Could the Euro and Dollar Go One-to-One?
By Anthony Wile - October 29, 2011

This is a funny question to ask given that the dollar is in the dumps and the euro has had a strong rally since the region's top Eurocrats "saved" the euro this week. But in Europe, where some DB elves are traveling and especially in Spain, those in the banking community – especially at the commercial banking level – are beginning to speculate that the euro and the dollar may eventually reach parity.

The elite's promotional media guns, of course, are aimed at assuring us once again that the euro-crisis has finally been contained. But given the difference between what the Anglosphere elites say and DO, I'd humbly submit that the crisis is nowhere near finished and that the real objective may be to unwind both Europe and America preparatory to creating the kind of full-blown chaos necessary to usher in a world currency. Stranger things have happened – and we do live in strange times these days.

Of course, I don't have any crystal ball. And betting on a market as large as the currency market is generally a fool's errand. But it's an interesting question nonetheless for those with a stake in the overall global financial system (that means almost all of us).

Interestingly, British banks may often trade the most currency, regularly generating up to some 30 percent of market activity.

The idea of dollar-euro parity has been raised before. The last time this question was asked seriously was in May 2010. At the time, Thomas Mayer, chief economist at Deutsche Bank, told the Bild am Sonntag weekly that inflation and the growing Greek-debt crisis could so weaken the euro that euro-dollar parity was not out of the question.

"As long as uncertainty over Greece and other countries on the periphery of the euro area continues, the euro will remain under pressure," he was quoted as saying by AFP. Here's some more from the AFP article:

"I think we could soon see 1.20 against the dollar and a further decline in the direction of parity is definitely possible," added Mayer … As volatile markets closed for the week, the euro fetched 1.2755 dollars as investors warned that failure to nail down a credible rescue plan at Sunday's meeting of EU finance ministers could pressure the euro even more.

Meanwhile, other economists warned of the dangers of inflation returning in Germany in the wake of the Greek crisis. Wolfgang Gerke, president of the Bavarian Finance Centre, said he expected "maybe not hyperinflation, but around three to four percent, caused by high budget deficits."

The majority (52 percent) of Germans fear that inflation could result from the Greek crisis, according to an Emnid poll published Sunday, compared to 45 percent that saw no such danger. Moreover, nearly two thirds (59 percent) of Germans think Berlin should consider a return to its pre-euro currency, the deutschmark, with one in three believing the euro will no longer exist in 10 years.

Of course, this was over a year ago, and since then the "facts on the ground" have changed considerably. As a result of the seemingly optimistic news from Europe, the euro continued its advance this past week, rising against the dollar for the third straight week. In fact, the dollar continued to be weak generally, dropping against other major currencies based on the idea that the US Federal Reserve is going to embark on yet more quantitative easing.

The Standard & Poor's 500 Index rallied, advancing 3.8 percent this past week, according to Bloomberg, while the Thomson Reuters/Jefferies CRB Index of raw materials rose 3.9 percent. Meanwhile, hedge funds continued to bet against the dollar, according to the Commodity Futures Trading Commission. Speculators pounded the dollar against the yen, euro, Swiss franc, pound and other currencies.

Greg Salvaggio, senior vice president of capital markets at the currency-trading firm Tempus Consulting Inc. in Washington, was quoted by Bloomberg as saying – regarding the latest Euro-deal – "It's nice to see a group of officials actually act like adults and get something done in a welcome surprise to the market … We now have to start focusing on if it has really been contained. It's still a very, very thick animal over there."

While Merkel, Sarkozy, et. al. are certainly adults, I have a hard time believing that this "welcome surprise" is going to look so very welcome in a few weeks or months once the post-mortems start rolling in. Over at ZeroHedge, Tyler Durden tells us this:

Germany "Raises" €55.5 Billion, or 1% Of Its Debt/GDP Ratio, Thanks To Derivative "Accounting Error" … As usual, the most surreal news of the day, perhaps week, is saved for Friday night, when we learn that Germany has magically raised over a quarter of its total EFSF obligation of €211 billion by way of what is essentially magic. The Telegraph reports that "Germany is €55bn richer than it previously thought because of an accounting error at state-owned bank Hypo Real Estate Holding …

As a result, FMS will only contribute about €161bn to Germany's debt this year, down from €216.5bn in 2010." Another way of representing the error is that it is equal to a ridiculous 1% of the country's debt to GDP ratio … In other words, the modern world, best characterized by the imploding fiat ponzi, has discovered a way to raise capital (electronic, naturally) courtesy of CDS bookmarking errors. And now, we have seen it all.

You see? … funny money. And why should we expect any better from Brussels itself? We're told the new "bailout" program that Brussels has just concluded is a "game-changer," but Euroland, it seems clear, continues to substitute semantics for reality. The mainstream media goes along with it, but just because it's written down doesn't mean it STAYS down.

The current deal in place is, of course, no different. European banks that own Greek debt have "voluntarily" agreed to reduce the face value of this debt by some 50 percent. They've also vowed to expand capital reserves to nine percent by mid-year 2012. Finally, the European Financial Stability Facility is being boosted to US$1.4 trillion from around US$620 billion.

The kicker is the "voluntary" notion put forth in this package. That's where semantics begin to take over from reality. There is nothing voluntary about what European banks have submitted to. This is, in fact, a managed bankruptcy taking place at the behest of Eurocrats telling their respective banks what they will have to do. Brussels is essentially the intermediary for a Greek default. Nonetheless, to paraphrase Gertrude Stein, a default is a default is a default.

There are other problems. It is not entirely clear where the funds will come from to expand the current EFSF. Of course, the idea is that the fund can be leveraged by three to one or more but adding debt to debt seems only to involve the creditworthiness of the entire EU (such as it is) in Greece's intractable problems.

Yes, all of Europe seems destined now to sink down into little Greece's bottomless tar pit. Greece is supposed to reduce its debt burden to 120 percent of gross domestic product by 2020, down from about 170 percent currently. And Greece has also "agreed" to expanded austerity measures – an agreement that is somewhat dubious considering that Greek government numbers are about as reliable as, well … Greek tax collections.

It's not just the Greeks, anyway. As we've pointed out in other articles in these pages (along with a good segment of the Internet's financial blogosphere), Portugal, Italy, Spain and even France (hush-hush) are suffering from problems similar to Greece's – only no one's talking about them at the same decibel level. Seems the media can only handle discussion about one busted country at a time.

It's not just countries, either. There are estimates that Eurozone industry and households have emerged from the oughties with debt equal to some 165% of GDP; that's reportedly some 20 percent lower than US aggregate debt at its peak earlier in the decade. Debt across Europe is perhaps some 15 TRILLION euros, and the defaults apparently have not even started to unwind yet. When they do, Europe's banks will take still more losses. Say, perhaps they ought to be recapitalizing beyond nine percent … Just a thought.

The real solution to all this is a unified fiscal authority, economists tell us gravely. Good luck with that. Germany, as we've just seen, is already using accounting tricks to avoid paying further into the expanded fund; all over Northern Europe resentment is rising over the profligate PIGS and the chances of Northern Europe submitting to a Brussels-led federal government are slim-to-none in my view.

So long as the ECB cannot print money with the abandon of the US Fed, this charade will continue – eventually unwinding to its inevitable conclusion, the bust-up either of the euro or the EU. And that means, sooner or later (no matter how controlled currency markets actually are) that the dollar may eventually begin to climb against the euro, eventually reaching parity.

Of course I should add that there are several caveats to this. The Eurocrats seem to have a somewhat inexhaustible number of gambits to stave off the inevitable, so dollar parity might be a long time coming. Additionally, the euro as we know it may be voluntarily unwound before it implodes. The most logical possibility would be a currency that ends up being used by the stronger Northern countries of the EU. The Southern PIGS may have to fend for themselves.

Another possibility is that the US dollar itself substantially implodes because, let's face it, the US is really in no better shape than the Eurozone. And don't believe all the hype you hear about the US "emerging" from recession, either. The numbers US officialdom uses to buttress whatever story it wants to spin are as phony as the Eurozone numbers.

In truth, the US is as busted as Europe. Its aggregate obligations (especially to its vast Baby Boomer generation) are possibly in the area of US$200 TRILLION, an unfathomable amount. The US Congress argues currently about cutting billions or trillions from the national debt – but the argument needs to be one focused on multiple tens of trillions. This is not going to happen. And so the anger grows.

The Tea Party, Occupy Wall Street – so far these are in part controlled protest-movements as we've been pointing out. But that doesn't mean the anger is not real or that in this Internet era, the anger couldn't spill out of control, creating great and unforeseen socio-economic and political consequences. The Internet Reformation is a process not an episode.

Europe and the US could be in for massive changes, even near-term ones, which will affect far more than the currency. Perhaps the world will end up with new currencies altogether, perhaps even a private-silver-and-gold standard, as in the past. One could make the argument, finally – if this were to happen – that the real one-to-one parity between the dollar and the euro might be zero.

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