What Leaves Our Readers Cold + Beware of Regions Lacking Monetary Control

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by Adam Richardson

 

It’s painful…watching regions, countries, people, suffer from policies that could never have done anything but what they have.  Fail.

 

A Q Wealth reader put it well recently when she said, “It leaves me cold”.  Yes, sometime cold, sometimes flushed with frustration and raw anger.

Especially when the same people that are victims of  governments and central banks play right into the divisive trap and swing to the other side (politically) for help, to be “saved” from the other side.

 

The urge to save humanity is almost always a false front for the urge to rule.
H. L. Mencken

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This morning I had a good chat with my friend Nigel…the topic?  Greece.  With news from Cyprus, the drop in gold prices, and the Boston Marathon bombing still on my mind it had been a while since I had considered what was happening there.

Not Nigel, here is what he has to say:

 

Beware of Regions Lacking Monetary Control

by Nigel Bolton Shaw

The EconoMonitor asks “Why Hasn’t the US become another Greece?” … and this is a good question. We think we know the answer, but the EconoMonitor examines the issue in great deal with charts, graphs and narratives.

The big point of the article is a simple one however.

Greece’s main problem has to do with lack of economic control. It cannot devalue currency because it has none … only the euro. A devaluation would affect all equally, thus making larger sociopolitical antagonisms less prevalent. But this it cannot do.

Another one of the problems Greece suffers from now is civil unrest, but an across the board currency devaluation would have diminished that sort of infighting. It is hard to mount a civil protest against the debasement of currency when everyone’s currency is getting the same treatment!

A devaluation hits creditors across the board as well. No more arguing about whether bondholders or shareholders are going to be damaged the most.

One of the reasons among many others that Greek officials have been in many ways paralyzed regarding the crisis is because the social/fiscal dilemma is virtually unsolvable. Without a devaluation there is no way to figure out who should suffer and who should not. Here’s how the article explains it:

A … reason that the United States has fared better than Greece is that we have our own currency, the dollar, whereas Greece is a member of the Eurozone. That gives us two advantages. One is that a country with its own sovereign currency can often count on a depreciation of its exchange rate to boost its competitiveness during an economic downturn.

In contrast, the Greek exchange rate is fixed relative to its largest trading partners, which are also members of the euro.

True, the euro can change in value relative to other currencies, but whether it does so depends on policies of the Eurozone as a whole, not just those of Greece.

The other advantage of having one’s own currency is a lower risk of default.

A country with its own currency can never be forced to default on its sovereign bonds. It can, if need be, always issue enough new money to pay off its maturing debt. The lower risk for a country with a sovereign currency often translates into a lower market interest rate on its bonds.

The article makes additional points about the US’s advantages over Greece but the reality is that currency control is everything for a country. Lose control of your money and you lose control of your country.

Even without a devaluation, Greece could have inflated away some of its problems, but it cannot even do that. Greek officials instead have to engage in torturous negotiations with Brussels to find the money to pay the country’s bills.

And as a result, a nasty form of austerity has been imposed on the country that has exacerbated the monetary crisis.

Again, the US suffers from none of these constraints. The dollar reserve system enforced by the Saudis who demand only dollars for oil is yet another advantage the US has over Greece. US pols can print virtually unlimited amounts of dollars if they wish to as other countries need to hold dollars to pay for fuel.

There is really no comparison between the monetary situations of Greece and the US. But it all starts with monetary control. Once Greece gave up its drachma, it seems its fate was assured.

This is obviously another red flag for investors in this era of growing globalization. Countries that have lost control over their monetary destiny ought to be examined warily and at length. Even countries that are booming can experience a bust over night and then not have the wherewithal to counteract it.

As we have seen, a boom brings euphoria but a bust can linger for a tortuously long time and the resultant damage to investors’ portfolios can be equally painful.

Nigel Bolton Shaw specializes in international Austrian economic analysis and writes for numerous publications including Without Borders newsletter. Please see here:  https://secure.viscountmedia.com/order/sales_nigel3.html Articles provided to Q Wealth are original compositions not to be found elsewhere. He welcomes your comments at [email protected].

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1 thought on “What Leaves Our Readers Cold + Beware of Regions Lacking Monetary Control”

  1. Very interesting article. I just think we still miss a few important factors:
    1. Any country needs to buy most of its imported goods with dollars, oil is priced in dollars. If a country starts printing money and devalues its currency the inflation rate would go very high and people savings and salaries would lose their value. THAT would create a lot of turmoil.
    2. US can (and did) print money like mad WITHOUT suffering from inflation only because they do not have to buy another currency to buy oil, they still use the dollar. The Euro has become a little more expensive for US, maybe reducing imports from EU countries and helping domestic industry.
    3. It strikes me that immediately after Lehman Brothers collapse – suddenly – the whole problem was Europe financial stability. An alien coming from Mars now would really think that the huge loss of value everybody suffered was Europe’s fault. In fact everybody knows Lehman Brothers was a greek company with Headquarter in Athens…

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