Quantum Pranx

ECONOMICS AND ESOTERICA FOR A NEW PARADIGM

Posts Tagged ‘Ireland crisis

As the Euro goes the way of the dodo, where does that leave the Dollar?

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by Gonzalo Lira
Posted Nov 30, 2010

http://gonzalolira.blogspot.com/2010/11/as-euro-goes-way-of-dodo-where-does.html

The Eurozone is heading for a crash — anyone saying otherwise is either stoned, works in Brussels, or hasn’t checked the European bond market action lately: All hell is breaking loose there.


And if, as I have argued here, the Irish Parliament decides not to pass the austerity budget next December 7—that is, decides not to take the European Central Bank bailout—then hell is going to break out in Europe just in time for Christmas: Satan and Santa Claus just might be squaring off on the Rue Belliard before year’s end.

Therefore, the smart money starts thinking about what’s going to happen after the euro-crisis-climax happens.

In other words, what’s going to happen to the dollar, once the euro goes the way of the dodo. First, we have to understand how we got here, in order to figure out what’s going to happen next.

The Banana Republics of Europe

In the 1970’s and ‘80’s, various Latin American republics foolishly pegged their currency to the U.S. dollar. It worked like a charm—at first. At first, all these small-fry countries took advantage of the fixed currency exchange rate to get indebted in dollars, and go off on a big-time shopping spree.

It all ended in tears, of course, when the bill came due. Chile, Argentina, Perú, Uruguay, at various times they all had their currency pegged to the dollar. And in each of those situations, once the currency peg became unsustainable, their economies crashed.

This is exactly what the smaller economies of Europe did. As I argued back in April, if you look at the euro as simply a very complex currency peg, then the solvency crisis we are witnessing in Europe was inevitable. Just like the banana republics in Latin America, the PIIGS of Europe got over-indebted to the point of insolvency.

What are the Europeans doing? Trying to save the gangrenous limbs, instead of the Patient

When the Latin American economies and their bondholders realized—the hard way—that their dollar-peg was unsustainable, the countries devalued their local currency, and started rebuilding their economies.

The bondholders? That is, the people fool enough to lend to these countries which had pegged their currency to the dollar? If they were lucky, they took a haircut. If they weren’t so lucky, they went home with a big fat bagel—a big fat zero. What has the ECB been doing, with regards to the failing eurozone economies of Greece and Ireland? They’ve been trying to prop them up with bailouts—but keeping those economies pegged to the Euro.

What are the bailouts? Why, they’re loans. In other words, the Euro-morons are lending money to these shaky economies so that they can pay off their other loans. The Euro-drones in Brussels are not allowing Greece and Ireland to default and restructure: They are instead insisting in bailing them out and imposing austerity measures, without forcing haircuts on the bondholders. So as the Greek and Irish economies continue to deteriorate, they have an overly strong currency for the weakness of their economy, and they are being forced to pay 100c on the euro, on loans they cannot possibly repay. The effects are obvious:

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QE2 and the Great Mis-Diagnosis

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by Jim Willie CB
Originally published: November 24, 2010

http://www.goldenjackass.com/

Use the above link to subscribe to the paid research reports, which include coverage of critically important factors at work during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

THE BACKDROP HAS TURNED DIRE ON SEVERAL FRONTS SIMULTANEOUSLY. The great millstone around the USEconomy’s neck continues to drag it down. CoreLogic reported 2.1 million units have created a swamp in Shadow inventory of the housing market. That equates to 23 months inventory, whereas normal is 7 months. They tallied the growing tumor of bank owned properties as a result of home foreclosures, also called the REOs (real estate owned). Look for no housing market recovery for at least another two years.

Starting in summer 2007, the Jackass forecast each year has been for another two years of housing market declines, all correct. Ireland might be squarely in the news, but the big enchalada is Spain. The Irish banks have presented a grand headache for the European banks, with a $150 billion exposure. Ironically, Ireland has done more to reduce its budget spending effectively than any EU member nation, yet is left to twist in the soft rain. They cut their government budget by 20%. The USGovt budget grows every year without remedy or remorse. Few seem to remember that Irish fund managers lost the German civil service pension funds a couple years ago, a source of hidden tension and great resentment. Spain will rock Europe and the Euro currency in the springtime. The gold price consolidation will center on the Spain debt crisis hitting fever pitch, with the Euro hit. Then again, perhaps a mammoth new wave of European gold demand will neutralize any USDollar stability. On Tuesday this week, the Euro fell by 200 basis points, but the gold price was stable like a rock. That is notable strength. But the bigger story of strength is with silver. The round robin of destruction to major currencies that makes the Competing Currency War, the race to the bottom in rotated currency debasement, it will lift gold & silver in a round robin of strong demand.

MISDIAGNOSIS: INSOLVENCY NOT ILLIQUIDITY
The US bankers often go home to mommy and order a giant slosh of monetary inflation whenever in deep intractable trouble, like after the previous mistake in QE1 when ordering a giant slosh of monetary inflation. The USFed, led by the academic professor with no business experience, has ordered a fresh supply of gasoline from a lit fire hose, but he does so on a collapsing building. Bernanke has very erroneously diagnosed lack of liquidity within the system to be the underlying problem. He has prescribed a huge swath of ‘free money’ to be sent into the bond market as a solution. He has prescribed that cheap money continue to be delivered to the USEconomy. Bernanke has failed to notice the insolvency in banks, and has failed to notice that 0% has yet to prompt any revival in lending among banks. Bernanke is fighting INSOLVENCY with LIQUIDITY for a second time after learning nothing the first time.

The USTreasury 10-year yield has risen from a grand bond market dare, not at all from evidence of growth. Bond players dare the USFed to create another $1 trillion in new money. In no way does another lift in retail spending constitute a recovery. Household insolvency rises every month from worsening home loan balances. The USFed wants households to spend more on borrowed funds, yet they have depleted home equity and vanished income security.

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Is Europe coming apart faster than anticipated?

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by Gonzalo Lira
Originally posted November 16, 2010

The sky is black with PIIGS coming home to roost: I was going to write my customary long and boring think piece— but the simmering crisis in the Eurozone just got the heat turned up: Things are boiling over there!

“Euro Dead” by Ryca

SO LET’S TAKE A BREAK FROM OUR REGULARLY SCHEDULED PROGRAMMING, and give you a run-down of this late-breaking news: The bond markets have no faith in Ireland—Greece has been shown up as having lied again about its atrocious fiscal situation—and now Portugal is teetering — in other words, the PIIGS are screwed. I would venture to guess that we are about to see this slow-boiling European crisis bubble over into a full blown meltdown over the next few days—and it’s going to get messy.

So to keep everything straight, let’s recap: The spreads on Irish sovereign debt widened, and the Germans are pressing them to accept a bailout—despite the fact that the Irish government is fully funded until the middle of 2011. But it’s not the Irish fiscal situation that the bond markets or the Germans are worried about—it’s the Irish banking sector that is freaking everyone out.

After all, the Irish government fully—and very foolishly—backed the insolvent Irish banks back in 2008. And for unexplained reasons, the Irish government is committed to honoring Irish bank bonds fully—which the country simply cannot afford. However, German banks are heavily exposed to Irish banks, which explains why Berlin is so eager to have Ireland accept a bailout.

Right now, European Union, International Monetary Fund and European Central Bank officials are meeting with Irish representatives, putting together a bail-out package. The reason the Irish are so leery, of course, is that any bail-out would be accompanied by very severe austerity measures: In other words, the Irish people would suffer the consequences of shoring up the Irish banks—which is the same as saying the Irish people would suffer austerity measures in order to keep German banks from suffering losses. Also, the EU/IMF/ECB bail-out would probably also cost the Irish their precious 12.5% corporate tax rate—a key magnet for bringing capital to the Emerald Isle.

Add to the Irish worry, Greece is once again wearing a bright red conical dunce cap: They’ve been shown up to have lied again about their fiscal situation. Three guesses what they lied about: If you guessed Greek deficit, you win—yesterday, the Greek government officially revised its deficit figures: 15.4% for 2009, and 9.4% for 2010 (as opposed to an original 7.8% projection). Odds are good that these figures will be revised—for the worse—soon enough: Nobody believes anything other than Greece is insolvent.

That’s what’s going on this morning—and as a reaction, the dollar (if you can believe it) is roaring back alive: As I write (noon EST), the Euro is at $1.3511, the Pound at $1.5870, gold down to $1,333 an ounce, silver $25.05 an ounce; the dollar is up ¥83.45.

There was no specific reason why things took a turn for the worse today—but this downturn of sentiment has been having a cascading/contagion effect through the rest of Europe:

As a result of the Irish not taking the EU bail-out, Portugal’s debt started to tumble—which has everyone worried. Portugal is looking an awful lot like Greece did five-six months ago: It’s debt spread over the German benchmark is 6.5%, and climbing. Even France’s debt yield spread widened against the German bund—it costs more to insure French debt than it costs to insure Chilean debt (I guess a good “Viva Chile!” would be in order?).

The reason the entire slate of Euro bonds are tumbling is because of Ireland—but the real worry is Spain. If Ireland and then Portugal go down the tubes, then it would only be a matter of time before Spain is next—and Spain is far larger than Greece, Ireland and Portugal combined. If Spain goes, then it’s curtains for the whole Eurozone, perhaps even for the European Union as a political entity.

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