The West is broke and its choices from here are limited. Contagion is out of the bag in Europe. The course is set to run through Italy, Spain and onwards through France to the rest of the world. The situation is simply weird.
Germany is blocking the necessary changes the European Central Bank (ECB) requires to get inflation going, which it needs to do to erode the unbearable debts built up by EU states. In doing so, Germany is dooming Europe to a great depression and its own collapse.
If France falls, so will the US. Interest rates will rocket across the globe and the vast monies locked up in bonds will be incinerated. This untold wealth will go to ‘money heaven,’ never to return. There will be a massive money-supply squeeze.
The end result of will be a global recession that will land on Germany’s doorstep.
The nation’s obstinacy and refusal to endure 5-7% inflation seals not only Europe’s fate but the US’s, too. Promising to have a solution to the problem sorted by the end of October, Germany then missed its self-imposed deadline completely, sparking the end-game that kicked off last week.
If that isn’t weird enough, the euro is still amazingly strong.
If it’s about to implode then the shared currency should not be 1.35 to the USD. The euro is holding strong – just as it would appear impossible that the currency will survive at all.
How can this be? The choices from here are limited and stark.
The simplest, or “Occam’s razor” answer is that the whole crisis is baloney and the all-powerful “them” paranoid traders talk about already know how this mess pans out and that it has a happy ending. I keep focusing on this, because as Occam posited, the simplest answer is often the right one.
Yet as no one has a remedy, or even a sketch of one, Occam unfortunately doesn’t cut it for me. Germany could be ready to bite the inflation bullet, but if it is, its decision makers are hiding it brilliantly while at the same time exacerbating the meltdown the nation so desperately needs to halt.
A more likely answer is that the sovereign markets are so huge and the day-to-day momentum of currency and bonds so vast that, like a super tanker running aground, the euro is just grindin on across the land, disintegrating in slow motion.
Stocks crater in minutes but when they crash it is like a bar brawl – short and brutal. A currency crashing is like a war -with a prelude, unfolding conflicts and final, ghastly resolution. The sovereign markets could be just “too big” to crash and burn fast; this drawn out torture could just be a function of giant scale.
The last option is that the market thinks the weak European countries will simply flunk out of the euro and the frontier of the currency will pull back into the states that have their economies in order. This contraction will automatically strengthen the euro as its membership gets smaller.
The euro will retract to an imperial guard of countries. Under this model, the ECB would end up with a lot of cheap euro bonds from satellite countries who had reverses outside of the Eurozone. Once back within their own inflating currencies, the weak EU countries could talk “debt hair cuts” or deferral, keeping the debts technically alive.
The ECB prints its own money. It can lose euros and then print them again. Money would flow from the solid core to the flaky EU periphery, but few would notice or care. Chronic economics always win out in a paycheque to paycheque world.
The excess euros in the system, after various exits, would help juice the new smaller eurozone with money supply. Then, when the bear market finally reversed, the ECB could end up with an appreciating cache of once-questionable bonds and normality would have resumed.
This would be a tortuous process; one so radical that the euro’s current value still seems way too high.
So, the mystery is unresolved – why is the euro still too high? I’m tempted to imagine the real Occam’s razor answer is that China has huge reserves stashed in euros and is scrabbling to keep this position whole. That would be ironic, indeed.
Based on obscure technical insights, a year ago I argued the market was about to experience a new era. At the time, I said I had no idea whether the new era would be for the better or worse, however the signs said a financial cycle was concluding and a new economic episode was about to begin. I hoped for the best, but it turns out that optimism was the wrong call, at least for the initial phase of this new economic dynamic.
This crash will not only reshape the world economy it will also reshape our society. Already two European Prime ministers have fallen: Papandreou and Berlusconi. More will follow, with even Obama’s second term now in doubt.
The West is broke.
Two decades ago, Western social capitalists finally conquered Eastern communists. Now Eastern capitalists are destroying Western socialists. The wealth of the West has gone East. The trillions of surplus in the East is basically equivalent to the trillions of deficit in the West. Until that flow is rebalanced or the drain at least dramatically slowed, chaos will reign. The saga of the euro is the beginning and it seems that time has run out for the old order: period.
Only the value of the euro gives me any doubt. That final thread could snap at any moment.