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Contagion Affects Europe

Posted: 2012-06-12
From: Mathaba
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by Stephen Lendman

Europe keeps sinking deeper into financial crisis. Eurozone straightjacket rules force 17 dissimilar countries to live by one size fits all diktats. Flawed planning preordained eventual disaster.

Monthly more systemic cracks emerge. Money creation alone prevents collapse. That game only works for so long.

An unstoppable slow motion train wreck promises to be ugly on impact. Too much damage was done to undo it. When it's coming who can know. Only Cassandra was good at forecasting. Her specialty, however, wasn't calling economic peaks and troughs.

Greece is most troubled. Conditions there go from bad to worse. Insolvency approaches in weeks without more cash. The more it gets, the greater amounts needed.

The Eurozone experiment is in crisis. Bailouts and fixes don't work. Grexit is inevitable. Economist Nouriel Roubini says leaving in an orderly fashion buys time but nothing else.

Other conservative analysts and euro system apologists think it's coming later this year or next. Disruption will follow. In July 1997, Thailand's baht devaluation was thought too insignificant to matter. The Asian economic crisis followed.

Thailand's economic weakness affected the region. At the housing bubble's peak, so-called experts said it reflects only 5% of GDP. Again they got it wrong. Its decline had a disastrous multiplier effect. Financial instability keeps increasing.

Expect worse when Greece exits. The ECB alone holds 50 billion euros of Greek debt. Default will hit hard. Banks with large holdings will feel it. Breaking up is hard to do.

An ugly divorce seems likely. Ellen Brown suggested five creative alternatives.

(1) "The open marriage." Adopt a dual currency system. Combine the drachma and euro.

Better still, adopt the Argentine solution. It works.

From April 1991 - January 2002, Argentina maintained a currency board. The Argentine peso was pegged one for one to the dollar. Massive fiscal deficits accumulated.

In late 2001, Buenos Aires adopted a dual exchange rate system. A preferential exchange rate peg for exports was adopted.

It wasn't enough. Economic collapse approached. Bank deposits were frozen. Debt payments to domestic and foreign creditors were halted. In January 2002, a floating system replaced the exchange rate one.

Around $100 billion in debt was restructured. In 2005, it was completed on a take it or leave it basis.

Stiff haircuts were imposed on creditors. Around 65% was mandated. Most decided something was better than nothing. In 2010, holdouts finally capitulated on similar terms.

Sustained economic growth followed from 2003 through 2007. Vital debt restructuring and a devalued currency achieved it.

Greece and other troubled Eurozone countries can do the same thing. Exit Eurozone bondage. Regain national sovereignty. Have full monetary and fiscal control.

Adopt sensible economic and financial policies. They work. It's not rocket science. Argentina is one of many success stories. Troubled nations can replicate them.

(2) "Separate bank accounts." Greece's central bank can issue more than one currency. It can replicate ECB policies. It can print dracmas and euros. It could refinance its debt and pay itself interest. It can use other ways to restore growth.

(3) "Divorce." Exiting euro rules can work. Why live under outside policy diktats when homegrown ones work better.

(4) "Spousal support." Nationalize Greek banks. Mandate public ones. Benefits accrue to the state. Residents reap the rewards. Public banking is an idea whose time has come. Everywhere it's tried it works.

(5) "The dowry." Also impose a financial transaction tax (FFT). "If Greek public banks borrowed from the ECB at 1% and bought Greece's sovereign debt, (it) could be paid off in 10 years...." A modest 0.3% FFT could achieve it.

Fix troubled economies can be done lots of ways. Public banking always works.

Putting money power back in public hands changes things responsibly. People regain control their own lives. Recovery and prosperity follow.

Today's reality reflects hard times getting worse. Europe is hardest hit.

Greece is hardest hit. Spain, Italy, Portugal, Ireland, Cyprus and other European economies are also troubled. Contagion spreads. Debt entrapment, banker occupation, and austerity harm every country adopting these policies.

Germany and France can't save the continent. Neither can Troika diktats. Everything tried so far failed.

Dead cat bounce market rallies reflect short covering and hope that global central bankers will rescue economies on the brink of collapse. Four and half years of massive liquidity infusions at near zero interest rates only bought time.

Festering problems remain. Delaying responsible fixes assures deep problems getting worse. Europe is heading south. Q I real Eurozone GDP turned negative. April industrial production slid a worse than expected 2.2%. It's 0.7% lower year-over-year.

Spain's industrial production contracted 8.3% from year ago levels. It reflects near Depression conditions. What affects Europe, hits America. April export orders dropped from 58 to 53.

Prices paid fell from 68.4 in February to 49.8 in May. It was the first sub-50 print since July 2009. ISM data show weakness. At 53.7, it's well off its beginning of the year 57.3 peak.

Barely over half of industries reported growth compared to 77.8% in April, the same percent last May, and 88.9% in May 2010.

With the economy in recession in May 2008, it was 72.2%.

America's employment picture is dismal. At 42%, long-term unemployment is the highest since the Great Depression. Over half of college graduates under age 25 are either unemployed or underemployed.

Over 45 million are on food stamps. Nearly half the population gets some form of government help. The employment-to-population for 25 - 54 year olds is 75.7%. It's lower than at the June 2009 recession trough.

Since mid-2009, the labor force added eight million. Remove that factor and U-3 unemployment is 50% higher. Workers confident to leave jobs fell 11% in May. It's the lower print since November 2010.

Unemployed workers looking fruitlessly for 27 weeks increased 310,000 in May. It was the sharpest increase in a year.

The U-3 unemployment rate for male youths aged 16 - 19 is 27%. For males 20 - 24, it's 13%. True figures approach three times this level when calculated by 1980s standards.

Only 16% of the 2009 - 2011 graduating classes found full-time work. Another 22% work part-time. 2006 - 08 graduates faired almost as poorly. Only 14% of high school graduates believe they'll have better financial futures than their parents.

New generations haven't for four decades. Future prospects look worse.

The latest Fed Beige Book mentioned troubled Europe 19 times. Global contagion keeps spreading. China's going from bad to worse. Cutting interest rates reflects concern. Credit squeeze problems exist. Since January, its M1 contracted 5%. In the previous two years, it expanded 30%.

Chinese bank lending is weak. Double digit GDP growth is gone. Around 7% or lower looks likely. Landing hard looks possible. Expect more contagion.

Calls for Fed QE III grow. What more can be done isn't clear. Interest rates are near zero. The Fed's balance sheet is bloated. Everything tried so far failed. It bought time, nothing else.

The longer the can gets kicked down the road, the worse off things get. Bailing out insolvent banks at the expense of job creation and economic growth assures failure.

Nothing in sight looks promising. Greater global economic pain is coming. Ordinary people suffer most. Western governments don't care. Maybe they'll notice when public protests expand exponentially. It's just a matter of time.

A Final Comment

Spanish banks are insolvent. Nationalization only can save ones worth rescuing. Others should be declared bankrupt and shut.

Instead, same old, same old polices continue. They accomplished nothing since crisis conditions emerged in fall 2007.

Weekend headlines said Spain seeks up to $125 billion in bailout help.

Unexplained was they don't work. The more gotten, the more needed. Holes dug get deeper. Bad policies beget more of them. The cure is worse than the disease.

Earlier Spain said it could go it alone. Independent analysts knew otherwise based on current policies in place. Nothing more than buying time is possible. Workable solutions are systematically avoided.

Some now discussed include renouncing national sovereignty, establishing pan-European banking, and yielding total fiscal and monetary control to an external authority.

It's hard imagining any nation would agree. At best, nothing can happen quickly. Treaty authority is likely. Before gotten, the entire Eurozone house of cards may crumble. It's inevitable. Only timing is uncertain.

Fundamental economic problems aren't addressed. Bailing out banks responsible for crisis conditions is prioritized. Job creation and economic stimulus are required. Instead, counterproductive policies are pursued. Bad endings are assured.

Stephen Lendman lives in Chicago and can be reached at:
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