Thoughts from the Frontline

All for One Euro and One Euro for All?

By John Mauldin

May 20, 2011

Choose your language

Economic versus Political Theory
Trichet Says “Non!” Again
What Will the EU Do?
All for One Euro and One Euro for All?
We’re Off to Europe

I have been doing a lot of reading this week, and today we look at some of the thoughts that keep coming to my mind. We’ll think about the declining importance of economic theory (which is a tragedy) and then cast our eyes to Europe, where a truely tragicomic drama is being performed. Who needs the movies when you have the EU? There is a lot to talk about.

But first, some of my thinking has been deeply colored by some recent Conversations I have had with Neil Howe, Lacy Hunt, Dylan Grice, and George Friedman. Those audios and transcripts will soon be on the Conversations website, and others will join them shortly.

Conversations with John Mauldin is my subscription service, where I offer subscribers audio and transcripts of conversations I have with thought leaders about the topics of the day. It is just as if you were sitting at the table with us, listening in on our exchange. The service has been very popular, and the reviews are quite good. And the education you’ll get, the ideas that are generated, will help you as you create your own investment strategy.

You can go to http://www.johnmauldin.com/conversations/ and type CONV in the coupon code to get a discount. And the Conversations I am lining up for later this summer will be just amazing, I assure you! Now, let’s jump into the letter!

Economic versus Political Theory

Speaking of conversations, Dr. Woody Brock called me to say very nice things about my latest book, Endgame (www.amazon.com/Endgame). He used words like tour de force. Coming from Woody, who has one of the more powerful intellects I know, it made my day. Woody has so many degrees. He is a master (and the doctorates that come with them) of game theory, economic theory, and political theory. His…

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Michael Heid

May 26, 2011, 3:29 p.m.

“Note that the paid in capital to the ECB is only â?¬10 billion. The market is pricing in a 50% haircut to Greek debt, which technically would make the ECB far more insolvent than Lehman!”

I am not sure where you get your numbers from. When I read through the most recent ECB balance sheet (http://www.ecb.int/press/pr/wfs/2011/html/fs110524.en.html) next to the Bâ?¬81 equity, the ECB has another Bâ?¬305 in “revaluation accounts” . These Bâ?¬305 are the capital gain for the 11000 metric tons gold reserve of the ECB, which are currently mark-to-market valued at Bâ?¬350 (item 1 of the assets). This gives the ECB equity of some Bâ?¬480.

Against this, the exposure to Greece included in item 7.1 “Securities held for monetary policy purposes” is the max Bâ?¬135 (Greeks share estimated Bâ?¬80 from you) and accounted for “held-to-maturity”, i.e. valued at 100%.

Even a 50% haircut on these securities, the ECB could easily absorb these writedown without decreasing the paid in capital. An insolvency of the ECB seems to be very far fetched, and illiquidity of an central bank is virtual impossible anyway.

On top of this, remember that a euro crisis will increase the value of the gold assets in â?¬ of the ECB.

Jerry Bannon

May 22, 2011, 8:28 a.m.

Well it looks that most of us are still here in the Pacific NW, no rapture here, just come minor flooding.

As I have watched all this unfold over the years, domestically and internationally, the talk is about economics and politics, when in reality is really the entropy of physics playing out in a “designed” fiat money system, and this is the point of contact with the real world where people are trying to understand “What’s up!” in a real world. The unintended consequences of all of this is not just the price of gas is too high, but we have finally run out of energetic gas to run this system; furthermore there seems to be no political will anywhere to really look at the problem, which is required before any true solution is possible; other than to quote the book title from Robert Bork, “Slouching Towards Gomorrah!

This means we must, changing metaphors, realize that there is really no human “Wizard behind the screen” that will be willing or able to fix it, and we must look deeper, to find opportunities that simply are capable of countering the entropy of the real physics and can create modest true wealth in this rapidly changing world.

Jerry Bannon

Malcolm McClure

May 21, 2011, 5:22 p.m.

John:

I have been an avid reader of your economic e-letter for a few years, and have bought your Endgame book.
I have not commented before, but this week’s letter was so carefully thought through and lucid that I am obliged to compliment and thank you for your efforts to make the world economic situation understandable.

The big question, as you pointed out previously, is whether we can expect inflation of deflation (or indeed a reboot of the entire system.)  Living between London and remote part of Ireland, I get to see a lot of lively economic issues. Judging from my own small portfolio of shares and treasuries, and watching Euro, Dollar and Sterling X-rates,  I get the impression that the market is not yet in full panic mode. Ireland has benefitted hugely from participation in the Eurozone. but as you point out the time has come to pay the piper. But, as David McWilliams said at the Zeitgeist fest last week, in Ireland we have no money, so we cannot pay our debts. So that is somebody else’s problem. We have good houses and roads, fertile land and plenty of water. Given a year to get cracking, we shall not starve. The Queen’s and Obama’s visits helped to renew our self-belief. So that explains why, unlike other debtor nations, we have not been rioting on the streets in spite of 14% unemployment.

Enjoy your Provence vacation/homework

Regards

Malcolm McClure

Rodger Malcolm Mitchell

May 21, 2011, 4:58 p.m.

In 2005, in a   speech at the UMKC, I said, “Because of the Euro, no euro nation can control its own money supply. The Euro is the worst economic idea since the recession-era, Smoot-Hawley Tariff. The economies of European nations are doomed by the euro.”

Bingo.

Rodger Malcolm Mitchell

Rodger Malcolm Mitchell

May 21, 2011, 4:51 p.m.

”. . . Greece should leave the eurozone and go back to the drachma. . . “

You are absolutely correct.  In fact, all the PIIGS should go back to their own sovereign currencies and become Monetarily Sovereign.   To surrender sovereignty over your own currency in exchange for dubious trade convenience was foolish and destined to fail.

Rodger Malcolm Mitchell

Bruce Lawrence 23254

May 21, 2011, 3:30 p.m.

“Your assuming you did not get raptured if you are reading this analyst”
On the contrary I was enraptured by the article. Plus I agree about the brilliance of Woody Brock and second his comments about ENDGAME.
Bruce Lawrence

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