US Dollar Breaks Through!

Posted by Jack Crooks - Black Swan Capital

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In response to: 

“Hey buddy, can you spare a dime?”  

W.C. Fields is quoted as saying: 

“Sorry, son, all my money is tied up in currency.” 


    Thanks Bill 


FX Trading â€“ Through!   



Do we have a dollar breakout or fake out in the making? It depends on the euro here.  


The European currencies are lower against the dollar this morning on news that  

Germany didn’t want to throw its hard earned Treasury at central and eastern European  

problems.  Why should they?  Oh yeah, I keep forgetting, it is a â€œunion” of European  



We were wondering for many years actually how the â€œUnion” would fair during a real  

test of the system since the introduction of the euro.  We didn’t think it would fair very  

well.  And we have not been disappointed.  Not to wish ill on Europe—we really don’t.   

And we hope the budding eastern and central European democracies can weather this,  

given all they have weathered after being abandoned by the â€œgreat leaders” of West to  

dwell in an Orwellian‐hell‐hole called the USSR.        


But we continue to believe a viable monetary system must have political cohesion,  

besides synchronized business cycles; neither seemed to be present to any lasting  

degree within the European Monetary System (ERM).  And any modicum of political  

cohesion may have just left the station.  


Though we could see the ERM muddle through, maybe due in part to the massive  

problems of its competitors, it is a dangerous time indeed for the ERM.   


There is an idea floating that if quick adoption of the euro is allowed—fast track process  

for the eastern and central European countries, maybe this problem of massive loan  

exposure on the books of European banks and liquidity will somehow magically  

reappear in those struggling countries.    


None of what we pen here is new or original.  There has been concern in the market  

about the euro for many years.  Below is an excerpt from an interview with Milton  

Friedman by Radio Australia back in July 1998, before the official introduction of said  

euro [our emphasis]:  




Thank you very much. Before we sign off, 

could I just take the opportunity to ask you 

what you think the prospects are for the 

attempts in Europe to create a common 

currency area? Are you optimistic about 

their success? 


Professor Friedman: 


I think it’s a big gamble and I’m not 

optimistic. Unfortunately, the Common Market 

does not have the features that are required 

for a common currency area. A common 

currency area is a very good thing under 

some circumstances, but not necessarily 

under others. The United States is a common 

currency area. Australia is also a common 

currency area. The characteristics that make 

Australia and the United States favourable 

for a common currency are that the 

populations all speak the same language or 

some approximation to it; there’s free 

movement of people from one part of the 

country to the other part, so there’s 

considerable mobility; and there’s a good 

deal of flexibility in prices and to some 

extent in wages. Finally, there’s a central 

government which is large relative to the 

local state governments so that if some 

special circumstances affect one part of the 

country adversely, there will be flows of 

funds from the centre which will tend to 

offset that.  

If you look at the situation in the Common 

Market, it has none of those features. You 

have countries with people all of whom speak 

different languages. There’s very little 

mobility of people from one part of the 

Common Market to another. The local 

governments are very large compared to the 

central government in Brussels. Prices and 

wages are subject to all sorts of 

restrictions and control.  

The exchange rates between different 

currencies provided a mechanism for 

adjusting to shocks and economic events 

which affected different countries 

differently. In establishing the common 

currency area, the Euro, the separate 

countries are essentially throwing away this 

adjustment mechanism. What will substitute 

for it?  

Perhaps they will be lucky. It may be that 

events, as they turn out in the next 10 or 

20 years, will be common to all the 

countries; there will be no shocks, no 

economic developments that affect the 

different parts of the Euro area 

asymmetrically. In that case, they’ll get 

along fine and perhaps the separate 

countries will gradually loosen up their 

arrangements, get rid of some of their 

restrictions and open up so that they’re 

more adaptable, more flexible.  

On the other hand, the more likely 

possibility is that there will be asymmetric 

shocks hitting the different countries. That 

will mean that the only adjustment mechanism 

they have to meet that with is fiscal and 

unemployment: pressure on wages, pressure on 

rices. They have no way out. With a 

currency board, there is always the ultimate 

alternative that you can break the currency 

board. Hong Kong can dismantle its currency 

board tomorrow if it wants to. It doesn’t 

want to and I don’t think it will. But it 

could. But with the Euro, there is no escape 


Suppose things go badly and Italy is in 

trouble, how does Italy get out of the Euro 

system? It no longer has a lira after 

whatever it is – 2000 or 2001 – so it’s a 

very big gamble. I wish the Euro area well; 

it will be in the self-interest of Australia 

and the United States that the Euro area be 

successful. But I’m very much concerned that 

there’s a lot of uncertainty in prospect 

To sum it up: Danger Will Robinson! Danger!!  



Jack Crooks   

Black Swan Capital LLC