Friday, July 13, 2012

devaluing isn't a solution; it's default


"Greece’s inability to devalue its currency is often cited as a reason for the extreme economic pain its citizens are enduring, and many commentators say the country should return to the drachma to restore competitiveness.
In the U.K., which -- unlike Greece -- isn’t part of the euro area and can devalue if it wishes, there’s growing pressure to do so. A letter recently circulated to some 3,000 influential figures proposed deliberately weakening the British pound to boost exports and hence economic growth. Debasing currencies in this way is promoted as an alternative to sovereign default, as well as to other methods of increasing competitiveness, such as cutting nominal wages.
But all this wistful focus on currency devaluation -- the route that countries such as Greece, Spain and Italy cannot take so long as they remain in the euro area -- is a mistake.
To start with, devaluation is not an alternative to sovereign default. When a government decides to devalue, savers who trusted the currency to store their wealth, and creditors who bought bonds denominated in the currency, find the value of their assets cut. That’s sovereign default by a different name."

gordon kerr is one of europe's foremost financial writers, instructors, and experts.

finding a good one today is like finding another soul at a jazz concert.

above is a link to one of his recent offerings in bloomberg.
devaluing isn't a solution; it's default.
this is so obvious to me and you, but virtually every economist in the world is racing in the other direction.
we all get sucked into thinking paradigms.
there are certain truths, even when true, that  you can't speak in certain circles.
"the best  way for any financial system to run itself to have very intelligent fellows in government working in lockstep with the big banks taking certain actions to help the economy get back on its feet.
in august 1971, president nixon terminated this final link in the currency system to anything remotely tangible or hard.
we have had 41 years of constant stimulus.
look at the mess we are now in.
the people caught in the middle are the savers and  certain clearing firms, 
back in the clinton era, he wanted to float more money.
his advisors told him that the market would kill him.
when you look at the history of governments printing money to get out of these problems, in paper money systems, they ultimately result in severely rising inflation.
when you debase money in this manner and remove interest income from retirees, there are several unplanned consequences.
pension crisis after pension crisis, public and private----------
most politicians know this to be essentially true.
at some point, money owed,  some of that to us, is simply not going to be paid.
when folks in the public sector have pensions, many of them anticipated 7 or 8% annual inflation to fund the pensions.
that rate  is effectively 0%  for 10 years now.  the folks with 401K's have the same problem.
folks with pensions on the public side feel that they are better than you or me and that their pensions should be made whole while ours may go to heck, but we are obligated to fund public pensions.
the retired 54 year old police chief in hayward california retired at 52 at $185,000/yr.
public pensions are out of control.
nobody is doing the sums properly, or has been for quite some time, or do we expect them to.
there is an integrity gap here.  does anyone believe what the bankers and government currency officials tell us?
folks are borrowing mony at about 0% in germany and investing in spanish banks at 7%, guaranteed by german banks.  a circular trade indeed.  this will not go on forever.

the numbers just won't work.
william grant still
phantom chapel

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