The Zombie Club of Nations
Greece has supposedly received a bailout and markets across the globe are soaring. In fact, they are rising in the same manner they did a few months after the bailout of the U.S. financial system, now known as the Emergency Economic Stabilization act of 2008. However, the truth is there is no such thing as a complete and genuine bailout; there is only a transfer of burden from the government and banks to the middle class.
In this latest example of government interference in the cathartic rebalancing that the free market demands must occur, the troika (ECB, IMF and EFSF) has agreed to leverage their European bailout fund to $1.4 trillion. From what source is this money supposed to come from? Perhaps from the Chinese, but I sincerely doubt they would divert 1/3 of their entire currency reserves to purchase European debt. And even if they did, the Chinese would have to sell bonds they currently hold of another country; most likely the U.S. But that would send yields sharply higher here and the Chinese would then soon be on the spot to bailout America.
The government of Greece must be elated because the principal on their debt has been cut in half. And European banks must be filled with alacrity because even though their holdings of Greek debt have been halved, the government has promised to recapitalize them with at least $150 billion -- which is guaranteed to be woefully inadequate a number. Regardless, the commitment has been made and insolvent institutions will be allowed to survive another day.
But what about the citizens of Europe? If you are a private owner of Greek debt there is no money coming in to fill your hole. What you can look forward to is the knowledge that the European Central Bank will have to print hundreds upon hundreds of billions in Euros to support insolvent banks and countries. And that's the point which goes missing while politicians are busy patting themselves on the back for coming up with all these bailouts. They are indeed capable of saving insolvent institutions but in the process they bankrupt the middle class via inflation. The rich can afford to own gold and certain assets that rise when central banks counterfeit money. But the middle class becomes decimated because they can't afford to properly hedge against the destruction of the purchasing power of what little currency they own. Is it really any mystery why gold and gold stocks skyrocketed right after the announcement of the agreement to bailout Greece? European citizens of any means rushed to avail themselves of gold; the proven store of wealth when governments are busy corrupting their currencies.
By the way, the bailout of Greece concocted by the European Oligarchy is a complete farce on every level. The restructuring of Greek debt is supposed to bring Greece's Debt to GDP ratio down to 120% from the 170% today, by the year 2020. You can be sure of two things; Greek debt will never drop to that level by 2020, and even if it did so what! Italian debt to GDP is already 120% and their bond market is in full revolt. Even though the ECB has been actively buying over $100 billion worth of Italian debt in an effort to keep yields from rising, the yield on the Italian 10 year note closed above 6% for the first time since early August. That's up from well below 4% just one year ago. And this has occurred despite the fact that Mario Draghi (designated to succeed Jean-Claude Trichet as President of the European Central Bank by November 2011) has promised to continue the practice. In his own words spoken on October 26th the incoming President stated that the ECB remains, "determined to avoid a poor functioning of money and financial markets." Translation, we will print all the money that banks and governments' will ever desire.
But all the money printing and inflation creation in the world can't save these countries. In fact, it will make matters much worse. Europe has now joined Japan in The Zombie Club of Nations. These nations have zombie banks and zombie-like GDP growth due to high levels of government debt that suck all available capital out of the private sector. And the sad truth is that America is next in line to join that ignominious club; if it hasn't done so already.
The bottom line is that real interest rates continue to fall across the globe as fiat currencies are being debased at an ever alarming rate. This is the case just as the debt of the U.S. continues to soar both in nominal terms and as a percentage of GDP. That leaves me to several conclusions: the U.S. dollar will soon lose its status as the world's reserve currency, inflation and nominal interest rates in our country are about to soar and the ultimate bailout of the American citizen can be found in owing gold.