Europe stands at a crossroads. How strong is its economic union? How strong is the Euro? How much debt can some of its nations sustain before that debt impairs them so much that they seek leave to attempt to inflate their troubles away and or declare the sovereign equivalent of bankruptcy?
Greece is in a predicament. It can choose ongoing bailout status and austerity. That is tough medicine for its people to swallow. Or, it can cut itself loose from the Euro and embrace, perhaps, a scenario which Argentina did about 10 years ago. Some argue that for the good of Europe, it is important that Greece does not cut itself loose from the Euro or get booted off it.
Why? Reasons abound. The domino effect comes to mind. If Greece falls, will Spain be far behind? What about Portugal, Ireland and Italy? What would the net effect be on Europe and the Euro? Would that currency fall prey to some sort of monetary collapse? Would the Euro effectively cease to exist?
If the Euro’s future is in question – for among other reasons because certain nation-states using it are debt laden and, economically speaking, structurally unsound – what of the dollar’s future? Based on the USA’s debt load, the debt load of some of its states and its expansion of the money supply, does the dollar potentially face the same fate that the Euro ultimately might?
Clearly, the debt dynamics of the United States of America are untenable. The nationa has, for far too long, been rooted in rampant consumption rather than purposeful creation. That the dollar is the world’s de facto reserve currency has given the USA leeway that other nations would not have had.
The USA’s debt to GDP ratio is neither healthy nor sustainable. Individual states are struggling mightily under budget shortfalls. Does this put the dollar on a parallel course with the Euro?
I do not think so. First, rightly or wrongly, the dollar is the reserve currency of the world. The Euro is relatively new and though important, it does not play the same role as the dollar. In Europe, there is a far greater structural gap between fiscal and monetary policy. Clearly, the USA has to get its act together immediately and learn to live within its means or things will deteriorate more than they already have. Will it? We can hope.
However, assuming that for the meantime, the dollar maintains its position as the reserve currency of the world – an assumption emerging economic powers contest – perhaps we should be looking not simply at the USA’s debt to GDP ratio, but at the world’s debt to GDP ratio.
If we accept that the dollar is the de facto world reserve currency – until something better comes along – maybe we should judge its future by reviewing the world’s debt challenges rather than those of the USA alone. Of course, there are those bound to ask why the Federal Reserve Bank of the United States of America should so heavily impact world monetary policy, when the USA has been nothing less than a beacon of profligate spending. That is a good question.
I simply and humbly offer that dynamic tensions on the dollar are different than those on the Euro.
Free images from FreeDigitalPhotos.net
You can reach me with your questions and comments at Jay@CYinterview.com