The New Carelessness or: Words and Paper Not a Permanent Solution

Published on 2013/01/21

Are the financial crisis and the Euro crisis a thing of the past? Well, it may seem so at first glance. Investors increasingly have the impression that the crisis has essentially been overcome. This sense of security manifests itself in a variety of ways:

  • The Swiss franc in its role as “safe currency shelter” has lost considerably against the Euro.
  • The gold price suffered substantial, if temporary, dips. Even though it has rebounded lately, the gold price trend shows that the panic on the markets has subsided for the time being.
  • During the first week of January, equity funds that invest exclusively in rallying share prices collected nearly nine billion US dollars worldwide, the largest cash inflow since March 2000 at the peak of the dot-com rally.
  • Bond and equity prices in the crisis-ridden countries in Europe’s southern periphery are rallying.
  • Prices for luxury properties in London, among other places, are rising slower than in recent years.
  • CDS prices for most Eurozone member states have plummeted.
  • The warnings of cautious and critical voices are losing their audience.

All these are signs of a new carelessness and of a hazardous optimism that is backed by no fundamentals.

  • But has any of the issues that triggered the Euro crisis actually been resolved?
  • Has the sovereign debt dropped?
  • Is the unemployment in the crisis countries declining?
  • Has anything changed about the 50% unemployment rate among Spain’s young?
  • Has Italy tackled the urgently needed reform of its labour market?
  • Has the economy of France, the second-largest in the Eurozone, stabilised?
  • Has the policymakers’ mania to regulate banks and the financial system had even the slightest positive effect?
  • Has anything changed for the better in the former crisis countries (except in Ireland)?

Each of these questions must be answered with a resounding No. What appears to have helped things were WORDS uttered by Mario Draghi who said he would do anything to save the Euro. These words were backed by massive bond purchases, that means by the production of fiat money in vast quantities. The ECB has lost its independence in the process and this will cost it dearly.

However, words and paper are no long-term solutions. The problems were glossed over and ignored, rather than solved. Ignored problems will, however, resurface at some point and unfold an unsuspected destructive energy.

But what would it mean, if circumstances proved me wrong while proving those right who spread optimism and declare that both the Euro crisis and the financial crisis over? In this case, interest rates would start rising again in the medium term (bad for project developments and real estate investors), and the run on real estate would come to a swift conclusion. Institutional investors would soon be relieved of the pressure to invest in real estate and other alternatives to bonds. Moreover, the immense demand for real estate generated by family offices and high-net-worth individuals would decline. Rising interest and regressive demand for real estate would exert considerably pressure on the real estate market prices. But to say it again: all of the above explained could (and will) happen at some point, but it will not happen in the coming years unless I am completely off the mark with everything I wrote in this commentary.

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