Dummies guide to what went wrong in Europe.

[Rakewell]

A brilliant simplification.

Lots of work for a hedge fund in this scenario, as the distortions and mis-pricings multiply.

http://philpin.com/humour/2012/06/a-dummies-guide-to-what-went-wrong-in-europe/

Dummies guide to what went wrong in Europe.

Helga is the proprietor of a bar. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem she comes up with a new marketing plan that allows her customers to drink now, but pay later.

Helga keeps track of the drinks consumed on a ledger (thereby granting the customers' loans).

Word gets around about Helga's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Helga's bar. Soon she has the largest sales volume for any bar in town.

By providing her customers freedom from immediate payment demands Helga gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer - the most consumed beverages.

Consequently, Helga's gross sales volumes and paper profits increase massively. A young and dynamic vice-president at the local bank recognises that these customer debts constitute valuable future assets and increases Helga's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

He is rewarded with a six figure bonus.

At the bank's corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS. These "securities" are then bundled and traded on international securities markets.

Naive investors don't really understand that the securities being sold to them as "AA Secured Bonds" are really debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.

The traders all receive a six figure bonus.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Helga's bar. He so informs Helga. Helga then demands payment from her alcoholic patrons but, being unemployed alcoholics, they cannot pay back their drinking debts. Since Helga cannot fulfil her loan obligations she is forced into bankruptcy. The bar closes and Helga's 11 employees lose their jobs.

Overnight, DRINKBOND prices drop by 90%. The collapsed bond asset value destroys the bank's liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Helga's bar had granted her generous payment extensions and had invested their firms' pension funds in the BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations; her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multibillion dollar no-strings attached cash infusion from the government.

They all receive a six figure bonus.

The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who've never been in Helga's bar.

 

[DigDog]

we already knew this without the need for oversimplification;

 

[waggy]

so my question. how is helga? is she doing ok? she hot? and single?

 

[The-Noid]

I think you missed the part where Germany and France tried to take advantage of the rest of Europe to weaken their currency by lending them money in the form of a common, weak currency.

The problem is that although the Germans, French and Dutch were very competitive with the new weak currency the periphery was not competitive with the new strong currency.

The lack of productivity across all of Europe is the death knell, it is just showing up in the form of no one wanting to lend them any money, creditors don't lend for negative NPV projects. Paying EZ pensions and poor government investment is negative NPV.

 

[JohnOfSheffield]

A brilliant simplification.

Lots of work for a hedge fund in this scenario, as the distortions and mis-pricings multiply.

http://philpin.com/humour/2012/06/a-dummies-guide-to-what-went-wrong-in-europe/

In reality things went south because of spending.

You're in the same situation, the EXACT same situation.

It sucks to be Greek or American, you're going to have to pay.

 

[Texashiker]

so my question. how is helga? is she doing ok? she hot? and single?

Pics of helga?

 

[JohnOfSheffield]

I think you missed the part where Germany and France tried to take advantage of the rest of Europe to weaken their currency by lending them money in the form of a common, weak currency.

The problem is that although the Germans, French and Dutch were very competitive with the new weak currency the periphery was not competitive with the new strong currency.

The lack of productivity across all of Europe is the death knell, it is just showing up in the form of no one wanting to lend them any money.

Absolutely CONSIDERING THEY HAVE THE SAME CURRENCY you blithering moron!

The productivity outpaces the US by 3000%, it's not the problem, the problem is the leniency on taxes.

That is IT, if no one earning a higher income pays taxes, it won't work, the US doesn't work either, you are in a WORSE position but can sustain it for now, not forever.

When it comes to what actually happened, it was just that, spendings without the taxes to cover them.

In ten years you'll have no balls left to play with, that is where you are heading and no, it matters not who your president is, it matters who owns him.

 

[The-Noid]

Absolutely CONSIDERING THEY HAVE THE SAME CURRENCY you blithering moron!

The productivity outpaces the US by 3000%, it's not the problem, the problem is the leniency on taxes.

That is IT, if no one earning a higher income pays taxes, it won't work, the US doesn't work either, you are in a WORSE position but can sustain it for now, not forever.

When it comes to what actually happened, it was just that, spendings without the taxes to cover them.

In ten years you'll have no balls left to play with, that is where you are heading and no, it matters not who your president is, it matters who owns him.

Your post.

1.) Makes no sense.

2.) Is factually inaccurate.

Search industrial production on FRED and Eurostat or search on Datastream or BBG.

Also, if you are in Sheffield, does the UK not have to pay because the BoE has monetized 40% of outstanding UK debt? Is that the supposition?

Banking system liabilities in US compared to GDP == 100%
Bank system liabilities in UK compared to GDP == 750%

That seems sustainable...

The entire developed world is screwed (sans Norway). Don't get me wrong. Were headed for a depression (if we aren't already in one); however there aren't really any countries that are in better shape than others and the UK is at the top of the screwed list because they let the banks get out of control. Any kind of shit hitting the fan event in Europe will cause massive problems to the UK banking system and rapid expansion of central government debt and finally default. Just because the UK isn't on the Euro doesn't mean it isn't going horribly affected by any event in Europe.

Maybe Merv can buy up all the Gilts?

 

[CPA]

Why is it the hedge fund's fault that Helga decided to extend credit to her customers?
Sounds like piss-poor marketing decision by Helga.

 

[Linflas]

Actually from what I understand it is a little more complicated than that. The problem with the Euro is that the European Union does not have the same power that a true Federal Government has to regulate the finances of the member states which is necessary for a central bank and unified currency. In the long run either the member nations will need to cede some sovereignty to the EU government in this area or the Euro is eventually doomed.

 

[BoberFett]

I don't think I've ever met an attractive Helga.

 

[JohnOfSheffield]

Your post.

1.) Makes no sense.

2.) Is factually inaccurate.

Search industrial production on FRED and Eurostat or search on Datastream or BBG.

Also, if you are in Sheffield, does the UK not have to pay because the BoE has monetized 40% of outstanding UK debt? Is that that supposition?

Banking system liabilities in US compared to GDP == 100%
Bank system liabilities in UK compared to GDP == 750%

That seems sustainable...

1.) yeah it does.

2.) No it isn't.

It doesn't matter since most of the production is national and not even in those figures.

GDP debt is unsustainable in a few nations, sure, the bank system in the US got ALL the money it needed because national debt isn't considered an issue in the US for some reason, in the UK, it will lessen as time goes by since we are not running an unsustainable national debt.

I think you are reading too many blogs and haven't got ANY clue as to what is actually happening, especially since you are going by specific numbers that are contexted out of the real issue that we are discussing.


In reality, the US owes more per GDP than any other nation and has a sustainability index of -1300% while a nation like Greece won't ever be allowed to drop below 100%

 

[waggy]

I don't think I've ever met an attractive Helga.

this works for me.

lol i did a search for helga. that pic came up along with this joke
Helga hung the wash out to dry, put a roast in the oven, then went downstairs to pick up some dry cleaning.

“Gootness, it’s hot,” she mused to herself as she walked down Main street. She passed by a tavern and thought, “Vy nodt?” so she walked in and took a seat at the bar.

The bartender came up and asked her what she would like to drink. “Ya know,” Helga said, “it is so hot I tink I’ll have myself zee cold beer.”

The bartender asked, “Anheuser Busch?”

Helga blushed and replied, “Vell fine, tanks, und how’s yer pecker?”

 

[BoberFett]

this works for me.

I stand corrected.

 

[The-Noid]

Actually from what I understand it is a little more complicated than that. The problem with the Euro is that the European Union does not have the same power that a true Federal Government has to regulate the finances of the member states which is necessary for a central bank and unified currency. In the long run either the member nations will need to cede some sovereignty to the EU government in this area or the Euro is eventually doomed.

The euro is screwed because the competitiveness and industry is different in the member states. Without a full out 100% fiscal union that can make adjustments to productivity constraints and objectives the Euro can never work. The reasons for entering the Euro are also very divergent by the member states. It's doomed to failure.

The peripheral debt yields would be lower not on the Euro as well as worst case you would still get money back in the form of a newly printed depreciated currency (inflation from printing). In the current form the payback on debt is similar to what happens in emerging markets, the emerging market can't borrow anymore in the foreign currency and can't print in the domestic, so the bondholder ends up with a donut (0). In the Eurozone they are attempting to do huge cramdowns to sustainable levels, which will lead to deflation not inflation, which is going to lead to bank failures etc, in the periphery (see SAN Equity, Socgen Equity, etc) Deflation kills banks and without the ability to print and no ability to borrow the coming drop in industrial production will accentuate the recession that has already started in the EZ. The EZ is truly in a terrible position and without some sort of hastily designed fiscal union (which won't pass the constitutional courts of the member states) and the ECB is basically at the limit to what it can do by mandate.

Greece is the beginning, Italy, Spain and France are the ends.

 

[JohnOfSheffield]

Actually from what I understand it is a little more complicated than that. The problem with the Euro is that the European Union does not have the same power that a true Federal Government has to regulate the finances of the member states which is necessary for a central bank and unified currency. In the long run either the member nations will need to cede some sovereignty to the EU government in this area or the Euro is eventually doomed.

Why?

I've heard this claim from MANY different sources but not one of them have been able to answer this question.

Mainly because IF they managed to do so they would also be arguing for a dissemination of the US states into one big nation without separate states.

Greece has defaulted a few times before, this time they have a currency to keep them afloat, there are states in the US that are in the exact same position and i hear no one arguing for them to give up any state sovereignty.

I think you and most like you consider the EU to be of another world entirely but it's not, it's a representative democracy with a mixed economic system just like the US, some nations are more socialist than the US some nations are more capitalist than the US but then again, that goes for US states in comparison to the EU too.

We're pretty much in the same shit.

But you're doing much worse because you won't even acknowledge it, you're running with it and making it worse and if someone would actually have the gall to propose defence reductions, increased taxes and reduced spending which is what both you and Greece needs to do, then he'd get no votes.

The Greek are retards for voting against that but you are even more moronic becuase you should fucking know better by now.

 

[The-Noid]

1.) yeah it does.

2.) No it isn't.

It doesn't matter since most of the production is national and not even in those figures.

GDP debt is unsustainable in a few nations, sure, the bank system in the US got ALL the money it needed because national debt isn't considered an issue in the US for some reason, in the UK, it will lessen as time goes by since we are not running an unsustainable national debt.

I think you are reading too many blogs and haven't got ANY clue as to what is actually happening, especially since you are going by specific numbers that are contexted out of the real issue that we are discussing.


In reality, the US owes more per GDP than any other nation and has a sustainability index of -1300% while a nation like Greece won't ever be allowed to drop below 100%

I think your confused as to how poor the financial shape of the UK is. Any kind of shit hits the fan event in Europe will destroy the UK, I guess the 200 Billion Pounds of periphery debt that your banking system holds as core capital will be in great shape?

Problematic countries in order.

1.) Eurozone because of the possible liquidity shock.
2.) UK because of the possible liquidity shock.
3.) Japan because of solvency.
4.) US because of solvency.

Total debt (national,bank,business,personal,etc.)/gdp is about 300% in the US, around 350% in the EZ and over 1100% in the UK.

 

[Moonbeam]

I stand corrected.

I stand corected.

 

[JohnOfSheffield]

US is great, UK sucks

That is pretty much what you're saying, as if it would get to me... lol.

I'm not an American, i'll piss on the Union Jack any day of the week, i didn't do my service for the nation or the flag, i did it for the idea that right is right and yeah, you are welcome.

I don't take pride in what nation i was born in or the flag of it. I do care about my nation for another reason, as a grandfather i'd like to see my granddaughter grow up like my daughter did, with the opportunities provided as they should be for someone who carries my genes (i'm brighter than fuck).

SO if you want to piss on the UK, go ahead, our former colony which is proving again that it's unsustainable by itself is now complaining about us once again... boo fucking hoo, don't worry we won't reclaim it now, why would we? It's filled with idiots who either say "yessir" or are on welfare, it's just fucked up.

Meanwhile, six weeks of vacation... oh if i just didn't have to settle for the four room apartment in London and my house here in Sheffield, or my two cars and four bikes... i will never know what wealthy is, like Americans do. Need some meds though, deadlifted too fast, will not cost me one cent either...

But then again, i'm so poor since i pay all these taxes...

 

[The-Noid]

That is pretty much what you're saying, as if it would get to me... lol.

I'm not an American, i'll piss on the Union Jack any day of the week, i didn't do my service for the nation or the flag, i did it for the idea that right is right and yeah, you are welcome.

I don't take pride in what nation i was born in or the flag of it. I do care about my nation for another reason, as a grandfather i'd like to see my granddaughter grow up like my daughter did, with the opportunities provided as they should be for someone who carries my genes (i'm brighter than fuck).

SO if you want to piss on the UK, go ahead, our former colony which is proving again that it's unsustainable by itself is now complaining about us once again... boo fucking hoo, don't worry we won't reclaim it now, why would we? It's filled with idiots who either say "yessir" or are on welfare, it's just fucked up.

Meanwhile, six weeks of vacation... oh if i just didn't have to settle for the four room apartment in London and my house here in Sheffield, or my two cars and four bikes... i will never know what wealthy is, like Americans do. Need some meds though, deadlifted too fast, will not cost me one cent either...

But then again, i'm so poor since i pay all these taxes...

I think you be reading another post than what I wrote.

The UK is rightly fucked, but the US is right behind her.

If I was living in the UK, I wouldn't be throwing any stones though, that is my point.

The Norwegians can throw stones, they spend appropriately, save appropriately and made the right choice to not join the Euro and run a banking system that didn't want to run the world.

Including the financial guarantees, what is the UK public sector debt now 150% of GDP? That looks very Greece like. At least without the public sector guarantees it's only running 70% of GDP...numbers that 7 years ago would be astronomical, now look brilliant.

That's also great that you have all that stuff; how much is financed by the 750% debt/gdp of your banking system?

 

[MovingTarget]

we already knew this without the need for oversimplification;

:thumbsup:
I can oversimplify even better! Here's the problem in a nutshell:
1) Austrian Economics at work
2) Ineffective regulation of complex financial instruments

 

[JohnOfSheffield]

I think your confused as to how poor the financial shape of the UK is. Any kind of shit hits the fan event in Europe will destroy the UK, I guess the 200 Billion Pounds of periphery debt that your banking system holds as core capital will be in great shape?

Problematic countries in order.

1.) Eurozone because of the possible liquidity shock.
2.) UK because of the possible liquidity shock.
3.) Japan because of solvency.
4.) US because of solvency.

Total debt (national,bank,business,personal,etc.)/gdp is about 300% in the US, around 350% in the EZ and over 1100% in the UK.

Not really, the BoE has liquidity to cover all outstanding debts as it is, that means ALL English banks do.

1.) Nope.
2.) Absolutely not because it's already under the umbrella.
3.) Bigger problem for China and the US, it's like a drop in a very large bucket that we will never deal with.
4.) We really do not care, we already got credit guarantees on it, you'll pay it or China will.

In the UK it's -30% because of guarantees, but keep making it up, it's cute.

 

[JohnOfSheffield]

I think you be reading another post than what I wrote.

The UK is rightly fucked, but the US is right behind her.

If I was living in the UK, I wouldn't be throwing any stones though, that is my point.

The Norwegians can throw stones, they spend appropriately, save appropriately and made the right choice to not join the Euro and run a banking system that didn't want to run the world.

Including the financial guarantees, what is the UK public sector debt now 150% of GDP? That looks very Greece like. At least without the public sector guarantees it's only running 70% of GDP...numbers that 7 years ago would be astronomical, now look brilliant.

We already have a full guarantee from lenders, we are operating on that premise.

In short, the BoE is solvent, we don't have a problem at this point in time and our GDP-spending is in perfect order.

 

[The-Noid]

Not really, the BoE has liquidity to cover all outstanding debts as it is, that means ALL English banks do.

1.) Nope.
2.) Absolutely not because it's already under the umbrella.
3.) Bigger problem for China and the US, it's like a drop in a very large bucket that we will never deal with.
4.) We really do not care, we already got credit guarantees on it, you'll pay it or China will.

In the UK it's -30% because of guarantees, but keep making it up, it's cute.

You do realize the Fed can guarantee exactly the same as the BoE, right?

England has also only guaranteed the previous financial crisis, not the Eurozone financial crisis.

 

[JohnOfSheffield]

:thumbsup:
I can oversimplify even better! Here's the problem in a nutshell:
1) Austrian Economics at work
2) Ineffective regulation of complex financial instruments

Not really.

1) Pay no taxes for any company or anyone who earns enough to avoid it.
2) fail

that is what happened, tax regulations were so lax that anyone who wasn't dirt poor didn't pay taxes.