It Could Have Had Class
Last week, the European Central Bank abandoned all pretense that the euro would be the worthy heir of the Deutsche mark; based on the enormity of the nearly $1 trillion bailout of Greece and the moral hazard it creates for other spendthrift member-states, the euro is instead on its way to becoming the worthy heir of the drachma. While the bailout was intended to restore calm to the continent, thereby strengthening the euro, the result is a currency that has lost its shot at glory. Like Terry Malloy... it coulda been a contender.
Prior to this bailout, many investors - myself included - held to the belief that the German-led eurozone would be more fiscally responsible than countries whose governments have unilateral control over their own currencies. Given the decentralized political structure of the eurozone and the independence of the ECB, it was assumed that Western Europe would be unlikely, and perhaps unable, to inflate its way out of debt. As a result of this assumption, Europeans have enjoyed low interest rates and favorable exchange rates since the euro's introduction.
However, many member-states, Greece first among them, abused the borrowing privileges conferred by a strong currency and, to put it bluntly, bit off more than they could chew. Rather than allowing Greece to default, which would have put real teeth into Europe's previously untested commitment to fiscal responsibility, Europe proved it was all bark and no bite. The net effect has been to demonstrate that the ECB will monetize the debts of any member-state that has borrowed too much. As this understanding sinks in around the globe, the euro just sinks.
Unfortunately, many are mistaking this euro weakness for dollar strength. A quick glance at the price of gold - which has made new highs in both currencies - quickly disproves this myth. The fact is that both the dollar and the euro are losing value. At the moment, the euro is losing value faster; however, in the race to the bottom, my money is still on the dollar to win.
The remainder of this article and even more in-depth analysis of the euro/dollar "race to the bottom" are available in the May edition of my newsletter, The Global Investor. This issue also features fresh ideas on oil investing, including two oil services companies I think are worth watching. Click Here for complimentary access.
Click here for a description of my best selling just-released book How an Economy Grows and Why it Crashes.
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Author: Peter Schiff
Peter Schiff C.E.O. and Chief Global
Strategist
Euro Pacific Capital, Inc.
Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly. As a result of his accurate forecasts on the U.S. stock market, commodities, gold and the dollar, he is becoming increasingly more renowned. He has been quoted in many of the nations leading newspapers, including The Wall Street Journal, Barron's, Investor's Business Daily, The Financial Times, The New York Times, The Los Angeles Times, The Washington Post, The Chicago Tribune, The Dallas Morning News, The Miami Herald, The San Francisco Chronicle, The Atlanta Journal-Constitution, The Arizona Republic, The Philadelphia Inquirer, and the Christian Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg. In addition, his views are frequently quoted locally in the Orange County Register.
Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkley in 1987. A financial professional for seventeen years he joined Euro Pacific in 1996 and has served as its President since January 2000. An expert on money, economic theory, and international investing, he is a highly recommended broker by many of the nation's financial newsletters and advisory services.
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