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Generational Dynamics Web Log for 17-Nov-2010
17-Nov-10 News -- Anger at Germany boils over

Web Log - November, 2010

17-Nov-10 News -- Anger at Germany boils over

Revulsion of the bubble

Anger at Germany boils over

That's the headline in an article that appeared on Tuesday in the Financial Times (Access):

"The drive by Angela Merkel, the German chancellor, to rewrite the European Union’s treaties to set up a new bail-out system for future Greek-like collapses – and her insistence that private investors bear more of the cost of such rescues – was quietly resented when she bulldozed it through last month’s summit of EU leaders.
But as bond markets have reacted and plummeted in the weeks since, that resentment has begun to boil over, with increasing accusations that Ms Merkel has put many of her fellow eurozone leaders in untenable positions in order to reinforce her own standing with German taxpayers.
“They’re unprintable at times,” said Daniel Gros, director of the Brussels-based Centre for European Policy Studies, of the angry remarks he has heard aimed towards Berlin.
German officials insist their campaign to get private bondholders to shoulder more bail-out costs is not just about domestic considerations. The government is more concerned that the current system – which condemns well-managed states to bailing out badly-managed ones – is unsustainable.
But even some of those well-managed states have expressed anger at German tactics. Countries such as the Netherlands, Finland and Austria, all normally allies of Germany in economic governance issues, have raised questions about Berlin’s behaviour.
Anger first arose after Berlin cut a deal in mid-October with France over the new bail-out system, even as it was working closely on economic reform issues with several of its allies among the northern, fiscally prudent caucus.
Ever since the deal was struck, Germany has slowly lost support for its hardline stance on the new rescue mechanism and has been forced to back away from its original ideas about setting strict rules for private investors’ role in a bail-out “ex-ante”, or before a rescue even occurs.

As we reported yesterday, Merkel made this proposal because she doesn't want Germany to be stuck with paying for an Ireland bailout, as it had to pay for a Greece bailout in May. Still, it's laughable to say that German caused the current crisis, as if merely making a proposal was enough to cause market panic, while the continuing collapse of Greece's economy has nothing to do with it.

So everyone is furious at the Germans, and now the Germans are still furious at the Greeks, according to an article in the Guardian, quoting German media:

"That Germany will have to step in [to bail out Ireland] is now not in much doubt, despite denials from Ireland that it needs the help. The question being asked is precisely how much of the burden Germany would be expected to bear.
German taxpayers are still smarting from the multibillion-euro Greek bailout in May, which led to ugly headlines in the mass-market Bild about excessively profligate Greeks and how frustrated Germans were cancelling their holidays to Crete in protest at having to pay for their fellow Europeans' unchecked excesses.
Six months on, anger towards Ireland is not yet as acute, but there is growing unease about the idea of Germany having to pay yet again for a fellow European country, particularly one whose per capita annual income is around €34,000 – more than Germany's €30,000.
"The poor Germans are going to have to feed the rich debtors," wrote Die Welt, in an analysis whose acerbic undertones were only thinly disguised."

Now it turns out that the Austrians are furious at the Greeks as well. As we reported yesterday, Greece's budget situation is much worse than previously estimated, and Greece is violating the terms of the bailout agreement. So now the Austrians don't want to pay their share of the next bailout payment, according to Reuters:

"Greece has not fulfilled commitments for its European Union-backed aid package, Austrian Finance Minister Josef Proell said on Tuesday, warning that his country had not yet submitted its contribution for December. ...
Speaking ahead of a meeting of EU ministers in Brussels, Proell said Greece had not kept its promise to get its finances in order and that Austria's 190 million euro contribution was not automatic. ...
"If this is clear and credible then we will have a new set of data," he said according to remarks distributed by his office.
"From the Austrian point of view, there is no reason to release the (aid) contribution in December with the (Greek) numbers as they are at present," he said."

The article points out that the Austrians later backtracked somewhat on their threat, but there's no doubt that the anger is there.

From the point of view of Generational Dynamics, the world is headed for a major financial crisis, and it appears more and more that it's going to be centered in Europe.

The Germans do NOT want to bail out Ireland or Greece (again) or Portugal or Spain, while the other European nations DO want Germany to bail those countries out, since Germany has the strongest economy, and everyone thinks that the Germans are rich.

Revulsion of the bubble

Most people are aware that the stock market has been falling briskly in the week, but other things have been happening as well that are worth noticing.

In particular, prices for US Treasury bonds have been falling, and yields (interest rates) have been rising. (As with most bonds, the price and the yield move inversely.)

This is a great surprise. The Fed has already begun purchasing Treasury bonds, as part of the quantitative easing ("QE2") program that was announced last week. What SHOULD happen is that the large Fed purchase should RAISE the price of bonds (by the law of supply and demand), and yields should go down. So what's actually happening is the OPPOSITE of what should happen.

What this means is that there's a huge selloff of Treasuries by investors. Now, or course, one week doesn't make a trend, and in fact, Treasury prices rose slightly on Tuesday, though not nearly enough to offset the previous week's losses.

Why would investors be selling Treasuries? We can only speculate, but perhaps they believe that the U.S. Treasury is going to default. And why not? It's widely expected that Ireland and Greece will default, so why not the U.S.?

Yeah, yeah, I know - the U.S. Government can "print" more money. The whole generational point, however, is that as the Boomers and Generation-Xers become more risk-averse, they're less willing to try dangerous experiments like "printing money."

Higgenbotham is a regular contributor to the Generational Dynamics forum. He is a trader and a scholar who has studied and analyzed how bubbles form and then burst, including the Panic of 1857, the South Sea Bubble, the Tulipomania bubble, even going back to the 1340s collapse of the Florentine banks (Peruzzi, Bardi, etc.).

What he's found is that there's a point when the population develops a feeling of "revulsion of the bubble." At this point, people who had previously gone along with policies that created the bubble now blame those policies and, in doing so, cause the bubble to burst more quickly, causing a crash.

As evidence that revulsion of the bubble is occurring right now, Higgenbotham points to the harsh national and international backlash against Fed chairman Ben Bernanke and the whole quantitative easing proposal that was announced last week. As Higgenbotham points out, there seems to be an actual "revulsion" growing against the idea of putting the country into another trillion dollars in debt, and this is a major change in attitude.

If Treasury bond prices continue to fall, as they have in the last week, then it would be signaling a strong deflationary trend. It would indicate that the dollary currency is strengthening, as investors more money out of Treasuries and into other dollar-denominated assets. Thus, in the past week, we've seen the dollar strength and, along with it, decreases of prices of commodities, including gold.

If Higgenbotham is correct, then this is a time of great danger for investors, since the stock market may be headed for a major correction or a crash.

(Comments: For reader comments, questions and discussion, see the 17-Nov-10 News -- Anger at Germany boils over thread of the Generational Dynamics forum. Comments may be posted anonymously.) (17-Nov-2010) Permanent Link
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Generational Dynamics Web Log for 17-Nov-2010 17-Nov-10 News -- Anger at Germany boils over

Anger at Germany boils over

Revulsion of the bubble

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Generational Dynamics Web Log for 17-Nov-2010
17-Nov-10 News -- Anger at Germany boils over