There is often a strange interlude in world affairs. We have a dramatic turn of events and then a period of quiet until the full effect of an unfolding disaster launches itself with a severity and speed that is overwhelming. Two great disasters come to mind. The invasion of Poland in September 1939 and declaration of war on Germany by Britain was followed by a queasy period of quiet until the Nazis turned their attention to France in May 1940, and the shock of the massive assault on France and Britain is still the stuff of literature and history. Similarly, the crash of 1929 was followed by a similarly confused period that made it seem that perhaps things were not so bad. But 1931 saw the onset of massive bank failures and some really mark that year as the real start of the Great Depression. I am no economist. But something happened today in Europe that filled me with trepidation.
This from JPM's newsletter "Eye on the Market" today:
Today, Italian equity markets sold off sharply and were eventually shut down after the ECB (for now) rejected being the buyer of last resort for Italian government bonds, as the markets were hoping. The Bundesbank apparently has objections to the idea. This is a problem: Italy has issued around as much public debt as Germany, but is a considerably smaller country with almost twice the debt load as a percentage of its GDP. Absent a decision by Germany to move to Federalism or a lot more debt monetization by the ECB, the European Monetary Union (as it is currently configured) could be facing its final stretch. Today’s reported move by Italian regulators to seize documents at Moody’s regarding declines in Italian bank stocks is an indication of the pressure the system is under, and the possible search for scapegoats.
If the Euro is entering a stage of collapse, partly due to bank failures in Italy, the 2011 may be marked as our 1931. Everything is linked to everything in today's world. We have exposure to European debt and to the European economy. China holds a lot of EU debt. Greater minds than mine must ponder the implications. But I must say that I feel extremely nervous at the prospect that we are about to experience an awful economic shock. I write this diary in order to hear what others have to say on the subject of the possible effects of EMU collapse on us and the political implications.