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When people have asked who is going to blink first, Germany or Greece, Jim’s answer has always been “Both.”
This is the dynamic of a successful negotiation — neither side likes it.
Greece doesn’t like being pushed around by the Troika and Germany doesn’t like making concessions, but the consequences of a failure are catastrophic.
If Greece left the euro it would be catastrophic. There would be no bottom to markets. Spain, Italy, Portugal and Ireland would have pressure to be right behind it.
It would be like Lehman Brothers, but now all the balance sheets are bigger. The Peoples Bank of China, the Federal Reserve, the ECB — all those balance sheets are bigger than they were in 2008 and there’s a lot more leverage in the system.
The biggest banks are also bigger. The whole thing that was too big to fail then is bigger and more complex today.
Italy wouldn’t necessarily raise their hand and quit the euro the next day, but the markets would expect them to leave. Their financing costs would go up, their deficits would go up and it would feed on itself. It’s a dynamic you can’t stop.
Conversely, if Greece gave up the euro there would be hyperinflation.
Greece and Germany need each other.
Jim is worried about the consequences if Greece leaves, but he doesn’t believe they will leave and he has said that all along.
It’s a good time to buy Greek government bonds.
It’ll take a couple of months for them to make a deal. They’ll do a bridge loan at the end of February and it will give them two months to fight it out — they’ll have a deal somewhere around March or April.
Denmark has had three rate cuts, Sweden cut today, Canada has had one cut recently and probably another one on the way, and China cut in November when they eased bank requirements and they’ll probably cut soon.
In Istanbul this week they had the meeting of the G20 finance ministers and central bank heads. It was a pretty big deal and they sort of gave their blessings to the currency wars.
They didn’t say it in so many words, but they said that it was okay to cut rates and ease policy for domestic reasons. That a euphemism for currency wars.
You’re creating unintended problems.
First of all you don’t get the growth you expect, what you get is inflation.
The second thing you get are asset bubbles.
What’s the Fed going to do? In Jim’s view they aren’t going to be able to raise rates because it will just make the problem worse — it will make a stronger dollar which is deflationary.
When will they be able to raise rates? Theoretically never.
Markets have never re-priced for what happened in 2008. Instead of going down to the bottom and then having a robust recovery, the Fed eased and printed money to truncate the collapse.
The US is Japan.
Japan’s been in this for twenty five years, and the US will be in this for twenty five years if they don’t make structural changes.
Jim Rickards can be found on Twitter @JamesGRickards and at http://www.jamesrickardsproject.com
Gold is $1,226.10 US per ounce via Kitco.
Central Banks are Boosting Their Gold Reserves via Bloomberg
Central Banks’ Gold Purchases Close to 50 Year High via RT
Another Week on Wall Street
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