Ad Hoc Commentary – the European elections

The most important elections from the capital flight standpoint is the European elections that runs from May 22 to May 25, 2014. Election results will trickle in from Sun night itself. The recent Indian elections might be the world’s biggest by number of people, but it pales in comparison to the European elections if you are concerned about market movements.

The first question we ask ourselves today is where is big capital parked today. A good place to start is IMF COFER (currency composition of official foreign exchange reserves) at

As you can see from the chart at the IMF COFER site, we have the breakdown only for allocated reserves. Out of this, USD makes up 61.2% of reserves, while EUR makes up 24.4% of reserves. For those who believe the CNY will become the next reserve currency of the world, you have to appreciate that CNY is unlikely to take the lion share of reserves anytime soon except in the case where America is deprived of its military might. This could happen through an external force like Russia + China, or more likely internally through bad decisions. Those who read Romance of Three Kingdoms will know that the other two kingdoms will always join forces to beat the predominant power before turning on one another.

In any case, Europe and her 24.4% share of reserves is likely the weakest link. If the reserves are held mostly by residents, then it is perfectly fine, i.e. we remember Japan. Since most reserves are held in government securities, we refer to the IMF fiscal monitor at

As you can see from Statistical Table 12a and 12b, non-resident holdings of general government debt is very high in Europe. The average for advanced economies is 36%, while Germany and France is at 61% and 64% respectively. The widely discussed Americans are below average at 32%. As we mentioned before, it is very likely that the money that ran away from Asia in 1997 went into European government securities for the creation of Euro.

Country Nonresident Holding (%)
Austria 87.36
Belgium 62.61
Bulgaria 44.42
Czech Republic 30.92
Denmark 43.29
Estonia 71.25
Finland 83.48
France 63.81
Germany 61.07
Greece 85.85
Hungary 58.69
Ireland 65.27
Italy 36.71
Latvia 93.05
Lithuania 76.28
Netherlands 55.93
Poland 50.27
Portugal 63.62
Romania 53.97
Slovenia 49.83
Spain 40.01
Sweden 47.29
United Kingdom 29.66


The problem for Europe today is that the European elections is going to be seen as a yardstick on the European project by capital who had been hiding in European government bonds. As we mentioned before, the European debt crisis had left Europe’s PIGS for Japan and then headed back for France and Germany in 2014. The 2014 European election is thus very important because capital fear danger, and political danger like Euro-skepticism is one of them.

In the recent past, Europe had benefited from the capital flight from Russia following the problems in Ukraine. Having recently escaped political uncertainty, this new capital inflight is likely more sensitive to changes in political winds than the average capital. If the European election increases the likelihood of political upheaval within Europe, then capital that recently poured into Europe is of not much help. The short term upside for the Europeans is that there doesn’t seem to be many places good to invest in right now. That means the European have precious time. However, if the past is any prediction of the future, then Europeans have a bad habit of squandering precious time. They remind me of Asia. We too have a tendency to look the other way in the hope that it is just a bad dream that will go away. While the political elites do that, capital might be thinking: perhaps we should wait for a selloff in the US equity to buy it up?

Infrastructure spending funded by investment dollars printed to retire government debt is perhaps the only way out of this European austerity. By retiring the national debt, we solve the problem of eventually unpayable government debt and compound interest on those debts. If we do not print, we can be sure that taxes will increase. Not printing will likely usher in the Piketty wealth tax. The tag line says they are ‘getting the rich bastards’. However, we remember that America introduced income tax in 1913 with purpose of ‘getting the rich bastards’ too.

“You can’t tax business. Business doesn’t pay taxes. It collects taxes.” Ronald Reagan
As Ronald Reagan insinuated, businesses can pass down whatever tax you impose on them. Similarly, the truly wealthy cannot be taxed. Instead, they will collect the Piketty wealth tax by government through goods and services inflation. At the final calculation, it is very probable that the middle class itself would suffer the brunt of any global wealth tax. The phrase ‘getting the rich bastards’ is after all perhaps just a play on the poor man’s envy of the rich to get them emotional. Someone should remind them that tax policies on capital and labor is best done rationally than emotionally.

Good luck in the markets.