Many of you who have been following my articles will know that I have been very critical of central banks as I believe that they did not take the necessary steps to restructure the global financial system but rather focused on monetary expansion.
Many commentators have argues that this is due to an erroneous diagnosis by the central banks who have mistaken a solvency challenge for a liquidity challenge.
I was also of that opinion but my thinking has evolved and I do not believe that anymore. My research has suggested that central banks do understand that it is a solvency challenge facing our global financial system. This is why they continue to flood the banks with liquidity in order to keep them solvent.
Many of the current and previous central bankers have studied the Great Depression that occurred between 1929-1939 and have all drawn the conclusion that it occurred and was prolonged because the banking system was not adequately capitalized and it is this conclusion that is driving their current actions.
This conclusion was erroneous, it is correct that the banking system was undercapitalized but this was an effect and not a cause. The main cause was excessive speculation and the unwise use of leverage.
Many banks simply over extended themselves so when the market began to weaken as part of the natural cycle of the markets, many positions began to unravel, margin calls began and this began to push the market into a vicious cycle of selling at lower and lower prices.
In this regard, this is not different from any other financial crisis in history. It is driven by excesses of human behaviour and until this is recognized and addressed then it will continue and on a greater scale.
When analysed from this perspective, we see what a lethal combination the central banks have created with low interest rates and continual monetary easing. These will only continue to drive speculation and leverage, the very type of behaviour they should be discouraging.
Until monetary policy is normalized and central banks stop interfering in the markets, we will continue to see a worsening global economic outlook. The central banks cannot be the market, it goes against every principle of free market economics.
Despite all of the foregoing, I want shift my attention somewhat to the euro project as I believe that this is something the ECB has done well.
This analysis will help to put into perspective what the future of the euro is likely to be and will help investors position themselves accordingly.
The euro has been a success, this is not because it has de risked investment into the Eurozone or created economic certainty. It was not designed to do that on its own. It was designed to help merge the monetary system of what is now nineteen sovereign nations.
This merger included integration of their banking and payment systems, monetary and economic policy and much more. It has also succeeded in bringing some stability to Europe. Prior to the euro, for many, investing in Europe involved dealing with the Deutsche mark, guilders, drachma, lire francs, lats, litas, pesetas and so on.
The euro system helped to remove all of the uncertainty and risks associated with all of these currencies and created a seamless monetary union that eased the process of doing business throughout Central, Southern, Eastern and Western Europe.
It is my belief that it is only a matter of time before the other remaining nations within the European Union join the Eurozone.
In fact, it is my assertion that by 2020, we will see the UK abandon the pound and join the euro, what the UK needs is closer and not further relations with Europe and after this is settled in the referendum, it will give the Conservative party leadership a clear democratic mandate to seek for greater cooperation with the EU which will include joining the Eurozone.
It will not be a matter of choice but of necessity because more attention is now being paid to the parlous state of the UK public finances and as we see continuing weakness in the global markets, this will weaken the pound even more and thus causing more investors to short the pound again culminating in another sterling currency crisis. The state of both the economics and civil society in the UK does not inspire any confidence about any economic strength in the short or the medium term.
In conclusion, I believe the euro has been a success and it will expand despite continuing challenges in the banking and financial sector, this is because of the utility of having a single regional currency.
Furthermore, I believe this will become a growing trend because the nature of global finance has changed so much and exchange rate volatility has increased significantly, it is more challenging and almost impossible for one nation to hold firm in the midst of significant currency fluctuations.
The answer therefore will be to increasingly integrate currency and monetary policy decision making. In fact, I will not be at all surprised to see a global single currency within the next decade that is administered by the IMF.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.