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Archive for the ‘Currency’ Category

The euro is a dying currency.  On Thursday, the EUR/USD fell below 1.28 for the first time since September 2010.  In fact, as I write this the EUR/USD is sitting at 1.2791.  Back in July, the EUR/USD was over 1.45.  But this is just the beginning.  The euro is going to go a lot lower.  At this point, there are several major European nations that are on the verge of default, the European financial system is overflowing with debt and toxic assets, and most major European banks are leveraged about as badly as Lehman Brothers was when it collapsed.  Most Americans simply do not grasp the gravity of what is happening.  Just because the Dow is sitting above 12000 and a few U.S. economic numbers have improved slightly does not mean that everything is going to be okay.  As I wrote about recently, the EU has a bigger economy than we do and they have a bigger banking system than we do.  U.S. banks are massively exposed to European sovereign debt and European banking debt.  When the financial system of Europe collapses and the euro falls apart it is going to rock the entire planet.  So you better look out below – the euro is coming down and it is coming down hard.  After the euro implodes, nothing is every going to be the same again.

So how far are we going to see the euro decline?

Julian Jessop of Capital Economics expects the euro to fall much further….

The relative strength of the recent economic data from the US is supporting the dollar more generally, and we expect this divergence to persist as the euro-zone slides into a deep and prolonged recession. Above all, doubts about the very survival of the euro itself are likely to remain a drag on the currency. We therefore continue to expect the euro to fall to around $1.10 by the end of the year.

Others are even more pessimistic.

As I have written about previously, the head of global bond portfolio management at PIMCO believes that the euro is going to go even lower than that….

“Parity with the dollar next year is not out of the question”

Can you imagine that?

1 dollar = 1 euro?

Don’t think that it can’t happen.

But the decline of the euro is just part of the story.  The truth is that Europe is on the verge of a financial collapse that could end up dwarfing the financial crisis of 2008.

Sadly, most Americans have no idea what has been going on in Europe the past few days….

-The stock of the biggest bank in Italy, UniCredit, is absolutely collapsing.  Shares of UniCredit fell 14 percent on Wednesday and 17 percent on Thursday.

-Shares of another major Italian bank, Intesa Sanpaolo, fell 7.3 percent on Thursday.

-Shares of three major French banks all fell by at least 5 percent on Thursday.

-Even shares of German banks are falling like a rock.  Shares of Commerzbank fell 4.5 percent on Thursday and shares of Deutsche Bank fell 5.6 percent on Thursday.

-The yield on 5 years Italian bonds is back over 6 percent and the yield on 10 year Italian bonds is back over 7 percent.  Analysts all over Europe insist that that the Italian debt situation is not sustainable if rates stay this high.

-Italy’s youth unemployment rate has hit the highest level ever.

This is mind blowing news.

But what is the top headline on USA Today right now?

“Employers Impose Bans On Smokers”

These are some of the other top headlines on USA Today right now….

“Automakers Rush To Offer Apps In Your Car”

“Bargain Season At Taco Bell, Pizza Hut, Wendy’s”

“Does Your Dog Understand You? Study Says Maybe”

Is that what passes as news in this country?

A financial meltdown of historic proportions is happening in Europe and you cannot even find anything about it on the front page of USA Today.

Amazing.

All of us need to snap out of our television-induced comas and start waking up.

Things are about to get really bad for the global financial system.

At this point so much confidence has been lost in the euro that even the Council on Foreign Relations is admitting that the euro is a failure….

The euro should now be recognized as an experiment that failed. This failure, which has come after just over a dozen years since the euro was introduced, in 1999, was not an accident or the result of bureaucratic mismanagement but rather the inevitable consequence of imposing a single currency on a very heterogeneous group of countries. The adverse economic consequences of the euro include the sovereign debt crises in several European countries, the fragile condition of major European banks, high levels of unemployment across the eurozone, and the large trade deficits that now plague most eurozone countries.

If even the CFR is throwing in the towel, that should tell you something about what is about to happen to the euro.

There is a very real possibility that we could see the euro break up at some point during the next couple of years.

It now seems that a report produced a while back by Credit Suisse’s Fixed Income Research unit was right on target….

“We seem to have entered the last days of the euro as we currently know it. That doesn’t make a break-up very likely, but it does mean some extraordinary things will almost certainly need to happen – probably by mid-January – to prevent the progressive closure of all the euro zone sovereign bond markets, potentially accompanied by escalating runs on even the strongest banks.”

The European debt crisis just continues to get worse and worse.  None of the solutions that European leaders have tried have worked.  We are rapidly approaching the meltdown phase of this crisis.

As I have written about previously, it doesn’t take a genius to figure out what is happening in Europe.  The equation is simple….

Brutal austerity + toxic levels of government debt + rising bond yields + a lack of confidence in the financial system + banks that are massively overleveraged + a massive credit crunch = A financial implosion of historic proportions

Unfortunately, what is happening right now in Europe is eventually going to happen in the United States as well.

As I wrote about yesterday, U.S. debt is a ticking time bomb that is going to devastate the entire global economy at some point.  Nobody knows when the implosion will happen, but everyone knows that it is inevitable.

When Europe falls apart financially, that is going to make our own financial system much less stable.  What is happening in Europe could turn our “limited recovery” into a “major recession” almost overnight.

So keep your eye on the euro.

If the euro keeps going down, that is going to be really bad news for the global economy.

Unfortunately, the truth is that the decline of the euro is just getting started.

Hold on to your hats.

The Economic Collapse

The devalue-your-way to prosperity proponents are out in full force in spite of the mathematical silliness of it all.

Three writers of the Wall Street Journal article Weak Currency Stands to Buoy Zone Exports propose Europe is in the midst of a “weak recession” and a falling Euro will help exporters.

Weak recession? We will see about that.

At the top of the “beggar-thy-neighbor”, weak-currency devaluation list is Martin Feldstein who writing on the Financial Times specifically proposes A weak euro is the way forward.

The Way Forward – Not

Feldstein believes “The key is to expand the net exports of those trade deficit countries to the world outside the eurozone.”

Yet at the same time Feldstein readily admits “The politicians who planned the euro, generally did not think about future current account imbalances or other economic problems. They wanted the euro as a means of accelerating political integration.”

Moreover, Feldstein specifically notes “Productivity in Germany rose much faster than it did in Italy, Spain and France. Germany also placed limits on wage growth. Those two factors mean that labour costs in Germany’s tradable sector have risen some 30 per cent less since the start of the euro than labour costs and prices in those countries with slower productivity growth.”

Proposal to Fix the Unfixable

Devaluing the Euro cannot and will not fix those structural problems. In essence Feldstein wants to fix a problem that is not fixable.The amazing thing is Feldstein nonetheless wants to try anyway with proposals he knows full well cannot work.

Put Feldsetein in the can-kicking group with this admission: “A decline of the euro cannot be a permanent solution to differences in  productivity trends within the eurozone. But it would give those  countries time to improve productivity growth before the euro’s  fundamental strength returns.”

Can the Euro Be Saved?

Given that the Euro is fundamentally flawed, even if it could be saved, why should it be saved? At what cost? To whom?

Feldstein does not specifically address any of those questions, although does wonder how much the Euro needs to fall.

Wondering how far the Euro needs to decline to “save the euro” is akin to wondering how many peanuts elephants need to eat before one can launch a rocket ship to the moon.

Ironically, Feldstein concludes “If those relative improvements in productivity do not happen, there may  be no choice but to end the eurozone as we know it today.”

Why Don’t We Start There?

Getting Greece, Spain, Portugal productivity up to the standards of Germany is NOT going to happen while all those countries are on the same currency with the same interest rate (and probably not under any circumstances at all).

While currency devaluation may in theory help one country in isolation, it cannot save the global economy or  Europe as an entity.

Feldstein should know that, and I suspect he does. Unfortunately, he refuses to go down the only path that makes political and economic sense.

This is after all, not only about economics, but also about political realities.

Political and Economic Realities

The political and economic reality is the Euro has failed. It was fundamentally flawed from the beginning.  Politics suggests it is too late to start over. Germany will not go along, and in my opinion, for excellent reasons.

So, instead of attempting to fix the unfixable, why not work on the best plan to break up the Eurozone?

Mathematical Realities

Not every country can run a current account surplus. Yet, every country wants to. On May 19, 2011, Paul Krugman Praised a Weaker US Dollar.

What’s driving the turnaround in our manufacturing trade? The main answer is that the U.S. dollar has fallen against other currencies, helping give U.S.-based manufacturing a cost advantage. A weaker dollar, it turns out, was just what U.S. industry needed.
Yet the Federal Reserve finds itself under intense pressure from the right to make the dollar stronger, not weaker.

Mathematical Impossibilities 

1. Krugman and the Fed want a weak Dollar
2. Feldstein and European countries want a weak Euro
3. Switzerland wants a weak Swiss Franc
4. Japan wants a weak Yen
5. China wants a weak Yuan

Can someone, anyone, tell me how that is supposed to work?

Magically it’s supposed to. Yet, mathematically its impossible in relation to each. However, it is possible in relation to another currency: gold.

Amazingly, not even Nouriel Roubini can figure that out, which prompted my article Dear Nouriel Roubini: The Fundamental Case for Gold Has Not Changed; To Understand, All Roubini Need Do is Look in a Mirror.

Here’s the deal: If the Euro slips, the dollar must by definition rise. If dollar exports then drop, the Fed may respond with QE3 and Japan may sell the Yen.

Note the extreme silliness of the circular proposals to weaken everything, yet the writers cannot even see it. It’s a sad testament to the absurd grip Keynesian and Monetarist theory has on academia, Nobel prize economists, and in general economic writers most places you look.
Mike  “Mish”  Shedlock

Global Economic Analysis

Aaron answered them, “Take off the gold earrings that your wives, your sons, and your daughters are wearing, and bring them to me.  So all the people took off their earrings and brought them to Aaron.  He took what they handed him and made it into an idol cast in the shape of a calf, fashioning it with a tool.  Then they said, “These are your gods, O Israel, who brought you up out
of Egypt.”   –   Exodus 32:2-4 (NIV)

It seems to me that in this day and age of economic/social/political uncertainty, more and more people are frightened and have started clamoring for something away from the Old System of our economic norm: principally fiat currency (i.e. money with no tangible assets backing it, but just the good faith and credit of the government).  These people are alarmed by the recent decline in monetary values and the specter of inflation and possibly hyper-inflation.  Increasingly, they use the examples of runaway inflation in Argentina in the 1990’s and Weimar Germany in the 1920’s to prove that fiat currency is inherently evil and unreliable.   So, in their fear they turn to a substance which they believe is indeed right and true, gold, in order to return us all to what we want: a bull market and good times.

While there are indeed many problems with the status quo, I firmly believe that a rush by the people to call for a resurrection of the “golden bull” of a gold standard in the United States may lead to inevitable ruin, just as it did for those who strayed in the Hebrew Bible.  As much as the gold-standard proponents tend to point to history, I too will take a cue from the pages of days gone by.  Following the establishment of the Federal Reserve System in the U.S. in 1913, the American people were promised economic stability and prosperity.  Instead, they underwent two recessions and The Great Depression within 25 years, all while under a Gold Standard.  The Panic of 1907 was instigated during a Gold Standard, as were recessions, depressions, and bank runs throughout the 1800’s in our country.

In times of antiquity, many countries can attribute rising economic periods and prosperity for the majority of their citizens while using fiat currencies.  The Romans (copper and bronze coins), England (tally sticks), and the American Colonies (Colonial Scrip) are but a few examples of economic prosperity and development under stable fiat currency systems, some lasting for centuries.

So, why the sudden push for a return to a Gold Standard?

I believe there are two reasons, primarily.  One, the average citizen today is not aware of the economic setbacks under gold standards in the past and is lulled and enticed by terms such as “solid,” “stable,” “real,” and “inherent” when describing gold’s value.  They often point to gold’s scarcity to highlight its inherent value to societies throughout history, stating that it will not lead to inflation or hyper-inflation.  However, I submit that it is specifically because of gold’s scarcity that it is a dangerous commodity to base one’s economic hopes.  Gold’s scarcity makes it easier to control and manipulate by a small number of powerful elites, which leads me to the second reason for the recent push for a gold standard: Central Banks.

While publicly central banks around the world appear to downplay the value of gold and its role in establishing a “stable” currency anytime in the near future, their actions seems to discredit their assertions (in recent Congressional testimony, Federal Reserve Chairman, Ben Bernanke went so far as to say “No,” when asked if gold is money).  In the past decade most central banks around the world have turned from being net sellers of gold bullion to net buyers.  The largest single holder of gold bullion today is the International Monetary Fund (IMF, the central bank of central banks).  And there is substantial evidence to suggest that the gold thought to be in Fort Knox, Kentucky is no longer there and has been transferred to the control of central banks, out of the hands of the American people.

So, while the American people may run to their high priest of finance and cry for a new golden calf to be made so that they may worship at its feet, we should all remain vigilant of the need to steer away from anything that takes more power out of the hands of the American people and puts it into the hands of a select group of über-rich bankers.  Perhaps instead we should wait for the prophet, who right now is getting the divinely inspired word that yes, indeed, we can have economic prosperity, if only we will take the power to create money out of the hands of the big banks and put it back into the hands of We the People.  I think I see him coming down off the mountain now…

What we need instead of a Golden Calf is an end to the debt-standard of money creation.  Currently, when the American government issues more money, they do so by borrowing it into existence, issued out of nothing, by a small group of mega-banks.  And while that system may work for a while, it is inevitably doomed to collapse, as you can never get rid of debt by borrowing your way out.  Instead, we need to get back to what our government is constitutionally mandated to do: coin money and regulate the value thereof.  It’s been done before in America.  President Abraham Lincoln won the Civil War with debt-free currency (the “greenback”).  The colonies prospered under a debt-free fiat-money system.

If the American people are tired of economic uncertainty, depression, and stagnation, we should indeed consider the past – and not consider a gold standard.

By Torin Nelson

If you want a way out of the perpetual debt slavery, make your vote count this time.  Support real hope and change you CAN believe in:  Bill Still   Still2012.com

Ireland faces elections, probably on Feb. 25. Ireland has an historic opportunity to lead the way for the rest of the world. If politicians will just stop bailing out the bankers with the taxes of the Irish people, and have Ireland withdraw from the Euro, they could escape the coming storm.

“It’s the DEBT, Stupid!”
We’re Doing Something About it! Come Join the Swarm!

Solving the massive debt problem with more debt. American consumers carry as much debt as annual U.S. GDP. Credit card debt declines but auto loans and student loans go up?

Posted by mybudget360

The Federal Reserve has come to the aid of bailing out Greece.  I wonder how many Americans even know that billions of U.S. dollars are going to prop up a failing European country in Greece that got into the mess they are in because of too much debt.  In the end, the Euro is still crashing down because Greece is merely one country out of many with massive debt problems.  Middle class Americans don’t need an extensive lesson in economics to understand this.  If you take on too much debt, at a certain point you will end up paying the piper.  This doesn’t matter if you spend too much money on clothing by charging up your credit card or buying a home that you clearly couldn’t afford.  In the end, a bill comes due.  Unlike Wall Street who operates the Washington D.C. purse strings, you are small enough to fail in their eyes.  If you purchase a home that is too expensive, you will either have to pay the mortgage or end up in foreclosure.  Giant amounts of debt have ruined individuals as well as countries.

The trend of taking on too much debt has been going on for over half a century:

And you will notice that we have reached a point of too much debt in this recession.  This is actually a historical event.  Americans are on the hook for as much household debt as our annual GDP.  U.S. households currently carry $13.5 trillion in household debt.  Most of this is connected to mortgage debt.  Yet with 7 million households in foreclosure or 30+ days late, you have to ask if this debt is really even worth that much?  It actually isn’t.  One third of U.S mortgage holders are underwater on their mortgage.  So banks might be pretending that the mortgages are worth $10.2 trillion when in reality, the actual market values of the homes are closer to $8 trillion.  The only way this gets balanced out is through purging of debt through foreclosure or bankruptcies (including purging the too big to fail banks on Wall Street).  Yet banks have no incentive to mark to market any item when they can keep getting taxpayer money to fund their gambling on Wall Street.

If you break down the above household debt, it looks like this:

Home mortgages:                           $10.26 trillion

Consumer debt:                               $2.481 trillion

The consumer debt amount is incredibly problematic because this is money many Americans never had in the first place.  Think of someone making $40,000 a year with no money saved purchasing the average new car costing $25,000.  They didn’t really “purchase” it but financed the entire amount.  So for the next 5, 6, or 7 years they have committed approximately $400 per month to finance this car (we’ll use 6 years at 5%).  This is a large portion of their income:

The person just committed 16 percent of their net pay for the next few years.  This is money they never had.  Now with a stable economy, it is likely that the full loan would be paid back.  Not in a recession as deep as this one.  And during the crazy credit bubble people were able to take on incredible amounts of credit card debt with no actual verification of income.  During the boom, there were people claiming that everyone paid off their credit card off each month.  The facts showed otherwise:

We were on path to having $1 trillion in outstanding credit card debt.  That is $1 trillion that Americans spent with money they had yet to earn.  Banks were willing to lend this out because if all failed, they could call on their plutocrats to bail them out while middle class Americans were left paying bills and facing higher taxes and the prospect of inflation because of the monetization of banking debt.  This is why in recent polls and surveys Americans are increasing disenfranchised with both Republicans and Democrats alike.  Banks purchase air-time with both political parties because like the stock market, they hedge their bets in order to win even if their actions destroy the real economy.

Even though credit card debt has shrunk, people are getting deeper into debt with auto and student loans:

“WASHINGTON (MarketWatch) – U.S. consumers increased their debt in March for the second month in the past three, the Federal Reserve reported Friday. Total seasonally adjusted consumer debt rose $1.95 billion, or at about a 1.0% annual rate, in March to $2.451 trillion. The increase was unexpected. Economists surveyed by MarketWatch expected consumer credit to decline by $4.5 billion in March. On a year-on-year basis, consumer credit is down 3.4%. The increase in January was led by non-revolving debt, such as auto loans, personal loans and student loans, which rose $5.1 billion or 3.9%. Credit-card debt fell $3.2 billion, or 4.5%, to $852.6 billion. This is the record 18h straight monthly drop in credit card debt. Since the collapse of Lehman Brothers in September 2008, credit card debt is down 12.6%, while nonrevolving debt is down 0.3%.”

The student loan market has now become another subprime loan market.  Many for-profit colleges allow students to finance 90+ percent of their education through federal loans and many students come out with worthless degrees.  These for-profit schools market and advertise heavily in lower income areas where unemployment is high and promise the world if you go to their schools.  Students come out with $20,000 to $50,000 in debt and a degree that has no market value.  The schools don’t care because now the government is on the hook for the loans.  Does this sound familiar?  Do you notice how no other country has such a gigantic student loan market like the U.S.?  Now we have millions of students jumping into massive student loan debt that many will be unable to pay. Frontline on PBS estimated that nearly 40 to 50 percent of for-profit student loans end up in default (if you measure defaults accurately).  Ironically this figure is edging up to the default rates of subprime loans in the housing market.

Debt has been the engine of growth in the last decade.  The fact that credit card debt has been contracting fiercely since the recession started is good.  What isn’t good is banks used the pretense for the bailouts that they needed extra money to keep lending to Americans.  This has not happened.  In fact, banks are sitting on large chunks of that money:

Now why would banks sit on over $1 trillion in excess reserves?  Because they know what they have on their balance sheet.  And more trouble is down the road.  Why would they lend to a middle class America with less money when they can gamble on the stock market and make bigger profits in one quarter?  Debt access for middle class Americans has become restricted but debt access to Wall Street is alive and kicking.  And the amount of debt in the U.S. is stunning:

Corporate debt:                                                               $7.2 trillion

State and local governments:                                    $2.3 trillion

Federal government:                                                     $7.8 trillion

Even though it isn’t openly stated, we are trying to solve a problem of too much debt with more debt.  How is that working out for Europe?

The Euro has fallen 20% in five months even after they announced a $1 trillion bailout.  We all know that more debt is never the answer to a problem that started out with too much debt.

The Fallacy of Gold Backed Money

To download a printable version, click on The Fallacy of Gold Backed Money

Bill Still – The Still Report, Why Gold Money Won’t Work Part I (5:47):

Bill Still – The Still Report, Why Gold Money Won’t Work Part II (9:59):