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SPEAKING
FREELY
US gives euro a long rope
By Alex Wallenwein
Speaking Freely is an Asia Times Online feature that allows guest writers
to have their say. Please
click here if you are interested in
contributing.
Fighting an opponent doesn't always mean opposing his force. When faced with
overwhelming power, good fighters often use their attacker's force to their
advantage, as in judo, for example. There are better examples in martial arts,
but judo is probably the most commonly known and understood.
It looks as though the US strategy in this transcontinental currency battle is
to give the euro's masters what they want - except way too much of it, way too
quickly - in order to overload the euro system and make it collapse.
The European Central Bank (ECB) was instituted by the euro's creators to
preside over an orderly transition away from a dollar-dependent world to a more
versatile arrangement wherein the euro fulfills a quasi-reserve function that
will eventually give way to gold being the ultimate international currency
reserve, with all the fiats freely floating against gold instead of against
each other.
But the road there is a long and winding one, and not even all of those
currently "in charge" (international central bankers) are fully aware that this
is the ultimate goal. Rather, that unstated goal was wrapped up implicitly in
the ECB's role of guaranteeing price stability, rather than using interest
rates to jump-start an otherwise faltering economy as the Federal Reserve Board
does in the United States.
"Price stability" means that the currency is intentionally not used as a means
for gunning Euroland's economic engines. This goal is designed as a precaution
to avoid the excesses caused by overprinting, which has been the United States'
main tool for papering over any possible recession, or even looming depressions
- so far.
So far, the US model has "worked" - but only to the point where the resulting
trade and investment imbalances are about to do the dollar in altogether. To
provide a lifeline to keep the world from falling into that same pit together
with the dollar was the very reason for the euro's creation and launch.
We now find ourselves at a juncture where the US (in its efforts to continue to
paper over its excesses and their consequences) absolutely must have a
lower dollar even to survive. A lower dollar has the twin benefits of (a)
lowering the monstrous current account deficit (reflecting trade plus
investment-flow imbalances) and (b) propping up the competitiveness of US
exporters, in hopes of leading to more investment by these firms, and
eventually to increased employment.
The Fed and the administration of President George W Bush know that the euro's
ultimate aim is to slowly attract foreign investors and central banks to the
euro and away from the dollar. But they also know that an explosively upward
rocketing euro will wreck the Europeans' major economies in a heartbeat. As a
result, the US game is to allow the dollar to drop lower - and faster than the
Europeans' fragile economies can tolerate.
What financial commentators call a policy of "benign neglect" turns out not to
be so benign at all: by pursuing its current strategy, the dollar establishment
is killing three birds with one stone: they get the benefit of (1) higher US
export-competitiveness and better economic performance, (2) simultaneously
lower European Union export competitiveness resulting in economic stagnation,
and (3) shift the entire burden of smoothing out the dollar's forex movements
on to the Europeans' backs.
The dollar faction knows that it has nothing to resist the world's slow but
steady, molasses-like run to the dollar-exit doors. It will happen. Nothing can
prevent it. The dollar faction's best chances at regaining control, they
believe, lie in speeding up that very process - way past the ECB's tolerance
level - in an attempt to utterly destabilize the euro system, hoping for an
eventual complete breakdown.
In essence, the dollar faction is playing a game of "chicken" with the
Europeans. So far, the ECB hasn't blinked. It was able to get away with purely
verbal intervention this year. It will be interesting to watch what happens now
that the purely verbal attempts have proven to be of very little effect, so
far.
My personal guess is that the ECB will try some covert actual intervention
before it drops its interest rates. Maybe some friendly arm-twisting of certain
Asian nations will do the trick. Who knows?
In the meantime, China and the Muslim nations are playing another game
altogether. Every time the dollar drops, they are buying gold. It certainly
isn't the Europeans who are buying gold. Most individual European investors
know as little about gold (and value gold as little) as their US counterparts.
When the US financial media utter their textbook mantra for explaining gold's
powerful rise in dollar terms (ie, "a lower dollar makes gold more affordable
for buyers paying in euros"), they are not saying that Europeans are on a
buying binge.
As a side note: Whoever is out there doing this buying of gold for euros is a
heck of a lot smarter than American gold investors. Americans collectively lose
their pants every time COMEX (commodity exchange) gold takes a dip. "They"
(whoever "they" are) are doing it right: they are buying gold when it gets
cheaper instead of when it gets more expensive. If only Americans could learn
from them.
So who is winning? Is the US winning by figuratively letting go of the rope the
ECB is pulling on in order to make them fall on their collective behinds? Or is
it the ECB and the rest of the world, by having the last laugh because they
hold in their hands the key to blowing the US economy sky-high?
Remember that the Asians, particularly China and Japan, hold huge amounts of
dollar claims in the form of US Treasury debt. If they decide to accelerate
their selling, US debt prices will collapse and long-term rates will explode
past the United States' point of tolerance.
The saying that those who live in glass houses should not throw stones comes to
mind. The lower the US lets its currency fall, the more temptation the Asians
feel to dump their US debt holdings, as they see their US "assets" depreciate
with every tick lower by the dollar on its journey into forex "Hades". At some
point, this temptation will become overwhelming. The US is currently betting
that the Asians' point of no return comes after that of the Europeans. I don't
think that's a safe bet to make.
No matter which way this battle turns out, if you put a good portion of your
assets in gold, you can afford to sit on the sidelines and simply "watch the
game". Whoever wins or loses, you will be safe from the carnage on the playing
field. While the euro's rise against the dollar certainly gives US gold
investors a boost, even a total collapse of the euro system will be good for
gold.
Why? Because the international move away from the dollar has become a do-or-die
necessity. If there is no euro, that move will be directly into gold as the
ultimate currency reserve. The euro was just interposed to make that transition
less painful.
Either way, it will be nice to own some gold before that comes to pass.
Got gold?
Alex Wallenwein is editor and publisher of
Euro vs Dollar Currency War Monitor.
(Copyright 2004 Alex Wallenwein.)
Speaking Freely is an Asia Times Online feature that allows guest writers
to have their say. Please
click here if you are interested in
contributing.
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