Eastern Europe is dragging down the EU more so than any US housing crisis. This may be a more important issue to watch for most currency investors because there are structural barriers that will not allow a fix to occur. First, it is difficult for the EU to solve or provide leadership for this crisis given the continued problems with EU countries. The EU was not structured to handle problems of coordination across regions which will require financing from countries that already have funding problems. Second, there are limit to what can be done within each Eastern European country since they are having internal fiscal crises. Third, the banking system which should be the mechanism for a solution is strained with EU loans problems. Four, large non-local liabilities within these countries is placing significant strain on Eastern and Western Europe. Many Eastern loans were financed in euros or Swiss francs under the assumption that there would be a continued tight link between these currencies and the West. In the case of the case of the Swiss franc, Eastern currencies have declined beyond 30%. This increases the default probabilities on the loans.
Poor economic trends will continue because there is no quick solution to the problem except for devaluation of the currencies and an abandonment of the any thought of entering the EU. Currencies will have to adjust significantly and stay at lower levels. There will be no easy fix because even if goods can become competitive with lower exchange rates, there is still a problem of the external debt repayment which cannot be solved. Much of the loan portfolio will be turning over in the next year so there will not be financing available to roll the debt at current exchange rates. Watch for the bottom to fall-out.
Poor economic trends will continue because there is no quick solution to the problem except for devaluation of the currencies and an abandonment of the any thought of entering the EU. Currencies will have to adjust significantly and stay at lower levels. There will be no easy fix because even if goods can become competitive with lower exchange rates, there is still a problem of the external debt repayment which cannot be solved. Much of the loan portfolio will be turning over in the next year so there will not be financing available to roll the debt at current exchange rates. Watch for the bottom to fall-out.
2 comments:
What's your take on the proposed tax reform by Obama, especially the reduction on mortgage interest and charitable contribution in AMT?
Is this tax reform or a fundamental change in the policies of government. One of the basic tenants of government policy for housing has been that the core objective is to increase home ownership. We have been willing to provide subsidies through interest deduction for mortgages. Any change in policy that increase the tax on mortgages will move resources away from housing.
While this may be an effective longer-term strategy, is this what we want in the shorter-run? We will reduce the interest deduction and then provide direct subsidies for falling housing prices. What the left hand takes away, the right hand will give back in a different form.
Reduction in charitable giving will change the complexion of the country. Private charity has been one of the unique features of US culture. While our charitable giving to say the UN is less than other countries. Our willingness to provide for charities is greater than many other countries where there is more dependence from the government. Less giving will result in the government stepping in and filling the void, so the charitable works will be determined by bureaucrats and not the individual. Perhaps they have a better understanding of charitable needs. It will be different. If you cut charitable giving to the arts, then the government will have to subsidize or they will have to go out of business. Is this what we want?
Now looking at the AMT, we have to think about the result of inflation. There will be greater incentive for the government to inflate because you will get classic bracket creep.
The idea of tax reform is to simplify and broaden the base. Is this being done with these proposals? Yes, there is simplification but there will also be a greater tax burden.
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