Tag Archives: europe

Eurozone collapse ‘starts this year’ says CEBR

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Europe’s single currency is almost certain to disintegrate within the next decade, the CEBR has predicted, with Greece and Italy potentially abandoning the euro this year…or so this article says (The Telegraph).

I sincerely hope this does not happen, but we as currency traders must be prepared for this event. Are you ready for a massive euro shorting storm?

Out of curiosity, who is long on the Euro at this point?

Alan

Beware the Coming Bailouts of Europe

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The economic establishment in this country has come to the conclusion that it is not a matter of “if” the United States must intervene in the bailout of the euro, but simply a question of “when” and “how”. Newspaper articles and editorials are full of assertions that the breakup of the euro would result in a worldwide depression, and that economic assistance to Europe is the only way to stave off this calamity. These assertions are yet again more scare-mongering, just as we witnessed during the depths of the 2008 financial crisis. After just a decade of the euro, people have forgotten that Europe functioned for centuries without a common currency.

The real cause of economic depression is loose monetary policy: the creation of money and credit out of thin air and the monetization of government debt by a central bank. This inflationary monetary policy is the cause of every boom and bust, yet it is precisely what political and economic elites both in Europe and the United States are prescribing as a resolution for the present crisis. The drastic next step being discussed is a multi-trillion dollar bailout of Europe by the European Central Bank, aided by the IMF and the Federal Reserve.

The euro was built on an unstable foundation. Its creators attempted to establish a dollar-like currency for Europe, while forgetting that it took nearly two centuries for the dollar to devolve from a defined unit of silver to a completely unbacked fiat currency note. The euro had no such history and from the outset was a purely fiat system, thus it is not surprising to followers of Austrian economics that it barely survived a decade and is now completely collapsing. Europe’s economic depression is the result of the euro’s very structure, a fiat money system that allowed member governments to spend themselves into oblivion and expect that someone else would pick up the tab.

A bailout of European banks by the European Central Bank and the Federal Reserve will exacerbate the crisis rather than alleviate it. What is needed is for bad debts to be liquidated. Banks that invested in sovereign debt need to take their losses rather than socializing those losses and prolonging the process of adjusting their balance sheets to reflect reality. If this was done, the correction would be painful, but quick, like tearing off a large band-aid, but this is necessary to get back on solid economic footing.  Until the correction takes place there can be no recovery. Bailing out profligate European governments will only ensure that no correction will take place.

A multi-trillion dollar European aid package cannot be undertaken by Europe alone, and will require IMF and Federal Reserve involvement. The Federal Reserve already has pumped trillions of dollars into the US economy with nothing to show for it. Just considering Fed involvement in Europe is ludicrous. The US economy is in horrible shape precisely because of too much government debt and too much money creation and the European economy is destined to flounder for the same reasons. We have an unsustainable amount of debt here at home; it is hardly fair to US taxpayers to take on Europe’s debt as well. That will only ensure an accelerated erosion of the dollar and a lower standard of living for all Americans.

Ron Paul – US Congressman

Euro Crisis Destabilizing the Dollar

In response to pressure from Wall Street, the White House and central banks in Europe, the Federal Reserve last week drastically cut interest rates for currency swaps to benefit troubled European banks. This will flood world markets with more dollars and will soon mean rising prices for every American at the grocery store. This extra liquidity will temporarily ease the cash crunch for irresponsible bankers, but in the long run it will make the situation much worse for consumers all over the world. Equities markets registered big gains at the news, but only for a day. Make no mistake – this is not capitalism, and this is not how a free market operates. In a free market, bankruptcies happen, even to large banks. We must remember, free markets are the true and best regulators of financial mismanagement.

By contrast, under our current form of special interest corporatism certain businesses are granted too-big-to-fail status and are never allowed to go bankrupt. They keep profits generated during the good times generated by the Fed’s monetary inflation, yet their losses are socialized through inflationary bailouts. This means you and your family eventually pay for the Fed’s decisions because every dollar you earn is worth less. Few people make the connection that they have enriched bankers in Europe through doubling and tripling prices on milk, eggs, gasoline, and clothing, but that is exactly what is happening. The increased pace and size of these types of desperate financial maneuvers means price inflation will hit sooner and far too fast for wages to keep up. This is how the middle class gets wiped out, as has happened so many times in the past when fiat money fails.

The Fed’s latest actions in cooperating with foreign central banks to undertake liquidity swaps of dollars for foreign currencies is just one more reason why Congress needs enhanced power to oversee and audit the Fed. Under current law Congress cannot examine these types of arrangements. Those who would argue that auditing the Fed or these agreements with central banks harms the Fed’s independence should reevaluate the Fed’s supposed independence when the Fed bails out Europe so soon after President Obama promised US assistance in resolving the Euro crisis.

Rather than calming markets, these arrangements should indicate just how frightened governments around the world are about the European financial crisis. Central banks are grasping at straws, hoping that flooding the world with money created out of thin air will somehow resolve a crisis caused by uncontrolled government spending and irresponsible debt issuance. But those governments and central banks never grasp that it is their own monetary policies that allowed European banks to become so wantonly overleveraged in the first place. If those banks need liquidity, they should generate it the old fashioned way: by attracting depositors. If they cannot do so, they should be allowed to fail. Congress should not permit this type of open-ended commitment on the part of the Fed, a commitment which could easily cost American taxpayers trillions of dollars. These dollar swaps are purely inflationary and will harm Americans as much as any form of quantitative easing.

Americans deserve sound money that cannot be manipulated and created out of thin air by central planners who deceitfully promise prosperity. Fiat money caused this European crisis and the financial crisis before it. More fiat money is not the cure. The global fiat currency system has proven itself a failure. We need real monetary reform. We need sound money.

Ron Paul

European Debt Crisis Threatens the Dollar

The global economic situation is becoming more dire every day.  Approximately half of all US banks have significant exposure to the debt crisis in Europe.  Much more dangerous for the US taxpayer is the dollar’s status as reserve currency for the world, and the US Federal Reserve’s status as the lender of last resort.  As we’ve learned in recent disclosures, this has not only benefitted companies like AIG, the auto industry and various US banks, but multiple foreign central banks as they have run into trouble.  Nothing has been solved, however, by offering up the productivity of Americans as a sacrificial lamb.  Greece is set to be the first domino to fall in the string of European economies at risk.  Rather than learning from Greece’s terrible example of an over-consuming public sector and drowning private sector, what is more likely from our politicians is an eventual bailout of European investors.

The US has a relatively small exposure to overwhelmed Greek banks, but much larger economies in Europe are set to follow and that will have serious implications for US banks.  Greece is technically small enough to bail out.  Italy is not.  Germany is not.  France is not.  It is estimated that US banks have over a trillion dollars tied up in at-risk German and French banks.  Because the urge to paper over the debt with more credit is so strong, the collapse of the Euro is imminent.  Will the Fed be held responsible if the Euro brings the US dollar down with it?

The most disingenuous aspect of the narrative about the European sovereign debt crisis is that entire economies will collapse if more resources are not bilked from productive people around the world.  This is untrue.  Tough times are coming for the banks, to be sure, but free people always find a way back to prosperity if the politicians leave them alone.  Communities within Greece are coming together and forming barter systems because they know the Euro is becoming unstable.  Greeks are learning how to engage in commerce with each other, without the use of fiat currency controlled by central banks.  In other words, they are rediscovering what money really is, and they are trading with each other in ways that cannot be controlled, manipulated, squandered, inflated away and generally ruined by corrupt bankers and the politicians that enable them.  Farmers will still grow food, mechanics will still fix cars, people will still make things and exchange them with each other.  No banker, no politician can stop that by destroying one medium of exchange.  People will find or create another medium of exchange.

Unfortunately when politicians try to monopolize currency with legal tender laws, the people find it harder and harder to survive the inflation and taxation to which they are subjected.  Bankers should take their dreaded haircut rather than making innocent people pay for their mistakes.   The losses should be limited and liquidated, rather than perpetuated and rewarded.  This is the only way we can recover.

Government debt is often considered rock solid because it is backed by a government’s ability to forcibly extract interest payments out of the public.  The public is increasingly unwilling to be bilked to make bankers whole.  The riots and the violence in Greece should tell us something about the sustainability of this system.

If we continue to bail out banks and bankers so they can continue to lose money, if we cavalierly put this burden on the taxpayer, it is all too predictable what will happen here.

Ron Paul

Short this Currency Now

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Back then, it took several billion to buy a loaf of bread. Another couple billion to purchase eggs, fabrics, sugar – basically anything you needed.

The price of everything was doubling almost every single day. Workers were paid three times a day to keep up with rising prices.

Inflation was rising by 29,500%…each month.

This was the reality in Germany, 1923. This traumatic event has gone down in history as one of the worst cases of hyperinflation ever. It also made the Germans almost paranoid about fighting inflation ever since.

No wonder the recent spike in commodity prices is already making Germans a little nervous.

And that has important consequences for the currency market. Monetary authorities in Europe are getting ready to fight inflation. For those of us who are ready, it will mean some killer opportunities in certain currencies.

An Economy Running on All Cylinders

The present-day Germany is booming. That’s the good news. The bad news is inflation is also on the rise.

Inflation measured by the Consumer Price Index is already higher than the European central bankers would like. It’s already above the European Central Bank (ECB) target. And official data actually underestimates the problem.

Unicredit Bank, one of the major banks in Europe, adjusted the official inflation by giving more weights to goods people buy most often, such as fuel, food and clothing.

This methodology makes perfect sense. It’s more likely to reflect the true level of inflation. The bad news is they concluded prices in Germany are rising almost twice as fast as the official rate.

Last month, the employment situation improved three times faster than the market expected. The unemployment rate is now reaching a two decade low.

German unions are already pushing for bigger wage increases. The country’s IG Metall union, for example, has asked for a 6% increase for workers at companies such as Volkswagen.

This demand for higher wages really scares the ECB. And the rising commodity prices don’t make things any easier for the central bank.

History is Likely to Repeat Itself

We’ve seen this before. So we can visualize how things will play out.

In 2008, there was a major rally in commodities, with oil spiking all the way to $140. At that time, the euro also surged on expectation of higher interest rates.

Higher oil prices increased the fear of inflation, forcing the ECB to hike rates in July. As you can see in the chart, it didn’t take too long for the euro to tumble.

Last Time ECB Hiked Rates, the Euro Took a Big Dive

Shortly after raising rates, the financial crisis escalated, forcing the ECB to cut rates to a record low. History may be about to repeat itself.

If commodities keep rising, the threat of inflation will escalate in Germany. The ECB may just make the same mistake it did in 2008, hiking rates at the wrong time.

While in 2008 the global financial crisis was behind the euro decline, this time I suspect internal imbalances will do the job.

Who Cares About the PIGS?

With prices of commodities skyrocketing, the inflationary pressures will only get worse.

That’s why the European Central Bank has already signaled it will raise interest rates if inflation fears escalate. And that’s what has been driving the euro higher recently.

Higher interest rates would be very appropriate for a booming Germany economy. But it’s certainly not appropriate for nations that are slumped in recession, such as Greece.

While employment in Germany keeps improving, the unemployment rate in countries like Greece and Spain has more than doubled in recent years.

But for the European Central Bank, it doesn’t really matter. They will always do whatever is best for Germany.

Higher rates will make the life of the PIGS (Portugal, Ireland, Greece, and Spain) a whole lot more complicated.

With austerity measures still biting, higher interest rates is the last thing those countries need. It may just send them into a very nasty deflationary environment.

Saving Germany Will Hurt the PIGS, and the Euro

That’s the problem when you have to use the same monetary policy to countries in very different situations.

It’s like giving the same insulin shot to two different patients, one diabetic and one healthy. The injection will do wonders for the diabetic, but it may just kill the otherwise healthy person.

So the European Central Bank has to decide between fighting inflation in Germany and saving the troubled nations. With rising commodity prices, a booming German economy, and the ECB’s natural inflation phobia, the Central Bank will most likely pick the first option.

That just confirms my view that the euro is going to fall from here. Be on the lookout for shorting opportunities.

Bottom line: Although higher rates will push the euro higher in the short-term, in the long-term, it will come back to bite the troubled nations. Stay short the euro!

Best Regards,


Evaldo Albuquerque
Editor, Exotic FX Alert
http://evaldo.worldcurrencywatch.com/

Why March 25th Will Seal the Euro’s Fate

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By Evaldo Albuquerque, editor, Exotic FX Alert

Imagine getting a letter from your bank saying your mortgage bills will double starting next month.

If you were paying $1,200 a month, you’re now responsible for a $2,400 payment. And there’s nothing you can do about it.

It’s not far-fetched. It already happened to thousands of Americans, just a few years ago.

During the real estate boom, adjustable-rate loan companies suckered in Americans with their very low teaser rates.

House prices back then were so high that many people could only afford to buy a home with this kind of loan. The initial low rates made the monthly payments very affordable.

But things got very ugly once those loans reset to higher rates. Mortgages bills skyrocketed, and forced many Americans to give up their homes through foreclosure.

Now, something very similar is happening in Europe. But it’s not happening in the housing sector.

This time, governments are the ones facing skyrocketing interest payments. And there’s one more EU country that’s doomed to face a “rate reset.”

When it does, it will send the euro spiraling even lower. Let me explain…

Why 7 Is the Point of No Return for the EU

Recent events have proven that the European troubled nations (affectionately known as the “PIIGS”) can’t handle interest rates above 7%.

What that means is, these nations can’t afford to pay bond rates above 7%. When the yields on 10-year sovereign bonds cross that level, it’s nearly certain that a country will ask for a bailout.

In other words, when bond rates hit 7%, these countries cry “uncle!”

That number has already exposed the true extent of Greece’s and Ireland’s problems. Once Greece’s debt holders started demanding an interest rate above 7%, it took Greece 16 days to ask for a bailout. Ireland requested a bailout 20 days after Irish debt hit the magic 7% level.

Those countries just couldn’t afford such high borrowing costs. It’s just like what happened during the U.S. real estate crisis – only on a grander scale. Eventually, the mortgages rise to a rate that Americans simply can’t afford to pay – and they foreclose.

Well in sovereign debt, nations ask for a bailout once their debt hits 7% rather than “foreclose.”

And now, the dreaded 7% interest rate is about to make another victim: Portugal.

It has just breached that important threshold. Check out the chart below. It shows the yield on 10 years bonds from troubled European nations.

Portugal Can’t Afford Such High Borrowing Costs

Portugal: The Next Shoe to Drop

Portugal’s borrowing cost is approaching dangerous levels. Some European Union member states are increasingly concerned about Portugal’s ability to fund itself in financial markets. With interest rates on the rise, Portugal is not going to be able to hold on beyond the end of March.

Meanwhile, investors are demanding a higher interest payment on Portugal’s bonds because of uncertainty regarding the rescue fund.

European authorities promised to announce a comprehensive plan to solve the debt crisis by March. But there are a lot of disagreements between Germany and troubled nations, such as Greece and Italy.

Germany is proposing tougher austerity measures in exchange for beefing up the rescue fund. But Greece and Italy have already rejected Germany’s proposal.

So there’s a good chance European authorities won’t keep their promise of delivering a final solution by the end of next month. When that happens, Portugal will be in trouble.

Mark This Date on Your Calendar

Athanasios Orphanides, one of the European Central Bank members, has recently warned that without a comprehensive plan, European nations might slip back into crisis.

In his opinion, the longer political leaders “delay in agreeing on a framework that will ensure stability, the greater the threat of another crisis similar to what happened in 2010.”

All the European Union nations will be meeting at a summit at the end of next month. March 25 is the informal deadline for the leaders to announce a comprehensive package of measures to address the sovereign debt crisis in Europe. If they fail to announce anything significant, the market will get very upset.

Orphanides’ fears will become reality, and the euro will take a dive. So make sure you mark this date on your calendar.

In the meantime, I’m shorting the euro with everything I’ve got. I recommend you do the same.

Best Regards,


Evaldo Albuquerque
Editor, Exotic FX Alert
http://evaldo.worldcurrencywatch.com/