Things are falling apart across the Atlantic, and the implications for U.S. investors are now loud and clear.

As an American who grew up on baseball, yet was educated and employed (partly) in Germany with a residence today in France, I suppose it’s fair to say I have a global perspective as to both the realities and stereotypes of certain cultural and financial nuances.

As for Germany, well, it conjures up a great deal of stereotypes and ideas, both fair and unfair. I won’t defend or address those here.

However, what most of us on both sides of the Atlantic (including the French…) can agree upon is that Germany has a uniquely strong passion for disciplined spending, thrifty saving, and currency risk sensitivity.

This land of Max Weber, along with blunt speak economists like Ludwig von Mises or Walter Eucken, is all too aware (remember Weimar) of what happens when wheel barrels of worthless money are rolled out to solve chronic debt problems.

In short (kurz gesagt): It doesn’t work.

Here’s why…

A Fool’s Errand

This might explain why in the last ten years, three German members of the ECB’s Executive Board (most recently, and notably, Sabine Lautenschläger) have resigned in what can be boiled to down to little more than disgust.

Why?

Because these folks know that creating money out of thin air (quantitative easing) and calling that a “plan” is a fool’s errand.

Unfortunately, the entire raison d’etre of the ECB has been to do precisely that: print, print, and print again – then hope for the best.

Another overseas stereotype is that the farther south one goes – say the closer one gets to the Mediterranean – the more sun one sees, the more fun one has, and the less disciplined, shall we say, are the economic concepts of fiscal restraint – from Athens to Rome, Seville to Lisbon.

Whether such notions are fair or unfair, it was always an open joke in Europe to imagine an Italian (“Do [print] whatever it takes” Mario Draghi) running the European Central Bank. Given Italy’s record of financial comedies, it just seemed like an ironic mistake in the making.

A few years ago, while sitting in a very swank private club in New York City, none other than Alan Greenspan, the godfather or money printing, sat before me and a small circle of invited guests to openly admit that the Northern Europeans (primarily the Germans) would eventually tire of putting their own savings, economy, and thrift at risk to bail out what he called the “Club Med” economies of Southern Europe.

Why? Because for every Euro printed, the purchasing power of classic savers in the strongest EU economy – i.e. Germany – gets slaughtered.

Ah… Mr. Greenspan, the ironies abound, for here is the proverbial pot calling the kettle black, as he, along with his doppelgängers Bernanke, Yellen, and then Powell, are about as trigger happy as one can imagine when it comes to printing trillions out of thin air and then calling the stock market rise that follows an “economic recovery.”

The bottom line is this: No matter which economy one considers (European, Asian, or American), and no matter which central bank one looks to (the Fed, the ECB or the Bank of Japan), they are all drinking the same Kool-Aid of printing money and artificially cramming rates to (and below) the floor at historical levels of crazy.

And if you are wondering what crazy looks like, just consider that right now in Europe, holders of German bonds (by way of one example only) are getting negative yields on their bonds for as far as 30 years out.

Read that again.

That’s Germany’s yield curve in the chart below. Every yield plotted is below the red zero-line at the top of the chart.

That’s simply absurd… it means one is not only paying their governments to lose them money, but they are doing so three decades out.

Ahhh… the miracles of money printing.

But as even the ol’ hypocrite Mr. Greenspan warned, this is likely to infuriate fiscal conservatives or frankly anyone with an ounce of common sense.

And as of today, the Germans, are, well… irritated, vexed to the extreme, you name it… there are worse words, but I’ll refrain.

Angry Germany

Even as far back as the 1990s, the ever financially prudent Germans were extremely reluctant to buy into the whole “Euro” concept.

As Jacques Delors, the former (French) president of the European Commission confessed: “Not all Germans believe in God, but they all believe in the Bundesbank.”

That is, Germans notoriously trust their own fiscal and monetary system and have historically and philosophically distrusted the central tenets of the current “monetary stimulus” ideals of the ECB – i.e. massive money printing to buy (distort) unwanted debts (say in Italy, Greece or Spain…).

Nor do the German economists universally drink the EU Kool-Aid/faith that artificially cramming rates below the floor boards is a good thing.

In fact, they know it just makes borrowing costs cheap, debt levels insane, and bond yields effectively extinct.

Sure, such “stimulus” buys time, sets economies on a drunken autopilot, but eventually it ends in total catastrophe – a lot like Lance Armstrong on steroids.

This philosophical schism inside the ECB began from the first day, and now, decades later, is starting to really crack.

In September, seven of the 25 members of the ECB’s governing council voted against Draghi’s call for more money printing and rate cuts.

Last week, unnoticed by the U.S. financial “media” (whatever that is), a group of six former central bankers wrote an open letter of protest to the ECB.

And three of those six speak German.

This is a telling sign, as Germany is the ECB’s largest shareholder, holding over 25% of the equity of the 19 Euro countries.

And it’s not just the economists or bankers who are worrying (and swearing) auf Deutsch

Unlike Americans who buy real estate or stocks to prepare for rainy days (of which Germans are all too familiar), German citizens traditionally safeguard their money in savings accounts or life insurance policies that pay out in direct relation to bond yields.

But as we’ve seen above, bond yields effectively don’t exist in a Europe of central bank “accommodation,” and thus savers from Frankfurt to Hamburg are getting unfairly punished for prudence.

Wolfgang Schaeuble, Germany’s former Finance Minister is worried. In fact, he’s so worried that he fears such punishment is a leading cause of the rising populism in Germany – never a good thing.

A group of citizen German plaintiffs even took the ECB to court – all the way to Germany’s supreme court in Karlsruhe, from where the case has since been remanded to the European Court in Luxembourg.

In other words, the natives are getting restless.

Enter Lagarde to Help Save the “Union”?

This might explain why Draghi’s replacement at the ECB, none other than France’s own (and ethically challenged) Christine Lagarde, is a lawyer not an economist.

It will take some smooth-talking legalese and classic French diplomacy to keep the European Union “unified” as German savers get crushed just as the U.K. is exiting the EU party in a messy Brexit of undeniable Sturm und Drang.

Now, I’ll be the first to admit that the French language is a bit easier on the ear than German, but even the best linguists or legal minds in Lagarde’s camp may be of little impact against the harsh math and political stress emanating from across the borders in the land of Beethoven’s 5th symphony…

Stated otherwise, the European Union may not be collapsing, but it certainly is feeling less “unified.”

Germans are increasingly fed up, as they, along with many others throughout the EU, are slowly discovering that the “helicopter money” tossed out of the ECB’s printing press is revealing itself ever more as a failed experiment.

Again, lots of money buys lots of time – but both money and time are running out.

Over There, Over Here

And speaking of FED-up… It should come as no surprise that this failed experiment, rising populism, and weakening purchasing power of currencies and savings accounts overseas is based upon the very same central bank (Fed) template of insanity occurring right here in the U.S. of A.

It should come as no surprise, then, that we, too, are seeing rising populism, weakening purchasing power, and increased anger.

Needless to say, gold is thus a nice option to address such systemic risks…

As well, I’ve written at length of the short-term fun and long-term pain that is embedded in the current (and insane) policies of our own post-’08 central-bank, highlighting all the distorted (and rigged to fail) consequences that have trailed in the wake of our own record breaking money printing and rate reductions.

Yep, it has been a party for Wall Street and the wealth advisory complex, and a carefully ignored disaster for Main Street.

Sadly, and unlike the rising resistance seen in Germany, many Americans still feel the Fed has their back and is in control. These are comforting thoughts.

But as I’ve recently pointed out in two separate pieces – one on the repo market scam and the other on the Euro Dollar liquidity time bombthe Fed is neither in – control nor in your corner.

Instead, the Fed serves the banks and the markets they play in, as well as the publicly traded corporations who use retail investors (suckers) to pump up their own shares before their executives cash out at the top, leaving the rest of you at an inevitable bottom.

It has always been this way – or as the French say: la plus ca change, le plus c’est la meme choses

Those in charge (or reaping the rewards) of this rigged game aren’t capitalist heroes – they’re self-seeking antiheroes, plain and simple. The more you dig into this, the more this becomes obvious.

How do I know? Well, I’ve worked alongside and among them for decades.

I left those circles to breath fresh, honest air, and I’m sharing that with you today.

How Long Can the Crazy Last?

And as for today, the question remains: How long can the central banks keep this game of money printing, rate suppression and record-level debt time bombs ticking?

The magical money printers behind Modern Monetary Theory (MMT) tell us that no country that prints its own currency needs to stop printing money, as inflation is just a bad word, rather than historical possibility.

The Germans, of course, know otherwise. They remember the Weimar wheelbarrows. They remember history.

It would be wise if we Americans did the same.

Instead, we have entered the Twilight Zone where reason has been replaced by a nervous faith in nervous central bankers.

Sure, the bankers can keep the crazy going, but I hope you are preparing (informing) yourselves for the eventual return to a harsh reality.

For now, and for those who still believe that a nation can solve a debt nightmare with more debt and fiat money, I’ll leave you with the historical warnings of yet another German-speaking economist:

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
Ludwig von Mises

Any Good News?

Yes, there is some good news in all of this. Twilight or no twilight, we’ve got your back – more to come on what to do, why and when to do it.

In the meantime, stay safe, informed, and tuned into Critical Signals Report.

Sincerely,

Matt Piepenburg


Comments

22 responses to “German Lessons – Dire Warnings from Overseas”

  1. Well spoken! Who will pay the pension of retirees who have worked hard and put their money in saving accounts/government bonds in order to receive interest? Their funds will be depleted by negative compound interest and they will have no choice but to eat into their capital and when that is gone rely on state handouts to survive.

    Modern Monetary Theory is akin to the concept of creating a communist paradise, wonderful in theory maybe, but history has shown the awful consequences of these monetary and social experiments. Zimbabwe, Venezuela, Stalin’s Russia and the Eden of North Korea are examples of how these wonderful theories pan out in reality.

  2. Though the author is writing what most readers already know, it reminds us whose parents lived through the “Great Depression”, that DEBT was engendered by the generation following the 30’s. Some of us —- our entire lives — have never sought debt & paid only in cash! The principle of “living within one’s means” isn’t new. Just ignored. Avarice, yes is one of the sins that church-goers would have had driven into their psyches. But in our new world order following WW2, it appears that “consumerism” has been the new God. God & Gold are certainties. Maybe Debt is on the dark side, lodged with debt $ an anti-Christ!

  3. Thanks. Great information and analogy. Always enjoy your reports as they deal with facts and not the crap thrown out by the fed, media, government, etc.

  4. Matt, I really like your ongoing analysis. Without providing specific financial advice beyond the scope of discussion, would commentary regarding the relative merits of asset classes for positioning ahead of credit expansion culmination help your readers? This makes the analysis more applied and practical. Thanks.

  5. I’ll make an actual hold me to it prediction: We in the USA will never and I do mean never go to negative interest rates !!! The sane people of this country will not tolerate it. LZ

  6. It is The central banks Who is running the fully economy nowdays with massive debt and cash injections,,, not good company and New products. Only The printing machine of fiatmoney

  7. DEAR SIR,
    Not just Germany, but also the Netherlands is Seriously Fed up by the Draghi rein of the ECB.
    As you probably know the first President of the ECB was the Dutch central banker Willem Duisenberg, while the currently ‘t President of the Dutch Central Bank {DNB}, who qualitate qua is of course a boardje berichten of the ECB ha’s a History of voting against Draghi.
    Het even published an open letter in the papers his display sure and critique regarding Draghi’s latest decision then Even ingevuld of that same day.
    A very important element for the Dutch advertising to the “Draghi policies” can be found in the way it is working havoc with the Dutch Pension Funds.
    And, by the way, also Dutch Government’s Obligation are being issues and traded with a negatieve interest.

    Sincerest yours

    Roy Kloosterman
    {former securities banker and retired reserve Major of the Royal Netherlands Army }

  8. I grew up here in America, but in an immigrant German household, where because of what my Dad experienced, as a child, carrying a wheelbarrow full of German Marks to buy a loaf of bread, I was taught early on to be thrifty and save. He would always ask “How expensive is it” when I wanted him to buy something for me as a child. He also frequently used the expression “Germans live to work, Italians work to live” in his conversations with me.

  9. Absolutely brilliant Matt;
    I have subscribed to countless newsletters and investment papers, but none of them have been as explicit and as enlightening… in their explanation off the serious problems relating to the financial markets as yourself.
    Thanks sincerely for your help.
    Carl

  10. Thank you for your insight regarding problems that seek their solutions by extending their problems.

  11. Hi Matt, writing you from Germany my simple question is:
    Do we have, within the Eurosystem, similar shenanigans you unveiled for the US-Dollar/FED last month?
    Sincerely Michael

  12. China has made sure that each “Gold certificate in trust for the gold purchased is guaranteed the buyer upon request”. In USA “Gold certificate in trust for the gold purchased may not be guaranteed the buyer, since as many as ten or even more gold certificates may cover the same gold whereby should the many certificate holders request the actual gold bullion at the same time, the bank would have to go into the open market to acquire the gold for all or default which may result in the bank seeking bankrupcy protection.”

    China has it right. USA has it terribly wrong! Buyer beware. This fact may result in China’s gold backed currency replacing the USA dollar as the international currency.
    Rudy

  13. 20% of my portfolio is gold and silver bullion, soon to be converted to the actual metal, senior and junior mining stocks and 300 acres of prime staked mining claims

  14. I read the following exert from another analyst and I’m just wondering what your reply might be? If you have a little extra time?

    “We already know that the risk of a recession is much lower than many on Wall Street are claiming, just by understanding how important the refinancing market is to economic growth.

    But by using Uniform Accounting, we can see even more… Not only is the risk of a recession overstated, the actual risk of HY corporates – the highest-risk businesses – is even lower than the market realizes. As the market adjusts to this reality, it will give even more tailwinds to the refinancing cycle, extending out the risk of a recession to 2022 – if not even further.”
    Thank you for your time.

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