These are hard times for global markets, especially for all stock markets in the world that spent the day in the bright red. The financial hurricane was announced last week and as a result world stock exchange indexes lost a significant percentage of their value.

Traders hope that there technical recovery will occur this week, but it might all remain a hope. The downward movement is too comprehensive and too widespread and that is the reason why traders around the world return to the markets by saying that the worst of the storm is behind them.

The public is kept in the dark with speech at once reassuring and tight linking stock market movements to complex interactions between different economies and complicated and remote factors. The stock market remains a vaguely mysterious realm is well suited to many people. Yet it’s not very complicated.

Over the last several years, the biggest central banks in the world, including European Central Bank, Federal Reserve, Swiss National Bank and the Bank of Japan have data for word address the crisis in which their economies are deliberated since 2008 and the battering that shook the financial world, which later continued with the subprime bubble, Lehman Brothers crisis of public debt and so on. It is not easy to give a precise date for the origin of this deliberate policy, but to the point where we are, the importance of it rises.

Correspondingly, it would take too long to make an inventory of all the crimes and all the lies committed by central bankers incontrollable in the handling of currencies which they are responsible. However, for simplicity, whatever the excuses displayed by each central bank, all manipulations were more or less the same effect, which means that interest rates reduced to zero or even negative as well as an explosion in the quantity of money in the balance sheet.

This means that the money created by central banks profusion flooded some economic circuits, but not necessarily those that were announced and completed companionships in the world where a financial bubble inflated.

Whether the reason was the need of authorities to create the illusion of good economic health of societies or not, it is difficult to decide undoubtedly between deceitfulness and incompetence, but the fact is that for years, more and more obvious, the prices of corporate shares are totally uncorrelated economic activity actual or even projected, which, of course is not a coincidence.

The fact is that the illusions do not last forever since the financial bubbles are invariably doomed to burst.

Generally, over the past decades many financial institutions became more aware that things are going completely wrong since the economic business goals are not achieved, macroeconomic conditions weaken, while, on the other side, the courses take good stock indexes continue to rise constantly. Of course that it could not happen in normal conditions and without hidden activities that intrude markets, but once we realized that central banks directly buy shares with the money they print, such as Fed in the hugest amounts, everything became clearer.

Yesterday’s „modification” remains minor, while the worst is yet to come. Many traders wonder why the crisis exploded on Monday in August, taking the hypothesis that it really broke yesterday that we cannot verify that the coming days. The fact is that that it was evident for a while, while it has just became more visible yesterday.

As a result, there are two new issues that changed the perception of the world economy. The first relates to the major raw materials extraction companies reported disappointing figures, since China is the world’s factory and its plants use raw materials.

The second is linked to international trade. The main problem with the programs “progressive” central banks is that you can print money and simulate financial health by manipulating the stock market, but you cannot simulate consumption of raw materials or transport existent goods. Reality resumed with losses on the financial markets. The extent of the decline and its global nature suggests that central banks interventions are increasingly visible and that this is not the end.

The main question posed these days that is related to the situation in the EU is what the Grexit scenario would cause to the rest of the users of the euro. Grexit is a slang term introduced in February this year by the Citigroup’s analysts and refers to the scenario of Greece’s leaving the Eurozone and readopting drachma. The most essential issue related to this possible turn of events is how costly would it be not only for Greece, but for the whole EU. The situation showing that such decision would bring negative consequences could be seen through the fact that by leaving the euro that country would be open to the global economy during a recession’s devastating consequences.

By giving up the single currency Greece could be followed by the other economies of southern Europe. According to the current studies, that state of affairs will create a hole in global economic growth amounted to 17 trillion euro that would cause a wave of global recession, shifting the economic conditions even in the United States and China. Another question that requires a response at the moment is: what could happen if Greece would have bankrupt and creditor countries would discontinue giving support to other Eurozone members? In the worst case scenario, according to the latest study made by Prognos AG the European Central Bank would be a sort of insolvent, so that the output of the single currency of Greece, Portugal, Spain and Italy would cause downturn, generating a decline in gross domestic product of about 17.2 trillion euro in at least 42 developed countries in a rapid tour that will not be ended before 2020. According to the estimations presented by the CNBC, the turn down will be the greatest in France, even 2.9 trillion euro, then in the U.S. 2.8, in China 1.9 and Germany 1.7 trillion euro. They reveal that many analysts have speculated on when not if Greece would leave the single currency, but German Chancellor Angela Merkel, the president of the ECB Mario Draghi and the president of Eurogroup Jean-Claude Juncker have constantly pledged their hold up for the country over the recent months.

The Prognos’ study shows that France would be particularly hard hit by the Italian sovereign default and exit from the euro on account of the extensive loans that French banks have placed in Italy. According to the most recent study by the Prognos AG (PDF file available here) of the analysts, in addition to a range of issues and economic consequences, such as the recession, the downfall of the euro threatens also the political stability in Greece as well. Despite all of the data presented in studies, the damage that would cause Grexit still cannot be precisely predicted, since it is creating a spiral of problems for the rest of the world.

On the other hand, there should be considered the cuts that will be made that will have an impact on lowering of the gross domestic product, but in terms of fiscal measures that would open a decade of overstated restrictions. That shows why once a country takes the euro and, unlike the Denmark, uses it for a certain period of time it cannot go back.

The current data are showing that the global economy is going through a long period of restrictions and taxation so it represents a combination of monetary and fiscal policies, while EU may be supposed to be in a benefited position. However, the fact is that there are breakings inside the system that will make avoiding the risk even more difficult. According to the current data and projections, some of the largest and most advanced economies in the world, first of all the United States, top EU countries, United Kingdom and Japan still swing among the resolutions on fiscal policies that might have an impact on a decrease in GDP by approximately even more than one percentage point per year, and it is estimated that such trend could last between five and eight years, which prolongs the uncertainty and reduces the chance of recovery to come even for a decade.

It is important to highlight that the euro is the final step in the integration process, but the fact is that member countries are more striving into it than they are actually meeting the other criteria for synchronization with other members at other levels. In other words, the purpose of the EU was not to create only a space with a single currency, but the single market with harmonized regulations, where such a step is preceding. Unfortunately, this important step was omitted and it resulted with a desire of some countries, not only Greece, but also Spain and Portugal, to abandon the single currency.

If the analyses continue to show that there is lack of benefits of the output of Greece from the Eurozone in comparison with the number of side effects, it would be clear that Grexit should not be allowed. In that case the disintegration of the euro would mean the key source of political and monetary destabilization of the EU that would continue to spread globally. Unquestionably, this gives the good lesson to the other eight members that are not in the Eurozone should have to think twice before adopting the single currency.

There is no doubt that it is better not to go into the game with the euro before determining that the Maastricht criteria could be fulfilled in the long run, otherwise it will create an uncertain situation which any national economy would not be able to escape, which means that the return to monetary sovereignty will not be possible under any circumstances.

Considering the current situation in the European system of central banks, there are no doubts that the year 2013 will be very dynamic. Since over the past several years that area is overloaded with problems there could be questioned whether the banks will tend to form any sort of cooperative union or they will slide into further disintegration. What should first be observed are the steps taken to solve financially critical issues.

During the summer there were several developments in the field of crisis management by the political class of the Eurozone, but from the end of September, it seems that all hope of recovery for the euro has been a waste of time. The fact is that the crisis of the euro as a currency is in progress. Among the events meant for the rescue of the single currency are the direct recapitalization of banks and the activation of the funds of the European Stability Mechanism to save the most problematical countries of the Eurozone. It all goes on under the big impact of the approval by the German Constitutional Court of the fund ESM and the situation where the option that was the most pro-euro won the elections in the Netherlands. Another fact to observe is the launch of the program of the Outright Monetary Transaction.

In this case Germany insists that the recapitalization of banks by the fond of the ESM which is to be guaranteed by a supervisory body. As a result it struggles a lot, whether it is more suitable that the fund contributes to the recapitalization of banks passing through the government or whether it is more appropriate to direct recapitalization. Regardless how confusing the situation is at the moment, by the end of the next year the things will be placed in certain directions, so that the picture will be clearer.

Considering the supervision of the banking system, there cold be noted that Germany and its partners would like the supervisory role of the European Central Bank that would be restricted to a limited number of institutions, giving more importance to international banks. Besides, according to this standpoint, it would be more appropriate that the fund ESM departed only once the supervisory body was activated, and then further delayed. As a final point, the finance ministers of Germany, Finland and the Netherlands argue that there should be no form of mutual debts. What has been pointed out is that the biggest problem is the austerity. It was confirmed with the fact that the potential of the OMT remained unexpressed until the governments do not agree to all the conditions that this implies. Another issue is that the conditions are unknown, so the whole situation increases the need for the austerity, but it is still unknown to what extent. In Greece the situation is rather fragile, since so much so that the International Monetary Fund has intervened in the matter, which complicates the situation even more because too much austerity is bad for economic recovery.

The question is what benefits the bank union would give. To save the life of the single currency, the most reasonable solution would then be to create the banking union quickly, or, at least, make real progress in that direction. In this way, the European Central Bank could become supervisor of the entire banking system of the euro, a single resolution system for insolvent banks, a single system of guarantee funds and deposits. The banking union is a necessary step to restore the monetary transmission mechanism of the Eurozone which was damaged by the bad relations between governments, banks, national banks and debt.

In addition, to save the euro there should be created conditions for the resumption of growth and restructuring of the debt of insolvent governments: Greece, Ireland, Portugal and Cyprus, but possibly also Spain, Italy and Slovenia. The labors of austerity in the peripheral economies and those to save the nations at the core of the economic system of the Eurozone imply that the ECB’s control of the euro is the only one that can fill the gap that exists between public debt and the national banking system. However, any attempt to change the situation actually places the ECB system in the role of being able to provide the right help on a large scale that would result in the release of the “strong” by the single currency, which instead should reject the role of the ECB as its all-time rescuer.

The survival of Greece in the eurozone depends on the capability of their authorities to implement tough economic reforms. This warning that is actually referring to the circumstances of the country Continue reading “Eurozone: Calm before the Storm Scheduled for September” →

The modern systematic approach of the Karl Popper’s golden rule is that as for a theory to be valid, it must make, if necessary, to be disproved by the observed facts. According to this golden rule of Popper, Continue reading “In Times of Crises, Keynesianism is Not More Effective than Numerology” →

There are billions of euros on the bank accounts in the European Union. For three years, as the death of the euro is often being announced, it would be irrational not to care and the question is what to do in Continue reading “Another Way to Protect the Euro” →

Taking a look at Eurozone economy and crisis, the most common question posed these days was “Is Portugal the new Greece?” having in mind that it might easily become the victim of the joint action, solidarity and “brotherhood” of Europe and the IMF. The subject took place after the current news about this country. To be more precise, there is a sign, that the EU should not help Greece, adding that Spain and Portugal risked being swept away through this situation and the latest news is not encouraging.

Greece went into trouble because, according to official misinformation, it had not played the game as Portugal did, using the same half truths that presented in their reports of achieved results. It obeyed in all respects to the commands of Europe and the IMF. Therefore, during the May of 2011 Portugal received 78 billion euros support. At the same time, the public debt was 107% of GDP. In 2012, it was announced that according to forecasts, it could rise to 118%. This is the one verification of the harmfulness of policies obligatory by the so-called international community. Indeed, this deprivation is anticipated for much of what the economy is reduced.

The Portuguese Finance Minister Vitor Gaspar is respected by his colleagues for tough measures he has reduced the budget deficit of more than a third. The result is that the economy constricted 1.5% in 2011, with a trend towards 3% in 2012. External analysts determined that the actions that guide to blocking will not reimburse the debt even in the long term. In early February this year, a switch over between Vitor Gaspar, Finance Minister, and his German corresponding person has disclosed. They categorically predicted that the additional effort would be necessary. Now it is officially confirmed that Brussels is considering a second salvage.

Yet on July 5, 2011 the forecasts of Moody’s rating agency downgraded the rating of Portugal with four mark notes on the sovereign debt. This rating means that Portugal, as being a country in the euro area that is striked by the debt crisis, is considered appropriate to assemble its commitments, but the investment is measured as “speculative” and consequently risky. It was shown already at the time that Portugal would need a setting of financial support before being able to finance itself in international markets. Moody’s notes assessed its negative outlook, meaning that it plans to further subordinate the medium term.

To give good reason for this reduction, the rating agency claimed that it was afraid that Portugal fails to meet the commitments it made to the European Union and the International Monetary Fund, in decrease of its deficit and debt stabilization. In substitute for the loan of 78 billion euros agreed in May, Portugal was dedicated to put into practice a program requiring thorough reforms over three years. This new austerity plan was supposed to enable the country to bring its public deficit to 9.1% of GDP in 2010 to 5.9% this year and 3% in 2013.

However, Moody’s fell within the growing threat to see Portugal have need a second aid plan before again have a loan on the markets. The rating agency believed that Portugal might not be capable to borrow on financial markets at rates tolerable before the second half of 2013 or later. It appears that the agency was correct in its predictions that confirm the latest news. To be more precise with this, although it is not stated openly, this meant that the Portuguese power was not sufficient to force its citizens to start caring about the country’s economic conditions.

The whole situation and processes during this period could be easily described in two words: acknowledgment and impatience. The dissimilarity today with Greece is that the Portugal is not uprising again and its streets were not inflamed. The question is just how long it might last. For a short period of time people seem to accept the severity measures imposed by force. There is foreseen a turn down of old age pensions, a drop in wages and higher taxes and, as elsewhere, the political class does not support the common sacrifices. So, if first there was Greece and after it was Portugal, the question that should be posed is which country will be the next, because, surely, the situation shows that this will not end here.

The answer to this question might be Spain, since it had a public debt of 36% of GDP before the debt crisis, the coefficient should increase to 84% by 2013. Also, Italy stood at 105% in 2009 and will go to 126% in 2013. The rich Italians, in the meantime, are known by real estate agents in London for their ability to purchase real luxury. Despite the misinformation, specialists agree that the necessities of the IMF by their ruthless austerity put off real growth to reconcile. The fact is that the “international community” is becoming more and more intolerant towards the overspending and curing the malpractice of PIGS countries. Over the time it more and more resembles to the game of Angry Birds where these problematic elements are trying to ruin its stability, pointlessly at the first sight. They just keep on hitting and ruining.

The IMF, under the direction of Dominique Strauss-Khan, has built an interference method that has been ordinary and sometimes with devastating effects in many countries that have called on it. The fact is that Christine Lagarde blindly followed negligence of DSK. The damage, both for the countries supposedly aided and Europe, is the assignation. In the case of Greece, the money is dispensed into a bottomless hole. Somehow, for Portugal and possibly for Italy and Spain the money is poured without providing any realistic resolution.

For the lending countries, is the devastation by taxes or borrowing essential. In a first round, these countries are members of the EU and in the second round they are all members of the IMF which makes the problem of so called PIGS countries became global. The remarkable breakdown of development in Europe will find some of these explanations. Regarding the further EU enlargement, the new potential members would experience too much trouble. The European Union would try to prevent joining of any economically problematic, over-indebted or overspending country rather than it would insist on the application of their policies in the other categories during the international process.

Though it might seems as a chance for Western Balkan countries that have many open question regarding the rule of law, the fact is that establishing sustainable economic growth in the time of crises looks even more like a mission impossible. However, this situation might seem inspiring for countries such as Montenegro, since it gives a chance to think of all the alternative ways of creating the wealth, which will primarily start from the point of establishing the rule of law to allow the economy to function properly.

The performance of the foreign exchange market precisely reflects the current state of the Eurozone that can be summarized in one word: uncertainty. During many months there was a talk about the credit crisis, liquidity problems, risks default, Greece, Spain and spread and the result is that it got to the point that it cannot be made any better.

Excluding right away the judgment of rating agencies that took effect only in a very short period of speculation activating sessions, what is this happening in Europe seems a mystery, and is the confirmation of this that could be seen these days. On February 29th there will be announced the second refinancing operation since for three years the ECB pushes the experts Exane BNP Paribas to make a point on the subject. Through there is the Long-Term Refinancing Operation which increases liquidity in the markets, the most important purpose of the ECB was to avoid a systemic banking crisis in Europe, the main cause of the peripheral output of a country by the Economic and Monetary Union.

The overload liquidity in the banking sector may in fact be likened to a kind of security measure because the banks do not have to worry about a possible liquidity crisis that could influence the different players. According to analysts at the Exane, the performance of the Euro OverNight Index Average (Eonia) spreads and increases in deposits at the ECB are the verification that this objective has been achieved. It should, however, be revealed that while a boost in the money by the central bank had a positive effect on liquidity resulting in a surplus that was obvious in the stores, now the mechanism seems to be changed. In the sense that the current cash gather makes the environment easier resulting in a decline in the budget of the ECB and allowing the body to decrease its support to that segment.

In addition to this, the ECB hoped to attain through the Long-Term Refinancing Operation other secondary objectives, which, however, come out to be more rhetorical than anything else. It refers, in particular, to the effects on sovereign bond yields in non-central countries, the motivation to provide credit to the real economy and the achievement of the need for recapitalization. For example, some analysts from French banks consider that not all desired objectives have been achieved by the ECB. The simple presence of more liquidity in the market, however, was positive. In that regard, there should be paid attention to the spreads of peripheral countries that have reduced resulting of the yield curve, even the spread of the banking sector decreased but did not seem to have had an impact on the real economy.

There it comes to the question of uncertainty. In November of 2011, analysts of Exane reported that the liquidity problems in Europe were mainly due to the constant requirement for a way out strategy by the ECB. The situation has now changed and the ECB has recognized its role as the lender of last resort. However, it is unlikely that it wants to involve in the European banking industry for a non-defined period: three years would be sufficient to record a normalization and regularization of the field. Given that the support will come to an end in three years, Exane analysts consider it essential to stay on that risk. If there was a taught that on January 29, 2015 will expire 489 billion euro from the first that Long-Term Refinancing Operation (LTRO), there could be realized that it cannot restore funding through the senior unsecured bonds, and banks have been able to meet deadlines of 2012 and 2013 through LTRO.

Therefore, the attitude of the ECB has allowed European banks to be less driven by the timing and more responsive to price, but these participants cannot escape from reality. Any kind of return to the senior unsecured market is, then, the next step for Exane to re-establish a self-sufficient business model that can cover the cost of equity in different economic cycles and the long term. This step is the logical path to the exit strategy of the ECB. If this situation were to be taking source would generate a balanced supply and demand in a way that the debtors will become more aware and reasonable about the new conditions of funding and investors would need to put more cash in circulation. It seems questionable whether the cost of supporting new equilibrium will be determined by the debtors. With respect to the data of the European Central Bank Lending Survey it indicates that the competitive environment is approving to the banks.

According to the experts from Exane the liquidity crisis has ended and the time is now ready to deal with problems related to funding, capital and profitability, according to which the second operation of Long-Term Refinancing Operation, which should be around to 350-450 billion, is configured as an opportunity for smaller banks that were not able to participate at LTRO of December rather than for large banks. This group of actors who have, in fact, already requested sums for a sufficient amount of the needs of short-term, are characterized by better use of collateral. Therefore, there can be seen that a revised rate of the banking sector is necessary is the encouraging signal observed on the funding in January to continue to register. However, there should be highlighted the risk that some investors may have done right choices for the wrong reasons that have exposed the banking sector because they believed that the Long-Term Refinancing Operation had changed the existing framework rather than the unassuming progress made in solving problems bottom.

The conclusion of the Exane BNP Paribas was that those investors may be disappointed by the short-term bounce that may occur after the Long-Term Refinancing Operation activities scheduled for February, and that a return will depend on the amounts that are supposed to be borrowed”. Also there was explained the EUR/USD trend, the world’s largest currency issue caused tensions in Europe from the fact that not only they are unable to make predictions for the immediate future, but mostly no one can comprehend which is the real situation in the Eurozone. At this time, large investors are therefore the connection with the sources of capital and they allow time to calm down the general framework to understand where they are actually guided. In this situation the stocks also suffer the consequences and the trading of medium term time fall to next month probably. For despite the intraday movements are good opportunities for trading with a good risk or reward is very little and takes away the unpredictability traders. In the nearest future there might be stabilized the situation and there could be followed the key developments closely to see when it is best for many of them to return on the market.

The implementation of Eurobonds could cause an enormous crisis that may result with the collapse of the entire euro area in the long run. The considerable sums have been mobilized in 2010 to avoid debt restructuring in Greece, Portugal and Ireland because they have been proven insufficient.

During the last month, Spain and Italy saw their markets demand waged higher to six percent, which has limited compatibility with a decrease in future debt.

If the intention was to escape from this disorder, the mechanisms of European Financial Stability Fund were not sufficient. The intervention of the European Central Bank has turned aside a crisis, but there must be found a permanent solution.

According to the mainstream opinion, the issuance of Eurobonds would be such a solution. These bonds would be issued by a central institution and the proceeds would be allocated to countries in the area, as for the appearance of their financing needs. The repayment of these instruments is jointly guaranteed by all countries of the Eurozone.

This is leaving aside the political and legal problems raised by the creation of an organization empowered to issue Eurobonds for those that do not discuss financial aspects. Their general advantage is clear and is related to the fact that all maturities in all countries of the Eurozone would be placed without the need of special funds that are traded under the pressure of the markets.

There are two major shortages of Eurobonds. The first is that a single interest rate will be higher than that of countries, such as Germany, are now paying. The question is whether therefore would it be necessary that countries would be punished by the Eurobonds to be agreed in the name of solidarity or as a cost of resolution of sovereign debt crisis.

The second one is that the governments of countries whose debt is excessive, given that in any case, no matter what they borrow at the rate of Eurobonds, will not be motivating to those who should implement the measures necessary to restore their unmanageable finances.

Unfortunately, this disadvantage brings the risk for the euro. While the indebtedness of some countries continues to grow and since the Eurobonds would not help decreasing it, the time will come to recognize their inability to repay what they owe. Greece, with other Eurozone countries, is trying to lend money from the IMF for more than a year in order to achieve sustainable levels, but it witnesses unpaid return to growth and sees its budget deficit down.

This is not something that we see now. According to the latest forecasts, the economy will continue to weaken not only this year, but also in 2012 for the fourth consecutive year, while the debt would continue to rise. Sooner or later, officials in Athens will be forced to restructure Greek debt.

In this situation of continued declining, if the Greek debt consisted of Eurobonds, creditworthy countries could continue to fund a Greek debt. If we really put things this way, some other countries could alse become unable to reduce their debts, so those with healthier finances could be forced to prevent a trouble that will be be more visible over time.

Until a default of all Eurobonds would limit it heavily, in Germany and other countries it would come to be called insolvent. It therefore appears that many Eurobond prevent the reappearance of crises refinancing on situation ultimately, all the countries of the Eurozone would be successful in decreasing their debt. As this scenario seems unlikely, their implementation would cause a big crisis that could result in causing the collapse of the entire euro area. Slowly.

The bursting of the euro area is the most common topic in many analytical approaches. For long period time there was questioned how the euro has been set up as the face of skepticism from economists while its creation has been nothing but supported in the past. Entering the Eurozone was a political decision for each member country of the area. Each of them was able to decide otherwise, and thus escape. Entry into the euro had its advantages: low interest rates, lack of currency volatility between the currencies of the zone. However, at the same time it was an entrance to the club of hard currency.

An output of the euro will not necessarily have the benefits attributed to it. It is true that if some countries were not members of the area, their currencies have been devalued. But it would have been a constraint, which would force them to raise interest rates to restore confidence. The euro still offers advantages in terms of financing the economy, even in Greece. Moreover, even if a country out of the euro, the currency is still used by its citizens, because of the confidence it inspires. The euro is used widely by countries bordering the area. However, what is interesting is the argument put forward by economists who do not believe the euro. They point to the fact that countries in the region are too different to be economically the same currency. Convergence is insufficient. At best, they feel the need to strengthen political governance of the area, so that each country has the same policy. At worst, they predict that these differences can only lead to the bursting of the area, or, at least, the output of some countries. This argument stems from the teaching of economics. The prevailing view is that money is a sovereign domain, a prerogative of the state, and an instrument of economic policy. Therefore, in this paradigm, the euro is part evil. Yet money is not necessarily a prerogative of state. Bills of Exchange, ancestor of paper money, were private. The system of the gold standard can be both public and private. It forced banks to discipline, monetary regulation. Economists, like the Austrians, defending a private currency. Moreover, the fact that the gold standard back in the debate shows that the problem of monetary and economic unrest, it is precisely the fact that money has become an instrument of economic policy.

Indeed, monetary policy aims to ensure growth. It systematically reduces interest rates when growth slows. The interest rate is not the regulator of the risk, but an instrument of economic policy. It is decreased when growth slows to rise, and possibly increased when inflation risks are becoming way too large. The current crisis comes as a revival of the U.S. economy by the credit recovery caused by the U.S. government and the U.S. central bank. The countries that have experienced a similar phenomenon, such as the United Kingdom and Spain are the most affected countries after the USA. Banks are also protected, so as not to endanger the economy. Because of that the interest rates are lowered to the cyclical hitch: to restore their margins. The belief in the protection of monetary policy is very strong. This is how countries in the euro area could borrow excessively. But other countries were also able to borrow in dollars or euros, as Hungary. The world was so confident in the monetary mechanism: just cut interest rates to stimulate the economy. The question is where the risk is, if there can be controlled the economy as it controls the flow of a tap, through the interest rate.

The result is a lack of regulation of risk. The regulation of risk is based on responsibility. If someone makes a bad investment, he bears the losses. But today, banks are protected, buyers of government bonds are protected. They do not question the relevance of their investments, they provide credit in the case of banks. They know they will be protected in case of bankruptcy of borrowers. The interest rate should be the indicator of risk. As set by the authorities, it does not fulfill this role. The interest rate should result from risk analysis. It is instead defined in terms of monetary policy. The ECB is independent in theory, and has a goal of monetary stability. However, in practice it has followed the movement of the U.S. central bank, even if sometimes it is discarded. Above all, the ECB considers that it can control money creation. It can know what creation is necessary for the economy. And it actually acted as if the euro area was a homogeneous country.

There are two failures – the Fed, the U.S. central bank, who wanted, with the U.S. government, to revive the economy by the credit. The ECB has failed with the same interest rate for the euro area, regardless of the particularities of each country. As for financial institutions, they have abandoned any analysis of creditworthiness of borrowers’ public, private and even sometimes with the protection of monetary policy, and the effectiveness of this policy. What is needed is to draw the consequences of these failures. By empowering, at least in part, money creation States, the ECB is a step in that direction. This movement is part, as the ECB still feels with a mission of economic policy, as shown by its decision to buy bonds of countries in the euro area. It is nevertheless a first movement that challenges conventional wisdom. The model of the ECB does not come from a large economic theory. It comes from the Bundesbank, the German central bank, which held the country’s monetary stability, and prosperity. The process is a process of liberal learning. Bad decisions lead parts, which prevents them again. However, it has been growing the system without this learning process and regulation. Tour is to relearn, so that the system has grown considerably. A wrong decision may actually lead to a collapse.

The ECB may also differentiate between interest rates paid to banks in different countries. Instead of serving a global interest rate as today. Finally, the ECB could always stop funding the banks. The principle of central banks is to fund the banks that lack liquidity. By forcing them to fund only the financial markets, we force them to monitor the solvency of banks and thus their behavior, their credits, their investments. These are only assumptions. Another hypothesis would be to return to the discipline of the gold standard.

This debate on the role of money is largely absent, except in newspapers and business magazines. It sometimes appears under the form of a call back from the gold standard. However, the real debate is posed by the crises of recent years, since the 1970s in fact, when appeared the need to fight against inflation. The fight against inflation was a first step. Now is the control of money creation by central banks all powerful, rather than a market mechanism controller, which is in question.

The European Financial Stability Fund was established in order to provide the liquidity to countries in need, provided that they take drastic steps to recovery. Financial markets should therefore abandon all fear to lend to states and banks in the euro area. This is not what we observe. Is this an effect of a new maneuver speculative or is this a sign that Europe’s problems are not solved so far?

The second hypothesis is by far the most likely, to the point that a new banking crisis is possible. Mmany governing bodies in Europe have worked hard to establish a support fund, endowed with impressive response capabilities. European states are unlikely therefore more liquidity crisis. The problem is that they may rather insolvency.  What “saves” Greece? Officially, the idea is to provide liquidity to the Greek state to finance for three years, until the remedies are working. The underlying assumption is that the Greek situation can be rectified within three years. In that case, why fund managers expect their stratospheric interest rates to buy Greek debt?

The answer most often given is that financial markets are speculating against Greece and Europe in general and that this speculation is self-fulfilling. This response does not make sense, it is quite possible that the CDS accentuate the phenomena, but they do not explain the current difficulties of Greece to find buyers for its debt. Indeed, if the speculation was causing the problem, the price of CDS would be much higher than it is, corresponding to an anticipation of rising interest rates on Greek debt. Since this is not the case, consider another case, more simple, namely that operators do not believe the scenario of recovery in three years and take seriously the possibility of a default state Greek. A look at the available data, it is quite logical. The country’s public deficit for 2009 is estimated by Eurostat between 13.6 percent and 14.1 pervent of GDP, public debt is estimated at between 115 percent and 120 percent of GDP at end 2009.

The first solution is austerity. If the crisis is limited in scope, you can get away with borrowing to buy time and take austerity measures reducing balance. We have seen, this answer is not at the height of the Greek problem. The second solution is inflation, which reduces the real value of debt. But inflation does not assert itself, especially with an independent central bank. Logically, inflation can arise only if the output gap (difference between growth and full employment growth actually occurred) is positive. However, it is now negative and the austerity measures will increase it.

On the monetary side, the ECB already practices zero interest rates and the limited monetization of deficits that has been accompanied by a process equivalent sterilization by attracting additional deposits to her. This solution is currently unthinkable.  The third solution is to restructure the debt. Clearly, this is for the creditors and the Greek state to agree on some Greek debt discount, once accepted the idea that full repayment is impossible. For example, the government would commit to continue to pay interest on the debt and pay 50 € a bond with a face value of 100€.

While being the IMF, Anne Krueger, American economist had also proposed a mechanism similar to U.S. bankruptcy law to manage such situations. In Latin America in the 1990s, the Brady Plan, named after a minister of George Bush senior, has organized such a mechanism discount. The only alternative to a solution of this type would be a sudden collapse. The restructuring, which nobody wants to hear right now, then eventually win through, and this justifies the high interest rates on debt and Greek concerns about the profitability of banks.

We are currently in the eye of the cyclone, it is calm, we will take holidays and everything will resume in September … At least, that is what the media and our great international thinkers say. The G20 has already released all its heavy artillery out of crisis.

To give you an idea, according to Bloomberg, the US government has already spent $ 3.2 trillion ($ 1 trillion) and would be ready to go up to $ 7.7 trillion to revive the infernal machine. The total sum of all major US expenditures in its history (the Vietnam War, Iraq, the Marshall Plan, etc.), reduced to current inflation rates, amounts to 3.5 trillion. If it proved useful! Unfortunately, this little game of giving the banks what they want has absolutely not solved the problems of the real economy: tightening credit, resulting in job losses and bankruptcies.

To get an idea, there are also the last two reports of the GEAB (Global Europe Anticipation Bulletin) titled “When the world finally emerges from the frame of reference of the last sixty years” (see figure) And “The Three Wicked Waves of Summer 2009”. Number 35 insists on the loss of reliable benchmarks and indicators, contrary to optimistic global announcements. The GEAB team also advises us to review the Matrix film to “reflect on the consequences of the manipulation of the sensors and indicators of an environment on the perception of this environment. ”

In issue 36, GEAB stresses that summer 2009 will see the convergence of three “wreck waves” that are particularly destructive and reflect the worsening crisis. These three waves are respectively: unemployment, bankruptcies and the death of the Dollar and the Book.

Same for the G20 or Europe! “Each country is represented by its Minister of Finance and its Governor of the Central Bank, to which are attached several hundred Senior Officials, chosen for their neoliberal convictions within the national and international administrations … No one can become the Governor A Central Bank or the Finance Minister of any of the member countries … without being co-opted by commercial bankers or insurers (who are generally shareholders of the largest banks). “(Source: G20: no chance for any change!)

The dollar reference is coming to an end. Its replacement is increasingly mentioned by the BRIC countries (Brazil, Russia, India, China). China is advancing the use of the IMF’s Special Drawing Rights (SDR), based on a basket of currencies and balancing trade balances in deficit or surplus between nations. Bye-bye the American scam, hello that of the countries BRIC (1). In 2002 for example it was calculated that the dollar had yielded 400 billion in the United States just because it was the international currency. The United States has been living on credit for a long time, but this time it seems that they have gone too far. The world is tired of working for a client who does not pay or who pays in “monkey money and toxic assets”.

The only forcible precipitation of the dollar resides in its detention by a number of creditors still too numerous. All of them try to get rid of them as quickly as possible, massive purchases of land (Cfr. Poor Countries for sale), raw materials (China has made its stock), gold buying, currency shelters … See for example This fact various 134 billion in a suitcase on the Italo-Swiss border! Or this famous video circulating on YouTube concerning the “loss” of 9000 billion dollars to the Fed. Would there be enough trees on earth if we really had to print those 9,000 billion paper notes? For a more technical and detailed analysis, the article Market analysis: we will not go higher! Denotes, among other things, a drop in the price of US Treasury bonds, the main source of US government funding.

The death of the dollar will not be smooth. From “non-negotiable”, the American way of life will become “unenviable”. All the great empires have an end: the Incas, the Greeks, the Romans … All the great dogmas also have an end: money is scarce, money is neutral, all profits are good for the nation or confidence is not restored Not at the height of billions!

Grave? Yes it is … but certainly no worse than what awaits us in a future that is getting closer and closer every day … Let’s see the good side of things, since the beautiful speeches (Mitterrand), warnings (Reeves, IPCC ), Reports (Stern), protocols (Kyoto) and international agreements are not enough, is not a serious crisis the best way to bring us back to reality? This economic-financial crisis is a forced step of the world so that it understands that its system of dominant value is obsolete and hypocritical. An “above ground” value system, totally uprooted from human and natural realities. Unfortunately, it is still the weakest and the most deprived who will suffer.

One can ask the question: how does the money supply evolve in history? Once all idea of ​​the imposition of a dogmatic view on this notion is abandoned, there remains the simple and clear purely experimental view of the concept.

How to measure its evolution? The simplest is undoubtedly to measure it in gold. How much is a monetary unit worth of gold in time? Measuring this value will give us a partial idea of ​​what is going on, Gold being stable as a value in a short time (which is less clear on a long time when its rarity may increase with population if production does not follow) .

Dogma collapses before experimental reality. It does not have to be, it is not related to what is observed. Worse, it is dogma, which, contrary to the reality of economic growth (and therefore, where one finally understands the need for growth in relation to the money supply), causes global societal crises, leading to wars (Leaping forward), or to massive and brutal devaluations when dogma no longer holds, with all the impoverishment of those excluded from the monetary system during the “stable” phases, and the brutal ruin of the rentiers during the correctional phases.

Logically the money supply increases over time, devaluing the currency regularly over time.

On the other hand, what should be noted? This devaluation is brutal, without anticipation, and each time is provoked by a major economic crisis (1st and 2nd World Wars, 1st Choc Petrolier of 1971).

The economic reality is therefore an increase in the money supply (or devaluation of the currency, which is equivalent), the political reality is a firmly dogmatic determination to have a “strong” currency that would not devalue in relation to the ” Now (the palliums).

But what does the monetary dividend offer? To ensure that monetary growth accompanies economic growth on a regular, gradual and smoothed basis over time. The additional monetary dividend reduces the interest of monetary capitalization and annuity to the advantage of asset capitalization, investment, and dynamic capital management. To depreciate a declining monetary capital in relation to the total money supply, we must invest, undertake, arbitrate, play the game of the economy).

In such a system, the debt-credit ration must be reduced to 1 (one can lend only what one has, all the deposits of a bank only creates 100% of credits ), And the monetary dividend which takes the place of monetary creation. The purchases and productive investments of the citizens direct the economy, and the more the State and the Banks, reduced to a non-null but normal role, acceptable. The “risk-free” annuitants disappear naturally (the dividend divides growth, a non-reinvested capital mechanically loses purchasing power in relation to the money supply).

It is not a dogmatic system as we have just seen, it is the mere adaptation to the experimental reality of the historical measure of a given monetary mass. It is a question of espousing the experimental reality and not of imposing an abstract view as “logical” as it may seem, but as catastrophic as it may be before the facts.

Consequently, the consequences of the monetary dividend are not a doctrinal choice of society, it is the mere acceptance of the local, individual implementation of the Global Long-term Economic Law as it is That it appears: Only the choices of supply (investments, enterprises) and demand (purchases) are the fundamental motor, money being only the measure.

Petroleum is at $ 145, a tinge of panic began to spread in the markets this week, and consumers, meanwhile, make a long face like a day without bread.

This is not surprising: the growth figures are also at half-mast, the purchasing power – we never get tired of repeating it – declines, and so on. Until then, all is well, I am about.

Then, on Thursday, the European Central Bank announced a 25 basis point increase in its key rate. And that’s where I start getting lost. Is the attitude of the ECB, as it is often said, responsible for the soaring oil? Is Trichet destined to roast in monetary hells for his struggle against inflation?

Philippe Béchade answered yes to some of these questions, as he wrote in his chronicles on Thursday and Friday. As far as I am concerned, I want to give a reply from Normand: p’têt ‘ben qu’oui … but p’têt’ ben non, too.

The ECB is the cause of many evils (ask European exporting companies, for example) but the rise in oil? It contributes, of course – but speculators, OPEC, the geopolitical situation, the fall in the dollar and the fundamental factors of supply and demand must not be forgotten.

Simone Wapler gave us some more thought in MoneyWeek’s Daily on Wednesday.

“At the beginning of this crisis, last summer, oil was at a reasonable level: $ 70 a barrel,” says Simone. “It was $ 80 a barrel in July 2006. The” collapsed “dollar is only a consequence of the debt of the world’s biggest power, issuing the fiduciary currency in which world trade is traded. Current inflation is not the result of oil, it is the result of an unprecedented monetary issue. This ill-considered monetary issuance was made by the United States. “

“This is still not enough, and this time it was justified by the fact that nobody wanted to pay for the madness of the internet bubble.” Remember: everyone was going to get rich because the 0 and 1 were circulating Freely in networked computers “.

“In order to make a soft landing, the Fed has softened credit conditions, while the other central banks of the world followed.” The revival by consumption, an old French myth, was applied by the world’s leading power. Which inflated the internet bubble served to reinflate a bubble of real estate. Everybody (American) would be able to own its roof “.

“But a low interest rate causes the currency to fall.” When the Fed wanted to raise its rates to resuscitate its dollar, the housing bubble has deflated in turn.

And this is where the ECB stands today: with a galloping monetary mass, in direct contradiction with its original mission (to maintain price stability), and consequently obliged to raise its rates at the worst possible moment. Except that … all this is probably a poultice on a wooden leg – that’s what Adrian Ash thinks of BullionVault.

He was wondering at the beginning of the year, while the Financial Times pointed to J.C. Trichet as “Man of the Year 2007”:

“Will Trichet’s policy at the head of the ECB put an end to inflation in 2008 and extinguish the dazzling rise in gold? We would give more chances of success to a firefighter trying to extinguish a fire By spraying it with kerosene “.

“There is no room for complacency [on inflation],” Mr Trichet said. But what explanation other than complacency for explaining the M3’s soaring increase? But which is not accelerating fast enough to keep pace with monetary expansion in the United States or indecent inflation in Great Britain and China?

“Trichet may seem like a strange choice for ‘Man of the Year 2007’, but he seems to be an ideal choice for” the man of the moment. “It embodies the current air of time in terms of central bank – a moment when one uses words … and small actions.

“By saying one thing while doing another … by helping the inflation forces to come together, when he claimed to firmly oppose it … Trichet summed up the spirit of our financial era even better As Ben Bernanke to the US Federal Reserve “.

The financial crisis that has spread to all financial centers around the world, starting from the initial shock of the subprime crisis in the United States, leads us to question and seek many new explanations that Have probably not yet been proposed. We can ask, for example, “Can a better understanding of finance help avoid financial crises? ”
More precisely, would a better understanding of financial mechanisms, by economic agents who are the authors of the many financial operations carried out daily, be conducive to reducing the “chances” of occurrence of financial crises?

Is early financial education essential?
The President of the Federal Reserve, the central bank of the United States, answers this question without ambiguity: “The subprime crisis illustrates the importance of early financial education”. For Ben Bernanke, a better knowledge of the functioning of the financial mechanisms would be conducive to more balanced decisions regarding the risk / return couple. “The problems in the subprime mortgage market remind us how crucial it is for individuals to acquire financial knowledge at a young age to be better prepared to make decisions and navigate an increasingly complex financial market.
But is access to information not a prerequisite for its treatment? Admittedly, in increasingly complex financial markets, sufficient knowledge is needed to properly collect and process information in order to make the “right decision”. But it must first be possible to dispose of it. Then, only the question of the ability to handle this information rationally can be asked. However, the asymmetry in terms of access to information is a constant on the financial markets. Not all actors have equal access to available information. The asymmetry in the processing capacity of this information will be cumulative to the first form of asymmetry. Here, it is necessary to know before knowing how to do.
In addition, what may be considered an effective choice for some will probably not be for others. Individual rationality and collective rationality do not converge automatically. The actors act in a system. On the one hand, they are interdependent with the decisions taken by the other actors, but on the other they depend on the movements of the system as a whole. The game, on the financial markets, can not always be and everywhere win-win, “win-win”. It can also be win-lose, “Win-loose”. What one gains, the others lose it. Finally, in times of crisis, it can become loser-loser, “Loose-loose”.
It may also be added that behavior, choices and decisions in the financial markets are not only dictated by the rationality of agents in analyzing available information. They are also guided by drives, emotions, “animal spirits” – “animal spirits” according to John Maynard Keynes. In other words, when waves of pessimism succeed waves of optimism, behavior changes and sometimes, what becomes rational is to follow the meaning of collective movement and regardless of the actual content of economic information stricto sensu. Mutual, panurian behavior is in some cases the most rational.

The individual and the system
From microeconomic to macroeconomic levels

Understandably, the understanding of decision processes and financial mechanisms is a highly complex problem to be solved. The decisions of the actors, considered in isolation, fall within a systemic framework which makes the weight of the decision of each one on the whole relatively low. It follows that the sum of the “best individual understandings” and the sum of the individual decisions induced does not guarantee ipso facto that the “collective decision” that will result will be globally effective. There is a long way from the cup to the lips. Economists have long known that the transition from the microeconomic to the macroeconomic level is not without difficulty, even smooth. This is the whole debate, bridge or no bridge between microeconomic and macroeconomic levels.
They also know that in a market economy, and in financial markets in particular, the co-ordination of millions (billion) of individual decisions requires, in order to be effective, close supervision by many institutions. The visible hand of the State and institutions outside the market must accompany the invisible hand of the market so that the sum of individual interests can converge towards the collective interest.

 

The incompleteness of information, that is, the fact that information about the future is more than fragile, merely reinforces the nuances previously put forward. In these circumstances, the level of financial education is limited. We can not reasonably expect miracles as to the implications of better financial education for the public. But there is to be done, nevertheless!
Should we, therefore, renounce an improvement in the financial education of the public? Probably not ! It seems essential to harmoniously combine individual responsibility with collective responsibility in view of the constraints mentioned above.

Thus, in spite of the reservations, the nuance of the argument that it would be enough to improve the knowledge of individuals in financial matters in order to improve the financial markets and the economy, it is essential to promote the development of culture Economic and financial impact of the public. It is for this reason that there has been an Institute for Public Financial Education in France for several months now: IEFP, as there is already a Codice or Council for the development of economic culture, Idies, Institute for Economic and Social Information of the Public.
To take stock of the importance of the development of the financial culture of the public, we will start from the example of the financial crisis, and real, present.
Without attempting to be exhaustive, we will attempt to highlight some key mechanisms that each citizen should necessarily understand in the current financial crisis so that the chances of a new crisis of this type can be reduced in the end in the future.

The economic circumstances are considered disturbing at times when the geopolitical situation is considered serious, and the certain cause and possible solutions have the same address. Central banks can intervene to diminish the effects of the banking crisis. The governments and the associations are trying to minimize the concerns of the economy, in particular the dissimilarities, while the strategic maneuvering and international relations are functioning to decrease the amount of conflict situations.

The existing social crisis is demonstrated through statistical data, the distribution of income between labor and capital. More specifically, it is the value added the product of the activity of transformation of men in the system, a value that is divided between the wage bill and the return on invested capital. The financiers sometimes have some means and show goodwill towards the banks, so it is obvious that the states have a strong-minded but inadequate will to control the social crisis with limited means. In the area of ​​geopolitical conflicts, it would take only a little less destructive will and a little more understanding to bound conflicts.

The main economic problem is the sectoral exchange of money, with a attentiveness in high-income, high-value activities and notional operations, with unwarranted returns, so what dries up whole segments of society with social and cultural needs to be supported. The portion of labor income has declined, but the amount is the worst since it masks two realities, where the first one is the disproportion in wages, as the fall in labor income is due to social clearance, while high earnings have kept up well. The evolution of the distribution between income from capital and labor is ineffective in several respects.

In the meantime, creation is increasing and globalization is not a unscrupulous mechanism if we take into account the idea that one can rebalance by the traditional ways the payment of the work is an illusion. Additionally, all predictable solutions have become out of action, except to push citizens into a major social crisis. In fact, the growth of principal income is based on the awareness of high value-added activities. The only certainty we have is that income from profit has increased because the returns to capital are tangible, but there are also restrictions, the symptom of which is highly exposed, the subprime crisis with so called natural effects, while insolvency and reduction of profits occurred since the financial suction of the economy has found its restrictions.

For the system to adopt a new resolution, it would not be a class fight, but an intellectual fight that contains figurative, coherent, and moral struggle. Instinctively, leaders, academics, media, economists cannot go against their interests even if some repentance produces them, buying a good integrity in good words or charitable. An option that remains out of bounds is not debated and which, to be considered, supposes a movement of greatness of public opinion and a powerful media intervention. The real objective of a restructure of the system would be to reload the areas of poverty by monetary injection, but for the middle and working classes, who struggle to get out of it, it is individualism. There is a shortage of civic awareness, of positive depiction combined with complete change of a desire to do good for others as well as for oneself.

Financial institutions are reluctant today to engage in new credit operations in favor of the most creditworthy debtors, banks even refusing to lend to one another despite the often massive injections of liquidity provided by the states.
This aversion to the risk – incomprehensible and even scandalous – coming from establishments which find themselves in such a position because of the very risky risks incurred in the recent past – is in fact derived from the “toxic” assets held by these same institutions, ‘It is impossible for them to value today! In these circumstances, what bank would lend credits to one of its sisters who is not in a position to quantify the state of its losses or – at least – of its liabilities? The interbank credit market, ie loans between banks themselves, is therefore not likely to resurface once a certain number of players can only estimate valuation very randomly – The degree of toxicity – of the securities held, despite the various extensions, guarantees and credits granted by the States!
Thus, despite the fact that some consumers still manage to benefit from certain loans, the economy can not be restarted without a frank and generous recovery in the credit market even if a certain percentage of these future debtors are inevitably lacking … Paralysis Of the credit market forces our economies to a stalemate that is prompting our Governments to charge companies that have received public funds that they can not use by making new loans. Because the financial institutions affected – that is to say almost all of the world’s so-called developed institutions – prefer to cling to the tangible and real assets they still have, rather than making them available to other banks or companies a credit.
Worse still, this aversion to risk is in no way diminished or moderated by the massive State aids because these funds are instead placed by the banks that benefit from them in insubmersible assets, such as the Treasury bills, in place of This situation becomes totally blocked when the banks of a country are asked by an institution in a foreign country if it is true, if it is already very difficult to Quantify the liabilities of an establishment located in the same country, it is impossible to gauge the losses of a foreign establishment!
Adam Smith (1723-1790) described a similar situation in which the English and Scottish merchants preferred to abstain from engaging in uncertain operations American colonies deemed too risky in spite of much better returns than their local operations. These merchants therefore favored less profitable but safer operations, such as financial institutions which today invest in government bonds with insignificant returns rather than engaging in new, more remunerative loans, Certain degree of risk.
However, the understandable mistrust of these merchants resulted in local investments that benefited the country directly, with national enrichment and more jobs. According to the famous metaphor of Smith at the time, it was the “invisible hand” (ie, God or Providence) that urged these merchants to invest in the national economy. Nowadays, our analysts would more prosaically talk about market theory – in this case risk aversion – instead of Smith’s mystical qualification to explain the fear of these traders to place their holdings in distant lands.
Similarly, there is no invisible hand at work with our current bankers: The change of personnel – even at the highest level – would not lessen this reluctance because replacing a CEO or a board of directors would not eliminate the assets rotten! Suspicion, mistrust and fear are companions that our bankers are not about to get rid of, despite the taxpayer’s generosity!

Unexpectedly, while the probable economic growth of the Eurozone countries is rather low compared to that of the United States, and that the effectiveness of companies in the euro area is poorer than that observed in the United States, the United Kingdom and Japan, the euro appreciates against the dollar, the yen and the currencies of emerging economies such as China, India, Russian federation and South Korea, except Brazil. By surpassing the 1.50 dollars for one euro, and even 1.52 dollar over one euro, the single European currency continues to rise relative to the green one.

More obviously and more important is the constant appreciation of the effective exchange rate since 2002 in the Eurozone countries. The effective exchange rate of a currency, dissimilar to bilateral exchange rates between two currencies, measures the value of a currency in relation to a biased currency basket, therefore it is a better indicator of the attractiveness of an economic zone, and its differences, although qualitatively indistinguishable, are much less remarkable but still substantial. Among the explanations, one can distinguish between cyclical and repeated causes of structural, non-cyclical causes.

From a cyclical point of view, worries about the US economy can be emphasized since the subprime mortgage crisis. The reactions of the Fed result in successive decreases in interest rates and deterrent the holding of certain dollar assets. From a structural point of view, the factors of the rise of the euro and the devaluation of the dollar are more difficult to establish with certainty. The weakness of potential growth in the euro area should be a restrictive to holding assets in euros, particularly since the prospects for speeding up productivity gains are low, so that demographic prospects show an aging population.

One of the explanations would be that in this global economy where capital is increasingly moving, and increasingly fast, in search of ever higher yields, in spite of the costs related with the financial bubbles they create and the consequences on the economy, the real demand for euro-denominated assets continues to go faster, while at the same time the nature of these investment flows in euros would be differentiated.

In order to differentiate their asset portfolios, central banks buy large quantities of euro-denominated bonds. They would be influenced by the trustworthiness of the ECB’s anti-inflationary monetary policy and by the lack of most important economic disproportions comparable to those of the US economy. Additionally, private investors would be strongly demanding euro-denominated shares, which would result in a weak correlation between share prices of large companies and the overall state of the economy of Eurozone. These highly internationalized firms would see their profitability deviate from that of mainly domestic firms, so they would consequently barely or not be affected by the poor growth of the Eurozone economy as a whole.

Under these circumstances, there would be a previously determined surplus of the demand for euro assets by non-resident agents, in particular central banks. This type of deficit in the supply of assets in euros for non-resident agents can be described by the outer surplus of the euro area. The combination of the external surplus in Eurozone and the increase in ex-ante demand for assets denominated in euros is not remarkably replicated in the appreciation of the single currency, so the euro these days takes the form of a new international reserve currency for central banks, which traditionally invest their reserves in deposits and risk-free bonds, and for private agents since stocks and bonds are of long-term securities.

 

The current financial crisis would be the delayed result of a monetary policy that is permanently and unreasonably expansionary. The continued policy of low-interest rates, attached to financial innovations supported by the Ponzi scheme mechanisms, would be the source of troublesome underlying forces that allows subjects to arise from a crisis but accepts to enter another financial crisis, far along and in a different place.

It is the fight against the overwhelming effects of the technology bubble at the turn of the century, with excessive use of monetary expansion, which gradually produced the conditions for the crisis of the real-estate market in the United States during 2006 and 2007.

It is indeed the mixture of an excessively and durably expansionary monetary policy and the inevitable consequences of the Ponzi scheme, based on financial innovations, applied at structured products, which is answerable for the current market crisis.

This dynamic is therefore prompting, for the detonator, the expansionary monetary policy applied to fight against a past financial crisis. The conditions for its spread from one asset market to another are linked to financial innovations and Ponzi-scheme.

The financial crisis that occurred in 2007 was believed to be caused by an unreasonably expansionary monetary policy that had been in place for some time. This policy included low-interest rates and financial innovations that relied heavily on Ponzi scheme mechanisms. While this policy initially helped to combat the effects of the technology bubble in the early 2000s, it ultimately led to the crisis in the US real estate market in 2006 and 2007.

The combination of the long-standing expansionary monetary policy and the Ponzi scheme-based financial innovations in structured products is responsible for the current market crisis. The expansionary monetary policy was used to fight a previous financial crisis, but its continued use created conditions that allowed the crisis to spread from one asset market to another.

Central banks are now faced with the challenge of preventing a systemic crisis of banks while also avoiding the conditions that could lead to the next crisis. They must inject the necessary liquidity to prevent bank defaults and credit crunches, but they must also be careful not to reveal the conditions that could generate the next crisis.

In summary, the current financial crisis is the delayed result of a monetary policy that has been permanently and unreasonably expansionary. The use of financial innovations based on Ponzi scheme mechanisms has compounded this issue, creating conditions that allowed the crisis to spread from one market to another. Central banks must carefully navigate this situation to prevent future crises.

To prevent a systemic crisis of banks, central banks must inject liquidity to prevent bank defaults and credit crunches. However, they must also avoid revealing the conditions that could lead to the next crisis. In addition to short-term interest rates, economic policies can use other mechanisms to combat excessive leverage or asset price bubbles, such as higher reserve requirements on certain credit categories, management in the cycle of principal ratios of banks, and the taxation of certain capital gains.

The maintenance of an expansionary monetary policy that facilitates debt leads to the overpricing of assets in different markets, creating a speculative bubble that requires liquidity to feed the market through an expansionary monetary policy. In response to the newly emerging crisis of sharp corporate defaults, the US central banks, the Federal Reserve, and the European Central Bank have pursued very expansionary monetary policies, particularly in the United States to prevent a drying up of the credit market.

This policy, while avoiding the worst-case scenario in the short term, has led to about two years of the holdup, a strong outpouring in household debt, especially secured loans for real estate purchases, and then for businesses. The increase in everyday mortgage debt fuels demand in the real estate market, inevitably raising property prices. Monetary authorities must now take into consideration the relative development of indebtedness and prices of financial assets and properties, rather than simply regulating inflation rates in the market for goods and services.

In conclusion, central banks must be careful to prevent a systemic crisis of banks, inject necessary liquidity to prevent defaults and credit crunches, and avoid revealing the conditions that could lead to the next crisis. Economic policies can use various mechanisms other than short-term interest rates to combat excessive leverage or asset price bubbles, and monetary authorities must take into consideration the relative development of indebtedness and prices of financial assets and properties.

The Eurozone faced challenges due to the complexity arising from productive concentrations and different country strategies. The four largest countries in the monetary union were the most important, with significant differences between them. Despite disruptions from the subprime crisis, there were many reasons for a recommencement of a clear appreciation of the euro against the US dollar and the Japanese yen.

When a country has imperfectly distinguished, refined production, its exporters are forced to decrease their prices when the country’s currency appreciates recollecting their market shares. Germany had the highest increase in the ratio related to the export price over the unit wage cost of all countries, showing its strongest product diversification. The central American financial institution, the Federal Reserve, was likely to stay more responsive than the European Central Bank in the event of an economic slowdown or financial crisis, confirming current developments in monetary policy and market outlooks.

The slowdown in growth was expected to be stronger and more durable in the United States than in the Eurozone. The US witnessed a collapse in construction activity due to the very high stock of unsold houses, while Eurozone countries experienced a slight weakening in construction activity after a period of strong growth. The United States found it difficult to sell securitized assets to the rest of the world as non-residents were less attracted to assets issued in that country. Additionally, emerging countries accepted a faster depreciation of the dollar, making it increasingly difficult to stabilize.

Japan cannot continue regular processes with a strong yen. With the decline in the real income of Japanese households, the only drivers of demand were exports and associated investments, which weakened with the US slowdown. Germany’s big burden of imports came from outsourcing to emerging countries, taking advantage more from the drop in import prices due to the appreciation of the euro.

The appreciation of the euro reduced the import prices of the four biggest Eurozone countries during 2002 and 2003, so the change in the amount of the sensitivity of exports to changes in the euro is a function of concentration. Countries that concentrate on distinguished, high-end products typically have lower export price elasticity and lower export trend growth. The appreciation of the euro during 2002 and 2003 also affected the markets of the other three countries, i.e. France, Italy, and later Spain, much more than it was the case in Germany. This has shown that there is a rule in this process, where, if a particular country has a big, progressively growing nontradable service sector, it is to some extent resistant to fluctuations in the euro. The differentiation of the Spanish industry and market shows that it is definitely not the case in that country.