John Taylor On A Schizophrenic Europe - A Must Read

Tyler Durden's picture

John Taylor's most brilliant letter to date.

Schizophrenic Europe
June 10, 2010
By John R. Taylor, Jr.
Chief Investment Officer

Managing an investment portfolio in Europe can put you on the fast track to a mental asylum. Only a playwright like Luigi Pirandello, who lived with a schizophrenic wife and wrote plays like Henry IV with its multiple levels of reality, could cope with the financial landscape in today’s Europe. Unfortunately, with the powerful political elite so committed to the EMU process, which they see as critical to the survival of the European Union, these economic distortions will only become more severe. Eventually it will either end badly, as in Henry IV with violence and death, or well, as in a crucible-like reordering and re-characterization of the European nation states. I expect to be writing about this fascinating process for the rest of my life – and I hope to live a long time.

Differences within the Eurozone are extreme. Ireland saw its nominal GDP drop by 10.2% last year, a decline similar to those experienced in the Great Depression, while the German economy recently grew at a nominal rate above 3%. An independent economist calculated that the value of the euro would have to be $0.31 to balance Greece’s international position, and the number for Spain was $0.34, while Germany could effectively compete in the international marketplace with a euro over $1.80. Despite the ECB pegging the refinancing rate at 1.00%, two-year benchmark government rates for Germany are way below that at 0.48%, but way above it at 7.91% for Greece, Ireland 3.37%, and 3.20% for Spain. Ireland has been living with annual deflation for the last 16 months, while German lawmakers are worried about inflation. These differences have become more dramatic in the past few months and most independent observers forecast that trend to continue. By any economist’s measure this is not an optimal currency zone. But the economists are not in charge, the politicians are, and these politicians have spent their entire careers following their conception of the European currency. Their reputations and the European myth depend on the survival of the euro, and those who doubt its viability are enemies who deserve to be ground into dust. There is one overarching problem that the defenders of the euro cannot overcome: in its current form, the euro’s survival is economically impossible. Prior to the Greek crisis, the market did not understand this, but now it does. And you cannot put the genie back in the bottle.

If part of the euro is worth $1.80 and another part is worth $0.31, how do you value this currency today, while it’s still in one piece? That is the crux of the matter. The uncertainty around this issue is what has caused billions of euros to flee into the security of the Swiss franc. The Swiss authorities have intervened, buying so many euros that their reserves expanded by 45% of their GDP since the start of this year. Despite that massive intervention, the Swiss franc has climbed by 10% against the euro since mid-December. There is no sign of change. As the politicians are completely in control, the schizophrenic euro could go on for years with the economic dislocations becoming more and more intense. Little explosions are likely. Certainly, the Swiss are in a terrible position (see Switzerland Surrounded Again, April 29, 2010) as the euros will keep flowing in. The Swiss franc might gain another 10%, destroying its export base, but the Swiss could change the rules to protect themselves. Although the European political elites are totally committed to the euro, the man on the street is different. The European political peace is a compromise between entrenched elites and the highly entitled masses first formulated by Bismarck over 120 years ago. The withdrawal of those entitlements in order to save the euro could easily upset this historic deal. If those in power continue to ignore the needs of the people, neither the euro nor the current political structure will survive in its current form.

h/t Teddy KGB

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carbonmutant's picture

I believe that Charles Lutwidge Dodgson understood the problem.

Which is why he wrote under a pseudonym.

TraderMark's picture

Nassim Taleb emerges from exile - 2 videos


  • The economic situation today is drastically worse than a couple years ago, and the euro is doomed as a concept, Nassim Taleb, professor and author of the bestselling book "The Black Swan," told CNBC on Thursday.
  • "We had less debt cumulatively (two years ago), and more people employed. Today, we have more risk in the system, and a smaller tax base," Taleb said. 
  • "Banks balance sheets are just as bad as they were" two years ago when the crisis began and "the quality of the risks hasn't improved," he added.
  • The root of the crisis over the past couple of years wasn't recession, but debt, which has spread "like a cancer," according to Taleb, who is now relived that public attention has shifted to debt, instead of growth.
  • "Obama promised us 8 percent unemployment through stimulus. It hasn't worked." There are significantly more liabilities in the US than in other countries around the world, he said.  "Don't give a junkie more drugs, don't give a debt junkie more debt."
SteveNYC's picture

That "debt cancer" was further metastasized by the radiation particles of T.Geithner and B.Bernanke.

brushfire's picture

If those in power continue to ignore the needs of the people, neither the euro nor the current political structure will survive in its current form.


Al Gorerhythm's picture

This will probably end in rebellion over loss of entitlements. It certainly won't end because of mass philosophical acknowledgment that money has to be representative as a store of value linked to wealth creation, and the paper equivalent credit note given a link to that wealth through redemption of the credit notes.

I'm about to research Real Bills doctrine to see if that is the path our government should adopt (again).

At this point I'm lost for a solution other than: money has to be linked to gold.

The notion that the dollar is backed by oil just doesn't cut it for me (as a $ link), as I have no wish to redeem my saving chits in barrels of oil. Too bulky. One of the reasons why the notion is not sound.  Therefore, oil ain't money and neither is the $.

Ragnar D's picture

The problem with oil as a currency is that it doesn't last forever like gold, so instead of being able to lock away a ton of it in a vault and simply change account notations as it was traded, you'd have to constantly cycle out the old and new, incurring a lot of costs.

Also, supply and demand fluctuations would make it much more volatile (not to mention what happens if we ever finally start building a ton of nuke plants, etc).


Not wanting to redeem your money in oil isn't really a problem.  If oil was the unit of value, and contracts were written with barrels as their unit, you wouldn't ever actually have to redeem it.  The fact that a dollar represented a claim on X amount of oil and could be redeemed at any time, instead of randomly slipping against real goods, would keep that dollar's value stable.


I have no desire to actually carry around gold in my wallet.  On a gold standard, I'd be perfectly happy continuing to use paper, checks, and debit cards, because even if I never touched gold my paper would still be anchored to that tangible asset.  So long as I had the ability to take delivery whenever I wanted, I wouldn't actually need to for my money to keep its value.

Al Gorerhythm's picture

AH ha! A unit of account, a yardstick. But then, why not use dirt?

Ragnar D's picture

Dirt is divisible, fungible (uniform/substitutable), and countable.

But it has next to zero inherent desirability, and is virtually infinite.


Gold is gold because it fits the criteria the best.  Silver is next down the list, but there's no real reason it couldn't be platinum or palladium (or rhodium or iridium).  I'm not sure that the latter few are available in sufficient quantities to run a money system; gold is, and is pretty easy to confirm as actual gold.

Ragnarok's picture

Parallel currencies is the answer, gold it the reserve (~yardstick).  The length of time dictates whether you hold gold or fiat.  Fiat MUST be able to hold its wealth for short durations.


anony's picture

Under that definition of money, I have a  box of Twinkies that I bought in 1978.  They feel as fresh as the day I bought them.

Oil derivatives that last forever, like the plastic in this keyboard are equally resilient and will certainly last multiple centuries, it not millennia, which by then it might be desirable to switch to something else out of sheer boredom. 

And angry Grudges I have against the republican and democrat party for throwing their bases into the deep blue sea I can assure you will outlast the gold and diamonds that I have hidden away.

There are many possibilities for relatively permanent media of exchange that are available, plentiful and easy to carry.  I notice the electronic 1's and 0's that Ben and company add to Lord Blankfein's account take but a split second to transfer to him $21 billions from the rest of us seem even more better.

The mind reels.... 

Ripped Chunk's picture

Twinkies have a half life of 86,000 years, So does Uranium. What is your point?

What about the depletion of plastics caused by sunlight and ozone?

Your mind reels? You are on drugs are you not?

bigdumbnugly's picture

Yeah, by that logic the beachgoers of Louisianna, Florida, etc. are swimming in money.  I don't think they actually see it that way either though as I haven't seen any of them flinging the gulfwater in the air and screaming "i'm rich!  I'm rich!".

Popo's picture

That's a nice way of saying:  We face economic collapse or blood on the streets.

Woosirsir's picture

History told us blood on the streets are more likely. The question now is only when it will happen. Even it will take a long time, the value of gold will go up during the course.

Anton LaVey's picture

Both: economic collapse first, THEN blood on the streets.

MsCreant's picture

The depression is not known for "blood in the streets."

Enough TV just might do the trick.

Anton LaVey's picture

There were plenty of (fairly bloody) incidents in the USA during the great depression.

And let's not forget that small matter with the German Chancellor of the time. You know, the one with the small mustache and the weird obsession with people of a certain religious creed.

WaterWings's picture

Yeah, I was about to say...

Birth or Baby, which do you want?

johnnynaps's picture

How can you put a valuation on anything these days. The manipulation by politicians and financiers is too great! I really wish I could fist fight a central banker or politician (except for the Gubernator)! What happens when we stop saving the Euro......will the Dow go 6500? And, to stop entitlement programs.........the most sinister beings are milking the system. I just hope they go after the "real white collar criminals" when TSHTF!


tom a taxpayer's picture

Schizophrenic? What do you call someone with 27 different personalities? Europhrenic.

tom a taxpayer's picture


Mine too. 

Henny Youngman Wife Jokes 

Take my wife, please! 

Someone stole all my credit cards, but I won't be reporting it. The thief spends less than my wife did. 

I take my wife everywhere, but she keeps finding her way back. 

I asked my wife, "Where do you want to go for our anniversary?" She said, "Somewhere I have never been!" I told her, "How about the kitchen?" 

We always hold hands. If I let go, she shops. 

My wife drives the wrong way on a one way street. The cop pulled her over and asked, "Where are you going?" My wife said, "I must be late, everyone is all coming back!" 

My wife told me the car wasn't running well, there was water in the carburetor. I asked where the car was, and she told me it was in the lake. 

She was at the beauty shop for two hours. That was only for the estimate. 


Sad Sufi's picture

Really a priceless barage of bad (good!!) humor.  Thanks!

Ripped Chunk's picture

Getting on a plane, I told the ticket lady, "Send one of my bags to New York, send one to Los Angeles, and send one to Miami." She said, "We can't do that!" I told her, "You did it last week!"

More Henny Youngman at:

Truly one of the greats

LeBalance's picture

If I were a humorous cynic I might write:

I suspect that JT is wrong on two counts in one sentence, when he writes:

"I expect to be writing about this fascinating process for the rest of my life – and I hope to live a long time."

But then I am neither, so I won't bother.

williambanzai7's picture

In hindsight, the EURO was one of the stupidest contraptions ever conceived.

Imagine if we suddenly decided to issue a single currency for Mexico and the United States....

carbonmutant's picture

I don't believe that Mexico wants us adopting their immigration policies.

NOTaREALmerican's picture

Old joke, but kinda fits:


What's the difference between heaven and hell?


Heaven is where all the lovers are Italian, the cooks are all French, the cops are all English, the bureaucrats are all German, and the entire place is run by the Swiss.

Hell is just the opposite:


All the lovers are Swiss, the cooks are all English, the cops are all German, the bureaucrats are all French, and the entire place is run by the Italians. 


thesapein's picture

That has got to be one of the funniest and most appropriate jokes of the week. Thanks. It was new to me.

TBT or not TBT's picture

A hell of a lot of the actual living breathing French are bureaucrats.

Anton LaVey's picture

Give it a few months, and the bureaucracy of the USA will be much much worse than the French.

Reese Bobby's picture

Why is the Swiss franc any kind of safe haven?  Seems like just another run-of-the-mill worthless fiat currency to me. Is John R. Taylor, Jr. living in the past?

I do agree the Euro is a flawed concept.  But I expect it's life span is a lot shorter than J.R.T.j. thinks.  The Hun are ready to cut bait already me thinks...

TonyV's picture

I was going to say that swiss franc is backed up by gold but then I looked at wikipedia and is says that in year 2000 swiss people voted in a referendum to remove the tie. Having said that, their economy is quite strong and very diversified for a small country, with only 3-4% unemployment.

Reese Bobby's picture

Your response is thoughtful.  I suppose the franc may be a tall midget amongst fiat currencies.  But it isn't the currency our fathers knew....

fajensen's picture

Why is the Swiss franc any kind of safe haven? 

Because Switzerland is just about the only functional democracy left in Europe, the Swiss are fiercely independent and every male between 18 and 40 has the weaponry and the training to keep things that way - Switzerland was the only popular uprising in Europe that succeed in that the people assumed power and subsequently kept power instead of just making room for a new set of nobility. 

Zina's picture

But, but... Switzerland has a lot of "entitlement" spending, so it CAN'T be a democracy, it HAVE to be a "socialist" dictatorship.

[teabagger mode off]

SteveNYC's picture

Haha, I catch what you are saying. I don't know why you got 4 junks for it, it makes sense.

WaterWings's picture

No, Zina is proving that he doesn't understand a thing about the roots of the American psyche. We've got socialist mortars raining over our heads and we're not going to take it anymore!

Why are old, white folks the only ones that seem to be pissed about the status quo? Because generally speaking they aren't the ones voting themselves bags of free shit and aren't falling for the "everyone is inherently entitled to equal prosperity without equal effort, hooray!" shtick.

Jamestown, bitches!!!

Politicians get into office with easy, hot-button issues and lies - not initiatives that sustain robust growth and prosperity for all. Lifeboat can't fit everyone, contrary to popular belief touted by the MSM. When the JIT supermarket shelves start to empty and the WIC cards can't download Bernanke bucks anymore there will be blood on the streets.

'The trouble with socialism is that eventually you run out of other people's money.' -
Margaret Thatcher

Sespian's picture

Why is the Swiss franc any kind of safe haven?

My guess is that it has to do something with this:

The Bank for International Settlements (BIS) is an international organisation which fosters international monetary and financial cooperation and serves as a bank for central banks.

The BIS fulfils this mandate by acting as:
a forum to promote discussion and policy analysis among central banks and within the international financial community
a centre for economic and monetary research
a prime counterparty for central banks in their financial transactions
agent or trustee in connection with international financial operations

The head office is in Basel, Switzerland

 Established on 17 May 1930, the BIS is the world's oldest international financial organisation.

As its customers are central banks and international organisations, the BIS does not accept deposits from, or provide financial services to, private individuals or corporate entities.

Just FYI, Timmy Geithner was a Director on the BIS Board until he was appointed to U.S. Treasurer.  Just saying...

anony's picture

"...BIS is the world's oldest international financial organisation"  ???


The Federal Reserve is older.  The Bilderberger and Masons even more so.  The Shadow Elite, like Rockefeller, Rothschilds, Warburrgs, Rothensteins, and the Jews in the temple go back to b.c.

plongka10's picture

Note the word "International"

Sespian's picture


Take it up with the BIS, the quote is taken directly from their website.

contrabandista13's picture

"... If part of the euro is worth $1.80 and another part is worth $0.31, how do you value this currency today, while it’s still in one piece?......"


Easy, it's worth $1.19784......  I prefer to let the market tell me what the Euro is worth, especially when my only interest in the euro is for arbitrage. 

thisandthat's picture

You forgot to weight in the relative importance of each part. And yet, if you have half your family wearing size 6 and the other half wearing size 10, buying everyone size 8 won't get you anywhere.

vainamoinen's picture

"It is increasingly difficult for the nation-state to fulfill the functions that it added to its portfolio when it supercede the state-nation;not simply the maitenance of an industrial war machine of immense cost that is unable to insure the physical security of its citizens, but also the maintenance od civil order by means of bargaining among constituencies, the administration of juridical norms that embodoed a single national tradition and, above all, the management of the economic growth of the society in order to provide a continuous improvement in the material conditions of life for all classes".


"The reason that the constitutional order of the nation-state is undergoing a transformation is that it faces a crisis of legitimation".


"The most important development ios that the nation state seems less and less credible as the means by which a continuous improvement in the welfare of its people can be achieved"


"It is the increased influence of the news media that has deligimated the state, largely through its ability to disrupt the history of the state, the process of self portrayal that unites strategy and law and forms the basis for legitimacy"


"These various developments and others have led to a disintegration of the legitimacy of the nation state - - - no nation state can effectively control its own economic life or its own currency"


Phillip Bobbitt "The Shield of Achilles".


The transition from nation state to market state as detailed by Bobbitt in the above work seems apropo here. The transition from nation state to market state is simply the transition of the "occupants" of a state from citizens to consumers. What ever rights one may have had under the nation state system - particularly under the socialist system practiced in Europe - are washed away and replaced by an individuals "right" to purchase what he can afford and what the market makes available to him. As such, the turmoil in Europe is a crisis of national sovereignty being threatened by the operatives in the international market place - particularly by such organizations as the IMF. Greece is experiencing this directly. They have a choice - retain their sovereignty and go it alone or take the money from the IMF and EU and live their lives by the rules imposed  on them by these organizations.

Prior to making this decision I would recommend people review some of the characteristics listed by Bobbit of the imposed market state.  

In a market state "the creativity and capital of the nation state is turned against the nation state itself"


"For a nation state a currency is a medium of exchange; for a market state it is only one more commodity"


"For the nation state full employment is an important and often paramount goal; whereas for the market state the actual number of persons employed is but one more variable in the production of economic opportunity and has no overriding intrinsic significance"


"Deficiencies in the provision of health care or in income security after retirement are to be dealt with by market based adjustments"


"the market state is largely indifferent to the norms of justice, or for that matter any particular set of moral valuess so long as law does not act as an impedement to economic competition"


Any of this sound familiar to you?!


You can bet Taylor will be writing about this for a long time. Unfortunately, everyone else will be (or already is) living it.



NOTaREALmerican's picture

America!   F* YEAH!!!!


We're number one, dude!!!

StarvingLion's picture

And yet when I examine Modern Money Theory (MMT or Chartalism) claim to replace the indifference of the existing Central Bank structure with regards to Full Employment, I cannot help but laugh at the fact of:

Everyone gets a job under their MMT system no matter what their skills

What would they do,  build the Great Wall of America to stop the flood of mass humanity wanting a job?  When I look at Warren Mosler's and Bill Mitchells blogs,  its nothing but talk of Advanced Manufacturing, or anything else pertaining to a real economy.  For that reason I never bother reading the damn book by Randall Wray.