The Worldwide Investor

For years now, the Euro currency has been on a tear, killing the US dollar and most of the world’s other currencies along with it. If we look solely at the Euro/Dollar relationship, the past few years has not been that big of a surprise. The Dollar has huge debts hanging on its shoulders and external debt is mounting by the day to the tunes of billions of dollars thanks to Asian central banks. The printing press in Washington is increasing the supply of dollars every day, debasing and devaluing the currency, and inflation is being totally ignored by Mr. Bernanke & company, leading to lower interest rates, despite oil rising to $140/barrel. The Euro on the other hand, has strict requirements on balance of trade figures, and has been far more hawkish on inflation than its US counterparts. This one way relationship, however, has gone to such an extreme, that virtually everyone on the planet is bearish on the Dollar. While certainly the Euro is a better currency than the greenback, the US economy is still far more potent than the ticking time bomb in Western Europe. The Euro bubble has reached its climax, and will reverse course over the next 2-3 years in major way.

The huge welfare state of most Western European countries places enormous pressure on these countries to increase government revenues. Taking away benefits from the massive number of retirees in the pipeline is likely to be too politically unpopular to actually occur, and thus, the countries in this area will be stuck between a rock and a hard place. Do they increase taxes to pay for all their social programs, do they reduce benefits to the retirees, or do they borrow huge sums of money, which would be a violation of Euro regulation rules. Increasing already high taxes would kill the economy, and political pressure is likely to keep retiree benefits high, so borrowing massive sums from the debt market is likely to be the most logical course of action. Most of the Euro countries now are in violation of debt or inflation targets, and if this continues, the Euro experiment is on its way towards being dead. Prudent economic practice is the reason a stable currency was needed, and if it will be violated anyways, why does any country want to be handcuffed and penalized by another entity to the tunes of millions of dollars when they are already in massive amounts of debt?

In the US, a different course of action is occurring, the printing of massive dollar bills to deflate the currency, devalue the debt, and decrease retiree benefits without anyone actually knowing its going on. Its quite a brilliant, if not diabolical plan, that is not available with the single Euro currency. With France’s debts mounting, the would love to print some money to get themselves out of this situation, but they are unable to do so. Their hands are tied by the European Central Bank. Ireland, whose referendum killed the Lisbon treaty over the past week, will likely be remembered as the country that killed the Euro a few years from now. While France and the Netherlands rejected a previous treaty 3 years ago, the Euro kept rolling strong. This time around, the inevitability of the Euro’s decline, justifiably or not, will be linked to the Irish vote. It is the major turning point in a resurgence of the Dollar against the Euro.