Welcome to Currency War, Part 2: Massive Euro Devaluation

Greece, Spain and the rest of the PIIGS countries can’t fix their economies because they can’t devalue. If they were still using their old national fiat currencies, they could just mark them down by 30% and instantly see their exports surge and their deficits shrink.

But the euro is beyond their control, leaving them with only austerity—or a Depression. Hence all the speculation over radical ideas, like a Greek or Spanish exit, fiscal integration with Germany in charge, and eurobonds guaranteed by the Eurozone.

This is all wasted effort without the final puzzle piece: The ECB will have to flood the system with newly created currency, which is another way of saying that the euro itself will have to be devalued.

Acknowledging this inevitability, Martin Feldstein, Harvard professor and former chairman of Ronald Reagan’s Council of Economic Advisers, has called for a euro devaluation.

Put bluntly, devaluation is theft. When a country borrows too much and then marks down its currency, it is stealing from its savers and the trading partners who believed the currency was a trustworthy store of value. So calls for the Eurozone or anyone else to devalue rather than live within their means are simply enabling the breaking of a serious promise.

Devaluing the euro will ease the integration process for about two weeks, until the US, Japan, China, Brazil and all the other trading nations that are hurt by a falling euro retaliate with devaluations of their own. Then we’re in a currency war, complete with rising volatility in prices, interest rates and pretty much everything else.

One of the guaranteed results of a currency war that starts with today’s stratospheric debt levels and systemic fragility will be capital controls of a scale never seen before. Each combatant will try to trap its citizens’ wealth at home in order to confiscate it through inflation, taxation or direct expropriation. Geographic diversification is more important than ever.

To read John Rubino article: Welcome to Currency War, Part 2: Massive Euro Devaluation

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Tagged as: Council of Economic Advisers, Devaluation, European Central Bank, Eurozone, Greece, Martin Feldstein, Ronald Reagan, United States