Ministry of [Un]Truth
Saturday, June 23, 2012 at 12:00AM
Silver Prices

By Eric Sprott & David Baker

Speaking at a Brussels conference back in April 2011, Eurogroup President Jean Claude Juncker notably stated during a panel discussion that "when it becomes serious, you have to lie." He was referring to situations where the act of "pre-indicating" decisions on eurozone policy could fuel speculation that could harm the markets and undermine their policies' effectiveness.1 Everyone understands that the authorities sometimes lie in order to promote calm in the markets, but it was unexpected to hear such a high-level official actually admit to doing so. They're not supposed to admit that they lie. It is also somewhat disconcerting given the fact that virtually every economic event we have lived through since that time can very easily be described as "serious". Bank runs in Spain and Greece are indeed "serious", as is the weak economic data now emanating from Europe, the US and China. Should we assume that the authorities have been lying more frequently than usual over the past year?

When former Fed Chairman Alan Greenspan denied and down-played the US housing bubble back in 2004 and 2005, the market didn't realize how wrong he was until the bubble burst in 2007-2008. The same applies to the current Fed Chairman, Ben Bernanke, when he famously told US Congress in March of 2007 that "At this juncture… the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained."2 They weren't necessarily lying, per se, they just underestimated the seriousness of the problem. At this point in the crisis, however, we are hard pressed to believe anything uttered by a central planner or financial authority figure. How many times have we heard that the eurozone crisis has been solved? And how many times have we heard officials flat out lie while the roof is burning over their heads?

Back in March, following the successful €530 billion launch of LTRO II, European Central Bank President Mario Draghi assured Germany's Bild Newspaper that "The worst is over… the situation is stabilizing."3 The situation certainly did stabilize… for about a month. And then the bank runs started up again and sovereign bond yields spiked. Draghi has since treaded the awkward plank of promoting calm while slipping out enough bad news to ensure the eurocrats stay on their toes. As ING economist Carsten Brzeski aptly described at an ECB press conference in early June, "Listening to the ECB's macro-economic assessment was a bit like listening to whistles in the dark… It looks as if they are becoming increasingly worried, but do not want to show it."4 And the situation has now deteriorated to the point where Draghi can't possibly show it. Although Draghi does now warn of "serious downside risks" in the eurozone, he maintains that they are, in his words, "mostly to do with heightened uncertainty".5 Of course they are, Mario. Europe's issues are simply due to a vague feeling of unease felt among the EU populace. They have nothing to do with fact that the EU banking system is on the verge of collapsing in on itself.

When Prime Minister Mariano Rajoy assured the Spanish press that "There will be no rescue of the Spanish banking sector" on May 28th, the Spanish government announced a $125 billion bailout for its banks a mere two weeks later.6 This apparent deceit was not lost on the Spanish left, who were quick to dub him "Lying Rajoy". But Mr. Rajoy didn't seem phased in the least. As the Guardian writes, "Even when the outpouring of outrage forced Rajoy to call a hasty press conference the next day, he still refused to use the word "bailout" - or any other word for that matter - and referred mysteriously to "what happened on Saturday". He went as far as to say that Spain's emergency had been "resolved" ("thanks to my pressure", he said). He then took a plane to Poland to watch the national football team play ("the players deserve my presence")."7 Sound credible to you?

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