The First (and Possibly Last) Euro Decade 16 comments
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This week, I had to give thought to something I haven't considered since my kids were young: Just what kind of a present do you get for a 10-year-old?
In this case, the 10-year-old isn't a child. It's a currency. The euro - now coin of the realm for 16 nations – celebrated its first decade on New Year's Day.
So why would we at Hard Assets Investor care about a fiat currency that's just managed to shake off its training wheels? Two reasons. Well, one and a half, really.
Reason One: No other currency in the world could be backed by more gold than the euro. I say "could" because the euro's value really isn't driven by gold. The gold window was effectively shuttered in 1971, long before the euro's birth. Still, the Eurosystem – the European Central Bank [ECB] and the national central banks of European Monetary Union [EMU] member countries - owns more than 36% of the world's official gold reserves, a third more than the hoard maintained by the United States.
That leads us to Reason One-And-A-Half: During the tenure of current ECB President Jean-Claude Trichet, the euro's been more inflation resistant than the Yankee dollar. That, in part, explains why the euro has been gaining ground on the greenback as a world reserve currency and why we use the euro in our real-time monetary inflation calculation (see "Explaining Inflation ... Again").
The ultimate refuge from currency devaluation (read: "inflation") is a peg to gold. You can't, of course, turn in euro notes for bullion, but M. Trichet's policies would certainly get you closer to redeemability than the tenets of U.S. Fed chairman Ben Bernanke. After all, "Helicopter Ben" wants to dump greenbacks on the populace. Just try to imagine Trichet doing the same with his gold ingots. Doesn't figure, does it?
Now, don't get me wrong. The euro is a fiat currency, too. To be sure, there's been inflation in the euro zone; it's just not been as virulent as the Yankee variety. Over its 10-year life span, the euro inflated, in terms of its gold purchasing power, at a 9.8% annual rate. That hardly seems a record worth crowing about until you note that the U.S. inflated its currency at an 11.8% annual clip. Compared to the Brits, however, even American inflationistas seem circumspect. The world's third most widely held reserve, the pound sterling, has been devalued at a 13.1% annual rate over the past decade.
Euro Inflation In Gold
European gold holdings aren't monolithic. Only 5% of the euro zone's gold is actually held by the ECB. Most of the gold and foreign exchange reserves held by EMU countries before the launch of the euro remain in the possession of their national banks. Under the terms of the 1992 Maastricht Treaty, however, these reserves are at the disposal of the ECB. It's as if the state treasuries of California and New York held gold pledged to the Federal Reserve.
All tolled, the gold held in the Eurosystem amounts to 10,887 tonnes (350 million ounces), which represents more than half of the zone's reserve position. In contrast, more than three-quarters of U.S. reserves are held in gold.
Euro Zone And U.S. Gold Reserve Positions
Tonnes Of Gold | % Of Reserves | |
United States | 8,133.5 | 76.5 |
Germany | 3,412.6 | 64.4 |
France | 2,508.8 | 58.7 |
Italy | 2,451.8 | 61.9 |
Netherlands | 621.4 | 57.8 |
ECB | 533.8 | 20.1 |
Portugal | 382.5 | 85.9 |
Spain | 281.6 | 37.0 |
Austria | 280.0 | 41.9 |
Belgium | 227.5 | 42.2 |
Greece | 112.7 | 93.1 |
Finland | 49.1 | 14.6 |
Slovakia | 35.1 | 4.6 |
Cyprus | 13.9 | 34.5 |
Ireland | 5.5 | 14.2 |
Slovenia | 3.2 | 8.2 |
Luxembourg | 2.3 | 14.8 |
Malta | 0.2 | 1.3 |
The euro itself is a reserve currency that's, up ‘til now, been steadily whittling away the dollar's hegemony. Euro allocations have risen by more than a third in the past decade, mostly at the expense of the U.S. currency. The euro is the second most widely held reserve currency in the world.
Euro As A Reserve Asset
The euro's attractiveness as a reserve currency, however, could be jeopardized by the current global recession. Under M. Trichet's stewardship, the ECB was an inflation hawk. The bank's reticence to cut interest rates on his watch could actually put the euro zone on a slower track to recovery. Additionally, marginal economies such as Poland, the Baltic states and Hungary are stepping up their bids for early entry into the euro zone. Admitting these hobbled nations into the bloc could have a corrosive balance sheet effect, as exposure to bank failures would mount.
There's, in fact, a growing apprehension about a breakup of the euro bloc. The growing disparity between the weak and strong economies and a one-size-fits-all monetary policy may end up chafing some members. Indeed, the growing spread in Continental bond rates mirrors the widening rift.
Talk about the internal tensions in the euro bloc is nothing new. The euro was birthed amid doubts of its sustainability in a global economic crisis. That crisis is now here, so the next few months will tell us if we should make plans for a second decade's celebration.
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This article has 16 comments:
By the way: (a) all currencies are "fiat", even commodity backed currencies. Money is only money because you can reasonably expect everyone else to have confidence in it. From Antiquity forward, metal-backed currencies regularly lost confidence even when there existed ample reserves. (b) There was plenty of inflation under gold-based systems. In fact, the largest bubbles as a portion of the total economy occurred under gold-backed currencies of the Imperial era.
Do goldbugs actually study history, or just the cartoon version of the television version of the Cliffs notes of history?
So many actual faults in it and it still gets published?
Just look in the gold reserve positions in the table as publised above:
USA with a 300+ million population,
The Netherlands with only a 16+ million population
and we are to believed that gold reserves stand at:
USA = 76.5 % of reserves &
My country = 57.8 % of reserves...
In my country these reserves are not borrowed out, in the USA it is different.
Lets leave it with that....
Ok ok one more blast against this kind of stupidity:
In the USA the reserves of the FDIC are only Treasuries, all the money paid by the banks is gone by now. All their insurance money is replaced by US Treasuries. And every bank saved is only via tax payer money, or as lately money press fun from Ben Bernanke.
Here in the Dutch landscape we are not that stupid, here when we talk about reserves we talk about reserves.
That is saved money....
In the USA the only saved money is belly fat and on the bank accounts only debt is found.
That's not how everyone here behaves - please don't overgeneralize at SA: the site is about precision and accuracy.
Best,
Geoff
Central banks hold diversified positions as a manifestation of their risk management policies.
I suggest you look at IMF statistics to get a better sense of current central bank reserve positions.
On Jan 07 05:39 PM Randy_H wrote:
> The EUR is not a reserve currency. It may become one (though I rather
> doubt it), but it is not, by definition, a global reserve yet. Nor
> does the ECB enjoy anywhere near the seigniorage privileges of the
> Fed.
>
> By the way: (a) all currencies are "fiat", even commodity backed
> currencies. Money is only money because you can reasonably expect
> everyone else to have confidence in it. From Antiquity forward, metal-backed
> currencies regularly lost confidence even when there existed ample
> reserves. (b) There was plenty of inflation under gold-based systems.
> In fact, the largest bubbles as a portion of the total economy occurred
> under gold-backed currencies of the Imperial era.
>
> Do goldbugs actually study history, or just the cartoon version of
> the television version of the Cliffs notes of history?
Where are the numbers that support your contention of "fault"?
Is the ratio of gold held by the US as a reserve asset problematic?
The numbers are what they are.
What have evidence have you to substantiae different values?
Your umbrage may be, in fact, misplaced. Keep in mind that the figures in the table reflect proportion of central bank allocations to gold, not the degree to which the currencies are "backed" by metal.
If you pay attention to the chart comparing euro zone monetary inflation with that of the dollar, I believe you'll see evidence of the US's recent profligate ways. The trend, however, is now tipping toward inflation in the euro zone.
On Jan 07 06:49 PM Reinko wrote:
> Not often such a dumb article was published around here.
>
> So many actual faults in it and it still gets published?
>
> Just look in the gold reserve positions in the table as publised
> above:
>
> USA with a 300+ million population,
> The Netherlands with only a 16+ million population
>
> and we are to believed that gold reserves stand at:
>
> USA = 76.5 % of reserves &
> My country = 57.8 % of reserves...
>
> In my country these reserves are not borrowed out, in the USA it
> is different.
>
> Lets leave it with that....
>
> Ok ok one more blast against this kind of stupidity:
>
> In the USA the reserves of the FDIC are only Treasuries, all the
> money paid by the banks is gone by now. All their insurance money
> is replaced by US Treasuries. And every bank saved is only via tax
> payer money, or as lately money press fun from Ben Bernanke.
>
> Here in the Dutch landscape we are not that stupid, here when we
> talk about reserves we talk about reserves.
>
> That is saved money....
>
> In the USA the only saved money is belly fat and on the bank accounts
> only debt is found.
I know of 2 historical gold inflations. The first happened when Alexander 'liberated' the Persian treasury at Persepolis, sometime during his conquest of Persia 334-323 BC.
The other was in 1324 AD when the potentate Mansa Musa of Mali made his gold-dripping pilgrimage to Mecca via Cairo. Apparently Mansa unloaded so much gold in Cairo alone that it took over a decade for prices to restabilize.
You mention the Spaniards bringing shiploads of New World silver and gold to Europe, which is another gold money supply inflation that caused disruptive price inflations. Personally I would very much like to have a shipload of money, and damn the inflation!
I think it's useful to note in the cases of Alexander and Mansa Musa and even the Spaniards that all they did was circulate gold that was already held in reserve. They didn't 'create' new gold like fiat money. It's not simply 'having' too much money in your economy that inflates prices. It's 'circulating' it. So failing to circulate the money you have should cause price deflation, by Friedman's formula.
John Lounsbury has been alerting us to the importance of Friedman's 'velocity' of money as we try to understand inflationary vs deflationary pressures. It's not just money supply, the total amount of money that's out there. It's how many times that money gets transacted in a given period of time.
So the gold bugs may have a point. In a gold-money economy you could increase economic activity by increasing the velocity of transactions even if the supply of national gold remained static. That hadn't occurred to me until just now, and I thought a static money supply would automatically constrain economic growth.
scarcity...think grocery costs...water bills
leveraging...guy borrows 80% to buy a home, tend to inflate the price.
government spending...government services grow...taxpayers pay inflated
taxes and hidden taxes aka inflation.
the problem is inflation steals from productive growth...soaring real estate
taxes and insurance rates mean diminished leverage in real estate prices.
I can't get a grip on a gold trend....do feel the economy is years from a
meaningful recovery....also feel the taxation in this country is stifling
growth...government and entitlements are totally unsustainable..
We'll see if there is more to come when eastern european companies start defaulting on their loans.
On Jan 07 06:49 PM Reinko wrote:
> Not often such a dumb article was published around here.
> Here in the Dutch landscape we are not that stupid, here when we
> talk about reserves we talk about reserves.
>
> That is saved money....
>
> In the USA the only saved money is belly fat and on the bank accounts
> only debt is found.
On Jan 07 06:49 PM Reinko wrote:
> Not often such a dumb article was pubished around here.
>
> So many actual faults in it and it still gets published?
>
> Just look in the gold reserve positions in the table as publised
> above:
>
> USA with a 300+ million population,
> The Netherlands with only a 16+ million population
>
> and we are to believed that gold reserves stand at:
>
> USA = 76.5 % of reserves &
> My country = 57.8 % of reserves...
>
> In my country these reserves are not borrowed out, in the USA it
> is different.
>
> Lets leave it with that....
>
> Ok ok one more blast against this kind of stupidity:
>
> In the USA the reserves of the FDIC are only Treasuries, all the
> money paid by the banks is gone by now. All their insurance money
> is replaced by US Treasuries. And every bank saved is only via tax
> payer money, or as lately money press fun from Ben Bernanke.
>
> Here in the Dutch landscape we are not that stupid, here when we
> talk about reserves we talk about reserves.
>
> That is saved money....
>
> In the USA the only saved money is belly fat and on the bank accounts
> only debt is found.
Who measures inflation in terms of exactly one highly volatile commodity? That's not inflation, it's called "price." Would you say there was an inflation rate for oil, for real estate, or for one-hour massages? Of course not.
> Perhaps Randy_H could educate me with some specific periods of Gold-based
> currency inflation? I am only aware of that period in Spanish history
> when Gold (and Silver) from the New World flooded the markets of
> Europe. There are corresponding periods of Gold deflation during
> the life of Ancient Egypt as the burial rites of the pharaohs took
> these metals out of circulation. Could you be detailed? I am not
> a "Gold Bug" but am intrigued by the relationship between the past
> decade of "Gold-defined inflation" and the present period of "asset-defined
> deflation"
If you define gold inflation or deflation as the amount of goods and services that an amount of gold can buy, that amount changes every day. After all, Gold's price has ranged from near $600 to near $1k just this year. Dollar denominated prices for goods and services have not varied by nearly that much, except for gasoline perhaps. Gold is much more volatile than the price for goods and services on a year-to-year scale.
It is that volatility in the exhange rate between gold and actual goods and services that made the US dollar so unstable during the 19th century. Waves of deflation bankrupted farmers and industries who borrowed to fund their operations, followed by waves of inflation bankrupted the banks who lended depreciating currency. Meanwhile, government could do little to stabilize its own currency, because the currency was based on open market prices for one highly volatile commodity. In the late 1800's there was a movement to base the dollar on a combination of gold and silver to reduce this volatility. When the US abandoned the gold standard, inflation rates became more predictable, resulting in less business destruction from currency swings, resulting in higher long term growth rates in the 20th century than in the 19th.
The dollar inflation rate cited at the top of the Hard Assets Investor daily blogs (see, for example, www.hardassetsinvestor... ) is derived by comparing the pricing of the dollar and the euro in gold, a universally accepted standard. It is thus a measure of MONETARY inflation, not an insular measure of price inflation.
On Jan 09 11:35 AM Chris B wrote:
> "Over its 10-year life span, the euro inflated, in terms of its gold
> purchasing power, at a 9.8% annual rate"
>
> Who measures inflation in terms of exactly one highly volatile commodity?
> That's not inflation, it's called "price." Would you say there was
> an inflation rate for oil, for real estate, or for one-hour massages?
> Of course not.