Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19
The IPO Market Is Nowhere Near a Bubble - 9th Oct 19
US Stock Markets Trade Sideways – Waiting on News/Guidance  - 9th Oct 19
Amazon Selling Fake Hard Drives - 4tb WD Blue - How to Check Your Drive is Genuine  - 9th Oct 19
Whatever Happened to Philippines Debt Slavery?  - 9th Oct 19
Gold in the Negative Real Interest Rates Environment - 9th Oct 19
The Later United States Empire - 9th Oct 19
Gold It’s All About Real Interest Rates Not the US Dollar - 8th Oct 19
A Trump Impeachment Would Cause The Stock Market To Rally - 8th Oct 19
The Benefits of Applying for Online Loans - 8th Oct 19
Is There Life Left In Cannabis - 8th Oct 19
Yield Curve Inversion Current State - 7th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

Euro Is Not Gold, May Collapse Plunging Eurozone into Chaos

Currencies / Euro Feb 17, 2010 - 09:01 PM GMT

By: Adrian_Ash

Currencies

Best Financial Markets Analysis ArticleBorrowing at low German-style rates, the Eurozone states forgot to apply German-style limits...

ALTHOUGH hedge funds keep confusing the two, the Euro is not gold.


It might just collapse, however, under the same pressures – and with the same "bang!" outside the markets – that killed the international Gold Standard eight decades ago.

"Nobody invented this remarkable system, no grand plan was ever devised, no one ever wrote a rule book on the necessary codes of behavior," as the late Peter Bernstein wrote of gold – and not of the Euro – in his 2001 tome, The Power of Gold.

That's not to say rules and codes didn't apply. Indeed, it was suspending and then wilfully breaking them which brought about the Gold Standard's demise, first as Europe and then as the world slipped into chaos in 1914 and twenty years later. But for a short half-century, this frock-coated theatre applied the rule of law to the way humanity had scrabbled about to store and exchange value for more than 5000 years.

The Gold Standard, which coalesced into international fact around 1870, meant "having a currency that was universally accepted, because it was backed by stuff before which humanity had been genuflecting since the beginning of time," Bernstein explains. Put another way, "Currencies were just names for a particular weight of gold," as Robert Mundell, Nobel economist (and 'father of the Euro' ironically enough) once said.
 
There was a competitor, of course, in silver. But "We chose gold not because gold is gold, but because Britain is Britain," as Ludwig Bamberger, co-founder of Deutsche Bank, told the Reichstag after leading the newly-unified Germany to nail its money to gold in the early 1870s. Similarly, by the end of the century that followed, it was Germany – rather than simply its Deutsche Mark – which everyone wanted to ape.

Never too hot or too cold, the world's third-largest economy had side-stepped the 1970s and '80s inflations...re-embracing its poor eastern sibling in the '90s more easily than anyone guessed...and offering a clear template for sustained growth, built on what now sounds like a Victorian if not barbaric aim:

Sound money.

The trick? It was simple, really. Just keep a lid on the money supply. Raise rates whenever things get too warm. Thereby ensure – with diligent savers avoiding both housing and consumer bubbles – that interest rates can stay low the rest of the time.

See the "convergence" between interest rates on profligate Pesetas and the doughty Deutsche Mark as the birth of the Euro approached?

Note also how it came about. First, the political fudge cooked up at Maastricht 18 years ago this month offered to share Frankfurt's "sound money" with its "Eurozone" neighbors. They too could borrow at low German rates, rather than being whipped by "hot money" flows and "speculative attacks".

So second, and with the convergence clock ticking, bond-buyers the world over took their cue to start bidding up West Europe's high-yielding debts.

Down went Portuguese, Italian, Irish, Greek and Spanish interest rates as these "speculators" poured cash into previously wayward economies, safely anticipating the day that a single, pan-European central bank housed in Frankfurt would set the cost of money for the PIIGS, Finns, French, Belgians, Dutch, Austrians and Germans all at once.

Bond speculators got a sure thing; the newly Germanized states got access to cheap money. What could go wrong? All it required was everyone played by the strict terms of the treaty.

But just the Euro isn't quite gold, so Spain wasn't quite Germany, as the charts below from Global Property Guide show...

The single European currency wasn't the first attempt at creating European Monetary Union (EMU). Hell, between Feb. and Sept. 1992, the pre-Euro union even tried to include the United Kingdom!

But unlike the so-called Latin Monetary Union tried by France, Italy, Belgium and Switzerland in 1865 – and unlike the coinage minted by Emperor Charlemagne a thousand years earlier – the Euro arrived with that unsurpassed wisdom only the very end of the last century enjoyed...a sure knowledge that history's worst horrors were over thanks to clever people pulling this level, twiddling that dial, and framing new laws for the good of their voters.

Pulling together through treaties and summits, European leaders could steer what they called their "free-market economy" to unending growth...all boom and no bust...enjoying German-priced finance without first having a Weimar-style lesson etched onto their brains. The rules, it was hoped, were quite simple. "In order for [monetary union] to function smoothly," as the European Council still states, "member states must avoid excessive budgetary deficits. Under the provisions of the Stability and Growth Pact, they agree to respect two criteria:

"A deficit-to-GDP ratio of 3% and a debt-to-GDP ratio of 60%."

And to keep the union's 12 (and now 16) members in line, "Only an exceptional and temporary excess of the deficit over the reference value can be exempt from being considered excessive," as the European Central Bank says, "and then only if it remains close to the reference value..."

Yet 12 of today's 16 Eurozone members – including Germany and France, as well as the PIIGS – are now so wide of these rules, they are subject to excessive deficit procedures (EDP), a set of deflationary budget demands imposed by the union's governing council in Brussels. And it's not just Eurozone states either who stand in breach of their vows. Twenty of the European Union's 27 political members are also now subject to EDP slap-downs – just the kind of "austerity" budgets currently being applied to the Greek financing crisis, bringing out strikers and marches across the nation.

Here in London, for instance, the UK Treasury laughed off the threat of EDP after its 2007 spending overgrew tax receipts by 2.7% of gross domestic product. Sixteen months later, EDP was begun as the UK's state deficit shot above 12% of the annual economy.

"Bringing an end to the excessive government deficit situation by 2013/14," announced the European Council last year, "implies an average annual fiscal effort of clearly beyond 1% of GDP over the period between 2010/11 and 2013/14."

But can you imagine? Fiscal shrinkage worth 1% of GDP each and every year until 2014...?! That's enough to turn Paul Krugman's beard snow white. And it's just the kind of supra-national deflationary stricture which caused the Gold Standard to crack at the start of the Thirties.

Part II to follow...

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules