Global Debt Time Bomb explodes soon

[SeerSavant]

No sweat... Every time I take a good long look at the economy I can't help but get into a dark mood either...

[DarkAxel]

Thanks for answering my questions in part, but one thing I didn't see addressed:

There is a huge disparity between the amount of physical currency in circulation and the amount of currency held on computer systems.

This is best illustrated by your local bank. At any one time, they might have up to 10 million dollars in the vault available for withdrawals, but the total value of the money stored in accounts can be in the billions. This is the main reason why banks failed during the Great Depression. As a result, we have the FDIC insuring deposits of up to $250,000 (I think. The increase from $100,000 was supposed to be a temporary one), but it still didn't prevent banks from failing this time around.

Or think of it this way (Numbers made up, btw)
The Fed loans banks $500,000,000 dollars in one year.
The U.S. Treasury only prints $100,000,000 that same year, and destroys $200,000,000 in old bills.

See the problem?

[the_alias]

Thanks for answering my questions in part, but one thing I didn't see addressed:

There is a huge disparity between the amount of physical currency in circulation and the amount of currency held on computer systems.

This is best illustrated by your local bank. At any one time, they might have up to 10 million dollars in the vault available for withdrawals, but the total value of the money stored in accounts can be in the billions. This is the main reason why banks failed during the Great Depression. As a result, we have the FDIC insuring deposits of up to $250,000 (I think. The increase from $100,000 was supposed to be a temporary one), but it still didn't prevent banks from failing this time around.

Or think of it this way (Numbers made up, btw)
The Fed loans banks $500,000,000 dollars in one year.
The U.S. Treasury only prints $100,000,000 that same year, and destroys $200,000,000 in old bills.

See the problem?

Nope.

It only becomes a problem if people expect to be able to withdraw all their money in cash.

Most transactions are electronic in nature now so I don't see it as a real issue.

[Kommander]

Due to the fact that our money is no longer backed by gold there really is no difference between physical currency and electronic currency. The Fed knows how much it has printed and how much it has loaned electronicly.

[NoAm]

While reading the last few posts all I can think is "That must be one hell of a spreadsheet " or "What if someone hits the wrong button!"
Interesting article I found
http://www.washingtonpost.com/business/economy/jon-corzine-to-tell-house-panel-he-doesnt-know-where-customers-money-went/2011/12/07/gIQAwLUleO_story.html?hpid=z1

[phil_in_cs]

Merkel says the Euro has "lost credibility."

http://www.bbc.co.uk/news/world-europe-16100258

If it has lost credibility, can it be regained? or will we have a new DM and Franc shortly?

[TacAir]

Merkel says the Euro has "lost credibility."

http://www.bbc.co.uk/news/world-europe-16100258

If it has lost credibility, can it be regained? or will we have a new DM and Franc shortly?

In October of this year, Zero Hedge(and others) openly talked of the New DM.


In the same time frame, polling showed"More than half of all Germans would like to bring back the Deutsche mark "

In Feb of this year, the FOREX put out a piece on how the DM might/could/ would return.

I am amazed at the sheer number of 'fringe' sites (no, I won't post links) that posit that the return of the DM means everything from a collapse of the EU to the bizarre rise of a German/Russian/French (or all the above) hegemony. Weird, huh?

[Krustofski]

Merkel says the Euro has "lost credibility."

If it has lost credibility, can it be regained? or will we have a new DM and Franc shortly?

The complete statement was (paraphrased from German) "The Euro has lost credibility which can only be regained on a new contractual basis."

You know why Germany and France do bother with this at all, even though a majority in both countries wishes to return to Franc and DM? Because their export-based economies, especially small and medium-sized business, love the Euro.

[TC]

Britain stays out of EU financial crisis deal

David Cameron has refused to join an EU financial crisis accord after 10 hours of negotiations in Brussels.

Mr Cameron said it was not in Britain's interest "so I didn't sign up to it".

But France's President Sarkozy said his "unacceptable" demands for exemptions over financial services blocked the chance of a full treaty.

Britain and Hungary look set to stay outside the accord, with Sweden and the Czech Republic having to consult their parliaments on it.

A full accord of all 27 EU members "wasn't possible, given the position of our British friends," President Sarkozy said.

Mr Sarkozy said the eurozone countries would sign an intergovernmental accord aimed at stabilising the currency in the face of the debt crisis, plus any other EU members that wanted to join.

Speaking in a press conference following the meeting he said: "The countries that have remained outside are Hungary and Britain, and the countries that have to consult with their parliaments are the Czechs and the Swedes."

Mr Cameron told a press conference: "We want the Eurozone countries to come together and solve their problems. But we should only allow that to happen within the EU treaties if there are proper protections for the single market, for other key British interests.

"Without those safeguards it is better not to have a treaty within a treaty, but have those countries make their arrangements separately.

"It was a tough decision but the right one."

Mr Sarkozy said the exemptions Britain proposed were unacceptable because a lack of sufficient regulation had caused the current problems.

The head of the European Central Bank, Mario Draghi, said the planned accord would lead to much more discipline in economic policy.
Good deal

A 45-minute meeting between David Cameron, the French president and the German chancellor earlier broke up without agreement.

Sources say there was "no movement" with each side setting out their respective positions.

The prime minister had said he has two aims: stability for the euro and protecting Britain's interests.

Speaking before the summit, Mr Cameron he said he would have "no hesitation" in vetoing a proposed new European Union treaty if it did not offer a "good deal" for the UK.

Some senior Conservatives say any big changes should go to a UK referendum.

Others want the prime minister to do more to reshape the UK's relationship with the EU by taking back specific powers.

France and Germany want a new EU treaty enshrining stricter fiscal rules for the 17 member states that use the euro.

Mr Sarkozy and Mrs Merkel have called for much closer co-operation among eurozone members, including budgetary oversight, common corporation and financial transaction taxes.

Mr Cameron had said he would exact "a price" for UK support for any treaty change which requires the support of all 27 EU members and wants safeguards on financial regulation and for the single market, in the event of closer fiscal integration in the eurozone.

Britain has been critical of suggestions of EU-wide financial controls which might affect the City of London.

"In return for the treaty that they want - to sort out the problems of the eurozone - I want to make sure we get a good deal for Britain, we keep our markets open and we have the power here in the UK to make sure that our top industries are properly promoted and enhanced," Mr Cameron said earlier.

[phil_in_cs]

Capital flight to Germany, by people that ought to know what is smart:

http://www.bloomberg.com/news/2011-12-0 ... -risk.html

Wary European CEOs Move Cash to Germany

Grupo Gowex (GOW), a Spanish provider of Wi-Fi wireless services, is moving funds to Germany because it expects Spain to exit the euro. German machinery maker GEA Group AG is setting maximum amounts held at any one bank.
“I don’t trust Spain will remain in the euro zone,” said Jenaro Garcia, founder and chief executive officer of Madrid- based Grupo Gowex, which provides Wi-Fi access in 15 countries. “We moved our cash and deposits to Germany because Spain will come back to the peseta.”
European companies spent billions preparing for the euro when it was introduced in 2000 by 11 countries. Contingency planning for an unraveling of the currency involves cutting investment, moving money to Germany, transferring headquarters to northern Europe from southern, and even going out of business, according to interviews with more than 20 executives.
The Bundesbank, Germany’s central bank, registered capital inflows of 11.3 billion euros ($15 billion) from non-banks in September, according to the breakdown of its current account published Nov. 9. That helped transform a deficit of 47.3 billion euros in Germany’s balance of other capital flows in August to a surplus of 700 million euros in September.

[emphasis mine] and I'm sure it has accelerated since September.
more at link

[phil_in_cs]

Op Ed from the Chief Economist at Citi
http://www.ft.com/intl/cms/s/0/6cf8ce18 ... z1fxjOZ9no

pasted in full because FT requires you to set up a free account and log in

The terrible consequences of a eurozone collapse
By Willem Buiter

What happens if the euro collapses? A euro area breakup, even a partial one involving the exit of one or more fiscally and competitively weak countries, would be chaotic. A full or comprehensive break-up, with the euro area splintering into a Greater Deutschmark zone and about 10 national currencies would create pandemonium. It would not be a planned, orderly, gradual unwinding of existing political, economic and legal commitments. Exit, partial or full, would likely be precipitated by disorderly sovereign defaults in the fiscally and competitively weak member states, whose currencies would weaken dramatically and whose banks would fail. If Spain and Italy were to exit, there would be a collapse of systemically important financial institutions throughout the European Union and North America and years of global depression.
Consider the exit of a fiscally and competitively weak country, such as Greece – an event to which I assign a probability of about 20-25 per cent. Most contracts, including bank deposits, sovereign debt, pensions and wages would be redenominated in new Drachma and a sharp devaluation, say 65 per cent, of the new currency would follow. As soon as an exit was anticipated, depositors would flee Greek banks and all new lending governed by Greek law would effectively cease. Even before the exit, the sovereign and the banking system would fail because of a lack of funding. Following the exit, contracts and financial instruments written under foreign law would likely remain euro-denominated. Balance sheets would become unbalanced and widespread default, insolvency and bankruptcy would result. Greek output would collapse.

Greece would temporarily gain a competitive advantage from the sharp decline in the new Drachma’s value, but like Portugal, Spain and Italy, Greece does not have the persistent nominal rigidities to make it a lasting competitive advantage. Soaring wage and price inflation would restore the uncompetitive status quo. Without external funding, imports would collapse, disrupting domestic production. Aggregate demand and aggregate supply would chase each other downwards.

If Greece storms out of the eurozone there might be little fear other countries would follow suit.

However, if Greece is pushed out of the eurozone because other member states refuse to fund the Greek sovereign and the European Central Bank refuses to fund Greek banks, the markets could beam in on the next most likely country to go. This could prompt a run on that country’s banks and stop funding for its sovereign, financial institutions and companies. Fear might actually then force the departure of the afflicted country. Exit contagion might sweep right through the rest of the eurozone periphery – Portugal, Ireland, Spain and Italy – and then begin to infect the “soft core”of Belgium, Austria and France.
A disorderly sovereign default and eurozone exit by Greece alone would be manageable. Greece accounts for only 2.2 per cent of eurozone area GDP and 4 per cent of public debt. However, a disorderly sovereign default and eurozone exit by Italy would bring down much of the European banking sector. Disorderly sovereign defaults and eurozone exits by all five periphery states – an event to which I attach a probability of no more than 5 per cent – would drag down not just the European banking system but also the north Atlantic financial system and the internationally exposed parts of the rest of the global banking system. The resulting financial crisis would trigger a global depression that would last for years, with GDP likely falling by more than 10 per cent and unemployment in the West reaching 20 per cent or more. Emerging markets would be dragged down too.
Exits by Germany and other fiscally and competitively strong countries could be even more disruptive. This might occur amid attempts to introduce a one-sided fiscal union with open-ended and uncapped euro-bonds or other transfers from the strong to the weak without a corresponding surrender of fiscal sovereignty to prevent future crises or if the ECB were to “go Weimar”. I consider this highly unlikely, with a probability of less than 3 per cent. Following such an exit, Germany and the other core eurozone member states (perhaps excluding France) would introduce a new Deutschmark. The sovereigns in the periphery would default. The new Deutschmark would appreciate sharply. Financial institutions in the new area would have to be bailed out because of losses from exposure to the old periphery and the soft core. As nothing would be holding the remaining eurozone countries together, the rump would split into perhaps 11 national currencies. The legal meaning and validity of all euro-denominated contracts and instruments would be up for grabs. Everyone, except lawyers specialising in the Lex Monetae, would become much poorer.
Even if a break-up of the eurozone does not destroy the EU completely and precipitate the kind of conflicts that disfigured the continent in the past, the case for keeping the show on the road seems rather robust.
The writer is chief economist at Citi

[raptor]

That is an excellent article. I agree with his assessment on almost every point. My disagreement is likely based upon semantics. The key disagreement I have is his probability of Greece exiting the EU is at 20% to 25%. IMO the probability is higher than that of Greece deciding to opt out of the EU. Like I said semantics.

[J.C.]

Interesting that he predicts such different outcomes if Greece "storms out" rather than is pushed out. No one knows what goes on behind closed doors. If they do "storm out" it would not be unreasonable to speculate that they were pushed out and agreed to make it look voluntary in exchange for some considerations.

[Kommander]

What do you think Tue probability is Raptor? I rate it at about 50% myself.

[TacAir]

That is an excellent article. I agree with his assessment on almost every point. My disagreement is likely based upon semantics. The key disagreement I have is his probability of Greece exiting the EU is at 20% to 25%. IMO the probability is higher than that of Greece deciding to opt out of the EU. Like I said semantics.

So, this little gem caught my eye:
The resulting financial crisis would trigger a global depression that would last for years, with GDP likely falling by more than 10 per cent and unemployment in the West reaching 20 per cent or more."

Given that US unemployment is already at or pushing 20%, what does a Euro fail really mean for the US? Loss of market? WHat will this do to the (world) price of oil?

My concern is due to 85% of all revenue to the SoA is oil money, a fall in oil prices would be catastrophic.

[raptor]

What do you think Tue probability is Raptor? I rate it at about 50% myself.

I have no idea what the true probability is. My opinion and it is simply opinion is that the probability of Greece exiting is closer to 50/50.

It is a crap shoot though. I think it has finally dawned on Germany that Greece exiting would be bad. France had already figured this out. So I think the powers that be sat down did the math and I think the math shows it cheaper to prop up Greece than let it fail. However, if they prop up Greece what do they do about Italy and Spain? If they go to Greece's aid it sets expectations for those guys. Thus we have seen the recent hard line posturing with Greece.

Greece is not dim. They understand that it is cheaper to bail them out and therefore they are also posturing and bargaining. I think if they put in the agreement between all EU countries for automatic fiscal restraints this will tip the balance in the EU's favor and they can carve Greece out as an exception. Without this agreement Greece will be a negative exception and there will demands made of Greece that will force it to have a referendum to stay in or leave the EU. The Greeks will opt to leave rather than face the fiscal constraints imposed by the EU.

My opinion only. This is by no means a fact.

[phil_in_cs]

I think he means the official rate, now at 8.6%, would get to 20%.

[Kommander]

So where is all this money going to come from? Also I am not sure of these countries governments ability tlo maintain cohesiveness on the face of the spending cuts they will have to make.

[phil_in_cs]

As a data point, there will be "automatic sanctions" if a nation's annual deficit is more than 3% of GDP. As a comparison, the USA's GDP is approximately $14.5 Trillion, so if we were part of the deal we'd have to reduce our annual deficit to $435 Billion, a reduction of about $1,000 Billion dollars ($1,000,000,000,000)

That would be very difficult here, as the recent "debt commission" found they couldn't trim much from growth rates, much less trim from actual dollars spent. Reducing spending that much would throw millions out of work in the short run.

http://www.bbc.co.uk/news/world-europe-16057252

I am not seeing what the "automatic sanctions" entail yet. I will have more time to look later, but if anyone sees them I am very interested to know.

[raptor]

As a data point, there will be "automatic sanctions" if a nation's annual deficit is more than 3% of GDP. As a comparison, the USA's GDP is approximately $14.5 Trillion, so if we were part of the deal we'd have to reduce our annual deficit to $435 Billion, a reduction of about $1,000 Billion dollars ($1,000,000,000,000)

That would be very difficult here, as the recent "debt commission" found they couldn't trim much from growth rates, much less trim from actual dollars spent. Reducing spending that much would throw millions out of work in the short run.

http://www.bbc.co.uk/news/world-europe-16057252

I am not seeing what the "automatic sanctions" entail yet. I will have more time to look later, but if anyone sees them I am very interested to know.

Yep this is what has to pass. They may dither with the 3% of GDP and/or allow a phase in or whatever. However, if this passes I think they can carve Greece out as an exception and keep the EU together as is.

[phil_in_cs]

... if this passes ...

That's relevant too. Only the UK said "No", but they aren't part of the Euro anyway. However, many of the PM's said they'd need their parliaments to agree since this is changing the treaty that they'd agreed to.

That might take a while, and the markets could get ahead of them again if they aren't careful. There were downgrades today on major French banks.

[Kommander]

So what happens if the people don't take the enforced austerity lying down?

[phil_in_cs]

So what happens if the people don't take the enforced austerity lying down?

The "automatic sanctions" are undefined, so there isn't an answer for this.

Also from the BBC piece:

Private investors never again to be asked to take losses, as in Greece

Does that give banks and hedge funds carte blanche on sovereign debt?

[raptor]

... if this passes ...

That's relevant too. Only the UK said "No", but they aren't part of the Euro anyway. However, many of the PM's said they'd need their parliaments to agree since this is changing the treaty that they'd agreed to.

That might take a while, and the markets could get ahead of them again if they aren't careful. There were downgrades today on major French banks.

http://finance.yahoo.com/news/treaty-sa ... 47671.html

Britain, which doesn't use the euro, led the push against a revised treaty tying all 27 EU countries to tighter fiscal union. The others that didn't sign on were Hungary, the Czech Republic and Sweden.

There were other countries that did not sign yet. IMO and it is only opinion: 100% of the countries that use the Euro need to sign up. I think the other countries using their own currencies could slide. Though obviously unanimity is always better.