EURO and DOLLAR Similarities

Beginner Questions
1

With all the bad news coming out relentlessly from Europe, with the P.I.G.S. (Portugal, Ireland, Greece and Spain) you’d be forgiven for thinking why the Euro isn’t falling, and maybe even falling through the floor even.

One reason for this will be that the stronger economies account for more of GDP than the smaller ones which are in trouble.

But what occurred to me and this is what I think might lead to an interesting discussion is that there is a similarity between the Euro and the Dollar, in the way that as well as the countries of Europe having separate economies, to a lesser extent the states in the USA have their own economies.

2

Just now getting around to that realization, eh? :stuck_out_tongue:

3

Well yes kind of I suppose, I’ve ‘always’ known that, but I hadn’t really thought about it so much, so I was just wandering what actually are the similarities and differences, I mean for instance, corporate tax rate I believe is nationwide, but is there a state element to it? What are the implications when a state goes bankrupt, as opposed to an EURO zone country? Not that anyone actually know what the implication of Greece for instance going bankrupt would be.

4

The big difference at this point is that in the EZ there is no central fiscal authority - no money flows from the states to a central government, or vice versa. Taxation and spending is strictly a state concern, so long as budget balances are within EZ requirements. Trichet was talking about changing that today - creating an EZ Finance Ministry.

5

It’d be roughly the same thing as far as I can see. In the event of a US state going bankrupt they’d be looking to the Federal government for a bailout as opposed to some joint EZ/ECB/IMF bailout. Presumably state debt bond holders would get a significant haircut in such an event. All sounds much the same to Greece to me.

Greece isn’t a massive part of the overall EZ economy. They could default and, all other things being equal, it’d be ok in the end - looking at Greece on it’s own it’d probably be the desirable route for the country to take. The EZ are massively concerned about the contagion effects though if Greece defaults. Then it goes like dominoes as the rest of the PIIGS maybe go the same route after their bonds go through the roof which would be a disaster for the EZ in the eyes of EZ ministers. This is why they’re desperately trying to kick the can down the road for as long as they can in the hope that the EZ can recover enough in general to withstand Greece defaulting (which they almost surely will in the end looking at the bond market’s pricing of them).

6

The similarities are:

A gigantic debt issue.

Both are fiat currencies. Thus, it’s not money. It’s a debt paper. Like a check.

The differences are:

The buck is an old currency. The eur is a fresh currency.

The buck is an economic currency around a unique political system.

The eur is a “artificial” politically established currency where it’s members still remain in their different government rules.

You can see this if you look at the central banks. The Fed is controlled by DC. The Ecb is controlled by all it’s member countries.

The US is one country with several states. The EZ is a mingled pot of countries. With an EU as loose political overhead.

7

While you’re right in the fact that Greece, in as of itself, is not a significant part of the overall EU economy, it’s scary to think of the implications should they actually default.

There is almost 200 billion of EU and IMF funding propping Greece up at the moment.

Now, should Greece not be able to pay up (which is coming), here’s a nutshell view of the implications.

Banks with heavy exposure to Greek debt (and there are some big ones) will lose depositors. That will start the chain reaction towards being overleveraged, and with deposits falling, the double whammy would be stock value dropping quickly as well.

Suddenly banks that were okay will be in danger of failure themselves. The chain reaction would ripple through pretty much the entire EZ banking system much like the housing crisis did here in the US. Countries already on the brink, like Portugal, Spain, Ireland, Belgium, and so on would find themselves in even MORE dire situations, because the strain they are currently under would be compounded greatly.

As for that situation being equal to the US, while there are similarities, the fact that all the states are under one roof make things a game changer.

I think Germans have every right to gripe about their tax dollars leaving town to pay for failing Greek social programs that have nothing to do with them. But states here being run under one governing body, and one (badly managed) monetary system would have a much easier time getting help.

And for the record, helping all the states with shortfalls would actually amount to less than one sixth of what was spent on the original TARP program.

Greece alone has had over 150 billion loaned to it.
To aid all 44 negatively balanced states would amount to 111 billion, with California being the biggest issue, with 25.5 billion in a shortfall.

Let’s put that into perspective against Greece.

California’s GDP is roughly 1.1 trillion. It’s 13% of the entire US GDP.
Greece on the other hand has a GDP of 339 billion.

So, for every 2 dollars of GDP, they borrowed one, while California’s budget shortfall amount to roughly 2.4 cents on the dollar for debt vs GDP.

Short of the Bernanke not admitting to inflationary issues, I think the US is in better fiscal shape. It’s not GREAT shape, but as Buckscoder alluded to, it’s easier to manage because there aren’t quite as many moving parts.

8

Here’s a very interesting, and surprising article I came across some time ago.

I found it very eye opening…

News Headlines

9

Well it seems that Greece is just about to have it’s second injection of another massive debt burden, so the gigantic debt burden upon Greece is just about to increase, or does it? It seems to me that the end result is actually more of a loan consolidation, they already have the debt, they will then just have a different version of it, with still the massive interest payments that go with it. Yes it’s probably just one big house cards ready to collapse again with the poor old tax payer the actual bailer outer in the end, meaning real hardhsips to the ordinary man and woman.

So yes Master Tang, given those figures and taking the total Eurozone GDP being around the same as Total US GDP of say $15 trillion, give or take a trillion, it very much so seems that Euro debt is higher.

I saw a documentary just last week which showed how all this comes about and I blame the IMF, I think it’s a horrible crooked organisation that screws the Third World to the point that it’s detrimental to the West, it shoots itself in the foot.

And what I understand that has happened over the last 15 years or so is this, and correct me if I’m wrong and I don’t have any figures to hand :-

The West invests loads of money in South Asia mainly in property, for example, the South East thinks it need properties, houses, offices, hotels, etc etc, to supply a notional demand that has been created by the unscrupulous, what they actually need is housing for their poor homeless hungry civilians. When they then realise that there is no demand they are laden with all this property debt which the IMF obligingly lend to them, which in effect then has to be used to pay back the debt to the West, now the West is sitting pretty, all the problem are in South Asia.

But they don’t take this sitting down, China by whichever means maintain a low value Yuan, which then sucks all the money back from the West, supplying and fuelling the West’s own greed for consumerism, it’s a see-saw!

Another thing the IMF does is loan money to fledgling Countries, in return for them employing Free Market policies, what are now strong economies were built on protectionism and protection of their ideas and technology.

And really what’s happening day in day out is downright fraud, speculation is speculation, that’s what we all do on here one way or another, but when guys in the city start mixing derivatives and re-badging them with higher class of debt that’s just plain wrong, if I did that I’d end up in jail. This is what Gordon Brown was referring to as clever financial devices - Oh heck, hoodwinked again. The ‘dot.com’ boom was just the same the only difference was that it gave property a break, but essentially, create a notional demand, sell the shares/property go out of business, then bail out.

Why don’t the governments spot it, it’s every 10 years or so, I’ve been able to see them coming, what is the problem? Don’t they understand, don’t they want to understand? Or is bust and boom the best way to run the economy and that’s where we are at and it won’t change?

11

BBC News - Eurozone woes are US woes

To take this down to it’s most basic level, if Greece defaults, the American tax payer foots the bill.

12

They’re at it again, it’s not even speculation - it’s fraud, they are ripping people off, and nobody will do anything about it until they’ve run away with the money and leave the poor Africans in a worse state than they have been in the last 100 years. I give them 7 years to create the bubble, burst the bubble and run away, with the Africans carrying the can this time, and why not? Everywhere else has been done!

BBC News - Hedge funds ‘grabbing land’ in Africa

13

Hello,
Purplepatch maybe you could share the name of that documentary or even a link.

14

BBC iPlayer - All Watched Over by Machines of Loving Grace: Love and Power

15

Thanks, unviable in my country, but will look for alternative tomorrow.

16

Please correct me if I’m wrong but this is how I understand it…

The US have decided they want to borrow another $2.4Trn, but this time they have a plan to pay it back, to me it looks like they are in a hole but they still want to borrow the money and then pay it back with the spending cuts, so then when it’s paid back in a few donkey’s years, they will still be in the same hole.

It’s just the same all over it’s not just the US that are totally delusioned, it’s just the same here, the goverment keep going on about the deficit reduction, but it’s not a deficit reduction, we are just reducing the rate at which our national debt increases, it’s like I’ve got a £100k overdraft and I was borrowing £10k a month, but now I’m only borrowing £5k a month, that is [B]NOT[/B] a deficit reduction, it’s just a reduction in the rate at which everything is going down the plug hole.

17

Yes the US has been living beyond its means for the past 50 years on the back of a 15 trillion dollar credit card which is now all but maxed out. So unless the US comes up with some way to vastly increase its GNP in real terms, future generations will have to not only live to a lower income with massive debt repayments, they will also not have the benefit of a large credit balance to play with.
The way I see it the last generation has screwed the future generations, it is like they spent the hell out of their credit card, partied real hard for 50 years then left the bill for their children to pay.

18

Absolutely! What is the reason? If you look how fiat money is “printed”, the inflation and default of the currency was already implemented inherently while the currency was born. That is valid not only for the usd, but regarding the eur as well. That this fiat money was finally decoupled from a real asset like pm’s makes it even worse, because there is no limit to “print” more and more money.

I do also agree with SDC. The people who live the big party now do it on the bills on their children and grand children. The best option would have been to not rise the debt limit but cut spending. The same any private household would do if the debt runs out of rationality. Sure that is a hard cut and it would bring some eruptions. Anyways, the eruptions a couple of years ahead will be much worse. The longer that sick system stays, the bigger the eruptions will be at the end if all collapses.

19

I’ll tell you what else I think too, I admit I dont know all the ins and outs of US economic policy and government but I have this gut feeling, that somewhere along the line, the US has been stolen out from under the US people and for decades has been in the hands of a self serving wealthy elite who’se only interest has been increasing their own wealth at the expense of the US as a whole.

What we are seeing now is the result of that capitalist greed at the highest level, a serious lack of investment within the US, and most of the wealth generated in the past 50 years in the hands of the elite while at the same time, 50 years of anti socialist propaganda has the rest of the population convinced, this kind of behaviour is right and good, capitalism is right, there should be no government investment in anything that benefits the majority unless that wealthy minority can make a profit from it.

Obviously some of that profitable behaviour includes decimating the manufacturing and industrial base within the US and moving those operations to third world countries, knowing this will lead to irrepairable mass unemplyment within the US but not caring about that as long as the profits are good for those wealthy enough to own the lions share of the corporations responsible, while at the same time procrastinating about “new jobs in technology” what new jobs ? Where are these going to come from ? Research and development in the US discovers a new technology therefgore they go ahead and build a huge plant in downtown USA to manufacture it, so creating thousands of jobs for the US working man. Yeah right now wake up from that dream and see the real picture.
Research and development in the US discovers a new technology. Step one, find third world country with cheapest labour and as few regulations regarding hazardous waste disposal etc as possible.
Step two build plant there to manufacture the new technology cheaply.
Step three sell it to US citizens at a large profit.
Step four laugh all the way to the nearest foreign bank.

20

SDC believe me or study it anywhere, but nobody is interested in creating “anti socialist propaganda”. There is just socialist propaganda out there and all of the problems come from socialistic governments. To print fiat money and decouple it from real money is a left wing and socialistic behavior, whatever it looks like which party or president is responsible for it.

Capitalism might not be the best system, but until now there was not one example of a better system.