A day after the German Bundestag passed into law the expansion of the EFSF fund, Europeans were greeted by headlines giving the unwelcome news that inflation is on the rise again. Indeed the inflation number was far greater than expected, coming in at 3% from 2.5% for September , and may be indicative of the massive injection of cash into the European banking industry over the past number of years. The unsettling side to the story is the effect this will have on the average consumer, with the euro area unemployment at 10% and member countries ploughing ahead with severe austerity measures, there is a real danger that the burden on consumers will be too great and trigger a deep a recession. The German people have a huge issue with inflation, it is at the heart of their economic policy, inflation targeting is seen the key to maintaining stable long term growth. If we witness continuation in inflation growth without relief in the form of lower interest rates for consumers,who are already burdened with significant debts; this would reduce spending en masse. 

Central Banks Were Net Buyers in August

In the face of higher gold prices central banks in South America and Asia added handsomely to the gold reserves. Thailand was a buyer of 300 kilos/oz of gold in August thus bringing its reserves to 4.4 million ounces; Bolivia was a buyer of 225 koz bringing its reserves to 1.36 million ounces; Russia added another 118 koz and Tajikistan bought 60 koz. 

How to Stop a Second Great Depression

George Soros chimed in with an article printed in the Financial Times - How to stop a second Great Depression today. He stated quite starkly the risks of anything less than massive overhaul in the treasury functionality of the Union. Stating Financial markets are driving the world towards another Great Depression with incalculable political consequences. The authorities, particularly in Europe, have lost control of the situation. They need to regain control and they need to do so now.  He pulled no punches. Soros's solution calls for a centrally managed treasury that is configured alongside the ECB to manage a potential Greek default by protecting affected government and bank finances.

He goes into the nuts and bolts of the scheme as follows;

The EFSF would be used primarily to guarantee and recapitalise banks. Thef systemically important banks would have to sign an undertaking with the EFSF that they would abide by the instructions of the ECB as long as the guarantees were in force. Banks that refused to sign would not be guaranteed. Europe's central bank would then instruct the banks to maintain their credit lines and loan portfolios while closely monitoring the risks they run for their own account. These arrangements would stop the concentrated deleveraging that is one of the main causes of the crisis. Completing the recapitalisation would remove the incentive to deleverage. The blanket guarantee could then be withdrawn.

Kicking the Can Down the Road

The European debt crisis is far from over and the fear is the expansion of the EFSF is far too little too late as stated by RBS's Silvio Perruzzi, There is no choice. The ECB will have to keep buying bonds, moving ever closer to debt monetisation. If this firewall is removed, contagion will accelerate dramatically, we think the euro-zone is falling into recession and this is a big risk. It will call into question the budget consolidations of Italy, Spain and even France.