News Flash: The Euro's Not Really a Safe Bet

Who wants to be in the shoes of the governing council of the European Central Bank [ECB] next Thursday?

Despite all statistical tricks Eurozone inflation remained unchanged at a record 3.1% (pdf file) last December, overshooting the ECB's target of 2% by a horrific 55%. As blogged Thursday, money supply M3 growth remained at a record 12.3% for the second consecutive month too. This is almost 3 times more than the target rate of 4.5% M3 growth.

If the ECB would really stick to its mandate of fighting inflation (which central banks with their unbacked fiat currencies create in the first place), it would come to no other conclusion than to raise its reference rate, currently standing at 4%.

Also take note that the deposit facility of the ECB pays a negative real interest rate at currently 3%. But I don't think European banks would have much to deposit anyway as it appears that Europe will drown in a sea of debt in 2008. Investors here have been good buyers of property related U.S. debt, relying on wrong AAA ratings and enjoying a moderate yield pickup compared to sovereign debt. It will cost them their corporate life.

But don't worry too much. It will be as in all financial cycles: In good times private shareholders cash in dividends and when it goes bankrupt the bucket gets passed on to the taxpayer via nationalization. Banks have always been a specially protected industry.

While the ECB's inner workings are hidden from the public - no minutes of the meetings are published - we can nevertheless expect raised voices next Thursday. Cyprus, a Euro member for only the fourth day, has already expressed its opinion that the thinking should rather circle around a rate hike.

The ECB faces a dilemma, though. If it raises rates, it risks further unwelcome speculative inflows and would also accelerate the drop of Federal Reserve Notes [FRN].

European politicians hope for a rate cut in order to stimulate the declining economies in the Eurozone, with only competitive Germany shining as a better example.

But hey, the structural problems faced in Europe cannot be cured by creating more worthless debt/credit/fiat money.

From a global perspective, Europe's relevance will decline rapidly. After all, Europe has:

1. almost no commodity or energy resources
2. the highest labor costs in the world, and
3. a rapidly aging population.

So think again before you consider the Euro as a safe haven. It will not be.

Comments

[tstock]

Wow. tell us how you really feel about Europe? French girl left you? Here's a few pluses I can think of - Europe has a much better track record and history of going beyond it's borders for business, and it's companies are more international and faster at exploiting emerging markets than US companies. This is a cultural plus versus the isolationism leaning US. Europe has a lot of tech that is years ahead of what American companies are pushing to the local consumer (cellphones, SAP, renewable energies). That tech is going to compete better in latin america, africa, eastern europe. The Euro is since Dec. '06 the currency with the highest combined value of cash in circulation in the world. Fiat or no fiat, it's more stable than the Dollar, the other world currency. While oil and other commodities are costing more in dollars, they are relatively stable measured in Euros, this is a plus for Eurozone economy.

This doesn't mean Europe is a sea of roses petals, it has it's many thorns, and some are listed in the article. However, Europe has been in business for a while, and doing better than other developed markets in the last couple years. This is no magic, and it didn't happen for no unreasonable reasons.

[NutritionFacts]

Europe has:

almost no commodity or energy resources
the highest labor costs in the world, and
a rapidly aging population.

======================...

Is this new news? In fact, is this news at all?
In any case, assuming this to be true, since when has it been true?
One imagines that this is not a recent development - in fact, far from it - and so, given the Euro's strength in the last few years, one also is forced to wonder, does it matter? To date, no, and so, ultimately the question is, why should it matter *now*? This question, you have singularly failed to answer. But thanks all the same.

[Cxar]

*laugh* Believe me, Europe is alright, and would be much better if european financial institutions (banks et similari) didn't gobble down part of the american debts craftly disguised as shiny luscious financial tools in the form of a poisoned chinese boxes set. Year 2007 will be recorded as the moment in time when Europeans, like many other non-american investors around the globe, asked themselves "How come I'm paying with major losses on my NON-American stocks for some yankee trailer park junkie's insolvency???"

[Reinko]

The above artcle contains a few good points, but yet the US$ is just as fiat as all other currencies since fiat money was introduced under the Nixon regime.

And speaking as a European, I am not aware of an 'ocean of debt' here in Europe. To be honest the biggest ocean of debt can be found at the Federal Funds Z1 release, the 'flow of funds' sheet.

Here is a link to it:

www.federalreserve.gov...

Just add the relevant total colums (the first and the one last) to arrive at the conclusion that in the next year total US debt on her economy will reach 50 trillion US$.

What can we learn from that?

Well, take a reasonable level of interest say 5%.

Now 5% of 50 trillion is 2.5 trillion US$ or over 18% of the US gross domestic product...
Thus the US economy as a whole is a so called 'Ponzi financial unit' saying that the US must borrow money just to pay for the interest.

For the US financial sector we have the same stuff: compare 2007 Q2 and Q3:

Financial sector debt:

2007Q2 = 14855.0
2007Q3 = 15435.3

Thus Q on Q debt grew 15435.3/14855.0 = 3.9%.

On an annual basis this is 1.039^4 = 16.6%.

And 16.6% of 15435.3 billion is over 2.5 trillion US$.

__________

So although the article contains a few good points: for example M# money growth is far to high and the rates are far to low, but lets not forget that the Federal Reserve does not even publish the M3 money growths numbers since 2005 with the weird reasoning:

The costs of tracking M3 money growth outweigh the benefits of publishing it...

Yet the real mountain of debt is in the USA:
Next year needed money to pay for the debt: Over 18% of GDP (and thus over combined profits of the US economy...)
And financial sector debt grow next year: 2.5 trillion US$.

Next time you write an article it is adviced to do some homework Prudent Investor...

[Reinko]

Ok, I have read a few more articles of the Prudent Investor. And I have to say that on economics we often are on the same page.

Here is the Prudent Investor's collection of articles on this website:

seekingalpha.com/autho...

I think the only difference between the Prudent guy and me is that I have calculated that the US economy as a whole and it's financial sector in particular are nothing but a giant Ponzi financing unit.

So the USA will bust anyway and lots of the European parts of our economy too, well I do not care: If sectors like the banking sector or countries like GB made close economic ties with the USA, it was their choice & they made it out of their free will.

Mirror mirror on the wall, who is the most Ponzi of US all?