Tag Archives: europe

Reply to Ron Paul’s views on the European financial framework

Hello folks.

A while back I posted an article by Ron Paul in which he expressed his opinion that the current European debt crisis threatens the dollar. I received a few e-mails from my readership expressing both agreement and disagreement with Mr. Ron Paul’s viewpoint. One of them stood out though, and I thought I’d publish it because I believe it is important to get a different side of the story. This e-mail came from a currency specialist from a popular UK forex brokerage firm. Letter follows below:

–begin letter–

Hi Alan,

I read with great interest your recent post written by Ron Paul, evaluating the problems with continuing to support the ailing European financial framework and the cost of US involvement in this.

On most points I think Mr. Paul makes a convincing case. For instance, he is right to point out the dangerous position of the US as global lender of last resort. In spite of White House remarks to the contrary, it does seem that significant US funds have gone to propping up the European system in the last six months. This creates dangerous US exposure in addition to that already shouldered by US banks and financial funds. In addition he is right that the cost of a breakup of the Eurozone is overestimated. Recent reports by banks including UBS for instance (detailing the possible cost should either Germany or Greece exit the euro) have been branded gross exaggerations and sensationalist. These are the product of organisations that stand to lose in the event of a euro breakup and so are engaged in scare mongering.

In spite of this though, it seems to me that in his eagerness to avoid exposing the US to the European crisis, Mr. Paul overextends his case. For example he tells us it is impossible to bail out either France or Germany, as opposed to small European countries such as Greece. True enough, but this of course gives an immediate (and misleading) impression that France and Germany are in need of bailing out. This is not the case: both nations possess (for the moment!) AAA credit ratings from all 3 credit rating agencies, unlike (it is worth pointing out) the United States. In other words it seems that here Mr. Paul is not above a little scare mongering himself. In addition it seems that, though European organisations have to date provided an exaggerated impression of the cost of a euro breakup, Mr. Paul gives us an underestimation. He notes for instance that Greeks are using bartering as an alternative to euros, as though this were a pseudo-democratic uprising against failing financial structures. Is he then suggesting that the entirety of Europe do the same thing? This strikes me as an irresponsible and (in the hands of an elected politician) dangerous underestimation of the crisis facing Europe.

In short, it seems to me that in spite of Mr. Paul’s admirable desire to see banks contribute to the cost of the financial crisis, he doesn’t grasp the scale of the European debt crisis. In particular, his proposed solutions are idealistic to the point of being fantastical.

Yours kindly,

Peter Lavelle
Foreign currency exchange specialist Pure FX

–end–

European Debt Crisis Threatens the Dollar

ron paul

The global economic situation is becoming more dire every day.  Approximately half of all US banks have significant exposure to the debt crisis in Europe.  Much more dangerous for the US taxpayer is the dollar’s status as reserve currency for the world, and the US Federal Reserve’s status as the lender of last resort.  As we’ve learned in recent disclosures, this has not only benefitted companies like AIG, the auto industry and various US banks, but multiple foreign central banks as they have run into trouble.  Nothing has been solved, however, by offering up the productivity of Americans as a sacrificial lamb.  Greece is set to be the first domino to fall in the string of European economies at risk.  Rather than learning from Greece’s terrible example of an over-consuming public sector and drowning private sector, what is more likely from our politicians is an eventual bailout of European investors.

The US has a relatively small exposure to overwhelmed Greek banks, but much larger economies in Europe are set to follow and that will have serious implications for US banks.  Greece is technically small enough to bail out.  Italy is not.  Germany is not.  France is not.  It is estimated that US banks have over a trillion dollars tied up in at-risk German and French banks.  Because the urge to paper over the debt with more credit is so strong, the collapse of the Euro is imminent.  Will the Fed be held responsible if the Euro brings the US dollar down with it?

The most disingenuous aspect of the narrative about the European sovereign debt crisis is that entire economies will collapse if more resources are not bilked from productive people around the world.  This is untrue.  Tough times are coming for the banks, to be sure, but free people always find a way back to prosperity if the politicians leave them alone.  Communities within Greece are coming together and forming barter systems because they know the Euro is becoming unstable.  Greeks are learning how to engage in commerce with each other, without the use of fiat currency controlled by central banks.  In other words, they are rediscovering what money really is, and they are trading with each other in ways that cannot be controlled, manipulated, squandered, inflated away and generally ruined by corrupt bankers and the politicians that enable them.  Farmers will still grow food, mechanics will still fix cars, people will still make things and exchange them with each other.  No banker, no politician can stop that by destroying one medium of exchange.  People will find or create another medium of exchange.

Unfortunately when politicians try to monopolize currency with legal tender laws, the people find it harder and harder to survive the inflation and taxation to which they are subjected.  Bankers should take their dreaded haircut rather than making innocent people pay for their mistakes.   The losses should be limited and liquidated, rather than perpetuated and rewarded.  This is the only way we can recover.

Government debt is often considered rock solid because it is backed by a government’s ability to forcibly extract interest payments out of the public.  The public is increasingly unwilling to be bilked to make bankers whole.  The riots and the violence in Greece should tell us something about the sustainability of this system.

If we continue to bail out banks and bankers so they can continue to lose money, if we cavalierly put this burden on the taxpayer, it is all too predictable what will happen here.

Ron Paul