Oh dear – the wolves have come back to haunt us

When the UK and US banks got into trouble all the European friends put on a knowing look. There you are, they said. That’s what happens if you don’t have our system based on solidarity and friendship. Thank heavens we set up the Euro and turned our backs on all that Anglo Saxon stuff.

So it came as a dreadful shock one day when they heard that the wolves were back attacking them. The wretched wolves had worked out that although they couldn’t gobble them up in the currency markets any more, they could gobble them up in the bond markets.

All those friendly countries having such a good time kept on borrowing the money they needed by issuing things called bonds. Unfortunately the wolves could sell these bonds, just as they had the currencies. The more they sold, the more it cost the countries to borrow extra money. Because some of them had borrowed so much, they couldn’t afford a big rise in the cost of their loans.

The wolves soon mangled Greece. Then they devoured Ireland, and moved on to Portugal. Each time the friends met and decided it was too dear to stop the wolves. They had one of their friends in the IMF, and the good old IMF came along and started lending money to the countries in trouble. When he was attacked with some unfair allegations, they put another friend of theirs into the top job at the IMF. That all seemed fine, until one day they were told that it was difficult to keep Italy in the game without going to the IMF.

(there are two possible endings to the fairy tale. Ending one is the unhappy one. Ending two is the happy one. You can choose which you like best – or you may think I’ve got them the wrong way round)

Ending One
Because the wolves were so ravenous and angry, the friends met and decided they would feed the wolves so much they would slink away full or die of overeating. So they got what they said they wanted. They beat the wolves, and lived on with their single currency and their common bank account. The Germans just had to put up with printing lots of Euros, and with the value of their money going down.

Soon they started complaining that they had got what they wished for. The poorer countries did not grow. They had to keep cutting back what they spent. Their people got poorer. The richer countries kept bossing them about, telling them to tighten their belts more. Germany was not happy, because there was more inflation than they liked and they had been made to pay some big bills. They could not sell so much any more to the others, because they had all run out of money.

Ending Two

Because the wolves were so ravenous and angry the friends met and decided they could not beat them. So they decided to break up their currency, and recreate all the old currencies they used to have. Germany said she was fed up with paying so many of the bills. The poor countries said they were fed up with endless cuts and more commands. So they sadly ended the Euro. It was rough at first, but within a year the poorer countries were growing again and felt better about themselves. They could make more of their own decisions. And Germany found that just as she had before she could still export even though her currency had gone up. She just got more for what she sold. They were even allowed to choose their own governments again.


  1. ian wragg
    December 23, 2011

    And the extreme elements flourished, there was mayhem on the streets of southern Europe. All things German were destroyed and anarchy ruled.
    Meanwhile in the sureal world of Brussels, legislation banning gatherings of more than 3 persons were passed and a tax on looting was introduced.
    VAT on stolen good was increased to 25%.

  2. Mike Stallard
    December 23, 2011

    I have just got back from Switzerland where I was able to have a chat over local beer about the Euro and its future with a very successful Swiss financier. I presented ending two and he very politely begged to differ. His view is that ending one is the future. Why? Well, Germany, he says, will be very pleased with devaluation because it will aid exports and hurt imports – the solution to a depression. The other countries will be happy as the value of the Euro sinks to meet their demands and the Euro will survive because, frankly, it is too much trouble to do all the alterations back into old money.

    So we can look forward to quite a lot of secret inflation as the Euro devalues. He is buying properties.

    This man, I wish to say, is extremely successful and his whole future rests on his making the right call at the right moment. And I, personally, hated being a poor relation in a country which I have always regarded as a rather eccentric backwater.

    1. Alan
      December 23, 2011

      I agree with much of what you say in your first two paragraphs, and your account of a Swiss viewpoint is interesting. But I don’t think you need to feel so defensive about Britain as you imply in your third. There are still many reasons why living in the UK is better than living in Switzerland.

      I do envy Switzerland and Germany the stability of their currencies (which I expect to continue in the long run even if the euro is devalued in the near future). I wish we could find a way of running our economy efficiently that did not rely on periods of excessive borrowing followed by sharp devaluations.

    2. ian wragg
      December 23, 2011

      But it still won’t change the competitive variations with the PIIGS so another crisis will surely follow.

      1. Mike Stallard
        December 23, 2011

        The new question which I now face is this: will the euro devaluation (secret) be enough to cure the crises permanently? The argument has so far been that given local autonomy, countries will be able to devalue for themselves. Maybe a total devaluation might do the trick?.

  3. Alan
    December 23, 2011

    Another alternative ending:

    Then David awoke from his daydream. He reached for his glass of scotch, but it too must have been part of the dream. Or perhaps his man, Salmon, had removed it. He had been showing irritating signs of too much independence lately. Very irksome.

    Looking out through the glass walls of his house David could see his neighbours across the ditch. As always they were debating, arguing, agreeing, disagreeing. Time to wake them up to reality. He reached for one of his pebbles and threw it, but it bounced irritatingly off the glass. The pebbles were getting lighter and lighter and often did not even get through the glass. Only occasionally now could he make the sort of impression that his heroine had so frequently made. However he was able to recall with satisfaction the effect he had had last week. One pebble had been big enough to shatter one of his windows and had got more than half way across the ditch. For a moment that had halted their debate. One or two of them had even had the effrontery to ask if he was in difficulty and to enquire whether he would like to join them. Naturally he had ignored them. It was a pity that Nick had been under the window when it broke.

    It was irritating that the pebbles were so small. With bigger pebbles he could have broken more of his windows and perhaps reached his neighbours across the ditch. That would show them. But when he had asked George why the pebbles kept on getting smaller George had just muttered something that sounded like concretative paving. That couldn’t be right. It made no sense. Mind you, not much that George said made much sense. At least George had promised that he would never run out of pebbles, unlike those idiots across the ditch. Their pebbles were almost as big as they had been years ago, but they were running out of them. George had already made an extra 250 billion pebbles out of nothing and was about to do the same again. With friends like that you could not go wrong, even if you couldn’t understand all this stuff about paving.


    What was happening now? The neighbours were all agreeing. They had more pebbles and the pebbles were still large. That Irishman from across the pond – O’bama or whatever his name was – was chatting to them and helping them to build a strong brick house. Meanwhile David’s pebbles were even smaller, not much bigger than grains of sand really, although George had made trillions of them. The wolves were getting in through all the broken windows and the pebbles were too small to drive them away. It was time to ask the neighbours if he could join them. But after all his stone throwing and insults, what hope was there that they would help?

    “Welcome”, said the neighbours. “Merry Christmas. We are very pleased you could join us. Have some scotch: Mr Salmon gave us some when he joined”. From the other side of the room Salmon, his erstwhile manservant, who had somehow already gained admittance to the club, smiled in welcome and raised his glass in a toast. David drank deeply. It tasted good. He wondered if it might actually be easier to be friends than enemies.


    Merry Christmas everybody.

    1. Peter van Leeuwen
      December 23, 2011

      @Alan: Fun to read!
      (without admitting it, they’re our friends already)

    2. David Dee
      December 24, 2011

      Alan I hope that you,too, enjoy Christmas because,even before you know it, it will be time for you to return to school !!!

  4. Jim
    December 23, 2011

    Please don’t take my suggested ending to the story literally: economics is not my strong point and I’m sure I’m attributing views to John Redwood that he doesn’t hold – apologies, and anyway I don’t really expect a happy dénouement … But this is just Walter Mitty-inspired comic fiction for Xmas …. A Happy Xmas to all, and thanks to Mr Redwood for his excellent blog … And please wish me luck; I’m spending the holiday with my euro-fanatic Spanish in-laws ….

    Through the door into the operating room he strode …

    “Thank God … Thank God … Messrs. Sarkozy, Merkel, Barroso, Rompuy, Draghi …allow me to present Doctor Redwood … ”

    Redwood nodded: “Lady … gentlemen …”

    “Is bad,” blurted Barroso, “Verry bad so … so is why … is why we asking you come … ”

    “We have a diagnosis?” asked Redwood

    “Peripheral schlerosis, obviously,” Merkel gulped, “Severe downturn in the extremities … Fluidity non-existent … contagion spreading upwards.”

    “Eez not,” muttered Sarkozy sulkily.

    “It ist,” spat Merkel.

    “Eez not”


    “In God’s name shut up! … Can you help us, Doctor? Will you take the case?” spluttered Draghi, distraught, haggard.

    “Is that your wish? The wish of all of you?” Redwood glanced at each in turn.

    “Yes, oh yes, we are wishing, Doctor. Oh we is wishing so much.”

    “Very well then. I make no promises … I will do what I can … ” They slipped a green gown over him, a mask … white gloves.

    Redwood consulted the huge many-dialled machine connected by tubes to the operating table. He tapped a dial: “Stagflation has set in … There’s not a moment to lose …”

    “Is no point, if you is asking me,” muttered Rompuy.

    “I’m not asking you,” snapped Redwood . “Maximise quantitative easing.” “Maximise quantitative easing,” repeated Merkel, “I is knowing it all time! All time I is knowing it!” Redwood consulted another set of complicated dials, “Activate the EFSF.” “Activate the EFSF.”

    “I is telling you,” muttered Sarkozy, “What? What I is telling you?”

    “Ist not.”



    “Gentlemen … Lady … This is not the place … This is no time … ” said Redwood in a low, cool voice even as he glanced at the dials: “Keynsian stimulus.”

    “Keynsian stimulus. Always I knowing it!”

    Redwood strode across the room and began to finger another row of glistening dials. Wires hummed and lights flashed … A pretty nurse mopped his brow …

    “Sell all risk-weighted assets.”

    “Sell all risk-weighted assets.”

    Another nurse was at his side with a blackberry: “Sir … It’s … It’s … HIM … He’d like a word – if you can spare a moment, he says.”

    “Redwood speaking … Yes … Yes … I think so … Just … Just about … Yes, skin-of-the-teeth job … If they’d come to me a bit sooner … But I think so – just …Yeah … Yeah, thanks, thank you and happy Xmas to you and to Michelle and the girls …”

    1. forthurst
      December 23, 2011

      I think Mme Teak Chops deserves a role; where would we be without her very important le platitude du jour?

      Perhaps Dr Redwood could also provide a consultation for DSK who is now suffering from electile dysfunction?

  5. Peter van Leeuwen
    December 23, 2011

    It was interesting to read that the departing Italian ECB member Lorenzo Bini Smagi is coming out against eurobonds. He prefers to keep some wolves around in the bond market as a good way to discipline the countries concerned (e.g. Italy). Obviously he doesn’t fear the wolves that much. Indeed, larger wolves like George Soros (a ferocious hunter in the early nineties) is on record as having no appetite to try and hunt the euro down. By fencing in the wolves (a bit like in wild parks) calm will return to civilized society (no dramatic ending). We won’t need to change the wolves into German shepherds, but just to make sure that ultimately man will be in control. Now, politicians will have to turn to a jobs growth agenda, as they will in January 2012. In the meantime, have a merry X-mas!

  6. lifelogic
    December 23, 2011

    Ending two it must be and the sooner Germany leaves the better for all.

  7. Mazz
    December 23, 2011

    I have an uncanny feeling we may be having the same choice of scenarios on the menu next Christmas time. The whole cabal will string it out for as long as possible.

    Thank you for your great blog, John.

    A very “Happy Christmas” to one and all.

  8. English Pensioner
    December 23, 2011

    Another alternative ending

    Because the wolves were so ravenous and angry, the friends decided to feed them, but unfortunately the wolves had been breeding rapidly on their nutritious diet and there was still insufficient to satisfy them, resulting in the printing presses working overtime.

    And so, the German people, having worked hard to re-establish their finances following the war, and having saved money for the future said “enough is enough” (in German, of course), “Why should we work hard in order that all these southern Europeans can laze in the sun all day at our expense?”. And the French people, seeing how the Germans were thinking said “Merde” and lots of similar words.

    And so it came to pass that the French and German peoples jointly cast Merkzoy to the wolves and rebuilt their own defences in the form of a new Mark and a new Franc, retreating within their boundaries for safety leaving the rest of their ex-friends to fight the wolves alone.

    And the Cleggiband knoweth not what to say!

  9. javelin
    December 23, 2011

    The end game has been put off again and again by Government and Central Bank interventions. But the effect of interventions are now at the point of being worthless.

    We have another EZ Summit planned for end of January. The effects of each of these summits has lasted less and less time. The effect of the first summit was about 40 days. The positive effect of the summit of last week lasted 5 days before the banks exposed the deal as woefully inadequate. As I said yesterday last weeks LTRO will only give banks 4bn by June when 115bn is need to meet Basel3. Eposed as an epic fail in 5 days. The time to failure is getting less and less. As banks understand the problem space more and more, as the solution space becomes clearer and clearer the gap between the attempted solution and the required solution is being exposed faster and faster. We’re now down to a few days before failure is declared.

    The massive central bank intervention in November lasted less than a month – now most bank shares are back to where they were, or lower, before the intervention. Epic Fail.

    Each intervention and summit is having less and less impact. The can no longer be kicked down the road. The patients morphine is having almost no effect. We’re now down to a few days for each solution to be exposed. Banks try to give politicians the benefit of the doubt – until evidence is published by analysts.

    Just like Gordon Brown’s budgets we’re now AT THE POINT now where evidence of failure will soon be found before the next days trading. Banks don’t want to be mean, they dont want to tear the politicians apart if they can help it, banks need evidence. So banks researchers hold bank and try to understand the solution on offer. Reputations are being built by banks’ analysts and it is off the back of those reputations that the Governments and Central banks are being damned at a faster and faster pace.

    Given the bond refunding that are needed I can see the EZ surviving January – but only just. But I honestly can’t see this farce going on past Feburary. St Valentines day looks like a candidate for being a bloody mess.

    Reply: The large injection of funds eases liquidity pressures and provides an alternative source of cash to bond markets where weak banks may find it difficult to roll over debt. It does show the ECB wants to stand behind Euro area banks.

  10. javelin
    December 23, 2011

    Just to illustrate how CRAZY things are getting the Swiss are considering *paying* people money to borrow money – negative interest rates – just to get their FX rate down. The system has broken down.


  11. Atlas
    December 23, 2011

    Ending number two would be better.

    However, the abilities of Merkosy to defy the laws of (economic) gravity seem to equal those of the Inquisition when it came to Galileo, so I don’t hold out much short-term cheer…

    Anyway, talking of Cheer, I hope you have some this Christmas, John.

  12. Disaffected
    December 23, 2011

    Little Liberal boy was hoping that Santa Merkel and her elf Sarkosy would bring him all the gifts he and his friends hoped for. He was a greedy spoilt boy and did not care what it cost as long as he got his own way. Where he came from people behaved like this. He knew that his Daddy Dave would always cave in to his demands; Liberal boy was a greedy spoilt child from a privileged back ground and was taught manners at the best schools his daddy could afford, but this did not improve his attitude (emotional intelligence) that created his morals and values. Liberal boy would tell people all they wanted to hear as long as he could get what he wanted from Santa Merkel, he was a very manipulative child who was encouraged by his bully boy friends.

    Merkel made all the gifts and sold them in Euroland. Euroland thought the gifts were cheap or free, but Merkel and her elf Sarkosy had disguised the true value of the gifts and so the greedy children of Euroland wanted more and more. Merkel had got (personal word left out-ed) and rich by her deeds, but she did not like to share. Most of her family did not even like to share bath towels on the beach with other children when they went on holiday together. The terms of friendship was always on her terms or she would take the toy away even if it did not belong to her and she would tolerate other people saying a word about it or she would punish them further. In fact she made it clear that although the wolves gather at Christmas time she would be happy to feed her friends and customers to the wolves if they did not play the game she wanted. Liberal boy adored her. One day he would grow up to be just like her and her elf Sarkosy. He did not want to join them in their country he wanted a country to himself and behave like them.

    The wolves were bigger and stronger than Santa, the elf, their bully boy friends from Euroland and their weak poor friends. The wolves were hungry and did not care what they did or what they said. They heard it all before, all wind and bluster. They had been given a taste of what they could eat and wanted more. Much more. They were going to have their Christmas feast and the consequences were irrelevant to them. The wolves had their feast, there was carnage and those who escaped blamed their friends for the mess they had actually created.

  13. Conrad Jones (Cheam)
    December 23, 2011

    I think I like “Happy Ending” Two.

    I guess what you are saying is that for a Country to be Democratic and Sovereign – it needs to have control over it’s currency.

    Unfortunately – Happy Ending Two only moves towards that as the Government could still be attacked by the “Wolves” as it’s Bond Market could still be manipulated on the Worlds Foreign Exchanges – despite having it’s own currency.

    If the Greek, Irish, Portugese, Italian, Spanish Government’s each controlled the quantity of money in their respective Countries, creating money instead of Bonds, the economies would improve dramatically and the National Debts would begin to be paid off.

    A National Currency controlled by Private Banks is not a happy ending – a national currency controlled by the policies of a national government is.

  14. javelin
    December 23, 2011

    Ho ho ho.

    An early Christmas present for Sarko.

    10 year gilt falls below 2% !!

    Enjoy it while it lasts.

  15. John B
    December 23, 2011

    I favour Ending No 1 as this requires inaction at which the “leaders” of the EU are so good.

    Getting in the decorators to paper over the cracks with expensive wallpaper, rather than fixing the foundations.

    Ending No 2 would require conscious thought and a grasp of reality and action at which the “leaders” of the EU are incapable.

  16. Ken
    December 23, 2011

    Actually there is only one likely ending – the wolves break in and eat lots of people. The stupid neighbours mill around in a brick house and blame everyone else. The enraged people of some of the neighbours’ villages break into the brick house and hang their leaders. Martial law is declared. The neighbours continue to blame the wolves. Soon, their brick house is on fire. The people realise their leaders are idiots, there is a rise of extremist parties. The neighbours finally become beggars and homeless. They regret not doing what the British told them.

    Since ending one is impossible, they should embrace ending two before my ending occurs. But because the Euroliars think they can bounce us towards political union using this disaster, they are going to get lots of people eaten.

  17. Denis Cooper
    December 23, 2011

    In another alternative ending, it is finally admitted that there are no wolves, just investors who don’t want risk their capital by lending it to governments which are unlikely to repay it with the agreed interest.

    Just as with an earlier fairy story, briefly fashionable among the left in the 1960’s, when in the end it turned out that there were no gnomes in Zurich.

  18. Kenneth
    December 23, 2011

    John, your fairy story is a great way of getting the kids off to sleep on Christmas Eve.

    Lobbying for ending 1, as our government has been doing, does make some sense from our point of view. The longer ending 1 is tried, the more debt Germany will absorb and the less we will absorb.

    However, ending 2 is inevitable and I suspect Germans will force the ending of the Euro (or get out of it) sooner rather than later.

  19. Derek Emery
    December 23, 2011

    There are few if any of the EU elite with any understanding of economics, finance, markets, and risks as otherwise they would not come up with such inane sticking plaster solutions to the problem they originally created by the formation of the eurozone. They had zero understanding then and have not improved in the slightest over the last decade.
    The elite are incapable of maths and even slightly understanding analysis based on the use of financial mathematics. The elite are so conceited that they think what they do not understand in not worth knowing hence their lack of interest in analysis of situations. King Canute-like they think they can force the markets into submission. One belly laugh is that they think that if they had their own ratings companies (i.e. towing the EU propaganda line they tell them) they could get the rest of the world to invest in their debt. How infantile is that?
    Meanwhile Fitch reckons that a “comprehensive solution’ to the eurozone crisis is technically and politically beyond reach.”
    Who would you put your money on being right – the other-worldly immature EU elite or Fitch?

  20. BobE
    December 23, 2011

    Happy Christmas John. Thank you for your wonderful blog.

    Reply: Thanks. Happy Christmas to you.

  21. Frances Matta
    December 23, 2011

    A. The Brothers Grimm story “The Goblin Cobblers”.

    B. Hans Christian Andersen’s “The Emperor’s New Clothes”.

    Either way, it’s a fairy story.

  22. Frances Matta
    December 23, 2011

    Fairy stories no longer cut it.

    This is serious.

  23. uanime5
    December 23, 2011

    Alternative ending: people realise that the wolves are the real problem and shoot them all. Thus removing all the problems caused by wolves.

  24. Rebecca Hanson
    December 23, 2011

    hmmm, yes. If you remember my dad you’ll guess this is the kind of story I grew up on.

    But I was a kid who asked a lot of questions.

    Like the questions about the issues associated with the fluctuations of the many smaller currencies. And the questions about the relative morality of the different wolves. And the probing of the deeper issues and how things could be otherwise and why they are as they are. And so on.

    In 2012 could you write blogs which probe aspects of chapter 6 in ‘Masters of Nothing’ John? I think it would be interesting to explore some of the issues it touches on here.

    Good to see David Cameron in Afghanistan and at Havel’s funeral. The latter gives hope to those of us in education who cannot cope with Gove.

    Merry Christmas to you and all who comment on your blog.

  25. Javelin
    December 24, 2011

    European markets closed quietly yesterday.

    The exception was Italian bonds – back up above 7% – following mark to markets on the BTPs issued to the LTRO. It appears the LTRO has is creating a negative feedback on collateral. So now we find out the payback.

    The London Clearing House will be imposing increased margin calls on BTPS. The US will be working on Boxing day to react to this. I don’t expect Christmas spirit to last until the new year.

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