Europhoria

Posted on 11th May 2010 by Trevor Reynolds in Blog

EU policy makers have enabled debt-laded countries to take on more debt, this hardly seems like a long term solution to the problem of living beyond their national means.  EU politicians hope that by extending more credit to sovereign governments, bond vigilante investors will just, leave them alone!

It is astounding to read how officials blame derivatives as the “Wolfpack” of speculators for the crisis. As if it was the speculators who ran up huge debt-to-GDP ratios. I am amazed these politicians can actually look in the mirror! 

So what does this nuclear solution to Europe’s debt problems really mean? It is simply another way of saying “Quantitative Easing – super size 1 Trillion more debt!.”
 
Does this now mean all national debt will be bailed out?  All states of the USA will be bailed out? Where does it stop? 
 
This very well could be the set up for a massive collapse. 

“You cannot make any nation that is unable to service its accumulated debts more creditworthy by extending more credit!” said Jeremy Batstone-Carr, analyst at Charles Stanley in today’s Wall Street Journal. “If the EU lends Greece money, the loan will increase that country’s public sector debt. The interest on the additional loan, whatever it eventually proves to be, will increase the public sector deficit. Total debt-servicing costs will rise, raising the burden on public sector cash flows. At some point in the future, the loan will have to be paid back.”

Regardless of the first knee jerk market reaction, gold is going to higher much higher due to nuclear suggestions of adding more debt to entities failing because of debt. This is the EU Helicopter Drop, the next one coming up is the bail out of US States.  Remember Greece has the same credit rating as the state of Utah – but Utah is more than double the size.
 
So what else will happen?  With the ECB’s huge cash infusion coupled with the US Federal Reserve’s existing an very likely “more cash coming” should lead to a quick reflation of some markets.  

Where? The biggest inflation could come in precious metals. One should hedge against the central bank monetization strategy and precious metals are about the only sensible speculation in a market which has essentially been reduced to total speculation by the distortion of values from the flood of money.

 

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