Thursday, June 24, 2010
The End of The Great Bailouts is Approaching
Broke central banks, UK must monetize or collapse, 20 major countries on the edge of insolvency, No way but down for the Stock markets, defaulting on bailout payments, Fed audit going through Senate, shrinkage of high-end properties, VAT coming.
The result of all this is that some 20 major countries are on the edge of insolvency, not to mention scores of other countries. We see one funding crisis after another. Even major countries can’t sell their bonds even with higher than normal yields. Interest rates are close to zero. We suppose they could go into minus territory, where they would pay you to borrow money. Don’t laugh, it has happened more than once. It was also not uncommon to see negative lease rates, as countries engaged in the suppression of gold prices. Governments do anything they want. This same state of mind exists in increases in money and credit. Presently almost all governments are in trouble. If they haven’t made a dog’s breakfast out of their own economies they have bought bonds from those who have and stand to take stiff losses. Look at the euro zone’s almost $1 trillion bailout of the PIIGS. Do you really think those bonds will ever be paid off – we don’t. It is this concept of interconnectivity that as the players are finding out it is a disaster. How can solvent European countries even contemplate a $2 trillion bailout for nations that really do not care if the debt is ever paid off? That is how today’s world turns.
We fall back on a very important underlying concept and that is if you do not understand what is really going on behind the scenes you can never get the right answers and conclusions. People talk about cycles and super cycles as if they occurred out of nowhere. They all happen by design. As an example, the economy has improved, but that is because of $800 billion in stimulus and Fed spending. The growth that evolved was tepid at best. Now that the economy is trailing off, the stimulus having expended itself, and the question is what comes next? The only way to stave off recession/depression is to have another stimulus plan. That, of course, doesn’t affect the root causes - it just gains time.