The European Liquidity Mechansim

In the preceding article, we looked at how china's currency manipulation was leading to money creation on a massive scale. Today we will contrast the european method for dealing with the dollars we throw at them.

China is not the only net exporter in the world; it is just the most extreme example. Germany, for instance, maintains large trade surpluses with many nations. Since germany is the largest economy in europe, this means that on a net basis the european union (EU) is one of the largest net exporters to america.

Like china, this means that there is a constant stream of dollars heading into the euro currency zone. Unlike china, there is much less currency manipulation. The european central bank (ECB) does not make it an everyday policy to keep their currency cheap by printing euros and using them to buy dollars like china does with the yuan. This means that the euro has increased against the dollar for most of the past 7 years.

That isn't to say that every dollar sent across the pond is sold for euro's: far from it. As one of the largest markets in the world, the so called "eurodollar" market refers to dollar deposits held by european banks. A great deal of these dollars make their way back to our domestic capital markets in the form of investments in stocks, bonds, and toxic collateralized mortgage obligations (CMO's) like the ones in today's current crisis. That is one of the reasons a US housing bust caused so much pain abroad, both europe and asia were heavily invested in US debt.

Nevertheless, until the US reverses its trade deficit with the EU or the ECB begins a china-esque policy of currency manipulation, the euro will resume its long rise against the dollar.