Single Currency Experiment Risks Rising.

Amberman

As indications come in that a massive £17tr...(with a T...an incredible amount) could be needed for bank bailouts in the Eurozone.

We have to stop talking about Lisbon for a while and talk about the whole monetry union surviving this crisis. The situation is that severe...and the risks of the single currency not surviving are growing.

How much pain will countries take as their bond spreads widen and diverge further inside the eurozone, before they leave the club? How can individual countries pay back these huge sums at ever increasing interest rates?

Will German tax payers stand by as their standards of living plummet in order to artificially inflate the standards of living in Spain, the UK and Ireland beyond what they should be right now?

This train is in danger of derailing...and that danger is growing daily.

Scofflaw

Amberman wrote: »

As indications come in that a massive £17tr...(with a T...an incredible amount) could be needed for bank bailouts in the Eurozone.

We have to stop talking about Lisbon for a while and talk about the whole monetry union surviving this crisis. The situation is that severe...and the risks of the single currency not surviving are growing.

How much pain will countries take as their bond spreads widen and diverge further inside the eurozone, before they leave the club? How can individual countries pay back these huge sums at ever increasing interest rates?

Will German tax payers stand by as their standards of living plummet in order to artificially inflate the standards of living in Spain, the UK and Ireland beyond what they should be right now?

This train is in danger of derailing...and that danger is growing daily.

On the other hand, how long would the individual currencies survive? How would individual countries pay back huge sums at possibly higher interest rates?

We don't know - nobody has ever tried this before. It will be an interesting experiment.

cordially,
Scofflaw

Amberman

Individual currencies can always set appropriate interest rates and inflate their way out of trouble, rather than taking money from German tax payers.

Run_to_da_hills

Worst scenario would be the introduction of the full blown cashless society.

There are forces behind the scenes in the world today that are developing technology and global economic standards that will be eventually be used to control the buying and selling of everything that we humans buy or sell on the planet. The Radio Frequency Identification (RFID) technology required to implement the cashless economy is reality will prove it. NFC cashless cellular phones will be out next year.

http://www.textually.org/picturephoning/archives/images/set3/mcdonaldsjapan.gif

Amberman

With the huge stresses currently building inside monetary union, I can think of several worse scenarios which are growing in probability.

A fracture at the periphery, or even worse, at the centre of the EU, brought about my the huge capital requirement to bail out banks, could lead to a rise in internal European protectionism...which would be a disaster for the whole of Europe

View

Amberman wrote: »

Individual currencies can always set appropriate interest rates and inflate their way out of trouble, rather than taking money from German tax payers.

And we could all expect to be paying HIGHER interest rates than those of the Eurozone, as: a) was the case prior to us adopting it, b) as is currently the case of Denmark. Let's see now, given the current economic climate, how would higher interest rates help?

jimmmy

Amberman wrote: »

Will German tax payers stand by as their standards of living plummet in order to artificially inflate the standards of living in Spain, the UK and Ireland beyond what they should be right now?

This train is in danger of derailing...and that danger is growing daily.

Methinks, given the UK is our main trading partner, and they can change interest rates to suit themselves ( we in Ireland would not have had this mess as bad if we were able to raise interest rates to control the bubble in 02, 03, 04 etc ) ....we may well have been better off sticking with the pound.

nesf

View wrote: »

And we could all expect to be paying HIGHER interest rates than those of the Eurozone, as: a) was the case prior to us adopting it, b) as is currently the case of Denmark. Let's see now, given the current economic climate, how would higher interest rates help?

More importantly, our currency rates would be high not because the economy needed it but to protect our currency from excess devaluation if we were independent, i.e. exactly what Iceland is having to do at the moment.

nesf

The Economist has a good article in it this week on this topic: http://www.economist.com/world/europe/displaystory.cfm?story_id=13062174

limklad

The US Dollar is also in the rocky waters as the Euro's while smaller currencies are in stormy waters for the foreseeable future. Right Now the Euro seem to be the more stable currency as Interest Rates are slightly higher than the US. There no doubt about the Euro ( Created by the TEU - Masstricht Treaty ) is proving to be the safest bet right now - (if you have money that is). So if the Euro (World Largest Single Market and and Huge economic powerhouse) Falls, So does the other currencies due to trade with the EU in this globalised World. (-minus Sterling Britain largest economy outside the Euro). Sterling will fall before the Euro, it is more vulnerable, It does not have the same Cash Reserves as the Euro. Remember the currency speculation during the 90's, alot of currencies where under pressure. Lessons were learnt from that time which led to the creation of the EURO, to help insulate/buffer EU eurozone members economies.
Also Various Countries around the world are building Euro reserve of hard currency
http://en.wikipedia.org/wiki/Euro#As_a_reserve_currency
Iran have change from selling oil in US Dollar and are selling it to Europe and Asia in Euro's, if more non-EU countries start doing this (trading in Euro's) then the Euro will get stronger.

I do not believe the Euro will fall, Biggest problems right now is to get finance moving to 1/. Stabilize the EU economy and 2/. Recreate more Jobs across the Eurozone. This is a major problem in every economy around the world no matter what currency they have.

View

jimmmy wrote: »

Methinks, given the UK is our main trading partner, and they can change interest rates to suit themselves ( we in Ireland would not have had this mess as bad if we were able to raise interest rates to control the bubble in 02, 03, 04 etc ) ....we may well have been better off sticking with the pound.

Ireland does more trade with the Eurozone states than it does with the UK. We'd in effect have been paying a premium (i.e. currency exchange charges) to trade with them had we stuck with the pound.

Also the point about the bubble is a bit moot - the OECD called year after year for the Government to introduce a property tax. That would have had the effect of making property a less attractive investment (as you'd be buying a tax bill when you purchased property) - instead we had a plethora of tax breaks that encourage people to put their money into property (Section 23, 45 etc. etc.) thus adding fuel to the fire.

Blaming the Euro for the mess we are in is akin to blaming a car manufacturer for your crash that occurrs when you are speeding (i.e. being reckless) and hit black ice (i.e. the international financial "perfect storm").

Amberman

View wrote: »

And we could all expect to be paying HIGHER interest rates than those of the Eurozone, as: a) was the case prior to us adopting it, b) as is currently the case of Denmark. Let's see now, given the current economic climate, how would higher interest rates help?

Hmmmm....lets see....it would rebuild the savings base, help pensioners who reply on interest income, make it easier to raise foreign capital, lower inflation....Im sure theres more. Oh yeah, and they would deflate the property bubble much faster so that we could bottom rebuild quicker.

Amberman

View wrote: »

Blaming the Euro for the mess we are in is akin to blaming a car manufacturer for your crash that occurrs when you are speeding (i.e. being reckless) and hit black ice (i.e. the international financial "perfect storm").

I'm worried if you really believe this. Its patently untrue if the wheels come off your particular car and contribute to the crash, and other cars are suffering from the same fault...even if some cars are OK.

nesf

Amberman wrote: »

Hmmmm....lets see....it would rebuild the savings base, help pensioners who reply on interest income, make it easier to raise foreign capital, lower inflation....Im sure theres more. Oh yeah, and they would deflate the property bubble much faster so that we could bottom rebuild quicker.

We already have deflation mate and picture the default rate on mortgages and other loans if interest rates here increased by a factor of ten, because we're talking about high teen interest rates here.

Amberman

nesf wrote: »

We already have deflation mate and picture the default rate on mortgages and other loans if interest rates here increased by a factor of ten, because we're talking about high teen interest rates here.

I think you mistake "deflation" for falling prices. Deflation is a contraction in the money supply, and that isn't happening. While asset prices are moving to more sane levels (I think this is what you term deflation), other prices like food prices are still going up...and will continue as the monetary expansion works through the system. Thats the point of the monetary expansion...the inflation.

So you think high teen interest rates are needed? I agree. Think of the drop in income boomers and pensioners have had thanks to the low interest rates and the stock crash. What happens if they lose their houses though interest rates that are too low?

Theres 2 sides to this argument...but I'm guessing you aren't a pensioner.

Scofflaw

Amberman wrote: »

I think you mistake "deflation" for falling prices. Deflation is a contraction in the money supply, and that isn't happening. While asset prices are moving to more sane levels (I think this is what you term deflation), other prices like food prices are still going up...and will continue as the monetary expansion works through the system. Thats the point of the monetary expansion...the inflation.

Hmm - I'm not sure you're right there. The Consumer Price Index has also fallen:

CSO data show that the consumer price index fell by an unprecedented 1.7% in January, meaning that there was an annual rate of -0.1%. The annual rate has fallen from 4.1% as recently as October to its current level.

While most of that effect (two-thirds) was falling mortgage repayments, energy prices have also fallen (petrol prices down 4.3% mom in January alone), and other forms of inflation, such as food price inflation, have fallen. Also, of course, the fall in mortgage repayments is not the result of falling asset prices - unless we believe that the banks have very kindly dropped people's mortgages in line with the loss in value of their houses!

cordially,
Scofflaw

BlitzKrieg

Deflation is a contraction in the money supply,

http://en.wikipedia.org/wiki/Deflation

Deflation in economics is a persistent decrease in the general price level[1] of goods and services, when inflation is below zero percent, resulting in an increase in the real value of money — a negative inflation rate. When the inflation rate slows down (decreases, but remains positive), this is known as disinflation. It is a substantial drop in the price level.[2]

Inflation destroys real value in money. Deflation creates real value in money. Alternatively, the term deflation was used by the classical economists to refer to a decrease in the money supply and credit; some economists, including many Austrian school economists, still use the word in this sense.[3] The two meanings are closely related, since a decrease in the money supply is likely to cause a decrease in the price level.

just making sure we are all on the same page here on the term deflation.

View

Amberman wrote: »

I'm worried if you really believe this. Its patently untrue if the wheels come off your particular car and contribute to the crash, and other cars are suffering from the same fault...even if some cars are OK.

Yes, I really do believe it. I don't believe that the "wheels came off the car" as you put it. Were that the case, then we could look at Iceland, Denmark and the UK and see how well they were doing, couldn't we? Sadly, though all three of them have their own difficulties which undermines the "Euro is a faulty wheel" argument.

Instead, a large part of our problem is as a direct result of the policies pursued by the Government (i.e. the reckless driving). Even if we had retained the Irish pound, with the same policies, we'd have "crashed" in some shape or other.

Having tax breaks that encourage people to plough money into property (i.e. artifically increasing demand), when everyone and their Granny is agog at the increases in property prices (i.e. demand is exceeding supply) is just plain recklessness.

Likewise, year after year, increasing Government spending at multiples of the inflation rate wasn't smart, was it? When we wake up to find the Government is spending 3 Euro for every 2 Euro they take in in taxes, that's just bad math - and it doesn't matter what currency you are doing your sums in.

Économiste Monétaire

Amberman wrote: »

I think you mistake "deflation" for falling prices. Deflation is a contraction in the money supply, and that isn't happening. While asset prices are moving to more sane levels (I think this is what you term deflation), other prices like food prices are still going up...and will continue as the monetary expansion works through the system. Thats the point of the monetary expansion...the inflation.

You might want to check recent annual growth figures for M1 and M3, you'll find they are negative. Also, price levels fluctuate due to either demand-supply imbalances or money supply inflation, either of those can lead to index reading inflation/deflation. Consider the recent summer of '08 and the short-term oil shock. Both are acceptable to professional economists.

jimmmy

View wrote: »

the point about the bubble is a bit moot - the OECD called year after year for the Government to introduce a property tax. That would have had the effect of making property a less attractive investment (as you'd be buying a tax bill when you purchased property) - instead we had a plethora of tax breaks that encourage people to put their money into property (Section 23, 45 etc. etc.) thus adding fuel to the fire.

As I said, the point is we in Ireland would not have had this mess as bad if we were able to raise interest rates to control the bubble in 02, 03, 04 etc. Instead we had to toe the line to the Germans, to suit their economy. They said they were in recession then and did not want to raise interest rates, if I remember correctly....even though property was rising throughout much of the Eurozone. We in Ireland always had property tax - its called stamp duty, vat etc etc....higher than most countries. Of course the Irish govt should not have given their constituents in certain areas and certain towns section 23 27 tax status etc It was grossly corrupt and unfair. Some people in streets I know of could get it, others on the other side of the street could not. Plus look at the environmental mess made in rural areas...

Scofflaw

jimmmy wrote: »

As I said, the point is we in Ireland would not have had this mess as bad if we were able to raise interest rates to control the bubble in 02, 03, 04 etc. Instead we had to toe the line to the Germans, to suit their economy. They said they were in recession then and did not want to raise interest rates, if I remember correctly....even though property was rising throughout much of the Eurozone. We in Ireland always had property tax - its called stamp duty, vat etc etc....higher than most countries. Of course the Irish govt should not have given their constituents in certain areas and certain towns section 23 27 tax status etc It was grossly corrupt and unfair. Some people in streets I know of could get it, others on the other side of the street could not. Plus look at the environmental mess made in rural areas...

If we'd had the UK's rates, I doubt we'd have had less of a bubble to any significant degree.

cordially,
Scofflaw

Scofflaw

Long and interesting FT analysis of the thread topic here.

cordially,
Scofflaw

Amberman

Économiste Monétaire wrote: »

You might want to check recent annual growth figures for M1 and M3, you'll find they are negative.

time horizon bias...they might have fallen last thursday between 1pm and 2pm...you need to look at the longer trend....fiat currencies are one way bets re: money supply expansion generally. Also, quantitative easing is looking more and more likely...it will hit EU.

Amberman

Scofflaw wrote: »

Hmm - I'm not sure you're right there. The Consumer Price Index has also fallen:

While most of that effect (two-thirds) was falling mortgage repayments, energy prices have also fallen (petrol prices down 4.3% mom in January alone)

CPI has fallen due to a lot of factors. Sure....oil is a big one. Food prices aren't falling, though they are rising less quickly than before.

This is only temporary, since oil extraction at these oil prices is uneconomical at a growing number of locations, even if the disconnect can go on for some time.

K-9

Amberman wrote: »

CPI Food prices aren't falling, though they are rising less quickly than before.

Proof, some stats?

Amberman

View wrote: »

Instead, a large part of our problem is as a direct result of the policies pursued by the Government (i.e. the reckless driving). Even if we had retained the Irish pound, with the same policies, we'd have "crashed" in some shape or other.

Sure, if the Irish government chose the policies on its own...exactly like the path that was imposed on them, the same outcome would have resulted. I'm not arguing with that.

Would have been better to have a choice though...yes?

Amberman

K-9 wrote: »

Proof, some stats?

Sure...go to Newry any weekday and observe the people crossing the border where food and other consumables are about 1/3 cheaper. A big part, but not all, is due to currency fluctuations. Measure how many shops and century old businesses are closing in Dundalk. The Euro makes them prisoners to this trend.

Heres the Irish governments own stats...lots of things went down, in 2008, clothing, furniture, but food went UP.

http://www.cso.ie/statistics/consumpriceindex.htm

Heres Januarys figures for 2009...foods still going up....as wages decline...so the effect is magnified, even if the rate if increase has declined significantly.

http://www.cso.ie/statistics/cpi2009.htm

I believe this decline in the rate of price increases in food and energy is temporary...the forced liquidations of Q4 08 has seen many commodities make bottoms and spring back up strongly as continueing and expanding monetary inflation looks a near certainty across the globe. Commodities fundamentals are deliciously good at these levels, better than anything else out there. Investors will wake up, and it wont take long. Let see what happens to prices then...as wages fall.

Amberman

Scofflaw wrote: »

Long and interesting FT analysis of the thread topic here.

cordially,
Scofflaw

I read the headline....LOL

heres the job title of the guy who wrote it.

"Professor of European Political Economy"

Amberman

Heres what people inside the EU really think....

"Ministers and officials fear that the process could lead to vicious spiral that threatens to tear both the euro and the EU apart."

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4590512/European-banks-may-need-16.3-trillion-bail-out-EC-dcoument-warns.html

The european political economics professor from the FT is never going to print that...its more than his jobsworth...:)

Amberman

Scofflaw wrote: »

If we'd had the UK's rates, I doubt we'd have had less of a bubble to any significant degree.

cordially,
Scofflaw

You're missing the point entirely.

It doesnt make any more sense to tie your rates to Timbuctoo than it does to Germany, or the UK.

What Ireland really needed was rates that were right for Ireland...Tied to nothing else apart from the prevailing economic climate.

Amberman

View wrote: »

Yes, I really do believe it. I don't believe that the "wheels came off the car" as you put it. Were that the case, then we could look at Iceland, Denmark and the UK and see how well they were doing, couldn't we? Sadly, though all three of them have their own difficulties which undermines the "Euro is a faulty wheel" argument.

How does it? They arent even in the Eurozone...my point is about countries in the Eurozone.

Of all the countries in the Eurozone, Ireland was growing the fastest for longest, easily the biggest expansion of all Eurozone states, so interest rates that were too low for Ireland had a disproportionate effect on Ireland compared to other countries whose economic situation warranted such interest rates.