Mike Norman, anchor, HardAssetsInvestor.com (Norman): Hi everybody, and welcome to HardAssetsInvestor.com. I’m Mike Norman, your host. Well, when we’re talking about commodities, we always want to consider the outlook for the dollar. Many people follow the dollar. Here to talk about the currency markets, coming back on the show, is Marc Chandler, chief currency strategist at Brown Brothers Harriman. Marc, thanks a lot for coming back on the show. It’s always nice to have you here.
Marc Chandler, chief currency strategist, Brown Brothers Harriman (Chandler): Great, thanks for having me.
Norman: A lot of things have sort of come into the picture in the last several months, principally the situation in Europe, and Greece, of course, under terrific financial stress right now; problems with the deficits, problems with rising interest rates over there and a real concern as to the impact it’s going to have on the eurozone and the euro. Can you talk about that?
Chandler: Sure. I think you're right. Of course, Greece is really just the tip of the iceberg. While the Europeans didn’t have the subprime real estate problem, they had a similar type of issue, and that is, they were lending people money, not so much based on a proper understanding of risk. And they were highly leveraged. So those are two things they have in common.
But rather than lending to subprime to, say, less qualified individuals to buy homes, they were lending to countries. But it’s not just Greece. Greece is just a lightning rod, now. Behind Greece is Portugal, another small country. But then, you get bigger countries like Spain and Italy in there.
I think we’ve all known about the problem that the eurozone had. But this exposes the raw nerve. And the raw nerve is something like this: Can you have monetary union without political union? And so what Europeans had then was an ECB, a European Central Bank that was very tightfisted, very much anti-growth, because they were worried about inflation.
Chandler: And you’ve got the countries like Greece and Spain and Portugal, which used to devalue to regain competitiveness. They can't do that. So they were left with one way out, and that was fiscal excesses. And the interesting thing, I think, is that a lot of people wanted to believe this fiction. So then, for many years, I have to believe that the Greeks’ problems were well known. But then, what the Germans wanted, though, was to lend money to Greece so Greece could live beyond their means to buy German goods.
Chandler: I figure that, if you look at how much bank exposure Germans have to Greece, it amounts to roughly 50 percent of their exports over the last decade. And so, as this issue has come to the fore, the euro has been hit hard. And the dollar, of course, in foreign exchange, we’re always talking about relative things. Some of your viewers might like gold; they can just buy gold. But in the currencies, we’re always talking about relative value. So I agree with a lot of the critics: The U.S. has some serious problems. But Europe’s problems are more serious. And they're less able to deal with them.
Norman: Far more serious. And I’ve actually seen comparisons. First, I think people should understand that there’s a big distinction. The countries in Europe are no longer currency issuers. Only the ECB issues currency. And it’s not coming to the rescue of any individual nation. And there’s no overriding fiscal authority like we have here in the United States in the federal government which could, if push came to shove, bail out California or New York or whatever.
And also, they don’t have credible deposit insurance over there. So there really is no way, if bank runs were to begin to happen, there’s no way to really preclude that. I mean, here we have that. We have the Treasury, which could, you know, credit bank accounts to any degree that it wants. They don’t have that.
Chandler: But I think there’s one difference that Greece has, that California doesn’t. And that is, there’s another fireman out there: the IMF. California, no matter how bad California gets, it can't go to the IMF.
Norman: Well, why would you want to? But, Trichet, who is the president of the ECB, said something to the extent that any outside help, outside of Europe, is very, very bad. Those were his exact words.
Chandler: But the problem, I think, is that they're sort of caught between a rock and a hard place. Because a lot of these treaties – and especially the Germans have this – the largest state has an election in early May. And, having German workers work longer to let the Greek Civil Service retire earlier is just not politically viable.
Norman: It’s not going to fly.
Chandler And so all these treaties that bar European countries from bailing each other out; it causes some legal problems. So even if the politicians all wanted to give Greece money, there’s these legal issues that sort of get in the way. And so the IMF might be ... as embarrassing as it is, I think if you give me the choice between political reality and pride, I’d say pride goes before political reality.
Norman: But the IMF has a history. When it comes in to “help some country,” it imposes very draconian austerity measures which only impact demand even more negatively than what is happening right now. You have more unemployment. It’s tough to see how they emerge from that situation under those conditions.
Chandler: I could think of one country that went to the IMF and actually did better. And that’s the U.K. The last time a major European country had to go to the IMF, that was sort of the turning point. Thatcher gets elected.
Norman: But the U.K. was always a currency-issuing nation. And it had that fiscal backstop there. We don’t have that situation in the current structure of the eurozone right now.
Chandler: Right; which I think what’s going to happen then, you're right; because it cannot issue the currency. It seems to me that there’s only one alternative. And they can get money, perhaps, from the EU, ECB, IMF type of package. But eventually, it comes back to competition.
Chandler: And, they can't devalue their way out. So, it seems to me that if I was in Greece, I’d be preparing myself for working longer, for my children to have as good of a lifestyle as I enjoyed. I think you're going to have to see a major, significant, for a prolonged period of time, depression in Greece.
Norman: So you think Greece will bear that difficulty, and it will not pull out of the euro?
Chandler: In many ways, I don’t think there’s any solution by pulling out. Because why did Greece and Portugal and Spain get into this problem? Because they lack competitiveness. And so, in many ways, dropping out of the eurozone might help them initially get a currency devaluation. But then they're going to have inflation. And they're going to have sky-high interest rates. And no one’s going to have credibility in those currencies, the new currency, the new drachma that comes out.
Norman: Well, it helped Argentina in 2002 when they broke their dollar peg. And essentially, overnight, their problems pretty much went away, and a very prosperous period followed. Their stock market was very, very strong over the ensuing four or five years.
Anyway, we’re out of time. But we’re going to come back and have a second part of my interview with Marc Chandler.
Disclosure: No positions