As traders and brokers are shifting gear towards Eurozone frailty, Washington is preparing to kick the economy into the twilight zone
Last week two German Banks ordered a total of 45,000 golden Kruger Rands from the Rand Refinery in South Africa. A cost of $54 million at the day’s market price. Not much news in itself and not really that unusual, were it not for the fact that Germany had just underwritten a massive bailout plan for the Eurozone. Many individuals in Europe are growing alarmed that the European Central Bank (ECB) has deviated from the anti-inflation policy set forth by the legendary German Bundesbank and, instead, will begin monetizing debt or creating paper money to bail out weaker Eurozone countries. And that is scary especially for those countries that provide the economic power to the Union.
Taking Tim Geithner as adviser over the weekend did not help the issue much as Geithner’s only proud advice was to do as he and Bernanke did and that is bailout majestically and make sure the system keeps running. Kick the can down the road was his advice. Many investors in Europe feel that ECB’s credibility is now in the garbage next to the US Federal Reserve…and so are two of the world’s largest reserve currencies.
It’s en vogue for all quasi experts and media pundits to point at Europe as the questionable cause for a crisis that no one is ready and willing to face. Washington is actually kicking the can so far ahead of the currency collapse that everyone here thinks that the worse is already behind us. But I’m sorry to say, unions are now starting to crumble on both sides of the Atlantic. We are seeing budget deficits, protests in the street, and debt-infested governments that all need to cut spending but never really do. City, county, state and federal levels are crunching numbers and Washington starts up the presses.
There is a new $100 bill waiting in the wings; it took many years but timing is perfect as oversight will be limited and hard to gauge. In a ‘valiant’ effort the Feds will pull the original bills out of the world market say in 2 years time, and printing presses will burn the midnight oil until there is no more linen to print on. The issue date is February 10, 2011, but who would ever really know how many bills were printed?
In the meantime strategic bailouts will skew statistics and figures to be positive and hopeful. But no matter how much hope will be created, the underlying issues of the Crisis that no one talks about, have not been removed. The Big Banks are leveraging beyond control again and hide that they support the Euro Bashing as the most popular full contact sport this summer. But the fact is, the EU’s debt problems are peanuts compared to our debt issues in the United States.
The U.S. is the real danger economy (and currency), but it also provides the easiest way to protect yourself in the coming months and years.
Before we get down to business, let me give you my take on this so-called “euro crisis.”
Euro Collapse? Give Me a Break
Long ago, before there was a “euro” the European Union members agreed to the Maastricht Treaty. The year was 1991. This treaty would govern the member countries, so eventually they could create a “one policy meets all” for the entire Eurozone.
Among other things, but most importantly the Maastricht Treaty mandated that each member state could only have a budget deficit of 3% of its GDP and to join the EU, each member must meet that limit. For the preparation period of almost 10 years, the members decided that their national currencies would be valued in a “snake” with percentual boundaries up and down, as to have “weaker” economies adjust to the stronger ones with production quotas and trading opportunities.
Most members decided to meet the 3% target by selling their gold, which they did in 1998 and 1999. When the Eurozone formed, 13 nations joined together under the Maastricht Treaty. Today, 17 nations are EU members, and all those citizens use the euro as their currency. A notable exception is for example the UK as well as the Scandinavian countries.
Now unfortunately, one of those members used historical voodoo economics to meet the budget deficit rule and the rest of the union members were too busy in their own neighborhood to impose supervision. Basically, they cooked the books to make it look as if they only had a 3% budget deficit.
And now the nasty truth is finally coming out, years after joining the EU.
That country I’m sure you can guess is Greece. Is this shocking? Wrong? Absolutely. And a fierce penalty is needed.
But using it as the reason why pundits all over the world are talking about the “coming collapse of the euro,” is ludicrous.
Will it be a setback for the EURO. Sure! But come on the euro will NOT fall apart just because some crooked politicians far removed from Brussels and Strassbourg cooked their books . It doesn’t make sense. Greece’s total contribution to the total Eurozone GDP is just 2%. If you remove 2% of the total Eurozone’s GDP, do you really think the EU will collapse? That’s like saying the U.S. dollar would collapse if Idaho left he union. Not going to happen!
To take this further, everyone calls EU’s troubled states “the PIIGS” (Portugal, Italy, Ireland, Greece and Spain). But again, all those little Piggies together only account for 14% of the total Eurozone GDP. Think the PIIGS Are Bad? Well then how about the the fact that several U.S. states can’t make payments to state schools. Some are in the red on their pension payments. Some aren’t paying their insurance premiums. Some are issuing IOUs on tax returns and other payments, but they can’t repay without more debt.
The list of deadbeat states includes the “great states” of California, Michigan, New York, Massachusetts and even Obama’s territory, Illinois. Count up all these states’ debt and the “hit” to the U.S. total GDP is more than 30% and compare that to the PIIGS’ debt of only 14%. But here is the key and crucial difference between the Eurozone and the United States…
Greece, or Spain, or any of the PIIGS could drop out of the EU at any time … or EU leaders could force them to leave if they don’t comply with the new rules.
California, Illinois, and others cannot leave the U.S. — and Uncle Sam can’t kick them out either!
So the U.S. is saddled with these defaulted states’ deficits, whereas the Eurozone could very well say, good riddance to the PIIGS, and move on as a stronger entity! Oh you want an example? Let’s put the spotlight on Illinois… I swear it’s a random pick.
Rep. Suzie Bassi (R-Ill.) said recently in exasperation: “The state is in utter crisis. We are next to bankruptcy. We have a $13 billion hole in a $28 billion budget. The state has been paying bills with unfunded vouchers since October last year. A fifth of our buses have stopped. Libraries, owed $400 million, are closing one day a week. Schools are owed $725 million. Unable to pay teachers, they are preparing mass lay-offs. A catastrophe in the making said the Schools Superintendent.
Closer to home, we know that Jacksonville is shutting down or limiting a lot of essential fire and rescue services, state budgets are being cut left and right and looking at the enormous amount of Property Tax delinquent pages in the local newspapers, a solution is not in sight.
Again, the dire nature in the U.S. states is far greater than the Eurozone members. Yes, these EU member states were completely out of line when they continued deficit spending. And it’s only fair that the euro suffers a bit. However, to say that the euro is going to collapse is simply unreasonable. It’s another Wall Street trick for profit taking in the ups and downs.
Before the Euro even became a real entity in January of 2002, there were those that did not believe it would last, and would soon collapse. However, the euro, which suffered at first, eventually came on strong, after all it had been more than 50 years in the making.
In 2005, when Sweden and Denmark both said “no” to join the euro, pundits once again called for the euro to collapse. But the euro only came back stronger. In 2008, during the financial collapse, they said the euro would fall apart. And once again, the euro came back stronger after selling off.
If you really wanted to experience the power of the Euro in the past decade, you should have lived on the island of St.Maarten-St.Martin in the West Indies, where the French side worked with Euros and the “Dutch Antillean” side worked with a dollar pegged to the Antillean Guilder. Dollar salaries had a hard time surviving.
So is this just another case of euro selling as various voices again are running around calling for the euro’s collapse, only to see it rebound and come back stronger? Or is this finally thelast chapter for the euro?
Personally, I don’t think so and here’s why…
The euro is the second most liquid currency in the world, and the second most widely traded currency in the world.
It is the offset currency to the dollar — and the closest thing to the next world reserve currency.
So, if you believe that the euro will collapse, then you must believe that the U.S. dollar will continue to soar for years. You must also think our deficit spending that has gone on for over ten years now is no biggie. You must be thinking that all our trading partners in the world still believe that the dollar is the answer to manna from heaven. There are plenty of traders and stock brokers who think this way. They believe that deficits don’t matter. And if you believe that then I have a humorless joke for you. An investor leaps off the Empire State building. He passes the 47th floor and screams to people in the windows watching… “So far, so good!”
Long-term deficits always matter. Greece found that out. It’s only a matter of time before the U.S. does.
The Real Crisis will be a Currency Collapse Crisis
We have all noticed that the United States’ deficits are not showing up in the dollar’s price… yet. Of course we have all witnessed the drop in purchasing value over the years, but deficits have been masked smartly by more printing and faster transaction speeds. But it’s starting to head in that direction. And the sad thing is that we all know it but try to ignore it as if it were a nosebleed and not a broken nose.
When these deficits do come home to roost, anyone owning dollars will find out just how damaging all that debt really is! And it will go with the speed of light.
Comparatively speaking, our problems are much greater than over in Europe where at least the governments have taken notice. Today the DOW dipped under 10,000 for the first time in several months, while also the S&P500 and the Nasdaq lost ground. For now, I believe the markets will continue to focus on the debt problems in the Eurozone rather than here in the United States.
Traders are punishing the euro, so we will see some more euro weakness for a few months, probably into the fall. But beyond that the Euro excuse won’t be able to cover that economic recovery here in the States is still years away.
Until it does, however, we need to protect ourselves from euro weakness. And that’s why German banks are stocking up on golden Kruger Rands and the Chinese government tells its citizens to buy industrial silver.
The coming 6 to 12 months may show the greatest market ever for gold.
Just one reason is that the International Monetary Fund is holding 190 tons of gold that it has to unload at some point in the near future. North of $1,250 per troy ounce, the IMF could start unloading it to get cash for the bailouts in Europe.
What will that mean for prices? In the absence of aggressive interest-rate hikes in the world, investors should use the upcoming correction – which should be quite sharp but relatively short-lived – as another opportunity to acquire gold.