“The current upset in the European sovereign debt market is a prequel to what might happen here.”

No, it absolutely is not. The irony here is so thick I am nearly choking on it. What Greece has essentially gotten themselves into a single currency system akin to the gold standard. There is no flexibility within such a currency system. There is no floating exchange between economies.

There have been a couple of variations in the Gold Standard. The pure Gold Standard was when gold coins were in useage. When sovereign countries made trade payments in gold bullion.

Then we have the watered down Gold Standard, where one country prints fiat money, dollars, that are exchangeable into gold. Every other country then pegs their currency to the dollar, this was the Bretton Woods system.

Now the Euro for Greece most certainly floats against the US Dollar, the Chinese Yuan, the Russian Rouble, etc. It does not float against the Spanish Euro, nor the German Euro, nor the French Euro.

So while Mr. Einhorn talks up his positions in gold he is actually justifying his actual portfolio composition without realizing that the piece of metal he is so heavily invested in is effectively the cause of the Greek crisis! This is exactly the kind of crises the world used to confront under the gold standard when there was no currency float.

So let me understand this, the Greek crisis is due to there being no way to float Euro against Euro? It has nothing to do with Greece spending more than they earn, and wanting to borrow the difference. They cannot legally print the difference, because they are part of the Euro, and do not have access to the printing press, so they are forced to borrow to make up the difference in their deficits.

As I’ve previously explained, trade deficit nations (such as Greece) are at an inherent disadvantage in such a system because there is no room to devalue or utilize fiscal/monetary policy to alleviate pressures. Because they are not the issuer of their own currency they are forced to beggar thy neighbor and turn to the bond markets to “finance” their spending.

Fiscal policy and Monetary policy are two very different approaches. Monetary policy is a method by which a Central Bank increases or decreases credit in the Banking system, which increases or decreases credit in the economy.

Fiscal policy however is different. Fiscal policy controls Government income and expenditures. When a recession/depression intervenes in the business cycle, Keynesian theory mandates that Government runs deficits to increase spending [someone elses income] within the economy. This deficit is financed through debt in Greece’s case, or debt and/or printing in the case of the US.

The great irony here is that the Greek crisis is not a condemnation of the US dollar or the British Pound (though the Brits clearly think so) or any fiat money system. If anything, it is a condemnation of the gold standard.

Really. How so?

Mr. Einhorn continues his rant while evoking the ageless fear mongering visualization of “money printing” and “debt monetization”. Both terms are not truly applicable to a monetary system in which the sovereign nation has a monopoly supply of currency in a floating exchange rate system.

Absolute nonsense. First, no country has a momopoly on the fiat money system. Second, even if they did, said country could only exist while other countries were willing to accept the fiat money in exchange for goods and services. Once the monopolist overplayed his hand and debased the money, such acceptance would cease.

But believers in the gold standard like to invoke these images because they give the appearance that the government is simply creating money out of thin air and being totally reckless.

Yes we do. Because that is exactly the truth of the matter.

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