Friday, May 21, 2010


This is definitely not good news. The fact that the Federal Reserve is lending money to Europe that might not be paid back, at rock bottom prices, tells me that our financial mandarins realize that our economic mess is not confined to the idiots on Wall Street. While it may seem improbable that the Europeans wouldn't pay us back at this point, the fact that we're trying to create a risk free market world after the 2008 meltdown tells me that we're in deeper trouble than many suspect.

For those of you familiar with the 1930s - and who have read "The Fed's Currency Swaps" - you wouldn't be off the mark if you thought about the Ottawa Conference in 1932, when the global economy began breaking up into competing currency blocs. Apart from the fact that we're now almost two years away from the meltdown, here are the similarities between 1932 and today:

1. 1932 ... The British tried to manage their way through the Great Depression by creating favorable conditions for their dominion states, which would benefit the British economy.
1. 2010 ... The United States is trying to manage their way through the 2008 Market Meltdown by creating favorable conditions for their "dominion" states in Europe, which will benefit the U.S.

2. 1932 ... England's concerns over paying more money because of higher tariffs (Smoot-Hawley) led England and her dominion states to drive down their dollar exchange losses by essentially abandoning the dollar to form a new "sterling bloc." They did this because no one really trusted "the market" or the irresponsible policies of the Great Powers at the time. Others followed suit, which led to currency wars.
2. 2010 ... Europe's concerns over paying higher interest rates for dollars led the Federal Reserve to drive down Europe's interest rate costs with dollar swaps (essentially unsecured loans), which have done little more than dump more dollars into Europe. The U.S. has done this because no one really trusts the market players or the irresponsible policies of Europe and the United States to keep the price of the dollar stable in Europe (or around the world). When others (China, Russia, etc.) decide they will retaliate, watch out.

3. 1932 ... In the process, England and their dominion states essentially admitted that the gold standard had collapsed.
3. 2010 ... In the process, the U.S. and Europe are essentially admitting that market cues are unreliable and that the dollar (and EU) may be collapsing.

Ottawa 1932 was the shot that preceded the arrival of competing currency blocs. Put another way, with the U.S. desperately trying to save it's "dominion" states in the aftermath of the 2008 market collapse, it's efforts just might put the world's monetary system on the road to meltdown.

The U.S. might be trying to save the day (as did the British in 1932) for their dominion states by playing with currencies and the cost of money. But everything may still come tumbling down because the excesses of market players today, coupled with short-term policy prescriptions (forming a "sterling bloc" in 1932 vs. offering rock bottom interest rate dollars to Europe in 2010), are akin to the false bravado that emerged around a sinking Titanic.

The details may be a little more complex than I have offered here. But the bottom line is this: We're screwed.

- Mark

No comments: