Tags: Euro Debt, U.S. Economy

Eurozone Debt Crisis, U.S. Economic Policy Not Likely to Cause Currency Collapse

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By , Associate Editor, Money Morning •

The Eurozone debt crisis and U.S. economic policy continue to draw speculation over how these countries will overcome growing mountains of debt - and how the incessant borrowing will affect the euro and U.S. dollar.

More bad news came from Europe yesterday (Thursday) when the European Central Bank (ECB) had to intervene in Eurozone bond markets to buy Portugese debt. The country's 10-year bond yields hit a new euro-era record of more than 7.6%.

Portugal has already instituted pay cuts and tax hikes to pay down its debt, but recessionary concerns are casting doubt over Portugal's economic recovery. The Eurozone government's inability to agree on rescue tactics for its weaker governments is also making investors lose faith in the euro.

The European Union last year created a 440 billion euro ($599 billion) support fund to bail out any of its member economies. Greece and Ireland already requested money, with and Spain and Portugal could soon follow.

Meanwhile, the loose monetary policies employed by the U.S. Federal Reserve have led analysts to predict a sinking U.S. dollar in 2011.

"I fully expect the dollar to continue to disintegrate in 2011," said Money Morning Chief Investment Strategist Keith Fitz-Gerald.

Many U.S. politicians and investors have been frustrated with U.S. Federal Reserve Chairman Ben Bernanke's dismissive approach to U.S. dollar concerns. This was showcased Wednesday when U.S. Rep. Jason Chaffetz, R-UT, asked Bernanke to comment on reports that other countries were looking to peg their currencies to oil or commodities instead of the U.S. dollar.

Bernanke suggested to Chaffetz he didn't take the talk seriously, according to The Wall Street Journal.

"[L]ately, given the problems of the euro... and the prospective growth in the U.S. economy - the dollar has actually been looking a little bit more attractive relative to some of the other currencies in the world," Bernanke said in Wednesday's testimony.

Flooded with conflicting news about which currency, the euro or the U.S. dollar, is in a worse position, a reader sent the following comment into the Money Morning Mailbag. Money Morning Contributing Editor Martin Hutchinson addressed the bleak, but not terminal, futures for both currencies in his answer below.

Question: I am an Englishman living in the Netherlands and reading your American publication. Everyday I read several online economic Websites and also the contrarian tipsters. If the economic situation was not so serious, all the "feather preening" going on could only be described as laughable.

Here's what I notice: In Europe/U.K they say the euro is strong and getting stronger, while in the United States they say the euro is in melt down and there's a corrupt government. The dollar contrarians (mostly Americans) and the European critics state that the United States is finished and is heading for bankruptcy sometime in the next three years due to a corrupt government. The United States says a collapse in the euro will trigger a worldwide collapse, the Europeans argue that a collapse in the dollar will be the root cause of a worldwide collapse.

Which is it? And why all this political scandal mongering? Shouldn't we all be sorting out our own pile of mess and stop looking elsewhere for the scapegoat to blame the mess on?

-Rick P.

Martin Hutchinson: I don't see either the euro or the dollar collapsing. I do think it's possible that Greece and possibly Spain (in worse trouble than Portugal or Ireland in my view) may have to leave it, or may default on their euro-denominated debt (Greece almost certainly will default in some way or another.) But that doesn't destroy the euro, any more than Pennsylvania defaulting in the 1840s destroyed the dollar. The euro itself is sensibly managed, and there are lots of countries in the Eurozone, notably Germany, with good economic positions -- you'll note it's the Deutsche Boerse taking over the New York Stock Exchange, not the other way around!

The United States is badly run currently, and I think will undergo a British-type treatment of very harsh budget cuts, probably accompanied by inflation. Health won't be restored until the deficit is well down and interest rates well up from the current levels. But the strength of the U.S. political/economic system was demonstrated by the remarkable speed and strength of the reaction to the U.S. President Barack Obama/Rep. Nancy Pelosi (D-Cal.)/Sen. Harry Reid (D-Nev.) spend-a-thon.

President Obama may well be re-elected, but he won't be able to spend like he has been (and taxes will be pushed up if he is re-elected). The U.S. economy may well be sluggish and there may well be a crisis when the current bubble bursts - but the dollar won't collapse.

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