Thinking the Unthinkable - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 4 December 2010
Thinking the Unthinkable A  A  A

Mumbai, India

This week, like the last one, was dominated by euro babel. Speaking in their various tongues, all at once, Europeans were talking nonsense. Especially Jose-Ignacio Torreblanca. The senior fellow at the European Council of Foreign Relations begins: in an ideal world," he says it is "fair and rational" for people to get what they've got coming... referring to the people who lent money to Irish banks. He even quotes the old Latin maxim: fiat iustitia, pereat mundus (follow the rules, even if the world should perish).

------------------------------ "I have already doubled my capital..." ------------------------------

This just came in from Nalin K Narula, one of our valued subscribers -

"Just writing in to say that Asad Dossani's Lucrative Derivative Report is an excellent guide to trading futures. Using this as a guide since November, I have already doubled my capital at risk in derivatives by shorting the Euro and Yen. This will pay for my subscription for more than a year. Thanks."

So, you see, subscribers like Nalin are getting money making recommendations effectively FREE!

You too can become a part of this group under our exclusive introductory offer for The Lucrative Derivative Report...But you must hurry! This offer is available only till 5 PM on the 7th of December. For full details, please click here...

He should have stopped there. Instead, he misses the point he has just made. This time it's different, he says. Why? Because "there is a good chance that in real life the eurozone could be killed..."

When the financial crisis hit in 08, Europe might have let the chips fall where they may. But for nearly a century, elected officials have thought they could keep the chips from falling at all. Instead of merely consuming and redistributing the fruits of the economy; they pretended, by enlightened management, to increase them. Few people noticed the audacity of it. But in a downturn, government no longer lets wealth perish. It counteracts corrections with 'stimulus.' And it doesn't merely provide a stable currency, it manages a 'flexible' currency system to help guarantee full employment and prevent debt crises.

By the 21st century, diddling the economy has become second nature...but much less effective. In the US, the fiscal and monetary stimulus of the early '30s - equal to about 8% of GDP - had a powerful effect. One year later the US economy was growing at an 11% rate. Nearly four score years later, a combined stimulus effort of about 30% of GDP produced a response of barely 2% GDP growth. As for last week's 85 billion euro Irish bailout, the market rally was over by tea time the following day.

The trouble with trying to get the outcome you want is that you end up getting the outcome you deserve anyway. Ireland guaranteed bank assets nearly 6 times greater than the nation' GDP. Now, with unemployment at 20% and GDP down nearly 15% over the last two years, investors wonder how Ireland can possibly be good for the money. And they are beginning to wonder about Spain, Portugal, Italy and even France. Between them, French and German banks hold nearly a trillion euros worth of peripheral European nations' debt. How long will it be before they go down too? The Irish bailout may cost about 100 billion euros. Spain is ten times as big. These were 'unthinkable' thoughts, said former Italian Prime Minister, Romano Prodi.

The periphery states benefited from the low interest rates of the Eurozone. With lending rates at 3%, instead of the 10% rate it had before it took up the euro, Irish property boomed. Irish banks were able to lend their way to insolvency. When the bust came, potential losses became real losses. But insolvent institutions do not become more solvent by borrowing more money. By the time the fix for Ireland is fully implemented, the Irish government will be deeper in debt - with a quarter of its GDP needed for debt service. At that level, they will be sunk. And you can forget about 'growing' out of this debt problem. This year, for the first time ever, more Europeans will retire than join the workforce. Retirees are not producers of tax revenues. They are consumers of it. Besides, how will the Irish economy grow at all, with the government cutting back by 10% of GDP over the next 4 years, probably followed by another 10% cut when this one proves insufficient?

But that's what happens. One manipulation leads to another improvisation. You pretend it's a matter of principle, but you've already thrown out the 'iustitia.' You're just trying get what you want, making it up as you go along.

The euro is a managed paper currency, like the dollar. Still, it is not managed enough for many Europeans. The Irish might revolt, leave the euro, and bring back the punt. In the old days of drachma and pesetas, Europe's sunny countries could scam their lenders with shady currencies. There is even a proposal to introduce a new currency, known either as the "medi" or the "sudo" - designed to help Europe's periphery states to manage their way out of their financial obligations. A weaker currency would lower the real value of debts, employment contracts, pensions and just about everything else.

"There will be no haircut on senior debt," said Olli Rehn, the EU's commissioner for economic and monetary affairs, still trying to keep the chips in the air. And why not? Because the consequences are unthinkable? No, he's thought about them. He just doesn't like them. But who cares? You can't really manage an economy. You have to let it happen. Here we offer some constructive criticism: Stop worrying. What will happen if lenders suffer the losses they deserve? We don't know. But we'd like to find out.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Get The Daily Reckoning directly
in your mail box.
Just enter your e-mail address » 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "Thinking the Unthinkable". Click here!

2 Responses to "Thinking the Unthinkable"


Dec 8, 2010

sab bakwas hai logoke paise eithna hai..



Dec 5, 2010

Let come what is coming or let happen what is sure to happen, but the political thinkers have to postpone the crisis, until they hit upon a plan to save their positions.

Equitymaster requests your view! Post a comment on "Thinking the Unthinkable". Click here!

Recent Articles:
Trump Takes a Beating
August 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Which Gods Will Bring Down the US Empire?
August 17, 2017
Mr Trump is in the White House and the gods are in their heavens; what's not to like?
Will They Haul Off Trump's Statue, Too?
August 16, 2017
All across the country, the old gods become devils. New, gluten-free gods take their places...
Farm Loan Waivers: Why Bad Economics Makes for Good Politics
August 14, 2017
It is because the negative effects of the waivers aren't clearly visible.