MISTAKING YOUR CURRENCY FOR SIGNIFICANCE:

US gives euro a long rope (Alex Wallenwein, 11/29/04, Asia Times)

It looks as though the US strategy in this transcontinental currency battle is to give the euro's masters what they want - except way too much of it, way too quickly - in order to overload the euro system and make it collapse.

The European Central Bank (ECB) was instituted by the euro's creators to preside over an orderly transition away from a dollar-dependent world to a more versatile arrangement wherein the euro fulfills a quasi-reserve function that will eventually give way to gold being the ultimate international currency reserve, with all the fiats freely floating against gold instead of against each other.

But the road there is a long and winding one, and not even all of those currently "in charge" (international central bankers) are fully aware that this is the ultimate goal. Rather, that unstated goal was wrapped up implicitly in the ECB's role of guaranteeing price stability, rather than using interest rates to jump-start an otherwise faltering economy as the Federal Reserve Board does in the United States.

"Price stability" means that the currency is intentionally not used as a means for gunning Euroland's economic engines. [...]

The Fed and the administration of President George W Bush know that the euro's ultimate aim is to slowly attract foreign investors and central banks to the euro and away from the dollar. But they also know that an explosively upward rocketing euro will wreck the Europeans' major economies in a heartbeat. As a result, the US game is to allow the dollar to drop lower - and faster than the Europeans' fragile economies can tolerate.

What financial commentators call a policy of "benign neglect" turns out not to be so benign at all: by pursuing its current strategy, the dollar establishment is killing three birds with one stone: they get the benefit of (1) higher US export-competitiveness and better economic performance, (2) simultaneously lower European Union export competitiveness resulting in economic stagnation, and (3) shift the entire burden of smoothing out the dollar's forex movements on to the Europeans' backs.

If the Europeans are willing to trade their economies for the illusion that they still matter, why not exploit them?

Posted by Orrin Judd at November 29, 2004 9:15 AM