Reflections on European Economics

Europe went into a financial crisis 10 years ago, as did North America, and never climbed out. That in spite of the fact that the baby boomer generation is in their prime earnings years and saving for retirement…a lot of cash flowing into lending markets, theoretically creating liquidity and money for capital formation. 

Take a look at Germany in particular. Its population pyramid appears to the side. The baby boomers are retiring and will begin contracting, withdrawing savings. If Europe hasn’t been able to make a go of it in these good years, it doesn’t have a hope several years from now.

 

I think the market is suspecting that. Any thought that the Euro might become the world’s reserve currency is gone. In my opinion, the value of the Euro is eventually headed to zero.

It appears that July elections in Italy may see the formation of an anti-EU coalition government, followed by a move by Italy to leave the EU. So Italy has a bond crisis going on now. I mean, rates have risen sharply and that means bond prices are caving. Italy is the fourth biggest government bond market in the world, and it’s on greased skids. A lot of the too-big-to-fail banks, which are now a lot bigger than they were 10 years ago when they were bailed out, are exposed to Italian bonds. This might not be a problem if these banks weren’t so highly leveraged. A small percentage fall in assets can mean a huge percentage reduction in equity.

The Fed may not have the resources to bail out the banks in the next crash. In the late 90s, Wall Street bailed out the S&L industry. Ten years later, the Fed bailed out Wall Street. Now 10 years later, who will bail out the Fed? It has been trying to build its ability to lower interest rates….rate increases will keep on happening…next one is scheduled for this month. Maybe it will succeed in getting rates to where they are needed, without triggering a deep recession, but not without triggering a rise in the value of the dollar. That isn’t such a bad thing for the USA though since only 7% of American GDP is exports, unlike Germany where 50% of GDP is exported.

Anyway, just musing about what I see happening. I know I am missing some pieces of the puzzle and will probably be surprised by some of the outcomes. I will close by saying I’d rather have assets in the USA than in Europe.