The last time the Euro was at perfect parity with the US$ was a little less than 20 years ago, in November 2002. And here we are again. All it took is just a few weeks to get back to that parity.
At the same time, the last few weeks also reflect nothing more than the tipping of that global order we have been used to in the last 70 years. And it’s a story which is part of the narrative we shared with you several times in the last few months.
But it is also the story of the Euro that needs to be told here with a narrative that will allow us to better grasp the unfolding of events in the times to come. The tipping of global order seems to be mirrored by what we are witnessing on the Euro/US$ parity. For the first time in 20 years, the parity fell below $1. That’s a sign of what’s to come and we’ll tell you why.
If you remember, we already talked about the shifting global value chains, and the inflationary cycles we have witnessed in the last 70 years. We also referred to the likely shifts in the dynamics of currency reserves.
This is all part of the shifting global order. And you are all witnessing under your own eyes right now is a momentous milestone in the longer ark of global history.
But don’t be fooled by appearances. There is a tendency to think that these shifts are all taking place because of the war in Ukraine. And I want here to stress that these changes were already bubbling under the surface for quite a while. All you have to do is look at the last 70 years.
We got used to the way things looked in the last 70 years and thought it was part of normality. But under the surface of that apparent normality, many deep changes were happening. Many emerging countries could see it coming because they themselves were at the forefront of the dislocation happening in slow motion. Meanwhile, many of us, in richer nations especially, could not see it coming. We were too busy with our internal election cycles and inner social-economic workings. We were too busy trying to rearrange the deck of ship without any concern about the effect our central banks were inflicting inadvertently on other countries tied to our own currencies.
That’s the Triffin dilemma we were referring to a few days ago. So let’s take a little diversion here at this point of our narrative. Let’s talk first about Central Banks.
In our current dominant monetary system, central banks are here to protect the value of a currency and maintain price stability. That’s in a nutshell what they are about. You see, a central bank just does what it is supposed to do. It’s like a robot with a clear mission embedded in the coding of its inner workings. If you tell it to fight inflation, it will do just that. That’s all and nothing else. “You got to do what you got to do”, as the saying goes, and that’s how a central bank behaves. Some of them are more activists and reactive on the short term, others take a longer view to start acting. The activist and reactive ones will handle the situation more swiftly and correct their errors more rapidly because they handle a monetary area that is smaller and less systemic for the world (the Bank of England, the Sverige Riksbank, the Bank of Canada, the Reserve Bank of Australia etc..).
Others, the Federal Reserve in the US, the ECB in Europe, the Bank of Japan, or the People’s Bank of China, act more like the super tankers of the global monetary system. Their areas of influence are much larger and reflect the size of their respective economies and their trading patterns with the rest of world. Their actions have a much longer and deeper effect. They are systemic. They are like super tankers which need a very long time to turn around. A friend of mine back when I was in business school was also studying at the naval school to become a commercial ship captain. He was telling me that these super sized super tankers can take up to 10 miles to stop. You don’t maneuver these ships like a speed boat.
So these large central banks are the super tankers of central banking. And right now, because of that sudden and violent spike in inflation, they are about to slow the super tanker down with a single concern on their mind. Stand on the breaks as aggressively as possible and bring the economy as fast as possible to a halt, even if it means that a recession unfolds. And if their action makes waves all around them that could capsize the smaller boats and speedboats of the global economy, that’s none of their business. It has happened several times in the last few decades and they will not hesitate this time again.
We saw it in the early 70s with Volker at the head of the Fed. We saw it within the older Euro area – then the European Monetary System also known as the European monetary snake in the early 90’s. Back then, both the FED and the Bundesbank just followed that adage: « you got to do what you got to do. »
And this time again, history will repeat itself. But this time, something different is happening. This time around, the inflationary tsunami is hitting everyone at the same time and concomitantly.
And this time around, the super tanker FED is about to create waves that are about to capsize another supertanker called ECB/Euro Area.
And all the other supertankers standing in nearby waters are also watching and wondering how they should protect themselves. Some of them, the BRICS, are even looking at taking things into their own hands. And this time, it looks like their initiatives could lead to some tangible results.
Let’s consider the following; back in 1950, right after WWII, US+UK+FRA+GER represented 45% of the world economy, CHINA and INDIA 9%, and the Rest of the World 46%. Yet, out of that share of 46%, the great majority was in the hands of large colonial empires. So that share allocated to the US/UK/FRA/GER should be a lot higher, closer to 70%.
China and India together, back in 1950 represented 9% of the the world GDP. In 70 years, these two same countries rose to 22.3% of world GDP (https://www.visualcapitalist.com/100-trillion-global-economy/).
Meanwhile, the same US/UK/FRA/GER economies stood at 35% of world GDP in 2022. That’s a 10 percentage point in 70 years.
But don’t get fooled by these 70 years. It took China 20 years to get to the number two spot and it is expected that it will surpass the US by 2030. Many other countries will also climb that ladder faster than expected, just because their population will provide the impetus for that economic vibrancy.
In other words, what the currently industrialized countries did in 100 years, other BRICS and emerging countries will take a fraction of that time span, maybe 15 years, or 20 years, or even 50 years. But in any case, now is the tipping point, and it’s happening right under your own eyes.
That’s what I wanted to share with you today. Let me know if you have questions and feel free to comment.