Euro-zoink
As you might know, the Euro-zone economies have suffered a contraction.... Yes, GDP shrank. If you recall, about 6 months ago, as the dollar was getting hammered again, I pointed out that this was over doing it: the U.S. had better growth prospects than Europe, and a hell of a lot more dynamism to permit change. While oil prices are directly responsible for part of this, it is a mistake to think that the cold from the U.S. would not spread to Europe. This hubris (of an independent, strong economy with a strong currency) caused Europeans to continue to ignore certain global realities: (1) Americans cannot continue to buy anything -- they are broke; (2) Europeans have to import staggering amounts of everything; (3) Americans actually produce a lot of what it consumes, in terms of raw materials and finished products; (4) the Asian economies are totally dependent on U.S. fortunes ... if we contract, they will fall off of a cliff -- meaning no Euro-sales in those areas; (5) a weaker dollar meant cheaper oil for the Europeans ... until the spike which far exceeded Euro srength. If energy skyrockets, prices will rise and consumption fall, for everyone.
Europe has been protected by the Euro, which being strong, insulated Europe from price rises, globally, encouraging growth and consumption. Huh? Yes, the Euro's strength helped shield it from the contagion of over-extension in credit and inflation. But, as the Euro suddenly seems vulnerable -- due to slower growth (the Euro can only get so strong and no stronger and in the process Euro-goods get too expensive), you get a double whammy effect: if you drop rates to boost the economy, you also make the Euro weaker relative to the dollar ... and a weaker Euro causes prices to rise more strongly, raising inflation and making the Euro even less attractive. Raise rates to deflect inflationary pressures and to protect the Euro, you positively kill off the already weaker economy, causing further economic contraction -- leading to greater Euro zone weakness. Net? The ECB, in letting the Euro get too strong, causing everything to look cheap, decreasing exports, increasing imports, choking off the engine that helped countries like Germany thrive. How can it be stable where a BMW 335 costs 50% of the European price in the United States? Sound familiar? Sort of like the Fed failing to raise rates to kill off the housing bubble that everyone was making money off of? Weren't the Europeans doing EXACTLY the same thing?
The idiocies of cheap credit and overbuilding -- the financial Goldilocks of the last five years -- was particularly extreme in Spain, Italy and parts of France. And totally insane in England. While the subprime mess is uniquely American (although the greedy world-wide bought the securities generated), Europeans may have even exceeded the overbuilding and property speculation of the Americans. And in America, you can be sure that the house or apartment you bought was built on surveyed land with surety of title, with appropriate planning permissions. That is not necessarily the case in Spain or France.
In Spain, builders and developers are simply walking out on projects: there is no money, there is no credit and there is no hope of their ever selling the product within the forseeable future. None. Even better is the ECB's determination to prevent inflation ... this guarantees that nobody is going to be able to buy housing due to non-existent credit. However ... if you let a small recession happen, then you benefit from weakened demand which relieves inflationary pressures, even if the Euro falls, but it might take longer than you'd like. And nobody wants a long recovery, so....
Ok, so the $/Euro is $1.49. Still very weak. I would not hold my breath for the time it takes to fall as the financial community is still looking at the basket case of the U.S. Nothing much is going to change until we get an idea of where the U.S. is going. Would you go long dollars in front of Obamonomics? Me neither. But I could see the dollar drift up to $1.30 in the run-up. And that is 20 cents, not small beer.
Oil will continue to fall, how much more, I don't know. Perhaps $80? Gold too will continue to drop as the dollar looks better and commodities worse. $700? $650? But say the Russians continue to seize oil/gas countries? Say the Russians simply tell the Europeans that this winter gas will cost them ... whatever, and if you don't like it, stuff it. Or sign a nice treaty of economic alliance, to bring them closer into the fold. I wonder if France would baulk? Or the U.K. .. but not with Red Gordon in power.
Europe has been protected by the Euro, which being strong, insulated Europe from price rises, globally, encouraging growth and consumption. Huh? Yes, the Euro's strength helped shield it from the contagion of over-extension in credit and inflation. But, as the Euro suddenly seems vulnerable -- due to slower growth (the Euro can only get so strong and no stronger and in the process Euro-goods get too expensive), you get a double whammy effect: if you drop rates to boost the economy, you also make the Euro weaker relative to the dollar ... and a weaker Euro causes prices to rise more strongly, raising inflation and making the Euro even less attractive. Raise rates to deflect inflationary pressures and to protect the Euro, you positively kill off the already weaker economy, causing further economic contraction -- leading to greater Euro zone weakness. Net? The ECB, in letting the Euro get too strong, causing everything to look cheap, decreasing exports, increasing imports, choking off the engine that helped countries like Germany thrive. How can it be stable where a BMW 335 costs 50% of the European price in the United States? Sound familiar? Sort of like the Fed failing to raise rates to kill off the housing bubble that everyone was making money off of? Weren't the Europeans doing EXACTLY the same thing?
The idiocies of cheap credit and overbuilding -- the financial Goldilocks of the last five years -- was particularly extreme in Spain, Italy and parts of France. And totally insane in England. While the subprime mess is uniquely American (although the greedy world-wide bought the securities generated), Europeans may have even exceeded the overbuilding and property speculation of the Americans. And in America, you can be sure that the house or apartment you bought was built on surveyed land with surety of title, with appropriate planning permissions. That is not necessarily the case in Spain or France.
In Spain, builders and developers are simply walking out on projects: there is no money, there is no credit and there is no hope of their ever selling the product within the forseeable future. None. Even better is the ECB's determination to prevent inflation ... this guarantees that nobody is going to be able to buy housing due to non-existent credit. However ... if you let a small recession happen, then you benefit from weakened demand which relieves inflationary pressures, even if the Euro falls, but it might take longer than you'd like. And nobody wants a long recovery, so....
Ok, so the $/Euro is $1.49. Still very weak. I would not hold my breath for the time it takes to fall as the financial community is still looking at the basket case of the U.S. Nothing much is going to change until we get an idea of where the U.S. is going. Would you go long dollars in front of Obamonomics? Me neither. But I could see the dollar drift up to $1.30 in the run-up. And that is 20 cents, not small beer.
Oil will continue to fall, how much more, I don't know. Perhaps $80? Gold too will continue to drop as the dollar looks better and commodities worse. $700? $650? But say the Russians continue to seize oil/gas countries? Say the Russians simply tell the Europeans that this winter gas will cost them ... whatever, and if you don't like it, stuff it. Or sign a nice treaty of economic alliance, to bring them closer into the fold. I wonder if France would baulk? Or the U.K. .. but not with Red Gordon in power.
posted by Zaphod at Thursday, August 14, 2008
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