Monday, June 18, 2018

Capital Flight to Germany in Full Swing?

Bah, here we go again.  Public demand for currency never ends and provides a continuing shrinking supply of cash which allows governmental spending.

The problem remains locating risk free investments and they do not exist except as a government promise.   The expanding cash and credit bubble drives the economy and makes it all work well enough.  Throw away all those borders and all this disappears immediately.

Local guarantees shift that capital to areas that are capital poor.  This is as it should be.  A guarantee in North Dakota shifts deposits into their banking system.  Their loan portfolio expands locally.

All those private deposits landing in Germany merely come back as local bank deposits simply absolving the individual of local government confiscation.  As it should.
Capital Flight to Germany in Full Swing

The ECB guarantees these loans.

As long as they are guaranteed, then hells bells, why not make more loans?

1 Germany and the creditor nations forgive enough debt for Europe to grow. This is the transfer union solution.

2 Permanently high unemployment and slow growth in Spain, Greece, Italy, with stagnation elsewhere in Europe

3 Breakup of the eurozone

Capital; flight to Germany, the Netherlands, and Finland is in full swing. These sums cannot be paid back. 

I have commented on Target2 liabilities before.

Perhaps a Mish-modified translation from the Welt article Imbalance in the Euro System Reaches a New Record will ring a bell.

The central banks of Germany's euro partners Italy, Spain and France owe the Bundesbank almost a trillion euros . This is a new high. - more than ever before. Tendency continues to rise. There is no security for this money.

Read that last line again and again until it sinks in. Italy is €464.7 billion in the hole. Spain is €376.6 billion in the hole.

Debtors owe Germany, the Netherlands, and Finland over €1.157 trillion.

In May, Italian liabilities increased by almost 40 billion euros.

"Capital flight to Germany is in full swing," says Hans-Werner Sinn, longtime head of the Ifo Institute and one of the most prominent economists in the Federal Republic.

Originally, Target2 was designed to facilitate cross-border transactions within the eurozone. The system achieved this goal. From the point of view of critics, this means that the Deutsche Bundesbank provides long-term unsecured and non-interest-bearing loans to the central banks of other eurozone countries , especially the central banks of southern countries Italy, Spain and Portugal.

Fundamental Eurozone Flaw

Target2 is a fundamental problem of the Eurozone.

Germany Will Pay

Germany will pay one way or another. Here are the possibilities.

Those are the alternatives.

Germany will not allow number 1. It is unreasonable to expect number 2 to last forever. The only door left open is door number 3.

The best move would be for Germany to leave the eurozone. Germany is in the best shape to suffer the consequences.

Unfortunately, the most likely outcome is a destructive breakup of the eurozone, starting in Italy or Greece.

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