JOHN TAYLOR: THE EURO CRISIS HAS ONLY JUST BEGAN

Below is an intervew from John Taylor on Bloomberg TV

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 realize 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.