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The Euro is broken and everybody knows it now

December 6, 2010

One of the strangest things about finance and trading is that it takes so long for people to figure out what is correct, but then when they do, it is totally group mentality and the trade happens.

Now, the world has come to the realization that the Euro has serious flaws that cannot be addressed under the current framework.  There isn’t really anything the individual countries can do to prevent their CDS from being driven to sky high levels – the CDS market just isn’t all that large, and doesn’t trade frequently enough.  So when “quotes” are given in the market, it is easy to bid high and just push the prices up day after day.  It isn’t like there are 200 people in the Irish CDS market.

The Euro is broken.  Everyone knows that the ECB is constrained, and the Maastricht Treaty spending limits are being used as a cudgel to lower spending.  So the commonly accepted way of “printing money” is not totally available to the Eurozone, and the real way money is created (Government Deficit Spending) is under attack from the Germans.

But this was true last year too.  The Euro was broken then as well, but everyone knows it know. That is the difference between this years Irish crisis and last years Greece crisis – the Euro is the same, but everyones understanding of the limitations surrounding the Euro have dramatically increased.

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