Friday, August 5, 2011
Interesting times we live in. The economies of Portugal, Ireland, Italy, Greece and Spain (PIIGS) have finally hit the wall. The Ponzi schemes their governments were running by borrowing money through selling bonds to then pay voters entitlements has ended as all such schemes do. They can’t sell enough bonds at a reasonable price to make payments on the ones they have already sold. That’s bad, but the worst part is that the banks are the ones holding the worthless debt. It’s kind of like the US banks holding mortgage loans from homeless people.
Today the European Central Bank (the Chinese turned them down) said that it would start buying the bonds if the governments in these countries only spend as much as they take in. This leads to two questions.
First, where is the ECB going to get the money. The two options are Germany and/or the printing press.
The second question pertains to the populations in these countries. When the government takes away the free health care or social security, or both, how are they going to react? What would happen in America if Social Security checks were cut in half? Multiply that by two and you have the European mindset. These people get 8 weeks of vacation every year. Italy takes August off.
The smaller countries are problems but Spain and Italy are ginormous problems. Their economies are in the trillion dollar range and not even Germany has that kind of money. The ECB was formed to combat inflation. That’s it. If they start printing money to bailout these countries you can assume that the financial system in Europe is without hope. Good bye Euro.
The European situation is illustrative for Americans in two regards.
First we will see how people who have been paid for their votes react when the politicians don’t hold up their end of the bargain. They might start trying to take what they feel like they’re owed from whomever has it. That’s called "political unrest”, or the seeds of anarchy if it matures.
Secondly, what if the Federal Reserve had to start buying California’s bonds or the city of Chicago’s debt? These guys have been running Ponzi schemes too. When the gig is up, are the people from states who have not lived so lavishly going to sit quietly by while their currency is devalued so these big spenders can be saved? I doubt it.
I find it incredible that nobody during the recent “debt limit” debate failed to point out the immoral proposition of selling bonds to pay off current investors. Bernie Madoff sits in prison for doing that. The US is going to hit the same wall Europe has their nose pushed up against right now. It’s just a matter of time, unavoidable and easy to predict.