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Devalue the Euro?
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.
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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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Germany is no longer a pivot, Angela Merkel gave in to pressure in Brussels, and faces legislative scrutiny of her financial pledges for the ESM and ESFS by the German Constitutional Court.
The scenario BK outlined is a possible one.
The core issue is the Eurocracy - burocrats of the European Union - which will maintain and multiply itself at any expense. Economic theories to one side, the political reality of the Euro crisis is control of all aspects of Europe by Brussel Eurocrats. Democracy at several arm lengths.
The survival of the Eurocracy will determine which scenario will work itself out. We are just words, full of sound and occasional fury, signifying nothing, or almost that.
Jim "domed cranium" "250 IQ" Rickards (author of top selling book Currency Wars) tweets that the EUR will be fine. Latest communication Jun 30: "....Euro Crisis coning in for staged soft landing".
So with all these phenomenal experts with collectively hundreds of years of experience in the markets, whom do we believe?
The FSA. Damn they're good: http://www.bbc.co.uk/news/business-18623222
good one
http://www.guardian.co.uk/business/2012/jul/01/vince-cable-criminal-inve...
Another classic: Pretend that there is an investigation going on so the unwashed think there exists justice.
Now you ask: where's the punchline? There is none, the joke's on you.
<laugh track>
.. how about this then
http://www.out-law.com/en/articles/2012/may/serious-fraud-office-went-a-...
One other deus ex machina scheme I've read about would be to adopt a gold-backed standard for the Euro, revaluing gold at about ten times its current price. That would inflate away Europe's debts. I don't know if it would work, but it's a straw that might be clutched at.
The € is marked to its gold "market" value on the ECB balance sheet every quarter. See FOFOAs website for a discussion. This is the big difference to the Fed which has gold certificates on its balance sheet at 42$ per oz. Anyone who owns € can buy gold at the Crimex/LBA ""price". For the € to "devalue" against the gold "price" the Crimex would have to be abolished and a mechanism found for valuing physical gold.
devaluing the euro won´t change the balance of payments problem within europe. yes, it will improve competitiveness to the rest of the world. it might create a somewhat higher inflation in germany´s export oriented economy which is much needed. however a devalued euro would surely streghten all european economies and buy some more time but it wouldn´t solve the balance of payments problem. and those "bond vigalanties" as paul krugman calls them do not exist. the european bond markets simply have undergone a paradigm shift. after introducing the euro sovereign bonds of euro-member states were considered safe. period. no risk premium asked. ..after all those states could always pay back their debt by printing more euros, right? and there´s the shift. euro-member states cannot do that- unlike the U.S. which will always be able to pay back it´s debt simply because it has it´s own currency. so european bonds have lost their risk-free status and are treated like corporate bonds. unless europe manages to change that the common currency is toast- but not because some "bond vigalanties" pushed it into the abyss. the only thing that´s surprising is that almost for a decade noone saw that problem..well, "the markets" see it now. and of course there´s the banking crisis. maybe, just maybe europe might be able to tackle that problem. devaluing the euro surely will kick the can further down the road but the way i see is: 1.will it solve the balance of payments problem within europe and 2. will it solve the problem that euro member sovereign bonds are beeing treated as corporate bonds. and i think the answer is no and no.
First it was "Trade deficit does not matter". Now it is "Trade surplus nations are committing a great sin against others!". Fuck man, these American and British economists are so fucking delusional that even Alice in Wonderland would say at the gate, "Stop right there pal, you ain't coming here, you friggin freak. We do not need your kinds in here!"
it´s not that trade deficits/surpluses do not matter. it depends..they matter less if you look at a deficit of a country with another country. they can be handled. (for that see: http://neweconomicperspectives.org/2011/06/mmp-blog-2-basics-of-macro-ac... )
deficits and surpluses become a bigger problem in an economic entity that shares a common currency. like the US. so how do you handle that problem? just like any other country does: surplus states give aid to deficit states. in europe whole nations share a common currency without having a mechanism of getting rid of those imbalances.. easiest way would be if surplus nations i.e. germany) would give aid (aid..not credit) to deficit nations- not going to happen. another solution would be higher inflation in germany and little inflation in the periphery to bring wages and prices in line with the core- higher inflation in germany is not going to happen. a third way would beto enable the EU to act towards euro member states like washington does towards states within the US: that is if budgets are out of line the EU should be able to halt the budget and make adjustments. problem with that is that nations define their sovereignty over budget soverignty. just image..brussels tells spain what they can spend their money on, where they have tu cut budgets and what not. nations rather default than live in slavery. so not going to happen either... i really don´t see how the euro can be saved. it´s the fourth year of the crisis and all you hear in teh media is debt, debt, debt...not a word about balance of payments, not a word about the shortcomings of the euro. they have managed to kick the can for four years, they might manage to kick it down further but we are not making progress on actually solving the problems
US States, GDP per capita
District of Columbia: 174500
Massachusetts: 58108
New York: 57423
California: 51914
Texas: 45940
Florida: 40106
Mississippi: 32967
Puerto Rico: 23380
That is with those "aid" transfers between states...still US Southern States perform like shit, after what..150 years of "welfare" transfers. No thanks for that kind of stupid aid.
i see your point there. in germany people have the same doubts about say giving additional aid to states of former east germany...but after all it´s germans helping germans, holding the union together or in the same sense americans helping out americans. it´s an ongoing controversy but by the end of the day there´s zero chance of changing that. no politician would demand to stop giving aid to florida or have them exit the union or have them introduce their own currency. a moral play doesn´t stand a chance..in europe on the other side it´s easy to make a moral play out of it. headlines like "german taxpayer money funds retirement age in france of 60yrs/ bailingout irish banks/ financing spains youth unemployment program etc...we are not one people on this side of the atlantic. we are over 30 nations. so "No thanks for that kind of stupid aid" is the agenda here and it will remain so for decades to come
What is the point of permanent welfare transfers and pork projects if those do not even help? Just to keep Florida and Mississippi in the Union?
The point of the transfers is for the Power Elites to keep their herds. If they let them starve too much, they'll leave and become livestock in someone else's herd (or die). The welfare transfers don't cost the Power Elites much if at all. Real wealth is never transferred to the recipients.
A Power Elite without a herd is just all hat, no cattle or not really much of a power elite.
They do help, they just don't change the local economy that much.. People suffer less.
You are interpreting the numbers wrong people. Per capita production in the District of Columbia is $174,500 ????? What were the inputs ? Taxes ??? Which way did you say the transfers went ???
Last time I looked the main export from DC was bullshit, and not a single bovine in sight.
Politics and cronyism. Same with the Mezzogiorno in Italy. And in Germany several "Laender" (provinces) have been running large deficits at the expense of the more fiscally prudent ones for decades. Not to mention the "solidarity" tax surcharge transferring wealth from former West to former East German provinces since the 90s.
It sounds like its time for the Icelandic Carry Shuffle, if you're a EUROpean. Borrow in EURs, buy a basket of foreign currencies, buy stuff that you need/want and can touch. Then payback your loans in what will be shitEURs.
Icelanders are my heroes.
Hey Ben, how are those USD-EUR swaps lookin' to work out for you?
The USD/EUR swaps are working out fine. They were/are intended as a measure to increase his handlers' power. Ben doesn't give a shit whether they're actually profitable in fiats. He can always create, and I expect he will, more of those fiats with little effort.
Fiats are trees. World domination is the forest. Unfortunately, most people cannot see the forest, because they're too focused on the trees in their own back yards. Ben's supervisors can see the forest and it's their intention that that forest will belong to them, lock, stock, and serf.
"
Spain exports were worth 17200 Million EUR in April of 2012. Historically, from 1991 until 2012, Spain Exports averaged 10447.9 Millions EUR reaching an all time high of 19890.0 Millions EUR in March of 2012 and a record low of 1924.4 Millions EUR in August of 1992. Spain major exports are: machinery, motor vehicles, fuels, chemicals, and semi-finished goods and foodstuffs. Spain is also the third largest wine exporter in the world. The EU accounts for 70 percent of Spain's exports, the most important trading partners being France and Germany."very good article bk.
Excellent article BK! Just missing the perspective on the swissy peg, I guess the EU doesn't really care where the swissy goes, but the Swiss probably do.
Should something like I describe happen (10% probability??) the Swiss would be totally screwed.
They would have to break the 1.20 peg. If they did not let the Swissie float, they would get E500 billion of unwanted reserves in a month.
The SNB has been intervening and buying Euros like crazy the past few months. But they also have been selling these Euros and buying Yen and dollars in a effort to diversify reserves. They are doing this in an effort to keep their Euro reserves as low as possible.
It's like they see the same thing as I do. It's risky to hold Euros.
The history of co-ordinated central bank intervention has always include the Swiss National Bank. If the E is devalued, the SNB would not participate. They would lose a fortune on their holdings.
The Swiss have been Shanghaied on the Ship of Europe and there's not much they can do about it. They can't get off. It's not unlike being a passenger on one of the 9/11 planes. They will, in effect, be a guarantor of ECB debt through the mechanism of trading CHFs for EURs at 1.2 CHF/EUR while the ECB prints euros, a la the Fed, to buy worthless bonds (the ECB ultimately has no choice but to do this just like the Fed had no real alternative).
And the poor bastards in Zürich don't even get a representative in Brussels or any of the other perks that EZ Kings and Queens receive.
How come Spanish export sectors are having a bumper year despite euro, exporting more than ever before, even passing the peak of 2007? So quit talking about things you know nothing about...
Well then, if everything is so peachy in Spain I guess you won't be wanting that bailout after all then? Perhaps you should go talk to the 25% of the population who have no jobs and bring them the great news about exports - I'm sure they'll all feel much better knowing that.
That is over tenfold increase from the the low of 1992. In 1992 there was no euro. The Spanish domestic sectors are in deep recession but that has little to do with export sectors which have been booming ever since 2010.
The export sectors have been traditionally quite small in Spain, when compared to similar sized countries like Italy or UK but they have been growing quite fast ever since 1992. So the argument that euro is somehow hampering the recovery in Spain is just bullshit.
There is a flaw in BKs argument, fuel prices. A 20% devaluation of the euro would put gas at 2.50 euros per liter, maybe 3 in some places. That would create a immediate economic depression.
Gas in the EU already costs 4x what it does in the USA. So what? People in the EU don't have to drive as much for the economy to function normally. Gas prices do not matter the way they do here, because the EU has ultra-strict zoning and enforced localism. If gas goes to 6x the US level, EU vacationers will pay more and trucking will cost a bit more, but that is it.
In case you hadn't looked lately, Brent just fell by 20%.....
those nasty Saudis and Irakis, they keep upping their production when our demand goes south. WHy can't the Oligachy just learn to walk in step. Fiat pump and oil pump.
read this : FuturePundit: Marginal Oil Production Cost Nearing $92 Per Barrel
Wow, so it costs $92 to produce one barrel of oil?
Bullshit. So up until 2008 oil companies were losing between $50-70 per barrel? The oil companies were only able to make money with oil above $100? How did every single oil company make billions in profit when oil was trading at $20 per barrel, if it cost $92 to pull the stuff out of the ground.
Bullshit stories like this are nothing but psy-op propaganda to make people believe the high price of oil is justified. Shale oil is more expensive to extract than easily accesable reserves, but nowhere near this bullshit $100 per barrel figure. It is hard to find the old stories on the net, because they are being pulled. The first shale oil figures put the production cost around $10-15 per barrel, triple the $5 cost average of simpler oil wells.
The cost to pull oil out of the ground didn't go from the $4 per barrel historical average to $100 in less than ten years. In 2005 when oil first started the massive climb, engineers at Exxon said building drilling rigs on the ocean floor would be profitable at $40 per barrel. Nobody believed oil could go above $50. One of my college friends is an engineer at Exxon and told me extraction costs for gulf oil rigs is under $8 a barrel once the rig is paid for.
Well that is nobody believed other than the commodity speculators that obtained free reign to go wild with 46:1 leverage and drive the price of oil up to $147 per barrel. The cost of pulling something out of the ground doesn't go up if a stock exchange increases the price of what is sold. People still don't get the fact that Saudi oil is sold to the exchange for far less than the price of a contract. I remember reading a few years ago that Saudi oil was sold to the exchange on a contract for $4 per barrel. When the price of the contracts soared, the Saudis lobbied to get their conract increased, and got it increased to $8 or $9 dollars.
No wonder 90% of oil contracts are held by speculators. They were able to take something trading at $20 during normal market conditions and inflate the price to $147 just by selling it to each other. All the while the poor Saudis were still making the same amount of money as before. The problem with the price of oil and all commodities, is that they must first go through a stock exchange before making it to a consumer. He middle men have figured out how to add $100 to the price, and they're the ones who get the cash.
Read carefully :
the article did say marginal cost of oil....currently from tar sands and shale type high cost production. FYI from classical oil wells it ranges in the region of 20-40 USD/bbl in current USD terms from MENA sources, and this includes all R&D fixed cost recovery.
falak pema
There is a wide range of marginal costs in the Oil Sands. Some are $40 and some approach $80. But essentially they are strip mining operations that scale up well.
Oil drillers are booming, natgas not so much. There is plenty of cheap oil at cost. Pricing, well... that is another matter.
SPOT FUCKING ON!!...........very well said....
Planned devaluation of Euro the only central bank solution... Maybe.
But I agree with the BK take. As I posted this : 2575547 and 2575517
The bail out of euro is on the right lines but too small to effect the Spain/Italy/Greece/Ireland/Portugal collective private banking and sovereign debt shortfalls.
Its first world financial conundrum bigtime and it'll all come back to ROme, and the FED who run the reserve and the ponzi fiat equilibrium on global scale. Meanwhile the vigilantes drill holes into the hull of the Titanic!
Down the road, the issue is can we avoid massive reset and depression, without going to WW3?
On central bank collusion in the pipeline : Global Central Banks Are Set To Act Next Week - Business Insider
This should not be as difficult as it is made out to be. If the Eurozone prints more relative money than the USDzone then it tends to lose value relative to the USD. Why do people, and supposed "professional" investors, keep falling for this stuff? No matter what is said or printed, the universal answer these days is to print. In the Eurozone printing tends to be a bit more convoluted because of the checks and balances the Germans set up for the ECB in order to join (Weimar memories); but in the end the laws are ignored and/or modified retroactively and the printing happens (see, e.g., Merkel’s typical reaction: nein, nein, nein, … ja!). This is the world we live in these days and shouldn't require the immense number of convoluted words from our investing and political bettors. For example, it is clearly against the Constitution to force someone to buy something (or pay for someone else's desire to purchase it at no cost to themselves), yet a "conservative" "swing" vote voted for just that and will so again and again until reset (i.e., the laws are ignored and/or bent beyond even Orwellian recognition, for the outcome drives the results). This same type of thing has been happening within the Eurozone by printing to bail out their banks or profligate spending countries (or whatever the elites want to do to consolidate power and/or maintain their power). This will go on until reset, but let's not act like Homer: "Please don't let it be the print. Doh! Doh! ..."
Agreed. The CBs will print. That is all. Adjust your investing accordingly.
Agreed historically they have always printed. But it has always failed.
um, failed? failed to keep them atop the pyramid? failed to make them even more rich in the ensuing wars? hmm...don't think so. Do you?
War is the last solution, bombing Syria will inflate everything by ???%.
Bombing Syria is too small a thing to affect much outside its neighborhood. But if Syria invades Turkey, NATO could be obligated to respond with overwhelming force.
Uhm, aren't all the major countries around the world already trying to devalue faster than their competitors?
China and even more Japan and England don't look in good enough shape to accept an accord on such a thing.
I hate it and I find it FUBAR, but the most likely outcome is Merkel or her successor to finally accept Euro Bonds, with a disguised mechanism under a different name of course.
That's not because Merkel has no backbone, but because her political support in Germany will not be strong enough to prevent that dam from breaking.
Sounds like yet another scheme to keep the 'citizens' of the world on their tax farms... as 'debt slaves'.
People should be released from the bondage of debt slavery to debt they never condoned or agreed to take upon themselves. I know I never agreed to the debt my Government has racked up. Never. I do not condone Trillions in deficit borrowing and spending. I never wanted to be part of a money system that can be counterfeited at the whim of central planners that wish to tax me through inflation. Why should I submit to slavery?
We won't have freedom until we have free market money. The freedom to voluntary freedom choose what is used as money for transactions. It might take a little bit of time, but soon it would be become apparent what people have decided is acceptable/agreeable to use to transact with one another with, as opposed to having a system of usury Government and Banking Cartel either decide or force upon them.
Probable Requirement: Debt Jubilee
Yep. Though radical, counter-intuitive and uncomfortably Biblical, the Jubilee gives both political extremes a result they can live with:
To the right it gives instant resolution and a reset.
To the left it gives "equality" and "fairness" to all sorts of "underprivileged" people by basically giving them a free home.
To the middle of the road it avoids the massive city & state tax/assessment/accounting reset that would otherwise be imposed by big inflation/deflation.
Debt Forgiveness? Not a freakin' chance in hell. You do realize that would give instantaneous mind boggling run away inflation. Everyone would suddenly have an asset to borrow against...I mean everyone. Think about it. Not only would there be an instant mass borrowing orgy, people would have even less respect for going in debt.
Europe = Zimbabwe ??
judging at the weather we have here this summer.... No we're not...
Bratwurst for a buck.
And less expensive hangovers.
Bitburger, König Pilsener, Krombacher, Kulmbacher, Holsten, Astra, Carlsberg, Veltins, Hasseröder, Oettinger, Beck's, Warsteiner, Paulaner,...all for a discount.