Thread: Look Out Below - The Nightmarish Decline Of The Euro Has Begun

Look Out Below - The Nightmarish Decline Of The Euro Has Begun




January 6th, 2012
134 comments

The euro is a dying currency. On Thursday, the EUR/USD fell below 1.28 for the first time since September 2010. In fact, as I write this the EUR/USD is sitting at 1.2791. Back in July, the EUR/USD was over 1.45. But this is just the beginning. The euro is going to go a lot lower. At this point, there are several major European nations that are on the verge of default, the European financial system is overflowing with debt and toxic assets, and most major European banks are leveraged about as badly as Lehman Brothers was when it collapsed. Most Americans simply do not grasp the gravity of what is happening. Just because the Dow is sitting above 12000 and a few U.S. economic numbers have improved slightly does not mean that everything is going to be okay. As I wrote about recently, the EU has a bigger economy than we do and they have a bigger banking system than we do. U.S. banks are massively exposed to European sovereign debt and European banking debt. When the financial system of Europe collapses and the euro falls apart it is going to rock the entire planet. So you better look out below - the euro is coming down and it is coming down hard. After the euro implodes, nothing is every going to be the same again.

So how far are we going to see the euro decline?

Julian Jessop of Capital Economics expects the euro to fall much further....

The relative strength of the recent economic data from the US is supporting the dollar more generally, and we expect this divergence to persist as the euro-zone slides into a deep and prolonged recession. Above all, doubts about the very survival of the euro itself are likely to remain a drag on the currency. We therefore continue to expect the euro to fall to around $1.10 by the end of the year.

Others are even more pessimistic.

As I have written about previously, the head of global bond portfolio management at PIMCO believes that the euro is going to go even lower than that....

"Parity with the dollar next year is not out of the question"

Can you imagine that?

1 dollar = 1 euro?

Don't think that it can't happen.

But the decline of the euro is just part of the story. The truth is that Europe is on the verge of a financial collapse that could end up dwarfing the financial crisis of 2008.

Sadly, most Americans have no idea what has been going on in Europe the past few days....

-The stock of the biggest bank in Italy, UniCredit, is absolutely collapsing. Shares of UniCredit fell 14 percent on Wednesday and 17 percent on Thursday.

-Shares of another major Italian bank, Intesa Sanpaolo, fell 7.3 percent on Thursday.

-Shares of three major French banks all fell by at least 5 percent on Thursday.

-Even shares of German banks are falling like a rock. Shares of Commerzbank fell 4.5 percent on Thursday and shares of Deutsche Bank fell 5.6 percent on Thursday.

-The yield on 5 years Italian bonds is back over 6 percent and the yield on 10 year Italian bonds is back over 7 percent. Analysts all over Europe insist that that the Italian debt situation is not sustainable if rates stay this high.

-Italy's youth unemployment rate has hit the highest level ever.

This is mind blowing news.

But what is the top headline on USA Today right now?

"Employers Impose Bans On Smokers"

These are some of the other top headlines on USA Today right now....

"Automakers Rush To Offer Apps In Your Car"

"Bargain Season At Taco Bell, Pizza Hut, Wendy's"

"Does Your Dog Understand You? Study Says Maybe"

Is that what passes as news in this country?

A financial meltdown of historic proportions is happening in Europe and you cannot even find anything about it on the front page of USA Today.
Amazing.

All of us need to snap out of our television-induced comas and start waking up.

Things are about to get really bad for the global financial system.

At this point so much confidence has been lost in the euro that even the Council on Foreign Relations is admitting that the euro is a failure....

The euro should now be recognized as an experiment that failed. This failure, which has come after just over a dozen years since the euro was introduced, in 1999, was not an accident or the result of bureaucratic mismanagement but rather the inevitable consequence of imposing a single currency on a very heterogeneous group of countries. The adverse economic consequences of the euro include the sovereign debt crises in several European countries, the fragile condition of major European banks, high levels of unemployment across the eurozone, and the large trade deficits that now plague most eurozone countries.

If even the CFR is throwing in the towel, that should tell you something about what is about to happen to the euro.

There is a very real possibility that we could see the euro break up at some point during the next couple of years.

It now seems that a report produced a while back by Credit Suisse's Fixed Income Research unit was right on target....

"We seem to have entered the last days of the euro as we currently know it. That doesn’t make a break-up very likely, but it does mean some extraordinary things will almost certainly need to happen – probably by mid-January – to prevent the progressive closure of all the euro zone sovereign bond markets, potentially accompanied by escalating runs on even the strongest banks."

The European debt crisis just continues to get worse and worse. None of the solutions that European leaders have tried have worked. We are rapidly approaching the meltdown phase of this crisis.

As I have written about previously, it doesn't take a genius to figure out what is happening in Europe. The equation is simple....

Brutal austerity + toxic levels of government debt + rising bond yields + a lack of confidence in the financial system + banks that are massively overleveraged + a massive credit crunch = A financial implosion of historic proportions

Unfortunately, what is happening right now in Europe is eventually going to happen in the United States as well.

As I wrote about yesterday, U.S. debt is a ticking time bomb that is going to devastate the entire global economy at some point. Nobody knows when the implosion will happen, but everyone knows that it is inevitable.

When Europe falls apart financially, that is going to make our own financial system much less stable. What is happening in Europe could turn our "limited recovery" into a "major recession" almost overnight.

So keep your eye on the euro.

If the euro keeps going down, that is going to be really bad news for the global economy.

Unfortunately, the truth is that the decline of the euro is just getting started.

Hold on to your hats.

***UPDATE***

The euro continues to drop like a rock. Right now it is at 1.2721.
Michael




http://theeconomiccollapseblog.com/a...euro-has-begun

Dream of Universal Currency Just Won’t Die

• By David Wolman
• December 27, 2011 | 12:00 pm
• Wired January 2012

The euro zone maelstrom refuses to end. Thanks to the debt crisis, some Greek officials are contemplating dumping the common currency for the drachma. Meanwhile, Italy and Spain teeter. A decade after the shared currency was heralded as a 21st-century tool for peace and prosperity, it turns out that currency unions aren’t such a hot idea.

Not so fast, though. This is undeniably a period of epic turmoil, and many economists will tell you that sovereign states need sovereign currencies—full stop. But this notion ignores a fundamental truth: Countries with their own currency may have monetary independence, but in reality—as gun battles in Libya, CDOs in the US, and tsunamis in Japan have taught us—we are only becoming more economically intertwined, regardless of what our coins look like.

Step back from the current crisis to consider the long view, and currency unions—or even a single global currency—have a fair share of appeal. A universal medium of exchange could eliminate currency risk and jack up trade. It would mean speculators couldn’t short an individual country’s currency. Exporters wouldn’t have to fret over the gap between a price on a contract and the value of the payment. A single currency could halt spastic swings in prices and end conversion fees, leaving more of the pie for little stuff like R&D and employee health insurance. Oh—and it could put an end to international disputes over currency manipulation. Hello? China?

True, sovereign currencies afford the ability to manipulate the money supply, jiggle the handle of interest rates, and buy up piles of toxic assets. When a boom goes bust, devaluing currency is the least bad way for governments to rein in wages and prices that are suddenly too high. But if you use the same currency as another country that isn’t in dire straits, good luck convincing them to accept devaluation on your nation’s behalf. (This is part of the reason for the euro zone impasse.)

But does this mean we don’t see a global currency in our future? For many, the answer is no. A recent Pew Research poll reveals that 41 percent of Americans expect it by 2050. Maybe the idea has been planted in our heads by leftist utopians and science fiction authors: a system of “credits” is used in everything from Star Wars, Star Trek, and Babylon 5 to the Foundation book series. Yet the idea has also been touted by economics titans like John Maynard Keynes.

The fact is, the modern economy and monetary system are too damn precarious for us not to examine every possible way to protect against future shocks—including going all in on a universal currency. It’s a bit like geoengineering: radical and outrageous at first blush but, given humanity’s current predicament, not as outrageous as dismissing it out of hand.

Some pundits insist that gold could do the trick or that we could achieve many of the benefits of a global currency by tying the value of national ones to a set amount of the shiny stuff. But most economists view a return to gold as anachronistic, absurd, and even hazardous. Maybe, but it’s possible they’re saying so because reviving the gold standard is so incongruous with the present and not necessarily because reordaining gold would result in a system inferior to today’s tumultuous one.

Of course, the universal currency could be the US dollar, and in some ways that’s already the case. The greenback is what central banks hold the most of on reserve, and it’s the currency used for the vast majority of international transactions. But the dollar’s special status seems less stable than ever—and will worsen if Washington can’t overcome its paralysis to deal with the debt.

Perhaps the seed for that universal currency has already been planted. The International Monetary Fund uses something called Special Drawing Rights, a crossbreed of four of the world’s key currencies, to make certain kinds of settlements between IMF members. Could SDR someday morph into the One Coin to Rule Them All? If so, some lucky designer will have a field day mashing up $, ¥, £, and, yes, €.

A global currency may indeed prove to be a vision best left in the realm of fantasy. But it would behoove us to seriously analyze the pros and cons before ditching the idea in favor of today’s smorgasbord of euros, pesos, yuan, and Malawi kwacha.

Contributing editor David Wolman (@davidwolman) is the author of The End of Money, out in February.

http://www.wired.com/magazine/2011/1...lobalcurrency/