The List of Companies & Governments Preparing for Euro Breakup Grows

The list of companies and governments putting plans and systems in place to handle a breakup of the Euro continues to grow. Last week The Telegraph reported the UK "Treasury plans for Euro failure":

"The Treasury is working on contingency plans for the disintegration of the single currency that include capital controls.

The preparations are being made only for a worst-case scenario and would run alongside similar limited capital controls across Europe, imposed to reduce the economic fall-out of a break-up and to ease the transition to new currencies. 

Officials fear that if one member state left the euro, investors in both that country and other vulnerable eurozone nations would transfer their funds to safe havens abroad. Capital flight from weak euro nations to the UK would drive up sterling, dealing a devastating blow to the Government’s plans to rebalance the economy towards exports."

The bold was added by me.....Clearly that should say "perceived" safe havens. To think currencies from indebted counties like the UK, Japan and the US are true "safe havens" is wishful thinking.

"Britain’s response to a euro meltdown would reflect measures taken by Argentina when it dropped the dollar peg in 2002 and by Czechoslovakia after the country broke in two in 1993, according to sources. Faced with a massive capital inflow, the Czech Republic temporarily imposed taxes on foreign inflows to banks and capped the amount of overseas credit domestic banks could use.

In addition to the risk of an appreciating currency, dealing with potential UK corporate exposures to the euro poses a considerable challenge for the Treasury.

Britain’s top four banks have about £170bn of exposure to the troubled periphery of Greece, Ireland, Italy, Portugal and Spain through loans to companies, households, rival banks and holdings of sovereign debt. For Barclays and Royal Bank of Scotland, the loans equate to more than their entire equity capital buffer."

Here is a nice chart from economist Steve Keen's debtwatch blog on the distribution of debt in the UK

You can expect that UK Government debt line (orange) to continue to explode as it absorbs (via bailouts) the coming defaults in the UK Finance sector (black line). Want to think about the possible magnitude we are talking about? And we thought the US finance sector was bloated........

What was that about running to the safe haven of the UK? If you think running to your slaughter is a good idea then be my guest. The UK will eventually have no choice but to print, print, print.

So despite ongoing denials to any possibility of a Euro breakup. A wide range of companies  and governments are putting plans and systems in place for that very possibility. Not a bad idea considering that the "possibility" will eventually be reality despite all the denials. The only question is which countries will be left in the Euro, if any, and how long will it take to play out?

Why is it hard to cut $1.2 Trillion out of the Budget over 10-years? (It's NOT!)

The reality is you only need to reduce one department (to its historical average funding level) and you could save more than 1.2 Trillion over ten years.

Everyone is talking about how the "Supercommittee" was unable to reach a deal to cut 1.2 Trillion from the budget over a 10-year period. As CBS news reports:

"After more than three months of negotiations, the congressional supercommittee announced Monday that it would not be able to reach a deal to reduce the deficit by the group's midnight deadline, citing 'inability to bridge the committee's significant differences'"

"According to the debt limit deal, the committee's inability to compromise will result in $1.2 trillion worth of automatic cuts in domestic and defense programs as of 2013. The so-called 'sequestration' was designed to serve as an incentive for compromise, and both parties had previously emphasized their commitment to avoiding those triggers."

This made anyone and everyone remotely connected to the military industrial complex scream bloody murder about the planned automatic cuts to the Pentagon. By default half of the 1.2 Trillion in cuts is supposed to come from Defense if no deal is reached. To that I say who cares?!? That is basically $60 Billion per year or less than 10% of the defense budget (and the cuts won't even take effect until 2013).

I don't understand how this "supercommittee" is unable to cut 1.2 Trillion over ten years (that's $120 Billion per year or less then 4% of what the US spent this year). What kind of "supercommittee" can't see what is staring them in the face?

A simple look at the crazy levels defense spending has reached gives you an obvious target. There is no need to touch ANYTHING until you first bring "defense" (cough cough) spending down to historical levels (levels which were never low in the first place).

The average amount for defense spending since 1948 (in inflation adjusted dollars) is about $442 Billion. I don't think anyone would say that our military was "weak" during any of this time. I am not even saying we must bring it below that level (although I think we easily could). However, just bringing US defense spending back to it's historical average would make the "supercommittee's" job complete.

Unfortunately, we have people trying to twist the message and defend ridiculously high levels of defense spending by comparing it to GDP....so you will be shown a graph like this

That one is from the heritage foundation. However, comparing defense spending to a GDP level is slightly moronic. How does the market value of the goods and services produced in country determine the cost of protecting it? Shouldn't it instead be more related to things like population size, land mass, number of bordering countries? By lowering our defense spending and reducing our presence in foreign countries we can REDUCE the aggression (out of sight out of mind). Ron Paul has a good speech about it, imagine if roles were reversed. Our military presence, not our economic standing is causing aggression.

This chart from the Economist puts in perspective how out of whack US military spending is. Do we really need to spend more on "defense" then all these countries combined? Well I'm sure according to Lockheed Martin, Boeing, Northrup Grumman, Raytheon, General Dynamics and the rest......it's not enough!

It's a sad reality that the "supercommittee" can't even make these OBVIOUS cuts. What are they going to do when it actually comes down to making the hard decisions? Because this $1.2 Trillion over ten years? That is NOTHING!

cartoon from heraldnet.com