Indeed, how could such a worthless piece of paper backed by the promises of an even more worthless set of bureaucrats possibly hold its value any longer? One answer to that question could be that England succeeded in using split pieces of wood known as "Tally Sticks" as a currency for over 700 years. Another answer could be "for lack of better options." The aforementioned will immediately point to gold as a better option, and I would agree. And I would take that one step further and say that the best option for an alternative to the dollar is whatever people damn well please. That is, we should have a competitive currency system. But until legal tender laws are repealed, that is not going to happen. And legal tender laws will not be repealed until the streets run with the blood of central bankers and the militaries which they command (let's be honest here) who will defend them to the death.
As disturbingly pleasing as that visual image may be, it is not going to happen in the near term. Therefore, we can conclude that the only options to worthless US paper are worthless paper issued by someone else. Exhibit A is the Euro, which coincidently accounts for 57.6% of the Dollar Index. If the Euro rises, the Dollar falls and vice versa. In my opinion, there is no reason to believe that the Euro has any intrinsic characteristics to make it more valuable than the Dollar. And unfortunately for Dollar bears, the Euro has a web of bureaucracy behind it that I believe will eventually lead to its collapse. An article by Bloomberg this morning sums this picture up nicely.
ECB Policy Makers Clash After Trichet Engineers Truce
May 14 (Bloomberg) -- European Central Bank policy makers clashed over the bank’s asset-buying program less than a week after President Jean-Claude Trichet engineered a truce.
Slovenia’s Marko Kranjec said yesterday the ECB is likely to spend more than the 60 billion euros ($82 billion) it has earmarked for covered-bond purchases and hasn’t ruled out acquiring corporate bonds and commercial paper. Hours later Germany’s Axel Weber, who had already said there’s no need to buy other assets, insisted 60 billion euros is the “maximum.” Slovakia’s Ivan Sramko said today nothing can be excluded.
“The ECB Governing Council looks like a battlefield,” said Laurent Bilke, an economist at Nomura International in London. “It would be simply ridiculous if we weren’t already in the middle of the worst recession in postwar history. But now it has more dramatic consequences. Trichet will have to restore some order.”
The diverging views suggest the ECB is still split over the best way to tackle Europe’s worst recession since World War II, even after Trichet said the decisions taken last week by the 22- member Governing Council were “unanimous.” Weber has always opposed asset purchases and warned yesterday against stimulating the economy too much. Other policy makers have argued the bank may need to do more to counter the risk of deflation.
Currency traders said the prospect of the ECB expanding its asset purchases was weighing on the euro, which fell to $1.3526 today from as high as $1.3721 yesterday.
“The markets have begun to think there’s a possibility the ECB may commit to non-traditional steps,” said Hideki Amikura, deputy general manager of foreign exchange in Tokyo at Nomura Trust and Banking Co. “The euro is likely to be top-heavy.”
Trichet declined to comment on the bank’s plans today after a meeting with French President Nicolas Sarkozy in Paris.
On May 7 Trichet cut the benchmark interest rate to a record-low 1 percent and said that’s not necessarily its lowest level. He also announced the ECB will buy 60 billion euros of covered bonds, securities backed by mortgages and public-sector loans which have suffered a slump in demand during the financial crisis. Details of the plan are to be unveiled next month.
“The 60 billion euros they announced is peanuts for an economy the size of the euro zone,” economics professor and former Bank of England policy maker Willem Buiter said at a conference in Dublin yesterday. “I expect they will announce more or that the recession in the euro zone will be longer and deeper than would otherwise be necessary.”
The Federal Reserve, Bank of England and Bank of Japan have lowered their key rates to close to zero and are buying government and corporate debt, effectively pumping new money into their economies to prevent the development of a deflationary spiral.
The economy of the 16 euro nations will contract 4.2 percent this year, according to the International Monetary Fund. Recent reports suggest the recession may be bottoming out.
Trichet was forced to compromise on the ECB’s asset- purchase program in order to get Weber on board. Weber argues Europe isn’t at risk of deflation and the ECB should avoid taking additional risk onto its balance sheet. He also wants the ECB to signal an end to rate cuts.
Other council members say the ECB can do more. Athanasios Orphanides, the former Fed economist who now heads the Cypriot central bank, has said the ECB may have to continue easing policy if deflation risks increase.
Kranjec, who heads the Bank of Slovenia, said in an interview in Ljubljana yesterday that the ECB can lower rates further if needed and 60 billion euros is “not the final amount” for the asset-purchase program. The bank has not ruled out buying corporate bonds or commercial paper, he said.
Sramko said at a conference in Vienna today that the ECB “can exclude nothing” on non-standard measures. “I’m sure the council will also discuss other possibilities,” he said.
Still, Marc Chandler, head of global currency strategy at Brown Brothers Harriman in New York, said that as president of Germany’s Bundesbank Weber has considerable influence.
His views “probably reflect the attitude of most of the other participants,” he said. “Who’s going to agree with the guy from Slovenia against Weber?”
Austria’s Ewald Nowotny said today the ECB has decided to buy covered bonds and “that’s it. No further options are of relevance now.”
Weber said in a speech in London last night that inflation may make a “rapid and powerful comeback” if the economy recovers faster than expected and policy isn’t tightened as quickly as it was loosened.
ECB Vice President Lucas Papademos agreed, saying there are signs the economy is stabilizing and “the recovery may start sooner than previously envisaged.”
“Once financial conditions and the macroeconomic environment improve, the non-standard monetary policy measures taken should be quickly unwound,” Papademos said in Vienna.
At the same conference, Dutch council member Nout Wellink contradicted Papademos on the economy, saying it’s best not to “become too optimistic when you see a few swallows flying around or green shoots.”
Turning to asset purchases, Wellink said: “The council has made it’s decision and that’s it for the time being. There is a need under the present circumstance, with so much uncertainty around, to be clear. There is a need for a precise clear-cut message. We have given such a message.”
Wellink insists that the ECB has given a clear message. The message I got was that these folks probably couldn't agree on what to order for breakfast let alone monetary policy.
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