Monday, July 23, 2012

How A Country Rationally Exits The Eurozone

Hi all. Sorry for being away—it couldn’t be helped. Enjoy the new post. More will be forthcoming on a steady basis. GL
We are about to experience the Euro Exit Crisis.

Mish Shedlock and I have a private bet as to whether Italy or Spain will exit first—he says Italy, I say Spain. But either way, it’s gonna pretty much suck.

The whole point of exiting the eurozone is because a country no longer has the money to finance its continuing operations. Insofar as Spain, Greece and possibly Italy, that moment will arrive shortly—possibly within days in the case of Spain. So if a sovereign government reaches this moment, it will have no choice but to exit the EMU and revert to a local currency which the government can then devalue.

By doing this, the government simultaneously has all the cash it needs to continue operations, and also inflates away its debts. The private sector gets a shot of adrenaline insofar as foreign trade is concerned, because its goods and services become that much cheaper on the foreign markets. And the employment situation gets a boost, as those producers selling their cheap goods and services overseas begin to hire more workers to fulfill demand.

The downside is that the government gets shut out of foreign bond markets, its financial sector takes a huge hit, and prices for essential goods and services rise dramatically, hurting the poor, the lower middle-class, the elderly, and the unprepared.

Even with these negatives, though, a forced conversion and devaluation is a boon to bankrupt nations. It is, basically, a reset of the economy: And historical experience shows that though it hurts a lot in the short term, it helps to reignite an economy, and get the people moving once again. This has been true of the United States in 1933, Germany in 1948, Latin America in the 1980’s, Argentina and Uruguay in 2001.

But it’s crucial to understand both the sequence and the mechanics of the process, in order to be able to anticipate what will happen, and thus make sound investment choices.

Once the political decision to exit the EMU has been taken by a country’s leadership, this is what it has to do:

1. The government decrees the creation of a new local currency, and establishes its convertibility on a one-to-one basis with the euro. (Let’s call the new local currency the nueva peseta.)

2. The government makes these nuevas pesetas available to the local financial sector, and orders everyone to convert. Thus the local Central Bank takes all of the local banks’ euro-denominated deposits and converts them into nuevas pesetas. And all the local banks in turn convert their retail customers’ euros into nuevas pesetas as well—all of these conversions taking place on a one-to-one basis.

The government thus has exchanged all these newly minted nuevas pesetas it has created for euros—euros which are now in the government’s coffers.

3. At the same time as it obliges the financial sector to convert to the nueva peseta, the government by decree says that all local debts of the government are now to be paid in nuevas pesetas. Any euro-denominated bond or contract that the government signed is now automatically—and irrevocably—in nuevas pesetas. All pensions and government salaries are also in nuevas pesetas.

4. The government also decrees that all private debts—as well as all consumer debts with the banking sector (ie., credit card debts, mortgage debts, etc.)—are to be converted to nuevas pesetas on a one-to-one basis as well.

5. The government decrees a wage-freeze and a price-freeze—obviously. If it does not implement a wage-and-price freeze, consumer prices will go to the moon, creating runaway inflation. This is not to say that there won’t be hoarding—there will be, regardless of the wage-and-price freeze. And a black market will also sprout up. But a wage-and-price freeze will halt any possible inflationary panic; or at least slow it down enough to keep it from becoming hysteria.

Capital controls would not be necessary, due to the fact that depositors’ euros had been converted to nuevas pesetas. Certainly dollar deposits would flee the second the announcement was made—but cash dollars account for a relatively small amount of a prospective euro-exiter’s balance of payments.

6. The government also tries to convert all sovereign debt obligations into nuevas pesetas. This won’t necessarily happen—it could be that the sovereign debts have riders that make it impossible to convert. It could be that foreign bond holders have the political leverage to prevent forcible conversion of euro-bonds into nueva peseta-bonds. But the government will most certainly try to convert its foreign debt from euros into nuevas pesetas—and will likely succeed in at least a tranche of these outstanding bonds.

7. Once the government has converted as much of its obligations as possible to the new local currency, it devalues the nueva peseta—hard. An initial devaluation of 20% to 30% is historically reasonable (see the Latin American countries during the 1980’s), with an eventual devaluation of a full 100% within 6 to 18 months.

I insist: This is the rational approach to eurozone exit.

So if we posit the rationality of this decision and its implementation, then in order to be effective—and in order to minimize panic—all of the aforementioned steps (except step 6) would have to be accomplished as swiftly as possible: Say over a weekend.

This is totally doable: Modern financial technology would easily allow a government to forcibly convert banks’ euro deposits into nueva peseta deposits almost instantaneously. Ditto with retail banking customers’ deposits and debts.

Step 7—the devaluation of the nueva peseta—will also happen immediately: On Sunday night of this very busy weekend. The devaluation of the nueva peseta is of course the whole point of this exercise: The government is exiting the euro and devaluing the nueva peseta in order to re-ignite the economy.

The problem wouldn’t be the implementation—the problem would be leaks: If any sector of the public gets wind of what’s coming up, then you would get what happened in Argentina in 2001—huge convoys of armored trucks, carrying the oligarchy’s money away, before it can be converted by the government.

So if a government makes the decision to exit the eurozone, it will have to be swift and surprising. If it takes too long, or if the decision is long-winding, or if there are leaks, then there will be a massive capital outflow like Argentina in 2001, which will cause terrible damage.

Critics consistently claim that no country can exit the eurozone, because if it does, it will be shut out of the bond markets—and thus will not be able to borrow money with which to buy necessary imports, like grain, oil, etc.

This is a stupid objection—because it ignores the mechanics of an EMU exit and reversion to a local currency: If a government forcibly converts its banks’ and people’s euro-deposits into nueva peseta-deposits, that government will have essentially confiscated all those euros. Obviously: It’s printing up nuevas pesetas, and forcing everyone to take them in exchange for euros.

And where do those euros go? To the government’s coffers.

Thus in the short-to-medium term, the government will have no need of the euro-bond market, because it will have all the euros it could possibly need.

(It also explains the need for swiftness and secrecy in the decision and implementation of this decision: If there’s a leak, the capital flight will leave the government without any euros—which the government can’t allow. Of course, the argument can be made that the government is stealing the euros from the people—which it is. But I’m not arguing the morality of these decisions—I’m arguing the practical aspects of it from the point of view of a desperate government that is facing bankruptcy and has thus decided to exit the eurozone.)

Though the government that exits the eurozone and forcibly converts to a local currency will have all the euros it needs to cover its international balance of payments in the short-to-medium term—including all necessary and essential imports like grains and oil—this does not mean that it will never have need again for the international bond markets: It means that in the short-to-medium term, the government that exits the EMU will be sitting pretty in terms of its hard-cash position, and thus have the ability to flip the bird at the euro-bond markets.

Again, continuing on this rational scenario: Euros will be needed in order to buy necessary imports, like grain and oil. To prevent hyperinflation of the nueva peseta, the government will likely subsidize some of the larger local importers of grains, oil and other essential imports in order to cushion the impact of rising oil and food prices on the general population. The way this subsidy will happen is by selling the euros the government confiscated to these local importers at a better exchange rate than the open market, with the understanding that the grains and oil the importers buy will be sold at lower prices to the general population.

All is not sweetness and light in this scenario: A whole slew of small-to-medium businesses will go bust—with the concomitant bump up in unemployment—because these businesses will have foreign currency liabilities they cannot meet because their locally-sold products are now that much cheaper due to the devaluation of the nueva peseta.

However, the point that matters is that now the government will have both euros and nuevas pesetas to throw at the population—which they will, and thus ease their country into this new phase.
This article was adapted from a longer post which appeared in my Strategic Planning Group. That post was called “Investment Ideas for the Euro Exit Crisis”. If you’re interested, check out the preview page. GL

68 comments:

  1. What's your advice to someone living in a country about to leave the euro?
    Buy foreign currency? buy gold? what?
    All the best
    Costa

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    1. gold and silver, physical not paper.
      best of luck to you.

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  2. Hiya GL,

    I totally agree with your post describing the steps a country has to when leaving the Eurozone and how that will work out.
    However, i was hoping when i read the first sentences that you would describe an analysis what is the dependent variable or trigger that Spain will go first in stead of Italy. Or make a comparison with the arguments of Mish Shedlock why he's thinking Italy is the first one to step out.

    Like reading your posts :)

    Best wishes,

    Laurens de Jong

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  3. Glad you're back, GL. Hope all is well!

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  4. So, newbie question, but in most of the defaults that have happened over the last 20 years, the IMF has played a role. How would that work for this situation?

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    1. Spain is too big for IMF bridge loans, as they’ve done with other bankrupt countries. IMF will mean nothing in this disaster.

      GL

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    2. If the IMF has the ability to print an unlimited amount of SDR's, their ability to ease government debt burdens is unlimited. Their only restrictions are those that would be imposed by member countries. Political will.

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  5. "—the problem would be leaks..."
    Your post is the first gentle stream of water coming out of the dam! If this gets around, the smart compadres in Barcelona and Jerez will start pulling their euros out of el Banco and things can get very ugly very quickly. Hopefully there are not enough smart compadres for this to cascade into a major bank run.

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    1. I understand that in both Italy and Spain, there is already an active "run on the banks" by those whose eyes are open and have more than just cash from last paycheck.

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    2. Sincerly, NOT trying to be insulting...'the smart money' left the EURO about Dec of '11 when no one was paying attention. The question, which I restate because I like to read what I write, will be what happens when the lemmings start marching. I suspect that a large number of EUROS still held by the masses will be lead to slaughter as these groups have no choice but to go along for the ride.... irregardless of who is piloting the ship as their accounts are either so small and necessary for daily operations that expatriation or conversion to some other currency is just not possible.

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  6. Germany will be the first to leave the Euro before Spain or Greece

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    1. As soon as a hint is given that either Spain or Italy will declare a bank holiday, Germany will leave.

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  7. Glad to read from you again, Mr Lira. But I think the ECB will print big time and Germany will exit Euro.

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  8. GL,

    Your absence has been obvious, but the world hasnt changed one iota.
    Still the same diabolical mess, with the same players, at the same table, playing the sfg.

    As obvious as your absence... is the matter of default..as it seems. But IS it ? Just as Greece was but a few months past.

    Although I fear for the event and the consequence in what is "Spain" or "Italy", I have grave fear for something more sinister, something which cannot be explained, dismembered or eloquently analysed as you have with Spain's demise.

    Spain is not in isolation in its debt obligations, deficits, unemployment, poor growth, proximity to other countries in EZ. The great fear I have is that Spain (or any EZ nation for that matter) becomes the catalyst for a larger,more widespread contagious event. That event would not be controllable and would be enormous in in its reach in both magnitude and breadth.

    So when we call for a departure, as certain as the sun rises, we are absolute in our conviction. I hope and pray that it does not eventuate, notwithstanding the near certainty of it occuring. It would, in my humble opinion, bring about the greater financial crisis and then a world wide Great Depression that would make the last one look like a picnic in Central Park. Be careful what you speak of and what you wish for. The consequences are very dire for not just the Spanish or Italians.

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    1. A little late for a response, but speaking out or wishing has nothing to do with reality. It's a simple matter of cause and effect

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    2. Better late than never......not wishing it to occur..as opposed to thinking it wont. It cannot !

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  9. At the first sign of any sovereign devaluation (or the first phase of GL's roadmap), PMs will start to rise dramatically. The sheeple might finally understand what real money is.

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  10. I live in Spain. But my income stream is in sterling. And most of my assets are in Krugerrands. So, the price of my smallholding in Spain - that I've paid for - will plummet. But on the other hand, the house I wish to build ought to become cheaper to build because I'll be paying with Sterling. I only keep a few hundred Euros in a Spanish bank to pay electricity bills, etc. So I say Bring It On!

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    1. It's good to hear there are smart people like you that are one step ahead of the crisis who will profit. Some of us are already taking those steps in the United States, even though our crisis is a few steps away.

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    2. What steps are you taking??? We can't figure out what to do...gold still seems overpriced...the dollar worthless...what do you think?

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    3. Its called diversification...citizenship, income, assets/investments, bank accounts, home, precious metals. The strategy is to make yourself as least dependent on ur home country as possible. You need to become a world citizen. It may sound fanciful....but you need to become a Jason Bourne...without the "assassin" characteristic.
      BTW...Gold is not overpriced...your view is back to front..... Gold is the inverse of mirror image of the loss in purchasing power of the USD.

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    4. Both of those things can't be true (gold overpriced and the dollar worthless) can they? Start reading here: http://fofoa.blogspot.com/2010/12/focal-point-gold.html

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    5. I tell this not attempting to sound like a smart ass; I am now as I write organizing the last of my affairs and I am moving to Colombia where I have already purchased a business. My days in the USA are numbered now in less than 60 days. What may seem like a tragedy in Europe will sound more like the collision of tectonic plates in the USA. It is happening in slow motion for most citizens as just like the whole 2008 crisis...it's just way to far above their heads... and they will become the lemmings in my country. They will not know what is happening until it's too let to get out of the way and then they will become a huge herd of panicking lemmings looking to the American Idol TV show to tell them what to do [sarcasm]. I have been working on my exit for four years and was planning on staying another year but I just don't see any upside to staying and putting myself thru the stress. I, for lack of a better analogy, am simply making sure that I am standing fully off the side of the road when the runaway, brakes-burned-out, smoking hulk a dump truck full of America's savings, with blistered and wobbly tires, comes screaming down the road to Hell with Uncle Sam yelling out the side window...."Don't worry folks, we will never crash in the Land of The Free! Nothing to see here just keep on shopping!"

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    6. Why Colombia ?
      God speed nonetheless.

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  11. So, when does the bank holiday begin? Any clues?

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  12. I'm sorry, but you are wrong. The very moment spain converts to pesetas there are no euros left in spain (besides allready printed notes). The only euros spain could confiscate would be foreign accounts of their inhabitants. On the other side these foreign accounts could be forcefully converted to pesetas by the other european nations to at least partitially cover the huge debt of the spanish central bank (TARGET2).

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  13. What about neighboring countries? As soon as one nation pulls this off, heavy capital controls will be required in the others to keep this option open for them.

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  14. "gold still seems overpriced".....Frankly, at this stage of the game (troubles everywhere)I'm amazed it's still this cheap...The obvious price suppression going on daily tells you how desperate they are. That is the only reason we aren't at $3000. They do a great job of making the sheeple believe in the debt ridden, bankrupt piece of paper we call the dollar.

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  15. Everything you described is correct and old school. What will actually happen; if Spain or Italy tries to exit the Euro, ALL the European counties will exit simultaneously (on the same Sunday). The countries will have no Euros to spend after their conversions. The Euro will not exist! This is the threat that is told to all the European countries when they threaten to leave the Euro. The only exception to this would be Greece leaving. The other countries are too big to continue with the Euro experiment if they leave. The playing field is very different if they have no Euros as backup to buy grain or oil. What do you think Spain or Italy would do then? The weak will fall and the strong will survive.

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  16. Jack in the PhilippinesJuly 25, 2012 at 3:35 AM

    "Certainly dollar deposits would flee the second the announcement was made—but cash dollars account for a relatively small amount of a prospective euro-exiter’s balance of payments."
    That isn't what happened in Mexico a couple of decades ago. In Mexico, they decreed the conversion of all the dollar accounts in Mexican banks to pesos first -- at the pre-devaluation exchange rate -- then they devalued. A lot of Americans had dollar accounts in Mexico because of the higher interest rates. Boy were they surprised.

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  17. Truly the only way for Spain (or Italy for that matter) to "survive" is to offer up its sovereignty. Isnt that what the Germans want ?...CONTROL...fiscally, politically and monetarily. Once you have those factors in place...all under the one roof so to speak....you have a UNITED STATES OF EUROPE. Doesnt necessarily mean it would be any more successful, b/c as we know ....BANKS are BANKS ...and they have a tendency to play dirty games.

    Political success = Banking success.
    U will find in time that the essence of any coordinated development in this direction is all driven by the BANKS...for the BANKS. They are the ultimate beneficiaries of the EZ continuance...not the masses who will be indebted for generations via public debt and repression.
    Not being a conspiracy theorist here...would it not be feasible to suggest that "They" have painted themselves into a corner...some would suggest perhaps intentionally, to force the hand of the agenda..ie. to complete the holy grail of ensuring complete UNION. Wouldnt that be the ultimate in manipulation. Understanding that it was nigh on impossible to have it when the EZ was born into existence, maybe TPTB knew that it was just a matter of time before the less fortunate member states would succumb to debt proliferation and reliance.AND that ultimately if they ensured austerity, growth, stability within their own backyard, that they would sit atop the tree out of reach and able make demands to ensure political/fiscal union. Bigger games with even BIGGER prizes. Sad...VERY SAD..!!!

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  18. Sr. Lira,
    Please show one fact that Sr. Rajoy is contemplating doing this. All of his actions thus far have been in total obedience to Brussels and their banksters cronies. Unless otherwise shown this plan of yours is nothing but an irrelevant fantasy.

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    1. Yes, So far all the establishment parties are doing their best to fleece their own peoples for the benefit of the banks. No jail break yet. Other parties need to be elected first.

      Secrecy? These countries are all ruled by intensely corrupt elites. That's why they are stealing from their own peoples. See? So they would all have their assets out of the country well before. But that would become known well before devaluation and exit. Hard to do.

      The one thing they could do is stop bailing out the banks and explicitly default on the debt whether they exit or not. I don't see that happening yet. Then not borrow any more money - but that would mean not bailing out their banks - so they'll keep borrowing as long as they can.

      Unna

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    2. If I might pile on w/ Unna...

      'The one thing they could do is stop bailing out the banks and explicitly default on the debt whether they exit or not. I don't see that happening yet.'

      I don't think that I am being non-factual, to say that the slow bleeding of their own is fully underway all in the name of "saving the economy"...only after the taxpayers can be bled no longer will the banksters and politicians then say 'Wow, we really can not pay this debt and a negotiated exit from the debut must be pursued... Default!' The banksters and politicians know exactly what they are doing... it is the poor single-minded John Q Public who hasn't got a clue how they are being sodomized...at least not yet.

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  19. I'm in Spain on holiday at this moment. While a lot of real estate is on sale it's still hugely overpriced. But it's obvious they've done too much. Even the remotest mountain villages look like shiny new holiday resorts and have their own real-estate agencies. But many houses are empty and a great deal on sale - but, again, overpriced.

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  20. About me I sold gold a few months ago, and buying my 2nd woodlot. I consider woodlot a safe assets with yield. I think there was a bubble in all , even farmland, but nothing in woodlot.

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  21. Being a Belgian, I consider it this way:
    how on earth could other member states sit still as Spain is converting and devaluating. Consider the multitude of contracts for deliveries signed between Belgian and e.g. Greek firms. This method of currency conversion would have disastrous effects.
    I think panic will be very big and we might see bank runs all accross Europe. Ideal recipe for a global Great Depression... Our crisis already affects China, South-America etc.

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  22. Seriously, These Politicians and Bankers need to go to JAIL. NO more resignations or fines. PRISON. Join us in email campaigns and peaceful protesting at Gov and Financial HQ's. If you are tired of the blatant corruption that no one is doing anything about then join us! www.facebook.com/BankAndPoliticianFinancialCorruption

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  23. Prof. Zinn, Ifo-Instituts, wrote about a vacation in Greece is the euro.
    But do offer the optimum...

    Drachma. Weekend instead of the holiday.

    Flash crossing phantom currency:

    Euro >> Drachma >> Euro new exchange rate

    for example:
    1 Euro >> 1 Drachma >> 0.9 Euro

    No trade or payment transactions in drachma.
    Only the depreciation of domestic debt!

    Period of operation - just a few hours, days.
    Greece remains in the euro zone and devalue the domestic debt.
    For optimal devaluation of debts the process can be repeated.

    The transition could be easily modeled with/based on official statistic data.
    Test Phantom-currency empirically. You can make a painless transition through an experimental phantom with the devaluation of the currency on the symbolic 0.1-1%.
    _________________
    the same way:
    1 Euro >> 1 Pesetas >> 0.9 Euro
    1 Dollar >> 1 PhantomDollar >> 0.9 Dollar
    _________________
    Sorry for my English.

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  24. If I lived in Spain I would convert my Euro's into Dollars. Dollar is up 15% over the last 6 months over the Euro. The smart money in Spain and Italy has been doing this over the last 6 months buying US Treasuries. Just look at the 10 year yield now 1.4%.

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  25. I rated the post as stupid although it has value and substance due to the fact that the author does not understand what 100% devaluation means: It means "go to zero"

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  26. Speculating on the number of angels that can flamenco on the head of matador would be more useful of your and your readers' time than this utter irrelevant claptrap. The EU and Euro is working perfectly, that is, lowering the standard of living of the plebians to neo-serfdom. What part of the New World Order don't you and Mish understand?

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  27. I always said that the best thing that hapenned when Argentina defaulted was that no one would lend them money again (at least for a long while). The resault was that the
    Argentine government had to live within its means and not depend on loans.

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  28. Sounds like a bank holiday... I remember you saying on Max Keiser that a "Bank Holiday" was impossible, silly, ridiculous.. Thankfully nobody, but me, actually keeps track of what people say and predict.

    I remember the guest before you got it right.

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  29. The game is much bigger than this. We are essentially witnessing a war of the great powers trying to establish a new world order. One that will remove the US as the dominating power in the world. The Euro was created for the purpose to give Europe a place in the new world after the end of US hegemony. Similar plans are in place among the BRICS. Now we are witnessing the transformation taking place and the US fighting back. I hope we can make the shift without major world war. I don't think any country will be allowed exit from the Euro, no matter how many unemployed, starving citizens suffering through debt slavery. I think they'll even go so far as to send in military against their own population, anything to defend and preserve the European power elite's stake in the new world order. Preventing any breakup or fracture of the union is paramount to succeed in becoming a major power after the fall of US dominance. They won't allow an exit, instead they will use the crisis to force consolidation of power. Member countries will have to give up more of their sovereignty and control as part of any "bailout". European central banks are already now being kicked out and replaced with an all powerful ECB with direct control of national banks. Soon we'll see national governments become more and more servants of a central European authority. People can only accept this transformation when conditions are so bad they'll accept anything in order to have a meal to eat tomorrow as well. If that doesn't succeed, we'll be looking at Hitler like politicians emerging across Europe, rallying people to take up arms against the IMF, Germany, EU and the ECB. In that case the US will have won and Europe will once again be reduced to rubble. It's divide and conquer on a higher level, only the concept is still the same.

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    1. I dont practise religion or have strong religious beliefs, but the circumstance that you describe has high correlation to an event in the Book of Revelations (last book of new testament)...along with the rise of the 3rd Anti-Christ. The person who comes forward as a saviour for the masses.... will turn against the followers. It may not be just Europe that encounters that experience. A NWO requires a controlling body...and that requires a leader.

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    2. Maybe you should consider a relationship with God. Everything in this world is passing away including the money and gold of everyone posting here.
      In the end, that is the only thing that will last. Read John 3:16 and pay attention to that perishing part.

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  30. What is your best guess as what will happen to loans taken out in Euros in a Spanish bank, by a foreigner?

    Will these loans be converted to devalued Nuevos Pesetas, as well; or will foreigners be stuck with loans denominated in Euros? If the former, it is almost too good to be true. In fact, it would make all the sense in the world for pretty much everyone in Europe to shift as many of their loans as possible to a bank in a shaky country; gambling on the possibility of getting a nic devaluation windfall.

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  31. WHAT IF Germany exits the Eurozone? This would then make the current Euro currency the vis-a-vis peseta you allude to. Hence allowing devlauation not only for one particular nation, but all willing. This may be is a more likely scenario.

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  32. Every sovereign nation in the euro zone prints their own euros. Instead of printing nueva pesetas and stealing value from its own citizens, wouldn't the politically more viable thing be to simply print more euros? The negative effects are spread out much more that way, there is no need for bank closures and no risk of leaks. Who would stop you? Who *could* stop you? How would a bondholder tell if the euro he's being paid off with is a "legitimate" euro or not? Yes, yes, everybody would be very upset. But in a bankruptcy situation when is everybody not upset already?

    Spain, Italy, Greece, et al have promised that they would not print more than a certain number of euros. They also promised many other things like maintaining a certain fiscal balance, etc. At this point, what makes printing extra euros such a taboo?

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  33. The collapse of the hyperinflated Spanish real estate market was based on the idea that a common currency equalized the needs of all economies in Europe. Real estate price inflation had gone out of control, resulting in unsustainable high prices. Soon the dominoes began falling. People stopped buying overvalued real estate. People employed in building trades lost jobs. Then, those people dependent upon them lost jobs. Then companies dependent upon the first two groups saw their sales falling, and their employees began losing their jobs. So on and so forth, until Spain found itself in its current unenviable condition.

    Like the USA and other western economies, Spain has a government supported social safety net. The net went into automatic overdrive, as the needs of the Spanish people grew. Government expenses grew. With real estate prices crashing, banks who counted mortgages as 'assets" became insolvent. The Spanish government was forced to support banks, and, most recently, it was being forced to expend billions to rescue a bank that supposedly had already been rescued.

    All of Spain's problems arise out of the fact that the Euro is a fiat currency. Fiat currency is an inherently flawed concept because it relies on decision-making by human beings. Fiscal union does NOT solve the problem. For example, from 2000 to 2005 the Federal Reserve blew immense housing bubbles in fast developing states like Arizona, California, Florida, and Nevada. The Fed imposed ultra-low rates appropriate for New York City. Like Spain, those states needed higher rates of interest than New York or Germany.

    In spite of the fact that the USA is one nation with one fiscal policy, uniform interest rates are inappropriate. Different regions are very different and have very different needs. The static, Politburo-like, rate setting mechanism cannot account for these differences, just as the ECB could not account for the differences between the states of Europe. We have seen the collapse of U.S. state finances, very similar to what we see in Spain and elsewhere in Europe.

    The imposition of uniform low rates on fast developing economies and / or imposition of high rates on fully developed economies leads to instability. That is the problem with central banking. A free gold standard solves this problem. If gold floats alongside paper currencies as equally legal tender, it is no longer an "asset". It becomes money and that allows capital gains or losses to not be recognized just as they are not recognized when the buying power of the dollar rises or falls.

    Wherever there is growing demand for money-- and the higher risk, such as when lending to fast-growing areas-- the local interest rates on gold loans would automatically rise to the appropriate level, since no rate is set by any central bank. Similarly, when there is lower demand for money, rates will automatically fall. Differential demand for money in the form of freely traded gold GLD, IAU, PHYS depends on the commercial needs of the region.

    Although the problem of both the Euro and the U.S. dollar would be solved by a free floating gold money regime, Spain is too small to lead the way. Until a major nation-- like the USA or China-- leads the world from fiat currency, Spain must either keep the Euro, and that means more suffering both now and in the future, or it must replace it with another fiat currency.

    The process of reintroducing the Spanish peseta would be traumatic, and would probably have serious side effects around the world. A fall in the DOW (DIA), S&P 500 (SPY) and NASDAQ (QQQ) indexes in the USA, for example, would be almost assured. But the end of the Euro is inevitable and kicking the can down the road, while possible, will simply make the adjustment process even more painful when it finally takes place. Returning to the peseta, with rates set for a more uniform geographic region and people, by a Spanish central bank in closer touch with Spain's special needs, will help Spain get back on its feet.

    ReplyDelete
  34. One also must consider to whom this debt is owed and what follows. Primarily I would suggest the Central Banks and "too big to fail" corporate entities hold it. But since they really created the problem, they deserve what is coming to them, financial ruin. The trick is to not let them get their hands on real assets with their worthless paper money and military force before the culmination.

    Prepare for a period of self-sustainability and hardship followed by the greatest period of prosperity ever known on Earth. This is our chance as humans to finally throw off the yoke off control. Do away once and for all with the oligarchs and royals.

    To a free, prosperous and compassionate future!

    ReplyDelete
  35. Smart post admin
    I hope to visit my blog and subscribe to me :)
    Map of Ancient Greece and Ancient Greece Timeline

    ReplyDelete
  36. Enjoy the new post. More will be forthcoming on a steady basis. GL

    Bullshit.

    ReplyDelete
  37. What happened to your hyperinflation forecast, Gonzalo? You predicted 10% CPI inflation for 2012 and 20% for 2013. Where is your follow up article on your forecast?

    ReplyDelete
  38. Helloooooooooooo...

    ReplyDelete
  39. "Mish Shedlock and I have a private bet as to whether Italy or Spain will exit first—he says Italy, I say Spain. But either way, it’s gonna pretty much suck."

    "Insofar as Spain, Greece and possibly Italy, that moment will arrive shortly—possibly within days in the case of Spain."

    Can I get in on this bet? I'll bet that neither country exits. Since I'd like to get paid and you said it would be only days... lets make the cut off 2 years? Fair?

    If you win I will donate $1000 to your blog. If I win you have to promise to read www.fofoa.blogspot.com so that you know what is actually going on in the world and can help spread the word. The Euro and the Eurozone are fine. It's the dollar that has lost its structural support in the world.

    -Sam

    ReplyDelete
    Replies
    1. Yeah Sam, I'm with you. Fact is, Europeans love their Euro. And are scared s***less to leave it, with good reasons. Period.

      Delete
  40. WAKE UP GONZ!
    Close the blog down if you aren't going to write.

    ReplyDelete
  41. Gonzo, you're still a force to recon with. A lot of people from the old days of weekly updates visit your blog expecting to read some of your thoughts. You want to make this your living, so why not post part of your commercial updates with a link "become member and read it the whole article" and maybe once a month give "free" surfers an article on your blog? Don't forget, the blog made you famous in a way... -No, seriously! Mish does this, so do most other bloggers and writers. You need to keep your tentacles out there or you'll eventually find yourself floating around all by yourself, completely forgotten, somewhere very far out there in cyberspace.

    ReplyDelete
    Replies
    1. More will be forthcoming on a steady basis. GL

      Yes close the blog!

      Delete
  42. I know right? 3 posts in 5 months....

    RIP Gonzalo Lira.
    Your passing has saddened me.

    ReplyDelete
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    ReplyDelete
  44. You've already made clear that America is not morally superior to any other nation. So, when attacked, why do you expect us to react differently than the Russians in Chechnya or the Chinese in Xinjiang? (Never mind who started it, it's always the other guy)

    If I were President, I'd do like Obama, but more openly. I'd mail my Peace Prize back to Norway and announce that Americans are my people, and that whoever kills my people, his people shall suffer that many deaths times one thousand. Unlike the Israelis, who go to ridiculous lengths to avoid harming civilians, I'd scatter the bombs and let Allah decide who dies.

    If you choose to worship a dogshit religion started by a pedophile highway robber, you are not one of my people; your American passport is a ruse, like a pirate ship flying a national flag as it closes in for attack.

    ReplyDelete
  45. waiting for grexit, spanxit or italexit is like waiting for godot, maybe you now think a germexit is more likely



    ReplyDelete

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