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Devalue the Euro?

Bruce Krasting's picture




 

Holy smokes! The EU technocrats have finally pulled out the big guns! The agreement on Friday was to take the incredibly bold step of avoiding subordination in the Spanish bond market. The money needed for the busted Spanish banks will now be made available directly from Brussels with few strings attached. Wow! What a breakthrough!

Global markets have taken a quick look at what has been offered up by the deep thinkers in Euroland and said, “WE LOVE IT!”

Me? I think it’s a spit in the bucket. The half-life of this bailout will be measured in weeks.

We have seen this play out time and again the past four years. The capital markets are forcing policy decisions. 

“Wise” people like Paul Krugman have said for years that “Bond Vigilantes” don’t exist. There is no doubt any longer that they exist and are alive, well and hungry. The vigilantes are also armed with highly sophisticated robots that can execute attacks on multiple fronts and across markets in milliseconds. The war going on in the bond markets is not over by a long shot.

My read of the EU summit is that Spanish banks are going to get a “soft” bailout. Existing common shareholders and subordinated bond holders will not get wiped out (as they should). The bankers must love this result. They get to keep their jobs for a few years longer, all the time praying for a miracle.

Where does this go? Directly to Italy. Which Italian bank would love to have some of that cheap equity money that Brussels is doling out? All of them.

But here’s the deal, France’s banks are in desperate need of new equity too. They have been selling off assets left and right. That’s no way to keep up employment in Socialist France. There are some very big balances sheets in Paris that need a new slug of 3% Perpetual Preferreds. If Italy’s banks get the "Sweet Deal," then the French banks will have their hands out too.

Talking about re-caps of banks in Spain, Italy and France, we might just as well include a few dodgy banks in Brussels. A couple of German banks are also thin on equity.  Add a few of them to the list.

Ah… I’m sorry to rain on the parade, but the number derived from all that bailing starts with Euro 1 Trillion, and could easily push to E2T.

Where is this big sum of money coming from? A three-letter entity that doesn’t really exist yet? One whose charter requires votes from EU countries? The “savior” that is going to do the trillions of bank-bailing actually doesn’t have a penny to its name.

And can I ask someone about the timing of all these things getting sorted out? Look at the calendar. Europe is on holiday. See you in September before any of this is inked and the money is flowing. The vigilantes are not on Vaca.

If I'm right, after a few weeks things turn south again in the capital markets. Then what?

- More LTRO. No – there is no more collateral. All of the swill loans have already been hocked.

- Cut ECB % rate. Doesn’t matter. It won't change conditions in Italian or Spanish funding markets one bit.

- A spending plan of <1% of GDP. That won’t put a dent in the recession that is building.

- Brussels buys more sovereign bonds to avoid a catastrophe of Italian 10-year exceeding 7% (capitulation). Sorry. There are “wise men” in Germany who will simply not allow this to happen in the scale that is required.

- The ECB goes Defcon 1 and launches a E2T QE program. No – same answer as above.

- Merkel does a 180 and embraces Euro bonds. No chance in hell.

-The US or China are going to start buying EU bonds? Lunacy – not happening.

-The IMF will come to the rescue? No way – the IMF does not have the resources to solve anyone’s problems.

There are more bullshit things that could be added to this list, but they either will not work, or are too politically unacceptable to happen. If the steps taken on Friday fail to stem the crisis beyond a few weeks, what else is on the table for consideration? The answer is that whatever may be coming, it must meet the following criteria:

-must be able to be implemented in a very short period of time (e.g. a Sunday night announcement).

-must have a global component. Europe does not have the resources to address the problems it faces alone.

-can’t be subject to political approval. That process takes too long, and the politicians can’t agree on anything of substance.

What policy steps meet these requirements? There is only one. The next significant step out of Europe will involve changes in FX rates around the globe. A number of possible currency steps have already been discussed, including:

1) Peripheral countries re-establish their legacy currencies. Spain will reintroduce the Peseta, Italy will bring back the Lira etc.

2) The Euro is split in two. There would be a Northern and a Southern Euro.

3) Germany leaves the Euro and re-establishes the Deutche Mark.

These are possible outcomes. But I consider them to be unlikely. Too much effort has been taken to create and preserve the Euro for the deciders to throw in the towel anytime soon.

There is one currency option left. Devalue the Euro by 20++%.

This would make a difference. It would go a long way towards stabilizing the real economies of Europe. It would create inflation, something that is sorely needed to devalue the real size of Europe’s debts. Germany would agree to this as it preserves their export-competitive position within the EU, and improves it outside of the EU. The technocrats in Brussels would love it; it’s the only thing left that would preserve the monetary union.

Is this feasible? I say it is. It has happened twice before in history. In 1985 the world got the Plaza Accord that devalued the dollar and in 1987 we got the Louvre Accord that revalued the dollar. In both cases, the global central banks (CBs) and acted together.

With Plaza Accord, the CBs made a joint announcement on a Sunday evening that they would be selling the dollar against major currencies until such time as a meaningful devaluation had been achieved. It worked.

A devaluation of the Euro (versus the Yen, Sterling and the Dollar) would be approved in Brussels in a heartbeat. Germany would be reluctant because of the inflationary implications, but it would reap the benefits of a cheaper currency too. The USA and China would absolutely hate to see a devaluation of the Euro. It would hurt their respective economies. But the deciders in China and Washington also know that a complete breakdown of the EU economy would lead to a global depression.

The timing of something like this is critical. Would Obama instruct the Treasury Department to intervene in the currency markets (via the Federal Reserve)? He would, if it happened in the next few months. The consequences would not be felt, in a meaningful way, by US exporters until after the November election. Obama also understands that if the EU goes belly up before the election, his chance of winning goes down. If the EU tanks, so will the S&P.

China and Japan would have some say in this in order for it to be successful. The CB interventions would have to be coordinated. If the UK and US go along with it, then Japan will be forced to join in.

China is a wild card. If China participated, it would be devaluing its own Euro reserves. It would cost China a few hundred billion dollars. But it would cost China far more if the EU went into the crapper for the next five years.

I’ve been out of the FX markets lately. I’ve been concerned about “event risk”, where something is accomplished in Europe that actually made a difference. I think that this kind of event risk is now behind us. I bought some puts on the Euro Friday afternoon. We shall see.

The idea of a coordinated central bank response ala the Plaza and Louvre Accords may seem far-fetched. But tell me another option that has a chance of working.

What is the “fair” value of the Euro? Whatever the central banks want it to be. Is the Euro over valued today? Visit the EU and make your own judgment. I say it is. The following articles go a long way towards answering the question of the Euro’s value versus the dollar. When EADs puts up $600m to build a manufacturing facility in Mobile Al., you know the Euro is over-valued.

.

.

.

Given what is happening in Europe these days, I'm surprised that Airbus is doing this. Places like Spain could use the $600m investment in plant, equipment and jobs that goes with this. Good for Mobile, not so good for Europe.

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Mon, 07/02/2012 - 14:26 | 2581265 Big Ben
Big Ben's picture

I also feel that Friday's changes are just a drop in the bucket. But the significance is that Germany blinked. And if Germany blinked once, it will probably blink again and again when pressed by the markets. So I would tend to expect Germany to gradually and grudgingly abandon its opposition to ECB measures to support the PIIGS, eventually culminating in ECB printing to buy bonds that the private sector is unwilling  to touch. This would negatively impact the value of German bonds.

Mon, 07/02/2012 - 11:09 | 2580686 Zero Govt
Zero Govt's picture

Bruce, a 20% devaluation in the €euro, what happens to the Swiss peg?

Mon, 07/02/2012 - 08:15 | 2580172 matterhornclimber
matterhornclimber's picture

Famous Albert Einstein once said: His believe is, that there are only two things that are infinitely:

One thing he believes, but doesn't know for sure, is the universe, the other thing, he knows for sure is infinitely,

is the stupidity of mankind!

Mon, 07/02/2012 - 06:54 | 2580068 negative rates
negative rates's picture

I second that comment.

Mon, 07/02/2012 - 02:04 | 2579925 caerus
caerus's picture

hey...who doesn't like fake money

Mon, 07/02/2012 - 00:26 | 2579834 Carpathia
Carpathia's picture

Bruce, you are spot on, comme d'habitude.  This is the only solution that benefits the insolvent Eurozone countries AND also benefits the Germans.  If Germany abandons the Euro, the D-Mark would appreciate so much as to destroy their export driven economy.  Germany, as a giant export nation would enjoy a weak Euro.  The inflation in Germany would be mitigated because they have shown the ability over the last few years of not allowing the inflationary pressures to be magnified through comensurate rises in labor costs.  Your observation that desparate times requires desparate measures is also spot on.  Obama can NOT let the Eurozone collapse prior to November.  The Dollar will appreciate significantly.  Oil prices in particular, but also other commodities and precious metals will be driven lower.  The deterioration to American exports will not show up until next year.  The drop in oil prices will act as an immediate tax cut going into the election.  After the election, the fed will institute another round of QE, the Dollar will weaken and this process will reverse.  It's the only solution that pleases the PIIGs, Germany and Obama.  Q.E.D.

Mon, 07/02/2012 - 00:01 | 2579802 ghostfaceinvestah
ghostfaceinvestah's picture

Good analysis, I agree.  The Euro should be at par at best with the USD.  It's beyond me why it is at 1.26.

Sun, 07/01/2012 - 23:06 | 2579717 chirobliss
chirobliss's picture

“Wise” people like Paul Krugman have said for years that “Bond Vigilantes” don’t exist.

Until someone can provide an explanation for the eternal safe haven status of the yen, I'm with Krugman. Suggestions?

I'm all ears.

Sun, 07/01/2012 - 22:56 | 2579698 theTribster
theTribster's picture

It may help tourism but that's about it. Without consumption demand the devaluation will have minimal impact on exports, in fact whatever benefit it received would be fleeting as demand will continue to decline and none of the fundmental problems would be solved, so it would end up being nothing more than kicking the can down the road a few feet.

The global situation is bad and getting worse, employment, wages, complete political corruption, mideast issues, these things all conspire to pressure the Euro and the rest of the world's economies and politcal environments. The only solution that will work for Europe must include global growth, ain't happening. Instead of solving the European problem in isolation and beyond a short term currency fix, what really needs to happen is a coordinated global reset that includes debt restructuring on a global scale - ain't happening either.

These solutions, no matter how cool they are end up being nothing more than another squeeze of the balloon with more popping through the cracks and crevices. Until the global issues are addressed, which are comming to almost every country, we won't get anywhere. The biggest fundamental problem is the corporate connection to politics, specifically banking and finance but it also includes others like Monsanto (agriculture) and big Pharma, etc. Unless the rampent corruption is brought under control not only will the people suffer but so will the planet - considerably!

Its bad because the problems are ubiquitous, its like no other time in history!

 

Mon, 07/02/2012 - 00:09 | 2579809 Imminent Collapse
Imminent Collapse's picture

The biggest fundamental problem is the corporate connection to politics +1

The buying of politicians must stop before any other reform will be possible.

Sun, 07/01/2012 - 22:56 | 2579697 mjk0259
mjk0259's picture

If Europe is such a mess, why would they need to do something to cause the Euro to devalue? After all these years of frenzy, it's gone down about 8 cents. It was a lot lower before they were recognized to have any crisis.

As for the practicality of the recent proposal - markets are supposed to know best - record one day increase in the price of oil says a lot of people betting it works at least for a while

 

 

 

Sun, 07/01/2012 - 21:28 | 2579585 Kimo
Kimo's picture

"this presents several difficulties, primarily that of credit default swaps that did'nt exist in the time of the Plaza Accord."
http://themeanoldinvestor.blogspot.com/

Sun, 07/01/2012 - 20:22 | 2579517 GlassSteagall
GlassSteagall's picture

-The US or China are going to start buying EU bonds? Lunacy – not happening.

 

It may be lunacy, but the FED will start pumping (pimping) the idea that if we don't bail our US banks will be severely hurt and in French 'Voila' ... Bail des Banco

Sun, 07/01/2012 - 19:58 | 2579479 XtraBullish
XtraBullish's picture

"Tell me another plan that might work."

 

OK Bruce - you take the Central Bank EuroZone gold reserves and you pool them as collateral for the sovereigns and the bank debt and then you RE-PRICE gold to a more market-driven value - like $5500 per U.S. ounce. With the recalibration of the collateral, you have now put an underpinning to the debt. Since less than .4% of investible assets are currently gold-related, it becomes a non-inflationary re-set. A very tiny minority gets filthy rich (always the Black Swan case btw) but the "greater good" is achieved. The only thing that reverses the Eurozone bank runs is a restoration of confidence and only those gold reserves will do it.

"There is the ONLY plan that "works""...

Sun, 07/01/2012 - 22:57 | 2579699 mjk0259
mjk0259's picture

Except they don't determine the price of gold.

Sun, 07/01/2012 - 19:03 | 2579405 Yen Cross
Yen Cross's picture

 The ESM>  efsf < Bis , WB, IMF, < are underfunded.   Nothing has changed. The ECB has to expand the balance sheet!

   The " European Central Bank" is the only funding Mechanism for europe. Period.

   If China funds Europe , (western) They will be overrun in a Heart Beat! 

Sun, 07/01/2012 - 17:25 | 2579200 tom
tom's picture

Your proposal makes some sense, but I don't see any movement towards it. I would look for more euro issuance as bank refinancing, which depresses the FX rate, but not for outright FX intervention. I don't agree that all the dicey loans are already hocked. To get an idea how much more refinancing they could do, look at how much Greece has done, and apply that proportionally to the rest of the south, Ireland, Belgium and France.

Sun, 07/01/2012 - 17:07 | 2579174 Snakeeyes
Snakeeyes's picture

They have no money velocity either. Recessions ahead and Socialists can't bring themselves to cut spending. Obama is having thevsingle biggest tax increase in history in a recession!

Socialists and crony capitalists are insane and will destroy.

https://confoundedinterest.wordpress.com/2012/06/28/the-molasses-recover...

Sun, 07/01/2012 - 16:09 | 2579071 NoTTD
NoTTD's picture

As far as the early options, I think that you, and most other pundits, have way too much faith in German political will.   I can only assume that echos of WWII still affect our view of them.  Their leaders are as all others in the EU - they believe in the EU above all else, even their own countries.  It's the type of mass hysteria that will amaze the historians of the future.  Expect them to ultimately go along with just about anything, no matter how self-destructive, agreed to by the others.   History will judge them harshly - again.    

Sun, 07/01/2012 - 16:43 | 2579128 Kayman
Kayman's picture

Eurobonds = Treaty of Versaille.

French humiliation of Germany.

Sun, 07/01/2012 - 15:35 | 2579003 brianshell
brianshell's picture

What was the REAL reason for the European union?

If you were a central banker trying to consolidate power, wouldn't it be easier to control Europe as a single monetary unit?

In the past, controlling the countries of Europe was like trying to herd cats.

EU politicians are tools of the bankers just like most everywhere else.

Power.

Sun, 07/01/2012 - 22:03 | 2579632 anonnn
anonnn's picture

What was the REAL reason for the European union? That is  key  Q.

How better to accomplish control than to have a small number of Control Points [e.g. Brussels, NATO, UN Sec Council ,etc], each having only a few humans in-charge, who in turn can easily be either corrupted or disappeared/replaced. And only a majority, at that.

A work in progress.

A local exaample: The 5 members of Los Angeles County Board of Supervisors wield enormous authority over abt 10 Million people. How expensive might it be to sway a majority of 3 votes?

Sun, 07/01/2012 - 16:41 | 2579124 Kayman
Kayman's picture

brianshell

Isn't what we are witnessing in Europe an attempt to herd cats ?

Sun, 07/01/2012 - 14:17 | 2578873 cathrynm
cathrynm's picture

If they go to auction bonds, and then someone doesn't buy, does that make them a bond vigilante?    What am I missing here? 

If the EURO is falling, then, what are bond buyers going to want for the default risk and the currency risk?   I don't get how this is going to help.

Sun, 07/01/2012 - 14:09 | 2578855 Pat Fields
Pat Fields's picture

Given that the banknote currency scheme automatically inflates at an exponential pace according to complex compounding of interest accruing on the entirety of it, ‘devaluation’ is only a temporary respite from the inexorable math proceeding apace nevertheless, beneath.

THE … PERMANENT … solution is to ‘harden all banknotes at their residual purchasing power, calculated on their last physical expression before banknote issuance. As an example … the American banknote has depreciated about 97% in purchasing power since it was physically expressed as 100 units of copper in 1912. So, the present equivalent is a 10 gram copper piece.

Making this reversion preserves the entire financial super-structure intact.  All wages, prices and accounts remain numerically identical except as defined in ‘coppers’.  No one is ‘richer’ or ‘poorer’ as a result yet the core source of their constant undermining, inflating currency and coincident debt inherent in the monetary scheme … evaporates! Capital formation is unhindered and productive investment is released from the ‘currency load’.

Sun, 07/01/2012 - 15:12 | 2578959 LawsofPhysics
LawsofPhysics's picture

That's it you are on the list. The central bankers will see you dead and start WWIII before letting such things happen.

Sun, 07/01/2012 - 13:15 | 2578690 shovelhead
shovelhead's picture

How do you 'outgrow' total insolvency of both banks and Govt.s?

The time for 'fixes' passed years ago. Run amok banks lending and Govts spending have committed a mutual suicide pact.

Putting makeup on a corpse does not bring it back to life. Granny ain't gonna get up out of the box and walk.

"That parrot isn't dead."

"Yes, it IS."

"Nah, 'e's just resting."

Time for a do over.

 

 

Sun, 07/01/2012 - 13:13 | 2578684 Grand Supercycle
Grand Supercycle's picture

More Equity Rally Expected.

Any traders predicting a multi month equity rally apart from me ?

As of June 30th I am.

Last week was the turning point.

Further equity upside and USDX weakness expected this year according to my analysis.

However the SPX big picture remains very bearish and unfortunately this will not change.

http://www.zerohedge.com/news/2012-12-24/market-analysis

Sun, 07/01/2012 - 17:47 | 2579237 Orly
Orly's picture

Inasmuch as I simply love to disagree with you, I can at least understand why you (and others...) would predict a rally to come in equities.  I don't think that is going to happen, despite the facts that:

  • The BofE is about to launch into another QE programme...
  • The inevitable cascade of European banks has been stabilised, for now...
  • The Australian dollar is showing considerable strength secondary to a resilient commodities market...
  • The US unemployment report for June will come in slightly better than forecast...

The main reason as I see it is the chart of the EURUSD over the past fourteen weeks.  The Euro is demonstrating consistent weakness on a Weekly basis, as the pair has failed to make higher highs and higher lows, despite the ECB taking its bazooka-level to ten.  If there is a "risk-on" pair in the world right now, it is the EURUSD.  And the chart is saying that risk is not "on."

Therefore and whatnot, with risk off, US stocks plunge (and I try not to use that word too lightly...), the Euro tanks, dragging the Pound Sterling with it (even as the SNB looks like that guy in the jet simulator, with his lips all flapping around and everything...), gold and precious metals follow stocks into the "risk-on" dustbin of what coulda-been and the US taxpayer is once again called on to save the world.  And that would mean all yen crosses would see record bottoms...

It goes around, it comes around.  Same story, different flavour.  Only this time, it's really about to get ugly and the Euro, according to Bruce's scenario, will revalue itself with everyone still in and everyone taking a bite.

I do appreciate your analysis, though.  :D

Orly

Sun, 07/01/2012 - 13:00 | 2578656 ddtuttle
ddtuttle's picture

This would almost certainly buy the time politicians crave, but that's about all.  A devalauation 50% is what they need to get their debts down to a level where default can be avoided.  Of course, this would require them to run their economies responsibly to aoivd ending up right back here again.

The future of the EMU is boiling down to one simple fact:  if Germany stays in the union she will be drawn into an inevitable collective EMU default.  This is true whether they create a fiscal union or not: collectively the EMU is bankrupt.  However, taken alone Germany is solvent, so if they leave the zone they can avoid a default.

This trumps any benefit the EMU holds for Germany.  Once it is widely understood by Germans, their politicains and bankers, the die will be cast.  Then you will get your EUR devaluation without anybody having to agree on anything.

Sun, 07/01/2012 - 12:34 | 2578611 orangegeek
orangegeek's picture

Although we saw a big drop in the US dollar (big jump in the Euro), the structural weakness in the Euro will drive the US Dollar back up.

 

http://bullandbearmash.com/index/usd/weekly/

Mon, 07/02/2012 - 05:00 | 2578557 THE DORK OF CORK
THE DORK OF CORK's picture

This is a slightly different stat. but gives a impression of how different the Southern Irish car market is.

New and used imported private cars new regs. Jan - May 2012 total :69,620

Volks: new cars : 6,664  second hand :2,249  (top  brand)

Vauxhall ; new cars : 0     second hand : 1,092

 

Update :

sorry made a elementry mistake with these numbers - forgot to add Opel figures to the southern car figures...........

It changes it a bit me thinks.

New Opel cars registered Southern Ireland jan - may
3,212

 

 

Sun, 07/01/2012 - 12:12 | 2578509 THE DORK OF CORK
THE DORK OF CORK's picture

Well this would affect the UK outside of London.

GM has made a investment in the Vauxhall Ellesmere port site because of the Fiscal and monetary integration withen the UK economy after its devlauation.

For example the Vauxhall brand is normally the first or second biggest car reg in Northern Ireland while it is very unpopular down south.

en.wikipedia.org/wiki/Ellesmere_Port

http://www.youtube.com/watch?v=QmVF2X02bzU

Northern Irish new car regs per quarter
Oct - Dec 2011 : Vauxhall 13% (919)
Ford 12% (817)
Volks 9% (594)

July -Sep 2011 : Vauxhall 11% (1,348)
Ford 11% (1,335)
Nissan 9% (1,086)

April - June : Ford 12% (1,430)
Vauxhall 11% (1,278)
Volks 10% (1,165)

Jan -March : Ford 11% (1,902)
Vauxhall (1,735)
Volks (1,460)

Sun, 07/01/2012 - 11:31 | 2578484 MFL8240
MFL8240's picture

This is a charde and there is no way out except some pain and dismissing the debt.

Sun, 07/01/2012 - 11:10 | 2578450 bankruptcylawyer
bankruptcylawyer's picture

bruce, your posts are not only good, but they attract some of the best commentary and commentators on ZH. thank you. 

 

I like your relatively near term perspective. but as you well know and as people in the comments point out. there are bigger structural issues at work here. and if you ask me. I tend to think that the solution to the next decade or two of structural demise resulting from expected demographic changes more than anything else-----will be war and/or revolutions. 

The devaluation of currencies , and all other central banking efforts, to keep the system 'stable' is a ratchet ensuring that political measures are unable to solve the structural problems. the world is indeed to interlocked. 

I have a sense that the chinese and other major debtor treasuries understand this better than the U.S. and they are more able, and willing, to use the full fascist force of the state/military/police apparatus at a time they deem necessary. People in america are buying guns and the government is incubating the department of homeland security and the pan-optican omniscient NSA program, but in the end of the day I think the "west" by virtue of its gun rights, diversity,  and liberal culture lacks the capability for outright full scale social repression that is possible in Japan and China. I think the bankers will get their way-more so than they will in the east. 

 

 

Sun, 07/01/2012 - 14:10 | 2578858 disabledvet
disabledvet's picture

Is it "Bring back the Punt" or the punta?

Sun, 07/01/2012 - 11:35 | 2578486 Eireann go Brach
Eireann go Brach's picture

Bruce or someone else, can you give me an explanation of who the Bond Vigilantes are, what do they do and who they are comprised off?

Sun, 07/01/2012 - 14:12 | 2578861 Bruce Krasting
Bruce Krasting's picture

Vigilantes sounds like a bunch of bad guys who wear black hats and are out to take advantage of widows and orphans. Types like these would also be cruel to stray animals.

Actually they are just fixed income investors, portfolio managers, Bond funds, Central Banks, Sovereign funds (Saudi etc), banks, primary dealers, hedge funds and everyday folks. They are not a bad lot at all; by nature, they are risk adverse.

It's not so much what they do, it's what they don't do. Right now they are not buying bonds of Spain and Italy. Do you blame them?

Sun, 07/01/2012 - 16:42 | 2579127 FeralSerf
FeralSerf's picture

Vigilantes are, by definition, the vigilant ones.  They are not necessarily out to take advantage of widows and orphans, but since W&Os usually aren't very vigilant, they often suffer.

No, I don't blame them.  I am a bit envious of their tools and results though.

Sun, 07/01/2012 - 10:16 | 2578396 Mr.Kowalski
Mr.Kowalski's picture

Insolvent nations, insolvent megabanks, insolvent Central Banks, unpayable CDS's written by the trillion-- this is not how to run a financial system, folks. But is it within the Wit of Man to some up with something better ? If so, how would we get from here to there ? Being rather overcaffeinated this morning and having made promise on last week's post to present my Answer To All, here we go. 

 

http://themeanoldinvestor.blogspot.com/2012/07/great-reset.html

Sun, 07/01/2012 - 08:57 | 2578318 kindape
kindape's picture

Bruce.

This is clear and spot on using old paradigm thinking. But devaluing even 20% doesnt come close to solving problem but would buy a few months. All OECD countries, including China, Brazil etc have used credit instead of productive capacity to pull demand forward in time. The disconnect between what future financial claims are vs ability to pay is a factor of 5 (270 trillion in what people think they own in OECD).  The problem is MUCH worse than a 20% devaluation (and of course, that means other currencies go up 20% which makes their end game all the closer)

Sun, 07/01/2012 - 14:13 | 2578866 disabledvet
disabledvet's picture

How about an 80% devaluation?

Sun, 07/01/2012 - 16:21 | 2579090 kindape
kindape's picture

80% of Euro? maybe, but that would be a 80% reval of other currencies. Whats needed is 80% debt/credit writeoffs across the board. Whatever you own, its now 20% of that.  That would do it (but will never happen)

Sun, 07/01/2012 - 08:47 | 2578310 disabledvet
disabledvet's picture

SPOT PHUCKING ON! IMF=I M Phucked as well EZ! (and that is precisely where this is headed...all euro gold to IMF????!!!!!) the interesting thought is whether the euro value has already priced in the WAVE of Sovereign defaults coming. Talk about the Mutha of all Recaps! GAME, SET, MATCH when that happens...

Sun, 07/01/2012 - 08:38 | 2578300 Dan Duncan
Dan Duncan's picture

The argument for Obama's support of a 20% Euro devaluation doesn't make much sense.

BK writes, "Obama also understands that if the EU goes belly up before the election, his chance of winning goes down. If the EU tanks, so will the S&P."

OK, fine.

BUT if the EUR/USD falls precipitously as it will under the devaluation plan, than S&P is still going to tank.

Since the Yen typically outperforms when markets fall (and markets WILL fall under this plan), what's this devaluation plan going to do to the Yen...push USD/JPY to .65 and EUR/JPY to about the same, since the EUR/USD will be at parity?  This effect, too, will have a vicious effect on the S&P?

Even if this ill conceived plan is implemented and is somehow "successful", next year we'll be back on these same channels and instead of discussing Italy and Spain, the talking heads will be fretting about what CBs can do to save Japan.

[Oh but wait, come to think of it...it's not going to be so difficult yo save Japan because at that point Europe will have already been "saved", so the Europeans will then certainly step to the fore and applaud the coming Japanese devaluation/Euro appreciation because by that point all of Eurpo's problems will be in the rear view mirror...and the Central Planners of the Chinese economy are going to have no problem with the helter skelter Central Bank machinations...blah, blah blah.]

Sun, 07/01/2012 - 11:21 | 2578465 Bruce Krasting
Bruce Krasting's picture

Desperate times require desperate measures.

Think of what has been done the past 4 years. An alphabet soup of government interventions that is in excess of 10 Trillion. What I see potentially happening is just another chapter of the CB intervention story.

After all that intervention, do you really think they are going to quit now? I don't. It's just a question of what is coming, not a question of if something is coming.

A strong dollar is not good for the S&P. But a collapse in Europe before November would be much worse.

Which dirty shirt would you choose?

Sun, 07/01/2012 - 12:30 | 2578606 barliman
barliman's picture

 

Desperate times always end up in the most desperate of moves: WAR

Every idiotic thing done in the last 4 years has led to fewer choices. The $ 10 trillion in interventions has taken a greater amount of potential global economic growth and buried it in the ground, forever.

We have come to the endgame. It does not matter if they intervene more ... or never.

The lesson of the last 4 years is now writ large across the sky: ALL central bank intervention has only made things WORSE.

Devaluing the euro by 20% means appreciating the renminbi by 20% - which drives a stake through the heart of Chinese exports to one of their top 2 export markets.

I know YOU did not miss last Friday's headline about Japan's industrial production dropping the most since the March 2011 quake/tsunami due to dropping European demand.  Under your scenario - the yen will jump in value even higher and Japan will drop immediately into a depression.

Devaluing the euro by 20% means lowering the standard of living for the European Union by 20% - as JUST the starting point.  The ability to "rein in inflation" requires the Volcker Approach. You remember what it was like to live through the Volcker period, Bruce. Do you see the EU being ABLE to start down that road?

A strong dollar? That is a massive piece of understatement, Bruce. The DXY would pass 100 in the first 30 days and keep climbing.

Tell me what I am missing in my analysis, Bruce.

The item I mentioned regarding the renminbi increasing in value ... I'm sure you know it would be the match to light a WAR ... because at that point, China's export economy doesn't just have a hard landing ... it would "auger in" and come apart at the seams - which the Communist leadership would find COMPLETELY UNACCEPTABLE.

barliman

P.S. We are at the "War Games" moment - the only winning move for the Central Banks is NOT TO PLAY.       Stop the interventions. Take the pain now. Pick up the pieces that survive and move on.

Sun, 07/01/2012 - 14:25 | 2578885 brianshell
brianshell's picture

Quotation by Mayer Amschel Rothschild: Give me control of a nation's money and I care not who makes the laws.

Central banks, fractional reserve banking, sovereign borrowing and credit cards must be outlawed definitively worldwide.

Who start wars? People? No.

Leaders starts wars. Who are the leaders?

Bankers.

If people succumb to the 'silver bullet syndrome', they will always turn their backs on evil after a time and, like Sauron, it will return. Power has such a magnetic attraction that it will never disappear.

Find a way to systemically confine power to the multitude. Find a way to engrain caution instinctively into the human brain so future generations don't have to relearn this lesson.

 

Sun, 07/01/2012 - 13:44 | 2578775 SamuelMaverick
SamuelMaverick's picture

You are missing the unintended consequence of a Euro devaluation which would be the reciprical devaluation of competing currencies ie. Currency Wars. It would start a chain of currency devaluations worldwide. Same thing happened during the Great Depression, and did not fix a damn thing.

Wed, 07/04/2012 - 14:13 | 2587185 barliman
barliman's picture

 

The currency wars have been going on for the last 30+ years.

The devaluation of the dollar Bruce refers to ignited them in earnest.

In September 2008, China and other players went "nuclear" with their attempt to withdraw $ 2+ trillion USD from money market funds one afternoon.

Since then, the rule has been "beggar thy neighbor" every step of the way in a race to the bottom.

The euro devaluation Bruce proposes would be another "nuclear" exchange (as he well knows) and would have the immediate effects I have described BY INTENT and would disrupt the current race to the bottom.

It would edge the Fed towards going nuclear and removing their currency swap lines from Europe ... but at that point the actual wars would break out because the euro would be less valuable than 2 ply toilet paper.

barliman

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