Saturday, July 16, 2011

Debt Ceilings & Europe's Mini Crisis

This week was an interesting one. First here in America, there were a series of political theatres and scare tactics prepared for the masses by the media. Warnings of economic armageddon abounded on MSNBS, with Democratic blowhards Chris Matthews and Rachel Maddow telling us that the Repubs were "playing chicken with the economy" and that the only possible solution is more taxes. Obama stormed out of one budget session. As I've said before, all of this is political theatre, folks. Over the next week, there will be a series of votes in the House next week on proposals put forth by Republicans-- which might well pass in the House, but they know full well will never make it thru the Senate. It's pure theatre, folks. There will be a deal, likely right around the end of July or first days in August. For those interested enough, my guess is that something very small {$1.5 trillion over 10 years} will be the result. Americans would do better to worry about Casey Anthony's release date. Here's Calculated Risk's assessment:

Here in the great state of Minnesnowta, our fearless political leaders apparently have the the outlines of a deal after 2-3 weeks of doing battle in the media. The liberal media here has shamelessly put in vast amounts of propaganda to convince the people to support the Democratic position that the only answer is tax hikes. At both the national and state levels, the media bias and propaganda blitz really annoyed me. But in the end, it was Democratic Gov.Dayton that buckled; there will be spending cuts and no tax hikes. Most people here were not even remotely affected by the shutdown and openly began wondering what the 22,000 people who were laid off were actually doing. This public sentiment shift is what caused Dayton to buckle, though he can claim a few small victories in the spending priorities arena.

Early this week in Europe, there were some very serious problems which might've quickly gotten out of hand. At the end of the day, it was the Peoples Bank of China in combination with the ECB that forcefully stepped in to halt the rout on Tuesday morning by purchasing nearly a hundred billion euro's worth of Spanish and Italian Gov't Bonds. Nonetheless, the problems continue to mount there as the week progressed. Greece, Ireland and Portugal's Govt Bonds were all downgraded by the ratings agencies to junk after the ECB said it would continue to accept these bonds as collateral for loans. The EU, in response to a crisis of debt, decided that one of the ways forward was to muzzle the ratings agencies (as opposed to actually dealing with the problem at hand) and introduced legislation to do just that. From Wednesday thru Friday, however, the bond markets gave their answer back by punishing Italian, Spanish and Portuguese Govt debt; Friday was a particularly sharp deterioration, though not nearly as sharp as the mini-crisis on Monday. Italy did pass an austerity package, yet rates on their bonds continued northward. The crisis is actually continuing, but not at the same pace as Monday. If the deterioration continues into next week at the same pace, the EU might need another Chinese bailout by month's end. RBS said the eurozone storm is far from over. "We expect the crisis to continue deteriorating, and threaten to undermine the entire euro area as European policy-makers still misunderstand market dynamics. They show no sign of catching up with reality," said Jacques Cailloux, the bank's Europe economist.

The ECB conducted yet another "stress test", which was {much like the first such effort} a complete joke. Only eight banks failed out of ninty they tested. In actuality, perhaps 1/4th should be shut down immediately and another 1/4th put on notice. I'm not going to bother typing their names or anything else on this subject as it's not worth my effort to type it.

The problem in the Europe is the obscene levels of debt-- bank, household and government debt-- and the astonishing level to which all of these institutions are interconnected, which has the effect of making one big failure a failure for all of the other dominos. Europe's situation is, because of it's complexity and debt levels, much worse than our own. One day soon enough, all of the kings horses and all of the king's men will not be enough. The Chinese will not forever bail out the Europeans.

Update 7/18 7pm: The EuroCrisis is back. Just like last monday, Italian bank stocks were halted, Spanish & Italian bonds tanked. The EUrocrats have an important meeting on Thursday. "This is a key meeting. If there is no agreement on how to proceed, the markets could really panic"
Here's another terrific article:

1 comment:

  1. Thanks Mr. K for sharing your thoughts on this financial mess.

    Yes – the bankers are the ones who are making the most noise about what will happen if Congress does not come to an agreement and the Debt Ceiling is reached, so obviously they feel that they are the ones with the most to lose.

    My Mammoth crystal ball says that they will reach an 11th-hour agreement, pass it before the ink is even dry, and nobody will even have the time to read & digest it before the new debt ceiling is implemented. Oh, and the bill will contain all sorts of perks & earmarks which have nothing to do with approving the new debt limit.