drhalimahali

LESSONS FROM PIIGS’s BUDGET DEFICIT

In Uncategorized on May 18, 2010 at 8:36 am

Unfortunately, one of those members used voodoo economics to meet the budget deficit rule. Basically, they cooked the books to make it look as if they only had a 3% budget deficit.
Everyone calls EU’s troubled states “the PIIGS” (Portugal, Italy, Ireland, Greece and Spain). But again, the PIIGS only account for 14% of the total Eurozone GDP

Excerpts from Sovereign A-letter

This union defied the odds. It cleaned up its messes. Union leaders stopped members from leaving, and played referee as member states argued over how to run their economies.

Eventually, this union built the largest economy and political entity in the world. Investors not only respected this union — they suddenly wanted to hold this union’s currency.

…Well, until recently.

I’m sorry to say, this union is starting to crumble. Now each member state is in more disarray than the last. We are seeing budget deficits, protests in the street, and debt-infested governments that all need to cut spending but never do.

And now plenty of investors are snickering on the sidelines saying that this crisis will collapse the currency…

The ‘Crisis’ Story that No One Is Telling

Think I’m talking about the EU, right?

Well I’m not … I’m talking about the U.S.!

That’s right — the U.S. is a monetary union just like the EU. We all share the same currency, same government and we can travel across state borders without taxation, a passport or changing currencies.

Lately, everyone in their brother is beating up the EU. But the fact is, the EU’s debt problems are peanuts compared to our debt issues in the United States.

The U.S. is the real danger economy (and currency), but it also provides the easiest way to protect yourself in the coming months and years.

Before we get down to business, let me give you my take on this so-called “euro crisis.”

Euro Collapse? Give Me a Break

Long ago, before there was a “euro” the European Union members agreed to the Maastricht Treaty. This treaty would govern the member countries, so eventually they could create a “one policy meets all” for the entire EU.

Among other things, the Maastricht Treaty mandated that each member state could only have a budget deficit of 3% of its GDP. To join the EU, each member must meet that limit.

Most members decided to meet the target by selling their gold, which they did in 1998 and 1999. But they made it. When the Union formed, 13 nations joined together under the Maastricht Treaty.

Today, 17 nations are EU members, and all those citizens use the euro as their currency.

Unfortunately, one of those members used voodoo economics to meet the budget deficit rule. Basically, they cooked the books to make it look as if they only had a 3% budget deficit.

Now the truth is finally coming out, years after joining the EU.

That country? I’m sure you can guess. It’s Greece.

Is this shocking? Wrong? Absolutely.

But it’s also the reason why pundits all over the world are talking about the “coming collapse of the euro.”

Now I can agree that this will definitely be a setback for the euro. But come on. The euro will NOT fall apart just because of one bad apple. It doesn’t make sense.

Greece’s total contribution to the total Eurozone GDP is just 2%. If you remove 2% of the total Eurozone’s GDP, do you really think the EU will collapse?

That’s like saying the U.S. GDP would collapse if Idaho left. Not going to happen!

To take this further, everyone calls EU’s troubled states “the PIIGS” (Portugal, Italy, Ireland, Greece and Spain). But again, the PIIGS only account for 14% of the total Eurozone GDP

Chicken Littles Cry About Euro’s Impending Demise (Again!)

Yes, these EU member states were completely out of line when they continued deficit spending. It’s only fair that the euro suffered a bit.

However, to say that the euro is going to collapse is simply unreasonable.

Before the euro even became a real entity in 1999, there were those that did not believe it would last, and would soon collapse. However, the euro, which suffered at first, eventually came on strong.

In 2005, when Sweden and Denmark both said “no” to join the euro, pundits once again called for the euro to collapse. But the euro only came back stronger. In 2008, during the financial collapse, they said the euro would fall apart. And once again, the euro came back stronger after selling off.

So is this just another case of euro selling as various Chicken Littles run around calling for the euro’s collapse, only to see it rebound and come back stronger?

Or is this finally the hangman’s noose for the euro?

Personally, I believe it to be the former. Here’s why…

The euro is the second most liquid currency in the world, and the second most widely traded currency in the world.

It is the offset currency to the dollar — and the closest thing to the next world reserve currency.

So, if you believe that the euro will collapse, then you must believe that the U.S. dollar will continue to soar for years. You must think our deficit spending that’s gone on for over eight years now is no big deal.

There are plenty of traders who think this way. I call them the “deficits don’t matter crowd.”

This blatant disregard for a currency’s debt always reminds me of a man leaping off the Empire State building.

He passes the 56th floor and screams… “So far, so good!”

The point is long-term deficits always matter. Greece found that out. It’s only a matter of time before the U.S. does.

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