1. Europe is Going from Strength to Strength, Contrary to the Naysayers

    I have been baffled for years at Americans’ inability to understand Europe and the euro. In 2010, prominent economists such as Paul Krugman, Joe Stiglitz, and Nouriel Roubini were running around saying that Greece should be kicked out of the Eurozone.

    They said Spain should quit the euro, go back to the peseta as a currency, and devalue. They also said the Eurozone should break into a “two-tier” structure with a Northern Tier of hard currency countries like Germany and the Netherlands, and a Southern Tier of currency weaklings like Italy and France. I publicly argued with all of them at the time.

    I said no countries were being kicked out, no countries would quit, and new members would be added over time. That’s exactly what happened. When I made my forecast there were 16 members of the Eurozone. Now there are 19 members and a 20th is on the way soon with others waiting in the wings. (The UK “Brexit” is another matter because the UK never joined the Eurozone. They are exiting the EU, which is not the same as the Eurozone. The Eurozone is far more important precisely because it has its own currency and central bank).

    I even wrote an entire chapter on the economic strengths of Europe in my 2014 book, The Death of Money. This article vindicates the view I have taken all along. It explains how Europe has become a magnet for direct foreign investment, and has taken steps to address longstanding issues of labor mobility and inefficient regulation.

    The euro is poised for a major rally against the U.S. dollar. This article explains why.

  2. Canary in a Coalmine: Venezuelan Credit Defaults Begin; More on the Way

    Venezuelan debt crashed and burned last week as described in this article. The major state-owned oil company, Petroleos de Venezuela SA, or PDVSA, defaulted on its debt. S&P and Fitch ratings declared the company to be in default. The International Swaps & Derivatives Association (ISDA, the rule-making body on over-the-counter derivatives) declared PDVSA credit default swaps to be payable also.

    The PDVSA is likely to be the first of many Venezuelan defaults. Government debt looks unpayable, and is currently being renegotiated, which is another kind of default. Other Venezuelan companies with dollar-denominated debt are in worse shape. None of this comes as a shock.

    Venezuelan credit has been deteriorating for over a decade under the rule of first Hugo Chavez, and now Nicolás Maduro. The Venezuela currency, the bolívar, is essentially worthless and civil society has descended into chaos bordering on civil war. Yet, the significance of this story goes far beyond Venezuela.

    The 1998 global financial crisis started with a simple Thai default in 1997. The 2008 global financial crisis started with an uptick in mortgage defaults in 2006. Financial crises have a “snowflake and avalanche” dynamic in which small catalysts (the snowflake) soon cause catastrophic results (the avalanche).

    The Venezuelan crisis definitely has the potential to spread to other emerging markets and possibly cause a new global financial crisis in 2018.

  3. Ice-Nine Comes to the Desert. Saudi Political Targets Scramble for Gold.

    In my most recent book, The Road to Ruin, I describe a phenomenon called “ice-nine.” The idea is that in the next financial panic, regulatory authorities will not be able to print money or lower rates enough to stop the panic because they failed to normalize rates or balance sheets after the last recession.

    Liquidity will drain out of money market funds and the government will have to suspend redemptions to prevent a collapse. Investors will then turn to banks for liquidity and the only response will be to close banks. Then investors will dump stocks, and the stock exchanges will close, and so on. One by one, the entire system will be “locked down” to stop a liquidity crisis that’s bigger than the central banks’ ability to liquefy. I got the idea for ice-nine from another book, Cat’s Cradle, by Kurt Vonnegut.

    In that book, a doomsday machine in the form of a water molecule called ice-nine is unleashed. The molecule is frozen at room temperature and turns water into more ice-nine when it comes into contact. Eventually all of the water on earth turns to ice-nine and life on earth dies in a frozen wasteland. That seemed like a good metaphor for how the financial system will be locked down little by little until the whole system is frozen.

    Some readers objected that this could never happen. My answer is that it happens all the time.

    In 2013, the banks in Cyprus were frozen. In 2015, the same thing happened in Greece. In 2017, the Spanish government shut down banks in Catalonia in response to an independence movement. Banks in Puerto Rico were shut when the power went out after Hurricane Maria. Every bank in America was closed shut in March 1933.

    As the article shows,bank accounts of political targets are being frozen today in Saudi Arabia. Whether the reason is financial panic, natural disaster, or political targeting, the result is the same. Freezing bank accounts is the first resort of governments trying to maintain control.

    When skeptics say, “It can’t happen here” I point out that it did happen here in 1933, and it’s happening again all over the world.