-
Quote
-
0
login to like this post
Post
by Strong Eagle » Mon, 01 Apr 2013 7:40 am
It's pretty clear that those in control on the Euro and EU economic policy are really sitting at the Mad Hatter's tea party. There are a few facts (my facts, anyway) that really need to be considered in dealing with these situations.
a) No country will decrease its debt by any sizable amount. The political will is not there to actually make a dent, and even if the will were there, the austerity required makes debt reduction not only unpalatable but impossible to achieve. The very act of cutting spending only makes things worse... higher unemployment, reduced tax revenues and even higher deficits.
b) No country can sustain interest payments to banks and other investors that exceed 25 percent and more of the total budget. In fact, banks and investors who buy/bought government bonds will be seen over time to be bloodsucking leeches, sucking the life out of an economy.
c) Countries that have already collapsed (Greece, Cyprus) are fools to remain with the Euro. This only ensures long term pain and quite possibly makes it impossible for a real recovery to occur. Returning to a local currency that is essentially immediately devalued means that labor rates cheapen while locally produced products become increasingly attractive over imports. Yes, anyone holding debt in the new currency is going to get a haircut, but who in the hell ever said any investment is risk free? And actually, isn't all the machines of the central bank all about trying to make Euro based investments risk free?
d) We are fortunate at the moment that the world is flooded with cash looking for a place to invest (one of the few positive aspects of the wealth transfer to the very rich). Therefore, solvent governments can continue to borrow cheaply (US debt service amounts to around 4.6% of revenues). Analysts estimate that this amount will severely increase as total debt rises and interest rates rise as well.
e) 60% of US debt is now held by foreign sovereign funds or foreign private investors. Critics of foreign investment note that they could all become lemmings and sell off their debt, creating a crisis for the US. More accurately, foreign investors would cease rolling over their notes, creating a financial crisis for the US.
f) There is nothing more stable than the US dollar (and economy) and to a lesser extent, the Euro. Investors need to put money somewhere, if not under the mattress, and these currencies will continue to be supported because there is nothing else, and because investors can ill afford to kill the economies that support the bonds in which they are invested.
g) Therefore, we will see a reversal of thinking in policy about interest rates and inflation. Instead of interest rate rises to control inflation (an interesting concept in and of itself), countries will be far more interested in keeping a lid on interest rates to control the damage being done by interest payments on the national debt.
h) Inflation will become the norm, and all countries will practice it to keep up with each other, relatively speaking, and to keep their own borrowing costs low... lots of money means lower rates... even if lenders attempt to price in the costs of inflation.
i) Investors will keep investing in US treasuries and Euro denominated bonds and other sovereign investments because there is nothing else except putting your money in a mattress... and that won't work because all countries will inflate their currencies to reduce interest rates and cut the real value of the debt.
j) Those who hold cash and bonds get hurt in this scenario. But short of actually paying it back, inflation is the only way for a country to reduce its debt obligation.
