Bruce Krasting on the EU devaluation

Five days ago French President Sarkozy said:

“We will confront speculators mercilessly.

The only speculators who got “confronted” in the last few days are the speculators who bet that this plan would work.

The White House must be livid. From reports it is clear that Obama was involved in hatching the EU TARP. He must have pushed on Bernanke to open the swap windows. The President told the Europeans the plan had to have teeth. Five days later the US is getting sucked down the European rat hole. There is no bazooka to save the Euro.

There is no chance for a soft landing of the European debt crisis until the Euro finds a level of support. That support can be had if the ECB/Fed were to intervene. They could hold any reasonable level of the Euro they chose to. But only for a short period of time. They know this.

This is setting up as a Plaza Accord type event. That would imply a 10-20% one-time devaluation of the Euro.

Something like that might work. The capital outflow would stop. Europe would get a leg up through exports as a result. China and the US would suffer as a consequence, but that is likely to happen regardless of how this works out.

There may not be a one-time adjustment in FX rates. This could alternatively get dragged out in the markets over the next few months. The end results will be the same. The US will have an overvalued currency, its balance sheet is in many ways worse than those under attack today. The main event of the sovereign risk story will then begin.

I found this video of the history of the Plaza Accord. Lots of still familiar faces; including Paul Volker, Alan Greenspan and a very young Paul Krugman. That was 25 years ago. The shoe is on the other foot today. But not much else has changed.



watch it on YouTube
During the first half of the 1980s, the U.S. dollar appreciated dramatically, undermining the competitiveness of American products. The Plaza Accord of 1985 was designed to reverse the earlier appreciation.

(from Bruce Krasting's blog, May 14, 2010)

Bruce Krusting's "US Treasury - Deep Thinking?"

I was down in Washington on a business trip. That ended at four and I headed for a bar. I found a spot between Pennsylvania and Kentucky Avenues. Nice place. Two barkeeps, me and another guy who looked like he had been drinking gin for the past few hours. Quiet, just the way I like it.

Sure enough, at five the place fills up. It’s a young crowd. Good looking. Well dressed. This looked like an Ivy League group. I was thinking that they could be DOJ, possibly IRS (they looked too happy, but who knows). They could have been Treasury folks; the headquarters is not far off. Anyway, they had two drinks gossiped for and hour and left. I stayed.

At one point I happened to look under the now empty stool next to me. Some folded up papers. Being the nosey S.O.B. that I am, I picked them up and took a look. Bingo!

I am just guessing, but these initials could stand for Geithner, Volker, Summers, Goolsbee and Romer. Of course they could stand for anything. I will leave it to you to draw any conclusions that might be appropriate after a look at this. Judging from the notes that were taken, this must have been an interesting meeting. I am using the Scribd format so you can enlarge this. Enjoy!

Found Memo


If you haven’t as yet, take a look at the ‘labels for this post’. Life is a comedy. We’re all a part of it.
(from Bruce Krasting's blog, December 21, 2009)