The European Central Bank is being cagey. Recently, Jean-Claude Trichet tried to explain himself. We do not have the same mandate as the U.S. Fed, he put forth. The Fed is meant to do two things at once – protect the value of the dollar…and maintain a healthy, prosperous economy. Our mission at the ECB, he went on, is merely to protect the value of the currency.
Accordingly, the ECB has been reluctant to cut rates in order to help the economy. And consequently, the euro (EUR) has gone up against the dollar…and the pound.
In today’s news, the ECB warns that the U.S. Fed may not be able to continue cutting rates: “crashing dollar may stop Fed cuts,” says the headline.
Against gold and oil, the dollar has already crashed. You could buy an ounce of gold for just over $260 when George W. Bush first began using the White House toilet on a regular basis. That was not quite seven years ago. As of yesterday, you’d pay $902 for an ounce. Against gold, the buck has lost 60% of its value in less than two presidential terms. Against oil, it has taken a similar shellacking. Even against the euro – Europe’s Esperanto money – the greenback has been cut in half, more or less, over the same period of time.
And now the whole world is wise to America’s game. When the voters feel pinched, the feds give them more money. But the money they give them competes for value directly with the dollars the foreigners have saved. The Asians, for example, sweat and save…and stick the dollars in their vaults. Now, they have trillions of them. But they wake up every morning and find their dollars are losing value. One day, a dollar buys one 800th of an ounce of gold. A few days later, it will only bring one 900th. One week, a dollar will buy one 90th of a barrel of oil. The next week, a barrel of oil costs $100.
So the ECB feels it is only fair to give warning. ‘Don’t expect us to keep protecting the quality of your money. If you keep putting it out, we’re going to sell it.’
Trichet is right about the theory. But he is probably wrong about the practice. Property prices on the fringe of Europe – in Ireland and Spain, notably – are falling faster than those in the United States. It won’t be long before the squeals of pain – in various foreign languages – reach the ECB too.
Spain and Ireland benefited hugely from the European Union. Suddenly, the Irish and the Spanish were able to borrow money at rates set by the Germans. They were low rates – the kind of rates the Germans, with the financial discipline and economic rigor, deserved. When such rates were on tap in Ireland, it set the whole country into major boom. Everyone wanted to buy property. And after a decade, Irish property was the most expensive in Europe…and the Irish, improbably, were Europe’s richest people. In Spain, the circumstances were different. But the effect was the same – Spain enjoyed a boom of the sort not seen in Iberia since the galleons came back from the New World with Inca gold.
But now what? Irish houses fell about 10% last year. We don’t have figures on Spanish property prices, but word on the Costa del Sol is that they are falling…and so are the shares of the large builders who have been putting up apartments at a furious pace for the last 10 years. And the editors of International Living magazine tell me that they’re preparing a special feature article on Spanish real estate prices in the next issue. “If you’re looking for bargains,” they say, “that’s the place to look.”
What will Trichet do in the face of such America-like problems? Will he hold fast to his principles and refuse to cut rates? Or will he take a page of the Alan Greenspan Manual of Successful Central Banking and fall into line with his counterparts in Washington and London? Like them, will he favor the quantity side of the balance…and let the quality go to Hell?
We don’t know. And we’d still rather hold euros than dollars…but the rate of increase in the European money supply is not much different from that of the dollar – about three or four times GDP increases. We prefer the yen to the euro…and the euro to the dollar…and the dollar to the pound…but we’d rather hold gold than any of them.
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