For the same reason that small children should not be allowed to play with matches - or loaded guns - small-minded governments should not be allowed to play with money creation. This is especially the case when the government in question is relying upon "guarantors" of the debt it creates (all money today is based on debt) who are not in control of its borrowing and spending policies. When small children get out of hand, the best result possible is that they will get burned. It is also possible that they will put a hole in themselves - or in somebody else - depending on what they are playing with. Such is also the case - with a matching degree of severity - when governments get hold of the financial cookie jar.
This week the world's eyes were on Europe and it "sovereign debt crisis". On October 27, a "fix" was duly announced and global paper markets breathed a huge sigh of relief. These markets did not look very closely at the fix that was announced, nor did they waste any time wondering whether the steps announced to "fix" the problem would actually do the job. They simply bought - especially in the global stock markets and with gleeful abandon in the financial (bank) sector of the global stock markets. As usual, the buying was most frenetic on Wall Street. By the end of the week, all three of the major US stock indexes were back comfortably in the black for the year.
Other people had a slightly different idea about what to buy. Over the week, Gold rose $111 or nearly 7 percent while silver was up $4.10 or just over 13 percent. Part of this was due to a renewed slide by the US Dollar, but most of it was due to the nature of the "fix" Europe put in to "solve" its debt crisis.
To paraphrase many financial commentators inside Europe - and many more across the English Channel and across the Atlantic - Europe has refused to use their central bank (the ECB) in the way that it is "supposed to be used". They are dragging their feet on using it as a lender of last resort - to the government. Worse still, they have had the temerity to impose a 50 percent "haircut" on the sovereign debt of a Euro-using European government. Whatever happened to the sanctity of the claim that the "FULL FAITH AND CREDIT" of a government stands behind the debt paper - AND THEREFORE THE MONEY - issued by that government? Well, in this case, nobody had any faith in the credit of the Greek government. Nor was there any likelihood that either could be reclaimed.
Everybody "knows" that a central bank has limitless resources, do they not? Remember Ben Bernanke's famous remark that the Fed has a printing press. So does the ECB. So does every other central bank in the world. Why are European governments outside Greece (and the other peripheral European nations) so reluctant to simply use it? Because they know that by doing so they put their taxpayers in potential hock to the policies of other governments. No govenment has any compunction about holding taxpayers to ransom for their own borrowing and debt creation. But they are not happy to stretch the point outside their own borders in most cases. The fatal flaw in the creation of the Euro is said to be the fact that a supra-national currency was created without creating the supra-national government necessary to "manage" it.
That IS the fatal flaw in the Euro. Without a monolithic government with sole control over the issuance of debt, a money which is based on debt (and nothing but debt) is vulnerable. The Euro is exactly like every other currency in the world. It is backed by the "full faith and credit" of the government's which create it - and NOTHING else. By forcing private holders of Greek debt (denominated in Euros, don't forget) to "accept" the fact that they will never get their capital back, the Europeans have set a dangerous precedent for themselves. They have also set a dangerous precedent for every other nation which operates with a money backed by the "full faith and credit" of the government. And that, unfortunately, is every other nation in the world.
In the avalanche of fatuous statements made in the wake of the announced European "fix" of October 27, one from Fitch (the US ratings agency) stands out. Fitch virtuously pointed out that the 50 percent "haircut" on Greek sovereign debt "may" create an event of default if investors accept it. Why? Because even if this haircut is accepted, the owners of this Greek debt paper are left with a "product" that is lower in value to what they originally agreed.
Is there a piece of sovereign debt paper issued anywhere in the world whose "value" (or purchasing power converted into cash) is NOT lower in value to what was originally agreed by its purchasers? Is there a fiat currency anywhere in the world which has NOT lost purchasing power on a continual basis ever since it became a fiat currency? Of course, there is not. Given Fitch's criteria, there is no such thing as an AAA rated bond (including a government bond) and no such thing as an AAA rated currency either.
There is, however, an AAA rated MONEY. That's gold, which continues to languish outside the financial system altogether. We do not know how much longer that will be the case. We do know that the Europeans have hastened the day when Gold is once again used as money with their 50 percent "haircut" on Greek sovereign debt.
(Chart appears here in original analysis)
The significance of the table above is that it shows the all time high for Gold denominated in what is probably the most representative major "commodity currency" in the world - the Australian Dollar. That high was set on February 20, 2009.
Gold in terms of the other three major currencies shown in the table had since gone on to set major new highs considerably above the levels reached in February 2009. At the end of July, Gold hit new all time highs in terms of US Dollars, Euros, Canadian Dollars, Pounds and many other currencies. By August 4, there was a BIG change in the table as the Aussie Dollar Gold price took out its February 2009 high. It has maintained these levels ever since.
When Gold reached its all time high in Aussie Dollar terms in February 2009, the Aussie Dollar was trading at $US 0.6377. This was at the height of the huge US Dollar rally which took place in the aftermath of the Lehman Brothers crisis of September/October 2008. The Aussie Dollar gained parity with the US Dollar (for the first time in nearly 30 years) on November 3, 2010, the day that the US Fed officially announced QE2. It has been climbing steadily since then and accelerated in April 2011. On April 29, the Aussie Dollar reached almost $US 1.10. Over the last week of July, it hit that level for a second time. On September 16, the Aussie Dollar closed at $US 1.0341 after the concerted central bank action to provide US Dollars to Europe on September 15.
Gold in terms of the other three currencies in the table is a long way above the level it reached in February 2009. In early August 2011, Gold in terms of the only "commodity currency" in the table, joined them.