Potential Euro Collapse & Rapid Redistribution Of Personal Wealth

By Daniel R. Amerman, CFA

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Winners & Losers

Across German society and across the entire German business landscape there will be many kinds of winners and many more kinds of losers.

Anyone who owns euro-denominated bonds loses, particularly if their expenses aren't paid in euros. On the other hand, anyone who owes large sums of money in euros, but has the ability to earn money in the new Deutsche marks, wins fantastically, as their debts are essentially paid off for them by the monetary crisis.

German financial institutions that pay their depositors in Deutsche marks, but have large portions of their investments in euro-denominated bonds and loans outside of Germany – where their investments will be repaid in euros – can expect to be devastated.

On the other hand, the German manufacturing firms who have borrowed extensively in euro terms internationally, but earn income in Deutsche marks (or that have the ability to have their international earnings float with exchange rates), will benefit in a major way as they make their own debt payments effectively in drachmas and liras. This may indeed drive the internal German political debate, as one has to look at the sections of German society that will benefit, and the sections of German society that will lose.

Individuals who own bonds and assets but don't have current income from the economy, such as retirees, may face devastation.

However, German manufacturing firms will gain a huge global advantage and the benefits will flow to the domestic German workforce, particularly those workers who are younger or in middle age, with many years remaining until retirement.

So as is always the case – and this is crucially important whenever we look at monetary crisis – we not only have an international redistribution of wealth, but a generational redistribution of wealth within each society.  Germany will be no exception.

Currency Speculation & The Deadly Counterattacks

As crises continue to develop around the world, the headlines and the financial focus are likely to be on such subjects as currency speculation, as well as other derivatives strategies.  However, the particulars of currency speculation may not work at all like some speculators think they will.  As an example, some investors have quite accurately identified past moments of crisis for the US dollar, such as September of 2008 - only to be badly burned when the dollar's global refuge status turned out to trump fundamental deteriorations in the US economy. 

Of greater concern is that the currency markets will be the subject of central banking, governmental and regulatory interventions, and given the stakes, these interventions will likely be on an unprecedented scale, both in terms of money deployed and rules changed.  The central banks of the US, Europe and Japan have all been openly monetizing in recent years, so there are no handcuffs that prevent the banks from creating more trillions of dollars, euros or yen in an afternoon - with a timing that doesn't just defend the Euro, but is quite deliberately chosen to attempt to bankrupt the speculators.

The governments of Europe have identified their scapegoat, and it is the speculators.  Rather than accept responsibility for the results of their own policies, the plan seems to be to try to punish the market forces that attempt to profit from deteriorating conditions.  At the least, there are likely to be regulatory changes along the path ahead, implemented with a timing that is tightly coordinated with the central banks' interventions. 

An obvious example is to flood the markets with trillions of dollars and yen in support of the Euro in the same hour that margin requirements are raised through the roof - and deliberately create a discontinuity, in which speculators suddenly find themselves in deeply underwater positions with no ability to unwind on the way down, it is difficult to find a buyer at all in the stampede for the exits, and they must come up with massive cash infusions to meet the margin calls that day - or go bankrupt in an afternoon.  Then repeat, in a series of savage attacks on the speculators, who will be presented as traitorous near-criminals that are trying to bring down the West for personal gain.  These tactics are child's play if one has unlimited monetary creation ability, absolute control of the rules and has historically unprecedented motivation - and all three elements will be there for desperate governments who find themselves backed in a corner and fighting for their lives. 

The label could also be changed at will from "near-criminals" to just "criminals"; all it takes is a change in the governing law to make some kinds of speculative activity into actual criminal offenses. 

This potential criminalization of certain types of financial speculation may sound far-fetched, but one has to remember the box the governments have created for themselves.  The "too-big-to-fail" banks who are being propped up by the governments are some of the very same institutions who are speculating against the governments, and inflicting devastating financial losses on an institution that the government is trying to keep afloat can easily lead to into self-inflicted wounds on a massive scale.  However, governments criminalizing the undesired activity could act as a sort of "banking neutron bomb" by threatening the personal destruction of the traders as individuals - both domestically and internationally - but while leaving the office around that individual intact, as well as their employer's balance sheet.  European governments have already shown their willingness to start down this path, not only through proposed legal changes to date, but the identification of the speculators as effective enemies of the state.   And the greater the future crisis - the more likely it is that substance will replace rhetoric. 

On the surface, the potential collapse of the Euro arguably represents one of the most profitable arbitrages in the history of the currency markets - or it would be, in a theoretical free market with no government interventions.  In practice, however, speculators face opposition from desperate governments who can and likely will be using a near infinite supply of money, along with implementing drastic regulatory rules changes, and changing civil and possibly criminal laws in a very deliberate and calculated effort to destroy them.  It may take deft footwork indeed to reap the profits while dodging the savage counterattacks.

Multi-faceted Personal Strategies For Multiple Problems

Across the globe, for hundreds of millions of retirees and other long-term investors in the developed countries, while the specifics will vary by the country and currency – the inflation and debt-driven redistribution of wealth may end up being the number one determinant of financial security and ongoing standard of living.

This has been true in past crises. For instance, everyone talks about gold during the US monetary crisis in the late 1970s and early 1980s. Yet the redistribution of wealth that occurred in the United States via mortgages dwarfed the redistribution of wealth that occurred because of gold, both in domestic dollar terms and most particularly in the number of households affected.

What’s best for you?  The correct answer of course is not just precious metals, nor debt-strategies, nor generational strategies, nor what you can do inside of a 401(k), but all of the above combined. As I have been exploring in my most recent work, it is in the integration of all these factors, with each component doing what it does best, that is the best way for individuals to not only preserve but increase their after-inflation and after-tax wealth during times of crisis.

The need for an integrated strategy with multiple components - potentially including a major precious metals exposure - is particularly important given the key themes within this article.  We don't know whether it will be currency collapse as explored herein; or economic and/or military warfare as non-Western powers try to exploit a breakdown; or whether the forces seeking increased government controls over markets (and market participants) will win out instead.  Regardless of the outcome, if the battle is fought, then the rules and regulations are likely to be changed along the path, and changed in a manner specifically designed to punish speculators of all kinds. 

This is no mere theory when it comes to attacks on precious metals - one only has to remember the recent regulatory attack that used rapid fire margin requirement changes to drop the price of silver by 30% within days, in a manner designed to deliberately inflict maximum financial damage on those using silver futures to speculate against the currencies of their own governments.  As the crisis grows, then the governments may very well deploy even more powerful weapons, perhaps in multiple coordinated attacks that deploy unlimited monetary resources, regulatory changes and legal changes potentially including tax law changes, as part of an overall strategy of Financial Repression.  (If you are not familiar with Financial Repression and its current use by the US government, the link below contains vital information.)


An uncertain future requires multiple approaches, integrated together, where the failure of one component as a result of government intervention does not destroy a person's life savings, but can potentially be offset by gains in other areas.

However, there is something that has to occur first before any of these components can be put into place. You need to thoroughly understand them. Education is the key.  Understanding the different factors, understanding how they affect you, their interrelationships, understanding how to protect yourself and how to turn them to your advantage is the first and irreplaceable step in these times of turmoil and crisis.

(Most of the above article was originally written in 2010 and 2011, it has been updated as a result of developments in 2012.)