US Dollar Triumphs Over Europe
by Chriss W. StreetIn a stunning worldwide move, the U.S. Federal Reserve in coordination with the European Central Bank, Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Swiss National Bank and China’s Monetary Authority agreed to temporarily “dollarize” the euro. Facing a vicious bank liquidity crisis and a political nightmare; the German dominated European Central Bank (ECB) agreed to the virtual outsourcing of Europe’s monetary policy to the U.S. Federal Reserve. Although described as a precautionary arrangement for political cover; the “dollarization” of Europe has re-established the U.S. dollar as the world’s only reserve currency.
Twenty years ago, European nations sought to form their own reserve currency to limit the power of the United States in controlling their economic destiny. Following World War II, the U.S. took control of European monetary policy by pouring over $50 billion of cash into the war shattered economies. Over time, sovereign currencies were re-introduced; but the U.S. maintained dominance over each nation’s monetary policy through its reserve currency status.
In 1971, President Richard Nixon exercised this domination in a trade dispute with Europe and Japan by suspending the convertibility of the U.S. dollar into gold, setting wage and price controls, cutting taxes, and placing a 10% surcharge on all imports in an effort stimulate the U.S. economy by devaluing the exchange rate of the dollar. U.S. stock markets had their largest one day rally in history; while foreign stock markets crumbled. Four months later; the United States forced agreements for currency appreciation by Japan of 16.9%, Switzerland of 13.9%, Germany of 13.6%, France of 8.6%, and Britain of 8.6%. This effective devaluation of the dollar is credited as creating 700,000 American jobs and cementing President Nixon’s reelection in 1972.
Having suffered from such manipulation under America’s control over European financial affairs; in 1992 the nations of Europe began creating an economic integration that would lead to the introduction of the euro currency on January 1, 1999. Overnight, Europe became the largest trading block in the world and the euro with €890 billion in circulation became the world’s second reserve currency.
Prior to the introduction of the euro; the southern European nations of Portugal, Italy, Greece, and Spain (PIGS) regularly devalued their currencies to remain competitive with the highly industrialized and sophisticated northern European countries. The introduction of the euro permanently fixed exchange rates for all euro members; but gave the PIGS access to loans from northern banks at less than half their prior interest costs.
The euro currency seemed to be a huge success as Greece, Spain, and Portugal experienced huge real estate booms powered by low interest rates. With the southern nations forbidden to devalue under euro membership regulations; the sales and profitability of German and other northern companies increased due to their higher productivity growth against southern companies. But after the 2008 credit crisis; German banks demanded the PIGS pay higher and higher interest rates. These higher rates crushed real estate prices and devastated the economies of the PIGS.
The ECB may have called itself the “Central Bank of Europe”; but it virtually no ability to act as “lender of last resort”, like the U.S. Federal Reserve that prints unlimited amounts of money in an American banking crisis. As fear of potential defaults caused large depositors to pull money out of European banks and convert euros to dollars; the ECB was incapable of stopping a system-wide run on the banks. In desperation; the ECB was forced to surrender its sovereignty back to the U.S. Federal Reserve by agreeing to engage in 90 swaps of euros for dollars.
Given that U.S. banks operate with half the leverage of the European banks; the short-term structure of these arrangements will put pressure on the European banks to deleverage or risk the Federal Reserve refusing to roll over the swap by demanding repayment of dollars. This “dollarization” of the euro seems likely to be a prelude to defaults in the south as one or more of the PIGS seek to devalue by re-issuing their currencies back to escudos, lira, drachmas, and pesetas. But whatever happens; it seems clear that from now on decisions regarding European monetary policy will now primarily be made in Washington D.C.
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69 Comments
"…the “dollarization” of Europe has re-established the U.S. dollar as the world’s only reserve currency."
It appears that America's relative transparency, rule of law, and the still-as-yet-not-submerged free market, captalism-based economy that has given the vast majority of us such unprecedented economic prosperity seem to be the most reasonable safe harbor for spooked investors and central bankers.
The next big task at hand, after reasonable minds take over the financial helms in Europe and back here at home, slash spending, and begin to crawl back up the slippery slope we're sliding down, will be to gobsmack the Chinese communist dictators pretending that China's economy is based on a free market and suggest to them that their currency manipulation, theft of intellectual property, trade secrets, and the rest of the long list of their economic crimes should probably begin to taper off before the unintended consequences of their distorted economy's "success" come back around and bite them in their complacent @5535!
didn't the us just agree or had in the past agree to help bail out european banks? maybe this was part of the deal. at any rate everything is just a cheap facade.
Good! Good! and Good! Europe deserves NOTHING more than this. If I was America I'd have let the whole thing collapse under the weight of it's own stupidity. However, maybe the Euro will stabilize a little now.
Great! We've hitched our wagon to a falling star.
Everybody get ready for yuan as our national currency.
Will this undermine George Soros and his attempts to collapse the US dollar? If so, then good. I'm sure the puppet will receive new orders to undermine all this…
The F'ED is just staving off the inevitable by backing one fiat currency with another, and it's all backed by a 'con.' This is going to end very badly…
The closer the collapse comes the wonkier the response.
It is the foundation of your economy that was laid incorrectly and you just keep patching it as it crumbles.
All the fancy footwork only stalls the inevitable and may even make it much worse.
What We’re Financing With All Those Interest Payments on Obama’s Debt
Unfortunately the ChiCom military won’t always be this easy on the eyes when it’s on the march:
http://www.youtube.com/watch?v=BAGjv-L2GYM
Well said Turgeson,
This puts to bed for a while the "fall of the US dollar" we keep hearing about.
As I 'm sure dollarizing the Euro came with much resistance but like you said it shows a confidence in the US economy
Obama must be disappointed.
Then again are we simply allowing Europe to kick their can further down the road at US tax payer expense?
Before they recover:
Lets kick the anemic economic in-chef out and replace him with a fiscal pit-bull and increase interest while implementing American austerity. That will take majorities in both House and Senate with a republican President.
This will be our last shot because Austerity will bring out the takers more then ever.
Oh am I a mean selfish Capitalist or what
I never really knew why exactly, that,….
China's "economic" success was a popcorn boom, but,…..
I knew I was right.
The evolution of the American economic machine is something that,…..
can not be easily duplicated and certainly not by a………..
central planning politburo.
Sure hope there are now enough of us to realize,……..
how great our tried and true American economy is and,…….
come next November, start putting our affairs,…….
back in order.
'I have seen the past and it works'.
" But whatever happens; it seems clear that from now on decisions regarding European monetary policy will now primarily be made in Washington D.C."
I won't pretend to understand the details of all this. But I interpret the above statement, if true, to indicate coordinated money printing in Europe, to follow Fed policy here in the United States.
The ECB may not do money printing now. One way or another, perhaps it soon will.
Am I looking at this wrong?
While I have long understood that the purpose of their creation of the euro was to become a larger trading block than the U.S. (farmers tend to keep up with that sort of thing), I'm certainly curious how this agreement to "dollarize" the euro will affect the world grain trade. Since U.S. grain has a tendency to move more freely when the value of the dollar is down, I'm thinking this may cause a huge crash tonight when the market (Globex) opens for electronic only overnight trading. Furthermore I doubt Europe's tendency toward socialization of society will change, so what have we really accomplished with this big "win"? Will European governments dive into austerity and embrace Capitalism anew?
.
Yep, I hope the occutard generation has a good time learning to speak Mandarin to their new Chinese overlords.
Yes, we borrow money from a communist adversary. The borrowed money is either wasted and/or split up among Obama cronies. The adversary uses part of the money to build up their military. And we'll be in debt for a long, long time. China will have the best military our tax dollars can buy. What's wrong with this picture.
Oh goody, now the American taxpayer is on the hook for the European’s lunacy.
Great article(again!) Chriss.
I guess the European union members had 2 choices: German hegemony over Europe, or US dollar monitization.
Going forward, this could contain PIIG defaults from becoming a system wide crisis.
I wish the communists in Washington DC would come to this conclusion.
"Dollar triumphs over Europe" –
That's not necessarily a good thing, considering the Federal government has been driving the value of the dollar down and that's really what has prompted the bailouts and stimulus and so forth – government weakens the economy with inflation, then seeks to prop it up with more inflation. That's had a domino effect into Europe, which routinely inflates its own currency.
That would require reason and logic, neither of which they use. The only thing they know how to come to is an O-gasm.
it's all smoke and mirrors! The Euro is BS, the Yuan is not that strong and the Dollar is, and will continue to be, inflated to Weimar Republic heights of idiocy. Just as directed by those in the know with Obama as their puppet, the whole thing will come crashing down in the next few years if we don't get tough on our debt NOW. Sad.
This move is a disaster for the people who wanted to take away America's exceptionalism. The euro was designed by the social liberals to destroy the American dollar as the world's reserve currency. By undermining the dollar, it was believed that the U.S. would be forced to always engage in "multi-lateral" trade negotiations; rather than setting its own path. Given that most of the rest of the world is collectivist to some degree; America would almost always be out-voted in multi-lateral trade deals. Now that Europe's social-welfare state is collapsing; the collectivists have been forced to bow down in subservience to the American capitalist state.
I think you have it basically correct. The only option seems to be "print, print, print". Germany has already been through an extreme version of this and they don't want to ever do it again.
You've made my day!
We never should have gone off of the gold standard. Floating fiat currencies are subject to the hubris of a few unelected people. However, we are where we are, and I don't like it. We'll see if we can continue to defy all of human history…..
This is a big win for the USA.
It really shows the lack of influence on world markets of the Chinese and Europeans (despite Barack Obama's efforts to destroy USA hegemony).
This was not the change Barry was looking for. Obama campaigned as a European social-welfare elitist and the American voter accepted his invitation to a "Brave New World". Now that America is beginning to learn what it is like in Barry's worker paradice; they are realizing it looks allot like Jimmy Carter's worker paradice.
Actually this guarantees that European social welfare state shrinks and they are forced to become more capitalist. The rebirth of Europe after WWII was built on the U.S. dollar as their reserve currency. The American Congress may have a long history of money printing to buy domestic vote; but their is no appetite to bail out Euopean colectivist governments.
The way currency swaps work is that you give me a fixed amount of euros and I give you a fixed amount of dollars. If the Europeans devalue by printing lots of new euros over the next 90 days, they will have to pay back the Americans if much more expensive dollars. America always has the oprion to refuse to "rollover" the swaps. Such a move would instantly bankrupt most of Europe.
America is again now the master and Europe is again now the servant!
Good observation! What is really happening here is a new "Bretton Woods". This agreement "pegs" the exchange rate between the U.S. and core Europe at about 1.35 dollars to the euro. I also believe that the Chinese have accepted that they must re-value the yuan up and then also peg to the dollar. The PIGS can leave the euro and devalue back to 3rd world countries.
"print, print, print" …status quo…but lots more of it. More inflation on the way.
And to think……not all that long ago, in the opposition to everything W and America, we were being told by media that the Euro should become the world standard currency…….replacing the dollar bill.
Here is a thought, how about we replace the dollar bill with an actual dollar? You know, replace something that represents debt with something that represents WEALTH!
"We'll see if we can continue to defy all of human history….. "
"This time is different" has generally been what is said in each of those instances throughout history.
This agreement fixes exchange rates and force the U.S. back onto a monetarist policy for managing the money supply. Without devaluation, Congress will be forced to "simplify" and cut U.S. tax rates to be more competitive in trade.
I thought about using the word hegemony in my reply to your comments, but wussed out. Actually this is more on the line of America master and Europe and China servant !
Chris, Thank you for this information.
Do the swaps you mention relate to the news on 11/30 where the Fed and some other CBs cut rates on dollar swaps, or is this something different?
I hope you are correct, because we could all use some good economic news about now. But with human nature being what it is, and a preference among weak-kneed policy makers to take the easy way out and print money rather than cut spending, I continue to hold a "show me" attitude until I see this actually play out.
I'm with you, TLD, there just seems to be something going on here that has the stink of unforeseen consequences common to progressive governments. And you have to admit, most of the governments involved, including our own, are progressive (no matter who the elected leaders are!)
For some reason I see the Fed's dollar printing machines glowing white hot from overuse, just from this line, "Given that U.S. banks operate with half the leverage of the European banks"!!??
Somebody has to take up that slack in a dollar / euro swap!
I see inflation writ large coming down the pipe!
The reduction in rates was just the cover story, The real action was that these swaps are different than any other Fed swaps in history. The European central bank send the Fed a big bucket of euros and the U.S. sends the European banks a big bucket of dollars. During the next 90 days: the Europeans CB can spend, invest, or do what they like with the dollars. The Fed agrees to do nothing with the euros, but hold them in safe-keeping. Ninety days later the Europeans have to present back the bucket of dollars they swapped and the U.S. gives the Europeans back the euros minus a hair-cut. It doesn't take long to realize this is working for the company store. The Fed can always decide not to "roll-over" the swap and BK Europe. Pretty cool eh !
The next EU pow wow is 12/9, and the next Fed pow wow is 12/13. Let's see what happens. Our current crop of policy makers are drawn to money printing like moth to a flame. Hope to be proven wrong.
I'm afraid your last question is the big one, OC, 'cause you know, as well as, everyone here, it ain't gonna' happen! The answer to getting what you had before is not cutting back and biding your time through productive work to get back to that level of largess for most "socialized" societies. It will be to lash out at those they think are keeping them down "unfairly".
Watch for pogroms, coming to a European country near you soon! Guess who is going to be at the wrong end of that spear…again.
Though, quite possibly, Muslims might take the brunt of it this time.
Thanks Mr Street. I'm thinking the U.S. agriculture sector better get ready for a wild an wooly ride. @ 1.35 U.S.D to the euro I doubt our trading partners will be doing much grain buying for the next few months, even though I think world supply is currently measured in days in several of the grains.
I see your language on the Chinese acceptance of this deal is a little squishy. Since they keep at least a year's usage of grain on hand at all times, I imagine they can sit out some of the near term grain market uncertainty.
My next question is, who will feed the PIGS? We're too "civilized" to turn them out to go free range, aren't we? I see some serious charity in our future.
LOL, now I can spend my Sun reading everything I can find on crop condition in the Southern hemisphere, and kicking my posterior for not having my 2012 production pre-priced. I'm not sure how U.S. grain producers will continue production, with a 30% or more decline in market prices. It seems our input costs always lag declines like this by no less than a year. It's very hard to operate in that economic environment.
That's my take away from this mess too, Stan!
After all, isn't Europe just like GM or the banks, too big to fail?
Did you read right past the most critical part of the story, at least for Americans?
"…the U.S. Federal Reserve that prints unlimited amounts of money in an American banking crisis."
Our policy is unsustainable and driven by political expediency. We've still not learned the lesson, despite our current condition.
This is way too important to be left to the politicians.
On China's economy…
http://articles.moneycentral.msn.com/Investing/Ju...
Happy Trails, Ralph ; )
Agreed, Mike. Who would have thought Soros was that good?
Might be better than the salt pouches and shell beads we use now, eh Ash?
Government s collectivist by nature. Bureaucrats get promoted by managing more money and more people. The county of San Diego about 10 years ago decided to pay cash bonuses to managers that successfully cut their spending and budgets, whitout "dimunition" of the service performance levels.
The program was wildly successful and the County saw massive budget cuts and paid some bonuses of almost 100% of comp to managers. Two year into the program, some mindless right wingnuts raised hell about the pay and killed the bonuses. Over the next couple of years all the spending came back.
If this type of comp was implimented in D.C.; spending would crash. This year is the first year since 1948 that federal spending will actually shrink and the first year sinnce 1946 that state and local spending will actually shrink. Head counts and spending for all government in America is going to shrink big time over the next decade. Maybe it is time to introduce "performance" pay for cutting costs in all government entities.
We're #1! We're #1!
#1 in debt
#1 in crumbling economy
#1 in printing of money…
This link is over a month old, and with things moving as fast as they are, some of the information is no doubt stale and incomplete. But the presentation suits me. Sort of like a "Euro Bailout Explained – for Dummies".
Euro Bailout: An Animated Explanation
Our chief export has been inflation.
The fix is in to manage the migration of the PIGS (minus Italy) out of the euro. The IMF has always had the role of bail-out and feeding of bankrupt countries. The ECB loaned $270 billion to the IMF last week. The IMF has the right to leverage this by 3 to 4 times.
The PIGS cannot survive under low inflation regimes of northern Europe; they need to devalue. There are two ways to devalue; devalue the currency or massively cut wages internally. Greece has been in "austerity" for two years and now has a positive trade balance – when you are broke, you do not buy imports. When the PGS exit the euro, they will be supported by the IMF. The IMF will arrange imports of basic food stuffs from their contributors. Guess what – U.S. is the largest IMF contributor. U.S. farmers are going to like the IMF bail-out just fine. This may not change the price of grain, but it will influence who sells the grain to the IMF.
Which part is unlike any other Fed swaps in history?
Very interesting! Although now I must research PGS total yearly grain usage, since they are not normally on my radar. China has dominated our market for years now, dwarfing the purchasing power of European countries.
"… but it will influence who sells the grain to the IMF."
LOL, now the task is to figure out the politics of the IMF? Who will try and usurp the U.S. as the major contributor. Another question that floats to the top… are there subsidies that the U.S. government offers to those grain companies who "contribute" grain to the IMF?
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The Europeans can do what they want to re-circulate their swap proceeds; but the Fed will not re-circulate their euros proceeds. This is why I call the deal "dollarization". The Euros in circulation shrink or just eventually go away. The dollar is the last man standing.
The Fed is taking over the euro? Has anyone looked recently at what the Fed has done to our own currency? For the first time in my lifetime that I know of, the Australian dollar is worth more than the US dollar and for the first time since the 1970s the Canadian dollar shares virtual parity with the US dollar. This reminds me of the mess created when Packard bought Studebaker in the 1950s. By the time the surprises were discovered, it was too late to back out of the deal. Anyone seen a Packard OR Studebaker lately?
Don't get me going on rich farmers getting paid subsidies! The IMF buys for who their friends are. That means who has the votes from being the largest contributors to the IMF.
Watch it, on that "rich farmers" talk. I know that you must be aware that quite a lot of U.S. govt subsidization now goes to the major U.S. grain exporters. Those guys, Cargill, ADM et al are the ones raking in the big cash. Just like GE, they have all sorts of nice little perks on shipping costs et.c. And notice I didn't even bother mentioning the alternative fuels tax credit, that they keep going, by trotting out some idiot MidWest farmer to whine about once or twice a year. Actual grain producers wind up with less than $0.03 cents of that, I believe. Since the major grain companies own ag from the ground up, with only the exception of actual farmland ownership at present, they are the crony capitalist in this equation… courtesy of those two IA pols we all know and love.
FYI, gov subsidies to my operation are less than 2% of my cash flow. You think I care one whit if they end? Not right now… but when I am forced to go "free-style", the U.S. consumer better be prepared for the wild fluctuations in food prices that will result, as well as big increase in percentage of their income that food will consume. The gov entices me to produce corn (translates into beef) and wheat with their less than historically generous subsidies these days, when I might just rather produce cotton, without them. ; )
Chris, Our country's experience with Fed machinations has conditioned me to always look for the fly in the ointment. The fact that our own Fed is driving much of global policy doesn't provide me with total comfort.
It sounds like you believe the volume of these swaps is big enough to have a major impact?
I'm wondering if this was done for strategic advantage, or was it one more emergency move to avoid an imminent European disaster? And a key feature here being this was a coordinated action by world central banks, led by our own Fed, somewhat like the actions taken in the US in 2008, where we now know the Fed committed to something like $8 TRILLION in guarantees to avoid a US meltdown.
If it was a materially big move, I'm wondering what are the unmentioned side effects. Doesn't our own Fed print up new dollars in order to perform these swaps? If so, given that Fed money printing constitutes a stealth tax on the American public, this would not give me a warm fuzzy feeling.
The bottom line for me is this sounds like more money printing, now on a global scale, to stave off disaster, without actually fixing anything. Perhaps the dollar may or may not be the last man standing, but what does all this imply for inflation?
This is good old fashioned Adam Smith vanilla printing of 1.35 dollars for every 1 euro accepted in exchange. If this was the only monetary policy the Fed engaged in, there would be no such thing as Keynesian economic stimulus.
This is a huge deal if "dollarization" is the end game!Something had to happen in Europe. Either Europe goes forward to the collectivist "Brave New World"; or reverts back to the dollar as their daddy. We will know in the next 90 days.
With all that's going on in the US, it's difficult to keep up with developments in Europe. But it's apparently near the precipice of exploding into American consciousness.
With all this going on in Europe, it is astounding that any debate whatsoever exists in the US about continuing towards the European quasi-socialist model. Obama has made huge strides in that direction in just the last three years. God help us and the rest of the world if he's re-elected to finish the job.
Sometimes ya just gotta go with your gut feeling.
Thanks there Texas rose.
So what you are saying is that GE, ADM and Cargill spend lots of time tilling their fields of dreams in Washington D.C. ?
I grew up in Redding, CA; a place I affectionately refer to as teeth-are-optional California. There are lots of farmers who work long hours and are verrrrrry productive. I still believe that crop supports come with lots of strings attached that actually hurt farmers over time.
LOL, yep… you pretty well summed it up. Actually 20 or more years ago, when subsidies were as much as one third to one half of grain producers annual income, the Big 3 grain exporters happened to notice all that cash that was floating out of DC to grassroots ag and set about figuring out how they could get in on a piece of that pie. It wasn't long before producers "share" was being reduced, and we were being told how beneficial it would be to farmers if the Big 3 had some help on shipping costs, as well as various other "programs". I try and ignore them, because they only serve as aggravation, but many of the farm producer publications I receive regularly do articles touting their success. As if consumers of US superior quality grains wouldn't buy our exported grain without a few cent discount.
Crop supports may have strings that manipulate markets artificially, but when subsidies end will the gov strings on my operation disappear? NO! We will be "hurt" either way.
There is probably no place in the world where the locals will not take Yankee greenback dollars. Not Swiss Francs, not Chinese Yuan, not Japanese Yen, not even British Pounds. The Euro comes a close second, but I bet there are some in the Euro zone that will gladly take greenbacks, but no one in the USA that will take Euros. And yes, the USA can be dysfunctional, kind of stupid, prone to doing dumb things, but they tend not to be as big as in Europe or China, and we tend to overcome our own stupidity a little quicker.
wonderful article and response!
Thank you Harry Truman for this world's financial mess. I wasn't born when this gooberhead shoved the FED thru a lame duck session with just enough Congress critters to get the bill passed during Christmas holidays. Fiat money isn't worth the ink required to print it. Now we have digital and virtual money worth even less. "Merry Christmas to all and to all a very good night". I'm a fan of the "Geezer bandit". He seems more successful than our present government and at least he isn't living a lie.
glh
The reason we got off the gold standard in 1971, was that we had a fixed price of gold. The French were priniting currency as fast as possible, exchanging it for dollars, and then exchanging it for gold. The French had cleaned out almost half of our gold before Nixon shut the "gold window".
Converability of gold may be our future; but this does not eliminate the ability of politicians to print money. It just means that the guys that take our money can take our gold.
You bring up a good point. We were cheating on the gold standard (printing like crazy) and the French called our bluff. If we went back to 'free banking' and got rid of the evil Federal Reserve, then an honest gold standard might hold. As long as we have the Fed, we are pretty much doomed.
I regularly beat up on the Fed, but going to plan B would be tricky. Wall Street has always been a teenager that drives the car as fast as it can until it crashes and then wants somebody in government to bail them out. We have had 3 national banks in 230 years. Sometimes it was good to have the Fed.
Most people do not realize that the reason AIG was bailed out is that there were 20 million grandmas and grandpas that owned AIG variable rate annuities. If AIG went night night; they would have been paupers. Somebody would have had to do some form of bail-out. The Fed may get its money back this time.
Yup.
Thank you Triffin dilemma
http://en.wikipedia.org/wiki/Triffin_dilemma
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