AHHH, EUROPE AGAIN!
European sovereign bond yields are blasting higher again. Sounds familiar doesn’t it? Ahh, yes. I love the smell of Ponzi in the morning!
Here’s a little story about band-aids. Your son falls down, you put a band-aid on his knee, tell the kid to go run around outside, then the kid rips the band-ad off, falls down again and comes back to mommy screaming in pain. You put on another band-aid, rinse wash repeat. No, that’s not a story of your experience at the park last weekend. It’s essentially what’s going on in Europe.
This is a very simple problem. The real crux of the problem in Europe is that none of these nations are autonomous issuers of their own currencies. This is not a debt crisis. It is a currency crisis. So since they all use the same currency they can’t devalue against one another. So they can’t try to grow their way out through trade rebalancing. And they can’t print money to offset growth declines. So they’re in this positive feedback loop that is essentially sucking the life out of each of the peripheral economies. The core wants to impose austerity on the periphery because they don’t want to print and they’re convinced that the cure is reducing the debts of the periphery nations – they think it’s a debt crisis and not a currency crisis. But what’s happening is something that I predicted a long long time ago. The austerity is actually causing the economies to contract at a rate that is faster than the debts are contracting. So you’re getting stagnant or rising debt:GDP levels. So all we’re getting is a whole lot of economic pain.
To make matters worse, the ECB has stepped in time and time again with their quarterly band-aids. This perpetuates what has essentially become one big ponzi scheme. Or to put it more delicately, it’s like a Wayne Rooney sized kick of the can. And Wayne Rooney’s pretty fast for a white guy so he catches up to that can pretty quickly. And he kicks it again. But the can is getting weaker and weaker every time he slams his foot into it. And one day he’s going to kick the can and realize that it can’t be kicked any further. That day in Europe is fast approaching. Europe needs a real fix. It’s time for a US of Europe or it’s time to start sending some sheep to the slaughter in the form of defections. All I know is that Europe needs a sustainable fix in place and they need it sooner rather than later. Bankers aren’t going to wait around long to realize that the ECB’s latest program isn’t going to actually fix the underlying cause of the crisis…..And that’s a currency crisis. Not a debt crisis.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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22 Comments
Summit, print. Repeat.
Good thing we’re on solid ground in the US. And a good thing volume doesn’t matter.
Greece was a best-case scenario for ECB intervention. It it is a very small nation and it was first in line for bailouts. But holder of Greek government bonds were still forced to accept deep loses in spite of all of the efforts of the ECB.
Spain is a much larger problem than Greece. The only way that the ECB could make a dent in Spain’s problems would be by printing huge numbers of euros. Unless the Germans decide to allow this, I think Spain will be forced to leave the EMU. If that happens, then Italy will come under fire.
So I think that even German debt is looking risky now. The Germans may relent in order to save the euro, and that would mean inflation that would destroy the value of German bonds. The Germans talk a tough game about holding the line against printing because they know that their bonds will come under fire at the first hint of weakness on their part. But they are also very fond of the euro. I suspect that if they decide to allow printing, they would privately communicate that to the ECB. And the first indication that the markets would get would be the overnight announcement of a massive new liquidity program by the ECB.
We’ve started to see creeping signs of solvency worries into the core. Not Germany yet, but the writing is on the wall. I wouldn’t touch German debt. It might be the best house in a bad neighborhood, but without the ability to print there’s no such thing as risk free in Europe. Payment is ALWAYS a concern for bondholders in Europe whether they realize this or not….Much prefer US sov debt. Or even the UK for that matter.
Boy did I get the timing wrong on this one. I thought the last kick would get us through 2012, looks like not. The economy over here is a complete mess, it isnt just shenanigans at the state level, the private sector is hurting.
Hey, we all get the timing wrong on occasion. I was totally wrong about how effective the can kicking of the LTRO would be. But the situation remains. This doesn’t fix the budgets. Which means the currency crisis will continue to unravel in the form of continuing economic imbalances.
What can one expect to happen when our economic wonderboys (yes you, Krugman) still refuse to think in terms of money and monetary systems? Even a novice with only a few months study in MMR/MMT could easily predict that this would be the outcome of not addressing the fiscal union/trade imbalance issue, but I’m sure we’ll hear yet again how markets and economists were “surprised” at the continued economic deterioration.
Exactly! Of all the countries who are deep in the dooh dooh barrel known as European debt Spain is actually the country who is most fixable via an exit from the Euro.Rather stupid politicians do not seem to appreciate this. I’ve always thought of Spain as threefold,they actually have an Industrial base,they also have historically a throving tourism Industry and they have a climate based property market for the comfortably off crowd and retiree crowd.A European equivalent to Florida for want of a better analogy. They also have extremely high unemployment and a huge and otherwise intractable problem known as proprty overhang. The common denominator to fixing that lot sooner than later would be a reversion to the Pesata (New) devalued naturally. The inward inflow following such a devaluation would I suspect be huge.
Greece for all of it’s media attention was a sideshow ,or rehearsal because it is a bit player. The main attraction is Spain !!
Moreover ,I do not think there is an equivalent program that could be put together in Europe that would have anywhere like the same effect on growth that a Euro exit would bring for Spain.
The real questions to be faced when leaving the Euro are:
– Can my State feed itself without imports?
– Can my state produce fuel from domestic resources?
If the answer to either question is no, the State will not exit the Euro without a coordinated EuroZone-wide disbandment of the currency. To leave unilaterally is to invite ruinous retaliation by the rest of the EU. Legally, if a State leaves the Euro, it must leave the EU as well, and that means the rest of the EU imposes a watertight trade embargo / blockade against that State in order to break them.
Wow, that must be a TPC record for metaphors, film references, youthful parables, … next thing you’ll be starting a literature website! ;-}
I haven’t heard a peep out of the EU finance ministers? Usually by this time they are squawking all over any medium they can. Either the cooperation/unity is severly breaking down or they simply want the markets to slaughter the fate of the PIIGS and the market appears angry and hungry.
So that monetary austerity of ECB smells like Ponzi, but the massive printing of dollars of the FED to buy bonds (yes I know, it is only a swap of assets) smells like teen spirit.
¡Tócate los cojones!
This smell of Ponzi happens this morning only because one bastard of Merrill Lynch and another of Citigroup decided that Spain is now near of default than ever.
But, of course, these bastards didn’t say that thing two months ago when LTRO was in the peak. They say now when isn’t any LTRO nor ECB bonds buying. They say now for make a lot of money with their shorts in spanish banks and CDS of spanish bonds.
Portugal and maybe Ireland and even Greece again may well be in the line before Spain.
Is this not both a currency AND a debt crisis?
debt crisis is a symptom of the currency disease.
…at least that will allow you to copy/paste past articles
a little acne cream on bill gross’s ‘zit that is greece’ will only buy you a month on the ‘tumor that is spain’
printing only puts anything off alittle this time.
we are reaching the end of the cycle.
We have been waiting 25+ years for this cycle to end.
But whenever politicians are looking at the end – and the potential social unrest – they flinch and throw money at it.
Real education and hard work are the only solutions – and just how many of our leaders are advocates for that?
No my friends – Democracy (by definition) lacks the ability to solve the real fundamental causes of this problem.
Agreed about German debt. Short bunds/long Treasuries seems like a great trade, but I’ve thought so for a while, and have been wrong so far.
Also agreed that Wayne Rooney is pretty quick for a white guy.
Read Matthew chapter 7, verse 3.
Didn’t C.R. see that municipal bond rates currently are higher than T-bonds yields ? How does C.R. want to cure that problem ? Print more money ?
Why is it a problem? And yes, the USA always funds about 20% of state budgets. EVERY SINGLE YEAR. What’s new? You call it money printing. I call it a healthy functioning monetary system. The alternative is to do what the knuckleheads in Europe are doing and require all the nations to use one currency, but give no state the ability to print at will while also providing no federally based funding. How’s that working out?
I thought Schadenfreude was a typical German thing, but I’m happy to see that Americans really enjoy that too. Off course the US is in bad shape as well but as usual they try not to seen wearing a dirty shirt by deflecting attention to even dirtier guys with less media power.
Yes, the situation in Europe is pretty bad in the southern countries and the population is suffering. But don’t get fooled by the protest and the crying people on tv.
One has to understand the culture of these countries. Take Spain for example (I have a few Spanish friends who actually told me that). Yes, there is protest and people are hurting but if you ask the population, they will never leave the Euro. I can understand that many wish for the Euro to break up, but that is very unlikely and almost unconceivable for anybody living in Europe at the moment.
The problem in Spain is a structural one and not a currency issue.
What’s happening there at the moment is that the government is finally getting rid of the last remains of the Franco heritage which gave employees a lot of safety (was done to calm down the population and to accept the fascistic regime at the time) but also made the labor force very stiff and inappropriate to adapt to the new economic situation the country is facing today.
Spanish people are very passionate and it is normal that they get vocal but they are also aware that they need to change the unfair employment situation for their childrens and adapt in order to remain competitive with other European countries.
Also, remember a Greek pensioner could retire at 55 and received on average a 2500$ pension per month. This is clearly unworkable and those countries in the south have to come to terms with that. They can blame whoever they want, but the true problem is their own institutions and the structural inefficiencies they allowed to build up over the years.
It will take some time and a lot of pain to walk through this process, but it needs to be done.
“Also, remember a Greek pensioner could retire at 55 and received on average a 2500$ pension per month. This is clearly unworkable and those countries in the south have to come to terms with that. They can blame whoever they want, but the true problem is their own institutions and the structural inefficiencies they allowed to build up over the years.
It will take some time and a lot of pain to walk through this process, but it needs to be done.”
Are you serious?Enough with this propaganda already.First of all the ability to retire at 55,was true for a certain number of workers in specific jobs such as the military etc.If you ask me they shouldnt be able to retire this early but they are a minority.They are not the avg working people in Greece as you like to claim and they are not the reason for the current problems.My mother has been working for 37 years,she retired in 2009 before the crisis in Greece realy kicked in.She started with a 1700 euro pension (she paid for every single cent of it during her working years) and now she is down to 1200 after all the cuts.More cuts are planned for June so it may go further down.