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The Bruges Group spearheaded the intellectual battle to win a vote to leave the European Union and, above all, against the emergence of a centralised EU state.
The Bruges Group spearheaded the intellectual battle to win a vote to leave the European Union and, above all, against the emergence of a centralised EU state.

Meltdown in Turkey - an omen for the Euro

Gresham was a 17th century banker and trader, after whom Greshams, the North Norfolk Public school is named.

Mr Gresham is most famous for 'Gresham's law' which states that, 'Bad money drives out good.'

In Gresham's time of coins, it meant that, one would always spend a 'fake' coin or one with less precious metal content and keep the good ones; a bit like people trying to use foreign coins of less value in vending machines.

Over time and if there were lots of devalued coins in circulation, only bad coins would remain. The good ones would have presumably fled to other countries or be hidden under beds. The result was that everyone knew that the money had been debased and was not worth as much. Inflation started as people demanded more coins for the same product.

And this still goes on today. People assume that inflation starts because of wage pressure or printing money or whatever. Inflation actually happens when the 'good money' has left a country and there is a complete loss of faith in that country's government - when everyone knows the money is 'bad.'

Another way to express this would be, the ' smart money' or the 'strong hands' from poker.

Turkey is in the throws of disastrous currency devaluation. All the 'good' money has already left the country or has been leaving it fast in the last few weeks. By the time this article, hit the newspaper, the currency had already devalued another 10% overnight in Singapore and proceeded to lose 16% on Friday alone.

But this devaluation has been going on for months and months. The Turkish lira was $2.00 a couple of years ago, then $3.00 in 2017. All during 2018, it has been creeping up. By April it was $4.00. By August 1st, it was $5.00. By Friday night it was $6.5, after having moved 16% on Friday alone. You can see the acceleration.. The clever money has been getting out for a while.

Once this loss of confidence starts, there is usually a point no return. No one will lend. No one will invest. No one will accept the 'bad money.'

It is at this point that real hyperinflation starts. Prices start to change in shops everyday. Goods run out and hoarding takes place on a massive scale.

And this is why , so far, Western governments have be able to print billions upon billions of Dollars, Pounds, Yen and Euros but yet, there is no inflation - indeed still deflation in southern Europe and Japan. Confidence still exists, the good money is still there and no one is hiding gold and dollars under beds.

There are now some big global shifts. The first, (which is exacerbating the Turkish lira crisis) is a shortage of American dollars worldwide. America is doing a number of things to cause this to happen: raising interest rates, curtailing money printing (QE), lowering taxes and above all, it's economy is booming despite what all the Trump detractors say.

Meanwhile in Europe, taxes are rising everywhere, governments are becoming more and more desperate for income, economies are stuttering especially in Southern Europe and most Spanish and Italian banks are insolvent.

And as importantly, there is starting to be a loss of confidence in the European Union to sort out anything - from the migration crisis, to youth unemployment, to banking crises.

As this loss of confidence accelerates, look for the Euro to fall fast and eventually break apart. Investors are likely to start to selling government bonds as they prefer to lend to Tesco or Aldi, rather than the Spanish or British government and look for interest rates to rise worldwide.

The 'good money' is already making these two fundamental and seismic capital shifts: One is out of Europe and indebted emerging market countries and into the United States and the dollar. The other is out of government bonds and into stock markets.

Watch this space - Turkey was the beginning of many such crisis in the next few years. The tsunami of course, will be the collapse and disintegration of the Euro which will make anything in Turkey look like a light breeze.

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Friday, 22 November 2019
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