The Euro is Taking a Beating


Today, the euro. Tomorrow, the dollar.

The euro is taking a beating. Investors are worried that it won’t survive Europe’s debt problems.

Note, we said ‘debt’ problems. Many experts still believe it is a liquidity problem. That is, they think it’s just a problem of finding financing. They blame speculators and hedge funds for panicking…or for deliberately cutting off the flow of juice.

But the speculators are just doing their job. They see that the real problem is debt. Greece, for example, has government debt equal to 120% of GDP. It’s too much. And even if all their austerity measures are put in place successfully – that is, if the Greeks go along with proposed budget cuts – the level of Greek debt will still increase, to 150% of GDP.

In other words, the fix makes things worse, not better. Debt needs to be defaulted…and restructured…not increased.

And it’s not even sure that the fix will happen as planned. Spain’s big unions are planning a huge strike for June 8th. Malcontents, anarchists, public employees, retirees – all are resisting budget cuts. And as long as the fix is in, they figure they can get away with it. Most likely, the only way to really rein in spending is by cutting off the money.

With the cuts or without them, the situation looks bad. What will happen? Some think Germany will leave the euro. Others think Greece and Spain will leave.

Who knows?

But the euro is not alone. The worst deficit on the east side of the Atlantic is not in Greece. It’s in England. And the worst household debt is not in Spain; it’s in England too.

Not surprisingly, the pound is falling. This week, speculators are betting against sterling at a record level.

And the US dollar can’t be too far behind. From the US to Britain to Greece, the basic numbers are very similar. Debt and deficits are high – with no obvious way to bring them down.

“Divided Europe Spreads Contagion Fears in US,” says a Reuters headline.

Reuters sees the effect; it misses the cause. Debt is not catchy. It’s more like cirrhosis of the liver or lung cancer. It’s the result of behavior, not the result of contagious disease.

Yesterday, in New York, the Dow gave back the gains it registered on Friday. It was down 126 points. It is clearly headed down. The question we’ve been asking ourselves: is this just another downtrend…or THE downtrend.

We’ve seen the top. Somewhere up ahead is the bottom. At the top, stocks sell for more than 20 times earnings. At the bottom, they sell for less than 10 times earnings…maybe as little 5 times earnings.

If this is THE big downtrend, it will keep taking stocks down until it finally reaches bottom – even if there are a few bounces and countertrends along the way. Look for Dow 5,000 or less – sometime in the future.

In the meantime, gold went way up yesterday – a $17 gain. The fundamental problem in the western world is debt. That debt is stated and measured in terms of paper money. Rather than let the debt go bad, governments are trying to increase the supply of money so that debtors will be able to pay. But governments don’t have any money, so they have to issue more debt first (magnifying the problem). Then, when governments can’t pay, they will probably issue more paper money to cover the problem. How this will play out exactly, no one knows. But it is sure to spell T-R-O-U-B-L-E. And when there’s trouble, people turn to gold.

Here at The Daily Reckoning, our guess is that the bull market in gold will continue until the monetary system finally falls apart. Then, the dollar, the pound and the euro will ALL be going down – fast – against gold and other real assets. And all forms of debt, denominated in paper currency, will be marked down sharply. Many will disappear…worthless…

And here we offer a prediction:

The employees of the US Federal Reserve will ask to be paid in gold before the crisis is over.

And more thoughts…

Banks aren’t lending to private businesses. And now, they can’t raise money from the bond market either: Sales of corporate bonds have collapsed.

Bloomberg reports:

Corporate bond sales are poised for their worst month in a decade, while relative yields are rising at the fastest pace since Lehman Brothers Holdings Inc.’s collapse as the response by lawmakers to Europe’s sovereign debt crisis fails to inspire investor confidence.

Companies have issued $47 billion of debt in May, down from $183 billion in April and the least since December 1999, data compiled by Bloomberg show. The extra yield investors demand to hold company debt rather than benchmark government securities is headed for the biggest monthly gain since October 2008, Bank of America Merrill Lynch’s Global Broad Market index shows.

Concern that European leaders won’t be able to coordinate a response to rising levels of government debt from Greece to Spain, while US legislation threatens to curb credit and hurt bank profits, is driving investors away from all but the safest securities. The rate banks say they charge each other for three-month loans in dollars has almost doubled since February.

“This is a quintessential liquidity crisis,” said William Cunningham, head of credit strategies and fixed-income research at Boston-based State Street Corp.’s investment unit, which oversees almost $2 trillion. “It’s not inconceivable to imagine a situation where the markets behave so poorly, the liquidity behaves so badly, and risk- tolerance just evaporates that – particularly in Europe – consumers contract, businesses stop hiring and stop investing, and economic activity halts.”

Mr. Cunningham doesn’t understand what is going on. It’s NOT a liquidity crisis… It’s a debt crisis…aggravated by a stupid government response.

Almost all capital in the western world (and Japan, for that matter) is going to the government. The private sector is deflating…the public sector is inflating…

.the whole process will continue until it blows up.


Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

Latest posts by Bill Bonner (see all)



  1. In a rush to be perpetually moving $1 from place A to place B at a commission and with an ever expansive money supply inflating the very basic bricks and mortar that we all need, there was a crash in bank balance books.

    In order to redress the empty reserves of the banks and to reduce the excessive liability differential against a declining asset book, the banks had new money pumped into them. This shifted the liability from the banks to governments. Future tax receipts were mortgaged to rebalance the bad mortgage debts the banks held.

    Now these unrealised losses are sitting on national governments books, and these are now technically bankrupt just as the banks were 2 years ago.

    What is now happening is (in Europe) that individual nation states are now shifting the liability towards the trading bloc itself. The EU is going to end up with this debt pile.

    So two of the 3 principle trading blocs in the World are now so endebted there is only one way for the USA and EU to move forward. They cannot default because World commerce will freeze, and other nation creditors will object so strongly war could result.

    They have only one course of action and that is a slow default to allow the debts to be unravelled and this slow default will take the form of systemic inflation, reducing their liabilities by reducing the value of the underlying unit of currency that they are constituted upon.

    Anything that happens in the mean time is just futile and represents governments in denial.

  2. “…this slow default will take the form of systemic inflation, reducing their liabilities by reducing the value of the underlying unit of currency that they are constituted upon…”

    You’ve got my attention. Makes sense. How does it end? :)

    Biker Pete
    May 26, 2010
  3. Great post Joe, possibly the best I have seen on that specific topic.

  4. Comment by Biker Pete on 26 May 2010:

    “You’ve got my attention. Makes sense. How does it end?”

    Interest rates of 20% in the USA to stop Hyperinflation.. same as 1980’s… maybe higher because it’s worse now..

    Those high rates then “trickle” down into Australia 12 to 24 months later.. maybe not as high as whatever the peak becomes in the USA but significantly higher than they are currently.

    May 27, 2010
  5. One possible scenario*, Shoes… . And your timeline for this?
    Would make the riots in Greece look like a Sunday School picnic… !~ ;)

    Biker Pete
    May 27, 2010
  6. Another possible scenario is that nothing much changes… we simply go on with the evolving scenario… and rising inflation, with some areas of actual deflation. That’s the political framework (Bolman & Deal) at work. As Bill notes in today’s DR(US):

    “…that is not what Americans want…neither Republicans, Democrats, nor Tea Party members. Nor is it what voters want. What the man on the street seems to want is cheaper gasoline, free health care, food stamps, Social Security, wars and boondoggles. At least, that’s what the evidence suggests. He wants protection from everything and a free lunch too.”

    The nothing-changes-much scenario is a possibility we might all have to contend with!~ :)

    Biker Pete
    May 27, 2010
  7. What if USA says to it’s creditors, sorry, we’re not paying. Don’t like it, tough. They have piles of nuclear and non-nuclear weaponry to literally throw around, enough to conquer other nations and reap the resources of the conquered. Inconceivable that a democratically elected country would go to war over an issue such as not paying the bills? They’ve gone to war using far flimsier excuses in the past.
    Desperate people do desperate things to stay in power. Just look at George Dubya.

  8. Too true, Davo!~

    Another likely scare-nario? Northern hemisphere countries unite under a new economic banner… The United Nations of Debt Obligated (UNDO)… and then plunder the New World… . :)

    But, as you say, the US has gone to war for less… the WMDs*, for example.

    * Now to stand for World Money Debts… ;)

    Biker Pete
    May 27, 2010
  9. Comment by Biker Pete on 27 May 2010:

    One possible scenario*, Shoes… . And your timeline for this?

    Within 5 years for us… 2 to 3 years for the USA

    “The nothing-changes-much scenario is a possibility we might all have to contend with!~”

    Man can not stop the tide… ;)

    May 27, 2010
  10. Conversely, in a nothing-changes-scenario, we may see the following:

    * Continued money-printing

    * Steadily rising inflation*
    (which we’ll all get used to, like the lobster in the slowly heating
    saucepan… )

    * Steadily rising wages, to attempt to compensate

    * Politicians (continuing to) avoid the hard(er) decisions

    * Continued government interventions (in just about _everything_ )

    * The rich getting moreso and the poor still paid to reproduce.

    A few years back, a hundred thou meant something. A million has taken its place. The term millionaire is now meaningless. Billionaire still means something… for now. Inflation will put an end to that, eventually;
    before currencies are replaced by (insert choice here ………………, including new paper, which is easier to print than ingots!)

    Some years ago, we held a party for seventy or so colleagues, on our front patio. One young bloke commented that our (new) home would be worth a million in a few years. We nodded… and laughed it off… as you do.
    Later, after everyone had gone, we had a good laugh about his naivety.
    It’s now valued at nearly double that. Do I feel wealthy as a result?
    No, it’s simply inflation at work. That’s why Joe’s summary, above, is probably the way it will go:

    “this slow default will take the form of systemic inflation, reducing their liabilities…”

    There’ll be stacks of money about, but no-one will really feel any richer.

    My hypothetical “Finish-the-story-How-does-it-end-query” was probably completely answered by Joe’s: ‘systemic inflation’ supposition.

    China’s ascendancy adds some very interesting alternatives to the ‘nothing-changes-much-scenario’. These changes, like my colleague’s prediction, are unimaginable to us, having enjoyed Western indulgences, prosperities and freedoms like pressing a ‘Submit Comment’ button, without thinking too much about the consequences… . ;)

    Biker Pete
    May 27, 2010
  11. my goodness Biker Pete.

    are you actually turning into a valuable contributor?

    good post (even if it did include a nod toward your “comfort”)

  12. “…even if it did include a nod toward your “comfort”…

    These euphemisms are necessary, prozak. I could hardly state the bleeding obvious… . :) None of it from an “inheritance” though(!) ;)

    “…are you actually turning into a valuable contributor?”

    My goodness, I had to re-read my post, to see if I’d contributed anything new. Nope. My ‘nothing-is-likely-to-change-scenario’ is intact. The downside to China’s _rise_ remains red-flagged. I infer Australia-wide medians of a million plus. Given the company, I doubt these are valued contributions… !!~ :)

    And where Bill’s concluding prediction is “…the whole process will continue until it blows up… “, mine tends to view the NH’s future continuing; and ‘not with a bang, but with a whimper… .”

    Biker Pete
    May 28, 2010
  13. Good heavens – Will wonders never cease? :)

    The Yanks get all aggro and do a real war against a real power – Won’t happen. In either the nuclear or non-nuclear version.

  14. The Yanks played peeky poo with a real war experience back in about 1860 – And a handful of them got hurt – Geez ask BB – They STILL remember … That they didn’t enjoy it! So have been VERY careful to never do one since. Nah, all anyone would need to do these days is give poor ole unca Sam a nipple cripple and he’d cry and run off home – 1m dead shipped back in nice shiny new Al boxes – 2m tops – And he’ll declare victory and bolt! :)

  15. Good comments, Biker, because in the medium term that is exactly what will happen re: inflating away the problems, which, like bubbles in wallpaper, will reappear elsewhere but in ever greater quantity. The thing about Europe though is that, although it has damaged itself by exporting its manufacturing sector (in part as a result of Kyoto) it is nowhere near as unproductive as the US has become.

    I reckon the predictions which I read around the traps that the US is in for something that makes Europe look healthy, is not far off the mark. So a military solution is in order … is the South Korea incident just a useful excuse to kick off the war games? They won’t be coming home in aluminium boxes, because they will be needing the aluminium for something else.

    Nonetheless for Australia the short term real estate trends are becoming interesting again – the turnover rate is slowing from what I can see, so I’d be guessing that credit expansion is also slowing. Buyers losing confidence, Biker?

  16. “Most likely, the only way to really rein in spending is by cutting off the money.”

    Correct. Let em swim.

  17. I don’t blame the government for being what it is. You boil down most news headlines these days and eventually you are left with “the government must do something about this or that or the other…” whether that be “tackling” underage drinking, unemployment, road toll or whatever the else you can name. People asking for assistance, help, intervention, ,handouts etc etc. Who can blame them for trying to oblige everyone and as a consequence growing at a steady clip, they have plenty of justification for doing so. The downside of course is more regulation, bigger bureacracies, higher taxes and more red tape. If taxes fall behind too much then they can crank up the printing press and acquire people’s savings in the usual fashion :)

  18. “I don’t blame the government for being what it is”
    I suppose everyone will though Don if suffering/hopelessness sets in. That govs’ may identify a greater threat overseas (diversion).. and we’ll be at war…seems likely to me.

    Hi Ned ;)

  19. “Nonetheless for Australia the short term real estate trends are becoming interesting again – the turnover rate is slowing from what I can see, so I’d be guessing that credit expansion is also slowing. Buyers losing confidence, Biker?”

    Don’t know, Dan. I’ve never put much store in auction clearance figures.
    I think what happens is this: Once clearance rates start to rise, potential sellers fly silly figures… and they soon fall again.

    Never claimed to be expert in the east coast stuff. In fact, I really can only claim to _know_ three locations very well these days. In the one we’re currently focussing on, prices are rising; there’s a shortage of both rentals and quality homes in the $350K – $440 range (which is our target area, since we can build well for that); and the population is rising faster than we can build. Buyers can get in for 5% down, which is a little crazy, in my view; so credit is still flowing here.

    I’ve read some silly claims about beach property growth here: 25% per year 2009, 2010. If that’s happening, I haven’t seen it. I’d put it at 12 – 16%. We need no capital gain, so it’s a bonus (on paper.)

    Blocks are possibly rising faster than houses here and developers are asking ludicrous prices for stuff 80km from the CBD. I’ve never given much credence to the term ‘spruiker’ until yesterday, when I saw a new ‘suburb’ advertised on a half-page colour advert in the paper. The picture? A happy couple standing in front of a nice new home, _immediately_ behind which you can see Perth city crystal-sharp. Looks like it’s 500m from the house in fact… right in the CBD. The location? Belswan, in Pinjarra: 75km out!!~ Prices from $230K+

    So enthusiasm must be running fairly high, despite the mining tax threat, for realtors to be trying on that kind of BS!~ ;)

    Biker Pete
    May 28, 2010
  20. “A happy couple standing in front of a nice new home, _immediately_ behind which you can see Perth city crystal-sharp. Looks like it’s 500m from the house in fact… right in the CBD.”

    An interstate buyer who bought into that might have a strong legal case, BP,
    perhaps even against the paper that ran the ad. :(

  21. ‘Correct. Let em swim.’

    Delightful image here of Scrooge McLachlan diving into his money bin, awash in krugerrands, eagles, maple leafs, pandas and sovereigns… !~ :)

    Biker Pete
    May 28, 2010
  22. John,

    Advertising in Australia is ridiculously unregulated.
    How come every dissinfectant advertised on TV kills 99.9% of germs.
    Surely, if I made a product that only kills 0.01% and advertised that you should use it after the competitions, I’d make a fortune.
    Additionally, the language used on beauty products is completely un substantiable.
    If an company claims proven, guaranteed, or specifies an absolute measurement, they must be legally required to prove it.
    As a final point, it should be illegal to deceive or attempt to mislead via deliberate ambiguity.
    Then you would not get adverts like this attempting to drum up interest where in reality there would and should, naturally be little.

    Biker Pete,

    The end game you asked on my last post, is eventually we will all die.

    Inbetween now and then, I absolutely guarantee you, politicians will in an attempt to make things better, make it very much worse for the majority.

    Where does inflation end ? Either in a resetting of your economy with complete disregard for others external to your economy because your economy has stopped functioning (Germany and Zimbabwe are prior examples), or a war where the victor takes the spoils and resolves thier economic troubles at the expense of the defeated foe.

    Either way, the previous sentence will be proved correct with politicians dispensing either death and destruction, or just plain suffering.

  23. Gave you five Biker. I like your image :)

  24. Let’s be a little more optimistic, Joe. The mess may just continue… . :)
    Perhaps _different_ people suffer more. Perhaps it’s the usual suspects.

    As for death, we live on:

    19 yo does a reasonable job with it. One of my favourite places, too:
    Cape Breton.

    Back in the sixties, two Liverpool economists summed it up well, Joe:

    The love you take = the love you make.

    Smile. :) It’s not _just_ a jungle out there…

    Biker Pete
    May 28, 2010
  25. We rise again
    in the faces of our children

    Some here might think you’ve got religion, BP. DNA rules, OK? ;)

  26. John,

    I have no religion, I believe my route to immortality is via my 2 children.
    That satisfies me. My death makes room for them and theirs in a finite World.

    I do however have faith. Faith that politicians cause more harm than good, and this will continue to be the case.

    A more striking example of this was in 2008 when all that debt was loaded onto the community and all those losses were not realised by the banks.

    The collapse of the banking system would have caused alot of problems, but, none of them as large as those we now face.

    The rich/wealthy would have lost all or a good proportion of their wealth for investing in a stacked ponzi like financial system. That would have been fair punishment. $100 million reduced to say $25 million.
    Instead we have some poor sucker on $50K a year having to pay more in tax over the near term to help reset the $75 million losses of this one individual. But not just one poor sucker, its all of us.
    So a 10% increase in taxation to repay the deficit (not in Australia I conceed) means the $50K man is down another $5K where as the $100 million man is only down $10,000,000 … He still has the wealth of $90,000,000 behind up. Not much of a sacrifice by comparison is it.

    So, the tax rates will have to go up, and inflation will devalue the debts. A two pronged attack on the poorest in society. Ain’t Capitalism grand that politicians of all ilk defend is so immorally in this fashion.

    Ah .. but we are saving you all say the politicians whilst arse kissing the rich person next to them.

  27. Joe: “I believe my route to immortality is via my 2 children.”

    _Precisely_ what the song says. Wife wants it played at her funeral, so I get a little choked up if I hear it unexpectedly…

    “inflation will devalue the debts”
    True. It will also steadily chew up our retirement buffers, too… .

    On auctions, Dan:

    Note the line re the lack of popularity of auctions here. In the West we tend to watch the number-of-days-to-sale figures. Not as immediate (or perhaps flawed, in the West) as auction clearance rates, which may be good indicators of either panic… or reduced interest… in housing due to higher rates (or silly auction sales) over east.
    Auctions: zoos for the ego.

    Biker Pete
    May 28, 2010

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