Letters by a modern St. Ferdinand III about cults

The Euro is a modern marvel. A wonder of the world. It levitates at a 40% premium to the US dollar. One would assume that the 40% premium is premised on fundamentals. Europe must have resources, oil, commodities, a strong manufacturing base, low taxes, high growth rates, lots of created jobs, dynamism, open and accountable governments, reasonable [not zero] interest rates; low and manageable inflation; strong liquid banks......In actual fact Europe does possess some of these assets. The Northern regions have oil and some commodities. Manufacturing in Germany and Holland still constitutes 40% of GDP. Tax havens do exist in the Euro community such as Luxembourg and the Jersey Islands. Solid firms and entrepreneurs do push their collectivist economies along and against all odds, provide innovation and dynamism. As well the Euro does make business and cross-border transactions easier. That is a net profit. But the costs outweigh these benefits.

The liabilities should weigh much heavier on the Euro balance sheet and they make a 40% premium to the US$ a simple impossibility. The Euro is a fixed exchange system with member currencies fixed at a level to the general Euro currency and the local currency substituted by the common Euro – unsupported by Gold or Silver [Euro gold reserves are nowhere near the level they need to be, to back up all the Euros in circulation]. Like the U$, the Euro is in reality a 'trust-based' currency. Trust us, the Euro Central Bank, to get things right. Trust us that we won't go bankrupt. Trust us that the paper the Euro is printed on is worth something. This 'trust' would be easier to accept if it was backed up by gold and silver reserves and if the Euro was fixed to a gold or silver standard[s].

The negatives in Europe should mean that the Euro has to decline. Job growth is anaemic. Structural, non-governmental economic growth limited. Governmental debt including off the balance sheet liabilities are $100 Trillion or more, this on an economy of $14 Trillion in size with current debts of $15 Trillion. Per capita incomes are 30% below US levels and the population of 450 millions only matches US output, even though the US has 130 million fewer people. Productivity, the surest sign of wealth creation, is thus very low within Europe as are living standards when compared to the US. 

Euro fiscal policy is bankrupt, but the monetary is not much better. Current negative real interest rates ensure future bubbles and inflation. There is nowhere to put one's money but into a over-bought stock market or commodities which are betting on U$ devaluation and Euro instability. Monetary policy has long been a political project within Europe, one not initiated in the best interests of the total economy. It is another form, like the cumbersome and burdensome tax code, of social engineering.

According to some analysts the crisis is 'far from over' and as long as the small countries are the only ones at risk, it will be contained.

Far from over? No kidding. It has been an ongoing drama for years. The climacteric is still far off – most likely in 2013 when a lot of the Euro debt needs to be turned over and rescheduled. Even then the Euro's probable decline will take years. It has to. Unemployment at 10%? Please. In Holland alone the real unemployment is 20% when you add in the people being paid by the government at 70% of their previous salaries to stay home due to psychological or back problems. This scam is replicated throughout the Continent. 25% is the more likely unemployment number. Other economic indicators are also as weak as the Euro government balance sheet. Insolvency across most of the Continent is highly likely.

It is clear that in the past 10 years the fiction of a European currency simply hid the fiscal insolvency of the peripheral Euro states and the general socialist descent into financial oblivion so obvious across the Continent. It is highly unlikely that the Euros will reform their governments, their spending patterns, their powerful unions, the support of national champions; or curtail the beneficent welfare state.

Given reality why then is the Euro so over-valued against the US dollar? The US is not in good shape of course, but Europe is certainly not 40% better off. There is no reason for it. It is not the world's reserve currency and does not, unlike the US and its dollar, gain from seigniorage or the ability to buy and sell goods in its currency, outside of the Eurozone. This accrues about a $ Trillion per annum to the US in real profits. That to me would mean that the US $ should be at a premium to the European currency not the other way around.