M2RB:
I'm waking up at the start of the end of the world,
But its feeling just like every other morning before,
Now I wonder what my life is going to mean if it's gone,
The cars are moving like a half a mile an hour
And I started staring at the passengers who're waving goodbye
Can you tell me what was ever really special about me all this time?
But I believe the world is burning to the ground
Oh well, I guess we're gonna find out
Let's see how far we've come
Let's see how far we've come
Well I, believe, it all, is coming to an end
Oh well, I guess, we're gonna pretend,
Let's see how far we've come
But its feeling just like every other morning before,
Now I wonder what my life is going to mean if it's gone,
The cars are moving like a half a mile an hour
And I started staring at the passengers who're waving goodbye
Can you tell me what was ever really special about me all this time?
But I believe the world is burning to the ground
Oh well, I guess we're gonna find out
Let's see how far we've come
Let's see how far we've come
Well I, believe, it all, is coming to an end
Oh well, I guess, we're gonna pretend,
Let's see how far we've come
It is bad enough that the world is
utterly unprepared for the future that can be foreseen. The
unanticipated financial, economic, and political consequences of the
coming crisis could be even worse.
By Christopher T. Mahoney
Losing a long war is always hard to
accept. Hemmed in by the western allies and the Russians in the final
days of World War II, Hitler convinced himself that he had two armies in
reserve to mount a counterattack and win the war. Meanwhile, having
lost the entire Pacific, Japan’s imperial cabinet believed that no enemy
could set foot upon the country’s sacred soil. When the truth is
unimaginable, human psychology finds an alternative reality in which to
dwell.
That describes the global situation
today. The entire planet seems to be in denial about what is about to
occur in the eurozone. Pundits keep expecting Germany to pull a rabbit
out of the hat and flood the continent with eurobonds, or that Mario Draghi will mount a coup at the European Central Bank and buy up every deadbeat country’s bonds.
Either could happen, but both are
extremely unlikely. Germany cannot guarantee the eurozone’s debt without
control over the eurozone, which no one has offered, and northern
Europe will not permit the ECB to be hijacked by “Club Med” and turned
into a charity organization. It is not just a matter of politics; it is
also — as the Germans keep pointing out — a matter of law.
Europe has a Plan A, whereby each
country would reform its economy, recapitalize its banks, and balance
its budget. But Plan A is not working: its intended participants, most
notably France, are rejecting it, and there is an emerging southern
European consensus that austerity is not the solution.
Greece’s recent election has put it
in the anti-austerity vanguard. Italy and Spain (which does not have
enough money to bail out its banking system), have similarly called for
an end to austerity. All have lost access to the bond market, and
Portugal is so far beyond hope that its sovereign debt is trading for
cents on the euro.
There is no well-thought-out plan for
the orderly exit of the eurozone’s insolvent countries. There are no
safeguards, no plans, no road map — nothing. The Maastricht Treaty, like
the United States Constitution, did not provide for an exit mechanism.
So, instead of realism and emergency planning, we get denial and more
happy talk. But, just because something is “unthinkable” doesn’t mean
that it can’t happen.
In fact, it already is happening.
Greece is rapidly running out of money; its residents are withdrawing
their deposits and have stopped paying their taxes and utility bills.
Even if the country can stay afloat until the June 17 election, a
disorderly eurozone exit, default, and currency redenomination will
follow. Greece will be dependent upon foreign aid for essential imports
such as petroleum and food. Civil order will be difficult to maintain,
and the army may be forced to step in (again).
Once Greece goes, runs on bank
deposits are likely to follow in Spain and Italy. There is nothing to
stop Spanish and Italian depositors from wiring their euros from their
local bank to one in Switzerland, Norway or New York. At that point, the
only thing still standing between the eurozone and financial chaos will
be the ECB, which could buy government bonds and fund the bank runs.
The scale of such an operation would be enormous, and would expose the
ECB to huge credit risk. But it could, in principle, step in — if
northern Europe permitted.
If the ECB does not step in, Italy
and Spain, too, will be forced to exit the eurozone, default on their
euro-denominated sovereign and bank obligations, and redenominate into
national currency. Massive losses would be imposed on the global
financial system. Given the opacity of banks’ exposures, creditors would
be unable to discriminate between the solvent and the insolvent (as was
the case in September 2008).
The U.S. banks most likely to be
affected by such a scenario would be the globalists: Citigroup, Bank of
America, JPMorgan Chase, Goldman Sachs and Morgan Stanley. They would
require a rescue package similar to the U.S. Troubled Asset Relief Program, created after Lehman Brothers’ collapse in 2008. The U.S. can afford a second TARP, but it would require congressional legislation, which is not guaranteed.
Massive wealth destruction, combined
with global financial chaos, would pose a challenge to monetary
policy-makers worldwide. Central banks would be tasked with preventing
deflation, implying a major round of quantitative easing. But since
banks are the transmission mechanism for monetary stimulus, this
presupposes functioning banking systems. Each country would need to
restore confidence in its banks’ solvency, which would most likely
require a blanket bank guarantee and a recapitalization scheme (such as
TARP).
The U.S. financial system can
withstand any shock, because the U.S. can print the money that it needs.
The Fed can maintain nominal prices, nominal wages and growth if it
acts heroically, as it did in 2008.
The stock market will react
negatively to the level of uncertainty caused by the collapse of the
European financial system (as it did in 1931), and the dollar, yen, and
gold should benefit. The fate of the British pound and Swiss franc is
impossible to predict; they could benefit as safe havens, but their
banks are highly exposed to the eurozone.
It is bad enough that the world is
utterly unprepared for the future that can be foreseen. The
unanticipated financial, economic, and political consequences of the
coming crisis could be even worse.
Christopher T. Mahoney is a former vice chairman of Moody’s.
Related Reading:
Europe's Demographic Deficit Grows Wider By The Day
The callous cruelty of the EU is destroying Greece, a once-proud country
(Hello, hello, hello)
I'm waking up at the start of the end of the world,
But its feeling just like every other morning before,
Now I wonder what my life is going to mean if it's gone,
The cars are moving like a half a mile an hour
And I started staring at the passengers who're waving goodbye
Can you tell me what was ever really special about me all this time?
[Chorus]
But I believe the world is burning to the ground
Oh well, I guess we're gonna find out
Let's see how far we've come
Let's see how far we've come
Well I, believe, it all, is coming to an end
Oh well, I guess, we're gonna pretend,
Let's see how far we've come
Let's see how far we've come
I think it turned ten o'clock but I don't really know
Then I can't remember caring for an hour or so
Started crying and I couldn't stop myself
I started running but there's no where to run to
I sat down on the street and took a look at myself
Said where you going man you know the world is headed for hell
Say your goodbyes if you've got someone you can say goodbye to
I believe the world is burning to the ground
Oh well, I guess, we're gonna find out
Let's see how far we've come
Let's see how far we've come
Well I, believe, it all, is coming to an end
Oh well, I guess, we're gonna pretend,
Let's see how far we've come
Let's see how far we've come
It's gone gone, baby its all gone
There is no one on the corner and there's no one at home
It was cool cool, it was just all cool
Now it's over for me, and it's over for you
Well its gone gone, baby its all gone
There is no one on the corner and there's no one at home
Well it was cool cool, it was just all cool
Now it's over for me, and it's over for you
[Chorus]
Let's see how far we've come
Let's see how far we've come
Let's see how far we've come
Let's see how far we've come
Let's see how far we've come
Let's see how far we've come
Let's see how far we've come
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