Excess generally causes reaction, and produces a change in the opposite direction, whether it be in the seasons, or in individuals, or in governments. – Plato

I just finished reading Richard Russell´s 'Latest Remarks´. He sums things up with the following comment: "The bear keeps torturing the majority. If only the authorities could straighten out the oil problem, the housing problem and the unemployment problem, everything would be fine… But the market is not interested in current problems; it is looking ahead to the disaster that we will see in late 2010…

"Holding stocks here is a sure ticket to a smaller bank account. People cannot take it into their psyches that this is the resumption of one of [history´s] great bear markets."

I largely agree with this assessment. The reason I am concerned about the approaching second-half of 2010, is that several recent occurrences at the geo-political level have confirmed the accelerating currency war we have commented on recently. America is defending its world reserve currency status with all means available. However, in order to do that successfully, the US is dependent on the concerted support of several foreign nations, including China, Russia and Europe. That "life support team" is falling apart RAPIDLY.

The signs that the party is indeed almost over are all around us and are becoming VERY difficult to ignore. The seemingly relentless rebound on global stock markets ended two months ago. Despite a small rebound in mid-June, stock markets are getting increasingly fragile.

Europe and America no Longer See Eye to Eye

Over the past 4 to 5 decades, we have seen growing monetary and fiscal excess across the globe. Governments of OECD countries in particular, with very few exceptions, have 'solved´ every problem with 'cheap and cheaper´ money.

The excesses culminated and accelerated in the aftermath of the subprime crisis in 2008. Since then, in a desperate attempt of spurring growth, monetary inflation (money supply growth) has become the standard government reflex. The US government took the lead and fully opened their money floodgates. The recovery needed to be forced at all cost and they expected everyone to follow their 'good example´.

And this is where recently the differences in the European and American monetary mindset and philosophy have become very visible. Europe, contrary to the US, is not as willing to force a recovery with more and more money. European governments, no matter how socialistic their political systems may appear, is not convinced of the Keynesian panacea, at least not as convinced as Timothy Geithner, Barrack Obama and his 'star economist´ sidekick Paul Krugman.

The legendary investor George Soros has joined this ominous team of stars, telling Germany to step up to its responsibilities or leave the European Monetary Union. His tonality, although not quite as much as Krugman´s, was one of authority, a wise professor talking with his unknowing disciple. Soros demands that Germany embraces the 'growth strategy´ (??!!), describing Berlin´s austerity doctrine as a threat to democracy and political stability in Europe.

This hits precisely at the heart of what is a growing point of contention between the US government and Europe. However, it is not only the European governments that are jumping off the Keynesian ship; Russia and China have recently taken a very different stance.

In the wake of the latest G-20 meeting and after Britain´s serious budget cuts, the UK Chancellor of the Exchequer Osborne summed it up like this:

"Some have suggested that there is a choice between dealing with our debts and going for growth. The crisis in the Euro zone shows that unless we deal with our debts, there will be no growth."

You can rest assured this is not what either President Obama or Treasury Secretary Geithner wanted to hear during their preparations for the G-20 meeting. According to a Bloomberg article, "President Obama pushed his G-20 counterparts meeting in Toronto to focus on spurring growth". However, other G-20 leaders commented that "nations can move at their own pace to reduce budget gaps".

Memories of Weimar Don´t Exist in America

The global era of fiat currencies is more than 40 years old. The final act of divorcing the world´s reserve currency – the US Dollar – from gold took place in August, 1971. However, the slow death of a reliable reserve currency, based on disciplined and accountable monetary and fiscal policies, was initiated in 1968, when the mandate of holding gold to a ratio of US$ 35 per ounce failed. First, the London Gold Pool failed. Then, later in 1968, the US Congress terminated the Fed´s obligation to hold gold equal to at least 25 percent of the value of Federal Reserve notes.

That was the beginning of the descent into the monetary chaos we are getting the first glimpses of today. Greece is only the beginning. And, if you believe the majority of US mainstream press, the crisis is centered in Europe. As forcefully purported by the likes of Paul Krugman, it is Europe´s fault if the "recovery does not come to fruition".

Having won the Nobel Prize in economics, Mr. Krugman understandably expects to be seen and hailed as an 'economist´. And, I suppose a lot of people do precisely that. Equally, President Obama won the Peace Nobel Prize. Possibly, a lot of people hail him as a 'man of peace´. Both of these hailed Nobel Prize winners are hell-bent on inflating the world out of this crisis. And, they have forcefully, and not so peacefully, voiced their dissatisfaction, first with the Chinese, and now with Europe, over the fact that others are not fully committed to their leadership and right cause.

The historic memory of mankind is generally quite short. That goes for Americans as much as it applies to Europeans. However, unlike America, Europe experienced first-hand what unlimited, out-of-control money supply growth can do to an economy and the social fabric of a country and an entire continent.

The effects of Weimar are much more present in the minds of Europeans. But, you don´t have to go back that far in history. Great Britain, around 1910, was still the world´s richest nation. They were the leaders with an extensive world empire. Great Britain was in charge of the world's reserve currency, a currency that was even backed by gold. Some 40 years later, Great Britain was financially broke and economically ruined. Britain eliminated its currency´s link to gold in 1931 and watched the enormous benefits of holding the world's reserve currency pass over to America in the following years.

The US became the richest nation; richer in comparative terms than Britain had been in 1910. In 1970, the US government did what the Brits had done: borrowed and spent their way into bankruptcy. Britain repudiated the link to gold in 1931. The US did the same in 1971. But this time, there was no nation to take over from the US as the US had from Britain 40 years earlier. This time, the world gave up on money and embraced 'fiat paper´.

Some forty years later, the bill for this fiat-currency adventure is being presented and that is where we stand today.

The US is Losing its Followers – One by One

On June 19th, President Obama released the contents of a 'public letter´ to Europe. The letter Obama asserted that: "Our highest priority in Toronto (at the G-20 head of state meeting) must be to safeguard and strengthen the recovery."

Over the past few weeks, and in Toronto, it became crystal clear that the rest of the world is turning away from this Keynesian "leadership" of the US. The budget cuts in Europe show this. The decision by China to stop pegging their currency to the US Dollar shows this. The fact that global central banks are now INCREASING their holdings of physical gold shows this.

Economically, things don´t look good in the US to start with. The 'recovery´ is nowhere to be seen. Most states are approaching bankruptcy, California is bankrupt, a growing number of banks are going belly up. In America, this year alone, more than 86 banks have gone bankrupt. Last year, the FDIC closed some 140 banking institutes. The total number in 2010 will break that record easily. The commercial real estate market is about to enter very rough waters. And it looks like another wave of defaults in the housing market is about to break.

In addition, the US government is increasingly isolated amongst its peers in maintaining that perpetual debt issuance is the way forward towards prosperity. It is a leader without followers.

To me, it looks very much like the excesses of the past are finally coming home to roost. As Plato knew a long time ago: Excess generally causes reaction, and produces a change in the opposite direction…