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Eurozone: A Bad Marriage
Kenneth Rogoff explained the fundamental issue regarding the eurozone perfectly: It is as is 17 unmarried individuals are sharing a bank account. Next week, leaders are meeting to discuss the fate of the euro. Angla Merkel, accordingly, believes there needs to be a treaty revision. Namely there needs to be swift and deliberate action to move towards fiscal consolidation before any more bailout discussions can occur.
So what is all this fuss about eurobonds? Countless individuals continue to make their way into the media insisting that eurobonds are the solution, at least a leading solution amongst many solutions. I don't get how this is so. This is a bond backed by a region that has proven itself to be a failure. OK, if countries like the U.S. and China back the program this adds a tiny bit more validity to the promises to repay this debt. However, these bonds are still being used to throw new money on top of a fire that will not stop burning until serious structural reforms take place. I applaud Chancellor Merkel for taking the actions that she has, including insisting that the ECB maintain its independence by not taking advice from Germany (who has been asked to contribute their thoughts regarding what the central bank should do, sounds like government officials not belonging where they are to me).
So eurobonds do not seem likely in the near future, but they absolutely will be introduced following the mitigation of this disaster, if we in fact make it past the next 10 days. I am eager to see how markets react in the run-up to the EU meeting next week. I assume there will be extreme volatility, mainly because this recent move by the Fed and other central banks is really only a temporary solution, much like eurobonds are in theory.
My main question is: when are our "leaders" going let markets correct themselves and begin to construct more meaningful, permanent and structural solutions?
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SP500 bull vs bear battle reverts to bearish bias after price action on Friday and more downside expected.
My long term indicators have continued to warn of US Dollar strength and EURO weakness and these signals have increased since 2009. The overdue dollar rally should be substantial.
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Technically, you just have to ring-fence SOV-Bonds into a very long-term SPV. Then have massive deflation of financial assets. Even if only thirty banks are left standing in europe, that's still sufficient, their actual 'size' doesn't matter (at that point loan-books can be part-guaranteed), as long as the payments infrastructure remains. Employment income is then fairly important, current a/c.s' at 2%. Now you have a well-educated workforce and a currency that cannot afford imports, but more importantly, prices are extremely low, so there is little profit to be made from industrial investment...this is the optimistic outlook for the next five years, one where government can still provide 'law and order' (laughable). ...to compensate for the disincentive to invest, a 'co-operative framework' to investment ought to be worked out (perhaps across Europe) and where the costs, inc. start-up, associated with such Inv. are also extremely low.
Massive 'Deflation' is the only way that governments can continue to fund themselves over the medium term, while the financial architecture is predicated upon Creeping Inflation. Since you cannot not have a government, which is a shame, it is the financial system that will have to significantly change.
Right now, europe is required to draw upon a considerable amount of intelligence and wisdom in planning a response, or it will be pulled into the same tier of cultural achievements with which the US is currently regarded, without many of the economic benefits.
How can you have Eurobonds among countries that are still talking about World War II? Does that sound realistic?
99% of "analysis" on Europe ignores basic common sense issues.
Let's look at the difference between the US (or UK or Japan) and the European Union.
Because the US (and UK or Japan) can borrow in currency that is self-issued there is NO TECHNICAL LIMIT to what the US can borrow. Ditto with UK and Japan.
Countries which borrow in their own currencies can borrow to the point of absurdity.
It's fair to admit the US has reached absurd but why is $55 trillion too much while $25 trillion is not? Why not $555 trillion?
(Next week, ha ha!)
As long as the US (and UK and Japan) keep borrowing the interest rate will be very low. The US (and UK and Japan) can monetize their service costs for extended periods -- for decades as has been the case of the US (and UK and Japan).
The EU cannot do any of these things because there is no 'United States of Eurozone' (All Your Base Are Belong To Us). All the independent EU states are borrowing in foreign currency. This makes borrowing dependent upon uncontrollable 'unfriendly' lenders rather than the EU itself.
It is the same as the US borrowing roubles ... or Argentina borrowing dollars.
Having a central fiscal authority along with the monetary authority is Econ 101, why the EU states (Germany) are opposed to this is hard to fathom. Germany would not be 'on the hook' for US of E debt any more than New Jersey is on the hook for US debt.
The Germans gripe about sovereignty but New Jersey has more sovereignty than Germany which is saddled with a balance sheet denominated in a 'foreign' currency! What happens if France defaults? Germany has no control over its own destiny.
All of what is taking place in Europe is unnecessary and self-inflicted. Problem is time is running out on a fiscal solution. By end of year it may be too late.
THIS IS NOT A CURE but BUYS TIME. Only energy conservation -- 50% reduction in petroleum use in EU -- will cure imbalances and stave off inevitable EU bankruptcy.
US has to cut 75%. Either we voluntarily conserve or fuel conservation is shoved up our butts by events.
since we are operating on the too big to fail principle, (until they eventually do no matter what) in the interim, in spite of the fact the banksters are in control, perhaps politically some pressure could be applied to run any bailout on a lottery basis. The winners (banks) get bailed and the losers fail. sooner or later the risk of failure would stem the tide of unbridaled risk.
What this really is, is a wife with 17 maxed out credit cards.
Sounds more like polygamy with Germany owning the balls and money. France as the Number one girl running the household. The rest of the girls dont mind getting screwed every now and then as long as they get to sit around in pretty dresses.
The fix is underway-the only problem is the politician's and bankers that want to stop it from working-
The market is functioning perfectly as always-
It wants to see blood and bodies floating and it will not be denied-it will eventually bowl over everyone and everything that stands in its way-
Can you file for divorce if you're not married? And what about the Lisbon pre-nup?
Get a clue, Chris. The bank account is overdrawn and the remaining debt far exceeds the economic capacity of the hapless 17, so no entity except a govt printing operation, the FED, IMF or ECB, would touch the bonds. Hence 2 alternatives only for the euro criminals and banksters: default or, much more likely, massive printing, which will destroy the populace, but allow the bankers to escape with some lott.
Maybe I didn't make myself clear enough by stating:
This is a bond backed by a region that has proven itself to be a failure. OK, if countries like the U.S. and China back the program this adds a tiny bit more validity to the promises to repay this debt.
I don't expect eurobonds, if they even ever come into existence, to be a hit.
Eurozone is a Harem...without the benefits.
...My main question is: when are our "leaders" going let markets correct themselves and begin to construct more meaningful, permanent and structural solutions?...
This has to be in the context of the financial crisis the most pathetic reasoning one can imagine!
How can you expect a gang banged, totally dead, so called market, to fix anything....? Mind boggling reasoning! The Market is the killer horse on which has ridden the Oligarchy, draped in criminally fictitious, fraudulent, pseudo virtuous, white knight, 'invisible hand' mantra.
As for the leaders, surrogate shills now on the verge of systemic collapse through their own corrupt impotency, they first have to control the market, divorce it from its speculative spiral for the benefit of the Oligarchs, make it into a utility system serving the average man and his savings, servant of real entrepreneur rather than arrogant lying king of financial ponzi world. And..its not over, as it may even be the end of capitalism as we understand it, for a long time.
Wake up who ever you are, you are so pathetic in your reasoning, you need a long cure in a psychiatric ward.
Another garden hose for a house on fire.
Not sure I follow you there.
Are you suggesting that Eurobonds would be part of some new treaty in conjunction with enforceable deficit criteria?
At some point eurobonds will have to exist if the region wants to function as a normal economic entity. But steps would be required beforehand viz. fiscal consolidation, uniform tax policies, or some sort of central figure that oversees taxation and spending.
Essentially yes to your question but I don't see eurobonds being introduced for at least a few months, once stability returns.
But Eurobonds can only be introduced by Treaty change.
I have doubts that such changes will pass in all 17 member states.
Let's say it did pass.
It is, is it not, impossible for Greece to repay existing debt.
Also at rates of 7% it will become impossible for Italy to service debt given that they have €300bn to rollover in the next twelve months.
Do you see the ECB bypassing it established remit and using a conduit, the IMF?, to buy up Italian and Greek debt?
Greece should be solved since it is entirely solveable. Italy on the hand is "the big one."
Fascist police supercontinental state will be the first step.
Hmmm...wait, that has already been implemented.
Never or until they can't
The market of course, will run up on rumors of a plan for a meeting to plan the rumors for the next meeting.
The market IS the rumors and news of the rumors as is parameterized by the HFT algos.
Real investors and stakeholders are getting the hell out
The markets can do what they always do, misprice everything 100% of the time, what are they supposed to correct? It's time for leaders to correct themselves. The whole fiat ponzi is a mistake. Governments should never have been allowed to borrow from financial instituions at a loss to the taxpayer and a profit to the finance industry. Printing or policy or any other "solution" will achieve nothing unless you divorce the unholy union between government and banks. This is where it all started centuries ago, and this is where it must end.
This is a "Red Herring". Germany wants Treaty changes to force stricter discipline on budgets in the profligate South and a a way OUT for those who cannot, or will not comply, NOT to create Eurobonds or allow ECB printing. Germany, quite rightly, understands the moral hazard of all the "Easy" solutions. Germany will not subsidise the rest of Europe and, in any case, the German people will not allow such to happen. In the event that it is not possible to get Treaty revisions to meet Germany's goals, more likely outcomes, therefore, are either a GERMAN exit from the EUR or Sovereign defaults followed by IMF intervention and the recapitalisation of German Banks. These are more politically palitable in Germany because of both the discipline which the IMF would bring and the fact that the German people can more easily (Be made to) accept that putting taxpayer money into GERMAN Banks is preferable to pouring taxpayer funds into the black hole which is "Club Med"