Speeding Toward the Currency Graveyard

Written by  //  April 5, 2010  //  Antal (Tony) Deutsch, Economy, Europe & EU, Kimon Valskakis, Ron Meisels, U.S.  //  Comments Off on Speeding Toward the Currency Graveyard

We look forward to more comments from Wednesday Night economists – and others fascinated by the topic.

From Kimon Valaskakis : Here’s my take.
A. POLITICAL UNION.The remarks about political union are correct. Monetary union should be followed by some of fiscal union itself a prelude to some form of political union. This was the goal of the founders of the European Union from the very start. This is why today there is a European passport, a European flag and a European president. There is no NAFTA passport, flag or president nor are these present in the other free trade and customs union zones.
The author says that there will never be political union. I suppose, if he were writing in 1935 he would argue that there would never be a reconciliation between France and Germany. In 1985, he would deny that the Soviet Union would ever collapse without a war and in 2002 would never dream of a black president of the US in 2008. Superficial analysis not taking into account a crucial historical fact : Necessity is the mother of invention. Change occurs when the status quo becomes untenable.
European integration has followed a cha-cha-cha pattern from the start with forward, sideways and backward moves. The net result has always been forward. The Euro skeptics buried Europe many times. The rejection of the European Constitution in 1996 was supposed to be its death blow. Then came Lisbon, ratified by all. Integration takes time but, if perceived as inevitable, will ultimately prevail.
There are two reasons why I believe Europe will move towards further integration.
First, there is no attractive alternative. A return to national currencies and a breakup of the EU would lead to catastrophe and extreme marginalization for all countries concerned. In the age of giants, no European country by itself can make the grade. Even Germany.
Second, a huge historical mistake is to believe that Europe has been divided for thousands of years. In fact Europe has been united in most of its two thousand years, generally under empires – not the whole of Europe but most of it. Roman, Holy Roman, Spanish, Austrian, German, Russian etc. Therefore long term European unity is an historical fact. The Treaty of Westphalia of 1643 did lead to some decentralization and the growth of nation states. The French Revolution unleashed the forces of nationalism. But now we are entering a post -Westphalian world order and Europe is a pioneer in post westphalian structures. Therefore I am bullish on European integration for the simple reason that any other solution is lose-lose for all.
B . COLLAPSE OF ALL CURRENCIES. This obviously cannot happen. If one currency goes down then another goes up by definition. If all currencies go down vis-a-vis gold or real estate or oil, perhaps so but all that would mean is that the price of gold, or real estate or oil would go up nothing more. This ‘asset’ inflation would then lead to a bubble which would, ultimately explode at one time or other. Japanese real estate, US real estate, oil after the two oil shocks etc. have gone up, then down again. The key words is cycles not irreversible trends.
In spite of that, the industry of ENDISM has always been thriving all the way back to Cassandra itself : end of western civilization, end of history, end of Europe etc. However Western Civilization, History and Europe have a habit of rebounding. Endism is popular yet, more often than not very superficial and the fruit of the trivial extrapolations of sensationalist writers, seeking to shock. Later they repent. like Fukuyama who recently declared the resurrection of History..
That European integration needs deepening and rationalisation is the main lesson from the Greek Crisis. Eventually, I believe that this lesson will be learned but only after a few more steps of back and forth cha-cha-cha.

Tony Deutsch:
When the Euro was conceived, Milton Friedman pointed out that Europe lacks the factor mobility characteristics of an optimum currency area. In English, that means that various parts of the Eurozone will need different kinds of monetary policy at the same time, but with a single currency issued by a single central bank there cannot be anything but a single monetary policy. Such problems have arisen in the past within Canada and the U.S. as well. Having a single federal government with taxation powers in the latter cases, the problems arising from the one-size-fits-all monetary policy can be compensated by fiscal transfers. Within the Eurozone there are now, I think, thirteen governments with their sovereign taxing powers. The EU has none, and to complicate matters, it has about ten members who are not members of the Eurozone. Hard and long working Germans will not be happy to subsidize the welfare states of Southern Europe where people retire at 55.Thus the fiscal transfers cannot be made to work.
Hence Eurozone monetary policy will have to be a perpetual compromise, and some will always be dissatisfied.

Ron Meisels: Well, what a topic!!!!!!!
1, I am not sure that I want to hear from an American to figure out the future for the European countries.
2, Yes, there is no political union in Europe, but we are talking about the Euro, a currency! A Political Union is another matter.
3, “Trying to unify them and their many disparate cultures and 23 official languages with a single currency”: what has cultures to do with currency?
4, The Euro will survive, because it is convenient. Many do not like it (it caused inflation), but by now it is history.
5, There’s no true central bank behind the euro currency. Well, do we know who is behind the Federal Reserve (FR). Let’s review Jekyll Island and how the FR came into existence.
Who created the FR? Who prints the $ bills in America? Who benefits from this?
Why did Lehman go bankrupt and not the others? Conspiracy?
The U.S. Constitution, as it was drafted, specifically mentioned that there should be no Central Bank in the U.S!! They must [have] had had a reason for this!
Yes, the U.S. is in trouble, same as Greece and Portugal, etc. Obama wants the Chinese to raise the Yuan to save the dollar! This must be a sign of something.
My answer is the same as I have stated at WN for the last 15 years. The world will (have to) go back to a Gold standard, and Gold will trade at the equivalent of $3,000.00 —- maybe not in my lifetime (I am getting old!) but sometimes soon in the future.
P.S. Please accept these notes for what they are worth, since they does not come from an economist,
just a man who knows history and cycles.

This is what started the debate
Larry Edleson: Speeding Toward the Currency Graveyard
(Uncommon Wisdom) Between 1998 and 2002 I published several articles on how the just born euro currency would ultimately fail, resulting in the collapse of the European Monetary Union.
Almost everyone, even my colleagues, scoffed at my forecast. But my reasoning was sound: No matter what the short-term benefits of the new euro, mainly in trade within Europe, I said, long term, there was no way the euro would survive, because …
A. There was no political union in Europe, and there still isn’t. The European Union’s Charter is nothing like the Constitution of the United States, nor the set of Federal and State laws that have been mapped out over the last 234 years in the U.S.
Plus, in Europe, each country’s nationalistic pride, and each country’s culture, is far more deeply ingrained than in the U.S. which is far younger and was formed as a melting pot, with immigrants from all over the world.
In contrast, countries in Europe are thousands of years old. Trying to unify them and their many disparate cultures and 23 official languages with a single currency, I said over and over again, would simply not work on a cultural basis alone.
In short, there is no United States of Europe. There never was, and will likely never be one.
Moreover …
B. There’s no true central bank behind the euro currency. There is the official European Central Bank (ECB). BUT, the ECB is virtually nothing more than a figurehead bank. It does set interest rate and fiscal benchmarks, but importantly, in Europe each country’s own central bank has remained in place and still has the option of setting its own fiscal and monetary policies.
That’s like the state of Connecticut being able to set a different interest rate and monetary policy than, say, New York. That may work in the short run, but no way would it work in the long term.
The main function of a central bank is to smooth out a country or region’s seasonal cash flows, to foster economic growth commensurate with population growth, and to provide liquidity in the event of natural disasters and unusual circumstances that cause massive geographic shifts in liquidity.
Such as what happened in this country after the 1906 San Francisco earthquake, which caused massive disruptions in cash flow and commerce, and which gave birth to the Federal Reserve.
It is not to set monetary or fiscal policy, which is what has gone wrong with today’s central banks, in general. In the U.S., the Federal Reserve is deeply involved in fiscal and monetary policy, even to the extent that it can hold the country practically hostage to its ways. Which has clearly gotten out of hand.
But it’s even worse in Europe — where each country’s central bank can effectively act independently of the European Central Bank!
As the Greek sovereign debt crisis spreads, it is becoming apparent that the European Monetary Union is doomed to failure.
Short term, naturally, all this is clobbering mostly the euro, as the European Union deals with the Greek sovereign debt crisis.
And Greece isn’t the only country in trouble in Europe. Just over a week ago, ratings agency Fitch downgraded Portugal’s credit rating one notch to AA-, warning that Portugal faces “a sizeable fiscal shock.”
Italy and Spain will be next to get hit. Then Britain, whose currency is already taking a shellacking.

But Make No Mistake About It: The U.S. Faces The Same Fiscal Nightmare, And The Dollar Will Not Survive It Either.
Although here in the U.S. we do not have the same exact problems as the European Union, nor the same flawed designs of the European Central Bank — we do have the same problem of being dead broke as a nation.
Deeper in the hole than any civilization in history.
And once this sovereign debt crisis hits the U.S., I have absolutely no doubt in my mind that the U.S. dollar will also get clobbered, eventually losing as much as 50% of its current purchasing power in international terms, and perhaps even more domestically.
To the point where someday in the not-too-distant future, the dollar may even cease to exist.
Think it can’t happen? Nearly 4,000 paper currencies have come and gone in the history of civilization, ending up as nothing more than a heap of garbage in the currency graveyard.
Naturally, over the next few years, the world’s currency system is going to go through wild gyrations. But long term, the financial crisis which started in real estate and is now migrating to sovereign debt, are merely the opening acts of …
The Complete Collapse Of The Current Fiat Monetary System. Read more

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