The weekends are monotonous. Every Friday, a bank or two (or five) are closed/merged by the FDIC. Every Saturday or Sunday another bailout is announced for Greece.
This last announced bailout is worth €30 billion or €45 billion (what’s the fifteen billion? A typo?) The check is in the mail; Greece wants even more money at the same time the word is that the Greeks still haven’t ASKED for any money … who knows what’s going on?
Of course, the various stock markets will go up. All of this back and forth nonsense is mini- drama to keep the stocks rising. Bailouts have taken such an out- sized place in the public lexicon that the threat of default on any level is completely discounted by the markets. Defaults have lost their potency, the outcome is complacency.
The stock markets are supposed to represent the publics’ interest in finance, yet the markets are wholly- owned by their specialist participants, they trickle upward with evanescent volume and in ways that suggest complete manipulation by sinister forces. Who cares what the markets dictate or represent?
Interestingly enough, the dog that isn’t barking during this crisis/entertainment is China, which would certainly seem to have a more than passing interest in goings on in Greece and elsewhere on the Continent.
Looking at quarterly IMF data, the euro’s share of reserves has risen to 27.4 percent at the end of 2009 from 18 percent for its pre-euro constituents in 1999. This compares with a 62 percent share for the dollar at last count.
What is more, nearly all respondents in a poll of 43 reserve managers taken late last year said the euro’s standing as a reserve currency had been enhanced since the credit crisis. Some 65 percent said the dollar’s had declined.
So much for last year.
One of the biggest hurdles the euro has faced as a reserve currency has been the quality and liquidity of its government bond market compared to the U.S. Treasury alternative.
To be sure, the amount of euro zone bonds of maturities of more than a year is 50 percent bigger than in United States and the benchmark German bund market may be an adequate and liquid safe haven for stashing reserves.
But bunds only account for 19.5 percent of total euro zone government debt outstanding. Italy, Portugal, Ireland, Spain and Greece together account for almost 45 percent.
Even if reserve managers do not think euro breakup is likely, the possibility of capital loss, evaporating liquidity and even IMF-recommended debt restructurings could well make them wary of holding anything but bunds.
While Beijing wastes no opportunity to lambaste the US for excess credit creation even as it relies more on the liquidity and market depth this credit provides. The euro’s vulnerabilities are unmasked: either it vanishes from circulation into a deflationary German black hole or the Euro- team spews out endless amounts of euros in order to gain in quantity what it cannot by the attraction/compulsion of ordinary commerce. Certainly, a euro-spew policy would effect China’s hoard, just as the idea of a Fed ‘printing orgy’ is enough to generate squealing from Beijing.
The serial bailouts of Greece, then Spain, Portugal, Ireland and Italy would represent just such a currency flood and de- facto devaluation, just as default would be a devaluation centered around the failure of the euro ‘idea’.
Why wouldn’t the Chinese participate in the euro restructuring? Any desire to be taken seriously as a major socio- economic player in the greater world would require the Chinese do more than sit on their hands. They are in G20, they aren’t in Europe. but are major trading partners. They have interests … but, what are they?
Since the euro cannot be devalued for an individual country, that country’s ‘austerity’ would be represented by wage and benefits cuts. See ‘Latvia’ for details. The Greeks will not take this sort of nonsense without fighting hard in the streets. It’s not likely that Chinese would be interested in being any part of that kind of disturbance. At the end of the austerity road is deflationary collapse and the end of the Greek government – and that of any imitators.
Bernanke – not Zhou Xiaochuan – is going to write a check to bail out Greece – and do so from negligible euro reserves. The US taxpayers will be on the hook as it is for much of the bailing that has taken place since 2007. This is the issue that the Germans are frantically trying to avoid; a German or Brussels central bank takeover of the entire German economy. Germany looks to Bernanke and Geithner with horror and swears to never let anything like what has taken place in Washington take place in Berlin. At the same time, Greece is too big to fail. Ten thousand miles away, China sits on a massive hoard of euros! China could lend some of its euro chump- change to the Greeks @ 5%? This would be a good opportunity for them to make an international statement, head off a general euro collapse and schtup the annoying Americans at the same time …
The Chinese appear more interested in bolstering the value of their dollars vis- a- vis diminution of the euro. Whether they have made this calculation or not is irrelevant.They have already read the handwriting on the (Great) wall written by the upper bound price peg between crude oil and the dollar. By treating the euro- crisis with silence, the Chinese appear to be making a strong dollar bet, one which would have the effect of influencing the outcome as a consequence of the betting process itself. China looks to the continent and see a diminished competitor that cannot harm them even with a significant euro devaluation. The Chinese are doing what US is unable to do for itself; pick a winner. That ‘winner’ is the dollar.
It is not only the quantity of a currency but what can be bought with a currency that matters, what the currency represents.
When a good is exchanged for a dollar … or a euro, that euro becomes a representative of what that euro would in turn be offered against. In days past most currencies were freely exchangeable for gold – currencies represented or stood in place of gold. Currencies were pegged at fixed rates and gold reserves were exchanged to keep current accounts between countries in balance. The ‘representation’ argument means that a currency’s value is relatively stable over time.
Post- gold standard, currencies up until recently have represented production and commerce in various iterations rather than a raw material. With increases in real energy costs and the resulting contraction in production and commerce, currencies poorly represent diminishing value or returns on production and commerce. This is particularly true in developed countries where commerce must support higher aggregate workforce compensation. This is a cost that diminishes the value of commerce even as the same cost provides final or top- line demand for the products of commerce as well as capital for new investments.
In the Eurozone the various exchange rate, between borrowing capacity and the euro float in any given country, has tended to fix or embed existing imbalances. Merchantilist Germany is more productive- they have a greater output – than the Club Med states. The Germans earn by manufacturing high value products. The Meds earn – or did earn – by entertaining Germans! In a context of increasing/expanding commerce, more German output led to more Mediterranean vacations. More vacations meant more commerce; more Greek purchases of German goods and services.
The Club Med countries also earned – as did most home owning Americans – by arbitraging the different borrowing spreads against the spread- driven rise in home prices and other assets. Everything was okay until the spreads turned and bit the Meds in the ass! There is no difference between sub- prime Fresno, California and sub- prime Greece. Real returns from commerce vanished first leaving speculative returns. When those disappeared nothing was left. Both euros and dollars represented first and best commerce, then gambling. Now dollars represent oil and euros represent nothing in particular but frustration! The casino has been shut down and Germans aren’t going to be taking any more vacations. The Club Med does not have any oil of its own and it can offer little of value for others’ oil.
As I have said before on this blog what is happening is not the end of capitalism but the end of financialism – of money making money. In the onrushing future, the only way to earn will be to provide an energy- value added good or service. This is extraordinarily difficult! Creativity and artistry will gain in importance against ignored externalities (fraud), luck and capital.
Right now the euro is a bizarre ‘negative currency’; it represents a shrinking pool of dollars – as the euro sellers have learned over the past few months. These dollars in turn represent the vital resources that the Eurozone requires. The ‘new’ spread arbitrage is not between the different euro bond rates but between the euro itself and crude oil which is represented by the dollar. Without cheap crude oil there is no European economy.
This is a fiendish three- way arbitrage that is sublimely destructive. To the euro because of uncertainty, destructive to the dollar for the exact opposite concern.
Some currency HAS to represent crude oil. It is dollar by default, because the dollar is ubiquitous and because of what the dollar will buy in addition to crude oil. The consequent dollar hardness is a constant, a certainty. The hard dollar is stringently deflationary and there is no escape from it. Also inescapable is the certainty of the dollar itself. Dollars representing crude oil makes the dollar as important is oil to the economy. The alternative is barter. As dollars disappear into hoarding and become more valuable than gold or diamonds, barter is what will emerge!
The euro can only buy (smaller amounts of) dollars or it can buy Greek/Italian vacations that nobody can afford in euros either because nobody has any to pay for them or because there are so many euros that they have no meaningful purchasing power. This uncertainty itself prices the euro to worthlessness, this in turn makes speculating against them fruitless.
How do you short the euro? Who will take the other side of the trade? How is there to be a functioning economy? The sum of austerity is ruin and feudalism, debt slavery to the citizens leading to revolution and war!
This is perhaps why the Chinese are turning their backs on the opportunity to become Europe’s ‘New Best Friend’. The euro is not just a deflation trap but a lost cause.
The issue of Greek – and Italian, French, Spanish, Irish, even German ‘competitiveness’ becomes questionable. The assumption is that Greece and the other Club Med countries have industrial economies that have over- borrowed and over- spent their productive labor too high relative to that of other industrial economies.
This is nonsense of course. Greece as well as the other Club Med countries are not industrial states. Theirs’ is a tourist trade. Competitiveness is not relevant. There is nothing they can do that they have not done already: cut hotel room rates and prices for restaurant meals This indeed is part of Club Med’s difficulty in the first place! The decline of aggregate wages represented a decline in top- line demand for German and others’ goods. The same thing has taken place in America. The replacement for earning power was credit. The credit is gone, there is nothing left to supplant wages which cannot rise because there is no productive context nor are there customers even if there was.
Instead, it is the consumption side of the ledger that matters; Greece either must export more or import less; it has little to export which is true for most of the other countries in Europe. Gone are the days of European export supremacy or even parity. Exports belong to the heavily industrialized slave labor countries plus Japan and Korea. The issue is European imports.
For Greece and the other Club Med countries it is the imports from export powerhouse Germany. The imbalance in the Eurozone tilts toward free- rider Germany and the middle east oil producers which have reaped the profits of merchantilism and vendor finance. As the limits to consumption have been reached, adding a few billion will give time at great cost for Greece to restructure – if indeed any billions are forthcoming. Will Germany restructure as well?
Will Saudi Arabia?
This issue is not simply Greece’s … or even the ‘uncompetitive’ Club Med. It is all of Europe. To become more (relatively) competitive, Europe needs to import a lot less, it must import less crude oil, which represents the euro drain translated into the increasingly hard dollar which is the gateway to petroleum access. It must also import less Chinese goods, which is another reason why the dog does not bark.
The choice is between two vicious cycles: one is a short- term dollar decline (and euro decline) and another oil price spike. The other is a decline in oil prices in hardening dollars and the twilight of the euro.
The devil and the deep blue sea …