There was blood on the ground
Blood on the sand, blood all around
And Minnie and Mickey, Brer and Pluto secretly prayed
There was no doubt at all, no two ways about it
Was the day Disney’s dream debased
– The Wonderful and Frightening World of The Fall
Things are looking a little strained for “old Europe,” though one could say the Euro is about as new as Europe gets. Nonetheless, the great global financial bubble instigated by the “financial innovations” of the past several decades has now officially entered the global currency markets. The great experiment in untethered money is destined for the dustbin, but it will take many years to play-out and no doubt ever greater volatility till some new order is agreed upon. Greece is getting all the attention, but if the austerity solutions bandied about in the financial press are to be the rule, you can fairly quickly fill up both hands with European nations who will have to follow suit, such as Portugal and Spain. And let’s not forget the Brits and the pound. Yves Smith has a good summation about what’s going on. It shouldn’t be the poorest who are left facing the full brunt of the consequences of the failed policies of wealth, but that would indeed be ahistorical.
The most important thing to understand is that the financial innovations, specifically in this case, credit default swaps(CDS), are playing a catalyzing role in the crisis. There’s an excellent must read piece in the WSJ stating:
Again, derivatives, known as credit default swaps, are playing a part in the current trading. Some of the largest hedge funds, including Paulson & Co., which manages $32 billion, have bought such swaps, traders say, which act as insurance against a default by Greece on its sovereign debt. Traders view higher swaps prices as warning signs of potential default.
Now, that paragraph could take volumes to unpack, but let’s look at two important points. CDS are playing the same role the gold standard played in catalyzing currency instability in the 1920s. Under the gold standard, forces could destabilize a nations currency by forcing a nation to deplete their gold supply, thus weakening the currency. The mechanisms of using CDS are different, but the results are the same. By piling on positions against a currency, our financial lords destabilize it and can force the devaluation of the currency. As the Journal points out,
Some heavyweight hedge funds have launched large bearish bets against the euro in moves that are reminiscent of the trading action at the height of the U.S. financial crisis…It is impossible to calculate the precise effect of the elite traders’ bearish bets, but they have added to the selling pressure on the currency—and thus to the pressure on the European Union to stem the Greek debt crisis.
The Euro is down 10% since the “bets” began in earnest. But the more important point is the Orwellian take, and what has been the great propaganda of the financial innovators for the past two decades that they provide “insurance.” Remember, one of the great lines used until the Panic of 2008 was the financial innovations “spread risk.” You don’t hear that term anymore, which is funny because they were right. The risk was spread to you and me. The tax payers’ bail out of an utterly failed system continues.
What came out of the experiences of the 1920s was unanimity in understanding the value of currency stability. The end of the second war Bretton Woods Conference developed a regime that worked fairly well for several decades. Its remnants, most notably the dollar reserve system, helped provide stability for a couple more decades. Aside from the manipulation enabled by the financial innovations, the currency crisis is fundamentally about the tremendous imbalances in the global economy. We must understand Keynes’ point that all currencies derive their value from interaction with the material economy, so as the economy changes, currencies will need to change. There are ways to wall-off great parts of the economy, providing longer term stability, but we have taken down all the walls, and left the entire economy to the vagaries and manipulations of a few traders. For the immediate term, the hand has been dealt and we’re watching the current game play-out, we are going to have to change the rules.
Also, here is Jan’s better piece on Boron.
Crossposted from Archein: Euro