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Jim Cook

 

RUNAWAY SOCIAL SYMPATHY

Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

 
Best of John Browne
December 16, 2010
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Despite America's economic problems, the U.S. dollar has maintained its respected status the world over–and has even managed to maintain value in comparison to other currencies. It appears the dollar will likely finish 2010 at the same levels it started. Even today's announcement of more tax cuts and stimulus, which will guarantee widening federal deficits for years to come, could not put a dent in the dollar. The dollar's charmed life stands in strong contrast to the euro, which is currently suffering from its internal flaws and the Europeans' unfortunate recognition of reality.

Given Washington's monetary irresponsibility over the past decade and a half, many market observers have wondered if the euro could one day become the world's top currency. In the early to mid-2000s, when the euro surged more than 60% against the dollar, this was in fact a popular view. But unlike all other currencies on the planet, the euro is not a sovereign currency managed by a single country. It is dependent on the collective political will of the leaders of the European Union (EU).

In the bust that followed the Greenspan/Bernanke dollar-based boom, the U.S. economy started to deleverage significantly. Unwilling to accept the political cost of a possible failure of its banking system, the Federal Reserve decided to re-inflate out of deflation and devalue the U.S. dollar. Meanwhile, the European Central Bank (ECB), heavily influenced by Germany, decided deflation was necessary and inevitable. As painful as it was likely to prove, the Europeans had appeared until recently ready to face the music and delever their economies.

Unfortunately, Europe's banks had, for years, invested enthusiastically in the debt of their member sovereign states. In addition, they had greedily invested in the debt securities of U.S. and domestic real estate. The collapse of real estate prices on both continents exposed these massive risks and revealed the high degree of interconnection between the world's major banks.

As the EU is not yet a super state with a single government, the response to austerity is far from even. For instance, German voters are extremely angry at bailing out what they see as nations with profligate governments–the likes of Greece, Portugal, Italy, et al. They feel that those who invested or, as the Germans see it, speculated in European sovereign state bonds should suffer at least some of the downside. The problem is that the speculators were largely European banks. Acceptance of the real losses would bankrupt major banks, likely creating a chain reaction across the European and even U.S. banking sectors. European politicians are now showing less inclination to tolerate such an outcome.

But European citizens are growing restless. They are vehemently opposed to the idea that their governments should incur massive debts to rescue what they term 'banksters.' European politicians are becoming panicked, not knowing where to turn. Some urge quantitative easing (like the Americans!). Others maintain this will only magnify the problem and that austerity must be continued. Varied and often-conflicting public statements by government officials are creating an air of political and monetary uncertainty for the euro.
The situation within the EU has become so serious that the future of the world's second major reserve currency is now in question.

Meanwhile, sentiments expressed by the American Tea Party movement have gained considerable weight. Americans have received the Fed's second wave of quantitative easing with far less enthusiasm than the first. Increasingly uncertain statements now emanate from Washington. Furthermore, the U.S. government has still to face the problem of default threatened by many politically important states, such as New York, New Jersey and California. This political uncertainty has spread to the dollar.

In response, some major nations, led by China and including Russia, are soliciting political support for the removal of the U.S. dollar's privileged status as reserve currency. Together, the U.S. dollar and the euro account for some 70% of world central bank reserves. But both currencies face great internal political uncertainty and high relative volatility. As a result, global investors are looking for alternatives.

In these uncertain circumstances, precious metals continue to establish new nominal price records. Unless there is a miraculous internationalization of the yuan, I think precious metals have a rare opportunity to regain their historic status as the global reserve, a status subverted by the dollar only in the past century.