When the Euro was imploding earlier this year the dollar was the main beneficiary. With all the problems coming from countries like Greece, Portugal, Italy and Spain, the dollar was flew past 80 on the index and the Euro was in fact approaching its mid-2009 lows in the 118/119 range, an area I thought it would reach.
But a funny thing happened on the way to the forum. The Euro, and all the markets, somehow, someway, actually believed that ECB President Draghi could pull rabbits out of a hat. When someone promises you swampland in Florida, you know it’s a bad deal. But the markets believed in the swampland propaganda coming out of Draghi’s mouth. The problem is, no European country can right their sinking ship. Just look at the External Debt to GDP Ratio data from the main countries that make up the Euro. How do you overcome this iceberg straight ahead?
France and Germany (mostly Germany) are touted by the media as being the ones to save the Euro yet they too, like Greece, Spain and Portugal, all sit between 200% and 300% External Debt to GDP. Italy comes in best at 169% while Ireland sits at a whopping 1,267.71%.
The U.S., by comparison, comes in at 100.52%, a number that Bernanke says he would like to see at a more manageable 75%. Good luck with that Ben.
The Fed’s Euro Risk Exposure
The Fed, as of March of 2012, had exposure to the ECB of $54 billion. Congress had grilled Bernanke and Geithner back in March about whether or not the Fed was worried about the ECB paying this money back. Bernanke said it wasn’t a concern of his as you can hear starting at the 1 hour and 35 minute mark in the following video (hey, someone has to watch these videos!).
But the Euro was a concern even before Spain entered the picture as the poster child of problems as Bernanke stated in the following two videos from 2011 related to Greece and the possible interconnection issues of the ECB with the Fed (the Euro and the Dollar).
This $54 billion the Fed lent the ECB (and another 14 billion to the Bank of the Japan mind you), I am sure turned out to be much more. The original loan amounts by the Fed to the ECB were less than 90 days according to Bernanke. Does anyone think this was a one time loan? I don’t.
You will learn that the Fed also was involved in helping out these European countries via the IMF, thanks to Congress. Geithner is heard in the videos saying that the Fed can’t do anything through the IMF without Congressional approval. This of course has been going on for quite awhile as I pointed out in May of 2010 in an article Which Congressmen Voted to Give IMF $100 Billion? Vote Them Out! Of course we were only in debt $12 trillion then, not $16 trillion like we are today. And many of these congressmen are still around. Perhaps we should wait to vote them out when we are $20 trillion in debt? $50 trillion? What will get voters to make the right decision? This isn’t left versus right issues. It’s a simple matter of getting rid of anyone who votes for handouts. Keep the money in America please.
Did the Fed Step In to Stop the Euro Free Fall?
Because there was no real data to back up the beginning of the climb of the Euro versus the dollar, I was confused as to how one persons words, Draghi’s, could have such a positive impact. But in retrospect, look at what words have done to prop the U.S. stock market up to these current lofty levels. It sure as hell isn’t the data as I pointed out in Stock Market Bubble and QE3 Surprise.
So with the Euro sinking as it was earlier this year, and quickly approaching the 118/119 danger zone falling below 1.22, Bernanke started flapping his gums about possible QE3 here in the U.S. This started the dollar fall and by default really, the Euro rise. Then Bernanke and the Fed threw in the towel and followed through not with QE3, but QE3 to infinity! The dollar took a big hit during all this falling below 80 on the Index, while the Euro is now back above 1.30.
What does this mean for the payback of the loans to the Fed?
The ECB gets to pay back in cheaper dollars. Fed’s mission accomplished (and Draghi’s for the moment). In just about a month and a half, the Euro rose 8.3% versus the dollar. That’s $4.48 billion extra purchasing power in the coffers of the ECB, thanks to the $54 billion loan from the Fed. This does not take into account any IMF loans the Fed was involved in. Of course the Fed, to maintain the stability, doesn’t care that the loan was paid back with cheaper dollars. That’s why Bernanke was never worried about it. He knew he could wreak havoc in the dollar anytime he chose to with his QE rhetoric and subsequent implementation.
And all the while, I noticed the media, collectively, stopped chatting about the problems in Europe. It’s the same thing they do with wars, you know? Stop talking about it and people will forget.
Bernanke lied when he said there would be “no financial cost” to the ECB loan. If I borrowed a Roosevelt dime from you in 1964, and paid you back that dime today with interest at 6%, using the rule of 72 you would have quadrupled your money in those 48 years and now possess 4 dimes of interest when getting the loan paid back today. But one thing these liars do is leave out a little concept called purchasing power. One Roosevelt dime today is worth $2.50 today because of its silver value. 4 Roosevelt dimes would be worth $10.00 today at current silver spot prices. Bernanke simply loaned U.S. dollars to the ECB and got the same U.S. dollars back, with 8.3% less purchasing power versus the Euro.
But Is the Fed’s Mission Accomplished?
Short term yes. Long term, heck no.
Did the GDP numbers get better for the European countries as seen in the World Debt chart above? No. China’s economy is declining because people in the Euroland aren’t buying. People are trying to hold onto what they got and they are not spending. There is still trouble in Euroland.
The truth of the mater is, the U.S. economy is still the leader of the bad bunch. Why else would U.S. Treasuries still be so strong? As bad as things are here in the U.S., things are much worse in Europe. The data tells me this. People may believe what Draghi says, but the only leg he has to stand on is Bernanke’s Fed, not the miracle of an improved economy in Europe because of cutbacks that will never come. Who votes for less of a handout from government (coming to you in the near future America)? Only those who rely on government. It’s like a politician saying I am going to raise taxes (think Mondale here). Any new leader of a European country is going to win if he promises, like Draghi, to take care of the people. But the promises are empty. There has to be some improvement in GDP to get countries back on track. If not, then game over.
That’s why Bernanke is telling everyone here in the U.S. the Fed is ready to do unlimited amounts of QE and will keep doing so until their mandate of lower unemployment is attained (but it’s really about the banks, wink, wink) .
That’s why you buy gold.
The Fed has to be ready to help their buds across the pond in all those failed economies, and of course the ECB, because we are all one now. No risk of anything bad happening right America? I mean, 2008 was so long ago everyone’s forgotten about it. That was last decade! Bernanke saved us then and he’s doing the right thing now right?
But why have gold and silver have bounced off their lows of earlier this year? Because some investors actually remember the Fed’s track record in buying all the bad assets of their favored sons (TARP, GM, AIG etc.). Now that all of Europe is on the bailout list, including the ECB, these investors in gold naturally are thinking ahead.
We should all be so lucky to have a pal like Bernanke to spare a dime when we need it. Especially when you can pay it back in dollars worth less!