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Trading Any Market

Why Worry About The Euro?

Currencies / Euro Feb 14, 2010 - 11:18 AM GMT

By: Andrew_McKillop

Currencies

Best Financial Markets Analysis ArticleFrom as early as first quarter 2008 it was possible to predict the overvalued Euro, always able to gain from intrinsic US dollar weakness, was itself heading for a fall. Through 2008-2009 this was delayed, with speculators first making unsurprising bets on the traditional hedges, Gold and Oil, rather than mount direct attacks on the Euro. The recession also slowed the move to full frontal attack on the Euro, since the fantastic national budget deficit of the USA, overseas debt, and Obama bailout spending for Wall Street made, and make a weak dollar more than rational. The Euro reached its all-time high against the Dollar in Oct 2009 at a little more than $1.50.


Reasons for real and underlying weakness of the Euro, making it a fitting partner world reserve money for the US dollar, and joint candidate for scrapping and replacement "by something else" are simple but numerous. They start with the fact it has no status of "old and trusted" world money, like its big rival the Dollar. The dollar, preceded in the rebel British North American colonies of the 1760s by tobacco-backed money, and other value tokens, was first officially produced and circulated as a national money backed by gold, in 1792.

Exactly like the Dollar since 1971, and like all other world moneys today the Euro has no physical backing. The Euro is not convertible to a fixed weight of gold, other precious metals, or a basket of real resources.

Replacing whatever new single world reserve currency that can be imagined, with gold, is however not possible without a massive deflation and compression of the world economy. For the moment, believers in the Euro, like believers in the Dollar will have to remain believers in these and other major "Fiat monies" like the Yen, Yuan, GB Pound, Ruble, Rial, Swiss Franc, etc. Recent currency market sentiment however underlines the Euro "Fiat money" is certainly not a Mercedes, Bentley or Porsche money. Its exchange value, both defined and enshrined by shifting economic criteria, can also be changed by instant political decision. This may happen sooner rather than later, underlined at this time by press and media discussion asking: "Should the Eurozone be shrunk to only the stronger countries, or should the Euro be scrapped?".

Gold Backed Money

Since Gresham's time, the 1560s, defenders of "official money" are obliged to defend their own "Fiat money" and castigate rivals. In the soon-to-be ex-British colonies of North America of the 1760s, the thick cardboard used to create artistic "bank notes" often bore the message: 'Counterfeiting is Death'. This money was backed by real resources such as tobacco, hides, lumber and metals, but as with the partly gold-backed Elizabethan money defended by Gresham 200 years before, it was impossible to fully back the money with something of such value it maintained complete and total confidence.

This is an even more impossible mission for today's central banks. Using only the most restricted definition of money in global circulation, called M1, this has a total dollar equivalent value of about 45 000 billion dollars, increasing at about 6% to 11% per year. Total gold stocks of all central banks reporting to the World Gold Council were estimated at close to 11 880 tons as of midyear 2009. This means that only a tiny fraction of 1 gram of central bank gold could guarantee each dollar equivalent unit of paper money in circulation, if we retained the bizarre idea of this "fiduciary gold" being completely used to back a new and strong single world reserve money. Physical problems, including the extreme high density of gold, would ensure that surprisingly large amounts of the gold was lost in a brief period.

For the present therefore, we have to disagree with Gresham's one-liner that "Bad money drives out Good". If good money means gold-backed, as Ludwig von Mises acolytes demand, the amount in circulation could only be tiny. The deflation shock following its forced introduction would surely kill the patient - the global economy.

Even in Elizabethan times it was impossible to defend the overvalued official money against illicit and rival moneys, by guaranteeing it with an automatic and formal, legal equivalent in gold. Since the time of Keynes in the 1930s and 1940s, and the Oil Shocks of the 1970s we can add oil, food commodities and other "real resources" to the wish list of what should back an ideal world money.

As we know, since 2009, the notion of "CO2 money" has been added to the fantasy list. This would be a global carbon-related money based on complex formulae ultimately depending on how much CO2 each holder of this new world money emits. Intrinsic to this rarely fully described proposal circulating in the IMF, World Bank, finance ministries and central banks, and a host of ecology and environment NGOs and parties for some while, is the concept of "trading". The new CO2 money would therefore be a betting chip, as much as a currency. Small-time bets would be run on how much each small holder of the tokens can cut their oil, gas or coal consumption.

Play Money, Fantasy Economics

The betting fever which helped explode the world economy in 2008-2009, causing the deepest recession since 1945, is now a basic lifestyle theme of the "advanced industrial" societies. If the Euro and Dollar disappeared tomorrow with no undisputed replacement world money the chaos would generate vast opportunities for black market and grey market trading, barter and swapping - the delight of all gamblers, speculators, fraudsters and thieves. Even better, for all heavily indebted persons, companies and countries, previous debt could be magicked away, as No Money replaced Weak Money, in the relatively short period before this generated world war.

Perhaps surprising, the idea of suppressing all present money, national economies and the global economy as we know it is not only the domain of anti-capitalists, anarchists, revolutionaries and hippies. Global Warming and Climate Change economics is backed by very heavyweight players. A short extract of published World Shift Network economic and social engineering goals, to save the world from "climate catastrophe", is sufficient:

We support the development of sustainable, decentralized, that is local, high-tech production, combined with local use of local resources, and the redesign of our monetary system according to a fourfold model: 1) economy of gifting (a basic matriarchal feature), 2) counter-trade barter economy, 3) complementary local monetary systems for regional trade, and 4) unified currency (for example called “Terra”) for inter regional and global trade. In our eyes compound interest has to be abolished. Also the concept of “owning” land must be reconsidered.” http://www.worldshiftnetwor k.org/action/subsistence.htm l

Other, even more extreme versions, or visions of the future sustainable world are supplied by the 'Gaian' advocates, led by James Lovelock. Terra money, we can surmise will be part of a Terror Economy, devoted to a form of metempsychosis or transmigration of souls, needing very little cash but an awful lot of belief and credulity, and massive obedience to the masters and rulers engaging their fear-driven fantasies. What counts is that any tiny move towards this "high level goal", including moves to remove the Euro, or sharply cut its value against the Dollar will feature a sharp rise in the US dollar price of real resources such as oil.

Pyrrhic Victory for the Dollar

To be sure, the dollar would regain its lost status of sole reserve currency in global circulation, if European infighting led to a new, restricted and hard money Core Eurozone of a few countries. But this new breathing space would be short - the Dollar would quickly come under renewed speculative attack. Disappearance of the Euro would speed the long-term decline of the dollar, and perhaps its own disappearance.

Unremarked by most, the Euro serves a critical shielding role for the dollar, which the also overvalued Yen cannot because of the smaller size of the Japanese economy relative to the EU27 or USA. While the Euro exists, the US dollar can also exist, because the Euro shares the strain of playing world reserve money. When or if the Euro is abandoned, world monetary crisis will be inevitable and massive, with unforeseen consequences for the Dollar.

This reality is already discussed, sometimes in "coded language" in the negotiation of bailout funding to Europe's Dubai, that is Greece. The list other bailout candidates is long, notably Ireland, Portugal and Spain close behind Greece in spiraling debt and budget deficits. In this context, given global macroeconomic trends and underlying fundamentals it is likely the Euro can continue losing ground against the dollar. Brave talk from Germany claims that parity, or 1 Euro = 1 Dollar is perfectly acceptable to export market-hungry German corporations. Rising import prices of food and energy, billed in dollars, would pose no problem.

What we can be sure of is contrarian: the falling Euro will benefit the Dollar but only in the shortterm. Currency traders will return to betting against the dollar as political deciders rush to support both the Euro and the Dollar.

By Andrew McKillop

gsoassociates.com

Project Director, GSO Consulting Associates

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

© 2010 Copyright Andrew McKillop - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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