The Fate of the Euro

[Gumby]

Interesting post referenced on The Browser:

Some European countries are in the habit of going bankrupt

[MediumTex]

Europe also has a tradition going back many centuries of periodically having wars among its members.

Keeping that thing together under one economic umbrella is going to be supremely challenging in coming years.

[craigr]

When they Euro came out and they started transitioning to it back in 2001(??) I was over there. I didn't think it would last 20 years. We are halfway through and I still think it will blow up.

I learned the differences in the European truck stops. We'd stop in Germany and it was very clean and orderly. Everyone was very quiet and polite. Service was efficient. Then we stopped in Italy. The truck stop had a mass of people at the counter waving their hands. There was no line for food. Whoever yelled loudest got served first. It was chaos. It was at that moment that I realized that the Euro doesn't have a snowball's chance in hell of working. The cultures of all those countries are just too radically different.

Germany has a very strong economy and they don't like massive spending without good revenue. The southern countries all have a history of blowing up their currencies due to spending problems. Why would Germans, French, etc. want to put up with that and have to bail them out? What is happening today is expected. Those countries like Greece, Portugal, etc. know that they can take advantage because the northern nations will have to bail them out due to the currency workings. It's just socialism taken to the fiat paper level. You get some people who realize they can take advantage of others. At some point the party will end though.

[moda0306]

Maybe the Euro story is part of the "how can we have LT bonds and gold both do so well at the same time" question.  I wonder if there were no problems with the euro whether treasury yields would be so low, or gold would be so high.

[clacy]

I certainly don't think it will stand the test of time.  I would be shocked if the Euro can survive another significant default situation.  It seems like it would be very hard to convince your voters (in Germany, France, etc) that it is in their best interest to keep bailing out lazy, financially reckless countries such as Greece and Portugal. 

[murphy_p_t]

Moda...excellent question...it deserves it own thread.



i'm waiting for someone, anyone to repeat the endless refrain of HB that the future is unknowable? A corollary to the refrain might be: if the future IS knowable, it will be real helpful to know "when"

(BTW you're all probably right)

i remember working in Europe  while the Euro peaked @ $1.60 & being told I should convert to US$....I thought he was crazy @ the time...how wrong I was. However, its been making a nice rebound lately vs US$

potential strengths of the Euro (by comparison to the US$) ?
-heavier gold backing than US$ ?
-not as heavily mired in global warfare / military-industrial complex compared to the US, who is depleting the Treasury with troops patrolling the world
-led by Germany...a country that continues to produce best-in-class products, almost without exception...strong balance of trade
-Germany will not allow inflation, ensuring a durable currency, recalling the Weimar era
-are the PIGS in any worse shape than Illinois, California, Nevada, Detroit ?
-The Euro doesn't have “reserve currency status”? which may be in danger of being lost
-when you're on top (US empire), there is only one way to go
-to date, Europe (Germany) is leading the US in imposing austerity

yet there are many problems conceptually w/ the Euro (as noted above), but I certainly wouldn't go shorting it (I don't know “when”? it will bust apart.) i certainly wouldn't bet it will happen before the US$ busts apart

in fact, if the PIIGS leave and/or are booted out, couldn't the Euro appreciate strongly, as it would be comprised of the core nations (who have lots of gold)

(maybe I best get my Euro out of Ireland & open a German account?)

[murphy_p_t]

also, couldn't the case be made that the US$ has already degraded beyond recognition?

less than 100 years ago it took only 20 slips of paper to get a 1 ounce gold coin to hold.

today, it requires well over 1,500 slips of paper to purchase that same gold coin.

so far, its been going out with a whimper...will it end in a bang? who knows...

[MediumTex]

also, couldn't the case be made that the US$ has already degraded beyond recognition?

Compared to what?  If the U.S. dollar is losing, I want to see what is winning.

less than 100 years ago it took only 20 slips of paper to get a 1 ounce gold coin to hold.

today, it requires well over 1,500 slips of paper to purchase that same gold coin.

How many British pounds did it take?  Again, on a relative basis, the U.S. dollar has done no worse than other world currencies and much better than a lot of them.

so far, its been going out with a whimper...will it end in a bang? who knows...

In 2008, when it looked like the world might end, the U.S. dollar was doing anything but whimpering.  When people really get scared, they go to the dollar, exactly as Harry Browne described in his writings--the U.S. dollar is the #1 currency in the world and gold is #2.  Will the euro change that arrangement in the future?  I don't know, it might, but right now I think the viability of the euro experiment is far from clear.  If history is any guide, future economic textbooks will describe the euro as an ill-fated monetary gadget play that made a relatively quick exit from the world economic stage.

[moda0306]

murphy pt,

How hard would you have had to work for that dollar a hundred years ago?  All negative talk about printing aside for a second, a currency, fiat or gold-based, is supposed to be a medium of exchange with relative stability and predictability.  A slow decrease in value of a medium of exchange (though at times it has hardly been slow, and may not be in the future) is hardly the worst thing I can imagine in a society.  It's the manipulations in the markets that it may cause that's the problem, and that's what I prefer to look at.  Talking about the $ being 1% of its former value at one distant point in history doesn't get us very far in 2010 when the next best fiat currency, the Euro, is looking pretty tough.

[murphy_p_t]

Moda,

Please elaborate on "It's the manipulations in the markets that it may cause that's the problem, and that's what I prefer to look at. "

Are you referring to to rush into commodities to protect against inflation? I certainly agree that the inflation tax creates many knock-on effects.



MediumTex,

to answer the question what the US$ is losing against, I claim that gold is winning, looking @ gold over both the past 10 years & over the past 100 years.


what i find more interesting is: "When people really get scared, they go to the dollar, exactly as Harry Browne described in his writings--the U.S. dollar is the #1 currency in the world and gold is #2."                I think this paradigm held up well when HB wrote.

Is this paradigm now breaking down, or will the US$ reassert itself? Based on the recent geopolitics, why haven't we seen a massive spike in the US$? (After all, how much more unstable can the world become? I tremble just asking)

see this chart    http://kingworldnews.com/kingworldnews/ ... erate.html


Did HB discuss the circumstances when the US$ would slip from being #1? Certainly for our lifetimes, the US has been dominant. What are your thoughts?  (Remember, the US$ wasn't always on top; before the US, the British empire was dominant.)

I'd like others' thoughts on the likelihood (& timeframe) of the US$ (rather Fed Res Note --  FRN) slipping from #1 vs. other fiat currencies.

or a more useful question to me: under what scenarios do fiat currencies smash gold for an extended term (5-10+ years)? again, what is the likelihood & how soon might it start?

thank you for your input...I'll be happy to re-evaluate my VP!

[Gumby]

Remember, the US$ wasn't always on top; before the US, the British empire was dominant.

The shift to the US Dollar did not happen overnight. It did not happen in a year. It took a loooonng time for the Pound to overtake the Dollar. It's a process that can take a generation. In order to replace the Dollar you would need a reserve currency that has a ton of liquidity. I mean, there would have to be massive and massive amounts of that currency all over the world. And in order to have a currency that has that much liquidity you need to have a growing trade deficit to continuously get that currency into foreign hands.

[AdamA]

(maybe I best get my Euro out of Ireland & open a German account?)

One of HB's reason for using US dollars (beyond the fact that it's the most popular currency in the world) was that he lived in the US.  You spend dollars, not Euros or Yen.  When you keep your cash in foreign currency, you introduce currency risk, which can really change the nature of the portfolio.

Although it is nice (for those of us who live in the US) that the dollar is so popular, I don't think it's a neccessary condition for the PP to function properly, as long as you hold cash, stocks and bonds in the same currency (that of the coutnry in which you live) and you are fortunate enough to live in a country that is relatively stable, the PP should work.

Am I right?

[murphy_p_t]

Gumby,

I think you'll find this article to be quite interesting. It outlines the history of the international financial system creation since WWII. I don't know how complete/accurate this is, considering its from wikipedia.

https://secure.wikimedia.org/wikipedia/ ... ial_system

One of the things I'm struck by is the amount of involvement by politicians/governments in creating the internat'l financial system. If this outline is reasonably accurate, it seems that changes can come fairly rapidly.

[MediumTex]

MediumTex,

to answer the question what the US$ is losing against, I claim that gold is winning, looking @ gold over both the past 10 years & over the past 100 years.

I meant the U.S. dollar hasn't done any worse than the rest of the world's fiat currencies.

what i find more interesting is: "When people really get scared, they go to the dollar, exactly as Harry Browne described in his writings--the U.S. dollar is the #1 currency in the world and gold is #2."                I think this paradigm held up well when HB wrote.

Is this paradigm now breaking down, or will the US$ reassert itself? Based on the recent geopolitics, why haven't we seen a massive spike in the US$? (After all, how much more unstable can the world become? I tremble just asking)

see this chart    http://kingworldnews.com/kingworldnews/ ... erate.html

Did HB discuss the circumstances when the US$ would slip from being #1? Certainly for our lifetimes, the US has been dominant. What are your thoughts?  (Remember, the US$ wasn't always on top; before the US, the British empire was dominant.)

I'd like others' thoughts on the likelihood (& timeframe) of the US$ (rather Fed Res Note --  FRN) slipping from #1 vs. other fiat currencies.

or a more useful question to me: under what scenarios do fiat currencies smash gold for an extended term (5-10+ years)? again, what is the likelihood & how soon might it start?

thank you for your input...I'll be happy to re-evaluate my VP!

I once heard a smart person say that reserve currencies don't collapse, but are instead "decommissioned" over time, as the British pound was.

Undoubtedly, the U.S. dollar will be replaced by something at some point, but I see nothing in the world today that seems like it could displace the dollar any time soon.  If this were to happen, it might be prudent to re-evaluate the PP at that point, but until it happens I'm not going to worry about it.  Data from around the world suggests that the PP does fine in non-reserve currency countries, so it probably wouldn't be a big deal.

To the question of when fiat currencies will smash gold, it will be when the underlying economies of those currencies are doing well.  The U.S. dollar "smashed" gold for most of the 20 year period between 1981 and 2001.

You linked to a Richard Russell commentary.  Personally, I think it's time for Richard Russell to retire.  I think age is catching up with him and he's starting to sound a little shrill to me.  IMHO, there is nothing unusual about what is happening with the U.S. dollar right now.  The rest of the world is facing the same problems, and many countries are in much worse shape than the U.S.

The country with the strongest currency right now seems to be Japan, and they are in approximately twice as bad a shape as the U.S. from a debt to GDP perspective.  It may be that the entire narrative we have been hearing on the effects of the debt situation is simply wrong.  Although it has logical appeal, the U.S.'s fiscal situation has been deteriorating sinced Reagan's first term, and every bad fiscal decision the politicians have made has been met by a drop in interest rates.  What does that mean?  I don't know, but I think Harry Browne would say it's just one more unpredicted development in this unpredictable world.

[Gumby]

Gumby,

I think you'll find this article to be quite interesting. It outlines the history of the international financial system creation since WWII. I don't know how complete/accurate this is, considering its from wikipedia.

https://secure.wikimedia.org/wikipedia/ ... ial_system

One of the things I'm struck by is the amount of involvement by politicians/governments in creating the internat'l financial system. If this outline is reasonably accurate, it seems that changes can come fairly rapidly.

murphy_p_t,

I think that article is a bit misleading. It makes it sound like people woke up one day and realized, out of the blue, that the British Pound wasn't 'up to the challenge' and decided to switch the world currency over to the US Dollar overnight. In reality, the switch took a long time to reach that point.

Here's another quote from Wikipedia, for what it's worth:

The United Kingdom's pound sterling was the primary reserve currency of much of the world in the 19th century. U.S. and German economic dominance from the second half of the 19th century onward, the emergence of the USA as an economic superpower (and, importantly, the establishment of the U.S. Federal Reserve System in 1913) as well as economic weakness in the UK at various intervals during the second half of the 20th century resulted in Sterling losing its status as the world's most reserved currency.

Source: http://en.wikipedia.org/wiki/Reserve_cu ... d_sterling

In other words, the shift from the British Pound to the US Dollar took at least 50+ years to happen. And the British Pound didn't exactly drop off the face of the Earth.

I'll also point you to the Triffin dilemma, for which Wikipedia says:

The Triffin dilemma (less commonly the Triffin paradox) is a theory that when a national currency also serves as an international reserve currency, there could be conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country's currency that foreign nations wish to hold - (i.e. the global reserve currency) must be willing to supply the world with an extra supply of its currency to fulfill world demand for this 'reserve' currency foreign exchange reserves and thus cause a trade deficit

Source: http://en.wikipedia.org/wiki/Triffin_dilemma

Think about that. Which country's currency is most "up to the challenge" of having a big enough national trade deficit to provide enough liquidity to the rest of the world? If there's one thing the US is good at, it's printing lots of money.

Switching a global reserve currency isn't something that typically happens quickly. It takes time. (And lets not forget that gold-standard currencies don't exist anymore). For the immediate future, every country on the planet seems to really like holding US Dollars — often in the form of low-yield, multi-decade Treasury bonds — despite the Dollar's tremendous flaws. But who knows... 20, 30 or 50 years from now, it's possible another currency could certainly take its place. Either way, it's not something you really need to worry about tremendously with the PP.

In any case, Treasury Yields are a good barometer for the world's appetite for Dollars. If you're really worried about the status of the Dollar, you'll see trouble in Treasury yields before you hear about it in the media.

[murphy_p_t]

thank you, Gumby. Your case is very reasonable.

In fact, FRNs may be our greatest export


We can thank Mr. Nixon for closing the gold window. As an American, I say let's hope the rest of the world continues to accept FRNs.

[Gumby]

thank you, Gumby. Your case is very reasonable.

In fact, FRNs may be our greatest export

We can thank Mr. Nixon for closing the gold window. As an American, I say let's hope the rest of the world continues to accept FRNs.

I feel that there must be an end to the madness at some point. But nobody knows when, or if it will even be in our lifetime. If you're looking for an interesting — and sad — opinion (from a 2003 presentation) about why the Dollar has become the king of all currencies, read this:

Crisis of the U.S. Dollar System

The author presents an interesting picture of how the US struggles to keep its Ponzi scheme running. There is a paradox in that the more chaos there is in the world, the more people want to cling to the Dollar — which often is the root cause of a lot of the chaos.

If I didn't have the PP, I think I'd be very confused and worried about my long term investing strategy.

[craigr]

Not my main source of information, but here is a breakdown of a UBS report on the Euro:

http://www.zerohedge.com/news/bring-out ... -civil-war

I made a comment many years ago to some EU cheerleaders that thought the EU would prevent wars in the future. My take was by tying all the countries together it would lead to a war when the whole thing eventually unraveled. What say the other forum political scientists out there in forum land?

[Gumby]

Not my main source of information, but here is a breakdown of a UBS report on the Euro:

http://www.zerohedge.com/news/bring-out ... -civil-war

I made a comment many years ago to some EU cheerleaders that thought the EU would prevent wars in the future. My take was by tying all the countries together it would lead to a war when the whole thing eventually unraveled. What say the other forum political scientists out there in forum land?

I read this yesterday and didn't know what to make of it. It was like reading a report about an asteroid on a collision course with Earth and having every mainstream media outlet totally ignore it. Do we think this is likely imminent if they went through the trouble to release the report?

[craigr]

I think they are covering all bases, but probably think it is possibility. I personally think the breakup of the Euro and EU is inevitable. And frankly, it can't happen soon enough.

[Indices]

God the Germans try and conquer Europe militarily, now that they run it, they act like governing it is none of their responsibility.

[craigr]

God the Germans try and conquer Europe militarily, now that they run it, they act like governing it is none of their responsibility.

"Be careful what you wish for because it may come true..."

[MediumTex]

I personally think the breakup of the Euro and EU is inevitable. And frankly, it can't happen soon enough.

The sooner the better.

It's a structure built on sand.  Collapse is sort of a given.  It's just a question of how much damage will take place in the process of discovering these things.

[Indices]

Speaking from a selfish perspective, I like the Euro. It makes traveling through Europe easier. No conversions!