Will the euro die faster than the dollar? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 1 August 2011
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Paris, France

It's a deal!

As expected...the papers are announcing that the Repubs and Demos have made an historic deal. With the solemnity and gravitas that the occasion calls for, they have come together, after great and profound debate, to join hands...

E Pluribus Unum, they said... We may have different ideas on the subject, but when it comes to the interests of the whole country, we can nevertheless work as one body, with one heart, and one digestive system...

...and so they crossed aisles...and clenched hands...and slapped backs...

...and the brightest and best...the leading statesmen, leading scholars, leading orators and rhetoricians of the world's greatest hegemon, all came together at the last minute...

...and agreed to continue debasing the currency and credit of the United States of America.

Hallelujah.. Hallelujah... We are saved!

All over the world, shouts of Hosannah go up...along with stock prices. And the US economy sinks...

"Great Recession Even Deeper than Thought," says a headline at MarketWatch.

Than WHO thought? Not our Dear Readers. We knew there was no recovery...and that what we're dealing with is a correction of epoch scope and power. The article continues...

WASHINGTON (MarketWatch) - The U.S. recession was even deeper than previously thought, a new government report showed on Friday.

As part of an annual revision of data on U.S. gross domestic product, the Commerce Department said that the economy contracted by 5.1% between the fourth quarter of 2007 and the second quarter of 2009, more than the 4.1% previously estimated.

It ranks as the most severe recession in the post-World War II era.

As a result of the revision, GDP is now still below the pre-recession peak, economists said.

Before the revision, it was hard to square an unemployment rate above 9% with the economy's growth rate.

Under the revised data, the U.S. economy declined 0.3% in 2008, weaker than the prior estimate of a flat reading.

The contraction in GDP for 2009 was revised to 3.5%, much weaker than the previous estimate of a 2.6% decline.
The real story is worse than that. Almost all the "growth" since '07 has been not growth at all...but just the result of US government transfer payments. The private sector - which is where real wealth is created - continues to sink.

Also, we know we're in a powerful correction. But we still don't know exactly what this correction is correcting.

----------------------------- Is this the Start of a Stock Market Crisis? -----------------------------

There's not much time left, so we will make this very quick...

You see, over the weekend, the US Government just about managed to avert a situation that could have triggered a huge global economic crisis.

But the solution is temporary. And the crisis could trigger again.

Here's what you should do immediately to protect yourself -

Crash Proof Your Portfolio

And to do that, all you need to do is respond to this message well before 5 PM tomorrow...

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You will recall. As we ended last week, we were speaking to a crowd at the investment symposium in Vancouver, Canada. We had introduced the provocative idea that maybe the course of history was not something we could understand or control. Maybe destiny, fate, or grand historical forces were at work. We can barely understand them, let alone control them, we argued. As for fighting against them, forget about it. Our speech continues:

Addison chose the "Fight or Flight" theme for this year's Financial Investment Symposium. Addison is a fighter. He's devoted a considerable amount of his time…and a considerable amount of my money…in trying to save the nation. His latest documentary, RISK!, which I didn't get a chance to see, shows how innovation, creativity and entrepreneurship can put some life back in the economy.

It's a very optimistic way to look at things. And maybe that is the destiny of the United States of America. Or maybe it isn't. But let me give you an example of the kind of thing that might lead to a much different outcome.

First, we have to understand. The US has an empire...it is an empire. We don't think of it that way, because we still call the US leader a president. He is elected...as are congressmen and senators. So, it doesn't seem much like an empire. But in critical aspects, the US has followed Rome on the path of empire. The US is the world's leading power...with much more of a monopoly on military force than any empire in history, including Rome itself. Rome had the barbarians to the North and the Parthian to the East. Neither could it ever subdue. America has almost no competition.

But what does it matter what happened to Rome? That's ancient history. Most Americans don't bother to think about it at all. And they certainly don't think that it has a destiny that cannot be checked or escaped. Americans don't believe in Fate. Or destiny. They think they can do whatever they want. They think their future is up to them, completely. They just have to get their leaders together to vote on it!

And yet, every empire ends up broke...and defeated. And the fate of every country that has tried to run a pure paper money system...with currency not backed by gold...has been disaster. The fate of every country that has allowed debt to get out of control has been disaster. It didn't matter what anyone thought or did. Once you head down that road, it seems that you have to go all the way. I guess, there are a lot of byways and side-roads you can take. But you always seem to end up in the same place.

But maybe Obama is smarter than, say, Ceasar Augustus or Marcus Aurelius, or Diocletian. And maybe Bernanke and Geithner are smarter than guys than, say, John Law or Karl Helfferich or Domingo Cavalho.

Maybe Obama, Bernanke, Summers, Geithner and all are such geniuses as to be able to do what no leaders or experts have ever been able to do before. But I wouldn't bet on it.

The US currency used to be fixed to gold. No one had to manage it. We didn't need geniuses. But since it has been actively managed - by people Bernanke and Geithner, and their predecessors - it has lost 97% of its value. What are the odds that these managers will do better in the future? What are the odds that they will succeed where all the central bankers and central financial planners who came before them failed?

So, if you expect to hold the US dollar for a long time, you're betting on something that has never happened before. And you're betting on the genius of the men and women who, so far, appear retarded.

One thing you learn from reading the history of Rome is that the imperial bargain is a tough one. You get glory. But you pay dearly for it. The middle class is destroyed...and the country goes broke. That's the destiny of empires.

You know, most of you have probably watched the value of your houses go down. They're down about a third on average. Well imagine how you would have felt as a citizen of Rome after the empire hit its peak under Trajan in about 100 AD. You would have watched the value of your real estate go down...and not come back for 1800 years. There were still goats grazing on 7 hills of Rome - once the world's most expensive real estate --when English tourists visited in the 19th century.

But those of you are a confident that the US will always be a winner won't believe me. You believe that that right-thinking, well-intentioned public servants will always find solutions...that they will always do the right thing, at the last minute, perhaps. You think Europeans may get themselves inot an impoosible situation. But not us!

But what I notice is that while Europe is broke...the US is even more broke. And while Europe can probably recover from its debt problems, the US probably can't.

"Europe is unraveling as we speak," said John Mauldin on Tuesday. "The euro will probably not exist within two years."

I told John I thought he was wrong. So he challenged me. In 2 years if the euro is higher than the dollar, he'll pay me $100.

I told him I'd rather have euros.

John may be right. He thinks the US has a big advantage. Because it has a political union as well as a currency union. It can force all Americans to pay for debts run up by just a few of them. It can apply one interest rate...and make it work for the entire country. It can put the full faith and credit of every village, borough and backwater at risk...in order to bail out its banks and pay for its central planning experiments. It can increase its debt and debase its own currency almost indefinitely - simply by an act of Congress, raising the debt ceiling.

That's what people think. No destiny involved.

Europe, meanwhile, is hamstrung and hog-tied. It has no centralized political management, so it cannot force Germans to pay for Greeks' spending, for example. Interest rates suitable to German savers are demonstrably unsuitable to Italian spenders. And member states of the European Union are given to all many of silly spending. Italy is sinking under the weight of too many limo drivers. No kidding. Chauffeurs for public officials form a substantial part of the Italian government budget. And don't forget the bunga-bunga parties, too. The Greeks, meanwhile, can't collect taxes. France gives away far too many social benefits; it faced massive strikes when it raised the retirement age to 62.. And Ireland should never have bailed out its insolvent banks; it didn't have the money.

To an American crowd these reports from Europe look like evidence of the superiority of the US model. The US may default, they say, but it would be just a voluntary, technical default.

"Compared to Europe," John continued, "America looks like it is well run."

To us, the US and its whole capital structure - its stocks and its bonds -- looks like a trap. And the tension on that trap is illustrated by current yields on government debt obligations. Greek 2-year debt was still yielding over 30% when last we looked. US 2-year debt yields are so low, there is nothing but a zero on the left side of the decimal.

Greece and the US have about the same amount of government debt to GDP. So does Italy, depending on how you calculate it. Italy actually has a much lower deficit - not even half the US. So why the higher interest yields in Europe?

Addison's movie suggests that America can still harness its traditional strengths...innovation, flexibility and entrepreneurship...to re-invent itself. But the America that led the world in growth and output, did so largely by trailing it in central planning as well as pettifogging, paper-pushing regulations. Now it leads the world in central financial planning, debt and regulation. Will it lead the world in growth and innovation too? I doubt it.
More to come...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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4 Responses to "Will the euro die faster than the dollar?"

kaycee

Aug 1, 2011

Indeed the fact that there is a single 'system' in US (save Democrats & Republicans as two entities wrangling, to please respective vote bank, till it is time to cut 'the deal' in the much abused cause of 'bi partisan' behaviour) does help wield a paper-wand and make the deficit disappear, unlike the loose confederation of "Nations", that would rather cut each others throat given half a chance; no wonder in EU, the individual Nation's 'desired financial policies' are at variance with other Nations' policies, mirroring the state of 'political policies' that existed even prior to the formation Great (European) Union & it sure does exists intact, even today!

Having said that, I thought the 'bi-partisan deal' struck on the other side of the pond, is supposed to also come with concomitant deep budget cuts, in the interest of (eventual) fiscal rectitude, even if it were to happen over ten years/worse still, only in the tenth year! I wonder, if the author thinks that that part of 'deficit wiping' plan is a hog wash (save another piece of legislation, yet to be created in future, to put off implementing 'agreed' expenditure cuts)?!?!

With or without the spending cut, I personally believe, thanks to the benefit of good higher education infrastructure investment (of the past, no doubt) of the US, compared to tattering Europe (let me include UK too in that motley crowd, for this purpose), innovation & entrepreneurship (to remove any doubt, ofcourse, I am not talking of Govt, where they remain rare qualities, be it in US or elsewhere, except in a negligible minority States like Singapore) I am sure, will pull US out off deficit trap due increased tax collection, over an increased base - may be, commencing in another 5 years, as Private Enterprise rise from the ashes of today's recession!

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Abhinav

Aug 1, 2011

i don't agree with what you say.. I think US is far better off then Europe.. the statement u madeaboutthe deficit. If you seethe statistical facts, Italy and Greece have much more debt compared to their GDP than US.. I feel Greece will default for sure and US will be saved by China.. If you calculate how greececanpayback its debt,U'll be surprised to knowthatgreecewill have to grow it's GDP by 8.9% per year which has never been achieved in Greece.. Well it' my personal opinion that USis still in a far better position than Europe..

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sridharan

Aug 1, 2011


US is having highest gold stock in the world.
If it reduces its aid to other countries and also
increase its savings and goes for low salary system,
and goes in for globle tenders @ most comptitive pricing
Can it save itself from present crisis.

regards

sridharan.s

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PM MENON

Aug 1, 2011

Whoa!!! What a dream. Both the USD and Euro may have to take a long walk on the short plank since the rest of the impoverished world may not fund their luxury for long.They would prefer to get by on Canton soup.

For starters just wait till the Chinese polish up their English and then the West will know what exactly the Chinese mean.!!!

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