Worthless Billions Won't Solve a Trillions Problem

Wednesday, December 19, 2007

Welcome to the inflationist days. Central banks are pouring money in unprecedented amounts into markets reeling from an insolvency crisis that cannot be solved by throwing artificially created bills of credit onto a market while accepting dubious collateral. Just have a look at the explosive growth of "other assets" in the ECB's balance sheet
At the same time European central banks salt away their only asset with alpha performance: gold holdings in ounces keep declining, and this practice has never been questioned by politicians so far. Is it ignorance or incompetence? Watching ECB president Jean-Claude Trichet telling a very empty European Parliament on Wednesday nothing new about the current crisis it enforces my belief that European politicians do not have the faintest idea how grave the situation is.
"Liquidity" actions
by central banks will not help to avoid but only delay the inevitable process of deflating the layers of debt created in this century. After all what is a few hundred billions of Euros for all European banks when only the off-balance risk of the banking sector of tiny Austria reels under 2.1 trillion of derivatives risk while having equity of only 73 billion Euros, according to data compiled by Oesterreichische Nationalbank
Translate these relations to the bigger members of the Eurozone and get an idea of how big the mess really may be...
So no matter how many more billions Trichet will create, it ain't gonna earn him a paper-jumpsuit from Superman as these new Euros that have grown the ECB balance sheet in less than a year by almost 20% will only worsen the current crisis which was brought on by too much money in the first place.The whole world nowadays knows that the mess was created by too much cheap credit. Only central bankers keep denying this. Extending credit further is not a solution but only a whimpish action to delay the outcome until 2008.
No matter how much new money is created, the day of reckoning will be December 31 when all "assets" have to be priced for year-end results. I think is is fair to advise some cash/gold on hand in January. Just in case the ATM won't work.

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