November 25, 2007
Elaine Meinel Supkis
Questions about the survival of the euro rise. From its inception, people have doubted the euro could last long as it is run by a very lose confederation of nations that has grown rapidly in size as Europe's main imperial powers seek to draw in all of Eastern Europe and even more distant places. But since this banking system isn't run by any one dominant person, is has no focus and is an easy victim for outside currency manipulations by countries whose central banks are ruled very closely by the powers that rule these countries, namely, Russia, Japan and China. And the kings in the oil kingdoms who have total control over their banking affairs. Time to see how the present international banking collapse is faring in Europe.
Eurozone split as bond spreads hit 6-year high
Investors in Europe have suddenly become wary of Italian, Greek, Spanish, and Belgian sovereign bonds, driving spreads over German government bonds to the highest level in six years.
*snip*
The scramble to dump riskier bonds hit all the southern European countries, as well as Ireland and Slovenia.While the markets have not begun to discount a possible break-up of the eurozone, they are clearly pricing in an ominous rift between the Latin and Germanic halves of the monetary system.
It is one thing to have a 'Common Wealth' or an umbrella for trade. The European attempt at running things like the early Confederation of States here in the US is running into expected difficulties. The US has always vacillated between a powerful Federalist system and 'state's rights' Confederations. The movement from one extreme to the other is part of our often quite bloody history. The bloodiest chapter being the Civil War or the War Between the States depending on which side of the Mason-Dixon line one lives. Even the disagreement about what name to give that war is revealing.
All nations can fly apart based on any number of excuses. Religious conflicts, for example. The US tried to prevent this by separating Church and State unlike so many nations that try to have mono-religious dictatorships. Many of our present allies are of this sort including Israel. Some states break up over language issues. For example, Canada limps along, constantly threatened by the tensions between French speakers and English speakers or Belgium which has unable to put into office any government in the last 170 days due to language differences. Some nations, like India, have a constellation of difficulties. Many languages, several religions and a host of ethnic and class differences that erupt into tremendous violence at the drop of a hat.
Europe is famous for this. Far from being peaceful, Europe has an extremely violent history, one where millions of people die violent or cruel deaths and whole cities destroyed. This isn't ancient history. My father went over there during the last huge bloody blowout called World War II. He is still very much alive. And so are still a host of survivors of that awful war.
When Europe formed the European Union, it was supposed to be a loose trade organization. But of course, it is rapidly morphing into what I expected it to change into: the Fourth Reich. What Napoleon and Hitler failed to do, the Germans and French managed to do via this nifty trade consortium. First, they removed trade barriers and made various regulations of trade items match each other. So everyone was using the same rules and standards.
Then Germany reunited. This sudden occurrence was a big problem for France. There were two choices: France could make an alliance with the US and England and become part of the US/UK empire or they could embrace Germany. The creation of the euro was an attempt at turning Europe into a defacto empire. In this way, since they are all under the same imperial laws, Germany could not dominate Europe via its own power.
So the euro is a tool for creating greater political power for France but of course, Germany dominates the actual economic condition of Europe due to its size and industrial base. Due to past history, the Germans want a strong currency. This desire has now been exploited by Asians and Americans who have relentlessly driven up the value of the euro this last 2 years. This is being done for hostile reasons. The Germans and Japanese knew long ago, weak currencies=export advantage. But the Germans don't like a destabilized currency while the Japanese don't give a hoot about this. So Japan has played the weak currency game quite ruthlessly since the mid-1990's using new tools for this. Holding other currencies in FOREX reserves, for example, is one tool they have used. The other is to have a depression at home while everyone else on earth has a hot inflation effect on their own home bases.
For the last year, the weaker economic nations of Europe desperately wanted to debase the currency so they could ship things to the USA and Asia. But the Germans and up until this year, French wouldn't allow this. I bet the secret meetings of the European Bank are now conducted at a very loud volume as everyone shouts at each other. The European Confederation, trying to pass a Constitution in vain, is now floundering on the rocks of economic reality just as the US did at the dawn of the Industrial Revolution.
Airbus hit by demise of dollar
Airbus may slash research spending to reduce costs as the United States dollar's decline becomes "life threatening" for the world's largest plane maker, according to Chief Executive Officer Tom Enders.The dollar-euro rate has "passed the pain barrier," Enders said in a speech to Airbus works-council representatives in Hamburg, Germany, on Thursday.
Unions said yesterday that the CEO's comments were "absolute nonsense," Bloomberg News reported.
Airbus prices planes in dollars, reducing the value of sales when converted into the European currency. The company also incurs the bulk of expenses in euros, leaving little room to combat the impact of fluctuating rates.
As France's ruler tries to crush the unions there, the German unions are united in feeling that the status quo must continue no matter how bad things go elsewhere. I see this all over the place. We see everyone struggling to keep this system running even as one whole, huge sector, the US, falls off the cliff. The Airbus workers don't understand that they are going to be outsourced or eliminated just like the US workers. And if the jobs stay, they will pay less and less. The brutal capitalist race to the bottom has not ended, it is accelerating.
The euro has reached $1.4850 as Mid-East and Asia central banks and funds switch out of the dollar. The latest balance of payments data shows record portfolio inflows of €46.2bn (£33.3bn) in September.Professor Peter Bofinger, one of Germany's five 'wise men' advisers, says the euro may soon reach €1.60 unless the EU authorities takes action to stop it, causing major distress for the aerospace and car industries.
ING said the euro's appreciation has gone far beyond the "painful threshold" of most European firms, with big variations by country. The threshold is $1.20 for French companies, between $1.30 and $1.40 for the Italians and Spanish, and $1.50 for the Germans, Dutch, and Finns.
The money that used to flow into the US is now flowing into Europe. As I expected last June, the Asian giants can't keep the dollar up anymore. China no longer wants to and Japan can't do it alone if the Chinese are buying yen and forcing that currency to rise in value. The Europeans are only just beginning to figure out the Asian games and are noticing the yen has, even as it strengthens against the dollar, is still dropping against the euro. This is making the G7 meeting increasingly loud and contentious. Time is running out for Europe to understand, they are in a trap. Not only will all investment money flow towards them, all this will mean is, Asia and the oil pumping nations and Russia will be buying Europe up just as they bought us up during the heady days of 1998-2004 when the euro was weak and Europe pretended to be in a bad way.
Due to popular support of social services, the European union which is a confederation, didn't ruthlessly suppress the working class and thus, create a depression like Japan. They lived it up. They also increased the euro's money supply by over 11% a year all this time. Normally, this weakens a currency but in the new way of doing things, Russia, Asia and the oil pumping nations simply hoarded euros just like they hoarded dollars. And like the US, Europe went deeper and deeper into debt the cheaper the loan's interest rates were and this is how a very toxic stew can be brewed!
Marc Ostwald, an economist at Insinger de Beaufort, said the flight to German bonds was linked to the global credit crisis. "There's a lack of liquidity so people are switching to Bunds, which are heavily traded," he said.
If the Bank of Europe continues to create money at 11% a year while the GNP grows at only 2-4% a year, this will cause a crisis and we are seeing exactly that. For the last several days, I have published charts showing the grotesque growth in money creation in three arenas: the US and EU running neck to neck with little old Japan right on their heels, far greater than China. Yet the economic tables have turned and China has moved up to #3 in the economic rankings yet Europe thinks they are still #1. Indeed, if one imagines they are Ein Reich with Ein Führer then yes, they are huge.
But they are not this at all. This is why they can't change other nation's monetary policies and are reduced to tongue lashings and begging spells. In the real world, we are in competition. If Europe insists on having a single currency with no one in control, then they will be punished in trade and commerce. The US Federal Reserve is also a fractured entity due to the whole state's rights/confederacy issue. So it is not an arm of the Federal Government nor is it all in one place. It is a consortium. And a pretty poor one, too. Note how, despite seeing our top trade rivals, China and Japan, are holding gigantic reserves of other nation's currencies and we are not.
But then, by not holding, we are still seeing our currency get weaker but only relative to currencies run by people who are just as clueless. Both China and Japan control their relative value vis a vis the dollar and the dollar is falling the LEAST against these two biggest holders of FOREX reserves in the world.
One thing is sure, President Nicolas Sarkozy will not let Airbus go bankrupt, nor see decimation of the French industrial core, without an almighty fight against those countries deemed to be engaging in a beggar-thy-neighbour strategy of currency devaluation - benign neglect in Washington, less benign in Beijing.He will have allies soon enough, once the housing bubbles collapse in Spain and across the Med. Mr Zapatero will not be in power for long in Madrid. Mr Prodi is on borrowed time in Rome. A new political order will soon take hold in much of Europe, bringing in a new wave of prickly national populists.
So, how will they fight? Will Mr Sarkozy and his allies resort to 1970s-style exchange controls to stem the rise of the euro?
The reader's comments at the Telegraph are interesting. More than one has suggested Airbus fix its problem by outsourcing everything to China. I hope that was tongue in cheek! But it isn't. China is courting Europe, hoping desperately, they will outsource the highest technological industries to China. Both China and Japan are busy forcing the US avionics industries to relocate at least part of their production in their home states This push is actually bearing fruit and slowly but surely, the US has complied with this strong arm tactics.
I will also note that the typical article discussing currency devaluations seldom mentions the yen. This huge blind spot is most curious to me. I have been scolded for focusing like a laser on the yen in the past. But as time passes, I feel more and more certain, my view of the yen as an important issue is correct.
Like in the US, then England and Spain and now, Australia and most of Europe, this peculiar housing bubble has been popping up in all nations running trade deficits with China and Japan. Since China also has a housing bubble and its money growth has been far less than Japan, I would deduce that this housing bubble has been fed by the notorious 'carry trade' created by the Bank of Japan. These housing bubbles all fail the same way. When the price of housing rises beyond 6X the average income of the buyers, the loans being offered get wilder and wilder. Eventually, the vast bulk of them are for interest-only and at a 'teaser rate.' Then the collapse begins and progresses rapidly leading to a loss of banking 'liquidity'.
I would suggest, the Asian funds fueling these bubbles then moves on to a new location where the price of housing is still only 2 or 3 X the incomes of people. Then this repeats itself. This housing bubble business is definitely global and is probably directly connected to the 11% growth in M3 funds in the West.
After combing through the EU treaties and court judgments, it concluded that Brussels may impose "quantitative restrictions" on capital inflows."Should extremely disturbing capital movements endanger the operation of economic and monetary union, Article 59 EC provides for the possibility to adopt restrictive measures for a period not exceeding six months," it says.
This threat is either hot air or it means the Confederation of Europe is finished and it is now Ein Reich mit einem Führer who happens to be some faceless bureaucrat. The six months rule can be extended eternally just like the dictator of Pakistan can replace the Supreme Court and rule via fiat forever. Or as we see with Putin possibly not stepping down out of power, either. It is also interesting that Europe, who has flooded into America and bought out many industries and businesses here, will not let this happen to them! Hahaha. So much for free trade and open borders which are fictional, anyway. The US used to boast about capital inflows. I think our rules still want this. They make money selling everything here, lock, stock and barrel, to foreign powers.
Will Europe impose exchange controls?
Spreads on the iTraxx financial index of 25 European bank and insurance bonds have jumped to a fresh record, worse than during the depths of the August crunch. The iTraxx Crossover of low-grade corporates is back to crisis levels above 400.The European Covered Bond Council suspended trading in covered bonds this week because the spike in spreads had become disorderly, and three-month Euribor rates have gone through the roof again, and that is the rate that sets Spanish and Irish mortgages. Bond issuance in Europe is frozen.
So now Europe has frozen bond issues? It seems to me the banking crisis is getting worse, not better. And of course, it is! The spending spree of the West's consumers continues unabated but only because of profit cutting by sellers and of course, the flood of money from Asia via various tools like the carry trade, continues to limp along, barely. But not enough to feed all the bubbles it fed in the past.
Fed faces a fine balancing act on rates
This may be why businessmen on the economy’s front line seem more optimistic about 2008 than do their bankers. One British banker, fresh from a visit to his US clients, reports himself astonished by their bullish outlook. A leading globetrotting British businessman/entrepreneur reports that his private-equity clients around the world are gloomy – because they are unlikely to earn the 45% return on equity to which they have grown accustomed. And I found that 46 of the 50 chief executives of big companies who attended a closed-door meeting expect profits at their companies to increase by double digits in 2008.Meanwhile, the Fed is caught between the Scylla of threatened inflation and the Charybdis of an impending downturn. It could cut interest rates and risk inflation in an economy that might not be slowing as much as the bankers think. Or it could hold steady and risk bringing credit markets to a screeching halt, triggering a recession. The Fed has decided that by adopting “appropriate monetary policy” it can avoid both dangers and pilot the economy to a soft landing. We will know when the Fed meets on December 11 whether the markets are right in betting that “appropriate monetary policy” means lower interest rates.
The bulls are making merry because they own the Federal Reserve and the Federal Government. Since they have their hooves on the steering wheel of our Ship of State, this means they will do stupid things because no one can stop them. They have been perfectly happy to see our industrial base shrink. They have been overjoyed over outsourcing jobs. They are perfectly OK with our budget deficits, our wild war spending and 'privatization' that is costing 10X more than if a government does the same thing. They love no oversight and no controls. They love our unbalanced currency because this is a major hedge for them, they play financial exchange games all the time.
The repeated near collapses of our banking system doesn't bother them. They hope this will trigger Bernanke into injecting huge sums of money into the system which they can then use for themselves. Much of this money will fly off to tax havens where it will be used to ring up even more debts. It is certainly shocking news that there is now $500 trillion in funny money which is derivatives, gambling on future commodity markets, betting on relative value of money systems with each other, and so on. How can we let this bubble happen? These guys know that if interest rates are super-low, they won't need the carry trade anymore. The US will be Japan, deep in debt and driving interest rates as low as possible in order to keep the economy going. And they know how to milk this.
So the news that the banking system is collapsing is good news for these guys. Yes, they are this disconnected from reality. They seriously think their pretty affairs will flourish if we repeat 1929! I wish I was at that closed door meeting. Most of the meetings of these people are behind very closed doors because they are plotting things in secret that should send them to prison. Also, these private equity pirates know that if they have figured out the new money stream which is forcing the yen up and the dollar down, they can all jump onto this and make money. Quite cynically.
And they are very cynical. This is why they are happy to be allowed to pump lots of money into our political system while not giving much at all in the form of taxes.
That’s the semi-bad news. The really bad news comes from the financial markets, where estimates of losses due to sub-prime and similar mortgages have been raised from $200 billion to $300 billion in only a few days
The private equity pirates who gave us the housing bubble are not even slightly worried about the blow-out jumping another $100 billion in a few DAYS. Nope. They have dropped that toy and are playing with a better one. A toy that has no moving parts and no downside for it doesn't exist as a physical object. Namely, playing with currencies as the world's financial system begins to fall completely apart. They know that Uncle Sam and Santa Bernanke will save all those poor homeowners and all this mess will be dumped onto the tax payers of America. And they do NOT pay taxes, themselves. These private equity funds are all on Queen Elizabeth's many islands and they pay 0% in taxes these days.
The Northern Rock bank collapse continues.
A CONSORTIUM led by Virgin Group plans to launch a deeply discounted share placing for Northern Rock that would value the beleaguered bank’s shares at less than half the current price.Under the Virgin plan, Northern Rock’s shares would be valued at between 20p and 40p. Virgin would inject a total of £1 billion in cash as well as its Virgin Money operation, worth between £200m and £300m, into the bank and take a controlling stake.
*snip*
Shareholders, including SRM and RAB Capital, are prepared to back their own £1 billion rights issue, rather than allow a third party to take control. To achieve this, they have given their support to Luqman Arnold, the former chief executive of Abbey. Arnold, who runs the Olivant investment company, wants to parachute in a new management and take a 15%-20% stake through a fresh share issue. In return for this his firm is prepared to invest £200m. Arnold is confident that Olivant could raise the funds to repay part of the £23 billion loan the northeast-based bank now owes the Bank of England.
The prospectus for Northern Rock openly talked about bankruptcy and defaults and warned investors that this was a possibility. So of course, everyone wants the government to save them from things they were warned about in the first place. No wonder global equity fund chiefs are smirking! They have the ultimate cushion. The Bank of England hopes to get back the £23 billion ($50+ billion) they stuffed down the Northern Rock rat hole. So now the private funds are sniffing around, trying to see how much they can get out of all this, knowing the Bank of England will be their sugar daddy.
The other day, the President of Virgin did a publicity stunt where he tried to rappel off of a skyscraper only he got scraped up and hurt. His dare devil may care ways may hit a wall here just like the Bank of America stupidly jumped in and bought up Countrywide only to see its funds nosedive into severe losses.
Smaller Companies Grab Bigger Share of Surging U.S. Exports
Smaller companies are grabbing a bigger share of U.S. exports, making up for some of the jobs lost as multinational firms move operations overseas.American businesses without international subsidiaries accounted for 46 percent of sales abroad in 2005, up from 38 percent in 1999, according to a Commerce Department analysis published last week. The trend is likely to continue, helping cushion the economy from the worst housing recession in 16 years, economists said.
The big multinationals can't export out of America. They have little here at this point. And of course, the childish notion that our deepening recession won't affect others is too silly. Good grief. When we go down first, we always drag down Japan and then all the others. Never do we have a major recession and our major trade partners don't. So we are in this brief moment when we can increase exports. In two years, this will be gone or much less. World trade can and does contract! And the US has pulled everyone else out of recessions by the simple act of running in the red. We buy on credit and world trade resumes.
Will it this time around? We can't do this forever. In good times, we have a huge trade deficit and budget deficits and in bad times they are still big. It is hard to get anyone at the top here to focus on all this. The good news isn't so good. It is INFURIATING that the major corporations are leeches who don't create exports but bring in lots of imports. We should increase their taxes.
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