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Hey Joe Get Over It …They Won’t Throw the Euro-Baby Out with the Bathwater

Politics / Euro Apr 08, 2012 - 12:21 PM GMT

By: Andrew_Butter


Best Financial Markets Analysis ArticleWatching the gurus strut their stuff on Bloomberg and CNBC it’s hard not to feel there is an undercurrent of glee that the Euro is in trouble. Finally the focus has shifted from the economic havoc wrought by the unholy and unnatural alliance between the state and the private sector which created the U.S. housing bubble, which created a multi-trillion hole in the balance sheets of U.S. and incidentally, Euro-zone and British, banks, pension funds and insurance companies.

Now all eyes are on the fall-out from the equally unholy alliance between the stogy over-paid over-wined and over-dined bureaucrats in Brussels, kept by corrupt politicians who were paid-off by the nominally private sector banks, who lent them money to be thrown around as election-candy, which created the Euro-Zone sovereign debt crisis.

The superiority of the dollar as the ultimate fiat currency, it is argued, is that the Federal Reserve could simply print dollars and hand them over to incompetent private sector bankers to paper over their capital inadequacy. In Europe on the other hand, that was harder to achieve, even after the penny dropped…remember this one?

On Friday (29th January 2010) European monetary affairs commissioner Joaquin Almunia declared; “There is no bailout and no "plan-B" for the Greek economy because there is no risk it will default on its debt”.

So much for plan-A; but he wasn’t lying, there really wasn’t a plan-B because the only viable one is the printing presses. And that was as verboten under the Treaty of Lisbon, as incidentally was fiddling your GDP numbers and doing back-door swap deals with Goldilocks to keep Euro-Stat on-side, but that was OK if you didn’t tell anyone, it’s a bit more difficult to print a trillion Euros without anyone noticing.  And that of course goes to prove the axiom, “never believe anything until it has been officially denied”.

Not that what was going down and that the ECB would eventually do the TALF pole-dance wasn’t patently obvious six months ago. At least to anyone whose faculties had not been blinded by hysteria mixed with a little dose of the sadistic glee that little boys used to try and hide at my school, watching the big boys getting lined up to be beaten…that where there was a will there would be a way.

How about this one; intriguingly from the “Entertainment” section of the WSJ:

 Just a few years ago, a spate of books trumpeted the ascendancy of a uniting Europe as the new global superpower that would run the 21st century. Europe’s mastery of soft power seemed destined to eclipse military might in the post-Cold War age. The building of a continent “whole and free” following the collapse of the Soviet empire would finally put an end to ethnic and nationalist conflicts. And the historic creation of the euro, as the coin of the realm in the world’s biggest trading bloc encompassing 500 million prosperous citizens, foreshadowed the demise of the dollar’s supremacy.

These days the European dream seems to be turning into a nightmare.

And along with that under-current, there are the side-arguments which point to the system of universal health care in Europe as a model that should be rejected in favor of the holy state-private-sector monopoly in USA ordained by The Almighty Himself (Peace Be Upon Him), operated under franchises given out by corrupt politicians by the pharmaceutical industry, HMO’s and the medical profession. Which means health care over there is the most expensive in the world, by far, yet the country overall ranks, at Number 37, lower than Costa Rica in terms of the quality of what you buy for the money.

Be careful whose kettle you call black, but now there is talk about the end of the Euro.

The argument there is that the Euro caused the crisis. If French and German bankers had not been able to borrow Euro’s at home at 2% and lend them to PIGS at 5%, or whatever, and gear that trade 32:1 under the Basel II Rules, that never would have happened.

The way it worked is if you had 100 Euros you could borrow 3,200 Euros at 2% (so you pay 64 Euros a year interest), and then you lend those Euros to Greece at 5% (you get 160 Euros from them), take away 64 and you got 96 Euros a year pure profit.

Take away the cost of all the wining and dining and don’t forget the bonuses and the kick-backs, the bank makes 25 Euros a year on its 100 Euros, and that’s pure profit…before tax, shareholders are ecstatic… happy days.

Until of course the Greeks stick you with a 75% haircut so they only pay you back 800 Euros…perhaps…in 2018. Meanwhile you have to find 2,400 Euros to pay whoever it was you borrowed from at 2%, NOW!! And if you go to the market-place and say you need it to roll over they want 5% to 7%....DARN!!

In The Land of The Free you can roll up to the Federal Reserve and they will hand over 3,200 Euros to you under the TALF program in exchange for the Greek debt, except in Europe the ECB isn’t allowed to do that, because, and this is the rub, they are Nazis.

Hang on a moment!!

The Euro didn’t cause the crisis any more than the Federal Reserve caused the crisis in America. Over there the money for the insane lending that caused the bubble, and the bust, came from securitization gone mad, with the rating agencies buying the theory hook-line-and-sinker that house prices would go up forever.

Which is why in their models to predict the likely default on residential mortgage backed securities, and the synthetic collateralized debt obligations those spawned, you couldn’t enter a negative number for the future rise in the price of houses.

Now they say that was a Black Swan, like a one in 3.4 million 5-Sigma event. Sorry Joe, you should stick to plumbing, the chances that the theory “house prices will go up forever” was right, was 50% (either they would or they wouldn’t), so an RMBS rated AAA with a less than 1% chance of default, in reality, always had a probability of default of 70% (thanks to the waterfall) x 50% = 35%. Which is how that worked out, then, Big Surprise; but that wasn’t a Black Swan; that was just stupidity, or in other words a Murphy’s Swan.

The Euro didn’t cause the Euro-Zone sovereign debt crisis and there is nothing wrong with the Euro. All that needs to be fixed is stupidity, and the world can live happily ever after.

But there again, what with the experts buying such ideas as “U.S. House prices will go up forever”, Rumsfeld’s Al Qaeda Bunkers in Afghanistan and the hundreds of WMD in Iraq; and “No Plan B”…sadly stupidity does seem to be on the ascendance.

That’s the worry. One of the Big Ideas behind the European project was that it would allow labor markets to become mobile and transferrable, so if you are a 24-year old unemployed PhD in Spain or Greece, you can get on a train and travel to Germany where you can get a job cutting grass, cleaning toilets, waiting tables or working night-shifts, paid daily without any job security. As in if you turn up drunk, or late, or you jerk-off on the job, you get fired; and that’s it, no chance of hauling your employer through the courts.

But that would of course be demeaning (many jobs are), much better to persuade your politicians at home to borrow money from Germany, so they can create a “decent” job for you with a guarantee of lifetime employment where if you don’t like your bosses’ attitude you can sue him, except the only place for jobs like that is in the public sector.

One small problem, the employee-union-friendly rules drive away the private sector. I know an Italian whose son does special effects for films; he’s apparently very good at it, I never understood how technical that is until one day I saw him work. He had a job with a film company in Italy for five years and they loved him, but after five years (or so, I’m a bit confused on the details), the law says they have to sign him up to some sort of lifetime employment deal…so they let him go. Now he’s working in Egypt making 250 Euros a day which is nearly double what he made in Italy, except this is tax free, plus accommodation, without any talk of lifetime employment. Interestingly he’s not working in Germany or UK, even though he speaks enough German to do that job and perfect English, they got unions there; so he can’t get in. In Europe there is a two tier society, those with government or union protected jobs, and the rest.

Just like Maggie Thatcher said, socialism is great, so long as you can keep borrowing money to pay for it, she could have said the same thing about fascism because it’s the same deal in places like Greece and Italy which had fascist governments.  The only way Europe will recover from years of stupidity will be when they can’t borrow any more money to pay for it and they create a space for the private sector to dig a way out of the hole, which is what is happening right now in USA.

I’m still sticking with my prediction last December that America will create another 250,000 jobs a month on average for the next 14-months; and nearly all of those will be in the private sector…go figure.

But either way, the Euro has got nothing to do with any of that, it’s not that the Euro destroyed the European dream, it’s that the European wet-dream destroyed the Euro, and if that goes, they will be back to Square One.

Perhaps it’s time they thought seriously about plan-B?

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe. Ex-Toxic-Asset assembly-line worker; lives in Dubai.

© 2012 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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