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Greek Crash May Trigger Currency Death Spiral

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Wealth Cycles
Sept 13, 2011

As the U.S. collectively commemorated the 10th anniversary of 9-11, folks in Europe braced for a different type of calamity.

Over the last week, Greek bonds have plummeted in value (driving one-year yields to a mind-blowing 117%), and with the market predicting a near certainty of default, German busybodies were engaged in trying to prepare contingency plans for their own banks. What surprised people was not the fact Greek bonds have plummeted (aren’t they always doing that?) or that Greece surprised markets by having a bigger deficit this year than last year—even after all the austerity jawboning. What surprised people was that Germany had enough instinct for self-preservation to come up with a Plan B.

  • A d v e r t i s e m e n t

Many have argued that Europe is in worse dire straits than the United States, and, by certain measures, that’s true. The investors who believe that are putting their currency where the mouths are, buying U.S. government bonds at record –low prices. The U.S. 10 year bond hit a record low of 1.87%.

But the “grass is greener” view is a little naïve. The debt problem is not only a European problem—it spans the globe, and while U.S. bonds might get a little boost at the expense of certain European bonds, the view that this will continue forever is shortsighted.

Sure, we are witnessing the end of the euro, but will the euro simply be the first currency domino to fall? Do people really think that U.S. banks and the U.S. government coffers are insulated from a collapse in the euro?

This article was posted: Tuesday, September 13, 2011 at 3:20 am

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