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As an example of what David is talking about, this chart reflects the netted position of EURO transactions within the Eurozone.

The chart is quite complicated and does not simply reflect bank deposits etc. The underlying explanation of TARGET2 in the zone is too complex to try and explain here. Suffice to say, there has been a continuing flow of funds into Germany, especially from Greece, as people expatriate their cash in fear of what might happen in Greece.

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

Peter,

Thanks for the chart. Is the last data point from Jan 3, 2011 or Mar 1, 2011? Had to look up TARGET in wikipedia - seems to be the European equivalent of Fedwire or CHIPS.

It would be instructive to see a recent chart showing the effect of the LTROs (Long Term Refinancing Operation) by the ECB last month and December.

Italy has seen some significant declines as well.

David

David, good question! I wish everybody would use the same date formats!

However, in this instance I think the date is incorrect and should either be 2012 or not there at all. I assume the date is DD/MM/YYYY format, as the chart is from a European source. I think the data is complete to end 2011 (will have to try and decipher and get back to you).

In any event, the flow of EURO deposits out of countries like Greece and Spain has not abated this calendar year. There may well come a point where the Greek Government will feel the need to put controls of such transfers in place, which will be very messy and not in any way appropriate (or expected) in a single currency zone.

The real test will come when Greek default and/or departure from the EURO becomes imminent. Nobody who has the ability to choose will choose to exchange their EURO holdings for Drachmas.

As to the Greeks turning to the USD. Well, their biggest problem right now is that they are already using 'somebody else's currency'. The Greeks and probably most of the rest of Europe (except Germany and, possibly, France) would be much better off if they had a currency that could fall against a German currency. That would help to restore the balance between economies. Meaning the drachma and peseta would fall substantially in value against a Northern European EURO, restoring some measure of competitive advantage and, at the very least, stimulating the domestic economies.

It is akin to (but far worse than) the problem Australia currently faces. We have a 2 speed economy. The commodity boom is bringing in vast amounts of money, both for investment and as revenue. Growth is high in that sector. In other sectors the growth is sluggish at best. A high Australian Dollar is compounding the problem by making imports cheaper and exports less (or not) competitive.

The Reserve Bank has the job of keeping inflation in the 2% to 3% range. It does this by managing official interest rates (which currently stand at 4.25%). To keep inflation in that range we don't want a growth rate of more than about 3.5% across the whole economy. Any more than that pushes up inflation and, consequently, interest rates.

However, the commodities boom means that the growth in that sector is more like 8%. Since commodities account for 20% of the economy, it means that all other sectors of the economy cannot grow at more than around 2% tops, lest we see inflation start to rise. That would lead to higher interest rates and a higher dollar, which would have the effect of depressing an already depressed manufacturing sector (amongst others).

The non-commodities sectors are running around demanding more interest rate cuts (they have a reasonable argument, but only when they consider their individual sectors in isolation).

I don't envy the Reserve Bank Board's job right now. They have to consider the big picture and, as a result, they have not followed up with any further interest rate cuts this year (there were two 25 basis point cuts in November and December 2011).

In the past it has been the consumer that has come to the rescue, spending up big. The paradigm has changed now. Australians have become savers, not consumers (a direct consequence of the GFC). Growth in consumer spending is at it's lowest levels ever, even though unemployment is still only 5.3%.

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

Deadly riots followed Argentina's decision to limit withdrawals in 2001, the government was ousted soon after and default followed. Growth did return to Argentina after pesification and default - impressive growth for some years - but they are having problems again. Invester confidence was never fully regained. A lesson the Greeks would do well to consider.
(emphasis mine)

In other words, Germany, France, Sweden, et. al. would be worse off.

Germany will not support a breakup of the currency union since it will cause the northern currency(s) to strengthen which will harm their economies. The weight on the EURO from the southern economies is helping German manufacturers and exporters. With China's economy slowing its ascent, the northern economies will not risk harm to their fragile recoveries.

Further fiscal transfer along with a stronger centralized union will likely be the end result, however difficult it is to imagine at this moment. IMHO, it is the best option as it lays the foundation for future strength and most importantly, confidence.

There are parallels (with obvious differences of course) to the early days of the USA, from the federal government's assumption of the state's revolutionary war debts to the 1837 economic panic, the states' first depression. The US did not begin with the strong centralized government it has today, quite the contrary.

Here's an interesting article (January 2012) with parallels between the EU and the 1837 panic:

http://mobile.bloomberg.com/news/2012-01-04/lessons-for-europe-from-america-s-first-great-depression-echoes

Some interesting comparisons between the Irish and US situations.

The following charts all relate to Ireland, the first in the EURO Zone to need bailing out.

This chart shows the Irish Unemployment rate (remember, the bailout only occurred in Ireland due to banking problems, specifically the Anglo Irish bank).



Not a pretty picture, is it?

Next is the Irish GDP



Just as depressing, GDP is falling, as it will when austerity is forced on you as a condition of bailing you out.

Now the Irish Government's Debt to GDP Ratio.



Up to the GFC the debt ratio was falling, reflecting the economic conditions in the Republic. Remember the Economic Miracle of Europe? All came to a shuddering halt when banks started failing and had to be bailed out.

Finally, the Irish Fiscal position.



Massive deficits, getting worse despite the need to be reduced.

What does all this have to do with the USA? Well, whilst I don't have charts, teh raw data is stark enough.

US GDP in 2011 was US$15.087T, Government Debt is about 102% of GDP. Ireland's is 96%.

US Budget Deficit is 10% of GDP at around US$1.5T. Ireland's deficit (remember 3% is the treaty figure supposed to be met, under normal circumstances) is a whopping 31.3%

So, US Federal debt as a % of GDP is worse (barely), but all other indicators are better. Deficit as a percentage of GDP is one third as bad. The US GDP is also growing and unemployment (finally) in a sustainable downward trend.

If I can get some time I will try and accumulate the same data for the rest of the EURO Zone. With the probable exception of Germany, I suspect most of the rest will look pretty awful as well.

The big advantage the US has over Europe (well, apart from being the world's largest economy) is the ability of the Federal Reserve to set monetary policy that applies to the entire US economy, to a single currency (which also just happens to be the global reserve currency).

In Europe, the largest economy is Germany and ECB monetary policy is more targeted at it that anywhere else. Or, more precisely, inflationary pressures in Germany have more influence on Official Interest rate settings than anywhere else in the Zone.

When Ireland and Spain need the sort of interest rates that prevail in the USA (i.e. effectively zero) and the ability to inflate their economies by 'printing' money (quantitative easing), they can't. If inflation picks up in Germany (entirely possible) then rates are going up, not down.

It's a wonder, now, how anybody really believed a single European currency was a good idea (outside of Germany and, possibly, France that is). Indeed, whether the idea was thoroughly thought through in the first place.

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

If you ever needed evidence that people don't listen, or hear what they want to hear, you only have to look at what the head of the Iron Ore division of BHP-Billiton said on Monday.

What he was reported as having said was that iron ore demand in China was flattening. What he actually said was that the growth in iron ore demand was flattening out.

In other words, demand continues to grow, but a a lower rate of growth than previously.

Since the report came out there has been doom and gloom on the markets. You would think China is about to implode and disappear! Yes, growth will be slower than previously (in a command economy the government can directly influence growth, although it remains to be seen how well it can constrain it now), but it will still be an impressive 7% plus.

Why do I think of lemmings whenever I watch market activity these days, I wonder?

Not all bad news, though. The A$ has fallen US$0.02c in the last couple of days.

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

http://www.bbc.co.uk/news/business-17471095 which is fascinating for

a) showing the way the US dollar is losing its role as reserve currency
b) Why Oz economy is strong. And why Oz politicians of all colours are confused by tying militarily with a dying superpower and ignoring the new superpower who controls the Oz economy.

I read a commentary the other day that claimed that a growth rate of 6-7% would be a "hard landing" for the Chinese economy.

Another bilateral currency swap agreement for China, does that make 15 now?

In order to understand China's currency and foreign reserve policies, you have to understand how the 1997 Asian currency crisis has influenced them. I wish I had more time to delve into this deep subject, but there is plenty of literature available. Granted, there is not a strong consensus about what caused the crisis but understanding how it has affected the policies of many asian countries will explain much including the long bull market for US treasuries. The dollar's reserve status has been cemented further.

China is likely experiencing a real estate bubble right now and fears capital flight (both are often cited for leading to the 1997 crisis). Exports still dominate their economy and thus are vulnerable to foreign exchange rates. China is hedging against a liquidity crunch, it is not trying to replace the dollar.

If I have the time later (unlikely), I will add a more detailed analysis. Maybe Peter can say more.

David

China has been caught out by a depreciating Japanese Yen recently, after the Japanese Gov't. finally managed to "print" enough Yen to cause it's value to sink (direct policy, not a consequential change), at least a little.

The Chinese YUAN, or RMB, can only ever become a reserve currency if it has a floating exchange rate that is set by the market. Whist ever the authorities determine it's value, relative to other currencies, it will never be a reserve currency.

I would also point out that the YEN has never been a reserve currency, despite being a floating currency and despite (until recently) Japan being the world's second largest economy. The EURO wanted to be, but that train wreck is still to be fully played out.

But you keep hanging in there, Jack, hoping and praying for the collapse of the USA.

Not in my lifetime, not in my kids (25 and 23) and not even in my grandkids (4,3 and 3 months) lifetimes.

Given a choice between the USA and China as allies, assuming we couldn't have both, then I will go with the USA thanks very much. They have their faults (doesn't everyone?) but I prefer a democracy to a one party state (no matter how friendly a face they present, it is still only a face).

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

There are people, including many in the US who would disagree that the US is still a democracy. In China the 'party' rules; in the US it is the corporations/ lobbyists.

As to the dollar as a reserve currency, that status is being 'chipped away'. With China now having 15 currency swap agreements (NewPhilatelist) the $US as a reserve currency has hardly been 'cemented further' particularly as the countries agreeing to these swaps include the 2nd and 3rd largest world economies (and others in the top dozen).

The collapse of the US, as a nation, that in all probability will not happen. The $US will however collapse ( in my opinion) sooner rather than later; and PeterS's, your grandchildren will still be paying the price for the action of todays fraudsters and apologists.

The currency swaps between China and various other countries (including Australia, by the way) are miniscule in comparison to international trade, largely denominated in USD.

You might remember there was another currency swap last year, when a number of large Central Banks organised a swap for EURO, plus a commitment of exchange availability (hundreds of billions worth) if required. What was the currency the EURO was swapped for again? Oh, that's right, USD.

Australia has a bilateral trade balance, with China, that exceeds US$100B pa. The currency swap with China is a drop in the ocean by comparison.

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

Came across some interesting charts today.

First, long term real yields on Bonds, chart 1 is US since 1920. The thing to note here is that yields are at record lows, despite more bonds than ever on issue. This clearly reflects, to me anyway, the 'safe haven' status (attributed by the market) of US Treasuries. It also reflects the fact that, in uncertain times, money has been flooding into US Dollars. That flood shows no sign of slowing.



Next, Australian 10 year bonds.



Again, heading for record lows but not as low as the US equivalent.

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

Finally, another chart that (I will admit) surprised me. There has been continuous commentary here in Australia about a supposed housing bubble. Many commentators point to unsustainable negative gearing (where interest costs are deductible and there is a net tax credit generated) as the culprit.

Well, this chart shows that (as an asset class) property has varied very little for a long time.



Australia has a significant shortfall in housing stock that, due to falls in new houses being built, is being exacerbated year on year. To me, that points to a soft landing on property and a medium term increase in prices (already starting to show it's head, after modest falls in prices last year).

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

Peter. I suspect that there is a rapidly reducing numbers of investors in all countries these days, who can only look at graphs, and wonder how they could have ever allowed coloured lines to dicate their path into retirement.

[Just a general observation of course and not necessarily meaning the ones displayed here.]

Huanga.

What you need to understand is that the chart represents all major asset classes, including cash and fixed interest. In Australia, the biggest gain by far has been in Australian listed securities. This, largely, represents the flood of money into superannuation (currently compulsory 9% of gross income must be put into preserved superannuation schemes).

All other asset classes are basically static over the long term. Almost all savings are represented (except money hidden under the mattress). Note that fringe assets, such as coins, stamps and art are not included but, in any event, represent a small part of overall assets.

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

One interpretation: the supply of US ten years has not kept pace with demand. The developing world, especially Asia, has increased their appetite for treasuries since the 1990s and have accelerated their purchases since the 1997 crisis. They have to buy something will all the dollars they have accumulated over the last few decades.

Another observation, note the substantial increase in the volatility (variation) since President Nixon closed the gold window in '71 (effectively ending the Bretton Woods system). Treasuries are not as safe as some would presume.

It would be instructive to see this chart with expected inflation stripped out leaving behind the premium/cost for safety.

Charts, past performance, wish-lists will not have any effect on reality

The $US is being chipped away as the reserve currency and the latest agreements by the 5 developing nations is a clear indicator that these nations no longer trust the US dollar or the information coming out from US sources. It is now being claimed that the unemployment, growth, CPI and inflation figures from the US are false..... that they are being manipulated.

In terms of the Euro, the EU is now talking about a 750 billion euro bailout for SPAIN ALONE and that this figure will rise to 2-3 trillion euros in the next few years if the issue is not addressed.

The latest speculation is that it is NOT Greece or Spain that will leave the Euro.

The word is that GERMANY will pull the plug because its economy cannot support these other countries.

Anyone care to Comment?

Any BRICS bank will have minimal impact on the USD as the world's reserve currency. 4 emerging countries plan (note the word, plan) to set up a bank that will allow them to trade between themselves in their own currencies.

Sounds like the death knell of the USD?

Care to have a guess and what the major export market is for all these countries? Care to guess the currency used for the overwhelming majority of their exports? Care to guess how much oil and gas any of these export, as opposed to import?

Maszki, you stay in your fantasy world predicting the demise of the USD (your biggest item on your wish list it seems to me). Meanwhile, the rest of us can get on with life in the real world.

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

These days the 'real' world seems to be one of graphs, charts, riots and bar flows! Although I think the latter term, bar flows. Is now moving out of fashion?

Huanga.

Oh dear Peter, you are starting to look like an argumentative fool again. BRICS are FOUR countries? Try counting the letters again and you might actually find that it is FIVE. (Though I'am sure in YOUR world, it IS four)

Emerging countries? Don't make us laugh...SOUTH AFRICA, BRAZIL, CHINA, INDIA, RUSSIA. Powerhouses, every single one of them!, and full to the brim with resources too! You don't seem to get it, they DON'T WANT TO ACCEPT THE DOLLAR ANYMORE. Though I'm not suprised that all this passes you by, while the Brics were talking about trading without the Dollar...BBC, SKY and FOX didn't run a piece on it at all, even though their world leaders were all there.

YOU wildly spout that those FIVE economies are 'a drop in the ocean' but yet economic papers dispute YOUR figures!
Currently, BRICS accounts for 25 per cent of the world's gross domestic product and their countries combined have 15 per cent share of the world trade. countries that make up 42 percent of the world's population, a quarter of its landmass and 75 percent of the foreign reserve worldwide.
Just some FACTS there, check them out yourself.

Read more: http://www.dailymail.co.uk/indiahome/in ... z1qgeBVX1m

http://www.guardian.co.uk/commentisfree ... orld-order

http://www.ft.com/cms/s/0/48a861ba-79aa ... z1qggNFBAY

Good luck in your 'real world' Peter

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Looking for South Korea up to 1884-1951,North Korea 1st issue 1946-1957,China 1898-1912 and P.R.C 1963- 1980,Thailand 1883- 1918, Commonwealth QV Issues.

Sorry, you are correct - 5 countries. Everything else you said is garbage, but you have to be right on at least something, occasionally.

If you are correct then the value of the USD will collapse spectacularly..sometime, anytime. But wait, you have been claiming just that for a long time now, haven't you? Based on you hopes and dreams, it has already collapsed. Funny how that bit of news has escaped the rest of us.

I can only reiterate, you need to look at the world as it really is, rather than as you would like it to be. The single most traded currency, globally, is the USD. The trading of vitually all oil, globally, is in USD. The Arabs don't want EURO, they don't want RAND, they don't want gold...they want and get USD. This includes oil sales to China and Brasil and South Africa and India. The gas that Russia sells to Western Europe? How do they seek payment? There you go, USD again.

China pays Australia somewhere in the order of a US$120B (net of bilateral trade) annually for Iron Ore and Coal (principally). Gee, I wonder where they get all those dollars, if they don't want them or accept them any more?

So, yes, I will stay in the real world and let you inhabit whatever planet you are on. My suggestion to you, though, is to stop taking those mind altering substances.

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

There you go Peter, I think in reality the differences come down to these main points.....

1)Us who are opposed to your 'rose tinted view' of Banking, think that the system is corrupt, the Dollar will collapse within the next 10 years maximum, and those who think that the Dollar is here for the next 100 years+ and the Banking system is clean.

2) Apologists that for some reason think that this 'fiat' currecy is any different to the multitude of 'fiat' currencies that have preceded the current ones. ( and which ALL, bar NONE have gone through hyper-inflation before collapsing)

3)Lack of Historical education. Have a little read about the establishment of the Petro-Dollar economies within the last 60 years and you will be suprised how many leaders of World states have been changed to keep this system intact. Many before the BRICS have tried to break free, but if you go it alone, we all know what happens.

4)Cleaning the system/ Collapsing the system. Apologists seem to think that because some of us want to see failed economies/banks/companies fail, and corrupt fraudsters jailed....Then we ALSO want to see the end of the world and a U.S collapse? What tosh! What we WANT to see a transparent system where the bailouts are not given out to the very people who put us in this mess, a short sharp correction would NOT need austerity. For with Austerity you CANNOT create growth. Furthermore the bankers and fraudsters should be jailed, fines that cover a fraction of the money stolen just dosen't make sense now...or does it?

I would love to see the Dollar recover and stay as the world reserve currency, but I want to see a system free of derivatives, short selling, bailouts and crazy economic practices. This is getting worse and it's not going to get any better if we keep on the same course we are heading, using the same methods and getting the same results.

I know you like charts, here is my favorite....

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Looking for South Korea up to 1884-1951,North Korea 1st issue 1946-1957,China 1898-1912 and P.R.C 1963- 1980,Thailand 1883- 1918, Commonwealth QV Issues.

Peter, firstly, Russia is the worlds No 1 oil producer and China is No 3 and they are both part of the BRICs group who are not only 'planning' to set up an alternate international financial structure but have already implemented currency swaps between themselves. When you add Iran to that group..and possibly Venezuala...??? who knows what will be the result. I think you mistake 'want' ( to use the $US) with 'no option'; but that situation will change if an alternate financial structure ( free of the fraud and manipulation of the current structure) is established by BRICs.

The US dollar has never been the only reserve currency. The pound was also in there as was the Mark and the Franc ( both of which were replaced by the Euro). Certainly it was the major reserve currency but it is being chipped away as countries seek to evade the volatility and declining value of the dollar and the massive US debt burden ( and the fraud and manipulation).

Here are another couple of articles that you may care to read. I don't know whether the authors are left-leaning economic illiterates like Ron Paul but ..hey..nobody is perfect..but they are still entitled to their opinions.

http://news.goldseek.com/UnionSecurities/1298563200.php
http://www.energybulletin.net/node/12463

As to mind altering substances, I find that reading and listening to alternate views are the most significant factors when it comes to changing minds and/or identifying reality.

Pick any currency on the planet and you will see the same effect (it is a consequence of a little thing called inflation). However, to get a true perspective, you need to compare comparative purchasing power. Take base rate postage as an example. In 1913, postage was 1d in Australia and the average weekly wage was about £2 ($4). Today, it costs 60c to send a letter and the average wage is around $1,200 a week. So, postage has gone up 72 times, whilst wages have gone up 300 times the 1913 figure.

The overwhelming case for just about any item you care to name.

You stick to your fantasies and anti-American rhetoric. I will happily live in the real world that you so despise.

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

Peter, lighten up. Nobody 'despises'...We are 'concerned'
Someone once said that when the US sneezes the world catches a cold. That is the problem. The US is in deep trouble. and therefore so is the world.

Presently the news out of the US is 'marginal' but if you scratch the surface, that information is manipulated.

The real unemployment in the US according to the Dept of Labour is about 14% (Schedule 6). Some knowledgeable but clearly communist, economic illiterate persons place the actual unemployment/ under-employment rate at 22%

The US GDP is skewed because gaol construction ( 1% of the US population is in prison) and productivity is added as is the construction of military basis (wherever).

The published Cost of living figures are based on stock market movements and not on actual prices (food up 4%, fuel up 12% etc) and in many cases the Consumer Purchasing Index is used. This index is based on what people BUY and not on price rises, and if you have no additional money, then you only spend the same amount ergo no increase and so 'experts' say there has been no increase in the cost of living

Ron Paul, your economic illiterate, has it right.

Bernanke, Dimond, Osborne and others have it wrong..but they have the power and so they do not care if 50% plus of youth are unemployed, millions of retirees are defrauded of their superannuation, hundreds of thousands of home purchasers are thrown out on the street, millions are below the poverty line.. I mean, so what? Those statistics do not show up on the balance sheet. The bottom line is all that counts

The fraudsters whom you defend have blood on their hands. Do you feel comfortable with that?

'Peter, lighten up. Nobody 'despises'...We are 'concerned'
Someone once said that when the US sneezes the world catches a cold. That is the problem. The US is in deep trouble. and therefore so is the world.'

In the old days; I'm now much more interested in the economies of country that own the world, rather than countries which are indebted to the world.

The USA is finished; it's debt is too large. It hasn't realised it yet but spending all that money on its military-industrial complex has bankrupted the USA, both financially and morally.

China now owns the world and is laughing looking at the USA now playing its normal bully boy military tactics with 'sanctions' on other countries...

Compared to Europe, the US is doing well. It is, at least, in recovery mode with positive economic and employment growth.

Your assertion that there is no despising of the US going on here does not match with realities.

I know it is pointless to point it out, yet again. However, the US is still the worlds largest economy by a long way. Much as various posters here want things to be different, the reality is that the US will remain the dominant economy for quite some time yet. If economic growth were to stall in the US, if it were to have a double dip recession (extremely unlikely) then China would see a fall in it's activity as well, with all the other flow on effects.

China needs the US to keep buying it's exports (where do you think all Apple products are produced, for example?). If the US recovery were to falter then the recession hitting Europe would be longer and deeper.

What I am trying to point out is the fact that the rest of the world needs the US to be strong economically. So, be careful what you wish for, you just might get it!

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

Here is some interesting commentary on the "real" reasons for certain actions and outlooks, courtesy of http://www.marketwatch.com

===============
By David Marsh, MarketWatch

LONDON (MarketWatch) — There are some powerful reasons of self-interest why the U.S. and China might wish to spread the word that the European sovereign debt crisis is past its peak. But you shouldn’t necessarily believe them.

After the quick burst of first-quarter optimism over the European Central Bank’s liquidity injections, governments and markets are coming down to earth. This was underscored by European Union officials’ warning to finance ministers on Friday that the underlying causes of the crisis have not been resolved.

The world’s two biggest economies are doing all they can to avoid rocking the boat. But will it be enough? China, confronting higher domestic production costs, a stronger yuan and more fragile markets for its exports all over the world, wishes to avoid a weaker euro exacerbating its growth slowdown.

In the U.S., ahead of the November elections, President Barack Obama has no desire to upset the euro, hoping that a semblance of order on European financial markets will shore up global confidence, prolong the improvement in U.S. labor markets and help him hang on to the White House.

Washington has told Berlin (and anyone else who may be listening) to ensure the European turbulence is firmly under control during the poll run-up. The quid pro quo is that the Americans, for one, will not demonstrate openly their obvious qualms about the European recovery process.

Whether the strategy will work is not at all clear. Behind the scenes, both China and the U.S. are almost equally worried about how slowly Europe is steering out of trouble. There is talk that Europe’s banks need to deleverage to the tune of $2 trillion to $2.5 trillion in the next two years. Where’s the money going to come from? The increase in the euro state’s bailout fund to 700 billion euros decided on Friday would not be enough, especially since it is concentrated on the sovereign states and not the banks.

Much criticism concerns lack of German leadership. Nothing much can be done about this, it seems. The Germans have an aversion about leading. As Prof. Michael Stürmer, the well-known German historian and commentator, puts it, Germany doesn’t even have a word for “leadership”. Since Hitler, “Führung” and “Führer” are not well regarded.

Indeed, in relation to any kind of effort to prop up the euro edifice, “Merkel’s Law of Permanent Disappointment” has come into play — as the long-standing debate over increasing the bailout funds has underlined. The German chancellor will always do more than she originally promised to help out errant states, but the funds committed will always be less than necessary to solve the euro’s problems once and for all. So people on both sides of the argument, whether conservative German voters or the financial markets or the hard-up states themselves, will always be disappointed — for equal and opposite reasons.

The Chinese and Americans are concerned about the ECB’s lack of full-scale commitment to euro rescue action. Again, there is not much opportunity for change here. With the Bundesbank leading complaints from the sidelines about the ECB’s fall from a pure form of central banking independence, the hawks on the ECB council are starting a campaign for an “exit” from the ECB’s liquidity injections. Observers in Washington say this is mightily premature and shows up Europe’s hesitancy and lack of resolve about what to do.

Meanwhile Jens Weidmann, the Bundesbank president, is leading the charge of the hard money brigade. In an uncompromising speech in London this week, he used possibly the most florid phrase ever coined by a Bundesbank president, saying the “wall of money” erected around Europe’s financial problems would, like the Tower of Babel, “never reach heaven.”

Weidmann’s message is clear. In coming months, the temporary factors that have calmed the landscape will retreat from view. What we now see is the calm before the storm.

David Marsh is chairman of London and Oxford Capital Markets.

Hi Jack. Yes, it will be interesting also to see if the USA imposes sanctions on China and India for continuing to buy oil from Iran - and without purchasing that oil in US dollars.
Talk about shooting yourself in the foot

Still, there is an upside. With a billion muslims already against them, adding another billion plus Indians and then a further billion plus chinese..that is, imposing sanctions against half the world population (if they are stupid enough to do it- they know such sanctions will fail) then surely the message will get through to even the thickest person in the US hierarchy.

Then again-maybe not.

I can't imagine sanctions on China and India.

Back to the deficit-reduction ideas floating around. The Bowles-Simpson plan is summarized at http://www.taxpolicycenter.org/taxtopics/Bowles_Simpson_Brief.cfm

A few nights ago, Charlie Rose hosted them discussing their plan for an hour, and I was impressed. Elimination of most tax expenditures is a must, and I'll pay my share (provided you guys buy more stamps).

I am now in the unhappy and frustrating situation of supporting Obama for re-election, due to the clue-less, plan-less, rigid, and obstructionist Republicans likely to run against him, one of whom is a certified nut-case (and that's being charitable).

I would vote for Hilary Clinton (our first qualified woman for President) or Colin Powell (the Afro-American Eisenhower) in a heartbeat, but neither one's running.

Sorry Doug2222usa, I tried but I can't resist....

..which is the certified nutcase, they all seem to qualify.?

Santorum = certified. If he were a stamp, he'd be, umm, off-center.

Did you ever stop to think that a joke has to start somewhere? Every joke you've ever heard, somebody thought of it, the next guy improved it, the next guy wrote it down, and the next guy made a few enhancements and emailed it to his buddy.

OK, I'll start a joke, and one of you optimists finish it:

"Donald Trump invited the four Republican candidates to an "animal" costume party; Mitt Romney came as a rattlesnake, Rick Santorum as a hyena, Ron Paul as a canary, and Newt Gingrich as a catfish..." (you finish)

Yummy yummy said the hyena as he gobbled up the catfish........

..next came...

I fail to see the connection between the US political candidates, humourous or otherwise, and the subject of this thread None have been elected to the position of President of the USA. Therefore their ability to have any major imput on the USD or the euro is at present...minimal.

Huanga.

Huanga, it's like potential energy. The extreme danger is that the potential may turn into kinetic! The Republicans only needed to find one candidate that was not certifiable (Romney is the closest in the current race), to easily win in November. Now, if any of them do actually become President then things could be rather 'interesting' (in the meaning of the ancient Chinese curse)!

The European sovereign debt crisis has a long way to run. Bailing out Greece (albeit, temporarily) was supposed to be about buying time for the rest of Europe to the house in order.

I heard a report this morning that European unemployment has hit 11% (and is worsening as unemployment in the US continues to fall). That is 16 million people looking for work. Some countries are, of course, far worse off than others. The ones worst off are also the one's that badly need a fall in the value of their currency to improve competitiveness.

Only, that won't work in the EURO zone. Spain (for example) has the same currency as Germany, so cannot gain any competitive advantage by a devaluation.

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

An open question to do with the US debt. As the US seems to be increasing the amount of money it prints, is it possible.....or probable, that in the not too distant future a US Gov., could revalue and re-call the present dollar. Then re-issue on ............? say 5 for 1.
ie. 5 present USD for 1 new?

It has been done a few times in the past, and as far as I can tell. Countries have recovered fairly quickly.

.............and. having listened to all four candidates debate their qualities and debase their opponents. Might I suggest that the only kenetic energy that any of them could generate, could be contained in a rubber tube and flushed down the loo, or disposed off in the nearest carpark!

Huanga.

There is, in my view, not the slightest possibility that there will be a replacement of current US Dollars with new ones. The market decides the value of a floating currency (such as the USD, the AUD, the YEN and the EURO). Governments and central Banks can influence it, via fiscal and monetary policy, but that is it.

Even the Swiss Government could only keep down the value of the CHF by buying lot's of EURO with it's own currency.

China can keep it's currency within a pretty tight range (against the USD) simply because it is not a floating currency, but is centrally controlled (as was the AUD till 1983) and exchange rates are set in Beijing. The last thing china wants is the value of it's currency to reflect the relative trad balances with the US, lest those balances begin to evaporate.

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

I should just add that, whilst there are benefits to be the world's reserve currency, there are also limitations. Not being able to make a government initiated change to it's value is one of those limitations.

There is, I am sure, nothing the Federal Reserve would like better than to see a lower USD. The recovery would be deeper and faster if the currency was cheaper.

The same situation is true in Australia. The AUD is trading in a range between about US$1.04 and US$1.07. The Reserve Bank would be happier with a rate closer to US$0.95c (the 'natural' rate), but there is little likelihood of that, absent a global meltdown. A global meltdown would see all currencies falling against the USD and would stifle the recovery there.

Pity the Greeks and Spanish, then, who cannot get the devaluation against a German currency that they so desperately need.

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

Which is a very good reason why they would be better to abandon the euro, and return to their national currencies. Taking Italy Ireland and a few others with them?

Huanga.

Yes, the EURO is a failed experiment as far as I am concerned. Unfortunately, there will be no such sensible transition (and it would need to be done carefully) in the near term. A planned transition will be no easy task, but should be being planned for now.

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

This may come as a shock to some of you.

The US does not issue bonds to raise money for its government to spend. China is not banker to the US. The US does not have to sell its bonds in the market in order to fund the government as the EURO countries do. Greece and the US are apples and oranges - they have completely different monetary systems.

If you believe the US dollar is headed for a cliff, then you must believe that at some point the US will be unable to "pay its bills" and nobody will want to own its bonds without extremely high yields, bankrupting the country or resulting in hyperinflation via the printing press, or something like that, right?

If you want to understand how that is highly unlikely (impossible, in the case of bankruptcy) you have to understand the mechanics of bond issuance in a monetary system such as the one in the US (not like Greece's or other EURO countries, but just like Japan's). A sovereign system which has a non-convertible floating exchange rate currency which is issued by its own central bank.

I found a description of the mechanisms, which is far better than I could write, so I redirect you to read this. It may challenge what you currently believe, but the mechanism is a fact, reality, not opinion or theory.

WHEN WILL THE BOND AUCTIONS BEGIN TO FAIL?

Now, could the US experience troubles from growing deficit spending? High unemployment? Low growth? Sure it could, as it does now. However, look at Japan. It has had a debt (gross) to GDP ratio over 200% - more than twice the US's ratio - but its bond yields are low, in fact their ten year bonds are lower than the US's at around 1%. How could this be? Are they so much more safe than the US? Have they suffered hyperinflation? No. Are they having troubles? Sure, who isn't. But their is no imminent collapse.

So for those that still believe the US is headed toward financial oblivion, please be more specific about how or under what conditions this will happen. At what level of debt to GDP will the bond vigilantes rise from the dead and punish the US for its profligacy? Given that reserves are preplanned to be ample before a bond auction and that it is in a bank's/foreign account's financial interest to purchase treasuries with its reserves, please explain how an auction will fail and bring about a collapse?

David

There is an old Australian expression..'Bullshit baffles Brains'

Thank you for confirming the accuracy of that expression

David, that is probably a little simplistic and slanted in the opposite direction to many posters here.

Borrowings (Treasuries) are used to fund the deficit, else there would be no deficit (money government spends over and above what it collects). The point I have been trying to make is that the borrowings are manageable and that foreign holdings of US Treasuries are much smaller than domestic holdings.

In the end, the US cannot default on any of it's debt. In the extreme sense, it could simply create the dollars (electronically or literally) any time it wanted to. It won't, simply because of the inflationary impacts.

Nor does it need to. Unlike some European countries, the US has never had a situation where it has been unable to sell Treasuries (not in the last century at least). In fact, new Treasury issues are always oversubscribed, even though the interest rate (yield) is extremely small these days.

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

Ha ha! great expression. I'll have to remember that one.

But seriously, calling something BS is not much of a defense of your views. Is that the best or only answer you have?

David

Peter, we agree that the debt is managable, for now at least. But, where you see investors heading for safety, I see a lot more going on. The effect you and I see is the same, yields go down, prices go up, but today's treasuries cannot be understood using old ideas based in a convertible currency system (pre-1972).

The government does not wait for taxes to be collected before it spends. Likewise, treasuries are issued (reserves are deposited) at any time to keep the rate near the target, there is no waiting for a bill from congress that says "we need $1T, please sell some bonds to investors so we can pay our bills". It just doesn't work like that. The Fed and Treasury are not like your household budget. They are not a corporation or bank.

Yes, it is true that the deficit is "funded" by treasuries but not in the traditional sense that most think, especially not like Greece or Spain. The Fed deposits the deficit amount (through spending) into non-public accounts electronically. Then a treasury auction is held and, not surprisingly, the bond auction is a success (their is incentive for the banks to invest their reserves by buying treasuries, it's a "slam dunk trade").
From the article I linked:

and


I realize that this goes against traditional education (mine as well), but that is technically what is happening and that makes a world of difference. Lots of money has been lost by very smart people (including stamp collector and "bond king", Bill Gross) because they fail to understand this.

David

I just love US haters............You just can't seem to stay on topic without tossing in your warped and uninformed opinion about People and a system you know nothing about. The US will fall in 10 years, give me a break. Hate to throw a wrench into the US demise gears but things here are looking much better.

http://www.bloomberg.com/news/2012-04-0 ... slows.html



Fact !

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"Life is a tough Teacher, it gives you the test first and the lesson later"
Anonymous

David, we are in furious agreement I think. No Western Government waits till the spending is required before making sure the funding is there. That is what annual budgets are all about.

We have a Federal Budget due, to be handed down in Early May, for the Fiscal Year 1 July 2012 to 30 June 2013. The Government is insisting that there will be a surplus next year (a razor thin one of around $A1.5B). This years deficit will probably end up at something like A$40B. The Commonwealth funded that deficit by borrowing, by issuing Commonwealth Bonds.

As with the US, the government could simply redeem all it's borrowings tomorrow if it wanted to. All Commonwealth borrowings are in AUD, so they could simply print money. For the same reasons that the US would not do that, Australia won't. Inflationary in the extreme.

There is, once again, the difference between a sovereign currency and a common one. Greece could not resort to printing money, it cannot issue money as it wants and can only borrow and raise revenue in a currency not, strictly speaking, it's own.

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Peter
Hawthorn - AFL Premiers 1961, 1971, 1976, 1978, 1983, 1986, 1988, 1989, 1991, 2008.

Peter, agree completely.

I will just add one example to illustrate the subtle point I was trying to make in my previous posts for those who believe the US is going to run out of money.

Recall that the US hit the debt ceiling on May 16th, 2011, but the Treasury announced it had a ample means (accounting tricks) to pay the government's bills until August 2nd. Nearly everyone in the media and every politician, believed that this meant the Treasury could not borrow anymore money, it could only use the funds it already had in its coffers or move funds from one place to another.

However, regular weekly debt auctions continued - the US "borrowed" more money - after May 16th as if the there was no such thing as a debt limit, yet no laws were broken. That evidence should challenge one's perception of what purpose a US treasury bond serves.

Cutting through the B.......t, the US continues to BORROW. That is, go into more DEBT.
Sometime, somewhere. the US will be held accountable and will be found wanting
It is a simple formula... if you spend more than you obtain then ultimately you will not be able to pay your debts.

Voodoo economics notwithstanding, 40 plus states of the USA are technically bankrupt. The USA is technically bankrupt.

Live with it.

The USA empire, just like ALL previous empires, is under attack and is on the way out.

FU LL STOP