Thursday, July 21, 2016

Europe Is Heading Into A Crisis
"The bail-in policy of the IMF and ECB was directed at the idea that the rich would pay, even if that meant paying for pension funds. But in Italy, stock ownership is distributed predominantly among individuals. Therefore, politicians were unwilling to deal with the crisis. Forcing bank holders of shares and bonds to take a haircut meant the middle class would be scalped, and that meant political unrest. Italy never cleaned up its banks, and as such, it has been a growing problem with about €360 billion in underperforming loans. This is nearly 18% of all loans in Italy. They are dealing with this in the typical manner of forcing haircuts on those who have been stupid enough to invest in banks in other countries that amazingly go back for more pain and suffering. In Italy, this may lead to a pitchfork revolution .. This is not unusual. This was also the core crisis that created the Great Depression. In that case, foreign governments issued bonds in dollars in small denominations and the New York bankers sold them to the general public. The crisis emerged because this was a Sovereign Debt Crisis in 1931. Hence, there could be no bailout domestically within the United States to protect foreign bonds sold to domestic mom and pops .. When mom and pops hold the bonds and shares of the banks, the option of a haircut is greatly diminished. The risk that we now see in Europe is the further deflationary pressure of the collapse of capitalization of the European financial system. This is not something that can be resolved by the ECB .. The outcome can only be the destruction of the euro and the single monetary system. The danger here is that the politicians in Brussels will fight to save their personal power at the expense of the entire continent."
- Martin Armstrong
link here to the reference

1 comment:

Anonymous said...

Quite so.

As Armstrong says being on a Euro standard is like being on a gold standard. Unfortunately, when you use a Euro or Gold standard it is not possible to devaluation your way out of a mess that naive politicians, promising all to everyone, can produce.

You are always going to have stupid politicians from time to time, when the electoriate is naive. For example, in Canada we have TrueDo who was elected using a platform of increasing national debt and higher taxes on the the rich .... (the very people who use their savings to create jobs). The man is so naive about economic affairs he is not even versed in the saga of Greece and other European countries. In politics being the popular guy of he moment is what it takes in many places in the world.

Brexit represents not only a chance for what remains of British society but also a chance for the economy. The latter is not clear at the moment to many and even to the likes of May, who seems to want to have a committee meeting about the issue rather than exercise Churchillian leadership.

A dreadful choice for a P.M. but who else was there ?