G&G Associates Tax & Financial Consulting
Is the Euro Going to Collapse?
The PIIGS (Portugal, Italy, Ireland, Greece and Spain Aren’t the Only
Ones in the Doghouse
Why the Dollar is Quietly Crumbling While the World Watches the Euro
Imhotep (Wisdom To You) G&G Readers,
It’s the largest monetary union in the world.
When it was created, everyone thought it wouldn’t last. Plenty rooted for it to fail outright. But then something strange happened.
This union defied the odds. It cleaned up its messes. Union leaders stopped members from leaving, and played referee as member states argued over how to run their economies.
Eventually, this union built the largest economy and political entity in the world. Investors not only respected this union — they suddenly wanted to hold this union’s currency. Well, until recently…
The ‘Crisis’ Story that No One Is Telling
Think I’m talking about the EU, right?
Well I’m not … I’m talking about the U.S.!
That’s right -- the U.S. is a monetary union just like the EU. We all share the same currency, same government and we can travel across state borders without taxation, a passport or changing currencies.
Lately, everyone in their brother is beating up the EU. But the fact is, the EU’s debt problems are peanuts compared to our debt issues here in the United States.
The U.S. is the real danger economy (and currency), but it also provides the easiest way to protect yourself in the coming months and years. Before we get down to business, let me give you my take on this so-called “euro crisis.”
Euro Collapse? Give Me a Break…
Long ago, before there was a “euro” the European Union members agreed to the Maastricht Treaty. This treaty would govern the member countries, so eventually they could create a “one policy meets all” for the entire EU.
Among other things, the Maastricht Treaty mandated that each member state could only have a budget deficit of 3% of its GDP. To join the EU, each member must meet that limit.
Most members decided to meet the target by selling their “GOLD” [wonder who they sold the gold to], which they did in 1998 and 1999. But they made it. When the Union formed, 13 nations joined together under the Maastricht Treaty.
Today, 17 nations are EU members, and all those citizens use the euro as their currency.
Unfortunately, one of those members used voodoo economics to meet the budget deficit rule. Basically, they cooked the books to make it look as if they only had a 3% budget deficit.
Now the truth is finally coming out, years after joining the EU. That country? I’m sure you can guess. It’s Greece.
Is this shocking? Wrong? Absolutely…
But it’s also the reason why pundits all over the world are talking about the “coming collapse of the euro.” Now I can agree that this will definitely be a setback for the euro. But come on. The euro will NOT fall apart just because of one bad apple. It doesn’t make sense.
Greece’s total contribution to the total Eurozone GDP is just 2%. If you remove 2% of the total Eurozone’s GDP, do you really think the EU will collapse?
That’s like saying the U.S. GDP would collapse if Idaho left. Not going to happen!
To take this further, everyone calls EU’s troubled states “the PIIGS” (Portugal, Italy, Ireland, Greece and Spain). But again, the PIIGS only account for 14% of the total Eurozone GDP.
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Think the PIIGS Are Bad? Listen to This
Several U.S. states are already in default due to a number of reasons.
Some can’t make payments to state schools. Some are in the red on their pension payments. Some aren’t paying their insurance premiums. Some are issuing IOUs on tax returns and other payments, but they can’t repay without more debt.
The list of delinquent states include the “great states” of California, Michigan, New York, Massachusetts and even Obama’s territory, Illinois.
Count up all these states’ debt and the “hit” to the U.S. total GDP is more than 30%!
(Remember … I said that the PIIGS’ debt was only 14%?)
Here is the key difference…
Greece, or Spain, or any of the PIIGS could drop out of the EU at any time … or EU leaders could force them to leave.
California, Illinois, and others cannot leave the U.S. — and Uncle Sam can’t kick them out either!
So the U.S. is saddled with these defaulted states’ deficits, whereas the Eurozone could very well say, good riddance to the PIIGS, and move on as a stronger entity!
Just as an example, let’s shine the light on what’s happening in Illinois…
“The state is in utter crisis,” said Rep. Suzie Bassi (R-Ill.). “We are next to bankruptcy. We have a $13 billion hole in a $28 billion budget.”
“The state has been paying bills with unfunded vouchers since October. A fifth of buses have stopped. Libraries are owed $400 million and are closing one day a week. Schools are owed $725 million. Unable to pay teachers, they are preparing mass lay-offs. ‘It’s a catastrophe,’” said the Schools Superintendent.
Again, the dire nature in the U.S. states is far greater than the Eurozone members.
Yes, these EU member states were completely out of line when they continued deficit spending. It’s only fair that the euro suffered a bit.
However, to say that the euro is going to collapse is simply unreasonable at least not before the Dollar.
Before the euro even became a real entity in 1999, there were those that did not believe it would last, and would soon collapse. However, the euro, which suffered at first, eventually came on strong.
In 2005, when Sweden and Denmark both said “no” to join the euro, pundits once again called for the euro to collapse. But the euro only came back stronger. In 2008, during the financial collapse, they said the euro would fall apart. And once again, the euro came back stronger after selling off.
So is this just another case of euro selling as various pundits (CNN_FOX) run around calling for the euro’s collapse, only to see it rebound and come back stronger?
Or is this finally the hangman’s noose for the euro? Personally, I believe it to be the former. Here’s why…
The euro is the second most liquid currency in the world, and the second most widely traded currency in the world. It is the offset currency to the dollar — and the closest thing to the next world reserve currency.
So, if you believe that the euro will collapse, then you must believe that the U.S. dollar will continue to soar for years. You must think our deficit spending that’s gone on for over eight years now is no big deal.
The point is long-term deficits always matter. Greece found that out. It’s only a matter of time before the U.S. does.
The Real ‘Crisis’ Currency
We are not seeing the United States’ deficits show up in the dollar’s price yet. But it’s starting to head in that direction. When these deficits do come home to roost, anyone owning dollars will find out just how damaging all that debt really is!
Comparatively speaking, our problems are much greater. But we still have to listen to the market and relay what its saying. For now, I believe the markets will continue to focus on the debt problems in the EU rather than here in the United States.
Traders are punishing the euro, so we will see some more euro weakness for a few months. But, I do believe that will change. Until it does, however, we need to protect ourselves from euro weakness.
It will be a real drag on the recovering U.S. economy, and the U.S. dollar. But when that happens, the euro will see some life again. You won’t be able to say that you weren’t warned!
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Asante Sana (Thanks)
Tax & Financial Consultant, RFC
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"F.E.A.R. – False Evidence Appearing Real”
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