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Euro Crisis: Faith-Based Reality

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I was inspird to write the following by Krugman's excellent Venn Diagram summarising the state of play for the Euro:

> http://krugman.blogs.nytimes.com/2011/09/28/the-eurovenn/

Our Euro leaders have not yet learned the lesson so aptly demonstrated by the sadly-maligned King Canute. They still think that by issuing political orders, reality can be made to conform to their wishes. It worked with the EU accounts (If the accountants refuse to sign them, simply declare them politically valid accounts). It worked with the EU expenses scandals (if we declare they have been at work, then they have been at work, even if they were lying in someone's bed in their home country). It worked with the deficits (yes, perhaps some countries have broken the Euro rules with their deficits, but we declare these deficits valid).

Fiat currencies are essentially faith-based reality. It's thus not unreasonable for politicians who are used to reality conforming to their declarations to simply declare a currency "secure" or an insolvent bank or country as having "liquidity problems" and expect the peons in the pews to behave as if their pronouncements were true.

Of course a few will demur, and such heretics will be punished. Hence the short-sellers are regularly banned when using their art to expose some political cant concerning a French bank which cannot raise money.

Their next Cunning Plan though is redolent with irony. They've extorted 440 million Euro from sundry EU countries (including the UK which isn't even in the Euro) as a bailout fund. Now that Italy and Spain are looking dodgy, and the French banks look like they might go under, a far larger bailout fund is needed. This however will require votes in the several parliaments and there's not enough time left for the usual EU "Vote, vote and vote again until you get the correct answer" to prevail.

So they will reheat an old idea: "leverage". If that sounds familiar, and indeed if it brings to mind the very reason that we all ended up in this mess in the first place, well, that's because it is. What the EU now plans to create is a Monster CDO, with what's eloquently called, in the trade, the "Toxic Waste Tranche" to be held by EU taxpayers in the form of that 440 million already extorted from them. Basically up to 2 million Euro, or 3 million Euro (the bidding isn't yet closed) will be backed by the EU declaring (there's that word again) that the first losses will be absorbed from the 440 million Euro tranche, and investors will only suffer losses once that has been wiped out. It's another one of those "Heads you win, Tails taxpayers lose" bets which have been irresistible to bankers over the years and if this makes anyone think "Moral Hazard" then be assured that this deal will certainly be blessed and anointed by EU politicians as morally pure.

So the debt crisis has iterated from dodgy CDO's based on failing mortgage bonds, through dodgy CDO's based on bonds of failing banks, and now to the granddaddy of them all: a brobdingnagian dodgy CDO based on the bonds of several failing nations.

It will of course fail. The collision of political declarations with Actual Reality has always been foreordained for the politicians of the EU and in the end they will be just as lost and startled as was Dominic Strauss-Kahn in his recent American adventure.

Unless of course they can persuade their counterparts elsewhere of the need for one last throw of the dice: a dodgy CDO based on the debt of the entire planet.

That would be something to behold: a religion for the entire world based on a common faith that somehow all the debt can really be paid.

Friedrich Hayek said that "There is no mathematical solution to debt". History seems to have shown him right. No effort will be spared though to find that magical formula this time. The alternative is to face reality, and EU leaders are not yet ready to abandon their faith.

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  • 285 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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