Hungary First To Offer Real Solution To Debt Crisis; Sets Stage for Gold's Re-Monetization

Hungary is considering allowing its citizens with mortgages denominated in a foreign currency -- typically the Swiss Franc -- to pay back their mortgages at an exchange rate that is lower than the current Forint/Franc exchange rate. Hungarian banks would be responsible for picking up the difference between the fixed exchange rate mandated by the government on these mortgages and the Forint/Franc market rate.

This plan has some problems -- in that Hungarian banks may not be able to afford picking up the tab on the exchange rate difference, and that the Swiss National Bank (SNB) may find an influx of capital, even in the form of loan repayments, to strengthen their currency (something the SNB has vowed to prevent) -- but I think it has some key features that may help us understand how the global sovereign debt crisis will be resolved, and what this means for the global economy. Specifically:

By letting those with mortgages pay back their debts denominated in foreign currencies at a lower exchange rate, Hungary is basically making banks pay for part of the loan -- not just the debtor with the mortgage. This type of debt cancellation is exactly what is needed and is the first step to a real solution. Until global debt levels are significantly reduced, there will not be sufficient capital available for investment or consumption. It's that simple.

By proposing a lower exchange rate for foreign-denominated loans, Hungary is pursuing an indirect form of currency appreciation; at least for Hungarians with mortgages denominated in foreign currencies, the Forint will be able to buy them a greater piece of their debt repayment. I still think the Forint has many problems and is not worth owning as a store of value, but a central bank pursuing a stronger currency in some way, while also helping advance the cause of debt cancellation, may be a policy we may see more of as this is at the heart of the solution to the global sovereign debt crisis.

As other central banks realize the need to strengthen their currency, they will naturally turn to where history has always turned to find strength in the midst of public debt crises: gold. This puts us on the trajectory toward some type of re-monetization of gold, which is what sends gold and gold mining shares both much, much higher.

Hungary's proposal here is also unlocking a new era in monetary policy, suggesting a reversal to fixed exchange rates and the end of the floating exchange rate system born when US President Richard Nixon terminated the link between US dollars and gold in 1971. We've already seen the SNB announce that they are basically pegging the Franc to the Euro, and now we are seeing talks of the Forint being pegged in certain situations at a rate different than what the market is pricing the Forint at. I don't think monetary authorities around the world have the trust of their constituents to pull this off, and think various forms of revolution and political re-organization are likely.

So, at the very least, developments in this story will be worth watching. If the right type of debt cancellation deal can be worked out, we may be on our way out of the global debt crisis and ready for the next secular bull market in equities.

Disclosure: I am long GDX.

Comments

[bernardpalmer]

gdehuff

"And all of this is justified for the sake of returning to gold. BP - I think that your oil rig is leaking. :-) "

Looks like venerability just blew yours out of the water.

[gdehuff]

Vulnerability

I am on both the long side and the short side. Your ESP has failed you in discerning several other aspects of my being as well.

Puerile humor is the only way that I know to deal with all of the futile certainty pompously spouted on these pages. Your paranoia will only destroy you and then it won't matter whether you are long or short.

[Venerability]

GDBot,

Puerile attempts at discrediting your self-styled "enemies" - i.e. anybody on the Long side anywhere - harm you alone.

That's because your Botmasters tend to be young, unsophisticated, and poorly educated in anything except computer science.

That's not meant to diss bona fide senior computer scientists, who are a very well-educated bunch. But the BotMasters they use on a day-to-day basis to administer the Botnets tend to be very junior Kiddies, whose main skills are hacking and keeping track of the minor algorithms. Propaganda is not their strong suit - nor is wit.

You'd be well-advised, Poopsie, not to spar with me in any kind of sophisticated propaganda contest. I'm a media veteran and a sector veteran. Just as the traders with the deepest pockets and the best algorithms win at trading, and the hackers with the best hacking skills win at hacking, the propagandists who are most articulate and skilled at propaganda win in that arena, when allowed a voice.

[Venerability]

DaveW:

Everyone who needs to know what I'm talking about, DOES.

And I just had an epiphany: Prefetch, DOGs, Fetch???

Just how far back does Al Gore's silly "We invented the Internet" go?

TOO far, that's for sure.

Which once again demonstrates just how momentous the sea change in the World's Currency Regime actually is.

It is INEXTRICABLY tied in with a concomitant sea change in the Internet and who is permitted to control it.

Which in turn means a sea change in world media and world information flow, the most important real determinants of world markets.

[gdehuff]

Vulnerability

I think that I understand where you are coming from.

The solution is to not use the internet for anything except to collect data. Keep all of your records on a computer that is never hooked up to the internet. Build a fortress around your self sustaining home with all of the weapons remotely controlled by wire linked elcectonics so that you don't have to hire guards and keep all of your gold under your pillow.

Sounds good to me at least until Genghis Kahn III decides to take you out (see my other post above).

[Thomas Noon]

OR....the banks would charge higher interest rates to try to measure the value of this currency hedge. The borrowers would be left with trying to figure out if 5% interest on a Hungarian-monetized loan were better or worse than a 7% interest rate on a Swiss -ranc-monetized loan.

[Thomas Noon]

"By letting those with mortgages pay back their debts denominated in foreign currencies at a lower exchange rate, Hungary is basically making banks pay for part of the loan -- not just the debtor with the mortgage."
But, unless the govt also required the banks to lend money under these terms, the Hungarian banks would merely not make loans where they take on the exchange rate risk; they would not make these kinds of loans in currencies they don't trust. Of course, of the loan were in a stable currency and the Hungarian currency were devaluing, then the bank is better off....their mortgage payments are rising (as measured in Hungarian currency). Mortgages are made for 30-40 years in many cases and no bank can predict what can happen to exchange rates in that time.

[bernardpalmer]

Wow Mr. Patel. You've called it first. Gold is coming back as money!

"This type of debt cancellation is exactly what is needed and is the first step to a real solution. Until global debt levels are significantly reduced, there will not be sufficient capital available for investment or consumption. It's that simple."

The way I see it once the fiat currencies fall over then the best way to refinance the world it by every one having complete ownership of the place where they normally live regardless if they are renting or mortgaged or in a long stay hotel room. There is no way out of this. Millions of families can't be forced onto the streets and who's going to force them anyway? Before long all the banks will fail so there will be no one to pay and nothing to pay with. So all debt in fiat currencies is wiped.

As most of the worlds wealth is shifted to one end then this is the easiest way to spread it back around a bit. Those with gold and silver can then buy property from the new owners who become renters using the gold they have just earned and we then hopefully get a circulating metal currency. Simple in theory.

All those with large reserves of hidden metal should be keen to bring it out of hiding with so many bargains out there to be had.

All government owned property including roads should be auctioned off for metal ASAP and the proceeds distributed equally to each living citizen regardless of age. Obviously this will best be done electronically so most transactions for a while will be electronic and by weight and purity probably through the Internet.

The most important thing is to keep the power supply normal and all communication open. If we lose power for more than a week or 2 then we could be heading back into the 15th century before we know it.

There probably will be a period of instability while the military possibly take control but once the gold starts moving around an interim government possibly made up of economist from the Austrian schools should know what's got to be done to fire things up.

Personal income tax should be abolished along with most other taxes though it should still be collected for a year but put into a credit union savings account accessible a month after deposit. That way the employers don't get to keep it and it makes a large national savings fund.

A 33.3% company tax could be collected weekly with 30% being equally distributed to all citizens allowing for 3.3% to run a very very small government. This should give incentive for the return to a manufacturing industry because all home made products will return money to the buyers.
Nothing like gold to create wealth and destroy Socialism.

More at
www.primaryfundamental...

[gdehuff]

Wow - sounds like anarchy to me and once that happens it will only be stopped with even more blood in the streets. Then when it begins to turn around you want to get an interim government rolling by heading it up with economists - MAN THAT IS FUNNY :-) :-) :-)

First, the survivor and quieter of anarchy, one Genghis Kahn III isn't like to turn his power over to anyone. Second, if he turned it over to economists we'd be in the same mess within 100 years.

And all of this is justified for the sake of returning to gold. BP - I think that your oil rig is leaking. :-)

[francba]

I am hungarian. In my opinion banks only lose the enormous profit they would have created by the rising of CHF price.
Why? Because as Peter Rona, an economist in Oxford said, banks DID NOT buy franks, it was just a counting reference, to override HUF's weakening.
Therefore if banks did not buy any franks there would not be a frank-influx into Swiss banks.

Not to mention, that the mortgage-treaty was unlawfully made, in many aspects. The risks for the loaners weren't exactly determined and the banks arbitrary raised interest rates.

[dr. Kotasz]

Thing is, the banks would not be able to absorb the losses i.e. they would have to be saved by the government. So taxpayer money would again bail out the financials. This is is still the same old story: socializing the losses of the financial industry.

[Venerability]

From the GG Yahoo Board - Please Pass On:

I won't let you get away with it this time.

I have links to at least 25 "Bird Game" sites, where my portfolio and the levels at which I bought things are there for the entire world to see.

A good forensic computer person - if anyone can keep up with you - would be able to see exactly how you managed to take over my E-mail, my history, my defender, my malware updates, my phishing filter, even my basic Boot, as well, of course, as making my - and probably everyone else's - brokerage account completely porous.

If you take me down, I will take TOS and Minyanville and Seeking Alpha and even the impregnable AmDocs down with me.

To make one tiny little woman the focus of so much pure hatred and malice FOR NO REASON! for fifteen years is beyond unconscionable behavior.

It is literally the distilled essence of Evil. Banal, childish, silly, filthy, based on NOTHING Evil.

[Davewmart]

I have no idea what you are talking about. Presumably this is an attempt to communicate something or the other, so why not do so.
Starting at the beginning is a good idea.

[untrusting investor]

Pegging the repayments at the exchange rate in effect when the mortgage was written seems somewhat logical. Thus shifting the exchange rate risk back to the mortgage/banking sector instead of the borrower/consumer sector. Just doubt the vast majority of consumers are anywhere near sophisticated enough to handle exchange rate risk, and seems like the banking sector was attempting to take advantage of this the maximize their profits and shift risk to others, as private corporations always do. Will not be sorry if the banking sector takes large losses on this, as they may well deserve to.

[Economic Analyst]

"Will not be sorry if the banking sector takes large losses on this, as they may well deserve to."

Maybe not for now, but you may change your mind when it is once again decided that the gov't is at risk of default because of all the people who borrowed money to buy a house based on prospects of future earnings, but because the corporations can't afford to pay taxes on the gains made by shorting the pension plans with offshore accounts they need govt stimulus to bring back jobs which means of course we need a consumption tax to balance the books even though its a fiat currency and we have a lot of gold sitting around that needs to be pushed out the door while prices are still sky high.

[untrusting investor]

What's the difference whether the individual goes bankrupt because they can't pay or a bank goes bankrupt because of losses. The effect on the country as a whole is the same. No difference in total. The losses are always losses and have to be taken by somebody. If as you posit, a consumption tax will have to be levied, it would be levied either way. Better to let the business go bankrupt and let the investors take the loss. They can always recapitalize and keep going.

[Economic Analyst]

"Better to let the business go bankrupt and let the investors take the loss."

You've hit the nail on the head. Unfortunately, society unwittingly perhaps allows organizations to create structures that are designed to extract risk premiums in the form of profits at the same time shifting the risks to someone else.

A better plan perhaps is for government to perform the role of ensuring that businesses and organizations that are established within the legal framework especially those that receive support and subsidies are structured to create measurable benefits to society.

Those that are counterproductive to established principles of civilized societies should be taxed and regulated in a manner proportionate to the damage they do. Corporations as well as government agencies only have a right to exist with the permission of and within the regulatory framework of civil society.

Those that create positive returns should be nurtured, the ones that prove to be more trouble than they are worth should be marginalized or systematically destroyed depending on the amount of damage done.