"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Friday, November 12, 2010

EU Sidetracked at Worthless G20 Meeting By Ireland's Fresh Debt Woes

The best the G20 could come up with was a "pledge" to avoid currency devaluations.  But we have to ask ourselves, are there any penalties for those that break that pledge?  Could any such penalties be enforced, and if so by who?  Obviously none of that occurred, so to me, it was a failed meeting.  It looks like business as usual, which means a continuation of sovereign debt crises followed by inadequate or misguided policy responses.

But the EU nations in particular had another headache while China and the US went at each other.  The Irish debt crisis was flaring up once again.  And if we consider the fact that London and Ireland has recently had its share of protests, as well as France's recent riots, to me, it looks like the EU is turning more into Greece - and not the hoped for German transformation of the European continent. 

Here's a great summary on the future of the Euro by John Taylor of FX Concepts, if you haven't read it already elsewhere, emphasis mine:
The Eurozone has begun its collapse a little later than we thought. My compliments to the political prowess of the euro-leaders for holding things together for so long, but this is an impossible situation and the crisis is on its way. Jean-Claude Trichet caught the spirit of the situation today in Seoul when he said that “it is absolutely necessary to change the governance of Europe” and called for moving “as far as possible in the direction of an economic and budgetary quasi-federation.” I only disagree with part of one word, ‘quasi,‘ as Europe must move to a full economic federation if the euro is to survive. With 16 countries using the euro and Estonia on the way, the odds of moving there is currently lower than infinitesimal. Things will change after the approaching horrible economic and political catastrophes that will wrack some of these economies and societies. Unfortunately nothing will happen before the current situation gets unbearable – this is the way of democratic politics. As all the leaders are still working toward the same goals, and no one has stepped forward express the inchoate fears of the European populace, this should take years. By the start of next year the Eurozone will enter a recession that will test the current leadership. The euro, which has been perceived as if it were a German mark, has already topped and will decline until it is priced like an Italian lira in the next few months. With Europe and the US in recession next year, commodity prices will drop again and global growth will suffer despite the outperformance of domestic Asian economies. With the policy stresses, and the risk of significant errors in judgment, international strife becomes more likely as well.

I agree with John Taylor, but there is one thing he did not discuss: the role of a debt based currency in creating imbalances amongst nations.  The imbalances within the Euro area were fueled by easy credit that now has become an uncontrollable Frankenstein of sorts.  And there is an additional concern here too.  If the Euro does indeed fail, it will not be an isolated event.  It will affect ALL PAPER DEBT BASED FIAT - INCLUDING THE US DOLLAR.

Which reminds me of an old (March 2010) CNBC interview of Christopher Wood, author of the newsletter "Greed and Fear" where he makes the prediction of the collapse of the US Dollar paper standard:

I know this interview is from earlier this year, but I like to occasionally post old articles and video interviews to see how accurate the analysts I follow are.  Our news cycle is forward looking and rarely do we look back to see what people have said in the past, in order to judge them on current predictions.  In this regard, Christopher Wood's prediction has obviously not transpired, but listen to his reasoning.  Not much has occurred to the contrary to make me think his view is off the mark.  But I'm not so sure that Asia will not be impacted either.  Much of their demand comes from the West - such a paper standard collapse would affect everyone. 

As I've mentioned before, the USA in the 1920s and 1930s was the world's largest exporter of oil, of manufactured goods, and the world's largest creditor, not debtor nation.  And what did the Great Depression do to the US?  It brought it to its knees.  In a severe global downturn, few escape unscathed.

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