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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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Wed, 06/09/2010 - 23:29 | 405194 carbonmutant
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I believe that Charles Lutwidge Dodgson understood the problem.

Which is why he wrote under a pseudonym.

Thu, 06/10/2010 - 04:49 | 405440 Escapeclaws
Escapeclaws's picture

+1 for humor

Thu, 06/10/2010 - 08:35 | 405605 TraderMark
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."
Thu, 06/10/2010 - 10:44 | 405866 SteveNYC
SteveNYC's picture

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

Wed, 06/09/2010 - 23:31 | 405196 brushfire
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.


Thu, 06/10/2010 - 00:18 | 405234 Al Gorerhythm
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 $.

Thu, 06/10/2010 - 02:57 | 405384 Ragnar D
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.

Thu, 06/10/2010 - 05:35 | 405465 Al Gorerhythm
Al Gorerhythm's picture

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

Thu, 06/10/2010 - 07:04 | 405512 Ragnar D
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.

Thu, 06/10/2010 - 09:51 | 405732 Ragnarok
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.


Thu, 06/10/2010 - 07:23 | 405523 anony
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.... 

Thu, 06/10/2010 - 12:52 | 406229 Ripped Chunk
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?

Thu, 06/10/2010 - 08:30 | 405595 bigdumbnugly
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!".

Thu, 06/10/2010 - 02:20 | 405350 Popo
Popo's picture

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

Thu, 06/10/2010 - 02:54 | 405380 Woosirsir
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.

Thu, 06/10/2010 - 06:13 | 405489 Anton LaVey
Anton LaVey's picture

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

Thu, 06/10/2010 - 08:10 | 405566 MsCreant
MsCreant's picture

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

Enough TV just might do the trick.

Fri, 06/11/2010 - 04:58 | 407741 Anton LaVey
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.

Thu, 06/10/2010 - 10:54 | 405895 WaterWings
WaterWings's picture

Yeah, I was about to say...

Birth or Baby, which do you want?

Wed, 06/09/2010 - 23:36 | 405204 johnnynaps
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!


Wed, 06/09/2010 - 23:37 | 405206 tom a taxpayer
tom a taxpayer's picture

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

Thu, 06/10/2010 - 00:06 | 405233 JohnG
JohnG's picture

My wife.

Thu, 06/10/2010 - 02:33 | 405365 tom a taxpayer
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. 


Thu, 06/10/2010 - 06:34 | 405497 Sad Sufi
Sad Sufi's picture

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

Thu, 06/10/2010 - 12:56 | 406246 Ripped Chunk
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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

Wed, 06/09/2010 - 23:37 | 405207 LeBalance
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.

Wed, 06/09/2010 - 23:44 | 405212 williambanzai7
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....

Thu, 06/10/2010 - 00:31 | 405254 SilverIsKing
Thu, 06/10/2010 - 00:53 | 405275 carbonmutant
carbonmutant's picture

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

Wed, 06/09/2010 - 23:47 | 405219 NOTaREALmerican
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. 


Thu, 06/10/2010 - 01:52 | 405328 Burnbright
Burnbright's picture

hahahahaha that is awsome

Thu, 06/10/2010 - 02:12 | 405342 thesapein
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.

Thu, 06/10/2010 - 05:02 | 405442 TBT or not TBT
TBT or not TBT's picture

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

Thu, 06/10/2010 - 06:14 | 405490 Anton LaVey
Anton LaVey's picture

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

Thu, 06/10/2010 - 00:12 | 405238 Reese Bobby
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...

Thu, 06/10/2010 - 00:33 | 405256 TonyV
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.

Thu, 06/10/2010 - 01:13 | 405297 Reese Bobby
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....

Thu, 06/10/2010 - 04:05 | 405420 fajensen
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. 

Thu, 06/10/2010 - 07:52 | 405549 Zina
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]

Thu, 06/10/2010 - 10:50 | 405883 SteveNYC
SteveNYC's picture

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

Thu, 06/10/2010 - 11:06 | 405936 WaterWings
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

Thu, 06/10/2010 - 05:20 | 405444 Sespian
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...

Thu, 06/10/2010 - 07:28 | 405526 anony
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.

Thu, 06/10/2010 - 08:05 | 405559 plongka10
plongka10's picture

Note the word "International"

Thu, 06/10/2010 - 13:16 | 406297 Sespian
Sespian's picture


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

Thu, 06/10/2010 - 00:18 | 405246 contrabandista13
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. 

Thu, 06/10/2010 - 23:09 | 407482 thisandthat
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.

Thu, 06/10/2010 - 00:19 | 405247 vainamoinen
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.



Thu, 06/10/2010 - 00:36 | 405261 NOTaREALmerican
NOTaREALmerican's picture

America!   F* YEAH!!!!


We're number one, dude!!!

Thu, 06/10/2010 - 00:49 | 405271 StarvingLion
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.

Thu, 06/10/2010 - 04:17 | 405425 fajensen
fajensen's picture

What would they do,  build the Great Wall of America to stop the flood of mass humanity wanting a job?

They will begin killing and robbing the invaders that is what "they" will do. When the nation state will not defends its borders nor help its citizens *the other* stable systems of human organisation kicks in: Tribalism and Fedalism.

All the guys coming back from Afghanistan has plenty of experience in tribalism, skills that can be leveraged when no jobs are available.

Thu, 06/10/2010 - 11:24 | 405968 WaterWings
WaterWings's picture

We must help ensure they return with a sense of duty to protect the essence of freedom as embodied in the Constitution and Bill of Rights. Without that they will be mercenaries.

Their sacrifice for us must also be recognized. We NEED the rough and ready to protect the more fragile elements that weave the fabric of society - and they also need to know they have a definite place in it.

Thu, 06/10/2010 - 00:19 | 405249 Mark Beck
Mark Beck's picture

Not sure where to put this but Ace talks about the collapse of Bear Stearns.

What is interesting is they had massive leverage, but did not check the validity of the AAA ratings, for these derivatives. Not one person sent out to bird dog even one tranche for a hard to price derived financial instrument.

Stupid is as stupid does? and this was monumental fail.

Is this the real wisdom of wall street banks?

Mark Beck

Thu, 06/10/2010 - 01:13 | 405296 StarvingLion
StarvingLion's picture

We must also realize that forcing banks to hold the mortgages they initiate to change their behavior is an experiment that was tried and failed. In this crisis, the Wall Street firms that got into trouble did so because they were holding vast amounts of these securitized toxic assets on their books. Presumably they did so because they drank their own Kool-Aid and believed their own sales pitches about the safety and high returns available from these securities. Alternatively, those managers within the firms manufacturing these securitized assets realized that their bonus wasn’t connected to who, including their own company, bought the product, but how much was bought. In many ways selling in-house may be easier than selling out-of-house. And if you know you are selling financial sludge to your employer, but can safely sock away large  bonuses for several years before it’s discovered and you’re fired, you are still ahead.

Jimmy Stewart is Dead by Laurence J. Kotlikoff

Thu, 06/10/2010 - 00:33 | 405255's picture

EUR/USD trading lovely this fine AM :)

Thu, 06/10/2010 - 00:59 | 405276 Crab Cake
Crab Cake's picture

"....a crucible-like reordering and re-characterization of the European nation states."

I don't think you sir are seeing the big picture.  This IS the plan.

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

Hope springs eternal, but I'm not taking any wagers on whether you or I will be around in more than a decade to tell the tale, and if you are you may not want to be.

Thu, 06/10/2010 - 01:09 | 405286 Caviar Emptor
Caviar Emptor's picture

I try to focus on what lessons we can learn in the US from Europe's experience. Most of our politicians and economists are still playing the smug game, thumbing their noses and presuming that we 'll come through without any "contagion". 

They're missing a key point: The specifics of Europe's situation are different from ours, the general "big picture" problems are eerily parallel. 

Most are focused on the the now obviously flawed concept of a monetary union without central fiscal authority. But is that the core problem, or is it just another falling domino? 

Like Europe, we know we're approaching the debt/GDP tipping point. Nobody knows how close to the edge of the cliff we are and the drop off could be sudden. That's a parallel to Europe that we're beginning to openly acknowledge (Bernanke in Congress today shows some mutterings). 

But the debt/GDP issue is just one symptom, an abstract problem. People like to talk about it just like some people like to pontificate about what they see in an abstract painting: they think they sound all brilliant, perceptive and urbane while talkin' trash. 

Where the rubber hits the road is no less than the central issue of the social contract: the relationship of the individual versus the state. Our current crisis represents a stepwise renegotiating process of the contract between nations and their citizens. Welcome to the Live Workshop of your life. Most people are going to be thrust or dragged into the whirlwind of this process. How long it will take and how ugly it will get remains to be seen. But there will have to be lots of hard work, hard choices, confrontations, red faces and full scale clashes at a minimum before we can get close to any solutions. At the extreme this is the stuff that civil unrest, radical political change and wars are made from. 

We're entering the early stage where there are more questions than answers, and the questions are mounting every day. Soon even the sleepiest, most apathetic citizen will have some strong things to say. And then the process will begin. Here are some of the key issues that will have to get addressed and resolved in some way: are citizens entitled to full economic security, some security or none at all? What is the relative value of labor, income and capital? How much freedom is safe and healthy for the average citizen to have? What controls need to be placed on the power of government? And how real or imagined is the independence of each nation state in the 21st century?


Thu, 06/10/2010 - 01:32 | 405309 StarvingLion
StarvingLion's picture

What is the relative value of labor

Nothing.  Because in a consumer oriented world lowest price is King.  Real innovation is easily stolen, and TV brainwashing and Lobbying can do wonders.

And how real or imagined is the independence of each nation state in the 21st century

Well, you are currently interacting with anonymous humans from unknown areas throughout the world instead of attending the local municipal meeting in person.  Hans-Hermann Hoppe says the democratic nation state is a sham.  I agree with him.

Thu, 06/10/2010 - 01:37 | 405313 Crab Cake
Crab Cake's picture

Are all these questions going to be answered before or after WWIII?

"And how real or imagined is the independence of each nation state in the 21st century?"

I guess we find out we'll find out when the bullets and missiles start flying, no?

Thu, 06/10/2010 - 05:50 | 405470 Sneeve
Sneeve's picture

Thank you, CA. This is the first lucid comment I've read on this thread.

Thu, 06/10/2010 - 10:00 | 405747 centerline
centerline's picture

Bravo. The math is real - but the effects will unwind on a social level for sure. I would wager we are already past the debt/GDP tipping point though. Hence, the shift of risk directly onto sovereign nations - which really just means onto the people of course. Turd transfer complete. Soon it will start stinking enough that the silent majority will have something to say. That's when it gets real interesting.

Thu, 06/10/2010 - 01:47 | 405324 London Banker
London Banker's picture

Why is this relevant to the eurozone for disparities between Ireland and Germany, but not relevant to the "dollarzone" for disparities between California and New Hampshire, or Florida and Idaho? 

Every currency zone has places/states/municipalities where there are structural deficits and structural surpluses. 

The eurobashing is overdone.  Where the default for Americans is conflict, the default for Europeans is cooperation.  Europe will come together, more unified and stronger, for the deflationary pain it suffers now.

Thu, 06/10/2010 - 02:04 | 405335 Crab Cake
Crab Cake's picture

"...the default for Europeans is cooperation."  

Is that a joke?

"Europe will come together, more unified and stronger, for the deflationary pain it suffers now."

Please present historical precedents.  I think not, unless you are pointing to some sort of tyranny by any other name.

"The eurobashing is overdone."

It's going to go down in a ball of flames, and so will the US if it makes any difference to you; the whole world will/is.

Be optimistic if you want, but History paints a bleak portrait of where we are heading.  The challenges we face have been seen before, under the sun as it were, and it always ends badly.  I wish I could tell you different, I really do, but it's just not realistic. 

Thu, 06/10/2010 - 02:22 | 405352 thesapein
thesapein's picture

...maybe because US states don't have their own currencies trying to function against the dollar?

Thu, 06/10/2010 - 02:41 | 405369 thesapein
thesapein's picture

Your line of questioning still makes sense though, regardless of whether or not states have their own currencies. Having multiple currencies in the form of silver and gold wouldn't be bad. So the root of the problem seems to be having a credit based fiat system instead of having a unified money.

And, yeah, why does this author fixate on national borders for drawing zones?

Thu, 06/10/2010 - 05:50 | 405473 Sneeve
Sneeve's picture

lol, 2 lucid comments in a row, ZH is getting civilised!

Thu, 06/10/2010 - 02:06 | 405338 Apocalypse Now
Apocalypse Now's picture

This link actually pinpoints the problem between the North and South that is causing problems with the Euro.

A much watch for the ZeroHedge faithful:

You won't be dissappointed, very cool.

Thu, 06/10/2010 - 07:46 | 405542 serendipitous_one
serendipitous_one's picture

Great link - thanks for posting!

Thu, 06/10/2010 - 10:04 | 405756 centerline
centerline's picture

Most ZH faithful would probably like Nate's work over there Economic Edge.

Thu, 06/10/2010 - 02:28 | 405361 thesapein
thesapein's picture

So the problem is that the euro is a floating currency and doesn't know where to float?

If they used something that didn't float, like gold, and called it geurold, there would be no problem, right?


Thu, 06/10/2010 - 03:15 | 405393 StychoKiller
StychoKiller's picture

[quote]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.[/quote]

Kinda like the Seven Blind men and the Elephant!

Thu, 06/10/2010 - 03:22 | 405399 bIlluminati
bIlluminati's picture

Dodgson? Brillig, positively brillig.

Demographics rules. For Europe, since 1945, children produced are fewer than the adults. For these U.S.A., only since 1973. Expected result: prosperity for 1-2 generations, followed by a crash. Add to this the rainbows and unicorns promises of old-age pensions and medical care for everybody, and you get wealth destruction. Remember those bumper stickers: "We're spending our children's inheritance"? True, and the piper has arrived to collect.

Thu, 06/10/2010 - 05:34 | 405447 Escapeclaws
Escapeclaws's picture

Kind of like the entitlements we have here in the US. An Abrams tank, AK47, and F14 for every American. Only, we don't get to keep these in our personal possession--unfortunately they are needed for our 700 bases around the world and the current peace we are waging in Iraq and Afganistan. Damn those Europeans, incurring deficits to provide medical care to their citizens (imagine! the horror!). At least we in America have our priorities right.

By the way, you forgot to mention the mortgage interest and tax deduction for a personal residence.

Thu, 06/10/2010 - 07:15 | 405519 Ragnar D
Ragnar D's picture

First off, it's those bases that allow the EuroPeons to extend and pretend their failed welfare states.  I agree we should withdraw them, but this pretending that military spending is the issue is a joke.

Military spending grows linearly, and what's more has to be approved every year.  Its growth can be halted instantly.

The Entitlements are growing geometrically, and already dominating the budget.  "Discretionary" spending, of which the military is a portion, is quickly being shoved into the corner.


And don't get all high and mighty about Europe "providing medical care to their citizens".  Their programs are nothing more than control freak politicians grabbing a big chunk of the economy, and taxing the few productive members of society into oblivion to buy votes from those they've made dependent.

Even with us paying their defense bills, they're broke.  And if/when we scale back our foreign military presence (or even gut it entirely as I'm sure Barry would love), we'll still be just as broke.

Thu, 06/10/2010 - 08:30 | 405573 Escapeclaws
Escapeclaws's picture

What are we defending them against? And for that matter, what are we defending ourselves against, at this point, the communist menace? It seems to me that the wars in Afganastan and Iraq are aimed at containing the Chinese and having control over their sources of energy. As for the "tersts"--GWB's term, are they really that much of a threat and can they be defeated by ICBMs and aircraft carriers?

Our medical programs are nothing more than control freak corporations milking the proletariat (that word is sure to get you riled up!).

By the way, have you read Stiglitz's book on the cost of the war in Iraq? When it was written, the war had already cost $2 Trillion. That was not included in the line item in the budget for the military which costs in the neighborhood of a mere $450 Billion per year. How's that for getting bang for your buck! TG we won that war, n'est pas?

Thu, 06/10/2010 - 05:12 | 405449 TBT or not TBT
TBT or not TBT's picture


Thu, 06/10/2010 - 03:24 | 405400 Harbourcity
Harbourcity's picture

In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: "If you don't work you die."

Thu, 06/10/2010 - 03:38 | 405410 A Man without Q...
A Man without Qualities's picture

"The withdrawal of those entitlements in order to save the euro could easily upset this historic deal."

The crisis over entitlements is not a consequence of the Euro, any more than the crisis in the US or the UK is down to the Dollar or Sterling.  It is far more simple than that - these programs were never funded and the politicians never thought about the true cost.  The economies do not have the forward wealth generating capabilities to pay for these, given declining returns on assets and declining populations.  It is easy to say that it is the flaws in the single currency which are to blame, but this is false.  If the Euro had never been born, these entitlements would need to be amended.

I think Merkel has decided there is no point trying to deny the reality any longer and this is terrifying the US and the French, in particular.  They see this as political suicide, which it may be, but seems like Merkel knows her days are numbered anyway, so she will do what she feels is right, so to hell with it.

It should be remembered that Germany has been through so many turmoils in the last 100 years, so the populous does not have the same fear as those in the US.  It also explains the higher savings rate - they tend to save in the good times, so they have something in reserve for the bad times, which are unavoidable.

Thu, 06/10/2010 - 05:54 | 405476 exportbank
exportbank's picture

Finding a politician that will do what's right long-term vs expedient short-term is humanities greatest challenge. 

Thu, 06/10/2010 - 07:57 | 405554 Zina
Zina's picture

 "The European political peace is a compromise between entrenched elites and the highly entitled masses first formulated by Bismarck over 120 years ago."

Oh! Otto von Bismarck was a socialist-communist-marxist devil!

Communism dominates Europe for more than 120 years! Oh!!!

[teabagger mode off]


Thu, 06/10/2010 - 11:38 | 406005 WaterWings
WaterWings's picture

Sai fora, menino.

Thu, 06/10/2010 - 04:12 | 405424 Cheeky Bastard
Cheeky Bastard's picture


BP’s $3 billion of 5.25 percent notes due in 2013 fell as low as a record 89.94 cents yesterday, pushing the yield to 7.57 percentage points more than Treasuries. The spread compares with an average of 7.26 percentage points for junk bonds, Bank of America Merrill Lynch indexes show. The cost to protect $10 million of BP debt for a year with credit-default swaps almost doubled to $512,000, according to CMA DataVision. It was $29,000 on April 30.

Debt investors are losing confidence in London-based BP as the company fails to contain the oil leak in the Gulf of Mexico. BP said June 7 it has spent $1.25 billion so far, or about $27 million a day, related to the accident. Credit Suisse Group AG estimated the total cost may reach $37 billion.
Credit-default swaps on BP implied a Ba2 rating for the company as of June 8, nine steps lower than its actual Aa2 grade at Moody’s Investors Service, based on data from the ratings firm’s capital markets research group. The implied rating was as high as A3 on May 28, the data show. Junk bonds are rated below Baa3 by Moody’s and lower than BBB- by Standard & Poor’s.

Thu, 06/10/2010 - 04:21 | 405426 Shylockracy
Shylockracy's picture

Here's a funny look at the warty dwarfs behind the curtain.

Goldman Sachs Europe boss, Yoel Zaoui, reading his answers in a scripted radio interview. When asked 'how come you posted such great results while your clients made losses?', his answer was: "listen, there was a huge volume in the markets, in our intermediation business we had  'good activity' (sic)", after which the shill/interviewer simply moves on as scripted.

Too bad he could not bring a teleprompter to a radio studio. The whole interview can be seen here (in French, no subtitles):


Thu, 06/10/2010 - 05:28 | 405460 Escapeclaws
Escapeclaws's picture

That was painful to watch. Reminds me of a scene in the movie "True Genius" with Val Kilmer. Rather than coming to class to give his lecture, the professor just left a taperecorder in the lecture hall set on play. Rather than coming to class, the students just left their taperecorders on the desks in the lecture hall set on record.

Thu, 06/10/2010 - 04:25 | 405428 kaiten
kaiten's picture

Well, the whole idea behind the european integration is political and economic convergence, the creation of a single and integrated european economy. And no one said it´s going to be an easy and short process.

Thu, 06/10/2010 - 05:18 | 405454 TBT or not TBT
TBT or not TBT's picture

Anyone still believe it is worth doing?    Each european country has epic problems of its own that "Europe" doesn't bring any means of resolving.   Au contraire.

Thu, 06/10/2010 - 08:50 | 405631 kaiten
kaiten's picture

Sure, most of (continental) europeans still believe in the idea of european integration, which doesnt necessarily mean they agree in a way it´s being done. And as for epic problems. Show me a country in the world that doesnt have "epic" problems. I dont know of any. 

Thu, 06/10/2010 - 04:25 | 405429 huckman
huckman's picture

The word entitlement needs to be scrubbed. 

Thu, 06/10/2010 - 05:20 | 405456 old naughty
old naughty's picture

So fall it will...Power to the people.

Thu, 06/10/2010 - 05:30 | 405463 bob resurrected
bob resurrected's picture

What this line means is that the banks – these are Canadian, Dutch, German, Swiss, UK and Japanese banks – require an estimated aggregate of $1.2 trillion (net) in US dollars.

This does not help the EURUSD either.

Thu, 06/10/2010 - 05:50 | 405471 Dismal Scientist
Dismal Scientist's picture

German citizens were persuaded they were getting the Deutschmark when the euro was launched a decade ago. In fact the truth is starting to dawn that they were sold the Drachma and the Escudo. The optimal solution today would be for Germany to pull the plug along with other strong countries and abandon the weak to a rump and depreciated euro. For sure this will involve large scale bank recapitalisations – we should be used to these by now – but these would surely cost a whole lot less than funnelling good money after bad to an ever widening cast of supplicants.

A slightly more sub-optimal solution is to eject the weak today and dust off the Brady Bond regional debt restructuring manuals. Such restructurings would have to be conducted across the board and in the context of capital controls for otherwise, intra-European bank runs and counterparty strikes – already in evidence in recent times – would explode.

Europe's political class have refused to even consider – in public at least – either of these two options preferring to try to bounce the Greeks into becoming Germans. The endgame was always likely to be mass default and euro breakup. In the interim, the iPIGS are going to be roasted in a deflationary oven with resultant blood on the streets and government collapses.

Thus far, the runs on European banks have been a function of counterparty strikes as financial institutions have become increasingly unwilling to lend to each other directly – via the ECB has so far been acceptable. A wish to unscramble long Greek and other weaker country debt positions in which there is now no real market has also manifested itself in a mad scramble to buy protection. There has also been large scale selling of the paper of the next weakest links in the chain in which a market still exists. But as far as we can tell, retail has broadly been unfazed.

Nevertheless, if the ECB makes it explicit that it is going to accept all comers at its window, hence implying a massively weaker euro and an inflation surge in Germany, the rush for the exits will surely begin. And how to stop this? Capital controls of course. Already being implemented in some cases. What the doubters have always failed to realise is that when one is dealing with a politically-inspired project overseen by an unelected elite who hold democratic accountability and the rule of law in contempt, the rules of the game can and will be changed.

The lessons of history are very clear. It not only matters what assets you hold but where you hold them and what passport you carry. Be afraid...

Thu, 06/10/2010 - 08:02 | 405557 Zina
Zina's picture

 Make an Eurozone with just Germany, France and the "Benelux" (Belgium, Netherlands and Luxembourg).

It will be funny.

Thu, 06/10/2010 - 06:34 | 405496 sangell
sangell's picture

Whenever I see a Romano Prodi or Herman Van Rompuy I am reminded of the Superman comicbooks wherein, instead of a newspaper reporter, a mildmannered' provincial politician dashes into a Brussels phone booth and emerges as SuperEUman able to get Vlad Putin, Hu Jintao or B. Obama to answer his calls, swagger across the continent in a single bound and stop a voting electorate with their bare hands.

Unfortunately, like Superman these Eurocrats have a vulnerability but it is of their own making and it is not Kryptonite but the Euro and it threatens to take away their superpowers and make them, once again, mild mannered provincial politicians.

Thu, 06/10/2010 - 07:11 | 405516 luigi
luigi's picture

Well, the problem with bouncing so called Pigs out of EU, or of Germany pulling the plug of the Euro and going back to the DM is mainly that mainly German Banks are overexposed toward mediterranean countries. If they would try to cut the ties to those Countries, and assuming the Euro would be in immediate free fall to level of denomination once common to the Italian Lira, all major German Banks holding now officially bad credits in a currency not worth the paper on which is printed, would face bankrupcy. If the Deutsche Bank files for Bankrupcy (just a hint, look at the leverage level of German banks), mighty Germany would be sent back to the pre-Roman age or, what would be more or less the same, they should bernanke'em out of the mess by printing so much DM that all Amazonas wood woul be needed... I don't think we'll see an end to the Euro that soon: a possibility could be the rise of parallel local currencies in form of reimboursement of State Paper in form of some sort of "portable debt certificate" with legal course...

Thu, 06/10/2010 - 10:13 | 405775 weinerdog43
weinerdog43's picture

I think you're making the same mistake we are doing here in the USA.  Namely assuming that the German banks are the same as the German state.  Here, Goldman, Morgan, Citi and the rest think they are the same as the US.  Sadly for us, so does our pitiful federal government. 

Thu, 06/10/2010 - 07:49 | 405544 Alcoholic Nativ...
Alcoholic Native American's picture

Europe is having to take austerity measures like they lost a war or something.

And speaking of chaos in the streets and losing wars.   Good thing You Euro bitch states went along with the noble "war on terror".  It's gonna come in pretty handy for your puppet governments

Now that the "coalition of the willing" war profiteering party is over, some of you might not be invited to the after party, the "coalition of the printing".  It's pretty exclusive and in fact it might only work for the reserve currency.

Thu, 06/10/2010 - 07:50 | 405546 bada boom
bada boom'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?"

Through illusion. 

Thu, 06/10/2010 - 08:16 | 405575 Snidley Whipsnae
Snidley Whipsnae's picture

Social Contract, an interesting term.

I have been waiting for many years for some bright scholar or layman to notice that the social contract in the US held up very well as long as the Soviet Union existed as a rival economic system.

Shortly after the fall of the Soviet Union the US began to disregard the social contract between government and governed. Globalization kicked into high gear. The US middle class became unnecessary, for no 'shining light' of capitalisim and an upwardly mobile middle class was necessary. IOW, the US middle class was necessary as a contrast to the lack of a middle class in the Soviet system.

The US middle class had cars, homes, washing machines, etc, and they did not have to get on a waiting list to aquire these consumer goods.

Now that the CCCP is gone why should the oligarchs in the US maintain a middle class to hold up as an example to the world? The US middle class can be left to slow decline while the oligarchs rake in the excess profits from productivity gains...after the FIRE sector gets their cut.

Labor without bargaining power equals surfdom. The American middle class was a battering ram to destroy the CCCP...which was equally worthy of destruction.

Thu, 06/10/2010 - 08:31 | 405597 bada boom
bada boom's picture

Yes, and most contracts require your explicit consent and signature don't they?


Thu, 06/10/2010 - 08:36 | 405607 Escapeclaws
Escapeclaws's picture

So now that the middleclass is becoming the new lower class, let them eat brioche.

Thu, 06/10/2010 - 08:38 | 405610 bada boom
bada boom's picture

Sure, it was all part of the contract.

Thu, 06/10/2010 - 08:41 | 405612 Alcoholic Nativ...
Alcoholic Native American's picture

The lower class has the upper hand here, they have food stamps.

Thu, 06/10/2010 - 08:47 | 405625 Joe Shmoe
Joe Shmoe's picture

I have to say, though I own gold for myself and clients, I see it more as an asset class in structural bull, rather than a viable replacement for our global currency system.  I see so many posts by people on things like blood in the streets, gold will be the only thing we can trust, and so on.  I just find that rhetoric so shallow.  Why the fuck would anyone expect gold to be a more stable currency than anything else?  And before someone jumps in to say that "gold has been around for milennia," you should first look how that worked out over all those years.  My reading of the history of money has it that gold and silver were used widely, but there was great confusion over value (where it was minted, how much finite supply was in the world, etc.).  You think gold as a currency wouldn't be regulated and manipulated?

I think the true issue with currency is related more to market distortions rather than what it's made by.  The supply and demand for currency would sort out quickly just how much "faith and credit" people actually place in a currency.  

And also, as for the blood in the streets, while there were riots and some looting during DepressionI, there wasn't revolution.  People pulled together in greater numbers than they pulled apart.  I don't think it's likely that we go from here to a Cormac McCarthy The Road scenario where we eat each other and hoard gold.  I think Greece or Spain are better metaphors.







Thu, 06/10/2010 - 11:13 | 405886 GeorgeHayduke
GeorgeHayduke's picture

I hope you are correct about the pulling together part of your analysis. However, we seem to have a lot of angry pissed off people in the world these days and they might enjoy the chance to kick someone's ass as a scapegoat for their troubles.

On the other hand, our owners have done what they do best, pit us against each other over indignificant differences, like race, religion, politics, etc... so nobody will look their way if there is blood in the streets. So, if it actually does come to the blood in the streets scenario, it will likely be people fighting each other over stupid shit while the makers of much of this mess watch on TV.

The masses are so used to being sodomized by their masters that they won't even think to look behind them at what might be causing their pain. They will just look and attack in the direction they are being pointed.



Thu, 06/10/2010 - 11:01 | 405918 SergeiTheBig
SergeiTheBig's picture


General position we are not commentining on others comments.

Greece clearly should go out off eurozone and on a Schizophrenic Europe. The only solution is golden drachma outside Schizophrenic Euro Europe.


Golden drachma was always standard for Europe, just look at back side of 2 Euro Greek edition coins there Zeius taking over (raping) Europe as a bull. Everything said 


Thu, 06/10/2010 - 11:56 | 406018 technovelist
technovelist's picture

I think this version of the European heaven and hell joke is better:

In heaven, there are French chefs, Swiss bankers, German automobile mechanics, British police, and Italian lovers.

In hell, there are French auto mechanics, Swiss lovers, German police, British chefs, and Italian bankers.


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