12 Things That Just Happened That Show The Next Wave Of The Economic Collapse Is Almost Here

12 Things That Just Happened That Show The Next Wave Of The Economic Collapse Is Almost HereAre we running out of time?  For the last several years, we have been living in a false bubble of hope that has been fueled by massive amounts of debt and bailout money.  This illusion of economic stability has convinced most people that the great economic crisis of 2008 was just an “aberration” and that now things are back to normal.  Unfortunately, that is not the case at all.  The truth is that the financial crash of 2008 was just the first wave of our economic troubles.  We have not even come close to recovering from that wave, and the next wave of the economic collapse is rapidly approaching.  Our economy is like a giant sand castle that has been built on a foundation of debt and toilet paper currency.  As each wave of the crisis hits us, the solutions that our leaders will present to us will involve even more debt and even more money printing.  And each time, those “solutions” will only make our problems even worse.  Right now, events are unfolding in Europe and in the United States that are pushing us toward the next major crisis moment.  I sincerely hope that we have some more time before the next crisis overwhelms us, but as you will see, time is rapidly running out.

The following are 12 things that just happened that show the next wave of the economic collapse is almost here…

#1 According to TrimTab’s CEO Charles Biderman, corporate insider purchases of stock have hit an all-time low, and the ratio of corporate insider selling to corporate insider buying has now reached an astounding 50 to 1….

While retail is being told to buy-buy-buy, Biderman exclaims that “insiders at U.S. companies have bought the least amount of shares in any one month,” and that the ratio of insider selling to buying is now 50-to-1 – a monthly record.

#2 On Friday we learned that personal income in the United States experienced its largest one month decline in 20 years

Personal income decreased by $505.5 billion in January, or 3.6%, compared to December (on a seasonally adjusted and annualized basis). That’s the most dramatic decline since January 1993, according to the Commerce Department.

#3 In a stunning move, Michigan Governor Rick Snyder says that he will appoint an emergency financial manager to take care of Detroit’s financial affairs…

Snyder, 54, took a step he avoided a year ago, empowering an emergency financial manager who can sweep aside union contracts, sell municipal assets, restructure services and reorder finances. He announced the move yesterday at a public meeting in Detroit.

If this does not work, Detroit will almost certainly have to declare bankruptcy.  If that happens, it will be the largest municipal bankruptcy in U.S. history.

#4 On Friday it was announced that the unemployment rate in Italy had risen to 11.7 percent.  That was a huge jump from 11.3 percent the previous month, and Italy now has the highest unemployment rate that it has experienced in 21 years.

#5 The youth unemployment rate in Italy has risen to a new all-time record high of 38.7 percent.

#6 On Friday it was announced that the unemployment rate in the eurozone as a whole had just hit a brand new record high of 11.9 percent.

#7 On Friday it was announced that the unemployment rate in Greece has now reached 27 percent, and it is being projected that it will reach 30 percent by the end of the year.

#8 The youth unemployment rate in Greece is now an almost unbelievable 59.4 percent.

#9 On Saturday, hundreds of thousands of protesters filled the streets of Lisbon and other Portuguese cities to protest the austerity measures that are being imposed upon them.  It was reportedly the largest protest in the history of Portugal.

#10 According to Goldman Sachs, bank deposits declined all over Europe during the month of January.

#11 Over the weekend, the deputy governor of China’s central bank declared that China is prepared for a “currency war“…

A top Chinese banker said Beijing is “fully prepared” for a currency war as he urged the world to abide by a consensus reached by the G20 to avert confrontation, state media reported on Saturday.

Yi Gang, deputy governor of China’s central bank, issued the call after G20 finance ministers last month moved to calm fears of a looming war on the currency markets at a meeting in Moscow.

Those fears have largely been fuelled by the recent steep decline in the Japanese yen, which critics have accused Tokyo of manipulating to give its manufacturers a competitive edge in key export markets over Asian rivals.

#12 Italy is an economic basket case at this point, and the political gridlock in Italy is certainly not helping matters.  Former comedian Beppe Grillo’s party could potentially tip the balance of power one way or the other in Italy, and over the weekend he made some comments that are really shaking things up over in Europe.  For one thing, he is suggesting that Italy should hold a referendum on the euro…

“I am a strong advocate of Europe. I am in favor of an online referendum on the euro,” Beppe Grillo told Bild am Sonntag.

Such a vote would not be legally binding in Italy, where referendums can only be used to repeal laws or parts of laws, but would carry political weight. Grillo has said in the past that membership of the euro should be up to the Italian people.

In addition, Grillo is also suggesting that Italy’s debt has gotten so large that renegotiation is the only option…

In an interview with a German magazine published on Saturday, Mr Grillo said that “if conditions do not change” Italy “will want” to leave the euro and return to its former national currency.

The 64-year-old comic-turned-political activist also said Italy needs to renegotiate its €2 trillion debt.

At 127 per cent of gross domestic product (GDP), it is the highest in the euro zone after Greece.

“Right now we are being crushed, not by the euro, but by our debt. When the interest payments reach €100 billion a year, we’re dead. There’s no alternative,” he told Focus, a weekly news magazine.

He said Italy was in such dire economic straits that “in six months, we will no longer be able to pay pensions and the wages of public employees.”

And of course government debt has taken center stage in the United States as well.

The sequester cuts have now gone into effect, and they will definitely have an effect on the U.S. economy.  Of course that effect will not be nearly as dramatic as many Democrats are suggesting, but without a doubt those cuts will cause the U.S. economy to slow down a bit.

And of course the U.S. economy has already been showing plenty of signs of slowing down lately.  If you doubt this, please see my previous article entitled “Consumer Spending Drought: 16 Signs That The Middle Class Is Running Out Of Money“.

So what comes next?

Well, everyone should keep watching Europe very closely, and it will also be important to keep an eye on Wall Street.  There are a whole bunch of indications that the stock market is at or near a peak.  For example, just check out what one prominent stock market analyst recently had to say

“Every reliable technical tool is warning of major peaking action,” said Walter Zimmerman, the senior technical analyst at United-ICAP. “This includes sentiment, momentum, classical chart patterns, and Elliott wave analysis.

“Most of the rally in the stock market since 2009 can be chalked up to the Federal Reserve’s attempt to create a ‘wealth effect’ through higher stock market prices. This only exacerbates the downside risk. Why? The stock market no is longer a lead indicator for the economy. It is instead reflecting  Fed manipulation. Pushing the stock market higher while the real economy languishes has resulted in another bubble.

“The next leg down will not be a partial correction of the advance since the 2009 lows. It will be another major financial crisis. The worst is yet to come.”

Sadly, most people will continue to deny that anything is wrong until it is far too late.

Many areas of Europe are already experiencing economic depression, and it is only a matter of time before the U.S. follows suit.

Time is running out, and I hope that you are getting ready.

So what do you think?

How much time do you believe that we have left before the next wave of the economic collapse strikes?

Please feel free to post a comment with your thoughts below…

Jeff Rowley Big Wave Surfer wipeout Photo Jaws Peahi by Xvolution Media

Kicking The Can Down The Road

Has Europe finally been saved this time?  Has this latest “breakthrough” solved the European debt crisis?  Of course not, and you should know better by now.  European leaders have held 18 summits since the beginning of the debt crisis.  After most of the preceding summits, global financial markets responded with joy because European leaders had reached “a deal” which would supposedly solve the crisis.  But a few weeks after each summit it would become clear that nothing had been solved and that the financial crisis had actually gotten even worse than before.  How many times do they expect us to fall for the same sorry routine?  Nothing in Europe has been solved.  You can’t solve a debt problem with more debt.  European leaders are just kicking the can down the road.  More debt will relieve some of the short-term pressure, but in a few weeks it will be apparent that the underlying problems in Europe continue to grow.  Unfortunately, there is not an unlimited amount of EU bailout money, so once all of these “financial bullets” have been fired European leaders are going to find that kicking the can down the road will not be so easy anymore.  The truth is that the financial crisis in Europe has not been cancelled – it has just been put off for a few weeks or a few months.

Do you solve the problems of a credit card addict by giving that person another credit card?  Of course not.  You may delay the short-term financial problems of the credit card addict by giving that person another credit card, but in the process you make the long-term problems even worse.

Well, that is essentially what is happening in Europe.  European governments and the European financial system have become ridiculously dependent on debt.  By giving European debt junkies another “hit” or two it may relieve a bit of short-term suffering but it doesn’t solve anything.

Just think about it.

Did the first bailout package solve the problems in Greece?

No.

Did the second bailout package solve the problems in Greece?

No.

Today, the Greek financial system is a complete and total mess, and Greek politicians are saying that a third bailout package may be necessary.

Many are claiming that Italy and Spain have been “saved” by this new deal, but that is a joke.

Yes, the ability to inject bailout funds directly into troubled banks is going to keep some of them going for a little while.  But the deal also calls for a new governing body to be established that will supervise those banks.  Will that governing body be established in time to even provide the short-term help that is needed?

Yes, spending bailout funds to buy up Spanish debt and Italian debt will artificially suppress bond yields for a time.

We have seen this before.

But what happened?

After the bond buying program was over, bond yields started spiking again.

So do the Europeans plan to suppress bond yields forever?

Of course not.  There is not enough bailout money to do that.

Let’s review the equation that I have shared in previous articles….

Brutal austerity + toxic levels of government debt + rising bond yields + a lack of confidence in the financial system + banks that are massively overleveraged + a massive credit crunch = A financial implosion of historic proportions

Have any of those elements been removed?

No.

Bond yields will be suppressed for a period of time, but that will not last forever, and all of the other underlying issues are still there.

Meanwhile, the rest of Europe continues to follow the Greek economy into economic depression.

The Spanish economy shrunk again in the second quarter of 2012, and austerity in that nation has barely even begun.

As a recent CNBC article detailed, the big spending cuts are still coming….

The conservatives, who inherited from the outgoing Socialists one of the euro zone’s highest public deficits, at 8.9 percent of GDP in 2011, have said they will shrink the shortfall to 5.3 percent this year and 3 percent in 2013.

Austerity has absolutely shredded the Greek economy, and we are starting to see that same pattern be repeated all over Europe.

When you spend far more money than you bring in for decades, eventually you have to go through a very painful adjustment.  What is going on in Greece should be a lesson for all of us.  Debt allows you to live above your means, but the consequences of going into way too much debt can be absolutely horrific.

More debt can delay the consequences of a debt problem but it cannot solve a debt problem.  The following is what Jim Rogers told CNBC on Friday….

“Just because now you have a way to get them (the banks) to borrow even more money, this is not solving the problem, this is making the problem worse,” Rogers said on Friday.

“People need to stop spending money they don’t have. The solution to too much debt is not more debt. All this little agreement does is give them (banks) a chance to have even more debt for a while longer,” he added.

But if you just went by the headlines in most of the newspapers around the world you would think that European leaders had discovered the cure for cancer or something.

Sadly, the truth is that they are simply choosing to fire off a few of the “financial bullets” that they still have left as a recent Washington Post article described….

The European bailout funds don’t have unlimited resources. If they throw $125 billion at Spain’s banks and another couple hundred billion toward Italy, pretty soon they’ll be running low. The only entity with unlimited euros is the European Central Bank. And right now, there’s no talk of using the ECB to provide bailouts. Which means that this latest move might have just forestalled the crisis, rather than ending it permanently.

So what comes next?

Bruce Krasting believes that the “half-life of this bailout will be measured in weeks”.  The following is his summary of what he sees coming next in Europe….

If I’m right, after a few weeks things turn south again in the capital markets. Then what?

More LTRO. No – there is no more collateral. All of the swill loans have already been hocked.

Cut ECB % rate. Doesn’t matter. It won’t change conditions in Italian or Spanish funding markets one bit.

A spending plan of <1% of GDP. That won’t put a dent in the recession that is building.

Brussels buys more sovereign bonds to avoid a catastrophe of Italian 10-year exceeding 7% (capitulation). Sorry. There are “wise men” in Germany who will simply not allow this to happen in the scale that is required.

The ECB goes Defcon 1 and launches a E2T QE program. No – same answer as above.

– Merkel does a 180 and embraces Euro bonds. No chance in hell.

The US or China are going to start buying EU bonds? Lunacy – not happening.

-The IMF will come to the rescue? No way – the IMF does not have the resources to solve anyone’s problems.

In other words, kicking the can down the road is going to get quite a bit harder after the current “sugar high” wears off.

Europe is still headed for the greatest financial crisis since the Great Depression (at least) and European leaders seem powerless to stop it.

Of course the United States is also facing a crisis of too much debt and a great day of reckoning is on the way for this country as well.

So yes, the global economy is still heading for collapse and there is still a multitude of reasons to be extremely concerned about the second half of 2012.

What is your opinion about all of this?

Do you think that European leaders will be able to keep kicking the can down the road?

Please feel free to post a comment with your opinion below….

The Countdown To The Break Up Of The Euro Has Officially Begun

The results of the elections in France and Greece have made it abundantly clear that there is a tremendous backlash against the austerity approach that Germany has been pushing.  All over Europe, prominent politicians and incumbent political parties are being voted out.  In fact, Nicolas Sarkozy has become the 11th leader of a European nation to be defeated in an election since 2008.  We have seen governments fall in the Netherlands, the UK, Spain, Ireland, Italy, Portugal and Greece.  Whenever they get a chance, the citizens of Europe are using the ballot box to send a message that they do not like what is going on.  It turns out that austerity is extremely unpopular.  But if newly elected politicians all over Europe begin rejecting austerity, this puts Germany in a very difficult position.  Should Germany be expected to indefinitely bail out all of the members of the eurozone that choose to live way beyond their means?  If Germany pulled out of the euro tomorrow, the euro would absolutely collapse, bond yields for the rest of the eurozone would skyrocket to unprecedented heights, and without German bailout money troubled nations such as Greece would be headed directly for default.  The rest of the eurozone is absolutely and completely dependent on Germany at this point.  But as we have seen, much of the rest of the eurozone is sick and tired of taking orders from Germany and is rejecting austerity.  A lot of politicians in Europe apparently believe that they should be able to run up gigantic amounts of debt indefinitely and that the Germans should be expected to always be there to bail them out whenever they need it.  Will the Germans be willing to tolerate such a situation, or will they simply pick up their ball and go home at some point?

Over the past several years, German Chancellor Angela Merkel and French President Nicolas Sarkozy have made a formidable team.  They worked together to push the eurozone on to the path of austerity, but now Sarkozy is out.

Francois Hollande, the new French president, has declared that the financial world is his “greatest enemy“.

He may regret making that statement.

One of the primary reasons why Hollande was elected was because he clearly rejected the austerity approach favored by the Germans.  Shortly after winning the election in France, he made the following statement….

“Europe is watching us, austerity can no longer be the only option”

Hollande says that he wants to “renegotiate” the fiscal pact that European leaders agreed to under the leadership of Merkel and Sarkozy.

But Merkel says that is not going to happen.  The following Merkel quotes are from a recent CNBC article….

“We in Germany are of the opinion, and so am I personally, that the fiscal pact is not negotiable. It has been negotiated and has been signed by 25 countries,” Merkel told a news conference.

“We are in the middle of a debate to which France, of course, under its new president will bring its own emphasis. But we are talking about two sides of the same coin — progress is only achievable via solid finances plus growth,” she added.

So instead of being on the same page, Germany and France are now headed in opposite directions.

But if the French do not get their debt under control, they could be facing a huge crisis of their own very quickly.  The following is from a recent article by Ambrose Evans-Pritchard….

“They absolutely must cut public spending and control the debt,” said Marc Touati from Global Equities in Paris. “It will soon be clear that we are in deep recession. If they don’t act fast, interest rates will shoot up and we will have a catastrophe by September,” he said.

Without German help, France is not going to be able to handle its own financial problems – much less bail out the rest of Europe.

Germany is holding all of the cards, but much of the rest of the eurozone does not seem afraid to defy Germany at this point.

In Greece, anti-bailout parties scored huge gains in the recent election.

None of the political parties in Greece were able to reach 20 percent of the vote, and there is a tremendous amount of doubt about what comes next.

New Democracy (the “conservatives”) won about 19 percent of the vote, but they have already announced that they have failed to form a new government.

So now it will be up to the second place finishers, the Syriza party (the radical left coalition), to try to form a new government.

Alexis Tsipras, the leader of the Syriza party, is very anti-austerity.  He made the following statement the other night….

“The people of Europe can no longer be reconciled with the bailouts of barbarism.”

But at this point, it seems very doubtful that Syriza will be able to form a new government either.

PASOK, the socialists that have been pushing through all of the recent austerity measures, only ended up with about 13 percent of the vote.  In the 2009 election, PASOK got 44 percent of the vote.  Obviously their support of the austerity measures cost them dearly.

So what happens if none of the parties are able to form a new government?

It means that new elections will be held.

Meanwhile, Greece must somehow approve more than 11 billion euros in additional budget cuts by the end of June in order to receive the next round of bailout money.

Greece is currently in its 6th year of economic contraction, and there is very little appetite for more austerity in Greece at this point.

Citibank analysts are saying that there is now a 50 to 75 percent chance that Greece is going to be forced to leave the euro….

Overall, the outcome of the Greek election shows that it will be very difficult to form a viable coalition and to implement the measures required in the MoU. Particularly, the identification of the 7% GDP of budget savings for 2013 and 2014 by the end of June looks very unlikely to us. As a consequence, in a first step, the Troika is likely to delay the disbursement of the next tranche of the programme. Note that for 2Q 2012, disbursements of €31.3bn from the bailout programme are scheduled. If Greece does not make progress, in a second step, the Troika is likely to stop the programme. If that happens, the Greek sovereign and its banking sector would run out of funding. As a consequence, we expect that Greece would be forced to leave the euro area. With the outcome of the election, to us the probability of a Greek exit is now larger than our previous estimate of 50%, and rises to between 50-75%. However, even after the elections in Greece, France and Germany, we regard the probability of a broad-based break up of the monetary union as very low. We continue to expect that in reaction to Greece leaving the euro area, more far-reaching measures from governments and the ECB would be put in place.

But if Greece rejects austerity that does not mean that it has to leave the eurozone.

There is no provision that allows for the other nations to kick them out.

Greece could say no to austerity and dare Germany and the rest of the eurozone to keep the bailout money from them.

If Greece defaulted, it would severely damage the euro and bond yields all over the eurozone would likely skyrocket – especially for troubled countries like Spain and Italy.

If Greece wanted to play hardball, they could simply choose to play a game of “chicken” with Germany and see what happens.

Would Germany and the rest of the eurozone be willing to risk a financial disaster just to teach Greece a lesson?

But Greece is not the only one that is in trouble.

As I wrote about recently, the Spanish economy is rapidly heading into an economic depression.

Now it has come out that the Spanish government is going to bail out a major Spanish bank.  The following is from a recent Bloomberg article….

Rodrigo Rato stepped down as head of the Bankia group as a government bailout loomed after Spanish Prime Minister Mariano Rajoy retreated from a pledge to avoid using public money to save lenders.

Rato, a former International Monetary Fund managing director, proposed Jose Ignacio Goirigolzarri, ex-president and chief operating officer of Banco Bilbao Vizcaya Argentaria SA (BBVA), as Bankia executive chairman, he said in a statement today in Madrid. The government plans to inject funds into the lender by buying contingent-capital securities, said an Economy Ministry official who declined to be named as the plan isn’t public.

But this is just the beginning.

Major banks all over Europe are going to need to be bailed out, and countries such as Portugal, Italy and Spain are going to need huge amounts of financial assistance.

So does Germany want to keep rescuing the rest of the eurozone over and over again during the coming years?  The cost of doing this would likely be astronomical.  The following is from a recent New York Times article….

Bernard Connolly, a persistent critic of Europe, estimates it would cost Germany, as the main surplus-generating country in the euro area, about 7 percent of its annual gross domestic product over several years to transfer sufficient funds to bail out Europe’s debt-burdened countries, including France.

That amount, he has argued, would far surpass the huge reparations bill foisted upon Germany by the victorious powers after World War I, the final payment of which Germany made in 2010.

At some point, Germany may decide that enough is enough.

In fact, there have been persistent rumors that Germany has been very quietly preparing to leave the euro.

A while back, German Chancellor Angela Merkel’s Christian Democratic Union party approved a resolution that would allow a nation to leave the euro without leaving the European Union.

Many believed that this resolution was aimed at countries like Greece or Portugal, but the truth is that the resolution may have been setting the stage for an eventual German exit from the euro.

The following is an excerpt from that resolution….

“Should a member [of the euro zone] be unable or unwilling to permanently obey the rules connected to the common currency he will be able to voluntarily–according to the rules of the Lisbon Treaty for leaving the European Union–leave the euro zone without leaving the European Union. He would receive the same status as those member states that do not have the euro.”

Most analysts will tell you that they think that it is inconceivable that Germany could leave the euro.

But stranger things have happened.

And Germany has made some very curious moves recently.

For example, Germany recently reinstated its Special Financial Market Stabilization Funds.  Those funds could be utilized to bail out German banks in the event of a break up of the euro.  The following is from a recent article by Graham Summers….

In short, Germany has given the SoFFIN:

  1. €400 billion to be used as guarantees for German banks.
  2. €80 billion to be used for the recapitalization of German banks
  3. Legislation that would permit German banks to dump their euro-zone government bonds if needed.

That is correct. Any German bank, if it so chooses, will have the option to dump its EU sovereign bonds into the SoFFIN during a Crisis.

In simple terms, Germany has put a €480 billion firewall around its banks. It can literally pull out of the Euro any time it wants to.

So has Germany been quietly preparing a plan “B” just in case the rest of the eurozone rejected the path of austerity?

Most people have assumed that it will be a nation such as Greece or Portugal that will leave the euro first, but in the end it just might be Germany.

And the “smart money” is definitely betting on something big happening.

Right now some of the largest hedge funds in the world are betting against the eurozone as a recent Daily Finance article described….

Some of the world’s most prominent hedge fund managers are betting against the eurozone — and not just the peripheral countries everyone knows are in trouble. They’re taking positions against the core countries, economies that — until now — everyone has assumed were rock-solid.

Yes, the countdown to the break up of the euro has officially begun.

A great financial crisis is going to erupt in Europe, and it is going to shake the world to the core.

If you were frightened by what happened back in 2008, then you are going to be absolutely horrified by what is coming next.

Is Germany Actually Preparing To Leave The Euro?

For a long time, most analysts have believed that if someone was going to leave the euro, it would be a weak nation such as Greece or Portugal.  But the truth is that financially troubled nations such as Greece and Portugal don’t want to leave the euro.  The leaders of those nations understand that if they leave the euro their economies will totally collapse and nobody will be there to bail them out.  And at this point there really is not a formal mechanism which would enable other members of the eurozone to kick financially troubled nations such as Greece or Portugal out of the euro.  But there is one possibility that is becoming increasingly likely that could actually cause the break up of the euro.  Germany could leave the euro.  Yes, it might actually happen.  Germany is faced with a very difficult problem right now.  It is looking at a future where it will be essentially forced to bail out most of the rest of the nations in the eurozone for many years to come, and those bailouts will be extremely expensive.  Meanwhile, the mood in much of the rest of Europe is becoming decidedly anti-German.  In Greece, Angela Merkel and the German government are being openly portrayed as Nazis.  Financially troubled nations such as Greece want German bailout money, but they are getting sick and tired of the requirements that Germany is imposing upon them in order to get that money.  Increasingly, other nations in Europe are simply ignoring what Germany is asking them to do or are openly defying Germany.  In the end, Germany will need to decide whether it is worth it to continue to pour billions upon billions of euros into countries that don’t appreciate it and that are not doing what Germany has asked them to do.

German Chancellor Angela Merkel’s Christian Democratic Union party recently approved a resolution that would allow a country to leave the euro without leaving the European Union.

Many thought that the resolution was aimed at countries like Greece or Portugal, but the truth is that this resolution may be setting the stage for a German exit from the euro.

The following is an excerpt from that resolution….

“Should a member [of the euro zone] be unable or unwilling to permanently obey the rules connected to the common currency he will be able to voluntarily–according to the rules of the Lisbon Treaty for leaving the European Union–leave the euro zone without leaving the European Union. He would receive the same status as those member states that do not have the euro.”

So was that paragraph written for Greece?

Or was it written for Germany?

That is a very interesting question.

What is clear is that the status quo cannot last much longer.

Voters in Germany are definitely not in the mood to give any more bailout money to other nations in Europe, but if Germany is going to continue to stay in the eurozone many more bailouts will be required in the coming years.

Meanwhile, Germany is rapidly losing control over the rest of the eurozone….

*Greece has implemented some of the austerity measures that have been required of it, but many others have not been implemented.  In a few weeks there will be a national election, and parties that are opposed to the austerity measures are surging in the polls.  It is likely that the new government will be much less friendly toward Germany.

*The Spanish government is already defying the budgetary requirements that the EU is trying to impose upon it.  Spain is definitely going to miss the debt targets mandated by the EU, and the Spanish government has absolutely no plans of making more reductions to government spending.

*The upcoming election in France could be absolutely crucial.  Nicolas Sarkozy is not doing well in the polls and the new French government could totally wreck the recent fiscal agreement that the members of the eurozone recently agreed to.

The following is how Graham Summers recently summarized the current situation in France….

We should also take Schäuble’s statements in the context of Angela Merkel’s recent backing of Nicolas Sarkozy’s re-election campaign in France against hardened socialist François Hollande, who wants to engage in a rampant socialist mission to lower France’s retirement age, cut tax breaks to the wealthy, and break the recent new EU fiscal requirements Germany convinced 17 members of the EU to agree to.

Obviously Germany has been trying very hard to keep the eurozone together.  But the German government also believes that if it is going to be bailing everyone out that it should also be able to set the rules.

So what happens if the rest of Europe tells Germany to stick their rules where the sun doesn’t shine?

Well, Germany would be forced to make a very difficult decision, and Germany appears to making plans for that eventuality.

For example, Germany recently reinstated its Special Financial Market Stabilization Funds.  This money would be used to bail out German banks in the event of a break up of the euro.  The following is from a recent article by Graham Summers….

In short, Germany has given the SoFFIN:

  1. €400 billion to be used as guarantees for German banks.
  2. €80 billion to be used for the recapitalization of German banks
  3. Legislation that would permit German banks to dump their euro-zone government bonds if needed.

That is correct. Any German bank, if it so chooses, will have the option to dump its EU sovereign bonds into the SoFFIN during a Crisis.

In simple terms, Germany has put a €480 billion firewall around its banks. It can literally pull out of the Euro any time it wants to.

If the rest of Europe continues to defy Germany, then at some point Germany may decide to simply pick up the ball and go home.

Germany is the strongest economy in the eurozone by far, and if Germany were to pull out the euro would absolutely collapse.  Whatever currency Germany decided to issue would be extremely valuable.  Such an event would actually have some tremendous side benefits for Germany.

Right now, the German national debt is denominated in euros.

If Germany left the euro, the value of euros would plummet and would likely keep declining as the rest of the eurozone fell apart financially and Germany would be able to pay back its debt in rapidly appreciating “marks” or whatever other currency it decided to issue.

All other debts in Germany would also be denominated in euros and would also be repaid with a much stronger currency.

Are you starting to get the picture?

Yes, Germany would likely have to bail out German banks if it left the euro, but leaving the euro could also prove to be a tremendous windfall for Germany.

If Germany chooses to say in the euro, it is going to be faced with extremely expensive bailouts of other countries for as far as the eye can see.

How expensive?

The following is from a New York Times article….

Bernard Connolly, a persistent critic of Europe, estimates it would cost Germany, as the main surplus-generating country in the euro area, about 7 percent of its annual gross domestic product over several years to transfer sufficient funds to bail out Europe’s debt-burdened countries, including France.

That amount, he has argued, would far surpass the huge reparations bill foisted upon Germany by the victorious powers after World War I, the final payment of which Germany made in 2010.

If Germany leaves the euro, that does not mean that the dream of a single currency is dead.  Germany could just let the rest of the eurozone collapse and then invite them to join the new German currency eventually after all the carnage is over.

At that point, Germany would have all the leverage and Germany would be able to dictate all the rules.

What is clear is that the status quo in Europe is becoming extremely unacceptable in Germany.  The Germans do not intend to give endless bailouts to other nations that do not appreciate them and that do not intend to follow the rules.

At some point Germany may actually decide to walk, and there are lots of whispers that Germany has been steadily preparing for that day.

For example, there are persistent rumors that Germany has ordered printing plates for the printing of new German marks.  Philippa Malmgren, a former economic adviser to President George W. Bush, says that she believes that this is already happening….

“I think they have already got the printing machines going and are bringing out the old deutschmarks they have left over from when the euro was introduced.”

Increasingly, it really is looking as if Germany is actually preparing to leave the euro.

If Germany did leave the euro, the consequences for the rest of Europe would be catastrophic.

The euro would rapidly drop to all-time lows.

The global financial system would be thrown in chaos.

Countries such as Greece would lose their major source of bailout money and would be forced to default.

The recession in Europe would likely deepen into a devastating economic depression.

So there would be a lot of downside.

But Germany would fare much better than most of the rest of Europe, and in the end Germany would be left holding most of the cards.

Keep a close eye on the upcoming European elections and the evolving political situation in Europe.

If things don’t go well for Germany, at some point Germany may just get fed up and walk away from the euro.

Stranger things have happened.

Do NOT follow this link or you will be banned from the site!