The future of the Euro-Zone: Comments,opinions and info

Hi rferra,

that's what I thought !

After what happened over the weekend in  Latvia ( ATM's empty) I will start stocking up the Euro's and Dollars under my pillow in case the EU goes sour. There is not much to loose anyway given the present interest rates. Might as well have a bundle to sleep on....

Cheers
Ricky

Hi rferra & Ricky,

Are the "hypothecations" (sorry, my spelling is awful) you refer to the same thing we call "derivatives" in the US?  Where the banksters buy a bunch of mortgages, bundle them, chop them up, resell them, and then when the bubble bursts as it did here - come whining to the government for help?  Which our imbecilic gov't gave them.  And look at the results.

If they are, take a look at the US housing market.  I don't know if it made the news there, but within the last year, a woman was due to have her house foreclosed on.  The banksters wouldn't work with her.  She shot herself and when the sheriff arrived to remove her, he removed her corpse instead. (The idea of the "bailouts" was that the banks would put the money into circulation, more people would borrow, blah, blah, blah.  Instead, the banksters paid themselves bonuses and unless you already own a house -- good luck in getting a mortgage.  I'm not thrilled with my house but it is better than nothing.

I hope and pray this doesn't happen in Europe.  Yes we are idiots, but they say everybody is good for something even if it is only as a bad example.

If you have cash however, you can make extra house payments with currency that is devaluated whether they admit it or not and pay off a mortgage faster. Same with land.

Like Ricky said, interesting times.  I almost think I would prefer Ms Merkel to Mr Obama.

duffy

Duffy,

a derivative is a contract between two parties based on the price of the underling asset, for example wheat, or the S&P index. One party bets that the asset will grow in value within a set date and buys the future or the option. The second party bets that the asset will loose value and sells the contract. At the end there is a transfer of money from the loser to the winner. The exchange regulating the contract makes sure that both parties have deposited enough cash (the Margins) to cover the final payment. And in the extreme case that the loser defaults, the exchange will pay the winner with its own money.

Unregulated (Over The Counter) derivatives differ because they are simply bilateral, off exchange, contracts. If I win but my counterpart cannot pay (and who the counterpart is I don’t know, because the initial partner in the meantime could have sold the contract to someone else, who sold to someone else…) I can only cry. And if I was banking on this win to pay my debts, or pay the counterpart on a different losing contract, I am broke, and if the counterpart needs this money, he’s broke as well.

Why the more risky OTC derivatives, if the regulated ones are clearly better? Simple: the institutions emitting and trading the OTC toxic kind make more money on them.

Unregulated OTCs are the Credit Default Swaps. A bank buying for example Italian bonds buys also CDS to cover the risk of Italian default. If Italy defaults, the bank will exercise the contract and ask for the payment due. The counterpart, whoever it is (who knows?), will have to fork out a huge sum of money. Will it be able to pay? Who knows?

OTCs are also the mortgage risks bundled into a contract, that received from the rating agencies the AAA riskless status…  and caused the first financial meltdown in 2008.

The notional value (the value of the underlying assets) of the OTC market is equivalent to TEN YEARS OF WORLD GDP. Warren Buffet, one of the top American investors, called them “arms of mass destruction”.

The re-hypothecations are a different beast. Say you have a house and need money: you hypothecate the property and the bank lends you the money. The mortgage gives the bank the right to seize your house if you do not refund. The bank can also re-hypothecate your mortgage with another institution and receives money created out of thin air (a new house was not built, nothing was produced). Now we have one property and two entities having a right to it.

The re-hypo trick, it seems, on average is done four times: one asset and four claims. It can be done on any asset deposited as a pledge. The failed US broker MF had in its hands the various financial assets deposited as Margins by hedge funds and private speculators operating on the futures market. MF transferred those assets to London, where re-pledging can be done without limits or controls, and raised money for speculating in its own account – and lost all. In the meantime the assets had been re-hypothecated to someone else, and so on. Will the legitimate owners of the assets ever recover them, at least in part? Nobody knows.

Sovereign bonds, once a riskless asset and now risky, have also been daisy-chain re-hypothecated.

The economist Minsky wrote that financial capitalism is the final stage of mega-cycles in capitalist systems, and that daisy-chain Ponzi finance is the terminal stage of financial capitalism. It seems we are there.

Right, if you have a fixed-interest mortgage, and money is devalued by inflation, you pay less (not in monetary but in real terms) for the house. Good for you. But will you have the money? Will you have a job? Will your salary keep up with inflation? Will your pension, devalued as well, be enough to eat and pay the bank?

We live in very dangerous times. Just choosing a bank for keeping a current account is a headache. In Switzerland they created a super-safe deposit that for extra safety is outside the Swiss banking system (we are talking Swiss banks, not American or Italian!). Rich people can have there not an account (than is nothing more than numbers stored in a computer and printed on a piece of paper) but deposits of bundles of cash notes in different currencies and gold. It’s for the rich, not you or me…

Oh, a second posting from Duffy.

Excellent survival tips. It is certainly better to live outside big cities, in places where you can grow vegetables, raise chickens, hunt and fish.

But no, I don’t think that in a year from now we will be laughing
Renato

rferra,

Thanks - I think we are kind of talking about the same things but I speak American English vs English English.  We call (I think) what you call derivatives "options trading" - regulated (COMEX) or unregulated (used to be mainly out of London) unless I completely misunderstood, which is possible.

And hypothecating sort of sounds like multiple mortgages on the same house that are, again, bundled up, resold, and by the time they are done, nobody knows who has a claim against the house.  That is a big part of what brought our housing market down.  Whatever you call it, it's deadly. I double checked on my own mortgage.  It is still intact and with the original credit union vs a bank or banks. Hope to pay it off early with worthless dollars - at least until we officially admit the USD isn't worth a dollar.

And re the ultra rich stockpiling gold in vaults - I read that has been going on for some time now. I thought you meant the rest of us.  We are stuck with fiat currency that could be valueless with a keystroke.  I reread Hayek on returning to serfdom: it's happening now but slowly enough that people don't riot. 

Here, the banksters took the bailouts and bought gold for themselves instead of loaning it out to "create" money.  I can't figure out if our gov't is really that stupid, or is actively trying to destroy the economy and return to a 2 class system: ultra rich and peasants. So we joke about the coming labor camps - which will not be funny if it actually happens.

Oh -- skip the survival lecture.     I burned my hand and was on pain medicine last night.  Does not mix well with internet.  I get very rambly and cheerful.

I don't know -- I want to believe things will work out.  But in reality, who knows?  You might be right about a year from now, but neither of us can change it.  Apres moi, le deluge is the motto of the day for our gov't over here.

Duffy

What will happen with euro as curency after friday 13 of january when euro felt down on 1 per cent regarding dollar?

a 1% move is nothing

Downgraded France, Austria, Spain, Italy, Portugal, Malta, Slovakia, and Slovenia. And in addition Standard & Poor's has placed the majority of EU countries on credit watch: further downgrades to come. Multiple downgrades signal far more than just some problems in some PIIGS countries. The staggering mountain of European debt is frightening. And the same can be said for Japan and the US. Those mountains of debt cannot be refunded. Impossible. There will be defaults. Or the debts will be devalued by strong inflation. In both cases the apparent wealth that since the Sixties has been created with credit and money printed out of thin air will disappear.

So far the Euro has only slowly depreciated, because the European institutions are covering debts in Euro and selling assets abroad and repatriating the money, with the result of increasing the demand of Euro. The current exchange rate with the Dollar around 1.27 is still strong, higher than the rate we had when the Euro was introduced. We shall probably see a parity below 0.90. Later of course the Dollar will fall, for the same fundamental problems, and the Euro will go up, a lot, but it will be a Northern/D Mark Euro, without PIIGS (and other countries) on board.