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The Imminent Failure Of The Eurozone
This article originally appeared on the Daily Capitalist.
You know those movies with the bomb set to a timer ticking down to øø.øø where the sweaty hero nervously cuts one wire at a time while holding his breath and then at øø.ø1 he stops the bomb? Well Europe is like that except that the bomb goes off and kills everyone.
Our planet has a problem. Its leading economies, the U.S., Japan, and the E.U. are declining. That is, about one-sixth of the world's population is losing ground. These big economies are the ones that lead the rest of the world, including China. Countries like China, India, and Brazil, depend on the health of the big economies to keep buying their products and commodities so they can grow and generate wealth for their citizens.
What is especially concerning is the blow-up that is about to happen in Europe. It is not something that is happening "over there." In a world that is so interconnected financially and by trade, a sinking Europe is everyone's concern.
Their problems are much the same as ours with a twist. Their governments and central banks have also pursued reckless monetary and fiscal policies and now, effect is following cause. They have more or less followed the same policies as has the U.S., much to the same end. They spent large, engaged in Keynesian fiscal stimulus in a bailout attempt, ran up huge debts and deficits, and their economies are in decline.
The twist is the European Monetary Union (EMU), known as the eurozone. It is as if here in the U.S. there was no federal government and each state was truly sovereign, but there was a Federal Reserve Bank. Some states spend more than others, funding deficits by borrowing huge sums to support programs their citizens wanted. The profligate states want the Fed to buy their debt and float them loans created out of thin air, or otherwise they will go belly up and they will take down many states' banks. The responsible states know they will be stuck with the bill.
The EMU started on the idea that it would bind the EU closer. In essence it was a political decision rather than an economic decision. They passed a stern rule that said no state could run of deficits of more than 3% of their GDP. Except for Estonia, Finland, and Luxembourg, all countries, including Germany, now exceed the limit. Thus their politicians sacrificed fiscal probity for political gains.
They have hit the wall: Greece will soon default on their sovereign debt. On Tuesday, yields on one year Greek bills reached 60%. It is a sign that investors have no faith in the Greek government's ability to repay their debt.
The EU, ECB, and the IMF are trying to establish a European Financial Stability Facility (EFSB) in order to further bail Greece out. They have already pledged €110 billion and they are trying to put another package together of €109 billion. But Finland insists that Greece puts up additional collateral, which is not possible. Since the collateral would be part of the bailout money, it would be, in essence, Germany and France guaranteeing Finland's contribution.
Greece has missed every fiscal target it or its saviors has had. They are trying to get their deficit down to 7.6% of GDP through more austerity measures, but it looks like they will miss again (est. 8.5+%). Basically they are asking the Greeks to do something they don't want to do, and they will no doubt take to the streets again in protest.
If they default, then that opens a can of worms. European banks, other than Greek banks, hold €46 billion of Greek sovereign debt. Belgium's Dexia hold Greek sovereign debt equal to 39% of its equity; for Germany's Commerzbank, it's about 27%. On top of that, EU banks are into private Greek companies for about €94B (France, €40B; Germany €24B). According to the Wall Street Journal, the total market cap of all EU banks was just €240. The same article also points out additional unknown liabilities to insurers and investment banks.
The International Accounting Standards Board (IASB) has warned banks they need to write down, or mark-to-market, the Greek debt they hold. Whether they do or don't doesn't matter. The fact is that these banks are undercapitalized and in trouble. Their "stress tests" are a fiction. Liquidity is starting to shrink in their banking system because of these jitters. Rabobank, for example, said it is growing cautious about interbank lending – now limited to overnight loans. More banks are stepping up to the ECB window for funds. Overall, credit is starting to tighten. Nervous Greek depositors are withdrawing funds from their banks. Rich Greeks never trusted their banks.
In other words the Europeans have created a problem that they can't solve, easily at least.
Here are their alternatives:
1. Keep bailing out Greece, with the specter of Italy and Spain being the next target of market forces as EU economies cool off. This is not appealing to Germany and France who know their taxpayers will have to put up most of the money.
2. Have the ECB buy as much Greek debt as necessary to keep Greece afloat. The problem with that is inflation and the prospect that they may be setting a bad precedent for other countries.
3. Have the EU issue bonds guaranteed by individual countries, which again is mainly Germany and France. Same problem as No. 1. As Sarkozy said they don't wish to guarantee debt they don't control – the spenders have no incentive to curtail spending.
4. Opt for a fiscal union whereby Brussels controls spending and taxation. Or, at least, as Sarkozy and Merkel propose, coordinate their fiscal and tax policies and pass a balanced budget amendment in each country. Good luck with that. Chances: zero.
Which one of those policies will best satisfy these three necessary goals required to ameliorate the worst damage:
- Remove the need for the ECB to buy bonds continually on secondary markets;
- Ensure that troubled countries have access to financing;
- Prevent the strong countries from being dragged down by the weak.
Which one of the above policies will prevent Greece from defaulting, will let the rich countries off the hook, will create enormous liquidity in the eurozone, and will bail out the banks?
The answer is the obvious one, the one that won't hit the taxpayers of the EU's powerful economies, that reduces the net effect of debt to sovereigns, that bolsters the reserves of nearly insolvent banks (at least on paper), and puts the problem off for another day. That would be solution No. 2— quantitative easing, or monetization of Greek debt.
It also lets the taxpayers of Germany, France, and Belgium, whose banks hold lots of Greek public and private debt, off the hook because Greece will be able to repay their obligations in devalued euros. That is, the taxpayers in those countries won't have to pay the tab to refloat their banks. Or, at least as big of a tab as if Greece defaulted.
This plan solves nothing except in the very short-term. The day after tomorrow, inflation will melt away much of the eurozone's sovereign debt as well as private debt, and savers will be robbed of their capital. Capital will be destroyed and consumed by price inflation. Their economies will continue to stagnate, unemployment will remain high, tax revenues will eventually decline in real terms, and they will again be facing the same problems they face today. There is no way to avoid it.
The EU faces an insolvable problem, but it is one they created. You can't have a monetary union without a fiscal union. At least when no nation is obligated to play fair. They either terminate the EMU or paper it over. There is no other practical fix, at least when economies of member states are declining. They are the poster child for the failure of Keynesian-Monetarist economics.
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Isn't the Euro backed by Gold? if that is the case then QE in Europe can't work without the price of Gold skyrocketing. I don't see how they could do it. Isn't that the problem with the Euro when compared to the Dollar?
"Mr Keynes is not without blame, although 90% of what is called Keynianism isn't his doing at all"
Same for Marx... 90% of what is called Marxism isn't his doing at all.
I doubt Stalin the butcher ever read or undrstood Marx...
This time the Panzers are of a financial nature,and they are going home to be melted down into printing presses
You can hear the clicks and whirs in England if the wind blows from the east.
http://www.youtube.com/watch?v=aN7rDp9nI1g&feature=related
" I suspect we may get what no one expected going in: A Euro crippled by inflation, and a $US that has been strengthened by capital flight Far more than its managers find convenient.
Wouldn't that be ironic?"
It's not ironic it's what they* want to happen but it'll only give them 10 more years (at best).
* = the U.S. top-gear mafia
"If Germany is smart, they would just allow the whole thing to implode and go back to their currency and take the lumps. Because eventually this whole thing is going to go under and it's better to get your resources to weather the storm."
Hey it's not THAT easy (otherwise they would have done this in 2009) : Germany exportations go for a larer part to othert Euro countries.
If the Eurozone explodes and the Euro-countries go back to their respective currencies there'll be massive devaluations except for the Deutsch Mark of course. Then Germany will have a hard time selling the said products at price that'll be inflated by 30 50 80%...
That means beaucoup unemployment for Merkel.
Unless the Chinese want to buy what Greece Spain and Italy won't be able to import from Germany. That's a bold bet imo... So yeah Germany is too knee-deep in shit with the Euro-debacle.
Bombs are wireless these days.
I love the smell of international monetary collapse in the morning.
And the USA is at 101% debt to GDP with deficits of 8-9%+ of GDP.... and the banks are bankrupt... and it's in 2 countries, bombing 3-4 others... The Imminent Failure Of America...
And the USA is at 101% debt to GDP with deficits of 8-9%+ of GDP.... and the banks are bankrupt... and it's in 2 countries, bombing 3-4 others...
Unfortunately, that all adds up to another major false flag event(s) in the U.S. over the next month or two. It will be most likely blamed on Iran or Syria and used as a pretext for invading them. Just my guess based on history. You know the old saying desperate times call for desperate measures...that's a dangerous combination when the government and the banks are both desperate.
what exactly is the german supreme court deciding on september 7? and when is it being announced?
is something else being decied by them on sept 15 and where can i find an analysis and update on these questions?
http://ec.europa.eu/economy_finance/articles/financial_operations/2011-0...
You might want to check out the European Stability Mechanism (ESM). Follow the link and read the pdf files at the bottom right of the page. The document effectively establishes a dictatorship over the entire EU and eliminates all sovereignty among the member states (imo).
Those European numbskulls don't even have large military budgets like the US to pay for. What the hell have they been doing with all that extra tax payer money to spend?
Is European socialism really that big a failure?
Michael has it right. I lived and worked in Europe for a long time. I remember being mocked then for "living to work, instead of working to live" while they sipped their lattes in the cafes and moaned about working 35 hours a week. It is true they have less than us; two or three suits, smaller food portions (a good thing), smaller cars and houses et al so they could to a point get a way with this. But debt and socialism has a funny way of catching up
They've been paying interest to banksters on funny money, instead of issuing their own, debt-free mediums of exchange ... see Ellen Brown and others for how things could be and are in N Dakota.
If non-Greek European banks hold 46B euro of Greek sovereign debt and 94B euro of Greek private debt then the cost of bailing out the banks directly might be around 100B euros (assuming that Greek companies are better capitalized than the Greek gov and would only default on 50B euro). In the worst case, a full bailout would only require 140B euros. The Europeans have already pledged 110B euro and are trying to come up with another 109B euros. Does anyone really believe that that 109B euros will be the last bailout needed? The previous 110B euros only lasted a little over a year.
Why not just bail out the banks directly and be done with it? Greece is still running a big deficit. Its debt is getting bigger, not smaller. All these bailout packages are just enabling the Greeks to continue to spend beyond their means. They are not reducing the problem in any way.
Democrims or Rethuglicans... Keynespenders or Austericrats...
In the end the policy - all policy - was killed by corruption - excuse me - is still being killed by corruption.
And, in the end the only thing that matters is that the debt slate will have to be wiped clean: because the debts can never be repaid by any of the players - small or large, here or there, now or later. Austericrats are as blind as Keynespenders.
Fraud, theft, graft and cronyism rein today. The only cure is death of the corruption, whether by blood or law or exhaustion.
Personally, I favor the latter.
2. Have the ECB buy as much Greek debt as necessary to keep Greece afloat. The problem with that is inflation and the prospect that they may be setting a bad precedent for other countries.
They always choose what's behind curtain #2.
For context consider that Nebraska takes way more federal funding per capita than New York. NY is the Germany of the USA, and their tax money is routinely sent to the mid west in the form of farm subisdies and highway funds. But nobody cares. New Yorkers are just glad somebody wants to live in Nebraska and grow corn. Heck, they deserve a subsidy. Besides all the best Broadway Musical performers come from the mid west, don't they?
We just don't care, but the Germans REALLY don't want to subsidize "lazy" Greeks. Doesn't that say it all?
"New Yorkers are just glad somebody wants to live in Nebraska and grow corn."
Excellent! Perhaps the best line of the evening.
If Germany is smart, they would just allow the whole thing to implode and go back to their currency and take the lumps. Because eventually this whole thing is going to go under and it's better to get your resources to weather the storm.
Germany has other plans. This link is staggering and evidence that war or slavery or both are not far away.
http://ec.europa.eu/economy_finance/articles/financial_operations/2011-0...
OK, I put in the time and effort to read the link and the two pdfs (the treaty and the announcement by the Ministers).
Where is Germany's plan?
It just looks like another mechanism to bail out member countries, albeit (perhaps) a little stricter... Or is that your point?
Regarding Germany, yes, that's my point. As you saw indicated in the treaty, Germany will hold sway over the majority of "power" with the ESM board of governors. Your time in reading the treaty was likely time well spent...or perhaps you were aware of the specifics of the emerging events with ESM, in which case I stand in the shadow of your intellect.
What resources are people gathering, besides PM.
Mr Abdullah Gui please help history move along and bail out Greece: Just buy the military!
oh come now daily capitalist! didn't bankster extraordinaire david rockefeller sternly lecture us during the latin american debt crises of the 1970s that lending to sovereigns was risk free because nations can't go bankrupt? hence chase lent billions to argintina and others.....and so it is today : ).
thus, since 'sovereigns' - a single worded oxymoron - can't go bankrupt, greece is completely safe.
i also take issue with labeling our crisis a keynesian brew.....it is every bit and more so a monetarist disaster - a la milton friedman - as it is a keynesian one....
Hi tony.
I am sick to the back teeth of this ignorant "keynesian" mantra. Why does such ignorance abound? Keynes was never in favour of deficit spending per se, he advocated fiscally (via taxation) building up a surplus during good times, then using that surplus to moderate down-turns.
Monetarism, on the other hand, relies on interest rates to 'regulate' an economy ... a neat move on the part of banksters, because interest charged is a "private tax" that always trickles (sometimes floods) up and out of the general economy. Ever wondered why propaganda constantly insists that taxes are bad and should be lowered!? But we all know where the bail-out money comes from when the Ponzi scheme starts to topple.
My take on what is unfolding is that the banks and their fellow travellers have crapped in their own nest by shrinking the tax base. If you see what I mean.
In any case we'll never know how things might have been if Keynes' actual ideas had been applied.
Excellent points. Keynes tried to walk a tight rope between communism and fascism, the two forces arrayed against capitalism in the 1930s. In many respects Keynes and his generation took Jeffersonian liberism and watered it down with leftist (maxist) and rightist (fascist) clap trap. We are still trying to sort our way through all that garbage today.
Keynes did regard savings as a drag on the economy. And that idea laid the foundation for replacing captial with credit. Makes the bankers happy and eveyone else broke. Monetarists just picked up tha ball and ran with it.
In a sound money system there is a constant money supply, and production and consumtion compete for funds establishing equillibirum automatically. F'ing with interst rates throwns that equillibrium totally out of whack. Everyody borrows money and deploys funds without regard for quality or productivity. Then it all goes bust, and credit dries up until order is restored and we start the cycle all over again.
Mr Keynes is not without blame, although 90% of what is called Keynianism isn't his doing at all.
The love of the car will be lead to the death of the west - people cannot imagine a life without their phallic chariots.
This is all foretold.....................................it's by design, and not man's,when all seems lost, and doomed, then HE will appear, and the entire world will flock to him, as he seems to have all the answers...............and the peoples will rejoice.
Then the SHTF.............................at Armageddon.(not the $$ one)
Yep and I am HE!!
Send donations to: meself.org for ways to catch "USS Rapture", so's I can get the hell out of wherever the next war is going to erupt.
Trust me, oh ye of little faith, I go to prepare the way for all who would follow me to a land flowing with whatever thou desirest.
Just send me your bank account details and you will be taken care of, before your bank screws you.
Verily I am HE!!
Imposter! I am HE!!
67 virgins for each who send donations to me at : iamtherealmessiah.com
(Do you see a problem developing here?)
USA is even more fucked up, 10 times more fubar. If you take ALL the industrial products made in the USA in a year, it still does not cover US yearly imports. It is you Americans who will need to learn to make something productive.
Why when we can teach you how to make it for us and pay you with "crispy" dolla?
Seems to me we've been here before. In 1992 we had the ECU and EMU. Germany needed higher rates to battle the inflation associated with absorbing E Germany at 2:1 marks. England on the other hand needed lower rates to combat economic slowdown. The Germans won the day, and the pound was forced out of the mechanism. Soros made $2 billion.
Anything new this time around? Substitute PIIGS for England and it's the same old story. Same old outcome too IMO. Dollar is still the least ugly girl at this carnival, at least for now, you may as well go home with her. Yuan depth and convertibility will change that in the longer term (Chinese cutie to go home with, when she grows up a little...)
EMU/ECB didn't exist then. Greece can't control money in a system run by Germany and France.
By 'England' I believe you actually mean the United Kingdom. Two different entities.
Nice one, Bodmas. I always wince when the 'mercans talk about "England", and especially when they mention "the Queen of England" !
Do you also wince when the United States is referred to as "America"?
The USA is not even all of North America, at least to the extent Canada is still independent.
Sometimes we have to just grin and bear with plebian parlance. It's tradition.
After all, Shakespeare did not exactly write about "merry olde United Kingdom".
I whince at it all.
At least the romans, as far as I am aware, did not fudge that theirs was the Roman (Rome-based) Empire.
The current dominant, if imploding, empire should really be called "The Washington Empire". The esrtwhile 'British Empire' should really have been called "The London Empire". The defunct 'French Empire' was really "The Paris Empire" ... and so on for the fact that ALL empires have emerged from sundry 'elites' gathered together in one city or another.
Consider this: The current Washington Empire began when the original 13 states merged and then began to conquest of the rest of what is now called the USA, i.e. the mainland empire, which has come to have some 700 military bases around the world ... far more than the London Empire ever did.
I am not having a particular go against those who think of themselves as "Americans", because it is just(?) a matter of history that the so-called "United Kingdom" was similary formed by firstly conquering the mainland and subsuming Scotland, Wales and Ireland ... and then London (well the 'elite' who congregated in the "City" of banksters and the "Westminster" of politicians) went on from local conquest to carve an empire abroad, on which "the sun never set".
All gone now, except that useless and genocidal politicians ride on the frayed coat-tails of the failing Washington Empire.
Rant over; except to say that what I have written is NOT some knee-jerk stuff ... I was born in England (so called). In 1971 I, more or less accidentally, came to Australia.
I have lived, albeit for fairly short periods in France, Germany and Libya.
'After all, Shakespeare did not exactly write about "merry olde United Kingdom".'
============================================================
Possibly due to the fact that he died nearly 200 years before the UK came into being.
soon there will be ex soviet-euroblock states
.
unless they can find another goon like stalin to whoop some good ol' eurasian sense into em
I'm chuffed for Trichet he's done what he said he would and "stopped contagion" ...this is looking good guys, reeeaaal good
Seems like the Ponzi Matrix is crumbling a bit faster now.
No Trichet has stopped the crumbling (contagion) ..last interview I watched of him he was talking "stability" and "we're taking steps... our strategy" and "it's all according to plan"
I thought in 2 years this mess has escalated and was running out of control, his words didn't even come close to matching the mess outside his doors, and just what fuking planet is this clucking French twat living on?!!
I switched over to a re-run of Baywatch for something closer to reality and sanity!!
That Bagdad Bob shite is too much fun.
Reality in your face!
One thing the EMU needs to do before doing anything more: Determine the reasons they've been doing what they've been doing, and evaluate those reasons. (Of course, the US needs to do the same thing, but it would seem that this is far more critical for Europe at this point in time.)
It's doubtful that this will happen, because it relates back to the reasons for the EMU in the first place, and whether those reasons still exist -- or were real to begin with.
From a distance, it truly seems the EU continues to cling to a Vision of a United Europe that is a mirage-cum-nightmare.
And it only gets better:
http://www.ft.com/intl/cms/s/0/5a6e2be6-d4aa-11e0-a7ac-00144feab49a.html#axzz1WYtvtk00
Tax evasion in Greece threatened to take organised form on Thursday when café and restaurant owners refused to pay a 10-point VAT rise ...
The problem, of course, is that the Red Shield Boyz cannot allow the eurobanks to fail. The FED and the American taxpayer will eat it once again, thanks to the US Congress ceding all of its oversight.