Euro Crash And Real Resource Bancor

By: Andrew_McKillop

From as early as mid-year 2008 it was possible to predict the overvalued Euro, always able to gain from intrinsic US dollar weakness, was itself heading for a fall. Unsurprisingly and until late 2009 speculators first shifted to buying the traditional hedges, Gold and Oil, rather than directly attack the Euro. This strategy was however soon troubled by the arrival of the sovereign debt overhang from global economic recession. Contrary to first impressions, the US sovereign debt crisis is at least as irremediable as European national debts.

Almost traditionally since around 2000, the overvalued US dollar supplies the preferred target for currency speculators, but by third quarter 2009 they returned to chipping and hacking at the Euro. Reasons for this loss of confidence are simple but numerous. The Euro has no status of "old and trusted", default choice world reserve money, like its big rival the Dollar. The USD was first officially produced and circulated as a national money backed by gold, in 1792, but since 1972 at latest it is exactly as "fiat" as the EUR, with no physical backing, not convertible to a fixed weight of gold, other precious metals, or a basket of real resources. As we know, and real resource producers know, the Euro and Dollar, the Yen, Yuan, GB Pound, Ruble, Swiss Franc and all other major moneys are "Fiat money".

Recent market sentiment underlines the Euro "Fiat money" is certainly not a Mercedes, Bentley or Porsche money. With its exchange value defined by shifting economic criteria, FX market tidal currents, able to be changed by instant political decision, and rumors of political decision of which Angela Merkel appears to be a leading producer. This fiat money, like the others, ultimately depends on the economy keeping above water, on national political policy and the shock of national policy hitting international policy - both of which are usually changed in secret and only under crisis conditions. To maintain its value, this paper money like the others must maintain the confidence of resource suppliers - swapping physical and real resources, for paper promises of future value. When physical resources start taking off in price, the game is up for the fiat money - its time to produce a new one !

REAL RESOURCE PRICE TAKEOFF

Gresham’s Law is often invoked, when devaluation is equated with inflation but Gresham himself, around 1560 had to deal with the impact on official coin-only money of Elizabethan England having to compete with pirate imports of huge quantities of Central and Latin American gold and silver. And official money didn't resist this onslaught. The cycle economist Kondratiev called the arrival of huge amounts of mostly illicit bullion, that he estimated at around 400 000 tons of silver and 40 000 tons of gold in the years 1550-1600, as a fundamental transforming event for the thenminuscule world economy, mostly European. Today's central banks, according to the World Gold Council have a total of about 12 000 tons of fiduciary gold.

Today's threatened devaluation of fiat paper moneys has no such metal backstop, in a process able to rival the effect on BP's share price of it venting about 10 000 barrels a day from deep under the Gulf of Mexico for 5 weeks. Logically, both the USD and EUR, and Japan's Yen should devalue against the Chinese Yuan and a few other moneys including the Saudi Ryal and Russian Ruble. The only measure of this will be appreciation of real resource value.

The question today is how far does the Euro fall, against which moneys or real assets, and how fast. Taking its high and low values against the dollar since 2000 this gives large range, from around 84 US cents in November 2000 to 1.50 USD in Oct 2009. As press comment already says, when or if the Euro becomes a "bad" money, it could in ultimate crisis conditions be simply abandoned, taking us back to Gresham's original definition of "bad money", but with the interesting twist there was too much real resource gold around, at the time.

World natural gas reserve potentials, according to not-so-trustworthy sources such as Tony Hayward of BP, are now immense but few resource abundance theorists say this about oil. Coal is plentiful underground, but extracting and transporting is costly in time and resources. Much the same applies to uranium, also.

The demand side for conventional fossil energy supplies is tight-linked to global economic recovery, due to to low ceilings of surplus production capacities. The same applies to a swath of metal and non-energy minerals supply, and to food and bioresource reserve and resource supply and processing capacities.

Since the time of Keynes in the 1930s and 1940s, and the Oil Shocks of the 1970s we can add oil, other fossil energy resources, food commodities and other "hard asset" to the wish list of what should back an ideal world money. Attempts in 2009 to generate groundswell support for the notion of "CO2 money", a global carbon-related reserve money ultimately based on how much CO2 each holder of this new world money emits, were a dismal failure. By default we are back to Real Resource Bancor.

The process enabling this to become de facto reality is now set in place, due to fiat moneys losing so much credibility, so fast. Predictably and after the FX traders have thoroughly whipped the EUR straw man, they will make a 180° turn and return to their traditional soft target, the USD. How much and how long it resists will be measured by how much and how fast Gold and Oil prices move upward.

The Euro served a critical shielding role for the dollar, which the also overvalued Yen could not do because of the smaller size of the Japanese economy relative to the EU27 or USA. While the EUR exists, the US dollar can also exist. When or if the EUR is abandoned, or loses all credibility world monetary crisis will be inevitable and massive. One of the foreseeable consequences, and measures of this will be a steep takeoff in real resource prices. These can move upwards almost without limit, until and unless the global economy slumps into double dip of massive proportions.

By Andrew McKillop

gsoassociates.com

Project Director, GSO Consulting Associates

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

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