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Where everybody losesby Charles Hugh SmithThursday, September 27, 2012, 8:33 PM
A year ago, in the wake of the then-announced additional monetary easing measures by the Federal Reserve (which since sent stock prices on a rocket ride for the next nine months), many of our readers feared a major decline in the dollar was imminent. To add some balance to our site content, we asked Peak Prosperity contributing editor Charles Hugh Smith to argue the case for a strengthening dollar. He graciously accepted, and in the year since writing Heresy and the US Dollar, America's currency did indeed strengthen notably vs. its fiat counterparts. Now, after the Fed's announcement of QE3 (plus), many of us are girding once again for dollar weakness. So we've invited Charles to once again play devil's advocate.

The Siren Song of 'Beautiful Deleveraging'

In a world of rising sovereign debts and an overleveraged, over-indebted private sector, history suggests there are only three possible ways out: gradual deleveraging, defaulting on the debt, or printing enough money to inflate away the debt.Ray Dalio recently described the characteristics of a “beautiful deleveraging” in which equal doses of austerity, write-downs, and inflation gradually lighten the load of impaired debt.  This might be called the Goldilocks Deleveraging, as the key feature of this “beautiful” solution is that each component is “not too hot, not too cold” – inflation is modest, write-downs of bad debt are gradual, and austerity is not too severe.  Given enough time, the leverage and debt are worked off without requiring any structural change to the Status Quo.Understandably, the Status Quo has embraced this solution for the appealing reason it doesn’t change the power structure at all.  Everyone currently in charge remains in charge, and everyone who owns outsized wealth continues owning outsized wealth. Rather than falling onto the politically powerful “too big to fail” banking sector, the pain of deleveraging is spread over the entire economy.  There is no such thing as painless deleveraging, so the “solution” is to distribute the pain over hundreds of millions of people. That’s what makes it “beautiful” to the Status Quo: It doesn’t cost them either their power or their wealth.http://www.peakprosperity.com/blog/79761/welcome-era-ugly-inflation?utm_campaign=weekly_newsletter_27&utm_source=newsletter_2012-09-28&utm_medium=email_newsletter&utm_content=node_title_79761

Why Germany Is Going to Exit the Eurozone

Simply put, it has no choiceby Alasdair MacleodTuesday, September 25, 2012, 12:24 AMIt's becoming clear that there is only one sensible solution ahead of us as the Eurozone’s problems evolve: Germany and the other countries suited to a strong currency should leave. If they do, the European Central Bank (ECB) will be free to pursue the easy money policies recommended by Keynesians and monetarists alike. It's increasingly clear that Germany has no option but to behave like any creditor seeking to protect its interests – and do its best to defuse the growing resentment against her from the Eurozone’s debtors.However, leaving the Eurozone is a political and legal, even seismic wrench, reversing decades of historical progression towards political and economic union.The saga of the Eurozone reads like an old-fashioned novel – with a beginning, a middle, and presumably an end. In the beginning we are introduced to the characters, the middle is where the action is, and the end is plainly predictable. There are two broad types of story: fairy tale and murder mystery.  A fairy tale starts with a handsome prince, who meets and conquers evil and woos the princess, and at the end they marry and live happily ever after.  A murder mystery starts with a murder, the middle is littered with clues (many of which are designed to put the reader off the scent), and the perpetrator of the crime is revealed at the end. The starry-eyed visionaries behind the Eurozone embarked on a fairy tale and instead have found themselves as characters in a murder plot. The difference is not the outcome, but how many pages we have left to turn to the end of the story.The victim, of course, is the great European ideal, the political project that was meant to unite the European nations. The murderer is sound economic theory, which has been ignored, even trampled underfoot, but has resurfaced in the guise of reality. None of the actors foresaw (let alone can accept) this turn of events, and to get a flavour of the current mood we only have to listen to Manuel Barroso, President of the European Commission, whose response is to retreat into yet more regulation and statist control in denial of all reality.Germany and France are centre-stage; in the post-war years they were partners in forming an economic and political block on Soviet Russia’s western boundary, containing the spread of communism. And by uniting the nations of Continental Europe, the reasons for war between them would be neutralised. These objectives were achieved, not so much by the formation of the European Union, but because the USSR’s communist model ensured the eventual economic collapse and disintegration of Russia and her satellites. And after the Franco-Prussian War and the First and Second World Wars, Germany lost all appetite for belligerence anyway.France, with a little help from her Anglo-Saxon friends, was cock-of-the-roost after the two world wars, so much so that De Gaulle, France’s post-WW2 leader, was confident enough to refuse to join NATO, building France’s own arms capability instead. This sharply contrasted with Germany, who disavowed any military capability of her own and submitted completely to the military jurisdiction of NATO. This was reflected in post-war politics, with Germany quietly rebuilding her shattered economy, basing it on the preservation of savings, while France sought to build the state. The background to our story is one involving neighbours presenting a common front, but with very different attitudes toward life.http://www.peakprosperity.com/blog/79685/why-germany-exit-eurozone?utm_campaign=weekly_newsletter_27&utm_source=newsletter_2012-09-28&utm_medium=email_newsletter&utm_content=node_title_79685