THIS IS STILL A CURRENCY CRISIS, NOT A SOLVENCY CRISIS
I still believe most market participants are underestimating the gravity of the issue here. While this is being largely played off as a SOLVENCY crisis I believe it is not. This is and remains a CURRENCY crisis. The Euro is unworkable in its current format. The imbalances that have been caused by the mish mash of differing economies has done what single currency systems do best – it has imposed harsh restrictions and vulnerabilities on the nations within the currency system. Alan Ruskin at RBS elaborates:
“The package does not solve M/T problems of a sub-optimum currency area. It cannot solve productivity divergences and associated divergences in growth, external balance and inflation trends. This is absolutely fundamental, and there is no way out of the long-term problems this pose.”
Many market participants are keenly focused on the solvency issue here when in fact, this is a currency crisis. The solvency issue is a byproduct of the failures within the actual currency system. As I’ve said repeatedly, a move to QE would undermine the system’s existence and the dramatic about face by the ECB leaves it with zero credibility in my opinion. The ECB is no longer independent and no longer responsible for price stability. Even with rumors of sterilization, with their bond purchases I believe they have crossed a line. Without their knowing it, they have all but admitted that the Euro is a failed currency experiment and have resorted to “last ditch” efforts to save it.
In my opinion it is not a matter of if the Euro will ultimately require some form or restructuring (such as defections), but when. This bailout may have bought the EMU some time, but it has not resolved the structural problems which will continue within the EMU. My greatest fear (for markets in the near-term) is that the “speculators” now know the system is broken (while the politicians do not) and they will continue to weigh on the market until it breaks.
Many say that these “speculators” are having an adverse impact on the markets. I fully disagree. When a young male lion attacks and kills his weaker competitors, the integrity of the food chain is kept intact and ultimately strengthened when the weaker animal is killed (or prevented from mating). Ultimately, the species is strengthened and its odds of survival substantially increased over the long-term. While this causes some near-term pain it is ultimately a benefit to the species as a whole. The Euro is broken. Single currency systems do not work and they must be killed. In the long-term, it is in the best interest of all involved. If the politicians in Europe are wise they will begin working on real structural reforms now that they have bought themselves some time. Unfortunately, I don’t think they recognize that this is a currency crisis and that’s why the risks in the market remain abnormally elevated.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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20 Comments
dan, is david roche a relative?….a very articulate informed person.
while we dissagree on this, gold’s 10% greek run-up points to its strength in a currency crisis.
now that it does not back up money anywhere,no, it isn’t logical….and no,from modern monetary theory it makes no sense cause it serves no purpose ……but then neither are people logical……and old habits die hard.
gold is up 3x from the 2000 beginning of this bear market(dow flat) and dow:gold will be between 1 and 2 before the end…….whether it makes sense in this electronic money era or not.
hopefully, we will be around to see, my friend
tiger toast for years,regretably
Who is Dan?
cullen, i was talking to my buddy dan on the phone and typing…..sorry
No relation.
TPC,
With EURO being so fractured and the battle line drawn to save it. There is a lot of talk in the gaurantee, almost, of gold to be the only store of wealth in the near-mid future. If the euro does indeed fail do we not end up with stronger US$ and what currency could take it’s place when around 80% of world transaction are done in US$.
Gold is store of wealth, but you can’t by a packet of corn flakes with it.
What are your thoughts on the dollar, If we don’t have it and gold is storing world wealth , are we in barter system, it seems too crazy this idea.
If the $ goes, is the broader society not completly screwed to the point, I don’t want think about it.
What are your thoughts?
Dollar AND gold become the beneficiary of a suffering Euro. Dollar as reserve is not going away. Gold standard is not coming back. Euro failure is not a failure of fiat money, but a failure of the single currency system. Ironically, gold was a single currency system which is largely why it failed as a currency system.
Wow – we finally agree on something. LOL
Perfect use of metaphor with the stronger lion protecting the gene pool.
All you need to know is “Trichet” in French is the verb “to cheat”
“As I’ve said repeatedly, a move to QE would undermine the system’s existence and the dramatic about face by the ECB leaves it with zero credibility in my opinion. The ECB is no longer independent and no longer responsible for price stability. Even with rumors of sterilization, with their bond purchases I believe they have crossed a line. Without their knowing it, they have all but admitted that the Euro is a failed currency experiment and have resorted to “last ditch” efforts to save it.”
did QE undermine US, GB and JAP? no fucking way, bond viligantes actually liked it. yes, EU isnt single country entity, but it tries to slowly move into such shape. on the other side, i think it will fail sometimes in the future…
QE didnt resolve any structural problems in US, GB and JAP, why it should be a problem in EU?
TPC, why you differ between EU QE and US,GB and JAP QE? would love to hear your answer
It shows how the currency is inherently flawed. Germany has this position of strict price stability. The move to QE is in many ways an abandonment of adherence to price stability. This sort of change in approach shows exactly how contradictory the monetary policy responses in the EMU are and how Germany’s trade surplus is directly at odds with trade deficits across the region in terms of policy approaches. It just doesn’t work.
Why is Germany even involved in this Union? QE proves the flaws in this currency and shows that the leaders in Europe don’t even understand the fundamental flaws within the currency.
It’s different than the USA, UK and Japan because all three are in a TOTALLY different currency systems and QE was not necessarily an inappropriate policy tool.
Welcome to Fantasy Island. Thanks to the magic futures all stocks gapped open and then sat there all day long. Thanks magic futures you saved the world.
The herd had to react, as one, to big news, which the EURO announcement over the weekend was. Given the extreme oversold condition, the rally was valid and expected. Of course, I’m just talking about today.
As far as the speculation about the EURO, it is probably wrong but that’s what gets page hits. For me, I’ll continue to follow price.
Actually, if I were just concerned with page views I would brew up this big story about how the United States is in over its head, has too much debt and is going to default. Oh no! It’s the end of fiat money. The gold standard is coming back! Buy gold, buy canned goods, invest in a bunker!
The fact that this is a currency crisis, but not a solvency crisis means it is workable and that there is a good long-term solution.
I’m not some fear mongering hack looking to generate page views or new clients. I’ll leave that to the Peter Schiffs of the world.
Simple this is a Global Ponzi scheme fed by the easy liquidity provided by sovereign/US/EU printing machines.
We just might see the repeat of post WW I German Weimar republic inflation in our life time and Great Depression II might not be far out.
Strap on to your seats and consider buying hard assets for the ride.
thanks for your reply.
“Germany has this position of strict price stability”
this rule was thrown away as Germany faced break-up of EU and therefore its insolvent banks. the old rules doesnt apply anymore… fuck the price stability, when all your banks could be BK in a few months, if you didnt QE.
strict price stability in the face of deflation? only in things you need (oil,food, etc.). well then you can exclude them from CPI calculation like the US is doing it.
i am not defending this, but thats how system works.
“QE proves the flaws in this currency and shows that the leaders in Europe don’t even understand the fundamental flaws within the currency.”
for me QE proves the flaws of any paper currency system(the debt must be always increasing in order not to see deflation and if its decreasing there is no way that all debt can be ever repaid. QE only buys time, you think countries can fund their deficit by QE up until the infinity? i think there will be a lot of currency crises if QE doesnt stop anyway.
” QE was not necessarily an inappropriate policy tool.”
was necessary tool for ECB authorities since they didnt want to see end of EUR just next month. after Greece, Spain and Portugal would be cutted out of debt market next week, then Italy as everybody realize that they have too much exposure to the previous countries, then everybody realize that all French and German banks are insolvent too….
of course the solution to debt crises isnt more debt, but tell that to Japan, GB, your country and ECB. I think they will laugh at our face…..
it is intrinsic in humans,especially politicians, to not face things.
and then it is worse when they are forced to.
Why is Germany even involved in this Union?
Because the D-mark had no chance of achieving reserve status that is on par with or similarly to the dollar, whereas the euro might have a shot IF it is properly managed. Reserve status brings price stability and reduced cost of capital, both of which would be highly desirable.
QE proves the flaws in this currency and shows that the leaders in Europe don’t even understand the fundamental flaws within the currency.
The problem isn’t with the currency per se, but with the political construct. What is purported to be the European Central Bank is really just the Bundesbank. To refer to the currency as a “euro” is a misnomer — it’s ultimately just a new name for the D-mark, with several nations adopting it with a currency peg.
Here in the US, individual states don’t manage Fed policy. There is no good reason why Germany or any other individual country within Europe should be giving marching orders to what supposedly is a pan-European central bank. They need to establish a regional policy that transcends local interests, but that requires a political decision to surrender power to a new European federal government.
In other words, they should borrow a page from 18th century American history, and dump their confederation in favor of a new centralized Constitutional government that accords enough authority to the new government so that can operate a monetary policy without inference. Germany, Greece and the rest of them need to stop behaving like nations and behave a lot more like US states. In these situations, confederation doesn’t work.
That would work, but it’s a dream. France and Germany unified under one constitution? No way.
France and Germany unified under one constitution? No way.
The Germans have already voted to have one. The problem is in nations that put these votes to public referendums; the populists often vote nay.
The decision to have Euroland purchase sovereign debt is a step in that direction, so I wouldn’t say it’s impossible. However, it is difficult, and your skepticism about the likely success of a political solution may be warranted.