Thursday, December 1, 2011

Euro Folly

Forgive my indelicate language, but what the Hell are world leaders and Wall Street investors thinking?  The Eurozone is on the verge of colossal financial collapse, and the Euro itself is in its death throes.  In order to save the whole doomed package, Europe turns to Washington, which is already more than 15 trillion dollars in debt, for a bailout, and Washington consents.  In response to this dance of folly, Wall Street goes up nearly 500 points in a day.  Tell me, please, how can one bankrupt business bail out 15 other bankrupt businesses, and why do otherwise sane people cheer the vain and ridiculous attempt?
The Euro is gone.  It cannot sustain the multinational overspending that Europe has indulged in for decades.  The time to pay up has come, and the only money they've got for payment is money from a nation that has none, a nation more than 15 trillion dollars in the hole, a nation that borrows money from China in order to pay its own staggering shortfall, a nation that actually buys its own debt and simply ramps up the government printing press to warp-speed in order to conjure more fake money by which to do it all. 
The issue that confronts us is this:  Crushing debt caused by unsustainable multi-government overspending, the absence of a gold standard, looming hyper-inflation, and the folly of tying radically different economies together under one centrally manipulated currency, especially when nations like Greece shamelessly lie about their financial condition and cook their books in order to sneak into the Eurozone in the first place – all coupled with the buffoonocracy in Brussels, which neglected its due diligence and simply didn't notice the Greek chicanery.
The system almost collapsed under the burden of saving Greece, which is not yet saved.  When it has to save Italy, Portugal, Spain, and Ireland too, the curtain will fall.  Then everyone will wish they were Switzerland, which declined a spot in the Euro’s mad march to self-immolation, and which now has perhaps the strongest currency in the world.  I’m not saying Switzerland won’t feel the rain and hear the thunder of the financial dungstorm that surrounds it on all sides; and I’m not saying it won’t feel the earthquake, both the tremors and the aftershocks.  It will.  But better to sustain those things in Switzerland than anywhere else on the continent.
The Euro and its zone were a doomed idea from inception.  It never could be made to work.  It cannot be made to work now, especially by economically-challenged community organizers from Harvard, who haven’t heard that Keynes was wrong, and who have not yet figured out that the more you invest trying to make an impossible idea work, the more you lose.
The best advice is to sustain the hit now, which will be painful but endurable, rather than tossing more (fake) money down that rat hole, which is just a one-way street to disaster.
The deeper you dig, the higher out you must climb.
Lay down your shovel, Mr. Obama.
Lay it down now.
You’ve rambled on wearily about shovel–ready jobs.
This is not one of them.


Mitchell Powell said...

Perhaps the reason stocks go up when inflation is predicted is because the unit in which the DJIA is dollars. Thus, if new indicators of high future inflation were to appear, it would not be outside the realm of possibility for the DJIA, as measured in dollars, to go up nominally, even if real business conditions were worsening.

And so a nominal rise in the DJIA can mean two things: the market anticipate future growth, or the market anticipates inflation. Contrariwise, a fall in DJIA could mean that the business prospects of the country are getting worse or that faith in the dollar has increased.

In any case, I suspect every day's DJIA fluctuations are reflections of a complex brew of these and other factors all mixed together, so I watch commodities prices, debt levels, and interest rates far more than the stock market.

The problem comes when the people who give us our financial news misunderstand the meaning of stock market swings by tacitly assuming that the dollar is a stable unit of measurement. So when the Dow goes up 500 points in a day in response to bad news for the dollar, that seems like a perfectly rational market response to me. What does not look like a perfectly rational response is people smiling just because the number went up. People still haven't made the psychological adjustment to understanding fiat currency -- though the moment they do realize what they're dealing with, fiat currency dies.

The prophets knew that bad things happened when people did business in units of money that were being manipulated for fraudulent prophets. Ancient kings and businessmen did it by making alloyed coins and using dishonest scales; today we do it by manipulating the money supply and interest rates. There is nothing new under the sun.

Mitchell Powell said...

Apologies for a few typos. I ought to have slowed down and changed the following:

in which the DJIA is dollars > in which the DJIA is measured is dollars

the market anticipate > the market anticipates

fraudulent prophets > fraudulent profits

Dr. Michael Bauman said...

Not to worry, Mitch. My typing is notoriously bad!

I take inflation to be an increase in the money supply, not rising prices. (That is, I take the latter to be the consequence of the former because when the value of a dollar is shrunk, more dollars are needed to buy what fewer dollars used to.) So, if I were afraid of an increase in the money supply, I would buy some commodity like gold or silver, not stocks.

Indeed, you are quite right: The prophets knew a thing or two about business and about wisdom of many sorts, financial wisdom among them. One could do worse than to study the prophets on any topic to which they address themselves. The fact that they are not our contemporaries does not render them irrelevant to current problems for exactly the reason you cite -- there's nothing new under the sun.

Mitchell Powell said...

Mises would be proud of you. When I'm being careful, I call them 'monetary inflation' and 'price inflation,' but sometimes I lump them together because of their close assocation.

As to stocks, it gets tricky with inflation. If a business debt that has fixed interest rates, and the business also has a good deal of real assets, an episode of high price inflation can greatly increase the worth of the business by effectively lowering its debt to capital ratio. Of the 30 components of the DJIA, I'd estimate at least 22 are in that position, so I'd still hold out for a rise in the DJIA being logically compatible with heightened inflation fears.

But I definitely agree with you, in general, that the markets have gone insane -- the fact that anyone would loan our government money for thirty years, let alone at an average annual return of 0.1%, shows that a certain mind-boggling stupidity has taken hold of a lot of people entrusted with managing a lot of money.

It is my sincere hope that governments does not interfere enough to stop the upcoming debt crises throughout the world from becoming what it ought to be: an object lesson to all in how money is taken away from the reckless and given to the prudent.

Dr. Michael Bauman said...

Amen to that. If we had a "like" button, I'd click it several times.