KRUGMAN: THE BEGINNING OF THE END OF THE EURO?
The rhetoric around Greece’s future is beginning to get very serious. As Dr. Krugman notes, this could be the beginning of the end for the entire currency experiment (via NY Times):
“Some of us have been talking it over, and here’s what we think the end game looks like:
1. Greek euro exit, very possibly next month.
2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.
3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.
3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.
4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:
4b. End of the euro.
And we’re talking about months, not years, for this to play out.”
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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18 Comments
So would now be a good time to get out of equities and park it in cash until we see how things play out?
Yes. Now is just a good time to short the euro temporarily. Plus the Bundesbank is signaling their acceptance of progressively higher inflation in Germany to help adjustments in competitiveness more possible between Nth and Sth. This is getting priced in the euro/usd since last week.
Well, I sold most of my stocks on Friday 4th of May half an hour before the labour market. And I went 50% short … which turned out to be quite good
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I meant “US labour market data”.
Today the market looks like as if a bubble burst will come tomorrow after the Europe GDP data.
I wait, see and have fixed the stop loss on my shorts.
Just short it
I think the sooner they kill the euro, the sooner Europe’s drag on the world economy will end.
I am not sure Krugman knows how the Eurozone’s settlement system (TARGET2) works. If a Greek transfers his 1000 Euro deposit into Deutsche Bank, no Euros actually leave Greece. The number of Euros in each State remains constant. The ownership of the Greek’s 1000 Euros are transferred to the Bank of Greece, the Bundesbank transfers 1000 Euros to his account at Deutsche Bank, and the Bank of Greece owes the Bundesbank 1000 Euros, interest-free (?) with no deadline for payment. So, capital flight does not directly imperil the solvency of banks in Greece or anywhere else unless the ECB requires the TARGET2 debts to be settled, which to date the ECB has not done. The real question is at what point does the Bundesbank get so uncomfortable with being owed trillions of Euros (that will never be paid), that the Germans say enough! and leave the Euro.
No, the (Greek) money supply actually drops when Greeks transfer Euros to Germany. Bank of Greece incurs a liability towards ECB and Bundesbank writes a claim. But Bank of Greece debits the Greek bank reserve account which usually means that the bank has to draw on a loan from Bank of Greece and park even more collateral at the central bank. Greek banks have parked almost their whole balance sheet at Bank of Greece by now.
Still a bit early I think – I expect the Euro will blow up but not yet – everyone still feels there’s too much to lose so kicking and bailing remains the name of the game.
Expect Germany to cave once again and lighten demands on Greece. Also expect it to have no real effect and for it to flare up again in 6 months time.
I believe the politicians know that the Euro is very overvalued. Most non-USD currencies are. But as Schaeuble said a few months back, they’re going to require a serious crisis for real political change to take place. I think what he meant was “for Germans to drop their opposition to inflation”. Well, it’s becoming more and more clear that the choice is either inflate or risk a resurgence of Naziism in Europe, and the only thing that terrifies Germans more than inflation, it’s that prospect. So, as Merkel said last week, they’re ready to accept more inflation. The German elections today showed that public support for austerity has collapsed. People across Europe are now demanding another approach, and so Merkel is able to fall into line while saving face. She credibly defended the Euro but now the people demand she stops. She’ll stop.
In my opinion this will mean a devaluation of the Euro against the USD, and thus most other countries too. If that were to happen Europe would have no choice but to spend hundreds of billions of Euros (that’s how you dilute your currency, after all), and the European Investment Bank seems like a very good vehicle for getting money to Main St.
I’m vaguely anticipating some announcement at the G8 meeting next weekend, which was moved from Chicago to Camp David at the last minute, ostensibly over some objection from Putin, but the reason sounded weak to me. Plus the JP Morgan thing will be huge all week and that would give them the perfect political cover to do it now, and let the blame fall (correctly) on the banks.
“In my opinion this will mean a devaluation of the Euro against the USD, and thus most other countries too.”
My brain malfunctioned here. I meant to say that most currencies will be devalued against the USD, either by fiat or through market forces.
Look at USD/EUR right now: -0.1%! Tell me how that makes sense without central bank intervention, given the news around Europe and China today, because I can’t think of an explanation. USD/CAD, USD/AUD… All very stable, as if nothing were happening at all and Krugman wasn’t writing hysterical blogs on the NY Times website. Almost as if they were pegged.
I think it has become clear,
that Greece in general thinks it can get away with endless blackmail.
This was not just Venizelos, Papandreou, Samaras, it is 2/3 of them.
And raising inflation by 1 % will not help one bit with that.
Soo, it is better to finish this now, and to make this experience for Greece so horrible, that nobody will ever repeat it.
Germany afraid of a few “golden path” idiots, laughable.
Krugman is a well known enemy not only of the Euro, but Europe in general,
no financial crime he doesnt support, Iceland not paying its debt to NL and UK.
Merkel didnt say any thing about inflation. And what people interpreted as the bundesbank tolerating inflation beyond 2.5 % was clarified last week.
The socialist mob must forget that he can somehow topple democratic rulers and treaties. The NRW election had nothing to do with the euro.
There is ZERO sympathy and patience for Greece left here in Germany.
I strictly vote for 4b. Never believed in the Euro anyway. Not that I was ever asked by the political ‘elite’…
Germany will not allow the Euro to fail, end of story. You have to live here to understand why.
Question: If you’re short on the Euro, and it completely collapses/goes away, are you not just as screwed as someone who is long? How are you going to collect on your trade?
“1. Greek euro exit, very possibly next month.”
No, next month a new election will take place in Greece.
“2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.”
No, that already happened. Look at the TARGET imbalances.
“4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible”
German officials (Schaeuble, Weidmann, …) have already accepted that inflation will rise. Members of all parties in Germany as well as members of Merkels government (Schaeuble, Bruederle, Roesler, von der Leyen, …) claim that wages should rise, in order to ignite a wage/price spiral, because the debt/GDP ratio of Germany is larger than that of Spain.
And nobody in Europe is worried about a Greece exit from the Euro, because after the last debt deal more than 50% of the Greece debt are written down. Serious financial institutions have already written down the rest.
So Professor Krugman: much ado about nothing!
The Euro problem is systemic and cannot be fixed unless there is wholesale law change. Sovereign currencies have fast feedback and are superior to the straitjacket Euro, to my mind.
Euro works like this: Greece issues a government bond to a private commercial bank, probably located in Germany. The private german bank issues new “credit” euros in proportion to the bond. The Greek people are now on the hook for both the principle and the added interest/usury. The new Euro’s enter the Greek money supply, and are spent on consumption.
Greek’s buy BMW’s from Germany, and the former EUROS sourced at a commercial bank, vector to Germany. Those Greek Euro’s then find their way back maybe to the originating commercial bank. As savings in the commercial bank, they can be used to hypothecate additional Credit.
Germany, as a mercantilist country must export more than it imports, and thus they suck in Euro’s as savings. The German savings are Greek debt.
They cycle of credit creation is not infinite due to the exponential function of usury over time. The Greek government by deficit spending with bond issuance to foreign banks, has caused debt to point outside of Greek Sovereing control; a cardinal rule that should never be broken, is to allow your debt to be denominated in another currency or held outside of your law. That this cardinal rule abandonment is encoded into the EURO is a sign that it was a purposeful flaw, or there is a serious lack of understanding among the designers.
The end game is when the population can no longer support real wealth losses. In other words, the Greek citizens output must eventually service some of the debt, and that then becomes debt deflation. Monies earned represent labor’s productive output, and that goes to debt service instead of the productive side of the economy. Already, commercial bankers and bond holders want real assets to satisfy their ledgers. In this way, bankers wipe out the numbers on their ledgers as the asset is confiscated. The creators of money, and those that own money, use it as financial weapon to disposses the people of their lands and assets.
Granted, Greek government should not have created bonds to borrow “private credit created” Euros. But, they should not have been snookered with the EURO system either.
The defect at the heart of the EURO is the lisbon treaty that only allows ECB central bank money to go to their private commercial banks. It is forbidden to spend into governments. (Although they are finding ways now to alleviate debt, to stem mass unrest.) But, consider a monetary system that requires borrowing to pay off the usury error, is itself an error. Central banks originally came into being as a means for governments to finance their debts.