What is likely to happen with the EuroZone and their monetary problems?
Will the EuroZone break-up and will a new United Europe emerge?
The situation over in Europe is reaching its nadir and the consequences that are likely to evolve will affect all the global markets soon. Currently, there are 17 nations that make up the EuroZone. Some of these nation/states are financially quite strong and some are quite weak. Can this mixture of stong and weak states continue to operate as one united political community? Will the strong (10 states) continue to support and bail-out the weak (7 states)? What is the problem with this community of euro countries and why must change happen soon? What impact will this change have upon the American economy and our future trends?
First of all, let’s understand the core problem. When this community of nation/states started in 1999, each state agreed to use the euro currency as their state’s legal tender for all debts (public and private). This agreement seemed logical at the time as each state was experiencing growth, confidence, and prosperity. Each state could borrow and spend using their euro currency and then collect their individual taxes to service all their debt and deficits. As long as growth, inflation, prosperity and confidence continued, this process worked great. What, however, emerged as public debt grew to unsustainable levels after 2008, budget deficits continued, and trade deficits emerged. All this started to occur after the financial Crash of 2008.
What happened is that states with these deficit and debt issues needed more borrowed funds in order to balance their budgets. Furthermore, the investment markets started to lose confidence in these assets (and many of the banks holding these assets) and this has made the problem worse…as interest rates on their debt increased and asset values declined. Then the rating agencies, especially Standard & Poor’s, downgraded many of these states to junk status (Greece, Portugal, and Cyprus) and lowered the rating of most of the others (France, Austria, Italy, Spain, Malta, Slovenia, Ireland, and Slovakia). This leaves only Germany, Belgium, Finland, Luxemburg, Estonia, and the Netherlands as relatively strong states. So what is likely to happen as we move forward in 2012?
It seems quite likely that the 17 state block of countries will either need a total bail-out by the strong members (primarily Germany) or the entire community will break-up into a new format. It seems logical as of now that a break-up into a northern group and a southern group is possible. The ten stronger states that might make up the northern group are: Germany, France, Austria, Belgium, Finland, Luxemburg, Netherlands, Slovakia, Estonia, and Slovenia. The seven state southern group could consist of Cyprus, Malta, Greece, Portugal, Italy, Ireland, and Spain. this concept of weak states and strong states tends to follow the historical emotional mentality of the people of each state. Countries that follow a disciplined budgetary mindset (the German mindset) can function communally and those which do not must fend for themselves.
The other possibility is that the weaker states may just go back to their old currency and political system and ignore any type of political/monetary union. All this change is likely to be chaotic and unsettling for Europe and the World in 2012. What Germany really desires is a new political union which allows for both monetary and fiscal policy (similar to our American system). This community would have a common Currency and a common Treasury (tax system). 2012 should be a year of major change in Europe as the weaker states collapse as deficits and debt become totally unsustainable. A lack of confidence in the European banking system and their political leaders could help to create this chaotic situation…especially for those countries now in the ‘junk’ bond category.
The consequences for the American economy and for American investors could be substantial and potent. First of all, a collapse of asset values within the banking system of major European banks would create similar declines in asset values globally. This domino effect could then create the beginning of the Greater Deflationary Depression that I have been predicting. As asset values decline substantially (30-70%) this means insolvency for many financial institutions. This then leads to a bank Holiday or similar. It is very unlikely that the Hyper-inflationary scenario envisioned by most pundits will occur in this environment. Will the Central Banks QE policies have any major effect in this environment? I sincerely doubt this. Why?
The simple answer is: ‘you can lead a horse to water…but you can not make the horse drink’. In other words, creating new digits in the accounts of insolvent banks is unlikely to lead to new lending or meaningful economic growth. Keep in mind that 96% of all new money creation is now electronic digits in major commercial bank accounts. Will these banks actually lend out these units (dollars or whatever) to borrowers who invest these funds in meaningful new projects? If not, then all the QE efforts are meaningless and mostly ineffective. Money must be lent and new meaningful projects must use these funds for new growth. If this is not done, then our economy deflates.
Deflation and depression are coming as the above events emerge in 2012. Those who envision Hyper-inflation and asset inflation are thinking about events with an outdated model in their minds (in my opinion). If our Central Banks actually ‘printed’ units of money as in Zimbabwe or Weimar Germany and if these ‘printed’ units were distributed to the general public for spending, then a Hyper-inflationary scenario could develop. Our monetary environment today, however, involves computer digits as our money (96%). This type of model is much more likely to lead to a Deflationary Depression. Asset values could decline substantially and major institutional insolvency and bankruptcies would occur. 2012 should be an interesting year for learning about economics and money.
In conclusion, Europe is unlikely to solve its debt, deficit, and balance of trade issues in 2012. Furthermore, the euro currency is unlikely to work for the weaker states within the EuroZone. This means some type of collapse and restructuring for many of these states. The stronger states (with Germany as the leader) should continue to function and solve their monetary and political issues. A new agreement which leads to a fiscal and monetary union is likely (similar to what we now experience in the United States of America). The stronger states are most likely to be those which are chosen by a German leader (the northern block of states). The weaker states are likely to combine and/or break-up into separate states. What investments might be best during this transition?
Personally, the U.S. Dollar may initially experience more strength and value during this chaotic period. Deflation should favor the ‘dollar’ for a short time period. After a period where confidence collapses and investors recognize the implications of the situation, we could see the final hyperbolic growth in the value (and price) of silver and gold. Money is the lifeblood of Capitalism and physical metals have been the foundation of Classical Capitalism. At some point in 2012-13, we could see silver prices in three digits and gold in five digits. The logic for this astronomical number is ‘fear’ in the marketplace. The final stores of value on this planet are silver and gold. Why?
Silver and Gold are metals which EXIST in spacetime. They are also metals with a 5000 year history as money. Our current money units (96%) are merely digits within our computer screens. These units DO NOT EXIST as physical units. The reality is that digits are imaginary units created ‘out of nothing’. They serve as ‘legal tender’ only while the general investment community accepts these units as money. Acceptance is based on the psychological concept of CONFIDENCE. When ‘confidence’ disappears…so do the imaginary digits in your computer screen. In reality, MONEY is based on a ‘shell game’ which is based on ‘illusionary’ CONFIDENCE.
2012 should be an interesting year for all of us, the beginning of the Deflationary scenario which I envision should start with a collapse in the banking system over in Europe. This could happen early in 2012 or it may get delayed until late 2012. It is impossible to predict the future with certainty. Watch the markets and watch what happens in the geo-political environment in Europe, the Middle East, and Asia (especially CHINA). China could also be a catalyst for major change in 2012. Enjoy and keep this website on your favorite list: http://kingdomecon.wordpress.com.
