Contact us
CALL US NOW 1-888-GOLD-160
(1-888-465-3160)

Euros, Dollars and Central Bank Manipulations

  by    0   0

Peter Schiff has been talking a lot about the weakening dollar. In a recent Schiff Report video, Peter said he sees the “mother of all dollar bear markets” on the horizon. The dollar has already dropped about 12% on the year, and it’s on track for its worst year since 1985. That was the beginning of a decade long bear market for the dollar. Peter says he thinks this one will be worse.

I think this one is going to be the mother of all dollar bear markets, and I think the dollar is going to fall much further than it did in any prior bear market.”

The following article by economist Dr. Daniel Lacalle, published at the Mises Institute FedWatch, provides some further insights into monetary policy by looking at the strength of the euro in relation to the dollar. His analysis sheds light on the relationship between strong and weak currencies, and the cost and benefits of each.

The primary purposes of the incorrectly named “unconventional monetary policies” are to debase the currency, stoke inflation, and make exports more competitive. Printing money aims to solve structural imbalances by making currencies weaker.

In this race to zero in global currency wars, central banks today are “printing” more than $200 billion per month despite that the financial crisis passed a long time ago.

Currency wars are those that no one admits to waging, but everyone wants to fight in secret. The goal is to promote exports at the expense of trading partners.

Reality shows currency wars do not work, as imports become more expensive and other open economies become more competitive through technology. But central banks still like weak currencies — they help to avoid hard reform choices and create a transfer of wealth from savers to debtors.

The Euro Rallies

So how must the bureaucrats at the European Central Bank (ECB) feel when they see the euro rise against the US dollar and all its main trading currencies by more than 12% in a year, despite all the talk about more easing? The ECB will keep buying 60 billion euro a month in bonds, maintain its zero interest-rate policy, and keep this “stimulus” as long as it takes, until inflation growth and GDP growth are stable.

Contrary to the wishes of the ECB, however, a strong euro is justified for several reasons. First, the European Union’s trade surplus is at record highs, and 75% of Eurozone trade happens between eurozone countries. Higher exports and the continued recovery of internal demand in European member countries strengthen the euro.

The third is the perception of weakness of the US government and its inability to push through key reforms. This has weakened the dollar and by definition strengthened the other two large trading currencies, the euro and the Japanese yen.The second important factor is the relief rally after the French and Dutch elections. The fears of a euro breakup have been eliminated, or at least delayed, as pro-EU political parties won.

The Problems With a Strong Euro

However, a strong euro has very significant implications for the EU economy and the ECB’s policy.

The strong euro puts exports to its main outside trading partners — the United States (20.8% of exports in 2016) and China (9.7%) — at risk. Despite the ECB’s extreme monetary policy and a euro trading almost at parity with the dollar, exports to non-EU countries have stalled since 2013. GDP growth estimates for 2018 are falling due to a lower contribution of net exports.

The currency also has a high impact on tax revenues in Europe. The correlation between the euro–dollar exchange rate and the earnings estimates of the largest multinationals represented in the Stoxx Europe 600 Index is very high.

According to our estimates, a 10% rise of the euro against the dollar is equivalent to an 8% drop in earnings and leads to lower corporate tax revenues. From an investment perspective, as earnings drop, the European stock market goes from being relatively cheaper to becoming more expensive.

Investors and economists need to pay attention to these factors. If the euro continues to strengthen, the EU economic recovery is at risk. So the eurozone is stuck between a rock and a hard place. It cannot stop the stimulus because deficit spending governments cannot live with higher financing costs, and increasing the stimulus to weaken the currency simply doesn’t work anymore.

The only way out is structural reforms, but most governments are afraid of them even in good times, let alone when the going gets tough.

Originally published by Epoch TimesReprinted with permission. 


Related Posts

Befuddled By Bubbles: The Greenspan Bernanke Era at the Fed

We have declared 2017 as the “Year of the Bubbles.” We’ve reported on the stock market bubble. We’ve reported on the student loan bubble. We’ve reported on the auto bubble. We even told you about a shoe bubble. And then there is the mother of all bubbles – the debt bubble. All of these bubbles are still floating […]

READ MORE →

Busting a Myth: Gold Makes Boom-Bust Cycles Worse

Some people claim gold isn’t “sound” money any more than dollars or euros. They argue that the gold supply can be inflated just like a fiat currency. After all, gold is constantly being pulled out of the ground, right? They say a gold standard actually makes the boom-bust cycle worse. But commentators who make this […]

READ MORE →

Money Printing Does Not Do an Economy Good

The following article was written by Peter Schmidt. Any views expressed are his own and do not necessarily reflect the views of Peter Schiff or SchiffGold.  When Nixon closed the gold window in August 1971, the US found itself in exactly the same economic circumstances as Britain had in September 1931 when she reneged on her gold […]

READ MORE →

Trump’s First 18 Months: The Good the Bad and the Ugly

Dan Kurz runs the DK Analytics website where he posts detailed breakdowns of complex economic issues. We recently interviewed Dan as part of our It’s Your Dime Series.  In his most recent post, Dan used his analytical skills to break down the first 18 months of the Trump administration. Dan finds a little good, a […]

READ MORE →

Ben Bernanke and Company Pass “Chapter 9” with Flying Colors

A 1980s era Far Side cartoon featured a veterinary student named Doreen studying equine medicine in Chapter 9 of her textbook. On the left-hand side of the page was a list of horse ailments. They included things like a broken leg, infected eye, runny nose, and a fever to name just a few. On the […]

READ MORE →

Comments are closed.

Call Now