Falling euro, friend or foe?

Many critics of the Eurozone are sceptical because they have always raised the fact that countries cannot devalue their currency, think twice would be my response, what is happening with the Euro is a large scale depreciation that means nobody has to leave the zone to get cheaper currency.

There is a race to the bottom happening in my opinion, the Chinese have definitely lead the way thus far with their Yuan manipulation, the only reason the world plays ball with them is due to their manufacturing output of cheap goods (which would be cheap compared to 1st world production costs even if Yuan traded at fair value) which we want and willingly buy.

Then you have the dollar, the US has such massive forward liabilities that the dollar will have no choice but to tank, the UK sterling doesn’t have a great future either, fifty years ago it was worth five dollars now it is at $1.43 – but currency is not absolute, it is relative – and that is why you have to look elsewhere to see what is happening, but you can’t look to trading pairs because the same manipulation is happening across the major pairs all at once (exceptions being the Loonie, Kiwi, Kroner and Australian Dollar who are not playing the game that nobody admits to playing).

Which is where gold comes into play, gold broke the €1,000 mark yesterday in a landmark move – to the investors that we have told to get into gold when it was trading at c. €600 this was a champagne moment (and a preliminary sell call to realise some profit). Gold doesn’t have the facility fiat currency does of mass creation – the alchemists stone was never discovered, you can’t make gold out of thin air – and that is part of why the prices are going up.

Europe has two vastly different diseases with the same cure, a weak Euro achieves several ends. Firstly it allows German and French exports (and ours but the EMU is primarily a Franco-German lead system) to pick up, Germany needs exports and in a world where demand is falling – in particular for their high end engineering infrastructure- a weak Euro is the best thing they can hope for.

The natural German avoidance of weakening currency will likely be over-ruled by the youth of the country who are being hit the hardest by unemployment/underemployment, the older Germans tend to be the most conservative, and they are the savers who stand to lose the most, they will be unhappy, but the loudest voice will prevail and when the same wealthy older generation see that they have to pay more taxes to support the people in difficulty a weak Euro looks like a better alternative. They’d rather see weaker money rather than have to part with additional hard earned money.

It’s like that Woodie Guthrie quote, ‘some men rob you with a six-gun, others with a fountain pen’, end result is you still get robbed but one version feels different than another. The Germans and French want to export, that is a given, but you can’t have a strong currency and export at the same time in 2010. Hence the weaker Euro. The competitive devaluation’s that are occurring will give rise to inflation (eventually), in particular as banks and other institutions start to search for yield in a low interest rate environment (we are cooking a bubble on purpose this time).

The fascinating aspect of this is that it’s a game that everybody is taking part in but won’t admit to being part of, no central bank is willing to come out and say ‘we are going to devalue’, instead they make every policy decision that has the same end result and they just don’t speak about it. A weak currency is good for everybody – for now. And it disproves the most vocal Eurosceptics regarding the monetary union, I take this as proof that it can work, Greece doesn’t have to leave and Germany et al recover nicely (eventually).

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