Sunday, November 25, 2018

Maximum Uncertainty, How A Fragile Euro May Not Survive The Next Crisis

We are Living with Maximum Uncertainty

Financial expert Catherine Austin Fitts has said for years that the economy was not going to crash, but be on a “slow burn.” How long can they make this heavily indebted game last? Fitts says, “Our problem as investors is we don’t know. If you look at all the information we need to make an intelligent assessment, we don’t have access to that information. I have said many times this is a military question. Who has the biggest weapons and who has the ability to deliver force and control? So, we are living with maximum uncertainty. . . . Clearly, we are headed into a new currency world that’s part of a new control system, but the answer is we don’t know when. My fear with many, many commentators is they are underestimating the power and endurance of the system. I am always getting yelled at because people think I am pro-empire. I am not saying I am pro-empire or I am for the things they are doing to keep it going.”

Fits adds that things are so uncertain that “the old system could go five years or five months.”
On introducing a new dollar, Fitts says, “Even if they do introduce a dollar backed by gold, it’s going to start off with a small market share. They are very unlikely to do a big bang thing. These guys are prototypers.”
There is no doubt wealthy people around the world are buying gold. Why? Fitts says, “The reality is . . . in the worst case scenario, gold is a store of value because it is respected globally as a currency or money without the backing of a sovereign government. What is the global currency that has backing without a sovereign government, and gold and silver are one of the few. I think it is one of the reasons I think wealthy people need to have a store of value for the worst case. It is central bank insurance. A core position in gold is not an investment, it is central bank insurance. . . . We continue to see people have a core position in precious metals for the worst case.”
Fitts says, “Right now, we are choking on secrecy as a society. If you look at all the people who got it wrong about the collapse, the reason they got it wrong is because all the information they needed to determine whether or not it was going to collapse was being kept secret even though they, as taxpayers, were financing it. . . . If we had transparency and we stopped with the secrecy, we could turn the red button green. . . . The cost of secrecy is enormous . . . . The cost of tyranny, the cost of oppression, the cost of Americans having lousy education and all this control, it destroys so much wealth.”
You cannot have a successful civilization with this kind of secrecy.”

A big US monetary inflation bang brought the euro into existence. Here’s a prediction: It’s death will occur in response to a different type of US monetary bang — the sudden emergence of a “deflationary interlude.” And this could come sooner than many expect.

The explanation of this sphynx-like puzzle starts with Paul Volcker’s abandonment of the road to sound money in 1985/6. The defining moment came when the then Fed Chief joined with President Reagan’s new Treasury Secretary, James Baker, in a campaign to devalue the dollar. The so-called “Plaza Accord”  of 1985 launched the offensive.
Volcker, the once notorious devaluation warrior of the Nixon Administration (as its Treasury under-secretary), never changed his spots, seeing large US trade deficits as dangerous. The alternative diagnosis — that in the early mid-1980s these were a transitory counterpart to increased US economic dynamism and a resurgent global demand for a now apparently hard dollar — just did not register with this top official.
Hence the opportunity to restore sound money. But this comes very rarely in history — only in fact, where high inflation has induced general political revulsion (as for example after the Civil War) — was inflation snuffed out. In the European context this meant the end of the brief hard-Deutsche-mark (DM) era and the birth of the soft euro.
The run-up of the DM in 1985-7 against other European currencies, as provoked by the US re-launch of monetary inflation, tipped the balance of political power inside Germany in favor of the European Monetary Union (EMU) project. The big exporting companies, the backbone of the ruling Christian Democrat Union (CDU) under Chancellor Kohl, won the day. The hard DM, an evident threat to their profits, had to go. The monetarist regime in Germany tottered towards a final collapse.

Around the globe, there was the inevitable run-up of inflation in the aftermath of the Plaza Accord and Volcker’s capitulation, given that many countries (crucially Japan) sought to limit the dollar’s fall against their own countries by following the US monetary lead. The inflation was evident in asset markets and good markets. Out of that new monetary chaos come an onward journey to the next stabilization experiment on both sides of the Atlantic: the “2 percent inflation standard”.

In these two distortions we find the existential vulnerability of the euro and the next US monetary shock will present the severest test yet. The shock is most likely to take the form of a sudden arrival of a “deflationary interlude” in a long and likely intensifying monetary inflation over the long-run beyond.

Specifically, as the virulent asset inflation stoked up in the present global monetary cycle (as always led by the Federal Reserve) proceeds into the final stage of unwind (asset deflation) and recession, there will be a period of overall credit contraction. This will be reflected most likely in the broad money aggregates. Prices and wages could come under some downward pressure, though this is not in itself evidence of monetary deflation.

A New, Smaller Euro Zone?

Hence the big German export companies would face a Day of Reckoning. The axis which joins the Berlin Chancellery to the ECB (at present the Merkel-Draghi axis) would no longer be able to support them (via a cheap euro). Under these changed circumstances, the euro falling apart may be their most promising road to future success. Yes, a re-incarnated DM would press down on export profit margins; but the menace of US-German or US-EU trade war would recede.
The CDU could have new scope to move towards the right and away from the prevailing euro-centrism of the Merkel era, so winning back voters from the parties on the far right while also gaining some middle-class support from savers long disgruntled with the soft euro and negative interest rate euro. The feared descent of Germany into Weimar-style political chaos as could occur if the CDU remains frozen in euro-centrism (eventually joining up with the Greens in coalition and thereby fanning support for the extreme parties) could be aborted.
Yes, Italy would fall out of the euro-zone. The potential for sound money renaissance in Europe, possibly with France, Holland and Germany getting together in a new monetary union, would be real. Europe’s monetary future would no longer hang on a US thread. This possible window of opportunity might be short, given the potential danger of a US inflation storm further ahead as stemming from devastatingly weak public finances.

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