EU Wed

  • Posted: 01 November 2011 06:51 PM #31

    Mace - 01 November 2011 07:46 PM
    fas550 - 01 November 2011 07:39 PM

    ... long term (hold on, yes the U.S. no longer being the reserve currency) ...

    If not Greenback, then which one?

    That question can’t be answered yet as the world political environment is not there to agree on one.  When will that be?  When the rest of the world (especially those that buy dollars now) sense the U.S. simply can’t get it’s financial house in order and only want’s to keep coming to the well.  The dollar will become much less attractive; then they will start looking around and looking for a replacement.  This is exactly what happend to the Brits; as the pound become less attractive the dollar became more attractive.  Hence now we have the dollar as the reserve currency.
    Why do IMHO think this is inevitable?  Politicians simply do not have the stomach to cut entitlements (i.e. Social security, Medicare etc..) given that population that utilizes it (the voting block) grows.  For craps sake they won’t even consider a means test. Bottom line is they care far more about getting re-elected than taking care of this country.

         
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    Posted: 01 November 2011 07:46 PM #32

    Gregg Thurman - 01 November 2011 05:02 PM

    The more I learn about the Euro zone debt crisis, the more I am believing that we’re headed to a gigantic meltdown of the World’s economy.

    The problem begins with decades of sovereign fiscal irresponsibility. Example: Greek sovereign debt is equal to 168% of Greek GDP, Italian debt is equal to 120% of GDP.  How in the hell did they find lenders willing to give so much?

    IMO: the fundamental problem (now widely acknowledged) is the creation of the Euro with no control on member states borrowing.  How did lenders lend so much to Greece?  Easy, its the Euro premium.  There is NO way that banks would have been willing to buy that many drachma, but that many Euros? Sure no problem.  Feel free to debate all you want about the different governments / societies / welfare states, but the fact of the matter is that the root cause is the creation of the Euro without the elimination of sovereign debt.

    Keynesian economic theory = governments can stimulate economies with increased spending. The problem with that theory is that there is no theoretical cap included in the theory (at least none that I’m aware of), so governments just kept on artificially stimulating economies through deficit spending, instead of allowing the market to balance itself.

    Pretty much, except most Keynesian’s would state the stimulus should only be applied during times of recession, and that debt payment should be the top priority (well ahead of tax cuts) in prosperous times.  The problem with the cyclical nature of our political system is that for this to work it needs to be implemented though the peak and trough of the entire business cycle, but rarely if ever does the same party have the reigns of government through the cycle causing imbalances and disruptions of both philosophies.

    Our worldwide debt crisis is a creation of too much liquidity, necessarily being given to those without the ability to repay it.  In other words, a house of cards built on worldwide deficit spending.

    Well it all depends on your time frame :-0 ... going back to the Drachma, before the Euro, it was a normal part of the financial business cycle that less developed countries (Greece, etc.) would simply default every generation or so.  These tendencies were well known to the major banks and routinely included in their calculations.  Now, with the Euro, the damage to the rest of Europe would be *HUGE*

    What should have been a small localized dispute quickly spread throughout Europe as one country came to the defense of another, and so on.

    Agreed.

    The fear today is that, with or without, a Greek defaul, French banks will be downgraded because of the scope of their toxic holdings. Those banks go down, causing other banks, sovereign debt holdings, etc.,  to go down, and so on.

    I’m not so sure how far the chain reaction will go: probably not as bad as people fear, but worse than people expect.

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  • Posted: 01 November 2011 10:35 PM #33

    ChicagoBob - 01 November 2011 10:46 PM
    Gregg Thurman - 01 November 2011 05:02 PM

    The more I learn about the Euro zone debt crisis, the more I am believing that we’re headed to a gigantic meltdown of the World’s economy.

    The problem begins with decades of sovereign fiscal irresponsibility. Example: Greek sovereign debt is equal to 168% of Greek GDP, Italian debt is equal to 120% of GDP.  How in the hell did they find lenders willing to give so much?

    IMO: the fundamental problem (now widely acknowledged) is the creation of the Euro with no control on member states borrowing.  How did lenders lend so much to Greece?  Easy, its the Euro premium.  There is NO way that banks would have been willing to buy that many drachma, but that many Euros? Sure no problem.  Feel free to debate all you want about the different governments / societies / welfare states, but the fact of the matter is that the root cause is the creation of the Euro without the elimination of sovereign debt.

    Keynesian economic theory = governments can stimulate economies with increased spending. The problem with that theory is that there is no theoretical cap included in the theory (at least none that I’m aware of), so governments just kept on artificially stimulating economies through deficit spending, instead of allowing the market to balance itself.

    Pretty much, except most Keynesian’s would state the stimulus should only be applied during times of recession, and that debt payment should be the top priority (well ahead of tax cuts) in prosperous times.  The problem with the cyclical nature of our political system is that for this to work it needs to be implemented though the peak and trough of the entire business cycle, but rarely if ever does the same party have the reigns of government through the cycle causing imbalances and disruptions of both philosophies.

    Our worldwide debt crisis is a creation of too much liquidity, necessarily being given to those without the ability to repay it.  In other words, a house of cards built on worldwide deficit spending.

    Well it all depends on your time frame :-0 ... going back to the Drachma, before the Euro, it was a normal part of the financial business cycle that less developed countries (Greece, etc.) would simply default every generation or so.  These tendencies were well known to the major banks and routinely included in their calculations.  Now, with the Euro, the damage to the rest of Europe would be *HUGE*

    What should have been a small localized dispute quickly spread throughout Europe as one country came to the defense of another, and so on.

    Agreed.

    The fear today is that, with or without, a Greek defaul, French banks will be downgraded because of the scope of their toxic holdings. Those banks go down, causing other banks, sovereign debt holdings, etc.,  to go down, and so on.

    I’m not so sure how far the chain reaction will go: probably not as bad as people fear, but worse than people expect.

    Bob,
    Nice exposition: balanced and informative. This thread has been very educational regarding a fast developing crisis that could severely affect US markets in the next few weeks.

    Alan

         
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    Posted: 01 November 2011 11:01 PM #34

    Bob, excellent post!  Thank you very much for that! smile

         
  • Posted: 02 November 2011 10:18 AM #35

    Another trenchant article by Steven Erlanger, who discusses the likelihood that a majority of Greeks are now ready to go it alone without the Euro in order to eliminate the “heavy-handed” pressure from Northern Europe (read “German”).

    http://www.nytimes.com/2011/11/02/world/europe/austerity-faces-political-test-in-greek-turmoil.html?ref=global-home

    An uncontrolled Greek default may be much closer today—with all the market chaos that this would provoke.

    Alan

         
  • Posted: 02 November 2011 06:41 PM #36

    Hannibal - 02 November 2011 01:18 PM

    Another trenchant article by Steven Erlanger, who discusses the likelihood that a majority of Greeks are now ready to go it alone without the Euro in order to eliminate the “heavy-handed” pressure from Northern Europe (read “German”).

    http://www.nytimes.com/2011/11/02/world/europe/austerity-faces-political-test-in-greek-turmoil.html?ref=global-home

    An uncontrolled Greek default may be much closer today—with all the market chaos that this would provoke.

    Alan

    I am not saying it won’t happen but the likelihood of Greece going back the the Drachma (sp) will be heavily influenced by the fact that any return to that currency will mean a large devaluation of the Drachma (heck who would buy Drachma given their financial woes).  One would think this would affect the more wealthy in Greece however I read last week (sorry I don’t have the article) that the wealthy have been moving there money out of Greece since the crisis began.  Anyway just another factor to consider when hearing stories of how the Greeks might want to return to the Drachma.  The direct affect on us with the referendum is continued uncertainty till next spring or summer when the referendum hits the ballot.

         
  • Posted: 02 November 2011 09:05 PM #37

    Well what do you know:  The French and Germans have said no more money until the Greeks decide what they want to do (Either commit to the Euro or not).  So there referendum is now scheduled for Dec 4 or 5.  Interesting as I believe Greece was due another cash injection some time in Dec or maybe Nov, I can’t remember.  This is like a four player poker game between the Greek PM, the Euros (FR and GE), the Greek opposition and the Greek electorate.
    Frank