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)

Obama: Too much debt could fuel double-dip recession

Barack Obama gave his sternest warning yet about the need to contain rising U.S. deficits, saying on Wednesday that if government debt were to pile up too much, it could lead to a double-dip recession.

With the U.S. unemployment rate at 10.2 percent, Obama told Fox News his administration faces a delicate balance of trying to boost the economy and spur job creation while putting the economy on a path toward long-term deficit reduction.

His administration was considering ways to accelerate economic growth, with tax measures among the options to give companies incentives to hire, Obama said in the interview with Fox conducted in Beijing during his nine-day trip to Asia.

"It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession," he said.

(from Reuters, November 18, 2009)