Can the dam be prevented from bursting.

Discussion in 'Economics' started by Chodmeister, Dec 12, 2011.

Welcome to the Army Rumour Service, ARRSE

The UK's largest and busiest UNofficial military website.

The heart of the site is the forum area, including:

  1. A lot of pundits and experts are saying that no concrete results of last Friday's Euro conference will be seen till late spring 2012 or even into the summer. My question, can the dam of debt defaults be prevented from bursting till then or will it all go tits up well before?
  2. It's already happened. We're just all sticking our fingers in our ears.
  3. Alsacien

    Alsacien LE Moderator

    In this case, the pundits are right.
    You cannot resolve a fiscal problem with a monetary solution, you just create a problem down the line because you address a symptom not an illness.
    There are 2 fundamental aspects to the whole conundrum, banking issues and national government issues.

    I am less concerned about the latter, so I will start on banking issues within the Eurozone 17.
    The first thing is I will take Greece out of the equation, in isolation it is insignificant in size terms and only becomes relevant if the bigger picture changes massively which is not likely.
    Within the pure banking context there is a liquidity, capital and collateral issue. The inter-bank lending market has dried up completely, banks are under pressure to increase capital, but they cannot. Bank bonds are not happening, markets are risk adverse to lending and bank books are unknown in detail.
    The ECB has extended its refinancing operations to banks to allow them to borrow cheap (1%) for up the 3 years. This allows banks to borrow long (3 years) and lend short (anything less than 3 years) - the opposite of what was happening a few years back and caused this whole crisis.
    The ECB has also relaxed its eligible assets collateral requirements a little bit (they can afford to, they own everything anyway), so any bank with reasonable collateral can get funding.
    Currently, most banks are bunging everything they borrow straight back into the ECB's cellar at 0.65% - a 0.35% loss is OK if you are trying to batten down hatches and you have lots of cash washing about, at least its safe.
    What the ECB is hoping, is that banks end up with so much liquidity that they either buy assets with it, or they lend it to SME's and Joe Bloggs - but it will take a while to build the comfort zone and to meet the capital requirements.
    The quick win for the banks is simply to stop lending to SME's and Joe Bloggs, this has to turn around as it covers 60% of economic growth. Big companies can raise capital via bonds or shares so are not in this equation.

    If a bank does not have any more collateral, then they have to hold out the hat to their government. If they are systemically important they will have to be bailed out (RBS), and that government will need to find the money from somewhere.......which leads into part 2.

    Before we go there, consider the banking sector in Europe is 20% oversized and in the UK 30%......... this will happen, and regulation to wind up complex, international systemic banks with minimal impact is vital.
  4. But it's a monetary problem at heart. German unit labour costs have remained pretty much flat since the advent of the Euro (its competitiveness hasn't changed). The Club Med countries' equivalent stats have skyrocketed, especially Greece. The solutions to this are monetarist, not fiscal.

    Or at least, they should be. The problem is, as it's always been, that the Germans run the ECB to suit themselves and they won't shift ground on that central plank of monetary union policy.
  5. Alsacien

    Alsacien LE Moderator

    First thing. The ECB is independent, fiercely so of late. They set monetary policy (which is a central banking function) considering the indicators of the whole Eurozone 17, not Greece and not Germany. I think their current position is completely correct when I look at the indicators myself, and they seem to be the only consistently rational party involved in the crisis. They publish the minutes of their monetary policy meetings on their website, you can see the rational and data yourself.

    Fiscal policy is set by national governments, how they tax, how they spend etc.
  6. The biggest threat (IMO) is if we get another oil price spike. There seems to be plenty of risks which could trigger this; from idiot Iranians threatening to close the Strait of Hormuz to another rise in oil production costs and the more simple scenario of demand overtaking supply. The added costs of production and distribution would require a huge amount of printing and could even result in rationing. At that point someone will default and bring the whole lot crashing down.
  7. Alsacien

    Alsacien LE Moderator

    This is a concern that is probably keeping the BofE MPC awake at night.
    Having gone the QE route based on a reasonable risk of recession, the nightmare would be having to pull all that cash out the economy to brake runaway inflation. I think they have done their sums right, but the risk of some y factor ballsing things up is definitely there....
  8. what a sack of utter cack. Any economist worth his salt should be telling us all this euro banking is merely fibbs being told, by fibbers to other fibbers, so that fibbers can gamble a bit more with more fibbed up money.

    The long and the short of it is... the competetiveness of the REAL world is shifting east and at an alarming rate. In the months to come 2011 /2012 will be seen as the great euro banking crises recession, but in the YEARS to come 2011/2012 will be seen as the end of the pretense that the west is the predominant power in the world.
  9. That would be the case if the West continues to ignore the East in the hope that it will go away. It wont. The absurd situation where Western countries accept goods from Chinese sweatshops while banning sweatshops in their own countries can't go on for much longer. While I don't think there will be full scale protectionism, I expect to see a levelling of the playing field within the next couple of years with the same standards being applied to imported goods as to locally produced goods.

    Interestingly, this has already started in the UK. One of the first steps taken by the coalition government in the UK was to stop abuse of the intra company transfer visa scheme. This allowed companies to sack UK staff and bring in Indian contractors to work in the UK under Indian employment regulations. No UK tax, no National Insurance, no unions allowed, no getting pregnant or you're fired etc etc.

    A number of MPs in the former government made fortunes working as "advisers" for Indian IT companies. It's quite amazing how a company's costs can be reduced simply by dropping 100 grand a year into the right pockets. Great to see that former Labour MP Margaret Moran, who boasted about her involvement in this scam on the Panorama hidden camera sting, is now, apparently, too sick to stand trial for her crimes.
  10. I am not sure about this. The current situation allows the preservation of a quasi-Imperial trading pattern. Normalising standards wouldn't seem to me to achieve much economically.