No one really knows if 'Euro' is really 'in or out?'

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No one really knows if 'Euro' is really 'in or out?'
by Iqbal Latif
17-Nov-2011
 

Without a European equivalent of Bernanke and Fed, Euro's future looks very bleak. The dollar is bid, not because of its fundamentals, but by default as Euro faces an uncertain future.

The structural dichotomy that confronts the Euro runs in the psyche and grain of PIIGS and Northern European citizens. Euro has very little likelihood to survive in its present shape and geographical spread. It is mainly due to the diversity in the home ownership trends of PIIGS and Germans.

It is one of the most important structural differences that remained hidden when Maastricht convergence criterion was agreed. The habits of PIIGS and Germany have now erupted into a full bleeding rapture. Germans resist granting ECB a package equivalent of TARP, i.e., monetisation of debt or to print money. Without a Fed Reserve kind of massive leverage, ECB hands are tied. They have limited options without such a package, that is to say, to be a lender of last resort.

The principal reason behind German reluctance is that predominantly Germans don't own houses, they lease. Leaseholders are most susceptible to price rises, on the contrary, PIIGS have the highest ownership of housing that is helped by rising prices. Germany is not prepared to sacrifice her tenants and Italians are not willing to forgo their homeowners to deteriorating packages of austerity.

Without a political unity there could have not been a monetary union, a fact the Europeans missed. Arkansas and California are two different economies but it is for the reason of 'political unity' that keeps Arkansas where it is and keeps California on a different economic cycle. In the name of convergence criterion Greek productivity was put at par with that of German, it was artificially maintained as capital inflows and indiscriminate loans maintained a decorum of equality of economies. Once the flow dried down the whole thing turns out to be a farce. Germany will have to deal this problem like they did for East German assimilation to German economy or just ditch the whole idea. It will cost PIIGS 30-40% of the GDP but will give them better competitive advantage and exchange of what they produce.

Germany can only help Euro zone, if they allow printing money for the advantage of the PIIGS nations to come out of the big crunch. This will be catastrophic for the tenants in Germany.

PIIGS led by:
1) Ireland: 83%
2) Italy: 78%

sit at the top of Home ownership and have the highest Home ownership in Europe.

German house ownership is 43 percent. The northern Europeans sit at the bottom of the table of Home ownership.

12) Denmark:53%
13) Netherlands:49%
14) Germany:43%

Germans rent inexpensively, and are remunerated well, their productivity fares better than the PIIGS. Hence their goods are well reputed and are reasonably priced.

No wonder PIIGS citizens individually are far more wealthy than Germany's. Tarp-assisted help will eventually lead to a bout of inflation that will reduce their real value of debt and increase prices of their stock. Germans mostly do not enjoy this luxury across the board.

Germany will have to either let Euro go and in that case recapitalise their banks, a price they have to pay for allowing her banks to lend to PIIGS freely, or support the TARP equivalent. Politics demand the latter, common sense demands the former. It is far cheaper for Germans to recapitalise their banks and take a huge haircut in PIIGS' credit than to commit to an umbilical cord of support that may take decades. 'You cannot make a single currency without economic convergence and economic integration.'

Latest data:

http://www.nationmaster.com/re d/graph/peo_hom_own-people-hom e-ownership&int=-1&id=OECD&b_m ap=1

Why 'Printing money' politely known as 'Quantitative easing' is a must?

http://iqballatif.newsvine .com/_news/2009/03/06/2512 191-why-printing-money-pol itely-known-as-quantitativ e-easing-is-a-must

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Iqbal Latif

The euro is a macro-economic weapon of mass destruction

by Iqbal Latif on

·        
The euro is a macro-economic weapon of mass
destruction - it simply must be defused.
 
How much louder do the alarm bells need to ring before time is called on this absurd monetary experiment?

There may be “no such thing as an orderly break-up”. But there is a very big difference indeed between embarking on a tough transition to a smaller eurozone with a coherent plan agreed by respective governments on the one hand, and a hugely-damaging systemic meltdown on the other, to be followed by years of pan-European loathing and mutual recrimination. Should Germany sanction the European Central Bank to guarantee the sovereign debts of all and sundry, with “printed money”?

Global equity markets would certainly rally if so, at least for a while. And eurozone bond yields would fall.

Taking this route would contravene European Union treaties, as Merkel well knows.

Far more importantly, once the ECB has bailed-out profligate governments once, the same countries will over-borrow all over again a few years down the line. The markets will eagerly lend to them too, such loans combining a lucrative yield with a de facto ECB guarantee.

The job of any central bank, the ECB included, is to act as “lender of the last resort” to commercial banks in its jurisdiction that are solvent, but in need of temporary liquidity.

Central banks aren’t meant to dish-out free money to governments that have spent themselves into insolvency. By 

7:00PM GMT 19 Nov 2011


Iqbal Latif

Hopefully!

by Iqbal Latif on

 

 

If so ECB will have to have deep pockets for QE1 of Euro land. Europeans Federal Reserve and a Bernanke cannot be created overnight, the political will is missing in Germany.

 

Imagine if California, New York, Texas, Florida, Illinois refuse to support the Federal Reserve? This is the kind of unequal economic influence of German economic might over PIIGS. Merkel will have to allow ECB a big QE package. It looks like so far she is inclined to save her banks more than Euro. 

 

 


Rea

Euro will survive

by Rea on

For there's no alternative.


Iqbal Latif

London- Mecca of global law, finance and trade

by Iqbal Latif on

 

Different political system I suppose. UK has one of the highest percentage of home ownership and credits. London is 40% of UK GDP and Banking, insurance and trade is what London does the best.   As Mecca of global law, finance and trade why would London give up its Vatican /Mecca status to Frankfurt or Paris Euro Mandarins? Sarkozy and Merkel can only dream of that.

 

Europe will never be one land, it is historically and geographically like the Middle East; land of 1000 tales, cultures and folklore. Germans, French and Dutch or Swiss has different tastes.

 

Compare French Champagne and wine to their eateries like Frog legs, Foie gras and German pints with frankfurters, all this point to a nation diverse in habits, productivity and inclinations.

 

You can strait jacket a McDonald eating, melting pot of culture into one $. But it is difficult for people who have different significance of having an abode and reflect different ingrained cultures.

 

Euro strait jacket has helped political unification to avoid bloody last century wars but to bring these diverse cradle of cultures to fuse into one greater culture and productivity centre ignoring Spanish siestas and Greece proclivity of  rosary that most of the Greek men are holding in their hands, sitting outside the kafeneion (cafe in Greece),is only a way of killing time is so . 

 

For example when Greeks even Spanish and Mediterranean countries like Italy when they go out for dinner, they always pay cash. No cheques and credit cards! And they have always got money enough to pay the bill for their company too. Not being able to pay, would be humiliating beyond belief. None of these habits are part of Northern Europeans culture, paying cash means undeclared rampant black economy. Euro was too steep a demand or multipurpose highly sophisticated and diverse population to be strait jacketed straight into German discipline.

 

On UK you will hopefully enjoy this piece that I wrote 4 years ago..

 

UK housing market crisis - London will continue to be the jewel in the crown.

 

http://iqballatif.new.newsvine.com/_news/2008/05/20/1500239-uk-housing-market-crisis-london-will-continue-to-be-the-jewel-in-the-crown?commentId=1821003

 

   

Iqbal Latif

Inflation one day will eat all this debt away.

by Iqbal Latif on

'You cannot make a single currency without economic convergence and economic integration. '

Inflation one day will eat all this debt away. Right now since last few years of this crisis, it is borrowed time that has been the biggest healer. The reason we have escaped from a huge global depression, food stamps and mass unemployment is because of the right decisions were taken to quantitatively ease, purchase securities to save the banks from collapsing.

It is marvel that this huge paper liquidity through QE's have failed to ignite the inflationary spiral. Why, because the unemployment has remained high and demand arrested due to 'liquidity' losses that has been immense.

Overproduction and overextension of last decade from 1997-2007 can only work its way through as time elapses and demographic demands help repair GDP growth on a stabilise trend curve.

As banks have not collapsed and semblance of order has been maintained we are producing far more than what the 'liquidity crunch and banking squeeze' should have possibly inflicted.

Inflation helps reduce the total debt stock over time, by reducing the real value of debt. There is no answer to this debt other than quantitative easing to continue to replace the 'immense liquidity loss.'

Time is a biggest healer, instead of taking a 50% hair cut straight away and hurt the balance sheets it is better to reduce the real obligations by managing inflation just enough and help recapitalise banks adequacy ratios.

There in an invisible hand of building that is working here. A decade of under par growth to pay for the excess of past far above non sustainable trend line growth. This is the policy, and it seems it is working, despite of sweeping levels of QE1 QE2 and QE3 possibly; inflation remains a non issue, but what were the options?

None, none what so ever, to let banks go down like Lehman would have ensued global chaos. Managing crisis in a sustained manner is far more difficult than managing people who lack conventional wisdom, if banks go down and economies suffer, it will be the bottom strata of the so-called 99% who will suffer the most. The white elephants always end up being bailed out.

Those who think this extravagance is caused by banks are wrong, it was caused by everyone of us who went and build and bought as if there will be no tomorrow.

Monetary pandemonium and ceiling high debt can only be handled by helping to ingrain efficiency in global productivity and helping the banks to restore their balance sheets so that a new cycle can be ensured. Maintaining order in face of chaotic disorder was the call of the day us far we have done well, to cave into demand of global disorder by letting the banks go down is foolish and crazy.


پندارنیک

Good read.......

by پندارنیک on

What was the real reason that Britain didn't enter the euro zone? A wise choice in hindsight we might say........

Thanks.........