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Tyler Durden and Paul Krugman agree! – The EU is toast!
A rare occurrence in journalism happened today. Tyler Durden of Zero Hedge is in agreement with – hold on – Paul Krugman of the NY Times.
Both writers point readers to the FAQ from S&P on the downgrades in Europe on Friday. Both hone in on one particular section. I’ll repeat it:
We believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.
There is absolutely no way to achieve economic growth while pursuing fiscal austerity. It just doesn’t work like that. The only other possibility is for Italy and Spain to re-establish their legacy currencies. That is S&P's unwritten, but clear message.
Boom!
The point on legacy currencies made by S&P is actually an old one. Many have insisted that monetary union between north and south was a mistake. But for S&P to have put it on the table is very confrontational to existing EU thinking regarding the need for a breakup. European leaders have all along ignored the blogs and various MSM commentators. Their line has always been, “A breakup is unthinkable”. Not any longer.
I don’t expect “Merkozy” to change their stance on the single currency issue anytime soon. But others will. The message in the S&P FAQ will not be ignored. We’re going to see it in the MSM, and we’re going to hear about it from both the political and the financial sides of governments (and of course, the blogs).
The thought process of a resumption of legacy currencies won't start on Monday. Before this can be accepted as a viable option, things have to first get worse. Much worse. Liquidity has to dry up further. Bond spreads for Italy and Spain have to widen. Funding conditions for the banks have to get worse. Equities (especially bank stocks) have to be broadly declining. The economies of the region need to be in recession coupled with very high rates of unemployment. Declines would be most severe in Spain and Italy. Social disturbance would be on the rise.
Reading the S&P FAQ, you have to conclude that the conditions that would force a return of the legacy currencies will happen, and they will happen in the next twelve months.
There are some very substantial currency implications built into this line of reasoning. If you believe, as I do, that things have to get (much) worse before we see Pesetas and Liras again, then you might logically conclude that the Euro is first headed south against the crosses. EURUSD at 1.100 would not be out of the cards in this scenario.
But consider the end game for this. What's the value of a Euro if Spain, Italy, Ireland and Portugal were no longer part of the monetary union?
That price starts at EURUSD 1.6000.
I look at this and wonder if the currency trade of the new millennium is taking shape.
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Also no capital in Somalia, so there's nothing for a govt to steal. Therefore no govt in Somalia.
Bang on the button Catullus
it's not only demented socialist economists like Krugman that peddle this total bollocks about austerity in Govt ruining an economies growth prospects but every shill from every nook and cranny of our equally demented society
cutting the bloated public sector and taxes (theft) on the private sector is the ONLY way to bring back productive wealth by leaving it in the private sector to go to work, rather than siphoned off into the destructive pea brained wasters in Govt
Every penny/cent/euro in Govt hands is money down the toilet of humanity
Bruce how did you arrive at that 1.60 figure?
Also, where do you see the value of the Lira and Peseta vs. the USD?
looks like Forex is going to continue to be a ton of fun this year.
It was an estimate.
What is the value of the currency of Germany, France, Netherlands,Belgium,Finland?
It's worth more than the EURUSD we know today. Agreed?
Is it worth more or less than a Pound Sterling? I think more. There are significant competitive advantages over UK for these core countries. The GDP is larger.
How big a premium over UK? Small. 5%??
Sterling trades at 1.53 against the dollar. If NEW EURSTG is 1.05, that makes EURUSD ~1.6.
As Tyler, and others have said, there is a lot of stuff that has to happen before Spain and Italy go back to the Peseta and the Lira.
The following is Nomura's guesses on what legacy currencies might be worth VS the old/new DM. I don't disagree with the direction of this. It does not answer the question of where the dollar fits into the picture.What's your number?
http://www.forbes.com/sites/afontevecchia/2011/12/05/sp-confirms-germany...
here's the actual approach BK Burgher used: http://www.youtube.com/watch?feature=player_detailpage&v=1twknEtRzUg
Thanks for the detailed response. Much food for thought.
I can't say I have a number in mind for the value of the EUR/USD or any other pair following any potential breakup or restructuring of the EU. However, wouldn't a EUR consisting of Germany, France and the others valued that high against the dollar and who knows how high against the Lira and Peseta be a major detriment to the economies of France and Germany? Particularly if we're talking about countries who are heavily reliant on exports as well as tourism?
Much to ponder...that's for sure. It's gonna be an interesting year...
thanks again Bruce.
If the PIIGS leave the Euro, German and French banks are fucked.
Germany and France will need to print like mad.
The Euro ain't gonna be at no 1.60. No way.
And do you really think the German export machine will be unaffected by the massive devaluation on the periphery? Do you think the end result will be good for France's deteriorating credit rating?
Euro at 1.60....Good luck with all that.
What if LTRO suddenly changes name to bank recapitalization program?
"If the PIIGS leave the Euro, German and French banks are fucked."*
* Bond holders and Sharesholders
If it becomes a 'game over' scenario, there would be little political reason to try and save these instituations. They'll pull a northern rock and nationalise.
12 months later I would be very surprises if a 'super euro' was not at 1.60+ especially not when a couple hundred thousand short contracts realise that they've touched the floor, and things begin stabilising...
Krugman agrees with Tyler. Well even a blind squirrel finds an acorn now & then.
Whats Rocky Krugmans next trick? To say if we entrusted all our "collective nuts" to the state everything would be just fine? ;-)
Are you *that* sure they both have found an acorn?
Are you sure they have not?
there is little you can be sure of nowadays. but I was very skeptical when in ZH the theme was how Germany would leave the EUR immediately, and I am now skeptical about this continuation of the theme "the eurozone will/must cease to exist in it's existing form".
1. the "reasons" are often outlandish misunderstood pieces of garbled financial "talk my book" AgitPropaganda. Even the FT goes there.
2. some of it is US-AustrianSchool "kill the FED" wishful thinking that the "foreign twin" of the FED might be the weaker one. You sure? they are a bit like Yin and Yang, sure, the FED is the dominant, active and adventurous member, but, you know, sometimes divorces can be messy and end up with...
3. the "...in it's existing form..." part is telling - so if Greece exits, it's ok, the "event" is there, as a hedgie would point out. The whole mass of facts around Greece and the cultural/political ties is irrelevant, for the median US financial guy "Europe" is a too complicated theme anyway. Bullish? Bearish? What else?
4. Meantime, I can envision a future where both eurozone and EU have a better ride through troubles than expected last year
Hell Yes... putting it all in State hands has been a mantra of Krugmans since he was a 6 year old Trotsky sitting on his Marxist Dads knee listening to bedtime stories of how communism can save the world
"One day Son the socialists and bankers will run housing, healthcare, education and a huge welfare State and run everything into the sewer bankrupt"
Paul Krugman, "Sounds good Dad"
It will be interesting to see him trying to wiggle out of his past insane pronouncements like the sovereign debt spending bombs were "just not large enough" to do any good...gosh darn it...lol.
So now we see it in all its unmasked naked glory. The conscience of a "liberal" was really just the conscience of the banker all along, debt slavery.
As the answer to a debt problem can never be, to borrow more.
i think the "war = economic stimulus" will sink 'The Krugman' forever
and to think his Marxist President got a Nobel Peace Prize, 3 wars and a tanking economy (post $3 Trillion in direct/indirect bailouts)
..the irony, hypocracy, stupidity is almost thick enough to be an economists brain
"War with Iran" would be war indeed.
I think more than a few citizens are waking to the thought, that if some group of people were trying to tank this economy, what would they have done different?
I can't think of anything.
hard to imagine anyone blowing through a $Trillion as fast as Washington
..where do they put it all?
You could build an entire nation from scratch with an Obumma budget extension!
"...where do they put it all?"
Why, it gets spirited off to Marin and Connecticut, of course.
Id' say Paul Krugman is in agreement with Tyler Durden, not the other way around
One minor point. Before the Eurozone in its current form falls apart, the Fed will openly announce it will be buying PIIGS bonds. Whether it does or doesn't is a different question and depends on whether this happens before or after the presidential election
Wait - so the Fed will buy PIIGS bonds, US MBS and still announce a QE3? How can they possibly expand the balance sheet that much? Won't the wheels come off the bus at that point?
That move has already been blocked by the Republicans in the US Senate. "WYSIWUG" namely: war with Iran. How's it going?
The Fed would be buying an ANCHOR with a short chain if it bought PIIGS "bonds". End the Fed: Save the Taxpayer.
yes but isn't the Fed even a little constrained by the debt ceiling? aren't they currently leveraged at nearly 50-1? as jawboning goes anything is possible. what if the US joined the EU, and the PIIGS broke off into EU lite or something. i can't figure out why the AMERO isn't happening, and why (as long as the globalists are in control) we don't just SPDRs, which they should float against the dollar in my OP.
My gut instinct tells me that the Kleptocrats, especially those with their technocrat puppets firmly in place, would use this crisis to maximise profits and create new opportunities for more looting. So, if the pundits in the MSM are discussing the 'end of Eurozone' so openly, it's because TPTB want them to. They've spent the last year preparing for this moment.
I think this instability and constant news telling us about the end of the Euro and crisis in the Eurozone, will make US equities, treasuries and the dollar look to many, albeit probably foolish investors appear to be 'safer' than Europe. This will give the Kleptocrats more collateral to leverage and rehypothicate. Another American bubble will be blown while their preferred candidate waltzes into the WH. We will see the Drachma, Lira, ext, but I say, not this year.
Italy has gold, a lot of it. Maybe it will be collateralised this year to 'save' them and not have to pay their debts through "growth killing austerity", it's probably on the table somewhere, and if it is, this gold will end up in the hands of JP Morgan & friends. And when the dollar is finally made worthless through more debt creation in 2012 & 2013 with the collapse of a major bank like B of A, by 2016, we'll see the ushering in of some new Yellow North American Currency backed by stolen European gold.
"Italy has gold, a lot of it. Maybe it will be collateralised this year..."
Yes they do, but I doubt they do any selling yet. If they can sneak through the next 3.5 months, things actually get better for them for the rest of the year.
A couple of Merkosky+ summit meetings followed by the usual BS about agreements and frameworks might keep the bonds cheap enough to get them through their heavy rollover period.
"collapse the euro: keep the gold." yes, yes? now let's look at the real plan:
http://www.youtube.com/watch?v=3lYm0c7gYyU&feature=player_detailpage
"backed by stolen European gold"
Just said the same to (German) friends this evening at Dinner.
Europe has 10,000+ tons . Taking it away - via Derivative Games - would mean it's over for the Euro, and the USD remains the Res.Curr for another 100 yrs.
In fact , maybe that is why the Bernank has done the EURUSD currency swaps !
I believe the Bundesbank would happily start World War III before they part with the first tonne of their gold reserves.
No more von Havensteins! NEIN!!
Too bad so much of the Bundesbank's gold is already in the US, sitting in the FRBNY's vaults.
The real question might be would the Federal Reserve Bank happily start World War III before they part with the first tonne of the Bundesbanks gold reserves.
That price starts at EURUSD 1.6000.
Good point Tyler, because if only Germany,France, Holland,Finnland and Luxemburg stay in the Euro, what happens to the PIIGS Bonds? If they are worthless, no bank in Europe will survive. But coorect, the Bernank will buy them !
if any Euro Bonds blow up so do US Banks via the CDS market
it 'covers' the stink of the Fed bailing out the US Banks/CDS market right in your face if the Fed buys Euro Bonds through the backdoor rather than directly shovel another lot of funny money directly into the bankrupt empty pockets of losers like Blankfein and Dimon
the "They Do Not Work, They Never Pay Out" CDS market is the next shit sandwhich to blow up in the faces of Dimon and Blankfein ..that really wil be the end of the gangster NY Banking cartels and they'll take their puffing puppet Bernanke down with them
Have to agree with WB7, I see parity not 1.60.
Why would the value go up, and why would Germany and France want to allow it to? It would hurt exports and tourism and reduce what money they get from the periphery that went back to their historical currencies.
I agree with you on the end of the EU.
I agree with you on the end of the EU.
However, nature abhors a vacuum so with the end of the EU, what will replace it?
The nations and currencies that were there before it was formed.
"We believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues."
Spot on. The quintessential defintiion of downward spiral.
Why 1.1? Why not parity? Didn't it begin below parity not too long ago?
First the idea that the North would leave the EZ, now it's the South, and it's not even sure the East will really leave...
What we are truly sure of is that Marin and Connecticut will stay put.
It began at somehere around $1.17 to the Euro.
TA has it going there again. Not to zero.
They'll have three currencies: a legacy currency, the EURO and.... Juicy Fruit gum...... should all else fails.
Will the public sector unions agree to be paid in gum?
Indeed, here's the euro - dollar exchange rate for the months of 2002, right after the euro was introduced as functional coins and currency on 1 January of that year (the euro existed as a construct for a few years previous, though not in coins and paper form)
In January, a euro was worth 88 US cents, by November it was worth more than a US buck -
http://www.x-rates.com/d/USD/EUR/hist2002.html
One word explains that trend : GWB. ANd military build up post 9/11 and pre 2003 Irak, all in 2002. Reminder : previously, the Euro started its life priced at 1.19 to USD. But Clinton's fiscal surpluses made the USD stronger in his latter days upto Dec. 2000.
The market anticipated Irak...and the subsequent vertiginous govt. spending deficits, as the consequent debt mountain. As oil prices spiked in 2002 onwards, the US balance of Trade went negative big time. 2002 was a tipping moment in degradation of US govt. sector budgets and macro economic trends.