Euro’s Problems Are the Overture to Ours

05/17/2010 1:25 pm EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

It isn’t working. 

They can throw all the euros—and dollars—they want at the Greek financial situation. But the markets won’t believe it. The euro is heading straight down towards parity with the US dollar. 

That wouldn’t be the end of the world: Remember, when the euro launched in January 1999, it was priced at parity with the US dollar. And amidst great skepticism over the possibility that Europe could create a common trading community, with common laws and currencies bound to each other, the euro quickly fell to 84 cents. 

It wasn’t until July 2008 that the euro traded at its highest exchange rate—over $1.57, before the current financial crisis began. The euro slipped in the rush to the safety of the US dollar in the fall of 2008. 

But as recently as October 2009, the euro was once again trading above $1.48—as it appeared that Europe would weather the financial crisis better than the United States. 

Now, that optimism has disappeared amidst the reality that while Germany and some other countries have taken a disciplined approach to their economic situation, Greece, Spain, and Portugal are unable to repay their debts, since they are tied to the euro and they cannot print drachmas, pesetas, or escudos to pay their bills.

We’re getting a first-hand look at what happens when the world loses faith in a government, and therefore in its currency. For most of us, the idea of Germans pushing wheelbarrows full of currency is historical hyperbole. But it really happened. And in my wallet, I carry a 100-trillion-dollar note from the Reserve Bank of Zimbabwe, printed a year ago. Today, it wouldn’t buy a loaf of bread in that devastated African country.

At the moment, the world is rushing out of euros and into US dollars. That’s pushing yields on ten-year Treasury notes down to well below 3.5%.

So, amid all this dollar buying, is the US dollar once again the undisputed reserve currency of the world? Or is it simply the current lesser of all evils? Your answer to this question will have a significant impact on your investing, financial planning and retirement plans.

I think it’s only a matter of time before the rest of the world turns to the United States and sees the same profligacy that is has already reacted to in Greece.

Ultimately, the world will look at the huge budget deficits being run up in a vain attempt to “stimulate” our economy into prosperity, and they will come to the same conclusions:  The currency is not worth the paper it is printed on—or the keystrokes that create the credits on the books of the banks.

Then there will be only one reserve “currency”—gold. We’re only at the beginning of the flight from some paper currencies—and into hard assets. Dollar selling has pushed gold up to record levels in dollar terms. But euro-selling has pushed gold even higher against that currency.

Full disclosure: I started buying gold coins in the 1970s and have never sold one—even when the price collapsed from over $800 an ounce to below $200. Instead, I kept adding to my position, which also includes gold shares, gold mutual funds, and the ETF that represents gold bullion prices, SPDR Gold Shares (NYSEArca: GLD).   

While gold is a trading market, subject to volatility—and the possible sale of bullion by central banks—I definitely expect to see gold trade above $2,000 an ounce within the next year or two.  That's because, as you're seeing now, gold is not only a hedge against inflation, but a hedge against the most frightening aspects of deflation, as well.

After all, even Rumpelstiltskin knew he couldn’t spin straw (or paper) into gold. But he kept trying!

What do you think? Please join the conversation and have your say.

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