Home > Uncategorized > How the Goldman Sachs guys (in cooperation with mrs. Merkel) wrecked Europe

How the Goldman Sachs guys (in cooperation with mrs. Merkel) wrecked Europe

Yesterday, Eurostat published predictably dismal economic data about Europe: the six-year slump continues. Important: this is very much an European slump, as Ambrose Evans-Pritchard showed:

nataxis

And it’s an engineered slump. A striking fact of the graph above is the sudden stalling of the European recovery around 2011, Q1. This stalling was deliberately caused by Eurozone monetary policies. One can of course point to the ECB interest rate increases of April as well as July 2011. But these increases were, in the end, limited to ‘only’ 0,5%. Much more important, however, is what happened to ‘real economy interest rates’, like those paid by governments and, as governments nowadays are the financer of last resort for banks, therewith to rates paid by households and non-financial companies (graph 2).

Graph 2. Difference between interest rates paid by Italian, Spanish and French governments and the German government  

Interest rate

Macro economics textbooks will tell you that one of the main tasks of a central bank is to prevent such events from happening. And they will tell you the recipe: unlimited buying of bonds (which is also the present ECB policy, of course, as long as ‘Karlsruhe’, i.e. the German constitutional court, allows this). Macro-economic textbooks are heavily biased towards the USA economy, but in the Eurozone these rules apply a-forteriori, as high interest rates in one country improve the competitive position of companies in other countries, which gives these countries an incentive to push policies which cause high periphery interest rates. Despite textbook wisdom, however, policies did not prevent high periphery interest rates – but even seemed to try to engineer them. Around 2011, scores of politicians and economists, probably unaware of the dire world-wide consequences of the high interest rates of 1982 and the lost decade of south America, joyfully lauded the virtues – the necessity – of high, ‘disciplining’ interest rates. And high interest rates did work: they wrecked government finances as well as the business economy and were willfully used to oust democratic governments.

Comes in the class of Goldman Sachs (a USA based bank). High interest rates and the accompanying turmoil were used to parachute Goldman Sachs people into positions of power and responsibility. Clearly, but for Mario Draghi (who did bring down interest rates in a rather miraculous way), many of these guys turned out to have neither the people and intellectual skills to be an effective politician or to have an idea of ‘public purpose’ – though they were of course effective enough to use resources of governments, households and non-financial companies to bail out the banks. In Italy, high rates were used to topple the government and install the ineffective mister Monti. In Greece, high rates were used to topple the government and to install mister Papademos, a total failure and – a Goldman Sachs Guy. Ireland? The infamous ‘bail out the banks’ mister Sutherland. Mrs. Merkel, from Germany? She’s not just the most powerful women of the world but also well connected with people from Goldman Sachs, like former CEO Henry Paulson and the head of the German branch of Goldman Sachs, Alexander Dibelius, an official advisor of Merkel. (look here and in this book). And then there is Antonio Borges, chief privatization officer in Portugal. Or Mark Carney, boss of the Bank of England (previous: boss of the Bank of Canada). And many, many more.

And these bankers started to push their fundamentalist agenda:  unemployment has reached unprecedented levels, ‘Europe’ is dwindling in an economic, political as well as a social way, poverty is increasing, labour is dumbed down and interest rates in the worst hit countries are, though finally coming down, still way too high, six years after the slump started. .

But banks are bailed out…

People state that the ECB should be more aggressive. But it’s too late. The damage has been done. Years have been wasted. Long term unemployment erodes the skills of generations. Poverty increases. It’s time for helicopter money, to get debts down (which, without helicopter money, is only really possible through large-scale bankruptcies, as paying down debts will lead to a decline in the stock of money, as the ECB monetary statistics clearly show, month after month).

We might bail out households and families…

  1. TK
    August 15, 2014 at 6:10 pm

    Merijn, I enjoy your posts on economic policy, but you should be careful with your links. The website with the article on Angela Merkel propagates an anti-semitic worldview and should not be rewarded with further attention or visitors.

    • merijnknibbe
      August 15, 2014 at 7:41 pm

      Checked the website, updated the post. Thanks.

  2. August 17, 2014 at 7:43 am

    You may want to take a look at this:

    Source: http://www.querschuesse.de/usa-industrieproduktion-juli/

    The above analysis shows that the increase in US industrial production since 2009 has only one source: mining = fracking. All other US industrial activities are still in a massive decline.

    • merijnknibbe
      August 17, 2014 at 8:16 am

      I do not agree. The graph in the blog shows manufacturing production, a subsector of industrial production which excludes mining and quarrying. This does show continued growth and an increase of the utilization rate, according to this official site: http://www.federalreserve.gov/RELEASES/G17/current/table12.htm

      • August 18, 2014 at 7:12 am

        I got in touch with Querschuesse and it turned out that you are right. According to Querschuesse the chart (green line) shows the ratio of entire industrial production index to mining subindex without reflecting the weight/proportion of the subindex mining. So it makes little sense.
        I am sorry for distracting with this.

  3. August 17, 2014 at 10:42 am

    Querschuesse is refering to this data set.
    http://www.federalreserve.gov/releases/G17/Current/g17.txt
    I guess table 4 and 5

    • August 18, 2014 at 8:06 am

      Querschuesse’s chart cannot be right because in 2009, mining in US was about $291 billion or about 2 percent of GDP ($14.4 trillion). Hence 30 percent growth in mining to 2013 cannot possibly explain the chart’s substantial decline in IP (ex mining) when total IP growth is positive by 2013.

  4. Ignacio
    August 18, 2014 at 3:32 pm

    This post strongly suggests that an hypothetical United States of Europe migth work much better than the European Monetary Union.

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