The collapse of the euro is accelerating, and it looks like we could be staring a major European financial crisis right in the face early in 2017. On Thursday, the EUR/USD fell all the way to $1.0366 at one point before rebounding slightly. That represents the lowest that the euro has been relative to the U.S. dollar since January 2003. Ever since 2011, I have been relentlessly warning that the euro is heading for parity with the U.S. dollar. When the EUR/USD was trading at about $1.40 that must have seemed like crazy talk, but I never wavered. I just kept warning people that the euro was going to weaken greatly relative to the U.S. dollar. Here is one example from March 2015: “How many times have I said it? The euro is heading to all-time lows. It is going to go to parity with the U.S. dollar, and then it is eventually going to go below parity.” After Thursday, we are almost there, and once we do hit parity that is going to be a sign that all sorts of chaos is about to erupt in Europe.
For years, so many people that write about our coming economic problems have been proclaiming that the death of the U.S. dollar is imminent.
But I have always taken a different approach. I have always maintained that the collapse of the euro comes first, and that the death of the U.S. dollar happens some time later.
So many people have wanted to get rid of all of their dollars in anticipation of the coming crisis, but that is a huge mistake.
First of all, without exception everyone needs an emergency fund that can cover at least six months of expenses in case there is a job loss, a health emergency or all hell breaks loose for some reason.
Secondly, cash is going to be king during the initial stages of the coming crisis. Later on the U.S. dollar will rapidly lose value, but at first it will pay to have significant amounts of cash available to you.
Most people out there seem to think that a strong dollar is great news and that it is a sign of good things to come under Donald Trump.
But the truth is that an overly strong U.S. dollar is actually very bad news for the global economy.
For the U.S., a strong dollar hurts our exports and tends to drag down our GDP.
For the rest of the world, a strong dollar makes it more expensive to borrow money. The economic boom in the developing world following the last financial crisis was fueled by mountains of cheap dollars that were borrowed at ultra-low interest rates. But now the U.S. dollar is surging and interest rates are spiking, and that is starting to cause major problems.
It now takes much more local currency to pay back those dollar-denominated loans that were made in emerging markets during the boom times. If the U.S. dollar continues to rise we are going to see a staggering number of defaults, and a credit crunch in many areas of the globe seems inevitable at this point.
Of course the big thing to keep an eye on over the coming weeks is the rapidly unfolding crisis in Italy. The Italians have the 8th largest economy on the entire planet, and we are in the process of watching their entire banking system completely implode.
In fact, their third largest bank is in imminent danger of collapse, and according to Reuters this could trigger “a wider banking and political crisis in Italy”…
Italy’s government is ready to pump 15 billion euros into Monte dei Paschi di Siena (BMPS.MI) and other ailing banks, sources said, as the country’s third-largest lender pushes ahead with a private rescue plan that is widely expected to fail.
The world’s oldest bank has until Dec. 31 to raise 5 billion euros ($5.2 billion) in equity or face being wound down by the European Central Bank, potentially triggering a wider banking and political crisis in Italy.
If needed, the government will pump 15 billion euros into the Siena-based lender and several other smaller banks to prevent that, two sources close to the matter said on Thursday.
This is so much more serious than the ongoing economic depression in Greece.
Greece is just the 44th largest economy on the planet, and we saw how much trouble Europe had trying to bail them out.
So what is the rest of Europe going to do when financial collapse hits Italy?
Here in the United States very few people are interested in hearing about a “global financial crisis” right at this moment, because in the aftermath of the election most people are feeling really good about where things are heading. Just consider the following three facts that I pulled out of a Bloomberg article…
#1 “The National Association of Homebuilders’ index of sentiment soared to an 11-year high in December, despite the sizable rise in bond yields since the election.”
#2 “The University of Michigan’s December index of consumer confidence also continued its upward post-election trend, rising to 98. A sub-index that tracks respondents’ opinion of the government’s economic policies spiked to levels not seen since 2009.”
#3 “The National Federation of Independent Businesses’ index of optimism among small businesses posted its sharpest surge since 2009 in November to reach 98.4. An expected improvement in business conditions among small business owners surveyed after Nov. 8 was the largest contributor to the improvement in the headline print.”
Hopefully happy days will stick around for a while.
But it won’t last forever.
As I have warned so many times, the coming crisis is going to hit Europe first, and the United States will join the party not too long after.
And a key marker that we have been watching for is almost here. The euro is going to hit parity with the U.S. dollar just like I have been warning, and once that takes place expect events to start accelerating significantly.
This is the month when the future of the eurozone will be decided. This week, Greek leaders will meet with European officials to discuss what comes next for Greece. The new prime minister of Greece, Alexis Tsipras, has already stated that he will not accept an extension of the current bailout. Officials from other eurozone countries have already said that they expect Greece to fully honor the terms of the current agreement. So basically we are watching a giant game of financial “chicken” play out over in Europe, and a showdown is looming. Adding to the drama is the fact that the Greek government is rapidly running out of money. According to the Wall Street Journal, Greece is “on course to run out of money within weeks if it doesn’t gain access to additional funds, effectively daring Germany and its other European creditors to let it fail and stumble out of the euro.” We have witnessed other moments of crisis for Greece before, but things are very different this time because the new Greek government is being run by radical leftists that based their entire campaign on ending the austerity that has been imposed on Greece by the rest of Europe. If they buckle under the demands of the European financial lords, their credibility will be gone and Syriza will essentially be finished in Greek politics. But if they don’t compromise, Greece could be forced to leave the eurozone and we could potentially be facing the equivalent of “financial armageddon” in Europe. If nobody flinches, the eurozone will fall to pieces, the euro will collapse and trillions upon trillions of dollars in derivatives will be in jeopardy.
According to the Bank for International Settlements, 26.45 trillion dollars in currency derivatives are directly tied to the value of the euro.
Let that number sink in for a moment.
To give you some perspective, keep in mind that the U.S. government spends a total of less than 4 trillion dollars a year.
So 26 trillion dollars is an amount of money that is almost unimaginable. And of course those are just the derivatives that are directly tied to the euro. Overall, the total global derivatives bubble is more than 700 trillion dollars in size.
Over the past couple of decades, the global financial system has been transformed into the biggest casino in the history of the planet. And when things are stable, the computer algorithms used by the big banks work quite well and they make enormous amounts of money. But when unexpected things happen and markets go haywire, the financial institutions that gamble on derivatives can lose massive quantities of money very rapidly. We saw this in 2008, and we could be on the verge of seeing this happen again.
If no agreement can be reached and Greece does leave the eurozone, the euro is going to fall off a cliff.
When that happens, someone out there is going to lose an extraordinary amount of money.
And just like in 2008, when the big financial institutions start to fail that will plunge the entire planet into another major financial crisis.
So at the moment, it is absolutely imperative that Greece and the rest of the eurozone find some common ground.
Greece’s new leftist prime minister, Alexis Tsipras, said on Sunday he would not accept an extension to Greece’s current bailout, setting up a clash with EU leaders – who want him to do just that – at a summit on Thursday.
Tsipras also pledged his government would heal the “wounds” of austerity, sticking to campaign pledges of giving free food and electricity to those who had suffered, and reinstating civil servants who had been fired as part of bailout austerity conditions.
Prior to the summit on Thursday, eurozone finance ministers are going to get together on Wednesday to discuss what they should do. If these two meetings don’t go well this week, we could be looking at big trouble right around the corner. In fact, Greece is being warned that they only have until February 16th to apply for an extension of the current bailout…
Euro zone finance ministers will discuss how to proceed with financial support for Athens at a special session next Wednesday ahead of the first summit of EU leaders with the new Greek prime minister, Alexis Tsipras, the following day.
However, the chairman of the finance ministers said the following meeting of the Eurogroup on Feb. 16 would be Greece’s last chance to apply for a bailout extension because some euro zone countries would need to consult their parliaments.
“Time will become very short if they (Greece) don’t ask for an extension (by then),” said Jeroen Dijsselbloem.
The current bailout for Greece expires on Feb 28. Without it the country will not get financing or debt relief from its lenders and has little hope of financing itself in the markets.
And as I mentioned above, the Greek government is quickly running out of money.
Most analysts believe that because of the enormous stakes that one side or the other will give in at some point.
But what if that does not happen?
Personally, I believe that the eurozone is doomed in the configuration that we see it today, and that it is just a matter of time before it breaks up.
And I am far from alone. For example, just check out what former Fed chairman Alan Greenspan is saying…
Mr Greenspan, chairman of the Federal Reserve from 1987 to 2006, said: “I believe [Greece] will eventually leave. I don’t think it helps them or the rest of the eurozone – it is just a matter of time before everyone recognizes that parting is the best strategy.
“The problem is that there there is no way that I can conceive of the euro of continuing, unless and until all of the members of eurozone become politically integrated – actually even just fiscally integrated won’t do it.”
The Greeks are using all of this to their advantage. They know that if they leave it could break apart the entire monetary union. So this gives them a tremendous amount of leverage. Greek Finance Minister Yanis Varoufakis has even gone so far as to compare the eurozone to a house of cards…
“The euro is fragile, it’s like building a castle of cards, if you take out the Greek card the others will collapse.” Varoufakis said according to an Italian transcript of the interview released by RAI ahead of broadcast.
The euro zone faces a risk of fragmentation and “de-construction” unless it faces up to the fact that Greece, and not only Greece, is unable to pay back its debt under the current terms, Varoufakis said.
“I would warn anyone who is considering strategically amputating Greece from Europe because this is very dangerous,” he said. “Who will be next after us? Portugal? What will happen when Italy discovers it is impossible to remain inside the straitjacket of austerity?”
After all this time and after so many bailouts, we have finally reached a day of reckoning.
There is a very real possibility that Greece could leave the eurozone in just a matter of months, and the elite know this.
The U.K. government is stepping up contingency planning to prepare for a possible Greek exit from the eurozone and the market instability such a move would create, U.K. Treasury chief George Osborne said on Sunday.
A spokeswoman for the Treasury declined comment on the details of the contingency planning.
The U.K. government has said the standoff between Greece’s new anti-austerity government and the eurozone is increasing the risks to the global and U.K. economy.
“That’s why I’m going tomorrow to the G-20 [Group of 20] to encourage our partners to resolve this crisis. It’s why we’re stepping up the contingency planning here at home,” Mr. Osborne told the BBC in an interview. “We have got to make sure we don’t, at this critical time when Britain is also facing a critical choice, add to the instability abroad with instability at home.”
And if Greece does leave, it will cause panic throughout global financial markets as everyone wonders who is next.
Italy, Spain and Portugal are all in a similar position. Every one of them could rapidly become “the next Greece”.
But of even greater concern is what a “Grexit” would do to the euro. If the euro falls below parity with the U.S. dollar, the derivatives losses are going to be absolutely mind blowing. And coupled with the collapse of the price of oil, we could be looking at some extreme financial instability in the not too distant future.
When big banks collapse, they don’t do it overnight. But we often learn about it in a single moment.
Just remember Lehman Brothers. Their problems developed over an extended period of time, but we only learned the full extent of their difficulties on one very disturbing day in 2008, and that day changed the world.
As you read this, big financial troubles are brewing in the background. At some point, they are going to come to the surface. When they do, the entire planet is going to be shocked.
That didn’t take long. On Monday, the Dow was down another 326 points. Overall, the Dow has now fallen more than 1000 points from the peak of the market (16,588.25) back in late December. This is the first time that we have seen the Dow drop below its 200-day moving average in more than a year, and there are many that believe that this is just the beginning of a major stock market decline. Meanwhile, things are even worse in other parts of the world. For example, the Nikkei is now down about 1700 points from its 2013 high. This is causing havoc all over Asia, and the sharp movement that we have been seeing in the USD/JPY is creating a tremendous amount of anxiety among Forex traders. For those that are not interested in the technical details, what all of this means is that global financial markets are starting to become extremely unstable.
Unfortunately, there does not appear to be much hope on the horizon for investors. In fact, troubling news just continues to pour in from all over the planet. Just consider the following…
-The IMF recently said that the the probability that the global economy will fall into a deflation trap “may now be as high as 20%“.
-The Baltic Dry Index is now down 50 percent from its December highs.
If our economic troubles continue to mount, could we be facing a global “financial avalanche” fairly quickly?
That is what some very prominent analysts believe.
Below, I have posted quotes from five men that are greatly respected in the financial world. What they have to say is quite chilling…
#1 Doug Casey: “Now is a very good time to start thinking financially because I’m afraid that this year, in 2014, we’re going to go back into the financial hurricane. We’ve been in the eye of the storm since 2009, but now we’re going to go back into the trailing edge of the storm, and it’s going to be much longer lasting and much worse and much different than what we had in 2008 and 2009.”
#2 Bill Fleckenstein: “The [price-to-earnings ratio] is 16, 17 times earnings,” Fleckenstein said on Tuesday’s episode of “Futures Now.” “Why would you pay 16 times for an S&P company? I don’t care about where rates are, because rates are artificially suppressed. Why isn’t that worth 11 or 12 times? Just by that analysis, you’d be down by a quarter or 30 percent. So there’s a huge amount of downside.”
#3 Egon von Greyerz of Matterhorn Asset Management: “Nothing goes (down) in a straight line, but the emerging market problems will accelerate and it will spread to the very overbought and the very overvalued stock markets and economies in the West.
So stock markets are now starting a secular bear trend which will last for many years, and we could see falls of massive proportions. At the end of this, the wealth that has been created in the last few decades will be destroyed.”
#4 Peter Schiff: “The crisis is imminent,” Schiff said. “I don’t think Obama is going to finish his second term without the bottom dropping out. And stock market investors are oblivious to the problems.”
“We’re broke, Schiff added. “We owe trillions. Look at our budget deficit; look at the debt to GDP ratio, the unfunded liabilities. If we were in the Eurozone, they would kick us out.”
#5 Gerald Celente: “This selloff in the emerging markets, with their currencies going down and their interest rates going up, it’s going to be disastrous and there are going to be riots everywhere…
…So as the decline in their economies accelerates, you are going to see the civil unrest intensify.”
Those that do not believe that we could ever see “civil unrest” on the streets of America should take note of what just happened in Seattle.
If that is how average Americans will behave when something good happens, how will they act when the economy totally collapses and nobody can find work for an extended period of time?
We are rapidly approaching another great financial crisis. Unfortunately, we didn’t learn any of the lessons that we should have learned last time. It is being projected that the debt of the federal government will more than double during the Obama years, the “too big to fail banks” have collectively gotten 37 percent larger over the past five years, and the big banks have become more financially reckless than ever before.
When the next great financial crisis arrives (and without a doubt it is inevitable), millions more Americans will lose their jobs and millions more Americans will lose their homes.
Now is not the time to be buying lots of expensive new toys, going on expensive vacations or piling up lots of debt.
Now is the time to build up an emergency fund and to do whatever you can to get prepared for the great storm that is coming.
As you can see from the financial headlines, time is rapidly running out.
What do governments and central banks do when they don’t like what is happening in the financial markets? They directly intervene and they manipulate the financial markets of course. On Friday, the central banks of the G-7 acted in concert to drive down the value of the surging yen. So why did they do this? Well, the fear was that a rising yen would hurt Japanese exports at a time when the economy of Japan needs all of the help that it can get. So, as central banks have been doing with increasing frequency, they directly intervened in the Forex market in order to bring about the result that they desired. Unfortunately, this is not an isolated incident. The truth is that foreign governments, central banks and large financial institutions are constantly manipulating the Forex, precious metals and stock markets all over the globe. You see, in today’s global economy the “stakes are so high” that the free market cannot be trusted.
The reality of the matter is that none of the financial markets are really “free markets” anymore. Not that they are completely rigged, but to say that they are very highly manipulated would not be a stretch.
At least this time the manipulation was made public. Of course it would have been really hard to hide the fact that all G-7 central banks intervened in the Forex on the same day.
The last time there was such a coordinated intervention in the global currency market was back in 2000 when central banks intervened to boost the struggling euro.
But the truth is that individual central banks attempt to manipulate the Forex all the time.
Some of these interventions become public. In September 2010, a bold 12 billion dollar move by the Bank of Japan to push down the value of the yen made headlines around the globe but had only limited success.
Many nations around the world have become extremely sensitive to currency movements.
In particular, there are several Asian nations that are known to be constant currency manipulators. For example, Singapore is very well known for intervening in the foreign exchange market in order to benefit exporters.
And that is what this most recent intervention on behalf of the yen was all about. It was about making Japanese exports cheaper.
But who is going to say no to Japan right now? It is believed that Japan asked the G-7 to do this, and so they did.
Japanese Finance Minister Yoshihiko Noda told the media the following about this massive intervention in the marketplace by the G-7….
“Given yen moves after the tragic events that hit Japan, the United States, Britain, Canada and the European Central Bank have agreed with Japan to jointly intervene in the currency market.”
So isn’t the Forex supposed to be a free market?
If you still believe that, I have a bridge to sell you.
According to Kathleen Brooks, the research director at a major Forex trading firm, it looks like there is a certain level that global authorities simply will not allow the yen to rise to….
“It looks as though global authorities are willing to pull out all of the stops to defend the 80.00 level in dollar/yen.”
The following is the full statement released by the G-7 defending their currency intervention….
Statement of G-7 Finance Ministers and Central Bank Governors
March 18, 2011
We, the G-7 Finance Ministers and Central Bank Governors, discussed the recent dramatic events in Japan and were briefed by our Japanese colleagues on the current situation and the economic and financial response put in place by the authorities.
We express our solidarity with the Japanese people in these difficult times, our readiness to provide any needed cooperation and our confidence in the resilience of the Japanese economy and financial sector.
In response to recent movements in the exchange rate of the yen associated with the tragic events in Japan, and at the request of the Japanese authorities, the authorities of the United States, the United Kingdom, Canada, and the European Central Bank will join with Japan, on March 18, 2011, in concerted intervention in exchange markets. As we have long stated, excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will monitor exchange markets closely and will cooperate as appropriate.
But it is not just foreign governments and central banks that manipulate financial markets.
If you want to try to make money on the Forex, you had really better know what you are doing, because most “little fish” get swallowed up and spit out.
A number of years ago I actually invested in the Forex and I rapidly learned that it is not a “clean game”. I discovered that there are industry insiders that openly confess that several of the “big fish” in the industry brazenly “stop hunt” and regularly trade against the positions of their clients.
Not that stock markets around the globe are much better. It would take thousands of pages just to document the well known cases of stock manipulation and insider trading.
And don’t get me started on the precious metals markets. As I have written about previously, very compelling evidence of manipulation in those markets has been handed to the U.S. government and they have essentially done next to nothing with that evidence.
Not that people don’t make money in the financial markets. Some people make a ton of money. But those people are experts and they know how to survive in a “dirty game”.
If you are an amateur, you really need to think twice before diving too deeply into the financial markets. If you think that you can jump into the Forex or the U.S. stock market and “get rich quick” you are in for a rude awakening.
The financial markets have become a game that is designed to funnel money to the “sharks” and to the “big boys”. Once you put your money into the game, the odds are that “the house” is going to win.
For those that still do believe that the financial markets are a good way to build wealth, at least be prudent enough to get some sound financial advice. There is no shame in having a financial professional invest your money for you.
But it is no guarantee of success either. The truth is that millions of Americans have experienced a lot of pain in the financial markets over the last few years.
As the global economy becomes even more unstable, the manipulation of the financial markets by governments and by central banks is going to become even more dramatic.
As financial markets around the world crash and rise and crash again a whole lot of people are going to be wiped out financially.
Some analysts are warning that the U.S. dollar is in danger of collapse because of the exploding U.S. government debt, the horrific U.S. trade deficit and the new round of quantitative easing recently announced by the Federal Reserve. Other analysts are warning the the euro is in danger of collapse because of the very serious sovereign debt crisis that is affecting nations such as Greece, Portugal, Ireland, Italy, Belgium and Spain. So what happens if the dollar and the euro both collapse? Well, it would certainly throw the current world financial order into a state of chaos, but what would emerge from the ashes? Would the nations of the world go back to using dozens of different national currencies or would we see a truly global currency emerge for the very first time?
Up until recently, the idea of a world currency was absolutely unthinkable for most people. In fact, the notion that all of the major nations around the globe would agree to a single currency still seems far-fetched to most analysts. However, if enough “chaos” is produced by a concurrent collapse of the U.S. dollar and the euro, would that be enough to get the major powers around the world to agree to a new financial world order?
Let’s hope not, but it is getting hard to deny that we are heading for a major currency crisis, and if the U.S. dollar and/or the euro collapse, the world will certainly never be the same afterwards.
In case you missed it, China and Russia made a very big announcement the other day.
They told the world that instead of using the U.S. dollar to trade with each other, they will now be using their own national currencies.
Most Americans don’t realize it, but that is a very, very big deal.
The fact that the U.S. dollar has been the primary reserve currency of the world for decades has given the United States a tremendous amount of economic power.
But now nations are beginning to lose confidence in the U.S. dollar and they are slowly starting to move away from it.
When the Federal Reserve announced a new round of quantitative easing in early November, it created a huge backlash from other nations. For decades, many other countries have been heavily investing in dollar-denominated assets, and now they are quite upset that those assets are going to be devalued.
Chinese Finance Vice Minister Zhu Guangyao used very strong language in denouncing the Fed’s new quantitative easing scheme earlier this month….
“As a major reserve currency issuer, for the United States to launch a second round of quantitative easing at this time, we feel that it did not recognize its responsibility to stabilize global markets and did not think about the impact of excessive liquidity on emerging markets.”
German Finance Minister Wolfgang Schäuble was even more blunt. He has called current Federal Reserve policy “clueless”, and he says that he is absolutely disgusted with the Federal Reserve at this point….
“They have already pumped an endless amount of money into the economy via taking on extremely high public debt and through a Fed policy that has already pumped a lot of money into the economy. The results are horrendous.”
So where is all of this going?
If the Federal Reserve keeps flooding the system with new dollars, the rest of the world could eventually totally reject the U.S. dollar and U.S. Treasuries.
If that day ever arrives, the results would be beyond catastrophic as the following short video from the National Inflation Association demonstrates….
But it is not just the U.S. dollar that is in trouble.
The euro is in danger as well.
Just consider the financial problems that some major European nations are experiencing right now….
*Standard & Poor’s has slashed Ireland’s credit rating two notches to “A”, and is warning that there could be further downgrades. The Irish budget deficit is projected to reach 32 percent of national output this year. Ireland’s finances are being called “just one big pyramid scheme”, and they recently accepted a huge European bailout. Unfortunately for Ireland, this bailout comes with strings. The Irish government is now being forced to implement an austerity program that is being referred to as “draconian”.
*Analysts are projecting that Portugal is going to need a bailout of at least 50 billion euros. The government of Portugal has implemented some harsh austerity measures in an attempt to get the red ink under control, and the people are not pleased. On Wednesday, a massive national strike shut down travel and basic services across the country.
*Greece was the first nation to need a European bailout, and now there are rumors that they may need even more assistance. The statistics agency for the EU, Eurostat, recently revealed that Greece’s budget deficit for 2009 was actually 15.4% of GDP rather than 13.6% of GDP as originally thought. The Greek national debt is now well over 120 percent of GDP. The financial problems in Greece never seem to stop.
*Belgium’s debt has reached 100 percent of annual national income, and the cost of insuring that country’s debt has now hit record levels.
*Even Spain is in trouble. Rates on Spanish 10-year government bonds have risen to frightening heights in recent days, and the official unemployment rate in Spain is hovering around 20 percent.
*In a recent article entitled “A Spanish Bailout Would Test Europe’s Strained Finances“, the New York Times quoted Jordi Galí, the director of the Center for Research in International Economics at Barcelona’s Pompeu Fabra University as saying that rumors that Spain is in financial trouble could end up making it a self-fulfilling prophecy….
“If investors expect Spain to have trouble refinancing its debt, now or somewhere down the road, then Spain will have trouble,” he added. “This is only aggravated by the fact that the reluctance of investors to purchase the country’s public debt leads to an increase in the interest rate it has to pay and thus in the budget deficit and the amount of debt it has to issue.”
So could this sovereign debt crisis actually cause the euro to collapse?
Well, it depends who you ask.
European Financial Stability Fund chief Klaus Regling says that there is “zero” chance that the euro will collapse….
“There is zero danger. It’s inconceivable that the euro would collapse.”
Other European leaders are not so sure about that.
So if the U.S. dollar and the euro do collapse, what would happen?
Well, already many world leaders are openly speaking of the need for a true global currency.
After all, they argue, there won’t be any “currency wars” if we are all using the same currency.
In fact, the Institute of International Finance, an organization that represents 420 of the biggest banks and financial institutions on the globe, recently declared that the time has come to adopt a one world currency.
A paper entitled “Reserve Accumulation and International Monetary Stability” by the Strategy, Policy and Review Department of the IMF recommends that the world adopt a global currency called the “Bancor” and that a global central bank be established to administer that currency. The report is dated April 13, 2010 and a full copy can be read here. Unfortunately this is not hype and it is not a rumor. This is a very serious proposal in an official document from one of the mega-powerful institutions that is actually running the world economy. Anyone who follows the IMF knows that what the IMF wants, the IMF usually gets. So could a global currency known as the “Bancor” be on the horizon? That is now a legitimate question.
So will any of this ever come to fruition?
Well, it would likely take one whale of a crisis to get the countries of the world to agree to such a thing.
However, we do live at a time when the world financial system seems to be perpetually on the edge of chaos. If at some point the U.S. dollar and the euro totally fall apart perhaps we will see a “new order” arise out of all of that chaos.
But let’s hope not. Once we give any organization the power to issue a global currency the odds of us ever getting our economic sovereignty back will be greatly reduced. The internationalists are going to use any crisis as an opportunity to argue for greater centralization of the world financial system, and it will be very important for the American people not to fall for those arguments.
Hopefully the U.S. dollar and the euro can remain stable currencies for at least a little while longer. Because once they collapse things will never, ever be the same again.
Are you ready for a currency war? Well, buckle up, because things are about to get interesting. This week Japan fired what is perhaps the opening salvo in a new round of currency wars by publicly intervening in the foreign exchange market for the first time since 2004. Japan’s bold 12 billion dollar move to push down the value of the yen made headlines all over the world. Japan’s economy is highly dependent on exports and the Japanese government was becoming increasingly alarmed by the recent surge in the value of the yen. A stronger yen makes Japanese exports more expensive for other nations and thus would harm Japanese industry. But Japan is not the only nation that is ready to go to battle over currency rates. The governments of the U.S. and China continue to exchange increasingly heated rhetoric regarding currency policy. In Europe, there is growing sentiment that the euro needs to be devalued in order to help European exports become more competitive. In addition, exporters all over the world are already loudly complaining about the possibility that the Federal Reserve is about to unleash another round of quantitative easing. Virtually all major exporting nations want the value of the U.S. dollar to remain high so that they can keep flooding us with lots of cheap goods. The sad reality is that our current system of globalized trade rewards exporting nations that have weak currencies, and many nations have now shown that they are willing to take the gloves off to make certain that their national currencies do not appreciate in value by too much.
Some nations have been involved in open currency manipulation for some time now. For example, Singapore is well known for intervening in the foreign exchange market in order to benefit exporters. Also, the Swiss National Bank experienced losses equivalent to about 15 billion dollars trying to stop the rapid rise of the Swiss franc earlier this year.
But as we race toward the end of 2010, currency manipulation is becoming a major issue on the world stage.
Rumors that the Federal Reserve is considering a substantial new round of quantitative easing is already causing many major exporting nations around the world to howl in outrage.
Well, quantitative easing by the Federal Reserve could put substantial downward pressure on the value of the dollar and that would make exports significantly more expensive in the United States. The reality is that even a relatively small change in the value of the U.S. dollar can have a major impact on exporters.
But what could really set off a massive currency war is the ongoing dispute between the U.S. and China.
For years, China has kept the value of their currency artificially low. Even though China has made a few small moves toward a more free-floating currency policy, at this point China’s currency is still pretty much pegged to the U.S. dollar. It is estimated that the Chinese government is keeping China’s currency at a value about 40 percent lower than what it should be. This is essentially a de facto subsidy to China’s exporters.
This has enabled China to flood the United States with cheap goods and it is killing entire industries in the United States. Americans have loved rushing out to Wal-Mart to get super low prices on all kinds of stuff, but in the process we have slowly but surely been shipping our manufacturing base and our standard of living over to China.
In recent years both the Bush administration and the Obama administration have been whining about this currency manipulation by China, but both administrations have stopped short of taking any real action.
But are there now signs that the Obama administration is going to get serious and start a currency war?
Well, last week Barack Obama did send the head of his national council of economic advisers, Larry Summers, to Beijing to discuss currency issues.
But what can we do other than whine at this point?
Are we willing to start a trade war?
Considering the fact that China holds nearly a trillion dollars worth of U.S. Treasuries, that probably would not go so well for us.
Even though China’s currency manipulation is absolutely raping the U.S. economy, China has so much leverage over us at this point that it isn’t even funny.
For example, China has almost a complete and total monopoly on rare earth elements. If China totally cut off the supply of rare earth elements, we would have no hybrid car batteries, flat screen televisions, cell phones or iPods. Not only that, but rare earth elements are used by the U.S. military in radar systems, missile-guidance systems, satellites and aircraft electronics.
But something has to be done. Essentially we are caught between a rock and a hard place.
Today, the United States spends approximately $3.90 on Chinese goods for every $1 that the Chinese spend on goods from the United States.
Last month, the monthly trade deficit with China was approximately 26 billion dollars. For the year, the trade deficit with China will be somewhere in the neighborhood of 300 billion dollars or so. The transfer of wealth to China that represents is absolutely mind blowing.
The U.S. economy is getting poorer and the Chinese economy is getting richer each and every month.
We are in decline and China is on the rise. In fact, one prominent economist is projecting that the Chinese economy will be three times larger than the U.S. economy by the year 2040.
This would not have ever happened if we had not put up with China’s open and blatant currency manipulation all this time.
But now they have us over a barrel and standing up to China would be incredibly painful for the U.S. economy in the short-term.
So will we actually see a currency war break out soon?
Well, it seems almost a certainly that countries throughout the world will continue to manipulate their currencies in order to gain a competitive advantage, but if you are waiting for the Obama administration to truly stand up to China you are probably going to be waiting for a very, very long time.