"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

Tuesday, November 16, 2010

Europe, If Not The World, Cracking

I have often joked to friends that every few decades, Germany tries to create a Reich involving lands outside of her borders, and just as the night follows day, the effort ends in spectacular failure.  I don't mean to make light of the horrors of World War II, or to compare Charlemagne with the German-influenced ECB, but it seems that the periphery countries are revolting under German driven austerity and control.  Let's be honest here.  It's control.

Don't get me wrong: I have much respect for Germany and the German people.  The issues arising today are not from some Teutonic ambition of world domination.  The issues arise out of economically binding diametrically opposed economies and cultures.  I believe in a united Europe.  Europe should be proud of her accomplishments after millenia of bloodshed and warfare that makes the modern Middle East look tame by comparison.

But tying Europe together with a common currency seems now, in hindsight, to be an overly ambitious goal that ignores issues of culture, sovereignty, and fair trade.  The periphery nations can be painted as irresponsible spenders needing a firm lecture, but that ignores the underlying issues of a common currency based on debt, that by its nature creates imbalances.

Germany was a manufacturing power before the Euro.  And much of European trade is done amongst the Euro nations.  Money that is lent to the periphery becomes a debt, but once that money is spent on German goods, it becomes Germany's asset.  It's basic double entry bookeeping.  For every nation in Europe to have a trade surplus, Europe would need to all at once strongly export outside of Europe.  But much of trade is within Europe, and thus it is mathematically impossible for every nation in Europe to have a trade surplus simultaneously.  And as a trade deficit grows, and money leaves the economy, governments pick up the slack by overspending, that is, creating new money/debt.  It is a vicious cycle.

A debt based fiat currency is no help either.  Under a gold standard, either you had an asset - gold, or you didn't.  If you ran a persistent trade deficit, there were "brakes" in the system that made you address it.  But under a debt based system where a nation's debt is another's asset - the game can continue for much longer, creating Tower of Babel sized imbalances destined to fail.. to topple.  As I said, Germany's assets are the debts of other Euro nations.  Germany isn't losing its export supremacy anytime soon, just as the periphery isn't going to become an economic German-style powerhouse any time soon.

And so, Europe is cracking.  It is an awful sight to behold.  After centuries of warfare, it is unsettling to watch European nations argue as they are today.  And the worst is that everyone is somewhat right, and everyone is somewhat wrong.  Thus, there are no rouge countries at fault.  If there was a rouge country or two - that could be easily addressed.  But what is at fault is the system.  A system has no face, no body, no borders.  It is intangible yet controls our daily routines.

Europe needs to figure this out, and soon, because to me, it seems like the early 1930s and 1910s could begin all over again.  I don't foresee a European war, but I fear that if these things are not addressed in a fair way, we may be laying the foundation for the events that could lead to strife.  In other words, we are two degrees away, not one.  We have time, what Europe needs now is strong but fair leadership.

And so, here are some news stories and links that well describe the current ongoing European devolution:
From the Wall Street Journal:

Addressing reporters in Paris, George Papandreou said the Germans' view—long-held, but recently reiterated—that private bondholders could suffer losses as part of a future bailout was intensifying government-debt woes.

The German position "created a spiral of higher interest rates for countries that seemed to be in a difficult position, such as Ireland or Portugal," Mr. Papandreou said. He added that the spiral could "break backs" and "force economies toward bankruptcy."

From The Telegraph:

Spain's central bank governor, Miguel Angel Ordonez, lashed out at Dublin on Monday, calling on the Irish government to halt the panic and take the "proper decision" of activating the EU-IMF bail-out mechanism.
"The situation in the markets has been very negative due to the lack of a final decision by Ireland. It is up to Ireland to take that decision, and I hope it does," he said.

From The Gazette:

The euro is facing an unprecedented crisis after another country indicated on Monday night that it was at a "high risk" of requiring an international bail-out.

Portugal became the latest European nation to admit it was on the brink of seeking help from Brussels after Ireland confirmed it had begun preliminary talks over its debt problems.

From The Guardian:

Greece's goal of reducing its gargantuan debt received a fresh blow today when the EU statistics agency announced that the country's 2009 budget deficit was much worse than first thought.

Six months after Athens received €110bn (£93bn) in emergency loans from EU nations and the International Monetary Fund to prop up its near-bankrupt economy, Eurostat revealed that Greece's budget deficit reached 15.4% of GDP last year, substantially higher than its previous estimate of 13.6%.
I also want to make one final point.  A failure of one or more countries in the EU can easily trigger contagion that ultimately affects the very existence of the Euro.  The failure of the Euro would  further affect the sovereign bond markets - globally.  This in turn, affects the entire debt-as-money based system the world currently employs - including the US paper dollar standard.  It would be an historic, global, fiat collapse.


Dave Narby said...

Been lurking with not much to add, but I agree, and think the collapse is a certainty... And is certainly taking long enough!

But IMO they need to keep holding out hope so that the middle class doesn't abandon markets and fiat en masse, as that would make it harder to transfer as much wealth to the upper class.

I believe you follow FOFOA, I wonder what A/FOA would think given the Euro's current state...

I post occasionally on www.TheTailDoesNotWagTheDog.blogspot.com , would appreciate it if you would give my ideas a look over occasionally, I need people to 'check my work', as thinking in an echo chamber can reinforce fuzzy thinking.

Thanks for sharing your thoughts,


Misthos said...


Yes, I frequently read FOFOA, and FOFOA's monetary views and narrative is a compelling one. However, aside from his monetary theory views, the writings of FOA and ANOTHER often entail views and activities that have taken place 10+ years ago.

I'm not so sure if their views on the Euro and gold still hold. I have doubts. The current problem with the Euro isn't just a fiat monetary problem, but a political and cultural one as well. What also makes me think that the Euro may not be able to be the power it was supposed to be is the fact that a significant amount of Europe's gold is held in custody by the US. I wrote about this in my post Don't Discount the US or the Dollar.

I think that A/FOA have different (or evolving) views given the recent turn of events. I can't speak for them, but I truly believe that they are disappointed. Just my opinion.

As you can see, my blog follows current events entailing geopolitics, economics, and monetary theory. I am certain that the existing monetary paradigm is nearing its end, and gold will be a part of the new one. The transition in method (planned or chaotic) and timeframe, however, is far from certain. That's what I try to follow in this blog. I have certain steadfast views, but I keep myself open to how things play out.

I look forward to reading your views on: www.TheTailDoesNotWagTheDog.blogspot.com


Dave Narby said...

Agree with you that A/FOA might have a somewhat different opinion on what's going on at present regarding the EUR given how it participated in the debt orgy (and also regarding silver, given much of it has been consumed).

I think though that the EUR may simply undergo a similar revaluation compared to the USD but not as drastic, as the EU holds in total more gold..?

Misthos said...

Yes, the EU in the aggregate holds more gold than the US, but there is one overlooked fact: Where is the gold held? Does the EU have more gold in storage than the US, or does the EU have more gold "on paper" than the US?

Many gold investors believe in "physical, not paper" ownership. What I'm saying is that applies to sovereigns as well.

I have done a lot of research on this, and there are no clear answers. According to Rickards, there are about 6 thousand tons of Gold held by the US on behalf of other nations - mostly European. Max Keiser has covered this in the past regarding Germany's gold.

Thus, I fear that A/FOA's theory has a gaping hole. If the concept of "Freegold" materializes, there will be warning signs. I guarantee you that the US, in such an event, will "buy" this custodial gold just before the great revaluation.

Which in my view, leaves the Euro in the dust, assuming it is still around if/when Freegold transpires. The Freegold theory overlooks this. The US still has this ace up its sleeve - not Europe.

Dave Narby said...

Looks like we're going to get that two tiered Euro...


Misthos said...

I'm not so sure yet. I'm still reading up on this momentous shift in EU policy. Here are my initial gut feelings:

1)Germany is trying to protect itself, but it's expectations of the periphery countries are extremely unrealistic.

2)You can't make paper act like gold. In a fiat money world, you want to control and issue the currency your debt is denominated in - you want to play the same BS game everyone else is playing. Why accept a handicap? And so, the periphery is screwed. How? Well, when interest rates spike for the periphery countries, they will not be able to debase and print to push down those rates the way Ben Bernanke and QE is doing. They're trapped. Does anyone really believe that these nations, experiencing debt deflation induced by austerity, will be able to handle higher rates?

This is getting worse. There is no real leadership in the EU. It's a disaster.

This is just my gut reaction - I'll be following up this weekend after more research. It's a hot topic here in Greece. People are extremely concerned here, and from what I have been reading, Ireland is not much different.

Dave Narby said...

Interesting article that comes to a rather disturbing (but possible) conclusion...