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SOVEREIGN MAN

Who has the best line of BS?

best-bs

September 14, 2012
Flic-en-Flac, Mauritius

Have you ever noticed how it seems like the public can only handle one major issue at a time?

Ten years ago it was terrorism. Then it became the war in Iraq. Then anthropogenic climate change became all the buzz. Then gas prices went through the roof and people forgot all about the environment.

For the past few years, it’s been the ‘global financial crisis,’ or as I prefer to call it, the end of the grand fiat experiment.

The market, likewise, has an equally limited attention span, and investors seem capable of focusing on only one crisis at a time. For the past few years since the euro crisis broke, attention has shifted regularly… primarily between fiscal woes in Europe, and fiscal woes in the United States.

This cycle has repeated itself with a period of 6-12 months, oscillating between euro fear and dollar fear. The headlines support this. The entire summer was dominated by catastrophic predictions about Europe, and insipid hope that the US economy was recovering, albeit slowly.

euro dollar chart Who has the best line of BS?

Now, with the German Constitutional Court having fully confirmed that the ECB will fight ‘to the last Germany taxpayer’ (in the words of Nigel Farage), and Mr. Bernanke having engaged in QE3, it seems the market’s attention has flipped once again: Europe is fixed, and the US is screwed.

In the last few weeks we’ve seen the euro shoot up over 4% against the dollar and US treasury yields rise, indicating a great shift of capital across the Atlantic. The market has spoken: the coast is clear in Europe. For now.

No doubt, the market’s premise here is fatally flawed. Both of these currencies have deep, fundamental, inescapable weaknesses, underpinned by huge debts and intellectually reprehensible economic theories.

Even a child knows that you do not create wealth by printing money. You do not create jobs by printing money. This is not the path to prosperity.

In the case of the dollar, the market is taking its cues from one man– Ben Bernanke. And in the case of the euro, for the most part, the market is taking its cues from ECB president Mario Draghi.

In other words, the fate of trillions of dollars worth of global capital flows which affect exchange rates, interest rates, derivatives, commodity prices, and people’s livelihoods around the world, fundamentally comes down to which one of these two guys has the best line of BS to sell the market.

This is a completely absurd system. And I’m convinced that at some point in the hopefully near future, people will look back and wonder how we could have allowed ourselves to be defrauded like this.

In the meantime, while the big institutions that have to manage hundreds of billions of dollars are trapped within this financial system, you and I can opt out of it. All we have to do is take those silly pieces of paper and trade them for something real like gold and silver.

About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

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Comments on this entry are closed.

  • Village Idiot

    Take a look at a chart longer than 2 1/2 years and you see a different story.

    Now, consider the words of “Victor the Cleaner” (http://www.tfmetalsreport.com/comment/162816#comment-162816)

    “with all respect, I think you are having the Euro bass ackwards.

    The major event during the next decade will be the end of the US
    dollar as the world reserve currency. One day, the exporters of the
    world will stop accumulating dollars and no longer support the US trade
    deficit. The Europeans stopped in 1999. China stopped buying in summer
    2011 and has been selling T-bonds since. At the moment, it is mainly
    investment flows and Japan that is supporting the dollar, but investment
    capital is disloyal and Japan now needs the dollars for their own oil
    imports. Both are not sustainable beyond perhaps another 3-6 months.

    The purpose of the Euro was first to insulate Europe against the
    fallout of the anticipated dollar crisis and second to provide a
    replacement currency that can be used to settle international trade.
    Notice that the Euro zone has always had a balanced trade account. It
    was engineered that way. As long as they receive the same currency for
    their exports that they spend on their imports, the Euro as a currency
    can be kept stable in the foreign exchange market (forget the day-to-day
    speculation of the momentum traders). The U.S. in contrast have a huge
    structural trade deficit. This means that either foreigners keep buying
    dollars (which they won’t) or the dollar will start a long decline
    (which is only a matter of time). The difference is: The Euro will be
    roughly stable with respect to goods and services, but the dollar will
    decline substantially.

    The major countries in the Euro zone know all this, and this is the
    reason why they will keep the Euro. Each one on their own, they would be
    unprotected (because of unbalanced trade accounts) and they would
    easily get drawn into the competition with the dollar in devaluing
    against goods and services.

    Finally, you can think about what would happen if one of the Euro
    countries left. If Germany left, for example, their New Deutschmark
    would get a mad capital inflow, and either their export industry would
    be instantly killed, or they would have to print in order to counter the
    inflow of capital. If a weak country such as Greece left, the
    devaluation would do little to improve their trade position. How much
    more Feta cheese are you going to eat just because it becomes cheaper?
    And so after the exit, Greece would have the option of either defaulting
    on their debt anyway or printing New Drachmas in order to cover the
    budget deficit. Since the investors would keep holding Euros (or gold)
    rather than New Drachmas as long term savings, this would merely cause a
    serious inflation by debasement in the New Drachma, but not improve the
    Greek position in real terms.

    Now don’t get distracted by all the political infighting that will
    keep the newspapers busy. The constraints on the currencies are pretty
    hard constraints, and I am sure that all politicians (in spite of what
    rhetoric they have used during their campaign) will eventually have to
    accept the fact that it is not in their interest to leave the Euro.

    In fact, a break-up of the Euro zone would be the only thing that is
    remotely dollar positive, simply because it would set back the rest of
    the world to the early 1980s in which they were faced with an almost
    failing dollar system and no alternative to use for international trade.
    What followed was a 20-year history of how the rest of the world
    propped up the dollar which, already at that time, was too weak to
    survive on its own.

    In fact, as long as the Euro is around, the dollar will automatically
    become obsolete because the presence of the Euro guarantees a high gold
    price in dollars, and this is precisely the environment in which the
    dollar will not be able to sustain its present role as the reserve
    currency. This may explain a good part of the anti-Euro hatred in the
    English speaking press. It is rather paradoxical that even some of the
    well-known gold bugs chime in, not understanding that it is the Euro
    that has made higher dollar gold prices possible. Ungrateful ignorants.

    At the moment all sorts of weak handed investment capital is flowing
    from the Euro to the dollar. This is a beautiful opportunity for
    international central banks to get rid of some of their excess dollars
    and to switch to the Euro without running up the foreign exchange value
    of the Euro. These days, you can watch strong hands (Asian central
    banks) rip off the weak hands (investment funds) on a scale rarely seen
    before. This is because most money managers who grew up in the U.S. or
    in the UK, don’t understand the Euro, but the Asians do.

    Of course, I cannot fully rule out the exit of a weak country from
    the Euro (say, Greece). But if they do exit, we will probably see their
    new currency hyperinflate in short order, for all to watch, and we will
    see their economy destroyed. (Note that a hyperinflation is at least ten
    times worse than all the ‘austerity’ these countries have been exposed
    to so far). So should a weak country leave, this will provide the final example of why leaving is a foolish idea.

    What we will rather see is further defaults and debt restructuring
    inside the Euro zone. That’s fine. There is an excessive amount of debt
    which needs to be cleared from the system. You will see the ECB print
    some money, but only in order to avert bank runs and chain reactions of
    bank collapses and in order to prevent outright price deflation, but no
    more. The debt will go, and the savers will find a medium that can store
    savings much better than debt. They will learn their lesson. But this
    is an issue between savers and debtors and not an issue between savers
    and the issuer of the currency (as it is in the U.S.)”

  • Sun Tzu

    Hola Simon.
    From where I sit (somewhere in Central America) I´m hearing rumblings from Panama re. maybe their not going to just roll over and comply with the OECD bank disclosure regs. Maybe they just might tell the OECD that they prefer to stick with what works best for them. Got any comment¿

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