Wednesday, September 14, 2011
The Daily Note - Euro on the Dance Floor
So now Euro is saved. Monday, when I started writing this article it went like this: So the Euro is again on the brink of collapse, OH NO, change of news, saved again. Greece threatens to default nay, be saved once more and we, little folk, again have to grind our teeth in worry, or wait it's saved so grin with elation, grind in worry, grin in elation as the news keeps spinning round and round. If ever there was an orchestra out of tune, playing music while the dancers on the floor try to dance as if the tune had a tempo, this is it. Are we to dance fast to slow or slow to fast? What steps go with inept what can the dancers do to be heard by a conductor who's convinced it's the dancers who are uncoordinated? The fact that the orchestra cannot play coherently any longer is beyond anyone's acceptance. And, once more we have to ask the question, who is the conductor in this? Is is Germany, is it France are they all in it together?
Here are a few unvoiced "facts". The EU created what it's stepping in now by forcing the new entry countries to borrow from the EU in order for their own old currencies to become stronger. Only by meeting certain criteria by a certain deadline could the countries qualify for entrance into the fold. The countries in question were mostly former Soviet block and countries struggling to make it in this new western world and wished desperately to be accepted politically and nationally into the "free" world. Many of the former Soviet block nations were eager to join Europe for protection also which is a topic for another article but in short, by doing so, they created a false value for the EU. Remember when the Euro was strong? It was the result of the false value, as countries borrowed, they brought in "strength" in outlook of the interest rates to be collected on those loans.
Trouble is the other "fact" that played into this mess seldom mentioned is that those nations that borrowed also had to start selling assets in order to stay solvent and as foreign companies saw opportunity, it was not that hard to do. But by doing so, they sold off their ability to grow domestic products. The much needed the capital was for building long neglected infrastructures and to modernize companies which were not updated during the socialist/Soviet years. (An example about how well socialism works.
It is perhaps the easier to explain if you think of it in the same vain as what happened in USA with the housing market. When people were sold on the thought that in order to become prosperous, all they had to do is borrow and buy a house and with added emphasis that they should be able to borow and qualify for housing loan no matter what level of income they had. The housing inflation that ensued starting mid to late 1990's was the result and as more speculators jumped in, the bubble developed, the ponzi scheme grew. Well, you know the rest; when people cannot pay back loans, the house of cards collapses literally.
So, in summary, in order to join the EU, countries had to borrow to make their weak currencies strong and then when the currency started pouring in and become available, people were feeling a new found prosperity and they spent as promises of more followed but so did inflation with as much as 30% in some countries. It becomes impossible to collect enough revenue in order to pay off loans under those circumstances. So more money lent/borrowed/thrown into the economy. On the one hand people get used to prosperity, and the promise of more easy living and on the other hand, they see the value of what they have eroding. A bad arrangement for playing by any orchestra.
Finally adding to the problem is the Socialist mentality that is prevalent throughout Europe. People of the former Soviet bloc were not yet weened off the idea that Government should be their caretaker and since most of Europe is of like mind, it is not hard to imagine how the people will react when threatened by the loss of that "security". Socialist Democracy still relies of the Government to run the roost making it almost impossible to become independent and truly prosperous for the long run.
So, where will it end? Ultimately what worries me is the very thing that is happening which is the formation of another central bank. Just another layer growing on a stinking onion. In other words another ruling class functioning on the "needs" of the many. Artificiality continues, reality is hidden, collapse is inevitable. Therefore the ultimate question is: in whose lifetime will the orchestra finally stop playing? Shall we dance?
Happy Trading, Living and Dancing
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