likely be the next president. Romeny is not well liked by the conservative section of the GOP and actually has to rely on the other candidates destroying themselves to actually win the nomination.

    BTW this isn't just my opinion. Search for sites like Real Clear Politics and you will get in depth statistical and factual data on elections past and present. The site is not political and has no agenda (unlike The Hill or Political).

  12. Goodmongo, you can find a (good and honest) site about everything on the web :).

    Some of Obama's decisions I genuinely don't agree with. All US wars (except for Libya!) were and are a waste of time and money and have been for a long time, for example. Afghanistan is not the problem - Pakistan's nuclear weapons are.
    But I don't see a (realistic) republican candidate handling things in any other way.

    In my opinion, Obama did many things wrong. But mostly the right choice was blocked by congress. So it's hard to blame him.
    This is, of course, the European perspective. The most stable and economical succesful countries in Europe: Norway, Denmark, Sweden and Finland have 40%-50% taxes per capita. And they often have higher GDP/capita than the US.

    It's mind-boggling to see some people in the US argue that the Laffer curve has a maximum at 15% or something like that.

  13. Nils, the problem isn't the tax rate but what is classified as income. You can raise the tax rate to 99% and 'the rich' still won't pay a penny more. Their income is not taxable per the laws on the books.

    BTW I wish someone would actually classify 'the rich' with hard numbers. We'll soon find that 'the rich' actually means something very different than what most people believe it to be.

    What people like Paul Ryan and other Republicans want to do is to lower the tax rates while doing away with the many ways that people can hide income.

    Do you know for example that the US has a higher corporate tax rate then most European countries? The problem isn't the rate as Obama and progressives in the US fixate on, but what is and isn't taxable.

    A rich person can get about 7% income by putting all their money in municiple bonds. They can make hundreds of millions in interest and not pay a single penny because all that income is untaxable.

    Munis are not a vehicle that most middle class use. So raising the tax rates ends up hurting the middle and not the so called rich.

    I can go on with thousands of examples (I was a CPA and tax accountant for many years during the first half of my carreer). People hear "tax the rich" and while sounding nice it doesn't solve the problem. In the US we don't have a tax rate problem, we have a revenue and spending problem. We just threw away 500 million on a politically connected and totally useless adventure trying to force the market to do things that are impossible to do.

  14. I actually agree with this, Goodmongo. Just be careful that by fixing the loopholes and lowering the rates, the 'the rich' actually end up paying more in the end.

    In any way, this is not the really the president's problem. It's Congress's problem.

  15. In reference to the eurozone situation, delay tactics like this are used quite often politically. A recent example is the debt ceiling debate in the US. Albeit in that situation it was self defeating for the country as a whole. I agree though, like in comedy, timing is everything in politics.

    In terms of the tax-code, the vast majority of the exemptions need to go. It starts off as a "good idea at the time" in the short term, but turns the tax code into a zoo in the long term. You end up with a lot of confusing imbalances. In fact, its probably a lot less messy for them to just go back to the start rather than try to sort through the current mess. Taxing all earnings as income without exemptions while lowering tax rates is the right answer in my opinion. Getting there involves an ugly political battle however.

    As for Romney, he is only good at telling people what they want to hear, and not what will do them the most good. Which has been an increasing trend in American politics unfortunately.

  16. Nils, in our political system it is the president's job to lead and to get involved. See to pass anything requires compromise. He is the leader of the left and progressives. He needs to tell his side that they have to forget about tax rates and go for increased revenues. All sides have to take a political hit. LBJ to pass his Great Society bills was on the phone working congress to get votes. Mr. obama hates this.

    So far Mr. Obama has not lead. he planed for failure by Congress and that is how he sees himself winning in 2012. If Congress came together he would not have them to run against.

    In the US all good and great presidents lead. Even the dems in congress have complained loudly that Mr. Obama is more of an absentee landlord than a president.

    I come from Illinois where Obama was a state senator before he was a US senator. He had a habit of voting present on the majority of his votes. He lacks the conviction to actually stand for something. He won his US senate spot through backdoor tactics (the Chicago way as its known here).

    The US has a phoney budget policy call base line budgeting. Ask any progressive if they would except $1 in new tax revenues for 1$ in real (not base line) budget cuts (meaning if I spent $100 this year next year I spend $99) and they would never agree to this. So far all proposed budget cuts are from their wish list base line. Meaning I want to spend $50 more next year but will settle for a $40 increase. I have now cut the budget by $10. This is why conservatives are so far against what Obama has proposed. They are phoney cuts.

  17. As far as I see it the President can veto stuff and that's about it. That's called checks and balances. He did get involved with the debt ceiline. Did it help? Hell, he was the first president who didn't fail (completely) with a health care reform - doesn't seem all that bad to me.

    If voters think that it is the president's fault if he cannot overcome a blockade by the (only) other party, then voters will get the next president they deserve, I fear.

    Look, President Obama isn't perfect. But I really don't see an angry old man like Gringrich succeed where Obama failed. Wasn't it Gringrich who said the new health care isn't all that bad, and a day later said "sry,sry,sry"?
    Wasn't he the guy who accepted several millions from fannie mae for "consulting" (as a historian) and at the same time blamed just these banks for lobbying too much in Washington?

  18. Being in Europe you probably don't see the impact of Obamacare on us here in the states.

    Already many doctors are rationing care based on insurance type.

    Rates of insurance have gone up almost twice as fast since Obamacare passed and many companies are now dropping their care.

    States are having to raise taxes or get waivers since medicaid costs are increasing faster then before Obamacare.

    Dr. Berwick was Obama's head of Mecicare and just resigned as he admitted that under Obamacare there would be rationing of health care and the government could intercede in the doctor patient relationship.

    In a recent study by the AMA it was pointed out that up to 125,000 americans would die waiting for cancer care under Obamacare. They would die before they got their turn at treatment.

    Finally, in the most recent poll the american people favor repeal of Obamacare by 13 points (53 to 40).

    Once again things look nice and green from far away, but as you approach you notice the land is just a bunch of green colored nails sticking up from the ground.

    BTW the president and all past president's have more of a duty then just vetoing stuff. I cited one example (LBJ) but go back and see that all presidents 'work the phones'. Kennedy, Clinton, Reagan, Bush 41, Bush 43, Nixon, Truman, FDR all got involved in LEADING congress what to do. Maybe the US is way different than what goes on in Europe. But here our prsidents work to get things done. And so far Mr. Obama has just campaigned about it.

    His two signature pieces of legilation (Obamacare and the stimulus) were done with late night backdoor deals and payoffs on votes. There wasn't compromise and in the US you need compromise to get the big things done.

  19. And I am sure none of this would have happened if the health care system hadn't been reformed ...

    I don't really see how Mr. Gingrich will 'work the phones' so much more successfully; being as charming has he appears to be. But if you think he can reform your health care system again and for the better feel free to vote. I like to tell myself that all countries have the governments they deserve ;)

    By the way, my sister lives near Austin, Texas.

  20. The Supreme Court will most likely overturn the health care law 5-4 so whoever is the next president will have to face it. But the people want the economy and jobs before they try and tackle health care again.

    See that was the big mistake that Obama made. If he concentrated on jobs the electorate would have supported him in the other areas. But the stimulus was a complete failure. It wasn't even Keyensian economics, but was just old time Chicago politics of paying off your supporters.

    Right now much of the country is ABO (anybody but Obama). If they screw up they'll be out in 4 years also. And like or hate Gringrich he worked with Clinton and got sometings done. I think that's what the country is wanting to happen.

  21. I'm not sure where you live Good, but according to polls the nation is not dead set against Obama. In fact, his approval rating is sitting right about where an incumbent president typically resides a year out from reelection. Congress' approval rating is at 9% however. I feel like we just need to boot 100% of the incumbents over the next 3 election cycles. The ones in there for 30+ years feel way to comfortable with their jobs.

  22. The stimulus wasn't a complete failure. Don't over-exaggerate so much. It doesn't help your argument. ;)

    Considering the situation, Obama has pretty impressive ~40% support right now and most people agree with his individual proposals. Congress' support is yet again at an all-time low.

    Irrespective of what should or shouldn't be, I am willing to bet good money that Obama will be reelected. All republican candidates are pretty weak because the good ones don't want to burn themselves and rather run in four years.

    And I know I wouldn't want to have a duel in front of TV cameras with this guy; and I am not usually afraid of such things ;).

  23. that train wreck in the US is the progressives and Obama.

    Oh, please.

    How much time was spent chasing after a birth certificate, again? How close did the US get to defaulting on its debt, and for what reason?

    Nils, in our political system it is the president's job to lead and to get involved. See to pass anything requires compromise.

    Exactly. Once the Republicans agree to compromise on anything at all (say, taxes), we will have a working political system. Unfortunately, they have been waging a nihilistic campaign for nearly 4 years now, banking on the fact that if nothing is accomplished, Obama would be blamed, and they can breeze back into power without "compromising their principals" by compromising.

    Taxes aren't some magic bullet, but I remember a time when there was a $2 trillion "Grand Bargain" was rejected because it had a higher than $0 tax increase, despite the fact that Democrats compromised on Medicare cuts to the tune of hundreds of billions.

    Tell me Republicans have been negotiating in good faith. Tell me that they are willing to compromise. Or better yet, show me.

  24. This is one of the largest, if not the largest, online news site in Germany. Might be interesting for some of you.


  25. Nils, I'm afraid your article (your original post) isn't right. It isn't even wrong (to steal Pauli's great line). I went into details on my own blog:

    The long and short of it is, don't buy German shares right now. They're on the edge of a precipice that Germany mostly created, itself.

  26. @Degrin please check a site like for poll results. Obama according to the Gallop poll is now the lowest rated prsident at this stage surpassing Jimmy Carter.

    Only one president with poll averages below 48% approval (Obama is at 43% approval) got reelected. That was Truman who Obama is trying to duplicate by running against a 'do nothing congress'. Only problem is Repubs controlled both houses against Truman while the dems control the senate today. And the senate has not passed a budget as required by law in over 4 years (even two years where they had 60 dem senators).

    Reelections are about the job the current president has done. And Obama's record is extremely bad when it come to the economy.

    The sitmulus was a huge failure. Just look at any non-partisan evaluation (like the CBO) to see how it was a huge failure. Reports are comming out that as much as 30% of the stimulus was mispent and the average cost per job was over half a million dollars per job. (CBO numbers).

    So I'm not over exaggerating at all. I'm reporting non-partisian results from the CBO.

    Obama needs a teleprompter and does not debate well without one. Newt has challenged Obama to 7 Lincoln Douglas style debates. I bet you all the tea in China that Obama declines.

    @Azuriel please read up about base line budgeting. Also see my referneces in other posts about tax rates vs. tax revenues. You fall into the same trap and say the same thing as all progressives that they want the rates raised. Republicans will go for more REVENUE by lowing rates and cutting loopholes which makes more types of income actually taxable. Dems hate this because that costs them power and control (believe it or not the biggest billionaires give more to dems then repubs). See those union dues would be taxable income and the union bosses can't stand for that, not to mention all the loopholes Hollywood gets to hide income.

  27. It seems you are about as enthausiastic about Gingrich as you are about Skyrim, Goodmongo ;)

    Look, we can't debate facts at this blog. All I can say is that the European press considers Gingrich a joke - and a bad one.

    And even though I know that the NYT isn't considered 'objective' in the US, the NYT is not known for making facts up, either.
    This is about 10 times as nice as what the European press is writing. And I actually remember Gingrich from the Clinton era. He's simply not trustworthy.

    If a good presidential candidate ran against Obama he might have a chance given the economic situation. But the current candidates are ridiculous. Not worthy of your nation, really.

    The teleprompter stuff is old, by the way. Have a look at this super boring press conference" with Obama and the leaders of the European Union.

    No teleprompters - and in contrast to the European leaders Obama speaks mostly free. He's actually pretty good at it.

    In my opinion we can talk alot about whether Obama did everything right with the economy. But to claim that he is a bad politician is just silly. He's the best politician I have ever witnessed - and that is NOT an accolade by me.

  28. Nils, last post I promise. First off the election is 11 months away so lots can happen. But the most recent poll out today show Newt over Obama 45-43.

    Having said that national polls mean next to nothing. It's all in the electoral college. It takes 270 to win and Obama has a lock on 163 with 38 leaning or 201 total. the GOP has a lock on 159 with 32 leaning or 191 total.

    That leaves 146 toss ups which includes Colorado, Florida, Iowa, Michigan, Nevada, New Hampshire, North Carolina, Ohio, Pennsylvania, Virginia and Wisconsin. All the other states really don't matter.

    Out of these states the unnamed GOP candidate beats Obama by up to 5% (hence toss up) in 6 of the states totaling 90 EV. that would give the GOP 281 or more than enough to win.

    As I said its early and we still don't have a firm GOP candidate but things aren't as rosey for Mr. Obama as the NYT or European press would like people to believe.

    BTW all of this can be fact checked at and they link all the polls and anaylsis. Also a great site for going back and getting a historical perspective on past elections including voting patterns and tons a great historical stuff.

  29. Sorry I forgot to add my thought on the European press. See in this country being talked bad about by the European press is a big plus. The majority of the people don't believe or trust the European press and hold them lower then most of the main stream press in this country.

    A negative article in some big european newspaper usually results in a small boost to that very candidate in the US. I've gotten campaing solicitations where they quoted euorpean press and records show they get more money that way.

  30. It really seems then that our contentients drift further apart, Goodmongo.

  31. that last bit is hardly surprising. after all the negative press the usa got since the bush era, which has hurt them a great deal longterm, they had to make a virtue out of all the anti-americanism (which i don't support) in europe and the rest of the world really. normal defense strategy, also in terms of trying to placate the increasing restlessness and discontent among the common people. let's not forget that the us-gov excels at uniting against the enemy out there and using it as a tactic to cloud internal issues. right now though, this seems weaker than ever. you can only fool ppl so many times.

    agree with nils on the re-election.

  32. It must be nice to actually have several presidential candidates to choose from.