Is the end nigh for the Euro? [vol. 3]

[AstonZagato]

jonah35 said:

AstonZagato said:

I suppose that one could argue that it is preventing deflation rather than creating inflation.

The Italian government issues bonds that are bought by the Italian Central Bank by adding to its balance sheet (more zeros on a computer screen). The Euros created are poured into the black hole that is MPS's balance sheet. No new money emerges into the system to devalue the current stock of Euros.

Without the rescue, then MPS implodes and savers, depositors, bond holders (individuals, pension funds, institutions), have lost money and that is effectively sucked out of the system. All they are doing is refilling the stock to account for what has been destroyed.

Not sure I buy it as that money was destroyed months ago.

Ok thanks. Useful post. So, the italian government have just got into even more debt then? Why are people still lending the italian govt money then via buying govt debt? They are clearly bankrupt. Wont the italian central bank be absolutely skint/in debt? I know they can keep doing this for a while but surely there will be an almighty crash when no more money can be lent?

What are the oknock on effects of this? What amd who will eventually suffer?

I cant help but think the credit crunch may look tame in comparison to what will happen when the house of cards falls this next time

But no-one is buying it. The buyer is the Italian Central Bank or the ECB. They do it with "printed" money (in reality it is just zeros on a computer screen). It's an accounting trick to create money for governments to spend that they could not otherwise raise in the capital markets.

The current conceit is that, eventually, all the borrowed money will be repaid and the zeros on the computer screen will be slowly erased. By creating a little inflation and growth, the government's tax revenues increase. The value of the debt is deflated away. They slowly become solvent again and the whole nightmare finishes.

However, a little inflation is very difficult to achieve. It could tip all too easily into rampant- or even hyper-inflation. This sorts the debt out but impoverishes everyone who is not rich in "hard" assets (real estate, companies, etc). As one German central banker put it, "inflation is like urinating in your underpants: there is a brief moment of relief and a lovely warm feeling - but the long term consequences are very unpleasant".

The other alternative is deflation. This terrifies governments as they will all default if this were to happen as their tax revenues decline and they cannot service the debt.

2% inflation for 35 years will halve the debt as a percentage of GDP (assuming they don't borrow any more).

[B'stard Child]

RYH64E said:

B'stard Child said:

And one of my key reasons for my vote to leave. The U.K. will still be affected when it does but I'd rather we were outside watching than inside being dragged down into the mire

If the EU and/or the euro were to collapse (and I don't think that either will) do you think it would make any difference whether we were in or out? The resulting chaos would be equally disastrous for the UK.

You can read right? The bit in bold.....

I think the impact will be less if we have concluded the divorce before it happens.

[Digga]

Apropos of Ponzis, debt and misappropriation, Mrs Digga and I have just cleared the decks at Digga towers for the annual, Boxing Day, inter-family Monopoly war. House rules say anyone not caught lying, cheating or stealing will be ejected from the premises and only designated drivers are allowed to remain sober and coherent.

I'm thinking of going full QE this year; writing my own promisary notes. Where'd I get that idea?

Merry Boxing Day one and all!

[RYH64E]

davepoth said:

RYH64E said:

If the EU and/or the euro were to collapse (and I don't think that either will) do you think it would make any difference whether we were in or out? The resulting chaos would be equally disastrous for the UK.

Two things will happen. Firstly, all trade agreements the EU has will become null and void, and secondly the new Deutschmark will become a reserve currency and skyrocket in value which will make British exports much cheaper than German ones.

We will have the jump on the rest of the former EU in getting trade deals with important partners, and anyone who was buying stuff from Germany will be put off by the prices.

Neither the euro nor the eu is going to collapse any time soon, so it's a moot point.

I'd be, and am, more concerned about the business we're likely to lose in the near future (as Trump's new trade chief says, Brexit is a 'God given opportunity' for our rivals to steal trade from Britain) than the opportunities that might result, some undefined time in the future, from something that's not likely to happen.

From what I can see, most of the proposed new free trade deals are more likely to result in low wage economies such as India and China getting even better access to our home market to sell us more cheap tat. It's much easier to compete with the French and Italians in the enormous market that's on our doorstep than it is to go head to head with the likes of China in various far flung markets around the world.

[chris watton]

RYH64E said:

Neither the euro nor the eu is going to collapse any time soon, so it's a moot point.

You hope....

[FN2TypeR]

chris watton said:

RYH64E said:

Neither the euro nor the eu is going to collapse any time soon, so it's a moot point.

You hope....

I doubt they will either to be honest, but I can see the continued southern European depression continuing for a good while and continued hardship whilst the banking sector remains in a parlous state.

[davepoth]

RYH64E said:

Neither the euro nor the eu is going to collapse any time soon, so it's a moot point.

I'd be, and am, more concerned about the business we're likely to lose in the near future (as Trump's new trade chief says, Brexit is a 'God given opportunity' for our rivals to steal trade from Britain) than the opportunities that might result, some undefined time in the future, from something that's not likely to happen.

From what I can see, most of the proposed new free trade deals are more likely to result in low wage economies such as India and China getting even better access to our home market to sell us more cheap tat. It's much easier to compete with the French and Italians in the enormous market that's on our doorstep than it is to go head to head with the likes of China in various far flung markets around the world.

Nobody thought we would leave the EU. Nobody thought Trump would get elected. It's not a moot point.

That Trump trade chief is Wilbur Ross, I believe. Isn't he the same Wilbur Ross who has an interest in the Bank of Cyprus, and would have been making those comments as someone who wanted success for his investments rather than in terms of his new role?

https://www.bloomberg.com/news/articles/2016-12-22...

We can't go toe-to-toe on low margin manufacturing with China or India, tariffs or not. Our strengths are in high value added manufacture, services, media, and intellectual property, and we lead the world in those. Unfortunately, most of the other economies in Europe are in the same boat, so when we trade in Europe we're directly competing against everyone else.

A deal with India that made low margin stuff cheap while reducing the tariffs on the things we make (like scotch, for example) would be mutually beneficial, as we have differing strengths and weaknesses. That's how trade deals can be of most benefit.

[chris watton]

FN2TypeR said:

chris watton said:

RYH64E said:

Neither the euro nor the eu is going to collapse any time soon, so it's a moot point.

You hope....

I doubt they will either to be honest, but I can see the continued southern European depression continuing for a good while and continued hardship whilst the banking sector remains in a parlous state.

Nor me, but when it does happen, I think it will be very quick and very nasty. The longer you hold off the inevitable, the worse it will be when it does go pop.

[jonah35]

AstonZagato said:

jonah35 said:

AstonZagato said:

I suppose that one could argue that it is preventing deflation rather than creating inflation.

The Italian government issues bonds that are bought by the Italian Central Bank by adding to its balance sheet (more zeros on a computer screen). The Euros created are poured into the black hole that is MPS's balance sheet. No new money emerges into the system to devalue the current stock of Euros.

Without the rescue, then MPS implodes and savers, depositors, bond holders (individuals, pension funds, institutions), have lost money and that is effectively sucked out of the system. All they are doing is refilling the stock to account for what has been destroyed.

Not sure I buy it as that money was destroyed months ago.

Ok thanks. Useful post. So, the italian government have just got into even more debt then? Why are people still lending the italian govt money then via buying govt debt? They are clearly bankrupt. Wont the italian central bank be absolutely skint/in debt? I know they can keep doing this for a while but surely there will be an almighty crash when no more money can be lent?

What are the oknock on effects of this? What amd who will eventually suffer?

I cant help but think the credit crunch may look tame in comparison to what will happen when the house of cards falls this next time

But no-one is buying it. The buyer is the Italian Central Bank or the ECB. They do it with "printed" money (in reality it is just zeros on a computer screen). It's an accounting trick to create money for governments to spend that they could not otherwise raise in the capital markets.

The current conceit is that, eventually, all the borrowed money will be repaid and the zeros on the computer screen will be slowly erased. By creating a little inflation and growth, the government's tax revenues increase. The value of the debt is deflated away. They slowly become solvent again and the whole nightmare finishes.

However, a little inflation is very difficult to achieve. It could tip all too easily into rampant- or even hyper-inflation. This sorts the debt out but impoverishes everyone who is not rich in "hard" assets (real estate, companies, etc). As one German central banker put it, "inflation is like urinating in your underpants: there is a brief moment of relief and a lovely warm feeling - but the long term consequences are very unpleasant".

The other alternative is deflation. This terrifies governments as they will all default if this were to happen as their tax revenues decline and they cannot service the debt.

2% inflation for 35 years will halve the debt as a percentage of GDP (assuming they don't borrow any more).

Thanks again.

So, rather than just bail out mpds why dont they print more money, say 5 trillion to bail out and recapitalise every italian bank and give 5 grand to every italian for them to spend?

That would raise inflation more but it would give people money, make them happy, the banks not indebted and so on.

Yes, there would be more fake debt or debt thats never going to be repaid but no one nor any markets seem to care about this? No one/no markets care about how much debt a country has - the markets have increased recently or certainly not fallen, banking shares havent fallen and the man in the street has no idea how much italy owes.

So, why not borrow more?

[davepoth]

jonah35 said:

Thanks again.

So, rather than just bail out mpds why dont they print more money, say 5 trillion to bail out and recapitalise every italian bank and give 5 grand to every italian for them to spend?

That would raise inflation more but it would give people money, make them happy, the banks not indebted and so on.

Yes, there would be more fake debt or debt thats never going to be repaid but no one nor any markets seem to care about this? No one/no markets care about how much debt a country has - the markets have increased recently or certainly not fallen, banking shares havent fallen and the man in the street has no idea how much italy owes.

So, why not borrow more?

The Germans still remember this:



Which is why they don't want to turn the money taps on fully.

[FN2TypeR]

jonah35 said:

Thanks again.

So, rather than just bail out mpds why dont they print more money, say 5 trillion to bail out and recapitalise every italian bank and give 5 grand to every italian for them to spend?

That would raise inflation more but it would give people money, make them happy, the banks not indebted and so on.

Yes, there would be more fake debt or debt thats never going to be repaid but no one nor any markets seem to care about this? No one/no markets care about how much debt a country has - the markets have increased recently or certainly not fallen, banking shares havent fallen and the man in the street has no idea how much italy owes.

So, why not borrow more?

If you have more of something available (money in this case) then it's value decreases, in general anyway, that would fuel massive inflation and that is a scary prospect indeed, it helped to ruin Germany in the 1920s for example - the price of imported goods rose dramatically as the German Mark went from being two to the US dollar to millions to the dollar in a short space of time, banks and industry collapsed and unemployment rose at a rate of hundreds of thousands per month.

[AstonZagato]

davepoth said:

jonah35 said:

Thanks again.

So, rather than just bail out mpds why dont they print more money, say 5 trillion to bail out and recapitalise every italian bank and give 5 grand to every italian for them to spend?

That would raise inflation more but it would give people money, make them happy, the banks not indebted and so on.

Yes, there would be more fake debt or debt thats never going to be repaid but no one nor any markets seem to care about this? No one/no markets care about how much debt a country has - the markets have increased recently or certainly not fallen, banking shares havent fallen and the man in the street has no idea how much italy owes.

So, why not borrow more?

The Germans still remember this:



Which is why they don't want to turn the money taps on fully.

Indeed. Wheel barrows full of notes to buy a loaf of bread.

They have even talked about "helicopter money" (effectively giving everyone a chunk of cash - akin to pushing bags of notes out of a helicopter) in Japan. It is an economic move that is being considered. It is occasionally mentioned in Europe and the UK too.

The trouble is that such a move has numerous drawbacks:

• The confidence in the economy evaporates - this is the last refuge of the bankrupt
• The banks will just releverage their balance sheets on stupid lending, so the problem probably is not solved - more can kicked down the road
• The individuals who get the money probably spend it on pointless tat, usually imported, rather than doing anything economically valuable with it - probably more help for China than your own economy.

[jonah35]

Yes but if the currency is the euro and italy prints 5 trillion then inflation would go up everywhere not just italy so overall italy would be better off than france spain germany etc.

[FN2TypeR]

I believe such measures are reserved by the ECB meaning that member states are unable to enact such a thing. Unlike say, the UK, which is free to tinker away to its hearts content in pursuit of aligning or manipulating its currency as it sees fit.

[Gargamel]

Whereas a tax cut on say VAT all across Europe would have a similar effect as 'helicopter money'.

Tax cuts are the one fiscal policy Europe hasn't tried, which is odd as it is a known stimulus to both moderate inflation, growth and prosperity.

Especially on a sales tax such as VAT.

[wc98]

Gargamel said:

Whereas a tax cut on say VAT all across Europe would have a similar effect as 'helicopter money'.

Tax cuts are the one fiscal policy Europe hasn't tried, which is odd as it is a known stimulus to both moderate inflation, growth and prosperity.

Especially on a sales tax such as VAT.

that requires the assumption that moderate inflation, growth and prosperity are desired at this stage of the eu project. something i am not entirely convinced of.

[Gargamel]

Happy New Year

Been quiet on here, so a question. Given the (very) dismal failure of current econmics to deliver predictions, or any kind of accurate modelling. What are your thoughts for this year

FTSE 7200 this morning, I would predict it will close this year lower.
Pound at $1.21 and Euro 1.17 - I think the £ will be higher for both by the year end

Think the US economy will start to really perform this year. That tends to pull the UK along fairly heavily.

Eurozone will grow too, in the absence of any other interference.

Brexit impacts will remain low in 2017.

French Election - seems to be the most likely banana skin for the Euro, along with Greek & Italian debts.

Will be interesting to watch and see if Eurozone can use the next 12 months to consolidate its position - given we have a relatively benign economic climate right now. Perhaps a chance to use the breathing space to update policy and stop QE (inflation at 1.1% today)

[FN2TypeR]

Gargamel said:

Happy New Year

Been quiet on here, so a question. Given the (very) dismal failure of current econmics to deliver predictions, or any kind of accurate modelling. What are your thoughts for this year

FTSE 7200 this morning, I would predict it will close this year lower. Agreed, I think it will be back below 7,000 come Easter - although any post article 50 currency drops might make it surge again

Pound at $1.21 and Euro 1.17 - I think the £ will be higher for both by the year endAgreed again, with another drop post article 50, but higher by years end, but not substantially so.

Think the US economy will start to really perform this year. That tends to pull the UK along fairly heavily. Also agreed, especially if Trump turns on the money taps and starts investing in public infrastructure and military spending etc

Eurozone will grow too, in the absence of any other interference.I think the average will be no better than it has been, so modest at best

Brexit impacts will remain low in 2017. [b[Also agreed - I'd look around 18 months into the future for the real bite, if there is one, once the negotiations are well under way and the outcome is more certain giving markets/people/businesses impetus to react (or not)[/b]

French Election - seems to be the most likely banana skin for the Euro, along with Greek & Italian debts. Can't see Le Pen winning TBH, but t'other chaps intended reforms, laxer labour laws, higher retirement ages, sacking public sector workers etc etc could hobble him - still, I think he'll clinch it, just

Will be interesting to watch and see if Eurozone can use the next 12 months to consolidate its position - given we have a relatively benign economic climate right now. Perhaps a chance to use the breathing space to update policy and stop QE (inflation at 1.1% today)

I am not an expert - so I could (and probably am) wrong on many of those counts, hey ho.

Happy New Year, all.

[YankeePorker]

Gargamel said:

Whereas a tax cut on say VAT all across Europe would have a similar effect as 'helicopter money'.

Tax cuts are the one fiscal policy Europe hasn't tried, which is odd as it is a known stimulus to both moderate inflation, growth and prosperity.

Especially on a sales tax such as VAT.

Happy new year and all that bah humbug.

The problem with a VAT cut is that it would have to be enough to seem significant to the consumers. Yet VAT is (in the case of France) by far the largest source of government income, so a cut would lead to major budgetary pain at a time when they struggle and fail to balance it anyway.

I believe that with time tax cuts like that could change the long term economic prospects for a country but, as is always the case, the short term measures will get preference due to the time of a government's mandate. If you have 4 or 5 years in power, why spend your money on a measure that won't yield benefits for 8 years as you'll be long gone.

I think that it's interesting that, despite German unwillingness to communitise € debt, they have not managed to stop Super Mario and the ECB from running up an impressive portfolio of hidden QE. This is just another can-kicking mechanism that will make the end of the € more painful - thank god the Brits stayed outside of it.

[Digga]

YankeePorker said:

I believe that with time tax cuts like that could change the long term economic prospects for a country but, as is always the case, the short term measures will get preference due to the time of a government's mandate. If you have 4 or 5 years in power, why spend your money on a measure that won't yield benefits for 8 years as you'll be long gone.

I'd agree with the problem of (all) governments of setting short term objectives and strategies because they are never the beneficiary of longer term plans. There is also the more immediate matter of piggies in troughs, with respect to cutting public spending to match a reduced tax take - never popular within the gravy train.