John Taylor, founder and manager of the currency hedge fund FX Concepts, was just on Bloomberg TV this afternoon discussing his outlook for the crisis situation in Europe.
Taylor said the world has only seen the “second or third inning” of the euro crisis because Europe is still only dealing with liquidity problems – not to mention the solvency problems and the “structural issues that are even beyond solvency” that must be addressed in order to turn things around.
To illustrate just how twisted the economic dynamics in Europe are right now, Taylor used an interesting analogy:
Germany has to realise that every time they sell a Mercedes to somewhere in southern Europe, [southern Europe] is only borrowing German money in order to do it, and they’re never going to pay for that Mercedes. Either Germany is going to have to write off the Mercedes because [southern Europe is] never going to pay for it, or Germany shouldn’t sell that Mercedes, but they don’t want to admit that. It’s just the fact of life.
[Germany is] either going to write the check or they’re going to go through a very, very severe recession because nobody’s going to buy Mercedes, because they haven’t got any money, because Germany’s not writing a check. So, it’s just like, you can’t get out of that fact.
In the past, Taylor has said that Greece should leave the euro in order to help its own domestic economic situation. When asked whether he thought Spain should now do the same, he replied:
Yeah, everybody’s in the same spot. There are lots of ways of measuring the deterioration of a currency. Going back all the way to 1974, whenever that Spain became a market-based economy, you can see that currency depreciated on a regular basis almost the same amount every year – it didn’t matter whether the euro was there or wasn’t there, whether we were the snake, or whatever – it just goes down. And so they have to devalue. And it’s the only way they’re going to get their act together again.
Taylor said he likes buying the U.S. dollar against the euro – even though he is pessimistic about U.S. economic growth and thinks the Fed is going to launch QE3 in September – because he thinks the ECB is going to print more than the Fed does, ultimately causing the euro to be the currency of the pair that heads lower.
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