Over the weekend, the European Union led an alliance to put up $957 billion to buy government and private debt (€750 billion) to keep debt markets working and lower borrowing costs. This has put a bid back not only in European debt, but the euro, and the American stock markets. The Dow is up about 400 points in pre-market as I write this. Gold is off about $16 an ounce.
So should you trust this rally? It sounds like a continuation of the Ponzi scheme to me. The program consists of €440 billion of loans from eurozone nations, €60 billion from an EU emergency fund, and €250 billion from the IMF. So let’s look at the money from eurozone nations – that means Portugal, Spain and Italy – all troubled debtors – are now throwing in more money to buy the debt. That really defines a Ponzi scheme.
The European Union is creating debt to buy debt. At some point, gravity kicks in, and Wile E. Coyote realizes he’s about to fall into an abyss.
There are really two ways that I can see this can work out. Either the austerity measures will take place, not only in Greece but across Europe, and unemployment will go to Depression-era levels. Or, countries will start to unhook from the euro and devalue their individual currencies to pay off debts and make them more competitive with industrial juggernaut Germany. That is the road to inflation and perhaps hyperinflation.
As for the U.S. market? I’d look for a bounce for a week or two, then it will probably nose over again. Meanwhile, this pullback in gold is likely a buying opportunity.
I said there are two ways I can see this working out, but I don’t have a crystal ball, and there may be other ways. If you can think of some, feel free to leave your ideas in the comments.
It could be that in two years time Europe’s deficits are much lower, the ECB has hardly bought any bonds, and they have successfully managed a Greek debt restructuring while Spain is out of trouble, and Portugal and Ireland are scraping by in limbo but now isolated problems. With the US likely to still be running near 10% GDP budget deficits – who will seem more risky then? This immediate confidence in the US dollar that has come out of this European crisis could very quickly evaporate.
XX Sean’s note — I don’t see how the ECB could end up buying very few European bonds, but Boone and Johnson may probably know more about this than I do.