This is a continuation of the "Chinese Pulling the Plug on the US Banking System?" diary of yesterday.
The original diary was posted by msaroff and can be found here:
http://www.dailykos.com/story/2004/11/8/171030/316
All articles in that diary are deemed included.
This diary is being written:
- To provide a place to continue the discussion
- A place for me to respond to several posters from yesterdays discussion.
I would like to thank all those who rated my comments & I grovel in your general direction.
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This is my post with the comments:
ORIGINAL POST:
The Euro, Oil, and We're In a Mess (4.00 / 2)
If OPEC isn't completely insane they are going to start looking at a basket of currencies as the medium of exchange for oil. The underlying monetary basis of the Euro is even worse (if you can believe it) then the US dollar. Not only in the immediate terms such as narrow and board inflation but the longer term fundamentals such as economic growth, investment per capita, future debitures for social programs, and etc, etc, etc.
Eliminating the social programs is not politicaly possible although some money could be freed - and the EU would gain some clout in the third world - if they drastically reduced CAP expenditures. Another gain would be a strike against the southern US economy that depends on cotton, sugar, and peanut subsidies when suit is brought in the WTO against these gov't support payments.
Doing this would support the Euro in the near term (2 to 5 years?) but wouldn't solve the fundamental problems listed above. It might be enough to cause OPEC (and Russia) to either move to the Euro completely or overvalue the Euro in a basket of currencies relative to the dollar.
Given the horrendous currency risk the dollar poses - a risk that can not entirely be shuffled off - I don't see how long we can depend on other countries to remain stupid.
I have not been able to find exact figures for the amount of dollar backed securities (DBS) held overseas but $2.6 trillion is bandied about. According to the latest Eonomist dollars and DBS account for roughly 70% of all currency reserves. Given the wish for these countries to avoid national bankruptcy any move will be slow (2 to 5 years?) UNLESS there is a drive to the bottom to avoid a cataclysmic collapse of the dollar. If the latter happens then its Katie-bar-the-door we're the next Indonesia and it's fire sale time for every major US corporation.
$2.6 trillion buys a whole bunch of stocks.
And this is what - perhaps - is happening now. I really do not understand why the US stock market is maintaining its current levels. If foreign goverments are starting to unload their dollar assets stock purchases would be one really slick way to do it. It would hide the dump, for a time, while trading paper for real assets: machinery, patents, real estate, and so on.
And I seem to have wandered from the point but:
If OPEC goes to the Euro we can expect a minimum immediate price rise of around $13/bbl given the current dollar/Euro price ratio with an estimated yearly increase of $3.6 trillion dollars in the world money market (assuming 77 million barrels traded per day and that is fairly accurate.)
So we can grossly estimate a potential net increase of $5.2 trillion coming into the national US economy because we are stuck if nobody else wants the buck.
Therefore: we are something ending in 'ucked.'
I hope LondonYank will double-stop me on this but I think we can avoid the above scenario if the Bush administration moves quickly to assure the international money and oil markets that he will apply a goodly dollop of fiscal prudence over the next 4 years. The two things necessary are:
1. Tax increases
2. Spending decreases
This is the standard IMF solution to a goverment gone financially loony-tunes. Whether you agree or not - unless you do not run a billion dollar money market fund no one gives a damn what your opinion is - this is what the international money market expects, wants, and demands. If the Bush administration does not meet their expectations then they will pick-up their marbles and go elsewhere.
What this means is the BEST scenario is OPEC stays with the dollar, there is flat growth through the rest of this decade, slowly falling house prices, flat or falling wage rates, and retrenchment of capital investment - think the US in the 70's or Britain in the 90's.
The WORST scenario is complete collapse of the US economy leading to international bank failures - AS ALMOST HAPPENED IN THE 90's (we came damn close) - resulting in a compete collapse of the world economy, and World War III with Pakistan and India chucking nukes at each other, China going to war against India, and so on and so forth.
Tra-la.
If you think I am being overly alarmist I suggest you consider the murder of an Arch-Duke that nobody, including his father the king, liked very much plus one incredibly stupid and over ambitious General plus a good deal of ignorance, fear, and hate plus interlocking alliances marinated over about 8 weeks resulted in WW I. A war nobody really wanted.
We are in a real mess.
FIRST RESPONSE by Zach in Phoenix
Have to disagree (4.00 / 2)
The Euro is quite strong. I don't have the latest figures, but I believe it now rivals the dollar in number of daily transactions, has a larger population base, and Eastern Europe is finally coming online. Currently huge deficits (a leftover from the transition days) are preventing the new accession countries from adopting the Euro before 2010, but they are all experiencing solid growth, and I predict they will burst open here shortly.
Not sure why people still see social investment as a weakness. A strong safety net isolates risk so that people and companies can innovate, infrastructure lays the groundwork for efficiency, and the EU's spending on poor regions has had a dramatic effect.
With a highly educated, well-trained work force, an advanced economy, access to cheap labor in the CEECs, long-standing political, economic, and cultural relations with just about the entire world...I'm tellin ya, they are poised for greatness if they can ever get past the UK and Turkish problems (neither should be in the EU).
And if countries start lowering the dollar weight, the Euro is the currency that stands to benefit.
SECOND RESPONSE BY dryfly:
AT & Zach... both 'right'... (none / 0)
I have business buddies in the EU... the EU countries do have issues (declining working age population, low growth rate, etc) but also HUGE opportunities (true one market integration w/ E Europe). It could break either way...
The point isn't that Europe stay strong as much as they don't completely screw the value of their currency... like we are. They could have slow growth and tons of socio-economic problems but if they maintain discipline to not PRINT money (like Bush & Alan are)... then the Euro stays strong regardless.
So far the EU has done that.
THIRD RESPONSE by RichM
I concure... (none / 0)
I haven't done the calculation recently, but the Euro covers about 75% of the US GDP and that's without Great Britan. If you include them, it would go up to 85%. Plus there are millions of highly educated, fairly weathly people tading and consuming in Euros. Yes there are problems and it could go either way, but I think the currency is strong, especially when one considers that the member countries must maintain their financial houses in order to be members (I know, France and Germany break these rules, but hey, they are there).
And the assumption that the social programs are too expensive, I believe, is inaccurate. These social programs allow new business to be created without having to worry about the welfare of their employees. Canada has had a big uptick in high-tech and scientific highering. Why do you think that is? Also, social programs are a much more calculatable cost. We spend billions on defense and the military. Iraq is big hole in the sand that we pour dollars into. Who knows what new adventures await our tax dollars in the middle east? Europe has no such expenses.
We are rapidly developing and extreme risk-reward model in the American economy. Some will reap huge benefits, but many, if not most will be left with nothing. I firmly believe that in order for capitalism to work, we need to have a fair re-distribution of wealth. Otherwise, what you have is fuedalism.
LAST RESPONSE BY hughdidit
And they have savings... (none / 0)
This is an often overlooked aspect of they're economies. While the booms are not as big the busts are not as destructive either.
Thus this last downturn in the United States has hardly affected the EU.
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START OF NEW POST
To clear a possible mis-understanding: I do not view "social investment as a weakness." The fundamental basis for economic expansion of the US was established by "social investment" in the GI Bill and the Marshall Plan. I view it as an expense that may, or may not, be affordable under a particular set of economic conditions.
The following data comes from the Economist Magazine of October 9th. It is slightly out of date but I chose it to be able to have a set of self-consistent data.
The Euro area is composed of: Austria, Belgium, Germany, France, Italy, the Netherlands, and Spain. The yearly inflation rate was +9.3% narrow (M1) and +5.5% broad (M3).
Let's define that ... M1 can be simply stated as the total amount of currency immediately available for a transaction and M3 is the total amount of all monies available including all financial instruments. [Obnoxious CYA note to economists: Yeah, I know. But you try it in 10 words or less.]
The unemployment rate for the Euro area was 9% although this covers a wide range of countries and age percentiles. In France, for example, the unemployement rate for those under 35 years of age is approximately 25%. In Germany the unemployment rate is 10.7% with 4.4 million workers looking for, but can not find, a job.
Consumer prices rose 2.2% over Sept 2003/2004 Producer Prices (the cost of goods to manufacturers) rose 3.1% and wages rose 2.2% over the same period. The FTSE EuroTop 300 (equates to the S&P 500) has risen 6% in Euros and 3.4% in dollars.
Fine and dandy, what the devil does this mean?
Broadly speaking the Euro zone, with all its advantages listed in the comments above, has the same structural problems the US is facing. From a monetary POV inflation is actually worse in the Euro Zone (EZ). Also, Germany is running a large budget deficit as is France and these are the two major economic engines of the EZ.
The Common Agricultural Policy, or CAP, is an absolute money suck that moves a lot of money from Germany to French farmers and keeps food prices higher than international norms require to EZ consumers.
Germany has and is pouring billions of marks, per year, in East Germany for current consumption not investment.
The social programs, including un- and under-employment payments, are again going for current consumption not investment.
Now add the fundamental fact of 2004: there are approximately 4 billion people in the 3rd world who live in what may accurately described as shitpiles. The horrendous poverty is partialy due to the kleptomanics running those countries but is also due, in part, to the agricultural subsidies
paid by the EU and the US. Not being allowed to exist on their farms these people move to the cities desperate to find work. They are willing - nay, overjoyed - to work for 100 Euros a month.
Labor is the largest cost of any manufactured good. They do not perform as well as EZ workers but they are cheap enough - in Euro terms - that it doesn't matter.
So, the manufacturers can make their products in a cheap labor cost area but they sell those products in a high labor cost area with high product sale price AND POCKET THE DIFFERENCE. As an illustration: a good made in Germany has a labor cost of 10 Euros but only 2 Euros in Needajobiland but both sell for 20 Euros in the EZ. Transportation costs, bribes, kickbacks, and other costs of doing business raise the cost in Needajobiland by another 2 Euros but that still means the manufacturer in Needajobiland makes an additional 6 Euros for essentially doing nothing. Which accounts for the rise of the Eurotop 300.
These businesses aren't just greedy bastards but they have to maximize profit to pay for the loans and bonds they have issued, pay the higher tax rates in the EZ, as well as paying the dividends and/or increasing the share price to reward their investors. If A and B are in the same business and A has their factories in Needajobiland and is making the extra 6 Euros the management of B needs to follow or loose their jobs.
(The same thing is going on in the US, FYI.)
What this means for the EZ is:
- Jobs aren't there
- The wages for the jobs that aren't there aren't circulating in the EZ but Needajobiland.
- The wages that aren't circulating aren't buying goods and services so there are no providers of the good and services so there are no jobs to provide those goods and services.
- The goverments of the EZ have to spend money on unemployment & etc and they raise that money in the same way the US does: taxes and bonds. The EZ can not raise taxes anymore or they drive out (increase the incentive to) even more business to move to Needajobiland so they issue bonds ... resulting in inflation.
Additionally, the difficulty in firing a worker in the EZ results in reluctance on the part of businesses to hire anybody unless they absolutely have to. Giving a systematic unemployment rate in the EZ of - off the top of my head - 7%. (All things being equal there will always be 7% out of work just because things are the way they are.)
In order to cut this diary short I'm not going to go into the under-employment problem in the EZ but it is there & a very serious problem.
Does the Euro have advantages? Yep. Over the next 2 years (or so) the Euro will be much stronger than the buck (my estimation worth everything you just paid) and if the EZ moves to fiscal sanity for a much longer time. If they continue to inflate the Euro for domestic policy reasons the Euro will be no better than the dollar and, with their greater structural problems, we should expect the dollar/Euro to rise.