Skip to comments.The week that Europe stopped pretending
Posted on 06/03/2012 10:18:06 PM PDT by bruinbirdman
The euro has essentially broken down as a viable economic and political undertaking. The latest rush of events reeks of impending denouement.
Switzerland is threatening capital controls to repel bank flight from Euroland. The Swiss two-year note has fallen to -0.32pc, not that it seems to make any difference.
Denmarks central bank said it was battening down the hatches for a "splintering" of EMU. It has cut interest rates twice in a matter or days and pledged to do whatever it takes to stop euros flooding into the country. Contingency plans are on the lips of officials in every capital in Europe, and beyond.
On a single day, the European Commission said monetary union was in danger of "disintegration" and the European Central Bank said it was "unsustainable" as constructed. Their plaintive cries may have fallen on deaf ears in Berlin, but they were heard all too clearly by investors across the world.
Joschka Fischer, Germanys former vice-Chancellor, said EU leaders have two weeks left to save the project.
"Europe continues to try to quench the fire with gasoline German-enforced austerity. In a mere three years, the eurozones financial crisis has become an existential crisis for Europe."
"Lets not delude ourselves: If the euro falls apart, so will the European Union, triggering a global economic crisis on a scale that most people alive today have never experienced," he said.
Mr Fischer has the matter backwards. The euro itself is the chief cause of the existential crisis he discerns. Yet he is right that three precious year have been squandered, and that Europes policy mix has been atrociously misguided. The pace of fiscal tightening has been too extreme, made much worse by the ECBs monetary tightening last year. This inflicted
(Excerpt) Read more at telegraph.co.uk ...
Perhaps I’m just having a hard time identifying the players without a scorecard, but aren’t these the same folks who announced they had solved the Greek crisis about 6 weeks ago? If they were wrong about that, maybe I am not buying their prognostications at this point. Actually, I’d rather see some creative destruction happen, and under no circumstances should the U.S. taxpayer be used to backstop this mess.
Actually, Id rather see some creative destruction happen, and under no circumstances should the U.S. taxpayer be used to backstop this mess.
Yes to that.
Where did I leave that tinfoil??????
The left and whatever their solution is (I haven't heard it) is what the gasoline is. More like napalm actually.
I would have expected the good ship USA to ride out this storm, but for the fact that our national millstone - our 10 or 12 too-big-to-fail banks - are up to their gunnels in loans to Europe. Too-big-to-fail=taxpayer backstopped.
Good. Let it blow.
Bernanke did it twice before.
Let's see what he has to say before the Congressional Joint Economic Committee on Thursday.
I have bad news for you...
Here in the U.S. we proportion our congressional seats and political power by population. Given the fact that some states have firemen, teachers, cops, and janitors who make twice what the same professions make in others (i.e. California/New York vs Tennessee/Idaho) the same thing will likely happen here in the U.S.
The states that have largely lived within their means will be paying for those who have not sooner or later - just like the Eurozone.
The root cause is socialism and big union government with lavish pensions. It only last until you run out of other peoples money. I know many retired cops who moved to Idaho after retiring that make over TWICE what the active cops still working make that patrol the neighborhoods they chose in Idaho. I know a few teachers who retired from California that make twice what active teachers do in Idaho.
What will Idaho get for their frugal nature when the rat states run out of money? Screwed. They don’t have the clout in congress that the big states do.
Redistribution of wealth will not only apply to entitlements in the future. Pensions are going to play a big role and they are the next entitlement bubble. This is one of the main reasons that unions spend so much money lobbying national politicians on the left. It was the main reason for Obamacare in my opinion.
Student loans are a drop in the bucket next to big union pensions.
Nope, the theft of the public's money has been too extreme, causing ever growing promises, and not enough people actually earning money to pay for it.
If Greece defaults as a nation, the Greek government will not be able to convince anyone other than governments or international institutions to loan them money. In other words, the private sector will not lend them money (buy their bonds) at face value. And politicians in most other nations will find hoardes of screaming constituents at their door if they start sending money to Greece.
The Greek government will then get along without borrowed money, so government handouts will reduce and those Greeks used to living on them will seek income in the private sector.
With what will be a motivated, i.e., hungry, workforce, newly willing to work, Greece will become a nation sporting some attractive business development opportunities. While some may dejectedly wait for government handouts, some will hustle around and try to look for opportunities to earn in the private sector. Life will simply go on for citizens, albeit with a much higher work/pay quotient. Selling apples on the corner, digging ditches, fixing old shoes and selling them, many new industries will appear as people struggle to survive. The sooner they set up a reasonable free market economy, the sooner they can start accumulating real wealth and increasing their standard of living based not on government borrowing, but on their own productivity.
Large banks in other nations who hold Greek bonds will take a huge haircut on them, getting paid little or nothing as they try to sell them for what cash they can get. Investors around the world (including pension funds, mutual funds, etc., via various private fund mechanisms) will come in and buy up the Greek “junk bonds” from the large banks, some of which will then be insolvent (as losses are written off on those bonds (assets) and the banks’ assets become worth less than the total of their liabilities) while others will manage to survive.
Large banks that go bankrupt will mostly be chopped up and have their assets sold off for pennies on the dollar (a la Lehman) and employees and creditors will be paid to the extent possible by the bankruptcy administrator. The large banks will be located in various nations around the world.
The other PIIGS nations will be hit kind of hard, because inevitably some of the large banks that are buying THEIR government bonds won’t exist any more, so they’ll stop lending money to those nations. Some or all of those nations will then wind up defaulting on their bonds, triggering the bankruptcy of other large banks.
As each large bank collapses, however, their assets will be bought up at very cheap prices by other banks. It’s like buying your neighbor’s second car, a 2005 BMW 5 series, in excellent condition, that he just finished paying off, and only paying $7,000 cash because he’s going bankrupt and needs cash. You just increased your net worth by a few thousand dollars because you only paid 7k but the car is worth say $12k to $15k.
As smaller banks are deluged with new customers who need to make their final withdrawal from their bankrupt bank and then open an account at another bank, they find they can easily hire bank employees to handle the work, because thousands of employees from the bankrupt bank are looking for a job.
After a few years, most of the big banks have gone under and the losses on owning all the worthless government bonds will be written off by their owners.
Populations of nations will be very un-warm to the idea of their government borrowing/issuing bonds.
The school marm of economic reality will have cracked our knuckles with a ruler - hard - to drive home the point that governments should do little to no borrowing, as it is highly addictive and never ends well.
The U.S., of course, is headed for the same natural austerity. How hard we crash is, of course, dependent on how much more we create a legal environment that makes entreprenuerialism increasingly difficult and how much more we allow our governments to spend on employees, contractors and “seminars”.
Perhaps it will help to remember, it’s not a “ghetto”, it’s a pre-re-development.
Ambrose quotes Joschka Fischer, the EU’s for vice-Chair...and a Red Army Faction and Beider-Meinhoff Gang violoent terrorist.
Fischer was a leader in several street battles fought by the radical Putzgruppe (literally “cleaning squad”, with the first syllable being an acronym for Proletarische Union für Terror und Zerstörung, “Proletarian Union for Terror and Destruction”), which physically attacked a number of police officers. Photos of one such battle in March 1973, which were later to haunt Fischer, show him clubbing policeman Rainer Marx
Your assuming the Greeks won’t simply riot and burn half the country down. Or in other words, you are assuming they are rational. I’ve seen no evidence of that.
But isn't this good for Idaho and bad for California? The "cops to cops" comparison is beside the point. California is paying the generous, not to say excessive, pensions of Idaho residents.
Short term of course it’s good for Idaho.
You get experienced public service employees. They are pumping, or have the ability to, pump twice the amount of money a normal person in their position would be able to into the local economy and tax coffers.
However the rub is with California $16 billion in the red this year when that state goes under financially speaking who has to bail them out? The people in Idaho, Montana, the Dakotas etc that have the money by way of the federal government.
It’s either that or you start letting states fail. I’m for the letting states fail part.
Like it or not you will see states fail in the next 10-25 years. It’s all going to come back to the basis that populations have been indoctrinated into electing candidates sensitive to gays, Latinos, minorities, environmental causes, abortion, unions etc as opposed to people who actually wanted to run a state in a sensible fashion.
So, does this mean that I should delay my purchase of classic car parts priced in Euro’s, for a better exchange rate not too far down the road?
Or should I hurry to place my order before the Euro goes the way of the DoDo bird?
If the Euro goes, is the European Union kaput too?
Back to Francs, Marks, Gilders, etc.?
Looking for the practical aspects of this.
“Your assuming the Greeks wont simply riot and burn half the country down. Or in other words, you are assuming they are rational. Ive seen no evidence of that.”
It’s hard to be too complacent. The union stuff in Wisconsin is a US prelude to exactly the same behavior. We’re not quite as far down the road as Greece. Only limited, state-level initiatives to curb union power and government handouts have been attempted here. Imagine the Wisconsin solution being forced on CA by reality. It would fall apart, just like Greece.
Pournelle has taken to quoting from that quite a bit in the last several years.
Yes. The way I see it, if there was never a Euro, the EU was/would be basically a trade pact using individual currencies. Now that the currencies are all combined, and then fall apart, there must be new trade agreements based in individual currencies, since I do not think that, say, France and Germany will continue to use the Euro and the rest of the countries will revert to their traditional currencies. The reason why all the Euroistas are bending over backward to save the Euro is complex, but I know there are large deals for large goods such as ships, cars, and military equipment, etc., and if the Euro goes down all those deals/agreements go down with it. Everything will have to be redone, which gives no one the benefit of keeping the Euro and IMO the EU will splinter based on currency valuations.
I have read that the Bankruptcy Code does not contemplate the bankruptcy of a State. If true, the Code should be amended to do so. The short term problem created by such a change would be an immediate increase in the borrowing costs of California, Illinois and other irresponsible States. The long term benefit would be a solution to the fiscal problems that have been created by the unionization of public employees and the consequent corruption of the means by which their compensation is determined.
It works until the state can’t pay the pensions and everyone else has to bail them out like Europe has bailed out Greece.
It’s just back to multi-currency bookkeping, which is what it is. Sometimes there is a gain on currency translation, sometimes a loss.
Germany’s marks would generally be appreciating relative to the other currencies.
The long-term limit on Germany’s export businesses would simply be the poorness of other nations.
One must remember sovereign debt in considering what’s been going on for the past few decades, and much more so in the past 10 years. National governments (including the U.S.) issue bonds, selling them for cash that they spend. This is government borrowing. That money is spent in the economy now by government employees, recipients of benefits and vendors who sell products and services to the governments. Government borrowing has increased to fund more spending to the point where the U.S. government borrows about half what it spends.
These bonds must all be paid back by future tax revenue.
The U.S., if every dollar of taxes went to paying off government bonds and not one penny for spending, would take 8 years to pay off all the bonds outstanding.
So companies that sell ships, cars, etc. - as well as everyone else - have been transacting business in an economy that is pumped full of cash that was borrowed against the government’s future tax revenues. Future tax revenues must pay back the bonds, or new bonds have to be issued to pay the current ones, or the government will default on the bonds.
If $16 trillion was not invested in those U.S. Treasury bonds - it would ultimately be invested in businesses. The Investors would buy corporate bonds, real estate, shares of stock, commodities, deposit the cash in a bank, etc. Somehow or another those dollars would be invested in business operations. But instead those dollars are invested, literally, in future taxes.
This same scenario is true in Europe.
If the Euro goes away, if BMW wants to sell cars outside of Germany, they will be selling to customers who need to earn their own cheap currency that has to get exchanged for expensive Deutschmarks in order to buy the cars.
If a major German chemical supplier sells to U.S. companies, they will simply need to exchange Dollars for Deutschmarks instead of exchanging Dollars for Euros. If any contracts have to be amended to effect that change, it could be done very quickly.
The contractual wordings aren’t really the problem. It’s the long-term problem of trying to sell SAP software, Mercedes cars and trucks, BASF products, etc., to Spain, France, Italy, etc., where they would find the products very expensive without incessant government borrowing to put cash into their local economies.
Due to American freedoms (rapidly disappearing), we still turn out to be the marketplace in the world where one can get the most for the goods and services one wants to sell. It’s quite simple why: America, more than any nation in history, protects the right of her citizens to embark on their own business enterprises. When the freedoms disappear (such as requiring small businesses to cater to protected classes of people when hiring, etc., or face lawsuits), small business will disappear and the prosperity will disappear.
To put the magnitude of the European problem in perspective:
U.S.______________USD 15_______UDS 1.5
Germany_________EUR 2.57____EUR 1.29
About half of Germany’s GDP is exports !
For the U.S., only about 10% of GDP is exports.
That means Germany wants it’s customers in other countries to be able to buy their products and services.
However, if the German government is lending to the governments of the other nations for them to be able to afford to buy, it makes no sense, because German taxes on it’s citizens are then ultimately funding sales of German exports.
This is really the headwind that American exporters face: the other nations of the world are too poor to afford to buy our exports.
Ergo, the leadership of American big business, inasmuch as they rely on exports, tends to be globalist and want to have U.S. foreign policy send U.S. tax dollars to poor countries to increase their standard of living. Trouble is, such use of tax dollars does not create fundamentally sound economies, only true Biblical morality creates the freedoms and ethics which are needed to create sustainable prosperity.