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Where's Sarkozy When We Need Him?

Bruce Krasting's picture




 
Five days ago French President Sarkozy said:

“We will confront
speculators mercilessly.

The only speculators who got “confronted” in the last few days are the
speculators who bet that this plan would work.

The White House must be livid. From reports it is clear that Obama was
involved in hatching the EU TARP. He must have pushed on Bernanke to
open the swap windows. The President told the Europeans the plan had to
have teeth. Five days later the US is getting sucked down the European
rat hole. There is no bazooka to save the Euro.

There is no chance for a soft landing of the European debt crisis until
the Euro finds a level of support. That support can be had if the
ECB/Fed were to intervene. They could hold any reasonable level of the
Euro they chose to. But only for a short period of time. They know this.

This is setting up as a Plaza Accord type event. That would imply a
10-20% one-time devaluation of the Euro.

Something like that might work. The capital outflow would stop. Europe
would get a leg up through exports as a result. China and the US would
suffer as a consequence, but that is likely to happen regardless of how
this works out.

There may not be a one-time adjustment in FX rates. This could
alternatively get dragged out in the markets over the next few months.
The end results will be the same. The US will have an overvalued
currency, its balance sheet is in many ways worse than those under
attack today. The main event of the sovereign risk story will then
begin.

I found this video of the history of the Plaza Accord. Lots of still
familiar faces; including Paul Volker, Alan Greenspan and a very young
Paul Krugman. That was 25 years ago. The shoe is on the other foot
today. But not much else has changed.

LINK

 

 

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Fri, 05/14/2010 - 22:28 | 353120 CEOoftheSOFA
CEOoftheSOFA's picture

I think the Euro crisis will have a soft landing.  Just like the Hindenburg.

Fri, 05/14/2010 - 21:36 | 353063 ZackAttack
ZackAttack's picture

Nice thought-piece, Bruce.

Simply put, I don't think the liquidity flood of 2008 can be replicated here without immolating one's currency.

Fri, 05/14/2010 - 20:19 | 352987 Buck Johnson
Buck Johnson's picture

Bruce is right, and I believe that the EU and the US used the bazooka and it turned out not to be enough.  And with the US administration sitting there and seeing that all their plans to bailout EU and the Western banking system is going going gone, what next.  An accord could work, but I think doing something like that today and back 25 or more years ago is entirely different.  Alot has changed and alot of capabilities that they didn't have back then they have today (massive short selling, front running with super computers, countries insolvent, etc. etc.).  They try to lower the Euro by 10 to 20% in some form of accord, it will go lower and two they are paying back bond holders with devalued money.  I don't think this plan would work anyway because it would require all the countries to come clean and they won't, heck we won't.  The western banking system need to get a complete wipe and start over.  To many people and countries have to much debt to service.  Lets just call it and everybody agree to a null and void of all debt so that we can get this monkey off all our backs.  It won't happen, but you can dream.  What will happen is broken promises, inflation/hyperinflation, and civil strife. 

And Im talking about the US.

Fri, 05/14/2010 - 22:25 | 353116 Bruce Krasting
Bruce Krasting's picture

In the the three years after the plaza accord the dollar lost 50% against the yen. It was the ultimate money machine....

Fri, 05/14/2010 - 19:48 | 352961 Gunther
Gunther's picture

Cherchez la femme-

find the woman behind the man; if you look for the right one you will know where Sarkozy is.

Fri, 05/14/2010 - 18:24 | 352826 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Is China doing this?  Even though I hate GS et al and think they could have rigged the algo crash, are they working for China?  This all seems to benefit only China, except that PMs are rising and China lacks them at the moment.  If it is China I know what Krugman would say.  "Damn you China!"

Fri, 05/14/2010 - 17:53 | 352772 Zeroexperience2010
Zeroexperience2010's picture

hbjork1, you are right to mention the nordic countries, especially Norway, which should still sit on a huge reserve of oil and has a currency that is AFAIK not linked/pegged to the EUR.

Would NOK be a 'refuge' currency candidate? Or what would be the arguments to say it is also a fiat currency like any other?

Fri, 05/14/2010 - 18:17 | 352813 Budd Fox
Budd Fox's picture

Man, basically , in theory fiat currencies are ALL fiat currencies...fact is the payment system is NOT ready to be regulated in gold, there isn't enough for the volume of transactions ( and that goes in the direction his low price is fake...) but an electronic worldwide system of payments needs a fiat currency of some sort to work...choose the less evil, NOK, AUD, NZD, CAD are still currencies with reasonable Govts debt and sitting on real resources...but except Canada and Australia, the other two are small fry, though sound.

Fri, 05/14/2010 - 18:30 | 352842 Zeroexperience2010
Zeroexperience2010's picture

you are right of course, it's getting late here... once a currency is not hard linked to gold or some tangible asset, it's built on trust, and first approximation would be to trust more those 4 than USD or EUR (or at least mistrust those less)...

Fri, 05/14/2010 - 17:08 | 352703 hbjork1
hbjork1's picture

This dialog is IMO (engineer's view), missing a couple of realitys.  1. The various currencies are NO MORE than mediums of exchange.  The currencies amount to small standard form contracts for compensation in the exchange of goods and services.  The relative variablity in the different currencies provides "cushion" that smooths the pertubations in supply and demand as real goods and services are exchanged.

Credit is promise to pay at a future time.  Of course, when your debt exceeds the output that you are able to generate then you have to default on your promise.  It seems obvious that the EU can survive if the debtor nations can accept austerity for a few years and the lending nations are able to share the austerity by forgiving some debt.  

I am old enough to remember the WWII period (that, today, would no doubt be called suffering)  I just came back from Washington DC and observe that it is the wealthiest city that I have seen since NY as it was in 1958-59. (I was there courtesy of the USAF for Weather school) Our problem is now obesity not hungar.  With the right leadership, IMO, the US will be able to accept some austerity and get along just fine.  Military spending (including off-the-books) must be reduced, taxes on all classes will have to be RATIONALLY increased and, I won't like the effect, but reductions in social programs will have to be implemented.

Voluenteerism, with respect accorded patriotic respect and properly channeled, could help a lot.

BUT, THE BANKS MUST BE RETURNED TO PUBLIC SERVICE.  The argument that separation of banking and brokering functions would make them vulnerable, IMO, is bogus. The US can simply legislate against the control of US banks by foreign holders.  Brokers can then live or die on their own.

2. Also missing from this is the question of the Nordic countries.  Not a peep on this board about Denmark, Norway or Sweden.  I understand how Germany, England and France could get strained lending to the PIIGS but why have the Nordics been left out of the termoil?     

Fri, 05/14/2010 - 17:56 | 352777 Panafrican Funk...
Panafrican Funktron Robot's picture

Relatively low exposure and decent breathing room.  Denmark is probably the worst off there as far as risk, but even there, a lot of flies would drop before Denmark.  I consider Norway's prospects of coming out strong on the other end of the Eurozone breakdown good enough to be seriously looking into buying positions in Norwegian companies, particularly oil/nat. gas (Statoil for example).

As far as how I see the chain forming:

Based on my analysis of the bond data, if Greece goes down, Portugal goes down, then Ireland, then France.

At that point, Euro is done. 

Fri, 05/14/2010 - 16:35 | 352626 BlackBeard
BlackBeard's picture

Cool.  In addition to exporting wars, we're into exporting bailouts now!

Fri, 05/14/2010 - 18:52 | 352883 knukles
knukles's picture

Old school Policy and Precedent....
Marshall Plan, officially Europen Recovery Plan (ERP) 1947-1951, just one among many. 

The Greeks want WWII reparations?  F*me, all I'm owed's a Ba(n)ker's Dozen Mercedes by now.

Fri, 05/14/2010 - 16:29 | 352619 Albatross
Albatross's picture

'20 drunks in a kitchen with sharp

knives' that's the best definition

I heard of ECB just made by brilliant

Michael Aronstein on BBG.

Fri, 05/14/2010 - 17:35 | 352610 kaiten
kaiten's picture

If there´s a new Plaza Accord, then the big winner will be the yuan, big looser the dollar and euro stays somewhere in the middle.

Fri, 05/14/2010 - 16:23 | 352606 Leo Kolivakis
Leo Kolivakis's picture

I like the close in the stock market. I say this all blows over, back in the green next week. Have a great weekend.

Fri, 05/14/2010 - 22:12 | 353101 LeBalance
LeBalance's picture

Harry! What have YOU done with Leo! :)

Fri, 05/14/2010 - 18:25 | 352830 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Gold to the moon in that case and I hope you have your SLW shares ready.

Fri, 05/14/2010 - 16:15 | 352586 zerosum
zerosum's picture

Do you still think the Germans "hate" the declining Euro? 

Fri, 05/14/2010 - 16:13 | 352582 Internet Tough Guy
Internet Tough Guy's picture

Stupid countries think they can devalue their way to prosperity. Stupid economists think everyone can then export their way to social welfare paradise. That's how we got here.

Fri, 05/14/2010 - 22:12 | 353100 LeBalance
LeBalance's picture

replace stupid with "smart instructive vampiric." To call someone or something stupid just means you don't understand them.

Fri, 05/14/2010 - 15:51 | 352522 kaiserhoff
kaiserhoff's picture

This game of banks uber alles is killing the free world, but this too shall pass, because markets are stronger than governments.  Oil is still a wild card.  By taking dollars for oil, the Arabs make the dollar a harder currency.  When that game ends, the dollar is done.

Fri, 05/14/2010 - 16:32 | 352623 Ragnarok
Ragnarok's picture

The Arabs take more that just dollars for their oil ever since the oil crisis.  They are compensated for their oil in gold at the LBMA.  

Fri, 05/14/2010 - 19:48 | 352962 CIABS
CIABS's picture

Yes, or outside of known channels.

Fri, 05/14/2010 - 22:10 | 353098 LeBalance
LeBalance's picture

Ah the Eye of the Columbia Cartel of the Illuminati, the Eye of Horus, the All-Seeing Eye of Mordor.  Charming.

Fri, 05/14/2010 - 15:47 | 352518 THE DORK OF CORK
THE DORK OF CORK's picture

Globalism is not working - the industrial infrastructure developed since the 80s which was dependent on cheap oil and wage arbitrage is now facing constraints.

To continue with a monetary and free trade agenda now is a waist of even more time and resources.

American workers need more wages not more credit  - Steel can be manufactured more cheaply in the states then China when you subtract wages.

The largest constructs that are now achievable are regional blocs - if our betters in central banks and elsewhere continue banging our heads up against a brick wall we will decide to build walls around Nation states.

Trade Tariffs are not dirty words - they will accelerate the depression but economies will never recover if we continue with the old ways.

Countries can no longer bear the economic externalities of  corporations profitability and indeed as countries collapse the reduction in redundancy that was a perceived advantage of corporations in the past are now being recognized for what they are - cataclysmic flaws.

We need to recognize reality. 

You cannot reanimate a corpse unless you are Dr frankenstein and that did not work out too well.

Fri, 05/14/2010 - 18:09 | 352797 Budd Fox
Budd Fox's picture

Short but to the point...I like the analysis dork...all the punters, worldwide, need, is wages, not fekkin credit....

You fear deflation?? REINFLATE you morons, but DO NOT reinflate assets, inflate salaries!!!!

What you seeing now has nothing to do with Keynes or keynesianism...Keynes theorized state intervention to put the unemployed at work and reinflate consumption and debt repayment trhough SALARIES not banksters bailouts. And ban the fekkin bonuses, that era is OVER...morons!!!

Fri, 05/14/2010 - 20:40 | 352999 THE DORK OF CORK
THE DORK OF CORK's picture

There is something very wrong with our accounting - corporations can now only increase profitability by running down systems and the true costs are laid to rest on the shoulders of countries and citizens.

The concept of increasing capital is now alien to us.

Why is this a successful strategy for corporations ? - the monetary system now no longer differentiates between loans for consumption and loans for capital growth.

The ZIRP and low interest rate policey of the past decade or two has fostered massive consumption growth rather then investment growth for the simple reason that it was easier and in the short term less risky.

But who now shoulders the risk?

I believe we now need a ZIRP for non oil based capital growth and a punitive high interest rate for consumption.

people can live on hopefully higher wages as credit for consumption is absurd.

Slowly standards of living can again increase as the necessary infrastructure is developed.

 

Fri, 05/14/2010 - 22:09 | 353095 LeBalance
LeBalance's picture

this is a system guided by the vampire, for the vampire, but for you as well to realise same and make a call (1) take responsibility for the areas of life that the vampire has usurped (turn away and depower the vampire), OR (2) give it up to the vampire.

Fri, 05/14/2010 - 17:18 | 352725 JW n FL
JW n FL's picture

***** "Globalism is not working - the industrial infrastructure developed since the 80s which was dependent on cheap oil and wage arbitrage is now facing constraints." *****

 

THE DORK OF CORK,

                                 http://www.docstoc.com/docs/906179/securitization-process/ and / or....

***** "

Securitization was a financial innovation pioneered by Salomon Brothers in the earl 1980s. In the late 1970s, Congress decided to deregulate the savings and loan industry. One of the unintended consequences of deregulation was that thrifts found they had to sell a lot of mortgages on their books to meet new capital requirements. There weren't a lot of buyers, so Salomon Brothers was able to scoop a lot of them up on the cheap. However, Salomon Brothers was in the trading business and had no interest in holding a lot of mortgages until maturity. So, it devised an ingenious way to sell them.

Salomon took a group of mortgages and dumped them into a company set up for the purpose, which we will call "Mortgage Pool." It then caused Mortgage Pool to sell IOUs, or more accurately, debt securities, to the public. The securities were secured by the mortgages, which served as collateral for the debt. For that reason, the debt securities were called "collateralized mortgage obligations" or "CMOs."" *****

http://www.tradersmagazine.com/news/sec-securitization-aaa-rating-cmo-mortgage-debt-105541-1.html?zkPrintable=true

Just an FYI You PUTZ!

Sincerely, JW

                               

Fri, 05/14/2010 - 16:45 | 352647 moneymutt
moneymutt's picture

find any successful economy in the last 150 years, say an economy that helped raise standard of living of everyone, and you will find trade tariffs and progressive taxation to create fairly flat income distribution...just reality...find an economy that was doing pretty well but incomes dropped and more poor/rich divide and you will find free trade, low taxes on property/rich/big corps..opposite of what they have been selling for decades...

Fri, 05/14/2010 - 15:42 | 352507 curbyourrisk
curbyourrisk's picture

Should we expect more swap lines and a bigger bailout this weekend?  Maybe the FDIC declares they are now backing the debt of banks in Europe as well as the ones here.  Just think of all the capital they could raise.  Maybe they will back the deposits too.....

Fri, 05/14/2010 - 15:27 | 352460 JackTheOffer
JackTheOffer's picture

Sure, devaluation.  The choice was:

1) support the currency, or

2) support the banks.

Being unable to imagine a Europe without the exactly-already-existing banks, they chose 2.

 

Fri, 05/14/2010 - 22:04 | 353092 LeBalance
LeBalance's picture

lol: in your terms the choices were:

(1) support their theft device (currency);

(2) take the money straight out the back door;

Since its past time and they are in full no reach around stance, ...

Yeah you get it.

Fri, 05/14/2010 - 16:11 | 352578 ratava
ratava's picture

tyler please ban this prick

Fri, 05/14/2010 - 21:04 | 353019 williambanzai7
williambanzai7's picture

Traveling to London to search for content. Until then, Fuck Goldman!

Peace all...

Sat, 05/15/2010 - 00:37 | 353281 WaterWings
WaterWings's picture

Safe travels.

Fri, 05/14/2010 - 21:00 | 353018 williambanzai7
williambanzai7's picture

Retarda?

Fri, 05/14/2010 - 17:13 | 352715 JW n FL
JW n FL's picture
by ratava
on Fri, 05/14/2010 - 15:11
#352578

 

tyler please ban this prick

 

ratava,

           Fuck YOU! William is FANTASTIC! Ban Yourself! Hater! what are you a Goldman Plant?

Sincerely, JW

Fri, 05/14/2010 - 16:29 | 352618 WaterWings
WaterWings's picture

Explain.

Fri, 05/14/2010 - 15:16 | 352435 wang
wang's picture

Bruce your post from last Sunday turned out to be quite prescient

Fri, 05/14/2010 - 16:40 | 352639 Bruce Krasting
Bruce Krasting's picture

Yeah, but I still lost money this week. No balls.....

Sat, 05/15/2010 - 00:37 | 353282 JW n FL
JW n FL's picture

Germany last weekend, France this weekend... no biggie, you can catch up Bruce!

Fri, 05/14/2010 - 18:03 | 352788 Budd Fox
Budd Fox's picture

Damn Bruce...YOU called it. I made money scrupolously following what you said in the past WE!!!

Fri, 05/14/2010 - 15:30 | 352422 Leo Kolivakis
Leo Kolivakis's picture

Bruce,

The market has already devalued the Euro by 20%. The run on the Euro was predictable following the trillion dollar bailout. Same thing happened to the USD post TARP. This isn't necessarily a bad thing. Given ZIRP, only adjustment to be made to loosen financial conditions is to lower the currency. Germany will export more, Greece, Spain, Italy and France will see a boom in tourism this summer (barring major riots), helping to buffer the shock.

More importantly, according to the WSJ, the spread between Libor and overnight index swaps, a gauge of market stress, has widened in recent days to more than 0.2, but it is well below the levels hit during the global financial crisis in 2008, when it widened as much as 3.66 percentage points. This tells me that current market overreaction will blow over in the next few weeks.

Fri, 05/14/2010 - 16:11 | 352577 Internet Tough Guy
Internet Tough Guy's picture

You said market overreaction blew over weeks ago,even before the greek bailout. Maye it isn't an overreaction. Maybe you are just overconfident. 

Fri, 05/14/2010 - 16:56 | 352674 Leo Kolivakis
Leo Kolivakis's picture

That trillion dollars will find its way back into risk assets. The big boys are having fun scaring off retail money and dumb institutional accounts. The deal is sealed, markets will rally higher.

Fri, 05/14/2010 - 17:11 | 352711 JW n FL
JW n FL's picture

Again, Leo... you forgot to say AGAIN!

Have a great weekend Leo, JW

Fri, 05/14/2010 - 15:34 | 352479 Panafrican Funk...
Panafrican Funktron Robot's picture

That doesn't solve the underlying issue, which is the austerity targets.

Based on a realistic, level-headed, unbiased look at the data, can you really expect any potential bond investor to believe that these targets are achievable?

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