Thursday, August 4, 2016

Why the Euro may survive longer than you think

I am writing something that I could not believe would be possible just one year ago.
I already mentioned in other posts, like this one, the reasons why the euro is a complete, total, irredeemable disaster. In a nut shell, in a fiat money system, where trade balance can stay unbalanced for decades (see my post about the origins of inequality), the only way for the system to have a bare minimum of equilibrium, on the long run, is to let the exchange rate of currencies free to self-adjust.

Simplifying to the extreme, those countries that export a lot:

1. have their currency becoming more expensive, because everybody is asking for their currency, so their products become more expensive, and they start to export less.

2. Plus, since they are exporting a lot, their factories are working at full capacity, wages increase, goods and services become more expensive. In other terms, they have inflation caused by a surge in demand, since citizens have more money to spend.

This is all ideal of course. Things in 2016 are more complicated than that. In fact, corporations today do not reflect "a country". FCA Chrysler, they produce in Serbia, sell in Italy, pay taxes in the Netherlands, are listed on the New York Stock exchange and Borsa Italiana in Milan, while having their Headquarters in London.
Plus, a French company may sell satellites (high level technology), but the tests are run in Russia, the electrical components come from China or Taiwan, the processors are bought from America, memories from South Corea, the honeycomb panels from Germany, the solar panels from the Netherlands, etc. Money is coming from China, thanks to the exported goods paid in dollars by the USA.

We are, in other terms, in a dense, interconnected network.

In addition to that, an emerging country can create money out of thin air, like China, and keep a competitive advantage in export over other countries.

Thiese are the effects of globalization. Factories can pay workers a few dollars per day in China and not 100 euros per day in Italy. This is possible in a fiat money system. Globalization was meant differently, in a gold standard.

That said, in any case I consider the sovereign currency a fundamental tool for a government of a country. The European policymakers, for reasons that are beyond the scope of this post, decided to join the eurozone and to prevent their citizens form having at their disposal such an important defensive instrument. The damage was done. And now we are living with the consequences of that dream, which has become a nightmare for many countries, and a huge opportunity for one only in Europe.

So, if the Eurozone is a disaster, why do I think it will go on for a long time? you know, historically there is only one reason that has fostered population against their leaders. It is when you do not have money to pay for basic needs, or, to say it differently, when the basic needs are too expensive to be purchased.

It is called hyperinflation.

It was hyperinflation, as a late consequence of the absurd monetary policy of John Law (who died in 1729) that led to the French Revolution in 1789. Recently, it was the huge raise in food, caused by the FED's Quantitative Easing, that triggered the Arab Spring in 2011. The Chinese riots that reached their momentum with the protests (and the massacre) of Tienanmen Square in 1989 were triggered by hyperinflation (20% in 1989 according to the Communist Party at that time, probably much higher).
Now, in Venezuela, inflation is 150%, raising: the country is collapsing, and of course media are not interested at all, nor in Europe nor in US. And, of course, everybody knows about Weimar's hyperinflation that destroyed Germany's middle class and paved the way for the ascent of Hitler (and, be aware, at that time, luckily, there were no atomic bombs that could be used).

The above examples are only a few among the many we can do. But I am not an academic, and I am not a historian either.

In any case, what I believe is that, unless there is going to be hyperinflation and you cannot find medicines and milk and bread around, nobody will raise a finger to fight for their "freedom".

Is there any possibility we will experience hyperinflation? currently, we are experiencing deflation (according to government's statistics, but other unofficial sources claim that inflation is in the range of 5-7% in the US), that is consumer prices are decreasing. This is due to credit crunch, in that banks have decreased the amount of credit to firms and households, worldwide, with the exception of China. Central Banks, following their wrong models (or on purpose, I do not know) created billions out of thin air that have inflated assets like stocks, bonds, and have prevented real estate from collapsing.

So, is there the possibility that in a world of negative interest rates, inflation can appear and skyrocket? There are economists saying it can happen if you fill the wallet of citizens with newly printed money from the banks. These people would run and buy whatever they need. So, things would dramatically, or slowly, increase in cost. But, two things:
1. The people would buy Chinese stuff. So, this money would fly to China again. And, if Chinese currency starts to appreciate, then China can devalue as it has always done in the last 20 years.
2. Real Estate would skyrocket. Rents the same.
3. Gold and silver would skyrocket. Maybe they will be banned and seized by the government.

There won't be dollars or euros on the pavements, like in Germany in the 20's, simply because money now is digital.

In any case, it would be a collapse, because in order to fight the hyperinflation governments should back the currency with something "solid", like gold. And if that happens, we would have a situation in which the eurozone countries have different gold reserves, so how can a fixed euro work in an environment where there are different gold reserves, that were not meant to backup the currency?

No, I think that eurozone will continue to exist, until hyperinflation starts to occur. Probably it will spread from the US. And this may require some years from now. At that moment, Germany + Netherlands will depart from the eurzone, since they will have managed to have business especially with Asia (and Russia, if USA votes for Trump).
In the meantime, the governments in Europe will seize all the private savings, whatever forms they may have (bank accounts, real estate - by means of inheritance taxes and property taxes, bonds by means of negative interest rates, stocks by means of increased taxes on capital gains) to repay their debts and guarantee a minimum of social welfare to pensioners and civil servants, at the expense of young generations and workers in the private sector.

What shall I do to defend myself, while living peacefully in the meantime? I will buy a house (hard asset, at a cheap price), I will buy gold and silver, I will invest in mining companies. And I will work hard to make money and diversify my skills to exploit them wherever it may be necessary, if things go not too well. And I will stay away from banks and insurance companies.

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