Changing the rules
Take a look at the Greek debt haircut, for example. As part of the rescue package negotiated with the International Monetary Fund, the European Commission and the European Central Bank, Greece forced its private-sector creditors into a "voluntary" 70% write-down on the value of their government bonds. The deal might have been necessary in order for European leaders to agree to fund a Greek bailout package, but it had several "trust-busting" elements, which were pointed out by critics at the time.
First, the haircut imposed an after-the-fact change of the rules. Because of this, if you hold the debt of other national governments, you're entitled to wonder how the terms of your bonds might change in a crisis.
Second, the haircut was imposed only on the private-sector investors in Greek bonds. The European Central Bank did not have to write down the value of its significant portfolio of Greek bonds.
And, third, by imposing a write-down, the European Central Bank and its partners created the question of when it might happen again. The deal certainly raised the risk of holding sovereign debt in the eurozone.
And then there's the breakup
Allowing the Greek crisis to go to a stage where a Greek exit from the euro is a real possibility has had a similar but even more profoundly negative effect on trust. Suddenly analysts are digging into the details of how the euro system works. Quite frankly, you no more want to know how a modern paper currency is made than you want to know what goes into a cheap hot dog. Analysts and economists digging into the euro system have been shocked, shocked, in tones that echo "Casablanca's" Captain Renault, to discover leverage and risk in the system.
And once you head down that path, well, the scenery gets mighty gothic mighty quickly. We wind up with economists saying things like, "In a euro breakup Germany will lose to 20% of its GDP when debtors renege on their Target2 liabilities" or, "The official sector (read the European Central Bank and the International Monetary Fund) are owed 290 billion euros by Greece. Of that 120 billion amounts to Target2 liabilities."
These are real issues only if 1) the euro does break up, and 2) levels of trust sink to such low levels that, like Byzantine mercenaries, no party in Europe is willing to trust the currency or its bookkeeping systems. Even in the event of a euro breakup, the Bundesbank could simply print money or write itself a check, in the words of University College Dublin economics professor Karl Whelan, to cover what it's owed. That would seem a reasonable alternative to trying to extract 576 billion euros (or whatevers) from German taxpayers to cover what is, from one perspective, a bookkeeping entity.
Of course, you can do things like print money or write yourself a check (and then not cash it, of course) only if trust in the system hasn't vanished. As the slow runs on Spanish banks (and the not-so-slow runs on Greek banks) demonstrate, though, there's not a lot of trust in the eurozone financial system.
And I think we're only a resentful and shortsighted Greek election result -- and a ham-handed political reaction from the German, Finnish, Austrian and Dutch governments -- away from a decisive erosion in trust in the euro. The European Central Bank has already made it clear that it is not prepared to be a Federal Reserve-style lender of last resort.
So who, exactly, does stand behind the euro? Not eurozone governments, it's clear -- they can't agree to issue joint eurobonds. Not the Bundesbank, the strongest of the national central banks, which clearly thinks it has done enough.
So who, then, thinks the euro is worth defending and who would spend some billions on defense if that were what it took?
And if the euro can dissolve, if the eurozone can go back to Deutschmarks and drachmas, then why should we have faith in any paper currency? The breakup of the euro won't mean the breakup of the dollar or the yen or the real, but it sure would accelerate the search for a more secure depository of value than paper money. Even one that proclaims "In God we trust."
Updates to Jubak's Picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:
- Politics puts Lynas' ambitions on hold
- A golden age for glass
- Is fear keeping us from good stocks?
- Why Jack in the Box is worth watching
- Are Spain's banks worth the risk?
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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VIDEO ON MSN MONEY
The USA dollar was a proposed form of currency, given to Congress by a couple bankers, when there were less than 20 people in the chamber at the time, that would give said bankers control over the US currency in the early 1900s... The paper costs approximately 7 cents to make, regardless of the number that's printed on it. It is no longer backed by gold because there is not enough gold to back it. It's value decreases with every passing year as more and more of it is printed before even a tenth of that which is printed has been cycled it out (ie, no equal exchange is taking place now).
My friends this is what happens when you let banks control your money. If you have gold, sell 10% of it as needed, but save up the rest. Because the economy is going to collapse very soon. Either President Obama, or President-Hopeful Romney will help this along by continuing the asinine approach of "Spend what doesn't exist." Ron Paul was right 30 years ago and he's right now. It's sad you'd rather elect a picture-esque fool instead of a "been there done that" old geezer.
go back to silver or gold backed notes.
Trust means expecting your government (or it's corrupted central banks) won't double the money supply almost overnight to pay for bloated government programs and pet projects of the politicians that the government should never have started or expanded to unreasonable scope.
In America we should be seeing massive inflation except that the Euro and other currencies were also massively devalued at the same time. This is why gold and other precious metals went through the roof while the Dollar maintained or improved its value against other currencies.
The Fed claims not to profit on the money it issues to the US government, but that is a bunch of bunk because what they mean is the owners take out as salaries all the profit and salaries are an expanse. The Fed is the largest financial parasite the World has ever known.
The FACT that the politicians have ignored their Constitutionally imposed DUTY to "Coin Money and regulate the value thereof" is the problem in the US! Our "monetary policy" would be solid if they had adhered to their Constitutional Duty instead of selling out (un-Constitutionally) to the banking cartels.
Our economy would have NEVER suffered the issues we have over the past 100 years if we had kept to the Constitutionally sound monetary principles the founders set out. Instead, we live in a world were there is NO financial stability because we cannot keep from reaching back into the well, The Private Corporation Central Bank - The Federal Reserve.
All the "Fed" and the European Central Banks are interested in is controlling the people and siphoning off the wealth of the people into the hands of the bankers. And our politicians have been willing accomplices.
The incredibly naive and misguided notion of "it could never happen here" will ensure it most certainly will. The vast majority will never see it coming, much less prepare. Now would be a really, really good time to divest oneself of dollar-denominated equities, and buy hard commodities, food storage staples, and precious metals. It's not the end of the world per se, but it will seem like it to those who don't take steps now.
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Markets across Asia ended mostly higher, buoyed by yesterday's Nikkei report suggesting Japan is set to downgrade its economic assessment in the upcoming April 17. If a downgrade were to occur, it would raise expectations the central bank would boost its QE program; however, it should be noted Bank of Japan Governor Haruhiko Kuroda ... More
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