Best of the Week
Most Popular
1.UK General Election BBC Exit Polls Forecast Accuracy - Nadeem_Walayat
2.UK General Election 2017 Seats Final Forecast, Labour, Conservative Lib-Dem, SNP - Nadeem_Walayat
3.UK General Election 2017 Forecast: Conservative 358, Labour 212 Seats - Nadeem_Walayat
4.Theresa May to Resign, Fatal Error Was to Believe Worthless Opinion Polls! - Nadeem_Walayat
5.UK House Prices Forecast General Election 2017 Conservative Seats Result - Nadeem_Walayat
6.The Stock Market Crash of 2017 That Never Was But Could it Still Come to Pass? - Sol_Palha
7.[TRADE ALERT] Write This Gold Stock Ticker Down Now - WallStreetNation
8.UK General Election Results Map 2017 vs 2015 vs Opinion Polls - Nadeem_Walayat
9.Orphaned Poisoned Waters,Severe Chronic Water Shortage Imminent - Richard_Mills
10.How The Smart Money Is Playing The Lithium Boom - OilPrice_Com
Last 7 days
Grenfell Fire: 600 of 4000 Tower Blocks Ticking Time Bomb Death Traps! - 22nd Jun 17
Car Sales About To Go Over The Cliff - 22nd Jun 17
LOG 0.786 support in CRUDE OIL and COCOA - 22nd Jun 17
More Stock Market Fluctuations Along New Record Highs - 22nd Jun 17
Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - 22nd Jun 17
Green Party Could Control Sheffield City Council Balance of Power Local Election 2018 - 22nd Jun 17
Ratio Combo Charts : Hidden Clues to the Gold Market Puzzle - 22nd Jun 17
Steem Hard Forks & Now People Are Making Even More Money On Blockchain Steemit - 22nd Jun 17
4 Steps for Comparing Binary Options Providers - 22nd Jun 17
Nether Edge & Sharrow By-Election, Will Labour Lose Safe Council Seat, Sheffield? - 21st Jun 17
Stock Market SPX Making New Lows - 21st Jun 17
Your Future Wealth Depends on what You Decide to Keep and Invest in Now - 21st Jun 17
Either Bitcoin Will Fail OR Bitcoin Is A Government Invention Meant To Enslave... - 21st Jun 17
Strength in Gold and Silver Mining Stocks and Its Implications - 21st Jun 17
Inflation is No Longer in Stealth Mode - 21st Jun 17
CRUDE OIL UPDATE- “0.30 risk is cheap for changing implication!” - 20th Jun 17
Crude Oil Verifies Price Breakdown – Or Is It Something More? - 20th Jun 17
Trump Backs ISIS As He Pushes US Onto Brink of World War III With Russia - 20th Jun 17
Most Popular Auto Trading Tools for trading with Stock Markets - 20th Jun 17
GDXJ Gold Stocks Massacre: The Aftermath - 20th Jun 17
Why Walkers Crisps Pay Packet Promotion is RUBBISH! - 20th Jun 17
7 Signs You Should Add Gold To Your Portfolio Now - 19th Jun 17
US Bonds and Related Market Indicators - 19th Jun 17
Wireless Wars: The Billion Dollar Tech Boom No One Is Talking About - 19th Jun 17
Amey Playing Cat and Mouse Game with Sheffield Residents and Tree Campaigners - 19th Jun 17
Positive Stock Market Expectations, But Will Uptrend Continue? - 19th Jun 17
Gold Proprietary Cycle Indicator Remains Down - 19th Jun 17
Stock Market Higher Highs Still Likely - 18th Jun 17
The US Government Clamps Down on Ability of Americans To Purchase Bitcoin - 18th Jun 17
NDX/NAZ Continue downward pressure on the US Stock Market - 18th Jun 17
Return of the Gold Bear? - 18th Jun 17
Are Sheffield's High Rise Tower Blocks Safe? Grenfell Cladding Fire Disaster! - 18th Jun 17
Globalist Takeover Of The Internet Moves Into Overdrive - 17th Jun 17
Crazy Charging Stocks Bull Market Random Thoughts - 17th Jun 17
Reflation, Deflation and Gold - 17th Jun 17
Here’s The Case For An Upside Risk In The Global Economy - 17th Jun 17
Gold Bullish on Fed Interest Rate Hike - 16th Jun 17
Drones Upending Business Models and Reshaping Industry Landscapes - 16th Jun 17
Grenfell Tower Cladding Fire Disaster, 4,000 Ticking Time Bombs, Sheffield Council Flats Panic! - 16th Jun 17
Heating Oil Bottom Is In.(probably) - 16th Jun 17
Here’s the Investing Reason Active Funds Can’t Beat Passive Funds—and It Worries Me a Lot - 16th Jun 17
Is There Gold “Hype” and is Gold an Emotional Trade? - 16th Jun 17
The War On Cash Is Now Becoming The War On Cryptocurrency - 15th Jun 17
The US Dollar Bull Case - 15th Jun 17
The Pros and Cons of Bitcoin and Blockchain - 15th Jun 17
The Retail Sector Downfall We Saw Coming - 15th Jun 17
Charts That Explain Why The US Rule Oil Prices Not OPEC - 15th Jun 17
How to Find the Best Auto Loan - 15th Jun 17
Ultra-low Stock Market Volatility #ThisTimeIsDifferent - 14th Jun 17
DOLLAR has recently damaged GOLD and SILVER- viewed in MRI 3D charts - 14th Jun 17
US Dollar Acceleration Phase is Dead Ahead! - 14th Jun 17
Hit or Pass? An Overview of 2017’s Best Ranked Stocks - 14th Jun 17
Rise Gold to Recommence Work at Idaho Maryland Mine After 60 Years - 14th Jun 17
Stock Market Tech Shakeout! - 14th Jun 17
The #1 Gold Stock of 2017 - 14th Jun 17

Market Oracle FREE Newsletter

The MRI 3D Report

European Monetary System Crisis, Euro Zone on the Edge of Collapse

Interest-Rates / Global Debt Crisis Dec 11, 2010 - 10:59 AM GMT

By: Bob_Chapman

Interest-Rates

Best Financial Markets Analysis ArticleBelieve it or not the euro zone and European Union crisis is still in the formative stages.

The bailout packages arranged for Greece and Ireland are not to bail out those two countries, but to bail out the European banks that lent to them and bought their bonds when it was imprudent to do so. They knew, because they control the governments that the public of the solvent governments would bail them out. Thus, the governments of Ireland and Greece with Portugal and Spain to follow will be showered with an Anglo-American style bailout.


As you know $1 trillion won’t be enough to make the banks happy, so $3 trillion will be needed. Germany says no we are not going to do that. Well, we’ll see just who the real masters of Germany are. Such policy flies in the face of German culture. It shows you though how close to the edge Europe and its euro zone really is. Germany understands, but the rest of Europe, particularly the PIIGS are in denial. The IMF has its nose under the blanket. It will lend and participate, so that it can serve its masters by keeping these wayward states completely in austerity and bondage for the next 50 years and in that process relieve them of their sovereignty. As all of Europe belatedly understands, one interest rate can never fit all.

We can assure you that the euro zone is on the edge of collapse. It’s just a question of when. Nothing has been contained nor can it be contained. Like in the US the taxpayers of the solvent countries must bail out the banks and other financial institutions of Europe. The monetary policy created by the European Central Bank and the bankers has failed. Whether this was deliberate or not, we do not as yet know, but the truth will eventually surface. Currently the scapegoats are the citizens of these beleaguered countries, when in fact the real malefactors reside at the ECB and the European Parliament. These same players still do not have solutions other than destroying the Greek and Irish societies in the name of repaying the bankers. Whether you realize it or not, it has been a year since this odyssey began in Greece. We now have Ireland and they will be followed by Portugal and Spain and perhaps even Italy.

The main battlefield that will decide the outcome will be Spain due to its size and its persistent claim that Spanish banks are very solvent, which is symptomatic of denial. Mr. Zapatero tells us the Spanish debt crisis has passed. Our question, is he dumb, naive or a liar? How could he be so out of touch with reality? He blames Greece and Ireland for the euro zone’s problems as if Spain was a victim of theirs and blameless. Mr. Zapatero’s leadership is simply idiotic. This incompetent is shepherding his people toward financial disaster and servitude. Their real problem is the euro, the euro zone, the ECB, the EU and those who have allowed Europe to be led into a financial and economic trap. Germany, the euro zone powerhouse, doesn’t want the euro or the EU and has never wanted them. They have been it shoved down their throats, because they lost WWII. This is also why Germany was forced to merge Eastern Germany into Western Germany under such horrible terms. Germany is sick of being used as a punching bag and they want out of both. In addition, the cost of staying in the euro is already unacceptable. Any further higher costs could lead to insolvency of currently stable countries such as Germany. Then there are the social issues. Germans expect other countries to work as hard as they do. That has not been the case and will never be the case, so they no longer want to continue to support them. Some say, the withdrawal from the euro will be too traumatic to contemplate. We say concerns regarding bankruptcy would be far more painful. A reflection of that are Germany’s recent failed auctions. Buyers are only taking 20% of the offering. We interpret that as fear that Germany will financially injure itself if it has to continue bailing out failed euro zone members.

European bond markets are beset with the same problems and solutions that the UK and US are. The ECB and the Fed have to remain active in the bond markets, otherwise they fall. They have to buy persistently and in size. This week we saw the biggest drop in bonds and rise in yields in some time, as the selling grew overwhelmingly. The yield on the 10-year T-bill rose to 3.30% from 2.50% only a month ago. The 30-year fixed rate mortgage as a result rose from 4.30% to 4.66%. The bond markets cannot function without manipulation from the ECB, the Fed and the Bank of England. Needless to say, these interventions are not solutions – they only prolong the inevitable. The bonds need higher yields to compensate for risk or buyers must be convinced solutions are in hand, otherwise in the end the ECB, the Fed and the Bank of England will end up with all the government bond issues, which will lead to collapse. The sovereign crisis in all of these countries has not been solved, nor will it be solved with current policies. Once Ireland and Greece leave the euro, Portugal and Spain and perhaps Italy would be forced to follow. That would mean the demise of the euro. Like it or not that would cause currency controls in each of these currencies. Bank withdrawals would be limited as would travel outside each country. Each country making their goods and services inexpensive and competitive with those of other nations would set currency values low. There would be no debt overhang because debt would have been decimated. Bourses would function in a primary fashion. In many ways Europe would look as it did in the late 1940s and 1950s, without the physical destruction. We were there we experienced it. Recovery would take five to ten years, perhaps longer. There will be no Marshall Plan because the US and England will not be any better off. Nations will put new currencies in place and the rebuilding of economies and markets would commence accompanied by tariffs. The cycle would begin again.

The option presently being pursued is unworkable. Perhaps $1 trillion can take care collectively of Greece, Ireland and Portugal, but an additional $2 trillion would be needed to bail out Spain ad Italy. In the end the debt load forced on the solvent countries would be unmanageable and that doesn’t even include the political will, which could disappear at anytime. Remember, Germans, French, Dutch and Austrian patience are already close to an end. At the same time there would be a major bureaucratic tug of war between those who want their national sovereignty returned and those who would want even more amalgamation, the reason that Europe is in the state that it is today.

The assumption of fiscal decisions by the EU in Brussels regarding fiscal policy will be a fateful decision, because it will strip each state of its sovereignty. Otherwise Brussels’ bureaucrats have made an expensive mess of everything else. Transferring such power under today’s circumstances would be a shortsighted mistake.

There is no changing the culture and attitude of Portugal, Spain, Italy, Greece and Southern France. They are what they are and have been for centuries. They will never have the work ethic of northern Europe and, thus, they will never be competitive. This is why the Treaty of Versailles II option will be met with aggressive non-compliance. This is a forced devaluation internally within the EU in the form of lower wages. The goal is to make exports more competitive. This is just another wrinkle in the currency war that will bring about tariffs. This is not ingenious – it is transparent and stupid. The cheapening of capital is essentially a devaluation, that is if they can get away with it, which they cannot.

The cuts are too deep too fast. Shock treatment is traumatic and often does not bring the desired results. Overnight it is expected that Greece and Ireland will balance their budgets, have no reason to issue more debt, while the ECB buys toxic sovereign bonds. Who is going to absorb those losses? The public of all euro zone countries, of course. This is exactly what the UK and US are doing through their central banks. The ECB is just a little late to the party. Monetizing doesn’t work and the debt purchased is still there to be written off. Deflation has gotten a small foothold in Europe and unless quickly reversed could end up irreversible. We do not think so though. The ECB has seen the error of its ways via Keynesianism and they will issue money and credit to meet the challenge and suffer the same inflation that others will. In the end monetization destroys all in the name of buying time.

If all of this is not going to work eventually then why do it? Why not do what Iceland has done and restructure debt, allowing bondholders to share losses. This, of course, is a form of partial default and in all probability it will work. This is also called a managed default similar to what happened in the early 1970s at the Smithsonian talks, at the Plaza Accord in 1985 and the Louvre Pact in 1987. Due to the contagion that would be caused by such unilateral policies, such attempts have to be done with all nations participating. This is the only fair way to solve the overall dilemma. There is no nation without quilt. They have all participated in cheapening their currencies, have created far more debt than they should have and have all engaged in excessive creation of money and credit. The notion that Germany, China and the US can produce capital to solve the problem is ludicrous. They all have their own problems. There can be no bailout, or the appearance of some savoir this time. Every nation has to bite the bullet simultaneously. This means that nations have to understand that quantitative easing will have to end and that a deflationary depression has to be accepted. The system has to be purged of its excesses in the creation of capital and its allocation. Banks and other financial institutions have to accept the blame for what they have done in their quest for excessive profits and power. This approach is the only way to avoid social chaos. After three years of recession and depression the world public is in no mood to play games. They have to be told the truth and what to expect. The blame game can be dealt with later. Either this happens or the world goes down in flames economically and financially.

We cannot afford more stress tests, which are nothing less than a game of fraud. Bank tests have to account for the risk of sovereign default. Most nations do not want their public or the rest of the world to know that they are financially on the edge of the abyss.

It is important to understand the concept of European government default and the potential inability to bailout banks. In the end there isn’t enough money to bail them out, even if they print it. The flipside is inflation, hyperinflation and deflationary depressions. As a consequence very few people have much confidence in their bank, or its ability to survive. As a result, credit default swaps linked to 25 banks and insurers continue upward, which means confidence and perception are worsening. In addition, investors do not believe banks’ assets are worth what they say they are.

The bottom line is the stress test does not work. How can it when they are allowed to keep two sets of books?

Theinternationalforcaster.com

Global Research Articles by Bob Chapman

© Copyright Bob Chapman , Global Research, 2010

Disclaimer: The views expressed in this article are the sole responsibility of the author and do not necessarily reflect those of the Centre for Research on Globalization. The contents of this article are of sole responsibility of the author(s). The Centre for Research on Globalization will not be responsible or liable for any inaccurate or incorrect statements contained in this article.


© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife