Tuesday, November 22, 2011

What's Lost With the Demise of the Euro? Only What Was Unsustainable

Scaremongering aside, the demise of the euro does not end European integration. It only means that which is unsustainable has been relinquished and a return to stability is finally possible.

So the euro is doomed. Toast. History. This will lead to:

1. the end of civilization

2. the end of European integration

3. the start of new Dark Ages

4. the return to a sustainable reality

The correct answer is 4. The euro was an unsustainable, self-destructing extension of the integration that has long simplified trade, travel and work throughout the EU (European Union).

At the risk of over-saturating you with more euro-related material, here are the basics we need to keep in mind as the third act plays out.

A common currency seemed like a good way to simplify trade and lower transaction costs. As I noted yesterday in Some Heretical Thoughts on the U.S. Dollar, such "folk" convictions rest on "sole-source causation": in this case, that a single currency would only offer more benefits of integration because it lowered complexity and transaction costs.

The euro supporters forgot or ignored the primary purpose of national currencies:to account for differences in transparency, productivity, trust, money creation and risk between nations' economies and their Central Banks/States.

If you remove this means of accounting for these fundamental differences, then you have removed a feedback loop from a dynamic system, and thus removed an absolutely essential flow of information and transparency.

What you're left with is a system of lies, officially sanctioned opacity, misinformation, disinformation, cooked books, artifice and propaganda, i.e. exactly what Europe has become. With the euro, there was no way for the system to account for thr vast differences in debt loads, credit risks, transparency, productivity and a dozen other fundamentals that are expressed in foreign exchange rates.

By all accounts, Greece and Italy have painfully dysfunctional national finances and political Elites resistant to admitting the dysfunction is unsustainable. Once those nations revert to national currencies, then their currencies will reflect the market's assessment of their economy and their national/Central Bank policies.

The same will hold true for all the other EU member states: the market will shift through the various metrics and feedback loops and reach an equilibrium around the value of each nation's currency.

Profligate, over-indebted nations with dysfunctional Elites and systems plagued by political corruption and gridlock will see their currencies devalued and the interest rates they must pay to borrow money raise to the point that borrowing will no longer be an option to escape the consequences of profligacy, and the devalued currency will preclude buying imports from strong-currency nations.

These feedback loops are essential to providing the citizenry and their economy with the transparency and information they need to adapt to reality. The euro has erased all that vital information, leaving only interest rates as the sole expression of differences between economies.

Interest rates are simply not a rich enough source of information and market feedback to express the differences between national economies; the global markets need the information and feedback loop provided by currencies.

As I attempted to describe yesterday, currencies are not explicable with "sole-source causality" or "folk" understandings; they are distillations of numerous information feeds and feedback loops that only a transparent market can generate.

I have little doubt the euro is being held aloft by cloaked Central Bank intervention; the Elites are desperately attempting to cloak the system's intrinsic dysfunction and stop the market from repricing the euro based on the inevitable return to national currencies.

Rather than fear this return to transparent feedback, we should welcome it and hurry it along. Systems which cut off feedback and choke transparency with artifice and lies are doomed to implode. If Europe ditches the failed "folk" experiment called the euro, then the process of recognizing and pricing dysfunction can begin, and the stability that only transparency and feedback can provide will soon return to the EU.

This may sound counter-intuitive, but it's the only way forward to a sustainable, stable reality. The immense hubris of Europe's dysfunctional Elites precludes their recognition that reality eventually trumps artifice and intervention. Their feeble, addled cries cannot turn back the tide, even if their bloated self-importance is infinite.

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