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Tonight I received a
thoughtful email from reader Rick Cameron who made some observations and
notes way back in 1992 and recently went back to review those notes.
His notes are regarding the European ERM, the Exchange Rate Mechanism, that was supposed to reduce exchange rate
variability and achieve monetary stability in Europe.
Before I list the thoughts of Cameron, here is some background information on
the ERM and the countries involves:
The UK entered the ERM in 1990 but in 1992 Britain exited the ERM after the
pound sterling came under pressure from George Soros, dubbing Soros as
"the man who broke the Bank of England".
In 1993 the currency band had to be expanded 15% to accommodate speculation
against the French franc and other currencies.
Wikepedia notes the ERM came to be known as an
"Eternal Recession Mechanism" after Britain fell into recession
during the early 1990s.
European ERM 1992 Replay
With that backdrop, please consider this Email from Cameron.
Hello
Mish
I am a student of history, and I was an active investor in 1992. I have
recently gone back and looked at my notes and the charts and the media
comments about the UK and the European Exchange Rate Mechanism.
The parallels between the UK in 1992 and Germany in 2011 are striking.
Under the ERM, the (financially) stronger countries would be responsible for
the weaker ones. Then the Berlin wall fell, the Eastern European countries
tanked, and the UK was on the hook to support them.
There was lots of pressure on John Majors not to continue that policy and to
leave the ERM. Political dithering followed, complete with bold speeches by both
Brits and the Europeans about unity. The Brits held their ground in the face
of enormous pressure on the pound, culminating with a $28B currency buyback
in mid-September.
Students of history know what happened next: The Brits finally threw in the
towel, left the ERM, and the pound tanked from $1.95 to 1.70 from September
19th to September 26th, then to $1.50 by November. George Soros made $2
billion.
Every article I read today about the ECB, the Germans, and the euro,
resembles closely some similar article I have about the Bank of England, the
British government, the ERM, and the eventual fall of the pound.
To me, it seems like an inevitable march down the same road - same players,
same dithering, same posturing, same lack of attention to any of the real
problems, same case of refusing to deal with any of the real issues - and
sadly, the issues in 1992 were EXACTLY THE SAME as they are today.
Are the financially strong Northern European countries going to support the
weaker Eastern and Southern European countries? Everyone in Europe loves the
idea - until they have to write checks with their own money. Then it all come unglued, every time.
Finally, we need to not forget that the guy who stubbornly held onto the
concept of the Brits supporting the ERM, no matter the cost and pain to the
British taxpayers was none other than John Majors, who at the time was
working on the Maastricht Treaty.
To quote Peter, Paul, and Mary "when will they ever learn?"
Have a
good day
Rick Cameron
Same Issues, Same Players
Yes indeed. We have exactly the same issues and same players. Note that the
UK is still on the outside looking in, with the rest of Europe clamoring to
get the UK in.
The smart play would be for Cameron to stay on the outside, looking out
as noted in Will Cameron Sell UK Down the River for Worthless
Promises? Two-Speed Europe and the Clutches of France
Since 1992, there has been an obvious change in political leadership.
However, the politicians involved all still seek the same proverbial free
lunch.
Irony of the Maastricht Treaty
The irony of the Maastricht Treaty is that it did temporarily bring about the
currency stability everyone wanted. However, that currency stability came at
the expense of something far worse - inherent interest rate instability
(coupled with heightened fiscal instability).
It just took some time to play out.
Now, instead of attempting to defend untenable currency targets, the ECB, the
Eurocrats, and the IMF all have their hands full
attempting to maintain untenable interest rate targets. With yields soaring
in Greece, Spain, Italy, Ireland, Portugal, and Belgium in relation to
Germany, the Troika has failed.
To alleviate interest rate concerns and fiscal instability caused by the
Maastricht Treaty, politicians now openly discuss breaking up the Eurozone,
which of course will immediately kick off a full-blown currency crisis in
various countries.
Interest Rates on Government Bonds Go Full Circle
 
Chart from Spiegel Online
When the currency crisis happens and the Eurozone breaks up as is inevitable,
Europe will have gone full circle on both interest rates and currencies, with
politicians chasing their tail every step of the way
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