Euro teetering on edge of dramatic devaluation

The WealthCycles Staff

As investors consider the precarious situation in Europe throughout the beginning of 2012, the hottest issue remaining on the minds of investors is that European taxpayers have finally reached a point where they will not be able to refinance all of their outstanding debt.

With over $8 trillion in G-7 developed nations needing to be refinanced this year alone, it has become clear that there is not the level of savings anywhere in the world available to loan to these nations, who are apparently quite desperate to get even further in debt.

Courtesy of

Leaving two options: default—or—increase the amount of currency in supply; in other words, to inflate their currency until the value of their debts are reduced to nothing.

Default is not desirable for lenders, as they would lose far more wealth than if the status quo were prolonged through inflation. In the latter scenario, the bond payments continue, albeit in a newly inflated currency with a lower real value.

Just before Christmas 2011, the first iteration of the long-term refinancing operation (LTRO) totaled over half a trillion dollars. The European Central Bank (ECB), issuer of the paper currency, the euro, created this program to remove debt from the European banking system, replacing it with cash the ECB simply creates from thin air.

Clearly there is a conflict of interest between those who hold and use paper currencies and those who seek to inflate their supply. The argument being made in favor of inflating the currency is that the process can be reversed years down the road. However, the prospects that the process would be reversed in future is something like zero to none, as there is nothing to prevent authorities from simply extending the program--an effectively permanent inflation of the Euro.

The chart above shows us that 2012 is the critical year in which those who own paper currencies will seek to trade for hard assets prior to devaluation. With Greece seeking to avoid a default March 20th and the next LTRO slated for February 29th, time is of the essence.

Inflation is simply an increase in the supply of currency and credit. The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling is defined by the term "price inflation." Central Banks attempt to stop deflation, a natural phenomenon which occurs in order to correct the prior inflation.

How long will QE to infinity last? Certainly not "infinity." How many years do you think? Until people riot in the streets? Until people bring down the U.S. government? We're going to be taxed to death through inflation.

We suggest never thinking negatively, but instead constructively preparing for the inevitable by diversifying how you hold your wealth.

QE is ongoing currently. The differentiation one must make is between overt printing -announced- and just printing. Overt matters, because psychology matters influencing the behavior of savers, businesses, entrepreneurs, and all actors in the global economy. When considering this factor remember - faith based currency.

How long before people MUST get out of paper? Can Iraq as an emerging economy have a part to play through the revaluation of their currency?

“How long before people MUST get out of paper?”

To me the best question is:

How much paper can I get out of my life today, leaving the remainder for immediate consumption.”

Moving now yields max capture, and when speaking of maintaining your present level of wealth, max capture is all that matters.

The same question could be posed years ago, and the answer above would still remain valid. Preparing, in general, should not be postponed. See the chart in the Feb 07 2012 blog for further reference.

Chances of real default, zero!
Chances of inflation/printing, 100%

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