The truth about Europe- There is no solution Part 2: Growth doesn't rhyme with crunch


Home Forums The Automatic Earth Forum TAE Blog Finance The truth about Europe- There is no solution Part 2: Growth doesn't rhyme with crunch

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    Portugal has a deposit fund of 1.4 billion euros collected from banks through annual contributions, according to Barclays. The country’s total deposits stood at 164.7 billion euros at the end of March, according to the central bank.

    And where was that 1.4 billion euros invested so that it would be available?

    Sound like a fishy story.


    The systematic withdrawals of deposits from PIGS banks is a slow leak, not a run. In 2008, the rate of withdrawal from money market funds was $250 billion/hr and accelerating, after Lehman fell and Primary Reserve broke the buck. This is 1000x the current rate of withdrawal from the PIGS banks. In 2008 the Fed stopped the run by issuing a blanket guarantee. If the Eurozone had a real run, Mario Draghi would grab emergency powers and do exactly what the Fed did in 2008. And he is the only one who could do anything because the ECB, as the issuer of the Euro, is the only entity that can guarantee all Euro deposits.


    I can’t help wondering if there’s a stalemate between the Fed and the consumer. The Fed wants credit growth, but the credit-worthy consumer is refusing to borrow (as much as the lenders won’t lend to anyone “less”). And I just can’t help wondering if these credit-worthy consumers have dug their heels in. They are refusing to budge. Contrary to the Fed’s expectations, these consumers are shrugging off 0% returns because they are going to wait this out in cash, no matter what the Fed does. And so the irony is that eventually, it may become apparent that the only way to increase spending is to capitulate to the consumer and give them yield on their savings. Once we have yield on our savings, THEN they will spend something. Only then will they feel richer and use some extra interest income to buy a nice car. Because as it stands, the 0% policy just makes the consumer feel poorer and poorer and even while he loses spending power to inflation, psychologically he feels like he still needs to hang on to that money for dear life. It totally flies against conventional wisdom….but I can’t help wondering if that’s where we’re at. An interest rate boost would actually increase the wealth effect rather than decrease it. The less credit-worthy would be more broke, but they aren’t going to spend no matter what. They’re broke either way, with or without an increased interest rate. However, the cashed up consumers, even as a wealthy minority, might start to spread some wealth around if it was earning something without having to engage in ridiculous gambling risks. Just a thought.

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