This is Scary, Possible Currency Crisis

currency exchange Economist

 

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.

Meta: 

Comments

The real problem

Is that you can't have money itself overleveraged without creating problems.

When your futures market is FAR beyond anything annual production can account for, the futures market will be setting prices outside of supply, demand, OR cost.

And that, in and of itself, is extremely dangerous.

I'm thinking perhaps the ancient Israelis in Exodus 22 had the better idea of economics- no long term debt, no robbing people by charging interest.

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This is what caused the Hungarian

meltdown.

Japan has had interest rates at extremely low rates since the late 1980s, periodically hovering just above 0%, this being a chronic feature of their propensity to save.

Now the problem is that this creates a great scam. Borrow in yen, buy in a foreign currency, and so long as the curreny doesn't rise you're friggin peachy keen.

Let's make a hypothetical example.

So let's say that you're in California, and you want to buy a house that costs $300,000. So you make the purchase in Yen on June 10th, 2007. The yen is at 123.46 yen to the dollar. The yen purchase price is 37,038,000 Interest is something like 0.5% so +1% that's 1.5%. So the monthly payment is 127,830 yen. In dollars this is $1,035.40 on June 10th,2007. Today this same monthly payment would be $1,347.85. A 30% increase.

In Hungary the same payment has risen by 50%.

For people buying at the edge of their means, this pushes them under. And repeated on a large scale, it unbalances the terms of trade between the two countries by causing a large scale outflow of cash from the country taking the loans.

More "free market" insanity.

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People are playing the forex with their mortgages?

How many other countries allow this? Is the originator in Japan or how exactly does this work and how much of it is going on? Is this because they broke up mortgages into packets and sold them globally or is it a consumer choice?

Thanks middle, I was not even aware this was happening.

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Neither did I

Makes me wonder if I can predict the next big socialist revolution in some unknown third world country- and just before it happens borrow the money from the central bank that is about to be destroyed to pay off my house.

Sounds like a 411 scam in reverse.

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411?

What is a 411 scam?

Yeah, I mean playing games with currency exchanges and debt sure sounds like "no so stable", but let's find out exactly how this works because yeah, you could gamble that some countries currency will devalue beyond belief in relation to the US dollar and buy a mortgage in that currency, but we don't know the details (at least I do not).

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A 419 scam is the infamous Nigerian e-mail

Darn it, I forgot the number. 411 is directory assistance.

419 is advance fee fraud.

Usually with LOADS of misspellings, named after the code in Nigerian law which forbids it, it's a form of identity theft in which the original author promises to send you some ungodly amount of money directly to your bank account, and you'll get to keep some, if you can just free it up by sending your bank account numbers, a check for some amount of cash, and maybe taking a trip to a foreign nation where you will be kidnapped and held for ransom.

http://en.wikipedia.org/wiki/Advance-fee_fraud

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