Europe is an economic basket case while the US is kind-of sort-of recovering. Why? Several reasons, but the only one that really matters these days is that in 2012 and 2013 the eurozone operated with tight monetary policy and an appreciating currency while the US created new money with abandon and let the dollar fall. So US products got cheaper on global markets and US companies and consumers were able to borrow at more favorable rates. The result: relatively fast growth in the US and a descent into deflationary depression for the eurozone. Here’s the euro vs the dollar between early 2012 and early 2014:
But this is a currency war, so every couple of years the battle lines shift. Since the beginning of 2014 the foreign exchange markets have been anticipating a new round of debt monetization from the European Central Bank and a winding down of quantitative easing from the US Fed. As a result the euro has been falling versus the dollar, nearly eliminating the previous couple of years’ appreciation.
So, a prediction: The coming year will see the US disappoint the analysts who expect a return to strong growth, while the eurozone, after a serious scare later this year that prompts the ECB to open the monetary floodgates, begins to stabilize.
None of this means anything of course, since a currency war is by definition a zero-sum game where one combatant’s gain is another’s loss. But it will surprise those who focus on secondary effects like corporate profits or equity prices, while moving us one step closer to the day when competitive devaluation stops working for anyone.
10 thoughts on "Welcome to the Currency War, Part 17: The Dollar’s Turn to Cause a Recession"
And we are moving closer to the day when there isn’t enough physical gold and/or silver left to sell to the east. It will be a very pivotal scene in this sad and scary show.
It is not really correct to call Europe an economic basket case.
Among the greatest problems are:
1. Securing the borders against the hundreds of thousands willing to sacrifice their lives for a chance to participate in the baskt.
2. Social tensions caused by the very large contingent of migrants with different cultural traditions and educational levels straining the social safety net and the social fabric.
Desparate poverty is hard to find (except in Albania or Moldavia), the streets are not littered with the homeless, food has never been more affordable (relative to income), the stock of housing is greater than ever, everyone has medical care and educational opportunities, people have paid vacations and travel. Europe is the biggest economic blog in the world by value and is an export power house.
Basket case indeed !!!
Europe is the biggest economic block, not blog!
Any nation or block of nations such as the ECU must remain solvent to fulfill its future obligations to its existing and future citizens. By any measure, as with the United States, the Central Bank has added Trillions of Euro’s to its balance sheet to attempt to jumpstart economic growth post Fall 2008. Without printing more money to service current outstanding debt, ECU IS INDEED A BASKET-CASE AS IS THE U.S.A. Margaret Thatcher put it so well: “Socialism is great until you run out of other peoples’ money!”. Most of the highlights of your comment relate to the socialized benefits everyone with a pulse receives in Euroland. Problem is, Europe does not have the economic growth to pay for the bill it has rung up. Same with America, which has a cool $140 Trillion of Unfunded Liabilities. The brick wall is just ahead. Will it be Scotland that tips the cart. Got Gold? Got Silver? Fiat currencies are all garage by definition and application. Sage of Wexford.
Europe has averaged .35% GDP growth for 10 years and has an average unemployment rate of more than 11%. They are, indeed, a “basket case.”
Yes, there are many poor North Africans who want to come to Europe for the social safety net, but Europe doesn’t really have the money to pay for that safety net. They are a country full of people who are consuming tax money but they don’t have a lot of people left who actually PAY taxes. Pension crises all over Europe are simmering under the surface and, eventually, they will have to print a ton of Euros to pay their bills (they’ve already printed more than they let on).
There are signs all over Europe that things are falling apart: the pitchfork riots in Italy, the big Madrid march this summer, the separatist movements in Catalonia, Venice and elsewhere, Greeks getting robbed and calling the police and being told that the police don’t have enough gasoline to come to their rescue, many countries, like France, have just given up on complying with the Maastricht Treaty requirement to keep deficits under 3% of GDP – they’re at 4.5% or so with no end in sight to the borrowing.
It’s an unsustainable situation: too many people relying on government spending but the government just doesn’t have the money to pay for all of the promises that it has made. Eventually, something has to give. Either they’re just going to print tons of money, which will cause mass inflation, or they will have to say “no” to all of those people who have their hands out. Then? Violence.
It’s a basket case.
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