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This note of mine appears in another thread, but I think it should be separate ...

'What astounds me is the seeming lack of interest/attention by American Investors in the unfolding Economic Crisis in Western Europe - unfolding for at least 2 years - but now at a breath-taking edge of catastrophe.
I have been thinking for some time about the possible consequences of populist uprising, political instability, and the rise of demagogues and militarists in a fraught Europe, a never stable Africa holding vast resources, opportunistic Jihadists, a nuclear enabled Iran, and a rich China with almost unquenchable needs and a Totalitarian Government.'
...
When I wrote it I considered mention of the vulnerability of Australia with its tiny population of 23 Million and its vast resources. An article in today's Washington Post prompts me to add it ...

"Since last year, China has fed the worries of its neighbors with a string of aggressive diplomatic and military moves, including attention-grabbing confrontations in the South China Sea, which is believed to hold valuable oil and minerals and is heavily used for commercial shipping.
The area has been in dispute for decades, with various portions claimed by Vietnam, the Philippines, Malaysia, Brunei and Taiwan. China has made the largest claim, on a U-shaped section that covers almost the entire region.
China’s increasing willingness to throw its weight around has put other countries on edge and spurred them to solicit U.S. assistance.

… Underscoring growing concern over an aggressive China, President Obama announced a new agreement Wednesday to expand the U.S. military presence in Australia. (Nov. 16)"

This is the remainder of my previous post :

'Today I read a recent article in The Economist that raises the same question that I have been trying to understand myself, as I revisit the past of schooling that was inadequate ... 'How did World War I come about?'.
In the face of the Brinksmanship of some of Europe's Leaders, the profound disregard for the imperatives of viable economic systems, I feel an urgency to understand the past. What part chance, what part device ? How fragile the ties ? What unintended ?'


Writer Robert J. Samuelson's Opinion piece in the Washington Post yesterday references an Open Letter from Arvind Subramanian, of the Peterson Institute, to IMF Managing Director Christine Lagarde asking her to intervene in the European situation and to call upon China to take a vastly greater role in the IMF. Mr. Subramanian says to Ms. Lagarde ...

'I have written elsewhere that China needs to be given power in the IMF equivalent to that of the United States and greater than that of Europe. You need to convince China that you will make that argument forcefully and if necessary take on your erstwhile French colleagues if they resist. That is key. On this you must speak with conviction and daring.'

... This has the feel of a Chess Game.

Just my thoughts,
Toni
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Toni

This is way more complicated than a chess game, but I think you are on to something.

It has been interesting to watch the North African spring, the US beginning to pull out of Iraq, China's muscle flexing in the South China sea, Russia's attempts to build a partnership with Germany, and South America pulling itself out of the US's shadow.

The funny thing about tipping points is that no one can anticipate what will set it off. It is a delicate balance of previous decisions, not all of which had a right answer. (The over-used analogy is that of a sandpile with grains of sands falling on it.) I can't remember where I read it but someone said it always seems clear what caused WWI, but when it was happening no one recognized the trigger point. Hindsight and all.

China flexing its muscles in the South China sea doesn't really scare me. Their military (specifically Navy) is too weak at this point to really pose much of a threat and its economy is too reliant upon imports and exports (which is part of why it is trying to gain dominance in the South China Sea).

The Australian deal was just a reminder that we haven't forgotten about Asia. It isn't aggressive (we don't have the will to fight another war right now) so much as a restatement of the status quo. We've been the protector of the Pacific Rim since WWII and several countries in the region were getting worried that we were losing focus. This reassures them more than challenges China.

Of course both WWI and WWII were preceded by the common assumption that the economic and human consequences of modern war were so horrible that no one would dare do it again. This was why the EU was formed and why Sarkozy and others have hinted that a break-up of the union would erase all we've gained since the end of WWII.
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Hi Nate
Thanks for your reply.

To quote the President... " ... I'm not afraid of China ..." ... he's not and neither am I; but we are living in very interesting times ... and there are many situations that could go terribly wrong and commence a trajectory which we have anticipated not well - which is only to state the obvious.

Of course, I concur with your observations above. And it is much more complicated than any Chess Game.

but to return to the Euro Crisis:
in my view
... with respect to Europe, the Bond Markets et al, seem to be behaving as if 'something' might be wrong, but they think they can 'adjust' just-in-time. A replay of the Too Big to Fail drama.

And Italy has had at least 30 years to restructure their Labor Markets, Etc, and has deliberately not done so; to think they will renounce the past anytime soon is (in my opinion) naive.

Ah well, enough.
Toni
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Toni

I am completely in your camp as far as Europe goes. No one seems to want to admit that the banks have a solvency problem, not a liquidity one.

European citizens are also going to have to face the harsh truth that the magical days of unlimited spending on someone else's credit card are over.

Germany (along with much of the "safe" Northern Europe) will have to realize that exports are there to pay for imports, not to build up massive foreign reserves (China is in the boat, too).

The banks need cash infusions, which means Germany is going to have to get over its fear of hyperinflation and let the ECB print.

These are major psychological hurdles and adjustments to national mentality that will only be made under the massive pressure of total collapse.

Sadly, the same can be said for the US and its issues (which haven't gone away - they're just hiding behind Europe's skirts right now).

Back to the issue of China's rising militancy, an interesting article out of India:
http://timesofindia.indiatimes.com/world/china/US-base-Oz-ma...
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Nate
Your remarks are right on point.

Of course the Germans are not going to flood the Banks with money, that the Banks will then use to buy more Government Bonds supporting status quo programs in Italy and Greece, until the actionable legislative packages have been enacted ... without the slippery slidey wriggle their way out of it loop holes and post-dated implementation schedules. Very hard to picture the Italians accomplishing such reforms, very hard.

And as all the world knows, Germany's aversion to inflation is a part of their post WWII brain-chemistry, a tenet of their civic religion, so I'm doubtful they will underwrite all of Europe, with help from France and the few others of the Northern Core.

In my view Europe's Crisis is vastly worse than our own, which as you say, is still very much with us.

And with regard to China, of course the World cannot help but take note of the change in the Balance of Economic and Political Power.

Thanks again for your remarks. At a time like this the macro picture is much more significant to me than the micro.

Toni
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There's one thing about all this that confuses me. I heard a rumor a week or two ago that Geithner had played a role a few weeks ago in the final form of the Greek "agreement". Supposedly he'd gone to Europe and delivered the warning that if a real default were allowed it would trigger the effects of CDS's and supposedly some large US banks, hedge funds, and insurance companies have significant exposure to them. The argument supposedly went that if Greece were to sink, it could sink the US economy, and thereby sink the European economies, so the European leaders needed to be tough on Greece and not allow a technical default to occur.

Don't CDS contracts insure bondholders from significant losses, thereby transferring much of the risk from the bondholders to the CDS writers? Because if that's true, then I'm guessing that that rumor I'd heard isn't true because the European banks aren't nearly as dangerously exposed to certain risky bonds as we think ... unless it's the pressure from US CDS institutions that is keeping the pressure on the European leaders from behind the scenes.

... now removing my tin foil cap for a little while ... ;-)

as always, i am full of carp
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"Back to the issue of China's rising militancy, an interesting article out of India"



Very interesting.....Also interesting that India might benefit from the move. Also, interesting in that I hope the US Military sends Pre-po ships http://www.msc.navy.mil/pm3/ like the one I am on to Australia. I never been to Australia before....maybe I might get a free ticket there one day:)


Starrob
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Hi Full of Carp
I can't speak to the Credit Default Swaps, but what I've read is that the European Banks are greatly exposed to Italian National Debt and Greek National Debt etc. through their Bond purchases - greatly only needs to be enough to tip the Banks into insolvency - and as I understand it the fear is that the back wash of all this mess can indeed take down many of Europe's large Banks. I don't doubt the U.S. institutions you mention are exposed too.

What mystifies me is that the European Banks etc. had an infinity of opportunity to observe and rub shoulders with their Neighbors in Italy and Greece to note their political and economic realities, and still they continued to buy more Bonds at blue sky prices.

Having Insurance to protect ones self against a bad outcome is worthless if the Insurer has misjudged the Probabilities and goes Bankrupt himself.

Thank you too for commenting on these issues.
Toni
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What mystifies me is that the European Banks etc. had an infinity of opportunity to observe and rub shoulders with their Neighbors in Italy and Greece to note their political and economic realities, and still they continued to buy more Bonds at blue sky prices.

Toni,

Again, just an innuendo that I heard a month or two ago, but supposedly some of those banks may be less ignorantly culpable than appears at first glance, if there is any truth to the stories that many of their purchases were the result of governmental policies (and maybe even political pressure) to make those very same investments.

If you're pushed to make a particular purchase that subsequently goes bad and the people who pushed you there are now trying to hold you solely accountable, that'd be pretty good grounds to go public. What I had heard/read were some behind-the-scene rumblings that there might be some truth to that, but because it hasn't yet reached the flashpoint, the story hasn't made it out into the mainstream. And since the potential political interest/political pressure works both ways, it's sort of like a doomsday machine that the banks wouldn't use unless we reach that worst-case alternative.

But interestingly this particular story seems to come from the opposite side as the other (from the pro/anti-bank sense), and since I think that I may have come across it from a similar or even the same non-mainstream European news source, it leads me to treat it as more likely to be true than I might otherwise consider. Or maybe that source is simply pro-conspiracy, regardless of sociopolitical angle.
... but maybe I just have to stop reading this conspiratorial stories ... ;-)

removing tin foil hat again

as always, i am full of carp
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Again, just an innuendo that I heard a month or two ago, but supposedly some of those banks may be less ignorantly culpable than appears at first glance, if there is any truth to the stories that many of their purchases were the result of governmental policies (and maybe even political pressure) to make those very same investments.

carp

I don't know that there is any innuendo here. It is pretty well-known that European banks are essentially financial arms of the state, and especially in countries where the state still owns or influences major industries (France, Italy, Greece, Spain, Portugal to name a few), the national gems get special financial treatment from the banks.

As seen with Dexia, which was they main buyer of Belgian municipal debt, Europe is full of banks that exist mainly to fund government expenditure.

This is part of why the European issue is so important and convoluted.

Also why I think the first step to halting the spiral is to recapitalize the banks so that they can handle the eradication of the value of a lot of the sovereign debt they hold on their balance sheets.
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Also why I think the first step to halting the spiral is to recapitalize the banks so that they can handle the eradication of the value of a lot of the sovereign debt they hold on their balance sheets.


As do I. But it looks like they're going to fight secondaries tooth and nail. Hopefully, that will change.

Nathan
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