The latest crisis across the pond has reared its ugly head, and it is not the Brexit. Italy’s large and shaky banking sector is about to require a massive bail out (or bail in alternatively) in order to prevent bank failures and bank runs across not only the Italian peninsula, but conceivably all of the European continent. The only person with the ability to stop such a crisis is ironically EU strongman German Chancellor Angela Merkel. Even now she is wrestling with questions about unfettered money printing and unlimited national asset buying that will determine the future of not only the EU economy, but that of the entire world, for years and potentially decades to come. Consider what is hinging on Merkel’s decision to allow or forbid large scale quantitative easing across the cultured continent now.
What Happens if Merkel Refuses to Allow Large Scale National Money Printing?
Saving Italian and struggling European banks and the failing economies of the periphery in Europe requires quantitative easing on a large scale and the end to German enforced austerity throughout the continent. Angela Merkel knows this all too well, but she is wrestling with her own personal German demon in the form of the ghost of Herr Haverstein. Rudolph Haverstein was the German Central Banker responsible for limitless German money printing almost a hundred years ago that led to hyperinflation and the ultimate collapse of the Weimar Republic and subsequent rise of Adolph Hitler. In the collective German memory, this is the worst possible route to go with potentially disastrous consequences not only for Germany but all of continental Europe.
Should Premier Merkel refuse to greenlight and encourage large scale money printing and massive national spending to save the European economy, then a European recession is only weeks to months away. If Germany will not allow its European national peers to fire up their helicopters full of money to go throw it out to the proverbial businesses and people on the streets, then it will become clear that Germany is choosing to pull back from the EU political project they have worked so hard to foster for decades. It will not only be the European citizens who suffer from the potentially long and painful recession, but equity investors around the globe as the economic malaise will surely spread. Ultimately the entire survivability of the European project is on the line, as it is clear from the signs of strain and discontent throughout the continent that the political union will not survive yet another financial crisis so close to the last one (and from which they have still not recovered).
The sign to watch as to whether Merkel is relenting or not concerns the imminent introduction of the BRRD Bank Resolution and Recovery Directive. If this is implemented and Italy is forbidden to bail out its banks, then bail ins will instead commence. This would lead to large scale bank runs across both Italy and probably throughout the continent. Some observers are already calling this the next Lehman Brothers moment waiting to happen. We all remember how wildly gold and silver reacted in 2008 to the uncertainty and financial chaos the financial crisis and economic collapse unleashed less than ten years ago.
What Happens if Merkel Endorses Throwing Money on the Streets from the Helicopters?
It is a completely different picture for Europe and the world economy if German Chancellor Merkel instead hands over the keys to the proverbial money printing helicopters. As a result of limitless national spending throughout Europe, worldwide stock markets would run up rapidly and massively. This effect on both European and global equity markets and prices would last for months, quarters, and quite likely even years. The bad news of this economic solution to complicated political problems in Europe is that investors already clearly know where the party finally ends— in hyperinflationary misery. If history is any guide, this will not keep euphoric investors from participating in and reaping the benefits of their irrational exuberance as the initially beneficial reflationary impacts take hold. The side effects of reflation and inflation are significantly higher gold and precious metals prices in the cards.
So Will Merkel Actually Give the Keys to the Printing Presses to the National Central Banks?
The answer to the billion dollar question depends on whom you ask. Judging by recent new highs in British and American stock markets, investors are supremely confident that Frau Merkel will sign off on the end to fiscal austerity policies in the Eurozone in the next few days to weeks. This would mean that she breaches the European Central Bank constitution and turns a deaf ear to the wailing inside her head of the ghost of Herr Haverstein. It should not be so lightly taken for granted that Merkel will bet everything and sacrifice the future on an alter to save the political union of the EU.
Still, investors feel the odds on favorite is that Merkel’s Germany will walk away from implementing the BBRD and requiring massive bail ins by the Italian commercial bank debt holders and large depositors, as happened in Cyprus a few years ago. Taking this position ignores Germany’s initial response to Italy’s recent statement that it will bail out and recapitalize its banks with public funds. Merkel not only recently insisted that the laws will be implemented as is, she intervened and commented on the Italian statements directly with her official EU wide policy. “We wrote the rules for the credit system, we cannot change them every two years.” That does not sound like a German Chancellor who is about to walk away from enforcing the rules. If this is where Angela Merkel really stands on the issue of fiscal and banking austerity, then the next full blown financial crisis is but a matter of days away from erupting. In this environment, you should not let anything or anyone part you from your retirement gold holdings.
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