The Polish letters: That beautiful collateral

In a now long ago forgotten week of June 2006, yours truly was participating in a week-long workshop organized by the ECB in Frankfurt-am-Main, to show off to the world the wonders of its carefully crafted monetary policy process. As I recall with amazement to this day, ECB officers spent a whole afternoon discussing just the thoughtful approach they applied to the evaluation of collateral for repo-operations. What a wonder! What a marvellous display of human ingenuity and rigor!! This was vastly superior to anything that those rustic cowboys on the other side of the Atlantic ever will come up with, not to mention the apes in the rest of the Americas or the brutish despots and their bureaucrat-henchmen in Asia.

And so it was... beautiful... Until Reality rang the doorbell, and against the best judgment of the Teutonic crew, Club Med people imposed their Board majority (and Axel went... and Jürgen went...), and now we are here, with this awful wound open... and rotting... The system was just too beautiful to resist the ugliness of humanity and life (like that, in lower-case...)

Anyway, I sympathize with the private creditors though. After all, it is true that the ECB got quite a discount on its purchases, so why isn't it taking a little cut to help the boys? Otherwise, Portugal's, Ireland's, Spain's, Belgium's, Italy's remaining private bond investors will confirm what they have known all along: they are now holding junior debt, junior to the identical toilet paper held by the ECB. You know, not all toilet papers are created equal, either...

But I sympathize with the ECB also, mainly because Jens is still involved with that motley crew... And also because they did attempt to perform an operation that restored the transmission mechanism of monetary policy, and besides, by not taking a hit they can still pretend that the system is young and beautiful and wholesome... That beauty is worth the self-delusion...

The only honorable thing to do now, is for one of the Ponzi-scheme funds out there (the ESM, EFSF, FBI, IUD, whatever) to purchase the rubbish out of the ECB balance sheet and take the hit... But hey, there are French involved here, so... Not to mention Angela Merkel, who with typical Weimar politician spirit, is again failing her constituents...

Now, you want something really funny? Listen to another Frenchman talking:

European Central Bank Executive Board member Benoit Coeure on Tuesday called for emerging countries to put their monetary reserves to use through the International Monetary Fund to help stabilise the global financial system.
In a thinly veiled reference mainly to China, Coeure said emerging countries hold around $2.1 trillion in U.S. government debt and have overall reserves of $6.5 trillion, adding that those levels are not justified for precautionary motives.
"The unused resources of the international monetary system need to be mobilised," Coeure said in the text of a speech to be given at a BIS/ECB workshop.
"It would be advisable, therefore, to utilise some of these excess reserves to stabilise the international monetary system, while Europe is enhancing its firewall. One obvious way to do this would be via the IMF," Coeure said.
"The IMF could borrow global excess reserves and use them to support programme countries that are suffering from liquidity shortages, under strict conditionality."
European governments have pushed other countries to help them increase the IMF's resources in order to build stronger defences against the euro zone sovereign debt crisis.

Is this the French way of begging? Is there no limit to arrogance? I know this whole rant of mine reeks of Schadenfreude, but truly, it is not. It is just looking at things the way they were looked upon in the past, when the roles were the opposite...

I presume that at this point you might be asking yourself (among many other more important things like "did I buy milk?") whether I think the German people can do no wrong. As a matter of fact they can. They are not asking for the devolution of Prussia yet...

Tschüss

The Polish letters: a long digression from the Euro discussion

Morning!

Back in the saddle here in B-city, and boy, is it cold or what?

By all means, I hope you actually got to sleep a bit over the weekend, the ECB certainly needs all its brightest minds alert and ready! But right off the bat, you bring up a crucial point: the French did fail to run monetary policy their way… But I think that was mainly because they never knew what monetary policy was in the first place!! The Bundesbank always did it for them... Now there lies the tragedy of the world right now: we (the world) no longer have a real Bundesbank, but a powerless rump and a bunch of bozos on both sides of the Atlantic worrying about expectations, output gaps, sticky prices and money-less monetary policy…

I am sorry that your foray into Verblendung (isn't Deutsch beautiful? We don't have such a precise word for that kind of "blindness" in Spanish, or in English for that matter) was so disappointing, that will teach me to be more prudent in the future when endorsing stuff, at my age I should have known that already. Further to your discussion, I should say that most movies draw endings from a well established set of clichés, so being surprised about a movie ending should not be a deliberate purpose of the wise movie viewer. I think the last time I have been mildly surprised by a movie ending was "The Sixth Sense" and even for that one, you could tell Willis was toast a good 30 minutes before the credits. So in my view, movies are pretty similar to life: you should enjoy the trip, not the destination. On that score, I would say Verblendung has got a lock on the upper half of the distribution… On a related point, I have recently seen some quite ingenious pornos, with totally unpredictable endings (for the genre). I hesitate to recommend you specific titles, after my botched attempt with Verblendung.

On Argentina and its education system, age comes into play again: this was then (when I was a boy), now the education system has been rubished by teachers' unions, so I don't even know whether they still have history anymore, except, perhaps, of the history of soccer. Beckenbauer (google him) will fill the role that Bismarck once had, and Maradona (ditto) is probably the new Argie "liberator" (in place of some José de San Martín, don't bother to google him). In any case, the Argie educational system was originally set up in the late 19th century by two presidents, Domingo Sarmiento (1868-1874) and Julio Roca (1880-1886, and again 1898-1904). It was quite a work, bringing down illiteracy from 90% to less than 10% in about 50 years…

So I shouldn't trust The Economist? Shouldn't I believe 100% their self-serving coverage? Oh my God!!! This thing you are telling me is terrible!!! I have lost the compass of my life!!! Somehow, in the future, I will have to read their notes with skepticism, treading carefully among the pile of angle and rubbish to try and sift through a few facts… and please don't swallow the crap!!! Specially not wholly!!! Thank you K., you just saved my life and career, although it will be tough for me to adjust to this new reality...


At some point next week I will go over the relevance of the Euro currency for the European project: I think they are very different things, and to me it is obvious that the Euro has become detrimental to the larger and more important European project. But that is what happens when you let the French inferiority complex run amok. Is it too intrusive of me, lowly South American, to say that the Euro contraption (i.e. the attempted neutering of the Bundesbank) was the price that Mitterrand and Delors exacted on Germany to approve the reunification? If so, la France has very well deserved the things that are coming its way…

The Polish letters: The Euro, that unnecessary mistake

At 8pm in the evening, I am in no position to deeply debate many of the subtle economic points you raised in your email (actually, I might not even be able to do that at 9am!). But some of the philosophical ones I want to tackle.

First of all, I actually don't like anybody or any country forcefully exporting his/her/its view of anything to anywhere, being the exporters Germans, Japanese, Americans, gypsies or PhD trained economists. Diversity is the great wealth of the world in general, and Europe in particular. But people have to live up to the consequences of their actions. And the reality (I hesitated to write "the truth") seem to be (I hesitated to write "is") that for the euro to survive, Europe has to die. Or in other, less dramatic terms, Europe has to become a big Germany (meaning competitive). Which would be a terrible tragedy. Now, there are different ways in which that could be achieved, that would involve fiscal restraint in most cases, but would not simply mean pasting additional German institutions on Greek or Italian societies and polities. And, as a matter of fact, I think M. recognized this, his position was that Italy was in trouble because Italians did not make any structural reform, while the Germans did, not that Italy failed to implement a Germanic reform agenda (as some commentators in the financial press are fond of suggesting). Incidentally, in the good ol' times (before the Euro), these situations could easily and relatively painlessly be dealt with a blow-up in some segment of the ERM. A few weeks of adrenalin, a couple of parliamentary governments went down, FT and WSJ had better sales for a few days, Soros pocketed some capital gains, and that was it, everybody back to work.  Now, it seems that the "adjustment" will certainly mean either long periods of wage deflation and possibly social unrest in Club Med Europe, or relatively high inflation (and social unrest?) in mein geliebtes Deutschland.

In regards to the role of Chinese imports on Germany's trade balance (the ultimate reason of my initial email), it seemed to me that you were surprised about my statement, which is the only reason why I brought this up again, otherwise I guess I would have forgotten about the whole thing. Your mild surprise made an impression on me (I obviously see you incapable of ignorance, if not mistake...).

Moreover, I did not say that you personally were supporting the idea of Germany's as an unfair trader, but the table's discussion was slightly drifting in that direction, something that I, a consummate germanophile, could not allow. Now I must say I totally share your three favourite eurocrat's ideas, maybe only swapping 1 and 2.  On the other hand, even though it is probably true that Germany is benefitting from some heavy degree of flight to quality, the fiscal impact of that effect is marginal (kicking in through the rollover of maturing debt, peanuts), compared with the massive size of the support that Germany might need to provide to her European buddies to "buy" time. So, it is not yet, but it could become a case in which to a large extent frugal Germans end up paying the bill for sinful Southerners (though their main sin was getting into a poorly designed monetary union with Germany… remember Hayek: to each people their money...).

Now, to cap it all, if your Polishness was somehow offended by the capricious projections of my incomplete European history knowledge, here's a tip, were you in the mood for petty revenge: you can really piss off an Argentinian if you ask him/her whether the capital of Argentina is Rio de Janeiro. A final dangerous remark: almost everything in life is relative. So if the benchmarks are the Kievan Rus' or the Grand Duchy, Ukrainians and Lithuanians have "some reason" to felt occupied…

Schön Wochenende!!!

PS: since Argentina was almost a desert before the XV century, we used to fill up the time gap in primary (and even secondary) school with long European history lessons  -- the Chinese were too far away, and Aztecs and Mayans were Mexicans, whereas we Argentinians thought of ourselves as Europeans in exile :). (Alas, the lavish display of European stupidity in the current juncture does nothing to prove countless generations of Argies wrong...)  Anyway, Kievan Rus', Grand Duchy of Lithuania, the old kingdom of Poland, Golden Horde, needless to say the Holy Roman Empire, are all entities with which I was quite familiar way before Wikipedia. Though I won't lie to you: I keep building up thanks to it!!

The Polish letters: Kick-off

A good friend of mine is an economist at the ECB... and Polish. The current tragicomical developments in Europe have motivated, recently, quite an exchange of ideas between us. While our editorial policy prevents me of using other people´s comments and publish them here without their consent, I will quote some of the statements that triggered my own responses, that I will reproduce here. So, without further ado, the first letter follows...
It all started at lunch in sunny (and humid) Cartagena. Four Europeans (non-German) and the Gorilla discussing whether or not and how Germany got unfairly benefitted by the new currency. The Gorilla, a consummate germanophile, was disputing the notion that Germany´s exported the Club Med bums to death. At some point, he comes up with the, till then unproved, assertion that Germany´s recent export success owes much more to the Chinese nouveau riches than to the lazy and spoiled Mediterranean deadbeats. Upon return to his base in B-town, he easily found evidence backing up his assertion. Moreover, he finds this in his Inbox (the actual "letter" follows, now for sure):

China takes over France as Germany’s biggest trading partner

As Angela Merkel starts her visit to China today, Les Echos explains on its front page that China will this year take over France’s long held position as Germany’s most important trading partner. Also the presence of German companies in China bears no resemblance to that of French companies and of any other European country. There are roughly 5000 German companies doing business in China compared to 900 French firms. More than two thirds of all luxury cars sold in China are German and the country’s manufacturers of chemical products and industrial machines are also leading. The paper also points out the support organisations German interest groups of small and medium sized enterprises have put into place in Beijing to help SME’s get started in China.

 I guess the gist of that conversation at lunch with P., your roommate M. and F. was whether or not the Germans have unfairly (?) benefitted from the euro contraption, by exporting too much (??) to the rest of Europe. I just brought to the fore the fact that over the last 10 years, about 50% of German exports have gone to emerging markets, especially China. And in fact, imports from Europe have grown much faster than exports to them deadbeats (sorry for the gangsta grammar). So what else the Europeans want from Germany in terms of rebalancing?

As a libertarian, I must say the German Leviathan seems to be one of the least harmful on the Western hemisphere. I understand that you, as a Polish, will be hard pressed to recognize any merit on the Germans, but I think you should try to overcome those ancient tribal rivalries. They seem to be blurring your judgment. And after all, you guys ended up snatching most of Prussia anyway :)