Felix Zulauf: expect more market turmoil than in 2008
In an interview from late September, Zulauf tells James Turk that he is very much a eurosceptic. The external imbalances in the euro zone make the euro an untenable currency union. Like David Blanchflower, Zulauf remarks how markets are leading European policymakers. Zulauf believes that this is what is behind the European bank run now in progress and that this run will eventually put the entire European banking system at risk. This will only be solved after successive crises. Notice that he agrees with me that rising economic nationalism will definitely play a factor here.
Zulauf and Turk also discuss the ECB and the balance sheet problems from buying dodgy assets that I alluded to earlier today. Note that Zulauf says that a central bank can survive without equity capital “in theory” i.e. it could be technically insolvent but that lacks credibility entirely. As Willem Buiter suggests, the ECB would have to be recapitalised in the event of a sovereign default, the reason they are resistant to one in Greece.
Zulauf also explains that austerity will not be enough; he believes governments everywhere will resort to monetisation, effectively a competitive currency devaluation. From this interview, it is clear that he sees the Weber and Stark departures from the Bundesbank and the ECB as a sign that the hard money crowd has lost control at the ECB. In fact, he expects enough monetary stimulus that it will lead to continued negative real rates and currency revulsion, pushing gold much higher.
I agree. Regarding the Fed, I said in August:
the Fed is already feeling political heat from its previous policy actions, so it will allow the economy to slip before it embarks on the next round of asset purchases. Therefore, if and when the next recession hits, debt deflation will take hold. The calls for stimulus will be deafening. And because the Fed will have resisted more aggressive prior action, the Fed will then be forced to be extremely aggressive in its policy response. That is when expanding the balance sheet will be a go and the Fed won’t just buy Treasuries, but a lot of other assets too.
Turk and Zulauf also discuss the similarities to 2008. Greece is bigger than Lehman, Zulauf says, So we should expect more market turmoil than in 2008.
Note that Zulauf says, regarding the UK, that while it is clearly not AAA material, the fact that it has currency sovereignty is important in avoiding crisis. However, he believes fiscal austerity at this point in the economic cycle risks “killing the patient” and that the UK is embarking on consolidation at the wrong time. Cutting deficits into the teeth of recession when the private sector is highly indebted INCREASES deficits by inducing crisis that necessitate bailouts and killing demand, causing tax receipts to plunge. Moreover, he says, monetary policy is largely impotent due to the deleveraging attendant with crisis situations due to a high private sector debts.
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