Monday, February 15, 2010

The Collapse of the Euro

There is a new acronym "PIGS" floating around. It refers to the countries of Portugal, Ireland, Greece and Spain. They all share one thing in common their currency is the Euro.

The Euro is a peculiar creation. Most currencies evolve out of the individual government and are subject to regulation by the state. In this case, a group of countries got together and formed an economic union supporting a common currency. The thing that distinguishes this currency from all others, is that there is no inflationary printing of money unless all nations agree to it.

Greece is the poster child for the Euro. Their government has lied to the people for so long that the aspect of an overthrow of the government isn’t what could be considered plan B; it’s plan A. Greece has frozen wages and increased taxes, to get in line, with what the Euro community expected them to do to get their house in order. The problem is; it doesn’t appear to be working. The people there, are fed up with the conflict between the political rhetoric and the economic reality they have to live with.

Then we have Portugal and Spain waiting to see what will happen to Greece. They too, would like a bailout. Somehow Ireland got swept under the carpet (2.39 Trillion dollars worth of debt???). The Euro is one of those concepts doomed to failure. It was a great plan to facilitate economic free trade. The trouble was that it removed the politicians’ access to the government check book. They could no longer fiddle with the currency to balance the budget, like the United States and Great Britain. This collective economic bond to the Euro prevents the politicians from spending more than they collect in taxes. Some countries promised the moon and now can’t deliver; the money isn’t there.

The Euro’s impending collapse centers around nationalism. The European confederation cannot come to an agreement. Why should a German or Frenchman take money from his kids future, to give to someone in Greece or Spain? Why should countries who acted responsibly, be taxed and have that revenue given to those that didn’t? The Germans don’t want to bail out the “shiftless” Greeks. On the other hand, the Greeks had a taste of Hitler decades back and don’t want these” Krauts” controlling their lives for a second time; telling them cut wages and increase taxes. Nationalism is a pot boiling over in Europe.

In most countries, the decision to inflate/ debauch the currency is not one that comes up for a vote--- it just happens quietly. With the Euro, that question will have to come up for a vote in the future; and it has to be unanimous. A collapse of the Greek government could make that vote a moot point. Look for the European Union to break up, they can't afford to feed the PIGS.


2rational in Lima,NY said...


I have been reading and enjoying your posts for many months and today I feel compelled to join in.

Back when the EU was being formed, the question of why it will work this time, when previous attempts for a common currency and trading block had failed, was posed during my finance course. The response from my professor was that the way the EU has been formed this time around and the Euro floated, the internal cost of reverting back to your old currency has been set very high. (Recall, back then the local currency traded along with the Euro for x months while it was pulled out of circulation and DESTROYED. Condition for joining Euro) While I do not recollect the finer details, few questions do come to mind.

Have you thought about how much worse off Greeks will be if their leaders DO WALK AWAY from the EU?

How does Greece win by floating a new currency during the worst of times? It will be worthless from the get go. The fact that they want out is a clear signal to the world that the new currency will be inflated as it is being floated. Think forward to the free market setting the new exchange rate of the new currency and the implications on the people!

So, in closing, if the decision to stay in or leave is left to rational people, hard as it may be, Greece will eventually end up taking orders from Germany, albeit reluctantly!

2rational in Lima,NY

Jim in San Marcos said...

Hi 2rational

Let's break it down into two items, Greek government and the Euro.

The Greek government will probably be overthrown. The government employees get paid well, and the rest of the country is going to hell in a hand basket.

If the government was to change hands, it would be very simple to change currencies. Your Euros in the bank would be converted to the new currency. All of the bonds issued outside of Greece would be repudiated. It's a little like what Adolf Hitler did in 1933 when he repudiated the war reparations debt. A new nation with no debt has a better chance to borrow with a clean slate. Its just another form of bankruptcy.

Walking away from the Euro would be painless. Remember, they have already borrowed the money and spent it.

As things get worse in Greece, you'll see riots and probably martial law declared and a fall of the government.

The neat thing about a new government, it has no previous obligations to its citizens.

In our country each state is a part of the whole. If we spend more money in Kentucky than California, it is for a reason and it is accepted. Whereas the Euro is an economic currency that has no goals to perpetuate each state at the expense of the group. Nationalism rules.

If the Greeks floated a new currency, I don't see it being worthless. It would be a new start for them. As it is, every time they open their wallet and look at a Euro, they feel the pain of what that currency has done to them. When you inflate a currency, it appears that everyone is getting a pay raise. Without inflation the pay cuts are real.

The world economy has at least another 4 years of grief to contend with, this is far from over. Greece is just an appetizer, Spain and Ireland are the real kickers.

In the short term you could be right, but I think as things get worse, everything is going to unravel.

Thank you for your comments.

Sackerson said...

Hi Jim

The more I read, the less I feel I know. But like you, I feel we have years to go yet before the sludge has hardened and we can climb out. If it follows the 1966 - 1982 pattern and the start this time was end 1999, that would make it 2016.

Jim in San Marcos said...

Hi Sack

Thanks for dropping by.

You hit on an interesting point. In order to sell newspapers, you have to paint a picture that the worst is over. That's what people want to hear.

Your time-line sounds reasonable but you and I are not selling newspapers either.

dearieme said...

I feel rather sorry for the Irish. In capital terms they got a very good deal on Independence - they had to bear only a tiny fraction of UK national debt, and then were allowed to ignore even that a few years later. In income terms it wasn't so good - the Nationalists had promised the population that they'd prosper when they stopped subsidising Britain, but Independence revealed that, on the contrary, Britain had been subsidising them. Still, it was a new state and, unlike other post-WWI new states, had no need for expenditure on Defence, and a negligible problem with minorities (many Protestants had left); it really should have done well. But it was run on reactionary, thick-headed, rather corrupt Catholic lines and didn't prosper at all - not even with Marshal aid, a ridiculous thing for a WWII neutral to receive. And then everything looked up about a generation ago. Now they are in the soup good and proper, not least because of their government's cavalier policy on guaranteeing the banks' debts. And unlike California, it's not clear who, if anyone, will bale them out.

frakrak said...

Jim, Ireland should be the one being kicked into line by the E.U. Apparently their bar tab is still being covered, why is that? Perhaps what we are seeing is an amount of political opportunism being played out here? Greece would have to be the most politically unstable country in the union at the moment, so why kick it now? Their economic balance sheet is no worse than Brittain, and how about Germany’s, the last time I looked both countries had problems with their balance sheets. And no, I don’t have Greek heritage!!

I guess my point to all this is if Greece implodes politically, what will be the outcome; a devalued Euro, sovereign defaults spreading throughout Europe? Then the combined global printing presses will not keep up with the havoc …. or will they?

Still think its deflationary route to oblivion, too much uncertainty for the inflationary scenario, and not enough reaction time!

Lets face it one rich hedge fund manager can light the fuse for all this for a short term gain! One seemingly insignificant Arch Duke was assassinated one hundred years ago, kick starting the most horrific human suffering, so what’s so different now?

When it comes to rational thinking and human nature I feel we have already armed the inmates of this economic insane asylum for their own personal wellbeing!

Sooner than later for me,

Jim in San Marcos said...

Hi Dearieme

It does make you wonder who would loan them so much money.

Looks like a lot of Irish Leprechauns are involved in this. The only other excuse is maybe Ben Bernanke is buying their paper for luck. He needs some.

Jim in San Marcos said...

Hi Frakrak

That's what struck me as odd when collecting the data for this; Great Britain has 9 trillion, France and Germany have 5 trillion apiece in debt. Then a little country like Ireland weighs in at 2.39 Trillion in debt.

The amount boggles the mind. What did they do over there, add sex benefits to their health care plan?

Something is out of whack here. What does Ireland produce to sell to the rest of the world? They can't pay it back if the rest of the world won't buy what they produce.

As for the Euro,I feel that it will be abandoned.

The Euro is kind of like a fancy country club with a lot of doctors and lawyers as members. Admitting new members with very low paying jobs does these new members a dis-service. They are out of their league, they don't belong there.

Just using Spain as an example, everyone in Europe decided to build a home there. Well the bubble burst and Spain has an unemployment problem created and financed by others. The richer countries are admonishing Spain saying "how dare you knock on our door and claim the baby is mine.

The PIGS have nothing to lose on this, they have already spent the money. In my opinion, the Euro is "toast" and Greece is a "scrambled egg omelet." The problem is; no one ordered breakfast.

AIM said...

It's actually PIIGS... don't forget Italy. They are in very poor shape too.

The Baltic or E. European area as well as PIIGS will default on or at minimum restructure their debt. The lenders are Switz, Germany, France, England... they are going to be hurt big time.

If IMF bailed Greece out then all the others would demand the same. Same if the EU (Germany mostly) bails out Greece.

I agree with Big Jim... the Euro is kaput. May take some years but... kaput. Failed experiment.


Anonymous said...

I don't think you are right. Forcing the countries to behave responsibly may have short-term pain, but long term it will be beneficial to the Euro.

I don't think even if there is 2-3 more countries with problems will have impact on the long term viability of the Euro.
Except if Eurozone try to bail them out as US or there is more than just 3-4 problematic countries.

I think in the long run Euro will be one of the major currencies. It is not necessary to be big as the dollar (now).
In fact that was not the goal.

Anonymous said...

The Goldman Boys will figure this all out.

In fact, it's of no concern to you little people...everyone go to bed now.

El Scorcho

Jim in San Marcos said...

Hi Anon 2:34

The biggest fault of the Euro is its strength.

Everyone else is printing money like crazy. The concept of inflation is not understood by the average working man. Cut his pay check, and he understands that, then raise his taxes and now you have pissed him off.

You are quite right when you said " Forcing the countries to behave responsibly may have short-term pain, but long term it will be beneficial to the Euro." In normal times that could work well, but what we are facing is a disaster, world unemployment is going to get a lot worse.

A strong currency while your wife and kids have no food, this is what revolutions are made of.

I look for the PIGS to go off the Euro as a method of filing for bankruptcy. Wipe the slate clean and start over.

I guess we'll have to wait and see what happens.

Thank you for your comments.

goodrich4bk said...

Let's imagine for a moment that five years from now the dollar starts to collapse, CDS spreads widen dramatically on the dollar, and China starts sounding to us like Germany now sounds to the Greeks. How many of us will want to hear lectures from the Chinese about "our" profligate ways? As somebody who didn't borrow excessively and voted for Ron Paul, it would drive me freakin' crazy to be called a deadbeat debtor by the Chinese after they undervalued their currency to steal our manufacturing base, lent their ill-gotten "profits" to Americans via "innovative" financial products that essentially buried our collective home equity in unpayable debt, and then demanded that these products get bought by taxpayers to ensure that these investors don't lose much money in the deal.

Well, that's exactly what's happening to Greece as we speak. When they joined the EU, the bright minds in charge made sure that the drachma was retired at an artificially high price, thus creating the appearance that the creation of the EU made Greece and other PIGS wealthier overnight. It's the same dynamic as we've just experienced in the past ten years with the devalued Renmimbi, which overvalued the dollar relative to our main trading partner. It made us all feel wealthier to build kitchen counters with $15 a foot Chinese granite and log on to the net with $499 Chinese computers, just as the Greeks felt wealthier taking their existing drachma wages and suddenly purchasing Gucci knockoffs at the Plakka for the price of a shot of a couple of olives. Cheap money ALWAYS encourages excessive indebtedness which ALWAYS enriches bankers, at least until the cheap money ends. But we should NOT be blaming the average Greek wage earner for the price of the cross he now has to bear. The blame is with the banksters who designed the EU to favor bankers, who deregulated European markets in a manner that greatly increased excessive debt, and who laughed every step of the way to their Swiss bank accounts.

Jim in San Marcos said...


I didn't really feel that Italy belonged in the group. Their debt ratios are better than ours. But you are right, it is PIIGS and not PIGS. Spellcheck however, says its PIGS, so that's good enough for me.

I kind of doubt that Germany would bail anyone out, they just finished "absorbing" East Germany's debt, which was quite a load.

I don't see anyone else that could come forward to do a bailout without putting themselves in a financial bind.

Be careful using the word "kaput" and "Euro" in the same sentence, thats getting a bit too ├╝ber Deutsch;>)

Take care.

Jim in San Marcos said...

Hi El Scorcho

Goldman Sachs was the only investment firm to escape the Great Depression intact. Just google "Shenandoah and Blue Ridge."
They ruined an awful lot of people. They could do it again.

Take care.

AIM said...

Hey Jim, here's an extrapolation:

The Euro goes down... the USD gets stronger... our exports become more costly... exports drop... US economy continues to go sidewards or downwards. Just what we need.

Like my dad said when he was in the hospital and close to passing on... "I'm really in a pickle".

Have a peaceful evening,

frakrak said...

Jim I am not sure either if Italy should belong with the PIGS, their gold reserves set them apart from the other company, and lets face it they export fairly popular fast cars and motorbikes, not to mention wine, truffles, cheese … that’s got to be the necessities of life right there!! Viva Italia!!

Found your comments re Goldman Sachs gave me motivation to find out a little more! Discovered an interesting site named “How Goldman Sachs took over the American economy.” Gives a fairly comprehensive run down on their history, unfortunately when you google, it is hard to know what you are reading is accurate, if you have little or no prior knowledge of the topic. It mentions quite a bit on the Shenandoah and Blue Ridge chapter, and for me the most interesting was their 2009 tax filing, and apparently how the U.S. tax laws allow for vast sums of money to be put offshore to minimise taxes, legally.

I wonder what happens with this money (not just GS money but other large corporations) and does any federal department in the U.S. keep tabs on this? The author of this above mentioned site does use four letters to form words that may offend!!


Jim in San Marcos said...

Hi Frakrak

The thing I liked about Italy, is that they make a lot of stuff for export. That's what has to happen in the US. We have to start producing product for internal consumption rather than import it from China and the rest of the third world.

As for that Goldman Sachs article you mention, I don't buy it, Rolling Stone is selling newspapers. The historical stuff from Shenandoah and Blue Ridge has been aged with time. I more or less threw it in to show that we have been here before, way before we were born.

Take care

Jim in San Marcos said...

Hi Jeffery

There are two different things at work here if we use Greece as an example.

The banks supplied easy credit to the citizens and they took advantage of it.

If we look at the country of Greece, it's government spent money with the concept that all they had to do was pay the interest on the money they borrowed (that sounds so familiar here in the US)

Both the people and the government have borrowed too much and now that interest rates are rising, they don't have the ability to pay even the interest on what they have borrowed.

Here's where common sense says walk away. Declare bankruptcy.

I think that both of us are pretty much in agreement that things are a mess, but I don't believe that the banks are the cause of this, they only greased the chute.

Thank you for your comments.

frakrak said...

Thanks Jim for the response, like most of the great unwashed on matters financial, being given perspective is important. I simply devote part of my busy life to this, not only out of interest, but if the time comes to make important decisions that I may be a little bit better equiped to be rational with my judgement!!

Take care, thank you and cheers

goodrich4bk said...


To the extent you're suggesting that banks just acted as, well, banks, I agree. As they're designed to profit from the creation of debt, none of us should get all riled up just because they profit while their borrowers sink deeper into insolvency. After all, there's no profit in making bad loans.

Or is there? I'd love you analysis of Matt Taibi's recent article in the Rolling Stone. He equates today's banking industry with shysters, con men and grifters --- and says we certainly should be questioning their claim that banking executives earned their bonuses.

As with Goldman's involvement in helping Greece hide its sovereign debt from EU auditors, while at the same time shorting that debt, we're talking about something entirely different than the free markets at work. As Taibi explains, the largest banks profit from exploiting relationships and government connections that are absolute barriers to entry. TBTF is simply the natural result of the capture of all western democracies by the financial elite years ago.

AIM said...

This is a financial crisis… a debt crisis. The Fed and the US Treas and the White House have no power to fix it (only mitigate on a small level… must mostly obfuscate and hold off).

Per history all countries that experience a major financial crisis wind up going into huge debt that can never be paid down and the only choice is default or inflate (there is usually a lot of pain and destruction that occurs before that final decision of default/inflate is enforced by the natural dynamics of economics). Fiat currency countries are doomed because with human nature… the discipline will fail. A strong currency is needed if there is going to be a strong lasting empire and the currency must be pegged to production/commodities/natural resources or the like.

Gold, silver, USD, or whatever is JUST money. Money is just the accepted medium of exchange… its the products or services you can obtain with a medium of exchange that is true wealth. Fiddle with or debase the medium of exchange = BIG TROUBLE.

Especially over the last 100 years or so, Congress along with our whole government structure, has proceeded to undermine this basic economic truth and now the empire is in decline.

Greece, the other PIIGS, et al are all suffering from the same thing... debt... and funny money controlled by central banks.

Bye bye USA and US Constitution… we hardly knew ye.

Jim in San Marcos said...

Hi Jeffery

I too, question if these financial wizards earned their bonuses.

I don't call them banks, these people were members of Wall Street financial institutions. Goldman Sachs with Greece violated no laws with what they did, but it was kind of like taking your sugar daddy who is wheel chair bound, mountain climbing. You just know there is going to be an accident.

You can bet this barn door will be locked, after the horses get out, just like all of the rest.

Thank you for your comments.

Jim in San Marcos said...


I know what you mean. A government can't print toasters or Toyota's; they can only print money to buy them with.

Sooner or later you run out of toasters and Toyota's.

Our government either hasn't figured that out, or figures we are too dumb (collectively) for that to be a problem.

Thank you for your comments.