Monday, February 15, 2010

Euro in Crisis--Thanks to dopes who buy Greek debt

You might have been watching the euro (EUR) tumble over the last couple months, and especially over the last several weeks as this crisis with Greece's finances really heats up. EUR has moved from around $1.50 in November to as low as $1.35 by the end of last week (3 month chart in USD). EUR is under major pressure, and it appears to be a fundamental pressure that is being stoked by the realization of the euro's fragility, as demonstrated by what a little nation called Greece can do to an entire "economic community."

As you would guess, the weakness in EUR has been matched by a relative strengthening in USD, as people sell those sliding EUR and scoop up USD. Compare this 3 month USDX (USDX is the "US dollar index:" USD versus 6 major currencies, weighted most heavily for EUR), and you'll see that while EUR has been moving down from its recent $1.52 high since November, USD has been moving up since its recent 74 lows in Nov/Dec. Right now, as EUR sits at a 9-month low versus USD, the USD itself is at about an 8-month high (1 year USDX). Now, currencies battle each other all the time, of course--but the question with EUR right now is whether or not this is an external battle with other currencies--like USD--or an internal battle with itself.

As we know, using the USD as a unit of measure against the EUR can be deceiving, but in the case of the recent EUR slide, EUR has lost against all major currencies, not just USD. Check these out 3-month charts: EUR v Canadian Dollar (EURCAD); EUR v Australian Dollar (EURAUD); EUR v Pound (EURGBP); and most importantly EUR v Swiss Franc (EURCHF). All down, down, and down. USD and Swiss Franc (CHF) appear to have been the biggest beneficiaries of money taken out of EUR and placed in USD and CHF.

And its very difficult to gauge EUR because it so artificial and it covers such diverse economies, which is also exactly why its really coming under pressure right now. Of the 27 nations that make up the European Union, there are 16 nations which have adopted the euro as their currency, and these make up the euro zone. These 16 euro zone nations are: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain, which contain a total population of over 328 million (which is about 20 million more than the US). Some of these nations joined after the introduction of the euro. Over a quarter of these nations--specifically Greece, Spain, Portugal, Italy, and Ireland--are in serious economic and fiscal trouble, and face huge deficits and obligations. The population of these financially troubled nations is 182 million, or over 55% of the total euro zone population.

For a little historical perspective on EUR (and I mean "little" because there's not much history to work with!), EUR was trading at $0.90 back in 2002 when it was introduced as paper (it had be running for a couple years before that as an electronic inter-bank currency). Here's a fabulous chart from the ECB on the EUR v USD. You can move the time-frame back to Jan 1 1999, and you'll see that when EUR was introduced, it was about $1.18. EUR slid for nearly three years, reaching a low of $0.825, then generally rose for seven years to a 2008 high of $1.59, before crashing to $1.26 during the October 2008 fiasco. Since then, things have been mixed--which is to be expected in any currency during this mess, especially when that currency is measured against the wild n’ crazy USD. At any rate, I'm bringing all of this up because for the first time ever, major European bankers themselves are losing confidence in their own brainchild--the euro!

There is an article linked up on infowars that is just remarkable. Here it is, from the Daily Mail, and it's worth reading in full: Collapse of the Euro is "Inevitable:" Bailing out the Greek economy futile, says French banking chief." The article clearly follows the headline: a top strategist from Societe Generale--the mega French bank (and FRS primary dealer, I might add),--Albert Edwards recently declared to Bloomberg and others that the euro is basically doomed, and that "the Greek budget crisis is a symptom of imbalances that will lead to the breakup of the euro region" (Bloomberg's paraphrasing of Edwards). This is remarkable statement to hear from a top strategist, particularly when he's from one of the very banks that helped create the euro in the first place. It is drawing attention to what's happening with the euro and the question of whether the shake-up is a reflection of outside pressure, or some internal, fundamental flaw of the multi-national currency.

Edwards is no lightweight: he was voted second-best European strategist in 2009, and has predicted currency meltdowns before. From the Daily Mail , Edwards says:

"My own view is that there is little "help" that can be offered by the other euro zone nations other than temporary, confidence-giving "sticking plasters" before the ultimate denouement: the break-up of the euro zone."

"Any "help" given to Greece merely delays the inevitable break-up of the euro zone."
Mr Edwards argued that Portugal, Ireland, Greece and Spain are too economically weak to withstand the rigours of eurozone membership. Countries that are highly uncompetitive are normally able to slash interest rates and devalue their currencies to prop up their economies. But this is not possible within the euro, given its one-size-fits-all economic governance. The implication is that weak, peripheral eurozone members will have to suffer years of painful deflation and tumbling living standards, as well as draconian budget cuts, in order to adjust."

And from Bloomberg:

"Southern European countries are trapped in an overvalued currency and suffocated by low competitiveness," top-ranked Edwards wrote in a report today. (Martin) Feldstein, speaking on Bloomberg Radio, said a one-size-fits-all monetary policy has fueled big deficits as countries’ fiscal records differ.
The problem for countries including Portugal, Spain and Greece “is that years of inappropriately low interest rates resulted in overheating and rapid inflation,” Edwards wrote. Even if governments “could slash their fiscal deficits, the lack of competitiveness within the euro zone needs years of relative (and probably given the outlook elsewhere, absolute) deflation. Any help given to Greece merely delays the inevitable breakup of the euro zone.”

As outlined in these two articles, Edwards is saying that the "overvalued currency" and "years of inappropriately low interest rates resulted in overheating and rapid inflation," which can only be remedied temporarily by "years of painful deflation and tumbling living standards, as well as draconian budget cuts, in order to adjust," but admits that even such measures would "merely delay the inevitable breakup of the euro zone." As Edwards sees it, the euro zone is doomed. But what does that mean for the euro itself?

Both articles above mention Martin Feldstein. Feldstein is a very well-known and well-regarded Harvard University economist. According to the articles, Feldstein said the euro zone simply "isn't working," and that this is due at least in part to the fact that while the ECB alone sets interests rates for the euro and thus the 16 nations that use it, the euro zone has "a single monetary policy and yet every country can set its own fiscal and tax policy." He continued that, “there’s too much incentive for countries to run up big deficits as there’s no feedback until a crisis.” A crisis--like Greece.

When Iceland went down (read: “when banksters took down Iceland”), it dragged its own currency (Krona) with it. Now in the euro zone, we have at least five nations--Greece, Spain, and Portugal, and Italy, and Ireland--which are in serious fiscal crisis, and which all share the same currency. It is unprecedented. Milton Friedman himself was not a fan of the euro, and he predicted over a decade ago that the euro currency itself would not survive its first crisis, never mind the euro zone. I remember people on Bloomberg radio in 2009 talking about the fact that apparently Freidman was wrong about the euro, because it has indeed survived, and it was actually stronger than the USD at the time. Well, well, well, now--not so fast. Now we have the #2 European strategist coming out in chorus with Freidman's decade-old prediction, at least in regards to the euro zone part. The next question would be to further consider what the breakup of the euro zone would do to the euro currency itself. The heat is yet to come, and the euro is already getting singed. Of course, like I said above, the major benefactor of this happens to be the USD. There is, of course, all kinds of conspiracy-theory putty there. So, let's just speculate for a second. We will get to what might happen to the euro if the euro zone goes down later, but first, lets consider this: what would the USD look like right now is the EUR wasn't such a mess?

Think about what Edwards and Feldstein said: an "overvalued currency" and "years of inappropriately low interest rates" running up "big deficits" and "no feedback until a crisis"--hum, what other national currency does that remind you of? Obviously, I have no way of determining what USD would like if EUR wasn't so ugly right now, but all things considered, and in my opinion, if USD had any strength, it should right now be shining. Instead, while USD looks "good" compared to the disastrous 10% EUR has lost relative to USD since November, USD itself had lost 15% from the beginning of 2009 to Dec 2009, and is still down 8% from a year ago. That's not exactly "shining." And this with the help of huge amounts of money leaving EUR and rushing to USD. We can only speculate, but image what that change would look like without EUR giving everyone such a reason to leave.

I mentioned above that Milton Freidman thought the euro would not survive its first encounter with serious crisis. I have been finding various euro-death stories, fantasies, and predictions quite often since I started researching it in 2008 (there is apparently an entire underground culture of euro-hating folks who write extensively on the internet, and I manage to find a lot of that stuff, along with the myriad dollar-haters, too!). In the process of researching the report I did on the Euro Currency Standing Committee at the BIS (you remember, the group that's name was changed three weeks after the introduction of the electronic euro to the "Committee on the Global Financial System" which is now trying to possibly centralize data for singular monetary control!), I encountered plenty of historical skepticism of the euro that goes back to well before the currency was even agreed to by treaty. Freidman wrote extensively about the euro, and the problems with it. Many others did too. But fast-forwarding to the current situation, one very interesting article I discovered in mid-2009 is this one here: Euro Doomed to Fail as Governments Pull in Opposite Directions. It was actually written over a year ago (Feb 3 2009), and is worth reading, especially considering what we now are seeing with Greece.

In the article, the author details the problems caused by the euro zone's structure itself, and goes even further than Edwards recently did by speculating about what this possible inadequacy means for the euro currency structure itself (emphasis mine):

"There is admittedly an embedded weakness in the way the European currency union is structured. In the United States, arguably that largest currency union in the world, fiscal transfers between member states allow for the federal government to adjust for variances in economic performances. There is no such mechanism within the euro zone, which explains why the member states are subjected to a number of rules. These rules require for everyone to exercise a high level of economic discipline. The problem is that there is little or no such discipline."

"EU countries outside the euro zone, such as the UK, have also lost out to Germany in recent years, but the UK has been able to play a card which is not at the disposal of the euro zone members. That card is called devaluation. Whether by design or otherwise, the UK has received a massive boost to its competitiveness in recent months as a result of the sharp fall in the value of the pound. Italy used to play this card repeatedly back in the days of the Lira. So did countries like Denmark in the dark days of the 1970s."

"Another issue, which is potentially even more destabilizing for the euro longer term, is the massive liabilities facing Europe as its population ages. We have borrowed table 2 below from Goldman Sachs which makes no secret of the challenges facing a number of European countries. Greece is clearly facing the biggest challenge. Public debt, which currently stands at about 95% of GDP, will grow to a whopping 555% of GDP by 2050 if the current pension and social security programme is left unchanged. The Greek government is painfully aware of this and have been working on several new initiatives. It was the passing of one of those new laws which caused the riots in Athens before Christmas."

This is a nice summary. In the first group, by "fiscal transfers between the member states" of the US, the author is referring to the redistribution of wealth done by the Federal government through our confiscatory federal taxes and Congressional re-allocations (aka, our despicable “American socialism”). For example, California contributes much more income absolutely and per capita to the Federal government than does West Virginia, but West Virginia gets more money per capita than California. Because of the uniform tax policy, the Federal government (again, despicably and unconstitutionally) effectively regulates the fiscal policy of the states, and can coordinate this with monetary policy to the degree that the Federal Reserve will independently "cooperate." In our union, there is a mechanism to centralized regulation, and its called the Creature from Jeckell Island. Likewise, the Federal Reserve can unilaterally utilize the mechanism of devaluation to control prices and exports (ie, Plaza Accord). These mechanisms allow the central bank control of the dollar in a fashion that affects all the states in our union.

In the euro zone, there is no such mechanism available to an individual nation that allows an individual nation to devalue its currency as a strategic advantage, because, of course, no nation has its “own” currency. Any euro-zone nation likewise shares the same currency with its major trading partners—the other euro zone nations--and cannot single-handedly control the value of the currency. Conversely, there is also no mechanism for the ECB that allows for centralized regulation of the member states' fiscal and tax policies--not yet, anyway. At least for a little while still, the member nations have some limited "sovereignty," which is, of course, compromised by their commitment to the European Union and its various treaties. As of right now, they are still permitted by their bankster rulers in Frankfurt and Strasbourgh to have different tax and fiscal plans. The current European Union's tax policy is complex and not currently "harmonised," which creates exactly the reason why the other frugal nations (like Germany) are so mad at Greece, because they and their taxpayers might have to bail those irresponsibly Greeks out!

Of course, the Treaty of Lisbon, which was just ratified fully in December 2009, will vastly change this--it is "harmonisation" on steroids, and authorizes an amazing and insane amount of authority in the new, soon-to-be super strong and utterly supranational EU President and Parliament, which will be able to take whatever it wants from whoever it wants and redistribute as it’s almightiness sees fit. There will soon be a uniform EU tax code (or at least euro zone EU), you can bet on that. But right now under the current Greek situation, the centralized scheme is not yet created or operational. I'm sure that when it is, they will use Greece as an example of their authority--and in fact, they might be doing it to some degree right now.

I say this specifically because it looks like the citizens of other nations in the euro zone may actually have pay up and bail out Greece, and have their money stolen from them and given to the bankster debt-owners holding paper from a country that isn't even their own! As you can imagine, the people are already very mad about this: the idea of bailing out Greece is utterly rejected by the people of Germany and other nations who don't want to pay for Greece's irresponsibility (and more importantly, pay for the banksters' stupidity/arrogance in buying the bad debt in the first place!). This article from Der Spegiel discusses the different scenarios for handling the Greece problem, and it identifies bailing out Greece as a "Worst Case Scenario:"

"One scenario is that it [the ECB] could declare Greece to be an exceptional case and provide bridge loans in order to prevent the bankruptcy. But it would have disastrous consequences. After all, why would weak countries make any effort to balance their budgets if they knew the EU would bail them out in the worst-case scenario.

"If the EU remained firm against Greece, that would certainly be fair to the member states who have practiced balanced budget discipline in the past. But that would also be politically untenable because it would drive investors away from any country that showed even the slightest signs of not being able to service its debt. They would have to continue raising the interest rates on bonds, and eventually the Greek virus would spread further, driving other countries into bankruptcy.

"In this highly theoretical scenario, the euro would, indeed, collapse. The currency could survive the bankruptcy of one member state, but it couldn't sustain a series of them.

"Euro-skeptics have long warned that tension inside the euro zone could destroy the currency one day. They now feel their convictions have been affirmed -- even if the aforementioned scenarios remain far from reality."

That's an interesting analysis--but it was written over a year ago, and the "Greek virus" is still thriving and multiplying. The "highly theoretical scenario" of a Greek default is no longer "far from reality." According to this analysis, the choices are either the "disasterous consequences" of providing a bridge loan to prevent bankruptcy, or the "politically untenable" denial of funds that would lead Greece to an "inability to service its debt" and spark a viral spread across the euro zone which would "drive other countries into bankruptcy" and surely "collapse" the euro. So, apparently, these are the choices: bad or worse.

Greece's spending, lack of tax collection, corruption, and various other irresponsible behaviors have been subsidized and enabled by the euro for a decade. The EU, the ECB, and Greece have all known this for years. Greece was not an original member of the euro zone: it was barred from joining in 1999 because it didn't meet the fiscal requirements. After "promising" reform and changes and whatnot, Greece was allowed in by the ECB two years after the launch, in 2001. And guess what--the "promises" to be good are still pending actualization. Even before it was admitted, people had been worried about what Greece would do to the infant euro. In fact, here's a BBC article from the very day, Jan 1 2001, that Greece adopted the euro—over ten years ago--and it mentions the same concern over Greece's public debt, public spending, and generally whack finances that we are hearing about today. However, the article ends with the statement that Greece's involvement in with the euro will have "little impact" on the currency. How things change in ten years: Greece's impact is hardly so insignificant. And now people from other nations might have to foot the bill to the banksters!

It would be an unprecedented insult of a caliber never before seen if euro-zone taxpayers are forced to bail out the stupid, irresponsible, and reckless banksters who lapped up the obviously toxic Greek paper when it was so blatantly obvious to even the Daily Mail over a decade ago that Greece had no possible way of paying it back! It seems clear that this was the assumption (the plan?) all along: by golly, the banks will not lose one single euro of their numbskull paper investment in the impossibly upside-down Greece, not even if we have to steal money from Germans to settle it! Europeans—wake up! Letting a group of criminal banksters destroy your currencies and feed you back a single, bankster-controlled piece of paper will only continue to lead you to the utter dismantlement of your entire economic and social structure--just ask us, we know!

It is not clear yet what the EU's plan is on Greece. Last week, the EU finance ministers "pledged" to "help" Greece, but gave no specifics on what that meant. A recent poll of Germans showed that people think Greece should be expelled from the euro zone rather than bailed out. Of course, if the EU bails out Greece, who's next? Spain? Portugal? Italy? Ireland? Where does it stop? The EU leaders are meeting again today in Brussels to perhaps hammer something out. It is likely it will be yet another transfer of wealth from the people to the debt-holding banks, probably under the guise that some impending economic collapse would occur if they didn't do "something." But we shall see.

We shall also see what happens with the deteriorating euro zone. If Edwards and others are right, there is no saving it. The next question, then, would necessarily be the euro itself. In the article quoted above (this one), here some of the author's observations:

"..I may disappoint one or two readers..but I firmly believe that the euro will almost certainly survive the current crisis. I am much more worried about some of the member countries."

"There is nothing in the Maastricht treaty [Treaty on European Union, 1992] which prevents a member country from leaving the euro, yet the decision to join is effectively irreversible. There are a number of reasons for this, the most important being economic costs. Take Italy which has a history of compensating for lost competitiveness through regular devaluations. If Berlusconi did the unthinkable tomorrow (sorry – nothing is unthinkable in Berlusconi's world), Italy's borrowing costs would explode. My guess is that bond investors would demand double digit returns on a Lira denominated bond to compensate for the dramatically increased devaluation risk. Already in a precarious fiscal position, Italy could quite simply not afford that."

"So, if any country were to leave the euro, it would more likely be from a position of strength, and only one country possesses enough strength to pull that off in the current environment. That country is Germany. And, although the euro is not particularly popular in Germany, I believe it is extremely unlikely for Germany to make such a move unilaterally. There are several reasons for that – Germany's history in Europe being the most important."

"At the same time, the fact that the euro has saved the bacon of more than one country in recent months - Ireland being the most obvious example - should not be ignored. For this very reason, the euro membership is actually far more likely to grow than to shrink as a result of the financial and economic crisis engulfing the world. The issue the EU has to deal with is whether the new applicants should actually be welcomed. Most of those who would want to join will bring plenty of baggage."

"Another possible outcome, which you hear almost no mention of, is the possibility of a new Transatlantic currency. When I mention this possibility, everyone laughs, but think about it for a second. The economic crisis on both sides of the Atlantic is enormous. Both are resorting to the same formulas – large fiscal stimulus and quantitative easing (a word invented by central bankers because 'printing money' smacks too much of Zimbabwe). There is a real risk that the entire financial and monetary system on either side of the pond needs to be re-designed. If that were to happen, I am pretty confident that the Fed and the ECB would at least sit down and discuss the possibility of a joint currency. That would also allow the UK to join a currency union without too much egg on its battered face."

And of course, that is a possibility--and a dream for globalists. It would also suit the general bankster-government feedback loop: if a program doesn't work, make it bigger, more extensive, and mandatory until it does! Or, Problem-Action-Solution. If the euro zone does not work in 16 nations, make it a transatlantic version that covers 20 nations, and if that doesn't work, make a global version that covers everywhere! It's very interesting that we have the chance to see what is happening right in Greece with euro. This is potentially something that will have long-lasting ramifications, especially if the ECB does not bust a bail out. I think that because of the Lisbon Treaty, it is only a matter of time before the EU is subject to a uniform, totally supranational tax code that will be imposed upon the citizens of the member nations through the unelected Parliamentary officials and unelected President. So if they steal some money from the people now and give it to Greece's creditors, that is just Lisbon-lite. But we shall see what happens, indeed.

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