Saturday, November 26, 2011

EZ to "United States of Europe"; Time is Now; The Event is Critical to World Peace and Stability

EUROPE – Carpe Diem – November 25, 2011

The Window of Opportunity is Closing

The window of opportunity for the USA to have great input in defining the next phase of Europe may have a date for its closure – December 9th – the date for the next EU “summit” in Brussels. For the last month and continuing, Merkel is running a full diplomatic offensive to arrive at the following goals:

  • 1. Commitment of all EZ countries to a rewrite of the Consolidated Treaty (Lisbon) which would arrive at “fiscal union”.
  • 2. “Fiscal union” would be a rules based system under the European Court of Justice (ECJ) (a most curious use of a supreme judicial body) that would enforce via sanctions and penalties the Treaty metrics like debt to GDP and deficit levels and other measures of spending.
  • 3. Acknowledge the legislated authority and independence of the ECB, but with unspoken threats as to their implementation of policy that is not aligned with Germany.

The ascendency of Monti was officially blessed by Merkel and Sarkozy yesterday, which is a dangerous precedent in suggesting that Sarkozy and Merkel have such a power of sanctioning and that an unelected technocrat can have legitimate authority as a head of state.

It seems obvious to me that Merkel’s objective will be a confederation of the EZ with fiscal sovereign authority surrendered to under an ECJ permanently standing fiscal “specialty” committee of the court armed with discovery and review and the ability to apply penalties. The ECJ does not enjoy the complete and well defined independence of the ECB and is obviously a “confederate” structure while the ECB is obviously a federal structure. The prescribed mandate for the ECJ (Protocol 3) is to solely ascertain that the provisions of the treaty are being applied and respected – they do not have an interpretive law – Marbury has not occurred in Europe and likely never will have reason to occur. The ECJ is under the rule of the EU, it is not independent and there are no “checks and balances” ideals and although justices are appointed one per EZ country, sub courts and specialty courts are defined by the Treaty and limited to that function which will allow suasion and oversight similar to the informal ad hoc Merkel led takeover we are experiencing now.

In other words the most basic sovereign right – to set a budget and taxation – will be surrendered to a standing committee of a specialty court. The construct to provide rule of Italy and Greece by unelected technocrats Monti and Papademos, will be the standing order under an ECJ supervised EZ budget process, only the Monti(s) and Papademos(s) types will become serving justices on the permanently standing budget oversight specialty court.

It is obvious that Merkel is trying to sideline the ECB back to being a mere “currency board”, setting the value of the Euro and no more.

With the budget process via the ECJ oversight will entrench the German hegemon, translating economic clout into political power, this ECB function of maintaining the Euro only will allow Germany to maintain the dominant competitive position within in EZ – basically making the PIIGS or internal deficit countries colonies. That combined with a corporatist “post-democratic’ plutocracy armored with deliberate complexity will make it very difficult and a long and tedious process to dismantle this Merkel design.

This, while perhaps more effective than what has experienced, is obviously not democratic and given that along with these treaty changes Germany is not entertaining any permanent measures to achieve internal balance – the Schengen Plan has all but disappeared so no significant internal immigration will occur to achieve balance, and of course Germany is adamant about no transfer payments from surplus to deficit locales be allowed (this is despite the fact that every successful federation or even confederation in history required 10% or so of GDP per annum in transfer payments to maintain union) – given these internal rebalancing will not be allowed, then of course serious civil strife will be the results. Those terrible groups who are now history will re-emerge, and now justified in the eyes of their cadre, like the Red brigade, the ETA, the IRA (not in Northern Ireland but Southern Ireland or Ireland entire), Greek communists, Italy ‘P2” type of organizations, and even the Maoists will revisit Germany.

The Reason the “Merkel Confederation Plan” is Unacceptable to the USA

Of course this confederation Merkel envisions, with the German hegemony oversight it will have and will require will not be able to sustain NATO nor any hard power of any usefulness as an ally for the USA for decades to come. A key to this confederate structure surviving will be the lack of motive for any hard power – so Germany and the plutocrats will endeavor to maintain the USA “court eunuch” role and expect the USA to guard the harem. Otherwise, if any hard power develops with any EZ or attached EU countries, an arms race will develop first to police the growing insurgency and civil strife and later to offset the German hegemon. It is not clear that Germany will allow increase of US troops in the area and the recent approach by Germany to Libya is an indication of what this new EZ “power” will be like. The USA will be backed into writing a free security option for the EU, providing the trumping defensive hard power but always being the receiver of any blame for misguided adventures. It should be noted that for the last several decades Europe foreign policy, under the veneer of self-righteous “green” and rights and so on, has been bare knuckles neo-colonial adventures of commerce devoid of any rights or ideology so when it goes astray it cannot be defended. The USA hard power will be sucked into these adventures on behalf of Euro business, usually in the volatile North Africa area, and then if there is mishap be blamed. This would likely destroy any progress we may be making with a Bush Doctrine or Obama’s Egyptian speech.

Almost all pundits analysis and input that is political accepts as a given Germany’s voice and right to pursue the course Merkel is setting. That if the non-democratic nature of Monti and Papademos assumption of power is noted, it is not considered being a characteristic of the nature of the EZ crisis.

Given that I am singular in describing the EZ debt crisis as a constitutional crisis and not at all related to economics or fiscal policy or markets – they are but symptoms – the ascension of Monti and Papademos will be used in history as a main characteristic as to what the crisis is all about.

Analysis that is not centered on the constitutional and Hegelian historical, will be in error.

Any technical assistance to Europe to “muddle through” misses that this is a rare window of opportunity for the USA, a window which may close on Dec 9th.

For example, it is incorrect for the Sec of Treasury to be taking a leading role during this crisis. The correct placement for US interaction with the EZ and the design of our policy should be with the Sec of State, if overt, and other US entities if covert. If US policy is being designed at those locales then we correctly understand the problem.

We cannot have one philosophical message for Egypt and another for the EZ.

It may seem the two locales are a world apart but they are both constitutional crisis. In Egypt our main effort is to bring a liberal democracy to Egypt so as to curtail the fascism implicit with Islamism or the authoritarianism of the military economic opportunism. The US would never see efficacy in sending Sec Geithner to Egypt now, nor allow his area to design strategy for Egypt but for technical assistance – Egypt is in the domain of either POTUS or Sec Clinton or your department.

EZ does not have the obvious violence and strife of the Tahrir Sq., but the problem of designing governance and sovereign definition and the core constitutional nature of the crisis is the same as Egypt. So why is Sec Geithner our main contact point now for Europe? I do not think the US leadership for this crisis are receiving adequate or the correct input. Why is the data and input they are receiving now mostly financial economics and numbers and market input? How much input are they receiving that goes over the historical thrust and Hegelian flow of Europe now, and the constitutional aspects of the crisis. Have our foreign policy leadership received a detailed summation of the constitutionality of the ECB, for example? Are they receiving ideas on how to use the ECB and force constitutional forming of Europe, or are they receiving the contagion implications via market structure? I am reading nothing from DC and other quality analysis and press which go beyond the market and technical nature of the EZ crisis – to me this is a sign of a fabulous error and possible catastrophic course being pursued, if such press reflects the DC policy designer’s mindset.

Given that the US is recovering and our ability to insulate ourselves from the EZ immediate outcome is ever increasing, and given the fact that Germany and Northern Europe are still powerful and liquid – it seems that a “muddle through” pragmatic course of action is being applied with technical measures and input from the USA as Merkel drives for her Dec 9th commitment. This is a serious error.

If a “muddle through” technical path is being applied now there will be likely some success, enough so it seems the USA has done what can be done, but for the USA would actually be helping Merkel close the window on the USA ability to provide suasion in designing the Europe the USA would like in the decades to come.

What Form must the EZ Take: Requisites of a Sovereign Federal Democracy

What form should that Europe take, or has to take to be an adequate partner and friend of the USA:

  • 1. The EZ must be a democratic federation;
  • 2. Must have a singular liquid “full faith and credit” debt market
  • 3. A fully independent central bank
  • 4. Universal taxation and decision process to decide on that tax – therefore a federal legislature and a national police force to enforce
  • 5. Total mobility of populace at all times for both travel and also to seek new residences of opportunity, liquid internal economic migration
  • 6. A hard power capable of mobilizing up to 10% of the populace during crisis to provide national defense
  • 7. Close treaty association with the USA
  • 8. Supreme court to adjudicate dispute
  • 9. Executive power in an EZ wide directly elected executive office

The USA should apply all possible diplomatic, overt and covert power to reach the above objectives. The USA should be aware that the “post-democratic” German hegemon confederation that now has momentum will not be in the USA best interest and will be a danger to the USA and will be in place for the next several decades.

Why Now? Why Urgency?

The USA has to realize an epic transformative historical moment is now occurring which will have a limited time span in terms of formation and definition and that the path of EZ history, the flow, has hit a Hegelian node and is about to branch to one thesis or another. That the thesis that will be the results will be a reality for several decades. It will be cast in cement.

This current point in time for the EZ is, I think, a swift and most significant massive shift – major historical tectonic plates are being realigned. The markets and input of BTP or Germany Bund auction results are, I think, distractions which may lead to policy errors if they are confused with the main problem.

History and SOSH over Finance and Econ

Just as the USA saw the importance of focus on the anthropological nature of the Iraq and Afghanistan crisis, so that US resources could be applied effectively and not be in opposition to the momentum of centuries of history, I think that Europe should be seen through the lenses of history and sociology and the political. The only economics that should be applied now are political economics. Europe is not a financial event nor is it an economic event – it is a constitutional event.

The USA right to be involved in Europe at this stage is unquestionable. I just finished reading If You Survive by George Wilson who served as a LT in the 22nd Reg, 4th Div in WW II and whose unit went through 167% casualty rate and the Hurtgen Forest and later the Bulge. (it is interesting to note Wilson acquired 2 Purple hearts, 2 Bronze Stars and a Silver Star before returning to civilian life where he became an average life insurance salesman. That he never was promoted but was always a LT even though due to casualties he had company command for months in combat. Very “American” – an average “Cincinnatus” ) My point here is that the USA has a duty and right to help in the formation of the EZ not only as we are “exceptional” and the “last great hope on earth” going forward, but also based upon our blood spilt and treasure spent in the EZ. I strongly feel that the current crisis in EZ is, hopefully, the last phase of WW II, and given the USA role we are one of the major actors.

The Remedy for the EZ Crisis With USA Leadership

I think it is important that the Department of State with the President take on the EZ portfolio, with technical input only from Treasury and the Fed. That the Union of Europe in the EZ becomes a most important objective of US foreign policy so as to realize the characteristics of an appropriate ally and friend listed above.

I suspect Jean Monnet was heavily influenced by US interests if not at times an agent for the USA – so the current form of the EZ is in many ways a US creation, and given the blood that the USA has spilt in Europe and the treasure spent, the USA has historical precedence and reason and right to do all we can to form a sovereign Europe. I strongly feel we must.

As the Dept. of State takes on the EZ portfolio, an important first step is to insist on the basic democratic principles for the EZ that we require for all other areas of the world. That the USA withdraws support for technocratic un-elected governance, no matter the cause, of a people. Then the USA provides diplomatic suasion to reach the form of the EZ that would be in the best interest of the USA. That we understand the leverage we have in that US hard power in Europe is critical to the Merkel plan succeeding, for the German hegemon confederation cannot have any hard power of note with any of the confederate members. In a way this is an “inverse Metternich” structure. [I think one wild card is that a German hegemon confederation will inspire a general Polish rearming – which will throw the lot into chaos.]

The Remedy, First Essential Step: ECB “Buys All Bonds”

ECB is the Essential Institution

To forestall the Dec 9th date, and to prevent this window of opportunity from closing, all possible roads or persuasion to have the ECB commit a significant “buy all bonds” action should be applied by the USA.

The ECB charter and mandate as defined in Protocol 4 (referencing many articles throughout the Treaty) clearly show the ECB is the sole and only empowered federal structure in the EZ. That it supersedes any nation, like Germany, in seniority and is over all EZ institutions. That it is the only institution that could withstand a technocratic “counter-attack” led by the hegemonic Germans and plutocrats in Brussels that will come if the ECB takes such action.

The ECB “buy all bonds” must be federal and constitutional and not based upon market dynamics. It would be best to do such an act not on one of the “crisis” market days but on a calm day as possible. The action is to define the federal nature of the ECB, and thereby the EZ itself, and not to support market levels. Once such a definition is accomplished no market support will be required in any case as the crisis will be over given that it is constitutional and that the lack of clear federal definition of the EZ has yet to be provided. Once the ECB acts it via such action defines the EZ constitutionally, basically declaring sovereignty and then all market pricing and expectations for all EZ member debt becomes “one”.

The ECB act must be “blind” to what EZ debt is offered to the ECB “window” – it must be “all bonds”, taking in at the best price offered swaths of $100 billion tranches at a time until all EZ debt normalizes at the same price. While the ECB should make it clear that it will go to trillions of such purchases, as soon as the market realizes the fundamental nature of ECB sincerity and integrity and intent – all EZ debt will trade at the same price. German debt will rise in yield significantly, perhaps 100 basis points or more and Greek debt will meet that level swiftly. “Many become one”.

This moves the EZ status from a “problem” of crisis to a non-crisis “situation”. With the focus now on the ECB, empowered with the clearly written Protocol 4 independence, the ECB becomes the setting for the start and end of nation forming and constitutional drafting versus a constantly morphing and complex informal power structure that is now driving Europe. Germany loses power as “the leader” and becomes simply one of the largest areas of prosperity. In order to provide oversight for this now extremely powerful ECB, appropriate constitutionally defined governance has to be defined – quickly.

Constitutional drafting must commence and then in that process each EZ country has the same voice, the same power and the intellectual capital and leadership of all the EZ is then deployed. In the meantime the EZ ally, the USA – the only ally who can demonstrate such support and friendship and with the power to do so –will provide technical support and protection financially via the Fed and security via NATO during this very dynamic phase. The constitutional drafting phase may take close to two years to reach conclusion. The power of debate returns to the people and the effective putsch that Merkel is now implementing is finished.

The United States of Europe must now be formed for the prosperity and security of the European people, as well as for the prosperity and security of the USA.

Saturday, November 19, 2011

ECB as "the blue guitar"

Wallace Stevens poem ‘The Blue Guitar” describes why most are missing in their analysis or thoughts on the current EZ crisis:

The man bent over his guitar,
A shearsman of sorts. The day was green

They said, "You have a blue guitar,
You do not play things as they are."

The man replied, "Things as they are
Are changed upon the blue guitar."

And they said then, "But play you must,
A tune beyond us, yet ourselves,

A tune upon the blue guitar
Of things exactly as they are."

Paul Krugman citing Ed Harris also touched on the essential characteristic of the ECB is not that it is of the size and brawn able to digest PIIGS debt, but rather that it is a “blue guitar” which when monetary policy or financial flow goes through it – it comes out different, not exactly as they are. Like some economic Heisenberg ideal – it is not the size or any sort of demand supply algorithm that is the input for the ECB impact, it is the mere fact the ECB is at first considering the problem as an “observer” and then processes the problem on their unique “blue guitar” instrumentality.

In fact it is this role which is of importance not whether the ECB should do E 1 trillion of PIIGS or more or less than that amount. It merely has to stand ready to purchase any and all EZ debt so as to perform their central bank functionality as per the Consolidated Treaty and Protocol 4. In fact by moving from a demand supply type of tepid bond purchases to a “buy all bonds”, the ECB will in the end actually not have to buy that many bonds at all, or no bonds beyond what is required for monetary operations.

This is central banking which is crucial to a sovereign identity and in this case would be the definitive federalist act from the fledgling nation of the ‘United States of Europe”.

There is talk about legality and inflation which is really much stupidity or rather shallow political objectives or minimal understanding demonstrated. It is often coming from areas where one would think a deeper understanding would be demonstrated or the party would have recused themselves long before as their allegiance and identity is clearly regional and parochial. Weidmann and before him, Stark, are examples of incredibly adamant parochial allegiance to the Reich over and beyond identity to the greater good of the European people entire. Their thoughts about legality of ECB ability, clearly in error, cannot be explained by ignorance as both men are very capable so it must be a patriotic dedication to the Volk that fuels their striving to operate outside the very clearly defined boundaries of ECB governance and the mandate. In that way I find both men bizarrely close in ideals to those who once upon a time talked about "Lebensraum". Only now the room is digital and virtual and involved with mercantalistic export based upon a "uber" competitive market. These Germans have a curious narrow regional nationalistic economic identity which with only a few words changed morphs to a very odious political identity, indeed.

But others pile on with amazing ignorance considering their past roles or experience, such as Mervyn King cited in a recent interview for the Guardian where he states that for the ECB to purchase PIIGS debt is not a Lender of Last Resort (LLOR) operation but is a market support operation and monetization of sovereign debt, a transfer of wealth. Perhaps given the Bank of England’s ubiquitous placement in the unwritten constitution of the UK, someone with the credentials of King takes for granted the BOE role that after reading “Lombard Street” by Bagehot in Cambridge (even though his comments smack of a rather inflexible Oxford man) he is never aware of the constitutional nature of the BOE, the central bank and therefore he is not aware that the central bank is a “blue guitar” – but is just like any other financial instrument/institution in the flow of funds orchestra, only bigger and perhaps stronger and more august.

The ECB is a “blue guitar” not because Draghi is a clever fellow or that Trichet was one as well, but that it is a constitutionally defined federal instrument for all of Europe. It is the only fully birthed and defined constitutionally institution in the EZ.

Money goes into the ECB as a storage of set value and a unit of exchange – in other words like the amount in any of our bank accounts or what we owe or spend on groceries. Money in this form is scalable and whether it is one unit for a candy bar or billions for purchase of Boeing aircraft or to borrow for a highway project, this money form is basically of the same stuff. Principles of thrift and spending, perhaps with tweaking when speaking in large aggregations as Keynes did or Ricardo, work pretty much the same for a household or for a large private entity. Moral qualities can be assigned and considered and folksy anecdotes have some use when discussing this money. This is the form of money that I think the likes of King consider and is the money of the Pete Peterson Concord group fellows and the Tea Party or those who cite the Weimar inflation with integrity and honesty thought present. And as I said, it is the money that enters into the ECB, but once it enters the ECB in any form - a presentation of “covered bonds” by a system member private sector bank or the purchase of PIIGS debt - then the money changes its very nature. As this money is now played on the “blue guitar” of a sovereign central bank it is changed.

This is what Bagehot and Kindleberger talk about when they take the leadership in defining central bank theory. It is the blue guitar of monetary economics and economics in general. It is the heart of any sovereign entity and it is the essential characteristic of the Westphalia system state.

When money enters a central bank which has a constitutional mandate, and depending on the “stateliness” or august nature of the state, size then has no meaning. This money wihtin such a central bank no longer has scale. It can be several units, it can be infinite units, as it then no longer becomes a unit of savings or exchange but becomes the very stuff of seignorage and thereby the very stuff of the “full faith and credit” of the state. “E pluribus unum” – out of one, many. Only when a central bank is losing its connection or integrity to the state, or when the state is losing its integrity and infinite tenor of expected existence, does the “blue guitar” fail and money in whatever form enter and then stay the same as money for all. So the Stark. Weidmann, and King folks (Volks) of the world either do not understand implicitly the blue guitar aspect of a central bank or they are ignorant or they are dissemblers and seek to forestall or prevent the essential nation forming act of a central bank preforming sovereign duty when it starts to play the blue guitar.

For central bank actions once taken are very hard if not impossible to be undone for they are the stuff of epic historical “nation creation” and the very act is a constitutional drafting complete. And being a “blue guitar’, the ECB has to make all aware it could go to infinite amount of debt purchase and then "that will be that" as far as an understanding of the nature of EZ debt enters the market place expectations. In fact after such an understanding, the ECB, as long as it is not required to provide reserve balances or are other operations will find they can actually reduce their current holding of PIIGS debt, or rather EZ debt on the balance sheet as the market understands that all EX debt is pari passu and sovereign in nature.

The ability of the ECB to be a central bank is obvious, with a mandate that has been democratically granted by all the EZ members through their directly elected parliaments and refined in the Treaty of Lisbon and summed in the “Consolidated versions of the Treaty on European Union and the Treaty on the Functioning of the European Union” which is available at . It is amazing that those who are so quick to opine and discuss the EZ crisis reflect a knowledge that clearly shows little if no reading of this critical document. Much was made of Weidmann citing Article 123 in regards to how the ECB purchase of sovereign debt was “illegal”. Perhaps English as a second language is the cause of that use of word “illegal”, but even a casual read of Article 123 shows there is at least a debate whether that applies to the ECB debt purchase (the actually language refers to a direct funding or “overdraft” to a member state by the ECB and does not even touch on the holdings of securities) and most would say its use by Weidmann was disingenuous or incorrect. Further read of the Protocol 4 which addresses specifically the ECB independence and seniority in the EZ system and then Articles 3, 12, 28,38,41,119, 127,128,129,and 282 clearly show the ECB is empowered to do anything the ECB Governing Council under the President Draghi which will support or promote the main Article 3 on the economic Union and unity and prosperity of the EZ entire. Further more Germany is only a vote amongst many - and in fact all the other ECB Board show a courageous and thoughtful non- native country orientation in their voting, but for the Germans. It is a majority rule with one vote per person with great power from the president as it is Draghi who controls the communication with other "competencies" and entities of the EZ and the research and reporting function of the ECB.

[Before you even start to think of rejoinder to this writing, or any thoughts or writings – you really cannot think clearly for yourself or enter into debate unless you read at least Protocol 4 and then the main cited articles in Protocol 4 – this is about 40 minutes of time invested.]

What is obvious is that the most time and legal crafting in the "Consolidated version.." was spent on the ECB. That the ECB was the key action and institution in the Treaty. Perhaps it is a political Trojan Horse, holding wiley Greeks sneaking into the prosperity of the seemingly impregnable Troy of the German hegemon, but that is the definition of a constitutional action – it is political.

There has been, I feel, a most deliberate coup d’etat attempt ongoing in Europe, a combination of “post-democratic” plutocrats with hegemonic recidivist Germans – both parties finding common cause for a power grab in what they mistakenly perceive as a power vacuum as Europe struggles with the messiness of democracy as shown by the failure of most referendums on the ‘Constitution for Europe”, the struggles of the Treaty of Lisbon ratification, and the chaos of smaller, mostly Eastern Europe, states piling in. The architects of a democratic and federal Europe from the days of Jean Monnet and the ECSC to the present always knew that it would be difficult to break through economic expediency to a true federal democracy. They did make a deal with the devil and hid a bit behind what others fully embraced – the Habermasian neo-Adorno complexity technical design. It was a deal with the devil which the cynicism it has evoked providing the basis for the German economic neo-Lebensraum crowd with the huge crowd of newly empowered and percs compensated plutocrats of the Euro non-elected governance.

Yet now, amidst all of this problems, is the “blue guitar” of the ECB which had only to be played and things “are no longer as they are”.

Granted the ECB has the power as per the above, but does it have the right to proceed with the essential act and form Union by commingling all EZ sovereign debt in ways that show its capacity is infinite as any sovereign entity with over 331 million populace and a EZ GDP in excess of the $16 trillion, both numbers exceeding the USA? The questions citing the size of the EZ provides the justification. If the ECB is chartered for overriding responsibility for the wellbeing of 331 million people, the sheer enormity of the responsibility insists on the answer. In any case Article 3, which the Protocol 4 use as defining the main duty of the ECB is completely clear and transparent as to not only the intent but the duty of the ECB to act in the best interest of the entire 331 million. Not German disingenuous traditions and unspoken deals on the formation of the ECB, nor non EZ members ideas as to what or should be done, but for the People of all the EZ populace. This is of course what the clear speaking Spanish Prime Minister Zapetero was driving at in recent interviews

The ECB is the only federal chartered EZ institution with authority and independence and "competencies".

Therefore if it does not act and remedy the EZ crisis, no one will.

The end of this crisis without remedy is very ugly indeed involving loss of treasure and in the end loss of life, certainly loss of living standards. It will be a calamity for Europe. A major problem for the EZ is that this crisis will likely not be visited upon the US as Lehman was visited upon Europe, for I think the US has firewalled itself from the EZ crisis and also with some US recovery and surprisingly robust GDP occurring now, there will be a move to an isolationist sentiment if not some tactical satisfaction with the clipping of the wings of likes of Deutsche Bank.

But, despite these isolationist thoughts, Europe and the successful remedy of the EZ crisis is essential for US vital geo-strategic security for the next several decades, so hopefully the growing isolationist tendency will not prevent the US from assisting the ECB with this great historical moment. But Europe should be mindful when they take what they think are “free kicks” against the USA, poking at Geithner or Clinton or even Obama, being disdainful of the US and repel US interaction from habits developed over the last decade or two – they may be upsetting by doing so their only true ally who might be the deciding prompting of the ECB to take the only action possible.

The ECB should act only in terms of Protocol 4. What will that mean in terms of the remedy? The most important step is to realize that the “blue guitar” is how to proceed and not acts in ways that are not market supporting devices or plans.

The yield levels of Greece and Spanish debt are not at all the issue.

The issue is that Greek and Spanish debt are not pari passu with German or Dutch debt. That they are not full faith and credit of the EZ area. Therefore the ECB has to act with majesty and play the blue guitar – it must transact not only the problem of the week PIIGS debt, but all debt. It should determine the debt market level commensurate with a sovereign nation of the size and scope and legality of the EZ and then bid at that market level for all bonds. At first, of course, those central bank purchases will be that will be whatever is cheapest as speculators quickly locate bonds trading at 20 or 30 or 50 or 70 or 80 price and basically receive Par from the ECB. While this will seem to be an incredible largesse, actually the market will find the prices of all the PIIGS debt, in fact all EZ sovereign debt, becomes “one” quickly. E pluribus unum.

And that is the magic of the blue guitar.

If done with the full intent to purchase whatever size the market can bring to the ECB window, my guess is about 300 to 400 billion will be all that is transacted, though it must be clear to the market the ECB is ready to go to infinite size. The ECB can choose to let the reserves remain in the system or can instantly drain the reserves created through standard central bank monetary operations with either the EZ member banks or with foreign accounts, all who would be keen to assist with this important stability operation. But when the ECB conducts this sterilization, if it so chooses to do so, it should do it not in reversing out the bonds purchased but in the form of ECB letter repo. This will cal an aggregation of all EZ sovereign debt, what Hamilton called an "Assumption".

This operation, simple and qualified by Protocol 4, but action of immense power and of a massive positive impact on 331 million people, would transfer the disparate forms and valuations of the EZ members and form a country, form and affirm or define irrevocably Union. That is the transformative blue guitar power of the ECB. It would be epic and historical event in the progress and history of democratic free countries, right back to the writing of the Magna Carta. It would be celebrated as an act of institutional courage and brilliance for centuries to come. It would immediately end the crisis and in fact slingshot the EZ to full equivalency on the world stage with the USA.

Wednesday, November 16, 2011

Europe: Economics No Longer Matter; Why ECB Will Act in a Massive Fashion

From Krugman recently, quoting Ed Harris:

If the ECB writes the check, the economic and market outcomes are vastly different than if they do not. Your personal outlook as an investor, business person or worker will change dramatically for decades to come based upon this one policy choice and how well-prepared for it you are. [ italics mine]

My read of the treaty and especially Protocol 6 shows the ECB is so empowered and mandated to do such an action.

The risk to the US here is no longer contagion, but whether a window of opportunity, which has what will be likely a short lifespan, is missed. ‘Decades to come” is right. The form of Europe for decades to come is about to be defined and the USA will have to abide with that form taken decades to come.

Merkel and the political establishment in Germany, especially the CDU, does not wish Germany to subsume under a European federal governance. That has been, of course, the driving force implicit or explicit in German foreign policy for well over a century.

If Merkel and Germany will have their way, it seems an implicit German hegemony will be ratified via treaty changes – at best a confederation and at worst a “post-democracy” neo-Hanseatic League will be the results.

It will be impossible for Europe to have any hard power with this Merkel structure and if the German goals are ratified this irrelevant Europe will be the status for decades.

The US will find, with Merkel/German structure, absolutely no support of any kind going forward and will in fact have to increase our military presence in Europe. Europe will ride on the US for decades for security. A good question is whether or not the USA can afford such a “free loading”, receiving all the blame for all problems, and not acknowledged or receiving any benefits from the security provided. Asymmetrical adventures will be constantly visited on the USA. It should always be remembered the 9/11 planners were based, for the most part, in Hamburg as the Habermas “deliberative” soft power culture breeds such nihilists and terrorists.

The USA is decoupling or has decoupled financially and market wise from Europe, and soon the usual isolationist and fiscal conservative reactionaries – the “Peterson” crowd will dominate once insulation from European problems is thought to have been achieved.

US financial institutions are now, I think, adequately firewalled against Europe. I suspect the US is about to show solid growth and equity values will increase enough so as to offset the wealth problems from housing and to allow the isolationists to direct the European discussion. Soon, if not now, the crisis in Europe will not matter to the average American, nor wil it have any significant impact to US market values.

Europe in aggregate is mighty. There is high likelihood that expedient measures will be found by Europe to calm Europe long enough to allow Germany to impose their model, especially if the US asset values start to improve with some recovery.

Therefore the sense of crisis is likely to quickly abate and with it the suasion the USA might have in defining the form Europe will take for the next several decades.

Again, that form is being defined now.

The present is a point in time with even more importance than when the European Coal and Steel Community or the Atomic Energy Community were being agreed to under US occupation during the Eisenhower era. In many ways the current form of Europe can be seen as being at least permissioned by the USA if not authored by the USA. That definition lasted in form for the 60 years and yet was set in a very few years window back in the 1950s. We are now back into such a defining window time span and the USA will have to live with whatever is formed likely for the same long time period (to 2060) as the last defining era.

The ECB actions or non-action will be similar in importance in terms of defining Europe to the Jean Monnet flurry of organizational designs in the 1950s. The US of course felt the need and the authority to participate at that time . The end results of this European design – Lord Ismay’s “keep Russia out and Germany down”, a “dual containment”, worked wonders and brought great prosperity and peace and security to the area if not the world for the next 60 years. It was perhaps one of the greatest triumphs of US diplomatic foreign policy.

The US is authorized now, as then, to have just as much voice during the current defining moment as in the Eisenhower era. And now the USA is multitudes more powerful than it was then.

The current German model or thrust, a confederate or technical neo-Hanseatic League Europe, will be, in the long run, a severe failure for US foreign policy. It would set the world on trajectory for severe social strife in Europe, the adjacent areas to Europe – all of which present massive risk of economic refugees as well as civil war. The Arab Spring has turned to God knows what – and may actually have become a clever counter move by the Islamist after defeats in Afghanistan, Iraq and likely Pakistan. And so on. All of which would be fueled if not able to cause great mischief by a weak, confederate, technical, post-democracy, and neo-Hanseatic League Europe.

Europe must be in form where up to 10% of the populace can be in arms in a general mobilization and at least a 1.5 MM to 2 MM standing military force with at least 2 ½% of GDP spent on security. It is an impossibility for Europe along the lines coming out of Germany now to be so empowered.

Only a Europe in federation could possibly provide such security.

Not to mention only a Europe in federation can provide prosperity and order for the European populace.

Since this “window” is closing, and what is closing it is what will be a semblance of abatement of the crisis and recovery in the USA markets and GDP – the USA must either maintain the crisis pitch or force its conclusion via any action which immediately starts Europe on the road to federation.

From everything I can gather the ECB under Protocol 6 of the Treaty of Europe (Lisbon) is the only European federal institution empowered to take measures that irreversibly set Europe on a road towards federation. Germany will be of most adamant voice against such a move – but their obligation and the true nature of their power (they are in reality a very large Luxembourg) and the blood debt they still owe the USA and especially all of Europe will make them comply.

Unless a better pathway can be found to bring European federation, the ECB should be immediately encouraged by the USA to proceed with an aggregation of all EZ sovereign debt, bringing their balance sheet towards equivalency with the current QE impacted Federal Reserve balance sheet. The purpose of that move is to empower the ECB and establish it as the first federal structure in Europe and by its exercise of power to initiate a federal Europe, to aggregate all EZ sovereign debt bringing all bond values in alignment, and to then force a federal European definition so as to provide guidance and financial policy going forward. While this is occurring on a federal asset side of the balance sheet – and in 1790 the USA did a similar procedure but on the debt side of the balance sheet with the “Assumption of Debt” – the resulting federal structure will be the same. A read of the “Report relative to a Provision for the Support of the Public Credit” (1790 Hamilton) or excerpts is very useful as well as the several Federalist Papers written prior, especially #21.

The technical issues involving the European debt crisis is now well digested by the market place. It is for the most part clearly understood by policy makers. But a major error seems to be that a “Rogoff” mentality of perceiving Europe as a solvency crisis is being applied – which is correct if the German model or proposals is followed. But if Europe is perceived as a liquidity crisis amidst a fairly standard constitutional crisis with rich historical precedent and instruction, then the problem becomes one of how is the constitutional crisis remedied and what form of remedy would be most aligned with USA interests going forward.

That would be the remedy of constitutional formation of Europe via the only channel available, a significant QE or “buy all bonds” by the ECB.

The USA should consider using every form of persuasion and capability to have the ECB conduct such an operation, especially considering the window of opportunity is closing. Given this importance and the key strategic nature of the current time, it will seem obvious in hindsight afterwards, that the ECB is about to initiate a most significant LOLR operation.