Even as the world's financial centers contemplate the effects of trillions of new U.S. dollars soon to be in circulation, it appears that the European Union will be following in the Federal Reserve's footsteps. The EU has already said it will soon conduct U.S. style stress tests on its own banks. Now a major European bank's currency chief warns that the political and economic union of nations will be forced to print fresh euros as well, raising the specter of massive inflation there and rounds of damaging competitive devaluations worldwide. The European Central Bank will have to print and then sell euros to protect member countries' exports, says David Bloom, global head of foreign exchange strategy at HSBC. Bloom told cable network CNBC that, despite disagreements among the 16 countries that use the euro "there's one thing that they have in common, the euro." – Money News
Dominant Social Theme: Currencies set for take off.
Free-Market Analysis: Before this business cycle is finished, the currencies of the Western world may well be in tatters, the European Union may have collapsed and the credibility of the American Federal Reserve may be badly damaged as well. We reported on part of the story yesterday, focusing on the lamentable – unbelievable – performance of the Federal Reserve Inspector General at a recent congressional hearing, one memorialized on Youtube. We explained in our opinion her astounding performance marked a watershed moment in the Fed's history – easily as important as the forced resignation of Dan Rather, also due to the Internet.
We indicated what we believe has not yet been much remarked on in even in the alternative ‘Net press (let alone the mainstream media), that the banking elite in America is reeling not just from the onslaught of a collapsed paper currency but from the infinitely more difficult challenge of the Internet. The ‘Net has exposed every move, documented every smirk and memorialized every drop of perspiration. It will ultimately have the same effect on European bankers.
Last week, in a single congressional hearing, the Fed's status switched from dictator to dictated. There is no way around it, no taking back what has been said. In a formal setting, the Fed trotted out individuals of high rank who behaved in an unqualified manner. The curtain was finally removed and the great wizard was seen to be a middle-aged woman with a fancy title, a big salary and absolutely no knowledge of her responsibilities, and no skill in skirting what she did not know.
There are few choices here. Either the Fed is arrogant, stupid or both. In public policy, posture is all: The Fed, in a single congressional hearing, effectively ended an era that has lasted 100 years. And soon the European Union will be similarly tested and we expect that institution, some 50 years in the making will lose much or all of the credibility that it has worked so hard to imbue itself with.
Why do we make such predictions? Because the mechanisms that allowed the monetary elite to ride out the storms caused by monetary mal-investment and over-printing do not seem to work in the age of the technology. It is one thing to issue a press release and make a proclamation via a thousands mass-circulation newspapers as the monetary elite did so often in the 20th century. Newspapers don't talk back. The impact of an article in a major newspaper (absent the Internet) was psychologically impressive and wonderfully credible.
But that was then. Today's reality involves endless public grilling and minute-by-minute critiques by a hundred thousand bloggers. Press releases that were used to control the message are now ripped to shreds by a 100 or a 1,000 email posts in the comment section beneath. These days, there's nowhere to hide.
We don't think the economic crisis is anywhere near over. We don't think the shoots of green are anywhere near so vital as they have been described. We think the EU central bank will have to print a lot of paper to keep up with the Federal Reserve that has already "lent" US$10 trillion in the past, say, 12 months. It is not the quantitative easing that will be so destructive to the EU – as to the Fed – but the tightening that will eventually follow as price inflation shifts into high gear.
The obvious overproduction of money has likely sealed the dollars fate, and eventually the Fed's. But David Bloom's point is that the EU will be forced to follow the Fed's lead and suffer the same fate as the Fed. Currently, central banks are on a roll because it looks as if the ruin that faced Western economies has been avoided. But we beg to differ. Worse times are ahead for numerous reasons and the Fed and EU central bank shall be forced to print even more money, especially the EU.
Already both the EU Central Bank and the Fed are in a great deal of trouble from an institutional and credibility standpoint. The Fed is grafted onto a culture that rejected central banks for two centuries. The EU is an uneasy amalgamation of traditionally hostile tribal groups whose allegiance has been purchased but not secured. The EU cannot even pass a constitution and when it ceases to be an economically viable institution there will not be much left to prop it up.
As inflation begins to roar – and higher rates rip the EU like a wretch on a rack – the chances are that the EU's survival will be called seriously into question. The great quasi-free market economist Milton Friedman didn't think the EU could survive this kind of economic stress. We think he's right. Eventually there will come a time when the torrents of criticism shall reach the proportions of a deluge – in both Europe and America. And there will be a likelihood that a flood will sweep away all that lies in its path, including the current monetary structure.
Like sausage, legislation should be made away from the light of day. And that goes for central banking policy. But where legislation may affect millions or tens of millions, central banking policies may affect billions. In the age of the Internet there is no real way to hide the cause and effect. People already "get it." If times worsen further, more will learn what many others know.
There will come a time in our opinion when the central banks, having printed much too much money, will start to tighten – if they get that far. But if we read what is happening correctly, the central banks may lose fundamental control sooner than that. Their every move is being scrutinized and in the age of the Internet, their explanations are not very convincing.
Of course, it is difficult to make predictions and a number of things could happen to take the pressure off the central banking establishment – up to and including a war, or at least several more wars of various temperatures. (The current wars are not perhaps hot enough.) But no matter what happens, the price of the unwinding of the paper-money economy should be seen in an upward spike of prices of gold and silver. It will not be a local spike, but a worldwide one given the linkage of central banking policies throughout the West. It is coming.