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July 01, 2004

The Euro: Another Broken Promise?
by Alex Wallenwein

What kind of animal is the euro, really?

If the pure fiat dollar after 1971 is an already-broken promise to pay in gold, then what is the euro? Is it any different from the dollar in that respect? Are there different "classes" of fiat currencies, then, according to whether they were once tied to gold or not? And, if so, does that make any difference at all in terms of the long term viability of that currency - either vis a vis the dollar, or gold? Those are some of the questions we will examine in this essay.

When you boil the euro down to the essentials of its genesis, it can be said that it is, as far as its forex value is concerned, the direct successor of the German Deutsche Mark (DM).

So, what was the DM, then? Was it a broken promise to pay gold? Not in and of itself. At the time of its creation, the DM was a pure fiat currency that rose from the ashes of Hitler's Reichsmark, which at the time of Hitler's coup d'etat was already disconnected from gold.

The DM was a typical Bretton Woods era fiat currency based on mainly dollar-reserves held by the German Bundsbank. The dollar, however, at the time the DM was created, was still on the international gold exchange standard. That means the DM was essentially a dollar-derivative, while the dollar was a gold-derivative at the time in question.

But the dollar-promise (to pay in gold) had not yet been broken.

When the US broke its promise, the dollar's inevitable decline began in earnest. The dollar-price of gold initially assumed only a slow, gradual rise at first and during the middle of the seventies lost about half of its gains again before continuing skyward. In 1980, Paul Volcker decided to take extreme emergency measures to rescue the dollar and began to force-feed the ailing currency with massive short-term interest-rate infusions that ended up turning the dollar malaise around - for a time. That action re-attracted foreign and domestic investors who thought they saw "the writing on the wall" and switched out of their gold holdings to buy dollar-denominated assets, once more.

However, a broken promise is a broken promise. It is worthless to anyone - unless it is temporarily underpinned by various government and central bank policies which, in combination with relentless media and "government-education complex" assistance, create and reinforce an illusion of stable "value."

The keyword here is temporary. Such a situation cannot last forever, and all parties concerned who took part in setting up this system are fully aware of that inconvenient fact. The only policy available to them was and is that of "buying time."

If this is so, then why is there this illusion of buoyancy, why is there this seemingly endless delay between the "dirty deed" and its supposedly inevitable consequences? If the unbacked fiat dollar and all the currencies that depend on it are such "leaden ducks", then why are they not sinking?

Here is a simile for you: Picture the world financial system as an airplane in flight, and the world's currencies as the crew and passengers of that airplane. Have you ever had a chance to watch a film record of one of those earliest experiments in weightlessness conducted during the fifties and sixties?

Back in those days, NASA engineers figured out that one way to simulate weightlessness was to pack a number of astronauts into an Army airplane, fly that plane at high altitudes and suddenly make it drop hundreds of feet per second.

If you watch that event on camera, you see a bunch of people in a plane suddenly becoming airborne and floating around the cabin as if the pilot of the plane had thrown a switch and suspended the laws of gravity.

Of course, it's all an illusion. In reality, both the plane and its passengers are inexorably hurtling toward the ground - except that you, as the observer, can't see it.

Your only frame of reference is the encapsulated environment of the inside of the plane's cabin. If you were an inadvertent passenger in that plane and the pilot suddenly pulled that stunt on you, you would indeed feel weightless. You wouldn't even have the sensation of the plane dropping as you are totally disconnected from the plane and are seemingly floating in mid-air, in apparent zero-gravity.

Such is the current geo-financial environment we all live in - and have lived in - for the past thirty-plus years.

We live our lives inside sort of a financial "matrix." Our saving and investment decisions are dictated by the controlled "reality" of the geo-financial equivalent of the airplane in our simile. We are plowing full-thrust toward our inevitable destruction while seeing only the permitted reference points of the inside of the airplane cabin, with all visible indicators pointing to the apparent "fact" that the economy is no longer bound by the laws of financial gravity - i.e., that what goes up must come down. So we keep plowing more and more money into a preposterously overvalued stock market, while dreaming of certain retirement riches.

We are in for a very rude awakening.

Back to the euro.

As far as the euro is concerned, the same economic laws of gravity ultimately apply, of course. The euro is a pure fiat currency, to be sure. It is a derivative of a conglomeration of former dollar derivatives (the European "legacy currencies.") As such, those legacy currencies are promises to pay based on reserves consisting of an already broken promise to pay - the dollar.

When the dollar officially went off gold in 1971, the world financial "plane" went into an immediate nose-dive. At that moment, all related market factors assumed "weightlessness." We all thought that we could forever inflate the money supply and so fake endless "prosperity" for everyone. It is almost like prosperity has become another government entitlement program. The end result is clear as day, and it's only a matter of time.

But, how much time? Why is this process taking so long?

Answer: the human capacity to be fooled is, unfortunately, infinite. Without our - the "market participants" willingness to cooperate and go along with these government and bank shenanigans, this whole mess would have hit rock bottom in 1980, or shortly thereafter. But it didn't - and we have only ourselves to thank for that. Without our willingness to be fooled, this government tomfoolery would have been an exercise in futility from the get-go.

Can There Be A "Soft Landing"?

In principle - yes. But that's a matter of definition. Putting the question of whatever would actually constitute such a "soft landing" aside for the moment, one thing is very, very clear: Before a soft landing - or even an economic belly-flop - is even possible, the world economic "plane" has to be pulled out of its headlong nosedive. Gravity has to be allowed to take hold of the airplane passengers and crew once more. That means, in real terms, that people and economies the world over will have to be allowed to actually feel the consequences of their collective actions (or inactions) again.

Unfortunately, that economic pain invariably leads to immediate political pain applied to those who have enabled this unreal condition of apparent economic weightlessness for this long - and that means whoever happens to be in office when the gravitational pull becomes noticeable again.

People will never blame themselves, i.e., blame their own stupidity and willingness to be fooled. They will also not blame the world's top bankers who are pulling the strings behind the scenes, for that requires too much actual concentration, study, and insight into the real nature of money.

We will, however, readily blame the politicians, even if they just got elected, because they are such visible targets, and, after all, didn't we elect them so they can fix whatever ails us? Generations of government-monopoly schooling have taken their toll on us. We were successfully trained, like Pavlovian lap dogs, to see government as the giver of all things.

For many people, subjectively speaking, this "righting of the plane" alone will bring with it so much economic pain that, to them, it is the equivalent of an extremely hard landing. So we come back to the question of definitions.

In my book, anything short of the total destruction of the fiat-based world monetary system will be a "soft landing" - no matter how much economic pain individuals are forced to endure.

If a functional and widely distributed parallel bullion currency can be launched - hopefully entirely without government "help" - then a soft landing is possible. (At this point, please realize that what mainstream economists and financial analysts like to call a "soft landing" is nothing other than a steepening of the plane's descending trajectory to perpetuate the illusion of weightlessness. It is no solution. It is only an exacerbation of the real problem.) Everything else, short of the creation and sufficient use of such a real currency will make it impossible to avoid a fatal crash.

So, in the end, the euro is no "solution", either. It is rather an intermediary step that is intended to create an environment conducive to a truly free gold price - a precondition for any future parallel bullion-currency system.

Whether any fiat system really can operate side-by-side with such a real currency in the long run remains to be seen. At least it is comforting, for the moment, that the creation and successful implementation of the euro currency is a positive indicator that such a move toward a free dual system even exists somewhere in the back of the heads of a few of the financial world's "architects."

Everything else is currently literally "up for grabs". I, for one, choose to grope for the gold. I just wish I had more broken promises at my disposal to buy more.

What about you?

Got gold?

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

Copyright © 2003-2008 Alex Wallenwein

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