Will the Dollar fall against the Deutschmark?

[thousandmilemargin]

Ambrose Evans-Pritchard continues to slag the Eurozone:

http://blogs.telegraph.co.uk/ambrose...up_on_the_euro

It makes me wonder though - if the PIGS leave the Eurozone, and only France, Germany and a few hangers-on are left, would the Euro become a strong currency? Likewise, if the Deutschmark comes back, would it be a more stable currency than the dollar?

We know that the US & UK have a systemic bias towards printing themselves out of trouble. But ever since the Weimar days the Germans have been very conscious of the dangers of inflation. And the postwar recovery in Germany was built on restrained monetary policy and a sound currency.

Also, the Eurozone structure does not lend itself to outright money printing in the way the US structure does.

So we might see Germany or a Euro core (with the more profligate states departing) attempting to deal with the crisis largely through austerity, and limiting the money printing and bailouts. If this were to happen, whatever currency the Germans were using would hold its value better than the US dollar, because the US will be printing with abandon.

It is possible the Euro core might experience a drawn out deflationary depression while the USA and UK are busily inflating their debt away. So we might have deflation in one part of the world, and inflation in the rest.

[Guest]

Re: Will the Dollar fall against the Deutschmark?

Dude. There is no Deustchmark. They are in the Euro.

[thousandmilemargin]

Re: Will the Dollar fall against the Deutschmark?

Dude. There is no Deustchmark. They are in the Euro.

Think about it.

[Guest]

Re: Will the Dollar fall against the Deutschmark?

I'm thinking. ... I'm thinking. ... Hrm. Hrm! Hmmm? Deutschemark? Hhhgh? Hrm... Hrm... :confused: ;) :confused:

Think about it.

[thousandmilemargin]

Re: Will the Dollar fall against the Deutschmark?

I'm thinking. ... I'm thinking. ... Hrm. Hrm! Hmmm? Deutschemark? Hhhgh? Hrm... Hrm... :confused: ;) :confused:

Ok, here's a clue. The first paragraph of my post includes the line " if the Deutschmark comes back, would it be a more stable currency than the dollar? " and I link to an article called "Are Germans giving up on the euro?".

So yes, I am well aware that Germany retired the Deutschmark in favour of the Euro in 2002. I was implying that the Euro may not survive and the Deutschmark might be re-introduced. I was assuming my audience was sophisticated enough to
a) realise that Germany is part of the Eurozone
b) realise that I probably know this
c) realise that I was therefore implying a possible return of the Deutschmark.

Damn, I hate it when I have to explain my witticisms.

And you are usually sharper than that Lukester. I have enjoyed reading your commentary for a long time.

[Guest]

Re: Will the Dollar fall against the Deutschmark?

Damn, I hate it when I have to explain my witticisms.

This is a witticism? Man, I'm really slow this evening. (searches for witticism nested in text, with bewildered look). Deutschemark ain't coming back. Not gonna come back. Any solution for Germany going forward is locked into some revision of the Euro. France will see to that.

Ambrose Evans-Pritchard continues to slag the Eurozone:

http://blogs.telegraph.co.uk/ambrose...up_on_the_euro

It makes me wonder though - if the PIGS leave the Eurozone, and only France, Germany and a few hangers-on are left, would the Euro become a strong currency? Likewise, if the Deutschmark comes back, would it be a more stable currency than the dollar?

We know that the US & UK have a systemic bias towards printing themselves out of trouble. But ever since the Weimar days the Germans have been very conscious of the dangers of inflation. And the postwar recovery in Germany was built on restrained monetary policy and a sound currency.

Also, the Eurozone structure does not lend itself to outright money printing in the way the US structure does.

So we might see Germany or a Euro core (with the more profligate states departing) attempting to deal with the crisis largely through austerity, and limiting the money printing and bailouts. If this were to happen, whatever currency the Germans were using would hold its value better than the US dollar, because the US will be printing with abandon.

It is possible the Euro core might experience a drawn out deflationary depression while the USA and UK are busily inflating their debt away. So we might have deflation in one part of the world, and inflation in the rest.

[Supercilious]

Re: Will the Dollar fall against the Deutschmark?

Ambrose Evans-Pritchard continues to slag the Eurozone:

http://blogs.telegraph.co.uk/ambrose...up_on_the_euro

It makes me wonder though - if the PIGS leave the Eurozone, and only France, Germany and a few hangers-on are left, would the Euro become a strong currency? Likewise, if the Deutschmark comes back, would it be a more stable currency than the dollar?

The structural instability of the eurozone is due basically having one currency with a flock of central banks and national governments with divergent bugetary priorities.

It is equivalent to an unstable Bretton Woods in disguise, where you have the German Euro, the Spanish Euro, the Italian Euro as separate currencies, with the 1:1 exchange rates are strictly enforced due to the fungibility regardless of the country of printing.

The stability of this rigid system of fixed exchange currencies is maintained only by strict control of inflation (deficit) and free cross border capital flows.

That works great as long as there is no big economic pressure inside the euozone and there is no dedicated party pooper. Now they have both a group of joyful party poopers (the PIGS) and a global economic crisis. There is no chance in hell such an artificial and rigid system can survive in its current form. It will break appart as the Bretton Woods I. (the notes still have a serial country code ;))

The only way the euro can be a stable european single currency is to have just one real central bank period: the Bundesbank.
Basically that would transform the euro in a DM in disguise, and in that case we may not have an European Union in the end (especially if the Wermacht doesn't grow significantly in size in order to be able to stop all those countries trying to leave the union. Will we have a North and South like in the American Civil War ? )

Also, the Eurozone structure does not lend itself to outright money printing in the way the US structure does.

They will do that before the system breaks apart.

So we might see Germany or a Euro core (with the more profligate states departing) attempting to deal with the crisis largely through austerity, and limiting the money printing and bailouts. If this were to happen, whatever currency the Germans were using would hold its value better than the US dollar, because the US will be printing with abandon.

It is not sure US will be printing massively. There is little real printing the Fed has done so far. Circle Jerk Finance (TM) is not real printing.

It is possible the Euro core might experience a drawn out deflationary depression while the USA and UK are busily inflating their debt away. So we might have deflation in one part of the world, and inflation in the rest.

I think this one of the aspects of the plan and that's why we may have a currency dislocation.

[Sharky]

Re: Will the Dollar fall against the Deutschmark?

If PIIGS pull out of the Euro, it's hard to see how it can survive with the remaining countries.

In a deflation, as the currency gets stronger, wages get more and more expensive to employers, since they're sticky in the downward direction. The cures are either to weaken their currency so that exports increase or for companies to reduce their workforce. The former is impossible with the Euro, and the latter leads to high unemployment -- which then leads to political unrest and eventually to the death of the Euro.

If the DM ever comes back, there's certainly a good chance that it would become a dominant currency. Most of the rest of Europe will inflate like crazy every chance they get. Even the Swiss have fallen prey.

[cjppjc]

Re: Will the Dollar fall against the Deutschmark?

Here is the part I like best:


Professor Pohl said Germany's political class is afraid their country will ultimately have to pay for the EMU mess. His view is that the burden should be shifted to the IMF (ie. the US, Canada, Japan, Britain). Thanks a lot Karl Otto. You broke it, you fix it.

[c1ue]

Re: Will the Dollar fall against the Deutschmark?

The PIIGS won't pull out of the EU. They might be booted out.

The scenarios are very straightforward:

1) Germany doesn't bail out the PIIGS (and Austria). The APIIGS start issuing toilet paper euro bonds. A de facto 'good' Euro and 'bad' Euro emerge. The whole point of the EU basically is nullified.

2) Germany does bail out the PIIGS. As a price for its intervention, Germany takes even more control over EU finances.

3) Germany leaves the EU to its own mess. Guess who they'd partner with?

[Guest]

Re: Will the Dollar fall against the Deutschmark?

More coverage from Bloomberg:

______________

Euro Area Risks Breakup, Subprime Bear Hayman Says (Update1)

By Bo Nielsen

Feb. 27 (Bloomberg) -- Hayman Advisors LP, the firm that earned $500 million betting on the U.S. subprime mortgage-market collapse, says Europe’s monetary union is about to fall apart.

Richard Howard, a managing director for global markets at Dallas-based Hayman, said Germany may opt to shore up its own economy, Europe’s biggest, rather than bail out fellow euro nations such as Austria, Italy and Spain as their banks sag under the weight of bad debts. That might lead to defaults and compel Germany to renounce the euro, he said.

“People said subprime could never blow up but it did and now they’re saying the exact same thing about the eurozone,” said Howard. “There’s no stopping what is now a downward spiral.” He declined to discuss his investments.

Hayman joins a growing number of investors seeing the possibility of a breakup of the $12 trillion euro bloc, conceived more than 10 years ago to cut unemployment, tame inflation and create a rival to the dollar. Societe Generale SA said this week Germany may refuse a bailout in an election year. ABN Amro Holding NV said Feb. 17 the crisis is “Europe’s subprime.”

Euro-region bank loans to Eastern Europe topped $1.3 trillion in the third quarter last year, or about 9 percent of the bloc’s gross domestic product, ING Groep NV said Feb. 18, citing Bank for International Settlements data. Now lenders face losses after extending credit to finance everything from industrial development to domestic real estate.

Debt-Default Insurance

Irish banks took on debt equivalent to 11 times the nation’s own gross domestic product, Dutch-bank credit reached seven times GDP and Belgium four times, according to BNP Paribas SA.

As concern intensified that the loans won’t be repaid, the cost to insure against defaults jumped six-fold to records since August. Credit-default swaps on Ireland climbed to a record 395.8 basis points, from less than 50 basis points in September, according to CMA DataVision.

Austrian swaps traded at 265 basis points, compared with less than 25 points six months ago.

The breakup may occur as investors shun all but the safest government bonds, said Hayman, which in 2006 was among the first to bet against Wall Street’s rush to securitize the debt of the least creditworthy U.S. borrowers, correctly predicting a slump in home values that sparked the global credit crisis.

Investor demand for the lowest-risk securities already drove the difference in yield, or spread, between Greek, Austrian and Spanish 10-year bonds and German bunds, Europe’s benchmark government securities, to the widest since the euro’s debut.

Steinbrueck, Soros

German Finance Minister Peer Steinbrueck said Feb. 18 euro countries would “show our ability to act” should countries face difficulties paying debt. Billionaire investor George Soros said Feb. 17 he doesn’t expect a breakup of the region.

The World Bank, the European Bank for Reconstruction and Development and the European Investment Bank will provide up to 24.5 billion euros ($31 billion) to help central and east European banks and businesses cope with the crisis.

European Central Bank officials also said solutions can be found that will ensure cohesion of the region. Executive Board Member Lorenzo Bini Smaghi said Feb. 21 that European Union rules permit the EU “as a whole” to aid states in “economic difficulty.” ECB President Jean-Claude Trichet said a day earlier “there is no weak link of the euro area.”

“The argument that the euro zone will find a solution contains some sense if the assumption is that the situation isn’t that bad,” said Howard. “But the more dire it gets, the less are the consequences of departing from the euro.”
Shrinking Economies

German GDP contracted 2.1 percent in the fourth quarter, the biggest decline since 1987, the Federal Statistics Office said on Feb. 25. The economy will shrink by 2.5 percent this year, with France contracting 1.9 percent and the euro-region 2 percent, according to an International Monetary Fund report on Jan. 28.

European governments, which committed more than 1.2 trillion euros to rescue ailing banks as the recession eroded tax revenue, will require more cash as defaults occur, Howard said. Faced with the prospect of a deepening recession, Germany and France may be reluctant to bail out euro-region members such as Spain and Italy, Howard said.

“Because of the size of this crisis and because of the linkage with Eastern Europe, I think we need to see more broad- minded thinking coming out of the big European countries, in particular Germany,” Jim O’Neill, chief economist at Goldman Sachs Group Inc., said in a Bloomberg Television interview today in London.

“Germany has got to create demand for many countries in Europe that have a strong need for some help coming out of elsewhere.”

The German government, facing elections in September, might refuse requests for help amid political pressure to spend money at home, Societe Generale said in a Feb. 24 report.

“A bailout of a debtor country from a surplus country like Germany would be like opening the box of Pandora,” former Bundesbank President Karl Otto Poehl said in London yesterday. “It’s a very dangerous course that we will enter” and “I’m very much against it, many people in Germany are against it, but the political pressure will increase,”

To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net

Last Updated: February 27, 2009 14:05 EST

[rj1]

Re: Will the Dollar fall against the Deutschmark?

How does the European Central Bank enforce "printing discipline" on their constituent central banks?

[GRG55]

Re: Will the Dollar fall against the Deutschmark?

How does the European Central Bank enforce "printing discipline" on their constituent central banks?

Each national central bank has share capital in the ECB, and by virtue of this share capital has a banknote allocation. The ECB holds a claim against every national central bank for the total value of the euronotes such national central bank issues.

It's not clear what the remedy might be for any gross voilation of an individual banknote allocation. But Central Bankers being the club they are, probably don't want to jeopardize their invitation to the regular shrimpfests...:rolleyes: