09:00 – It’s official. I’m crazy, or so says the IMF. Those of us who think a eurozone breakup is likely are engaging in crazy talk according to the IMF. The eurozone situation is fixable, they say, if only the EU will take certain actions. The article didn’t go into details, but as it happens I have a mole within the IMF. He or she tells me that the IMF’s proposal to fix the euro situation includes the following:
Tell them to make us a cambric shirt,
Without any seams or needlework.
Tell them to wash it in yonder dry well
Where water ne’er sprang, nor drop of rain fell.
Tell them to find us an acre of land,
Between the salt water and the sea strand.
Tell them to reap it with a sickle of leather
And tie up the sheaves with a rope made of heather
If they tell us they can’t, we’ll reply,
Let us know that at least you will try.
EU, when thou hast finished thy task,
Parsley, sage, rosemary and thyme,
Come to us, our loans for to ask,
For then thou art a true love of mine.
The bank runs are spreading. Greek, Portuguese, Spanish, and Italian banks have been under siege for some time. No one–people, companies, or other banks–wants to have money on deposit with a bank that is likely to go bust. And now French banks are coming under siege. It was announced yesterday that Siemens had withdrawn $6 billion–that’s billion with a “b”–from the French banking system and put it on deposit with the ECB, a strong indication that Siemens expects the French banking system to fail. And Siemens is by no means alone. Capital flight has become critical, with Europe being sucked dry by depositors fleeing to the US dollar, UK pound, Japanese yen, and other currencies that are perceived as safe havens.
Modern economies are credit-based. To state the obvious, no one can borrow if no one is willing to lend. In Europe, increasingly, that’s the case. So, on top of a debt crisis, we now have a liquidity crisis. Germany is moving to recapitalize its own banks, allocating available funds to that rather than to more subsidies for Greece and other debtor nations. Although doing that is sensible for many reasons, it’s also the first step Germany would take if it intends to withdraw from the euro and introduce a new DM or thaler. That could happen today, or it could happen six months from now. But one way or another, I think it will happen. Parsley, sage, rosemary, and thyme.
Saw a link to a study that looked at economic data reporting in the EU. Turns out data from Greece doesn’t pass one test used by auditors in looking for financial fraud. The data don’t follow Benford’s Law.
From Wikipedia:
Benford’s law, also called the first-digit law, states that in lists of numbers from many (but not all) real-life sources of data, the leading digit is distributed in a specific, non-uniform way. According to this law, the first digit is 1 about 30% of the time, and larger digits occur as the leading digit with lower and lower frequency, to the point where 9 as a first digit occurs less than 5% of the time. This distribution of first digits is the same as the widths of gridlines on the logarithmic scale.
I’m not surprised. In fact, I would have expected it. I actually had this discussion with Barbara a couple months ago when we were watching an episode of Numb3rs. She was surprised when I told her that Benford’s Law was a real phenomenon, not something the series writers had made up.
I don’t really blame Greece for what it’s done. Having joined the euro, which they should neither have done nor been allowed to do, their fate was sealed. There was no way that Greece’s economy could survive, let alone flourish, in a game where all the rules were and are stacked to favor Germany’s interests. I am surprised that Germany apparently didn’t think it through and realize that ongoing bailouts and subsidies on a huge scale were inevitable, especially since numerous economists said exactly that when the euro was created. And the other debtor EU nations are in the same boat as Greece. That’s why I’m so confident in saying that there is no solution, because there *is* no solution, short of the eurozone fragmenting.
“Siemens had withdrawn $6 billion–that’s billion with a “b”–from the French banking system and put it on deposit with the ECB, a strong indication that Siemens expects the French banking system to fail.”
It’s about time the French Froggies realised the superiority of the game of the ruling empire, and I’m sure the England and Wales Cricket Board can make good use of the money.
I’m crazy too. 🙂
Count me as among the truly insane and I feel I am in honorable company. The Euros are in deep shit, to be followed in short order by the rest of the world, to varying degrees of horror.
Life here in North America is gonna suck but not as bad as the rest of the world.
Yeah, the EU and ECB knew from almost the beginning of Greece’s recent problems, that it had lied big-time about its finances, pretty much all along the way. At one point, Germany thought that was its ace to get Greece thrown out of the Euro, but that did not work out.
Any country who withdraws to their own–or a new–currency will have more problems than with staying. Changing currencies will insure that money (wealth/deposits) will leave that country for elsewhere. The Euro is still accepted in trade as one of the major currencies of the world. As long as trade is possible with that currency, there is no advantage to leaving it. IMO, only Germany could survive a withdrawal, anyway. New currencies will take decades to be accepted at the level of the Euro–except, perhaps, the old Deutschmark.
EU member states fighting amongst themselves only shortens their own life. Merkel should be putting pressure on Siemens to stop that withdrawal nonsense. It will only end up costing Germany more in the long run, because they will have to make it up to their bosom buddies, the French, at one point or another. They are only hastening the possible demise of everyone.
But again, the world is not rejecting the Euro. Only the Europeans are fighting over it.
Chuck said “Changing currencies will insure that money (wealth/deposits) will leave that country for elsewhere.”
Where will it go? I don’t believe that most of it is “real” money anyway so does it just disappear?
Will the last viable currency end up with all the wealth in the world? That can’t really work, can it? We have to have a way to buy/trade with others.
Apparently I still don’t really understand how money works in a world economy.
RBT wrote
“It’s official. I’m crazy, or so says the IMF.”
We don’t need the IMF to tell us that, we’ve known for years. 🙂
It’s rather obvious to me the inmates are running the
asylumIMF. Bob may be a little cynical at times, but he’s certainly not crazy. There is often quoted statement about the US Constitution not being a suicide pact. The question today is whether the European monetary union is a suicide pact or not.I’d say the EMU is more a tontine.
Chuck said “Changing currencies will insure that money (wealth/deposits) will leave that country for elsewhere.”
Wayne wrote “Where will it go? I don’t believe that most of it is “real” money anyway so does it just disappear?”
Money is not real. It is a temporary creation of a government to represent value. Instead of directly trading your baked bread for your vintner neighbor’s wine, you accept money from him. You decide you do not want his wine at the same time you sell him your bread. So you trust that the value of government issued money to represent whatever your agreed trade terms were, so you can buy wine only when you need it, instead of having to accept wine every time the vintner needs bread. When you finally do buy wine from the vintner equal to the money you got from him, then the need for that money for the transaction between you is gone. That is why–in order to avoid inflation or deflation–there needs to be only enough money circulating in the economy to represent the exact amount of good and services for sale in that economy.
In order to ensure that people will accept their money, governments throughout history have backed that money with gold, or some other valuable commodity, so people feel confident that the money will hold its value over time, and 6 loaves of your bread will still buy 1 bottle of the vintner’s wine, when you need it 2 months later.
But US dollars have not held their value at all since Tricky Dick Nixon stopped redeeming dollars for gold. In 1966, my first new car cost $2,400. But what if I wanted to save that purchase until now. A new car equivalent to mine in 1966, now costs $24,000. If I had bought gold with that $2,400, I could today sell it for about $24,000 and still purchase a car. Otherwise, my money today is worth only 1/10th of what it was in 1966. That is why gold-back currencies are good for the money-holder.
But in the case mentioned way above, we are talking about money ‘disappearing’ because nobody will put money into the banks of the new currency. Greece starts a new currency, and the first thing it needs is deposits in the bank. But since their whole economy is bankrupt, they cannot pay interest. Even those inside the country will try to get their money in foreign banks who will pay more interest than Greece’s zero. Thus the money disappears–or ‘flees’ might be a better word–to where it will earn more money.
Chuck, would you say that the Gold Standard is a good thing because (or only because) it forces financial discipline on governments and populations?
If so, what about the many examples of financial indiscipline before the US went off gold?