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Currency Collapse - Where Now ?

Currencies / Fiat Currency Aug 24, 2011 - 02:52 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleOne thing is sure and certain. Permanent avoidance of economic, financial and monetary reality has resulted in the USA, European Union and Japan facing unmanageable and self-reinforcing debt spirals that - logically - should lead to currency collapse. By political decision, the "only solution" is to decree harsh austerity plans cutting economic growth and government tax revenues, and paper over the problem with massive amounts of newly printed currency. The only logical result is a stampede into gold and other precious metals. Occasionally, and without conviction, there will be a partial selloff in gold and some dip buying of eroding and fragile equities.

In a process of declining confidence, even though currencies are no longer "gold backed" and are printed like share certificates or government bonds, they are increasingly being "redeemed" for gold in the marketplace.

The political and economic process destroying confidence dates from four decades in the past. The 40th anniversary of Richard Nixon's decision to "close the gold window" and terminate automatic convertibility of the US dollar to gold was on 15 August. For decades, we have had a pernicious form of laisser aller-laisser faire reflected in the sad and dangerous spectacle of the USA, nearly all European countries and Japan becoming so economically stagnant, deficit riddled and indebted their national budgets can almost never logically or conventionally return to balance -  without the 'soft option' of constantly debasing their currencies.

Political wrangling in Washington has certainly damaged the financial credibility of the United States, but similar wrangling, inertia and refusal to decide has allowed the same zero sum game to emerge in the other developed countries. The long overdue US debt downgrade by ratings house Standard & Poor's is often given the same 'shock and awe' media treatment as the Sept 2008 collapse of investment bank and broker Lehman Bros, but this debt downgrade is no more unwarranted than similar downgrades, by S&P and other ratings houses, for the sovereign debt of Europe's PIIGS countries. The underlying reality is the same in all cases, but the S&P debt downgrade of the USA more specifically weakens a fundamental pillar supporting the dollar as the de facto global reserve money.

In Europe, which for essentially political reasons created and launched the euro currency in 17 countries, the unwillingness of politicians to face the fatal structural defects of the euro system and Eurozone is now driving a gathering storm cloud, with global impacts. One of these is the impossibility of the euro to in any way replace the US dollar. Another is the simple and proven effect of high levels of sovereign debt driving economic recession, generating more and larger sovereign debt defaults, repeating the European banking crisis of 2008-2009, and laying the basis for a euro currency collapse. The euro's former and supposed "bright potential" of replacing the dollar as the global reserve currency has disappeared in the space of 9 months.

In exactly the same way as US, European and Japanese banks, insurers and financial players "piled in" to the US subprime mortgage finance bubble, with Lehman Bros only one of the most glaring and public examples of insolvency when the bubble collapsed, European (and international) commercial banks repeated the same fatal errors, this time with sovereign debt in the Eurozone: since early summer 2011 they are correctly seen by analysts as vulnerable to further EU sovereign debt defaults.

Of course, exactly like the George W Bush regime, Obama regime and Japanese deciders, the German-French political axis controlling the EU, Merkel and Sarkozy, will act when sufficiently prodded by market panic to transfer toxic bank assets to increase already massive debt in the public domain. This will further raise sovereign debts, and further erode euro credibility - which however may stay fixed at the "market rational" exchange rate of around 1.4 US dollar for 1 euro, only underlying the sad reality that both moneys have no credibility.

Both moneys will continue to devalue or depreciate, against gold, other precious metals, food commodities and oil, for as long as the global economy does not collapse into recession. Even more dangerous, and possible, we can fear these real assets could continue to appreciate against the paper moneys even in recession, intensifying a potential global economic collapse.

China's yuan - relative to the dollar, euro or yen - has strong fundamentals, but also has what can be called "counterpart risk and liabilities". These are in fact immense, ranging from the political and geopolitical, to the economic and monetary, making it unlikely the yuan could "go global". More prosaically, any large appreciation of the yuan against the dollar and euro would have instant and massive negative impacts on China's trade surplus, which is the pillar of yuan credibility.

This in turn helps explain why in recent weeks we see gold prices able to rise in $20 or $30 leaps per day, with only small corrections, but of course generating a storm of gold price collapse warnings and sightings !  Private investors and central banks are turning to the monetary instrument that they always turn to when confronted by reality: bullion gold. Its rise in price only "measures" the loss of credibility and confidence in the dollar and euro - and almost all other fiat moneys.

We can be sure this threat is well known and understood by political deciders. Their only two "weapons" or responses are in fact fantastically schizophrenic: printing more money, and setting harsh austerity cures. Regarding the second, the results of IMF-dictated austerity cures for Third World debtors of the 1980s and 1990s are apparently "unknown" to OECD deciders of today applying exactly the same cures. The net result can only be inflationary - although massive effort will be given to covering up this  inconvenient truth. And it can only be recessionary - with the same obsession applied to denying this second reality. We are not faced by stagflation, but "recession-flation".

The outlook is for monetary inflation and economic recession which can be considered more or less the worst-possible and most incompetent-possible outcome. Underlining this conclusion, the potential for the "conventional solution" of print-and-forget, and austerity being durable or sustainable must be considered close to zero. At present we have almost no admittance of this risk and this outcome.

This raises the potential for entirely unexpected, therefore unprecedented real world results from the presently uncharted process that is operating, which tends towards the creation of new or alternative moneys as the only logical conclusion.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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