[The European Union] will collapse before the end of the year and very likely before the end of the summer. When this crisis hits it will be worse than 2008 and the world Central Banks will not be able to control the damage. What makes this time different are several items: [Let me explain]. Words: 1400
So says Graham Summers (www.gainspainscapital.com) in edited excerpts from his original article*.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.
Summers goes on to say, in part
- The crisis coming from Europe will be far, far larger in scope than anything the Fed has dealt with before.
- The Fed is now politically toxic and cannot engage in aggressive monetary policy without experiencing severe political backlash (this is an election year).
- The Fed’s resources are spent to the point that the only thing the Fed could do would be to announce an ENORMOUS monetary program which would cause a crisis in [and] of itself.
Let me walk through each of these one at a time.
Regarding #1, we have several facts that we need to remember. They are:
- According to the IMF, European banks as a whole are leveraged at 26 to 1 (this data point is based on reported loans… the real leverage levels are likely much, much higher.) These are at Lehman Brothers leverage levels.
- The European banking system is over $46 trillion in size (nearly 3X total EU GDP).
- The European Central Bank’s (ECB) balance sheet is now nearly $4 trillion in size (larger than Germany’s economy and roughly 1/3 the size of the entire EU’s GDP). Aside from the inflationary and systemic risks this poses (the ECB is now leveraged at over 36 to 1).
- Over a quarter of the ECB’s balance sheet is PIIGS debt which the ECB will dump any and all losses from onto national Central Banks (read: Germany)
So what we are talking about here, in summary, is:
- a banking system that is nearly four times that of the US ($46 trillion vs. $12 trillion)
- with at least twice the amount of leverage (26 to 1 for the EU vs. 13 to 1 for the U.S.),
- a Central Bank that has stuffed its balance sheet with loads of garbage debts, giving it a leverage level of 36 to 1 and
- all of this is occurring in a region of 17 different countries, none of which have a great history of getting along, at a time when old political tensions are rapidly heating up.
As bad as the above points may be, they don’t even come close to describing the REAL situation in Europe. Case in point, regarding leverage levels, PIMCO’s Co-CIO Mohammad El-Erian (one of the most connected insiders in the financial elite) recently noted that:
- French banks (not Greece or Spain) currently have 1-1.5% capital relative to their assets, putting them at leverage levels of nearly 100-to-1 and that’s France we’re talking about: one of the alleged key backstops for the EU as a whole.
To be clear, the Fed, indeed, global central banks in general, have never had to deal with a problem the size of the coming EU’s banking crisis. There are already signs that bank runs are in progress in the PIIGS and now spreading to France.
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The EU is a colossal mess beyond the scope of anyone’s imagination. The world’s central banks cannot possibly hope to contain it. They literally have one of two choices:
- monetize everything (hyperinflation) or
- allow the defaults and collapse to happen (mega-deflation).
If they opt for #1, Germany will leave the Euro – end of story. So even the initial impact of a massive coordinated effort to monetize debt would be rendered moot as:
- the Euro currency would enter a free-fall,
- forcing the U.S. dollar sharply higher
- which in turn would trigger a 2008 type event at the minimum.
Moreover, we need to consider that the Fed is now so politically toxic that…there is NO CHANCE the Fed can announce a large-scale monetary policy unless a massive crisis hits and stocks fall at least 15%.
Regarding #3 above, if the Fed were to announce a new policy it would have to be MASSIVE, as in more than $2 trillion in scope. (Remember, the $600 billion spent during QE 2 barely bought three months of improved economic data in the U.S. and that was a pre-emptive move by the Fed as the system wasn’t collapsing at the time.)
Therefore, given that the Fed will only be able to announce a large scale program in reaction to a crisis, whatever it [was to] announce would have to be ENORMOUS, a kind of shock and awe, attempt to rein in the markets.
Moreover, it would literally be the last QE the Fed could hope to ever announce as political outrage from the ensuing dollar collapse and inflationary pressures would likely see open riots and/or the Fed dismantled. (This has happened twice before in the U.S.’s history.)
In simple terms, the Fed’s hands are tied until a huge crisis hits and then, if the Fed acts, it would have to go “all in” with a massive program and, if it did:
- the U.S. dollar would collapse,
- pushing inflation through the roof,
- as well as interest rates,
- which in turn would destroy the banks,
- as well as the US economy.
In simple terms, this time around, when Europe goes down (and it will) it’s going to be bigger than anything we’ve seen in our lifetimes…This time it is different.
I realize most people believe the Fed can just hit “print” and solve everything, but they’re wrong. The last time the Fed hit “print” food prices hit record levels and revolutions began spreading in emerging markets. If the Fed does QE again, especially in a more aggressive manner as it would have to, we would indeed enter a dark period in the world and the capital markets.
This is not Doom and Gloom, this is reality.
*www.gainspainscapital.com (To access the above article please copy the URL and paste it into your browser.)
Editor’s Note: The above article may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
Once again the U.S. economy is tanking and everyone is talking QE 3. Sorry folks, it ain’t coming. If the Fed cranks up the printing press, Obama loses any hope of re-election. If the ECB cranks up the printing press, Germany walks. End of story. [Let me explain.] Words: 386
In every economic crisis there comes a moment of clarity. In Europe soon, millions of people will wake up to realize that the euro-as-we-know-it is gone. Economic chaos awaits them. [Let us explain why that is the case and how it will come about.] Words: 680
The media is rife with misrepresentations and analysis of the EU. Here’s the real deal, no BS situation with Europe – and its BAD! Words: 900
Introduction: “The crisis in the eurozone is the result of France’s persistent pursuit of the “European project,” the goal of political unification that began after World War II [with the hope] that a political union, a United States of Europe similar to America’s, would…prevent the types of conflict that had caused three major European wars…[and] also make Europe a power comparable to the United States, and thereby give France, with its sophisticated foreign service, an important role in European and world affairs.” [What went wrong and what does the future hold?]
Worries about an economic catastrophe in Europe are heating up again, and dramatic forecasts about doom are popping up everywhere. What’s important? How did we get here? Let’s put this all in perspective. Words: 2356
We still don’t have many political voices [in the European Union] that have the courage to say, ‘We’re headed for the rocks, and before we hit the rocks, let’s take a different course. Let’s try to break this thing up peaceably, before it ends in disaster….The establishment always supports the status quo…but actually, I think the only way we can avoid a depression is to break this (the EU) up.
I continue to see articles in the media claiming that Europe’s problems are solved. Either the folks writing these articles can’t do simple math, or they don’t bother actually reading any of the political news coming out of Europe [so let me present 3 data points that guarantee Europe will collapse at some point in the near future]. Words: 722
Europe may soon be choking on that plat du jour of government a la Hollandaise with the side of chopped Greek salad. The whole world, in fact, has got something like a giant hairball stuck in its craw. The hairball is composed of filaments of lies wound over a core of supernatural indebtedness. The lies are promises that the debt will be paid back. Words: 710
As many of you know, my primary forecast regarding Europe is that the EU will be broken up and/or collapse within the coming months. The reasons for this are financial, monetary and political in nature [with much of the latter dependant on what happens in Germany. Let me explain.] Words: 516
Europe is heading off a cliff! From one end of the continent to the other, the numbers suggest a double-dip recession is striking with brutal force…and with the world as interconnected as it is these days, what happens in Europe WILL impact our companies and markets here so now is the time to position your portfolio to weather the storm. Words: 900
The European economic situation is explained very simply in the illustration below. Take a look.
The U.S. government has put us between the proverbial ‘rock and a hard place’. Cutting spending to improve our country’s financial situation would surely trigger rioting in the streets by those Americans most adversely affected yet not cutting spending will trigger much higher inflation – even hyperinflation – which will also result in rioting….Government cannot control how this ends. They may be able to tinker with the timing a bit and they still have the choice of poisons with which to destroy the country, [but] that the country is gone, that is no longer alterable. Words: 930
The European politicians are totally committed to keeping the eurozone together. It’s a bad idea, but they are committed to it – and they are willing to spend everybody else’s money – especially German money – to do that.
On the surface, Spain’s debt woes have many things in common with those of Greece – bad age demographics and a toxic bank system – but you’ll note that, as we tackle each of these, Spain is in fact in far worse fiscal shape than Greece. [Let’s take a look.] Words: 700
In this article I lay out precisely why the coming Crisis in Europe will be THE Crisis I’ve been forecasting for the last 24 months, why it will have dire consequences on the U.S. and why the Fed can do absolutely nothing to stop it this time round. Words: 1334
On the surface things may appear to be calm, but I don’t think the European crisis is anywhere near its conclusion. Losses still have to be taken from Ireland, Spain, Portugal and possibly even Italy…There are a number of ways out of Europe’s problems. One of them is higher inflation…[which] is going to be very positive for gold… because the central banks will be under pressure to print.
When the supply of something is increased sharply relative to demand, the value of that commodity will decline. If the supply continues to increase rapidly and indefinitely, then that item will become worth less and less, with the potential to finally become nearly worthless. This is the Developing Disaster facing the US Dollar and the world. This is the factor that could become the single most important criterion in investment allocation decisions and possibly even for individual financial survival…[Let me explain this further by reviewing the 7 major problems facing the U.S. (and thus the world) and how they all will lead to problem #7 – devolution.] Words: 1520