I’ve been thinking a lot lately about how the dollar’s fall is likely to play out. The world is far bigger, richer, and healthier than it was during the last big currency shakeup. In the 1930′s, when the Pound Sterling lost its status as #1 reserve currency, the world had just 2 billion people with an avg life expectancy in the 40s (today it’s 69.2 – which is good in a societal sense, yet very bad in a govt-entitlement sense).
Its citizens are also saddled with many times higher debt-per-capita. Gold and silver-backed money has disappeared. Hence, the currency wars and economic turmoil we’re starting to see.
Importantly, the global financiers are (arguably) more thoroughly-entrenched in political/biz power structures than ever before. And they will have their way for now, like it or not.
Read Simon Johnson’s 2009 piece, The Quiet Coup, if you haven’t yet. Unfortunately, things have gotten worse since, during what will likely be seen in retrospect as the only real opportunity for financial reform this time around. Too late, Obama, if you care. So we are all-but guaranteed another, bigger crisis in the next few years. All anyone has done so far is kick the can down the road, in the direction of a muddy ditch.
EU v. Dollar, QE 2.80
The euro should provide quite an interesting challenge to the dollar over coming years, as the currencies vie for the title of “least-shitty” reserve option.
Germany has tough decisions to make, such as how best to slaughter the EU debt-beasts. Orchestrating a bond default of this magnitude, particularly the part where they try to convince Euro banks to eat losses, will not be pretty. But it’s going to happen (unless the populace as a whole agrees to be become debt serfs, and dedicate their entire lives to grinding away on 20% + debt.
No, that will not happen, which is why we’re seeing rising unrest. This transition can be orderly, or it can be ugly. But debt will, somehow, be restructured. If future programs look like that oh-so-horrible Irish package, with taxpayers and pensioners bearing the brunt for banks/financiers, we could see a revolution or two in the West. Those Greek riot pictures you’ve seen? Pretty bad.
But picture such an event in a large American city like Detroit, my dad’s hometown. Or any number of large struggling American cities. When food stamps, unemployment, and medicare stop providing the desired level of assistance, residents in these areas should expect things to get bad for a while.
In the US, the only decision I see Bernank and Co. making is how best to sell QEx to the public. As long as we have a dovish captured president, and Dudley, Geithner, Bernanke, Yellen, and other bank-loyal Bob Rubin types remain in power, that won’t change. Unrestrained, these folks’ proteges should be orchestrating round 28 of Quantitative Easing in 2025.
I suspect and hope that America’s crazy fiat experiment will be stopped before then. QE6 is where I think things will start to get really nasty (if we get there). By that time, the rampant, in-your-face, undeniable-despite-vigorous-CPI-massage-style-inflation will force even those such as Pulitzer-Prize winning economic doveologue David Leonhardt to question the Bernank’s wisdom (when he does, probably time to sell gold).
But for now, the Fed is determined in their mission to destroy the dollar and inflate. Pushed on by lazy politicians who don’t want to cut taxes or slash spending (numbskulls who voted recent leaders in, myself included, share the blame. Ron Paul 2012 ), and by banks who stand to reap enormous profits from their TBTF status.
Why will QE3, 4, and 5 appear?
Don’t worry, the Bernank assures us. More money-printing won’t be necessary*, (unless prices start to fall). Then, well… we’ll have to reevaluate. BTW, prices tend to fall when we stop printing money, and that inevitably leads us to print more money. It’s one of those vicious-cycle things, like Fat Bastard.
The QE brand will only last so long, so a new name and acronym seem inevitable. Maybe the powers that be could arrange a stock-split of sorts, 10:1. Make it a more publicly-digestible QE2.80?
QE 2.80 – or some acronym far more ridiculous and abstract – might fool a few hundred million people, and it would certainly look better for the Feds than a headline like this: US Central Bank Surprised For 27th time in a Row, As QE28 suddenly seen as necessary to prevent imminent and super scary deflation.
It’d be just like Citigroup’s reverse-split, but fwd (by the way, how is that $.01 per-share div a “dividend reinstatement” after a 1:10 reverse split, Vikram? Gotta love clumsy financial obfuscation..)
Whatever name QE3 takes, I think we should all agree ahead of time to call it that, regardless of the acronym spin.
Back to EUR/USD
My gut says that long-term, the Euro will stay stronger than the dollar (I don’t trade FX, and am but a lowly metal-owning sideline currency-heckler).
John Taylor said in January of this year that at some point in 2011, the USD and Euro should trade at parity (with the Euro even going lower). Of course, he’s right when he says that the market was/is overly optimistic on Europe. But it’s at least as bad in the US, long-term, and markets are starting to realize that. EUR is up 7% this year against USD.
Both economies have their strong and weak areas.
Germany – Europe’s largest economy by far – is quite healthy. California, New York? Not so much. Texas, PA, NJ? Pretty bad too. And the US Federal Govt? Likely worse off than Greece, long-term.
Almost all states in the US have big deficits, incredibly underfunded pensions, stagnant wages, rising prices, and very slow growth (likely negative in real terms). There are some bright spots, like Wyoming and North Dakota. But they make up a tiny portion of the total economy. The US manufacturing base has been exported, and will take time to rebuild.
Germany, meanwhile, is the EU’s top dog. And they have strong views on the necessity of controlling inflation.They also tend to focus on real economy and manufacturing, as opposed to America, where we have a big ol’ soft spot for finance/banking, expensive health care, and the military-industrial complex. Lots of good companies, but they are currently drowned out by TBTF crud. Financial-sector profits are back to 40% of ALL US profits, by the way…
Neither economy is perfect. But if I had to bet on a socialist-leaning economy with a strong manufacturing base and sound(er) monetary policy (GEUrmany), or the socialist-corporatist land of TBTF banks and reckless military spending (US), I pick the former.
Europe will inevitably get hit hard when Greece, Ireland, Portugal, and others go through their bond-default pain. But these things happen in economies, and economies rebound surprisingly fast from such trauma (see: Iceland, Russia, Asia). Europe’s future is cloudy, like America’s. But on a purely economic basis, I’d say the EU is likely to emerge from the mess before the US.
China will be tenting its fingers, a la Mr. Burns, in the corner, deciding how to play its increasingly sweet-looking hand; economically, politically, and militarily. There will be bumps along the road, like brewing housing-bubbles and inflation issues, but power is steadily shifting their way. They have over $3 trillion in foreign reserves, a growing domestic economy, and the luxury of letting their currency appreciate, if/when they want to.
China is an aspiring superpower snatching up resources across the globe. Notably, they’re doing it all in a very peaceful way. Sure, they have human rights issues at home, but thus far they haven’t even bombed a single country! Seems like a good sign for the world’s superpower heir-apparent.
The world has never seen such a currency war before, and it should provide observers with entertainment for years to come. Hopefully not decades
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