• 3 minutes Nucelar Deal Is Dead? Iran Distances Itself Further From ND, Alarming Russia And France
  • 5 minutes Don Jr. Tweets name Ukraine Whistleblower, Eric Ciaramella. Worked for CIA during Obama Administration, Hold over to Trump National Security Counsel under Gen McCallister, more . . . .
  • 9 minutes Shale pioneer Chesepeak will file bankruptcy soon. FINALLY ! The consolidation begins
  • 12 minutes China's Blueprint For Global Power
  • 17 mins EU has already lost the Trump vs. EU Trade War
  • 2 hours Judge Orders Trump To Release Tax Returns
  • 4 hours Does .001 of Atmosphere Control Earth's Climate?!
  • 16 mins Err ... but Trump ...? #Eggbox
  • 3 hours China's Renewables Boom Hits the Wall
  • 3 hours Offshore SE Asia: Offshore OFS Could Get Major Boost in SE Asia
  • 1 hour The lies and follies of the "cry wolf" enviros: No more fire in the kitchen: Cities are banning natural gas in homes to save the planet
  • 3 hours Saudi Aramco IPO Will Not Save Kingdom
  • 5 hours Atty General Barr likely subpeona so called whistleblower and "leaker" Eric Ciaramella
  • 8 mins CHK Trading @ 90 Cents
  • 17 hours Iran Finds New Oil Field With Over 50 Billion Barrels: Rouhani
Alt Text

Trade War Weighs On Western Automakers In China

Western automakers in China are…

Alt Text

Goldman: Automated Trucks To Cost 300k Jobs Per Year

The race for automated trucking…

Alt Text

Russia May Feel Pinch From Oil Cut Deal This Year

Russia’s central bank warned that…

Charles Hugh Smith

Charles Hugh Smith

Charles Hugh Smith has been an independent journalist for 22 years. His weblog, www.oftwominds.com, draws two million visits a year with unique analyses of global…

More Info

Premium Content

Why the Euro Might Devolve into Euro1 and Euro2

The euro as presently configured is doomed due to structural imbalances between mercantilist and consumer nations. A "euro1 and euro2" system would allow a face-saving demise to euroland's single currency.

I've got a bad feeling about the Euro: the structural imbalances I presented yesterday irrevocably doom the single currency.

Just to recap the cycle and its consequences, here is a chart:

Mercantilist Nation - Consumer-Debt Nation Cycle

Since the euroland leaders have invested their prestige and credibility in the single currency euro, it's demise will likely be cloaked in some "face-saving" measure. My best guess is euro-denominated bonds, both public and private, will be offered in two flavors: "euro 1" for mercantilist Germany, France, the Netherlands, etc. and "euro 2" for the highly indebted, debt-and-asset-bubble-dependent consumer nations: Portugal, Ireland, Italy, Greece, Spain, etc.

This could be a de facto (unofficial) "solution" to repricing debt and assets in each nation, or it might even become "official policy" as the great structural divide between mercantilist and consumer nations become unbridgeable even rhetorically.

Eventually, the "euro 1" currency will be valued more highly than the "euro 2" currency--again, either de facto or de jure. If the E.U. prefers total denial as a policy, then the revaluation/devaluation will be de facto; the "street price" of euro 2s will be worth less in the real world even if the E.U. maintains the fantasy of a single currency.

State and supra-State institutions like the E.U. can afford the facades of illusion; the real world of commerce has to adapt to reality.

China has already decided on its de facto policy on dollar-denominated debt: it is selling longer-term T-bills and buying short-term Treasuries as a way to limit its long-term risk to rising interest rates; the short-term T-bills offer a liquid market to "park" its dollar-denominated earnings.

China's strategy will pay handsome returns if the dollar strengthens and interest rates rise--both possibilities I consider highly likely. Right now the dollar doomsdayers are still holding sway; commercial interests are long the euro but they are playing with fire. The structural imbalance outlined above will not go away because it is inherent to the euro itself; it cannot be papered over for long.

As for China, I suspect that nation will be drawing down its foreign reserves to fund various make-work "stimulus" and social safety-net programs to calm domestic restiveness as the global economy devolves.

Thus Chinese selling of Treasuries should not automatically be interpreted as "financial warfare;" it might be that having squandered trillions of yuan on absurd and unneeded real estate developments, China actually needs its cash to fund domestic initiatives.

As the structural flaws in the euro and China's mercantilist economy become undeniable, then global capital will flow to the one remaining liquid market: the U.S. dollar.

Those calling for the immediate collapse of the dollar might want to switch to a longer-term time frame. If the dollar and euro (1) revert to parity (1 to 1, as in 2002-2003) then those holders of euros who switch out to the dollar now will be handsomely rewarded, while those who cling to the euro fantasy will suffer losses on the order of 35%-40% on the currency swap alone.

Yes, yes, I know: "that's impossible." Yes, just like the housing bubble wasn't a bubble, and housing never goes down in value, etc. Structural imbalances cannot be denied forever.

Charles Hugh Smith has been an independent journalist for 22 years. His weblog, www.oftwominds.com, draws two million visits a year with unique analyses of global finance, stocks and political economy. He has written six novels and Weblogs & New Media: Marketing in Crisis and just released Survival+: Structuring Prosperity for Yourself and the Nation.




Download The Free Oilprice App Today

Back to homepage



Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play