Why Germany will come to love printing Euros: Kohler

The stunning success of BHP Billiton’s bond issue last week is a clear demonstration that these days global investors prefer corporations to governments, managers to politicians.

Which is why Italy and Greece have put managers in charge in an attempt to appeal to bond investors. No one is fooled however, and the run on Europe has only accelerated.

Last week BHP raised $US3 billion at interest rates ranging from 1.2% for three years to 3.25% for 10 years – less even than the Australian government pays for debt, and it’s a solvent government.

And why wouldn’t the owners of capital throw money at a borrower that doesn’t need the money, has a gearing ratio of 26% and is backed by gold (as well as iron ore, coal, uranium, copper and gas)?

After four decades of a monetary system based on faith in governments instead of gold, the central banks of the world are in various states of penury. Even the People’s Bank of China has a gearing ratio of 1,297 to one as of September 30.

The United States has been printing money, Switzerland has been printing money and soon Europe will be printing euros – there is no choice.

What’s more, Germany will be as enthusiastic a money printer as the Federal Reserve because the alternative will be the bankruptcy of the Bundesbank and the collapse of its own economy.

China-based economist Michael Pettis showed recently that Germany has been the key beneficiary of the euro: “In the decade before 2000 [when the euro began], Germany shows up in the top 20 trade surplus countries only once, in 1990. But in the decade after 2000, Germany is the second biggest trade surplus country every single year except in 2001, and again in 2010, when it ranked third.”

“France shows up in the top 10 trade surplus countries every single year from 1992 to 2003, after which it drops off forever to become one of the major deficit countries after 2005. Meanwhile, surprisingly, presumed wastrels like Italy are actually in the top 10 trade surplus countries every year from 1993 to 1999, while little Ireland managed to put in four showings in the top 20 trade surplus countries in the 1990s. In the decade after 2000, however, they too became major deficit countries.”

In other words, Germany used the euro to become an export powerhouse; the peripheral countries used the low interest rates to boost domestic consumption and debt instead.

In my interview with him yesterday, the managing director of Magellan Financial Group, Hamish Douglass, said Germany is now dictating economic policy in Europe with a view to propping up the euro.

“I think the Germans believe they have time on their side and by allowing bond yields to go up is putting so much pressure for change to happen politically and economically within other large countries in Europe.”

Part of this strategy involves convincingly denying that it will allow the ECB to follow the Federal Reserve and engage in large scale monetary financing of bond purchases, but in the end necessity will be the mother of capitulation.

This article first appeared on Business Spectator.