Today's Guest Post comes from Michael Lombardi of Lombardi Financial. "An Early Obituary for the Euro," originally appeared on the Profit Confidential website on July 31st, 2011. In this piece, Lombardi breaks down the fate of the Euro. Enjoy with our compliments and please visit this page to obtain complimentary access to a complimentary report, "A Golden Opportunity for Stock Market Investors" as well as a free e-letter subscription to Lombardi's Profit Confidential.
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Does America want members of the 17 eurozone countries to go bankrupt one by one? If only a few went under, the American currency would win the currency wars and reaffirm itself as the reserve currency of the world.
If you were someone living outside the U.S., wouldn’t this sound like a “secret” strategy that could work? After all, are not all the major credit reporting agencies (that grant credit ratings to European countries) subsidiaries of major American corporations?
These are the suspicions I’m hearing from people here in Rome.
Let’s give the theory some further attention and you’ll be surprised at what we find…
When we look at the rising national debt of America, by the end of this decade, the debt-to-GDP ratio of the United States will surpass that of a number of European countries. Why, despite a never-ending rise in our total debt, are U.S. bonds not referred to as “junk” when so many other European countries, with better debt-to-GDP ratios than America, have their bonds considered junk?
On July 25, 2011, Moody’s Investors Services downgraded Greece’s sovereign credit rating by three notches to what is referred to as “Ca,” very risky.
In an ideal situation, here is what happens…
The American dollar is devalued over the next three to five years, so the U.S. is paying back its trillions of debt owed to foreigners with cheaper money.
The euro totally collapses over the next three to five years. With no euro, the greenback, although devalued, survives, as Europeans want American dollars, not Japanese yen or Chinese yuan.
Great idea, if you can pull off.
Under the scenario above, the snowball job of convincing two-thirds of world central banks that the U.S. dollar should be the reserve currency of those central banks continues.
But two problems arise…
Firstly, about 21% of the revenue generated by S&P 500 companies comes from Europe (according to Bloomberg). If the euro currency is devastated, the earnings of the major American companies will be as well, pushing stock prices lower.
Secondly, the rise in the price of gold bullion from $300.00 an ounce in 2002 to approximately $1,600 today is telling us a different story. There could be a new currency in town. Or, at the very least, there could be a new currency permanently tied to the price of gold.
Euro or no euro, American dollars partially backed by gold again…I easily see this in the cards. That’s the best advice on investing in gold or gold advice I can give.
What He Said:
“Any way you look at it; the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in PROFIT CONFIDENTIAL, August 27, 2007. “As for the stock market, it continues along its merry way oblivious to what is happening to homebuyers’ wealth. (Since 2005 I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in PROFIT CONFIDENTIAL, November 21, 2007. Dire predictions that came true.
-------------
If you like this article and would like to read more from Michael Lombardi and the analysts at Lombardi, please feel free to visit this page for access to a complimentary report, "A Golden Opportunity for Stock Market Investors" as well as a free e-letter subscription to Lombardi's Profit Confidential.
-------------
***The views and opinions expressed in this post are that of the featured Guest Blogger. This post does not necessarily reflect the INO.com’s own views. All trading involves a level of risk. Individuals should fully understand risks before entering the market. None of the information contained in this post should misconstrued as advice or any sort of solicitation to buy, sell or otherwise invest in any fund, company or security. ***
Second comment - Were the Euro to become a smaller entity, it would become a stroneger currency, so be careful what you wish for.
While I think America didn't initially want the Euro, I don't think it was ever their policy to destroy it.
What in fact has happened is that too many countries have borrowed too much all at the same time.
When you borrow too much you are in effect borrowing from the future.
Borrowing too much has failed as a strategy and now the bill has to be paid, the future want's to be paid back. Cue rising unemployment and austerity
Capitalism, unfortunately has reached it's zenith as a workable solution.
(I haven't a clue what the real solution is, but it better be based on reward for personal endeavour)
New thinking is required.
Our ability to produce far exceeds our ability to increase demand and this is a diverging trend.
This means less people producing more and as a result more unemployment.
Therefore a new way to distribute wealth has to be found. Growth in demand cannot continue indefinitely.
It has to plateau eventually. In some countries it is very close. When growth plateaus, then what - Export more. Then the plateau is reached globablly and THEN WHAT. I give it about 20 years for global plateauing.
The solution has to a global approach and is this will be difficult to achieve.
Single currencies help tho and the US should be encouraging the Euro development and other similar currency groupings.
"The world is about to discover the meaning of entropy in the economic sense."
Resources are limited and we are rushing towards those limits at an unsustainable pace.
We have to examine this issue seriously, in order to come up with realistic answers.
"The AGE of The GREAT COMPROMISE is upon us" - The rich cannot continue to get richer, while the poor get poorer.
What is the great compromise - The rich get poorer (note not poor, just less rich) and the poor get richer (note again not rich)
That convergence will obviously have to increase over time, but the limiting factor ultimately will be physical resources, iron, food etc.
Oh and remember you can't eat gold.
Though we are experiencing this financial crisis,it has never been perfect from whatever date behind time. At every turn in history human beings knows how to compound their own issues and look for whom to blame. The financial problem is one out of every trouble existing in one sector or the other. In all the best way to handle them is to be positive in your outlook about life. To look for better ways of bringing the best possible solution at that moment. Individually look for ways to benefit from the "foolishness" of the 'masses,.
Whatever you are doing do it diligently so that your little contribution can add to other good things from others which will in turn make the world a better place to be in.
The problem with private banking in the West [U.S./Europe] is public treasuries back and make possible what are called 'private' loans. The on book principal amounts of the loans made (not merely the interest)--loans on book that are at least ten times deposits--on that money printed for loan by the private bankers simply utilizing Western currencies. Is not owed back to those Western nations backing their currencies and thus making the loans possible in the first place. But instead is owed back to the private bankers printing for loan. The banks have no actual risk, they neither lend their own money nor depositors money. And yet all of the principal amounts on the printed money [plus interest] are shown as owed to the private banks. That's like if I used your savings account to justify my printing over ten times what your account contains, loaned that money I printed up in your taxpayer backed currency...And the principal amount and interest on all those loans is owed back to me (not to you), but shown/known to be [your] debt/risk. Your savings account makes the currency I loan possible, i.e. the printed money (over 10 times what your savings account contains). But it's all owed to and paid back to me, and until it is it's your risk. But don't worry your deposits are also insured (by you, by your taxes, just like your taxes make the currency I print and loan possible as well.) If the loans I make are stupid or the printed money is not loaned but used instead to gamble in derivatives and is lost, then you have to bail me out, because I'm too big to fail. You can't bail me out alone, so I print more money, which now you, your children, your grandchildren, and great grandchildren owe the money I lost, and for which you and yours immediately reimbured me, real time in the present. That is currently the privately owned-publically financed, banking system. If again public currencies are partially backed by gold it's the same system, but it only mildly curbs my same old profligate behaviour. Since now I can print 10 times my gold reserves, all owed back to me, but your risk. I have a license to print money backed by you and if it's paid back it's all mine, and if it's not paid back or it's lost it's your risk/debt. Otherwise instead of being shown as your nation's asset (it's your money I loaned) it's showed as your nation's debt. If there's any democracy at all we should be electing bankers so we could all take turns printing money backed by the public trough yet owed to us, and becoming unimaginably wealthy. Right now as it is those elected, the ordinary politicians, are thrown their relative crumbs and just made rich enough to allow the system to continue. [The Tea 'Partiers' will undoubtedly be no different.] This is the Western banking system today and as it has been for the past few hundred years. Which just gets worse and worse in terms of the accumulating power that the publically funded privately owned banks enjoy. And culminating today in the astonishing imbalances and orchestrated failures at further, and further public cost. If this system is not a slave system, I would like to know what is the definition of slavery. It's a slave system in which the slaves don't believe they're enslaved or don't realize it. Except they slowly learn the truth and that their ignorance is not blissful...And their own nations' currencies which they make possible were jacked quite a long time ago.
But with the gold bullion stocks in the US who can be afraid of new currency takeover? even euro or renminbi can not replace US dollar. The world economy will shut down.
.................there could be a new currency permanently tied to the price of gold.
Yes, and it is interesting that when Colonel Gaddafi tried to start up a new gold backed currency to be used by the West to pay for oil it was suddenly decided by the West that he was totally cruel and beastly to his countrymen and that he should be immediately overthrown.
Conspiracy theorists will love this. As for me, I just don't know. Is it a coincidence after about forty years rule, or not?
Most debts are denominated in US dollars, hence I don't see the greenback going away soon, but eventually all paper currencies fail. I just don't know the time frame.