Every day another story, fact, detail makes my eye balls pop out, but some hair raising reads are worse than others.
The oh shit headline, Europe on the brink of a currency crisis meltdown:
Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.
Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.
It appears that the Emerging Economies collapse will make the housing crisis look like kindergarten.
Here is the exposure to Emerging Markets:
- Austria 85% GDP
- Switzerland 50% GDP
- UK 24% GDP
- Spain 23% GDP
- US 4% GDP
Spain has twice the lending to Latin America than American banks have domestically.
In Urgent Need for IMF Action, Rodrik writes:
The IMF, possibly along with central banks of the G7, has to act as a global lender of last resort to emerging markets. These countries have to have ample access to liquidity in reserve currencies--quickly and with few strings attached--for them to be able to fend off what may otherwise become a historic rout of their currencies
Due to the possible collapse of these emerging economies' currencies, of course his concern is that the US might turn to protectionism which of course is a joke. Creating a global trade system that relies on arbitrage is of course a self-feeding prophecy to collapse. One cannot create middle classes by sucking every dime out of their pockets, yet assuredly it's possible to continue and even expand trade while not promoting global wage arbitrage, glorified outsourcing agreements and a race to the bottom agenda.
Krugman is also raising alarm bells and calls this the mother of all currency crises.
While in Hungry, Roubini refers to the Goulish Meltdown. Do we get a real horror show for Halloween this year?
If Hungary goes bust, the risk of a domino effect--like the one in 1997 that led the East Asian crisis to spread from Thailand to Malaysia, Indonesia and Korea--would be significant, as many of the emerging European economies share the same vulnerabilities as Hungary. Indeed, significant financial pressures are already underway in Estonia, Latvia, Poland, Romania, Bulgaria and Turkey.
This is Contagion, which is something I wrote about earlier that our lovely globalization architects actually do not understand.
What is most amusing is Citigroup is calling on China to provide the funds to shore up these emerging economies.
One result of this is the dollar is increasing in value as the world reserve currency. The dollar is still seen as safe haven, even though this author notes:
Even though I do understand the arguments put forward for a dollar collapse i.e. of the huge debt mountain, unfunded liabilities in the tens of trillions, rampant money printing by the central bank, and the huge federal budget deficit. However there exists the failure to recognise the fact that the U.S. Dollar has come out of a 7 year Bear Market i.e. it is NOT an over-leveradged market looking to unwind, on the contrary deleveraging of the credit bubble looks set to continue to drive the U.S. Dollar higher not only for the duration of the credit freeze which appears to be starting to thaw, but also for the duration of the global recession, as the rest of this article seeks to elaborate upon.
If the U.S. dollar was no longer the world's reserve currency, considering these conditions......
Update: Japan is about to intervene on the Yen due to it's sudden rise in value.