Betting on Germany for Now

Mr. Bernanke is at it again. Everyone is worried about the decline of the Dollar, exacerbated on 3 November by the Federal Reserve’s decision to pour another USD 600 Million into US Treasury bonds. Don't be fooled. What the Fed is actually doing is printing dollars.

The reaction in world financial markets was as swift as it was expected. On 4 November, world stock markets rose, commodities, especially oil, gold and silver, rose dramatically, and the US Dollar fell against almost every other currency. 

What to do to save your capital or avoid the coming defacto devaluation of the US Dollar? My bet is on Germany and the Euro.

Germany is the driver of the Eurozone - countries that share the Euro currency. Its manufacturing and export sectors are the backbone of the European Union’s export economy, representing 25% of its output. Germany’s heavy equipment is the most important export sector from the Eurozone to other European countries and Asia, especially China. Germany’s GDP rose at a 2.2% rate in the first half of 2010, far outperforming any other Eurozone economies, which couldn’t manage even 1% growth. Germany growth beat the US, too. And with that 2.2%, the Euro rose as well.

France and the other Eurozone countries are dependent on Germany’s engine to support the Euro. If one wonders why the Euro is so consistently strong, why it rises and outstrips the US Dollar, the answer lies in Germany. The Euro has become the surrogate for the Deutsche Mark, sadly missed by most Germans. In fact, I believe that the Euro already would have been greatly devalued or even disappeared if the Germans were not determined to maintain its stature in the range once possessed by the DM.

For example, Germany sets the agenda when Eurozone countries try to work out how to deal with those member countries whose debt burden has far over-reached the agreed 3% of GDP level embedded in the Treaty of Lisbon that governs Eurozone financial matters. Germany decides whether it will allow its Euro reserves to be the backstop for Irish, Greek, Portuguese or other members debt, because these countries would not able to borrow funds to provide for their public needs unless someone is willing to guarantee the debt. That someone is Germany.

Where’s the safe haven?

I would bet on the Euro and Germany going forward, at least until Mr. Bernanke decides he’s pumped enough Dollars into the world’s reserves, or the Dollar falls so precipitately that even he has to acknowledge that he’s got a disaster on his hands.