Alasdair Macleod: Europe is a Hot Mess

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It's almost August, the month everyone in Europe takes off on holiday to forget their troubles. This year may be different, though, as not only can many not afford a vacation, but Europe's troubles loom so large that forgetting them won't be easy...

In this podcast, Chris talks with PeakProsperity.com's European economy expert Alasdair Macleod about the current state of the Continent. As a reminder, Chris is keeping a keen eye on events in Europe, as he sees the region the most likely candidate to serve as the flash-point for the next major global financial crisis. Sadly, Alasdair has few reasons to convince him otherwise.

A quick spin through many of the countries there reveals much instability:

  • Greece: currently living through a capital "D" Depression; destitution has reached the professional classes at this point
  • Italy: teetering on the edge of political collapse as politicians fight any and all austerity measures
  • Spain: rocked by political scandal, its banking system is now insolvent
  • Portugal: experiencing the flight of its younger generation out of the country
  • France: quickly becoming a bankrupt welfare state, as only 17 million of its 66 million citizens are working
  • Holland: stumbling under the highest level of private sector debt to GDP of any EU country
  • Belgium: struggling with the same challenges as Holland
  • Germany: losing its sovereign wealth with every bailout of its clearly insolvent neighbors 

The principal problem with austerity is that governments end up not cutting their spending, but they end up raising taxes on the private sector. Politicians are not in the business of cutting back. They are in the business of extending what they do, and consequently they see the problems as rarely being not of their making, which I know sounds bizarre, but that is the way it is.

Apart from the appalling state of affairs the governments are forcing on their electorates, I think the obvious weak point are the major banks. If you look at the big banks in Europe, they are horrendously geared (i.e., levered) in terms of how much shareholder equity they have in the game, relative to their balance sheets.

But then there is another problem on top of all this, and that is that these large banks have quite large derivative positions. And one of the largest chunks of derivatives is interest rate swaps.

Now, just so that we can get this clear in our minds, basically, what an interest rate swap is – you and I might take out a mortgage on a new property. We can see that interest rates are as close to 0% as they are ever likely to be, so we want to lock in that low rate for a long time. On the other end of the transaction is a bank.

Now, the bank will allow us to lock in low rates, let us say, up to three or four years on an interest rate swap. And, the reason they do it is, they are confident that interest rates are going to remain low. Why? Because, Mario Draghi has told them that they will keep them low; that there is no way they are going to go up. And, they sort of feel that, well, when the economy recovers and property prices recover and all the rest of it, okay, we could probably take a little hit on that, particularly if interest rates rise gradually, we can correct our position.

But, that is not actually how it works. Once interest rates start rising, they will probably start rising very quickly. Why? Because of all this money, mainly dollar money around the world, which, at some stage, is going to start impacting on raw material prices and through raw materials, finished goods and so on and so forth.

So, once price inflation starts rising, these interest rates are going to rise irrespective of what the central banks say. Now, under those circumstances, if you think about the level of derivatives in these interest rate swaps, they are enormous. I do not have the figures for individual banks, but I can tell you that according to the Bank of International Settlements, world-wide, these interest rate swaps are $440 Trillion. That is absolutely enormous.

To my mind, when interest rates start rising, the banking system will be at risk of failing at its weakest point. And I think that weakest point, generally, is the European banking system. 

Click the play button below to listen to Chris' interview with Alasdair Macleod (40m:24s):

This is a companion discussion topic for the original entry at https://peakprosperity.com/alasdair-macleod-europe-is-a-hot-mess/

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At least one group has been working since 88/89 to prepare for the times coming.
 The so called “post democratic era".
They have connections to some of the big banks (the usual families)
Started in UK, has spread to several more countries,  these include France, Germany, Ghana, Hungary, India, Ireland, Netherlands, South Africa, Spain, Sweden, Switzerland and Turkey. Possibly also the United States.

This is its stated goal: "Common Purpose aims to improve the way society works by expanding the vision, decision making ability and influence of all kinds of leaders. The organisation runs a variety of educational programmes for leaders of all ages, backgrounds and sectors, in order to provide them with the inspiration, information and opportunities they need to change the world." From such bland descriptions come two questions immediately: A common purpose to what end? And change the world? in what way exactly? It (Common purpose) has members in the NHS, BBC, the police, the legal profession, the church, many of Britain’s 8,500 quangos, local councils, schools, social services, the Civil Service, government ministries, Parliament, and it controls many RDA's (Regional Development Agencies). CP influence is seen in force throughout the BBC, Local Councils, Police, Schools, National Health Service, and many government agencies that run towns in the UK bringing people in through 'Self Improvement' courses.
Brian Gerrish discovered CP when he was involved with a group in Plymouth in the west of England helping people find jobs and one of their projects was repairing wooden boats. He said they had lots of public support and backing from the local authorities and everything was going fine. But then it suddenly changed and the council support was withdrawn. When they tried to continue alone, he said that within a short time key people were being threatened: 'When we started to explore why we were being threatened we were absolutely staggered to find a very strange organisation called Common Purpose operating in the city. And we were absolutely amazed that there were so many people involved but they were not declaring themselves ... they were operating throughout the structure of the city, in the city council, in the government offices, in the police, in the judiciary. Essentially we discovered what is effectively, at best, a quasi secret society which doesn't declare itself to ordinary people.'
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Please get a a "Europe Expert" who actually knows something about Europe (rather than relying on guesswork and articles from other UK "Eurosceptics").
The ECB has a plan to deal with the crisis in Europe. Whether it fails or succeeds is one thing, but it would be great to hear analysis from someone who actually knows what it is,  or has connections to people who do.

I did enjoy his party political broadcast against the LibDems (35 mins).

You are doing your subscribers a disservice by letting MacLeod spout his parochial guesswork without question or query.

 

 

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So. The Africans are fleeing Africa for Europe and the Europeans are fleeing Europe for Africa. That makes sense.
Money is a call on resources. If I believe that my dollar maps onto that amount of fuel and another dollar pops into existence then we have two claims on that one jerrycan.

However money might mean different things to different people.

Personally I think that it has become too abstract.  (No. That is not right.)

It has become impossibly abstract. (Closer)

It is so abstract as it has lost all relevance. (Nearly)

Money no longer maps onto reality in any way at all. (Future tense)

Weaken the "Future tense".

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Inflation has and is kept low by the very cheap labour in the far east. The labour produces goods and services at a tiny fraction of the cost if we were to employ western workers. As a greater proportion of such labour moves to low wage economies, products get cheaper.

The combination of improving efficiency of production combined with lower wage costs have had a dramatic lowering effect on inflation.

A natural economic effect of a low labour cost, highly productive economy will be for the currency of that economy to appreciate so that wage costs move towards a world average for that level of productivity.

There have been mechanisms preventing this; preventing eastern currencies appreciating against the western currencies. The Chinese government, for example, has been busy for some time purchasing western currency denominated treasury bonds.

The nett effect is that eastern governments have been subsidising western governments welfare and bureaucracy programs. So long as the Chinese are happy to go out to work hard, then invest their savings in dollars and pounds, and we are happy to sit on the sofa watching Jeremy Kyle, the economic system could be said to be in equilibrium.

With this equilibrium, we can expect that “productive” industries in France such as automobile manufacture would likely not even exist if it were not for government financial support to counter the costs of high wages and trade unionism for some of these industries! I wonder if it would even be cheaper for the government to allow the industries to fail then pay the workers dole.

Examples of what might upset this equilibrium:

1) Increasing competition for raw materials

2) Fall in confidence in western currencies.

3) Change in policy by eastern governments

4) Chinese rebellion for better living standards – to consume more of the goods they produce.

5) Chinese standards to reduce pollution

6) Chinese decide assets are better than currency.

7) Some unforeseen black swan event such as a pandemic

The debt levels only measure how far things have gone. Not how far things can go.

If and when eastern governments close the inflation spigot, it is check mate for western governments.

 

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It seems Juergen Stark, former head of the ECB, agrees with Alasdair. As quoted in Handelsblatt (and translated by Google):

The Euro crisis will worsen in late autumn

A year ago, ECB chief Draghi announced plans to do anything to save the euro. The former ECB chief economist Juergen Stark considers this fatal. He fears that the ECB will soon have to support France with bond purchases.

The former chief economist of the European Central Bank (ECB), Juergen Stark, warns of severe kickback in the euro-debt crisis. "I think the crisis will come to a head in late autumn. We are entering a new phase of crisis management, "Stark told the Handelsblatt (Friday edition).After the parliamentary elections in late September that France would increase the pressure on the ECB and Germany. The government bond purchase program OMT should actually be used in Spain and Italy. "But the pressure will be enormous, use the instrument in France. And without that, the country must go to the rescue, "said Stark.

 
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I tried sharing this earlier from Mishs site. Office internet issues. Chris call is starting to take form and is why I am all a buzz. 

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I did a search for the above, and came up with the following links (among others):

  • http://www.cafebabel.co.uk/society/article/alternative-local-currencies-in-europe-time-is-funky-money.html
  • http://reason.com/archives/2012/07/06/alternative-currencies-rise-eurozone-cri (features Bitcoin)
  • http://www.paymentsjournal.com/Blog.aspx?id=14795&blogid=206
  • http://www.scoop.it/t/money-money-money/p/3946210590/alternative-currencies-to-the-euro-are-springing-up-all-over-greece-business-insider
  • http://www.time.com/time/business/article/0,8599,1865467,00.html
They're all pretty much skimming the surface, but you get the idea.

This isn't a new thing; alternative currencies (and more broadly, ways of enabling economic transactions) have been adopted, sometimes just within a local community, sometimes at the local government level.

One of the more interesting types of such currency are those using a system of demurrage to discourage hoarding.  (Some systems of this type were used successfully in Austria during the Great Depression, until they were shut down by the national government.  The current Chiemgauer system is another example).

So, would there be any interest here in PP to investigate this topic more fully, especially since Europe's present may well be America's future?