By Mortimer Duke

Given the huge dislocation in Europe lead by massive over-indebtedness, we should take a step back and try to understand why the US is different and what the market implications of those differences are.

The Eurozone was a bold attempt at fiscal and monetary union which the original architects knew had HUGE risk if political union wasn’t also achieved in a timely fashion.  Unfortunately, the huge risk arrived before the political union!  The primary challenge of the monetary union happens to also be its biggest strength: constraint.  In theory, the Eurozone is constrained from rampant money creation – which would result in a loss of purchasing power – by the European central bank’s (ECB) single mandate of price stability.  Herein lies the heart of the EU debt crisis.  In all countries using a fiat currency, there are only two ways to pay the bills: tax or print.  Throughout history, when given choice, politicians ALWAYS choose print because it’s the easiest politically, even though it is typically the more painful option for the people.  This problem was thought to be solved in the Eurozone by creating the ECB as the only central bank in Europe, thus removing the ability of the political class to hurt the currency through unconstrained money creation.  It sounds great in theory, but addresses the symptoms instead of the cure.  

The reason why politicians have to choose between ‘tax’ or ‘print’ in the first place is because they can’t control SPENDING!  The EU attempted to fix this problem as well by forbidding deficits in excess of 3% of GDP. But that went out the window with first whiff of the financial crisis in 2008, and it is now also clear many had lied or manipulated debt figures to begin with.  

As a result, now we’re back to the original problem of the political class spending recklessly.  But in the Eurozone, they’ve handcuffed themselves from the preferred exit strategy of PRINTING the problem away.  Without the ability to print, and with an economy too weak to tax, the prospects of sovereign debt default become front and center.  The Eurozone is faced with either defaults or significant austerity that NO ONE wants to deal with.  Both are highly deflationary events and are currently shaping the investment landscape. 

Here’s why it’s different in the good old USA: unlike the Europeans, we haven’t handcuffed ourselves with a restrictive central bank, nor a hard currency.  This allows the political class to spend away with the complete safety of knowing the Fed can print dollars if need be.  The Fed claims to want price stability, but in reality they’ve done a remarkable job of wiping out the dollar’s value during their near 100 year existence.  So what lessons does the European debt problem highlight here in the US?  We’re spending money at an alarming pace combined with NO attempt to slow the ever expanding debt burden. 

 The crisis Europe is currently going through will be very similar here but, unlike Europe, our debt bomb will be met with unfettered money creation.  This isn’t conjecture or wild speculation — this is how EVERY government throughout history has chosen to deal with over-indebtedness and would be the preferred mechanism in the Eurozone if they hadn’t constrained themselves.  Don’t let the deflationary fears coming out of Europe scare you into thinking the same thing will happen here; it won’t.  Our debt bomb will end in a money printing deluge that will destroy our currency.  As usual, fade any deflation trade and protect your wealth with hard assets, especially gold.