Dominique Strauss-Kahn delivered a speech today in Beijing, lambasting the leadership of Europe for its “state of denial” about the severity of the credit crisis. It seems that an angry DSK is speaking his mind now that he has no official capacity and can lash out at European leaders. The former IMF managing director was well received by his Chinese hosts who showed their appreciation for all the work DSK did to elevate the status of the Chinese in the IMF.
DSK was adamant that the EUROPEAN CRISIS was a three-pronged problem: A DEBT CRISIS; A GROWTH CRISIS; and A LEADERSHIP CRISIS. The CRISIS IN EUROPE is further aggravated by the fact that the European leaders seem that time is not of the essence where DSK believes time is not a friend of the Eurocrats. It is of the utmost importance that the CRISIS be dealt with now and not later. Nothing like a dishonored and wounded leader to finally speak the truth.
***Tomorrow’s Financial Times runs two interesting articles. Martin Feldstein has a piece in which he pushes the need for a weaker EURO as a way to help aid the peripheries to get back to current account balance. Feldstein suggests a need for a further 20% devaluation of the EURO to help Spain and Italy right the terrible ship of their trade situation. The problem is that Professor Feldstein doesn’t explain how he came to think that will be the magic elixir to turn the situation.
If the EURO DEPRECIATED 20%, Germany would create severe problems for U.S. and Japanese exporters. The Japanese auto sector is already being outsold by the Germans and the U.S. export sector has been one of the few positive elements of the U.S. economy. Also, Europe, the largest market for China, a 20% depreciation of the EURO would be a problem for a Chinese economy that is beginning to soften. While Feldstein’s remedy may make economic sense, the political reality of the fragile global situation is going to be a much tougher issue to resolve.
The second article is a piece by PIMCO‘s Bill Gross. Last week, NOTES FROM UNDERGROUND discussed the huge withdrawals from Greek and other peripheral banks. Moving money from the PERIPHERY TO THE CENTER can be compared to a contemporary GRESHAM’S LAW as depositors hoard the good EUROS in GERMAN BANKS in anticipation of being forced to surrender their domestic EUROS for a devalued DRACHMA or other currency. Gross takes the argument further and attacks the FED and other CENTRAL BANKS for a ZIRP (zero interest rate policy).The ultra-low interest rates chase money out of the banking system as savers flee zero rates and place their money in the “MATTRESSES.”
Gross asks why people would leave their savings in bank accounts that yield nothing while they take on the risk of a bank failure. Many traders post-MF GLOBAL now strip their accounts on a daily basis as the fear of another bankruptcy causes cash to head for safer quarters. As Gross concludes: “But all central banks should commonsensically question whether ultra-cheap money continually creates expansions as opposed to destroying liquidity, delevering and obstructing recovery. Gresham as opposed to Keynes may become the applicable economist of this new day.”
Tags: Bill Gross, central banks, Dominique Strauss-Kahn, DSK, Euro, European Crisis, Fed, Germany, IMF, Japan, Martin Feldstein, PIMCO, U.S., ZIRP
December 19, 2011 at 10:06 pm |
Although I am sympathetic to Gross’s take on ZIRP and so-called “financial repression,” it seems that once we crossed the Rubicon of, rightly or wrongly, deciding not to let weak institutions fail, that extraordinary fiscal policy was a tool worthy of implementation in order to attempt to ease incredible strains on the system. Rather than opine on whether this was the best course of action or not, seems it’s best, as is so eloquently done here in these posts, to work on figuring out what the ultimate response will be by market participants. In that vein, I’d argue that although many considered QE to be somewhat of a failure, the fact that asset prices were higher as investors moved further out along the risk curve, indeed rendered it a success. Which would make me assume that given the extraordinary policy response we’re seeing out of the EZ, along with the Fed on board to assist, should policymakers succeed in shifting sentiment might we not see a similar episode of ‘risk-on’ and especially selling in what has proven to be the ultimate haven asset, US Treasuries? As pointed out here the compression in peripheral yields, particularly Spanish (without the liquid futures market “pissing post” effect) looks pretty impressive. Am curious to hear what others hear are thinking in that regard.
Here’s to looking for a short-UST trade that is most carry efficient…
December 19, 2011 at 10:14 pm |
Great insight. And DSK is right…..the Euro Zone is a joke
December 20, 2011 at 6:49 am |
Matt–the short answer is yes.The key to it for the moment is the impact that the LTRO program put in place by Draghi is having a dynamic effect as the curves in the spanish and Italian and Irish markets have steepened dramatically .There is huge demand for the short end of the curve rallying the two year notes in all the peripheries—Corzine and Soros are the opposite masks of tragedy and comedy as the rally in the 2 year in Italy and Spain have been huge–classic bull steepeners and the banks are enjoying it for the moment.—equities and metals should both perform well.
December 20, 2011 at 7:12 am |
I believe what sums it up is the classic joke of 2 people falling off a building. The pessimist says “Oh my God we’re going to die” while the optimist says “10th floor, so far so good.”
December 20, 2011 at 1:37 pm |
[…] More… […]
December 20, 2011 at 3:57 pm |
Postponing the inevitable debt reconciliation has never proven to be a successful strategy in countering a global debt collapse. The lack of leadership in Europe is a parallel universe to the political vacuum in the United States. Temporary reflex, relief rallies in decimated sovereign debt markets such as Spain & Italy are for traders only, not for long-term investors looking to park decaying cash. Inflation in the real world of U.S. of A. approaching 9%, just compare your living expenses currently with a year ago. Shocking when you do the math. Yields artificially depressed with fiscal largess and money printing are only temporary relief for under-capitalized banks and over-committed Sovereigns, eventually the Piper must be paid with yields that reflect fiscal policies run amuck via Endless Entitlements, bubbling systemic leverage, persistent inflationary pressures with oil north of $90 in an unfolding Depression, and THAT PESKY OF ALL COMPONENTS TO YIELD DETERMINATION: CREDIT OR DEFAULT RISK. What Sovereign out there today, to include U.S. States, cities, and counties are truly investment grade, AAA??? Maybe Norway? I have always said since 2008 that the crap that U.S. financial intermediaries have peddled to the rest of the world will guarantee secondary and tertiary status of our stock, commodity, and bond exchanges and trading mechanisms well into the future. MF Global was the kiss of death for the Comex and the CFTC. Welcome to the new world order, America. We will need those little umbrellas that come in exotic drinks.
December 21, 2011 at 1:03 am |
[…] This post deals with a Dominique Strauss-Kahn (former IMF Chief relieved of duties after a sex scandal this summer in New York) speech delivered […]
December 21, 2011 at 1:14 am |
[…] On the European front, the problem there is getting worse, not better. Yesterday, the head of the International Monetary Fund (IMF), Christine Lagarde, said, “Currently the world economy stands at a very dangerous juncture.” Former chief of the IMF, Dominique Strauss-Kahn (DSK), was just as downbeat on the solvency crisis facing the EU. Renowned market expert, Yra Harris reported on his site yesterday, “DSK was adamant that the EUROPEAN CRISIS was a three-pronged problem: A DEBT CRISIS; A GROWTH CRISIS; and A LEADERSHIP CRISIS. The CRISIS IN EUROPE is further aggravated by the fact that the European leaders seem that time is not of the essence where DSK believes time is not a friend of the Eurocrats. It is of the utmost importance that the CRISIS be dealt with now and not later. Nothing like a dishonored and wounded leader to finally speak the truth.” (Click her for more from Mr. Harris.) […]
December 21, 2011 at 12:02 pm |
[…] On the European front, the problem there is getting worse, not better. Yesterday, the head of the International Monetary Fund (IMF), Christine Lagarde, said, “Currently the world economy stands at a very dangerous juncture.” Former chief of the IMF, Dominique Strauss-Kahn (DSK), was just as downbeat on the solvency crisis facing the EU. Renowned market expert, Yra Harris reported on his site yesterday, “DSK was adamant that the EUROPEAN CRISIS was a three-pronged problem: A DEBT CRISIS; A GROWTH CRISIS; and A LEADERSHIP CRISIS. The CRISIS IN EUROPE is further aggravated by the fact that the European leaders seem that time is not of the essence where DSK believes time is not a friend of the Eurocrats. It is of the utmost importance that the CRISIS be dealt with now and not later. Nothing like a dishonored and wounded leader to finally speak the truth.” (Click her for more from Mr. Harris.) […]