Euro’s slide may give U.S. more rope to hang itself

May 20, 2010

By Agnes Crane and Christopher Swann

Haven status in a market storm sounds good for the United States — but could make it less safe. Sure, it bolsters the dollar’s standing and delivers the perk of cheap financing. But for a nation that desperately needs to kick its borrowing habit, the weak euro could be a bad influence.

Global financial markets have been rattled for weeks as euro zone leaders have clumsily tried to contain the Greek contagion. A nearly $1 trillion rescue package has done little to stop the carnage. The euro has been hammered, though recovered some lost ground in the last two days. Stock markets around the world took another beating Thursday as investors feared a global economic slump. The S&P 500 index fell 3.9 percent.

The big winners remain the dollar and U.S. government debt. Ideally, this should provide a window of opportunity for America to address its own deficit problems. And the message from the euro zone should be loud and clear — if lawmakers don’t put their house in order, markets eventually will do it for them.

Sadly, any moves to raise new funds and curb the deficit have become taboo. The recent energy bill proposed by the Senate passed up another opportunity to raise around $100 billion a year through a tougher carbon cap and trade system. Social Security reform, a reduction in mortgage income tax relief and other revenue savers may have to wait until bond investors threaten to revolt.

There’s hardly even been a whiff of rebellion, however. The incredible shrinking euro, in fact, has quashed any sign of interest rates moving higher. The U.S. government would only need to pay 3.25 percent for a 10-year loan — and less than 1 percent for a two-year note. Further upheaval abroad means the rate will probably go lower still.

Moreover, the dollar’s status as the world’s reserve currency has few challengers. That means foreign central banks are more likely to think twice about diversifying their vast savings into other currencies. And private investors will continue to park funds in government debt, even if they’re dismayed at Washington’s spendthrift ways. U.S. lawmakers shouldn’t delay tough decisions just because of the dollar’s popularity.

Comments

With such huge unemployment statistics that do not appear to be improving anytime soon coupled with the devasation that still looms large in the housing market, I cannot imagine how anyone can, with a straight face, suggest that increasing the tax burden via carbon taxes, VAT taxes, what have you, is a good idea. “Stuff” rolls downhill, so how about dramatically decreasing the size of government and putting limits on its wild spending FIRST before tapping into the already tapped out American public!

Posted by GLK | Report as abusive
 

There is an alternative to green paper it’s called gold and at some point the central banks are going to lose their battle to control its rise. That will spell the beginning of the end of this monetary cycle which began when FDR confiscated people’s gold in 1932 and stoppedUS citizens from trading in their green paper for gold. Then in 1972 Nixon stopped foreigners from trade in their green paper for gold. After that Republicans and Democrats alike were free to buy votes with borrowed money without restraint. Thankfully this robbery of savers and con of the voters is just about over.

Posted by Truth_Teller | Report as abusive
 

“Sadly, any moves to raise new funds and curb the deficit have become taboo” illustrates all too well what our problem is as well as the fact that Agnes and Chris don’t have a clue. Raising new funds, or raising taxes, won’t fix anything. You can’t give politicians more money than they will spend. There is plenty of money already being raised but it is squandered by wreckless and totally irresponsible politicians. Think of the taxes you pay. Everything your buy or sell as well as your property and income. Everything is taxed and that’s always the age old solution, “raise taxes”. We’re sick of it. Quit spending. Eliminate useless government agencies (Energy Dept, Education Dept, Forest, Agriculture, too many to mention)and make a real effort to save this country. Spending more as witnessed in Europe isn’t the answer.

Posted by Avatar666 | Report as abusive
 

True words of wisdom.
Excellent article.

Posted by yr2009 | Report as abusive
 

The death of the Euro is a done deal.
Soon all the countries will return to their own currencies.
Hmmmmm, can you say “another european war”.
It will likely happen.

Posted by clearthinker | Report as abusive
 

It appears as the US has declared war on the EU, through the use of Wall St as an economic weapon it has secured the primacy of the Dollar, furthering the idea that the government has been merged with corporate power.

Posted by nuggatron | Report as abusive
 

You forget that “lawmakers” are first and foremost “politicians” who have an innate aversion for risking their survival by having to be the ones who give their constituents the bitter pill to swallow. The momentary strength of the dollar will make it much more difficult for “lawmakers” to resist taking the easy way out even if postponing and compounding an inevitably undesirable outcome. The opportunity of the moment seems to be for government to keep on borrowing and creating more money out of thin air since it appears that countries like China are happy to send us their goods in return for fiat paper money. When you look at it this way what’s wrong with having a trade deficit!

Posted by usbychoice | Report as abusive
 

@clearthinker

Europe is facing some tough times indeed, but Europeans remember the wars (WWI, WWII, Cold War, Yugoslavia) that plagued that continent periodically, and they don’t want to go back there, which means they’ll everything to preserve the EU.
They also understand that united, Europe has a better chance to compete in the Modern World.

Posted by yr2009 | Report as abusive
 

REPLY TO TRUTH_TELLER: GOLD?

“There is gold, and a multitude of rubies;
But the lips of knowledge are a precious jewel.”
— Proverbs 20:15

Truth_Teller is correct. At one time, the world did have an international currency … gold. In 1938, Hitler criminalized owning gold in Nazi-Germany, as Roosevelt had done in the United States in 1933. Both Hitler and FDR understood that governments can’t manipulate an economy using a currency based on gold. They substituted politics instead of employing Science.

Why Science? Science demands specificity, objectivity, and accountability. Currently, a knowledgeable electorate (whether in the EU, the UK, or the USA) would be demanding all three. It doesn’t demand any.

Are there reasons not to return to the gold-standard? Yes; reasons such as 1) the value of gold varies with its production; 2) its price does not reflect production of any other goods or services; and 3) whereas over the long term prices may remain stable, over the short term, they can and do gyrate sharply.

Is there a scientifically consistent alternative? Yes.

Goals: 1) To have a stable and respected national currency. 2) To have a restored and stable value of every denomination. 3) To have a currency that reflects primarily constructive requirements of the productive not self-serving demands of the unproductive.

How Can We Fulfill Those Goals?

Begin by restoring real value to every denomination of the currency, even the penny. Issue a new, revalued currency with a zero lopped off the end of each denomination and dividing the denomination by two. We merely would be returning the value of the currency to where it was before the Federal Reserve Bank came into existence and began its relentless debasing of the dollar.

How would the supply of money expand or contract to meet the changing requirements of the economy?

A producer of goods or services could go to a bank to borrow funds; thus, requiring a pool of capital through domestic savings. Such savings should be rewarded by the government instead of punished as they currently are via the income-tax. The bank then determines the creditworthiness of the potential borrower. If the bank deems the loan worthy, it lends its depositors’ funds. If the bank needs additional funds, it can borrow the money from the Federal Reserve Bank, as it does currently. The federal government can inflate the supply of money based upon only productive demand.

How would the government and others measure the changing requirements?

Measurements already are in place such as Gross Domestic Product; surplus or deficit in the national, current account; trade surplus or deficit; median income with standard deviation; and so on.

Admittedly, the politicians would hate such policies and would fight them to the death, were most of them not such cowards. (Remember the anthrax-scare in the Capitol a few years ago?) Accordingly, such change in the monetary system likely would require a constitutional amendment. Moreover, such an amendment requires a knowledgeable electorate. Since intruding into education in the 1950′s, the federal government has launched a vicious attack to “dumb down” the population while proclaiming the opposite. Even worse, it’s been succeeding. The consequence has been and will continue to be an increasingly oppressive and repressive central government. Yes, as Truth_Teller knows, the lips of knowledge indeed are a precious jewel.

Gene Richard Moss
Author, Inescapable Consequences (fiction/non-fiction; 2009)* and
Healthcare Reform D.O.A. (non-fiction; 1994)**

* http://www.inescapableconsequences.com
** Nominated for two national awards by the American Risk & Insurance Association.

Posted by Moss_GR | Report as abusive
 

[...] By Agnes Crane and Christopher Swann Haven status in a market storm sounds good for the United States — but could make it less safe. Sure, it bolsters the dollar’s standing and delivers the perk of cheap financing. But for a nation that desperately needs to kick its borrowing habit, the weak euro could be a bad influence. Global financial markets have been rattled for weeks as euro zone leaders have clumsily tried to contain the Greek contagion. A nearly $1 trillion rescue package has done little to stop the carnage. The euro has been hammered, though recovered some lost ground in the last two days. Stock markets around the world took another beating Thursday as investors feared a global economic slump. The S&P 500 index fell 3.9 percent. The big winners remain the dollar and U.S. government debt. Ideally, this should provide a window of opportunity for America to address its own deficit problems. And the message from the euro zone should be loud and clear — if lawmakers Read ahead [...]

 

A WORD ABOUT GOLD . . . AND AN ALTERNATIVE SUGGESTION

At one time, the world did have an international currency … gold. In 1938, Hitler criminalized owning gold in Nazi-Germany, as Roosevelt had done in the United States in 1933. Both Hitler and FDR understood that governments can’t manipulate an economy using a currency based on gold. They substituted politics instead of employing Science.

WHY SCIENCE? Science demands specificity, objectivity, and accountability; three criteria most politicians hate.

ARE THERE REASONS NOT TO RETURN TO THE GOLD-STANDARD? Yes. Reasons such as 1) the value of gold varies with its production; 2) its price does not reflect production of any other goods or services; and 3) whereas over the long term prices may remain stable, over the short term, they can and do gyrate sharply.

IS THERE A VIABLE ALTERNATIVE TO GOLD? Yes.

WHAT WOULD BE ITS GOAL?
1) To have a stable and respected national currency. 2) To have a restored and stable value of every denomination. 3) To have a currency that reflects primarily constructive requirements of the productive not self-serving demands of the unproductive.

WHAT WOULD BE THE PLAN?
1) Restore real value and respect to every denomination of the currency, even the penny by issuing a new, revalued currency with a zero lopped off the end of each denomination and dividing the denomination by two.

2) Expand or contract the money-supply based upon production not consumption.

HOW WOULD THE GOVERNMENT AND OTHERS MEASURE CHANGING REQUIREMENTS?

Measurements already are in place such as Gross Domestic Product; surplus or deficit in the national, current account; trade surplus or deficit; median income with standard deviation; and so on.

Admittedly, most politicians would hate such policies and oppose them vigorously. To achieve a lasting effect, the changes likely would require a constitutional amendment as one part of a much- needed, comprehensive overhaul of the American, federal government (www.inescapableconsequences.com).

Posted by Moss_GR | Report as abusive
 

It is a peculiar predicament, isn’t it? We Americans are always being harangued for not saving enough and spending too much. Yet, look at the bind a saver is in these days. If you have, say, $20,000 in a money market account, it earns less than $50 in interest a year. With even moderate inflation at about 2.5% per annum this means that you are actually losing about $450 in real spending power in the same year. So, what are the options? The stock market is hardly a reassuring place to park one’s extra capital. With all of those drops and wild gyrations one never knows if that 20 grand will be 10 next year. And government bonds are not a good place for the small player because of the time frames needed to reach maturity. So, it really does make some sense to spend and not save in the current environment. Perhaps a period of deflation wouldn’t be so bad after all. It would make us all save more and spend less because we know that TV or car will cost less in six months than it does now.

If any of the experts has a solution to this conundrum I’d sure like to hear it.

Posted by IntoTheTardis | Report as abusive
 

These comments are terrible! What is with all of the extremist right-wing nonsense being spewed here?

Gold Standard? Are you kidding?!?! Read a little history and find out why we actually stopped. No, not some conspiracy nonsense, we stopped because each large find of gold anywhere in the world threw the economy into a recession!

Lawmakers need to spend to lift an economy out of a recession and put it back on track. Lifted economy equals lifted tax revenue and you get the money back in the govt coffers.

“Derr! All government can do is waste money.” THE GOVERNMENT IS YOU, IDIOTS! You elected them. You claim to support Democracy and then you spew this nonsense?

Take your Paultard nonsense and go Galt so we can realize how much we need you, don’t bother to call, we will call you…

Posted by No-Wingnut-Lies | Report as abusive
 

There are many ways Goverment could save money and we really do need to be trying harder to find them. But, in my opinion, size-of-government arguments have “jumped the shark”. Too often they are exploited by people with an agenda who don’t really care how big Government is so long as they are able to, for example, perpetuate some obsolete but lucrative business model. Want a smaller government? Let’s debate specifically how we’re going to shrink it! Raise the minimum age for Social Security benefits to 70? Maybe that’s a good idea. Get rid of absolutely every last regulation about off-shore oil drilling? Maybe less so. But these are the kinds of debates we need to be having. Empty arguments about government shrinking to the size it was in the Revolutionary War era are useless. There were only 4 million people in America then and if the economy went kitty wumpus, they could live off the land. Today that’s just not an option for most people.

Posted by Longhair_Rob1 | Report as abusive
 

I think most of the comments here are a little off base, first thing, our personal fed taxes are among the lowest for industrial nations, also Obama cut taxes for 80% of americans. Also, our corp tax rate ranks among the lowest of the G20. So what do your taxes go towards, well that depends on your local state and fed reps. You voted for them, they all take earmarks because that’s the way our gov’t was set up in the past 30yrs. Second, it was the US housing market, bad mortgages, unregulated investment banks, and the fact that these same institutions were betting against these bundles as they told their clients everything was fine. Not only do individuals get screwed, but so do schools, pension funds, IRA funds, public works and so on. The woes in Europe are directly related to investments they made in the US fund market, these funds had ratings of AAA and were sold through any number of European banks and were considered safe and conservative. Third, americans need to blame ourselves for creating a neg savings rate, a horrible education system, a society based on how much can you borrow before it’s too much.

You want to blame someone, look in the mirror, it wasn’t gold and it wasn’t a single political party. You think Obama is doing a bad job, just think if we had another Bush in office. Our tax dollars go towards our national debt interest payments first, China and Europe has been funding our wars for the last 9 yrs, but no one seems to care about that. Sooner or later, companies are going to start betting against the US and them you’ll see inflation skyrocket and the people will start to show their true colors.

Posted by azhawkeye | Report as abusive
 
 

Interesting metaphors, perhaps unconsciously at work.

Lenin’s observation (which he may/may not have actually made) about ‘if the day ever comes to hang all the capitalists you will find them bidding on the contract for rope’. My corporate finance prof’s answer was it would be the only way that communists could hope of getting any rope.

We ain’t out yet kid. Never underestimate your enemy’s ability to screw up more than you. Lived long in the rain-belt that is much of N/W Europe. They have many, many problems that may not be obvious to people in this country, and have a rather long way to travel before they reach a place they can call ‘Europe’.

Consider: British politicians are still limited to calling each other names, and have barely started slandering the Italians. Our pols dump trash across state boundaries all the time and have for centuries. While that may seem of dubious value, it is a very useful barometer of social integration.

Posted by ARJTurgot | Report as abusive
 
 

So, what’s the point? All this article is is talking points………where is THE ROPE?

Posted by emenot | Report as abusive
 

The American Deficit doesn’t mean anything.

WE are NOT GREECE.

For now and quite a few years hence, we the United States is TOO BIG TO FAIL.

The wealthy that back and run much of the world’s financial system KNOW THIS, and KNOW that calling in American Debt would instantly bankrupt them, for their wealth is tied to a functioning American economy.

IF this were NOT the case, we’d all be learning Chinese and Peking would be our capital, because the PR China would have called in their markers and bought us on a steep discount as we imploded.

But we haven’t. We treaded water, and now while the rest of the world is sinking again, we’re rising again slowly but rising.

Recessions like the current one since they happen world over do not change this much since it’s all relative.

How safe the US is is measured against the world now, not some fantasy, imaginary measurement of perfection.

Conveniently when the world economy takes a dive, and we go along with it, we manage to stay secure – it sure is sweet being the major reserve currency.

The efforts to instill panic re: growing deficits are a fools game

Posted by JohnnyMorales | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/