Europe: Banking on US Dollar Depreciation

Europe needs to have the spotlight taken off of it, claims Philip Manduca. we couldn’t agree more here. Frankly we believe that help is on the way, in the form of a U.S. dollar devaluation. we don’t know when, but are 99.9% sure it has to happen.

Philip Manduca, Head of Investment of the ECU Group, discusses Greece and the very severe implications of what the final outcome will look like. “Trichet said the Greeks are crooks, and they’ve been lying about the numbers. There is a deeply embedded corruption within the Eurozone. Combined with the endemic European socialism and there is just no way you are going to get spending cuts and tax raises and maintain a GDP that makes any sense of the percentage aspect of debt to GDP. So the whole show is wrong. This is an intractable situation, this is going to continue on and on. The only hope for the Eurozone, and the Euro as a currency, is that someone takes the spotlight soon, and that may be the United States.” courtesy ZeroHedge

Here is our take on the current situation in the Eurozone:

German Exports

The German government needs to save the Euro at all costs, even if that cost is the wealth of its citizens. As exporters to the rest of Europe, Germany cannot let its trade partners wither as Greece currently is; it would spell disaster to their own economy and the Euro’s demise. They must bail out Greece.

Public Disconnect.

The German people do not want to bailout Greece. This political pressure puts the government in a bad position. While they EU members debate the “ifs” and “hows” of the bailout, the market is punishing them. Delay in action almost always results in a worse situation. We are witnessing this currently in the Euro swoon. The lost confidence and lack of decisiveness will make the bailout in whatever form it comes more expensive. This is a situation where what is in the best interest of Germany is not perceived to be in the best interest of its people. But it is nearly impossible to make the tragic alternative to not rescuing Greece clear to millions of people. What to do?

Choices and Consequences

• Single Lender Bailout- is not going to happen. Politics will prevent it, and a direct loan to Greece is too obvious a risk for any nation that makes the loan.
• IMF Money- spreading the pain seems logical. This also gets the US involved. For every dollar the IMF gets around 20 cents is from the U.S. tax payer. This shows major weakness in the EU and may spell the end anyway, to be dependent on outside help.
• Devaluation- the Eurozone lends Greece money and then starts printing, devaluing the currency. The wealth of all the stronger economies are depleted to rescue Greece and sure to follow Portugal, Spain et al.

Devaluation will happen. Perhaps it will be in conjunction with an IMF assist, but it will happen. Anything else in full measure is the end of the EU era.

• Saves trading partners
• Politically better- the tax on citizens is stealth at least in the short run
• Puts the onus on the U.S.

If we are right, the US will have the problem. It must also devalue to remain competitive globally selling goods and services.

Bailed Out EU Countries Will Short the $U.S.

Countries like Greece and Portugal will issue as much dollar denominated debt as is possible. If you believe the U.S. will also devalue to remain competitive, then the benefit to dollar-denominated bond issuers is two-fold. They borrow strong dollars now. They’ll pay back the debt with devalued ones after the U.S. prints more dollars.

Race to the Bottom

Assuming that the EU and the US both will devalue their currency to lessen their debt burden, who do you think would win a race to the bottom? We think the U.S. wins hands down. Here is why: the EU has unified monetary policy, but not fiscal policy. It is much easier for the U.S. to coordinate fiscal policy to weaken its currency than it is for the EU, with its national interests. You cannot tax a Frenchman to fix a bridge in Italy (yet). But you can raise the whole nation’s federal taxes to bail out California.