Fiat Currencies at Great Risk as Europe Increases Debt and Bernanke Hints at Further Manipulation

Merkel and Sarkozy have worked to increase the originally €440 billion European Financial Stability Facility to a huge €2 trillion. Markets, in response, have stayed at the top of the range set since the S&P downgrade. Financial stocks have experienced more outperformance, as the possibility of a Greek default looks extremely low now that European leaders have decided to defy the will of their countryfolk in order to preserve the EU and the Euro (as you may know, most German and French people oppose these bailouts).

Anything to prevent PIIGS defaults

I’ve been waiting for a real Greek default for a very long time, but considering the huge amount of cash that will be pumped into the European Financial Stability Facility (EFSF); I’m beginning to think that Europe is actually going to print away as much of the Eurozone debt as possible instead of undergoing the short term pain that is necessary for long term gain. This is wildly bullish for equities in the near term, but it’s also the case that European austerity measures will have to eventually take hold in the medium to long term. On top of that, it’s hard to see how perceptions of loose monetary policy by the ECB will be bullish for the Euro. Bearish moves in the Euro have generally led to bearishness in US equities recently. While the Greek default was the main driver behind the drop in the Euro in recent months, markets would be silly not to punish the currency for not providing a more feasible solution to the problem.

Overall, there is no free lunch for the Eurozone – they are collectively in debt and aren’t offering real-life solutions to the problems. No matter what Keynesian theorists may imply, the governments in the Eurozone cannot just create the resources needed to keep the system going without forgoing something else. Raising money could be difficult, since there’s not much left to take from. Directly taxing citizens of Eurozone nations probably won’t work though. The already infurated people (especially in Germany) probably can’t take much more, and there are certainly many political forces that want to give Merkel the boot. Between politically painful taxation measures and sneaky inflation-taxation (seigniorage), I think it’s much more likely now that European leaders will just create the Euros they need through the European Central Bank (ECB).

The Euro has been overvalued for a very long time, and when the ECB tries to print its way out of this mess I think traders will have an opening for huge profits in shorts. Although the trade may not be ripe for picking in a very long time, there will be a day to short the Euro.

Bernanke’s fingers are still on the Keynesian cannons

In a speech on Tuesday October 18th, Benjamin Bernanke gave a speech stating the importance of central banks in regulating banks during “market failures”. He also specifically claimed that the fed was very successful in preventing a deeper recession in recent years and that lower interest rates have helped the economy. Additionally, recent comments by fed officials have hinted at further quantitative easing.

Is it just me, or is it a little scary that this guy is playing god with the economy like the Europeans? Earlier this month, Ben Bernanke also stated that the economy was on the verge of faltering, and that the fed was ready to take action whenever necessary. Although the greenback has done extremely well in light of the European situation, we could start heading in the opposite direction if the fed implies looser monetary policy.

Between Bernanke who is a hardcore Keynesian willing to stimulate the economy as much as necessary, and the ECB doing anything necessary to keep the PIIGS afloat, the bullish case for precious metals has never been better. So long as any routs in the Euro don’t trigger any significant deflation of the dollar, precious metals have very strong fundamentals supporting their uptrend for coming years. The gold and silver frenzy is far from over.