Mark Twain once said, “If you don’t read the newspaper you are uninformed, if you do read the newspaper you are misinformed.” That couldn’t be truer in this crisis era. And for self-preservation, you’re probably better off doing the former rather than the latter.
If you read the daily newspapers, you likely think the Fed and the U.S. government are behind the curve on this recovery. That is, they’re making critical mistakes that will leave the U.S. economy behind.
Moreover, you likely believe they’re destroying the dollar in the process through their ignorance.
Here’s how I see it …
On one hand, policymakers have gotten what they’ve wished for: They’ve restored confidence.
On the other hand, they’ve done such a good job at restoring confidence that people actually think there’s a real recovery underway. As such, global pressures on governments and central banks keep rising for them to move away from the unprecedented emergency policies that were put in place to prevent an all out global economic disaster.
But there’s a disconnect between facts and perception when it comes to the state of the world economy. And that’s put policymakers in a place where they could make mistakes that could exacerbate the depth and duration of this ongoing crisis.
The structural underpinnings of economic activity are a disaster. The global financial system is still mired in bad debt … the systemic disease that triggered a global economic collapse. And without an unprecedented scale of coordinated, official intervention to stabilize global confidence, the world would be deep in technical depression right now.
Instead, it’s in a manufactured recovery — represented only by numbers on government spreadsheets. Meanwhile, most major economies in the real world feel and look like depression.
But because the depression is masked over by intervention, the global fallout is playing out in slow motion.
No Place Is That More
Evident Than in Europe …
While most of the world’s attention is constantly focused on Fed monetary policy, the U.S. debt situation and the dollar, Europe is where the next leg of the global economic crisis is playing out.
Looking back at historical financial crises, it’s clear we should expect sovereign debt defaults to follow — and for those defaults to be contagious.
Which is preciously what is happening in Europe!
But in desperation, European officials continue to adhere to the playbook of 2008: Delay, delay, delay.
In this case, it means delaying sovereign defaults and an unknown future for the euro and the European Monetary Union.
They keep the patient breathing in hopes of bridging the gap between economic downturn and sharp sustainable global recovery. For this strategy to have a chance of working, they would need a recovery so sharp that even bankrupt countries could quickly grow out of the problems that took decades, if not centuries, to develop.
But neither sharp nor sustainable recovery is coming. Even the optimistic official outlooks now agree.
Moreover, the patient count in Europe continues to grow. And the resources to keep them breathing are dwindling.
First it was Greece. Both European and Greek officials swore off all speculation that Greece was a problem. Finally, they admitted they were bankrupt.
Then it was Ireland. Again, Irish and European officials said “nothing to see here.” And then, they asked for aid.
Last week it was Portugal. As late as Wednesday afternoon, Portugal’s finance ministry spokesperson said it could meet ALL its financing needs. Later that evening, they made a formal request for aid.
Now, Spain is on the clock. And again, the adamant message from Europe and Spain is that the buck stops with Spain. There is no risk. The sovereign debt crisis is over, they say. Spain can handle its problems itself.
I think we’ve seen this movie before.
Dominoes Still Falling!
What about the Euro?
What hasn’t played out yet is a total collapse of the euro. After all, the euro is at the core of the sovereign debt problems in Europe. It’s the monetary union of the euro-zone countries that keeps these bankrupt countries from righting their own ships.
They can’t cure their insolvency by currency devaluation. And they aren’t free to restructure their debt.
Consequently a no-win situation continues to play out in Europe, but the can continues to roll down the road!
Why?
Because the euro is the reason these bailout schemes are being undertaken in Europe. It’s the second most widely held currency in the world. And global partners, like China, have more than enough interest in helping Europe buy time by persistently keeping the euro stable and reasonably strong. But when does that time run out?
When do China and a consortium of other global central banks (through the Bank for International Settlements) back away from buying the euro, and let nature take its course?
Based on recent history, there are two good reasons to think that time could be now.
Take a look at this chart below of the euro.
Reason #1:
Before last week, the last time the ECB hiked rates was in 2008, in the face of an unraveling financial crisis. That triggered a sharp 22 percent decline in the euro as you can see in the far left of the chart.
So it wasn’t a surprise when the ECB hiked rates last week, even in the face of a confluence of global economic threats, not the least of which resides in Europe.
Could that move get the euro ball rolling down hill again?
Reason #2:
When Greece formally asked for aid, it triggered a 13 percent decline in the euro — until China came in to turn the tide of the euro and stabilize sentiment in Europe. After Ireland’s formal request for aid, the euro quickly dropped by more than 6 percent. Again the bottom was marked by China buying euros.
Then last week, Portugal made a formal request for aid AND the ECB raised rates. Could these two events mark another sharp downturn for the euro? And this time, will the global community be there to support it?
Either way, the situation in Europe and with the euro looks very much like a game of musical chairs …
When the music stops, and the fallout in Europe confirms the next major wave of global economic crisis, expect the world’s focus to turn back to concerns about growth and away from concerns about inflation.
So the time to look for a chair is now — before the music stops.
Regards,
Bryan
{ 32 comments }
Dear Bryan,
you still do not get it right. Europe and the US are in dept problems, because there was too long easy money available in a cirsumstance of falling interest rates for nearly thirty years. Therefore the problem is not a rate hike by the ECB now. The problem is, that the ECB and the FED did not hike rates when it was necessary. Martin Weiss wrote a great comment on Monday. He is right, we have to pay a price for the mistakes of the central banks and the governments. Inflation or Deflation. I am clearly in the DEFLATION camp. Why? Because there is no easy way out of this crisis and money printig makes it much worse for the majority of the people but the big guys have to pay the highest price, no more bail outs with tax payers money!!!!
I am beginning to wonder how deep China’s pockets are going to be once the political winds of a developing society take hold. China has a lot of structural problems in its economy which will become more evident in the not too distant future. The populations of the developing world will not stand by for austerity when the rest of the world enjoys a significantly better standard of living and we can’t hide that standard of living with the advent of the internet. So look for the change in China’s domestic situatin to kick off the next major global economic monetary crisis.
In Europe and the United States the greatest threat to our economies is the diliterious politicians who will do anything, including selling their own children into economic slavery to save their positions of power. The mythe that governments can solve economic problems through regulatory intervention as opposed to the economies introduction of better more efficient methods of production has to be debunked. Let the people produce and civilization will move forward.
I find it quite amusing that Bryan’s anti-euro attitude is making him unable to see what is happening in the EU. Bryan insists that because euro nations like Greece can’t devalue their currency as means to improve their economy that the euro is no good for them. Nonsense! What guarantee is there that having one’s own currency would give them the power to devalue it and even if they did that it would change things? Currency values are at the mercy of international currency speculators, not government edicts, unless you are China.
Being in the euro has brought more good to countries like Greece than bad and everyone knows this even if they won’t admit it. In fact the present situation with Greece, Portugal and others has kept the euro from rising too much in value. A weak euro brought on by the PIGS troubles is the very thing that has benefited the euro and countries like Germany who depend on exports. Would Germany’s economy be so strong right now if all of the users of the euro had perfect economies? No, because the euro would be too strong and it would effect Germany’s exports.
The Chinese are not stabilizing the euro as much as they are keeping it from getting too weak. They are afraid if the euro would get too weak it would hurt their economy by making German goods more attractive than theirs. If the Chinese had not interfered the euro would probably be around 1.20 to the dollar or lower and Germany would be delighted because their exports and demand for their products would increase. But because of the Chinese this is not only happening, but the euro is getting stronger compared to the dollar, not weaker.
Bryan really needs to get his head out of the clouds and realize that the currency most likely to collapse and collapse soon will be the dollar. Because the US has basically exported all of its manufacturing it can’t benefit from a weaker dollar. Not using the metric system limits what goods it does produce that can be exported or are in demand outside the US. With countries like China switching their reserves over to euros it also means the US isn’t able to borrow what it needs to keep itself going. This means the FED has to print more and more money with no value thus risking hyperinflating the dollar economy and ruining the dollar forever.
I can understand Bryan’s hatred of the euro. If anything the dollar would not be in the predicament it is in if the euro did not exist. No single European currency had the power to challenge the dollar like the euro has. For this reason alone, the EU and the world will assure the euro remains stable and never collapses. Bryan hopes that if the euro would collapse then the dollar would become king again and the threat to Bryan’s living standard would cease. As long as the euro remains and remains relatively strong compared to the dollar Bryan is threatened with immense poverty.
Instead of trying unsuccessfully to debase the euro, Bryan should be concentrating on doing what is needed to improve the condition of the US to where it metricates its economy, repatriates its exported jobs and like Germany and China becomes a major exporting country earning (not borrowing) foreign currency needed to be stable and strong. Then and only then can Bryan sleep peacefully at night knowing he won’t end up in poverty.
To me it is a race between Europe and the USA vertually all the States of the US are bankrupt, so it is a matter of who rolls over first.
The USA does not want to go again as they started the first melt down in 2008 but it remains to be seen and how do we protect ourselves, or do we all go down together???
Another problem is how do we get rid of the 100’s of Trillions of dollars debt in derivatives.
Is it Deflation, the word the Fed does not like!!!
What HansV said X 10. China is now a net seller of US treasuries. When QE2 ends in June who will finance our INCREASING debt with such a low interest rate?????
this is how bad europe is 27 years go a tipical house cost in portugal 600 contos to 1000 contos in dollars that wus 6000 to 10,000 dollars a tipical worker made 20,000 per month 200 dolars in salary that time int to borrow 19% int in one year 1,900 dollars salary one year 2,400 dolars today one house
tipical 150,000 euros int 4% 6,000 per year salary 500 euros per month 6,000 per year it covers only morgadge int how peopel cood servive if int goes up euro will be under water and this big brines are ingnoring that peopel are buying wath they cant afford this is the same senario going for north america int goes up every one will go bankrupt soner or later or the money will be worthless
divaluated.this is the truth that no one wanths to face i wanth to live ritch ho will saport me china they dont saport there hone peopel never less westernes if we all dont smart up and live to our mines we are going to pay the big price for all this ingnorance have just spanding until there is no tomorow
There is no exit..only a willingness to face a plunge down the hillside. Buy commodities, agricultural indexes, gold, and silver…that will never go down, in the face of creditors fleeing currencies.
I hear a lot of the negative but will someone tell me what we can do short of following the suggestions of the money maket people. If they give advice that don’t net the succes they perdicted then the investment you made nets you a loss. The money market companies will make a profit. Weiss Research makes no warranties of any kind with regard to the contents of this site or to any comments posted by third parties.
What can we do as US citizens to create new opportunities for ourselves and the American people ?
America Is Only As Great As Its Citizens !
I don’t think any info on the EU is tradeable, except in the short term. The EU’s real problem is the lack of a true Federal Government. If the EU gets a real financial crisis, they will have to bite the bullet and do a complete political restructuring. The level of government that prints the money should also regulate the banks and insure deposits. My own expectations are that the EU will do a sudden rewrite of its Constitution in the middle of a financial panic several years from now. Whether this will move the Euro up or down from present levels is anyone’s guess.
Great post HansV.I agree with you that what is happening in China’s economy is likely to have great effects on the world economy,commodity prices,etc.Also,what you say about increasing productivity being the only way for a country to increase the overall standard of living of it’s citizens.Unfortunately,most Americans don’t believe this.Most Americans are thinking that the only way they can get ahead is by taking from the “evil” rich and corporations.They don’t realize that govt is the problem and even if they get their way,and taxes are increased on rich and corps, it will just cause a lower standard of living for the country,as inefficient govt wastes the taxes it takes in.
We have increased our productivity but corporations unlike in past recoveries are not sharing the increased profits with the workers thus the economy is not enabled as it would be when worker contribution to wealth is passed on.
JRJ, I have to disagree with you that the gov’t is the problem. The FACT is it is BOTH the Government and Global Business and Banking Elites that ARE the problem. It is NOT the global middle class that is the problem. Most middle class folks want to put in a balance fair day of work for a balanced fair wage. The FACT is that during the 1950’s the average CEO made 25-50 times the “average” worker, that went to 100 times in 1960’s then 200 times by 1970’s to where just around 2005 is was OVER 500 TIMES the average worker. JRJ, this IS where the problem is MAKE NO MISTAKE ABOUT IT! Add in the fact that they are totally and thoroughly intertwined via a plethora of councils, institutes and commissions (ie. Bildeberg, Trialateral Commission, CFR, RIIA, BIS, IMF,WORLD BANK and the writing is very clear. The Global Elites have thoroughly and efficiently fleeced the middle class and now you are seeing rebellion all over the world as this “Great Recession” continues…
Good article Bryan Rich. I have been following this site to the near exclusion of others except occassionaly reading others. All I ever hear is doom and gloom and yet it appears our economy is still improving. When will this other shoe drop as Weiss Money and Markets keeps predicting? Obviously, the Feds have been propping up our economy with their bag of tricks and yet the stock market continues to climb and no real threat of a global slow down is yet upon us. I am watching ever so closely all these predicitions of doom and gloom and waiting to see who is really right. I tend to agree with Money and Markets yet I have seen no impending doom or collaspe as of yet. Time will certainly tell us who is right or who is very wrong.
even a broken clock is right twice a day
I sure hope you’re right Mr. Rich. You’ve been saying for months that the Euro is doomed but I don’t see it happening and now the Chinese are investing in Spain. China is buying 40% of their renewable liquid gold (olive oil) and the Spanish have lots of windmills and giant solar energy farms. Why aren’t we doing that?
“…the Spanish have lots of windmills and giant solar energy farms. Why aren’t we doing that?”
Look at Spain’s predicament. They subsidized windmills; they are in trouble with their debt; they lost 2.2 jobs for everyone created by their subsidies.
http://www.bloomberg.com/news/2010-10-18/spanish-solar-projects-on-brink-of-bankruptcy-as-subsidy-policies-founder.html
http://wattsupwiththat.com/2010/05/24/climate-craziness-of-the-week-denmark-evicting-citizens-to-clear-cut-forests-for-wind-turbines/
Indeed all is well that ends well, where will Euro end it all? rate hikes or use of fiscal policies one thing is clear a common govt. over the Euro zone is what can save the area from the impending financial doom
Luke. Have you looked at food prices lately. I remember the 19% interest rates of the Carter years. The Fed just won’t stop printing money and we middle class and older folks and our offspring will pay the price sooner or later.
I have enjoyed Bryan’s insight. Unfortunately one can never tell how long the market manipulators can keep things going. Examples of such manipulation are plenty. Move from market to market creating bubbles and trying to dump the assets onto the public before the bottom falls out of that market. People with varying stamina get sucked in along the way until the final holdouts can’t take sitting on the sidelines any longer watching prices in a market rise and buy at the top (I’ve done this before). It seems the answer is to realize that most all markets are heavily manipulated these days. Find the one(s) that were more recently at lows, if the bought and paid for media claim shortages (like in crude oil in 2003 when there was no shortage, at all) you have a clue as to what is coming, even if it is misinformation as Mark Twain and Mr. Rich have described. When to get out, when to grab a chair before the music stops? There is more than one way to skin a cat but simple technical methods work. If you get out too soon, one can get back in using the same method. I’ve learned, more than once, the hard way, not to pay strict attention to media nor prognosticators. Sometimes their timing is good and other times less so. Such is the nature of telling the future. They serve to remind us to watch what we are doing …as we should. Thank you Bryan Rich for the warning of caution! One does Not want to be in the way of big intervention or epic event driven drop. Standing on the sidelines when things get uncertain can be wise. One can always get back in if conditions and changes warrant. Easier said than done however…
This Time if the euro does take a nosedive where do one want to be this time.
Short the euro/long the dollar or will we be better off with gold and silver??
Judging from market action it looks like a rush to the dollar is unlikely.
A further collapse in Sterling is far far more likely. Most of thecuts have been delayed by Cameron, off sheet libilities are huge, and the public sector pension in th euK is totally unsustainable. We dont make much. It is to be noted that middle to higher level German civil servants are paid half the over generous UK salaries
Not all Europe, or every member of the European Union, has the Euro for its currency. therefore “Europe” cannot plausibly be discussed in this way. Yet this is what people ignorantly and repeatedly do. Perhaps one shouldn’t confuse them with facts.
Bryan, good points. I would say, based on my fundamental, technical and cyclical analysis, I believe we will see another mini 2008 scenario occur. Meaning, we will have a deflation trade coming before an inflation trade. This means, just like in 2008, we will have a potential major equity correction, along with precious metals and commodities all correction, while cash, US dollar, Treasuries and shorting the market will be the up areas. Things are shaping up almost exactly like they were in 2008, except that instead of the US Credit Crisis being the trigger, this time I expect the Euro/Sovereign Debt crisis to be the trigger with capital flowing to “perceived safety” which would be the US dollar and US Treasuries. Now, after this event, I expect the Fed to implement QE3, which then could ignite an inflation trade, just like happened in March 09….but, this is a ways off….
As long as there is impending doom over-hanging the markets they will surely go up. The U.S. dollar is hardly a better choice than the Euro. That’s why central banks and China are buying gold.
Deflation or inflation all depends from which end one is looking. If the Fed is printing dollars without value then the overall value of the dollar will go down relatively to other currencies. From the US it looks inflation from the outside US goods cost fewer say Canadian or Australian dollars so it looks like deflation of the US goods. Within local only economy one could see deflation/inflation but in globalised it is all relative. The issue now is the flight of the investors from the US dollar. Once that starts then all is over and nobody knows what may happen. That what Weiss clearly stresses out. All countries are now loosing out paying for the US recovery. If the recovery is not happening then any reasonable person realises that it is tax to pay the US for their standard of living. Sooner or later it will give in: either recovery in the US or we get a new leader on the block. China? No, most likely a new weighed+gold international currency before the euro. Weiss pretty well figured it all out.
CHINS IS CHERRY PICKING THE COUNTRY “GARAGE SALES” AND BUYING INTO ALL FORMER STRENGTH MKT IN EUROPE , AND THE US….THEY ARE NOT STUPID, THEY KEEP BUYING FROM THE FIRE SALES AND LOANING TO THE POVERTY COUNTRIES , SUCH AS THOSE OF EUROPE WITH THE DOWNWARD ECONONIES …….NO WONDER THEY WILL BE THE LEADING ECONOMY POWER OF THE FUTURE……SAD BUT TRUE , ALL ARE WELL TRAINED RIGHT HERE IN THE USA AND EUROPE UNIVERSITIES……THEY ARE NOT KIDS ON THE BLOCK ANY LONGER …GO SEE FOR YOUR SELF…
Bryan Rich is right on the money – the ECB will kick the can down the road until doomsday, (if they can keep European populations hoodwinked). Politicians and bankers will ALWAYS opt to screw other persons – including their own future kin, if necessary. The alternative – holding a real job and getting their handss dirty like their serfs do every day – is too frightening to them.
I think Bryan is wrong on the Euro breaking up. The individual currencies of Europe has been gone for more than 10 years now. There is no way to go back to those currencies. I think what we are seeing are the growth pains of European fiscal integration following political integration. No doubt a lot of change are still to come The European Union and the Euro will be stronger after this crises.
The questions I think we should all be asking (in Europe and the US) are: What is the ideal situation and how far have we deviated from this. The US is a prime example. Many years ago the dollar was relatively weak against other currencies and everybody bought US goods. Money flowed to the US and the US exported to the world. Slowly the dollar rose against other currencies. So much so that other countries found that to have an export advantage it is in their interest to have a weak currency. So currency manipulation came to be. Like a huge vacuum cleaner the US with a strong dollar sucked up the production of the world. But jobs went the other away. The US economy switched from production and export to consumerism. People with jobs have income to buy stuff. People without jobs go on credit to buy stuff. Except credit has now come to an end. Suddenly the US finds itself at a disadvantage. Everybody else (except the Europeans) have manipulated weak currencies. To restore some balance the dollar need to reset lower. Except the rest does not want to play along. Some force need to be applied. The chinese has pegged their currency to the dollar. It is not a position they are going to give up without a fight . Same for most of the asian countries. The US desperately need to reset the balance between imports and exports. The Chinese won’t dump the dollar. They can’t afford the risk of a strong currency. Some mechanism will need to be worked out where artificial currency manipulation is taken out of the equation. That can only lead to a stable world currency or stable exchange mechanism where countries compete on efficiency of production and not artificial currency manipulation. So what is the ideal situation? It is a situation where goods, services and value flow equally between everybody where everybody get their cut according to efficiency of production and not some artificial advantage like a manipulated currency.
Economy is a creative complexity, based on each countries ability to compete internationally.
This global crises is a creation of rich people gambling there money globally.
History only shows that hard genuine working countries, and hard work come out of the people’s culture, these countries grow and remain strong economically.
For e.g. look at Germany and Japan these countries were virtually totally destroyed in the Second World War but yet have come back to becoming the world’s biggest economies. This does not happen from luck.
The USA has never experience destructive wars on its soil and yet it constantly finds itself in economic troubles. T think the USA has to many rich gamblers instead of hard working genuine people it should take lessons from countries like China, Germany and Japan.
Reports of my Demise are Greatly Exaggerated—The US Dollar…
Great Article I’m one of the five people in the Americas that believe the Dollar will gain strength soon….
Another new article by Bryan means new high for EUR/USD. We could take history as guide to our investment but history by no mean must happen again. Europe and USA are equally bad in their economy but bear in mind, US don’t produce anything as they already exported all their manufacturing industries to Asia. The China got loads of toilet paper aka US bills which need to be diversified either to EURO or precious matter. There is no hope for the US dollar at least in the near future unless US have a concrete plan on how to reduce their massive debt which nobody want to buy. US dollar is no longer the safe haven. Another debt limit raise or QE3 will mean another historical low against EURO.
Hey Mr. Bryan, why don’t you open your eyes and look at the facts. You have been saying the dollar would go up since the biginning of the year and the fact is that it has been loosing grounds against almost anything. Yes, it might go up say in 3-6 months or so but that is not the case for today’s market. Anything that is going down right now (i.e the Dollar) might eventually stop and starts to go up . BUT for now, the dollar is going down and you can see it clearly IF YOU OPEN YOUR EYES. I personally don’t think you are elligible to write articles anymore. Go do something and you might be more successful. you have to learn to go by facts and not by what you THINK might happen in several years or so. And stop wanting to be Mr. RIGHT because you are clearly Mr. WONG…
By the way, I am pretty sure you are not managing any assets and if you are, I am sure you have lost everything you had by now.