Jon, I think that the recent decline of the dollar has already discounted your scenario. Furthermore, I think that the EURO will eventually plunge Europe into a big malaise. Who was the moron that thought up this contraption (the Euro) and the lousy timing of its introduction, just before the economies of Europe (and the rest of the world) have to contend with dislocations caused by the Y2K problem, the weakening former Soviet block and the tail end of the Asian malaise.
Historically, any sudden change in taxation, regulation and trading environment brings about economic dislocations. The equation is very simple. Capital seeks best return, and it takes capital some time to reallocate itself. Gradual shifts allow for "painless" reallocation of capital, sudden shifts bring economic calamity.
The US changed a very simple rule in its taxation of real estate (from not at risk to at risk) and landed us the S&L fiasco. Yes, prior to the tax change, capital was misdirected to RE projects which without the special tax treatment had no economic viability, but the sudden change (rather then a graduated change over at least 10 years) did not provide enough time for capital reallocation, and we ended up with writing off half to a trillion bucks.
The European economy shifting at once from in essence independent economies each having its own balance between fiscal and monetary policy to a system with a single monetary authority but national fiscal policies will be catastrophic, IMHO.
Yes, CB's are going to have some EURO as reserves, but these will come more from sales of gold reserves, IMO, then from sales of dollar denominated bonds. The current weakness in gold (in conjunction with the weakness in the dollar) is a discounting mechanism to that effect.
Zeev |
