Friday, September 7, 2012

Existential Monetary Crisis

"The value of the euro has been increasing. Go on your European vacations before its too late."

Why is this headline strange: Euro touches 2-month high on ECB bond plan 

Any guesses? Anyone? If you read my previous post on the Eurozone would that help any?

After months and months of the ECB saying that they do not have the legal authority to purchase government bonds directly from euro-zone countries that are issuing them, they have finally found some wiggle room. Just like how the Supreme Court rarely overturns precedent, they just happen to find some wiggle room that in effect does so without actually having to say that the prior court was wrong. That would be admitting that they are fallible. The Catholic Church does the same thing - they don't change their position on issues like slavery, but instead find room for reinterpretation. It would be bad form, if not flat out rude, to admit that your predecessors did not know what they were doing. Or in this case, Draghi would have to admit he - not his predecessor - was wrong only a few short months ago. Politicians never admit such a thing.

The wiggle that Draghi found was that he newly discovered that the ECB has the legal authority to buy short-term bonds, but not long term ones. That would be against the treaty. To be honest buying bonds of any kind is pretty clearly against the treaty, but these times are too economically trying, with a timeline too short, to change the treaty to what needs to get done. Change that, to what should have been done months and months ago. What is new is that Germany's Chancellor Angela Merkel has dropped her opposition - being the last major holdout - to abiding by the letter of the treaty in order to ensure that the monetary union still exists on Monday morning. Everyone has agreed that what is written can be reinterpreted to say something it doesn't say because it is in everyone's self-interest to do so.

Here is another example. The Second Amendment to the US Constitution clearly states:

A well regulated militia being necessary to the security of a free state, the right of the people to keep and bear arms shall not be infringed.

The letter of the law gives permission for the militia's to exist and to bear arms. Not individuals. It became a political consensus that the spirit of the law meant that individual, as well as the group, had the right to bear arms. This was not challenged in the courts until District of Columbia v. Heller, where the courts upheld the individual right as opposed to the group right to own firearms.

"Bear arms for all"

I am sure the EU courts will end up doing the same thing. They will find a legal reason to interpret the treaty to what is political consensus as opposed to upholding the letter of the law.

Anyways, any answers yet to why the headline is strange? Another hint: It has absolutely nothing to do with anything I have said so far. 

Answer: When a country (or in this case, a group of countries) takes on monetary easing, then the value of the currency usually goes down relative to other currencies. If there is more euros, then each euro is worth less. Makes sense? Okay. Now look at that chart at the top again. More euros makes the currency worth more? How does that make any sense? It's because the ECB has sent a signal that they are willing to do what it is necessary to save the Eurozone. People have more confidence that the existential crisis of the euro is coming to an end, even if there is still a long way to go.

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