Ludwig von Mises Institute of Canada

“… For all practical purposes, the European Central bank made sure that its liabilities, the Euro, will never be able to reach a global reserve status…”

Click here to read this article in pdf format: July 9 2012

Markets had a quiet week, with a holiday in Canada and another in the United States. We will therefore be brief today.

In our last letter, we presented how we think, the end of this crisis will be brought about: With the collapse of the futures markets. It is important that these markets really break because they are the ones used to manipulate commodity prices (not just gold) and as long as commodity prices can be controlled, the flight from fiat money to real assets will not be triggered and the global depression will stay with us. We know that, “they” know that and that’s why when that critical moment approaches, the repression to avoid it will be phenomenal, of a kind nobody in the developed world has ever witnessed. We leave it here…

Last week, the central bank of Argentina declared that at least 5% percent, we understand, of deposits held by local banks “must” be lent to businesses. Everyone laughed at this ridiculous measure. Everyone knows that it is useless and that the government of that country can do nothing to prevent their eventual fall. Last week too, the central bank of the European Union declared that it will pay nothing, (zero percent rate) on deposits from Euro zone banks. Yet nobody laughed at this measure and still… it is nothing else but a twisted version of what the Argentines did. It is as ridiculous and it will be met with the same answer: Less lending and more recession.

As we wrote months ago, in order to save their currency, the Euro zone destroyed its banks. And with this last measure, it will have ended its money market. For all practical purposes, the European Central bank made sure that its liabilities, the Euro, will never be able to reach a global reserve status. The damage these irresponsible central bankers are doing is immense because until now, Euro banks were not lending to each other for a genuine reason: Very high counterpart risk within a currency zone that is falling apart. They were taking heavy capital losses on the sovereign debt holdings they had been coerced to invest their funds in but, at least, they were able to earn 25bps on immobilized monies. Now, they won’t even have this “risk-free” income, a situation that actually enhances counterpart risk, as solvency is further crushed.

At the same time, if the banks cannot afford to have funds immobilized, they will discourage the growth of deposits in the Euro zone, precisely when they are most needed. The way markets welcomed this measure shows we are not alone with this view.

On another note, last week too, Robert Diamond, ex-CEO of Barclays was called a criminal during a testimony before the British Parliament. The reason? His former employer was accused of manipulating the London inter-bank offered rate (LIBOR). We can only ask this: Why are bankers called criminal when interacting in the market to get a price for their product, while central banks, who actually “set” the rates….are not? Who is the criminal? After all, would any other business not try to move a price to its benefit? If it is successful, it’s because the demand for that product is there. The point is: They were not, which is why Libor, after all, has become an irrelevant rate. Was that criminal? Did bankers really ever force other banks or businesses to borrow by way of bank debt, rather than bonds or raising equity? Yet, central banks do actually impose rates on the market, regardless of demand. Who is the criminal? Who is it?, we ask…

Lastly, in our letter of June 25^th, we argued that it was now conceivable to see Germany leave the Euro zone first. We think that the latest actions, both by the central bank and the Euro Summit, make this outcome increasingly likely.

Martin Sibileau

“… For all practical purposes, the European Central bank made sure that its liabilities, the Euro, will never be able to reach a global reserve status…”

Martin Sibileau graduated from the Universidad de Buenos Aires in 1997, with a BA in Economics. He holds a Masters in Finance from the Centro de Estudios Macroeconomicos (Buenos Aires, Argentina) and a Masters in Business Administration from the Richard Ivey School of Business (Univ. of Western Ontario, London, ON, Canada).

Mr. Sibileau currently works as Director for the Loan Portfolio Management team of a Toronto-headquartered financial institution. In his free time, he regularly writes on global macroeconomic developments at www.sibileau.com.

Since 1997, he has held various positions in the areas of corporate finance, strategy consulting, international banking, commercial banking and risk management.

Tags: Bob Diamond, deposit rate, deposits, Euro, Euro Summit, Euro-zone, European Central Bank, Germany, global depression, LIBOR, money market