The Euro - At Last
We have euros in our wallets now. Nearly half a century in the making, you can buy anything you want with them. Even a little bit of monetary security.
"Let’s see, you gave me 4 coats…and you want to pay in euros," said the woman tending the cloakroom at the Champs Elysees theatre last night. "Oh my, that must be 7 euros. No, 7.5 euros. No, 6.5…Oh I don’t know… It’s 50 francs!"
If nothing else, the euro is improving Europe’s math skills. Every transaction involves long division or
"That’s not very much," said Edward, 8, when I switched his allowance to euros. "I’d rather have francs. I got
more of them."
Edward’s math skills are weak. So is his understanding of monetary economics. He thinks more currency is
better. But then, so does Alan Greenspan.
Here at the Daily Reckoning office in Paris, we preferred francs. Our French isn’t good enough to
pronounce "euro" correctly. Each time we try, waiters run for the English-language menus and clerks insist on talking to us in an English that is as bad as our French.
But apart from the language problem, we’re beginning to like the new currency. Especially the 500 euro bills.
With less than half an inch of paper, you could carry enough currency to buy a new Mercedes or spend a summer in Europe. Drug dealers, we predict, will not be loyal to the $100 bill. They will find the new 500 euro note useful for conducting business. Others – perhaps the silent majority – will find it useful for preserving their assets.
Reflecting on the future of paper money, the average shopkeeper in Dusseldorf, as well as the hedge fund
manager in Manhattan, will find in the euro a way to protect himself from America’s debt problem.
American consumers doubled their debt in the 1990s. So did American businesses. Bankruptcies for both groups are hitting new records.
The money for America’s spending spree came from overseas. America’s trade with the rest of the world has
become lopsided – about a billion dollars out of balance every day. That is the measure of the difference between what Americans buy from overseas and what they sell. This huge gap wouldn’t have been possible had not the foreigners decided to send the money back to America… buying stocks and bonds in huge quantity. Over the years, this is how more than $2.5 trillion worth of U.S. obligations has ended up in foreign hands.
We have no less faith in the Fed and Congress than we have in drug dealers. Neither will steadfastly defend the dollar. Already the Fed seems to be doing all it can to reduce the dollar’s value – increasing the supply of dollars at many times the growth rate of GDP. And why not? People seem to want more of them.
Besides, the U.S is the world’s largest debtor. It also controls the value of the currency in which those debts
are measured. America will, we predict, meet an irresistible temptation: to pay down its loans with
cheaper money than it borrowed.
All paper currencies, sooner or later, end up in the trash bin. But while the euro dallies, the dollar seems
to be headed to destruction with a greater sense of urgency:
* While America runs a huge trade deficit, Europe’s trade position is positive.
* While America’s economy is in recession, Euroland is still growing, though slowly.
* While Americans have billions in credit card debt; Europeans don’t even have credit cards.
* While America’s central bankers are quick to cut rates, Europe’s central bankers are reluctant to do
* While Americans take out more and more "home equity," sometimes without even an appraisal, Europe’s lenders are typically very cautious and conservative.
The inflation rate in Europe is only half the U.S. rate. Productivity growth, meanwhile, is higher in Europe.
Stock prices are only about half as high (in P/E terms) in Europe as in America. Plus, earnings tend to be
understated in Europe and overstated in America.
Even Alan Greenspan admires the euro:
"There can be little doubt that the euro is a sound currency," said the Fed custodian of the dollar,
speaking of his competition. "The mandate of the European Central Bank to maintain a stable purchasing
power for the currency is doubtless firmer than that of the Federal reserve or any other major central bank."
The ECB has no reason to want to drive down the value of the euro. Its temptation is towards stability. If the
currency rises too high…or sinks too low…member nations might forsake it.
Of the dollar, on the other hand, it was often said: "it has no competition." It will be interesting to see what
happens to it now that it has some.
Your correspondent in Euroland…
P.S. But could the dollar go down against other forms of money…even as prices, generally, fall? A Daily
Reckoning reader writes:
"In reading ‘The Dollar…Again’ [The Daily Reckoning, 12/31/01] it appears that Bonner has snuck out of Camp Deflation, crossed the river, and is now ringing the bell at Camp Inflation!
"He is, of course, entitled to switch camps…I only thought I might note that Camp Deflation just got a
Do not despair, fellow campers, there are still enough of us around the deflationary campfire to play 2-handed pinochle.
The dollar may fall against the euro (or, it may not)…but that doesn’t mean that the world can’t enjoy
the learning experience of a real deflation.
"How could it be that the Fed adds new money and credit at the fastest pace in [its] history," we wondered last week, "but inflation – as measured by consumer prices –
fails to rise?"
That question suggested another one: wouldn’t each dollar, sooner or later, buy fewer goods and services?
The answer to this question seems obvious – yes.
But this is not the same thing as expecting an imminent rise in the consumer price index. Another DR reader, my old friend Martin Spring of South Africa, explains:
"Inflation arises when there is an excess of demand for goods and services relative to supply; it is not related directly to money/credit supply. Only when money supply stimulates excess demand for goods and services do the prices of the latter generally rise.
"For quite some time the flood of liquidity has been stimulating demand for investment assets instead of
goods and services. That explains why valuations of assets have been driven to absurd heights in an
environment of indifferent, and now rapidly declining, growth in the global economy."
"Of course," Martin continues, "it’s all going to end in tears. The difficult bit is judging how soon that’s
going to happen, and how bad it will be. My own forecast is a continuing strong bear market in global equities generally for another plus/minus three years (with some strong rallies on the way down), taking prices down to perhaps half their current levels, followed by plus/minus another five years of sideways movement before the next bull market gets under way."
"A house is not an ATM," a headline in the Detroit Free Press tells us. When people need cash, the article explains, they turn to their houses…even if they don’t actually own one.
"I know you can buy a house and borrow 125% of its price," says one hopeful debtor. "Can you tell me how to do that? I need the extra 25% to help pay my loans."
All across America, "serial refinancing," has become not merely a way of paying for breakfast, but of
lunch and dinner too. As home prices rise, people rush to "unlock" the equity. Pity the poor man who doesn’t
have a house. He has to actually earn his money!
And now comes word that the friendly people at Fannie Mae are making it even easier to get themselves
too deeply in debt. "Fannie Mae quietly permitting some houses to go without appraisal," says a headline in the San Jose Mercury News.
As the quantity of reckless lending increases, of course, the quality decreases. In the 3rd quarter of last
year, the percentage of FHA loans more than 30 days behind jumped to 11.36% – the highest level since they
began keeping track.
But let’s turn to Wall Street, where all the news is good news, all the time. Eric:
(By the way, Eric will be hosting CNNMoney this week… which means, you can catch him diligently plying his trade from 9:30am – 11:30am every morning by tuning into CNNfn on your TV set.)
Eric Fry fresh from the Big Apple…
– It’s only January, and already Alan Greenspan is busily crafting a spectacular new entrant for the Macy’s
Thanksgiving Day Parade. His stupendous "Stock Market Bubble" is sure to wow the crowds lining the parade
route as it floats along Broadway. But honestly, Alan, you might want to pace yourself…that bubble of yours
is pretty darn big already…
– He’s done it folks! Greenspan has successfully re-inflated a busted stock market bubble. Sure, the current
bubble isn’t quite "as good as new," but it’s not too shabby. Consider the signs: the giddy CNBC talking heads are breathlessly gushing phrases like "powerful momentum," while the bears are fretting as much as ever about "a bubble of colossal proportions."
– The stock market itself provides some of the very strongest evidence that something more than a run-of-
the-mill bull market is in the works. On average, Cisco, Intel and Sun Microsystems sell for more than 70 times hoped for 2002 earnings! That’s a combined $438 billion worth of some very expensive stock.
– "There is a lot of anticipation in this [tech stock] rally," says Kevin Landis, the accomplished technology
investor who heads up Firsthand Funds. "If the economic turnaround turns out to the vapor, then the rally will make a U-turn." He reminds us that tech stocks enjoyed red-hot rallies in both January and April of last year. "[But] they were both head fakes," he laments.
– Last week, the NASDAQ Composite gained 3.6% to 2,059, while the Dow advanced 1.2% to 10,260. The stock market is rallying, the bulls earnestly explain, because it "senses" an imminent economic revival. For this feat too, Greenspan receives plaudits and accolades.
– Creating stock market rallies might be Greenspan’s bread and butter, but from time to time, he can also
turn around this big ol’ economy of ours.
– Just like a small rudder directs a massive ship, Greenspan’s little interest rate steers our economy
wherever he wishes it to go…or something like that. Right now, it’s "full steam ahead" to the land of
– We know that the course Greenspan sets is true because consumers are "confident" once again, and as Wall Street’s dimestore economists tell us over and over, a confident consumer is all that is required to guarantee safe passage to economic growth.
– "Keeping up consumer confidence is regarded as the most important task of policymakers," Kurt Richebacher observes. "The state of the consumer’s finances and the source of his spending are hardly considered."
– Richebacher does consider them, of course, and that’s why he insists "A V-shaped recovery of the U.S. economy is absolutely impossible as far as the eye can see."
– Furthermore, the idea that surveys of broad public sentiment could be helpful in assessing the economic
outlook is laughable, scoffs Richebacher. Consumers are simply in no shape to lead a sustainable economic
advance, no matter what they say.
– The recently reported jump in the consumer confidence index stemmed largely from a big jump in the "future expectations" component. The "present conditions" index remained virtually unchanged. Bridgewater associates terms this divergence the "Eggnog Effect." That’s because the December reading for future expectations is about three times higher on average than in any other month of the year. "In general people tend to be a little more cheerful in December," says Bridgewater.
– Interestingly, their data show that January and February future expectations readings are typically
among the worst of any other month. Would it be any great surprise if the pattern were to hold true this
– Certainly, the consumer does not lack for reasons to feel less confident, once the Eggnog Effect wears off.
No matter what the future expectations may anticipate, unemployment in the here and now keeps rising.
– The Department of Labor reported "only" 124,000 jobs lost in December. But the number is weaker than it
appears. First of all, the creation of 63,000 government jobs during the month made the overall number look somewhat prettier than it would otherwise have been.
– The private sector lost 187,000 jobs in December. What’s more, the recently revised numbers for November showed 40,000 more jobs lost than were originally reported.
– Not to worry. A few interest rate cuts and a great big stock market rally and we’ll have this economy thing all fixed-up in no time.
Back in Paris (after the Christmas vacation…)
*** Hey, what’s this? "Oil prices rocket," says the BBC. Silver has just hit an 11-month high. Lead is at a new
high too. What kind of deflation is this? More below…
*** Public companies went bankrupt last year at a record pace…255 firms filed for court protection.
*** Can you really make money by selling cars at deep discount? Apparently not. Ford is expected to show its first annual loss since ’92. GM will report a profit for ’01, but mostly from financing cars…and even that is in jeopardy. Cheap loans and incentives drew in many marginal buyers last year. Now, the loans are going bad.