Posts Tagged ‘europe’
Ron Paul – Beware the Coming Bailouts of Europe
The economic establishment in this country has come to the conclusion that it is not a matter of “if” the United States must intervene in the bailout of the euro, but simply a question of “when” and “how”. Newspaper articles and editorials are full of assertions that the breakup of the euro would result in a worldwide depression, and that economic assistance to Europe is the only way to stave off this calamity. These assertions are yet again more scare-mongering, just as we witnessed during the depths of the 2008 financial crisis. After just a decade of the euro, people have forgotten that Europe functioned for centuries without a common currency.
The real cause of economic depression is loose monetary policy: the creation of money and credit out of thin air and the monetization of government debt by a central bank. This inflationary monetary policy is the cause of every boom and bust, yet it is precisely what political and economic elites both in Europe and the United States are prescribing as a resolution for the present crisis. The drastic next step being discussed is a multi-trillion dollar bailout of Europe by the European Central Bank, aided by the IMF and the Federal Reserve.
The euro was built on an unstable foundation. Its creators attempted to establish a dollar-like currency for Europe, while forgetting that it took nearly two centuries for the dollar to devolve from a defined unit of silver to a completely unbacked fiat currency note. The euro had no such history and from the outset was a purely fiat system, thus it is not surprising to followers of Austrian economics that it barely survived a decade and is now completely collapsing. Europe’s economic depression is the result of the euro’s very structure, a fiat money system that allowed member governments to spend themselves into oblivion and expect that someone else would pick up the tab.
A bailout of European banks by the European Central Bank and the Federal Reserve will exacerbate the crisis rather than alleviate it. What is needed is for bad debts to be liquidated. Banks that invested in sovereign debt need to take their losses rather than socializing those losses and prolonging the process of adjusting their balance sheets to reflect reality. If this was done, the correction would be painful, but quick, like tearing off a large band-aid, but this is necessary to get back on solid economic footing. Until the correction takes place there can be no recovery. Bailing out profligate European governments will only ensure that no correction will take place.
A multi-trillion dollar European aid package cannot be undertaken by Europe alone, and will require IMF and Federal Reserve involvement. The Federal Reserve already has pumped trillions of dollars into the US economy with nothing to show for it. Just considering Fed involvement in Europe is ludicrous. The US economy is in horrible shape precisely because of too much government debt and too much money creation and the European economy is destined to flounder for the same reasons. We have an unsustainable amount of debt here at home; it is hardly fair to US taxpayers to take on Europe’s debt as well. That will only ensure an accelerated erosion of the dollar and a lower standard of living for all Americans.
Ron Paul – US Congressman
Get Your Free Report: The European Debt Crisis and Your Investments
Dear Investor,
In 1999, 11 European countries surrendered their currencies for the euro and a shared monetary authority. But as the world applauded, Elliott Wave International (EWI) forecast that those countries had also sealed a shared fate: to eventually collapse together in a liquidity-driven deflationary spiral.
Barely a decade later, the once-celebrated EU and its currency are facing collapse. In November 2011, EWI observed that its “pageant of concession and agreement focuses (now) on rescue and preservation rather than expansion.”
EWI’s analysts have been anticipating and tracking the credit contagion across the European nations for the past two years. Back in December 2009, EWI analyst Brian Whitmer warned that a set of troubling events across Europe were signaling that the entire continent was on edge.
In April 2011, Whitmer wrote:
Back in February 2010, we stated, “Greece’s woes aren’t over and neither are its neighbors.” Four months later, as nearly every country in Europe said they would avoid a “Greek-like fate,” the June 2010 issue added, “The only thing separating these countries from Greece is the fragile confidence that they are, indeed, distinct.”
Will the Central Bank coordination bolster confidence enough to turn around the economies of the world? Or is this just another hopeful attempt that will provide nothing more than a short-term fix?
You owe it to yourself and your investments to find out. Remember, even if you believe you’re not directly invested in Europe, there’s a very good chance that some of the companies in your portfolio are — possibly even your money market funds.
Gain a valuable perspective on the European debt crisis and get ahead of what is yet to come in this free report from Elliott Wave International.
Read Your Free Report Now: The European Debt Crisis and Your Investments.
About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private around the world.
European Debt Crisis Threatens the Dollar
The global economic situation is becoming more dire every day. Approximately half of all US banks have significant exposure to the debt crisis in Europe. Much more dangerous for the US taxpayer is the dollar’s status as reserve currency for the world, and the US Federal Reserve’s status as the lender of last resort. As we’ve learned in recent disclosures, this has not only benefitted companies like AIG, the auto industry and various US banks, but multiple foreign central banks as they have run into trouble. Nothing has been solved, however, by offering up the productivity of Americans as a sacrificial lamb. Greece is set to be the first domino to fall in the string of European economies at risk. Rather than learning from Greece’s terrible example of an over-consuming public sector and drowning private sector, what is more likely from our politicians is an eventual bailout of European investors.
The US has a relatively small exposure to overwhelmed Greek banks, but much larger economies in Europe are set to follow and that will have serious implications for US banks. Greece is technically small enough to bail out. Italy is not. Germany is not. France is not. It is estimated that US banks have over a trillion dollars tied up in at-risk German and French banks. Because the urge to paper over the debt with more credit is so strong, the collapse of the Euro is imminent. Will the Fed be held responsible if the Euro brings the US dollar down with it?
The most disingenuous aspect of the narrative about the European sovereign debt crisis is that entire economies will collapse if more resources are not bilked from productive people around the world. This is untrue. Tough times are coming for the banks, to be sure, but free people always find a way back to prosperity if the politicians leave them alone. Communities within Greece are coming together and forming barter systems because they know the Euro is becoming unstable. Greeks are learning how to engage in commerce with each other, without the use of fiat currency controlled by central banks. In other words, they are rediscovering what money really is, and they are trading with each other in ways that cannot be controlled, manipulated, squandered, inflated away and generally ruined by corrupt bankers and the politicians that enable them. Farmers will still grow food, mechanics will still fix cars, people will still make things and exchange them with each other. No banker, no politician can stop that by destroying one medium of exchange. People will find or create another medium of exchange.
Unfortunately when politicians try to monopolize currency with legal tender laws, the people find it harder and harder to survive the inflation and taxation to which they are subjected. Bankers should take their dreaded haircut rather than making innocent people pay for their mistakes. The losses should be limited and liquidated, rather than perpetuated and rewarded. This is the only way we can recover.
Government debt is often considered rock solid because it is backed by a government’s ability to forcibly extract interest payments out of the public. The public is increasingly unwilling to be bilked to make bankers whole. The riots and the violence in Greece should tell us something about the sustainability of this system.
If we continue to bail out banks and bankers so they can continue to lose money, if we cavalierly put this burden on the taxpayer, it is all too predictable what will happen here.
Ron Paul
Is Germany Eyeing the Exit?
German leaders talk about “more Europe”…but are they just buying time…?
THIS IS just an idea – but perhaps Germany is only pretending to want more European integration.
The rhetoric is real enough. German chancellor Angela Merkel told her party conference this week that the solution to the Eurozone crisis is “more Europe”. At the same conference, finance minister Wolfgang Schaeuble said Europe needs “to build the political union that we didn’t manage to achieve in the 1990s.”
“That means fiscal union,” he made crystal clear.
Schaeuble is echoing the words of Juergen Stark at a conference earlier this month:
“We need bold steps toward a fiscal union,” said Stark – who resigned as European Central Bank in September over its decision to buy government bonds.
“We need to go beyond and create a financial union. In one word, the crisis has clearly shown us that we need ‘more Europe.’”
This is heady stuff – especially when you consider that Merkel has said commonly-issued ‘Eurobonds’ are “not a sensible idea”. How to interpret Germany’s lurch towards such integrationist rhetoric?
One way is to take it at face value. An alternative interpretation is that Germany is simply buying time.
Let’s take the face value interpretation first. Germany is terrified of the idea of the European Central Bank monetizing sovereign debt. Though it is forbidden from buying government bonds directly – by Article 123 of the Lisbon Treaty and elsewhere – this hasn’t stopped it buying Greek, Portuguese, Irish, Italian and Spanish bonds on the open market, in the hope of forcing down their yields. This hasn’t really worked, so the next logical step is to ignore the rules and buy the debt direct.
Advocates of such a move say it is the only way to credibly stop the rot, since the ECB has ‘unlimited funds’ (what they actually mean is it can put the debt it buys on its balance sheet and create the Euros to pay for it). Anything less than this will be an open invitation to speculative bond market attacks.
Germany doesn’t like this idea – understandably, given the Weimar hyperinflation still casts its long shadow. In truth, neither does Germany like the idea of throwing its fiscal lot in with the rest of Europe. But it has come to realize that it faces a choice – fiscal integration or debt monetization. It has chosen the former.
This, at least, is the face value interpretation of Germany’s position. But might there be another explanation?
The Eurozone is in serious danger of breaking up. Everybody knows that. What some may not realize is just how close that moment could be.
Take a look at the following chart:
French-German 10-Year Yield Spread (last five years)
Source: Bloomberg
The chart shows the difference between the yields on French 10-Year government bonds versus their German equivalent – known as the spread over bunds. This spread hit a Euro-era high on Wednesday of 193 basis points (1.93 percentage points).
As you can see, this spread has risen sharply in the last month or so. This is what it looks like when a currency union starts to break apart. Bonds issued by the Eurozone’s two largest countries are yielding very different returns.
It is clear the market no longer considers French government debt risk-free – despite its AAA rating (if you ignore Standard &Poor’s somewhat Freudian accidental downgrade last week). This makes sense, especially when you consider how heavily exposed French banks are to Italy.
What is less obvious – at least, less obvious to many who are buying gold – is why German government debt is seen as such a safe haven. Yes, it offers a short-term bolt hole. Germany holds the Eurozone’s checkbook, and it isn’t going to let itself go under ahead of any other member.
And yes, many institutional investors are limited in what they can hold, and bunds do represent a AAA-rated, Euro-denominated, highly liquid asset.
But surely, sooner or later, Germany will be on the hook for all this? One way to understand the ‘contagion’ aspect of the Eurozone crisis is to think of a vast swarm of capital losses – most incurred years ago, during the boom – looking for someone to take the hit. German leaders must have noticed that these losses are heading their way.
Unless…
Unless there’s an alternative interpretation for Germany’s integrationist stance. Maybe – behind all the rhetoric about “more Europe” and “fiscal union” – maybe Germany is quietly preparing to leave the Euro.
This may seem an odd idea – especially when you consider how much Germany’s export sector has benefited from the Euro (something that Beijing-based economist Michael Pettis does an excellent job of demonstrating in his latest blog).
Germany leaving the Euro would create a great big mess – economically, legally and politically. But a great big mess looks unavoidable at this point.
A German decision to unilaterally abandon the single currency must now at least be considered a possibility. Going back to the Deutsche Mark would be difficult – and would almost certainly hit Germany’s export model as the currency appreciated. But domestic and international politics may make it impossible to save the Euro – and Germany’s leaders may already have realized this.
Schaeuble said this week he would like to see a change to the Lisbon Treaty by the end of 2012, to enable greater fiscal integration. Some European Union members – most notably Britain – are opposed.
Fine, says Schaeuble.
“In that case, we would ask them not to stop the 17 of us [in the Euro] from proceeding.”
A European ‘inner core’ has long been a desire of French president Nicolas Sarkozy. Now, it would appear, he has Germany’s backing. But it may be a feint – a ploy to buy time before a dash to the exit.
Ben Traynor
Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.
(c) BullionVault 2011
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.
Budget-Busting Bailouts in Europe to Drive Global Debt Burden Higher!
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I’ve been out in Las Vegas this week for the MoneyShow. So naturally, I have gaming on the brain. My conclusion after reading the latest news out of Europe?
The European Central Bank (ECB) and European Union (EU) policymakers are going “all in” to head off the sovereign debt crisis there. Specifically …
• The 16 countries that share the euro currency and the International Monetary Fund (IMF) are going to offer as much as 750 billion euros ($953 billion) in loans and aid to nations who are struggling with massive debts and deficits.
Individual euro-zone governments will pay 440 billion euros ($559 billion), while the EU will pay 60 billion euros ($76 billion) and the IMF will cough up as much as 250 billion euros ($318 billion).
• The ECB, for its part, is going to purchase billions of dollars in government and private debt. Central banks in Germany, France and Italy all are buying government debt. And the ECB is going to start offering three-month loans at fixed rates to institutions which need them. The cap on this program? None.
• Finally, the Federal Reserve will throw a few chips onto the table by reopening its currency swap line with the ECB. The Fed will get euros in exchange for dollars so the ECB can then extend dollar-based loans to euro-zone banks that need them.
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| The Fed has agreed to trade our dollars for euros. |
The program won’t have any cap, meaning the Fed’s exposure could theoretically be unlimited! The last time the Fed allowed ECB swaps, activity peaked at $583 billion in December 2008.
The Bank of Japan, Swiss National Bank and Bank of England will also have access to an unlimited amount of dollar swaps. Up to $30 billion will be made available to the Bank of Canada, too.
Good and Bad News in Wake of
Europe’s Major Wager
The immediate impact of the move? Stocks soared around the world. The gains were particularly noteworthy in the PIIGS countries — Portugal, Ireland, Italy, Greece, and Spain.
We also saw the difference, or spread, in yield between “core” German 10-year debt and debt in the PIIGS countries collapse. That spread tightened to 343 basis points (3.43 percentage points) from 973 points in Greece. It also narrowed to 201 points from 254 points in Portugal and to 94 points from 173 points in Spain.
The drawback?
By bailing out the worst offenders, the more well-behaved European nations are handicapping themselves. They’re exposing themselves to more risk. And they’re going to have to foot the bill for the massive rescue package, driving up their own debts and deficits!
That’s not exactly something the euro-zone nations can afford, by the way. The region-wide budget deficit is on track to hit 6.6 percent of GDP in 2010 — more than twice the so-called “cap” of 3 percent. Next year won’t be any better, with the current forecast calling for a deficit of 6.1 percent.
Result: German bond yields surged 18 basis points after the rescue was announced.
What about the U.S.?
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| While we help finance another bailout, our deficit continues to skyrocket. |
Our deficit could be as much as $1.6 trillion this year, or almost 11 percent of GDP.
Our debt load is soaring and on track to double to $18.6 trillion over the next decade.
Our Treasury is borrowing more than $375,000 per SECOND in certain weeks.
Our politicians have shown zero willpower to get the deficit under control, beyond a few token “window dressing” moves. And now, via the IMF and the Fed, we’re going to be ponying up untold billions of dollars more to bail out profligate European nations.
Is it any wonder that U.S. Treasury bonds also got clubbed after the bailout was announced? Bond futures prices plunged more than three points from their recent high, while 10-year Treasury note yields surged more than 30 basis points.
The Most Important Question to Ask:
“Where’s All this Bailout Money Going to Come From?”
What about the longer-term outlook for interest rates? Well, investors need to ask themselves a simple question: Where the heck is all the bailout money going to come from? It’s not like we have it sitting around in some national piggy bank somewhere.
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| To pay for it all, government printing presses will shift into overdrive. |
The answer is that policymakers at the Fed and ECB are going to print some of it out of thin air. And government officials are going to borrow hundreds of billions of dollars more in the bond market both here and in Europe.
All the money printing raises serious inflation concerns. And all the borrowing will drive up bond supply. Both are downright bearish for bond prices.
Oh, and now that the sovereign debt crisis has been temporarily tamped down in continental Europe, what do you think is going to happen next?
I’ll tell you what …
Investors are going to start searching for the next major victim. I believe they’re going to focus their ire on two of the biggest debt and deficit offenders on the planet — the U.K. and the U.S.
So if you are still exposed to long-term government, corporate, junk, or municipal debt here, now is the time to sell — and not look back! Or you can use specific vehicles such as inverse bond ETFs to profit or hedge yourself against an upward move in interest rates.
Until next time,
Europe WANTS a Lower Euro
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The euro is in devaluation mode … in a sharp 17 percent decline against the dollar over the past five months. And I’ve written extensively on why, and why it still has further to go.
Now I believe a covert policy decision has been made by the European Central Bank (ECB) to use currency devaluation as a tool for the European monetary union (Emu) to survive.
Of course, each individual country within the Emu doesn’t have the luxury of devaluing their currency when times are tough. They’re locked into a monetary union of sixteen countries. And monetary and currency policy decisions are made by the ECB.
That puts countries like Portugal, Ireland, Italy, Greece and Spain (the PIIGS) at a competitive disadvantage when trying to salvage themselves from debt burdens and feeble economic activity.
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| The Emu will do whatever is necessary to save the floundering euro. |
But now, it’s becoming evident that the Emu as a whole is prepared to take such drastic measures to keep the euro intact!
I think we’ll find that the ECB will aggressively reverse course on exiting from the emergency monetary policies they put in place to deal with the financial crisis of 2008 … returning to emergency mode, and in a big way. They’ll likely be forced to openly buy up the government debt of the weak economies to keep them breathing — i.e. print money, and a lot of it.
The plan requires that Germany, the core of the euro, participate in serving the interests of the lowest common denominator in Europe: The PIIGS. Of course, they’ve already done so by agreeing to provide bailout funds to Greece. But the next moves in the playbook will likely drag Germany headlong into it.
Germany: Swimming with the Fishes
Germany is the biggest, most robust country in the euro zone. It was among the first major economies to emerge from recession. Its economy is expected to grow by 1.5 percent this year, and 1.8 percent next year. So things are going relatively well for the Germans following the harsh recession.
Why, then, would Germany agree to be dragged down by the weak and expose themselves to potential inflation problems in the process? Why not just hit the eject button and remove themselves from the euro?
Here in a nutshell lies the problem: Germany has a lot to lose if other euro countries end up in shambles. It’s exposed on two fronts …
First, Germany is on the hook for $668 billion in PIIGS sovereign debt. Not to mention the fresh $30 billion they’ve agreed to give Greece.
A default, or worse, a string of defaults would be disastrous for German banks and European banks in general. European banks bought about half of the general government bond market last year.
And second, if these countries continue their downward spiral, Germany’s intra-Europe exports (10 percent of total exports) promise to dwindle with it.
So what does Germany gain from sacrificing for the weak?
For one, it averts the problems mentioned above. And two, it will enjoy a much weaker euro in the near future, thus providing a nice kicker for its exports outside of continental Europe.
ECB Already Taking the Plunge
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| ECB President Trichet would not discuss the euro’s value in his recent press conference. |
Europe, the IMF and the ECB demonstrated this week that it’s ready to go all out to keep monetary union intact. They announced a massive multi-year bailout for Greece. And perhaps in a bigger move, the ECB is now accepting Greek junk bonds for collateral — jeopardizing the credibility and independence of the central bank.
As I was watching the ECB press conference following its monetary policy meeting this week, central bank President Jean-Claude Trichet looked flustered and measured his words very carefully. And two things gave me a sense that they had a plan, which included a much weaker currency:
- He adamantly said a Greek default is “out of the question.”
- And a biggie … he ignored all questions about the value of the euro, despite its slippery slide!
The Swiss National Bank must have sensed something, too. This week it chose to back away from buying euros as an intervention tactic to curtail the strength of the Swiss franc. Perhaps, the SNB knows that gobbling up euros at current prices is a recipe for losing money.
In sum, financial crises and sovereign debt crises typically go hand in hand. As do sovereign debt crises and currency devaluations. So be prepared to see a continued decline in the euro and other global currencies … and more capital flowing into the U.S. dollar in search of a safe haven.
Regards,
