Parity hysterics: What it means and what it doesn’t

Photo by Guillaume Périgois on Unsplash

There’s been a flurry of articles, news stories and headlines lately over the developments in the FOREX market, specifically over the moves of the EUR/USD currency pair. As headwinds on all levels, economic, geopolitical and social, got a lot worse in recent months for the Eurozone, the news-breaking, headline-dominating “parity” event finally came about, with the euro even breaking below parity on July 13, and it seems to have captivated global mainstream attention — for all the wrong reasons.

The superficial story

Of course, this development makes the perfect base for a catchy news article, especially given the state of financial literacy of most news consumers in the West. For one thing, the euro hasn’t been worth as much as the dollar for 20 years, a fact which in and of itself is striking enough. Most europeans, having failed for decades to understand what their money actually is, how it was dreamt up in the first place and how it is still being created at will, have always tended to view their currency as “stronger”. And in some, rather insignificant, sense that has been true, as indeed one could buy more “stuff” with the same amount of euros than with dollars. Therefore, any European would understandably be alarmed by headlines claiming that this will no longer be the case.

It is important to acknowledge that not all of the coverage or all of the reactions were pure fear-mongering or click-bait fodder. Some mainstream financial news sources sought to explain the gravity of this event by outlining some of its potential implications and consequences. For example, some analyses explained the impact on imports and exports and what this extra burden might mean for the already heavily battered Eurozone economy. Same goes for the potential effect on tourism, on businesses with international exposure and overseas relationships, on the energy market and so on.

From this “economics 101” perspective, there’s really one take-away that is important for the average citizen to grasp and that most reports failed to highlight, or even mention. Larger and multinational companies that export outside the common currency area stand to benefit from the euro’s fall. Such companies can be found in the automotive industry, among chemical manufacturers and in the luxury goods sector. Conversely, import-orientated operations, like small, local businesses could see their costs explode even more than they already have.

And then, there are all the explanations for the euro nosedive. Some “experts” blame the Ukraine crisis for it and the fears that Russia would “cut off” gas supplies to Europe, while others point to the Fed’s more “aggressive” shift in monetary policy, in stark contrast with the ECB that still maintains negative rates while inflation is running amok. Eurozone officials in particular have been especially eager and/or desperate to find an explanation that absolves them, quite understandably.

The best candidate among them was arguably Francois Villeroy de Galhau, France’s central bank chief and ECB Governing Council member, who accounted for the parity by essentially saying “it’s not the euro that’s weak, it’s the dollar that’s strong”, demonstrating the degree of understanding of monetary dynamics (but also of basic logic principles) that central bankers at his level seem to share.

What parity really means

In brief, it means nothing. In practical terms, comparing two overinflated, unbacked and historically blatantly manipulated currencies is not unlike asking which of two inherently worthless things is more worthless than the other. Both currencies are supported by nothing but blind faith in governments and have been repeatedly used against their holders and users. This is the fundamental reality that most news reports and “in-depth” analyses have left out and which essentially makes this whole event a “non-story”.

There are, nevertheless, some important lessons that we can still extract from this development. For one thing, while it’s true that both currencies are worthless from a pragmatic, sound money point of view, it might indeed make sense to argue that one is “more worthless” than the other. Their “origin stories” are vastly divergent and the way the euro came to be is a true travesty in monetary history. While today neither is backed by any hard asset, at least the dollar used to be at one point. It can also be argued that the greenback had a relatively more “natural birth”. The level of artificiality that was involved in the euro’s birth on the other hand renders the phrase “funny money” uniquely appropriate to describe it.

The very fact that the euro even exists goes to show how little central planners have learned from the mistakes of their predecessors. “Willing” a new form of money into existence and then forcing people to abandon their own and to adopt it is a scheme that was always doomed to fail. Even more so when the newly invented and imposed currency removed all kinds of control from the nation states and handed the reigns to an unelected central authority that cannot begin to understand (or perhaps doesn’t even care about) the striking differences between the various economies that were brought willy-nilly under the same monetary “roof”.

“Reverse currency wars”?

Although the parity event may have captured the attention of the mainstream financial press and most western citizens, there’s a much bigger shift that has been going on in the background, which received much less coverage.

We are all familiar with the concept of a currency war. In essence, it is basically one of the most crude examples of governments colluding with their central banks (the ones that are supposed to be independent and make unbiased decisions, always in the best interests of the people and their economic prosperity), in order to manipulate the currency to gain a trade advantage.

Purposefully devaluing a nation’s currency makes its exports cheaper relative to competitors, thereby increasing demand from abroad, and at the same time imports get more expensive, thereby encouraging domestic consumption of local goods and services. As is apparent, both of these shifts provide a boost to local producers and governments like that as it keeps their voting base happy. Naturally, this “advantage” is temporary and currency devaluation does more harm than good in the long term, but the world has yet to see a central planner or politician that actually has a long-term view, or indeed a rudimentary understanding of how the economy and the market at large actually works.

This kind of “strategy” has been at play for centuries, but one of the most recent examples was the US accusing China of embarking on such a “currency war” by depressing the value of yuan in order to boost its exports. Of course, anyone with even a cursory understanding of monetary history and of how central banks work, couldn’t be blamed for wondering what exactly is the difference between what China or other “rogue” nations were doing and what the central bankers of “advanced” economies have been engaging in for decades. Printing money, artificially keeping interest rates close to or even below zero and in general manipulating the currency in any way possible, appears to be indictable only when some nations are doing it, while for others, it appears to be just another tool for reaching “full employment” or “managing inflation”.

Now, while this version of the currency war is clear cut, today we’re seeing its “twisted cousin”. If keeping a nation’s currency weak can spur “growth” (at least in the sense that the central planners understand and pursue it), then doing the reverse would stunt that growth, right? In turn, killing that growth would also tame inflation. And it might seem like an absolutely senseless step to take to control rising prices, much like chopping off one’s nose because it’s itchy, but governments are getting increasingly desperate by the day. They and their central bankers tried everything to resolve the inflation problem, or at least appear to, from denying it existed, to reassuring everyone that everything was under control, to sending out “inflation relief” checks (without an once of irony) to solve the problem that the previous checks they sent out created.

As the Washington Post noted in a recent article, “The Fed’s actions have boosted the US dollar, driving up Bloomberg’s gauge of greenback strength by close to 7% this year. On the flipside, the euro — which is used by more than 300 million people in Europe — has fallen to a five-year low against the greenback, while the British pound and a majority of other important currencies have slumped too.”

Whether this harebrained scheme will even make a dent in the inflation problem remains to be seen, even though it is certain that it constitutes no long term or sustainable solution. What is also certain is that people are slowly waking up to the fact that nothing their governments are telling them is adding up. One of the most important realizations in this respect is that none of the currency “moves” mean anything and investors and savers in particular need to understand the scale and the extent of the currency manipulation. “Trust” has nothing to do with it anymore (if it ever did) and there is no such thing as a “strong” fiat currency. There is only one kind of real, sound, and strong money, and it’s physical precious metals, as it has been for millennia.

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